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Operator: Thank you for standing by and welcome to the iQIYI Third Quarter 2025 Earnings Conference Call. All participants are in a listen-only mode. There will be a presentation followed by a question and answer session. If you wish to ask a question, you will need to press the star key followed by the number. I would now like to hand the conference over to Ms. Chang Yu. Please go ahead. Chang Yu: Hello, everyone, and thank you for joining iQIYI's Third Quarter 2025 Earnings Conference Call. The company's results were released earlier today and are available on the company's Investor Relations website at ir.iQIYI.com. The call today includes Mr. Lu Gong, founder, director, and CEO; Mr. Jun Wang, our CFO; Mr. Xiaobui Wang, our CCO, Chief Content Officer; Mr. Youqiao Duan, Senior Vice President of our membership business; Mr. Xianghua Yang, Senior Vice President of movies and overseas business; and Mr. Gang Wu, Senior Vice President of print advertising business. Mr. Gong will give a brief overview of the company's business operations and highlights, followed by Jun, who will go through the financials. After the prepared remarks, the management team will participate in the Q&A session. Before we proceed, please note that the discussion today will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. Potential risks and uncertainties include, but are not limited to, those outlined in our public filings with the SEC. iQIYI does not undertake any obligation to update any forward-looking statement, except as required under applicable law. I will now pass on to Mr. Gong. Please go ahead. Lu Gong: Hello, everyone. Thank you for joining us today. This summer, we captured the hearts of audiences with our original blockbuster drama, The Thriving Land. As we begin today's earnings call, I would like to share the journey of bringing this compelling story to life. The Thriving Land became a highlight of iQIYI, a highly acclaimed masterpiece theater collection renowned for its expertly crafted adaptation of famous novels. The Thriving Land tells a compelling tale of three families across two generations in rural China in the 1920s. When production began in Chengdu last September, there were questions and concerns. Can today's audience be drawn to a story set 100 years ago? However, we built this project with strong confidence backed by our years of experience in adapting literature to hit dramas like A Lifelong Journey to the Wonder and The Northward. It is our belief that great stories resonate universally. They transcend time, culture, and age, forging deep connections with viewers across regions and demographics. This ability to tell timeless stories is what sets long-form content apart from faster-paced, bite-sized entertainment. As we all now know, The Thriving Land became a major hit, exceeding the 10,000 mark on iQIYI's popularity index score and topping this year's Enlightened Data chart for PIV Daily market share. Its influence expanded far beyond our platform, making a meaningful impact on traditional TV and offline as well. It achieved the highest average rating per episode on CCTV's drama channel and boosted tourism in its filming location, acquiring the offline effect of The Northward and The Wonder. The success of The Thriving Land is no mere incident. It's built on a proven content methodology to create and amplify IP value through high-quality storytelling and advanced production technology. To connect with broad and diverse audiences and to develop our business model with IP as the core, from online to offline, from domestic markets to global audiences, our business model continues to evolve and scale. Today, our online operations are well-established, global expansion is accelerating, and our experience business is advancing our company. On top of that, we are embracing exciting opportunities enabled by a supportive regulatory environment and advancements in AI. These new regulatory policies lay a solid foundation for innovation and growth in the long-form video industry. At the same time, we are leveraging AI to transform how content is created and consumed. In July, we partnered with Google and ByteDance and launched a global AI short film competition aimed at discovering and nurturing talents who create short videos using AI technologies. We also collaborated with Academy Award-winning cinematographer Mr. Peter Pau on the program at AI Center, featuring AI-driven content. We aim to leverage iQIYI's professional production expertise to cultivate the next generation of operators pioneering innovative AI-driven content production methods and deliver compelling AI-powered storytelling that resonates with audiences. Now let's dive into the details of our business performance in Q3. Starting with content, which is a cornerstone of our business. Our goal is to engage audiences with diverse, beloved content that drives commercial success. For long-form dramas, we focus on top-notch stories with high commercial value. In the third quarter, we once again secured the top position in total viewership market share according to Enlightened Data. Our high-quality lineup included the nationwide hit, The Thriving Land, and our in-house custom detective serials, Coroner's Dilemma, which emerged as summer's dark horse with an active minority index score exceeding 10,000. Additionally, the science fiction series, Movies, earned strong acclaim for its innovative storytelling, reaching a peak popularity score of over 8,800. Moving to movies, we achieved major performance in original theatrical releases. The Shadow Edge grossed over RMB 1.2 billion, leading the box office and making a historic achievement for us. On our online movie platform, we retained the top viewership market share for fifteen consecutive quarters, driven by a diverse slate of 12 key titles. We launched an innovative revenue-sharing model in Q2 to maximize returns for films with limited box office opportunities. With new titles like A Cool Fish 2, this strategy is gaining traction in Q3, generating over RMB 17 million in revenue sharing model in two months. For variety shows, our focus on top-tier titles delivered strong results in both popularity and revenue. The King of Stand-Up Comedy Season 2, a flagship IP, generated impressive membership and advertising revenues. It achieved a high-tier popularity index of over 8,000 and dominated the channels with a leading market share according to Enlightened Data. Additionally, our newly launched observation show, Her Prime, sparked widespread discussions. To deepen audience engagement and elevate our variety show IP value, we introduced consumer products like collectible cards and co-branded merchandise collections, resulting in stronger audience loyalty. Turning to microdramas, they continue to enhance our content ecosystem, achieving double-digit sequential growth in average daily viewing time and daily subscription revenue in the third quarter. Microdramas also have attracted sponsorship from brand advertisers, with more partnerships anticipated in the future. This growth has been driven by our focus on premium content, enhanced original production capabilities, and an expanded library of free titles. Our microdrama content library now includes over 20,000 titles, with over half available for free. We have also established strong capabilities for consistently releasing original microdramas. Hits such as Feet of Three Lives, Nurturing the Night, and Immoral Paradigm resonate strongly with audiences. Additionally, we introduced a dedicated micro animation channel, Manju, and kicked off original production. Microanimation is an innovative format of short-form animation that has experienced rapid growth in the past year, following the success of microdrama and heavily leveraging AI technology. For animations, we continue to improve our original production capability. In the third quarter, over-the-top titles continue to enjoy strong viewership. Additionally, our highly regarded original production, Now Between Salary and the How Much You Re, returned with a second season, captivating loyal audiences and driving high engagement. Next, let me share our exciting slate of content for the first quarter. The diverse content pipeline includes Fitted Cars, In Short, It Go Up Four, and A Bit Low, Can Be Tension, Favorite Honor, Strange Tale of Tang Dynasty Three to Chang'an, Tang Talk, Road to Chang'an, Legend of the Magnet, Dash Meter, Speed, and the Strong and Silent Pipes from Utah. The movie pipeline includes all original theatrical films, theatrical releases, and original theatrical hits for online streaming. The first batch of original films under the Emerging Film Projects, under the licensed films such as Died to Rise 1921, The Legend of He Too, The Volunteers, Peace and Trust, and Nobody. Original variety shows include flagship IP, Blooming Journey 2, Yellow Sunhua, High Young Farmers, and a brand new IP, Wonder Together. The microdrama pipeline includes the first microdrama based on the highly popular IP, A Strange Tale of Tang Dynasty, titled Tang Dynasty Mysterious Python Conspiracy, Tom with Q Time, Q Time, Qi and Pi, as well as For Xingyu, In My Final Days, Samuel, You, Jenny, and The Saint Mark's Destiny. Children's content includes new animation, Ascendant of the Ninth Sun, Returning Dao Squad Season Four, and a new IP, Payment and a First Food Truck. Moving on to membership services, we aim to build a household name membership brand with broad market appeal, rectifying a vibrant content ecosystem and exceptional services. Membership service revenue recorded sequential growth in Q3, driven mainly by original hit dramas like The Thriving Land and The Coroner's Dilemma, as well as theatrical micro hit, NoJa Two. Beyond content, we are increasing our efforts to enhance membership services and deliver unmatched value. Our family-oriented membership plan stands out with inclusive products like the express package offering early access to shows, a valuable driver of new subscriptions and upgrades to this premium tier. The currency experience program in motor continues to boost engagement with meaningful revenue growth year over year. We have created stronger synergy between membership and advertising revenues by introducing branded rooms within the program. We are also integrating membership experiences with top IPs. This quarter, we launched IP-themed membership cards for Neutrol Two and Learning of Journey of Legend for Shanghai, giving fans a deeper connection to their favorite stories and characters. Connecting with our audience is at the heart of what we do. Our flagship July 17 iQIYI Membership Festival has become a signature fan appreciation event loaded with exclusive perks and irresistible subscription offers. We also strengthened membership value and loyalty through over 10 VIP-only gatherings, ranging from fan meetups to advanced screenings. We have elevated membership performance by focusing on operational optimization, aiming to boost membership value and encourage subscribers to stay with our service longer. This includes initiatives to promote longer-term plans and targeted promotions for specific audiences. Additionally, we expanded our bundled membership partnerships to 16 brands while broadening our sales channels across e-commerce and telecom platforms. Moving on to the advertising business, in the third quarter, brand ads recorded double-digit annual growth, mainly driven by premium variety shows like The King of Stand-Up Comedy Season 2 and hit dramas like The Journey of Legend and The Thriving Land. Our content-related ad solutions continue to gain traction, contributing over 60% of brand ad revenue. Key verticals such as food and beverage, internet services, e-commerce, beauty, and personal health all showed robust annual growth. We use AI to drive production innovation and advertising efficiency with features like creative bulleted charts and AI-generated materials, including animation-style visuals for innovative marketing solutions. As we enter Q4, we aim to capitalize on major advertising opportunities such as the Double Eleven Shopping Festival, Christmas, and the New Year campaign, and the new smartphone launch. Our focus will be on maximizing ad sales from premium variety shows, dramas, and drama-centered brands while further enhancing monetization on smart TVs. We will continue leveraging AI to improve brand advertising efficiency. For performance ads, we now have a healthier and more balanced advertiser portfolio with revenue dependent on community individual clients. By industry, internet services and education and training were standout contributors this quarter. Looking ahead, we will focus on capturing new budgets in the internet services sector, including tools, social platforms, and mini-games, while scaling up revenue in education and training, wellness management, and e-commerce. Additionally, we plan to expand our plan of performance and inventory and utilize AI to further enhance monetization efficiency. Moving on to technology and products, we continue to harness cutting-edge technologies to transform the entertainment experience, improve content production efficiency, and boost content value across our platform. On the content creation front, we are leveraging AI to transform storytelling. A notable example is our partnership with Academy Award-winning Mr. Peter Pau. Together, we will launch the Peter Pau iQIYI AI Center to pioneer the next generation of AI-driven talent development. The first titles are set to premiere soon, which we are very excited for. Additionally, we are using AI to produce high-quality original microanimation at much lower costs. Another unique example is the AI-powered iQuickReal connection, which now covers all major content categories. This feature utilizes a smart editing agent to automatically convert long-form videos into vertical short shots, which are then included in iQuickReal collections. iQuickReal collections offer users a real-time experience akin to that of microdramas. We are transforming user engagement with Touhou AI-powered personal assistant that provides personalized support, including video search recommendations and cloud insights. The latest update improved recommendations for microdramas and short-form videos alongside long-form content while also enhancing plot Q&A capabilities. Additionally, we introduced the binge-watching rankings, allowing users to track time spent on their favorite series and view their rankings. This feature has received highly positive feedback. In addition to enhancing AI applications, we are driving the industrialization of video production with cutting-edge workflow production. Our virtual production capability is now used for both in-house and external projects. This quarter, we launched an omnidirectional motion-simulating vehicle rig filming platform powered by our in-house developed iQIYI Stage virtual production system. The platform naturally enhances the efficiency of high-frequency VCOFIN shots. It delivers a streamlined, repeatable workflow and has already been utilized for virtual production in major theatrical productions. Moving on to business performance in regions outside of Mainland China, we maintained strong growth momentum in Q3, with membership revenue increasing by over 40% annually. Markets like Brazil, Spanish-speaking regions, Mexico, and Indonesia saw membership revenue more than double year over year. In this quarter, the average daily subscribers also reached an all-time high. The strong performance is supported by an exceptional content lineup. C-dramas, Chinese dramas, continue to gain popularity globally, with revenues growing double-digit both annually and sequentially. The Thai-dubbed version of Coroner's Diary set platform records for both viewing time and peak revenue within its language segment. It also topped iQIYI's popularity charts in 13 overseas markets. Meanwhile, our local content slate also exceeded expectations. King Jaro, the series, Yunhun Chongqing emerged as a phenomenon in Thai language content this year, generating the highest membership revenue among all Thai dramas on our platform and topping related rankings on Google and Twitter. Beyond long-form content, microdramas continue to build strong momentum overseas. Membership revenue from microdramas grew 114% sequentially by September. Microdramas ranked second only to long-form dramas across several core metrics, including membership revenue and viewing time. Moreover, multiple iQIYI original microdramas gained solid traction abroad. For example, How Dare You Young People has shown a strong long-tail effect three months post-launch. We are also expanding into locally produced microdramas. Multiple projects in English, Thai, Greek, and Indonesian are in production and targeted for launch this year. Looking ahead, we will continue to deliver high-quality content to international audiences, deepen partnerships with telecom operators and local partners, and leverage AI to drive user appreciation. Moving on to the experience business, we are focusing on two key areas: IP-based consumer products and offline experiences. We are leveraging our extensive and unique IP resources to build a more robust entertainment ecosystem. For IP-based consumer products, we have upgraded our business model from a licensing-only approach to a dual-track strategy, combining self-operated merchandise with licensing. Our self-operated portfolio has expanded beyond collectible cards into additional categories, supported by the establishment of in-house teams. IP licensing for the hit drama, The Journey of Legend, has partnered with over 30 licensees, setting a new record while expanding into multiple sectors, including e-commerce, FMCG, and beauty. In our offline entertainment experience business, we are pioneers in this emerging field. At the heart of this initiative are iQIYI Labs, which are designed to operate under an asset-light model. Two locations, Yangzhou and Kaifeng, are under development, with Yangzhou iQIYI Lab scheduled to open early next year. A third plant in Beijing has also been announced. By integrating technologies like AI and XR with our content IP, iQIYI Lab will provide interactive and scalable experiences that are faster to iterate and more efficient than traditional theme parks. This approach reduces space and capital requirements, with revenue expected to come mainly from ticket sales and other on-site spending. As 2025 draws to a close, we reflect on a year of rapid transformation driven by technological innovation and evolving business models. We are not merely adapting; we are advancing, fueled by our thriving overseas expansion, growing experience business, and ongoing AI investments. Breakthroughs in any of these areas could elevate us to new heights. Amid this change, our core remains the same: creating premium content IP supported by a proven commercial model. This foundation earns us the loyalty of hundreds of millions of users and the trust of industry partners. Moving forward, we will continue delivering quality content, fostering creativity with partners, and driving long-term value for shareholders. Now let me hand it over to Jun for the financials. Jun Wang: Thank you, Mr. Gong, and hello, everyone. Now let me walk you through the key numbers for the third quarter. The total revenue for the third quarter was RMB 6.7 billion, up 1% sequentially. The membership services revenue reached RMB 4.2 billion, up 3% sequentially, driven mainly by original blockbuster dramas and theatrical mega hits like Nezha 2 during the summer season. The online advertising revenue was RMB 1.2 billion, decreased by 2% sequentially as the performance in the second quarter benefited from a major advertising campaign. The company's distribution revenue reached RMB 644.5 million, up 48% sequentially. The increase was mainly driven by the strong distribution performance of the original theatrical movie invested by iQIYI, along with the growing transactions for drama. Other revenues were RMB 585 million, down 29% sequentially. Moving on to costs and expenses, the content cost was RMB 4 billion, up 7% sequentially, as we launched a more diverse selection of premium content during the peak summer season. The total operating expenses were RMB 1.3 billion, down 3% sequentially, benefiting from our disciplined expense management. Now turning to profits and cash balances, the non-GAAP operating loss was RMB 21.9 million. Non-GAAP operating loss margin was 0.3%. As of the end of the third quarter, we had cash, cash equivalents, restricted cash, short-term investments, and long-term restricted cash included in the prepayment and other assets totaling RMB 4.9 billion. At the quarter end, the company had a loan of USD 582.5 million to PAG, recorded under amounts due from related parties. For more detailed financial data, please refer to our press release on our IR website. Now we will open the floor for Q&A. Operator: If you wish to cancel your request, please press 2. If you are on a speakerphone, please pick up the handset to ask your question. For the benefit of all on the call, if you wish to ask your question to management in Chinese, please then translate your question into English. The first question comes from Zhiking Zhang from CICC. Please go ahead. Zhiking Zhang: Thank you, management, for taking my question. It has been three months since the new regulations were issued. Can management provide an update on the progress? Thank you. Xiaobui Wang: Thank you, Zhiking. We will invite our Content Officer, Mr. Xiaobui Wang, to answer this question. The core objective of the new policies is to promote the healthy development of the long-form video industry. The past two months since its implementation have observed positive progress in several areas, including the concurrent review of key dramas at a national and provisional administration, as well as the exploration of concurrent review of broadcasting for new content formats, such as download anthology drama, multi-season drama, multi-art drama, and pickup, as well as the optimization of co-review. Under the new policy environment, we are actively innovating in content production and broadcasting models. For example, we are exploring a brand new content format called online feature series and integrating it into our existing emerging film project collaboration framework. Through a revenue-sharing model with our partners, we aim to attract more creative talent and high-quality content, driving innovation and growth in the industry. Based on the current progress of implementation, it is clear that the new policies have sent positive signals to the industry. Some of our projects have already benefited from the policy support, allowing them to reach a ready-to-broadcast status more quickly. As productions proceed smoothly in the future, we will gradually see the broad benefits of the policy uptake. In the long term, the policies will drive the industry into a new growth phase, benefiting professionals across the board. Thank you. Operator: Thank you. Your next question comes from Vicky Wei from Citi. Please go ahead. Vicky Wei: Will management share some color about your outlook on the membership business? Youqiao Duan: Thank you, Vicky. We will invite our Senior Vice President of Membership Business, Mr. Youqiao Duan, to take this question. Since September, our membership business has shown nice growth momentum, driven by three main factors. First, the continual release of high-quality content. Second, the ongoing enhancement of member services and benefits. And third, the optimization of marketing and sales strategy, such as expanding bundled memberships and offering targeted discounts for teachers and students. The Silent Honor, which was released in September, broke demographic boundaries and captured the hearts of young audiences. Our female-oriented content, such as Faded Hearts and Sword and Beloved, along with the suspense theater titles like The Hunt and The Dead End, also gained wide popularity. The recently released Strange Tale of the Tang Dynasty Three to Chang'an, which is the third drama of the Strange Tales of the Tang Dynasty IP series, received widespread acclaim shortly after its premiere. With its popularity index on iQIYI surpassing 10,000, it became the second drama in the series to hit this milestone, making the Strange Tale of the Tang Dynasty iQIYI's first IP series to have two seasons exceeding the 10,000 popularity mark. The latest release in the series, building on the classic elements, introduced more innovative content, showcasing the strength of high-quality IP series development and successfully attracting and retaining a loyal audience base. At the same time, we have enhanced membership value and the perception of benefits through more refined operations. For example, offering more diverse subscription options, offering member-only IP merchandise, and also offline events tailored for premium members. We are confident in achieving sustainable growth in our membership business with the support of high-quality content and enhanced member benefits and services. Thank you. Operator: Thank you. Your next question comes from Felix Liu from UBS. Please go ahead. Felix Liu: Thank you, management, for taking my question. We noticed that Chinese culture industries have made good progress in the overseas markets lately. Can management share more progress on your overseas expansion and strategy? Thank you. Xianghua Yang: Thank you, Felix. We will invite our Senior Vice President of Overseas Business, Mr. Xianghua Yang, to take this question. Our overseas business has shown strong performance this year, with Q3 total revenue and membership revenue achieving the highest annual sequential growth in the past two years. We see that Chinese content serves as the cornerstone of our overseas content portfolio, and iQIYI has become the top choice for an increasing number of overseas users to watch Chinese language content. We continue to promote Chinese language content across various markets and have seen a significant increase in its influence in major overseas markets, effectively driving the growth in user base and membership numbers. In terms of local content, we have engaged in both licensing and original productions in Thailand, Malaysia, Indonesia, and Taiwan. Among these, Thailand has been our most successful market. This year, we launched several hit titles, such as the Thai drama King Jaro, the series, which set new records on our overseas platform in terms of both viewing hours and revenue for Thai content. With subtitles added, our original Thai dramas have been distributed in other markets, and revenue from our original Thai dramas in the US and other overseas markets has already surpassed that of Thailand's domestic market. We are pleased to see that Thai dramas have become the second globally recognized content category after C-dramas. Looking ahead, we plan to increase the perception of original Thai, Malaysian, and Indonesian dramas. At the beginning of the year, we mentioned that some of the newly developed markets, such as the Middle East, Spanish-speaking regions in Latin America, and Brazil, have maintained rapid growth throughout the year, with significant increases in membership revenue and subscriber numbers. In the future, we will continue to deliver high-quality content while leveraging AI technology to enhance content production and promotional efficiency. Currently, over 70% of promotional material for our overseas content is generated using AI, significantly boosting our market efficiency. Thank you. Operator: Thank you. Once again, if you wish to ask a question, please press 1 on your telephone. Your next question comes from Gigi Zhao from Guangdong Securities. Please go ahead. Gigi Zhao: Thank you. I will translate the question myself. The application of AI in the global film and television industry has been advancing in increasing depth. Can management share strategy insights and future plans pertaining to AI adoption in content production and business layout? Thank you. Lu Gong: Thank you, Gigi. We will have our CEO, Mr. Lu Gong, take this question. For AI technology, it provides a very promising outlook for iQIYI. To take an analogy, in the past two decades, the internet provided the video industry an opportunity and advantage to surpass traditional linear TV. We think currently, with the large language models for AI, it provides a similar opportunity for iQIYI. In the past few years, AI technology has deeply integrated into our operations, helping us achieve goals in three key areas. The first is to increase our operational efficiency. We use AI for marketing materials, for example, automatically generating posters and promotional marketing materials. We also use it for overseas content translation, which is much cheaper and faster compared to human labor. The second point is AI boosts monetization capabilities as it can efficiently produce advertising creative materials, and we can use it to optimize our placement algorithms, improving targeting accuracy and conversion rates. The third point is AI empowers us for content production. We use AI to support our internal production capabilities. For example, we have a screenplay workshop in iQIYI, which significantly enhances evaluation and creation capabilities for novels and scripts. We also have an image workshop feature, which effectively supports early-stage creative development by providing concept posters, storyboard generations, and character design. The fourth point is we use AI to build out basic user features. Based on AI, we built out the Toutdoor World, Toutdoor, and iJump features, all of which improve the viewing experience. The above-mentioned four points are already used in our operations, and we will keep refining and upgrading them, hoping to bring more benefits. Going forward, we will focus on three major areas. The first is iQIYI's intelligent production system, which was previously reserved for internal use. We will gradually open up core functions for our close partners, helping them leverage AI to enhance their production capabilities. The second point is we will continue promoting the use of AI in the market and industry. For example, we launched initiatives such as the AI short film creation competition, as mentioned earlier in the opening remarks, and partnered with Academy Award winner Peter Pau to roll out the AI theater. The main purpose of these initiatives is to discover and nurture AIGC creative talent through collaborations and market promotions, fostering an innovation-driven content ecosystem. Last but not least, our focus will be on collaborating with our partners and utilizing our current AI technologies to explore large-scale applications of AIGC in areas like microanimations, animations, educational content, documentaries, etc. Hopefully, AI will become a core engine of content creation. This is the first stage, and going forward, the bigger picture will be to utilize AIGC in our long-form video content, such as dramas and films. We estimate that in the next one to two years, or maybe three years, but no more than five years, AI will bring dramatic change to our industry and the video content creation industry. Currently, we have been investing heavily in AIGC and AI technology applications, and this is one of the core areas of investment for the company right now. Hopefully, going forward, we can utilize AI to create more creative content and change the content landscape. Thank you. Operator: Thank you. That concludes our question and answer session. I will now hand back to management for closing remarks. Chang Yu: Thank you, everyone, for participating in the call today. If you have further questions, do not hesitate to contact us. See you next quarter. Thank you. Bye-bye. Operator: Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.
Operator: Welcome, and thank you for joining Oaktree Specialty Lending Corporation's Fourth Fiscal Quarter and Full Year 2025 Conference Call. Today's conference call is being recorded. I'll now turn the call to Clark Koury, OCSL's Head of Investor Relations. Clark Koury: Thank you, operator. Our fourth quarter and full year 2025 earnings release, which we issued this morning, along with the accompanying slide presentation, can be accessed on the Investors section of our oaktreespecialtylending.com. Before we begin, I want to remind you that the comments on today's call are forward-looking statements reflecting current views with respect to, among other things, future operating results and financial performance. Actual results could differ materially from those implied or expressed in the forward-looking statements. Please refer to the relevant SEC filings for a discussion of these factors in further detail. Oaktree undertakes no duty to update or revise any forward-looking statements. I'd also like to remind you that nothing on this call constitutes an offer to sell or solicitation of an offer to purchase any interest in any fund. Investors and others should note that OCSL uses the investor section of its corporate website to announce material information. The company encourages investors, the media, and others to review information that it shares on its website. Now I will turn the call over to Matt Pendo, president of OCSL. Matt Pendo: Thank you, Clark, and thank you all for joining our call today. I'll begin the call with an overview of our results for the fiscal year and fourth quarter. Armen Panossian, our CEO and co-CIO, will then share commentary on the current market environment. And Raghav Khanna, our co-CIO, will provide details on our portfolio and investment activity. Christopher McKown, our CFO and treasurer, will then review our financial results before we open the call for questions. The 2025 reflected steady improvement for OCSL, even as the macro environment remained choppy. As we will discuss in more detail, our team worked hard to turn around non-income producing positions, find interesting investment opportunities, and reduce our cost of capital. In the fourth quarter, we achieved adjusted net investment income of $0.40 per share, up from $0.37 the prior quarter. This sequential improvement reflects the return to more normalized prepayment fees, higher dividend income, and lower interest expense from our refinancings earlier this year, and lower base rates. Additionally, we continue to make progress reducing our nonaccruals, a key strategic focus. At year-end, nonaccruals were 2.8% of the portfolio measured at fair value, down 20 basis points from the third quarter and down 100 basis points from last year. Last week, the board approved a dividend of $0.40 per share for the quarter, consistent with our dividend policy, and fourth quarter earnings. While the Federal Reserve September rate cut did not affect fourth quarter earnings, lower base rates will impact net investment income in December. As we've said before, we have several levers at both the corporate and JV levels to help offset lower base rates and support net investment income. First, we can prudently increase balance sheet leverage to enhance earnings power and deploy capital into interesting investment opportunities. Our balance sheet is conservatively levered at 0.97 times and provides us with ample financial flexibility. Second, we can continue to optimize our JV. Finally, reducing nonaccruals and equity positions will improve our earnings power. We have line of sight into, one, putting a portion of our previously nonaccruing loans onto accrual status, two, monetizing a portion of our nonaccruals, and three, monetizing equity positions. Any proceeds we receive from realizations of nonaccruals and equity will be reinvested into income-generating assets. On an ongoing basis, we will continue to evaluate these levers and their potential contributions to earnings and our dividend. Now I will pass the call over to Armen for an update on the market environment. Armen Panossian: Thanks, Matt. Turning to the current market environment, we see many conflicting themes. Private credit deal flow showed modest improvement during the quarter, although the overall quality of deals was mixed. We continue to see a steady supply of high-quality opportunities, alongside an increasing number of lower-quality deals coming to market. Sponsors are pursuing dividend recapitalizations more often as exit activity remains subdued compared to historical levels. Momentum in Europe slowed relative to what we observed in our third quarter given ongoing political and economic uncertainty. But we still see some interesting deal flow from that region. Ample liquidity in the broadly syndicated loan and private debt markets has driven sponsors to dual track financings. We have seen an increasing share of $1 billion plus LBOs opting for the broadly syndicated market and the tightening of the illiquidity premium. However, since the Fed rate cut in September, we have witnessed slightly more price discipline and are cautiously optimistic that private credit spreads have bottomed out at SOFR plus $4.50. PIK and looser covenants remain popular tools for private debt managers to win mandates and allocations, but we remain extremely disciplined in our credit documentation and acceptance of PIK. As a percentage of total investment income, PIK was 6.4% at quarter end. We prefer to use PIK judiciously and in situations such as financing a high ROE project or carve-out acquisition that requires the PIK option only for a defined period, after which a project or acquisition generates the necessary cash flow to cover the debt's full cash interest payment. Despite a mixed environment, our long-term outlook on private credit remains bullish. Issuers continue to value the speed and assurance of deal execution with a sophisticated partner. For investors, we think private debt will continue to deliver a premium spread relative to other floating rate asset classes and with lower volatility. To talk more about our portfolio and new investments, I will turn it over to Raghav. Raghav Khanna: Thanks, Armen. I'll start with a review of our investment activity in the fourth quarter. Our pipeline improved during the quarter, yet given heightened competition and tighter spreads, as Armen mentioned, we are taking a highly selective approach to new investments. We continue to prioritize senior secured loans to market-leading businesses with durable fundamentals, reliable cash flow, and strong downside protection. At the same time, we are focused on diversifying the portfolio, avoiding industry concentration risk, and limiting exposure to more cyclical sectors. Turning to origination and repayment activity for the quarter, new funded investment commitments, including drawdowns from existing commitments, amounted to $120 million, up 54% from the prior quarter. Prepayments from exits, other paydowns, and sales were $177 million. And the weighted average spread on deployments during the quarter was approximately SOFR plus 570. First lien loans represented 88% of our new originations. One notable investment during the quarter was Walgreens Boots Alliance, an integrated healthcare pharmacy, and retailer with a 170-year heritage. The company was taken private by Sycamore Partners for over $20 billion, and the sponsor subsequently split the conglomerate into four operating businesses. Each segment required its own bespoke lending solution, and the sponsor got lenders who could move quickly to underwrite the distinct challenges and transformation opportunities of the retail and pharmaceutical businesses. Oaktree strategies worked collaboratively to consider various capital structures. Ultimately, Oaktree funds acted as joint lead arranger for the $2.5 billion first in, last out, first lien term loan to support the US retail business. The FILO was priced at SOFR Plus 700 with 2.5 points of OID, which is attractive for the industry risk and complexity of the deal. Oaktree's deep expertise in inventory appraisal and long track record of investing in FILOs made us comfortable with the collateral coverage of the loan. This transaction is a great example of how Oaktree is positioned to capitalize on complicated yet compelling investment opportunities. Turning to our portfolio, over 40% of our portfolio companies were marked up during the quarter, by about 70 basis points on a weighted average basis, reflecting improving fundamentals in several portfolio companies. As of September 30, 83% of our portfolio was comprised of first lien senior secured debt, and the weighted average yield on debt investments was 9.8%. The median EBITDA of our portfolio companies was approximately $150 million, an $11 million decrease from the prior quarter. Portfolio company weighted average leverage increased slightly to 5.2 times from 5.1 times, and weighted average interest coverage remained unchanged at 2.2 times. As Matt mentioned, we have made tangible progress reducing nonaccruals and resolving challenged investments, which contributed to a decline in nonaccruals this quarter. I'll cover those now starting with an update on Mosaic companies. We have been working closely with Mosaic to realize value for the separation of its three business segments. Two of these segments were sold, and the third is in a liquidation process. As you may recall, these efforts resulted in a significant cash paydown during June, and we received additional cash paydowns in September and after quarter end. Inception to date, the paydowns we received amount to a little over 70% of our original invested cost, and when combined with coupon payments, have resulted in generating positive IRR over the life of this loan. We believe the proactive actions we took following Mosaic's tariff-related headwinds earlier this year helped maximize our recovery in a challenging situation. We also made progress in monetizing our Inopen Therapeutics, whose loan is secured by certain royalty rights and public shares of ADC Therapeutics. Following an increase in ADC's share price, we sold a portion of our ADC shares and used the proceeds to reduce the outstanding loan amount. Our remaining position in Inopen Therapeutics continues to be marked at 99.5, reflecting our view that we will continue monetizing the collateral supporting this loan and recover substantially all of the remaining loan balance. While the issuer is not new to our nonaccrual list, we added Baymark's first lien loan to nonaccrual status. The company's second lien loan was put on nonaccrual in the third quarter. We are working closely with other lenders and the company to maximize value. I'll now turn the call over to Chris to review our financial results. Christopher McKown: Thank you, Raghav. In our fourth fiscal quarter ending September 30, 2025, we delivered adjusted net investment income of $35.4 million or $0.40 per share as compared to $32.5 million or $0.37 per share in the prior quarter. The increase for the quarter reflects the return to normalized levels of fee income and interest expense following the one-time items that impacted the results in the third quarter. NAV per share was $16.64, down from $16.76 in the third quarter due to unrealized depreciation on certain debt and equity investments. Adjusted total investment income increased to $76.9 million compared to $74.3 million in the third quarter, primarily driven by higher prepayment fees and dividend income. Net expenses declined modestly compared to the third quarter. Interest expense decreased due to the refinancing of our syndicated credit facility completed earlier this year and lower reference rates. Additionally, as you may recall, our June results were impacted by noncash and nonrecurring interest expense related to the acceleration of deferred financing costs primarily in connection with the termination of the Citibank SPV facility. The weighted average cost of borrowings was 6.5% at September 30, down from 6.6% in the third quarter. Further, we waived approximately $1.9 million in incentive fees as a result of our total return hurdle. Our leverage ratio at quarter end was 0.97 times, up slightly from 0.93 times last quarter, and total debt outstanding was $1.5 billion. Our target leverage range of 0.9 times to 1.25 remains unchanged. Driven by our disciplined pace of capital deployment, we remain at the low end of the range. Unsecured debt represented 64% of total debt at quarter end, down slightly from the prior quarter. We have ample dry powder to fund commitments with liquidity of approximately $695 million, including $80 million of cash and $615 million of undrawn capacity on our credit facility. Unfunded commitments, excluding those related to the joint ventures, were $258.9 million, approximately $246.9 million of which can be drawn immediately as the remaining amount is subject to portfolio companies meeting certain milestones before the funds can be drawn. Turning to our two joint ventures, together, the JVs currently hold $513 million of investment primarily in broadly syndicated loans spread across 73 portfolio companies. During the fourth fiscal quarter, the JVs generated ROEs of 12.4% in aggregate. Leverage at the JVs was 1.7 times, compared to 1.3 times last quarter. In addition, we received a $525,000 dividend from the Kemper JV. With that, I'll turn the call back to the operator to open the call for questions. Operator: Thank you. We will now begin the question and answer session. At this time, I would like to remind everyone in order to ask a question, press 1 on your telephone keypad. And your first question comes from the line of Melissa Wedel with JPMorgan. Melissa Wedel: Good morning. Thanks for taking my questions today. Definitely noted the turnaround in the level of new net funding activity this quarter. I know that typically December is a seasonally busy quarter, but I'm just curious if you have any early insight into sort of expectations around investment activity in the December quarter this year? And any outsized repayments that should be thinking about? Armen Panossian: Thanks, Melissa. It's Armen. In terms of outsized repayments, we don't expect any at this time for the quarter, December. As far as deployment, nothing really stands out either direction, either on the heavy side or the light side relative to past December quarters. You know, we certainly have seen some tightening in the spreads, and so we're judicious about how we're deploying. But I don't see us materially deviating from past quarters in terms of deployment or leverage levels for the quarter. Melissa Wedel: Okay. I appreciate that. One of the other things related to your comment about spreads tightening, I did notice that the yield on new investments this quarter was a step higher, about 60 bps higher, compared to last quarter. I'm assuming that relates to sort of the complexity of the Walgreens deal, the complexity and size of the Walgreens deal. I guess, one, is that right? And then two, what's your view on sort of a pipeline for transactions like that where there might be more complexity and pricing involved? Thanks very much. Christopher McKown: Hey, Melissa. It's Chris. Thanks for the question. I'll start and maybe Armen can add a little bit in terms of pipeline. In terms of the quarter-on-quarter change, I mean, you're right in noting Walgreens. I think the other thing I would just note about June is that on balance, we had a little bit higher originations into your LIBOR indexed loans. So when you're looking at the absolute coupons, you know, June was a little bit lower as a result of that. You know, we do hedge all of that back to US dollars. There is a little bit of a pickup when you take into account that hedging impact, but that does create a little bit of noise, you know, kind of quarter to quarter. Armen, do you have anything? Armen Panossian: Yeah. You know, we do have a very active origination function in non-sponsored direct lending. I think Walgreens stands out as a pretty high spread loan. I don't see anything that we would be originating in the December quarter that's quite that high in spread. But we do have a few things that we're working on that might be sort of higher than the 450 to 500 spread that's typical sponsor lending, but I think it's too early at this point to provide forward guidance. I just don't think that the Walgreens deal is not repeatable, I don't think, in the fourth quarter. Oh, sorry. The fourth calendar quarter. Melissa Wedel: Yep. Understood. Thanks. Our next question comes from the line of Sean Paul Adams with B. Riley Securities. Sean Paul Adams: Hey, guys. Good morning. On the nonaccruals still on the books, it seems like there's still a heavy skew towards healthcare and pharma. Can you just share a little bit more color about what's going on in those particular segments? Armen Panossian: Sure. This is Armen. You know, we have or we had a couple of sort of chunky positions in the life sciences space. It's not many in number, but there were unfortunately some larger positions that continue to be the subject of workouts. FIO2 being the, I would say, the most material of them, which is a name that we've talked about on past calls. But that's really what it is. We continue to sort of work out situations that at this point have been in the portfolio for several years. They're all sort of stable to maybe slightly improving, but still not at the position where we're either going to exit or move them into accrual status, unfortunately. We're not adding. We haven't added other kind of life sciences or healthcare names that have created problems in the recent quarters. But again, these handfuls, a small handful of positions that were put on a few years ago continue to sort of weigh on the nonaccrual bucket. Sean Paul Adams: Got it. And as a quick follow-up, is there any workout strategies going on with those long-standing nonaccruals? Armen Panossian: They were operational workouts. They have already been, from a capital structure perspective, restructured. But operational improvements are being made. We're working closely with management teams to drive that performance. And when possible, we are working with the management to sell assets and either fund cash burn or repay, or make distributions to our position. But there's nothing significant or monumental that would be happening in the near term with respect to those positions. It's just kind of blocking and tackling with an operational turnaround. Sean Paul Adams: Appreciate the color. Thank you. Operator: Again, if you would like to ask a question, press 1 on your telephone keypad. Thank you. I'm not showing any further questions in the queue. I would now like to turn it back to Clark Koury for closing remarks. Clark Koury: Great. Thank you, operator, and thanks to everybody for joining. Please reach out with any questions. We're happy to jump on the phone. Have a great day. Operator: And that concludes our today's conference call. Thank you all for joining. You may now disconnect.
Operator: Greetings, and welcome to the Varex Imaging Corporation Fourth Quarter Fiscal Year 2025 Earnings Conference Call and Webcast. At this time, participants are in a listen-only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. Now my pleasure to turn the call over to Christopher John Belfiore, Director of Investor Relations. Go ahead, sir. Good afternoon and welcome to Varex Imaging Corporation's earnings conference call for the fourth quarter and fiscal year 2025. Christopher John Belfiore: With me today are Sunny S. Sanyal, our President and CEO, and Shubham Maheshwari, our CFO. Please note that the live webcast of this conference call includes a supplemental slide presentation that can be accessed at Varex Imaging Corporation's website at vareximaging.com. The webcast and supplemental slide presentation will be archived on Varex Imaging Corporation's website. To simplify our discussion, unless otherwise stated, all references to the quarter are for 2025 and to the year are for fiscal year 2025. In addition, unless otherwise stated, quarterly comparisons are made year over year from 2025 to 2024. Finally, all references to the year are to the fiscal year and not the calendar year, unless otherwise stated. Please be advised that during this call, we will be making forward-looking statements which are predictions and projections about future events. These statements are based on current information, expectations, and assumptions that are subject to risks and uncertainties that could cause actual results to differ materially from those anticipated. Risks relating to our business are described in our quarterly earnings release and our filings with the SEC. Additional information concerning factors that could cause actual results to materially differ from those anticipated is contained in our SEC filings, including Item 1A Risk Factors of our quarterly reports on Form 10-Q, and our annual report on Form 10-Ks. The information in this discussion speaks as of today's date, and we assume no obligation to update or revise the forward-looking statements in this discussion. On today's call, we will discuss certain non-GAAP financial measures. These non-GAAP measures are not presented in accordance with, nor are they a substitute for, GAAP financial measures. We provide a reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure in our earnings press release, which is posted on our website. With that, I will now turn the call over to Sunny S. Sanyal. Sunny S. Sanyal: Thank you, Chris. Good afternoon, everyone. Thank you for joining us for our fourth quarter earnings call. We are pleased to report a strong finish to the year, with fourth quarter revenue of $229 million, up 11% year over year and at the high end of our guidance. During the quarter, we saw strong demand from our global CT customers and continued to see strength in our industrial segment, which posted its highest revenue quarter ever at $77 million. Non-GAAP gross margin of 34% in the fourth quarter was above the high end of our guidance, benefiting from the higher volume and favorable product sales mix in the quarter. Turning to the fourth quarter results, total revenue was up 11% year over year with the Medical segment up 5% and the Industrial segment up 25%. Non-GAAP gross margin of 34% was 130 basis points higher than that in the same quarter last year. Non-GAAP earnings per share in the fourth quarter was $0.37, up $0.21 compared to last year. Looking at results for the full fiscal year, total revenue of $845 million increased 4% compared to fiscal 2024. Medical revenue of $593 million increased 2% year over year, and industrial revenue of $252 million increased 10%. Non-GAAP gross margin of 35% was 230 basis points higher than last year. Non-GAAP EBITDA at $122 million was up $33 million from $89 million last year. Non-GAAP earnings per share for the year was $0.90, up $0.35. We ended the year with $155 million worth of cash, cash equivalents, and marketable securities on the balance sheet, compared to $213 million last year. Recall that during the third quarter of fiscal 2025, we used approximately $75 million of our cash to retire our convertible debt. Let me give you some insights into sales detail by modality in the quarter, compared to a five-quarter average, which we refer to as sales trend. Our Medical segment saw strong demand in the quarter led by global sales of CT tubes, which were above its sales trend. Sales in fluoroscopy and radiography were also above their respective sales trends in the quarter, while sales in mammography and dental modalities were in line with their respective sales trends. Sales in our oncology modality were below its sales trend. Our Industrial segment posted its strongest quarter ever as demand for security screening continued to drive sales of security inspection systems and components globally. We also saw positive trends in nondestructive testing and inspection in the aerospace and defense and food inspection verticals, as our customers continue to find new ways to use our technology to solve problems they were unable to address in the past. During fiscal 2025, we advanced our key growth initiatives, including the introduction of innovative new technologies like photon counting for CT, a radiographic detector for the value segment from our new facility in India, and cargo systems in industrial. In photon counting, during fiscal 2025, we worked closely with our OEM customers as they continue to advance their product development process. We also made significant progress with our photon counting CT project with the Technical University of Munich. In addition, we completed the first stage of our India expansion plans and have begun to ramp up production and shipments of radiographic detectors from this facility. In Industrial, we are very pleased with how our cargo inspection systems business performed in fiscal 2025. During the year, we booked over $55 million in orders and shipped over 15 systems to several countries, including Mexico, Iraq, Brazil, and Saudi Arabia. We continue to be focused on establishing our sales channels for cargo inspection systems by building on our strong relationships and reputation for quality and innovation in this vertical. With that, let me hand over the call to Shubham Maheshwari. Shubham Maheshwari: Thanks, Sunny, and hello, everyone. Let me begin by sharing a breakdown of our revenues for both the medical and industrial segments. Providing this information annually offers valuable context for understanding our performance and the strength of our business. Our Medical segment spans nearly all X-ray imaging modalities, underscoring the breadth of our capabilities and market presence. Total medical sales for fiscal 2025 were $593 million, with CT as the largest modality and accounting for 40% of total medical revenue. These CT sales are primarily driven by X-ray tubes as we currently do not participate in the supply of detectors for this modality. From a geographic perspective, the Medical segment remains well balanced across all three regions, reflecting our strong global partnership with leading imaging OEMs. The slight skew toward APAC in fiscal 2025 was fueled by a recovery in China and increased sales to our top customer, Canon. In fiscal 2025, revenue from our Industrial segment grew to $252 million, serving a highly fragmented customer base. The security vertical accounted for roughly 41% of total sales, up from 40% in fiscal 2024. This growth was driven by strong performance in our security Inspection Systems business, which gained significant traction since its introduction early in fiscal 2025. Our top 10 customers were 52% of revenues in fiscal 2025, and revenue from our largest customer, Canon, grew 6% year over year. Turning to the fourth quarter, our performance exceeded expectations. Revenues of $229 million were at the high end of our guidance. Non-GAAP gross margin of 34% and non-GAAP EPS of $0.37 were above expectations. Compared to the same period in fiscal 2024, total revenues increased 11%, driven by a 5% increase in medical and a 25% increase in industrial, primarily from cargo system shipments. Medical revenues were $152 million, and industrial revenues were $77 million, representing 66% and 34% of total revenues, respectively. This marks the highest quarterly contribution of industrial revenue to total Varex Imaging Corporation history, a milestone that speaks to the strength of our diversification strategy. Now analyzing regional performance, Americas grew 9%, EMEA rose 16%, and APAC increased 8% year over year. Sales volume to China remained steady, contributing 14% of total revenues, underscoring the resilience of our healthcare market position despite the tariff challenges. Let me now cover our results on a GAAP basis. Fourth quarter gross margin was 34%, an improvement of 140 basis points year over year, reflecting our continued operational discipline. Operating expenses were $58 million, up $2 million compared to 2024. We reported operating income of $20 million, net income of $12 million, and GAAP EPS of $0.29 per share based on fully diluted 42 million shares. For the full fiscal year 2025, gross margin was 34%, up 270 basis points year over year, demonstrating strong margin improvement. Operating expenses totaled $318 million, an increase of $94 million compared to fiscal year 2024. As noted previously, the primary driver was a non-cash goodwill impairment charge of $94 million taken in Q3. This resulted in an operating loss of $28 million, a net loss of $70 million, and a GAAP loss per share of $1.70 based on fully diluted 41 million shares. Now moving on to the non-GAAP results for the quarter. Gross margin in Q4 was 34%, up 130 basis points year over year, primarily due to the higher volume and a favorable product sales mix. For the full year, we delivered a gross margin of 35%, up 230 basis points year over year and in line with the goal we communicated at the start of the year. R&D spending in the fourth quarter was $24 million, an increase of $2 million compared to 2024 and representing 10% of revenues. R&D was $91 million for fiscal 2025, an increase of $4 million compared to last year and represented 11% of revenues. For both the quarter and year, the increase in R&D was primarily due to investment in growth initiatives, including security systems in photon counting and radiographic in medical. SG&A expense was $31 million, in line with 2024 and representing 14% of revenues. For the full year, SG&A expense was $122 million, down $1 million compared to last year and representing 14% of revenues. Operating expenses totaled $55 million, an increase of $2 million compared to 2024 and represented 24% of revenues. For the full year, operating expenses totaled $213 million, an increase of $3 million compared to fiscal 2024. Operating income was $23 million, an increase of $9 million compared to the previous year, and operating margin was 10% of revenue, up from 7% in 2024. For the full year, operating income was $80 million, an increase of $28 million compared to last year, and operating margin was 9% of revenue, up from 6% in 2024. Tax expense in the fourth quarter was $2 million or 14% of pretax income compared to a $2 million benefit in 2024. For the full year, tax expense was $11 million or 22% of pretax income compared to $1 million in fiscal 2024 or 3% of pretax income. Net earnings were $15 million or $0.37 per diluted share, up 131% from $0.16 in the year-ago quarter. Average diluted shares for the quarter on a non-GAAP basis were 42 million. For the full year, net earnings were $0.90 per diluted share, up 73% from $0.52 in fiscal 2024. Average diluted shares for the full year on a non-GAAP basis were 41 million shares. Now turning to the balance sheet. Accounts receivable increased by $20 million, and days sales outstanding increased by one day to 62 days. Inventory held steady at $299 million in the fourth quarter, and days of inventory decreased by 21 days to 180 days. Accounts payable decreased by $1 million, and days payable decreased five days to 42 days. Now moving to debt and cash flow information. Net cash flow from operations was $8 million in the quarter. We ended the quarter with cash, cash equivalents, and marketable securities of $155 million, up $3 million compared to the third quarter of 2025. Compared to fiscal 2024, cash was down from $213 million, primarily due to the use of $75 million to reduce our debt in June. Gross debt outstanding at the end of the quarter was $370 million, and debt net of $155 million of cash, cash equivalents, and marketable securities was $215 million. Adjusted EBITDA for the quarter was $35 million or 15% of sales. Our trailing twelve months adjusted EBITDA was $122 million, and our net debt leverage ratio was approximately 1.8 times adjusted EBITDA on a trailing twelve-month basis. Over the years, our net leverage ratio has continued to come down, and this year's performance marks the lowest level we have reported as a public company. This achievement underscores our commitment to deleveraging and reflects our ability to establish a stable long-term capital structure since our spin-off from Varian. Now moving on to the outlook for the first quarter. Guidance for the first quarter is as follows. Revenues are expected between $200 million and $215 million. Non-GAAP earnings per diluted share are expected between $0.05 and $0.25 of profit. Our expectations are based on non-GAAP gross margin of 32% to 34%, non-GAAP operating expenses of approximately $52 million, interest and other expense net in a range of $8 million to $9 million, tax rate of about 23% for the first quarter, and non-GAAP diluted share count of about 42 million shares. I would like to now hand the call back to Sunny for some thoughts on the year ahead. Sunny S. Sanyal: Thank you, Sam. Looking back, we faced a challenging start to fiscal 2025 due to the unpredictable global tariff situation. However, as we had anticipated, our customers' ordering patterns normalized once the tariff situation stabilized. Looking ahead, our customers in China are projecting stronger orders and sales for 2026 compared to 2024 and 2025. Last year's uncertainty around the implementation of stimulus programs led hospitals to delay imaging equipment purchases, but this appears to be behind us. Customers in China are now saying that they are seeing increased tender activity driven by demand for value-tier and mid-tier CT systems to support rural healthcare expansion plans. I am also happy to say that we were recently informed by MOFCOM that investigations regarding CT tube pricing have been paused indefinitely. We are intensifying our efforts to strengthen geopolitical resiliency through supply chain and manufacturing regionalization. We have also raised prices and are charging our customers for tariffs. Together with export-oriented manufacturing and localized or regional supply chains, we have put several measures in place to position Varex Imaging Corporation better to withstand current and future trade challenges. These operational and supply chain initiatives are reinforcing our customers' confidence in Varex Imaging Corporation as a premier long-term partner. We plan to continue to invest in R&D to strengthen our competitive edge. Looking at other future growth markets, such as India, South Asia, The Middle East, and Latin America, we see value-tier and mid-tier products in both radiographic and CT playing a critical role in driving our future growth. Our strategy is to lead with innovation while also maintaining cost-effectiveness in these segments. Our investments in supply chain, cost-effective product designs, and expanded low-cost manufacturing in India are central to our strategy to drive growth in the value and mid-tier segments. Our detectors factory in Vizag, India is ramping up production of our radiographic detectors, and we are expanding the site to enable even greater vertical integration to support further product cost reduction efforts. We continue to advance our photon counting CT detector offering with our anchor OEM customers. We are engaged with additional OEMs to secure design-ins. A couple of years ago, we announced a collaboration with the Technical University of Munich to develop a technology demonstrator for our photon counting CT system. Over the past two years, this project has achieved key milestones, and we plan to showcase this system for customers at major trade shows in 2026. Our goal is to demonstrate the value proposition of photon counting CT beyond just higher resolution images. We know that photon counting technology offers potential for more precise material discrimination, and we hope to be able to show clinical value and improved workflow with our capabilities. This system will also showcase the added value of integrating multiple Varex Imaging Corporation components, such as our high-power CT tubes optimized for photon counting detectors, along with our high voltage generator connectors and heat exchangers. By enabling customers to experience the full capabilities of our X-ray components and photon counting detector technology within a fully functional CT system, we intend to accelerate the adoption of Varex Imaging Corporation's photon counting CT detector offering. November 8 marked World Radiography Day, commemorating Roentgen's discovery of X-rays 130 years ago. Since then, X-rays have largely been generated the same way, using a heated filament in a vacuum tube. Looking beyond photon counting, we expect nanotube-based cold emitters to enable a new generation of X-ray sources that will drive the development of new imaging applications for decades to come. We are continuing to invest in nanotube-based cold emitters and are making progress with this technology in collaboration with several innovative OEMs who are developing novel applications. As with any foundational technology, bringing applications to market takes time. We plan to provide more visibility to this technology at trade shows in fiscal 2026. On the Industrial segment side, progress on our products and implementations of our systems are on track, and we are planning to scale up production capacity of our cargo systems in fiscal 2026. Recently, we shipped a batch of our VXM6 mobile cargo system to our European customer, and we are now preparing to implement our channels. Overall, we are happy with our performance in fiscal 2025 and are looking forward to another year of solid progress towards our strategic plans in fiscal 2026. These include exiting fiscal 2026 with additional OEM design-ins for photon counting CT, ramped-up detector production in India, introduction of new products in cargo systems, increased traction with new bendable industrial detectors, and more OEM integration of nanotubes in multi-beam medical applications. I want to thank all our employees and partners worldwide for their hard work and dedication. Their efforts and flexibility have been instrumental in delivering a solid year and driving the innovation that powers our growth initiatives in medical and industrial. Together, we are building momentum and shaping the future of our business. Thank you, everyone, for your commitment and passion for making this possible. With that, we will now open up the call for your questions. Thank you. We will now be conducting a question and answer session. Operator: Our first question is coming from Suraj Kalia from Oppenheimer. Your line is now live. Suraj Kalia: Sunny, Sam, can you hear me all right? Sunny S. Sanyal: Yes, Suraj. How are you? Suraj Kalia: Gentlemen, congrats on a strong end to the year. Sunny, Sam, one of the comments you all made in your prepared remarks, appreciate you giving us some incremental detail and maybe I got my numbers wrong. Top 10 customers were 52% of sales. If I got that right, because it is split between medical and industrial, how should we think about the sustainability just given the customer concentration? Sunny S. Sanyal: Yeah. Yes, Suraj. Thanks for your question. I can try to answer that. So the sustainability and for a number of years, top 10 customers generally for us are in that range, 50-55% range. So this number is very much within the range over the last many, many years. The reason we do not break out medical versus industrial, Suraj, is that the vast majority of those top 10 customers are medical. And sometimes one industrial customer might be there, and if we begin to break that out, then it can become public information for that one customer, which is not something that for commercial reasons we are doing at this time. So that is the reason we do not break it out between industrial and medical. Suraj Kalia: Got it. Sunny, obviously for the last two quarters, medical has been somewhat soft, but it has been more than compensated by industrials. Can you just walk us through what specifically are we seeing some sort of a structural shift? And as we enter 2026, do you think any of the systemic forces could change, you know, as you go through the year specifically within these two buckets? Gentlemen, thank you for taking my questions. Sunny S. Sanyal: Thank you, Suraj. So Suraj, industrial as a percent of our overall sales has been growing. So it is approaching 30%, and we expect it will get up to mid-30s. So that is a trend that has been consistent. It has been consistently growing and growing faster than medical. Within medical, any movement between modalities or between China and non-China tends to be largely, I would say, that volatility is month to month, quarter to quarter, and it moves around. What we have been seeing though increasingly is given the geopolitical situation, more of our non-Chinese OEMs are asking us to ship product to them from our Chinese facilities, from our facility at Wuxi. So it is very difficult for us to now maintain consistency in between China and ex-China within the medical segment because of that phenomenon. Suraj Kalia: Sunny, forgive me. Can I ask another question? Sunny S. Sanyal: Yes. Yes. Suraj Kalia: Sunny, just I am sure you have heard in the news, GE is thinking about or there is some speculation about them kind of selling or divesting their China business. Siemens Healthineers is splitting out. Any implications for Varex Imaging Corporation per se, maybe not in the short term, but how do you see if these happen, do you see any impact to Varex Imaging Corporation? Thank you. Sunny S. Sanyal: So the vast majority of our business in China comes through our Chinese OEMs. So from that perspective, these announcements really do not have any significant implications for us, although our non-Chinese OEMs, our global OEMs do some business in China. So but we are not anticipating a significant impact from at least a couple of examples that you cited. Secondly, our Chinese OEMs are also increasingly commercially focused outside of China. So at the end of the day, for us, it is all about building our franchise of OEM partners and securing design wins, and the geography while they start in one place, they can all end up in another place. Virtually, most of our customers used to be concentrated in one geography, and then they moved global into other geographies. And we are seeing that out of our customers in China as well. Thank you. Operator: Thank you. Our next question is coming from Lawrence Scott Solow from CJS Securities. Your line is now live. Lawrence Scott Solow: Great. Thank you. Good afternoon or good evening. I guess first question, Sunny, Sam, I know you do not give full-year guidance. I do not want to make too much of Q1. I know seasonally it is a little bit slower. But I guess it looks like you have like kind of flat to 8% growth, so mid-single-digit for the quarter, 4% to midpoint. Is there anything we could glean from that the quarter in reference to the full year? Qualitatively, it sounds like things are going pretty well, both on medical and industrial. So just trying to get any high-level outlook for the full year that you can share would be great. Sunny S. Sanyal: Sure, Larry. Let me answer that question. Yes. At this point, the demand environment looks to be solid. And we expect full-year revenues to grow. We are expecting the medical business to grow for the year. We also expect the industrial business to grow. And we are expecting the medical business ex-China to grow, and at the same time, we are modeling China to be flattish. So that is some additional color that I can provide you for the full year. You know, and you mentioned that we do not guide annually just for various reasons. And so that is the color I can provide. And then trying to glean more from Q1 into the full year, I would say for this coming fiscal year, Q1 and Q3 comps are somewhat easier for us in the sense because of tariff and this and that, you know, business volumes followed some more of an unusual pattern for us in FY '25. But FY '26, everything seems to be normal. So I would expect through the year, through various quarters, we would see normal gradual growth through the year as opposed to the up and down pattern that we saw in FY '25. So I would say Q1, Q3 easier comps, Q2, Q4 a little bit more difficult comps. But overall, we should see gradual growth through the year as is our typical pattern. Lawrence Scott Solow: Got you. And the China piece specifically, you are assuming kind of flat or is in your budget. Not the full-year guidance because you are only going to share that with us. But it sounds like your customers in China expect growth. Although I know you also mentioned that it is a little bit to figure out now because you are shipping from China more often than not than you were previously, but any thoughts on that? Sunny S. Sanyal: Yeah. It is becoming more and more difficult. Our customers, global customers, are changing their supply chains. But to the extent that what we can model, we are seeing China as stable, stable to slight growth, but given the tariff and all of the uncertainties around the U.S.-China situation, we are modeling essentially a stable and a flattish China for the coming year. Lawrence Scott Solow: Okay. And I want to just ask on industrial, if I can slip in one more question. Sunny S. Sanyal: Yes, sure. Go ahead. Lawrence Scott Solow: Really strong. Sunny S. Sanyal: Yes, the quarter was strong. The year was strong. The quarter was really strong, obviously. I know a few million dollars could jack up those percentages a little bit, but also the gross margin was really strong in the quarter. Was there anything I am just trying to figure out, I know you have the standalone systems now, but sometimes the mix will actually drive higher revenue on the service side. So but that would not be a lumpy higher revenue number. So any color to that strong performance, particularly on the margins in the quarter in Industrial? Sunny S. Sanyal: Sure. I can try to answer that. So you are right, Larry. Industrial gross margins were quite a bit better than our expectations for this past quarter. You know, we experienced a higher than usual proportion of service revenues on our Linux installed base. And as you know, the service business is at much higher margin than the hardware equipment gross margins that we experience. So because of that service and time and material, which is generally unplanned service business experience. So that drove our gross margin higher for the quarter. So in order to kind of glean more than that, I think this is a little bit unusual for the industrial business to produce that type of margin. We are shipping currently a decent amount of hardware. So I would say that Q4 gross margin was not the norm, but we did benefit from higher as a normal service. Lawrence Scott Solow: And and Sunny S. Sanyal: Yeah. Yeah. Go ahead. Sorry. And I was saying that Sunny S. Sanyal: when I say if you go back two years ago, our industrial margin had much more of a service component to it. And at that time, we could do 35-37, 38-40% gross margin. And what I was going to add there is that my comment is more on the near to mid-term, but in the long term, say when you are thinking of say two years and stuff, when a lot of this hardware that we are currently shipping goes into service, that should provide a nice gross margin tailwind for us. And we would like to see our industrial margins go back up to 38-39%, 40% in that range. Lawrence Scott Solow: Great. That is exactly where I was going. I appreciate that. Thank you. I am also I appreciate all that call. Thank you. Operator: Thank you. Our next question is coming from James Philip Sidoti from Sidoti and Company. Your line is now live. James Philip Sidoti: Hi, good afternoon. Thanks for taking the questions. So your revenue came in well above my estimate, well above your guidance in the street. Was there anything unusual? Did you pull any sales in from the first quarter or anything unusual in this fourth quarter that led to the revenue growth? Sunny S. Sanyal: Jim, no. There was nothing unusual here. There always is a little bit of a push and pull driven by our own customers and their freight optimization type of a situation that can happen. But nothing to speak about in terms of pull-in or push-out. It is just that the demand in both the segments was strong. And we benefited from that. And also, we did ship cargo systems in this last quarter, and they can be they can be $1 to $2 million per system. So that can swing the numbers. One or two systems can increase the number. As opposed to tubes or detectors, which are generally in the $50,000-$75,000 in that type of a price range. Versus $1.5 million to $2 million type of a system. So that is a little bit more color behind the strong performance for Q4. James Philip Sidoti: Okay. And I believe you said China was 14% of revenue. So I am just checking my math, $32 million compared to about $30 million a year ago. Does that sound right? Sunny S. Sanyal: That is correct. This last quarter, China was $32 million. Yeah. And a quarter ago, I have $31 million, but it might just be rounding, Jim. James Philip Sidoti: Yeah. No. I was comparing to 2024. Sunny S. Sanyal: Yes. James Philip Sidoti: Okay. Alright. And India, it sounds like you started to ship the detectors. Do you expect those to ramp over the next couple of quarters? And when do you expect to start to ship tubes? Sunny S. Sanyal: Okay. So when it comes to India, yes, we have started to ship detectors from India. So now the factory, as you just said, we expect it to ramp up over FY 2026. So we are really excited about that. We are planning to ramp that up. And then the tubes factory, that is still under construction, although I would say it is towards the later stages of the construction schedule. So once we complete the construction, then we need to bring in equipment and then qualify the equipment. Run trial runs, etcetera, and make sure it is all optimized and qualified. So I would say that factory is still now twelve months away from production, or from product shipments, twelve to fifteen months. But we made a lot of progress there on the tube side. And of course, detectors, it started to ramp. James Philip Sidoti: Okay. And as the business from India grows, should we see that in growth an improvement in gross margin? Or are those lower margin products? Sunny S. Sanyal: Yes. So as you know, Jim, gross margin has many factors to it. Which is overall cost, new product introductions, as well as what the tariff environment is doing, and of course, concentration, product and everything else like that. But just isolated to India, there are two aspects in India that are happening. Some of the legacy product that we transfer from Salt Lake City to India, of course, that product will see a pickup in gross margin. So that is one aspect of India. So that should see gross margin improvement. However, the amount of product that we will transfer from Salt Lake City to India is mostly radiographic, and it is a very small proportion of overall revenues. We are talking $10 million, $20 million, $30 million and not more than that. So that is a small amount of revenue that ships from India eventually, which is transferred from Salt Lake. But our bigger plans from India are to be more competitive in the radiographic segment, sub-segment of our medical segment. And so, as we begin to ship from there, and then as commercial, competitive, and all other dynamics play out, we will be able to provide you more color. But overall, we are thinking that the new business piece is corporate average gross margins, not necessarily a big driver for an upward momentum to gross margin. So those are the two areas of color I can provide you as it comes to gross margin. Separately, outside of India, as it comes to overall color for gross margin for the company, you know, we have been doing a lot of work trying to take cost out, trying to pass tariffs related costs to our customers, and we are being successful at that. So that is helping our gross margin. And then as photon counting detector related products begin to ship, and as some of our new products in cardiovascular, etcetera, begin to ship, that should provide a little bit more tailwind to our gross margin. So I would say, India, impact on gross margin is there. But small. India enables us to grow in the RAD segment for medical, but our cost reduction and other new products actually provide more of a tailwind for our gross as we look into late 2026 and 2027. James Philip Sidoti: And then last one for me, R&D. I know that expense can move up and down. Know that I think you had a payment to Micro OX in the first quarter. But in this quarter, was up almost $3 million on a GAAP basis. From the June. Was there non-cash expense in there? Is that the timing of projects? How should we think about R&D? I know you said it will be up or you are going to continue to spend in R&D, but should that number continue to rise year over year? Sunny S. Sanyal: So, Jim, in R&D, there is a lot of expense that is, you know, engineers like to play with, you know, experiment with materials and everything else. And also, we need to buy material to build new prototypes. So and that is generally not on a linear basis across quarters. So it can jump up and down a couple million or $2 million here and there. So that is what happens in R&D. But what I can say is overall OpEx for the coming year, we are planning it to be lower than this last fiscal year. So all I can say is that OpEx should be around $52 million, $53 million a quarter. For the full year as we go through the year. James Philip Sidoti: Okay. Thank you. That is very helpful. Sunny S. Sanyal: Yeah. Thank you, Jim. Operator: Thank you. Next question today is coming from Anderson Shock from B. Riley Securities. Your line is now live. Anderson Shock: Hi, thank you for taking the questions and congrats on a really strong quarter and into the year. So you mentioned a batch of VXM mobile cargo inspection systems to a European and then implementing a rail cargo scanner this year, I guess in 2026. Is there any color you can share on the size of these orders and the timeline of shipping these? And I guess how should we think about growth in 2026 compared to the $55 million in orders in 2025? Sunny S. Sanyal: Yeah. We have not given specific color around that in that detail. We are expecting a growth year out of our cargo systems. So maybe I will just leave it at that. I mentioned the VXM6, the cargo and the rail scanner as examples of new products. So at this point, for the products that we had set out to build and market in cargo system, there were portals, gantries, mobiles, car scanners. They are all of them are the products are there, and they are manufacturable, and we shipped them to customers. And they have either been installed or in the process of being installed. So that was my point about giving the color about these systems. Anderson Shock: Got it. And then did I hear correctly that the anti-dumping investigations in China have been paused indefinitely? Sunny S. Sanyal: Yes. There were two investigations. One was antidumping, that is a pricing matter. And the second one was an industry investigation, and both have been paused without any end date, definitely. Anderson Shock: Okay, got it. Thank you for taking our questions. Sunny S. Sanyal: Thank you, Anderson. Operator: Thank you. Next question is a follow-up from Lawrence Scott Solow from CJS Securities. Your line is now live. Lawrence Scott Solow: Great. Just quickly. I know you do not guide sensitive products, but so the $55 million in orders that you got for the systems are a little bit more than that. Bit for the security screening. Is that I mean, I assume the majority of that has not shipped yet without giving us a number. Is that fair? Sunny S. Sanyal: I do not know if I could say majority. Some of that has been shipped, and a lot of that has not been shipped. Lawrence Scott Solow: So Okay. Lawrence Scott Solow: Or said another way, would you expect more to be shipped this year than last than in 2026 and 2025? Sunny S. Sanyal: Okay. Sunny S. Sanyal: Yes. The projects that are in flight will come off of that backlog. And then with it during the year, there will be orders that we capture depending on the timing. It is likely some of that will also get shipped and installed in '26. We do not have a large backlog. So our cycle time from taking the order to when it gets out of our ships out of our docks is about six months. Lawrence Scott Solow: Right. But that is actually pretty long for you for backlog. Right? Your business generally is not about Sunny S. Sanyal: Yeah. Our components business, yes. Lawrence Scott Solow: It is so so right. So that should that is probably yeah. Taiwan longer cycles for you at least. Sunny S. Sanyal: It is. But in a systems business, it is not unusual to have more than a year of that type of a lead time. Our case, we can we are at that point where we can get those out fairly quickly. Lawrence Scott Solow: Right. No. That is a good thing. Then just just last question. Just from a general you know, broad brush, tariff impact, there is some on the gross margin on the higher cost side, right? Assuming tariffs do not let us, you know, probably a tough assumption, but let us say nothing changes from here. Can you just kind of walk us through the impact of tariffs and does that I guess that may get better as you ship more out of India and China, but any just color on the impact currently? Would be great. Thanks. Yes. Sunny S. Sanyal: Yeah, Larry. So we are getting impacted by tariffs on the gross margin line somewhere between 100 and 150 basis points. And now, if those tariffs were not there, we would be clearly at a 35% gross margin. But with the tariffs being there and there is a lot of discussion in the Supreme Court and this and that in terms of tariffs decisions. Sure, sure. Yeah. So there is a little bit of variability to it depending upon where the right now, the tariffs have been flowing through our P&L and balance sheet, etcetera. And it is impacting us around 100 to 150 basis points. And you are right, in certain situations, rerouting supply chains from higher tariffs sourcing from higher tariff to lower tariff country into the United States. Right. And then the finished goods the only country where I am aware of the China is China, where there is US sourced product getting tariffed by China at around 10% right now. So some of that benefit can be obtained by us when the tubes factory in India goes online. So that can help, but it is still maybe I would say, at least twelve months away on that side. Lawrence Scott Solow: Sure. Great. Thank you. Appreciate it. Sunny S. Sanyal: Thank you, Larry. Thank you. We reached the end of our question and answer session. I would like to turn the floor back over for any further or closing comments. Sunny S. Sanyal: Thank you all for your questions and participating in our earnings conference call today. The webcast and supplemental slide presentation will be archived on our website. A replay of this quarterly conference call will be available through December 2 and can be accessed at www.vareximaging.com/investorrelations. Thank you, and goodbye. Operator: Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.
Operator: Good day, and thank you for standing by. Welcome to NTIC's Fourth Quarter 2025 Earnings Conference Call and Webcast. [Operator Instructions] Today's conference is being recorded. As part of the discussion today, the representatives from NTIC will be making certain forward-looking statements regarding NTIC's future financial and operating results as well as their business plans, objectives and expectations. Please be advised that these forward-looking statements are covered under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and that NTIC desires to avail itself of the protections of the safe harbor for these statements. Please also be advised that actual results could differ materially from those stated or implied by the forward-looking statements due to certain risks and uncertainties, including those described in NTIC's most recent annual report on Form 10-K, subsequent quarterly reports on Form 10-Q and recent press releases. Please read these reports and other future filings that NTIC will make with the SEC. NTIC disclaims any duty to update or revise its forward-looking statements. I will now hand the conference call over to Mr. Patrick Lynch, NTIC's CEO. Please go ahead, sir. G. Lynch: Good morning. I'm Patrick Lynch, NTIC's CEO, and I'm here with Matt Wolsfeld, NTIC's CFO. Please note that a press release regarding our fourth quarter and full year fiscal 2025 financial results was issued earlier this morning and is available at ntic.com. During today's call, we will review various key aspects of our fiscal 2025 fourth quarter and full year financial results, provide a brief business update and then conclude with a question-and-answer session. Please note that when we discuss year-over-year performance, we are referring to the fourth quarter and full year of our fiscal 2025 in comparison to the fourth quarter and full year of last fiscal year. Fiscal 2025 was marked by order timing shifts and selective softness in our ZERUST oil and gas and Natur-Tec markets. So NTIC used this period to strengthen its competitive position and to execute strategic initiatives that we believe will enhance our long-term growth potential. We accelerated product innovation within Natur-Tec, advanced new ZERUST solutions across global industrial markets and pursued emerging opportunities in the South American offshore oil and gas sector. These actions have expanded our pipeline, sharpened our focus and positioned NTIC to reaccelerate growth and improve profitability in fiscal 2026 and beyond. In fiscal 2026, we expect to start reaping the benefits gained from the strategic investments NTIC made over the past 3 years to upgrade our global operations and support future growth. We are also focused on flattening our operating expenses while expanding gross margins and driving sales in the higher-margin parts of our business, which we expect will improve our profitability and strengthen our balance sheet in fiscal 2026. While we anticipate macroeconomic headwinds to persist, especially in Europe, we believe NTIC is positioned to deliver growth and improved profitability across many of our key markets in the coming fiscal year. So with this overview, let's examine the drivers of the fourth quarter in more detail. For the fourth quarter ended August 31, 2025, our total consolidated net sales decreased 4.4% to $22.3 million as compared to the fourth quarter ended August 31, 2024. Broken down by business unit, this included a 29.4% decrease in ZERUST oil and gas net sales and a 10% decrease in Natur-Tec net sales, partially offset by a 5.8% increase in ZERUST industrial net sales. Turning to our joint venture sales, which we do not consolidate in our financial statements. Total net sales for the fiscal 2025 fourth quarter by our joint ventures increased year-over-year by 4.7% to $24.4 million. For fiscal 2025, joint venture sales declined 4.9%, reflecting the continued impact of high energy prices and regional political pressures on the European economy as well as significantly increased uncertainty related to U.S. trade and economic policies and the potential impact this will have on global supply chains. We continue to closely monitor trends across our European markets for signs of stabilization following years of subdued demand as governments begin to implement target economic stimulus packages. We expect that any economic recovery from these stimulus packages will lead to a positive impact on our joint venture operating income in future periods, especially in Germany. Improving sales trends at our wholly owned NTIC China subsidiary continue. Fiscal 2025 fourth quarter net sales at NTIC China increased by 12% to $4 million. For fiscal 2025, NTIC China sales increased 14% to $16.2 million, the second strongest year of sales we have experienced in this market. NTIC China sales for fiscal 2025 demonstrate that demand continues to grow in this geography. Furthermore, given that the majority of NTIC China sales are for domestic Chinese consumption, we believe NTIC China's exposure to U.S. tariffs is limited. We expect demand in China will continue to improve in fiscal 2026, helping to support higher incremental sales and profitability in this market. We continue to believe that China will likely become a significant market for our industrial and bioplastics segments, so we'll continue to take steps to enhance our operations in this geography. Now moving on to ZERUST oil and gas. Fourth quarter of fiscal 2025, ZERUST oil and gas sales were $3 million compared to $4.2 million in the same period last year. As a reminder, ZERUST oil and gas sales for the fourth quarter last year benefited from approximately $600,000 in sales that shifted from the third quarter due to timing. On an annual basis, ZERUST oil and gas sales were $7.3 million compared to $9.2 million for the prior full fiscal year. This decline was primarily due to timing of orders. We have continually invested in ZERUST oil and gas to enhance our sales team and add resources to support future growth. This has improved our sales pipeline as the size and the number of opportunities have expanded among both new and existing customers. Our pipeline includes global opportunities to protect above-ground oil storage tanks, pipeline casings and offshore oil rigs from corrosion. The nature of this industry will always cause certain fluctuations in ZERUST oil and gas sales. Nevertheless, we still expect to see ZERUST oil and gas sales and profitability to improve significantly in fiscal 2026 as we leverage these investments and rein in operating expense growth. Earlier this month, we announced that our 85% owned subsidiary, ZERUST Brazil, secured a new 3-year contract for a major offshore project with a leading global EPC company. Under this agreement, ZERUST Brazil will provide advanced corrosion protection solutions for floating production storage and offloading units, or FPSOs, with an estimated total value of approximately BRL 70 million, which is equal to approximately USD 13 million based on current exchange rates. The project started in Q4 and is expected to ramp up during our fiscal 2026 and then continue through calendar 2028. This is a significant validation of our engineering capabilities, scalability of our ZERUST oil and gas business and the reputation we've built as a trusted partner to leading offshore operators. Brazil represents one of the fastest-growing deepwater markets globally, and we believe this win provides a strong foundation for continued growth and expansion across international oil and gas markets. Turning to our Natur-Tec bioplastics business. Fourth quarter Natur-Tec sales were $5.1 million, representing a 10% year-over-year decline in Natur-Tec sales, primarily due to pricing dynamics and the timing of orders. For example, during the past year, a large North American customer of our resin compounds late purchasing for nearly 6 months as they made tooling adjustments to increase the output of their manufacturing line. While this contributed to Natur-Tec's decline in sales for fiscal 2025, we have already received orders for the first and second quarters of the new fiscal year for the equivalent of what this customer purchased from us in all of fiscal 2025. It's also worth mentioning that in Q4 of fiscal 2025, we entered into a preferred supplier agreement with the nation's leading specialized distributor for JanSan, food service and industrial packaging. We expect this new relationship to translate into higher Natur-Tec sales growth in fiscal 2026. We are also working on several larger opportunities for our Natur-Tec solutions that we believe holds significant promise to benefit our sales in the coming quarters, including advancing the compostable food packaging solution we mentioned on our last call. Overall, we believe Natur-Tec is a best-in-class compostable plastic business that is well positioned for significant further growth in the U.S. and abroad. While fiscal 2025 was more challenging than we expected at the beginning of the fiscal year, we remain steadfast on pursuing our strategic growth plan. We are confident in the direction we are headed. Before I turn the call over to Matt, I wanted to acknowledge the hard work and dedication of our global team of both employees and joint venture partners. Our success and our ability to navigate more complex economic periods are a direct result of their efforts. With this overview, let me now turn the call over to Matt Wolsfeld to summarize our financial results for the fourth quarter and full fiscal year 2025. Matthew Wolsfeld: Thanks, Patrick. Compared to the prior fiscal year period, NTIC's consolidated net sales decreased 1.0% in fiscal 2025 and decreased 4.4% in fiscal 2025 fourth quarter because of the trends Patrick reviewed in his prepared remarks. Sales across our global joint ventures increased 4.7% in the fourth quarter. Joint venture operating income in the fourth quarter increased 6.6% compared to the prior fiscal year period, primarily due to the corresponding increase in net sales. For fiscal 2025, sales across our global joint ventures decreased 4.9%, while joint venture operating income decreased 9.8% compared to the prior fiscal period. Total operating expenses for the fiscal 2025 fourth quarter increased 2.2% or $9.7 million for the fiscal 2025, primarily due to strategic investments in ZERUST oil and gas, sales infrastructure and increased personnel expenses, including new hires, benefits and higher travel and professional fees. As a percentage of net sales, operating expenses were 43.5% for the fourth quarter compared to 40.7% for the prior fiscal year period. For fiscal 2025, operating expenses as a percentage of net sales were 44.7% compared to 41.6% for the prior fiscal year. Gross profit as a percentage of net sales was 37.9% during the 3 months ended August 31, 2025, compared to 43.8% during the prior fiscal year period. Gross profit as a percentage of net sales was 37.6% for the fiscal year ended August 31, 2025, compared to 39.7% for the prior fiscal year. Lower gross margin for the fourth quarter and full year periods were primarily due to a less profitable mix of sales. There were a couple of onetime items that impacted profitability during the fiscal year, including a $1.1 million benefit to other income due to the receipt of cash from the employee retention credit that was payable in February of 2025. Secondly, NTIC recognized $387,000 in other expense during the fourth quarter of 2025 as NTIC's Chinese subsidiary was assessed penalties from Ningbo Customs, a customs authority in China as a result of a technical classification matter. We have since updated our export documents and internal review procedures and believe this issue has now been fully resolved. We also experienced an increase in our effective tax rate for fiscal 2025, which was 67.5% for fiscal 2025 compared to 17.3% in the prior fiscal year. The changes primarily reflect increased income tax expense in our foreign subsidiaries and is primarily due to the increase in income tax expense as compared to reduced consolidated pre-book tax income. As a result, our effective tax rate was unusually high and volatile in fiscal 2025. We expect the effective rate to normalize in future periods when additional profits are recognized in our North American operations. NTIC reported net loss of $1.1 million or $0.11 per diluted share for the fiscal 2025 fourth quarter compared to net income of $1.8 million or $0.19 per diluted share for the fiscal 2024 fourth quarter. For the full year, NTIC reported net income of $18,000 or $0.00 per diluted share compared to $5.4 million or $0.55 per diluted share for the fiscal 2024 full year. For the fiscal 2025 fourth quarter, NTIC's non-GAAP adjusted net loss was $607,000 or $0.06 per diluted share compared to non-GAAP adjusted net income of $1.9 million or $0.20 per diluted share for the fiscal 2024 fourth quarter. For the fiscal 2025, non-GAAP adjusted net loss was $12,000 or $0.00 per diluted share compared to net income of $5.8 million or $0.59 per diluted share for fiscal 2024. A reconciliation of GAAP to non-GAAP financial measures is available in our fourth quarter fiscal year 2025 earnings press release that was issued this morning. As of August 31, 2025, working capital was $20.4 million, including $3.7 million in cash and cash equivalents compared to $23.7 million, including $5 million in cash and cash equivalents as of August 31, 2024. As of August 31, 2025, we had outstanding debt of $12.2 million. This included $9.3 million in borrowings under our existing revolving line of credit compared to $4.3 million as of August 31, 2024. Reducing debt through positive operating cash flow and improving working capital efficiencies will be a strategic focus for fiscal 2026. We generated $2.4 million in operating cash flows for the fiscal year ended August 31, 2025. At year-end, the company had $28.6 million of investment in joint ventures, of which 51.7% or $14.8 million was in cash, with the remaining balance primarily invested in other working capital. During fiscal 2025 fourth quarter, NTIC's Board of Directors declared a quarterly cash dividend of $0.01 per common share that was payable on August 13, 2025, to stockholders of record on July 30, 2025. To conclude our prepared remarks, we are optimistic NTIC's momentum is building across many parts of our business. We believe our multiyear strategies are working, our global markets are expanding, and our team is delivering results. With a clear vision and disciplined execution, we're confident that the foundation we have built will drive continued growth, stronger profitability and meaningful creation -- value creation for our shareholders. With this overview, Patrick and I are happy to take your questions. Operator: [Operator Instructions] And we have a question coming from the line of Tim Clarkson with Van Clemens. Timothy Clarkson: Patrick, Matt, obviously, this year was not what everyone wanted. But just a couple of background questions. In general, are the income taxes on our international business, are they higher than the taxes domestically in the United States? Matthew Wolsfeld: It's not that it's higher. It's that essentially what you have is you have a situation where with all of our subsidiaries, let's say, the main 5 subsidiaries, they have a standard statutory tax rate, somewhere between 20% and 33%, 34% depending on the country. And so all of those subsidiaries are profitable, so they generate tax expense. So if you look at it from an effective tax rate when you put it all together, you have essentially the numerator in the effective tax rate calculation is a fixed number. There isn't a significant amount of -- there isn't a significant amount of tax expense from North America. However, we do have tax expense in North America based off of the -- we recognize here based off of the royalties and dividends that we received from JVs. The issue that we have is that the denominator in the calculation, there's very little profit, especially in fourth quarter that went into that number. And so what it created is a very large effective tax rate for fourth quarter. The expectations are that going forward, as there is more profitability, specifically in North America, the denominator in that calculation is going to be increased. For example, if we had more profit in North America, we would have had the same numerator, the same tax expense, but the denominator in the calculation would have been significantly higher, would have led to a more normalized effective tax rate. It's just the nature of how the tax provision calculation works, especially when we had, I would say, a difficult fourth quarter from a North American standpoint. So I do expect it to normalize in fiscal 2026 as we get back to similar profit levels that we had before. Timothy Clarkson: Okay. Sure. So I know you mentioned that you're looking to cut expenses in the company, too. I mean how realistic -- how much money do you think you can cut to improve profitability? Matthew Wolsfeld: The goal at this point isn't to cut expenses. The goal is to, I would say, maintain the same level of operating expenses that we had or close to the same level of operating expenses that we had in fiscal '25. I mean you recall all through the end of 2024 and through 2025, we talked about the increased investments that we've made in the oil and gas group and a couple of other areas inside the company with the ability to kind of use those investments to drive revenues going forward. We didn't see the revenue increases in fiscal 2025. The expectations are the investments that we made in 2024 and 2025, we'll start seeing the results of that in 2026 and beyond as those investments, specifically the people that we hired are able to gain traction and drive revenue growth. So the expectation is that we're going to drive revenue growth in 2026, those gross margin dollars falling down to the operating profit line as we're able to hold operating expenses as stable as possible. Timothy Clarkson: Sure. Okay. On the oil and gas, it sounds like there's some additional business that will kick into the first quarter and further on out with some of these larger orders. Now what is driving this business? Is it just having more sales out in the field in places like the Middle East and Brazil? Or is it as the technology finally getting to be accepted as superior to the legacy technology of the cathodic arc stuff? G. Lynch: Yes. Can you hear me? Timothy Clarkson: Yes, I can hear you. Go ahead. G. Lynch: Right. Okay. It's a combination of having [indiscernible] it's just general acceptance of the technology in the market, where we've proven that it works over and over again. We're getting repeat business from existing customers as we're putting in new customers. And that's really starting to starting to give our oil and gas business the attention that we think it deserves. Timothy Clarkson: Sure, sure. In terms of the packaging, I know that you guys had a breakthrough in terms of being able to kind of replace the traditional Saran wrap packaging that doesn't allow air to go out and you've now developed packaging that's similar to that, that's compostable. I mean how close are we from getting some business from that? G. Lynch: For that, I'd like to turn the question over to Vineet Dalal, who runs our Natur-Tec business. Vineet, go ahead. Vineet Dalal: Yes, this is Vineet. Yes, we have several customers where we're doing trials with compostable packaging, especially for food -- consumer food applications. So this is something that we're working on. We've gotten some good feedback, not just here in North America, but also in India, where there's a big market for these kind of applications. So we expect some of those opportunities to start hitting our sales in 2026. Timothy Clarkson: Okay. Are the costs similar for the compostable product versus the legacy product? Vineet Dalal: No. The cost is definitely higher as a premium solution, but due to legislation and government regulations in countries like India, these companies are forced to use compostable packaging instead of traditional plastic packaging. Operator: Our next question coming from the line of Gus Richard with Northland Capital Markets. Auguste Richard: You mentioned weakness in North America. Could you just describe where that's coming from? Matthew Wolsfeld: The main weakness in North America, we experienced throughout the entire fiscal 2025 was primarily the Natur-Tec group and the oil and gas group. If you look at the oil and gas group in North America was down close to 46% on the year. Natur-Tec North America was down about [ 13% ] on the year. Auguste Richard: Got it. Okay. And then in the floating platforms for the oil and gas, I'm trying to wrap my mind around how your solution work floating on the water and how much does that open up the market opportunity for you? G. Lynch: So it's a new market for us overall. It's not like you're trying to put the entire rig into a package, but you're taking sections of it and finding unique ways to apply our technology in those sections to provide long-term corrosion protection. And based on what we've seen in practice in Brazil so far, we think this is an opportunity, obviously, that can be very -- for us in Brazil, but in other areas around the world where they use offshore platforms. Matthew Wolsfeld: The only thing I'll add, Gus, is that the work that we talked about in Brazil, specifically on these FPSOs, there's a service component to it, where there are actual ZERUST oil and gas employees that are living on the offshore -- essentially the offshore floating platforms and applying the ZERUST solution to the infrastructure and then they're on the rig for a period of time and then they leave and then replacements come in. And so it's been a long process in order to be able to get slots where our specific workers can be on those platforms to do the installation work. And so that's a different -- it's kind of a different sales process than we typically see with onshore, where we're typically selling the solution and it's getting installed and then you don't need to continually apply and continually upkeep it. Auguste Richard: Okay. And just out of curiosity, is that having to have folks on the rigs and continually reapplying, does that have an impact on the margin profile for the floating platforms? Matthew Wolsfeld: Yes. There's -- I mean it's a slightly decreased margin given the service component and things like that compared to just selling any of the other ZERUST oil and gas solutions where you're just selling the actual product and somebody else is doing the installation work. Auguste Richard: Got it. That's super helpful. And then the onetime, I guess, is the Chinese tariff custom, whatever the heck that charge was. Was that a onetime event and nonrecurring? Or is there an impact to the P&L going forward? Matthew Wolsfeld: Well -- Vineet, do you want to address that? Vineet Dalal: Yes. It was a onetime event. I mean essentially, we produce some compounds in China that are filled compounds. So they contain minerals and then that we export out of China. And when you export it, I mean, we've always followed international norms for HTS codes that we use here in the U.S., in India, in Europe. And essentially, when we export it out of China, we get a VAT credit. Now because of the trade war between the U.S. and China and Chinese customs cracking down on any exports that contain minerals or rare earths, there's a customs official who basically said that because your compounds contain these minerals, you're not eligible for the VAT refund. And so that basically accounted for -- we have to repay back all the credit or the rebate that we got. So we expect this to be a onetime event moving forward, that will be part of our cost of goods sold. Matthew Wolsfeld: So essentially, it was a couple of years' worth of VAT that the Chinese government clawed back as well as a penalty on top of that for using what they deem to be the wrong code for the VAT. So the expectations are it's a onetime charge that we took and decided we weren't going to challenge the Chinese government and this we wanted to move forward as quickly as possible with the process so we can continue the import and export of the product. Auguste Richard: Got it. And then on the food packaging application, is this going to be like packaging in, I don't know, like a vegetable produce supplier? Or is this something applied in a supermarket over chicken breast or whatever? Sort of -- go ahead. Vineet Dalal: Yes. So we are looking at multiple applications. One of the applications that we're looking at in India is packaging of milk. So these are milk pouches where we're working with all the largest dairies in India to change over from conventional polyethylene packaging to a fully compostable solution. And we have run trials. We had to engineer the product so that it met the barrier performance, the shelf life performance, the handling. And then even on their form film machines, the throughput was -- with our solution was equivalent to the throughput with additional plastic technology. And so we have proven all that, and we expect that to be a growth business, at least in India. In the U.S., we are working with consumer foods companies where they're looking to -- we're looking at multilayer structures, which would be used for things like sauces and salad dressings and those kind of food items. Auguste Richard: Okay. So replacement for Tetra Pak, am I getting it right? Vineet Dalal: Yes, or pouches, like these little pouches for salad dressings or short shelf life sauces. Auguste Richard: Got it. Like the pouches you would get in a restaurant for -- salad. Vineet Dalal: Yes, in a restaurant or a QSR. So this one, the project that we are working on in the U.S., that's essentially for a QSR segment. Auguste Richard: Got it. And when do you expect that to sort of add to Natur-Tec revenue? Is that revenue second half of fiscal '26? Is it starting today? Can you give a little bit of color as to when you expect that to contribute to revenue? Vineet Dalal: The application in the U.S. that requires some, I would say, fine-tuning. So we are working closely with the customer on trials and prototype validation. So that will probably take several quarters at least before we can introduce that in the market. But the application in India, we've already gotten an initial appeal from one of the dairy companies. And so we expect that business to kind of grow probably by Q2, Q3 of fiscal 2026. Operator: And I'm showing there are no further questions in the queue at this time. I will now turn the call back over to Mr. Patrick Lynch for any closing remarks. One just queue up coming from the line of Zach Liggett, Desmond Liggett Wealth Advisors. Zach Liggett: On your presentations here over the last, I think, couple of years, you've had a strategic objective of hitting greater than 15% top line growth and slower expense growth. I'm just curious, I know the last couple of years have been sort of investment years for you. But how are you thinking about those objectives looking forward? G. Lynch: Matt, I think you're better qualified to handle this one. Matthew Wolsfeld: I guess from a top line growth standpoint, we are still certainly still optimistic. We look at the opportunities that we have in -- specifically in oil and gas, specifically in Natur-Tec, the expectations are that those 2 groups are going to have some significant growth in 2026. The traditional ZERUST business is going to be relatively stable with some slight growth. But certainly, the opportunities that we have in Natur-Tec and oil and gas kind of worldwide are what we expect to kind of fuel that 15% growth this year. Certainly, we didn't get that last year, but we think the investments that we've made should put us back to that kind of growth rate, which would obviously have a significant impact from a gross margin standpoint. And again, with the dollar values flowing down to the EPS level. Zach Liggett: Yes. Okay. And then the operating cash flow came off quite a bit this year. How are you thinking about that for FY '26 and free cash flow for that matter? If you could give us an update on your CapEx expectations? Matthew Wolsfeld: Well, our fiscal 2025 was a large year, really '24 and '25 were a large year from a CapEx standpoint. We had a new ERP -- new SAP ERP system that was implemented, which was -- certainly wasn't cheap. We funded that out of operating cash. We also purchased a building that's directly adjacent to our existing headquarters here for the increased production and warehousing that we need given we're kind of outgrowing the current footprint that we have here. So we were able to add another 60%, 70% to our office -- to our space here. The expectations are for 2026 that there's going to be very little capital improvements that are needed in North America. There are additional facilities we're looking at in Brazil, which they would fund on their own, which wouldn't involve operating cash coming out of North America, and they have a cash surplus in Brazil. And also at Natur-Tec India, they're looking at essentially building their facilities there to accommodate the production and warehousing needs for the Indian business. And again, they would be funding that and taking care of that entirely within their operating cash and any kind of financing in India. So the expectations are specifically in North America in 2026 is that we're going to be able to add a significant amount of cash to pay down our line of credit. The goal is certainly to pay down the line of credit as much as possible, get back to the point that as we're seeing increased earnings, we're able to ramp the dividend back up and have a nice cash cushion to be able to kind of fund future growth and needs that the company has over the next few years. Zach Liggett: All right. Yes, that sounds promising. And then last -- or 2 small ones for me, I guess. Any benefits you're seeing this coming year from One Big Beautiful Bill? Matthew Wolsfeld: Not really. I mean... G. Lynch: No. That's our business. Zach Liggett: Okay. And then any AI use cases that you guys have identified for the coming year? G. Lynch: No. Operator: Thank you. I'll now turn it back to Mr. Patrick Lynch. G. Lynch: All right. Thank you all for joining this morning. I hope you have a nice day. Operator: This concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Thank you for standing by, and welcome to the Amer Sports Third Quarter Fiscal 2025 Earnings Conference Call. [Operator Instructions] I'd now like to turn the call over to Omar Saad, SVP, Capital Markets and Investor Relations. Please go ahead. Omar Saad: Welcome, everyone. Thanks for joining Amer Sports Earnings Call for the third quarter of fiscal year 2025. Earlier this morning, we announced our financial results for the quarter ended September 30, 2025, and the release can be found on our IR website, investors.amersports.com. A quick reminder to everyone that today's call will contain forward-looking statements within the meaning of the federal securities laws. These forward-looking statements reflect our current expectations and beliefs only. They are subject to certain risks and uncertainties that could cause actual results to differ materially. Please see the safe harbor statement in our earnings release and SEC filings. We will also discuss certain non-IFRS financial measures. Please refer to our earnings release for important information regarding such non-IFRS financial measures, including reconciliations to the most comparable IFRS financial measures. We will begin with prepared remarks from our CEO, James Zheng; and CFO, Andrew Page, followed by a Q&A session until approximately 9:00 a.m. Eastern. James will cover key operational and brand highlights, and Andrew will provide a financial review at both the group and segment level and also walk through our guidance for the full year 2025 as well as an initial high-level sales and margin outlook for 2026. Arc'teryx CEO, Stuart Haselden; and Salomon's CEO, Guillaume Meyzenq, will join for the Q&A session with that, I'll turn the call over to James. Jie Zheng: Thanks, Omar. Amer Sports' strong momentum continued in the third quarter as our unique portfolio of premium technical brands continues to create white space and take share in sports and outdoor markets around the world. All 3 segments performed extremely well, led by exceptional Salomon footwear growth and Arc'teryx omni-comp reacceleration and solid growth from Wilson Tennis 360 and our Winter Sports Equipment franchise. We delivered strong results across the P&L, including 30% growth, 130 basis points of adjusted operating margin expansion and more than doubling our adjusted EPS. Our Performance was led by very strong growth and profitability in Outdoor Performance, led by Salomon footwear and Technical Apparel led by Arc'teryx. We also had a solid contribution from the Ball & Racquet segment, led by Wilson Tennis 360. All 4 regions accelerated in Q3 and achieved double-digit revenue growth, and that strong momentum has continued into Q4. We believe Amer Sports is a uniquely positioned company within the global sports and outdoor space. Our specialized, highly technical brands serve the premium sports and outdoor market, which continues to be one of the healthiest segments across the global consumer landscape. Several factors give me confidence for our near, medium and long-term outlook. First, we own a unique portfolio of premium innovation-driven sports and outdoor brands. Second, Arc'teryx is a breakout brand story with leading growth and profitability for the outdoor industry driven by its disruptive direct-to-consumer model. Third, Salomon Footwear has unique products and brand positioning and a very strong demand, but still a small share of the global sneaker market. Fourth, Wilson Equipment and our Winter Sports Equipment brands already have leading market shares and will deliver slower long-term growth, except for Wilson Softgoods, which we believe has significant long-term growth potential. And fifth, we have a strong differentiated platform in Greater China, where we continue to deliver best-in-class performance across our 3 big brands. I want to take a moment to address September fireworks incident. We regret our involvement and are working closely with the local authorities to address the impacts. We remain deeply committed to our communities and consumers and are taking actions to ensure we do better going forward. Before I turn it over to Andrew Page, allow me to briefly recap key brand highlights from our 3 segments, starting with Technical Apparel, which is led by Arc'teryx. Arc'teryx delivered another quarter of broad-based strength across regions, channels and categories, especially footwear and women's. We are encouraged by Technical Apparel's continued momentum in the direct-to-consumer channel, where the omni-com reaccelerated to 27% from 15% in Q2. We envision Arc'teryx as a truly global brand with significant runway to grow in all major markets, and we are particularly encouraged by the meaningful Q3 acceleration in North America and Europe as well as continued strength in Asia and China. Strong Women's momentum continued in Q3, growing 40% and was one of Arc'teryx' fastest-growing categories. We continue to see a large opportunity to serve women in the outdoors in a different way, focusing on pinnacle design and performance. The new women's Leutia Pant was a standout performer in the quarter and was a top 5 model across all U.S. epicenters. Our women's climbing pant, the Clarkia, also continues to be widely popular since its launch last year. For Fall-Winter 2025, we are expanding our focus on color and have launched new models like the Nia pant and women's-only shell jacket styles like Emaris and Altira. We continue to experience rising brand awareness and affinity with women in the U.S. and Europe, as we have improved fit, style and function. As we discussed at our recent Investor Day, Women's will represent approximately 25% of global Arc'teryx sales in 2025, and we expect it to become 30% of sales by 2030. Footwear also continues to be a key growth driver with 35% growth. Shoe models launched in the fall included the Konseal, a modern take on the classic approach shoe, which is light, grippy and built for long technical missions. We also launched Norvan Nivalis, a winterized evolution of the Northern LD4, delivering high-performance running in cold conditions with a bold, modern silhouette. Looking forward, Arc'teryx has an exciting pipeline of shoe launches for next year, and we continue to believe footwear will be a large and profitable growth avenue for Arc'teryx. Footwear will represent approximately 8% of global brand sales this year, and we expect it to reach 13% by 2030. Our Veilance sub-brand is still small, but grew strong double-digits in Q3 and we are excited for the future potential of this brand. Veilance is expanding into new high-end wholesale partners in North America, and you can now find Veilance in Nordstrom in the U.S., and Holt Renfrew in Canada. Veilance will represent approximately 5% of global brand sales in 2025, and we expect it to reach 7% in 2030. Circularity and ReBIRD continue to be at the heart of our brand. We now have 32 ReBIRD centers, which supported our successful September trade-in initiative, whereby guests received a 30% credit for returning their used Arc'teryx jackets. I would also like to mention Peak Performance, the other brand within our Technical Apparel segment. We are pleased to share that Peak Performance is seeing stabilizing sales, and profitability in its core European business as well as early green shoots in North America. We introduced Peak to REI in September, and we are also opening a Vancouver Flagship store in the previous Arc'teryx space in time for this Winter season. Moving to the Outdoor Performance segment, which was led by another outstanding quarter from Salomon Footwear and Apparel, as well as a healthy performance from Winter Sports Equipment. Salomon footwear momentum continues across all regions, especially Asia, with strong demand for both Sportstyle and Performance products. In addition to sneakers, bags and socks are also growing strongly across regions. There are several ongoing factors that give us confidence that Salomon footwear is well positioned for significant profitable growth in the years ahead. Number one, global Sportstyle momentum continues. One of Salomon's unique strengths as an outdoor brand, is how well we are connecting with younger consumers, especially women. Our Sportstyle offering is critical to Salomon's unique position as the modern outdoor sneakers brand, resonating with women in a way traditional outdoor brands have not. Second, our performance and running lines are also having great success. Our GRVL franchise is unlocking the run category for Salomon like never before. Salomon is gaining traction in the Run Specialty channel in North America and EMEA. And even China, which has been a Sportstyle-centric market is seeing traction in Performance Products. We are also seeing a benefit from improving capability to launch globally coordinated marketing campaigns to support our Sportstyle and Performance launch. Third is Salomon's continued amazing brand heat in Greater China and Asia, where we believe we operate the most productive and profitable sneaker shops in the industry. Beyond Great China, Salomon is also experiencing surging demand in Korea and Japan, both large sneaker markets. Fourth, our epicenter strategy is working. Our strategy to open a handful of brand stores alongside strategic elevated wholesale distribution in key metro markets is critical to elevating Salomon's presence and awareness globally. Epicenter cities include Paris, London, Shanghai, Beijing, New York, L.A., Milan, Miami and more to come. Fifth, we are seeing accelerating demand in Europe, Salomon's home market. Salomon is experiencing strong pull demand from consumers, which drives strong reorders, preorders and sell-through for both Sportstyle and Performance. Sixth in North America, which is still a much smaller sneaker market for us compared to Europe or Asia. It's growing at a solid double-digit rate, but under the surface. We can see that it's growing even faster. We are still exiting certain retail and e-com channels that work right for Salomon, while we simultaneously ramp up our North America direct-to-consumer footprint and wholesale expansion with the key strategic partners. Lastly, as we continue to elevate Salomon's brand awareness, we are excited about the upcoming Milano Cortina Olympic, where Salomon is a premium partner, outfitting all volunteers. This will be a great moment for the brand in its home market. I also want to mention our Winter Sports Equipment franchise, which had a very strong Q3 with healthy shipment to start the season and solid order books for the winter season overall. We were thrilled by the outstanding performance from Atomic athletes in the World Cup in Sölden, Austria. The event represents a great start for the season in Europe with record attendance and the broadcast viewership, which is a positive indicator of the engagement and the passion people in Europe have for winter sports. In 2025, Winter Sports Equipment is expected to represent only 28% of the outdoor performance segment, down from 46% in 2022. Moving to Ball & Racquet highlights. Ball & Racquet had strong sales in Q3 with 16% growth, driven by continued strength in Softgoods and racquet sports. Our Tennis 360 products continue to resonate very well with consumers from performance racquets to tennis apparel and footwear. Wilson Softgoods continued its explosive growth, more than doubling in the quarter with very strong growth across all 3 major regions. The brand has some big moments at this year's U.S. Open, both on and off the court. Wilson hosted brand activations across New York cities during the tournament, including our 4-day Wilson Tennis Club pop-up in Soho and our on-site U.S. Open shop again posted record traffic and sales. On court, Aryna Sabalenka won her fourth singles titles at the U.S. Open playing with Wilson Blade v9. On the product side, in July, Wilson unveiled Ultra v5. This is the most versatile Ultra racquet yet designed for intermediate to advanced players seeking both power and precision. Beyond the Tennis 360, we saw slight growth in golf, driven by EMEA and the Dynapower line and Infinite putter. Baseball was essentially flat, as growth in bats was offset by a decline in gloves and gear. Inflatables was down due to continued challenging market conditions and tariff-driven price increase. U.S. retailers and consumers are showing some price sensitivity in this category, and we plan to introduce a slightly lower price point, premium ball next year to make sure we are well positioned at the sweet spot on the price spectrum. With that, I will turn it over to Andrew. Andrew Page: Thanks, James. The headline is that our strategy is working. Our brands are firing on all cylinders, allowing us to exit Q3 with momentum and setting us up to enter 2026 with confidence. Before I get into Q3 results, I want to personally thank our more than 13,000 employees around the globe for their obsessive focus on the consumer and continued push toward operational excellence. These results are only possible through their efforts. Now to our results. Salomon footwear continues to add a strong second leg of profitable growth to Arc'teryx' already exceptional trajectory, significantly elevating the financial profile and long-term value creation potential of the Amer Sports portfolio. All 3 operating segments delivered both sales and margin ahead of expectations in the third quarter. And given our strong third quarter results and continued momentum, we are raising our full year revenue, margin and EPS expectations. Amer Sports grew sales 30% in Q3 on a reported basis or 28% ex-currency. The strong group sales performance was led by Outdoor Performance, followed by Technical Apparel. Ball & Racquet sales also accelerated and delivered double-digit growth. By channel, the group continues to be driven by direct-to-consumer, which grew 51% led by Salomon in Greater China and APAC. Wholesale grew 18% at the group level, also led by Salomon. Growth accelerated across all regions. Regional growth was led by Asia Pacific, which increased 54% and China, which grew 47%. EMEA accelerated to 23% and the Americas accelerated to 18% in Q3. Turning to profitability. Adjusted gross margin increased 240 basis points to 57.9% in Q3, primarily driven by favorable channel, geographic, product and brand mix. Gross margin also benefited by approximately 50 basis points from onetime inventory reserve adjustments. Adjusted SG&A expenses as a percentage of revenues was flat year-over-year and represented 42.3% of revenues in Q3. The Technical Apparel SG&A leverage on strong growth was offset by slight deleverage at Outdoor Performance and Ball & Racquet due to ongoing investments in Salomon Softgoods and Wilson Tennis 360. Led by strong gross margin expansion, we generated 130 basis points increase in our adjusted operating margin from 14.4% last year to 15.7% in Q3. Corporate expenses were $38 million, up from $23 million in Q3 of last year. D&A was $119 million, which includes $43 million of ROU depreciation. Adjusted net finance cost in the quarter was $18 million, which comprised primarily of $26 million of interest expense, partially offset by $7 million of FX gains on the remeasurement of certain monetary assets. In the quarter, our adjusted income tax expense was $68 million, which equates to an adjusted effective tax rate of 26%. Adjusted net income in Q3 was $185 million compared to $71 million in the prior year period. Adjusted diluted earnings per share was $0.33 compared to adjusted diluted earnings per share of $0.14 last year. Now turning to segment results. Technical Apparel revenues increased 31% to $683 million, led by Arc'teryx. Growth was fueled by 46% direct-to-consumer expansion, including a reacceleration in our omni-comp to 27% from 15% in Q2 of 2025. Technical Apparel wholesale revenues grew 11% Regionally, the Technical Apparel growth rate was led by Asia Pacific, followed by the Americas, Greater China and then EMEA. All regions grew strong double digits. Arc'teryx stores are critical to the brand's growth, especially how we engage with local consumers and community. Our stores include a mix of different formats ranging from multilevel large-scale Alpha flagship stores to small format very distinct mountain town shops. In Q3, excluding the recently acquired stores in Korea, which I will discuss shortly, Arc'teryx opened 4 net new stores with 10 openings offset by closures of 6 legacy locations as part of our ongoing strategy to optimize the quality and productivity of our store fleet. New store openings included the Arc'teryx flagship in Vancouver at Robson Street. Arc'teryx also opened brand stores in Manchester, U.K.; Canberra, Australia and Takanawa, Tokyo. We have opened 12 net new stores year-to-date, and we continue to plan to open approximately 25 net new Arc'teryx stores for the full year, with the largest number coming in North America. Our store opening plan incorporates a similar level of gross new stores as in 2024, partially offset by the closure of certain outlets and suboptimal locations. In Greater China, we continue to focus on optimizing Arc'teryx' retail footprint. This year, we will have slight net store closures, including some legacy partner doors. However, we will still grow our owned store count and our overall square footage in China with larger format, higher quality and more productive locations. A good example of this is our upgrade of the original Arc'teryx flagship in Shanghai at the Alpha Center, which will reopen this month after expansion and renovation. Looking ahead to 2026, we are planning for Arc'teryx to have net store openings in China after years of rationalizing the store fleet in the region. In North America, I would highlight our second New York City Alpha store, which recently opened on Fifth Avenue at Rockefeller Center. This store is the most pinnacle expression of the brand in the U.S., and we are encouraged by the strong sales in the first few weeks. With nearly 12,000 square feet, it's one of the largest stores in North America and a bold step forward in Arc'teryx' retail expression, designed to educate, inspire and connect more people to the mountain through immersive storytelling and product innovation. In Q3, we also closed our asset purchase agreement with Nelson Sports, Arc'teryx' distributor in Korea since 2001. This deal effectively converted 46 partner stores into our own fleet, which include a number of small format shop-in-shop locations. The revenue and margin impact in Q3 was negligible. Bringing Korea in-house will benefit our top line and operating profit dollars, as we convert from wholesale partner revenues to DTC revenues. Bringing Korea in-house will have an immaterial impact on both the segment and group operating margin. This acquisition will contribute approximately $25 million of incremental sales in Q4. On an annualized basis, Korea is expected to generate approximately $120 million of total sales at retail in 2025. Beyond 2025, we believe Korea is a large, high potential market for Arc'teryx, given its strong consumer affinity for the Sports & Outdoor category and premium global brands. Technical Apparel adjusted operating margin declined 100 basis points to 19.0% as SG&A leverage was offset by approximately 125 basis point headwind from a timing shift related to government grants. Moving to our Outdoor Performance segment, which saw revenues increase 36% to $724 million, driven by very strong performance in Salomon footwear, apparel and bags and socks. By channel, Outdoor Performance DTC grew 67%, led by new doors and higher productivity across markets, especially Greater China and APAC. Outdoor Performance achieved an impressive 33% omni-comp with strength in both stores and e-commerce. E-com is growing across regions, driven by higher traffic. Wholesale grew 26%, driven by strong sell-through and reorders in softgoods. Regionally, the Outdoor Performance growth rate was led by Greater China and APAC, followed by accelerating growth in both EMEA and the Americas. The popularity of Salomon footwear is inflecting globally, and we are well positioned to fully develop this unique opportunity over time. We believe we have very significant growth opportunities in all 3 major consumer regions and have the right talent and team structures in place to take a meaningful share of the global sneaker market. In Asia, direct-to-consumer continues to be the critical growth channel for Salomon, led by our highly productive Salomon compact shop format. We opened 19 net new Salomon shops in Greater China this quarter, including both owned stores and partner stores, bringing our total count to 253 doors. We are on track to reach approximately 290 Salomon shops in Greater China by year-end, including owned and partnered doors. We recently opened our second Salomon flagship in Shanghai, a 7,300 square foot pinnacle expression of the brand located in the French Concession district known for its boutique shopping. The 3-level store offers a more immersive experience for consumers and has performed very well in its first few months. In APAC, we opened 12 new Salomon stores in Q3, 6 in Korea, 4 in Japan and 2 in Australia. Our overall brand awareness and demand for Salomon footwear is rapidly growing across Asia. In Americas, Salomon softgoods grew strong double digits in Q3, and we continue to lay the groundwork to support significant future growth. Our first U.S. store in New York City continues to show incredible traction with consumers, and we are on track to operate 4 stores in Greater New York by the end of Q1 as well as continue to expand our presence in key wholesale accounts. New locations in Q3 include Woodbury Commons in New York, the trendy Bucktown neighborhood of Chicago. And later this week, we're opening our second New York store in Williamsburg, Brooklyn. And I also want to mention our first Los Angeles store on Melrose Avenue in West Hollywood, which opened at the beginning of Q4. The opening has been a huge success with very strong brand buzz in the area, high traffic and long lines outside the store. We were thrilled to welcome many first-time Salomon buyers, especially so many young female consumers. We will continue to focus on epicenters in 2026 and beyond, including New York, Los Angeles, Miami and San Francisco, and we are planning to open 7 to 10 new stores next year in the U.S. Looking at U.S. wholesale, Salomon is seeing growing demand across a variety of high-quality retail partners, including REI, Nordstrom and run specialty shops. In EMEA, we continue to expand our store fleets in key epicenters, including Milan and London. We recently opened our second brand store in Milan and will open a third one in Q4, and we will open a fourth store in London in Q4. In 2026, we will further develop our epicenters into Spain, Germany and other key U.K. cities. For our Winter Sports Equipment brands, Q3 was a strong quarter with double-digit growth across brands and regions. Sales also benefited from approximately $20 million of shipments that were planned in Q4 but went out in Q3. Order books for the season are solid, and our brands continue to take meaningful market share globally. In addition to strong market share in our core ski, boot and binding categories, we see incremental growth opportunities in areas such as snowboarding and protective equipment. Outdoor Performance adjusted operating profit margin expanded 420 basis points from last year to 21.7% in Q3. Margin expansion was led by gross margin, thanks to positive channel, region and product mix as well as favorable product cost driven by our footwear cost optimization initiatives. Gross margin expansion offset the very slight SG&A deleverage due to continued investments in growth. Moving to Ball & Racquet, where revenue increased 16% to $350 million, driven by softgoods and racquet sports. We continue to see very strong momentum in Tennis 360 globally. By category, the growth was led by softgoods, which more than doubled in the quarter with strong momentum in all regions. Softgoods now represents approximately 15% of segment revenue. Racquet sports also grew strong double digits, driven especially by very strong growth in EMEA and China. Regionally, the Ball & Racquet growth rate was led by China, followed by APAC, EMEA and slight growth in Americas. Globally, in Q3, we had 10 net new Wilson brand store openings, mostly in Greater China. Wilson continues to excel in China, and we are planning to open approximately 35 Wilson Tennis 360 shops in China this year, including both owned and partner doors, bringing the total to around 80. In Q3, Wilson celebrated the opening of its urban concept store, Brickhouse in Wuhan, which integrates American tennis club aesthetics with local Wuhan culture, a tribute to Olympic Champion Zheng Qinwen's hometown. In North America, our expansion into the warmer southern markets is continuing to drive strong results. Our Dallas North Park Mall location continues to perform very well, and we continue to expand our new Tennis 360 concept store into more southern and coastal locations, including our new shop in Beverly Hills and an upcoming shop in Miami. We also continue to expand our Tennis 360 test in new DICK'S Sporting Goods locations, including House of Sports locations. In APAC, we are excited to expand our retail format into 2 new markets, Japan with our first store in Tokyo's Marunouchi district and Australia with our first 2 stores in the Melbourne area. Ball & Racquet segment adjusted operating profit increased 70 basis points to 7.6%, thanks to strong gains in gross margin, driven by favorable product, region and channel mix and pricing. Ball & Racquet profitability also benefited from the above-mentioned onetime inventory reserve revaluations. These gains offset higher tariff costs and slight SG&A deleverage on continued softgoods investments. Turning to the group balance sheet. We ended the quarter with $800 million of net debt. Using the midpoint of our 2025 adjusted operating profit guidance, our net debt to adjusted EBITDA ratio was approximately 0.7x at the end of Q3. We exited the quarter with inventories up 28% year-over-year, slightly lower than our 30% sales growth. We are very comfortable with the level and quality of our inventory. This higher inventory growth is primarily related to 4 factors: number one, earlier receipt of seasonal Arc'teryx merchandise to prepare for better in-stock positions; number two, higher Arc'teryx goods-in-transit resulting from the greater use of ocean shipping versus air freight; three, FX translations due to the weaker U.S. dollar and four, the addition of Arc'teryx' Korea inventory following the recent acquisition. We expect inventory growth rates to normalize in the second half of 2026 when we start to cycle our improved in-stock positions and the higher use of ocean freight. Driven by strong profit growth and disciplined working capital management, we generated $104 million of operating cash flow in the first 9 months compared to $18 million last year. And for the full year of 2025, we expect to generate solid operating cash flow growth versus 2024 levels. Now moving to guidance. The updated guidance assumes the latest tariff rates on all countries will stay in place for the remainder of 2025 and beyond. We remain confident that we are well positioned to manage through a variety of tariff scenarios given our low exposure to the U.S., our pricing power and our clean balance sheet. We continue to expect negligible impact to our group P&L from higher tariffs in 2025 and beyond. Let's begin with our updated full year 2025 outlook. Given the upside in Q3 and our continued momentum, we are raising our full year revenue, operating margin and EPS expectations. We are raising 2025 revenue growth guidance from 20% to 21% to 23% to 24%, including an approximate 100 basis point benefit from favorable FX impact on current exchange rates. By segment, we are raising our Technical Apparel 2025 revenue growth guidance from approximately 22% to 25% to 26% to 27%, including continued strong omni-com growth. We are also increasing our outdoor performance sales growth expectations from 22% to 25% to 28% to 29% and Ball & Racquet from 7% to 9% to 10% to 11% growth. We are also raising our full year adjusted gross margin guidance from approximately 57.5% to approximately 58%, and we're also raising our adjusted operating margin guidance from approximately 11.8% to 12.2% to 12.5% to 12.7%. By segment, we continue to expect an adjusted operating margin of approximately 21% for Technical Apparel. For Outdoor Performance, we are raising adjusted operating margin guidance from 11% to 11.5% to 13% to 13.5%. For Ball & Racquet, we are maintaining our adjusted operating profit margin guidance of 3% to 4%. We are now assuming full year net finance costs of $85 million to $90 million and an effective tax rate of 27% to 28%. The lower effective tax rate is primarily driven by higher profit generation from lower tax jurisdictions. Other operating income will be approximately $20 million for the full year and net income attributable to noncontrolling interest will be approximately $15 million. We now expect adjusted diluted EPS of $0.88 to $0.92 versus our prior guidance of $0.77 to $0.82, which is based on 563 million of fully diluted shares. We are also assuming D&A of $350 million, including approximately $180 million of ROU depreciation. CapEx is expected to be approximately $300 million, primarily to support new store expansion, ERP optimization and distribution and logistics investments. As we have said before, should strong trends continue and better-than-anticipated demand materialize, we believe we will be well positioned to deliver financial performance ahead of our expectations. As we begin to look beyond 2025, we are also confident in our initial 2026 outlook. At the group level, we expect to deliver revenue towards the high end of our long-term algorithm of low double-digit to mid-teens annual sales growth. And we expect to deliver adjusted operating margin expansion within our long-term algorithm of 30 to 70-plus basis points. With that, I'll turn it back to the operator for questions. Operator: [Operator Instructions] Your first question today comes from the line of Brooke Roach from Goldman Sachs. Brooke Roach: Have you seen a sales impact in China following the fireworks incident? If so, when do you expect sales to recover? Do you think there could be any longer-term brand repercussions? Stuart Haselden: Brooke, it's Stuart. Thanks for your question. Arc’teryx China sales trends were softer at the beginning of Q4, but have since rebounded as weather has cooled. We are confident in Arc’teryx's brand position and equity with consumers across all of our markets. We are most focused on connecting with our consumers and communities and delivering great products and store experiences. Operator: Great. And as a follow-up for Andrew, how did this event impact guidance for 4Q? Andrew Page: It did not have a factor in our Q4 guide. Operator: Your next question comes from the line of Matthew Boss from JPMorgan. Matthew Boss: Congrats on a nice quarter. So James, could you speak to your confidence in guiding 2026 revenue growth to mid-teens, which is the high end of your long-term algorithm? And then, Stuart, at Arc’teryx, could you break down the cadence of the third quarter 27% omni-comp? And if you could elaborate on the strong global momentum that you've seen in the fourth quarter or just any change in demand that you've seen as we head into holiday for the brand? Jie Zheng: I'll just highlight our forecast for coming years. So we -- given the very solid foundation we built up in 2025, I think we have a -- the management team got a very good level of confidence to deliver what we guide in 2026. I think mid-teen growth patterns can be secured in 2026. Stuart Haselden: Yes, Matt, it's Stuart. So yes, the omni-comp, we're really pleased to see the momentum in the third quarter. The overall D2C revenue increase of 46%, we think is really healthy. The 27% omni-comp also reflects a strong 2-year trajectory, and that's definitely factored into how we thought about guidance into the fourth quarter. As we look at Q3 specifically, the retail performance was -- from a KPI standpoint was driven by traffic. So we saw really healthy traffic increases, more modest increases in conversion and AOV and [EPT]. Also worth mentioning, markdown levels were pretty consistent year-over-year. So it was not a markdown-driven sales increase. As you look at your -- and your question around the global demand, strong momentum around all of our regions, it was great to see an acceleration in our North American business in the third quarter, where they moved up in the ranking after Asia Pacific, which continues to be the leading region for us. But we still saw some very strong growth in China and in Europe. So we're not really seeing weakness in any of our regions. And it makes us optimistic as we look at fourth quarter and beyond. And yes, so I think feeling really good for how we've now stepped into the fourth quarter and the trends we're seeing quarter-to-date. Operator: Your next question comes from the line of Ike Boruchow from Wells Fargo. Irwin Boruchow: Let me add my congrats. I guess a higher-level question on next year's outlook, just maybe potential additional info on door growth for both technical, basically both for Salomon and Arc’teryx. And then would love to hear a little bit more about the progress on Salomon in the United States specifically? Andrew, can you give us an update of where you are in penetration there? Just there seems to be a lot of appetite for the brand locally here. Just kind of curious how you're measuring that, balancing the growth with the push-pull model? Omar Saad: We'll have Andrew actually take the first question, and then we have Guillaume Meyzenq here who's the CEO of Solomon brand, who will take the Solomon question. Andrew Page: Yes, thanks for the question. With regard to detail on store growth, I will provide more of that update as we get into our Q4 call. So not necessarily ready to provide a detailed update on store growth yet. Guillaume Meyzenq: And for Salomon, so nice to meet you all. Before jumping into North America, I think that we have to put Salomon into the context and the current momentum we have. So I'm convinced that we hold a truly distinctive position in the market, and we will fully leverage it to shape what's come next. We have an incredible opportunity to define and lead the modern mountain sports movement in the market. And if identify a few strengths of Salomon, the first one is the authentic mountain performance, which is what consumer is looking for is authenticity. We are true to what we are doing. We have a global recognition of design language led by innovation. What we are doing and developing is really true for performance, for function. And we have a growing cultural relevance reaching the mountain, the city and the modern lifestyle. And this quarter is definitely the good example of the potential of Salomon in the market, and we believe that this is just a start. If I move on the U.S. case because this is a question, of course, this is today the region that we have to build the fundamentals. So we are showing a strength in EMEA. We are very -- growing very fast in Asia Pacific and China. And today, we are focusing on U.S. And the U.S. provision is coming from this leading position in winter sports and outdoor where Salomon has high market share and high recognition in the market. And now we have to move to the city. And this is what is currently happening by a true epicenter strategy so that we started in New York a few quarters ago. Now we have L.A., the new shop opening we have in Melrose is a good example of a long line of consumer looking at this product. We have also good traction in running specialty distribution in performance. And now it's how we -- all this good signal and insight, which is coming with a new consumer, very often a female consumer, how we are transitioning and translating into a bigger scale in U.S. And this is why we look at more epicenter, more shop opening, having a curated media investment in the right spaces and of course, working with our B2B partner to drive the numeric distribution will expose Salomon to more consumers. And we feel very confident that we are on the right path to accelerate in North America. Operator: Your next question comes from the line of Lorraine Hutchinson from Bank of America. Lorraine Maikis: Just sticking with Solomon, you're pruning back some of the distribution there, which is causing a pressure. Can you talk about when that pressure will abate? And where you are on U.S. awareness at this point for the Solomon brand? Unknown Executive: I think you still speak about U.S. And of course, as I explained, we have this leading position in winter sports and outdoor performance and footwear. And this outdoor performance footwear led us a few years ago to go to places and some distribution that we think they are not anymore relevant, and we think -- and also the partner sometimes also is looking for other purity. This is why we have this kind of looking like negative -- some negative building block, which show finally kind of growth, but not growth expected as we would. We think that the end of H1 '26 will be the last time that we will not have any more anniversary sales, and we will have completely fresh and new setup for distribution. So we still wait for the -- for a few quarters, but I would say that the most of the change has been already implemented. Operator: Your next question comes from the line of Jay Sole from UBS. Jay Sole: I want to ask about Wilson, specifically the Tennis 360 stores. It sounds like -- I think you said you're up to 80 stores in China. Can you just talk about the big picture long-term opportunity in China? And I think you also mentioned that the store in Dallas, I think you said is off to a good start and you're opening some more Tennis 360 stores in the U.S. Can you just talk about the Tennis 360 opportunity outside of China and how that's developed over the last 90 days in your view? Andrew Page: Thanks, Jay. So you mentioned the Tennis 360 concept outside of Greater China. So we have 14, 15 stores in North America. I mentioned the Dallas Park store that's doing really well. We will focus really around the Smile States. So you think about where you concentrate tennis in the Southern Smile of the U.S. starting in Georgia down to Florida, around the south and then back up through California. So that's what I would expect to see from our retail format epicenter concentration. We are still -- we're in the early stages of that. We're excited and we're super motivated about where it's going. The consumer is really gravitating towards the product, but we're still in the early stages of really optimizing and formulating our total owned retail format. In addition to our owned retail format, we've also seen success in our DICK'S shop in-shop format, where we are able to present the full pathway of our Tennis 360 concept at the [indiscernible] and the consumer is really resonating with the consumer there. So you'll start to see the expansion even in the DICK'S and the House of Sports format for the DICK'S locations. Operator: Your next question comes from the line of Paul Lejuez from Citigroup. Paul Lejuez: On the margin guide for next year, I'm curious how much of the expansion is simply a function of business mix versus improvements that you might be seeing within each segment? And then I just wanted to ask a clarifying point on Solomon. Could you just say what is the number of doors that you're actually exiting in the -- within the Solomon wholesale business? And then what are you adding over the next 12 months? Stuart Haselden: Yes. Paul, thanks a lot. The same drivers of our mix shift is as before. It's going to be primarily driven by gross margin expansion. We will continue to make the proper investments in SG&A to continue to drive growth. So the margin expansion that you see will be driven primarily by gross margin expansion, that gross margin expansion is driven primarily by mix shift, both channel and product and region mix shift. As it relates to the number of doors, we're not necessarily going to comment. It's a bit nuanced as Guillaume talked about exiting some wholesale doors that could tell our full expression of the brand and getting into more strategic partners. But as we talked about, start to think about clearing that through H1 of next year and then you start to see as we get into the third quarter of next year, you start to see the brand really show up in the strategic partners that we... Operator: Your next question comes from the line of Anna Andreeva from Piper Sandler. Anna Andreeva: Congrats. We wanted to follow up on the Americas. Nice to see the region accelerate to high teens. Can you provide more color what you saw by channel? And how did U.S. perform within that? I think you mentioned slight growth at Wilson in the U.S. And as you look into '26 and the high end of the algo, should we expect Americas as a double-digit grower next year? And then we just had a quick follow-up. The CA omni-comp acceleration, great to hear about strength in traffic. Did that headwind from outlet that you saw last quarter begin to moderate? And just remind us, when do we anniversary that outlet dynamic in '26? Jie Zheng: Thanks, Anna. So we'll have Stuart answer the comp and talk about the Arc’teryx. We really think about your first question by brand, not at the group level. So since we have each of the brand CEOs here, we'll let each of them to answer. Stuart Haselden: Anna, it's Stuart. Yes, the acceleration in North America for Arc’teryx is really a function of success of our brand awareness, investments in community and different forms of brand marketing and with the growth of our store footprint. The stores are providing critical catalyst for driving guest engagement and brand awareness across our key markets. So we're pleased to see the success of that reflected in omni-comp. With regard to the -- I'll just stay on the traffic question that you had. The traffic really reflects what I just mentioned that we saw a meaningful reduction in markdown revenue in the first half of the year. So into Q3, we saw our markdowns basically on par, consistent with prior year. So as we think about next year, obviously, we would begin to lap that -- and then Anna, we have Tennis 360 in the Americas, if there's any commentary around channel and the trends there and, [indiscernible] if you want to comment on, I think you covered it pretty well. Andrew Page: Yes. I mean to your point around the uptick in North America, it was primarily driven by our Tennis 360 concept, both in footwear and apparel, both very, very strong growth in the quarter. And the other categories in Wilson also was strong, notably racquet sports was pretty strong, bats was strong, although baseball was relatively flat because it was offset by some challenges with gloves. But that's -- we're really excited about what we're seeing and how that's really inflected and returned to strong growth this quarter. Operator: Your next question comes from the line of Jonathan Komp from Baird. Jonathan Komp: Can I follow up just the initial 2026 view, would you expect technical apparel to be at least in line with the algorithm from September, mid-teens growth with China at least low double digits? Any color there? Andrew Page: Yes, this is Andrew. As you pointed out, we have reaffirmed the full algorithm from Investor Day, both at the brand level as well as at the group level. Jonathan Komp: Great. And then a follow-up just on the Q4 outlook, Andrew, operating profit growth has been very strong in the first 3 quarters, over 60%. It looks like you're embedding a single-digit growth rate in profit for the fourth quarter. So could you just share any more detail, anything unique in the fourth quarter impacting the margin outlook? And is there anything we should expect into the first half of '26 in terms of margin headwinds? Andrew Page: Yes, definitely. As I'll point out, obviously, really strong third quarter. We're excited about it. You see what happens when we're able to over deliver top line, we're able to drop that through to the bottom line. In the fourth quarter, as you start to think about what we're seeing, we still believe we're excited about our full year, you can see the implied guidance for the fourth quarter. But as Guillaume talked about, we're in the early stages of this inflection point. Fourth quarter will be the first full quarter of tariffs. We also have investments that we're making in [indiscernible] and invested in obviously continued market around our [indiscernible]. So we believe the guide for the full year and the implied guidance for the fourth quarter is responsible as well as we continue to say should demand materialize, we are -- there's no structural reason why we won't be able to overdeliver against our guidance. Operator: Your next question comes from the line of John Kernan from TD Cowen. John Kernan: Congrats on another strong quarter. Andrew, just to kind of follow-up on Jonathan's question. The guidance for the Outdoor Performance segment margin is for a decline in Q4. Obviously, there's been a ton of upside to your guidance this year and the incremental margin you've been generating on the soft goods really seems to be flowing through. I'm just curious why the conservatism here in Outdoor Performance and how you're thinking about the margin performance of Outdoor Performance into next year? Andrew Page: Yes. I mean a couple of things. As I talked about, there were some early shipments into the third quarter for sports equipment. We have some meaningful investments we want to make in the fourth quarter in marketing, increased awareness in our North American footwear and we just -- and the Olympics. And so we believe that if the business continues and the demand continues to show up as it's been, that there's opportunities in the fourth quarter. But again, we're in the early stages of that inflection point. So we don't know the end of demand at this point. John Kernan: Got it. And maybe just a quick follow-up on Technical Apparel and the segment margin there was down year-over-year on really impressive top line growth. I think you said there was a timing of government grants that affected the Technical Apparel profitability. Any comments on how you're thinking about fourth quarter and the drivers of operating margin expansion into next year for Technical Apparel? Andrew Page: Sorry, repeat the last part. John Kernan: Yes. Any thoughts on the Technical Apparel segment margin in Q4 and then into fiscal '26? Andrew Page: Yes. Okay. So Technical Apparel margins in Q4, I see those margins are in line. They are relatively strong. We've not -- for the full year, I see those margins being in the low 20s for technical apparel and talk about exceeding margins in the fourth quarter. The timing of the government grants, the point that I was making there is that in the third quarter of last year, we received a higher portion of our government grants than we did this year. And so it created a drag on the third quarter margin this year on a comparable basis. Operator: Your final question comes from the line of Alex Straton from Morgan Stanley. Alexandra Straton: I just wanted to focus on the China growth acceleration in the quarter. It definitely stands out versus a more somber narrative from a lot of your peers. So can you just help us square that difference between you and then maybe the broader Sportswear Group and then how you're thinking about industry dynamics in China into the fourth quarter and then next year? Andrew Page: Okay. Thank you for the question. So I mean, basically, we are quite pleased about the Q3 results in China, and we closed the lineup for the pattern we liked, that we projected in all 3 brands, especially Salomon and Wilson, they're growing extremely well in China market. So I think based on the Q3, we think we got a good level of foundation to finish the whole year in China with a very solid growth. In Q4, I just want to call out for 2 major seasons sitting in Q4, which is Golden Week and the Double 11. So overall, our overall achievement for these 2 major events are quite satisfied, okay? It's reached above our expectations. And I think pretty much we have a very good confidence for China this year and we will have a very good result in 2025. And so [download] for next year, I think it's the foundation is there. I mean we already mentioned, our 3 major brands, they all got a unique proposition in China, which really attract a lot of younger consumers in different segments. And we are in a very unique position to compete in markets, okay? So we are quite optimistic also for 2026 in China market. Operator: And that concludes our question-and-answer session. I will now turn the call back over to management for closing remarks. Andrew Page: Thanks, everyone, for joining. We'll see you in 3 months for our fourth quarter results. Have a great day. Operator: This concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Greetings, and welcome to The Home Depot Third Quarter 2025 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Isabel Janci. Please go ahead. Isabel Janci: Thank you, Christine, and good morning, everyone. Welcome to Home Depot's Third Quarter 2025 Earnings Call. Joining us on our call today are Ted Decker, Chair, President and CEO; Ann-Marie Campbell, Senior Executive Vice President; Billy Bastek, Executive Vice President of Merchandising; and Richard McPhail, Executive Vice President and Chief Financial Officer. Following our prepared remarks, the call will be open for questions. Questions will be limited to analysts and investors. [Operator Instructions] If we are unable to get to your question during the call, please call our Investor Relations department at (770) 384-2387. Before I turn the call over to Ted, let me remind you that today's press release and the presentations made by our executives include forward-looking statements under the federal securities laws, including as defined in the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These risks and uncertainties include, but are not limited to the factors identified in the release in our most recent annual report on Form 10-K and in our other filings with the Securities and Exchange Commission. Today's presentation will also include certain non-GAAP measures, including, but not limited to, adjusted operating margin, adjusted diluted earnings per share and return on invested capital. For a reconciliation of these and other non-GAAP measures to the corresponding GAAP measures, please refer to our earnings press release and our website. Now let me turn the call over to Ted. Edward Decker: Thank you, Isabel, and good morning, everyone. Sales for the third quarter were $41.4 billion, up 2.8% from the same period last year. Comp sales increased 0.2% from the same period last year and comps in the U.S. increased 0.1%. Adjusted diluted earnings per share were $3.74 in the third quarter compared to $3.78 in the third quarter last year. In local currency, Canada and Mexico posted positive comps. Our results missed our expectations, primarily due to the lack of storms in the third quarter, which resulted in greater-than-expected pressure in certain categories. Additionally, while underlying demand in the business remained relatively stable sequentially, an expected increase in demand in the third quarter did not materialize. We believe that consumer uncertainty and continued pressure in housing are disproportionately impacting home improvement demand. Today, we've revised our guidance for fiscal 2025, which Richard will take you through in a moment. We remain focused on controlling what we can control. Our teams are executing at a high level, and we believe we are growing market share. We continue to invest across the business, supporting our associates and delivering the value proposition expected by our customers. In September, SRS completed the acquisition of GMS, a leading distributor of specialty building products, including drywall, ceiling and steel framing related to remodeling and construction projects. GMS further enhances SRS' position as a leading multi-category building materials distributor, bringing differentiated capabilities, product categories and customer relationships that are highly complementary to SRS' existing business. We could not be more excited to welcome GMS to the family and look forward to bringing a truly differentiated value proposition to our Pro customers. We're excited to see many of you in person in a few weeks at our investor conference at the New York Stock Exchange on December 9. We will update you on our strategic initiatives, our unique positioning in the marketplace, our investments and the traction we are seeing with our customers as we continue to position ourselves to win market share in both the near and long term. In closing, I would like to thank our store associates, merchants, supply chain teams and vendor partners who continue to take care of our customers and execute at a high level. With that, let me turn the call over to Ann. Ann-Marie Campbell: Thanks, Ted, and good morning, everyone. Our associates did an incredible job focusing on our customers and delivering exceptional customer service in our stores during the quarter. We continue to lean in on initiatives that help our associates do their jobs more effectively while also driving productivity in our operations. I'm going to highlight our progress across a number of initiatives that have helped improve the associate experience and are resulting in a better customer experience and increased customer satisfaction. Last year, we rolled out our freight flow application to all stores, which has improved our freight processes and driven efficiency in all operations. This initiative has significantly improved our cartons per hour metric, resulting in greater efficiency in our onload and pack out process. We also continue to focus on on-shelf availability and through computer vision and Sidekick, we have reached record in-stock and on-shelf availability levels. Lastly, our faster fulfillment efforts leveraging both our stores and distribution centers that you've heard about over the last few quarters have driven an over 400 basis point increase in our customer satisfaction scores. In addition, we continue to focus on our Pro ecosystem, maturing the new capabilities we have built for pros working on complex projects while enhancing the tools we have to serve pros. We are pleased with the progress we are seeing as our customers engage with our capabilities. There are 2 new tools we have deployed over the last several months that help us differentiate our offering. The first is a new project planning tool that we launched in September, which allows our pros to create and manage material lift and track orders and deliveries. The second tool, blueprint takeoffs, will transform the way pros plan and prepare for their projects. This new tool leverages advanced AI and proprietary algorithms to deliver accurate blueprint takeoffs and material estimates in record time. Pros can then quickly and easily purchase all materials they need for their project through The Home Depot, simplifying this complex process by going through a single supplier. This technology replaces a manual intensive process that took weeks to complete, increasing accuracy and reliability. Adding this advanced technology to our ecosystem of capabilities to better serve the pro working on complex projects will further enable us to be the one-stop shop for all project needs from initial planning to material delivery, saving our pros time and money. We look forward to seeing you in a few weeks in New York to provide a holistic view of how our full ecosystem is resonating with our pros and allowing us to gain traction and win in the market. With that, let me turn the call over to Billy. William Bastek: Thank you, Ann, and good morning, everyone. I want to start by also thanking all of our associates and supplier partners for their ongoing commitment to serving our customers and communities. As you heard from Ted, the underlying demand in the quarter was relatively similar to what we saw in the second quarter. However, our results were below our expectations, largely due to a lack of storms relative to historic norms, which most notably impacted areas of the business such as roofing, power generation and plywood to name a few. Turning to our merchandising department comp performance for the third quarter. 9 of our 16 merchandising departments posted positive comps, including kitchen, bath, outdoor garden, storage, electrical, plumbing, millwork, hardware and appliances. During the third quarter, our comp average ticket increased 1.8% and comp transactions decreased 1.6%. The growth in comp average ticket primarily reflects a greater mix of higher ticket items, customers continuing to trade up for new and innovative products as well as modest price increases. Big ticket comp transactions for those over $1,000 were positive 2.3% compared to the third quarter of last year. We were pleased with the performance we saw in categories such as appliances, portable power and gypsum. However, we continue to see softer engagement in larger discretionary projects where customers typically use financing to fund renovation projects. During the third quarter, both Pro and DIY comp sales were positive and relatively in line with one another. We saw strength across Pro heavy categories like gypsum, insulation, siding and plumbing. In DIY, we saw strength across our seasonal product offerings, including live goods, hardscapes and other garden products. Turning to total company online comp sales. Sales leveraging our digital platforms increased approximately 11% compared to the third quarter of last year. We're excited about the continued success we're seeing across our interconnected platforms. Our faster delivery speeds are resonating with customers and driving greater engagement and sales. We know that as we remove friction from the experience, we see incremental customer engagement leading to greater sales across all points of interaction. During the third quarter, we hosted our annual supplier partnership meeting where we focused on how we will continue to work together to bring the best products to market, deliver innovative solutions that simplify the project and offer great value with best-in-class features and benefits. At the event, we recognized a number of vendors across categories who continue to transform the industry with the innovation they bring to our customers on a daily basis. They include Leedarson, Cobra Tork, Feather River, Milwaukee, RYOBI, Frigidaire, Makita, Traeger and many more. We are proud of the innovation and partnership that our suppliers bring to The Home Depot and the value we're able to offer both our Pro and DIY customers. As we turn our attention to the fourth quarter, we're looking forward to the excitement we will bring with our annual holiday, Black Friday and Gift Center events. In our Gift Center event, we continue to lean into brands that matter most for our customers with our assortment of Milwaukee, RYOBI, Makita, DEWALT, RIDGID, Diablo, Husky and more. We'll have something for everyone, whether it's our wide assortment of cordless RYOBI tools or Milwaukee hand tools. And in appliances for Black Friday, we have exciting offers on LG, Samsung, Bosch, Whirlpool, GE and Frigidaire. Our assortment includes multiple exclusive products like LG stainless steel french door refrigerator with Craft Ice and Frigidaire's new Gallery dishwasher with a wash cycle time of only 50 minutes. This quarter, I'm also excited to announce the addition of PGT Windows to our wide assortment of exclusive retail brands, including American Craftsman and Andersen Windows. PGT's impact-resistant windows are engineered to meet some of the highest performance standards in the industry, reducing storm damage risk, providing energy efficiency, UV protection and sound reduction, and they will be exclusive to The Home Depot in the big box channel. Our merchandising organization remains focused on being our customers' advocate for value. This means continuing to provide a broad assortment of best-in-class products that are in stock and available for our customers. It is the power of our vendor relationships, coupled with our best-in-class merchant organization that allows us to offer our customers the best brands with the most innovation to solve pain points, increase functionality and enhance performance at the best value in the market. With that, I'd like to turn the call over to Richard. Richard McPhail: Thank you, Billy, and good morning, everyone. In the third quarter, total sales were $41.4 billion, an increase of $1.1 billion or approximately 3% from last year. Total sales include approximately $900 million from the recent acquisition of GMS, which represents approximately 8 weeks of sales in the quarter. During the third quarter, our total company comps were positive 0.2% with comps of positive 2% in August, positive 0.5% in September and negative 1.5% in October. Comps in the U.S. were positive 0.1% for the quarter with comps of positive 2.2% in August, positive 0.3% in September and negative 1.7% in October. For the quarter and in local currency, Canada and Mexico posted positive comp. In the third quarter, our gross margin was 33.4%, flat compared to the third quarter of 2024, which was in line with our expectations. During the third quarter, operating expense as a percent of sales increased approximately 55 basis points to 20.5% compared to the third quarter of 2024. Our operating expense included transaction fees related to the acquisition of GMS, but otherwise were in line with our expectations. Our operating margin for the third quarter was 12.9% compared to 13.5% in the third quarter of 2024. In the quarter, pretax intangible asset amortization was $158 million. Excluding the intangible asset amortization in the quarter, our adjusted operating margin for the third quarter was 13.3% compared to 13.8% in the third quarter of 2024. Interest and other expense for the third quarter was $596 million, which is in line with our expectations. In the third quarter, our effective tax rate was 24.3% compared to 24.4% in the third quarter of fiscal 2024. Our diluted earnings per share for the third quarter were $3.62 compared to $3.67 in the third quarter of 2024. Excluding intangible asset amortization, our adjusted diluted earnings per share for the third quarter were $3.74 compared to $3.78 in the third quarter of 2024. During the third quarter, we opened 3 new stores, bringing our total store count to 2,356. At the end of the quarter, merchandise inventories were $26.2 billion, up approximately $2.3 billion compared to the third quarter of 2024, and inventory turns were 4.5x, down from 4.8x last year. Turning to capital allocation. During the third quarter, we invested approximately $900 million back into our business in the form of capital expenditures and we paid approximately $2.3 billion in dividends to our shareholders. Computed on the average of beginning and ending long-term debt and equity for the trailing 12 months, return on invested capital was 26.3%, down from 31.5% in the third quarter of fiscal 2024. Now I will comment on our outlook for fiscal 2025. Today, we are updating our fiscal 2025 guidance to include softer-than-expected results in the third quarter, continued pressure in the fourth quarter from the lack of storm activity, ongoing consumer uncertainty and housing pressure as well as the inclusion of the GMS acquisition into our consolidated results. For fiscal 2025, we expect total sales growth of approximately positive 3% with GMS expected to contribute approximately $2 billion in incremental sales and comp sales growth percent to be slightly positive compared to fiscal 2024. Our gross margin is expected to be approximately 33.2%. Further, we expect operating margin of approximately 12.6% and adjusted operating margin of approximately 13%. Our effective tax rate is targeted at approximately 24.5%. We expect net interest expense of approximately $2.3 billion. We expect our diluted earnings per share to decline approximately 6% compared to fiscal 2024 when comparing the 52 weeks in fiscal 2025 to the 53 weeks in fiscal 2024. And we expect our adjusted diluted earnings per share to decline approximately 5% compared to fiscal 2024 when comparing the 52 weeks in fiscal 2025 to the 53 weeks in fiscal 2024. We plan to continue investing in our business with capital expenditures of approximately 2.5% of sales for fiscal 2025. We believe that we will grow market share in any environment by strengthening our competitive position with our customers and delivering the best customer experience in home improvement. Thank you for your participation in today's call. And Christine, we are now ready for questions. Operator: [Operator Instructions] Our first question comes from the line of Simeon Gutman with Morgan Stanley. Simeon Gutman: My first question is more short term on the fourth quarter. So when you guided for the full year after the second quarter, we didn't have GMS in the numbers. And now we do. And then we now know your third quarter came in a little light and that the fourth quarter may be a little lighter on revenue as well. So there's some deleverage. We're having a tough time getting to the full amount of, call it, EBIT dollar shortfall because GMS looks like they made money last year. Are there any expenses that are tied to it? Or how do we think about the deleverage? Richard McPhail: Yes. Simeon, thanks for the question. I think you could look at it 2 ways. Let's talk about fiscal year, and let's talk about Q4. So fiscal year, as you know, we've revised our guidance by 40 basis points from 13.4% adjusted operating margin to 13% operating margin. The walk there, let's talk about the most significant item, which is GMS, the inclusion of GMS in our results. If you take their likely impact to 2025 and you add the transaction expenses to it, you're basically at 20 basis points of year-over-year impact to operating margin. You then take into account the decrease in our comp sales from 1 comp to slightly positive. And then we -- so that assumption would have obviously deleverage that we've spoken of previously. And then with respect to SRS and its impact, first, SRS continues to perform extremely well. There is significant pressure in the roofing market. We know that shipments are down double digits from the absence of storm activity this year. SRS actually comped flat for Q3. And so we think that they are taking significant share. But as our expectations have weakened slightly for them in the full year, rather than seeing them grow at mid-single digits, they're likely to grow low single digits. You do see some deleverage in SRS in the supply chain and in OpEx. And so you add those together and get your revision to the fiscal year guide. And really, you just add to that, if you're talking about Q4, you have all the same dynamics, but let's not forget, you're comparing Q4 last year has 14 weeks of expense. Q4 this year has 13 weeks of expense. And so you've got 50-ish basis points of operating expense deleverage in the quarter. So hopefully, that will help you with the walk. Simeon Gutman: Yes, that helped a lot. And then a follow-up. You mentioned on this call and in the release that there was an expectation of increased or improving demand, I guess, through the remainder of the year at one point. Was that an expectation based on housing or an expectation that there would be storms? And if there was any volatility related to government shutdown, do you have enough time looking backwards since the reopening that there's been an improvement in how the consumer is behaving? Edward Decker: Yes, Simeon, let me step back and just paint a broader picture of what we're seeing with the consumer in our sector. Our comps definitely slowed as the quarter progressed, but great work by the team to register the positive comp for the entire quarter. And as we said, the primary driver of that sales pressure was the lack of storm activity in the quarter. We don't plan for storms per se, but there's always some weather impact in the baseline. And given last year pretty significant storm activity, in this year truly 0. There was no storm activity this year. So we saw that most acutely in October. That was the single heaviest impacted month, and that's where, as Richard called out, the comp progression turned negative in October. And then you talked about the overall economy in housing. We did expect to start seeing some pickup in demand in the second half of the year. And this wasn't just the calendar dynamic of, oh, things will be better in the second half. We're expecting interest rates and mortgage rates to come down, which they did that would have been some assistance to housing. But we really just saw ongoing consumer uncertainty and pressure in housing that are disproportionately impacting home improvement demand. I think the good news is the team, as I said, is executing at a very high level, and we believe we're taking share. And if you adjust for the storm activity, our Q3 comp, the underlying business comp was essentially the exact same as Q2. And adjusting, again, for storm and weather, call that underlying business to be about a 1% comp in each of Q2 and Q3. So now here we are going into Q4, and we're going to see even more quarter-over-quarter pressure from the storm activity. So again, there's nothing that's happened this year. The storm activity and the rebuild and repair continued into Q4 last year. So we'll have even more storm pressure year-over-year in Q4. And then we just don't see the catalyst to increase that underlying storm-adjusted demand in the market. So I mean it's certainly a very interesting consumer dynamic out there. On the one hand, you look at certain economic indicators and you say, geez, things are pretty good. You look at GDP, you look at PCE, those are both strong. But on the other hand, what's impacting us in home improvement is the ongoing pressure in housing and incremental consumer uncertainty. So take housing. I mean, housing has been soft for some time. We all know the higher interest rates and affordability concerns. But what we're seeing now is even less turnover. The housing activity is truly at 40-year lows as a percentage of housing stock. I think we're at 2.9% turnover. And then home prices have started to adjust in even more markets over this past quarter. And then when you look at the consumer, what's going to spark the consumer, we still believe we have one of the healthiest consumer segments in the whole economy. But again, the economic uncertainty continues largely now due to living costs, affordability is a word that's being used a lot, layoffs, increased job concerns, et cetera. So that's why we don't see an uptick in that underlying storm-adjusted demand in the business. So as I said earlier, we're going to keep controlling what we can control, support our associates and deliver just a great value proposition for the customer and believe we took share in Q3 and year-to-date this year and do the same thing in Q4. Operator: Our next question comes from the line of Zach Fadem with Wells Fargo. Zachary Fadem: I wanted to start on the average ticket. I guess any callouts on commodities versus same SKU inflation? And then with last quarter ticking down on promo, curious how Q3 played out and whether you'd expect the industry to be more or less promotional this Q4? William Bastek: Yes. Zach, it's Billy. Thanks for the question. As it relates to ticket, as we've talked about on a few calls, I mean, we continue to see customers trade up for innovation. In fact, we really haven't seen any trade down that we haven't spoken about in previous calls, as it relates to that. So a modest increase in ticket, but most notably, that was from people, innovation and things in the marketplace that we've seen. As it relates to the promotional activity, it's really consistent year-over-year, both in Q3 and Q4. And as Ted mentioned, the fundamental demand in our business, while it didn't increase, certainly was very consistent with what we saw in Q2 outside of, as we mentioned in the storm impact. So from a fundamental standpoint, I feel very good about that and continue to see customers engage. Projects, as I mentioned, they're going to continue to have pressure where they're financed. But from a promotional activity standpoint, it's really a similar environment that it was in -- really for the balance of the year. And certainly, as it relates to Q4 a year ago, it's a similar environment for us as well. Zachary Fadem: Got it. And then, Richard, a couple of follow-ups on GMS. First of all, on operating expenses, could you help us understand what's onetime in terms of impact transactions, et cetera, on Q3 and Q4? And then on the inventory growth, up about 10%, any color you can offer on how much is GMS versus underlying volume versus pricing? Richard McPhail: Sure. You can think about the GMS transaction fees as about 5 basis points of margin to the year or 5 basis points of expense any way you put it, about 15 basis points to the quarter. Obviously, Q3 is one of our larger quarters. And you can think of the impact is about $0.05 of EPS for the year, for GMS transaction fees, and those all occurred in Q3. With respect to the inventory, inventory increases reflect principally the inclusion of GMS now in our balance sheet and the fact that we've leaned into investments, in particular, investments with respect to hitting our speed promise. So we've seen fantastic results from improving our speed and reliability of delivery over the last year. That's something we've leaned into. We have our DFC network, which we think is unmatched in our market. And as we see results from it, and obviously, this quarter, you saw an 11% comp online, we're going to continue to lean into that investment. So for the most part, it's investments in the business. Operator: Our next question comes from the line of Michael Lasser with UBS. Michael Lasser: Given all the comments from this morning, it begs the question, can home improvement demand recover without some assistance from either an increase in underlying housing activity or a reduction in interest rates? And how should this foster the market's expectation towards the recovery or potential recovery in 2026? Edward Decker: Thanks, Michael. We've talked about all the different drivers of demand in our segment. And there are leads and lags in all of them, and we've clearly called out over time that the most statistically relevant would be home price appreciation and household formation and housing turnover. Those 3 right now are pressured for sure. But we also know that we've more than worked our way through the pull forward of the COVID years. And there are many industry reports and calculations of now underspend per household. So on one hand, we're looking at something as much as a $50 billion cumulative underspend in normal repair and remodel activity in U.S. housing. On the other hand, we have less turnover and home price appreciation. So that tension is going to have to balance itself out as we work through the rest of this year and into next year. But fundamentally, our job is to put great value propositions in front of the customer and take share in any environment. So can The Home Depot grow? The answer is yes. Will the industry have some shorter-term pressures with turnover in home price? Yes as well. Michael Lasser: My second question is, as The Home Depot has taken a significant number of big steps over the last few years to gain market share, particularly in the Pro segment, has The Home Depot increased its fixed cost structure such that it's now experiencing deleverage as sales are under pressure, but this can act as a significant tailwind to the earnings outlook as sales improve. Edward Decker: Yes. I mean you're right, Mike. We have had a number of big steps on Pro. It's -- we've talked about the size of the overall home improvement TAM at $1-plus trillion and evenly split between Pro and consumer and how strong we've always been in both sectors out of our stores, the Pro and the consumer, but identified real opportunity to bring increased value proposition to that Pro space by building out wholesale type capabilities to capture more share of wallet with that customer. And that's what we've been doing, and we'll talk a lot about that more in a few weeks in New York. But we're very, very happy with all the initiatives and the organic investments we've made to build out those capabilities. And then we've augmented that with 2 acquisitions of very, very strong wholesale platforms with each of SRS and GMS. Now your question specifically on fixed cost structure, what's interesting, we've mentioned this several times, the organic effort is reasonably asset-light. This -- regardless of whether we lease our DCs or not, the capital deployed in those DCs is first and foremost for general store replenishment. And it's an added benefit that we're able then to deliver to the customer out of those buildings. And as Richard said, the speed equation is a flywheel that works and all our investments in our direct fulfillment centers regardless of what we're doing with the Pro, that's to serve all customers and increase the speed, which we have done very effectively. And then all the other related operating costs, we have variable incentive pay structures for our outside salespeople. We lease trucks and we add trucks and take trucks away from markets as volume ebbs and flows through the season. So really, other than an IT spend, which is modest investment in the scheme of things, there's not been a lot of incremental fixed cost put into the business to support the Pro organic initiatives. Operator: Our next question comes from the line of Christopher Horvers with JPMorgan. Christopher Horvers: So I wanted to follow up on the implied 4Q operating margin question. It looks like you're saying about 10.3%. Did you say that 50 basis points of that was the 53rd week lap? And is there anything like unique that we should think about that this is not -- this is or is not the right level to start to think about building the business as we look to the out years? So for example, 53rd week lap or perhaps the seasonality of the SRS and GMS business structurally changing the normal flow of operating margin over the year? Richard McPhail: Yes. Thanks, Chris. I would use our full year guide as the appropriate jumping off point. I think Q4 has a couple of items of noise. The first was the 53rd week. The second actually is the shape of the business. And if you look, you can actually see, for instance, the public filings of GMS when they were a public company and see the Q4 or rather our Q4 is a significant low point from a volume perspective. That's true for SRS as well. And so SRS and GMS see seasonal swings that are greater than Home Depot. You're going to just see that amplified if you hold Q4 in isolation. And so that's why I would really point you to full year as the right jumping off point for your modeling. Christopher Horvers: That's super helpful. I mean if you step back about the... Richard McPhail: The 53rd week is a year-over-year contract. So it doesn't impact your 2025 numbers, but it does impact the year-over-year. Christopher Horvers: Got it. Makes sense. If you think about this quarter, I mean, if you look at the monthly basis, even with the really tough weather/hurricane-driven compare in October, if you also look at the last -- the first 3 quarters of the year, the 2-year trend seems to be improving on the line, which points to replacement cycle demand and maybe some pricing and just life moves on. I guess -- and then there's some research out there that points to maybe the consumer is waiting for the full effect of the head. We have a couple of meetings coming up, and you had all this noise with a government shutdown that impacted even retailers that sell milk and eggs and take share every day. So why wouldn't we think that the launch point into 2026 is sort of 1 or if not better than this 1% sort of underlying demand just because uncertainty goes away, full effect of the Fed, housing stock ages and life moves on and replacement cycle demand continues to build. Edward Decker: Well, yes. And Chris, another positive add, there'll be more robust tax returns and the tax rates going into effect in '26. So yes, there's a positive story there. But again, the underlying 1%, that is what it was. And this ongoing consumer uncertainty we're talking about and specifically housing turnover and now price, those are near-term and newer phenomenon. Richard McPhail: Let me -- Chris, I mean, I'll just circle back. I was focusing on your question in context of Q4 being a jumping off point and thinking about 53rd week. Let me add something, though. When you pro forma GMS, we do need to take that into account. So on a pro forma basis, recall, we've sort of guided you to within The Home Depot numbers now with SRS included, SRS changes our margin profile by about 80 basis points of gross margin and about 40 basis points of operating margin. GMS, which was about half the size of SRS is about half the impact. So you've got a pro forma, this is not fiscal year, but a pro forma impact of about 40 basis points of GMS and about 20 basis points -- and about 20 basis points of operating margin for GMS, so 40-20. You add those together, you roughly have a change in our profile with both of them together of 120 basis points of gross margin and 60 basis points of operating margin. Now when you're talking fiscal year 2025, obviously, we have some wonkiness in the comparison periods. We've owned SRS for a full year of 2025, but only owned them a partial year in 2024. We will own GMS for about 5 months in 2025 and own them for no months in 2024. So I'm just going to avoid all the steps in the math and tell you, on a fiscal year perspective, you've got about a 55 basis point impact to gross margin year-over-year, reflecting the ownership of both SRS and GMS and about a 35 basis point impact to operating margin mix, reflecting the year-over-year comparison of those ownership periods of SRS and GMS. We'll clarify this more just one more time when we move forward and in the future, talk about future years. But hopefully, that gives you a little bit more clarity. So I do want to put an asterisk. The jumping off point is our full year guidance, but you also have to include that comparison or rather the full year impacts of GMS next year. Christopher Horvers: Right, offset by a tick of transaction fees. Richard McPhail: That would be correct. Yes. Operator: Our next question comes from the line of Zhihan Ma with Bernstein. Zhihan Ma: I wanted to follow up on the complex Pro and GMS side. So firstly, a short-term question on the $2 billion contribution to sales from GMS this year. I think if we do the math based on the reported numbers last year, kind of implies a high single-digit percentage decline on a year-over-year basis. I don't know if I completely got that math right. If that's true, how much of that is macro weakness versus underlying share dynamics? And is there any additional color you can provide on that underlying market? Richard McPhail: So basically, you're owning it for a quarter plus 8 weeks, and you're heading into the lowest -- the lowest quarter of the year for GMS' fiscal year. There was also weather impact across Home Depot, SRS and GMS. No one was immune to the broader weather impacts in the market. And so $2 billion is an approximation. We know that GMS continues to take share. We continue to take share as an enterprise and particularly in all of GMS' categories, and we feel great about that business going forward. Zhihan Ma: Got it. And then a long-term question, to your point about the current margin dilution impact from the acquisitions. Now is there a long-term argument that as you further consolidate -- I assume as you further consolidate in the complex Pro space, is there a path for you to structurally improve or recover your margins as you start to gain more bargaining power versus suppliers? Edward Decker: Well, there's structural differences in the margins of the wholesale business in retail. I mean, at the highest level, retail would have higher gross and lower operating cost in the inverse with wholesale. Of course, as we drive synergies between the 2 platforms and the most important synergy is the cross-sell and the value proposition to the Pro, we'll be able to leverage incremental sales in both retail and wholesale platforms to leverage the businesses. And of course, just operating efficiencies across a larger scale business will be able to drive efficiencies as well. But the fundamental difference of wholesale margin structure and a retail margin structure would be the case going forward. Those wouldn't dramatically change. Operator: Our next question comes from the line of Seth Sigman with Barclays. Seth Sigman: I had a couple of follow-up questions. Just first on transactions slowed while ticket accelerated this quarter. Just curious, how do you read that? Are there any signs of elasticity? Maybe just elaborate on price changes that you made in the quarter? Or is the slowdown in transactions just really storm related? William Bastek: Yes. Thanks, Seth. It's Billy. I'll answer your last question first. As it relates to the transactions, that was really related strictly to the storm impact that we called out. As I mentioned in our Q2 call after some policy changes were made around tariffs that we would take some moderate price moves with the entire strategy to make sure we protected the project. And so as it relates to elasticity, it's a little early. And then you couple that with a lot of dynamics in the marketplace over the last 60 days, 90 days since our last call, it's a little early to say how much of that is going to -- the elasticity piece will play out. I'm thrilled with the work that the team has done. If you go into our stores right now and look at Gift Center and all the value that we have there and certainly with our holiday program, same thing. So we're watching that. Again, our entire goal was to protect the project, and it bears also to point out that over 50% of our inventory is not part of tariffs and is obviously sourced domestically. So we'll continue to watch that and look forward to the Q4. Seth Sigman: Okay. And then just a follow-up on some of the demand comments today and what seems like a more cautious view on the consumer. I'm just trying to figure out how to reconcile that with big ticket still outperforming. You've had a few quarters of big ticket being positive that continued this quarter. And I guess just based on what you've seen historically, should that be a leading indicator for big projects that have still been pressured? How do you think about that? William Bastek: Well, I mean, you pointed out correctly. And in my prepared comments, I talked about big ticket transactions over $1,000 or positive 2.3%. But I wouldn't read into that from a project standpoint. Think about appliances, think about power tools and some of those pieces. Those are individual items as we've kind of talked about that metric in the past versus more of the project-oriented pieces that customers are still challenged with based on all the things that we've talked about earlier. Edward Decker: I think some of that -- some of the big ticket as well, we've called out the pressure on commodities overall. But some of that big ticket is the success in our Pro initiatives. I mean the managed accounts, the activity that Mike Rowe and team are driving to capture more share of larger Pro complex purchase. That is also driving that. So it's not so much that it's an indicator of demand as it is an indication of our taking share in bigger ticket pro-oriented project. Operator: Our next question comes from the line of Chuck Grom with Gordon Haskett. Charles Grom: There's a lot of talk about a K-shaped economy right now, but we're starting to see more evidence of job losses for white collar employees. So I guess I'm curious when you look at your data, is there anything you see that supports more fatigue in your upper income customer base? And I guess as a follow-up, anything regionally that you'd call out over the past couple of months? Edward Decker: Well, I think that regionally, the most acute difference, again, is the storm and weather patterns. On the larger or the higher income cohort, we don't see anything specific. As Billy said, there has not been a lot of trade down, and we've talked in the past, things like countertops, there's been some trade down, but we have still not seen trade down across the broader assortment in the store. If there's an indication of maybe some fatigue in taking on bigger projects, we have seen Pro backlogs and larger backlogs start to diminish a little bit. So our pros are reporting months that they're booked out. As we know some time ago, you couldn't find a pro. And then they all had full books, and we're seeing a little softening in larger project backlog. I can't say we've tied that directly to an income cohort, but we've definitely seen the dynamic. Charles Grom: Okay. And then just, Richard, can we just double-click on the opportunity to improve the margin structures of both GMS and SRS? It sounds like 30 -- 35 basis points of pressure this year. You probably have some wrap of that into '26. But just like broader picture over the next few years, I mean, how should we think about the improvement line for those 2 businesses? Richard McPhail: Well, we don't like to separate them out. While they do operate independently, as Ted said, the name of the game here is synergies and synergies in the form of cross-selling. And so I think the leverage in the businesses is going to be a function of how we create a differentiated value proposition across the entire enterprise, including SRS and GMS. So look, SRS, the combined entity is an engine for growth for The Home Depot. And so we're just getting started. So I wouldn't put a formula on it, but it's all going to be a function of how fast we can drive cross-sell. Operator: Our next question comes from the line of Steve Forbes with Guggenheim. Steven Forbes: Maybe, Richard, on the idea of cross-selling, would love to sort of hear high-level thoughts on -- I don't know if you can like rank order how you guys see the cross-selling opportunities today now that GMS is integrated. So what are you sort of building the business for from a cross-selling standpoint as we head into next year? Like rank order the opportunities would be great. Michael Rowe: Yes. Amit, it's Mike here. Thanks for the question. We see just from the relationships that have already been established between the outside sales force that we've got here within Home Depot, combined with the sales forces that they have originally with SRS and now with GMS, there is account handoffs that happen. So a great example, recently, with GMS engaged in a large roofing sale on a property, the customer was looking for much more in terms of product, in terms of whether it be framing, flooring and more. And that relationship then that SRS introduced to The Home Depot outside sales force to come in and sell that engagement to the contractor worked quite successfully. And that's just one example of many that have happened, and they happen both ways, whereby The Home Depot sales organization recognizes a large roofing opportunity that they can pass over to SRS or a large drywall opportunity that they can pass over to GMS, and those engagements are happening on a daily and weekly basis. Steven Forbes: And then just a quick follow-up. I was hoping to maybe explore the branch growth opportunity across SRS, GMS and Heritage. So I don't know, Ted, if you can provide a current update on branch counts across the various assets. And then like what's the right way to think about or think through the out-year branch growth opportunity? And I don't know if you can sort of talk about like what's the end state as you see it today versus the 1,200 you have today? How do we sort of think about the footprint evolving over the next 3, 5 or so years? Edward Decker: Yes. We'll certainly go into a lot more detail in a few weeks. But the model that SRS deploy is very similar to GMS that they'll drive organic comp growth through existing branches. They open greenfield branches. And then they'll focus on tuck-in customer list expansion-oriented acquisitions. And they've been doing that quite successfully. On the branches, think of SRS GMS, 40 to 50 branches a year, and they've been sort of running at that pace since we acquired SRS. And then they've done a handful of little tuck-in acquisitions. And again, these can be a 1 branch, $5-ish million acquisition or a smaller regional $30 million, $40 million, $50 million, a couple of few branch operations. So it's going really, really well, and we see that continuing with a key part of the business model. Richard McPhail: And I mean, just to -- it's not just about our plans. It's actually happening right now. If you talk about our non-comp sales, putting new stores and new SRS branches together, you've got about 0.5 point of sales growth driven by those 2 investments. And so we're thrilled with that. Isabel Janci: Christine, we've time for one more question. Operator: Our final question will come from the line of Steven Zaccone with Citi. Steven Zaccone: I wanted to follow up on the storm impact. So it sounds like it was 80 basis points of the third quarter pressure to same-store sales. How large will that be in the fourth quarter? And then we should be mindful of that, that that's also a headwind to think about in the first half of next year? Richard McPhail: Well, thanks. As Ted said, the underlying demand for the business was sort of similar Q2 to Q3. If you talk about storm Q3 to Q4, we absolutely are lapping strong results, in fact, even slightly higher sales last year in Q4 than Q3. Let's call it relatively even. So let's say, you basically, if you've got underlying minus the storm impact, you've got pretty much similar run rates for Q3 and Q4. Steven Zaccone: Okay. Understood. And then your comments on the housing pressure, how does that inform your maybe near- to medium-term outlook for SRS and GMS, right? Like these are new assets for Home Depot. So should we think that original expectation of mid-single-digit growth for SRS stepping down to low single digits? Is that kind of a run rate we should consider for the near to medium term? Edward Decker: I mean I wouldn't say that. We'll talk more about this in a few weeks. But the first thing to remember is SRS is much more in the reroof than new construction. So they're 80-plus percent reroof. So yes, their 15%, 20% of the business that goes into new construction is impacted. But the fundamental business is reroof activity, again, which is why it's disproportionately impacted with storms, particularly in their home and biggest market, which is Texas, which is by far, we think of hurricanes, we think of hail and other wind events. There was none such in 2025. So no, we look at SRS as a long-term mid-single-digit grower. And this is principally a storm impacted dynamic that's taken them down to flattish right now. But as Richard said earlier, we think roofing shipments, you can see this by reported data, roofing square shipments into the market are down mid-teens and SRS was flat. So clearly taking share. Operator: Ms. Janci, I'd like to turn the floor back over to you for closing comments. Isabel Janci: Thanks, Christine, and thank you all for joining us today. We look forward to speaking with you at our investor conference on December 9. Operator: Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.
Pedro Courard: Good morning, good afternoon. My name is Pedro Courard, I'm CEO of Atlantic Sapphire. And today, together with Gunnar Skinderhaug, our CFO, we will present the third quarter operational update of the company. The company has been performing according to plan during the last quarter. In terms of production, achieving 1,400 tonne HOG in the third quarter at an average weight of 3.1 kilo HOG. And in terms of prices, we achieved $8.6 per kilo, let us say, 19% above the U.S. price index. We have continued the process of operational improvement in all areas, allowing us to keep our ambitions in terms of future production. As we are finishing the operational upgrades started in 2025, we are now realizing the positive impact of having more stable systems. While our feed conversion remains stable in 1.3, we have been constantly increasing our feed consumption rate permitting us sustain our future production plans. Losses were slightly higher than in previous quarters, but still within normal ranges and very low. Keeping our trend for 2025. During the third quarter, we increased our harvest maintaining good average weight, reaching premium prices. Following market tendencies during the quarter, we had a decrease in prices compared to previous one. Both net and standing biomass are showing stable levels for the last 2 quarters, in line with our expectations. Gunnar Aasbo-Skinderhaug: Efforts are currently on Phase 2. improving biological and financial performance. Phase 1 harvest data improving, sales performance is improving. As Pedro mentioned, and profitability measures are on track. All efforts are currently on Phase 1. Phase 2 investments are preliminary cost as we focus all our efforts on improving Phase 1. The profitability measures are on track and will drive down unit costs in the coming periods, mainly from 3 areas. Scale is increasing as volume increase, scale effect is increasing. Current harvest volume is expected at 5,400 metric tons for 2025, growing to 7,000 metric tons for 2026 and 7,500 metric tons for 2027. Another improvement area is cooling and energy as new measures allow more efficient water cooling on the facility. The third main area is maintenance as Pedro mentioned the maintenance program is executed and completed and will drive down unit costs going forward. Beyond the ambition, we see further potential going forward. Also through scale, increasing from 7,500 and beyond, we see optimized Phase I operating at 8,500 tonnes annual harvest weight. We also have further potential to improve cooling and energy usage and also improve FCR. This will drive down unit cost in an optimized Phase 1 further. And Phase 2 will allow further scale on the facility, allowing even further reduced operational costs per kilogram harvested. Now we open for Q&A. Gunnar Aasbo-Skinderhaug: [Operator Instructions] We have one question from IntraFish. When do you expect to be able to move to Phase 2 and how have costs for this changed? Pedro Courard: Well, first, it's important to mention that today, we are 100% focused on Phase 1. Our goal is validate Phase 1and everything is going in that direction. Once we are able to validate Phase 1, we will continue spending resources in Phase 2. So far, we don't have yet a cost estimation for this step. Gunnar Aasbo-Skinderhaug: We have no further questions posted. We are open to receiving questions also on e-mail. We will reply as quickly as we can. There is 1 here from DNB. What measures will you take to improve net biomass growth to target 2,200 to 2,500 live weight per quarter? And when do you expect to get there? Pedro Courard: Today, we are running according to the plan. The measure are the normal one. We are increasing the feed consumption per day, our goal is to be at around 32 tonnes per day, and now we are moving directly in this path. So we expect that in the first month of 2026 will be in that level of standing biomass. Gunnar Aasbo-Skinderhaug: There are no further questions posted. As mentioned, we will answer questions also on e-mail. Thank you, everyone, for attending this Q3 presentation. Wish you all a great day. Pedro Courard: Thank you very much.
Operator: Good day, and thank you for standing by. Welcome to the Beneficient Second Quarter Fiscal 2026 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Dan Callahan, Director of Communications. Please go ahead. Dan Callahan: Good morning, everyone. And thank you for joining us on Beneficient's Fiscal Second Quarter 2026 Conference Call and Webcast. In addition to the call and webcast, we issued a results press release last Friday that was posted at Shareholders section of our website at shareholders.trustben.com. Today's webcast as the operator indicated, is being recorded, and a replay will be available on the company's website. On today's call, management's prepared remarks may contain forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ from those discussed today. Actual results and future events could materially differ from those discussed in these forward-looking statements because of factors described in our earnings press release and the Risk Factors section of our Form 10-K and in subsequent filings we make with the Securities and Exchange Commission. Forward-looking statements represent management's current estimates and Beneficient assumes no obligation to update any forward-looking statements in the future. Today's call also contains certain non-GAAP financial measures. Please refer to our earnings press release, which is available on our website for important disclosures regarding such measures, including reconciliations to the most comparable GAAP financial measures. At this time, I am pleased to introduce James Silk, the interim CEO for Beneficient. He was appointed to that position by the Board in July of this year. Mr. Silk previously served as Executive Vice President and Chief Legal Officer for Beneficient from January 2020 until May 2024. During that time, he was integral to the development of the company's corporate structure, the completion of the company's business combination transaction and the navigation of the complex legal issues associated with running the company's business. Additionally, Mr. Silk oversaw the company's operations, underwriting risks and legal groups. After James completes his remarks, Greg Ezell, Chief Financial Officer, will provide some financial highlights. I'll now hand the call over to James. James Silk: Well, a lot has happened over the past 6 months, has faced some challenges. The of Beneficient's business and our market opportunity remains strong. When I talked to the Board about returning, this was back in July, it was clear they were united and committed to Ben, which is important to me. And since my return, management, myself and others have been focused on stabilizing the company, getting the company to a place we can execute on our mission to provide liquidity, primary capital customers in the alternative asset market. It's our core business. And I'm committed to that mission and has been energizing to lead the chart during this transition period As it relates to recent developments, as we previously disclosed, in June, we separated from our former Chairman and CEO, Brad Heppner. That occurred just before our annual report was filed. That separation occurred after the company identified credible evidence that Mr. Heppner had committed fraud against the company. Also, as previously disclosed, Mr. Heppner was recently indicted and now faces multiple criminal charges. The company is considering all available options related to Mr. Heppner's conduct, including counterclaims and litigation against Mr. Heppner. The company also intends to vigorously pursue claims regarding the validity of over $100 million of debt poorly owed to an entity related to Mr. Heppner. Overall, while unpleasant, we believe this is an opportunity for the company to move past Mr. Heppner, both reputationally and substantively and ultimately better position the company to execute going forward. Another important recent development concerns the previously disclosed agreement to settle all claims pending in the lawsuits related to GWG against the company, its subsidiaries in each of their current and former directors and officers. That settlement has been approved by the GWG Busy Court. The district court for the northern history of Texas has granted the motion for preliminary approval of that settlement and the hearing on final approval of that settlement has been set for January of 2026. So important progress on that front. Importantly, the settlement is within insurance limits and requires no out-of-pocket payments by the company. I would also note that the claims against Mr. Heppner's entities are not included in that settlement. The company has also worked to regain compliance with NASDAQ listing rules. As previously disclosed, the company was not in compliance with the NASDAQ periodic reporting requirement with our filings being bladed primarily due to the timing of the developments surrounding Mr. Heppner's reputation. Now as of the first quarter 10-Q filing a few weeks ago, we're now back in line with our periodic reporting. And in fact, thanks to our incredibly dedicated accounting team, we filed a 10-K and 2 10-Qs in just over 6 weeks. So much credit to that team. We've also regained compliance with the market value of listed securities requirement with two. Finally, the company continues to take steps to regain compliance with NASDAQ good price requirements. More specifically, we anticipate holding a special meeting on December 1, 2025, to seek shareholder approval of a reverse stock split of its common stock. Bottom line in terms of NASDAQ compliance is that we worked on a plan of compliance. We presented that plan to the NASDAQ panel, and we've been executing on that plan. Importantly, as part of that plan to regain compliance with NASDAQ's continued listing requirements and what I would view is a strong show of confidence in the company's future. Tom Hicks, our Board Chair, converted approximately $53 million of our preferred units in the company's subsidiary into the company's Class A common shares. In connection with that conversion, we agreed not to sell the shares until October 1, 2028, to 3 years. We've also agreed to forego any potential appreciation of the converted shares during that lockup period. And we also agreed during that lockup period to vote those shares with the Board's recommendation for all matters other than the election of directors. We believe this transaction aligns our interest with those of our common shareholders and reinforce leadership's confidence in the company's mission in the future. Final note on developments, we also continue to focus on our relates to Kansas, we are committed to Kansas. We appreciate Kansas, and we'll continue to work to deliver on our obligation to Kansas and its communities. So far, I focused on recent development -- to that end, we've cut costs and operating expenses, which Greg will discuss further. We've also reduced our legitimate third-party debt from $27 million in January to under $4 million as of today. We are also streamlining operations and plan to roll out simpler ways to provide liquidity and capital to customers. We're also exploring adjacent markets where our solutions may work with minimal extra cost, for example, we're reviewing our existing tools and tech and are looking for ways to put them to use. Operator: Ladies and gentlemen, please stand by your conference. We'll resume momentarily. Dan Callahan: We're just having a little bit of technical difficulty with James' line. So you bear with us, we'll be back with James in just a few moments. In the meantime, Greg, why don't we have you run through the financials, and then we'll pick up with James when we're able to get him back on the line. I apologize to everybody for this. Gregory Ezell: That sounds good, Dan. Yes, we'll turn our results now our attention now to the quarterly results and financial position as of September 30, 2025. First, I'll start with a few highlights from the quarter. We reported investments with a fair value of $244 million. These investments serve as collateral for Ben liquidity's net loan portfolio of $223 million. Revenues were a negative $2.8 million and $15.4 million for the second quarter and year-to-date periods in fiscal 2026 as compared to a positive $8.6 million and $18.6 million in the prior year. GAAP revenues principally reflect mark-to-market adjustments on the investments that serve as collateral to Ben's loan portfolio, which for the current fiscal year also includes adjustments to fair value for investments that we have deemed probable of being sold at an amount less than the most recently reported GP value. These arise specific to our asset sales initiatives that we have previously disclosed. Operating expenses were $15.1 million in the second quarter of fiscal 2026, as compared to $22.3 million in the same period for fiscal 2025. On a year-to-date basis, operating expenses for fiscal 2026 were $95.1 million, which included the accrual of a loss contingency of $62.8 million and additional interest expense on the loss contingency accrual of $1.7 million, as compared to negative $12.0 million for the prior quarter, which included the release of a loss contingency accrual of $55.0 million and a noncash goodwill impairment of $3.7 million. Excluding the noncash goodwill impairment and the accrual or release of a loss contingency, including post-judgment interest in each period as applicable, operating expenses were $13.4 million in the second quarter of fiscal 2026 as compared to $22.0 million in the same period for fiscal 2025. With these same exclusions on a year-to-date basis, operating expense for fiscal 2026 was $30.6 million as compared to $39.3 million in the prior year. Reported GAAP net loss attributable to Ben's common shareholders for the current quarter was $3.6 million and $68.7 million for the current year-to-date period. Primarily reflecting negative mark-to-market adjustments on investments as part of the asset sales initiative and the accrual of the loss contingency including post-judgment interest impacting both the current quarter and the year-to-date period for fiscal 2026. During the current fiscal year, we have completed asset sales or equity redemptions of certain investments held by the customer ExAlt Trust, which has resulted in an aggregate of $46.4 million in gross proceeds on a year-to-date basis through the filing date of our Form 10-Q last Friday. These proceeds have been used to pay down certain debt and provide working capital. Next, we'll move on to our primary business segments. In liquidity, which generates interest revenue for supplying liquidity off the balance sheet and Ben custody, which produces fee revenue for the use of the platform and trust services. As typical, I will be focusing my discussion on these business segments, as it's their operations along with corporate and other that accrues to Ben's equity holders. During the second quarter of fiscal 2026, Ben's liquidity recognized $8.5 million of interest income, a decrease of 3.8% from the quarter ended June 30, 2025, primarily due to a higher percentage of loans being placed on nonaccrual status, partially offset by the effects of compounding interest on the remaining loans. Ben liquidity recognized $17.3 million of interest income for the 6 months ended September 30, 2025, down 24.1% compared to the prior year period. Primarily due to lower loans net of the allowance for credit loss resulting from higher levels of nonaccrual loans and loan prepayments, partially offset by new loans originated during the period. Operating loss for the fiscal second quarter was $0.8 million, an improvement from an operating loss of $6 million for the second quarter -- or for the quarter ended June 30, 2025. The increase in operating performance was due to lower intersegment credit losses in the current fiscal period as compared to the quarter ended June 30, 2025, due in part because of the disposition of certain investments during the period, which generated loan repayments at Ben liquidity sooner than had been estimated in prior period calculation of the intersegment credit losses. Operating loss was $6.8 million for the 6 months ended September 30, 2025, declining from operating income of $2.4 million in the prior year period. This decrease is partially a result of lower revenues period-over-period, plus an increase in the intersegment credit losses in the current fiscal year as compared to the same period in the prior year. Moving on to bank custody. NAV alternative assets and other securities held in custody was $271.4 million as of September 30, 2025, compared to $338.2 million as of March 31, 2025. The decrease was driven by disposition of certain alternative assets, distributions and unrealized losses on existing assets, principally related to the disposition of assets as part of our asset sales initiative and adjustments to NAV based on updated information reported from the fund's investment sponsor or manager during the period, offset by $11.8 million of new originations. Revenues applicable to Ben custody were $3.1 million for the fiscal second quarter, compared to $4.2 million for the quarter ended June 30, 2025. The decrease was the result of the lower NAV of alternative assets and other securities held in custody at the beginning of the period when such fees are calculated, along with certain upfront intersegment fees, that are amortized into revenue over time being fully recognized in a prior period. In custody revenues were $7.3 million for the 6 months ended September 30, 2025, down 32.5% compared to the prior year period, primarily due to lower NAV alternative assets and other securities held in custody, along with certain upfront intersegment fees that are amortized into revenues over time being fully recognized in a prior year period. Operating income for the second fiscal quarter decreased to $2.3 million from $3.1 million for the quarter ended June 30, 2025. The decrease was primarily due to the decline in revenues applicable to this operating segment as described earlier, and employee and professional service expenses, offset by slightly lower segment operating expenses. Operating income was $5.4 million for the 6 months ended September 30, 2025, compared to operating income of $5.6 million in the prior year period. While revenues declined in the current year period as compared to the same period in the prior year, operating expenses declined by a similar amount, primarily due to noncash goodwill impairment in the prior year period of $3.4 million. No such impairment was recorded in the current year period. Adjusted operating income for the 6 months ended September 30, 2025, was $5.4 million compared to adjusted operating income of $9.0 million in the prior year period, with the decrease in adjusted operating income primarily due to lower revenue related to lower NAV of alternative assets, offset by slightly higher operating expenses during the current year fiscal period. As of September 30, 2025, the company had cash and cash equivalents of $4.9 million and total debt of $104.0 million. Distributions received from alternative assets and other securities held in custody totaled $7.8 million and proceeds received from asset sales totaled $37.2 million for the 6 months ended September 30, 2025. This concludes my prepared remarks on the financials. Dan Callahan: Well, we're going to throw it to James, who is back and up and running. James, we'll ask, you were talking about the conversion. James Silk: All right. Can you guys -- Dan, can you hear me? Dan Callahan: Yes. James Silk: Okay. Well, this is exciting, obviously. While we're doing it live, this is not recorded unless this is one of the more creative ways to demonstrate live performance. Moving back to the conversion. So as part of our plant to regain compliance with the NASDAQ continued listing requirements, Tom Hicks, our Board Chair and myself, converted $53 million of our preferred units into the company's Class A common shares. In connection with that conversion, we agreed not to sell the shares until October 1, 2028, so 3 years. We've also agreed to forgo any potential appreciation in the value of the converted shares during the lockup period. Finally, also agreed to vote those shares with the Board's recommendation for all matters other than in the election of the directors. We believe this transaction aligns our interest with our common shareholders and reinforces leadership's confidence in the company's mission and future. I also want to point out -- I also want to highlight that we continue to focus in our relationship with Kansas. In short, we're committed to Kansas. We appreciate Kansas, and we'll continue to work to deliver on our obligations to Kansas and its communities. But that's the recent developments, but we realize the next steps are crucial on the success of our business plan and strategy. To that end, we've cut costs and operating expenses, which Greg outlined. We've also reduced our legitimate third-party debt from $27 million in January to under $4 million as of today. We're also streamlining operations and plan to roll out simpler ways to provide liquidity and capital to customers. We're also exploring adjacent markets where our solutions may work with minimal extra cost, for example, we are reviewing our existing tools and tech and are looking for new ways to put them to use. Put simply, we're working towards making beneficial leaner, more flexible and easier for our target market to understand and do business with. By carrying out these steps, we believe we'll be better positioned to seize new opportunities. The market for early liquidity services is large and growing. A Jefferies study in July found that private market secondaries accelerated and reached a 6-month record in the first half of this year. Global transaction volumes reached $103 billion. That's a 51% increase from $68 billion in the first half of 2024. Accordingly, we believe investors and alternative assets need liquidity and other services, and we have the solutions to meet those needs. I'll close by simply saying that I'm very excited about our future, and I'm glad to be back helping management and the employees on our positive path forward. With that, I'll turn it back over to Dan to close out and take any questions. Dan Callahan: Yes. Operator, we're available for questions. Operator: [Operator Instructions] Our first question comes from the line of Michael Kim with Small-Cap Research. Michael Kim: First, James, I understand the core value propositions of the company remain intact. But just curious how your strategic vision might differ a bit and what your priorities are going forward, particularly as it relates to reaccelerating origination volumes? James Silk: Thank you, Michael. That's a very good question. I think management going forward will be focused on implementing the business model in our core space, which is the sort of high net worth or ultra-high net worth market, focusing on transactions in that $5 million to $25 million range that has been sort of a core part of our early model. I think the difference would be that the -- previously, there's been a focus on perhaps larger transactions, more foundational. And I think our approach will be more approaching with more of an incremental approach in terms of the size of the transactions. Michael Kim: Thank you, Michael. Got it. Makes sense. Okay. And then maybe as you have discussions with some of these high net worth investors, have you gotten a sense that maybe prospective customers might be taking a bit of a pause in terms of allocation decisions, just given sort of market volatility and as you work through sort of the management transition? And then related to that, any update on timing as it relates to naming a permanent CEO? James Silk: So a couple of questions there. In terms of dealing with our customer base, I think the need for liquidity and sort of taking timing, think the need is there. Obviously, I think the market wants to see us stabilize before we begin to move forward, which is what we're doing, and quite frankly, what I believe we've done and positions ourselves to move forward. In terms of my role as the interim CEO, we continue to -- we continue to evaluate sort of this transition period. And I'm sure the Board will be communicating in short order in terms of its approach in terms of the permanent CEO position. But the focus right now has been on stabilizing. We're now shifting more to optimizing our model. As I mentioned before, we're simplifying our approach to our products. And I think that will be the point at which we'll have a -- for further developments in that regard. Michael Kim: Got it. And then maybe just one question for Greg. I appreciate some of the incremental color around on the expense side. But as we look forward, just curious to get your perspective on sort of further opportunities to rationalize the cost base, particularly as it relates to sort of corporate and other expenses. Gregory Ezell: Yes, good question, Michael. I mean, we continually evaluate all of our vendors and ways to be more efficient. I think we've -- as you've seen over time, we really ratcheted those kind of base expenses down. There are some additional opportunities there that we evaluate, but I think there'll be more modest and incremental reductions versus some of the more drastic changes that we've seen comparing the last 6 months in terms of cost reductions. Operator: Our next question comes from the line of Brendan McCarthy with Sidoti & Company. Brendan Michael McCarthy: Great. Just wanted to have a -- start off on the balance sheet. I think in the press release, you mentioned there was roughly $104 million in debt on the balance sheet. Can you provide color on, I guess, kind of the breakdown of that debt? Is all of that stemming from the credit agreement with BCH? And how can we kind of think about the debt going forward? Gregory Ezell: Yes, it's a good question. I'll take that. It's Greg. So on our balance sheet as of September 30, $104 million, about -- about $8 million of that was related to our -- we call it the HICS credit facility called HHBDH in the footnotes. The rest of that is primarily related to the HCLP loans and the HCLP loans, as a reminder, are the notes with Brad related Brad Heppner-related entities that we're investigating the validity of those amounts at this time. James Silk: And Greg, it's worth noting -- sorry, just to follow up on that, right, the HIC/TCV loan is now -- the balance of that is below $4 million. And as Greg noted, the HCLP loan is the Brad Heppner-related debt, which we intend to challenge and has obviously been the centerpiece of the criminal indictment against Mr. Heppner. So we will pursue all remedies as it relates to that debt. Brendan Michael McCarthy: Understood. I appreciate that. And I think there was talk about really exploring adjacent markets, perhaps ways to simplify the operating model. How can investors really think about what that ultimately means looking ahead for Beneficient? James Silk: Sure. From the standpoint of simplifying the model, it's both the cost and transparency process. The current product, the way things are designed, results in a fair number of internal entities that increases some costs and complications on our side. So we're simplifying that from an internal standpoint. And then from a transparency standpoint, the -- the goal is to develop products where the revenues and the cash flows from those products and from those services flow more cleanly into the -- basically into the public company in a way that shareholders can understand easier and also designed to basically provide more value to the common shareholders by going through a little bit of a cleaner approach. In terms of the adjacent markets, the company has developed over time, a fair amount of technology for its internal purposes, including AI-generated tools that help in both portfolio management, as well as data extraction. And that has been a -- these have been internal tools, and we're looking now to externalize some of those, either directly through technology or together with some of the trust related services that we can provide. Brendan Michael McCarthy: Got it. That's helpful. That makes sense. Has there been a conversation with end market customers just related to potentially outsourcing that technology? Or is that still more... James Silk: Yes, we're having some conversations, nothing to report. But yes, we are exploring both the market receptiveness, as well as ways to refine what we have internally and make it more outward facing and so those are part of discussions that we're having. Brendan Michael McCarthy: Great. That's good to hear. And last question for me just on the core liquidity business. Is most of the pipeline still more focused in the PCP channel? Or is there other interest in the general kind of broad liquidity transaction area? Right now, it's the channel has -- reflects sort of where we were, I'd say, 3, 4 months ago, just given the focus on stabilizing, getting ourselves current on our filings, resolving the NASDAQ compliance matters and obviously moving forward off of Mr. Heppner. So -- the pipeline is -- or rather the deal flow is probably more leaning towards the PCP, but that's a -- we are sort of moving forward, as you've gotten into this current on our filings, we're sort of reopening the process. So that will evolve, I think, over the sort of the near medium term. Operator: I'm currently showing no further questions at this time. I would now like to turn the call back over to Dan Callahan for closing remarks. Dan Callahan: Thank you, everybody, for joining us and bearing with us through our technical difficulties. If you want to listen to the replay, it will be available on the Shareholders section of trustben.com. Thanks again for joining us this morning, and have a great rest of your day. Operator: This concludes today's conference. Thank you for your participation. You may now disconnect.
Operator: Ladies and gentlemen, welcome to the conference call on the third quarter 2025 results. I am Mathilde, the Chorus Call operator. [Operator Instructions] And the conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Jürgen Rebel, Head of Investor Relations. Please go ahead. Jürgen Rebel: Good morning, everyone. This is Jürgen speaking. We welcome you to today's call on third quarter results for fiscal year 2025. Aldo, our CEO, will comment on business and strategy; Rainer, our CFO, will focus on financials. We are referring to the Q3 earnings call presentation that you can find on our website. There, you'll also find further materials such as the full comprehensive IR presentation. Aldo, please let us have your thoughts on Q3. Aldo Kamper: Thank you, Jürgen, and good morning also from my side. Overall, I would say a good quarter. Our strategic focus is paying off. We delivered strong cash flow and significant growth in the core portfolio on a like-for-like basis. Profitability was better than previous quarter, also supported by a one-off. We reestablished the base savings continue to be ahead of plan. And I'm now on Page 3, looking at the financial performance of the group. Revenues came in at EUR 853 million, above the midpoint of the guidance. We saw an almost double-digit percentage improvement in our semiconductor business. In the auto lamps aftermarket business, we had double-digit seasonal upswing. The weaker U.S. dollar cost us EUR 20 million top line compared to the previous quarter. Year-over-year revenues are down a bit with 3%. This is entirely due to the weaker U.S. dollar. Note the 0.07 difference in the average euro-U.S. dollar exchange rate, which equals approximately EUR 35 million top line. If we truly look at the like-for-like comparison based on today's core portfolio at constant currencies, we have grown by about 6% year-over-year. This includes the traditional auto lamps business. The semiconductor core business, that as we measure our growth, grew approximately 9% on a comparable basis, a really good result in the current market conditions. It clearly shows that our portfolio choices are paying off. Profitability. Adjusted EBITDA margin improved quarter-over-quarter and year-over-year by almost 1 percentage point to 19.5%. In euro terms, adjusted EBITDA improved by EUR 21 million. Within that number, we have a profit of a bit more than EUR 10 million from the sale of some manufacturing assets in our Singapore production facility. Now quickly on the segments. Page 4, look at the traditional halogen lamp business, a classic seasonal upswing. We saw a steep 13% quarter-over-quarter increase in revenues driven by the aftermarket season. The darker months in the Northern Hemisphere make drivers replace their broken lights in their cars more frequently. Nothing particular to report on specialty lamps for industrial and entertainment applications. The business remained at a similar level as last quarter with approximately EUR 40 million of revenues. We sold this business segment to Ushio as part of our accelerated deleveraging plan as we communicated last quarter. Closing is expected around end of first quarter '26. Adjusted EBITDA stayed almost flat. Why? If revenues were up by almost EUR 25 million, the gross profit fall-through from higher volume was eaten up by a meaningful reduction of inventories. Now on semis. I'm on Slide 5. First, business unit OS. The sequential increase in Opto Semis with 6% revenue improvement, EUR 365 million compared to EUR 344 million in the previous quarter. The increase was mainly driven by automotive, but also by the seasonal peak of the horticulture business. The upswing could have been higher if it wasn't for the negative impact on the top line of the weaker U.S. dollar. Coming to profitability, adjusted EBITDA improved by EUR 3 million to EUR 82 million. At first glance, you might have expected a higher fall-through from EUR 20 million more top line. However, the increase was balanced also here by inventory reductions and the absence of onetime effects that were supported in Q2, such as IPCEI funding catch-up. In the end, adjusted EBITDA margin stayed almost flat at 22.6%. Now sensors and ASICs on Slide 6, an encouraging seasonal jump in revenues by 13% to EUR 271 million. Consumer products were in high demand. Indoor business was okay. Products we basically discontinued still saw some further orders that, that live longer as often. Little changes in demand for industrial and medical products. Year-over-year, business grew by 2%, mainly driven by the new sensor products, which are more than compensating for the revenue loss from the phased out noncore portfolio and the top line impact from the weaker U.S. dollar. Adjusted EBITDA jumped to EUR 64 million. However, I mentioned earlier that more than EUR 10 million of windfall profit from selling manufacturing equipment was included there. Now looking at the semi end market in summary, and we are on Slide 7 here. Sequentially, 9% up and year-over-year, 2% down. If we exclude the noncore portfolio that we discontinued last year, the semi core business grew by 9% year-on-year at constant currencies, well in line with our semiconductor growth model and higher than last quarter. First, automotive. LED inventory correction has ended, but no significant restocking in sight. We even hear some customers who want to reduce their inventory reach even further. Book-to-bill hovered around 1 throughout the quarter. Nevertheless, we saw a slight sequential increase in revenues of 4%. The uncertainty in the supply chain persists, we see a lot of short-term ordering, which is now often below normal lead times. Fulfillment channel inventories went further down. We are now between 7 and 8 weeks. In the old days, 8 to 10 weeks were considered healthy and normal. Second, industrial and medical. In line with the slow recovery of the overall market, we saw a sequential improvement of 2%. However, we're still below last year's level and ignoring the weaker U.S. dollar, maybe roughly at the same level. As always, we have to look at the verticals individually. Horticulture revenues had a seasonal peak, professional lighting unchanged. Demand for industrial automation is improving only gradually. Same is true for medical. When we look at the channel, same picture as last quarter, Europe and U.S. relatively stronger than China. Third, consumer, a steep seasonal increase of 22% compared to Q2. Our main business is sensors for smartphones and wearables. Year-over-year, we see the impact of the weaker USD. The slight decline is entirely due to FX. Business-wise, our new sensor product more than compensate for the phaseout of our products. Now let's talk about future business. I'm on Slide 8. Design wins are underpinning our midterm growth model in semis. Traction in the market continued unabated in the third quarter. We are well on track reaching again accumulated lifetime value of EUR 5 billion of new business for the full calendar year. We landed about 800 projects in the September quarter across all verticals. This pushes the total to already EUR 4 billion for the first 9 months. A few wins that we are very proud of are sticking out. First, in automotive. With our industry-leading intelligent RGBi interior lighting solutions, we secured another design win at a leading Chinese OEM. And on top of that, also a large design win for a prestigious car platform at a European premium OEM. Second, consumer. Our spectral and proximity sensors are the best you can get. This once again convinced leading customers the design wins are worth a couple of hundred million euros. With that, let us look at some of our recent advances when it comes to differentiating technology platforms. Now on Slide 9. We do spend a lot of R&D money as we continue to believe in exciting growth opportunities. One part of our R&D is dedicated to mastering the cost pressure in more established technologies by creating cost performance optimized platforms. The other part of R&D is focused on differentiating technologies, especially for new applications that might see a growth inflection in the future. We're also making sure that our customers benefit from an appropriate IP safety for those innovations. For this, we signed a comprehensive cross-license agreement with Nichia covering thousands of patent protected innovations in LED and laser technologies. The new agreement also covers sophisticated LED packages and also includes metric headlamps as an example. As such, we are the right partner for our customers, holding a truly unique IP position in the industry. On Slide 9, you get an impression of our leadership in infrared emitter technologies that are used in a multitude of applications. We are speaking of AlGaAs material systems that provides LED and laser light between 808 and 1130 nanometers, just beyond what a human eye can see, the so-called near infrared. Our LEDs boast industry-leading wall-plug efficiency and red glow suppression. Our laser IOs boast industry-leading efficiency and optical output power. Together with high-quality, cost-effective standard packages, these components are ideally suited for a multitude of applications that deliver already today a revenue contribution in the triple-digit million territory. We see the infrared LEDs in the car for in-cabin sensing and consumer applications or in drones, among many others. Our lasers are very established in material treatment and LiDAR, but these properties also make them ideally suited for future defense applications such as drone defense or even for more visionary applications one day like nuclear fusion -- laser-based nuclear fusion, a technology that could harness the energy generation process of our sun. We think there's much more to come here on this technology platform. Now let's switch to the sensor side of things on Slide 10. We recently introduced the industry-leading 2-dimensional direct time-of-flight sensor platform. By direct, the sensor measures the time of photon traps from the object and back and calculates the distance pretty fancy. I'm very proud of our engineers who delivered industry-leading sensors that feature twice the frame rate at the same resolution as competitor devices or twice resolution at the same frame rate, whatever you need in your application. You can use this performance for gesture and object recognition, but also for 3D distance measurement. It also enables Edge AI sensing applications, for example, in smartphones. You will see the principle in the lower left corner when an image is enhanced with the 3D dimensional depth information from the sensor, you can place objects such as furniture in an environment completely virtually. Just to give you an example here. We see applications for the sensor technology, not only in smartphones, but also in building automation, home appliances, robot drones, consumer electronics, you name it. Completing our technology product to this quarter, I'm on Slide 11 now. We have the leading spectral sensing platform in the industry. Here, you see Honor's latest flagship model, the Magic 8, a high-end premium smartphone with 4 cameras on the world-facing site. Our sensors allow for eye-fatigue protection and professional-grade color accuracy for an enhanced user experience. With this, let us move to bottom line products. We reestablished the base continues to be a great success as it has been so instrumental in mastering many of the headwinds to our bottom line, especially when it comes to gold price this year. We're on Slide 12 here. By the end of September, we have pocketed approximately EUR 185 million of the implemented run rate savings, another EUR 25 million during the last quarter alone. Now this time for more details on the financials. And Rainer, please tell us about the latest progress. Rainer Irle: Thank you, Aldo. Hello, everyone, from my side as well. Let us look at the balance sheet first. With the private placement of an additional EUR 500 million of U.S. dollar and euro senior notes, we increased our cash on hand position to EUR 979 million end of September and end of October, we were even above EUR 1 billion. After the tap in July, we have approximately EUR 651 million equivalent of the U.S. dollar bond and EUR 1.30 billion the Eurobond, both are due on March '29. Last quarter, we got some questions about why we tapped at a particular moment. If you look at the leverage finance market in the last couple of weeks, it turns out that our timing was pretty good. Momentarily, conditions are certainly less favorable. No news on the Malaysia sale and leaseback transaction yet. We continue to talk to interested parties, but we are not yet on the final approach. The value stood almost unchanged at EUR 422 million end of September. This brings us to an almost unchanged net debt position of EUR 2 billion compared to end of June. Having just mentioned the sale and leaseback, we certainly continue full steam in negotiating the indicated asset disposals on top of the sale of the entertainment and specialty lamps that we announced in July to venture realize proceeds well above EUR 500 million. We are fully on track. Minority shares with a value of only EUR 11 million were tendered during the summer months. Consequently, the outstanding minority put options stood at EUR 570 million or 12% outstanding at the end of Q3. Taking cash, the revolver and bilateral lines into account, our available liquidity significantly increased to approximately EUR 1.6 billion. We are prepared for all eventualities, any liquidity concerns in the market should be a thing of the past. And switching to Slide 14, cash flows. A strong improvement in the third quarter operating cash flow. We recorded EUR 88 million. And that's despite us paying the coupon on the high-yield bonds, which, as you know, is always due in Q1 and Q3. So we paid that in Q3, but we also managed inventories well and made sure we are collecting money from litigation and subsidies. Last year in Q3, we had the customer prepayment of approximately EUR 220 million that came as a onetime positive at that time. CapEx stayed in check, EUR 48 million in the third quarter. For the full year, we will land between 6% and 7% of revenues, well below our long-term average ratio of 8%. In total, we finished the quarter with EUR 43 million positive free cash flow. This brings us year-to-date to breakeven in free cash flow. If you exclude the customer prepayment last year, Q3 was the best quarter in a long time, though Q4 is expected to be better with lower interest payments and counting on the promised money from the Austrian government under the European CHIPS Act. We switch to Slide 15, net earnings and earnings per share. On the left, you find the adjusted figures. The adjusted net result improved in line with EBITDA to EUR 27 million in the third quarter. Adjusted EPS developed accordingly. The net financing result came in at EUR 59 million. Income tax stood at just EUR 5 million. So following the rule of thumb that there's always EUR 50 million, EUR 60 million adjustments per quarter due to transformation cost, depreciation of PPA and share-based compensation, we ended up with minus EUR 28 million net result according to IFRS. Consequently, IFRS earnings per share also came in negative EUR 0.28. That concludes my remarks. And with that, I would like to hand back to Aldo for the summary and outlook. Aldo Kamper: Thanks, Rainer. And now on Slide 16, let me summarize the third quarter results again. Looking at the business, we delivered revenues above the midpoint and profitability at the midpoint of the guidance. 9% growth in the core semi business year-over-year on a comparable basis, well in line with our midterm target model. Execution of reestablish the base program is ahead of plan now with EUR 185 million run rate savings implemented. And we are securing future semiconductor business with unabated design win streak, now EUR 4 billion already in the first 9 months of this year. Looking at the deleveraging plan, everything well on track without being able to go into further detail right now. R&D investments I've presented to you, an example of our relentless efforts to find future growth opportunities by investing in differentiated technology with great potential. Today, we talked about infrared emitters and 2-dimensional time-of-flight sensors. With that, let us look at the right-hand side of the slide, the outlook for the fourth quarter. We expect revenues to come in between EUR 790 million and EUR 890 million at an exchange rate of 1.16. Compared to the beginning of the year, the weaker U.S. dollar cost us a middle double-digit million figure in top line. Automotive lamps will see its peak in the annual lighting season. For semis altogether, we expect a small seasonal decline. Industrial medical might be kind of stable, but we sense a lot of uncertainty in the automotive market, maybe flattish at best, whereas in consumer, the smartphone season is cooling off a bit logically. We expect adjusted EBITDA margin to come in at 17.5%, plus or minus 1.5 percentage points in absent, stable compared to Q3, if you back out the windfall profit from the selling of manufacturing assets in Singapore. Looking at cash flow. With year-to-date 0 and keeping up our promise for the full year, we expect free cash flow of more than EUR 100 million in the fourth quarter, certainly also driven by the expected inflows from the Austrian CHIPs Act. With that, I conclude my remarks, and we're now ready for your questions. Operator: [Operator Instructions] The first question comes from the line of Sébastien Sztabowicz from Kepler Cheuvreux. Sébastien Sztabowicz: The first one is on the automotive market. So do you see the demand building up? It seems that you are coming to the end of the inventory correction, but I'm just curious about the trajectory of growth moving into the next few quarters. And in the short term, have you seen any specific downside to demand linked to Nexperia turmoil or is not something that is affecting the global car production volume for you or your demand? The second question is on the synergies and the cost saving program. You already reached EUR 185 million at the end of Q3, which is well above the target for '25, and you are coming closer to what you expect for 2026. Do you plan to accelerate a little bit more further the cost-cutting action? Or you will stick to EUR 225 million for next year and then you're going to stop cutting the cost base? Aldo Kamper: Yes. Thanks, Sébastien, for those questions. Yes, on the automotive side, I would say inventory situation is okay. We do see that there is a lot of short-term order behavior. And I do also link that partly to the Nexperia topic, just our carmakers also have to be very agile in their production schedules and what they build and when they build it does vary a bit. So I would expect this quarter and next quarter to be impacted a bit by that. But overall, vehicle build volumes globally are actually holding up quite well. And here, it is also important that we have a good position in China as the Chinese market in this is doing -- is growing quite nicely, I have to say. And Europe and the U.S. are struggling a bit. But given our global exposure, we are able to balance that out. So I would say, overall, the story hasn't really changed. We still see more content per vehicle globally that we benefit from a fairly stable vehicle build volume currently and also for next year. At the same time, yes, also the usual price pressure that eats it up a bit. And then, of course, FX that also goes against us. But yes, underlying demand, I would say, is in principle, okay with some short-term hiccups, as explained. On reestablished the base, yes, we were very happy that we are making very good progress, EUR 185 million already. So I would assume that we can get to the EUR 225 million goal also significantly ahead of plan. And we are thinking about how to extend this program after that. But we at the moment, mainly focused on bringing in the savings as quickly as possible of the measures that we've already defined. Operator: The next question comes from the line of Harry Blaiklock from UBS. Harry Blaiklock: The first is just on the consumer business. I know you've had success at one of your big consumer customers in terms of getting a socket rolled out across the whole kind of smartphone portfolio. And historically, you've spoken about potentially getting further socket wins in that business. I was wondering whether you could just provide an update on that. And then my second question is just on whether there's any update you can give us in terms of progress on the further asset disposals for generating over EUR 500 million. Aldo Kamper: Sure, Harry. Thanks for the question. So yes, at the various cell phone customers, we are making good progress and are winning new sockets. And I must say that it goes across both Android and non-Android space in a very steady and good manner, I must say, without calling out one specific socket, but I must say the engagement across the customer base is very strong, and we continue to see good growth potential in this space with our technology. On the asset disposals, yes, it's hard to comment on that in detail, but I can say we are very active in the process and the plan still stands. We will deliver significantly more than EUR 500 million of disposal proceeds. As we have communicated, the first step, the EUR 200 million, on the lamp business, on the entertainment lamp business is in execution. We are progressing well towards closing probably by the end of Q1 next year. And on a second bigger step, we are making good progress, and we'll share that, of course, as soon as we can with all of you. Operator: [Operator Instructions] We now have a question from the line of Reto Huber from Research Partners. Reto Huber: Now I was wondering the adjusted EBITDA, maybe I missed it, that includes the gain from sales of assets, if I understood this correctly. Have you disclosed that number somewhere? And how much is the one-off gain? And then secondly, what is the reduction in year-over-year sales due to disposals? Rainer Irle: Yes. The adjusted EBITDA had a benefit from that asset sale of roughly EUR 10 million, a bit north of EUR 10 million. That's obviously a onetime effect. And yes, if you look at the year-over-year impact from asset disposals from the portfolio, I would say that, that is probably EUR 30 million. Operator: Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to Jürgen Rebel for any closing remarks. Jürgen Rebel: Thanks very much for the interest. We had a lot of people who dialed in. If you have any further questions, don't hesitate to reach out to us. And we're looking forward to receiving your feedback. Thank you. Bye. Rainer Irle: Bye-bye. Operator: Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.
Daniel Yuan: Hello, ladies and gentlemen. Welcome to Futu Holdings Limited Third Quarter 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. After management's prepared remarks, there will be a question and answer session. Today's conference call is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the conference over to your host for today's conference call, Daniel Yuan, Chief of Staff to CEO, Head of Strategy and IR at Futu Holdings Limited. Please go ahead, sir. Daniel Yuan: Thanks, operator. And thank you for joining us today to discuss our third quarter 2025 earnings results. Joining me on the call today are Mr. Leaf Li, Chairman and Chief Executive Officer, Arthur Chen, Chief Financial Officer, and Robin Xu, Senior Vice President. As a reminder, today's call may include forward-looking statements, which represent the company's belief regarding future events, which by their nature are not certain and are outside of the company's control. Forward-looking statements involve inherent risks and uncertainties. We caution you that a number of important factors could cause actual results to differ materially from those contained in any forward-looking statement. For more information about the potential risks and uncertainties, please refer to the company's filings with the SEC, including its annual report. With that, I will now turn the call over to Leaf. Leaf will make his comments in Chinese, and I will translate. Thank you all for joining our earnings call today. We concluded the third quarter with 3,130,000 funded accounts, marking a 43% year-over-year and 9% quarter-over-quarter increase. During the quarter, we acquired 254,000 net new funded accounts, up 65% from a year ago and 25% sequentially. We are encouraged to see accelerated client acquisition in all markets. In the third quarter, Hong Kong posted the highest quarterly net client app since 2021 and remained the largest contributor to new funded accounts among all markets for four straight quarters. We effectively sparked and captured clients' trading interests amid a quarter of strong equity market performance and busy IPO schedules. With a new IPO framework, retail investors in Hong Kong increasingly consolidate their brokerage accounts to increase their chances of getting out CEO allocation. And they tend to pick a trusted platform with the best overall user experience as their main brokerage account. In Singapore, new funded accounts again posted steady sequential growth. We led our peers in DAUs by an even wider margin, further solidifying our position as the number one retail broker in Singapore. Following seven quarters of rapid expansion in Malaysia since launch, we still see a huge runway for future client growth as equity ownership continues to go up. In the third quarter, we further strengthened product localization by launching Versa Derivative and SGX Futures. An upgraded AI tool to support Malay language and local stock analysis. Our annual flagship offline investor event, MoveFest, was held in Singapore in July and in Malaysia in October, altogether attracting over 28,000 investors to sign up and further elevating our brand image in the region. Thanks to our growing brand recognition and product experience, our US business delivered another quarter of high-quality growth. We achieved a high double-digit sequential increase in new funded accounts. We also observed another quarter of more active derivatives trading activity, as both the number of option traders and option contracts traded recorded double-digit sequential growth. As of quarter-end, total client assets reached HKD 1.24 trillion, up 79% year-over-year and 27% quarter-over-quarter. The growth was driven by another quarter of robust net asset inflow, while the appreciation in client stock holdings also contributed meaningfully to the overall asset expansion this quarter. Average client assets logged double-digit sequential increases and hit new highs in every market. Bullish sentiment on Hong Kong and US equities prompted more leveraged positions. The buoyant Hong Kong IPO market also boosted financing demand. As a result, margin financing and securities lending balance climbed 23% quarter-over-quarter to HKD 63.1 billion. Total trading volume rose 105% year-over-year and 9% quarter-over-quarter to HKD 3.9 trillion on the back of favorable market dynamics and upbeat investor sentiment. Elevated trading velocity and technology names lifted overall Hong Kong stock trading volume by 43% sequentially to HKD 1.19 trillion, which accounted for 31% of total trading volume, the highest percentage since 2023. US stock trading volume remained elevated at HKD 2.6 trillion, as many technology and crypto names posted new highs. Trading volume surged 161% sequentially, driven by a 90% quarter-over-quarter increase in crypto asset balance and accelerated trading velocity. Ethereum trading volume quadrupled during the quarter, overtaking Bitcoin as the most popular coin on our platform. In Hong Kong, the launch of Solana for retail investors was well received. Solana contributed meaningfully to the growth of crypto turnover this quarter. We believe that as we continue to broaden coin selection, strengthen product capabilities, and deepen investor education, there is significant potential to further drive crypto trading penetration among our client base. For the period-end, wealth management assets rose 8% sequentially to HKD 175.6 billion. During the quarter, clients increasingly allocated to fixed income funds, alongside the sustained inflow into money market funds. To better serve the bespoke needs of professional investors, we introduced a self-service request for quote function to structure products, whereby clients can customize products based on their desired parameters, access and compare quotes from a number of issuers, and execute trades seamlessly without human intervention. We leverage technology to remove friction in the client experience while driving operating efficiency. We ended the quarter with 561 IPO distribution and IR clients, up 22% year-over-year. We continue to play a leading role in facilitating retail participation in the heated Hong Kong IPO market. In the third quarter, 12 IPOs each attracted over HKD 100 billion in subscription amount on our platform. We served as joint book runners for multiple well-known listings, including those of Cherry Automobile Group and Lens Technology. Notably, in the Putong Group IPO, we assumed the role of overall coordinators for the first time, underscoring the advancement of our enterprise service capabilities. Next, I would like to invite our CFO, Arthur, to discuss our financial performance. Thank you, Leaf and Daniel. Arthur Chen: Please allow me to walk you through our financial performance in the third quarter. All the numbers are in Hong Kong dollars unless otherwise noted. Total revenue was HKD 6.4 billion, up 86% from HKD 3.4 billion in 2024. Brokerage commission and handling charge income was HKD 2.9 billion, up 91% year-over-year and 13% quarter-over-quarter, both primarily driven by higher trading volume. The change in planned commission rate was mostly technical in nature. The blended commission rate declined year-over-year as clients traded higher-priced US options compared to a year-ago quarter, while the quarter-over-quarter increase implied the commission rate was due to sequentially stronger trading activities in low-priced US stock and options. Interest income was HKD 3 billion, up 79% year-over-year and 33% quarter-over-quarter. The year-over-year increase was driven by higher interest income from security borrowing in the lending business, margin financing, and bank deposits. The quarter-over-quarter increase was driven by higher interest income from security borrowing and the lending business as well as higher margin financing interest income. Other income was HKD 441 million, up 111% year-over-year and flat quarter-over-quarter. The year-over-year increase was primarily attributable to higher currency exchange service income, fund distribution service income, and IPO subscription service charge income. Our total cost was HKD 780 million, an increase of 25% from HKD 625 million in 2024. Brokerage commission and handling charter expenses were HKD 161 million, up 97% year-over-year and flat quarter-over-quarter. Both the year-over-year and the quarter-over-year increase was roughly in line with the change of our brokerage commission and handling charging income. Interest expenses were HKD 474 million, up 17% year-over-year and 25% quarter-over-quarter. Both the year-over-year and the quarter-over-quarter increase was mainly due to higher interest expenses associated with our security borrowing and lending business, as well as high margin financing interest expenses. Processing and servicing costs were HKD 146 million, up 12% year-over-year and 10% quarter-over-quarter. The year-over-year increase was largely due to higher market information and data fees. The quarter-over-quarter increase was mainly driven by higher marketing information and data fees, as well as higher product service fees. As a result, our total gross profit was HKD 5.6 billion, an increase of 100% from HKD 2.8 billion in 2024. Gross margin was 87.8% as compared to 81.8% in 2024. Operating expenses were up 57% year-over-year and 31% quarter-over-quarter to HKD 1.7 billion. R&D expenses were HKD 574 million, a 49% year-over-year and 30% quarter-over-quarter. The year-over-year and the quarter-over-quarter increase was mainly driven by our greater investment in crypto and AI capabilities. Selling and marketing expenses were HKD 586 million, up 86% year-over-year and 36% quarter-over-quarter. Both the year-over-year and the quarter-over-quarter increase was mainly attributable to higher new fund accounts. G&A expenses were HKD 535 million, up 40% year-over-year and 26% quarter-over-quarter. Both the year-over-year and the quarter-over-quarter increase was primarily due to an increase in general and administrative headcount. As a result, income from operations increased 127% year-over-year and 17% quarter-over-quarter to HKD 3.9 billion. Operating margin increased to 61.3% from 50.4% in 2024, mostly due to strong top-line growth and operating leverage. Our net income increased by 143% year-over-year and 25% quarter-over-quarter to HKD 3.2 billion. Net income margin expanded to 50.1% in the third quarter as compared to 38.4% in the same quarter last year. Our effective tax rate for the quarter was 16.7%. That concludes our prepared remarks. We now would like to open the call to questions. Operator, please go ahead. Operator: Once again, we will take our first question. The question comes from the line of Cindy Wang from China Renaissance. Please go ahead. Your line is open. Cindy Wang: Thanks for taking my call, and congrats on the very great result in Q3. I have two questions here. First, client assets performed very strong in Q3. Could you break down by mark-to-market gains and net asset inflows? And what is the current run rate for net asset inflows and client assets in Q4? Second, customer acquisition cost in Q3 was higher than Q2, but still lower than your early full-year guidance. So given the stock market pullback order today, what's the recent customer acquisition trend, and what do you expect the customer acquisition cost in Q4? Thank you. Arthur Chen: For the first question, regarding the asset movement, around one-third comes from the net client's asset inflow, and the remaining two-thirds come from the mark-to-market fluctuations. In the fourth quarter to date, actually, the mark-to-market implication was negative. But on the flip side, the asset inflows we see the momentum remains very robust. There is no slowdown compared with the second quarter or the third quarters. In the third quarter, regarding the client acquisition, the average cap in the third quarter is around HKD 2,300, slightly up on a quarter-over-quarter basis. But on the absolute levels, it still remains below our full-year target range of HKD 2,500 to HKD 3,000. In the fourth quarter to date, what I witnessed is that both the client acquisition momentum and also client acquisition cost remain quite healthy. So overall speaking, I feel more optimistic regarding our over-year client acquisition cost versus our objective at the beginning of this year. Thank you. Operator: We will take our next question. Your next question comes from the line of Peter Zhang from JPMorgan. Please go ahead. Your line is open. Peter Zhang: Thank you for giving me the opportunity to ask a question. This is Peter Zhang from JPMorgan. We have two questions. The first question is related to interest income. We saw the third quarter interest income record very strong sequential growth. We would like to understand what's the driving forces behind the strong momentum. Can you help us to break down the interest income into the key items, such as the interest income from the client idle cash, from margin financing business, and from the security lending? We also noticed that the security borrowings' contribution to interest income has been very strong in the second and third quarters. We want to understand, is this purely due to the market, or is there something Futu Holdings Limited has been doing at the content level to lead to the strong growth? Our second question is related to the crypto business. We wish to understand what's the latest crypto business contribution to your revenue in the third quarter. And looking ahead, what will be the driving forces for the crypto business to expand? For example, is this mostly due to the expansion of the token offering on your platform, or are there other potential business opportunities like derivatives that may have some upside to your crypto business? Thank you. Arthur Chen: Regarding the breakdown of the interest income in the third quarter, we have two different results arising from the interest income. Number one is from the client's idle cash. The second is from the margin financing, and the third is the security borrowing and lending. Actually, in the third quarter, the percentage for these resources is quite even. Regarding the security borrowing and lending business, we see a very strong momentum in the second quarter and the third quarter. But mainly, the driving force was from the market itself. In particular, there will be more utilization for certain hard-to-borrow stocks in the third quarter. Thank you. Daniel Yuan: Peter, this is Daniel. I'll take your second question on our crypto business. First of all, I'm going to give you a breakdown of the exponential growth we saw in the third quarter, and then I'll discuss the outlook for this business. The strong crypto growth was quite broad-based across the three markets that we currently offer crypto trading. In Hong Kong, for example, our client's crypto AUM and crypto trading volume both reported triple-digit sequential growth. As we mentioned in our opening remarks, Solana was very popular among our retail clients, which is the new coin launched in the third quarter. In Singapore, we also saw triple-digit growth in trading volume and continuously growing penetration among our funded accounts. In the US, we launched a number of new functions, including market orders and added 10 new coins, which really helped drive crypto AUM and volume. So far, as we've seen in the third quarter, there's a lot of volatility in the crypto market, but we've seen that a lot of our clients really took advantage of that volatility. In October, for example, we've seen the crypto volume continue to grow high double-digit month-over-month and hit a new high for monthly volume and the continuous uptake in crypto penetration. These are all very encouraging signs. But still, crypto contributed a very small percentage to Futu Holdings Limited's current revenue. But we think there is a long runway for growth in terms of driving crypto penetration on our client base and driving crypto revenue. In terms of some of the factors and catalysts that are going to help with that revenue growth, I agree with a lot of the things you mentioned just now, like a broadening of token offering will be quite helpful and will be a direct beneficiary of that. Of course, derivatives with higher take rates are going to help with monetization. But a lot of these developments will be contingent on regulatory approvals. In the long term, we're quite optimistic about the growth of this business. We understand that a lot of these new businesses don't really grow in a linear fashion. Peter Zhang: Thank you. I have a follow-up on the interest income part of the question. We wish to understand what's the fourth-quarter trend on interest income, particularly for your security borrowing business. Do you see the momentum continue in the fourth quarter? Thank you. Arthur Chen: Regarding your question about the interest income trend, we do not have the high-frequency data set for the interest income, particularly regarding the security borrowing business. But I'm very happy to give you an update during our fourth-quarter result. Thank you. Operator: We will take our next question. Your next question comes from the line of Emma Xu from Bank of America Securities. Please go ahead. Your line is open. Emma Xu: I have two questions. The first one is about the sensitivity analysis to the Fed rate cut, and the second one is about your R&D and G&A costs. They increased notably quarter-over-quarter and year-over-year. You mentioned earlier for the R&D expense it's mainly related to crypto and AI capacity investment. And for G&A, for G&A staff increase, could you tell us what's your target or your plan for investment in these areas? Arthur Chen: Regarding the interest income sensitivities from the Fed, as we give the market some estimation for every 25 basis point cut by the Fed rate, our monthly pretax profit will be negatively impacted by around HKD 37 million. But having said that, the rate definitely will have a lot of positive factors such as trading velocity increase and also more clients' asset inflows, which will partially offset, if not fully offset, this potential negative implication from the rate cut. Regarding the second question, for the quarter-over-quarter increase on the R&D and G&A expenses, for the G&A expenses, we do have some front-loading costs in the preparation of certain new markets we may open in the next two years. Secondly, we have invested a lot on the crypto side, especially on the system, in the preparation of certain license applications, not only including Hong Kong but also in other markets. Regarding the AIs, we will further optimize our AI capabilities, especially for the external part. There will be further optimization for our AI agent for our clients. Internally, we will further utilize our AI capabilities to streamline our business process and enhance our operating efficiency. Thank you. Operator: We will take our next question. Your next question comes from the line of Yu Fan from CICC. Please go ahead. Your line is open. Yu Fan: Thanks for taking my question. Congratulations on the outstanding results achieved this quarter. This is from CICC. I have two questions here. The first question, we see the strong customer growth this quarter. So with the regional breakdown of the existing and also the net new paying client? And the second question is regarding the US market. Would you please share more color on the market strategy, and what's our competitive advantage compared to other peers in this market? Thank you. Arthur Chen: For the breakdown of the new fund accounts in the third quarter, Hong Kong and Malaysia collectively contribute around 50% of total new fund accounts. In the third quarter, except for certain new markets or small markets we entered recently, such as Canada and New Zealand, the remaining markets' contributions are in the range of 5% to 15% for the third quarter. As of the end of the third quarter, the Greater China clients contribute around 46% of the group's account fund accounts, and the remaining overseas markets contribute 54% of total accounts. Thank you. Daniel Yuan: Hi, Yu Fan. This is Daniel. I'll take your second question on our US business. As you mentioned, we saw very strong momentum in terms of new client accounts and also in terms of engagement of our existing clients, with the number of options traders and options contracts traded both logging double-digit sequential growth. I think that really thanks to our increasing brand influence. If you've been to New York recently, you'll see that we've launched another large-scale branding campaign in New York City in the heart of New York City. Another important factor is, obviously, we have a very superior product experience for our target clients. The US is probably the most competitive market in the world, but also unequivocally the largest brokerage market out there, which means that there's going to be diversified client needs to be satisfied by different players. We think that our product is built for the active traders, and those are the clients we want to serve, and we'll continue to optimize our product experience for that client focus. Operator: Thank you. We will take our next question. Your next question comes from the line of Charles Zhou from UBS. Please go ahead. Your line is open. Charles Zhou: Good morning. This is Charles Zhou from UBS. First of all, congratulations on your very good results. It's also a strong beat to the market consensus. I have two questions. My first question is about the Air Star Bank. Could you please share what investment have you made since Futu Holdings Limited acquired a 44% equity stake in Air Star Bank, I think, last June? And also, how do you see the Air Star Bank's strategic role within Futu Holdings Limited's business in terms of short-term, medium-term, and long-term perspectives? My second question is regarding the regional mix of the client AUM net inflow. Can you maybe just give us a little bit more color about the breakdown of the regional mix? Say, for example, does Hong Kong still account for over 70%? And also, are we seeing a rising share from high net worth clients in the third quarter? Thank you. Arthur Chen: Regarding the breakdown of the net asset inflow by regions, actually, we see the percentage contributed by Hong Kong slightly decrease on a quarter-over-quarter basis, mainly due to certain overseas markets such as Singapore and Malaysia also recording very strong asset inflows. So proportion-wise, Hong Kong's percentage contribution was down a little bit. Regarding the client's cohort, we do see more and more high net worth clients' contributions in Hong Kong. We think this kind of trend will remain in the next coming quarters. We think we have very meaningful potential in terms of further upgrading our client's quality in Hong Kong through wealth management, etc. Thank you. Daniel Yuan: Hi, Charles. This is Daniel. I'll take your first question on Air Star Bank. First of all, to give you an update on our investment, during the third quarter, upon regulatory approval and the discussion between the shareholders, we have increased our stake in Air Star Bank to 68.4%, thereby becoming the controlling shareholder of Air Star Bank. In the short term, we'll continue to focus on improving the customer experience, enriching products and capabilities. We believe that there are a lot of integration opportunities between the banking business and the brokerage. In the long term, we believe that the banking business can help Futu Holdings Limited increase client stickiness and improve client's wallet share. It will enable clients to complete fund deposits, investments, lending, and consumption. We can satisfy all these various financial needs within Futu Holdings Limited's ecosystem, and we can continue to enhance our clients' perception of Futu Holdings Limited as a one-stop financial services platform. So far, Futu Holdings Limited is the only online brokerage platform in Hong Kong that has integrated digital banking capabilities, and we believe that the scarcity of that license and the diversity of products and services we can offer under this license will continue to widen our competitive moat. After this round of capital injection, Air Star Bank will be consolidated into Futu Holdings Limited's financial statements. In the next two to three years, we'll still be in investment mode for Air Star Bank, but we believe that as Futu Holdings Limited's client quality improves across various markets, and as more markets become profitable and play out that operating leverage, the drag from Air Star Bank's loss to Futu Holdings Limited's overall P&L will be limited. After the capital injection, Futu Holdings Limited and Xiaomi Group will continue to work very closely and take advantage of each other's resources in their respective ecosystems to operate this bank together. Thank you. Operator: We will take our next question. Your next question comes from the line of Chiyao Huang from Morgan Stanley. Please go ahead. Your line is open. Chiyao Huang: I have two questions. One is about the product pipeline from crypto and tokenization in the next one or two quarters. And then maybe a bit longer term, what kind of value proposition do we try to achieve on tokenization for our clients? The second question is about whether management has any plan on M&A in the space to accelerate capability building? What kind of capability in crypto are we looking to build in the near term? Thank you. Arthur Chen: Regarding your two questions about crypto, number one for the new product pipelines and also tokenization, we do have a lot of preparations and internal discussions, even some layout of certain product connections. But as you can understand, tokenization is a very new concept to the market nowadays and subject to different regulatory regimes and examinations. So it is very difficult for us to lay out a very clear roadmap for the product launch given that a lot of factors will be regulatory dependent. Regarding M&A in the crypto side, definitely, we are very open in these directions given that crypto is a very strategic and important consideration in our business direction down the road. So definitely, we will keep these options open. Thank you. Operator: We will take our next question. Your next question comes from the line of Leon Key from CLSA. Please go ahead. Your line is open. Leon Key: This is Leon Key from CLSA. I have two questions today. Firstly, we are very glad to see that Hong Kong for the fourth consecutive quarter has led new client additions. I'm just interested in the client profile of our newly acquired clients in Hong Kong for the past quarter and actually for the past four quarters in general, given Hong Kong's equity market started to become quite active since around four quarters ago. If there are any meaningful differences in terms of these new customers in Hong Kong in terms of per average AUM, ages, trading velocity, the products they are buying, if there are any notable differences for these new clients compared to our existing Hong Kong customers, most of which were acquired during probably the bull market a few years ago. So that's the first question on Hong Kong new customer profile. The second question, I'm interested in the gross margin trend in markets outside Hong Kong. We're very pleasantly surprised to see gross margin disclosed in the third quarter was very strong. Given we also have very good AUM growth in markets like Singapore and a lot of new clients in Malaysia, I presume the economy of scale is kicking in very rapidly. If possible, if management can share with us some gross margin trends in Singapore and Malaysia, where are the margins in these markets standing now? Daniel Yuan: Leon, thank you for these two questions. This is Daniel. I'll take these two questions. First of all, regarding our Hong Kong business, in fact, in the third quarter, we have seen a continued upward trajectory in average client assets of our new clients. That coupled with the continuous net asset inflow, very robust net inflow from our existing clients led to a double-digit sequential growth in average client assets in Hong Kong. I think that is representative of what happened in the past couple of quarters as we continue to enhance our brand image. I think we can continue to attract more and more high-quality clients, and there will be more clients that are inclined to do one-stop asset allocation within Futu Holdings Limited's platform. In terms of these clients' behavior, trading behavior specifically, I think that's very much market-driven. As you know, in terms of our total trading volume in the past year or so, it's mostly US stocks. But in Q3 this year, as the Hong Kong equities market outperformed, a lot of our clients quickly flocked to Hong Kong equities and engaged quite actively. So I think this is very much driven by the performance and the relative outperformance of different equity markets. We think this is more cyclical than structural in terms of clients' trading behavior. To your second question, yes, we think that the online brokerage business inherently has huge operating leverage. But on the gross margin level, it's been very healthy across all of our markets because it mostly relates to trading and margin products, all of which have very high margins. The operating leverage mostly kicks in from the operating expenses. As we continue to scale in a lot of these international markets, we have seen a very rapid expansion in operating leverage. Maybe to give you some numbers on our Singapore business, for a couple of consecutive months, we have seen the operating margin in our Singapore business consistently top 60%, and it's still expanding. I think that really speaks to the strong operating leverage in our business model. Leon Key: Thanks a lot, Daniel. Very helpful. Operator: Thank you. This concludes today's question and answer session. I'll now hand the call back to Daniel Yuan for closing remarks. Daniel Yuan: That concludes our call today. On behalf of the Futu Holdings Limited management team, I'd like to thank you for joining us today. If you have any further questions, please do not hesitate to contact me or any of our investor relations representatives. Thank you, and goodbye. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Ladies and gentlemen, thank you for joining us, and welcome to the Third Quarter 2025 LATAM Airlines Group Earnings Conference Call. [Operator Instructions]. Before I turn the call over to management, I'd like to remind you that certain statements in this presentation and during Q&A may relate to future events and expectations and as such, constitute forward-looking statements. Any matters discussed today that are not historical facts, particularly comments regarding the company's future plans, objectives and expected performance or guidance are forward-looking statements. These statements are based on a range of assumptions that LATAM believes are reasonable, but are subject to uncertainties and risks that are discussed in detail in the published 20-F 2025 updated guidance, earnings release, financial statements and related CMF and SEC filings. The company's actual results may differ significantly from those projected or suggested in any forward-looking statements due to a variety of factors, which are discussed in detail in our SEC filings. And if there are any members of the press on the call, please note that for the media, this is a listen-only call. I will now hand the conference over to Ricardo Bottas, Chief Financial Officer. Ricardo, please go ahead. Ricardo Dourado: Hello, everyone, and good morning. Welcome to our third quarter 2025 conference call, and thank you all for joining us today. My name is Ricardo Bottas, and I am the CFO of LATAM Airlines Group. Here with me is Roberto Alvo, our CEO; Andrés del Valle, Corporate Finance Director; and Tori Creighton, Head of Investor Relations. And we will present our highlights and results for the third quarter. I will hand it over to Roberto to share his opening remarks. Once finished, I will present the key operational and financial figures as well as provide other updates. Roberto Alvo Milosawlewitsch: Good morning. Thank you, Ricardo, and thanks to all for being here today. This month, 3 years ago, LATAM emerged from financial restructuring. This period was one of learning, designing and executing. LATAM defined a blueprint that has a collection of essential elements we needed to excel. This blueprint was implemented and is working. The group's network is the most expansive in the region, and our loyalty program is by far the largest and most valued. No one else can connect South America within the region and to the world, reward loyalty and provide choice to customers as LATAM Group can. However, these results are the product of more than a co-branded credit card and a map of routes. At LATAM, we are obsessed with execution. Every day, in every interaction, we strive to be better, to depart on time, standard zero on every flight, to improve on what we do, seek and find cost-saving opportunities for each of our activities, to make sure we deliver what was promised to the customer at every interaction and to provide the care and respect that each one of them deserves as they entrust their journey to LATAM. We have made considerable progress, but are not satisfied. I believe we can do better. Looking forward, we must ensure that we remain disciplined, disciplined in execution and disciplined in controlling costs. At the center of all of this is our people, a group of more than 40,000 employees who care about and love what they do every day. People who believe in what they do and what it represents. They are the engine and the spirit that drives LATAM Group forward, and the most important commitment is to them, making sure that they feel that every day it is worth being part of the LATAM family. As we look into the future, I'm confident that we can continue the journey of improvement and deliver on purpose that we have, which is elevating every single journey. Thank you very much. Now back to Ricardo for a description of how we are achieving profitable growth, improving the quality of our traffic, keeping high customer satisfaction and maintaining our cost under control. Ricardo Dourado: Thank you, Roberto. Please join me on Slide 3. This quarter, LATAM Group continues to show the strength of its strategy, its unmatched network footprint, focus on disciplined operational and commercial execution as well as product improvement. In terms of operations, LATAM Group transported over 22.9 million passengers, reinforcing its role as the leading airline group in South America. Capacity grew by 9.3% year-over-year with healthy load factors of 85.4% on a consolidated basis. The group is seeing consistently high levels of customer satisfaction, increased customer preference, especially in the premium segment and sustained customer loyalty. LATAM translated this operational performance into financial results, driven by an 8.4% increase in passenger unit revenues while keeping unit costs broadly stable. Adjusted operating margin expanded to 18.1%, while adjusted EBITDAR reached $1.15 billion during the quarter, and net income totaling $379 million. During this quarter, LATAM executed its second share repurchase program for a total of $433 million with the company's disciplined approach to capital allocation. During this quarter, LATAM Airlines Group signed a major agreement for an acquisition of up to 74 Embraer E2 aircraft. Moving to the next slide about the fleet and this acquisition and the transaction. The E2 will indeed enhance LATAM Group affiliates' regional connectivity in South America and represent an opportunity for our network to open up to 35 new destinations. They also offer a 30% improvement in fuel efficiency per seat compared to previous generation aircraft, reinforcing the group's commitment to sustainability and cost discipline. In total, LATAM Group will receive 24 E2s with 12 deliveries scheduled for the fourth quarter of 2026 and the remaining 12, in 2027. With this addition, LATAM's order book now exceeds 140 aircraft through 2030, supporting the group's long-term growth and fleet modernization strategy. Initial deliveries are set to begin with LATAM Airlines Brazil, which will be the first to deploy these aircraft in its network. In Brazil, this aircraft will enhance capillarity across the country, enabling LATAM Group to expand into under-penetrated regions and destinations that are currently not served by the group. Over time and subject to market conditions and strategic evaluations, other LATAM affiliates may also incorporate the E2s into their operations. Still on this slide, we expect to receive an additional 8 aircraft on this fourth quarter of 2025. And also, we project to receive additional 44 aircraft next year, including the E2s. Let's move to the following slide, Slide 5. As mentioned earlier, LATAM Group delivered another quarter of strong traffic performance, transporting more than -- almost 23 million passengers with a consolidated load factor of 85.4%. LATAM has been committed to profitable growth at the consolidated level, passenger RASK increased by 8.4% year-over-year in U.S. dollars, a result that reflects the strength of LATAM Group's strategy and execution. A clear example of this is Brazil, where LATAM Airlines Brazil grew capacity by over 12% year-over-year. With this expansion, customer preference remained strong, and the load factor even increased by 2.2 percentage points. During the quarter, the Brazilian affiliate launched 6 new domestic routes, further supporting the strategy to deepen its presence and enhance connectivity in this market. In the Spanish-speaking countries, LATAM Group's affiliates have also improved performance during this quarter with passenger RASK increasing 18% year-over-year. In particular, as compared to 2024, LATAM Airlines Colombia experienced a stable domestic industry capacity, also seeing healthy demand. Demand is in the other Spanish-speaking affiliates domestic markets also remained healthy, except for Chile, where industry traffic figures are stable against last year. However, the focus on delivery execution and a higher premium product offering helped fully offset these effects. Meanwhile, the international segment continued to operate with high load factors, reflecting the relevance of the network and LATAM Group's role as the main connector in the region with a diversified network. Altogether, the unit revenues, even in the context of increased capacity reflect the effectiveness of the group's commercial and customer strategy. It is the result of offering the right product in the right markets while executing with discipline. Looking ahead, LATAM Group continues to focus on maintaining a sustained trajectory of discipline and profitable growth. The group is also focused on reaching the goal of high single-digit consolidated capacity growth next year, compared to 2025, supported by an ongoing focus on efficiency, a relevant fleet delivery schedule and a margin preservation on top of a healthy demand environment. Moving to the next slide, Slide 6, regarding our value proposition and customer experience. LATAM Group remains committed to deliver a superior travel experience and increasing customer preference. During the quarter, the group continued advancing initiatives. The new Lima Lounge was inaugurated at recently opened Jorge Chávez International Airport, one of the group's main hubs. This new space offers a modern and comfortable environment and comes in addition to the signature check-in area that was previously inaugurated at the same terminal, both part of a strategy to elevate the end-to-end experience for premium travelers and LATAM Pass members. Looking ahead, LATAM Group also announced the launch of its new Premium Comfort Class, which will begin rolling out in 2027 on long-haul routes. This product reflects a commitment to offering more choices to our passengers for how they want to fly. The new class will be an additional option other than the existing economy and business class cabins, for passengers seeking more space and personalized service. Finally, LATAM Group was once again recognized by APEX as a Five-Star Global Airline for 2026. This marks the fourth consecutive year the group has received these distinctions based on independent passenger feedback data from over 1 million flights worldwide. It's a testament to the team's dedication and to the impact of the investments being made across the network. In addition, LATAM Cargo Group was named Air Cargo Airline of the Year by Air Cargo News, becoming the only South American carrier to win in any category, further underscoring the group's excellence across all segments of the business. Together, these efforts underscore LATAM Group's dedication to continuous improvement and reinforce its strategic commitment to quality, consistency and the passenger experience, a focus that continues to support more passengers choosing to fly with LATAM and the group's ability to capture premium revenues. Next, let's move to the Slide 7. I will now walk you through the financial results for the third quarter, a period in which LATAM once again reflects a solid execution. Total revenues reached $3.9 billion, an increase of 17.3% year-over-year, supported by growth across both Passenger and Cargo segments. Passenger revenue rose by 18.5% with revenues from premium travelers also showing relevant growth, increasing by more than 15% compared to the same period last year, while Cargo revenues grew by 6.3%. On the cost side, total adjusted expenses ex-fuel increased by 21% year-over-year, driven mainly by increased operations, especially international and also a lower base of comparison due to the one-offs impact in the same period of last year. This increase was partially offset by 4.7% year-over-year decrease in jet fuel costs. That said, on the unit cost front, LATAM upheld its firm commitment to cost efficiency, a key pillar of its strategy. As a result, LATAM delivered an adjusted operating margin of 18.1%, testament to LATAM's operational excellence through profitable growth while also holding its cost control performance and advantage. Again, a nonnegotiable and relevant part of LATAM's strategy. Lastly, net income for the quarter totaled $379 million, up 26% year-over-year, even after $105 million negative nonoperational income statement impact related to the liability management exercise completed in last July, as disclosed to the market before. Net income for the 9 months was $976 million, 38% higher than the same period of last year. Now moving to the Slide 8. As you can see on this slide, LATAM operational performance this quarter is a result of consistent and disciplined execution of the group's strategy over the past several years. Since 2019, LATAM has steadily expanded its adjusted operating margin, rising from 7.1%, to 18.1% in the third quarter of 2025. At the same time, LATAM has maintained tight control of its cost base. Adjusted passenger CASK ex-fuel has been stable between $0.042 and $0.043 on the last 12 months basis, despite inflationary pressures and higher activity. This disciplined approach to cost has enabled LATAM to consistently grow margins while preserving efficiency, in order to continue delivering sustainable and profitable growth going forward. With regard to cash generation, as shown on Slide 9. In the third quarter, LATAM delivered strong adjusted operating cash flow generation, reaching $859 million. Interest payments remaining contained at $52 million, mainly as a result of the debt refinancing executed in 2024, which enabled LATAM's significant reduction of the cost of its non-fleet financial liabilities, which continue to translate into meaningful interest savings and overall cost of capital reduction. After both 2024 and 2025, refinance execution, combined interest payment savings expected for next year amount to $151 million compared to last year. And finally, during the quarter, LATAM executed its second share repurchase program for a total of $433 million. This reflects the group's capital allocation strategy and discipline. Let's move to Slide 10 to discuss LATAM's capital structure. LATAM ended the third quarter with a liquidity level of 25.8%, slightly above the upper end of the financial policy range, the execution of the share repurchase program this quarter brought liquidity more in line with the target levels. LATAM ended the quarter with an adjusted net leverage ratio of 1.5x, aligned with the full year guidance and well below the cap from the financial policy. A strong capital structure is not just a financial metric for LATAM. It's a strategic asset. It gives the group the flexibility to pursue growth where it's most profitable, return capital to shareholders when appropriate and manage the most accretive capital structure. This financial strength, combined with assets and cost advantage set LATAM apart from its peers and remains central to its ability to compete, adapt and lead into the region over the long term. Please join me on Slide 11. Given this solid year-to-date performance, supported by continued customer preference and the disciplined execution of a strategy centered on profitable growth, cost efficiency and financial strength, LATAM has updated its full year 2025 guidance. Consolidated capacity is projected to remain broadly in line with previous estimate with -- while revenues are expected to be higher within a tighter range. In terms of margins, adjusted EBITDAR guidance has also been refined to be between $4 billion and $4.1 billion, close to 9% higher than the previous guidance. The updated range reflects a more constructive outlook now positioned higher than the previous estimate. Adjusted passenger CASK ex-fuel was updated to be between $4.35 and $4.40, mainly due to FX variation in this period. Liquidity was also updated after the execution of the share repurchase program, and we are maintaining the same estimate to be above $4 billion by the end of this year. Mainly considered debt adjusted EBITDAR improvement in the cash generation, the forecasted leverage for year-end is now at 1.4x. And for next year, as I mentioned before, the group is focused on reaching the goal of high single-digit capacity growth compared to 2025, supported by our ongoing dedication to efficiency and margin preservation. Finally, and before we move to the Q&A, I'd like to take a moment to remind you that LATAM will be hosting an Investor Day in New York on December 9, 2025. We invite you also to tune into the live webcast on these events. With that, we now open the line for your questions. Operator: [Operator Instructions] Your first question comes from the line of Guilherme Mendes with JPMorgan. Guilherme Mendes: Congrats on another pretty strong results. My question is on the international front. When compared to Brazil domestic and Spanish-speaking countries, it looks like the past performance was relatively weaker, although still growing on a year-over-year basis. Can you share more details on how international is tracking, maybe on a per-region basis, which other routes have been pressuring the overall results and which are doing relatively better? Roberto Alvo Milosawlewitsch: So we have seen, in general, stable and healthy demand in most of the international segments. I would say that South America to U.S. is a little bit softer than what we used to see in the last few months. And this is, in our view, linked to people probably avoiding going to the U.S. and moving themselves a little bit into other regions. Also the northern part of South America, the regional traffic, which is international flights on the northern part, is a little bit softer as well. But in general, nothing that we have seen that is worrisome or concerning with respect to the level and the quality of the demand. So in that sense, we remain confident on the prospects for the remainder of the year. Guilherme Mendes: Very clear, Roberto. When you say softer into the U.S., is it more leisure related or even corporate related? Roberto Alvo Milosawlewitsch: No. This is more leisure related. Operator: Your next question comes from the line of Mike Linenberg with Deutsche Bank. Michael Linenberg: I have a couple here. I guess, Roberto, can you just update us on this measure in Brazil to potentially force airlines to offer up a free bag? Is that just domestic? Is that domestic and international? And where is that in the legislative process right now? Roberto Alvo Milosawlewitsch: A few weeks ago, a couple of weeks ago, the lower chamber in Brazil passed a law to allow basically passengers to carry a bag without being charged and also select seat without charge on seat that have no distinction in terms of space. This, as the law was passed, was for both domestic and international flights, it affects eventually therefore, domestic and international carriers into Brazil. The law is -- needs to go to the Senate. It has not been presented at the Senate floor at this point in time, and we have no clarity if that would happen and when it will happen. So for the time being, that still has the second step. Ultimately, presidential veto is also something that the Brazilian constitution allows for laws like this. So we will see. Michael Linenberg: The reason I ask is, and you mentioned international, is that -- all right, domestic is one thing, but international, from the perspective, I know at least from the U.S., they may view it as a potential tax or additional cost that's unilateral and therefore, in violation of the bilateral. So I just wonder how they implement it internationally when international carriers have different ways in how they price their product and obviously are protected by the bilateral arrangements between Brazil and those countries. Roberto Alvo Milosawlewitsch: Yes. I completely agree with you, Michael. And of course, LATAM does not support the passing of the law, and we have together with the IATA and ABEAR in Brazil been making very clear and explaining the impact of this potential measure. This is not good clearly for the industry -- airline industry in Brazil and I think -- I believe has the potential of ending up with higher fares for passengers that fly whether into Brazil or outside or coming to Brazil. So I think that at an industry level, we are making a lot of effort in making sure that everybody understands the impact that this has on traffic and on the industry, and we're completely sure that this would not be a positive measure for us all. Michael Linenberg: Great. And then just my second on capital allocation. And this is Roberto, to you or Ricardo, how you think about it longer term? You've had a nice balance. Obviously -- the dividend is statutory. But you pay the dividend. You've been paying down debt. You've also been buying back stock. As we think about the sort of various levers going forward, should we expect to see, say, regular reductions in shares outstanding? Or was that more of just an opportunistic initiative on your part? Roberto Alvo Milosawlewitsch: Thanks, Mike. So first of all, I mean, as we think about capitalization, do remember that the development of the business and how we see and foresee opportunities for growth, is the priority. So that will always take over other potential decisions. At this point in time, we believe we have done a balanced mix of initiatives, and we remain very close to the target that we have in terms of financial policy. So we're content with what we have done during 2025. Going forward, looking forward, I think we will see -- I mean, this is a Board decision. Ultimately, the dividend payout in Chile per law is a shareholders' meeting, a shareholder decision, which will happen in April. But all options for capital allocation and growth investment remain open. And as we progress in the next few months, the company will, for sure, explain to the market how do we continue depending on our results and of course, the situation in the region and the opportunities we may see. Operator: Your next question comes from the line of Gabriel Rezende with Itau BBA. Gabriel Rezende: Congrats on these very strong results. I would like to follow up on your comments regarding the investments and the efforts you have been putting into bringing a more premium experience to the customers. And just trying to understand how relevant it has been so far in terms of your revenue growth as well as your profitability. So if you could maybe provide some color on how relevant these premium revenue are at this point? You mentioned that it has grown by 15% year-on-year. So just trying to understand how much it represents out of the total passenger revenue at this point? And how much could it represent in the future as you bring more efforts into this? Roberto Alvo Milosawlewitsch: Yes. Thanks for the message -- the question. So first, I think it's important to remark what is what we're experiencing. First, yes, premium revenue is growing faster than capacity. And a relevant portion of the improvement that we see in the RASK for Spanish-speaking domestic Brazil and to an extent, international is due to a change of mix where we have a larger proportion and portion of premium revenue coming from there. And that's both corporate and as well, let me call it, high leisure, I don't know if that's a context or the concept in English, revenue that we're seeing. Now this is a function of, in my mind, 2 things. Most importantly, it's impeccable execution and care in every interaction that we made for the customer. Secondly, it's improvements in products, as you probably saw in the presentation, the Lima Lounge, premium economy in the international and other things. But as we have, in a way, decommoditized, if you want, our product, we have focused very much on experience. And that, I think, has brought a willingness to pay that customers probably had that we were simply not exploiting because our product probably was not as good as they were expecting. And now we are, I think, very clearly seeing the impact that this has in our results. Operator: [Operator Instructions] Our next question comes from the line of Felipe Ballevona with Santander. Felipe Ballevona: Can you hear me? Roberto Alvo Milosawlewitsch: Yes, we can. Felipe Ballevona: Great. Awesome. So well, first of all, congrats on the strong results. I have a couple of questions here. First, following actually on the first question of the Q&A. What was the reason behind the growth slowdown in international traffic recorded in October? Is international traffic being dragged down by Colombia? The last couple of data points of the [ IDOCB ] that have showed a slowdown in your international, not only in the domestic as has been the case for the previous months, but also in the international front. And also my second question, if you have any news regarding a potential buyback? Roberto Alvo Milosawlewitsch: Yes. Felipe, so first of all, our international Colombia operation is very small as compared to the total international traffic. We have not seen, in particular, an impact on international travel in and out of Colombia, and that it's very unsubstantial to the size of our traffic, particularly out of Brazil and secondly, Chile and then Peru. No, I guess this is a function, as I explained in the beginning, softer demand into the U.S., particularly on leisure traffic. We believe that this is linked to people probably deciding to go elsewhere and probably spending more time within their countries and to the region. But we don't see this as a fundamental slowdown in demand. It's probably assigned to more external factors than that. So that's the main reason, okay? Having said that, do remember that we expect that our ASK growth for the whole of 2025 is going to be around 10% to 10.5% increase in capacity, which is a significant increase in capacity, and that's a reflection of a good level of demand that we see to operate this. Felipe Ballevona: That's very good color. And do you have any news regarding a potential buyback or... Roberto Alvo Milosawlewitsch: Sorry. Felipe Ballevona: You're fine. Roberto Alvo Milosawlewitsch: As I said before, at this point in time, we are close to the financial policy targets that we have. Going forward, we will see what the Board decides and do remember that the company has a range of alternatives to allocate capital and also be mindful that the first priority will always be growing the business. And after that, any excess that we believe should go back to shareholders, the company has a few tools to decide on how to do it. So rest -- at least, stay tuned, eventually. Operator: Next question comes from the line of Jens Spiess with Morgan Stanley. Jens Spiess: Congrats on the very strong results. Just wanted to know if you could provide any context on next year, how is the -- like the order book -- the booking curve looking like? And also how much do you expect to grow in terms of ASKs next year based on your fleet plan, that would be very helpful. And if you could remind us how many leases do you have expiring next year, I would very much appreciate that. Roberto Alvo Milosawlewitsch: Yes. Jens, so as we explained in the press release and Ricardo mentioned here, we expect high single-digit ASK growth, or that's our goal for 2026. We will provide more detailed guidance on 2026 in a few more weeks. You asked about -- the first part of the question, fleet. And by the way, yes, fleet. So we have on Slide 4 of the presentation, you can see 41 arrivals of A320 family and 7 E2 aircraft, plus 3 wide-bodies. We have relatively few leases. I don't have the correct figure here, the right figure, but we have the option to, of course, extend them if you want to. And our expectation at this point in time is to end up the year with a total fleet of just over 400 aircraft -- around 410. You can see that as well in the press release, okay? And -- sorry, I'm just looking at a note here they're sending me. Yes. And last thing, they just reminded me to make you feel comfortable that we have the fleet we need to grow for what we're expecting next year. So I don't expect -- we don't expect that we would need to make changes in our fleet plan for the capacity we have planned. The first part of the question you asked me, now, remember, is booking curve into the beginning of the year. Very early still, particularly on domestic markets, the percentage of booked seats is very low. But what we're seeing initially for the first couple of months of the year looks in the current trend that we have seen in third quarter and that we expect for the rest of the year. Operator: Your next question comes from the line of Ewald Stark with BICE. Ewald Stark Bittencourt: I want to know if you can provide any color behind what is driving the lower percentage of hedged fuel during this quarter? Especially I would like to focus on, is anything on booking going forward that is driving this lower percentage of hedged fuel, or maybe you're looking something different about forecast of oil? Unknown Executive: Yes, thanks for the question. If you look at the press release, it's nothing that different for what we usually do. You have about a 47% for Q4 of this year and then 33% for Q1. And of course, as soon as we approach the next quarters, we will have, of course, consistent with the policy, an increase the fuel hedge. But I wouldn't say that this is any different than what you have seen in the past. It's a very standard, I think, coverage that we have today for fuel price, nothing that really deviates from the policy. Ewald Stark Bittencourt: Financial statements say that you have a 26% hedge fuel for the next 12 months. Starting from first quarter of 2026, every quarter is below 30%. Unknown Executive: Yes. If you look at the detail on the earnings release, there's more detail here. I think at the financial, that's sort of on a weighted average of what's it going forward. But here, you have the actual percentages covered for every quarter. Again, 47% for Q4, 33% for Q1. So that's a difference you were look at the financials here. Then as this is as of November 14, 2025, it's more updated. I think, of course, the financials, they call for, I think, September 30, but this is -- you have the most updated vision of the current portfolio, as of November 14. Operator: [Operator Instructions] Your next question comes from the line of Guilherme Mendes with JPMorgan. Guilherme Mendes: Regarding the pilot strike in Chile, can you share some potential -- expected impact for the fourth quarter? I understand it should be material, but I just wanted to hear your thoughts on what could we expect from this negotiation. Roberto Alvo Milosawlewitsch: Thank you, Guilherme. At this point in time, we have no clarity of the potential impact. So we will update that if necessary at an appropriate time. Operator: There are no further questions at this time. I will now turn the call back to Ricardo Bottas for closing remarks. Ricardo Dourado: I would like to thank you all to participating in today's call and remind you that we will have our Investor Day again on December 9. So we would love to have all of you participating on that opportunity to get more information from the company and the additional updates. Thank you all, and have a good day. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Kenny Green: Ladies and gentlemen, thank you for standing by. My name is Kenny Green. I am part of the Investor Relations team at Ituran Location and Control Ltd. I would like to welcome all of you to Ituran Location and Control Ltd.'s results Zoom webinar. And I would like to thank Ituran Location and Control Ltd.'s management for hosting this call. All participants other than the presenters are currently muted and following the formal presentation, I'll provide some instructions for participating in the live Q&A session. I would like to remind everyone that this conference call is being recorded and the recording will be available from the link in the earnings press release and on Ituran Location and Control Ltd.'s website from tomorrow. With me today on the call are Eyal Sheratzky, CEO, Mr. Udi Mizrahi, Deputy CEO and VP Finance, and Mr. Eli Kamer, CFO of Ituran Location and Control Ltd. Eli will begin with a summary of the quarter's results followed by Eli with a summary of the financials. We will then open the call for the question and answer session. You should have all by now received the company's press release. If not, please view it on the company's website. I'd like to remind everyone that the Safe Harbor statement in today's press release also covers the contents of this conference call and the associated presentation. And now, Eyal, would you like to begin, please? Eyal Sheratzky: Thank you, Kenny. I'd like to welcome all of you to our third quarter 2025 results call and thank you for joining us today. We are very happy with the results of the third quarter, which was strong across all key parameters. In particular, we are very pleased with the revenue growth. And we continue to grow, driven by our long-term efforts and success in bringing existing as well as new customer value-adding telematics and connected car products and services. In addition, we are also constantly bringing additional OEM partners to our growing roster, an example of which was Stellantis last quarter, and we are in active discussions with others. Our results show an ongoing expansion across our target geographies, in our large subscriber base of over 2,500,000 subscribers. In the third quarter, we added 40,000 net subscribers. We are on track to add between 220,000 and 240,000 net new subscribers in 2025, which will represent a very strong year of subscriber growth. We had a good third quarter. And I want to summarize some of our activities, which contribute to our growth and success. We continue to see solid demand for allocation-based products and telematics services in all our regions, as well as traction from our new initiatives and services. In Israel, the high car theft rate continued to provide strong demand for our services in the country, and we are reaching additional new subscribers from parts of the market that were previously untapped by us, such as lower-priced new vehicles or the second-hand car market. Our usage-based insurance business in Israel is also seeing good traction and bringing continued strong subscriber growth. In Latin America, we continue to expand our reach. Our new product targeting the motorcycle market is gaining strong traction across South America, especially on the back of our partnership with BMW Motorrad in Brazil. Motorcycles are a significant market opportunity, being the top mode of transportation in many parts of the world. It significantly increased our total addressable market. With Brazil as our starting point, we plan to scale into other high-growth motorcycle markets through partnerships with local OEMs as well as sales to the aftermarket. Our e2Run mob smart mobility platform is a unique technology and solution enabling remote vehicle access, real-time telematics, and efficient fleet management for shared mobility and rental fleet applications. Ituranmob was launched first in Brazil and has been gaining solid traction here, where it is being adopted by a growing number of fleet operators and rental companies. Based on the strong market interest and success we've seen in Brazil, we are now introducing Ituranmob to the United States market. We recently established operations for Ituranmob in the United States. We have identified a strong need in the US for our solution, particularly among the thousands of small to medium car rental companies, which include hundreds of thousands of cars. These companies could benefit from this type of technological solution, making the rental process more user-friendly and efficient. This creates a new long-term avenue of growth alongside our core telematics and subscriber-based businesses. Ituran Location and Control Ltd. generated a high level of cash in the quarter amounting to $21,300,000 in operating cash flow during the quarter. Due to our continued profitability and strong cash generation, we declared a dividend of $10,000,000 to shareholders for the quarter. I remind you, at the end of last year, we increased our dividend policy by 25%, from issuing $8,000,000 per quarter to $10,000,000 per quarter. This represents $0.50 per share. Our dividend yield on an annualized basis represents a return of around 5%, which is a very solid return from a strong and stable company. During the quarter, we purchased $1,500,000 in shares under our buyback program. As of the end of the quarter, we had around $5,200,000 still available under this program. We see our ongoing dividend and buyback as a reward to our shareholders, their loyalty, and long-term support of our company. In summary, we remain very pleased with Ituran Location and Control Ltd.'s performance in the third quarter and more generally, Ituran Location and Control Ltd.'s long-term and ongoing performance. At the same time, we look for more avenues to bring further growth to our business across all our regions, and the recent launch of Ituranmob is an example of this. We constantly aim to bring new products and services to both existing customers and new customers, as well as partnerships with new OEMs, new financing companies, and other leading companies. 2025 marks twenty years as a public company and thirty years as a company. We look forward to opening the nascent market on Tuesday next week, November 25, and we thank both the Nasdaq as well as our shareholders for the long-term support of our business. And with that, I hand over to Eli. Eli Kamer: Thanks, Eyal. I will provide a short summary of the financial results. You can find the more detailed results that we issued in the press release earlier today. Third quarter revenues were $92,300,000, an 11% increase compared with $83,500,000 in Q3 of last year. Subscription fees were $67,600,000, up 13% year over year, and representing 73% of total revenues. Product revenues were $24,700,000, up 4% year over year. Our subscriber base reached 2,588,000 at quarter end, an increase of 40,000 in the quarter. Year over year, the subscriber base grew by 219,000. The geographic breakdown of revenues in the third quarter was as follows: Israel 55%, Brazil 23%, rest of world 22%. EBITDA was $24,600,000, 26.7% of revenues, up 6% year over year compared with EBITDA of $23,300,000, 27.9% of revenues in the third quarter of last year. Net income for the third quarter was $14,600,000 or diluted earnings per share of 74¢, an increase of 7% compared to $13,700,000 or diluted earnings per share of 69¢ in the third quarter of last year. Cash flow from operations for 2025 was $21,300,000. As of 09/30/2025, the company had net cash including marketable securities of $93,100,000. This is compared with net cash including marketable securities of $77,300,000 as of year-end 2024. The board of directors declared a dividend of $10,000,000 for the quarter. The current dividend takes into account the company's continuing strong profitability, ongoing positive cash flow, and strong balance sheet. During the quarter, we purchased $1,500,000 in shares under our buyback program. As of the end of the quarter, we had around $5,200,000 available under this program. And with that, I'd like to open the call for the question and answer session. Operator? Kenny Green: Thank you. At this time, we will begin the question and answer session. If you have a question, please raise your hand via the Zoom platform. I will introduce you and ask you to unmute after which you may ask your question. Take a few moments to poll for your questions. Our first question will be from Chris Reimer of Barclays. Chris, you may go ahead and ask your question. Chris Reimer: Oh, hi. Thanks for taking my question. And, congratulations on the strong results. I was wondering if you could give a little more color on the launch in the U.S. What's the target market? Do you have any idea of how big it is, and when might you expect it to bear fruit? Eyal Sheratzky: Okay. Absolutely. Thank you. Before we decided to go from Brazil directly to the U.S. market, which is, I think, the most lucrative market for this kind of solution, we did a survey, and we got information that in the United States, there are tens of thousands of rental companies. It's true that about five of them represent more than 60% of the market, and these are the big names. At first, in the beginning, we are not aiming at them as our segment, but the others represent hundreds of thousands of rental cars. We are talking about small and medium rental companies from a one-family that holds 10 or 15 cars that they rent or some mid-sized companies with 100, 200, 300 cars. All of them are local. All of them are, or most of them are not nationwide. And they have a very strong demand for a solution that, first of all, will allow them to save their cost, and I will explain. In order today for a business that has 20, 30 cars to meet the customers, they have to go and meet each customer, give him the key of the car, then bring it back. It requires drivers, it requires service. Or in the worst case, they have to open an office, put a desk, put the people, put software, etcetera. And when you have 20, 30 cars, it's a dramatically high expense, and it's dramatically lowering the chance to make money from your rental company. What we provide is that you don't have to do almost anything except having the cars. Because everything is done on the streets, everything is done that you have a dashboard as a rental company owner, small rental company owner, so you can know every minute what is with the cars, who is driving the car, how much money this car will provide you, and that's done by having a smart key in the car, having the system that we developed through Ituranmob, our small subsidiary for this technology and innovation. And in Brazil, by the way, we have been doing it for almost three years. It's a very successful solution. Add to this that even in Israel, the largest leasing and rental company in Israel, Shlomo, Shlomo lease car, changed a technology that he found in the world because we didn't have it in the past. To our technology, he threw to the garbage about 2,000 hardware that he paid and installed in his rental cars, and now we are the partners in our units and services are also in Israel. I'm not talking about the U.S. because Israel, by definition, is a small market. It's maybe attractive, but it's not having a major influence on our future results. But the U.S. market, and it's important to mention, we are, I think, the first. I mean, we heard we know about companies that tried, they have a very not the same technology. Let me, I don't want to be arrogant. And when they tried, the technology didn't work. They tried to do it in a small city, one small city, but they are not really big technology or communication players that develop or represent it to the U.S. market. So we are in the beginning of this industry, I would say, in the States. There are companies that deal with remote renters, but not the renting the car itself. There are companies that provide services to rental companies, like integrators, software companies. That's good. This is, by the way, it's an advantage for us because we can partner with them. Before we do it, we have a solution which we can go independently by ourselves. We already have pilots in the area of Orlando and New York with some small rental companies that are very satisfied there. The response that we get is very, very good. I'm saying it's not something that will happen tomorrow. We are opening a new, I think, a new niche, a new segment, a new market. It also requires adaptations. But I think that the, let's say, the dream here is huge. Chris Reimer: Got it. Got it. Thanks. That's really great color. Maybe just touching on, OpEx. What was driving the increase in operating expenses this quarter? And how should we be looking at margin expansion into next year? Eli Kamer: Okay. If we are talking about the increase in the OpEx, the big majority of it is coming from the FX effect. As, and that, of course, increased the absolute numbers of the OpEx. And if we are talking about the margins, again, I don't see any reason that as long as we continue to increase our subscriber base, and this is exactly according to the guideline and I'm assuming next year, the same, that the margins will increase as well. Chris Reimer: Got it. Thank you. And maybe if I could just one more. How do you feel the subscriber momentum is performing versus your original guidance for the year? And can you give any color on where you're seeing the most traction? Eyal Sheratzky: As I said in my speech, we provide kind of guidance of 220,000 to 240,000. And according to the nine months, and add the current data that we have is that we will meet this range. It's the highest, I think, ever in the thirty years of Ituran Location and Control Ltd. And drivers are absolutely across all the regions, and it includes also from the OEM, it includes the aftermarket that we do in Brazil, which is including the insurance companies, and it's also including the financial solution that we provide to banks. And also, with a very major influence on the subscribers that we add during 2025 is Israel. And this is thanks to the requirement by insurance companies relatively to the cost of rate is very high, so more and more new cars, but more important is secondhand cars that in the past didn't require for the policy security system, now they required and Ituran Location and Control Ltd. is the first choice in Israel by far of any other security solution, this allows us to grow in 2025 dramatically as well in Israel. And I will add that the UBI also has some volatility at 2023, we did a very high growth in subscribers. 2024, we had to expand the customers that we are approaching. And in 2025, we had another large insurance company that we developed for them a solution and they also during the sale 2025, start using our UBI solution in high numbers. So overall, these are the drivers. Chris Reimer: Great. Great. Thanks. That's it for me, guys. Kenny Green: Thank you. Thanks, Chris. Our next question is gonna be from Allen Klee of Maxim Group. Allen, you may go ahead and ask. Allen Klee: Yes. Hi. Can you hear me? Eyal Sheratzky: Yes. Yes. Allen Klee: Oh, great. You talked about how motorcycles are important in South America and your partnership with BMW. How, where, where are you, could you talk about kind of how you're looking at increasing the uptake in this market? Eyal Sheratzky: Yes. Brazil and especially, but also the rest of Latin America, is a very motorcycles, I'm talking about mid to heavy engine motorcycles, which is quite an expensive vehicle, is very popular. The ratio between four-wheel drive and a two-wheel drive is very different than, for example, in other countries in the Western world, many people use motorcycles. Ituran Location and Control Ltd. always has a solution, but our solution was a little bit, I would say, not reliable enough to provide insurance companies with a low premium to motorcycles. This is first. Second, even the motorcycles themselves, were in a situation that they didn't want to add cost to their motorcycles. But in the last two years, we developed, thanks to our innovative teams, a unit, which is a state-of-the-art for security system and application for the driver on a motorbike. And what we did first, we used our OEM capabilities and teams, we started to negotiate. As you remember, maybe the first one was with Yamaha. Yamaha is our first customer for almost two years, eighteen months. And then now as we publish, we sign an OEM deal with BMW Motorrad in Brazil. The idea is that this is an untapped market for telematic solutions. And we're talking about the potential of millions of motorbikes that fit these needs and can pay it compared to the price of the motorbike. So we started with an OEM, this allows us to create reliability, this allows us to partner with brands. The guys of motorbikes are like sports cars. If somebody is driving a BMW, you will be very loyal. The same Honda, Yamaha, etcetera, specifically in Brazil. So we knew that partnering with a big brand in the OEM will again provide reliability, what we see is traction also from the aftermarket. Because if someone comes to a dealer of BMW, to have some treatment to the motorbike or to buy something, now he's asking or you will see that there is a solution by Ituran Location and Control Ltd. So we really believe that we just started, I am expecting that it will bring us tens of thousands of subscribers of new subscribers starting 2026, and it will grow as we will expand the segment and our customer, whether it will be B2B with other motorbike manufacturers. There are other names that we are starting to talk with. I'm not saying whether it will finish with the deal or not, but we see traction. And a major portion of this market is the second market, the aftermarket, and this is something, again, that I believe that can be very important with influence again on the results, in two to three years from now. Allen Klee: Thank you. I understand that Israel's an attractive market, but not that large. And you have a large opportunity in Latin America, South America. How do you think about, like, first, the size of the opportunity in South America, and then also is it possible over the next couple of years that there could be other geographies that might make sense? Eyal Sheratzky: First of all, we are not passing any opportunity, but by talking about how we focus. So the Latin America market, whether it's Central or South America, it's a huge market, which is, by the way, it's kind of an emerging market. So there is still a growing segment that we couldn't penetrate, whether it's because of price, whether it's because of awareness. So for us, the first online is to expand and continue expanding our business in Latin America because of the synergy that we can create, the relationship, the brand, and we still, I think, in the beginning, of tapping this market. So this is regarding how we focus, but on an opportunistic way, of course, when we're going to some play when we look at the rest of the world, we are more looking to do it by M&A, by acquisition. Because for us, to start a new business from scratch, for example, in the UK or in Europe, it will require high resources, we have zero resources now there. Until the moment that we will turn it to a major revenue and major profits, it will take a long time. At the size of Ituran Location and Control Ltd., the way that we are looking at other geographies is by M&A, but, of course, we are looking should be something that meets our DNA, meets our criteria, and our criteria is not a too small company. On the other end, the company that has assets that we can leverage such as partners, or customers, system of employees, control centers, etcetera. But to make the long story short, we still focus on Latin America, and in the U.S., as I said. Allen Klee: Okay. Thank you very much. Kenny Green: You're welcome. Sergey Glinyanov: Our next question will be from Sergey Glinyanov from Freedom Capital Markets. Sergey, please go ahead. Sergey Glinyanov: Good morning, Eyal, Udi, Eli. Can you hear me? Eyal Sheratzky: Yes. Sergey Glinyanov: Great. Great. So first of all, my applause to Ituran Location and Control Ltd. for another successful quarter. You guys beat market expectations with revenue and EPS. But now I'm interested in revenue dynamics. It seems your ARPU is increasing. Is it basically product and service mix or something more fundamental as a core? Eli Kamer: Hi, Sergey. ARPU is going up due to the fact of the FX. FX has been better in Q3 this year. Therefore, the ARPU went up as well. Sergey Glinyanov: Okay. And some kind of follow-up about your interim open North America. So do you have any expectation about revenue next year? Eyal Sheratzky: We never provide guidance about revenues. But I must tell you that we do all we can to make more revenues than this year. Sergey Glinyanov: Yeah. Sounds great. Sounds great. Thank you. Thank you. That's all for now. Kenny Green: You're welcome. Thank you. Sergey Glinyanov: Thanks, Sergey. Kenny Green: Our next question will be from Evan Tindell of Byrene Capital. Evan, you may ask your question. Evan Tindell: Hi, guys. Thanks for taking my call. My question is I've heard that some theft insurance providers in Israel are not requiring tests to have your system. And I was just wondering, is that true? And then secondarily, like, a follow-up to that is, you know, over ten, you know, over like five to ten, fifteen years, something like that, do you guys worry that more manufacturers will be able to sort of figure out how to do the internal telematics systems and anti-theft systems well enough to disintermediate you guys? Thanks so much. Eyal Sheratzky: Okay. So just to explain how is the process specifically in Israel, because there is a regulation, in Israel insurance companies cannot decide for their insurers or to require in their policy a specific brand, a specific solution. What they are allowed to do is, for example, if they want to have a location unit with a real-time alert, with a twenty-four seven center, that's what they put in the policy. Now as the insurer has to decide what company you choose. So never, never since the inception of Ituran Location and Control Ltd., insurance companies didn't say install Ituran Location and Control Ltd. or install another name. This is what is nice with Ituran Location and Control Ltd. We are not the chosen of the insurance company. We are the chosen of million subscribers in Israel. This is what the story and how we do it with our channels. And the channels in that case are car dealers, car importers. Just to remind you, in Israel, there are no manufacturers. But in Israel, there are car importers which represent manufacturers. So Ituran Location and Control Ltd. has very strong partnerships and relationships along the years. And this is the reason why twenty years ago, Ituran Location and Control Ltd. was declared as a monopoly in the telematics business in Israel, and this is why I can say and publish that Ituran Location and Control Ltd. has something like 85 to 90% market share. So it's saying that 10% of the industry by other companies. But for us, it's good. We have competition, but we lead the competition very, very strongly. So this is regarding this question. Regarding the second question, as we prove in the OEM business in Latin America, and General Motors is a very good example. Historically, we started by selling hardware and services. But Ituran Location and Control Ltd. always was built on a recurring revenue. Always, we were built as a service-oriented company. For us, the hardware in the car is a tool, is a tool to bring customers. But our, I would say, gold medal is to have a customer many years paying every month. For that, we don't need the hardware, but we need yes. We need a car manufacturer or an Israeli car dealer or a shop to say, okay. I'm selling a car a telematics solution. But the company that can provide the services. And for example, when we talk about SVR, this is the market we are very active. Israel, Latin America, very hostile environments. No technology will recover the car. The recovery of the car is done by people sitting in a control center providing information to enforcement people on the field, intelligence. We have drones. Those things are aside the technology. So along as long as we can sell and specifically in emerging markets, our technology is the state-of-the-art. It's very the companies, for example, that sell cars in Israel, even the Chinese companies. They are not providing communication telematics solutions, for example, in Hebrew. They are not providing the data that's relevant, and then don't and they will not integrate it for those small markets. On the other hand, in Brazil, and in Mexico, we are connecting to those manufacturers from the first level. So I think that for us, it's more important to provide the service to have the recurring revenues. Today, 95% of our customers, which are car dealers, car manufacturers, and any other customers, still buy our hardware. But there are a few percentages. We choose their own hardware. We are willing, it's for us, it's okay. For us, it's okay. So it may grow. This percentage will grow. I agree with you. In the next decade. But still, it's not something that we see as an aiming the business of Ituran Location and Control Ltd. Evan Tindell: Great. Thank you. Thank you for that. And one other question. Can you update us on your efforts in India? Eyal Sheratzky: I didn't talk about India today, specifically because there were a few quarters that I mentioned this joint venture that we have in India, and since this growing market is very, very, very slow, I didn't find a reason to repeat things that I said in the past. But for you, I can say we have a joint venture in India. We signed a large contract with Mercedes Benz for commercial cars. But with low margins. The current problem in India is that the market is premature. They keep the financial capabilities of businesses as well as retail is very low. So we have to find very specific deals to make money, but India is for the long term. India has a lot of potential as we see it for the future, and we are the main telematics or one of the main telematics players that are on the ground. Evan Tindell: Okay. Thank you. Kenny Green: You're welcome. Thanks, Evan. So that will end our question and answer session. Eyal, if you would like to go make your concluding statements. Eyal Sheratzky: On behalf of the management of Ituran Location and Control Ltd., I would like to thank you, our shareholders, for your continued interest and long-term support of our business. We look forward to continuing our accomplishments over the next decade. If you are interested in meeting or speaking with us, feel free to reach out to our investor relations team. With that, we end our call. Thank you, and have a good day.
Darren Seed: Good afternoon, ladies and gentlemen. Welcome to the Greenlane Renewables Third Quarter 2025 Video Conference. My name is Darren Seed, President of Insight Capital Markets, responsible for Investor Relations at Greenlane. I'm joined today by Brad Douville, Greenlane's Chief Executive Officer; and Stephanie Mason, Greenlane's Chief Financial Officer. We'll begin with prepared remarks followed by Q&A, which I will moderate. Before beginning our formal remarks, we'd like to remind listeners that today's discussion may contain forward-looking statements that reflect current views with respect to future events. Any such statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected in these forward-looking statements. Greenlane Renewables does not undertake to update any forward-looking statements, except as may be required by applicable laws. Listeners are urged to review the full discussion of risk factors in the company's annual information form, which has been filed with the Canadian securities regulators. Please feel free to submit any questions you may have through our investor e-mail address at ir@greenlanerenewables.com. Now over to Brad. Brad Douville: Good afternoon, and thank you, everyone, for joining us today on the update of the quarter. It's been a very busy quarter to say the least as we have accomplished many of the deliverables we set out for ourselves at the beginning of the year in our strategic plan. Our third quarter was highlighted by positive adjusted EBITDA and earnings, an increase in our sales order backlog and the market launch of our next-generation landfill gas upgrading technology. Let me get into each of these. At the start of the year, I said that we would have a relentless focus on profitability and maintaining healthy cash reserves. We've done that by delivering another strong quarter with positive adjusted EBITDA and our net -- and positive net income, marking back-to-back quarters of profitability. Our persistence has strengthened our balance sheet with more than $19 million in cash on hand after averaging just over $16 million at quarter end over the past 3 quarters. Importantly, we've achieved these results while continuing to invest in our future, advancing our next-generation Cascade LF upgrading technology. 2025 represents a reset year for our core upgrading business, which historically has generated the bulk of our revenue, considering the contract values are in order of magnitude larger than our other current revenue streams. Looking ahead, we've developed the Cascade LF upgrading system as our growth platform, building on the strong foundation of our biogas desulfurization, parts and service and royalty revenue streams. Quoting customers and working through the sales cycle to secure Cascade LF orders is underway following the product reveal events we held in September in Brazil and the U.S. Revenue from new orders is likely to begin in 2026. We believe that the launch of this product line will help make RNG projects more accessible and scalable by enabling project owners to enhance revenue-generating RNG output from their landfill gas assets while minimizing upfront investment. Greenlane's consistent financial and operational progress this year underscores the momentum we're building across the organization. We are creating a more resilient, focused company that is well positioned to drive long-term value for our shareholders and customers as we continue progressing towards achieving the 2025 strategic and financial goals outlined earlier this year. With that, I will now turn the call over to Stephanie to take you through the numbers. Stephanie Mason: Thanks, Brad, and good afternoon, everyone. As a reminder, all figures are in Canadian dollars unless otherwise stated, and all comparisons are for the third quarter of 2025 against the third quarter of 2024. Greenlane continues to demonstrate discipline and improvement across key financial metrics. Our revenue increased 10% to $11.6 million from $10.5 million in Q3 last year. We generated $0.5 million of adjusted EBITDA and $0.1 million of net income and comprehensive income. This marks a significant turnaround from last year's net loss and comprehensive loss of $2 million and adjusted EBITDA loss of $0.2 million and continues our achievements in Q2 of this year. Our gross margin before amortization increased to 39% from 34% last year, driven by stronger sales, product mix and enhanced operational efficiency. At the same time, general and administrative expenses declined by 5% over the same quarter last year, enhancing our ability to convert top line growth into bottom line profitability. Our sales order backlog has grown to $33.5 million, up sharply from $14.3 million a year ago. Sequentially, it grew by 27% from Q2 and 58% from Q1 of this year. Our $19.3 million in cash increased from $16.2 million in December 31, 2024, of which $1.2 million was from the release of restricted cash. This strong cash balance and no debt provides us additional flexibility to invest strategically in growth initiatives such as the new Cascade LF product line. The combination of higher margins, a growing backlog and a strong balance sheet positions Greenlane to drive long-term value creation. We remain focused on operational efficiency, financial discipline and the commercialization of our next-generation Cascade LF product line, as we continue to execute on our strategic plan. We look forward to keeping you appraised of our progress. And with that, let's go over to Darren for the Q&A. Darren Seed: Thank you, Stephanie. Some great results today and a healthy increase in our cash balance. So how should investors think about the company's cash balance moving forward? Stephanie Mason: Thanks, Darren. That's a good question. I want to start by reminding everyone that we do not provide guidance. But what I will say is that we did see $1.2 million increase in our cash balance from the release of restricted cash. But even above and beyond that, we've been able to maintain a strong cash position. So we've already said we've been focusing on the profitable areas of our business, having financial discipline. So that is a main contributing factor. And with that strong cash balance, we're going to invest in our business. We're investing in the Cascade LF product line. We're working on setting up manufacturing in the business, but we also want to keep optionality open and really be able to focus on strategic growth for our business. Darren Seed: Thank you, Stephanie. Now looking at the new Cascade LF system. We've revealed it. We're marketing it to new and existing customers. So how should investors think about its success or any purchase order reactions from customers? Brad Douville: Yes. Let me take that one. So firstly, we set our sights on solving the most difficult problems in the industry, and we're doing that with Cascade LF, specifically the persistent challenge of nitrogen removal, oxygen removal from methane in landfill gas applications. So that's really what this new technology associated with our new Cascade LF product line is around. So our ambition was to come down the cost curve, go up the performance curve, and that's something that we've been listening to our customers, obviously, for quite some time. We knew it's something that they need to be able to do more projects, smaller projects, but also the kind of projects that they need considering the amounts of nitrogen and oxygen in their various landfill assets. So, so far, so good. We've had some really positive feedback. We've had the reaction that we were hoping to get in terms of this product being compelling. And we're just in the early throes of that with early days on the sales pipeline. We just launched it from a marketing perspective in September. And so far, so good, really great feedback from customers so far. Darren Seed: Thanks, Brad. You've noted that in the Cascade LF product reveal events were held in Brazil and in the U.S. Are there other geographies of focus? And can you say more about the Cascade LF being the growth platform going forward after a reset year in 2025 for Greenlane's core upgrading business? Brad Douville: Yes. So the -- if you think about the sources of RNG, the feedstock sources, in particular, so landfill gas in the Americas, it represents about 70% of -- 70% of RNG is derived from landfill gas. Europe is a bit of a different case. Europe is more mainly dominated with anaerobic digestion. So that means our core focus area is the Americas. So we've launched -- did the marketing launch in Brazil, in the U.S., but key focus is other parts of Latin America and also Canada. When we talk about Cascade LF being the growth platform, it's really important to note that relative to the other revenue streams in the business today. So if you look at our biogas desulfurization product line, for example, contract values associated with the upgrading system, Cascade LF, it's an order of magnitude greater. So achieving the same kind of growth levels that we've had in the base business with a much higher revenue. That's what we mean when we say Cascade LF is really our growth engine going forward. Darren Seed: Thanks, Brad. Now I see that the Canadian government has tabled -- has recently tabled their budget for a vote in the House of Congress. Have you seen anything in that budget that might benefit Greenlight? Brad Douville: Yes, there's a couple of things. So the feedback from industry groups to the Canadian government has been, firstly, on the CFR, the clean fuel regulation. And the feedback was pretty simple, keep it and enhance it, make it work a little bit more efficiently and effectively. So that seems to be preserved in the budget that was tabled. The next most important thing that would help the industry in Canada move forward is ITCs, investment tax credits. So the industry had put forward to say, well, look, as of -- before this budget was tabled, the ITCs had not considered RNG or biogas more generally. And it appears that perhaps they've been listening. We'll see when the full regulations come out, but there is note in the budget that now renewables derived from biomass that go to heat or electricity, which, of course, RNG goes towards both of those things, would be qualifying for the investment tax credits for building out new projects in Canada. So that's really exciting. We'll see. We'll see how they actually turn that into the official language. Now the other piece that's also in there is around hydrogen. There's an existing ITC for hydrogen projects in Canada, built out in Canada. And that's now been expanded to include hydrogen, in this case, particularly the green hydrogen generated from methane. So the only way you can get green hydrogen from methane is through biomethane or renewable natural gas. So again, both of those have to be turned into the regulatory language. We'll see what happens. But by, at least, my read of it over the weekend, it appears that there could be some positive signals going to our industry in Canada coming up. Darren Seed: Well, thanks, Brad, and thank you for watching today's financial report. We look forward to seeing you in the next quarter.
Operator: Welcome to the Figure Technology Solutions Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Lastly, today's call is being recorded. I would now like to turn the call over to [ Craig Streem ] Investor Relations. Unknown Executive: Thank you, Nicky. Good morning, everybody. Welcome to our third quarter 2025 earnings call. This is [ Craig Streem ] in the Investor Relations team at Figure. Joining me on today's call are Mike Cagney, Executive Chairman and Co-Founder of figure; Michael Tannenbaum, our Chief Executive Officer; and Macrina Kgil, our Chief Financial Officer. In today's call, we will refer to certain non-GAAP measures, which are reconciled to GAAP measures in the earnings release we issued yesterday after the market closed and in the appendix to our supplemental slide presentation posted to our website. Non-GAAP measures are not intended to be a substitute for GAAP results. Certain statements made during today's call may contain forward-looking statements, which may vary materially from actual results. Information concerning risks, uncertainties and other factors that could cause these results to differ is included in our SEC filings and set forth on Page 3 of the earnings presentation we've posted in the IR section of our website and in the risk factors we've identified in our third quarter 10-Q filed earlier today as well as in other SEC filings. We're not undertaking any commitment to update these statements if conditions change, except as required by law. And a recording of the conversation will be made available on our website following the conclusion of today's call. Following the formal remarks, we will also open the line for questions, and I would encourage you to follow along in the posted earnings presentation as we go through our formal remarks. And with that, I'll turn the call over to Michael Tannenbaum. Michael, please go ahead. Michael Tannenbaum: Thanks, Craig, and thanks to all of you who are joining us this morning. Let's begin by turning to Slide 4. As you saw in the earnings press release we issued after the close yesterday, we had a very strong third quarter with great results in all of our key performance metrics. Adjusted EBITDA, the measure that most clearly demonstrates the profitability of our business, reached $86 million in the quarter, an increase of 75% year-over-year and EBITDA margin reached 55%. Net income for the quarter was nearly $90 million, more than triple last year's quarter. Total consumer loan marketplace volume reached almost $2.5 billion in the third quarter, representing a 70% increase year-over-year. This growth reflects continued expansion across our origination partner network and increased utilization of Figure Connect for liquidity. As more partners leverage the platform to fund and sell loans, we're seeing meaningful gains in both scale and efficiency. A standout example being first lien lending, where adoption has accelerated sharply among both new and existing partners. Firstly, volumes nearly tripled year-over-year, making it one of our fastest-growing products this quarter. Partners are leaning into Figure Connect as a liquidity solution, enabling faster funding, improved execution and lower cost versus traditional channels. This momentum demonstrates how our marketplace model extends beyond home equity and into the broader consumer ecosystem, capturing a larger share of the housing finance value chain. We also continue to see encouraging progress from new product categories, which together contributed more than $80 million in volume in the third quarter. These include innovative blockchain-based solutions for crypto-backed loans, loans to small and medium businesses and debt service covenant ratio, or DSCR, loans. Each of these products leverages the same origination and trading infrastructure that powers our core marketplace. This combination of core growth and product innovation reinforces the scalability of the Figure ecosystem. By expanding both vertically within home lending and horizontally across adjacent asset classes, we're creating multiple avenues for growth and ensuring that Figure remains the leading blockchain marketplace for consumer credit origination and liquidity. Now let's turn to Slide 5. Given it's our first earnings call as a public company, I want to share a bit about our evolution and how we have succeeded in delivering against what we see as a generational capital markets opportunity. From the beginning of the company, we've had a relentless focus on innovation and technology, in particular, on the use of blockchain to drive scale, achieve competitive differentiation and disrupt incumbents. With mortgage and home equity, we identified a greenfield product set where we could improve the product experience and capital market. But our ultimate objective has always been to create a true marketplace that will connect assets with the capital markets in a capital-light manner that generates the sort of margins you see in this quarter's results. Over time, we believe this will translate into lasting shareholder value. On Slide 6, I'll start by going back to 2018 when we became one of the first entities to originate consumer loans on blockchain. In 2020, we did the first securitization of blockchain assets. In 2023, we did the first AAA-rated securitization of blockchain assets and now our securitizations have AAA ratings from both S&P and Moody's. To date, we've originated over $18 billion in loans on the Provenance blockchain and executed over $60 billion in blockchain transactions. We believe we are, by far, the largest player in the public blockchain real-world asset space and our lead is growing. We began as a direct-to-consumer lender using our balance sheet to originate loans. We very quickly grew to a business-to-business to consumer platform and now have nearly 250 third parties, that's up a lot from last quarter who use our technology to originate blockchain-native assets. Originally, we used our balance sheet to bridge between our partners and the capital markets but we began to move away from that in June of 2024 with the launch of Figure Connect, where we allow our origination partners to access capital market liquidity directly. Instead of intermediating with our balance sheet, our partners sell directly to the capital markets using our marketplace. This fee-based model is more profitable for us, and in addition, does not require us to use our equity capital. We went from 0 volume in the marketplace of June of 2024 to having it comprise almost half of our total consumer loan marketplace volume in this quarter. Turning to Slide 7. I want to share a bit more about why blockchain is so important to our approach and how it has become the backbone of our entire strategy. We focus on 3 foundational elements of blockchain. Transactional efficiency, liquidity and lending and each of these is an essential element contributing to our ability to transform capital markets. Starting with transactional efficiency, we have found that blockchain has enabled us to save roughly 85 basis points in securitization costs by taking advantage of the immutability of putting loan attributes on blockchain, which has allowed us to reduce third-party review costs. Moving to liquidity. We created via standardization an homogeneity in our loans. Every loan originated across our now almost 250 partners is done electronically end-to-end on the blockchain without human involvement in the data. Regardless of the partner, every loan is underwritten the same way, and all performance data is captured transparently. We've seen the value of this approach validated recently given some of the capital markets issues and fraud highlighted by the Tricolor and First Brands situation. Earlier, I mentioned $60 billion in transaction versus $18 billion in originations, which demonstrates that through Figure Connect, we're turning homogeneity and data integrity into real tradable liquidity. That's a breakthrough for a historically illiquid asset class and is quickly becoming one of Figure's strongest moats. Finally, the last element is what we broadly characterize as lending, specifically how lean perfection and cross collateralization can provide greater economic efficiency for a variety of products. One way we're applying this directly is through Democratized Prime where our frictionless, short-term liquidity funding marketplace is delivering financing rates below those achievable in wholesale capital markets. This not only validates DeFI's potential efficiency, but also gives us a road map to extend this to other asset classes, something Mike Cagney will discuss later on this call. Turning to Slide 8. you'll see the 2 core marketplaces that anchor the Figure ecosystem today, our consumer credit marketplace and our digital asset marketplace. These are the primary engines of our business model. The consumer credit marketplace supports our origination partners, which include banks, credit unions and mortgage companies. Every loan they originate is fully digitally standardized and executed on chain, creating homogeneity and transparency across the ecosystem. Our digital asset marketplace provides a connection point between the capital seekers I just spoke about and the capital providers who seek to earn the best possible return. Our digital asset marketplace is a global regulated exchange built on the same blockchain rails as our consumer credit network. Embedded within this marketplace is Democratized Prime, our decentralized short-term funding market. Democratized Prime connects lenders and borrowers directly, eliminating traditional intermediaries. And importantly, it's not isolated from the rest of the platform. It can also finance the same loans originated by our consumer credit partners. These 2 marketplaces work together. One generates high-quality, real-world assets and the other provides the liquidity to fund them. Across both ecosystems, our revenue model is simple. We earn a fee-based take rate on ecosystem volume. On the next slide, you can see the illustration of the life cycle of a loan within the Figure ecosystem and how we capture value at each stage. Let's use a credit union partner as an example. When their customer applies for a loan, a credit union connects directly to Figure's system through an API or web app and sends us just a few key data points. Things like income, property details and loan amount. Within seconds, our technology determines whether that loan meets prespecified underwriting parameters. If approved, Figure's platform automatically verifies both income and property value by linking to the consumer's bank account and third-party data sources. In nearly all cases, there's no human touch. The resulting data credit score, income and property valuation are written immutably to the blockchain forming a digital audit trail that dramatically reduces quality control costs as those loans move through the capital markets. Loans are then aggregated and financed either through warehouse lines or increasingly on Democratized Prime before being sold to loan buyers. At sale, Figure earns a roughly 3% ecosystem fee which is deducted from proceeds, meaning our partners are not out of pocket. If the loan is later securitized through our platform, we earn an additional 40 basis points. Separately, we earn a 25 basis point annual servicing fee for as long as the loan remains outstanding, which typically runs about 5 years. Across this life cycle, automation and blockchain verification translate to meaningful cost savings in origination, diligence and secondary market execution. All efficiencies that directly strengthen the partner economics while creating recurring high-margin revenue for Figure. These improved economics for all parties involved have been a significant contributor to the growth and relationships you'll see on the next slide. Our partner network is one of Figure's most powerful differentiators. Today, that network spans traditional banks and credit unions, more than half of the top 20 independent mortgage banks and a growing base of fintechs, solar and home improvement companies. As highlighted in our earnings release, this quarter, we onboarded one of the largest mortgage servicers in the United States to our marketplace. These partners rely on our infrastructure to originate and distribute consumer credit products more efficiently creating a nearly continuous flow of high-quality assets. Because our partners can originate, fund and sell loans seamlessly, their economics improve and our overall reach continues to expand. As a result, over the past 5 years, partner-originated volume has grown at roughly a 74% CAGR. This network is a core part of our flywheel, broadening access to borrowers while also increasing liquidity for investors across our platform. Turning to Slide 12, expanding the supply side to meet this demand for credit is an important part of our mission to be a marketplace for these products. We are achieving this through Figure Connect, a purpose-built marketplace that enables buying and selling of standardized blockchain-native assets for all counterparties in the transaction. We now have a diverse range of participants on the platform. These are high-grade institutional counterparties such as banks, asset managers and insurers looking for transparent data-rich credit exposure that settles faster and more efficiently than anything available in traditional markets. On this same note, in Q3, we added 7 new buyers to our securitization program, including a prominent sovereign wealth fund who has become a programmatic buyer, benefiting our broader ecosystem. In short, Figure Connect is transforming what used to be a fragmented and opaque process into an always-on data transparent and institutionally funded marketplace, redefining how real-world assets move throughout the capital markets. Before concluding on Slide 13, I want to also note that in the conversations with investors, we frequently hear we have a high "do versus say ratio". This slide summarizes some of the operational proof points we have been highlighting recently. The first is expanding our consumer loan marketplace to first lien, which is up almost 3x year-over-year and is rapidly proliferating through our partner ecosystem. The second is the progress on our blockchain pillars with our blockchain native equity listing and our growth in our stablecoin yields or YLDS. The third is the ubiquity we have been building for our YLDS stablecoin, including recent expansions into the Sui and Solana ecosystems. We are committed to continued delivery on the growth of our marketplace and our vision of bringing the capital markets on chain. So before I hand it over to Mike, I want to take a step back and put this quarter in context. What you've heard today, strong financial results, growing partner adoption and continued product innovation, all reflect the strength of Figure's platform and the durability of our business model. We're executing with discipline, scaling a capital-light marketplace and translating technology investment into measurable financial performance. At the same time, we're still in the early stages of an even larger opportunity, which is transforming the capital markets themselves. The traction we're seeing in Democratized Prime, the expansion of YLDS and the upcoming equity initiatives underscore how blockchain is driving real change here at Figure. I'm incredibly proud of the progress our team has made and confident in the foundation we've built for sustainable long-term growth. With that, I'll turn it over to Mike Cagney to share his perspective on the broader opportunity ahead and the next phase of innovation at Figure. Michael Cagney: Thanks, Michael. I want to start off my remarks today by reminding the investors about the enormous opportunity we're executing into at Figure. This quarter was exceptional. We optimized for the long term in our approach to product technology investment and corresponding shareholder value. We're transforming the capital markets with blockchain, and we see the opportunity to build a $100 billion or more market capitalization company in this field. We built our consumer loan marketplace in a series of very deliberate, methodical steps over the past 7 years. And as Michael pointed out, that's clearly paying dividends for us today. The early progress you're seeing in YLDS and Democratized Prime is just that. It's early progress, but we're confident that over time, we will continue to build out these products and many more we've not even revealed yet. On Slide 15, Democratized Prime, our DeFi lending product is an important part of our future. And in many ways, it's the most scalable platform, the most natural place for both third-party assets and our ecosystem. Many of you heard me talk about the liability flight from banks to stablecoin, which will in turn drive demand for DeFi as alternative funding sources. We believe Democratized Prime is well positioned to benefit from that flight. Democratized Prime competes directly with traditional capital allocators that intermediate between sources and uses of capital, directly connecting borrowers and lenders and reduces significant time and cost benefits. We stood up at a number of loan marketplaces on Democratized Prime, and importantly, the funding cost there is lower than traditional warehouse lines. We see a significant opportunity to use Democratized Prime to offer warehouse into our existing Figure Connect lending partners eliminating the 90-day diligence, minimum fees, excessive legal costs that they have to face with the banks in lieu of a lightning fast, cheaper financing solution. The economic model of Democratized Prime is compelling as it generates incremental pure margins since it operates as a decentralized exchange-like marketplace rather than a balance sheet business. This continues our broader trend of introducing capital-light, higher-margin products that expand the ecosystem's velocity and profitability. Over time, we see Democratized Prime becoming the preferred liquidity venue not only for assets originating within our consumer credit network, but also for blockchain native real-world assets more broadly and a direct extension of the structural efficiencies we built across the Figure platform. And as we add additional blockchain ecosystem connectivity to YLDS, like you're seeing with Sui and Solana, we have a natural platform to access to Democratized Prime for their ecosystems. On Slide 16, earlier this week, we announced a partnership with Solana to deploy our yield-bearing stable coin YLDS on the Solana blockchain, the second major blockchain partnership for YLDS after Sui and that we've announced since the IPO. This collaboration brings together Solana speed, throughput and composability with YLDS regulatory anchor design and attractive transparent returns. The step also supports our broader strategy at Figure, building modern capital markets infrastructure that bridges traditional finance and decentralized systems. YLDS is not just a token, it's a regulated financial infrastructure asset designed to support fiat movement on and off chain and enable a seamless flow of yield and liquidity across our ecosystem and other LLMs. The Solana and Sui deployments extend that capability into one of the most active blockchain developer communities, opening up new rails for innovation, adoption and scale. Finally, I'm pleased to share one major strategic marker that further accelerates how we are reinventing capital markets as we continue to build out the blockchain ecosystem Michael referred to. Yesterday, we announced that we filed a confidential S-1 for the upcoming launch of a blockchain-native equity share class on Provenance blockchain. This offering is a nondilutive secondary transaction and represents the first public equity class to exist entirely on blockchain infrastructure. We'll share more about this offering in a call with the analysts and investor community next Tuesday, November 18 after the market closes, at which time we expect our registration statement will be public. This is a watershed moment for Figure for Provenance blockchain and for capital markets more broadly, and one we believe will define how asset classes are created, financed and traded for decades to come. With that, I'll turn it over to Macrina to walk through our financial results for the quarter. Minchung Kgil: Thanks, Mike. Turning to Slide 18. Let's take a closer look at our financial performance this quarter. As a reminder, at Figure, we focus on 3 key metrics: volume, revenue and EBITDA. Starting with volume, our total ecosystem activity continues to grow rapidly. Notably, our consumer loan marketplace volume reached a record level nearing $2.5 billion this quarter. Importantly, volume on Figure Connect made up nearly half of the total consumer loan marketplace volume as we continue on our path to building out our capital-light marketplace with limited balance sheet exposure. Moving to revenue. Adjusted net revenue reached $156 million in the quarter, an increase of 42% from the third quarter of last year. Adjusted net revenue benefited from the higher level of ecosystem volume I just mentioned, partially offset by lower take rates from partner branded volume as we shift more volume away from Figure branded. I would remind you that Figure-branded volume generates a higher growth take rate in revenue with higher operating expenses. Overall, our partner branded volume, especially volume from Figure Connect brings us higher adjusted EBITDA margin. Turning to our profitability. Figure achieved an adjusted EBITDA of $86 million for the quarter, up 75% year-over-year, representing an adjusted EBITDA margin of 55.4% compared to 44.9% in the prior year period. That's over a 10-point improvement in margin, driven by operational efficiency, automation and the continued shift toward our marketplace. On the expense side, we continue to demonstrate meaningful operating efficiency. Our fixed costs, which include technology and product development as well as G&A functions like finance, legal and capital markets, have remained stable from pre-IPO levels relative to our revenue growth. The investments in technology that we've made over the last 7 years allows us to add new product verticals without significant incremental development costs. Variable costs that move with our volumes have benefited from continued reduction in funding costs in addition to automation and AI applications embedded throughout the business. Variable expenses as a percentage of adjusted net revenue declined from 36% to 28% year-over-year, highlighting the efficiency of our marketplace model and transition away from using our balance sheet. On the next slide, there are trends I want to make sure you are aware of. As we look ahead to the remainder of '25 and early '26, it's important to note the typical seasonality in home equity loan origination volumes that we expect to see in the fourth and first quarters based on historical information from '23 and '24. According to a third-party data source, Q4 and Q1 volumes historically trended below the annual average, lower than the yearly baseline. This pattern is consistent with what we've seen historically as demand for lending tends to moderate heading into the year-end holiday period and through the winter months. We see that consumers typically defer major financial decisions such as home improvements or debt consolidation during the late fall and winter as household budgets shift toward holiday spending and travel. That said, we believe our diversified partner base and capital-light marketplace model position Figure to navigate these dynamics effectively. Before we close, I want to highlight the 3 long-term financial goals that guide our strategy shown on the next slide. First, adjusted EBITDA margin. We are targeting annual margins above 60%, reflecting the scalability of our model as more activity moves to Figure Connect, and as Democratized Prime adoption continues to grow. These initiatives fundamentally reduce the need for balance sheet capital, increase transaction velocity and drive a higher contribution margin with each incremental dollar of volume and balance. Our progress this year with adjusted EBITDA margin reaching nearly 55% this quarter demonstrates that level is achievable in the longer term. Second, capital light. Figure is moving to a marketplace model and as partners increasingly originate, fund and sell loans through our platform, our role becomes that of an infrastructure provider, capturing recurring marketplace economics without tying up capital. The transition to third-party and on chain funding through Figure Connect and Democratized Prime continues to reduce the use of our own balance sheet while maintaining liquidity and flexibility across the ecosystem. And third, operating efficiency. We've maintained a disciplined cost structure with limited increases in fixed expenses even as revenue and volume have scaled substantially. Our technology investments, particularly in AI and process automation have reduced variable costs as a percentage of revenue and allowed us to support more partners, more products and more transaction volume without proportional increases in headcount or spend. We believe we are uniquely positioned as the future of capital markets with an integrated platform that uses blockchain to originate, finance and trade real-world assets at a fraction of traditional cost. As we continue to grow our partner networks and develop our decentralized finance capabilities, we expect to deliver sustained volume growth, stable and attractive take rates and expanding operating margins over time. I'd like to thank everyone for joining us today and for your continued interest in Figure. Nicky, we're now available for questions. Operator: [Operator Instructions] Our first question is coming from Dan Dolev with Mizuho. Dan Dolev: Amazing quarter. I mean you're really crushing it. You obviously crushed all of our expectations. So maybe a question for you, Michael and Mike, what is either of you most excited about in the business right now? Because there seems to be so many moving parts and so many great things. Kind of I think investors want to know what's the most exciting thing for you guys. And great results again. Michael Tannenbaum: Thanks, Dan. I'll start, and then I'll let Mike add what he's most excited about. For me, it's very simple. Our existing and future customers are coming to us rather than us going to them, asking us how they can use our blockchain tech to improve their business, which I think is definitely exciting. I spend a lot of my time on partner acquisition and growth. And when I joined this company, blockchain for most of our partners was very much in the background. I've referred to it kind of similar to cloud technology where it just works. But increasingly, I see that our origination partners want to have conversations about our blockchain ecosystem more directly. They're considering YLDS, our stablecoin and Demo Prime in addition to our tokenized loans, and they see the connection between these things. So that go-to-market and sort of that dynamic is very exciting. Mike, I would be interested to hear from you. Michael Cagney: So I think you know my -- what I'm most excited about. I think the press release yesterday announcing that we're issuing equity native to public blockchain is a huge transformational opportunity. It's an opportunity to build an entirely new capital market ecosystem. And then unfortunately, I can't spend a ton of time talking about that today, but we're going to spend a lot of time talking about that next Tuesday. But I think that's a real leap of us demonstrating that the value proposition that Michael articulated earlier in the call, the transactional efficiency, the liquidity and the capital financing DeFI aspects of blockchain are applicable not just to the credit asset class, which I think we've clearly demonstrated, but to other asset classes as well and equity being the next one on the agenda for us. Operator: Our next question is coming from James Yaro with Goldman Sachs. James Yaro: Also congrats on the IPO as well as on the strong results coming out of the gate here. I'd love to just touch on your product road map. What's the order of prioritization of your products from here? And then maybe if you could comment on the TAM and profitability of those top few products? And what do you see as being meaningful to results among these new products over the next, let's say, 2 to 3 years? Michael Tannenbaum: Thanks, James. That's a good question. I'll start by saying that we have a huge $185 billion plus market opportunity in front of us. We see all consumer credit and asset classes, as Mike just mentioned, beyond consumer credit as addressable. From the core standpoint of our HELOC product, we're executing into $35 trillion of home equity. And there is just a huge amount of runway in that product. Importantly, though, as you heard us mention in the prepared remarks, we've seen a lot of traction as well in the first lien aspect of the business, which is a -- which is the largest consumer credit asset class. And so that is something that we're pushing really hard, and we'll continue to do so in the coming quarters. In terms of the blockchain ecosystem pillars, namely Democratized Prime and YLDS, we're also making significant progress and really excited in the coming months to share some ways that we're going to be bringing more liquidity and ubiquity to those products, particularly some of the liquidity you see in other blockchain ecosystems, bringing that into our Demo Prime marketplace. So Mike, I don't know if you want to elaborate on that a bit. Michael Cagney: No, I think we're going to continue to invest in Demo Prime. It's a core aspect of what we're trying to deliver on in terms of capital market disruption. Then as I mentioned in Dan's comment or question, the application of equity native chain is really an extension of the existing infrastructure that we have. Obviously, it's an extremely novel transaction, but it's one that's tapping into again, the transactional efficiency, liquidity and financing benefits we've demonstrated on the credit side. So we really look at this as just an extension, but an important part of the road map. Michael Tannenbaum: Yes, I'd like to add because it's -- could I just -- we called it Democratized Prime, which I think that name Democratized Prime is a reference to prime brokerage. So it really connects kind of all the pieces of our ecosystem, right? The cross-collateralization you could get across crypto, tokenized loans, tokenized equity. And so that name was very intentional, and you'll be hearing more about that in the future. Next? James Yaro: Super helpful. Maybe if you could just perhaps touch on the Figure Connect outlook. 46% of your volume on our estimates came from Connect this past quarter, which was better than at least we had anticipated. How do you think about the -- what that could comprise and over what time frame? Minchung Kgil: Sure. James, thank you for being on the call. How we think about Connect is we've made progress. We opened up Connect in June of 2024. Within 2025, we are already reaching very close to 50% of Connect volume across our overall consumer loan marketplace volume. We do think that in the mid- to near term, 60% of Connect volume is quite doable, and we're working hard with our partners to get there. . Operator: Our next question is coming from Patrick Moley with Piper Sandler. Patrick Moley: Congrats on the IPO. So you saw really impressive partner growth in the quarter. So I was hoping you could elaborate on that. Can you help us get a better sense for the composition of those new partners in terms of size and the types of loans you'd expect them to be originating. And then how should we think about the time that it's going to take for those new partners to reach what you'd expect to be kind of a realistic run rate from them? Michael Tannenbaum: Yes. The partner growth was really impressive. I think the biggest aspect of partner growth for the quarter was growth in the SMB segment. That's because there -- it's completely greenfield, and we actually saw not only tailwinds because of the government shutdown and the small business administration being closed, but also just broad recognition of the opportunity and what we're doing and the applicability into the SMB use case. That was coupled with a product improvement that we released that allowed us to underwrite small and medium business bank accounts. But more broadly, we are constantly onboarding a range of partners that range in size. And I think one of the nice things that add stability to our business is that we bring on people that can get up and running in as fast as 2 weeks. And then we bring on enterprise parties that are doing more of a years long in some cases, sales cycle and implementation, and we have all of that capability in-house. This quarter, you saw us add a major servicer, one of the largest, if not the largest in the United States. We also added an extremely large independent mortgage bank. And we also added one of the players that has done a partnership with Robinhood and so we do expect to see some volume from there as well. And so we're continuing to add a diversified group of partners and that range in size and now also end market with the SMB additions. Operator: Our next question is coming from Ryan Tomasello with KBW. Ryan Tomasello: Congrats on the strong quarter out of the gate. I wanted to ask about Democratize Prime and YLDS. If you could just discuss the strategies you're leaning into to drive adoption there. I think one of the opportunities, it sounds like you've alluded to in the past is given the ecosystem you have, the possibility of promoting some incentives to existing origination partners as well as the underlying consumer borrowers to jump-start usage of those products. So if you can just elaborate on what the strategy is there? Michael Tannenbaum: Sure. I'll start, and I'll let Mike add as he's very close to Democratized Prime. In terms of the marketplace, where we're focused today is on the funding side. We originate, as you can see from the results this quarter, a very large number of tokenized loans each month. And ultimately, we see Democratized Prime as serving not only those loans but third-party loans as well. So it's a really massive opportunity. It's, frankly, the most scalable in many ways because of our ability to work and support with third-party assets. And so now our focus is on building out the funding side where we want to make sure that there is sufficient liquidity for these assets because when you're building out a marketplace, which is something that Figure has a lot of success in doing, you need to kind of control one side of the marketplace and then add others. And so we have the asset side down, and we're looking to increase funding. Mike, anything you would add there? Michael Cagney: Yes. I think as it relates to YLDS, the announcement with Sui and Solana are important in terms of the direction we're taking with YLDS. YLDS started as a Provenance security and Provenance doesn't have the builder community that both Sui and Solana have. And so bringing a security into those ecosystems where you have a fiat on/off ramp and a yielding stablecoin for purposes of payments, cross-border remit, collateral, we think is a significant opportunity, and we expect to get significant acceleration off of that. We're also making headway with YLDS in terms of collateral on exchanges. I think you'll see some announcements from us as we go into the second half -- or at the end of this year as it relates to that and that's natural. We would expect that YLDS would be a superior collateral type versus USDC because of the yielding nature for it. On Democratized Prime, as Michael said, we have the ability to put billions of dollars of assets on there. What we're looking at now is the funding side, and we're doing this in lockstep fashion. So we can't drop $1 billion of assets and then expect the capital to show up. Conversely, we can't drop $1 billion of capital unless we're ready to put the assets to work. What we're very focused on in terms of the capital side is replicating what Athena and others have done in liquid staking protocols where we have an underlying yielding asset. In this case, a home equity line of credit or lending against such asset as the yield-generating feature for that as opposed to something Athena does, which is the drop between the spot and forward market and the yield that's there, which is extremely volatile as the market is seeing today. And so we expect that we have an enormous opportunity to drive asset generation through that yielding liquid staking protocol construct. And we believe that's going to add a significant amount of dollars in Democratized Prime. Ryan Tomasello: Great. Appreciate all that color. And then in terms of the value proposition of tokenization, you've clearly demonstrated that within the consumer credit asset class thus far. But if you're able to give us just your general thoughts on what you see that value proposition being for tokenized equities given the stronger liquidity and transparency in that asset class at least relative to consumer credit. So what are the additional benefits you see being unlocked from tokenization there? Michael Tannenbaum: Well, without getting too much into the structure because most of that's going to be covered on next Tuesday's call, and I do encourage everyone to join because I think it's very innovative, and we'll give a lot more detail. But I think one of the focuses and you've heard both Mike and I talk about this is a lot of the existing market today is focused on kind of tokenizing but not necessarily adjusting the full blockchain infrastructure behind that tokenization and what we're about to unveil will be a little bit more fundamental. So that's, I think, hopefully enough to make you interested in joining next Tuesday. Michael Cagney: I can add to that a little bit in a more general construct. I think that a lot of our peers are discussing tokenization of equities and what they're doing is promoting the idea of taking a DTCC security and doing a blockchain representation of that. And the value prop they allude to is 24/7 trading. And I don't think 24/7 trading is that appealing to the broader market. And I don't think the market makers want to make market 24/7. And so I think it's a little bit of a red herring in terms of why there's value here. If you go back to the 3 value props of blockchain that Michael talked through earlier, there's transactional efficiency, and there's some transactional benefit you get with a blockchain native equity. The transfer agent costs, for example, is lower, but it's not enough to move the needle. There's a liquidity benefit at the margin in that you do have 24 hours -- 24/7 trading. But again, I think we were looking to lift FTX out of bankruptcy. They had a U.S. equity [ perp ] business that traded 24/7. And that's all that mattered, that business would have been flying and it was and it was going sideways. I think the real value in putting equity on blockchain is the DeFI construct, the ability to cross collateralize your stock with other assets like Bitcoin, like Figure loans, for example, and build unique borrowing pools through processes like Democratized Prime, where you access leverage in a way that traditional prime brokerage can't service. And even more importantly, the ability to lend that stock out. So rather than the opaque locate market we have today, where the prime broker earns the benefit when the security goes on special and pays an extraordinary yield, you have a straight-up limit order book, a limit order book where you put the stock out for loan and you decide what you want to get paid for it. And that's enough that should drive anyone on the buy side to want to own the blockchain version of that security. There's considerations about liquidity and how do you keep the price in lockstep. Again, Michael alluded, we'll talk to that in depth next Tuesday, in particular, how we're doing this for our issuance. But I think this is the future of how capital markets, equity capital markets are going to work. And just as we did with lending, where we pioneered it with our own product, we think we'll do the same thing here on equity. Operator: We will move next with Rob Wildhack with Autonomous Research. Robert Wildhack: Just a quick one to start. I appreciate the comments on seasonality. Do you think we should expect the quarter-over-quarter cadence in 2025 to reflect what happened in 2024? Or are there any differences that we should be aware of this year? And then same question heading into 2026. Minchung Kgil: Rob, this is Macrina. So as you saw our Q3 was outsized growth compared to last year, and we have been trending really well with our IPO and all of the efforts with partners. I do expect some level of seasonality in Q4 and also into Q1, but I do want to balance out that we have been having great success with our partners. We're seeing a lot of interest. So for us, it's more of a balanced approach. Robert Wildhack: Okay. And then bigger picture, you guys have really emphasized the lower cost to originate and faster time to close as big advantages. I think this quarter, we've seen or heard several other fintechs either growing in or expanding their own HELOC businesses, some even with automated appraisals, income verification, things like that. So I was hoping you could talk a bit more about the sources of your advantage like how much of the better Figure process comes from the blockchain-based infrastructure versus maybe more traditional tech improvements? Because I think the extent to which it's the former could matter a lot for your defensibility there. Michael Tannenbaum: The thing to remember about what we do is we've built an alternative capital market that has deep liquidity ratings, tokenization and it brings -- we use blockchain as a tool to bring the transparency and to bring the immutability of the data. And for example, as we mentioned, highlighted this quarter with Tricolor, the lean perfection. And so having that data and the ability to track the true provenance of the loan is critical to building out that capital market. And so we're doing something very different than everybody else in the space. And HELOC is just kind of a primitive to that marketplace. And the reason is because we've built an alternative capital market on blockchain rails. And to be very specific, when we make a change to our technology, it's integrated into the capital market. So what we do is if we decide to push an automation like we did with small business bank account, it's our capital market and technology that are working together, and it's that point of integration between those 2 that unlocks the really high margins that you see this quarter, the capital-light marketplace and the growth that you're seeing. Operator: Our next question comes from Dan Fannon with Jefferies. Daniel Fannon: I wanted to discuss the outlook for the non-HELOC loan growth. I think it was roughly $80 million in the quarter. Can you talk about how you see that progressing as the products expand? And which of the products you mentioned in the release were really -- was there an outsized driver of those loans? Michael Tannenbaum: We're seeing significant growth in first lien, as we mentioned, 3x year-over-year. And that is the primary focus for figure of the new products that you've heard us mention because of the, frankly, market size and opportunity for our partners -- existing partners to grow. That said, the SMB and crypto backed loans are also extremely important to the growth story, HELOC loans has been grown as well around the 3x year-over-year number. And what we're seeing is just the beginning of that marketplace as we expect to pursue the same B2B2C approach that we did in the mortgage market. And so today, that's mainly direct to consumer. And then in SMB, as we add more and more partners and build that go-to-market engine, we do expect to see significant growth there as well. Daniel Fannon: Great. And as a follow-up, you mentioned the government shutdown as being a catalyst for some SMBs joining. Can you talk about just the outlook for new origination partners given the strength we saw in the adds in the third quarter and maybe how you're seeing those conversations in the outlook in terms of potential additions over the next several quarters. Michael Tannenbaum: Yes. So the opportunity is definitely much broader than that specific shutdown. But the parallel is interesting because in mortgage, you have Fannie Mae; in small and medium business, you have the SBA, and we are an alternative blockchain-based capital market to both. And so we think this is a huge opportunity to bring that transparency. Again, back to the earlier question, what makes us different, right? It's the combined technology with the blockchain transparent capital market. And that is a solution that is relevant not only for mortgage, not only for SMB, but for tons of asset classes. But SMB is where we are being pulled. And I think that the current market environment there is just adding further tailwinds. Operator: [Operator Instructions] We will move next with Craig Siegenthaler with Bank of America. Craig Siegenthaler: So a follow-up on Dan's first question. On the first lien growth, is that a first lien HELOC? Or is that a first lien primary? And then I wanted to get an update on your appetite to expand outside of HELOC because I saw you referenced debt service covenant ratio loans in your prepared remarks. I think that's a pretty small TAM, but I'm wondering what about resident transition loans, auto loans and also primary first liens, non HELOCs. Could we see Figure move into some of these other potentially larger TAM segments in the future? Michael Tannenbaum: Yes. So I'll start on the first lien question. And it is a first lien HELOC. We distinguish that because the use case is very different. Oftentimes, when people think about a HELOC, they think about a mortgage on top of an existing first whereas the first lien HELOC that we originate via our partners is used to pay off an existing loan, often because the rate is higher than the prevailing rate. And it's also -- so it's a true replacement for a cash out refinance or a rate and term refinance to use traditional mortgage parlance. There's also 40% of homeowners that own their home free and clear, and so don't have an existing lien. So that's the first lien opportunity. And where we really see growth in there, just to be even more specific, is among especially small balance first lien because the cost to originate for Figure is $1,000, whereas industry average is $1,200. And so if you look at a, say, $200,000 mortgage that's a really material savings, and that's why we are seeing partner adoption. In fact, we are seeing some partners adopt first lien that don't use our HELOC products. So it's really massive growth. I do want to correct the record on the TAM of DSCR. That actually is one of the largest, if not the largest components of non-QM. I believe there's over $20 billion annual securitization of DSCR. But I will just use this opportunity to remind everyone that the capital market that we're building, and I think the SMB use case represents this the best is one that transcends any one specific asset class. We really see this as the beginning. Our ambitions are much broader than just mortgage or HELOC. And so you'll see more next week in the coming quarters, but we're definitely really excited about the business that we're building and its broad reach into the U.S. capital markets. Craig Siegenthaler: For a follow-up again on HELOC. I wanted to hear a little more details on your value proposition for large banks especially large banks that originate and hold HELOCs on their balance sheet, they might not receive the full value of the Figure Connect value proposition. And also with large banks, is it a headwind that you're really only offering capabilities in one lending segment because they might want solutions across all the consumer loan classes that they play in. Michael Tannenbaum: So this actually gets to kind of what I was saying I'm most excited about, and I think it would be good for Mike to expand here as well because there's this broad thesis that we have at Figure which is that you're going to have liabilities moving into stablecoin, which are tokenized liabilities, and therefore, assets themselves will need to be funded with those. And so if you think about the broad capital market as one where assets have been moving out of the banking system for the last 20 to 30 years, that will continue and accelerate with stable coin. And so for a large bank, actually, what's happening is they're going to want to tokenize their assets to access those viabilities that are tokenized and Democratized Prime is actually a perfect way to do so. And so this is part of our broader macro thesis and it's being borne out in the conversations we're having, Mike is having, the sales team is having. I don't know if you'd add anything there, Mike. Michael Cagney: Yes. I mean I think that we got an interesting perspective in late '22, early '23, when we had some liability flight out of the banking system and the regionals and the super regionals were especially impacted by that. They were all selling assets at fire sale prices that had a cascading series of events that ultimately led to bank failure and the need for the FDIC and the treasury to step in with some extraordinary measures to stabilize the market. And the treasury is today talking about $2 trillion going to a stablecoin or $6 trillion going into stablecoin. And they're not talking about where that's coming from, which is clearly demand deposits. And we're in a discussion with a lot of banks, a lot of regional and super regionals about this across 2 factors. One is to Michael's point, the ability to originate blockchain-native assets and access that DeFI ecosystem, which paradoxically is just the reallocation of that capital pulled out of the demand deposit put into stablecoin and then reapplied in DeFi to generate yield. And we think there's an enormous opportunity and low balance first lien is a great use case for us to bring to those banks because they don't do that loan today. So it's a greenfield opportunity for them and an ability for them to get a front row seat as to how blockchain works. The second thing that we're doing where we're getting traction is around the ability to use yields defensively, where when JPMorgan comes with JP coin and tries to approach those deposits, the bank can offer up a yielding alternative where with YLDS we, just like any Genius Act coin we can hold treasuries and bank deposits, we have the ability to hold bank deposits back to that bank. So if a regional bank customer buys YLDS, and it comes through that regional bank, we can hold that deposit back at the bank balance sheet, therefore, not keeping the liability within the bank itself. And we think both of those are significant opportunities for us, especially as we're getting the Genius Act coming online, you're starting to see more noise out of Chase. I think Chase is going to make very aggressive moves here at the expense of regional and super regionals. And I think we're well positioned to bring both some defensive and certainly in certain circumstances, offensive capabilities into those banks, with the combination of on-chain asset origination and access to DeFi through Democratized Prime but also YLDS as a defensive measure for -- or an alternative to a nonyielding stablecoin. Operator: And this concludes today's Figure Technology Solutions Third Quarter 2025 Earnings Conference Call. Please disconnect your lines at this time, and have a wonderful day.
Operator: Ladies and gentlemen, thank you for standing by, and welcome to the PDD Holdings, Inc. Third Quarter 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 host today. Please go ahead. Unknown Executive: Thank you, operator, and hello, everyone, and thank you for joining us today. PDD Holdings earnings release was distributed earlier and is available on our website at investor.pddholdings.com and through the Globe Newswire services. Before we begin, I'd like to refer you to our safe harbor statement in the earnings press release, which applies to this call as we will make certain forward-looking statements. Also, this call includes discussions of certain non-GAAP financial measures. Please refer to our earnings release, which contains a reconciliation of non-GAAP measures to GAAP measures. Joining us today on the call are Mr. Chen Lei, our Chairman and Co-Chief Executive Officer; Mr. Zhao Jiazhen, our Executive Director and Co-Chief Executive Officer; our VP of Finance, Ms. Liu Jun, is unfortunately on medical leave. Delivering the prepared remarks on Jun's behalf today will be Ms. Xin Yi Lim from our Investor Relations team, who has spoken on our earlier earnings calls. Lei and Jiazhen will make some general remarks and on our performance for the past quarter and our strategic focus, and Jun Liu will then walk us through our financial results for the third quarter ended September 30, 2025. And during the Q&A session, Lei and Jiazhen will answer questions in Chinese and will help translate. Please kindly note that the English translation is for reference only. And in case of any discrepancy, statements in the original language should prevail. Now it's my pleasure to introduce our Chairman and Co-Chief Executive Officer, Mr. Chen Lei. Lei, please go ahead. Lei Chen: Hello, everyone, and thank you for joining our Q3 2025 earnings conference call. This year marks the 10th anniversary of the company's founding. Just before this earnings release, we celebrated our 10th birthday. When we started in 2015, we pioneered the team purchase model, which offered the value proposition of more savings and more fun at scale and created a new e-commerce defined by 3 characters, namely benefit all, people first and more open. Since then, we have gradually grown from a start into a key player in the e-commerce industry and along our journey, created greater value for our users, our merchants as well as the industry and the society. This quarter, we reported RMB 108 billion in revenue, with growth remaining under pressure. As always, we prioritize long-term value over short-term results. Looking back over the past decade, we have upheld our core value of concern, adhered firmly to our own duties and principles and maintained focus on our core business of e-commerce. Through our journey, we strive to create value for our users and to address the needs of the widest range of consumers. We have also made every effort in giving back to the industry ecosystem, driving the industry to become more benefit all, more people first and more open. Since day 1, our mission has been to serve the broadest range of consumers by offering affordable prices and quality services. 10 years ago, we introduced the team purchase model to address the challenges faced by the farmers and growers as well as industrial belt merchants. This e-commerce model has helped a large base of farmers and everyday workers increase their income while offering urban and rural consumers across through quality foods and daily necessities at affordable prices. Today, 10 years later, our focus remains on the day-to-day of people from all walks of life. We continue to provide consumers with quality goods at affordable prices and help merchants, many of which SMEs expand their market reach. And ultimately, we help producers and consumers live a better life. As a new e-commerce platform born in the mobile Internet era, we moved beyond the traditional online shopping model that placed products at the center. And instead, we put people first. We built our model around consumer focus. We try to understand a human touch behind every click, and we honor the consumer trust behind every order. We strive to bring more savings and more fun to every purchasing experience. And with this goal in mind, we will continuously driven product innovation, technology integration, service upgrades and improvements in product selection and the efficiency of supply chain. In doing so, we aim to satisfy the diverse and rapidly growing needs of everyday consumers. Throughout our journey, we have faced fierce and persistent industry competition, and yet we have remained steadfast in our focus on the company's intrinsic value in the long run, and we promote the high-quality growth of the platform ecosystem, and we advocate for a more open industry environment. Since last year, we have further elevated our ecosystem development and roll out substantial merchant support initiatives such as the $10 billion fee reduction program and $100 billion support program. Through these initiatives, we made investments in our merchants and a wider, creating room for innovation and growth for both established brands and SMEs. We hope to play our part in facilitating supply chain upgrade and addressing the long-standing challenge faced by our merchants who had quality but lack brand recognition. As we look ahead, the e-commerce industry is witnessing even more intense competition, and we will continue to uphold the principles that have guided us for the past 10 years, staying true to our mission of creating value for our consumers and focused on investing in the high-quality development of our platform and the wider industry. Today, the scale of our business is far greater than it was 10 years ago and with greater scale comes greater social responsibility. And therefore, as we think about our growth in this new era, we must do so in a way that prioritizes the interest of wider public and the long-term outlook of the entire ecosystem. Going forward, more strategic initiatives similar to $100 billion support program will be rolled out to support both supply side and demand side. We are also strengthening our efforts in giving back to the industry and a broader society. Three years ago, we launched our global business, which has now grown to serve many markets. Today, with the rapid evolvement of trade barriers and other global events, we are seeing significant shift in the platform's regulatory environment, including in trade policies, tax rules, data security and product compliance regulation across different countries and regions. This means we will inevitably face greater challenges and more uncertainties. As a young global company, we are working hard to learn to keep up and to adapt to these trends. However, there remain significant uncertainties exposing the company to risks that are unpredictable and difficult to quantify, which may impact our financial performance, both in the short term and over the long term. And in the midst of fierce industry competition, a complex global environment and our continuous ecosystem investments, our quarterly profitability will fluctuate and is inherently unpredictable. And therefore, simple linear projection might not be a good way to projecting future performance. As we have emphasized in the past, short-term stock price fluctuation has never been our focus. And rather, our focus remains on building long-lasting intrinsic value by doing the right thing and creating value for consumers. It is with our firm commitment to high-quality development, we embark on the next decade towards our vision of Costco plus Disney. And with that, we will turn the call over to Zhao Jiazhen for further remarks. Jiazhen Zhao: [Foreign Language] Unknown Executive: [Interpreted] Good day, everyone. This is Zhao Jiazhen. Thank you again for joining our Q3 2025 earnings release. The third quarter this year marks the company's 10th anniversary. As Lei mentioned, over the past 10 years, we have remained committed to creating value for our users and growing alongside our merchants. We have strived to drive the industry to become more open and have delivered incremental value to the society. At this 10-year juncture, we will continue to step up our efforts to give back to the supply side and the demand side as part of our efforts to drive industry upgrades and deliver more savings and more funds to the general public. In this quarter, our revenue growth continued to be under pressure and operating profit grew in low single digits. Currently, we see intensified competition within the e-commerce sector that is centered around new business models. We will continue to invest back into our platform ecosystem and our investments into the merchant support initiatives similar to the RMB 10 billion fee reduction program and the RMB 100 billion support program will continue in the long run. These investments will affect the sustained performance of revenue and net profit. And accordingly, our financial results of this quarter should not be considered as guidance for future performance. We cannot rule out the possibility that the financial performance in the next few quarters will continue to fluctuate. Over the past decade, we grew from a start-up into a public platform. We benefited from China's rapid economic development. And at the same time, we have not lost sight of the social responsibilities that are inherent to a platform company and proactively gave back to the agriculture and other industries. And this year, we rolled out the first RMB 100 billion support program in the e-commerce industry to support merchants and farmers. Through initiatives such as Duo Duo Premium Produce, new quality supply and logistics support to remote regions, we continue to drive the high-quality development of the platform ecosystem. As a new e-commerce platform with roots in agriculture, the first products bought and sold on Pinduoduo was agricultural produce. Along the way, we have made long-term investments across different parts of the agricultural industry from supply chain and warehousing logistics to supporting new generations of farmers and agricultural research and development. These efforts have significantly increased the scale and efficiency of agricultural product distribution, greatly promoted product standardization and helped farmers increase output and income. And in this process, we have become the largest platform for agricultural products in China. In the third quarter, our Duo Duo Premium project team visited dozens of agriculture specialty regions, including Hubei, Jingzhou, Henan, Shangqiu, Shandong, Liyang, and Yunnan, Pu'er. This year, on the back of CNY 100 billion support program, we launched the Duo Duo Premium Produce initiative to step up our investments into agriculture. Based on the 2025 agricultural product half year report that we just issued, our investments in agriculture have yielded significant results. And in the first half of this year, agriculture sales grew by 47% year-over-year, and we saw a similarly rapid increase in the number of agricultural merchants with a particularly notable increase of over 30% year-over-year in the generation of merchants born in the 2000s. This demonstrates that the online distribution of agricultural products continues to hold immense promise. In the third quarter, our Duo Duo Premium Produce team visited dozens of agricultural specialty regions, including Hubei, Jingzhou, Henan, Shangqiu, Shandong, Liyang, and Yunnan [indiscernible] to develop tailored solutions for the merchants and help them make the transition from a model that prioritizes scale to one that prioritize quality. And during the harvest season starting in September, we allocated RMB 1 billion subsidy and RMB 2 billion traffic support and in collaboration with the 300,000 agricultural merchants on our platform, we rolled out the Duo Duo harvest season program to facilitate the timely distribution of produce from rural areas to urban markets, helping farmers increase income. In the early days of our company, our team purchase model brought about a solution to the legacy challenges within the industrial belts and enabled the industries to quickly scale across regions. The number of e-commerce merchants in many of these regions grew from just 100 or 200 to several thousands. However, this growth has also led to commoditized competition. And today, these industrial belts have reached a critical juncture that calls for transformation. This quarter, we continue to invest in a new quality supply initiative through our CNY 100 billion support program. Our teams visited dozens of industrial belts such as down jackets in Pinghu, snacks in Huizhou, children's wear in Foshan, bags and luggage in Shandong, and Hanfu in Chaoqian. Leveraging our digital capabilities and fee reduction and merchant support programs, we continue to enhance quality and efficiency for our merchants, we aim to address the challenges of commoditized competition faced by many industries by incremental innovation across each part of the supply chain from raw materials to finished products. At the end of September, we released a 1-year development report on new quality supply. The report shows rapid growth in the number of industrial merchants. The number of merchants between the age of 25 and 30 grew by 31% year-over-year and those born in the 2000s grew by 44%. The number of high-quality SKUs increased by over 50% year-over-year, and we've also seen a significant rise in the branded stores on these industrial belts. And these figures demonstrate that the key industrial belts are steadily moving towards high-quality development. And on supply side, investments have allowed us to bring more savings and more fun to a broad base of ordinary consumers. We see urban white-collar workers ordering fresh flowers from Yunnan, while young people in small towns buy trendy designer toys. We see mountain villages enjoying high-quality seafood, while herdsmen in Western regions wear UV protective jackets. And taking the Western regions as an example, the exemption of transshipment fees has led to a significant surge in order volume for pet supplies, outdoor and sun protection gears, designer toys and fresh produce and plants, among other product categories. This greatly stimulated economic activities between the regions. Starting a fresh from this 10-year mark, we will continue to put consumers first and drive organizational evolution. And one by one, we will tackle the practical problems faced by our users, merchants and the industries through persistent focused efforts and continue to build a thriving platform that benefits all, taking on greater social responsibility and creating value for the public. Now I'll hand over to in Xin Yi to provide you with an update on our Q3 financial performance. Xin Yi Lim: Thank you, Jiazhen. Hello, everyone. This is Xin Yi from the Investor Relations team. Jun is on medical leave, and I will deliver the prepared remarks on behalf of her. Let me walk you through our financial performance for the third quarter ended September 30, 2025. In terms of income statements, in the third quarter, our total revenues increased 9% year-over-year to RMB 108.3 billion. This was driven by an increase in revenues from online marketing services and transaction services. Revenues from online marketing services and others were RMB 53.3 billion this quarter, up 8% from the same quarter of 2024. Online marketing services growth moderated further as competition intensified and as we invest in the merchant ecosystem. Revenues from transaction services were RMB 54.9 billion, up 10% from the same quarter last year. Moving on to costs and expenses. Our total cost of revenues increased 18% from RMB 39.7 billion in Q3 2024 to RMB 46.8 billion this quarter, mainly due to increase in fulfillment fees, bandwidth and server costs and payment processing fees. On a GAAP basis, total operating expenses this quarter increased 3% to RMB 36.4 billion from RMB 35.4 billion in the same quarter of 2024. On a non-GAAP basis, total operating expenses increased to RMB 34.4 billion this quarter from RMB 32.9 billion in Q3 2024. Our total non-GAAP operating expenses as a percentage of total revenues this quarter was 32%, roughly in line with the same quarter last year. Looking into specific expense items. Our non-GAAP sales and marketing expenses this quarter were RMB 29.8 billion, flat compared to the same quarter last year. On a non-GAAP basis, our sales and marketing expenses as a percentage of our revenues this quarter was 28% compared to 30% in the same quarter last year. Our non-GAAP general and administrative expenses were RMB 896 million versus RMB 647 million in the same quarter of 2024. Our research and development expenses were RMB 3.7 billion this quarter on a non-GAAP basis and RMB 4.3 billion on a GAAP basis, up 41% year-over-year. Our investment in R&D reached a new high this quarter, reflecting our focus on improving the core technology capabilities of our platform. We are committed to investing in R&D over the long run to capture opportunities in supply chain innovation and consumer experience. On a GAAP basis, operating profit for the quarter was RMB 25 billion versus RMB 24.3 billion in the same quarter last year. Non-GAAP operating profit was RMB 27.1 billion versus RMB [ 28 ] billion in the same quarter last year. Non-GAAP operating profit margin was 25% this quarter, down from 27% for the same quarter last year. As we invest in the platform ecosystem, our profitability may continue to fluctuate. Net income attributable to ordinary shareholders was RMB 29.3 billion for the quarter compared to RMB 25 billion in the same quarter last year. Basic earnings per ADS was RMB 20.96 and diluted earnings per ADS was RMB 19.7 versus basic earnings per ADS of RMB 18.02 and diluted earnings per ADS of RMB 16.91 in the same quarter of 2024. Non-GAAP net income attributable to ordinary shareholders was RMB 31.4 billion versus RMB 27.5 billion in the same quarter last year. Non-GAAP diluted earnings per ADS was RMB 21.08 versus RMB 18.59 in the same quarter of 2024. Now as Lei and Jiazhen mentioned, we are facing an increasingly competitive industry landscape, which calls for more investments in the platform ecosystem. And therefore, as we roll out greater merchant support initiatives and ecosystem investments, financial results may continue to fluctuate from quarter-to-quarter. That completes our income statement. Now let me move on to cash flow. Our net cash generated from operating activities was RMB 45.7 billion compared with RMB 27.5 billion in the same quarter last year. As of September 30, 2025, we had RMB 423.8 billion in cash, cash equivalents and short-term investments. Thank you. This concludes my prepared remarks. Unknown Executive: Thank you, Xin Yi . And next, we will move on to the Q&A session. In today's Q&A session, Lei and Jiazhen will take questions from analysts on the line. [Operator Instructions] Lei and Jiazhen will answer questions in Chinese and will help translate for convenient purposes. Operator, we'll open for questions. Operator: [Operator Instructions] Your first question comes from Joyce Ju with Bank of America. Joyce Ju: [Foreign Language] I will translate myself. My first question is, in the third quarter, we see a recovery in overall online retail sector as the industry's year-over-year growth reached its best level in the past few quarters. Could management share the company's perspective on the recent industry trend? In the meantime, we noticed a slowdown in Duo Duo's online marketing service revenue this quarter, which we estimate also indicated some pressure on the take rate. Could management elaborate on the main factors driving the growth? And do you anticipate this trend will continue in the next couple of quarters? Secondly, in the past few quarters, we've seen several platform companies roll out major business innovations and ramp up investment in the new models, which has really shifted the competitive dynamics. How does management view the competitive outlook in China's e-commerce sector from here and why? Jiazhen Zhao: [Foreign Language] Unknown Executive: [Interpreted] This is Zhao Jiazhen, let me take this question. In the past few quarters, the industry has entered a new investment cycle. The e-commerce sector is evolving rapidly and within an industry landscape that has a large number of strong players, competition is unavoidable. And faced with this competitive and fast-changing environment, our primary focus should be that what unique value our platform can create for the consumers, merchants and other participants. We do not pay too much attention to the short-term industry trends or every move made by the competition. And as we see it from here onwards, we must leverage our inherent strength to pursue high-quality growth and enhance our core capabilities in order to better serve our merchants and consumers and along the way, creating more value. And of course, we are also encouraged to see the overall recovery in online retail. And at the beginning of this year, we further recognized the long-term value of high-quality growth and our management team made a commitment to elevate our platform ecosystem investments to a new stage and launched CNY 100 billion support program to support our merchants. And this involves the platform proactively dedicating substantial resources to invest in merchants and the broader industry. And in doing so, we target to provide ample room for innovation and growth for both established brands and SMEs. In the meantime, we also formed the Merchant Protection Committee to create a long-term communication mechanism with our merchants. We have also undertaken targeted upgrades to the merchant aftersales service system and implemented multiple improvements to address issues like abnormal order disputes. And these efforts are all focused on optimizing the business environment for our merchants and nurturing a platform ecosystem where all participants can thrive together. And looking ahead at this juncture, management unanimously agreed that it is our responsibility to further increase investment in our platform ecosystem and to think about the company's development from a broader perspective of public interest and the long-term health of the entire ecosystem. We will remain focused on the platform's intrinsic value and healthy development in the long run. And therefore, in the period ahead, we plan to roll out more strategic initiatives that benefit both merchants and consumers. Programs such as the CNY 100 billion support program and further enhance our efforts to invest in the industry and give back to the society. And back to the topic of growth rates, we mentioned several quarters ago that as the platform increase in scale and also as competition intensifies, our growth rate is set to slow down. As we continue to invest in programs to support merchants and the industry, our financial performance may experience ups and downs in the coming period. However, we will always maintain a long-term perspective, focusing on creating a unique value for consumers and merchants and building our intrinsic value. And in terms of your second question about competition. And as you have observed, the competition in our industry has intensified. And over the past few months, we've seen many industry peers deploying significant capital and resources to aggressively develop new business models, leading to increasingly fierce competition around emerging business models in the e-commerce sector. And in this environment, we will continue to invest substantial capital to strengthen our platform ecosystem. Major merchant support initiatives such as the CNY 10 billion fee reduction program and CNY 100 billion support program will be sustained over the long run and with more similar program to be launched. The platform is willing to let go some of the profits to create room for the development of the entire ecosystem. We view these as our long-term investments. And for instance, as mentioned earlier, this year, we launched the Duo Duo Premium Produce campaign under our CNY 100 billion support program, which has significantly helped quality agriculture merchants increase their scale and improve the efficiency of product distributions. There are numerous initiatives like this. And these long-term investments will naturally impact our revenue and profit performance. And moving forward, amid the changing external conditions and intensifying competition, our long-term investments are set to increase. And therefore, we do not think this quarter's profitability should serve as guidance for future performance, and there is still the possibility of continuous fluctuation in the results over the coming quarters. Thank you. Unknown Executive: Thank you, Joyce. Operator, we're ready for the analyst -- next analyst on the line. Operator: Your next question comes from Alicia Yap with Citigroup. Alicis a Yap: [Foreign Language] Two questions. The first one is in the global business operation, we have observed that the company and also other peers are facing regulatory and also public scrutiny in many countries, some of which are quite intense. How does management view this situation? And what are our planned response? And then second question is the company has mentioned investment in the merchant ecosystem over the past few quarters. Could you share the current status of this initiative? And how should we assess the financial impacts of this initiative? And what are the company's future plans? Lei Chen: [Foreign Language]. Unknown Executive: [Interpreted] Alicia, this is Lei. Let me answer your first question. After more than 3 years of development, the company's global business now serves local consumers in many markets and has received positive feedback from users worldwide, and we are greatly encouraged by such support and trust, but at the same time, we sense profound responsibility. So from the very beginning, the goal of our global business has been to achieve long-term sustainable development in each market and deliver tangible value to consumers. And therefore, we continuously reflect on how to integrate with the local cultural practices and legal compliance systems in each of the markets so that we become an organic part of the local economies. The growth of our business alongside regulatory trends across different markets now set a higher standard for us. We have always believed that providing consumers with a safe and trustworthy shopping environment is a fundamental duty of an e-commerce platform. And accordingly, management has made trust and safety and also product compliance a key component of the company's high-quality development strategy and has made substantial investments in this area. And on the technical front, we are continuously refining the policies and processes for merchant onboarding and product listing. The company has dedicated significant resources combining automated and manual screening to proactively monitor product listing, sales and after-sales services. And by doing so, we hope to enhance our ability to detect and respond to safety risk. And at the same time, we actively collaborate with external stakeholders and incorporate the feedback to hold ourselves to higher standards. In terms of our teams, we continue to invest in building a professional compliance team that keeps up with regulatory trends in our operating markets and promptly implement adjustments in our business operations. And despite these efforts, regulatory environment in areas such as trade policies, tax, data security and product compliance are undergoing significant changes across various countries and regions, and this presents us with greater challenges and heightened uncertainty. As a young and global organization, we are striving to learn and to adapt to these changes. However, I have to admit that this process introduces significant uncertainties, which bring unpredictable and difficult to quantify risks and could impact the company's financial performance in both the short and long term. And in facing such uncertainties to us, we remain very focused on strengthening our internal capabilities and enhancing platform compliance and fostering a healthier and more sustainable platform ecosystem. Thank you. Jiazhen Zhao: [Foreign Language] Unknown Executive: [Interpreted] This is Zhao Jiazhen. Let me answer your second question. And over the past 10 years, we have undergone an extraordinary growth journey evolving from a start-up to a public platform with certain social influence. And throughout this journey, we have benefited from the rapid development of the digital economy and while at the same time, took on social responsibilities that are expected of a platform company like ours. And over these 10 years, we have explored different ways to leverage digital capabilities to serve the broader communities and give back to the society and particularly around rural revitalization and industry upgrades. And as part of this journey, we launched strategic initiatives such as the CNY 10 billion agriculture research program to inject new energy into agriculture modernization. And this year, we took another critical step to launch the first CNY 100 billion support program in the e-commerce sector. And through the key measures such as Duo Duo Premium Produce, new quality supply and logistics support for remote regions, we are continuously improving the platform ecosystem and brought more high-quality merchants and products to the broader consumer markets, driving the high-quality development of different industries. And regarding your question around merchant support investments, we have always emphasized that as an e-commerce platform, we must collaborate closely with all the ecosystem participants to create value for consumers and merchants are vital partners in our efforts to serve the consumers well. And therefore, a healthy and sustainable merchant ecosystem is a fundamental pillar of the platform's high-quality development. We hope these initiatives will promote high-quality growth for quality merchants. For instance, the fee reduction policies we introduced have lowered merchants costs, enabling them to be more willing and able to reinvest in their products and services. And currently, we are already seeing some positive feedback from these ecosystem investments on our platform. And this year marks our 10-year anniversary and standing at this new starting point, we will continue to diligently address the practical challenges faced by our users, merchants and industries one by one, and we hope to take a greater social responsibility and by building a platform ecosystem that benefits all. Thank you. Unknown Executive: Okay. Operator, I think we have time for one more analyst. Operator: Your next question comes from Kenneth Fong with UBS. Kenneth Fong: [Foreign Language] The company operating margin decline this quarter has narrowed compared to the previous quarter. Meanwhile, management just mentioned plans for increased investment. So how should we view the company's upcoming investment pace as well as the profitability level? And my second question is, could management share what the new consumption trend that we observed during the recent annual shopping festival promotion. Additionally, we have seen other industry participants achieving good results with the new business models such as quick commerce during Double 11. So how does management view the competitive landscape under these emerging models? Jiazhen Zhao: [Foreign Language] Unknown Executive: [Interpreted] This is Zhao Jiazhen. Let me answer your question. In the third quarter, heightened competition, together with our ongoing investments in the CNY 100 billion support program put pressure on our revenue growth and also led to a decline in operating margins both year-on-year and quarter-on-quarter. At the moment, the industry landscape continues to change rapidly. And in this environment, it is crucial for us to maintain our long-term strategic focus. Looking ahead, we will continue to increase investments in our platform ecosystem. This includes measures such as merchant fee reduction and marketing support for high-quality merchants and all targeted at creating more room for the healthy development of the supply chain, and these investments will pose challenges to our revenue and profit. And at the same time, as mentioned in our prepared remarks, our global business is currently facing a complex global environment. The policies and industry regulatory landscapes across different countries and regions have undergone and are expected to continue undergoing significant changes. This will bring unforeseeable risks and challenges to our company, which may also impact the company's financial performance in both the short and long term. Now as we communicated over the past few quarters, we will firmly prioritize high-quality development in the long term over short-term financial results. And accordingly, our financial performance may fluctuate over the coming quarters and linear projections may not be appropriate for financial forecast. And as to your second question, and over the past few months, we have observed an overall positive consumption momentum with gradually recovering market confidence. And during the Q3 promotional period, consumption needs in the e-commerce sector was further stimulated, showing a steadily improving trend. At the same time, we clearly recognize that the e-commerce competition remains very, very intense. New business models continue to emerge and the market landscape is constantly evolving. Major players are increasing investments in new business directions, leading to escalating competition and creating challenges for our businesses on all fronts. And in such an environment, we will further raise our standards, strengthen our core capabilities and continue to deepen our efforts in supply chain improvement and platform ecosystem development to identify new growth opportunities. And from a long-term perspective, we will increase high-quality investments to translate these capabilities into products and services that offer consumers greater quality for money. This process will not be immediate but will demand continuous efforts. For a considerable period of time, we may be at a competitive disadvantage to our competitors, and this will potentially be accompanied by financial pressures such as slower revenue growth. But our attitude remains positive. But first, we choose to view competition through a long-term lens and plan on proactively increasing investments to create more possibilities for the healthy and sustainable development of the ecosystem, even if this means forgoing some short-term profits. And these trade-offs are made with the intention to build a more robust and sustainable long-term value amid industry competition. Thank you. Unknown Executive: Okay. Thank you, Jiazhen. It's about time, and thank you all for joining us today. We look forward to speaking with you again next quarter. Thank you, and have a great day. Operator: Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may now disconnect. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]
Andre Parize: Good evening, everyone. I'm Andre Parize. Investor Relations Officer at XP. And it's a pleasure to be here with you today. On behalf of the company, I would like to thank you all for your interest and welcome you to our third quarter 2025 earnings call. Today's presentation will be led by our CEO, Thiago Maffra, and our CFO, Victor Mansur, who will both be available for the Q&A session right after the presentation. If you would like to ask a question, please use the raise hand feature on Zoom, and we will address them in the order we received. [Operator Instructions]. Before we begin, please refer to our legal disclaimers on Page 2, where we provide additional information regarding forward-looking statements. You can also find more information in the SEC filings section on our IR website. Now I'll turn it over to Thiago Maffra. Good evening, Maffra. Thiago Maffra: Thank you, Andre. Good evening, everyone. I appreciate you all joining us today for the third quarter 2025 earnings call. 2025 has been a very important year for XP as we have achieved significant progress on our agenda of excellence from the launch of the new way to attend and serve clients, implementing a culture to better understand clients' financial cycles as part of the main KPIs, new and more intelligent segmentation through a brand-new app with much more features and easier data access and new credit card offering. These few examples demonstrate our focus to become the leader in investments in the country while it brings a completely new approach on how Brazilians invest. Despite this advance we have made in different areas, the year has still proven to be challenging. But even with this challenge, our team is fully committed to keep evolving our business to deliver growth and profitability under different circumstances. Now going to the main KPIs. The first one is client assets, AUM and AUA for which we posted BRL 1.9 trillion, a 16% growth year-over-year. Total advisers accounted for 18,200, representing a small decrease year-over-year on the back of many of them becoming employees and our more restrictive policy, which requests higher standards of commercial behavior and productivity. And on activity clients, we posted 4.8 million clients with a 2% growth year-over-year. It's important to mention that we have been growing on core client segments, high income and private banking. For some quarters, we were not investing to capture and maintain low retail clients since it was too expensive to serve them in our old model. But now after some tests, we are almost ready to resume growth in this segment. We already see early stage of development on how to better serve the segment with profitability. Let's wait some quarters to be sure about the way we design to attend retail clients and maybe we'll see the overall number of clients growing again as this dynamic evolves. In the quarter, gross revenues marked BRL 4.9 billion, representing 9% growth year-over-year. EBT is 10% higher year-over-year, making BRL 1.3 billion. These results were positively impacted by the more constructive dynamics in Corporate & Issuer Services segments. Following this positive trend, our bottom line also posted an impressive growth year-over-year, reaching BRL 1.330 billion and representing a 12% growth when compared to the same period last year, which represents a new record. On profitability, we achieved 23% ROE during the quarter, a flat performance year-over-year. This represents our commitment to deliver profitability even in more challenging market scenarios. On capital ratio, we maintain a very comfortable level of 21.2%, which represented an increase of 180 bps quarter-over-quarter. Regarding diluted EPS, we posted 13% growth year-over-year, another quarter in which it grew faster than net income, driven by our share buyback program execution. Now let's see more details on the next slides. Our total client assets combined with the assets under management from our asset management business and with the AUA from our fund administration business totaled over BRL 1.9 trillion, which represented a 16% growth year-over-year. On the right hand of the slide, we show how net new money related to client assets developed in the period. This quarter, we achieved BRL 20 billion in retail net new money and BRL 9 billion in corporate and institutional, which combined represented BRL 5 billion lower than last year, but 3x higher than last quarter. On the retail side, we started to see the early signs of progress on our agenda of excellence we mentioned before, lower noise of some events we had during the first half of the year and better GCM activity towards the end of the quarter. All this combined positively impacted the inflows coming from individuals. Additionally, despite the maintenance of the same market dynamics during the third quarter of the year, we saw better net new money figures, both from SMEs, which are incorporated in retail figures and large corporates. Recent developments in our product range offering and more positive capital markets activities translated into higher net new money for both segments. We are constantly improving our investment platform. And as we mentioned before, enhancing clients' experience through adviser initiatives. This combination reinforced our confidence to achieve our target of around BRL 20 billion in retail net new money per quarter. On the next slide, we will explore our retail strategy. As I mentioned earlier, 2025 has been a year of significant progress in our agenda of excellence. We are constantly enhancing our way of serving clients with the aim of once again disrupt the market with our value proposition focused on service level. Going back to our foundation, XP disrupted the investment industry in Brazil by democratizing access to investments through an open and comprehensive platform of products and service. In a second stage, we scaled this innovative business model by building the largest and most qualified base of financial advisers in the market. We have come this far by offering best-in-class investment products built by top market specialists. Now we are once again disrupting how Brazilians invest by democratizing access to high-quality wealth planning, a service that until now has been reserved for high net worth clients of multifamily offices. We delivered personalized and premium planning for clients with more than BRL 3 million, scaling financial planning for those with over BRL 1 million and offering goal-based investment planning for clients with less than BRL 1 million. Our approach is holistic, encompassing the complete financial lives of our clients, assets, liabilities, expense and savings. Tax and estate planning solutions are also considered. In the end, we are serving our clients with top-tier solutions for both their personal and business finance. We are doing this at scale, powered by proprietary technology we have developed over the past years. This technology enables process standardization, scalability and consistent quality in our servicing model. Examples include our CRM system, proprietary allocation platform and sales activity management, among others, all of them powered by AI. Some of these process KPIs are shown here. Proving that this journey towards excellence is gaining traction day by day. Additionally, combined with all this progress I have just mentioned, we are leading another change in the industry by having an agnostic business model. We are able to serve clients in the way that best fits their needs and preferences. The fee-based model already accounts for 21% of total retail AUC. It started in the wealth service segment, which still has more representativeness in the model, but we are accelerating in the other segments from this year on. We will still capture considerable growth coming from this new way to serve. It will happen in the medium term as we are transforming our business model and our value proposition. Nevertheless, we strongly believe that will give us a sustained competitive advantage in the long run. Finally, XP once again is a pioneer. We are not only leading this redefinition on how clients are served, but we are also uniquely positioned to capture future growth coming from this change in client behavior and new market trends. Retail cross-sell has been one of our focuses to diversify revenue streams during the last years. During Q3, we achieved important milestones in this business segment. Starting with credit card, TPV grew 9% year-over-year, marking BRL 13.1 billion during Q3. As we anticipated last quarter, at the end of Q2, we launched new products targeting affluent and private banking clients. We estimate that with this new segmentation, each one of them with a unique value proposition, we should grow faster in the coming quarters. Life insurance written premium posted 25% growth year-over-year in Q3. As we have mentioned in the past, our insurance business is still in its early stage. Given its significant expansion potential, we expect it to continue growing. On retirement plans, our client assets posted 15% growth year-over-year in Q3 and reached BRL 90 billion. We keep expanding our sales force and our product offering to increase our relevance in this industry. As mentioned before, we see a lot of potential in life insurance business segment with a significant addressable market to penetrate in the coming years. Credit posted 11% growth year-over-year in Q3, achieving BRL 83 million in NII. In new products, we consider FX, global investments, digital accounts and consortium. Altogether, they presented 24% growth year-over-year with revenues reaching BRL 250 million this quarter. Beyond consortium, we also saw FX and digital account posting relevant growth this quarter. Moving to the next slide, we will address our wholesale bank evolution. Taking GCM into consideration, this quarter, we saw a sequential increase in industry volumes when compared to the previous quarter. This growth was pretty much concentrated in the last half of the period, backed by the progress in the tax discussion regarding tax exempt and incentivized instruments. In the third quarter of 2025, we had 10% market share in debt capital markets distribution. We still have a robust pipeline of fixed income offerings and depending on market conditions, we might see these mandates materializing into real deals still in 2025. Regarding XP broker-dealer, it was another positive quarter, and we kept leadership in the local industry with 17% market share. On corporate securities, this quarter, we kept about the same size of our corporate securities book with BRL 33 billion. The quarter started with possible change in taxation of tax-exempt fixed income instruments and finished with many companies taking advantage of low credit spreads to issue new debt. Next year, we can possibly see an increasing volatility and therefore, a reduction in corporate clients' appetite for new offerings. So our strategy, that being the case, is to increase this warehouse book in the last quarter of 2025 to sell it to our retail clients during the next year. As a final message, I would like to once again emphasize our ability to disrupt the market. We are the pioneers of this transformation trend, bringing clients unique value proposition or innovative offering combined with an agnostic business model and strong capital discipline position us as a distinctive player that successfully combines growth potential, profitability and risk management. I would also like to reinforce that our ecosystem today is far more complete than it was just a few years ago and there are multiple opportunities to be explored across all our businesses. We are confident that by executing this strategy, we will achieve our goals of market leadership in investments and deliver sustainable long-term growth. Now I will hand it over to Victor who will provide a deeper look into our financial performance this quarter, and I will be back for the Q&A session. Victor Mansur: Thanks, Maffra. Thank you all for being here today. Now we'll discuss our financial performance for the third quarter. Starting with gross revenues, we posted gross revenue of BRL 4.9 billion, a 9% growth year-over-year and 6% growth quarter-over-quarter. In retail, revenues reached BRL 3.7 billion, representing 6% growth year-over-year and 4% growth quarter-over-quarter. Institutional revenues were stable at BRL 304 million, flat year-over-year and slightly decreased quarter-over-quarter. Corporate & Issuer Services delivering outstanding performance, reaching a historic record of BRL 729 million, a 32% growth year-over-year and 33% growth quarter-over-quarter. This was driven by strong capital markets activity, followed by our leading position in corporate client solutions, which we will discuss in more detail in the next slides. Now starting in retail revenue. The performance was mainly driven by floating from both check and investment accounts, which benefited from higher average volumes and higher interest rates during the period. And second, new verticals included in other retail, such as international investments and global accounts, which delivered strong results. Lastly, it's important to mention that this quarter also includes the revenue of the expert event. If that, the other retail category totaling BRL 757 million, marking 24% growth year-over-year, 19% growth quarter-over-quarter, offsetting a weaker performance from other product lines due to lower ADTV and shorter duration. Now let's move to the next slide in Corporate & Issuer Services. This was the best quarter in our history. The outstanding performance was driven by a pickup in DCM activity compared to the previous quarter, and the continued development of our corporate client franchise. Issuer Services posted BRL 323 million, stable year-over-year and 21% growth quarter-over-quarter. Corporate revenues reached BRL 406 million, representing 77% growth year-over-year and 46% growth quarter-over-quarter. The strong growth reflects our increasing capability to deliver solutions to large corporate clients, particularly in hedging solutions. Moving on to the next slide, we explore SG&A and efficiency ratios. SG&A expenses totaling BRL 1.7 billion in the quarter, representing 10% growth year-over-year and 7% growth quarter-over-quarter. We remain committed to invest in the areas we consider critical for long-term growth including sales force expansion, marketing and technology, as highlighted by Maffra earlier. These initiatives are designed to enhance the client journey and elevate our overall service level. While this strategy may lead to stable or slight softer efficiency ratio in the short term, we see these investments as fundamental to sustain our competitive edge over time. Our last 12 months efficiency ratio was 34.7%. Compared to the last year, the ratio improved by 79 basis points. As usual, in the third quarter, results also reflect the impact of the expert event which once again proved to be outstanding opportunity to connect to our stakeholders. From another angle, the impact of it in the current efficiency ratio was approximately 70 basis points. Moving on to the next slide, let's see our EBT. As a result, our EBT was BRL 1.3 billion, representing 10% growth year-over-year and remaining sequentially stable. The EBT margin expanded 47 basis points on the annual comparison, while compressing 103 basis points quarter-over-quarter. Now looking at the net income, we reached BRL 1.3 billion, a 12% growth year-over-year and 1% increase quarter-over-quarter. The net margin expanded 106 basis points on annual comparison and compressed 112 basis points sequentially, closing the third quarter of 2025 at 28.5%. Now let's focus on capital management. This year, we have been highly active in returning capital to our shareholders. In 2025, we repurchased BRL 2 billion of which BRL 850 million occurred after the end of the third quarter, and therefore, are not reflected in the accounting metrics we are presenting today, such as ROE and EPS. Today, we are announcing the retirement of our outstanding treasury shares bought back during the year and the new 1 billion share buyback program to be executed over the next 12 months. On top of that, we are also announcing a dividend of BRL 500 million to be paid in 2025. This represents BRL 2.4 billion in capital return to shareholders in 2025 approximately 50% payout if you analyze our net income. If you consider the new buyback program, the payout ratio would be around 7% for the year. So let's focus on earnings per share and ROAE detail over the next slides. In the third quarter, our diluted EPS once again outpaced net income growth, reaching BRL 2.47 per share, supported by our activity capital distribution strategy through share buybacks. In this quarter, EPS grew 13% year-over-year and remained stable quarter-over-quarter. On the right-hand side of the slide, ROTE stands at 28% and ROAE at 23%, slightly lower than last quarter, since we had the capital generation without the corresponding distribution, assuming the execution of the new BRL 1 billion buyback program and BRL 500 million dividend payment and ROTE an ROAE would have been 30% and 24%, respectively. Now moving to the next slide. To conclude my presentation, our capital ratio ended the third quarter at 21.2%, and the CET1 at 18.5% well above peers average and the regulatory requirements. This comfortable capital position gives us a strong edge to navigate different scenarios and be ready for the upcoming volatility. Also, during 2026, we expect to have the opportunity to deploy capital in a more efficient manner. It's important to remember that we maintain our guidance for a BIS ratio between 16% and 19% for the end of 2026. Now talking about risk on the right-hand side of the slide, you can see that our RWA totaled BRL 108 billion, representing a 13% growth year-over-year and a 6% increase quarter-over-quarter. Finally, our VaR stood at BRL 29 million or 12 basis points of equity. Even in a quarter of outstanding performance from our wholesale business, we maintain a very conservative risk profile. In this quarter, it's worth to mention that our balance sheet grew 6%, but adjusting for retirement plans and secured funding, it growth would have been lower than the CDI for the period. This increase in retirement plans is associated if a one-off bulk migration we did from other insurance companies to our own, and we don't expect to see it in other quarters. Besides that, as you can see, we kept our market RWA stable and decrease our VaR sequentially, reinforcing our position as a robust ecosystem with strong risk recycling capabilities. And now we can go on to the Q&A. Andre Parize: [Operator Instructions]. The first question is from Eduardo. Eduardo Rosman: I have a couple of questions here on the wholesale business, results were really strong this quarter. Should we expect a similar performance in the fourth quarter? Or do think a slowdown should be expected, right? And my second question is on what Maffra mentioned, right, during the call, right? The strategy to increase the warehousing book in the fourth quarter. If you can give us a little bit more detail -- because you also mentioned that corporate spreads are very low. So wouldn't that be a risky strategy in an election year. Thanks. Thiago Maffra: Hello, Rosman. Thanks for your question, and good evening, everyone. So we are seeing the wholesale banking with a good performance for Q4. So as we mentioned earlier in the last call, we have seen the second half of the year is stronger than the first half of the year, especially for the wholesale bank. Victor Mansur: Rosman, this is Victor. Talking about credit spread first. We think that the credit spreads are really tightened. And if they -- the probability is that they can go a bit more wider over the end of the year and next year. But also, there is a lot of net inflow in fixed income funds that keep putting pressure in the spreads. And it's important to remember that our strategy is to hold high-quality assets and the velocity of turnover of our portfolio is higher than the average of the industry. And we are not as susceptible as credit spread volatility as the rest of the competition. And also in terms of RWA, we expect to sell a bit of what we bought over the third quarter. And depending on the performance of the same, warehouse a bit more to go through the first quarter of 2026. As we all know, the first quarter usually is a quarter with lack of activity in DCM. So it's important to us to have assets to sell in the beginning of the year. Andre Parize: Okay. Next question is from Yuri Fernandes, JPMorgan. Yuri Fernandes: Just to follow up Rosman on corporate. Can you remind what was the 46? I think you mentioned hedging strategy, but I'm not sure what was it? So just trying to understand a little bit again the corporate, inside Corporate & Issuers, the 46% quarter-over-quarter increase. And on bonus, this line was a little bit heavier this quarter, but coming from, I would say, a softer base, right, when we go to the 9 months. I think total bonus is up 80%, 90% year-over-year, so not a big increase. But if you can comment a little bit on what to expect on people, expenses, like salaries, like just to get some idea on SG&A. I would appreciate. And if you want to comment on bonuses also, I think it's also a good point, given it was a little bit higher this quarter. Victor Mansur: Thank you for your question. This is Victor. First, talking about the corporate performance. It's important to remember the corporate business is tied to the DCM activity. So one of the main drivers of P&L in corporate is hedge solutions to company issuing debt. So for example, the company issue a debt tax-exempt corporate bond, inflation-linked bond and it doesn't want the exposure inflation. it hedges against us in CDI plus. That's one of the business, and it's highly correlated with the same activity. Also, another business that is really important is the originator of credit operations that will be securitized and sold to clients in the next quarters. If you go to our credit portfolio, you see that it's flattish. Basically, we sold quasi-sovereign bank notes, and we originated corporate operations, but those operations will be securitized and then sold to clients the same as we did in other quarters. And now moving to bonus. It's normal to see the bonus going higher after the performance of investment banking going higher the way it did over the quarter. So part of that is explained by performance in Wholesale Banking. Another part is explained by the new hires over the year. We hired almost 500 new employees, mostly on sales force expansion over the year. And this is one part of the drivers of salary growth and bonus provisions. Yuri Fernandes: Super clear, Victor and congrats on the net new money improvement for the quarter. Andre Parize: Next question is from Mario Pierry, Bank of America. Mario Pierry: Let me ask 2 questions as well. First one, when we look at your retail revenues growing 6% year-over-year. But if we double-click on that, we see that our fixed income revenues actually contracted year-over-year. They have been contracting 2% even as the AUC grew 22%. So it means there was like significant pressure on take rate. Can you explain why that happens, right? Because when we look at fixed income, revenues were growing like 40%, I think, on average for the past like 6 quarters. So just trying to understand if there was a one-off event that impacted fixed income revenue? And then my second question is related a little bit to what Yuri asked, but when we look at your EBT margin, it had been expanding for past like 3 quarters, I think. In this quarter, it contracted because of the pickup in expenses and you're running below your guidance, right, your medium-term guidance of about, I think, it's 30% to -- 29% to 32%. So just trying to get a sense here also, like should we expect the trend to start to improve in the next quarters? Or do you think that the EBT guidance it's something for more like for the end of 2026. Thank you. Thiago Maffra: This is Thiago. I will take the first question. I can answer the second one and Victor complement myself here. About the fixed income revenue, the main problem here is if you look the take rate for investments, if you compare Q4 last year to Q3 this year, it's down 10 bps overall, okay? So it's a huge draw here, drawdown. And when you look only fixed income, 20 bps, okay? So it's a big decrease in take rate. And it's mainly explained because first one, mix, okay? So if you look CGs with daily liquidity, they used to represent 25% of the new allocations, okay? So 25%, today is 45%. Because of the high SELIC rate, we are selling almost half of everything that we sell for fixed income, it's CGs with daily liquidity. When you compare the revenue we make here, it's basically a daily spread on CGs with daily liquidity against duration times spread, okay? So it's a completely different revenue stream, okay? And the second one is shorter duration, okay? So right now, everyone is only buying like a very short-term durations, okay? So when you combine the mix of more CGs with daily liquidity and shortened duration, we are selling a lot more volume in fixed income, but with a lower take rate. About your second question, we are investing in sales force expansion. We are investing in SMB. We are investing in technology. So we are doing a lot of investments this year, and we are planning to do more investments next year. So I would say that is still possible to get to the -- at the end of the next year to the guidance we gave, but you see because in the past, I would say, 2 years or even more, we have been gaining a lot of efficiency quarter after quarter. I would say that right now, we should be more flattish when you look at the next quarters because we are investing more, okay? So -- but still doable to get to the guidance by the end of the next year. Andre Parize: Okay. Next question is from Gustavo Schroden from Citi. Gustavo Schroden: Hello, guys. Thanks for the opportunity. I have 2 questions as well. The first one is -- sorry to insist in this sales force that you guys mentioned. But because if I'm not wrong, you mentioned something around 500 new employees, and most of them related to sales force. But when we analyze the total number of advisers that you have, it is decreasing, right? So year-on-year and stable quarter-on-quarter at 18,200 advisers, including IFAs and XP's employees. So I'd like to understand what kind of sales force are you hiring? And if it is possible to reconcile with this total number of advisers? And my second question is related to financial expenses. We saw decent decrease quarter-on-quarter and year-on-year, so 28% below quarter-on-quarter, 45% decrease year-on-year despite higher SELIC rate we could see that there was a reduction of BRL 1.5 billion in borrowings. So my question is this reduction is related to these lower borrowings or are there different reasons behind this decrease in financial expenses. Thiago Maffra: Okay. I'll take the first one. About the total number of IFAs, as Victor mentioned, that we are hiring more internal advisers, okay, here, it's because when you look at the IFA, the B2B network, they have been converting some of the IFAs into employees because of the change in regulation that has been happening, I would say, for over a year now. And the second part is because we have been part of the third wave that we mentioned a lot here on quality, the way we serve clients we have been focused a lot more on quality. So more skewed IFAs, okay? So we have been I would say, even forcing some of the low-quality IFAs like to leave the network. So we have been increasing on what we call AAA advisers and we have been decreasing on what we call C and D curve of IFAs, okay? So those are the main reasons why you don't see the number of IFAs growing. But as we don't open the number of what we call AAA IFAs here, but this number has been increasing. So we have been focusing more on more qualified advisers. Victor Mansur: This is Victor taking the second part about the financial expenses. Just remembering here, we went through a reorganization of our conglomerate over the last year, changing the bank to the top of the business. And that has an important effect in financial expenses and also other revenues. So when debt that was a corporate debt inside the holding matures and it is rollover for a debt inside of the bank, it gets out of the financial expense lines and goes inside of net interest margin. So it's just a geographic effect. It goes from the debt to the -- to be a reductor of revenues. And that's also why other revenues is lower quarter-over-quarter. You're going to see that the change between lines, they are closer to each other. That's the -- may affect just a geographic movement between lines. And also, it's important to note that the bank debt is much cheaper than corporate debt. So you do have this geographic movement, but also the overall cost of debt of the company is considerably lower when you compare 2024 to 2025. Andre Parize: Next question is from Daniel Vaz from Safra. Daniel Vaz: I wanted to follow up on Mario's question on fixed income. Instead of looking on the 2% drop, I wanted to talk about the 7% drop quarter-over-quarter. I mean DCM activity improved, right? So we saw that on your insurance services, net new money improved, warehouse of securities did increase, and we had higher business days, right? So it's probably -- it's probable that you distribute a higher volume to the clients. So I heard you on the mix change, but this -- I mean, was this a quarter-over-quarter change? I mean the CGs with daily liquidity, went up from 25% to 45% in 1 quarter. Just wanted to touch base on that again, if you could explore a little more of what the change quarter-over-quarter means? And if I may follow up on the guidance, I wanted to check on your comment, Maffra. If you're able to get on the fourth quarter of next year on your EBT margin instead of the full year. Is that correct? Did I understand well? Victor Mansur: Daniel, this is Victor. Taking the first part here in fixed income. If you remember a few questions ago, I told that we sold quasi-sovereign banking notes from our warehouse book, and we warehoused corporate bonds. So basically, that is what happened in real life when Maffra say that client is buying short-term floating rates, that is what's happening. So the products originated by the DCM markets over the quarter are still in our books, and we are going to sell them over the fourth quarter and first quarter of next year and what we saw their short-duration banking notes. That's why we see this behavior in the revenue quarter-over-quarter. Daniel Vaz: And -- sorry, in the guidance, if you can comment on the fourth quarter or full year of EBT margin? Thiago Maffra: Yes. Sorry for that. Yes, we feel that it's possible to target that next year. We don't give guidance quarter-over-quarter. So it's hard to say what's going to be Q1 or Q2 or Q4 next year, but we feel that the 30% is still doable. Andre Parize: Next question is from Thiago Batista, UBS. Thiago Bovolenta Batista: So I have 2 questions. The first one on the buyback. The intention of the BRL 1 billion buyback is to be concluded this year. I know that depends on the price of the shares, et cetera, but the initial intention is to conclude these this year? And the second one, about the IOC in the equity business. We saw that this quarter or the third Q, the IOC was basically flattish Q-over-Q. And we have the BOVESPA in the all-time high now. I've already seen not exactly in the third Q, but more recently, clients trying to move the money towards more risk investments like equities or not yet? Or maybe we need to see SELIC rate, let's say, single digits or something like this. So my question is, are you already seeing this migration from fixed income to high-risk investment? Victor Mansur: Thiago, this is Victor, first on the share buyback. The buyback program is open, and we are going to be buying over the next 12 months. And the same as before. We are going to wait for the best opportunity to deploy the capital and maximize the return to our shareholders. So we cannot give you an idea when it will be complete or if it will be the beginning of the next year or the end of this year. What I can guarantee you that we are going to be buying everything the same as we did in all the other programs we're opening. Thiago Maffra: Yes. And just to complement, Victor, on the payout strategy here. If you guys see -- we still have very high BIS ratio, and we mentioned that we would like to bring it down to something between 16 and 19 by the end of next year. And that's still the case, but why we are not like giving more money like back to the market right now because we believe we will have good opportunities next year. It's going to be a volatile year. And for sure, we will have opportunity to do more buyback next year. So that's why we are not deploying or paying out more capital right now, okay? About the second part of your question is we don't see a big change in mix yet, okay? Because remember that the retail clients is -- they are a little -- of course, it's our job here to help them not to have this behavior, but they are a little bit lagging, okay? So once we start to see rate cuts and other things, price moving up and so on, people start to move money from one asset class to other, okay? But we are seeing a stronger funds platform right now, especially primary offering for closed or open end funds, REITs and so on. So the demand has been increasing for that type of products, but not yet for equities or for some other products, okay? So I would say that we are not in a point that we could say that we are seeing a lot of like a change in the portfolio. As we mentioned for fixed income, it's still the opposite. People are moving even more money to daily liquidity broad CGs because they are seeing 15%, okay? So I would say that we are not there yet. Andre Parize: Okay. Next question is from Tito Labarta, Goldman Sachs. Daer Labarta: A couple of questions also. First, a follow-up on the corporate revenues, right? You mentioned it's related to hedging solutions for companies issuing the tax exempt bonds. Is this a function of, I guess, companies just anticipating tax reform so that remains strong in the second half of the year, but potentially subsides next year? Or do you think that there's more sustainability to that? And then the second question, you saw a jump in retail inflows, right? I mean BRL 20 billion, which is more or less what you've been saying, but it was up significantly from last quarter. So was there anything significant, should we read in this, is just normal volatility? Or should that begin to accelerate from here? Just any color you can give on how that continues to evolve. Victor Mansur: Tito, the first one about corporate revenues. Hedging is related to issuance, but I think the issuance they are a function of the risk of the new tax regulation, but also the level of credit spreads. It's really cheap to raise debt here right now. Next year, we'll be extremely volatile. So I think components are moving around and doing whatever they need to do in terms of ION this year. Also, there is not only hedging solutions. We have power trading, cash management, FX operations, and the credit originate-to-sell as we commented before, I think what the hedging solution was one that gave a bit of highlights for the quarter, but there is still a lot of revenue lines inside of the [ corporate ] franchise. Thiago Maffra: I will take the second one about net new money. Of course, we have been doing a lot of things here, especially on what we call the third wave on increasing the level of service, the value proposition that we delivered to our clients. We mentioned a lot today on the presentation about that. So we have been democratizing the wealth service business to all our retail clients here for the past, I would say, a year or 1.5 years. So we have been developing a lot of technology CRM AI capabilities. So I would say that the level of service that we are delivering to our clients right now, it's much better than it was a year or 2 years ago and much better than most of our competitors. Talking about, of course, here, retail clients, okay? So we are delivering a level of service that nobody provides in the industry in Brazil. That's why we are calling it the third wave. But it's early to say that, that is moving a lot the needle here, okay? So I would say that's more like a medium-term impact, so we are around 20 billion. We have been saying that the level for the past quarters. I don't see any reason right now to change that for up or down here. So we are seeing BRL 20 billion as the level for the next quarters. But again, 16, 18, 22 or 23 for us is the same as BRL 20 billion, okay? So you could see 1 quarter higher than that and 1 quarter lower than that. Daer Labarta: Okay. That's helpful, Maffra. If I can, just one follow-up on that, right? Because just on the revenue guidance, right, you had said 10% for this year. I mean, expectations are that you'll probably be below that, but then also thinking on your 2026 guidance. The bottom end BRL 22.8 billion would be like a 20% jump. I mean is that still -- like what would need to happen for that to be realized? Or is that likely some downside risk just given the tougher macro that we've seen since you initially gave the guidance? Thiago Maffra: Yes. Yes. As we mentioned in the last earnings call, the second half of this year is going to be stronger than the first half in terms of growth, top line growth, but as the first half was soft, it's going to be hard for us to get to the 10%, but we can get close to that. For 2026, I would say it's almost the same rationale here because as 2025 was a little bit soft. Next year, we are going through -- we have to grow, not to give like a number here, but 17% to 20%, okay, still doable, but we might be a little bit short, like to the guidance next year, but if we are short, it's for a bit, not for much. Andre Parize: Okay. Next question is from Marcelo Mizrahi, Bradesco BBI. Marcelo, you may proceed. Marcelo Mizrahi: So my question is -- the first one is regarding the work days. I wanted to understand how the work days impacted the revenues in terms of the other retail revenues, in terms of revenues. So what's the mean back here? And if looking forward, if we will see a reduction of these lines. And the other question is regarding the investments. So you guys are talking about investment in technologies. We were seeing a lot of platforms investing in AI tools, digital tools and also the channel totally -- a robo digital channel. So it's -- are you guys already working on that, using AI to adviser -- to give advisers to the clients, especially to the kinds that the lower income are the lower tickets to bring them a better service and to increase engagement and the revenues. Victor Mansur: This is Victor. Thank you for your question. First year on business days. As expected, business days gave us a positive impact in terms of floating and trading days. But this was compensating the negative way in terms of lower ADTV for [ axis ] and the shortening duration that Maffra explained in the fixed income platform. So those effects goes in positive directions. And the mix overcomes the -- in terms of business days, that's basically what happens. But that's why we see [ axis ] on fixed income, EBITDA and other retail, which have the floating component a bit up over the quarter. Thiago Maffra: On the second question, Mizrahi, yes, we have been working a lot with AI on different verticals here. I will mention some of them. The first one is internal productivity. It can be for engineers. It can be for management people. So we have been working on operations, on customer experience. So we have a lot of use case live right now more on the productivity side. The second one, we have been trying -- I would say, the idea here is not like to replace advisers, but how we enhance our advisers using different agents. It can be a relationship agent, AI agents. Of course, it can be transactional agents. So we have been creating a lot of this type of agents to give more productivity and to increase the level of service that we deliver to our customers. And I would say a third one, we haven't been investing a lot on portfolio allocation of our customers. So we have been creating more rules. We have been creating a centralized portfolio allocation, and we are using a lot of technology to make it happen. So there are many use case here, some already at scale, some at very early stage. Another one that -- it's already at scale. Today, we listen, read, hear everything that our advisers, especially internal advisers today, 100% of them. And we can classify all the conversations, all the interactions with our customers. It's a product offering, if it's only a relationship activity. So the level of information and sales management that we have today, it's very, very high and we will continue to invest on that. But again, not to replace advisers, okay, but to enhance them. Of course, when you go to very small clients, more like a digital or what we call here self-direct clients, then you can have like a fully deployed AI solution, but that's a very small part of our business today. It could grow in the future. But again, the focus here is how we enhance the advisers and how we free them like to focus 100% of their time on relationship, not like on operations or allocation or other activities that don't generate value for our customers. Andre Parize: Okay. We're up the hour. So I would like to thank you once again for participating on our earnings call. And the IR team will be more than happy to attend any further questions you may have. Have a good night, and we're going to keep in touch. Thank you.
Dalton Philips: Good morning, everybody, and thank you for joining Catherine and I for our FY '25 results presentation. It's great to be sharing a very set -- very strong set of results with you this morning. Our core business is in a great place with our commercial and operational excellence programs, combined with our cost efficiency efforts, providing the platform for us to reach a record level of profitability. I'll start with some key messages, then we'll cover our financials and an operating review, and we'll close out on our acquisition of Bakkavor. So let's start with some key headlines on Page 5. Firstly, we're really proud of what we feel is an exceptional year of delivery. Catherine will share more; however, I do want to highlight the strong performance that we've had against every one of our financial medium-term targets. In particular, we achieved a 15% ROIC, which is an increase of 350 basis points on FY '24. Secondly, we continue to deliver for our customers on 2 things that are incredibly important to them, service and innovation. And these are 2 of the key elements that give us a competitive advantage in the market. Thirdly, against a subdued backdrop, we've had strong manufactured volume growth of 2.5%, which is well ahead of the overall grocery market. And we continue to take advantage of a number of structural tailwinds, which we expect to continue through FY '26 and beyond. Fourthly, we're driving this positive momentum into FY '26 as we know there is a lot more opportunity to go after in our core business. Trading has started well, and we anticipate another year of profitable growth ahead. Finally, regarding the acquisition of Bakkavor, things are progressing to plan, both in terms of the external support for the deal with the positive Phase 1 decision from the CMA and our internal progress on planning for integration and synergy delivery. We crossed another key milestone this morning with the agreement to sell our Soup & Sauce business to the Compleat Food Group, a business we have a high amount of respect for and one where our Bristol colleagues will really thrive. This now paves the way for us to complete the Bakkavor transaction in early 2026, in line with our original time line. Turning to the next page, and I wanted to highlight the 5 areas that we see as key to sustaining our enduring competitive advantage in the market. We've really doubled down on these to create what we call a moat around our business, something that is highly valued by customers and extremely difficult to replicate. Firstly, our innovation engine. We launched 534 new products this year in partnership with our customers. That's over 10 products every single week. What makes us unique here is that our innovation teams are increasingly embedded within our customers, and we've built capabilities to support every stage of the innovation journey far beyond just recipe development. Secondly, our technical leadership. We believe we have best-in-class capabilities in the technical and food safety space where you can never compromise on quality. These high standards were recognized in our BRCGS audit performance this year. To give another example, we reduced product withdrawals by 60% year-on-year from an already very low base in FY '24. And this level of reliability is incredibly important to our customers. A third part of that moat is around complexity management. Our business is complex, manufacturing over 1,500 SKUs using more than 2,000 unique ingredients produced in 16 factories up and down the country, operating chilled, ambient and frozen supply chains, delivering it all directly to our customers' doors or through our direct-to-store distribution system. There's a lot of moving parts, and we take great pride in the fact that we do all this without missing a beat with over 99% service levels in FY '25. Fourthly, our infrastructure. This is a really well invested and fully integrated manufacturing network, which we continue to ensure remains world-class, fit for the future of next-gen automation and technology. And the final area in our approach is to efficiency. We really lean in on our cost base at every level of the business, driving a culture focused on delivering the best possible value for our customers. This is in part executed through our Greencore Operational Excellence program, which last year delivered a 4% increase in units per labor hour. Bringing these 5 elements together creates a business that is highly resilient, extremely hard to replicate and provides a strong platform for future growth, hence, why we call it our moat. As I now hand you over to Catherine, I'm confident in saying that our business is in a good place and with plenty more opportunities to go after. Catherine Gubbins: Thanks, Dalton. Good morning, everyone. I just want to echo Dalton's thanks to you all for joining us in person and on the call today. It has been an exceptional year for the group with strong performance across every financial metric. I'm very proud of our performance and the progress that we've made. And starting on Slide 8, I'm going to give you an overview of some of those key financial metrics for 2025. Starting with revenue, you can see that we delivered a strong revenue number of just under GBP 2 billion for the year, representing growth year-on-year of 7.7%, the components of which I will cover in more detail shortly. Adjusted operating profit is a key KPI for us. We said 2 years ago that we would return to pre-pandemic levels of profitability by 2026, and we're delighted to have exceeded that one year early. We delivered GBP 125.7 million, an increase of 28.9% year-on-year. And again, I'll speak to some of the individual elements of that improvement in a moment. On adjusted operating margin, we have grown margin by 110 basis points to 6.5%. This is still short of our medium-term target of being at 7% or above, but it's clearly really strong progress in the right direction. And we will look at some of the key drivers of that growth as we move through the deck. You can also see that we delivered strong cash flow for the year, and our leverage closed the year at 0.4x net debt to EBITDA. Most importantly, though, we're delighted to have delivered a return on invested capital of 15% in 2025, representing a 350 basis point increase versus the prior year. This was primarily driven by an increase in net operating profit after tax and also a slightly lower average invested capital base. Return on invested capital is our North Star metric and is the key lens through which we manage the business. If we move over to Slide 9, we have set out in a little bit more detail the breakdown of our revenue performance for the year. As mentioned, total revenue increased by 7.7%, 2.9% of which was driven by new business wins. Underlying volume and mix growth represented 2.8% and inflation and pricing impacts then drove the remaining 2%. The most significant contributor to the new business win-related growth was the ready meals contract that was onboarded in our Kiveton site in September 2024. There were also several other wins across our other categories in the first half of 2025, and these are being delivered in the network throughout Q3 and Q4. Our underlying volume and mix growth was supported by continuing strong demand for convenience food, continued product innovation and some favorable weather during the summer. We saw good growth in sandwich and sushi in particular, while performance in parts of the salad portfolio and ambient sauces was a bit more challenging. When analyzed by segment, our food to go category revenue increased to GBP 1.3 billion, representing a 7.5% increase on the previous year, while revenue associated with our other convenience category grew to GBP 609 million, an increase of 8.3% on the previous year. Some further detail on the composition of those categories has been included in the appendix. Just moving on then to Slide 10. You can see our adjusted operating margin increased to 6.5%, and I'll take you through some of the main drivers of that improvement. Volume growth and mix drove a positive impact of 0.4 percentage points, driven by some of the factors I've just taken you through. There was a negative inflationary impact of 2.5 percentage points. That represents about GBP 45 million worth of inflation in the year. And to give you a sense of the components of that, about 75% of that was related to labor inflation, with the remainder coming from materials and packaging inflation, which really started to increase from Q3, Q4 onwards. Pricing and inflation recovery drove a 1.7 percentage point impact. This was delivered through our pricing pass-through mechanisms and positive discussions with customers around labor pricing, in particular, during the year. Our ongoing operational excellence initiatives drove a positive impact of 1.1 percentage points, which partially offset inflation, as you can see, but also contributed to the operating profit growth. This encompasses our continued focus on driving efficiency across our manufacturing business, including direct labor optimization and waste reduction. Finally, a focus on managing our overheads and indirect costs drove an incremental saving of 0.4 percentage points. I have been very focused on our overhead cost base since joining, so it's good to see the contribution being driven by this work. In the current year, this was predominantly driven by indirect labor standardization, functional headcount challenges and other overhead savings. Just moving on then to Slide 11 and cash. For this financial year, we recorded a free cash inflow of GBP 120.5 million, a significant improvement on the prior year with a number of factors contributing to this outturn. There was a net working capital inflow of GBP 27.6 million, which was a significant improvement on the prior year. Again, at our Capital Markets Day, I would have referenced the increased focus we are putting on proactive working capital management across all the components. The impact here is driven by a broad focus on stock management, managing our debtors, creditors and other payables to optimize inflows and outflows. Maintenance CapEx for the period was GBP 29.6 million, which was an increase of GBP 3.4 million when compared with 2024. While not included in the definition of free cash flow, we also meaningfully increased our strategic capital expenditure, which I'll speak to you about in a little bit more detail shortly. Cash exceptional charges for the year were GBP 17.4 million and were comprised of spend on the Making Business Easier transformation program and also on the Bakkavor transaction. Just going quickly through some of the other items here. Interest and tax charges, GBP 25.7 million, down GBP 600,000 compared to last year as a result of lower interest cost and borrowing, offset by a slight increase in tax paid. I have previously referenced that our U.K. defined benefit scheme would achieve a fully funded position by the end of September 2025, meaning nearly GBP 10 million of annual pension contributions from the group would no longer be required. We do, however, now anticipate an increase in tax-related cash flows in 2026, which is likely to offset this. Finally, lease payments of GBP 15.5 million were broadly in line with last year and other movements here of GBP 11.2 million related to share-based payments and other noncash-related charges. Our free cash flow conversion was 66.5% for the last 12 months. We are happy to have delivered this in the context of our overall medium-term target of being at 55% and above, and we'll continue to focus on cash conversion going forward. Just moving on then to Slide 12 and touching on our capital allocation framework. I have previously noted that I will update on our capital allocation plans at our half year and full year results announcements. Our priority, as you can see here, continues to be ensuring funds are available to invest in organic growth through maintenance and strategic CapEx, an area, as I said, I'll expand on further in a moment. But just moving on to dividends. Last year, the group reinstated the payment of a dividend for the first time in 5 years and indicated that going forward, it will be a progressive dividend growing in line with earnings. Given the strong financial performance of the group for the year, the Board is recommending the payment of a dividend of 2.6p per share, an increase of 30% year-on-year. We have closed out the financial year with our leverage in a very strong position with net debt to EBITDA at 0.4x. And as I think about points 3 and 4 here, this puts us in a really strong position as we contemplate closing out on the Bakkavor transaction and focusing on deleveraging post completion. As a result of this transaction, we are not proposing any further return of capital to shareholders at this time. At this point, it will be premature to talk about the capital allocation framework for the combined group with any specificity. What I will say is the group's philosophy is to deploy capital to balance long-term growth and shareholder returns. We will do this through investing in driving operating profit growth, generating strong free cash flow and following a disciplined investment and capital allocation approach that ultimately drives returns for shareholders. Moving on then to Slide 13. I wanted to just take you through a little bit more detail on how we think about investment into the core business. As you can see here, our adjusted operating profit growth feeds strong cash flow generation, which we then prioritize for investment into the core business. This ultimately then enables delivery of above-target returns. Year-on-year, we have increased that capital investment by 34% with strategic investments increasing from GBP 6.2 million to GBP 13.8 million. And I just wanted to call out some of the areas that we have invested in. We've invested GBP 4 million to automate certain manual tasks. In this financial year, this included projects like packaging automation, automated sushi rolling and some vegetable slicing. We invested GBP 5 million capacity and capability expansion across the network with many of these projects now operational and some carrying into full year '26. We also invested GBP 4 million in sustainability investment to help drive our sustainability objectives while also driving benefit to the P&L. As we've indicated in the guidance in the appendix, we'd expect to step this investment up again in 2026, and we are guiding on investing GBP 50 million in that financial year. Alongside this spend, we're continuing to invest in our making business easier program, investing GBP 12 million over the past year through exceptional items and increasing this investment into 2026. Dalton is going to speak about progress in this area shortly. Just to finish off, you will remember that we set out our 5 medium-term financial targets at our Capital Markets Day. I'm really pleased that we have made strong progress against all of these targets in 2025. We have effectively met our returns on invested capital target, and we've continued to drive the business to further deliver on this metric. On revenue, we obviously outperformed versus this metric in the financial year with a key driver of that being a significant new business win. On margin, again, we made excellent progress versus our target of being at 7% or above, and we are confident that we have a pathway to get to that target. On cash conversion for the full year, we outperformed our target for the reasons I've highlighted, and our leverage is clearly below the indicated range, but this is a welcome positive as we look to complete on the back of our transaction. So in summary, we have had a very strong year. I will refer you to some further guidance we've set out in the appendix. I just want to thank you all for your attention this morning. And now I will hand you back to Dalton. Thank you. Dalton Philips: Thanks, Catherine. And let me now turn to the strategic and operating review. And on Page 16, you can see our strategic framework, which we launched at our CMD earlier this year. And there are 2 key pillars here: strengthen the core and grow and expand, underpinned by 5 enablers, which make up our Greencore way of winning. And following some years of stabilization and rebuilding, last year was about progressing both pillars in parallel, realizing opportunities within our core business while simultaneously building the platform for future growth. And you can see on Page 17 that a key element of our strong core is our performance versus the wider market. It's been a tough year in the U.K. grocery market with subdued volume growing at 0.7% against a backdrop of persistent high inflation and muted consumer confidence; however, our core categories where we typically hold the #1 or #2 position continue to perform well. For example, the market -- the sandwich market grew at 4% year-on-year. For example, us, we grew at 4% year-on-year. In absolute terms, we outperformed the market by 180 basis points, achieving 2.5% manufactured volume growth. And despite that difficult backdrop, there are some key tailwinds to support continued growth. Firstly, consumers' desire for convenience continues to rise with the large multiples opening 175 new convenience stores this year, and the number of convenience stores is forecast to rise by 2% next year. Secondly, premiumization remains an important growth driver in our key categories. For example, own label premium sandwiches grew 23% year-on-year. Finally, we're seeing a sustained trend of growth in eating in, which was up 1% versus last year against eating out, which was down 3%. As eating out becomes increasingly expensive and dine-in options improve in quality and variety, more and more consumers are seeing better value by staying at home. This is particularly important for us as we look to our combination with Bakkavor who have real depth in the food for later market. Turning to Page 18 and another key factor of our performance has been in our portfolio management. We're committed to driving returns in every part of our business with the goal that each category will, in time, cover its cost of capital. And we can point to some really good progress here. You know about our 15% ROIC figure, but I thought it worth sharing the building blocks which sit underneath it. Our focus in portfolio management zeroed in initially on our larger categories, so sandwiches, ready meals, ambient sauces and salads, which make up 85% of our revenue. We've made really good progress here, increasing ROIC across these categories by 400 basis points, therefore, keeping returns well above WACC. A good example is in our sandwich business, where we drove returns in 3 areas: Firstly, new business wins in the retail and coffee channels; secondly, margin accretive new product launches; and thirdly, operational excellence initiatives. And we've also driven ROIC in our smaller categories by circa 100 basis points, whilst this is in the right direction, we still have more to do so that every category covers its cost of capital. A good example here would be our sushi business with improvements again driven by, firstly, new business wins; secondly, diversifying our offering into poke bowls; and thirdly, execution of our automation road map. Moving to Page 19, and let me share the key enablers of our strategic framework, starting with great food. We launched 534 new products in partnership with our customers last year. That's over 100 more than in FY '24. This includes NPD, so entirely new-to-market concepts as well as what we call EPD, so existing product development to improve quality and taste profiles. We're now able to deliver this scale of innovation at speed faster than ever before, reacting quickly to trends and working with our customers to get new products on shelf fast. You can see a great example of exactly that on the top left of this page. Last week at the CMD, M&S talked about their partnership with us and the work we did together on the strawberry sando, which went viral, quickly becoming M&S' top-selling sandwich and selling over 1.2 million units within weeks of launching. This is a great example of the incremental impact that innovation can have. The other products that we've highlighted here on this page, Greggs, Mac & Cheese, Sainsbury's, Taste the Difference, Chicken and Nduja Wrap and Cox, marry Me Chicken Sandwich are other examples of the many products that had hugely positive consumer feedback. And on the right, you can see some of the benefits that innovation delivers, driving incremental growth, margin accretion through premiumization and improved quality. Moving to Page 20, and we wouldn't be able to deliver any of this without our strong partnerships with customers and suppliers. And here, you can see a few examples of the value that we've delivered through these partnerships. For example, we supported the launch of a first-to-market food on the move store with co-op. We created a bespoke offering of hot and cold products, testing out new concepts such as serve over counters, super premium ranges and time of day offers. We've also -- we're also servicing these stores via our direct-to-store distribution arm. This is a great opportunity to trial new concepts, which can then be rolled out into their main estate. Secondly, we used our category management and insights capabilities to support a customer with a full store transformation, advising them on space, product locations, flow and range. 30 weeks after the reset, volume in the store was up 22% with the number of shoppers up 18%. Thirdly, through an Innovation Day with one of our customers, we identified an opportunity to expand their premium sauce range into a new cuisine. The products went live 4 months later, growing the tier by 163% for that customer and allowing them to grow 1 percentage point of share in that sauce cuisine. Fourthly, an incredibly important part of our partnership model is the relationship that we have with our suppliers. We often speak about our customers wanting to do more with fewer strategic partnerships. Well, the same is true for us with our supplier community. We've reduced our total supplier base by 15% since FY '22 and strengthened our relationships with our key suppliers. This is an important driver in helping us manage complexity whilst in parallel ensuring that we have the best quality products in the supply chain with the right cost structure. There are -- these are just 4 of the hundreds of examples where every day, our teams are going above and beyond to build truly lasting partnerships. Moving on to delivery excellence on Page 21, and our Greencore operational excellence model continues to deliver strongly. We've spoken before about units per labor hour as a measure of productivity in our sites. And this has continued to build, up 4% from FY '24 and up a material 10% since FY '23. This progress has been underpinned by the delivery of over 700 -- or 701 individual operational excellence projects in the year with an average value delivered per project increasing by 37%. An example would be a line balancing exercise we ran in 7 of our sites, reducing bottlenecks and increasing units per labor hour by 10% in those sites. This project delivered GBP 750,000 of in-year savings. And we still have more to go after in the core business. So we've set up 2 new centers of excellence to target the next set of opportunities. Firstly, on next-gen automation, we've continued to progress select concepts. You can see in the photo an automated packing line, which we installed in our Spalding salad site, and we're now kicking off the first of a 5-year automation road map with 12 prioritized concepts in order to deliver at least 10% direct labor savings over time, a number you might remember we shared with you at the CMD. Our current focus is on recruiting the team with a head of automation now in place in order to move at pace to deliver the first prioritized concepts. Secondly, on group logistics, we've kicked off a project to optimize and standardize the way we do internal logistics across our sites. This includes inbound, outbound and warehousing costs. Like many areas of our operational excellence agenda, we can drive real benefits here from moving to one standardized way of doing things across the group. On Page 22, a key part of delivery excellence is our Making Business Easier technology transformation, a multiyear program driving consistency and simplicity into the business. The program is now in its second year and is making good progress. We've included some examples on this page of the kind of initiatives that we are driving across 2 dimensions: the quick wins, which are delivering early value and the multiyear transformational projects. To highlight a couple. Firstly, a quick win for us this year was the rollout of an automated invoice processing across all sites. This has reduced time to process, improved payment controls and reduced errors. In FY '26, we expect to process over 100,000 invoices automatically, which at that scale has significant benefits. We've also made good progress on our larger multiyear initiatives. You can see some examples of the types we're working on, on this page. None of them are rocket science. It's more about standardizing and modernizing some of our basic business processes after years of underinvestment. An example of this would be supply chain planning, where we've now selected a tech platform for a solution to streamline demand forecasting and production planning and scheduling and are rapidly moving into the delivery phase. Whilst we're still early on our journey, we're making good headway. Total program costs are still estimated to be up to GBP 80 million over 5 years, whilst investment in FY '26 will be circa GBP 20 million to GBP 25 million, which is reflective of the upfront phasing of the program spend. Moving to sustainable choices on Page 23, and we're pleased to hit our Scope 1 and Scope 2 carbon emissions and food waste reduction targets in FY '25, which is a particularly strong result in a year when we increased manufacture volumes by 2.5%. And looking further out, we've also begun development of our 2040 net zero transitional plans for 4 pilot lighthouse sites, which will form the basis for future group level climate transition plans. And whilst we've got good results in some sustainability areas, we did not meet our in-year target on water reduction. This is because of a couple of particularly high water using sites as the other sites have substantially decreased our water usage in year. However, we know there is more work to be done, and this remains a key focus for us. In the people space, one achievement I wanted to highlight is the reduction in our attrition rate down by 600 basis points from 24% to 19%. We need to keep great people and have them grow their careers with us. So this is a really strong result. We also made progress on our employee engagement score, hitting 84% in our last survey. And we were also proud to donate nearly 1 million meals with our charity partners during the year. Let's now switch gears on Page 24 to the second part of our strategic framework, grow and expand. And let me briefly set out why we're so excited by the combination with Bakkavor. From a strategic perspective, the deal will create a U.K. convenience food champion with strong relevance, reach and resilience. It will also unlock at least GBP 80 million in cost synergies and creates significant optionality on capital allocation. From a financial perspective, the deal will create material value for shareholders with an attractive returns and earnings profile, which you can see on the right-hand side of this page. Since May, we've made really good progress on the planning for integration and synergy delivery with a cross-functional team and a central integration management office now up and running with colleagues from both businesses. On Page 25, you can see an updated time line for the deal. Let me orientate you on where we are today and what comes next. We announced the recommended acquisition back in May, receiving strong support from both sets of shareholders at our respective AGMs. Following this, the CMA began a Phase I investigation into the deal, which they concluded at the end of last month. And we were really happy that they raised no competition concerns with regards to 99% of the revenues of the combined group, and this is in line with the strategic rationale of bringing together 2 complementary but not overlapping businesses. Competition concerns were identified in only one area, supply of own label chilled sauces, less than 1% revenue of the combined group. These sources are manufactured exclusively in our Bristol site. And over the past weeks, we have been working with [indiscernible] to come to a quick resolution, and we were delighted to announce this morning that we have a binding agreement to sell our Bristol site to the Compleat Food Group, and that's just 3 weeks after the CMA announced their Phase I decision. In terms of next steps from here, we've already secured agreement in principle for our proposed remedy from the CMA. So the final step is to secure formal CMA approval, which is expected to come before the end of the year. As such, we remain on track to close the deal in early 2026. On a personal note, whilst, of course, we're very sad that we have to sell our chilled sauces business, I know that the Compleat Food Group will be a great home for the Bristol team. And looking ahead, we're really excited to be welcoming back our colleagues to the combined group and for what we can deliver together for our customers, for our consumers, for our colleagues and of course, for shareholders. I'll wrap now with some closing thoughts on Page 26. And firstly, we're thrilled by the group's exceptional delivery and our progress against our medium-term financial targets. Secondly, we remain encouraged by the potential in our core business. We know there are so many more opportunities to go after that will drive returns. Thirdly, trading has started well, and we look forward to another year of profitable growth. And finally, we remain excited about the potential from our acquisition of Bakkavor and are delighted that the pathway is now cleared to completion in early 2026, which will allow us to get going on synergy delivery. So thank you again, as Catherine said, for coming here this morning. We really appreciate it. And now we'd both be delighted to take any questions or clarifications you might have. Mike, are you going to do the honours? We will start up front here. Patrick? Patrick Higgins: Patrick Higgins from Goodbody. Two questions, if that's okay. Maybe the first one for you, Dalton. Just in terms of, I guess, the wider kind of consumer backdrop, your slide on Page 17 outlines several key drivers around the food to go or your convenience business that should underpin that category's continued outperformance, whether it's convenience or premiumization. I guess my question is just more around the general U.K. consumer backdrop. Are you seeing any shifts in kind of consumer behavior or any kind of green shoots in terms of an improving or improving underlying or kind of broader consumer demand? Then my second question is possibly for you, Catherine, just around the cost outlook. What kind of inflation are you guys budgeting for the year ahead? And maybe just talk us through the various buckets with labor, raw materials. And then against that, how should we think about the various levers you guys have at your disposal to kind of offset and continue your kind of margin delivery, whether it's in terms of price pass-through or your kind of ongoing cost savings initiatives? Dalton Philips: Okay. Thanks, Patrick. Look, I'll take that first one then. Look, there's definitely a sense of uncertainty out there. Consumer confidence is still pretty negative. You saw the latest GFK -- it hasn't really improved at all. In fact, it's not in a great place. Having said that, if you think about our business, look, volumes have remained really strong. Q3, Q4 were terrific for us and growing very strongly ahead of the market. So look, we enter into this financial year with a real level of confidence. I thought Simon Roberts did a super job last week talking about a trend that we've seen for a number of years, but this is in the same basket, people trading up and down in the same basket. And I think that bodes well for the portfolio and the categories that we operate in. If you think about our categories, we're own brand. So that by default has huge value credentials. We typically tier our ranges, even think about the meal deal, there's 3 tiers now. There's even an ultra-premium meal deal, and they're offering fantastic value. And I think, look, there's a strong underpinning of tailwinds out there, the move on premiumization, very important for us, the move on convenience stores, very supportive to our underlying business. And then this what I highlighted in there, this dine-in versus dine out and the value that's been offered there. So I think those 3 sort of structural tailwinds and then obviously, you've got the population growth underpin gives us a level of confidence as we go into what is a fragile market. I mean we can't get away from that. So I think we're confident that despite the consumer backdrop, those tailwinds, Patrick will continue to drive the business forward. Catherine Gubbins: Thanks, Patrick. Yes, look, when we think about inflation, I know I referenced it when I was speaking earlier, for 2025, the inflation we experienced is about 2% to 3%, and that was broadly throughout the year caused by labor inflation, as you know, by about 6% in the year. And obviously, we had the national insurance increase on top of that. Q3, Q4, we saw significant price increases in the protein space. So that obviously fed through quite significantly. When we were thinking about 2026 then, I think we were anticipating inflation of about 3% to 4%, to be honest. And again, seeing that protein inflation continuing into this financial year. There's a little bit of uncertainty as to how long that will continue. Obviously, we have expectations around labor inflation, but we await, I suppose, any announcements in next week's budget to see where that lands. But I suppose 3% to 4%, but I suppose a little bit of uncertainty as to how that would play out. Obviously, it's still pretty early in the financial year. And I suppose I would just reiterate, as we called out in the presentation, we've been pretty good at offsetting that inflation, whether it's through engaging with our customers are deploying our cost initiatives. And I know that was your other question. When we think about managing our margin, we think about it in 3 areas. And I think we've spoken at length about those areas today, I suppose is how we engage with customers. Dalton spoke about that at length, our innovation, premiumization, delivering for customers and really using that to drive volume and accrete margin. Then obviously, there's how we approach the manufacturing network. Again, we give you a fair bit of detail around how our operational excellence initiatives have kind of evolved. So we're really now starting to look at next-gen automation to really tackle that kind of manual element of our business that still is ripe for automation. So I suppose that's kind of where we see ourselves pivoting in that space. And look, I referenced the focus we have really deployed last year and will do into the future around pretty significant cost base under gross profit and above operating profit. There is lot of indirect labor there and other overheads to just be kind of laser-focused on. Again, they're the kind of key areas that we see ourselves kind of continuing to leverage to drive margin going forward. Dalton Philips: Just keep moving down the... Gary Martin: Gary Martin here from Davy. Just a couple of questions from me. Just a follow-on to Patrick's question there just around the cost side of things. Just around conversations with retailers at the minute, I mean, how challenging is that after a year of reasonably high inflation, particularly with NIC charges, national living wage? Is it becoming trickier from your side? Or are there levers to pull from your perspective? And then maybe just a second question just around -- or even just a follow-on to my first question actually, just around the level of, we'll say, low-hanging fruit that are left from a self-help perspective. Is there still a lot that you can do from that side to offset any additional costs and then just a further question just around cash conversion this year, very strong, well above the 55% set the CMD. I'm just wondering how sticky that is. I know that there were some puts and takes with regards to pension coming down and cash tax coming up and all the rest of it, but it would be good to get a long-term view on that. Dalton Philips: Yes. Thanks, Gary. Look, maybe I'll start on the first 2, Catherine, and then you can sweep over anything I missed and pick up the cash conversion. Look, the retailers have been fighting hard for their consumers to ensure that they're as competitive as possible, and it's a challenging market out there. I don't think the level of conversations have changed. We're very transparent. I mean, typically, about 75% of our volume goes through some sort of transparent model. So that's really helped the conversations because it's very transparent to -- as the proteins move up or down, they're getting it in that month or the next month depending on the contract. So the conversations, I think, are at a similar level to before. The real focus is on innovation. It's not really on cost because you've got the transparency there. That's sort of table stakes. It's all around innovation. And there's a huge push on it. Everybody is trying to just get an edge. And I think we've been very successful with these Chinese walls that we put through our business that allows dedicated teams for specific customers to develop those ranges that I put out. I mean, actually, there's a mince pie wrap that went out yesterday for one of our large customers. We're always trying to do something slightly different. And I think if the innovation is there, Gary, the conversations are much more positive. Typically, where I would have more tense conversations is where there'll be a challenge, well, somebody else launched that, why haven't I got that? That's where the conversations are. It's not really in cost. That's not to minimize it. It's just to say that if you're not there on cost, you don't have a business. And that leads, I think, into your second point around is the much more low-hanging fruit. We think you've got to continually be driving this. And leaving to aside the Bakkavor opportunities that will come from that, there is still opportunities in OE. So capacity management, line balancing, overhead balancing, like there's a lot of work we've done there. We were doing something the other day in terms of indirect procurement. You would be shocked in the variety of pricing around Wellington boots. It would blow your mind, there are Wellington boots that have been purchased that are extremely expensive in our network. Now it's not people doing anything wrong, but they're needing to react to a situation. And you go -- when you standardize all of that, and I think when you're talking about Wellington Boots, you're kind of going, yes, there's still a lot of opportunity out there. It's a well-run business, but we are going to keep going after it. And then maybe we'll talk later about next-gen automation, like there is just such an opportunity there. Like if you think about the dexterity of the hand, what it can do today in assembly, you think about next-gen automation that we think is probably 24 to 36 months away where you're able to mimic the dexterity of the hand and be able to pick up because you can pick up anything with a robot, but to pick up a tomato, a slice tomato without bruising it or a piece of avocado is a whole different kettle of fish. And that sort of dexterity is coming through. You think of that next-gen automation into our food to go operation real opportunity. But Catherine, do you want to pick up on that... Catherine Gubbins: And look, just to pick up on that point as well. I think we're really starting to see this year the benefit of that operational excellence mindset across our manufacturing business. It's a real muscle that's just strengthened over the last period and it's kind of just an ongoing assessment of the manufacturing business just to see where the opportunities lie. So yes, look, just around cash conversion, absolutely, we had a strong performance this year. As I said, it was just really from proactive management across the cash portfolio, I suppose specifically focusing on working capital, obviously, impacted by improved revenues. and increased costs as well give us a little bit more opportunity around the year-end. Absolutely, you've called out the point around the pension contribution. And I suppose our improved profitability over the last few years means we've been consuming some of those tax losses, and we're now in a position where we potentially are looking at higher cash tax this year. But I suppose broadly speaking, we're still confident with the range we indicated at the Capital Markets Day that we will be ahead of that on a go-forward basis. Charles Hall: Charles Hall from Peel Hunt. First of all, well done, terrific year. Could I just ask about the other convenience sector that you had volume -- underlying volumes were down slightly. Can you just talk about the moving parts of the different businesses within that, how you compare against the market and what you see as the outlook for that segment of the business? Dalton Philips: Yes. Look, I think there are some areas where we've just had some deliberate business losses that we've seeded. I mean I can talk about salads, for example, there's been a number of contracts there that we've just said, not for us. In fact, they were more on the commodity side of prep veg that we just didn't want to go into and we wanted to move up the value chain. But overall, I think if you think about other convenience like that ready meals has been absolutely like a train. We're trying to, Charles, continue with this focus that we was very successful for us 3 years ago, which was resigning volume that wasn't profitable, and it worked very well. You'll remember, we gave up 10% of our volume. You've got to be careful that you don't slip into that, business is good, so we'll take this on the side. So we've tried to keep our shape there. And -- but in general, our share, I mean, I think I would say salads would be -- that would be the one area where it just didn't really quite work to the level we had hoped. The rest, I think we're confident from a share point of view. I don't know if you add on that... Charles Hall: And are you now through that business resignation process? Or is there still more to do? Dalton Philips: No, we're absolutely through it. But these contracts are often on 3- to 5-year cycles. So actually, we're now coming up to many of those contracts that 3 years ago, we were -- we took a strong stance those are starting to be recycled into the market. And we're just trying to be firm on this and not get ahead of ourselves. So there's nothing more now. You've seen the portfolio, the ROIC that we've been making huge progress and even sushi, which I know we talked about a couple of years ago, like it's absolutely flying at the moment. I mean there's more to do, obviously. So I think we're in a pretty good place on our portfolio. Charles Hall: And anything to say on new business wins? Dalton Philips: Had some good wins over the summer, which will carry through. It's about 100 basis points of volume that will annualize into this year. So I think that's a good underpin and you put that on top of what's going on with those structural tailwinds of premiumization, convenience stores, you wouldn't want to get ahead of yourself, but we're feeling confident. And I think as we look to Bakkavor, when we think about that ability to manage those portfolios, there'll be learnings that we can bring to them, and I'm sure they'll have learnings for us as well. Andrew Wade: Andy Wade from Jefferies. First one, just sort of looking at your 7% operating margin target. So on the one hand, we've got that where you're at 6.5% this year. But just sort of looking through how you're talking about the opportunity still. There's still fundamental stuff like line balancing and overhead balancing and procurement and so on. But then you've got the big projects to come as well, the automation, logistics, the tech side of things, which is going to be another 5 years. I'm just sort of trying to square up where we're nearly at 7% already and you've got so much in the pipeline. Am I overestimating how much is still to go? Or is that 7% looking very conservative? That's my first question. Dalton Philips: Look, I'm sure Catherine will have some views on -- Well, actually, do you want to go on that? Catherine Gubbins: Look, we have plenty, plenty to go after, plenty levers to pull, right? They're not all going to magically appear next year. We're obviously planning to deliver these initiatives over the next number of years, right? I think what we would say is 7% over the medium term, 7% or above is a target that we're happy. We are happy to stand behind at this point in time. Obviously, that's Greencore on a stand-alone basis. We're really looking forward to combining with Bakkavor and then seeing what that looks like. And obviously, we'll be back out to talk to you about how we feel from a margin perspective in the context of the enlarged group. But I think, Andy, the point you made is valid. We have -- I suppose we have plenty of things that we're going to go after to drive the margin. But as I said, it's just -- we need to knock it down, deliver them and wait for them to show up in the P&L. So I think we're happy with the 7% and above. Andrew Wade: Okay. Second one, sort of touching back on question Charles asked on the contract side of things. Can you just remind us, you had the big ready meal win in September '24, which is annualized through now. You had some wins in the first half, a bit of salad loss in the second half and a couple more that you've just recently won. Is that broadly the shape of it? Or is there any big ones I'm missing there? Dalton Philips: No, that's broadly the shape of it. Some -- a number of sandwich contracts that have come our way that were either expansion or new customers, but... Andrew Wade: That's the sort of 100 basis point-ish number you were talking about with Charles' question. Great. And then a little bit churlish given how good the results are, but the making business easier, we're talking about GBP 80 million over 5 years. Are we going to be taking all of that as exceptional? And I guess if it's going to be going on for quite a long time, why do we think that -- I mean, obviously, you run it by the accountants and stuff, but how does that qualify as exceptional given it over quite a long period? Catherine Gubbins: Yes. Look, I mean, it's a transformational spend. We've obviously given that a lot of consideration. We're into year 3 of that program now, and we're happy that it qualifies as an exceptional spend. Clive Black: Yes, Clive Black from Shore Capital. Three relatively general ones. Firstly, what's the plant utilization then in September '25, what spare capacity you've got? Secondly, maybe say a word on your coffee shop opportunity because that's been a mixed blessing for Greencore in the past. And then lastly, what sort of -- how would you classify your relationships with the movers and shakers in process engineering? Dalton Philips: In process engineering. Clive Black: Manufacturing engineering. Dalton Philips: So I'll rattle through that and Catherine, please, come in if you want. So plant utilization, we're about 85% at the moment. So we've got that 15%. We had it before. We sold some of that capacity, which is part of the 2.5% volume growth, and we've been squeezing more out. And I think the challenge into the ops team is I will always be at around 15%. Now at some point, the guys will say, you need to put down more bricks and mortar. But I think our challenge back in is we shouldn't need to put more bricks and mortar down. I'm talking as a stand-alone site, forget the Bakkavor opportunity because obviously, one is to get to 3 shifts. Okay? And at the moment, for example, wrap rolling, we haven't got any technology that can go faster than a human. So we wrap roll ourselves. But we don't think we're far away, I mean, far sort of 18 months away from being able to speed the wrap lineup and bang, you pick up more capacity. So what we say to the team is, let's keep it at 15 and keep eking it out. In terms of the coffee channel, good question given ISG. But I think like if you take something like Costa or Nero, I mean, Nero is a fantastic business as is Costa, very professionally run. In the Nero case, they give us the keys. We deliver at night. We deliver through our DTS operation. We deliver other products for them as well. In some cases, we're quasi-merchandising the shop for them. So I think it's a good channel. It's professionally run. And I think if we're disciplined in holding our shape, I see the opportunity there. And then the third in terms of process manufacturing, this is a really good question. So we've been typically dealing with the Militex of this world, so European, and we want to go out to China. In fact, the plan is to go out in Q1 to go out to China to start speaking to other OEMs, think with the Bakkavor behind us and we can say, look, we've got 40 plants here. I think we believe there could be a different conversation. But we're trying to pull kind of current leading-edge technology from the Militex, but we want to see as something next gen from other sectors Clive because we're not the only other people out there who are dealing with the hand dexterity issue, and we believe there must be technology out there. And like I can't tell you how many thousands of people we have on our lines that -- and we've talked about 10% of that could be a medium-term target and some might say that's not ambitious enough in terms of taking labor out. Catherine Gubbins: Nothing further for me, to be honest. Operator: [Operator Instructions] The next question comes from Karel Zoete from Kepler. Karel Zoete: I have 2 clarification questions. The first one is in relation to the transition costs in 2026 plus the integration cost. What would be a reasonable expectation for both aspects combined in '26? And the other thing is on operating margins. Did I understand correctly you expect them to expand into 2026? Catherine Gubbins: Yes. So look, I suppose if you think about cost of the transaction into next year, we have an estimate of our costs being about GBP 40 million. for the transaction. And obviously, we recognized GBP 11 million in exceptionals in full year '25 in respect of the transaction. I suppose moving on to margin, absolutely, Karel, I suppose our expectation, our plan, our aspiration is that we will improve the operating margin in 2026. I'm not sure if you want me to build on it anymore. I think we've spoken a bit today around how we're planning to approach that, obviously, within the confines of that overall operating margin target of 7% and above that we've set out over the medium term, I suppose we are on the journey to delivering that, yes. Dalton Philips: Okay. Well, we'll wrap it there. We really appreciate you coming in today, and thank you for your questions and support.
Graham Sutherland: Good morning, and welcome to FirstGroup's 2026 Half Year Results Presentation. In a moment, I will hand over to Ryan to take you through the financial performance for the first half of the year. I will then provide an update on business performance in bus and rail before we take your questions at the end. Moving on to Slide 3. I'm pleased to report another strong half for the group despite several economic and policy headwinds. Strong execution has ensured that we've been able to fully counter the negative impacts of lower bus funding in England, above inflation wage pressures and higher levels of employer national insurance contributions. Group adjusted revenue, which does not include the national rail contract revenues, where we take substantially no revenue risk has increased by 30% to GBP 834 million. This was largely driven by growth in First Bus due to the acquisition of First Bus London, which completed in February. Adjusted earnings per share for the half year has increased by 16% to 9.9p, with earnings growth supported by the repurchase of circa 22 million shares during the period. As a result of our strong performance in the first half, the Board has proposed an interim dividend of 2.2p per share, up 29% against the prior year. As a result of our continued strategic delivery and the restructuring of the business completed earlier this year, we are on track to deliver modest growth in our adjusted earnings per share for the full year. We expect to then at least maintain adjusted earnings per share in full year 2027 as both Avanti West Coast and GWR are nationalized. This leaves us well positioned for the remainder of the year. Our focus will continue on operational delivery and the successful execution of our U.K. growth and diversification strategy. Turning now to Slide 4, which sets out some of the key highlights against our strategic framework. Delivering day in and day out remains a key priority for the group. We continue to drive operational efficiencies in First Bus with a 24% reduction in lost mileage to 1.3%. We have also increased our Net Promoter Score to plus 15 as service delivery remains core to our strategy. We have also completed our business restructure to deliver annualized overhead savings of around GBP 15 million, which will help offset the impact of -- on the group of increased national insurance contributions. We will see the full benefit of the restructuring in the second half. Looking at modal shift, generating additional demand for our service is a commercial driver of our business and also crucial for reducing congestion, improving air quality and supporting government decarbonization goals. In open access rail, our seat miles capacity utilization of 67% remains significantly above the industry average. And we've also secured Rolling stock for our new Stirling to London Houston service, which we expect to be fully operational in mid-calendar year 2026. Turning to our sustainability pillar. We are at the forefront of bus fleet and infrastructure electrification and are working to capitalize on opportunities to unlock adjacent electrification revenue streams. In the first half, this has included the launch of First Charge and a small investment in Palmer Energy technology to bring battery storage capability to our sites. We continue to diversify our portfolio with the First Bus London performing ahead of our expectations, and we continue to grow our business and coach asset footprint with high-quality value-accretive acquisitions. At open access rail, we were pleased to have been awarded Extra pass on our existing services and the extension of some of Lumo services to Glasgow. We've also submitted applications for new routes, where we can commit further material investment and utilize our proven expertise to drive economic growth through connecting underserved communities. I will now hand over to Ryan, who will take us through the financial results for the half year. Ryan Mangold: Thank you, Graham, and good morning, everybody. This has no doubt been a more challenging half year given the headwinds of inflation and national -- employers national insurance increases. However, the early actions that we have taken have helped mitigate some of these pressures and the group has continued to make progress across the business. In my presentation, I'll be covering the following 3 areas: strong growth in adjusted revenue, the improvement in adjusted EPS with further progress on a much better balance of earnings distribution; and finally, reinforcing our capital allocation policy and our financial guidance for full year 2026 as well as full year 2027. So turning to the financial summary on Slide 6, where we have made progress across all financial KPIs despite the headwinds. The group's adjusted revenue is up over 30%, driven by both organic and inorganic growth and decent performances across the business. The revenue improvements in bus and open access rail have largely been offset by inflationary cost pressures as well as the national insurance impact as well as business development costs in open access with the mobilization of our Stirling route, which is now underway. As a result, group adjusted operating profit of GBP 103.6 million is up 2.8%. Our positive operating profit performance has benefited somewhat by the IFRS 16 adjustment in rail being lower given SWR ending, partially offset by higher net finance costs, resulting in the group delivering GBP 55.5 million in adjusted earnings, up 7.1%. The ongoing share buyback program has reduced the average share count. And as a result, the group's adjusted EPS has increased by 16.5% to 9.9p. This robust underlying business performance and strength of the balance sheet has resulted in the Board proposing an interim dividend of 2.2p per share, an increase of 29.4%. The dividend is in line with the group's current progressive dividend policy of around 3x adjusted earnings per share with around 1/3 in the interim and 2/3 at the final. The free cash flow generation before acquisitions and returns to shareholders has been impacted by the timing of a more material investment in bus electrification in the half year, and this is us taking advantage of the available government funding, resulting in an above-normal spend in the half year. The group's adjusted net debt position was GBP 207.6 million with a strong free cash generation offset by the accelerated CapEx as well as about GBP 10 million in acquisitions and GBP 76 million returned to shareholders through the buyback program and the final dividend for the year. At the bus business, despite the material organic and inorganic growth investments in the year, the post-tax return on capital employed was 9.4%, which was impacted by the acquisition of the London business in February. And as expected, the profitability is initially lower from this business. Turning to the 30% growth in adjusted revenue on Slide 7. The material increase in adjusted revenue has been mostly driven by the capital deployment in the second half of full year '25, with London in particular, performing well and is operating ahead of the investment expectations. The regional bus business passenger demand has ever been marginally weaker with a number of factors contributing to this, which Graham will cover later. However, despite the marginally lower volumes, the bus business has been able to deliver some yield growth that has been partially offset by lower government funding. First Rail's open access operations delivered some revenue growth with this progress marginally impacted by the strike action that we saw in whole trains. The Rail Services business also delivered a strong performance in the half year. And what is pleasing to note now is that more than 30% of the current contracted revenues are now with external parties, demonstrating the continued strong value creation from these businesses. Looking at the 16.5% adjusted EPS growth on Slide 8. This chart shows our adjusted EPS progression on a post-tax basis for all the variances. Open access and rail services contributed 0.5p in growth, with this now at 3.6p of our EPS, representing a materially higher proportion of earnings in rail now from more sustainable business streams. H1 has, however, had a marginal benefit from once-off rail center provision releases. First Bus increased operating profits contributed 0.2p to the improvement and central costs are 0.3p lower year-on-year, driven by the cost efficiencies and the group restructure executed earlier. Despite SWR ending in May 2025, the earnings from the DfT talks are 0.1p higher than the prior year, with the first half benefiting from once-off enhanced variable management fees as well as lower disallowable costs. Interest costs were 0.5p higher due mainly to lower interest received on cash balances and the group now being in an adjusted net debt position. The buyback programs that have now run for several years has resulted in a lower number of average shares, and this contributed 0.8p per share. As can be seen, the work that we have been doing over the past few years, together with our disciplined capital allocation approach has grown our adjusted EPS to 9.9p per share. But equally as important, we are continuing to drive a far better distribution and the quality of our earnings as we look ahead. Turning to the adjusted cash flow movements for the past 12 months on Slide 9. As a reminder, our adjusted measures excludes the ring-fenced cash as well as the impact of IFRS 16 from the DfT train operating companies. The group generated EBITDA of GBP 181.4 million before the DfT TOC cash inflows where we have received GBP 37.9 million in distributions. Just as a reminder, these DfT TOC management fees are paid by way of dividends generally in the second half of the following year after completion of the top statutory audited accounts. Working capital was a net inflow of GBP 4.4 million in the 12 months, resulting in a total of GBP 223.7 million of capital generated from operations versus the full year of 2025 of GBP 207.4 million. The capital generated was deployed in investing GBP 126.5 million in CapEx, net of grant funding and battery sales into the Hitachi strategic joint venture. GBP 6.5 million was paid in cash interest and tax, mainly relating to interest on the new finance leases and arrangements for the electric fleet in First Bus, offset by interest earned on the cash balances. There was a nominal amount of cash tax paid with the low level of cash tax being driven by the historical losses as well as the accelerated capital allowances that should apply for several years given our decarbonization investment program. Other movements include payments to acquire shares for the Employee Benefit Trust that continues to hold around 20 million shares for share award settlements and small cash payments into the pension schemes, mainly to cover costs. This has meant that the business has generated a total of GBP 78.3 million in cash despite the accelerated investment in electrification of bus. Just short of GBP 150 million was deployed in growth capital with the acquisition of RATP London for GBP 90 million being the major contributor to that as well as several bolt-on acquisitions in First Bus, mainly in the business and coach market, but also includes investment into several innovative energy businesses as well as combined with the 2 open access rail businesses with Stirling in mobilization phase. GBP 37.1 million has been paid by way of dividends in the 12 months and GBP 99.1 million was spent on the share buyback programs. What is clear from the chart is that the group continues to deploy a very balanced approach to capital allocation, focusing on both organic and inorganic growth opportunities as well as meaningful returns to shareholders in line with our strategy. This results in the group ending the half year with GBP 207.6 million in adjusted net debt and a debt cover ratio of 0.95x, which is well below our leverage policy parameters despite being a fairly busy 12 months, combined with a seasonally high level of adjusted net debt at the half year. Turning to our capital allocation framework on Slide 10. As we look ahead, we have a leverage policy of less than 2x adjusted net debt to EBITDA. With our forecast year-end position being well below 1x, there's plenty of capacity for the U.K. growth for the right opportunities, where the post-tax IRR from these investments exceeds our WACC. On an underlying basis, pre-deployment of capital for acquisitions, we expect to maintain our leverage below 1x for the time being. We have a strong focus on decarbonization in First Bus with the additional cost and efficiency benefit this brings, and we will continue to deploy capital in this area, particularly where this is supported by government funding to help deliver the U.K.'s wider decarbonization strategy. At First Bus London, we continue to expect this business to be operating cash positive from full year '27 onwards, and we are very pleased with the business performance to date. For the DfT TOCs we now estimate that GBP 125 million will be received in cash from October 2025 onwards to the end of the contracts. And this includes the anticipated continued support as required under contract from the rail services businesses. This is effectively higher than the GBP 120 million that we guided in June, due mainly to the longer-dated contracts agreed in rail services business, slightly better DfT TOC end dates and partially offset by the cash that we received in the first half of the year. Our current dividend policy remains around 3x adjusted earnings per share with this ratio and quantum being progressive over time. And finally, in line with our disciplined capital allocation approach, the group is committed to any surplus cash that cannot be effectively deployed in growth will be returned to shareholders. Given the current adjusted net debt and the pipeline of U.K. opportunities that are currently being evaluated, we are not announcing an extension to the buyback program at this stage, and this will be reviewed again with the full year results. To end with on Slide 11, looking ahead for the financial outlook for full year 2026 as well as adding in guidance now for full year 2027, given the transition of the remaining DfT TOCs at some stage within the next 12 to 18 months. The group expects to deliver modest growth in adjusted EPS for full year 2026 and then to at least maintain this level into full year '27 off a higher base. The bus business anticipates making sequential operating profit progress year-on-year with growth being driven by the material change in the business following the acquisitions, including London, with bus now consisting of 3 strong business segments, delivering a combined annual revenue that's anticipated to be above GBP 1.4 billion for full year '26. In First Rail, the open access businesses are anticipated to deliver results ahead of full year 2025, reflecting strong demand and yield management being offset by inflationary cost pressures as well as the costs for mobilizing the Stirling business. The rail services businesses are expected to make progress year-on-year given the continued support provided to previous and existing DfT TOCs as well as growth in new customers. For the DfT TOCs, the fees are anticipated to be at more normal levels going forward and combined with SWR ending means that the underlying management fees will be lower. The IFRS 16 positive impact to EBIT for the year is expected to be circa GBP 36 million in full year 2026. At the center, we anticipate costs to be circa GBP 8 million lower, benefiting from the central restructuring that was completed in the first half. Below operating profit, we anticipate incurring GBP 60 million worth of interest, of which GBP 34 million relates to IFRS 16 charges mainly due to the DFT rail leases. We anticipate deploying a net circa GBP 180 million of CapEx in the First Bus after taking into account grant funding and the benefit of GBP 10 million cash from the Hitachi Strategic Battery partnership. This CapEx of GBP 180 million now includes GBP 30 million of CapEx in London for electric vehicles, where the group is trialing an outright ownership model rather than an operating lease model on a specific large route that commenced late in 2025 due to the operating margin benefit that the ownership model delivers. The current level of CapEx in bus is above the expected normal levels given the success the business has had in accessing grant funding and annual CapEx is anticipated to be around GBP 100 million per annum as we look ahead, depending on the model that may be applied in London. First Rail remains capital light, but with some investment expected on the inorganic growth in open access as we mobilize these routes. For the pensions escrow, we have now finalized the Bus Section 2024 triennial valuation. This resulted in GBP 20 million of cash being returned to the group in November with GBP 20 million paid into the scheme and the balance of GBP 43 million retained in escrow. The escrow will be reviewed with the 2030 valuation, where a number of medium-term actuarial and asset judgments will be clarified in the scheme's performance. And when this is combined with the group section, it means that GBP 65 million is now in escrow that we will continue to explore derisking options that will be tested on the 2030 valuations. We anticipate ending the year with circa GBP 125 million to GBP 135 million worth of adjusted net debt. And this guidance is before any further inorganic growth opportunities, where there's a decent pipeline in the U.K. that we continue to evaluate. As you can see, the group retains a very strong balance sheet position with a much improved quality of earnings trajectory where we expect modest growth in EPS for full year 2026 and then to at least maintain this higher level for full year 2027. I'll now hand over to Graham for the business review. Graham Sutherland: Thank you, Ryan, for the update. Much appreciated. Moving on to Slide 13. It's been a solid half year for First Bus with operating profit growth of 4%, driven by yield management, cost efficiencies and the benefits of recent acquisitions. This has come in a challenging environment, where the transition to a GBP 3 fare cap in England resulted in lower funding levels, down GBP 17 million on last year. This, combined with related pricing activity and generally a softer economy has negatively impacted regional bus volumes. Concessionary volumes are up 4%, but this has been more than offset by a 7% decline in commercial volumes, leaving overall volumes down by 4%. As well as the move to the GBP 3 fare cap, economic factors are impacting demand. It's worth noting that just over 40% of all bus trips are for shopping and leisure purposes and around 20% are for commuting, and we're seeing these journeys impacted by lower levels of consumer confidence. To offset the drop in funding and softer demand, we introduced a new simple distance-based fare structure, resulting in a circa 10% yield improvement in the first half. Inflationary pressures remain with cost increases due to inflation of circa 3%, mainly in wages, where there was a 4% average increase in driver pay awards. We have now settled the majority of our largest bargaining units with 2-year awards achieved in most cases. We have also delivered GBP 7 million of efficiencies through the electrification progress and overhead savings, including a GBP 2 million saving in fuel costs. We've also benefited from our new businesses in London and a business in Coach, where we also continue to extend and win value-accretive contracts. Adjusted operating profit margin of 6.1% after absorbing 1.4% impact from higher national insurance contributions. Regional bus operating profit margin was 8.2%, slightly lower than the prior year. Moving now to Slide 14. The First Bus portfolio is evolving as we grow our business in Coach segment and develop our franchising capability centered on First Bus London and our operations in Rochdale. In Business and Coach, we are actively growing our operational footprint and asset base. In the first half, this included the acquisition of Tetley’'s Coaches, an established profitable operator with a large own depot in Central Leeds. This segment's revenue grew by 30% in the first half due to contract wins and extensions, the launch of Flixbus services and the contribution of our new businesses, which are trading in line with expectations. This is an attractive market worth an estimated GBP 3 billion, and we have a strong pipeline of opportunities to further grow our market share. The significant increase in our franchising segment's revenue reflects the addition of First Bus London, which contributed GBP 150 million in the first half. Thanks to our focus on service delivery to drive customer satisfaction and performance incentives, both our London and Rochdale franchise businesses consistently hold top positions in the operator league tables. Looking ahead, a number of Merrill authorities outside London are progressing with bus franchising schemes. These include Liverpool City Region, West Yorkshire, South Yorkshire, Wales and the West Midlands, representing an opportunity for us to enter new markets. There is still some uncertainty over which franchising models will be deployed, in particular around fleet and depot ownership. This could lead to potential CapEx savings and property disposals should authorities opt for an ownership model. Our track records of delivering quality bus operations under contract in London and Greater Manchester leaves us well positioned to actively take part in franchising growth. And moving on to Slide 15. The electrification of our fleet and infrastructure is a key part of our strategy to transform our bus business and to unlock potential adjacent revenue streams. We continue to make good progress with circa 23% of our fleet zero emission with 3 fully and 17 partially electrified depots across the U.K. As I flagged on a previous slide, we're benefiting from electrification efficiencies, including through fuel costs. This has led to a net fuel cost per mile reduction of 20% over the last 3 years. We're also making good progress identifying and capitalizing on opportunities to further monetize our electrification assets -- we recently launched the First Charge brand, giving access to chargers at 15 of our depots. We also made a small investment in Palmer Energy Technology to bring battery storage capability to some of our depots. This included the launch of a battery energy storage facility in Holford, and we expect to launch a second facility in Aberdeen next year. Over time, this will drive further cost efficiencies and provide a potential platform for commercial second life use of bus batteries. And now moving on to open access rail on Slide 16. Our 2 open access rail operations, Hull Trains and Lumo delivered adjusted operating profit of GBP 16.3 million in the first half. This is lower than the prior year with some impact from industrial action at Hull Trains and GBP 1.3 million of mobilization costs for our new Stirling to London Houston service. Lumo saw strong demand during the summer months and Hull Trains had a good ramp-up in business traveler demand in September. Seat miles operate were 3% lower than the prior year, reflecting higher levels of engineering works on the East Coast mainline and industrial action. Seat miles utilization remains high for both operators and still well above the rail industry benchmarks. Looking ahead, the mobilization of our new Stirling to London Houston service is progressing well, and we expect the service to be fully operational in mid-calendar year 2026. As you can see on the slide, we've set out our current rail open access seat miles capacity and how we see this developing over the coming years. We were pleased to announce in July that the ORR had approved our applications for Extra Pass on our existing services from December 2025 as well as the extension of some of Lumo's services to Glasgow. These extensions will add an additional 118 million seat miles, a 13% increase to our existing capacity. This, together with our new Sterling and Carmarthen services will see us more than double our existing seat miles capacity over the next 2 to 3 years. We've also launched a number of applications with the ORR. This includes services from Payton to London Paddington, Hereford to London Paddington, the extension of the Sterling track access agreement to December 2038 with the addition of new battery electric trains a revised Rochdale to London Houston application and an application for a new route between Cardiff and New York. We've committed significant investment to facilitate the growth of our open access services, including our circa GBP 500 million agreement for 14 new Hitachi trains that are being manufactured in County Durham, securing the skills base and jobs in the local area. If our ongoing applications are successful, we will make use of our option to commit further investment in new Hitachi trains, representing a further U.K. manufacturing investment of around GBP 300 million. And moving on to Slide 17. Our teams managing the national rail contracts at Avanti West Coast and DWR continue to focus on enhanced service delivery and effective cost management. Both teams are performing well and attributable net income from the national rail contracts has been in line with our expectations at GBP 15.3 million in the first half. In line with government policy, the DfT train operating companies are moving into public ownership. Our SWR team worked tirelessly with the DfT operator to ensure a smooth transition with the business exiting the group on schedule in May. The dates for the transfer of Avanti West Coast and GWR have not yet been announced by the government, but are anticipated to be in full year 2027. Our rail services businesses, FCC, Mistral and Consultancy continue to progress and perform well with revenue showing encouraging growth. Almost 1/3 of the current contracted revenues are now from external customers. We continue to look at opportunities to scale these businesses as we believe private sector expertise will continue to be vital to the success of the rail industry. Moving on to conclude on Slide 19. Our robust performance in the first half and a challenging economic and policy environment is testament to the work we have done to transform, grow and diversify our business. We're on track to deliver modest growth in adjusted earnings per share for the full year, and we expect to then at least maintain adjusted earnings per share in full year '27 as we transition our train operating companies to the government. In First Bus, we're an experienced operator with a large, well-capitalized fleet and a network of own depots that will allow us to continue to improve performance and to grow in attractive markets. The electrification of our fleet and infrastructure continues at pace as we look to unlock cost efficiencies and potential adjacent revenue streams. We will also be able to leverage these capabilities when bidding for new contracts. In First Rail, we will continue to work to grow our open access capacity and revenues, look to optimize our rail services businesses and to bid for contracts where we can bring forward our experience and capability. In our remaining 2 DfT train operating companies, we continue to prioritize contractual and operational delivery together with the work required to ensure a professional handover to the DfT operator. Our strong balance sheet allows us to evaluate a good pipeline of value-accretive U.K. growth opportunities. We remain committed to our discipline on capital allocation, and we'll continue to return any surplus cash to our shareholders. As a leading U.K. public transport operator, we have a critical role to play in the delivery of the U.K.'s wider economic, social and environmental goals. We will continue to be proactive, demonstrate our strengths as an experienced partner, underpinned by our significant investment in growth and decarbonization. To close, the work we have done over the last few years has allowed us to maintain our positive earnings trajectory as the U.K. bus and rail markets partially transition to new models. We aim to continuously improve performance to drive more demand for bus and rail services and to capitalize on strategic U.K. growth opportunities. Thank you for your time this morning, and we will now open for questions. We will take questions from the room first and then from the webcast. Gerald Khoo: Good morning, everyone. Gerald Khoo from Panmure Liberum. 3, if I can. Firstly, on bus franchising. You set out the regions that are moving towards franchising. I was wondering whether you could sort of quantify the sort of revenue opportunity and also what's potentially at risk in, I think, just West Yorkshire is the area that you're in amongst those. Secondly, there's been quite a big increase in the CapEx guidance for the year, but not a very big increase in the adjusted net debt guidance. I was just wondering what the sort of reconciling item there is. And finally, you talked about having a look at owning electric buses in London. I mean what are the challenges around that versus owning diesel buses in London? Is it -- is it significantly more challenging to cascade electric buses into the regions to on to other London bus contracts? Graham Sutherland: Thank you, Gerald. And it was good to see the question starting before I even sat down. So I'm very impressed. I'll maybe take the first one on bus franchising. Look, I mean, obviously, we are in West and South Yorkshire. So that's clearly a risk for us, particularly given how some of these bids are formed with the ability only to win certain depots. But when we look at the opportunities outside, we kind of feel that we can balance the kind of risk/reward scenario here. And the fact that we've worked very hard to strongly capitalize our assets over the last few years with improved fleet, improved depot, I think it leaves us in a strong position in discussions with the local authorities in terms of how those assets are positioned and the future use within franchising. So I'm not going to quote individual subsector numbers, but I think the general feeling in the team is that we will come out of this process. We're likely to release some capital from the business in the areas where we have strong asset base. And we feel we've got the qualities and the experience now within our business, particularly bringing in the London business and what we've learned from that to be competitive in the bidding process. And obviously, that has started, the results of the first phase of Liverpool around the end of this calendar year. So we'll begin to get some insight as to where we stand in pretty short order. Ryan, do you want to take the second question on CapEx and net debt? Ryan Mangold: Yes. So CapEx is higher by GBP 30 million. It's primarily driven by us trialing the GBP 30 million, it's 59 EVs that we're trialing on a specific route in London, which is all electric that the business effectively retained and won that starts later this year. So the guidance is better than what we previously gave effectively with that sort of GBP 30 million going out and a couple of reasons for that. 1 is the GBP 20 million of escrow cash that's come into the business in the second half of the year as well as some underlying sort of cash -- stronger cash generation, particularly coming out of the rail business than what we originally anticipated. So a combination of those 2 factors offset against the CapEx in London is where the net debt guidance has ended being -- being slightly higher, but better off. And just also a reminder, we deployed GBP 10 million in growth M&A in the first half of the year as well. So we've got GBP 40-odd million and GBP 20 million back on the pensions escrow, but our net debt is slightly better than that, obviously, mathematically. Graham Sutherland: And then on the bus ownership in London. Ryan Mangold: Yes. So the EVs in London, I mean the TFL is committed to electrification in London. I think that the sort of risk of transition of technology in terms of how these EVs work and the warranties that the OEMs are now providing has kind of gone beyond the kind of risk factor that you previously, I think, would have taken and hence, kind of moving those to operating leases. I think the world is also moving to more post-IFRS 16 basis in terms of financial judgments. And I think there's quite a few bankers in the room. I think the banks eventually also start moving up to covenants to be sort of on a post-IFRS 16 basis. So your net debt to [ EBITDAR ] and your total cost of borrowing is going to be all kind of caught into one thing rather than just being simply off balance sheet. And combination of sort of commitment by TFL to go to electric. So we always have a use for those buses one way or the other is a positive. Technology improvements on the OEMs in terms of length of warranty is a positive. And if we can use our strong balance sheet to effectively kind of fund our business model in London at our WACC of 9% versus the WACC of the ROSCOs, then which is much, much higher, then we can sort of, in theory, kind of capture that benefit and that capture of that benefit really kind of translates into slightly higher margins. But we're just trialing this on a specific route. So we don't want people to think that we are just buying buses now in London. We're not going to uplease them. We're just trialing them on a specific route just to see that the kind of financial benefits are as we expect them to be over time. Graham Sutherland: Alex? Alexander Paterson: 3 from me as well, please. Firstly, just in the remote possibility that the budget doesn't like the blue touch paper of the U.K. economy and the consumer still doesn't feel great on the 27th of September. If commercial bus volumes remain somewhat subdued and the trend you saw in the first half continues, what sort of levers have you got? Should we expect more mileage reduction there? Secondly, if I can just elaborate on the bus franchising question. Manchester has obviously bought depots and fleet from previous operators. Birmingham has acquired a depot, look like they're going to buy more and fleet as well. What do you expect in the regions, where you think they may franchise? You talked about capital release. I don't know if you can quantify that at all. And then finally, just on the rail services, it sounds like you've had a very positive outcome on those continuing for longer. What do you think the end game is? Should we expect government provision of these services or private? If it's private, is there actually an opportunity for you to increase your market share? Graham Sutherland: Okay. Thanks, Alex. Very comprehensive questions. I mean the budget, obviously, when you look back a year, we obviously had to deal with national insurance contributions. I think the team worked very hard to manage that. The reality is when you're running a large business, you don't always deal with these issues in a 3-month period. So the reality is it's probably taken us right through to the end of the half year to do all the work that we wanted to offset those increased costs, and we will now see that in the second half. When we look at this budget, again, we will just deal with what comes our way. I mean, on volumes, we began to see volumes begin to -- this time last year, we were talking about volumes being up 4%. So clearly, there's been a number of impacts that have affected them. But we did see them begin to drop off in the January to March period and have largely been around the 4% level since then. We begin to cycle that effect out in January this year. And we're obviously working with various initiatives to stimulate more demand as well, including having put more frequency on in some of our larger urban areas to try and stimulate more demand. So we -- it's difficult to gauge, where volumes will be next year. But we still have population growth. We still have some macro tailwinds. So we do think it will settle down a bit, but we're prepared to deal with it, if we see softer volumes next year. So it's hard to call, but I do -- we do expect some improvement from the current level. In terms of bus franchising, yes, I mean, we have seen the signal from a number of areas that they want to own depot fleet in total. But we have also seen discussions around potentially a split fleet in certain areas given the lack of available funding to do the whole thing. So I don't think it's clear how that will completely play out. A lot of it will be down to choices at a Merrill authority level as to where they invest their money. I think the fact that we have a well-capitalized business is helpful. And also, we have available capital if the opportunity arises. So I think we'll lean into each individual situation as it kind of prevails. And as I said, if in Western South Yorkshire, they're looking at an ownership model, certainly the depots and maybe partially for the buses, then we're in a strong position to work with them to make that happen. So yes, so I think relatively positive in our ability to work there, but it's very hard to call out numbers because these are active negotiations, and they're not concluded at this point. I think then on rail services, the team have done a good job. There's no doubt about that. And we provide some high-quality expertise into the train operating companies, and we've been able to broaden some of these services beyond our -- obviously, into the external market, which is a positive. It's difficult to fully assess where GBR will go. But it's -- the reality is they may bring some in-house. They may combine and consolidate and look for 1 or 2 private sector partners. And at the end of the day, our job at the moment is to provide quality services, put good contracts in place, and then we'll respond to how the market evolves. But I think we have optionality here. And within the number, the GBP 125 million of cash receipts, that includes an assumption of how much rail services cash will be there. And we're more than comfortable with giving that guidance at this point. So evolving area. But since we last spoke, we have a better contract position now than we would have had 6 months ago, and that's encouraging. Ruairi Cullinane: Good morning. It's Ruairi Cullinane from RBC. The first question, I think the M&A was described as a U.K.-focused growth strategy. Should we infer from that, that you're likely to continue primarily buying businesses in the U.K.? And is there still a reasonable pipeline of opportunities there? Secondly, I was quite struck that bus CapEx could normalize towards GBP 100 million in the medium term. Is that -- does that come back to the shift to franchising and then more regions opting to own assets? And then finally, what have you assumed in terms of the timing of the exit of the remaining talks in terms of the upgrade of the cash inflow from DfT TOCs from GBP 120 million to GBP 125 million? Graham Sutherland: Okay. Thanks very much. On M&A, we are solely focused at this point in time on our U.K. pipeline of opportunity. We've been able to do over the last 18 to 24 months, 7 or 8 acquisitions. And we have a pipeline that at the moment that's made up of live opportunities under discussion and some more medium-term opportunities that we feel could come to the market. So our job right now is to run down those opportunities. They're a good fit with the strategy of the business in terms of more growth in bus and the potential to obviously completely optimize what's there on open access. So we feel there is enough there to have a strong growth story around bus and open access rail for the next 2 to 3 years. We -- as I've said before, we -- given the type of organization we are, stuff comes our way to assess and look at. So we will continue to look at opportunities outside the U.K., but we have absolutely -- at the moment, that's really just from a kind of good corporate citizen perspective. We are solely focused on driving and delivering the U.K. pipeline we have. And until that pipeline weakens, we have no real intention of looking elsewhere. Bus CapEx, Ryan, do you want to maybe take that one? Ryan Mangold: On the CapEx, there's a number of sort of variables on that. One of them being, obviously, as we transition towards franchising some of the markets, our own fleet in terms of our regional bus operations will be slightly smaller as a result of that. Now I kind of spoke a little bit earlier in one of the questions in terms of is it going to be depots and buses owned by the combined authorities or whether we can have a partner ownership. Now clearly, we're going to have to own the buses under that scenario, then clearly, the CapEx number will be higher, but that should then be reflected in the margins that those bids will go for in terms of cost of capital pricing. So that GBP 100 million kind of doesn't include the fact that we might have to buy buses under the franchising model, and we'll obviously update the market as and when that happens in terms of how the structure is going to end up. The other factor is that we've got a lot more confidence now on the electrification of our existing diesel fleet in terms of transitioning it from being a diesel fleet to an electric bus by just doing the -- putting in an electric drivetrain and battery. Normally, with the diesel bus about midlife, they'd have a massive engine replacement and a big refurbishment. And that happens instead of putting a diesel engine back into the bus, we're now putting in an electric drivetrain as well as the batteries. And that then gives us a sort of more limited amount of CapEx that we need to then spend to be able to electrify those fleets. And so that's -- I think we've got sort of 40, I think, in operation now, [ Janet ], I think from 30 in operation already, and we've got a sort of an investment in a business called KleanDrive, which is another one of these sort of adjacencies where we're trying to use our sort of scale and expertise to be able to help monetize the benefit of being a leader in this electrification journey for large fleets. And it's those sort of factors combined means that our overall CapEx, therefore, should be a lower number on a go-forward basis. But clearly, in the shortest term, whilst we've been successful in accessing government funding, which is very important to us in order to be able to continue this accelerated journey, then that CapEx level is generally higher. And you can see it from our average fleet age being down sort of just over 8.8 years currently versus starting out 11 years as early as 4 years ago. Graham Sutherland: And then on the TOC access, I mean, as we said during the presentation, we expect both of them to be transferred by the end of full year '27. Nothing has been announced by the government, but that's a kind of working assumption at this point. And as Ryan said, on the kind of cash upgrade number that we put out there is really a function of better operating performance and a little bit more longevity on some of our contracts, which is a positive. And I think it is worth saying as well that the operational performance, particularly Avanti in terms of what they can control outside of infrastructure failures has been very, very good. It's a significant step forward over the last 12 months and all credit to the team performing well above the industry averages on those metrics. So in terms of cancellations. So that obviously has a benefit as well in the short term. So I think general, just improved performance and contract longevity is really what's driving that upgrade. Any further questions in the room? Okay. Any questions on the web? Ryan Mangold: Currently no questions on the webcast. So I'll hand back for closing remarks. Graham Sutherland: Okay. Well, look, thanks, everyone, for coming along today, and thanks for all the questions. It's been fantastic to deal with them. And then look, the company continues to push forward and grow its key financial metrics, and we intend to continue doing that. So thank you very much for your time today.
Operator: Hello, and thank you for standing by for Baidu's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the meeting over to your host for today's conference, Juan Lin, Baidu's Director of Investor Relations. Juan Lin: Hello, everyone, and welcome to Baidu's Third Quarter 2025 Earnings Conference Call. Baidu's earning release was distributed earlier today, and you can find a copy on our website as well as on Newswire Services. On the call today, we have Robin Li, our Co-Founder and CEO; Julius Rong Luo, our EVP in charge of Baidu Mobile Ecosystem Group, MEG; Dou Shen, our EVP in charge of Baidu AI Cloud Group ACG; and Henry Haijian He, our CFO. After our prepared remarks, we will hold a Q&A session. Please note that the discussion today will contain forward-looking statements made under the safe harbor provisions of the U.S. Credit Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. For detailed discussions of these risks and uncertainties, please refer to our latest annual report and our filings with SEC and Hong Kong Stock Exchange. Baidu does not undertake any obligation to update any forward-looking statements, except as required under applicable law. Our earnings press release and this call include discussions of certain unaudited non-GAAP financial measures. Our press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures and is available on our IR website at ir.baidu.com. As a reminder, this conference is being recorded. In addition, a webcast of this conference call will be available on Baidu's IR website. I will now turn the call over to our CEO, Robin. Yanhong Li: Hello, everyone. In Q3, Baidu Core reported total revenue of RMB 24.7 billion, AI Cloud revenue reached RMB 6.2 billion, increasing 21% year-over-year sustaining value growth momentum. Apollo Go's growth accelerated sharply. We delivered over 3 million fully driverless operational rides in Q3, representing 212% year-over-year growth, up from 148% last quarter. This quarter demonstrated how AI is driving transformative value across our business. From enterprise services to consumer-facing products to smart mobility, our AI capabilities are delivering proven tangible impact at scale. Starting with the enterprise side, where our AI Cloud business continues to scale with healthy momentum and deliver measurable business impact. In Q3, AI Cloud continued its strong growth trajectory. Within AI Cloud, the areas most central to AI achieved the fastest growth. In particular, subscription-based revenue from AI accelerator infrastructure surged to 128% year-over-year, becoming the primary driver of AI Cloud's expansion. This reflects both a healthy shift towards a more recurring, structurally healthier revenue model and the strong demand for our AI products and solutions. Our ability to serve this growing demand stems from our early and strategic deployment across Baidu's full stack in AI architecture, spanning infrastructure, framework, models and applications, which allows us to support enterprises at every stage of their AI journey. At the infrastructure layer, our AI infrastructure is among the most advanced in China powered by a diverse mix of domestic and international high-performance computing resources, including our own self-developed AI computing architecture. Through continuous technical innovation, we drive performance and efficiency improvements while consistently reducing inference costs. Additionally, our industry-leading resource management capabilities significantly boost utilization and scalability. These advantages make our AI infrastructure reliable, scalable and highly cost effective for enterprise clients. And the model layer, we feature our self-developed early foundation model, which continues to iterate rapidly. At the recent Baidu World 2025, we unveiled ERNIE 5.0, our first native omni-model, foundation model with exceptional performance in omni-model understanding, creative writing and instruction following. ERNIE not only represents the cutting edge of our AI technology, but also serves as a backbone behind much of the AI-driven innovations across our businesses. At the application layer, we have a range of AI applications tailored to enterprise business needs. Let me share some examples. The first is [ Famou ] or FM agent, a self-evolving agent, we recently launched that significantly improved enterprise efficiency; built on ERNIE, it autonomously explores countless possibilities and continuously evolve its strategies to identify best solutions for highly complex, constantly changing real-world problems. FM agent is now deployed across industries including transportation, energy, logistics and ports, optimizing complex operations that traditional approaches struggle to handle. Its capability is particularly valuable in China, where we have diverse industrial sectors with numerous scenarios demanding efficiency improvements, when you can meaningfully boost efficiency across such varied use cases, the social impact is profound. Another example is the Daniel Wu English coach, an ERNIE powered digital employee we created for Yashi Education, featuring the lightness of the well-known actor. It enables users to engage in one-on-one real-time English conversation practice anytime, anywhere. This directly addresses a key challenge. Yashi's users require frequent on-demand speaking practice, which is difficult to scale with human instructors. The digital employee provides unlimited availability and an immersive engaging learning experience. Besides enterprises, our AI applications are creating value for individuals by enhancing productivity. Baidu Wenku and Baidu Drive, our largest AI applications for individuals, have been revitalized with AI. Their combined MAU has approached 300 million. In August, Wenku and Drive jointly launched a general-purpose AI agent platform that orchestrates hundreds of specialized agents to complete complex end-to-end tasks through simple natural language interactions. The platform has gained strong traction since launch, demonstrating how AI can meaningfully enhance personal productivity at scale. In the physical world, autonomous driving exemplifies the transformative value of AI, unlocking new possibilities for mobility, safety and efficiency. In Q3, Apollo Go's growth significantly accelerated to new heights. During the quarter, we provided over 3 million fully driverless operational rides to the public, representing a remarkable 212% year-over-year surge compared to 148% growth last quarter. In October, weekly average fully driverless operational rides exceeded 250,000, marking one of the highest levels achieved in real-world Robotaxi operations globally. To date, our fleets have accumulated over 240 million autonomous kilometers with more than 140 million of those being fully driverless, maintaining an outstanding safety record throughout. Achieving this rapid expansion while delivering exceptional safety performance is a powerful validation of our technology's maturity and operational capabilities. We are proud to see our decade-long commitment to autonomous driving now bearing fruit in large-scale operations. Reaching this scale requires maturity across multiple fronts, advanced technology, a rigorous and widely recognized safety record, demonstrated business viability, deep operational expertise and the ability to expand rapidly. These years of unwavering investment have not only given us a first-mover advantage, but more importantly, have built comprehensive capabilities that position Apollo Go as the undisputed global leader in this field. With this strength, Apollo Go has now entered a phase of rapid global expansion. As of October, Apollo Go's global footprint expanded to 22 cities, an increase from 16 last quarter. In October, Apollo Go entered Switzerland through a strategic partnership with PostBus, the country's leading public transport operator. Together, we plan to launch autonomous ride-hailing services in Eastern Switzerland, representing a key step in our European market expansion and another milestone in our global journey. In the Middle East, we secured one of the first fully driverless commercial operation permits in Abu Dhabi recently and deepened our collaboration with local partners. In Dubai, Apollo Go was granted exclusive authorization to conduct self-driving trials on open roads at the fourth Dubai World Congress for self-driving transport in September. RT6 provided trial rides to global attendees, including government officials, business leaders, media and investors, showcasing our technology's maturity on an international stage and demonstrating our global leadership. In Hong Kong, where Apollo Go has established by far the strongest presence in right-hand drive Robotaxi markets, we expanded our open road testing zones to include Kolon and Kung Tong District recently, further strengthening our position in the strategically important market. These milestones spanning Europe, the Middle East and Asia validate both our technology's adaptability and our ability to partner effectively with leading local operators in different regulatory environments. Looking ahead, we will expand to more markets with strong commercial potential and partnership opportunities, maintaining our unwavering focus on safety and operational excellence as we work toward making smart mobility widely accessible. In our mobile ecosystem, agents and digital humans represent AI-native monetization innovations that are transforming our online marketing business, creating substantial value for advertisers through higher engagement, better lead conversion and stronger ROI. Our agents help advertisers effectively clarify user intent through intelligent multi-round conversations and quickly find out the most relevant high-quality sales leads. This ensures advertisers receive more precise and qualified leads compared with traditional approaches. Building on this capability, agents have evolved into multiple forms; tech-based, voice-enabled and visually-embodied digital humans, each designed to address different scenarios and interaction needs. Such versatility enables advertisers to choose the most effective format for their specific use cases, achieving broader scenario coverage and higher conversion efficiency. As a result, agents have gained strong traction across diverse industries, including healthcare, business services and lifestyle services. In September, around 33,000 advertisers generated ad spending through our agents on a daily basis. Digital humans also saw strong momentum. Powered by ERNIE, our digital humans provide 24x7 AI-powered live streaming for advertisers at low cost, making professional live streaming accessible across more scenarios and industries. The technology continues evolving, delivering greater realism, more natural interaction and real-time engagement with viewers. This enables performance that surpasses human hosts in many cases, making our digital humans increasingly attractive to advertisers. Adoption has broadened beyond merchants to sectors such as healthcare, automotive and legal services. We are seeing both existing clients increase their budgets and new clients rapidly coming on board. In September, the number of digital humans live streaming on our platform almost tripled year-over-year, underscoring quick adoption across industries and growing monetization potential. These innovations are already generating significant revenue with fast growth rates. In Q3, combined revenue from agents and digital humans reached RMB 2.8 billion, up 262% year-over-year, validating the strong market appetite for our AI native monetization approaches. Looking ahead, we see substantial opportunities to scale these innovations further, broadening adoption across more verticals and deepening penetration with existing advertisers. Now let me review the key highlights for each business. In our AI Cloud business, our client portfolio continued to improve in Q3, demonstrating deeper collaboration across the board. Leading enterprise clients increased spending and expanded usage beyond AI infrastructure. Mid-tier enterprise clients delivered healthy growth with both subscription-based revenue and client count rising. Several key verticals saw strong momentum. In embodied AI, our client base expanded to 35 from 20 last quarter, covering nearly all major industry players in China. The automotive vertical also delivered strong growth with revenue nearly doubling year-over-year. In addition, this quarter, we entered into new collaborations with leading players, including Neolix, a major provider of autonomous delivery vehicles in China. Collectively, these results affirm the broadening adoption and strong recognition of Baidu AI Cloud. To address fast-growing demand, we strategically upgraded our MaaS platform Qianfan to be agent-centric. Qianfan is now positioned to provide not only leading model services with a constantly enriched model library, but also cutting-edge agent development capabilities and best-in-class agent infrastructure. By integrating high-quality proprietary and third-party capabilities and tools, Qianfan enables seamless agent creation and empowers enterprises to accelerate AI native application development. At the application level, we are driving productivity gains, both internally and externally. Internally, our developers widely leverage Comate, our AI coding assistant for developers. In September, AI contributed to over 50% of new code generation under developer oversight substantially improving our overall engineering and R&D productivity. Comate exemplifies our belief that AI should liberate humans from repetitive tasks and deliver immediate efficiency gains. Externally, we are democratizing AI through Miaoda, our no-code platform. After continuous capability enhancements, we launched the Miaoda's International version named MeDo in November, bringing powerful no-code capabilities to global users. By removing barriers like specialized training, we aim to empower more people worldwide to innovate and create with AI. On intelligent driving, Apollo Go provided 3.1 million fully driverless operational rides in Q3, up 212% year-over-year. As of November 2025, cumulative rides provided to the public have surpassed 17 million. In terms of geographic expansion, Apollo Go added 6 new cities, bringing its global footprint to 22 cities as of October 2025. In Chinese Mainland, Apollo Go has already achieved 100% fully driverless operations in multiple cities including Beijing, Shanghai, Shenzhen, Chengdu, Chongqing, Wuhan, Haikou, Sanya and more. These are not pilot zones, but represent real services already open to the public, which speaks to the maturity of our technology and operation. On our asset-light model and domestic partnerships, we also made good progress this quarter. The asset-light approach allows us to expand our autonomous driving services through partnerships and facilitate faster and more capital-efficient expansion. Following the launch of fully autonomous vehicle rental services with CAR Inc, Apollo Go now enables cross-city travel in Hainan province with fully driverless rental vehicles, offering users a differentiated experience, not typically available through traditional car rental services, particularly for tourism and leisure travel. In addition to our partnership with Hello Ride, we achieved scaled fully driverless operations in 2 cities in China, further validating the feasibility of the asset-light model. Looking ahead, we will continue to expand rapidly while prioritizing safety, accelerating the adoption of autonomous ride-hailing services across broader markets. In our mobile ecosystem, the AI transformation of Baidu Search continued to progress in Q3. At the end of October, roughly 70% of mobile search result pages contain AI-generated content. We believe this represents an optimal and sustainable level. This quarter, we prioritized enhancing the quality of multimodal content within AI search results while expanding our overall content ecosystem. AI generated multimodal content saw rapid growth in both volume and quality. In particular, with daily AIGC video generation consistently at the scale of millions, our total AIGC video content continues to expand quickly while daily distribution within Baidu App is also seeing strong growth. As content supply improves, users experience richer, more relevant and engaging search results, user metrics continue to improve. In September, Baidu App MAU reached 708 million, up 1% year-over-year. The daily average time spent per user in Q3 increased 2.3% year-over-year. We are also extending our AI search capabilities to external partners through the Baidu AI search API, which enables integration of our industry-leading search technology that delivers superior accuracy, authority and comprehensiveness. Leading companies such as Samsung, Xiaomi and Honor have already adopted the API. This strategic initiative expands our technology's reach beyond our own ecosystem, unlocking new business models and creating broader value across the industry. Underpinned by our full stack AI capabilities, each business group within Baidu has seen rapid progress with AI driving both product innovation and business growth. From an AI-native perspective, our portfolio cuts across business groups with a comprehensive range of AI-powered businesses from AI Cloud Infra to AI Applications, such as Baidu Wenku and Baidu Drive and to AI native marketing services, including agents and digital humans, all of which are showing strong growth momentum. In the physical world, Apollo Go, our largest AI application continues to scale rapidly, and these are just a few examples, underscoring the broad-based growth of our AI-powered businesses and the meaningful business impact our AI capabilities are already delivering at scale. Looking ahead, we will continue to expand our AI-powered revenue streams and strengthen our position to capture the long-term opportunities ahead. We are confident that our AI capabilities will bring even greater transformative value across our portfolio in the years to come. With that, let me turn the call over to Henry to go through the financial results. Haijian He: Thank you, Robin, and hello, everyone. Robin just mentioned our AI-powered businesses, and I'd like to elaborate. Based on ongoing feedback from investors and to better reflect valuation drivers based on our current portfolio, we are introducing a new AI native view this quarter cut across business groups to track AI-empowered assets company-wide. This new view organized our business according to the nature of our products and services, helping investors better understand the fundamental valuation drivers across our diverse product and service offerings. Going forward, we will provide business updates through this AI native view on an ongoing basis, while continuing to disclose results under the existing reporting methods, giving investors complementary lenses to assess the value of our portfolio. From this AI native view, we have a rich array of AI in power assets. We are highlighting 3 categories this quarter. AI Cloud Infra, AI applications and AI native marketing services. First, AI Cloud Infra, which refers to the AI infrastructure and platform services we provide to enterprises and public sector. In Q3, revenue from AI Cloud Infra reached RMB 4.2 billion, up 33% year-over-year. We operate one of China's most advanced AI accelerator infrastructure, enabling highly efficient and cost-effective training and inference across diverse enterprise workloads. Within AI Cloud Infra, subscription-based AI accelerator infrastructure revenue grew 128% year-over-year. Second, AI Applications. These are AI-native or AI-powered product offerings addressing specific use cases for individuals and enterprises, including our flagship software products such as Baidu Wenku, Baidu Drive and digital employee. AI is transforming how applications create value, enabling far more powerful capabilities that address real-world scenarios more effectively. We built a leading and comprehensive portfolio across both individuals and enterprises. Most of our AI applications are based on sticky subscription models, delivering high-quality revenue. In Q3, AI Applications generated revenue of RMB 2.6 billion. Third, our AI native marketing services, such as agents and digital humans continue to scale rapidly. This represents our second growth curve beyond our legacy business. These innovative products are gaining strong traction with customers seeking performance-driven AI-native solutions. Customers are increasingly willing to pay a premium for cutting-edge AI technology that delivers measurable improvements in productivity, marketing efficiency and ROI. In Q3, revenue from AI-native marketing services reached RMB 2.8 billion, representing a robust 262% year-over-year increase, accounting for 18% of Baidu Core's online marketing revenue. Now let me walk through the details of our third quarter financial results. Total revenues were RMB 31.2 billion, decreasing 7% year-over-year. Revenue from Baidu Core was RMB 24.7 billion, decreasing 7% year-over-year. Baidu Core's online marketing revenue was RMB 15.3 billion, decreasing 18% year-over-year. Baidu Core's non-online marketing revenue was RMB 9.3 billion, up 21% year-over-year. Driven by the boost of AI Cloud business within Baidu Core's non-online marketing revenue, AI Cloud revenue was RMB 6.2 billion, increased by 21% year-over-year. Revenue from iQIYI was RMB 6.7 billion, decreasing 8% year-over-year. Cost of revenues was RMB 18.3 billion, increasing 12% year-over-year, primarily due to an increase in costs related to AI Cloud business and content costs. Excluding impairment of long-lived assets, operating expenses were RMB 11.8 billion, increasing 5% year-over-year. And Baidu Core's operating expenses were RMB 10.4 billion, increasing 5% year-over-year. Baidu Core SG&A expenses were RMB 5.7 billion, increasing 14% year-over-year, primarily due to an increase in expected credit losses and channel spending expenses. SG&A accounted for 23% of Baidu Core's revenue in the quarter compared to 19% in the same period last year. Baidu Core R&D expenses were RMB 4.8 billion, decreasing 3% year-over-year. R&D accounted for 19% of Baidu Core's revenue in the quarter, which was basically flat from last year. Impairment of long-lived assets was RMB 16.2 billion, attributable to an impairment loss of Core asset group with our rapid progress in high-performance computing capabilities. We proactively conducted a comprehensive review of our asset base and impaired including, but not limited to, existing infrastructure that no longer aligns with current computing efficiency requirements. This results in a healthier and more optimized asset portfolio that better supports the future growth of our AI native business. Operating loss was RMB 15.1 billion. Baidu Core's operating loss was RMB 15.0 billion and Baidu Core's operating loss margin was 61%. Excluding impairment of long-lived assets, operating income was RMB 1.1 billion and Baidu Core operating income was RMB 1.2 billion. Non-GAAP operating income was RMB 2.2 billion. Non-GAAP of Baidu Core operating income was RMB 2.2 billion, and non-GAAP Baidu Core operating margin was 9%. Total other income, net was RMB 1.9 billion compared to RMB 2.7 billion in the same period last year. Income tax benefit was RMB 1.8 billion, compared to income tax expense of RMB 814 million in the same period last year. Net loss attributable to Baidu was RMB 11.2 billion and diluted loss per ADS was RMB 33.88. Net loss attributable to Baidu Core was RMB 11.1 billion, and net loss margin for Baidu Core was 45%. Excluding the impact of impairment of long-lived assets, net income attributable to Baidu was RMB 2.6 billion, and net income attributable to Baidu Core was RMB 2.7 billion. Non-GAAP net income attributable to Baidu was RMB 3.8 billion. Non-GAAP diluted earnings per ADS was RMB 11.12. Non-GAAP net income attributable to Baidu Core was RMB 3.8 billion, and non-GAAP net margin for Baidu Core was 16%. We define total cash and investments as cash, cash equivalents, restricted cash, short-term investments, net long-term time deposits and held-to-maturity investments and adjusted long-term investments. As of September 30, 2025, total cash investments were RMB 296.4 billion, and total cash and investments, excluding iQIYI were RMB 290.4 billion. Operating cash flow was RMB 1.3 billion, and operating cash flow, excluding iQIYI was RMB 1.5 billion. Baidu Core had approximately 31,000 employees as of September 30, 2025. With that, operator, let's now open the call to questions. Operator: [Operator Instructions] Our first question today comes from Alicia Yap with Citigroup. Alicis a Yap: My question is on ERNIE 5.0 that was unveiled at Baidu World recently? And then so how will the new model drive the next stage of application such as the digital humans? And what are the key focus area for earnings, future iterations and also the differentiation? Yanhong Li: Alicia, this is Robin. Over the past couple of years, I've been repeatedly saying that we're taking an application-driven approach when it comes to earnings iteration. At the Baidu World just a few days ago, we unveiled ERNIE 5.0, our first native omni-model foundation model. It has reached world-class levels in omni-model understanding, creative writing and instruction following, which are very important capabilities to our current and future product portfolio. From ERNIE 4.5 and ERNIE X1 in March to ERNIE 5.0 in November, ERNIE keeps getting better. Digital humans are a good example. Powered by ERNIE, they deliver fluent, contextually accurate and highly expressive dialogue. These are capabilities rooted in ERNIE's language strength. Beyond language, our model also drives visual realism, appearance, movement and even subtle micro expressions, all synchronized with the conversation. When these elements come together, the performance of our digital humans is truly exceptional and genuinely persuasive, capable of driving user engagement and purchasing decisions. ERNIE also powers FM agent, our self-evolving agent that significantly improves enterprise efficiency. It has proven to be very effective in industries like manufacturing, energy, finance, transportation and logistics. Similarly, our AI search and cloud business benefit from ERNIE's capabilities, too. Although ERNIE has delivered remarkable results for these applications, we see a lot of room for improvement. We like to see digital humans sell better than real humans in all kinds of live streaming e-commerce across many product categories. We like to see FM agents find better and better solutions in more complicated scenarios in all industries. We like to see AI-generated content to match users' interest better than KOL-generated content. We like to see ERNIE-based agents to be able to tell which piece of content has better quality regarding certain topics and so on and so forth. These are the areas where none of the existing models do a good job, not even close. So we aim to solve this problem. The application-driven approach actually reflects our deep conviction in where AI value will ultimately reside. While economic value today sits largely at the infrastructure layer, in a healthier AI ecosystem, the greatest value should come from applications where products deliver real impact to users, advertisers and enterprises. Going forward, I think no foundation model can be better than anyone at any aspect. We will continue to focus on making ERNIE strongest where it matters most for our portfolio. Baidu has always been a company with strong belief in technology, and we will continue investing decisively in areas where technology can create real measurable value. So staying close to applications ensures a sustainable path forward for AI development. Operator: And our second question today comes from Lincoln Kong at GS. Lincoln Kong: So my question is about the Cloud business. So in the third quarter, we have seen Cloud growth has slightly moderated. So are we seeing any changes in terms of the Cloud demand? And should we expect a re-acceleration in the coming quarters? So what's your outlook for the next year? And what are the key drivers that should support the sustainable growth of our cloud business? Dou Shen: This is Dou. Thank you, Lincoln. If you look at our year-to-date performance, our Cloud business is growing well above the industry average. Well, for quarter-to-quarter, there can be some variability, but the overall trend is strong, and we remain very confident about this growth trajectory going forward. On the demand side, enterprises are applying AI across every aspect of the operations, driving strong broad-based demand for AI-centric Cloud services. Within AI cloud, the area most closely tied to AI workloads is scaling the [indiscernible]. Our clients are using our cloud not only for model training, but increasingly for inference tasks. In Q3, AI Cloud Infra revenue reached RMB 4.2 billion, up 33% year-over-year, outpacing overall cloud growth. And the subscription-based AI accelerator infrastructure revenue grew 128% year-over-year, accelerating from around 50% last quarter. This results both strong -- reflects both strong underlying AI-driven demand and a healthier revenue mix. This momentum is supported by our full-stack AI capabilities. At the infrastructure layer, our high-performance AI infrastructure, especially self-developed AI computing architecture continues to see strong adoption driven by superior performance, efficiency and cost effectiveness. Many can start with AI Infrastructure and then expand to additional offerings over time. Also, our Qianfan MaaS platform has been upgraded to be agent-centric. With expanded model libraries, integrated tools and strengthened support for complex agent workflows, Qianfan provides best-in-class agent infrastructure, enabling enterprises to easily build and deploy AI agents at scale. At the application layer, we provide applications that can be readily applied to real business scenarios. Our cloud growth is not just about investment in AI infrastructure, we attach huge importance to applications. We have a comprehensive portfolio of AI products and solutions that is growing very fast, including digital employee, Yijian, Miaoda, FM agent and so on. So we firmly believe AI applications will create substantial value in our cloud businesses in the long term. So to sum up, if we look at our cloud business on an annualized basis, we believe that our full-stack AI capabilities and the strong demand for AI-centric cloud services will enable healthy, scalable and sustainable growth in the future. Thank you. Operator: And our next question comes from Alex Yao with JPMorgan. Alex Yao: The Baidu application evolves into an AI application and web search becomes a building feature for AI chatbots. The line between search and chatbot is getting blurry. How are -- based on your observation, how are user behaviors changing? And what is your competitive strategy going forward? Yanhong Li: Alex, let me answer your questions. And AI chatbot actually [Technical Difficulty] and evolve very quickly. So it's necessary to stay flexible to offer different products for different scenarios. And within Baidu, we leverage the chatbot capabilities through 2 complementary offerings. The first one is the ERNIE assistant, which is the built-in chatbot inside the Baidu App. This supports multi-round conversations function, calling and thanks for its deep integration with search. Since many users assess the ERNIE assistant directly from search, so you can draw on query contacts and interaction history to deliver a more relevant and personalized answers. It also connects to a set of tools through MPT, allowing the users to move seamlessly from information discovery to task compaction. And the ERNIE assistant is growing quite fast in our app. You can see that the conversation logs have increased around fivefold year-over-year and the DAU has surpassed 12 million with a very strong month-over-month momentum. And we expect this trend to be further continued in the coming few quarters. In parallel, we also offer the ERNIE bot as a stand-alone chatbot application. While it shares Core capabilities behind ERNIE assistants, the ERNIE bot takes an experimental and innovative approach with a near-term focus on improving retention and long-term ambition to compete at the forefront of the chatbot category. And for example, it provides some cutting-edge multimodel features such as the AI images or [ comic-style ] generations which have been especially popular among the younger users. And looking ahead, we believe the chatbots are not only all ultimate form of AI applications, the future of AI interactions will be multimodel real-time generative and interactive. And for example, at the most recent Baidu World, we have showcased the upgraded [indiscernible] digital human, which is capable of the instant interactions through the real-time voices and video like live conversations. As many of you may recall that we even had a very small technical hiccup during the live demo, which actually proved that it was truly real time and not prerecorded. And once resolved the digital human responding very vividly and deliver dynamic back and forth conversations that feel generally human. So we will continue to bring these advanced capabilities into search, making it more intelligent, personalized and capable of completing tasks. This continuous innovation is how we intend to capture the long-term opportunities in the AI area and strengthen our competitive advantages. Thank you, Alex. Operator: Our next question today comes from Gary Yu of Morgan Stanley. Gary Yu: And also appreciate the additional disclosure on AI-powered businesses. Could management share more on the growth outlook and also the profitability of Baidu new AI-powered businesses? And how will these categories help accelerate our overall revenue growth going forward? Haijian He: Thank you, Gary. This is Henry. Let me provide some background on this new AI-native views. Based on the investor feedback, we are seeing a need for greater transparency into our high-growth AI businesses. These views organize our portfolios by product nature, giving investors clearer visibility into the underlying value drivers. We will maintain both this AI native view and our existing reporting methods in parallel, offering complementary perspectives on our business performance. From this new perspective, I think we have a rich portfolio of AI-empowered assets. Let me give some highlights here. First of all, for the AI Cloud Infra, this part includes our industry-leading AI infrastructures containing self-developed AI computing architecture, cloud infrastructure and a best-in-class MaaS platform. As AI adoption accelerates, demand for robust infrastructure is growing and our differentiated capabilities position us well. We are capturing long-term sustainable revenue and expect margin to improve as utilization increases. Secondly, for the AI applications, this part includes flagship products, for example, of our Baidu Wenku and Baidu Drive. AI has significantly enhanced functionalities across these products. We have one of the China's broadest AI application portfolios, and most of these applications are subscription based and contributing to higher quality revenue and margins. Third, for the AI native marketing services, including agents and digital humans, this reflects how AI unlock greater efficiency and drive the second growth curve in our advertising business throughout enhanced engagement, conversation and ROI. This quarter, AI-native marketing services reached 18% of our Baidu Core's online marketing revenue, up from 4% a year ago, and we expect penetration to continue rising as adoption broadens. Customers are embracing these result-driven AI solutions and are willing to pay for tangible gains in productivities and marketing efficiency. Importantly, this AI-empowered business reinforce one another across Baidu's ecosystem. And AI embeds deeper across products. So we expect accelerating growth of these businesses. So when we're looking ahead, we remain confident in their revenue and profitability potential, which we believe will support for a stronger growth trajectory for Baidu over time. Thank you, Gary. Operator: And our next question today comes from Miranda Zhuang with BofA Securities. Xiaomeng Zhuang: The question is about the Robotaxi business. So Apollo Go has been accelerating growth this year. So looking ahead, can management update us on Apollo Go for next year and beyond, including your global expansion plans. And how do unit economics look across different markets? And how does management view the long-term profitability potential of the Robotaxi business? Yanhong Li: This is Robin. If you remember, our Robotaxi's journey started in 2013. So this is our 13th year. Today, Apollo Go is one of the world's largest robotaxi service providers. And as of November, we have provided over 17 million rides cumulatively, a level very few players globally have achieved. In China, we are the undisputed market leader. Through the first 3 quarters this year, our ride volumes were over 15x higher than our nearest domestic peers according to publicly disclosed data. All these rides are fully driverless, demonstrating unmatched operational scale and technological excellence. Scale matters a lot. The reason we are able to achieve a leading position in autonomous driving technology on a global basis is that we have the scale. We have encountered many issues, corner cases others have not seen. We were able to train our models to handle those cases and become smarter and smarter. I think robotaxi has reached a tipping point, both here in China and in the U.S. There are enough people who have chance to experience driverless rides and the word of mouth has created positive social media feedback, which I think will propel the opening or loosening of related regulations. For 2026 and beyond, we will continue to scale up our operations, both domestically and internationally. We will add more cars in our existing cities. We will expand to more cities. We will accumulate more fully driverless mileage and further improve our technology based on the operational data we gathered on the road. And yes, we need more data to train our models. Better models make the cars safer and faster. We will continue to drive down the cost per mile through technological innovation and operational efficiency. Right now, a few cities have achieved positive unit economics. As we scale, we hope to see more cities turn positive in 2026. Also, we're scaling through flexible business models, including asset-light models, we are very -- we are ready to enter any city quickly once regulatory and market conditions allow. As of October, Apollo Go's global footprint reaches 22 cities with significant progress in Europe, Middle East and Hong Kong. We're confident that UE will continue to improve as we scale. So in summary, for 2026 and beyond, we expect strong growth across 3 areas: rapid growth in ride volumes and [ fee ] size, geographic expansion in new markets -- into new markets and accelerated adoption of new business models. We believe Apollo Go is well positioned for continued global expansion and long-term profitability. Thank you. Operator: And our next question today comes from Thomas Chong of Jefferies. Thomas Chong: My question is about how is AI search monetization progressing? And what feedback are you seeing from advertisers and users? Can AI native marketing services offset traditional ad business? And how should we think about core advertising profitability going forward? Rong Luo: Thomas, this is Julius. In October, nearly 70%, 7-0 of the mobile search result pages have content AI generated and multi-model first content. This format is quite unique to us, and we are the first or maybe only one doing this. We expect this level to remain relatively stable as we have largely covered the query types where the AI meaningfully improved the user experiences. Our focus now has shifted to improving the quality, particularly the rich media content like images, videos, and we are seeing very clear improvement in content quality this quarter, which translate directly into the better user experiences. And we can see that the users retention is higher and the users exposed to the AI search results are initiating 6% more queries and spending more time with us. This tells us that users are finding real value in AI search and engaging more deeply. On monetization, we are actively testing and seeing some encouraging early results. First, we are testing MCP in the commercial modules in the AI search. For example, our e-commerce MCP module peaked nearly RMB 6 million in daily GMV during the recent Double 11 shopping festival. This is a very early stage, but the results are quite encouraging. Second, agents for advertisers are generating over RMB 25 million in daily revenue, and we expect this to grow as we bring more agents into the earning assistance as well. And third, we have started testing the digital human live streaming with the real-time interaction capabilities, try to explore the new ways to create engaging commercial experiences. And looking ahead, we see the significant monetization potential for AI search, and we will continue testing actively. However, our near-term priority still remains the user experiences over immediate monetization. This AI transformation is necessary for long-term competitiveness and will inevitably create a near-term pressure on both revenue and margins. So we believe this is the right trade-off to capture the large opportunities ahead. Thank you. Operator: And our final question today comes from Wei Xiong with UBS. Wei Xiong: Actually, I have a few questions here. First, just a quick one. Could you please explain this quarter's asset impairment and its rational? And second, what are your CapEx plans for next year? And how should we think about the margin trajectory as AI revenues grow? And lastly, could we please have an update on shareholder returns once the current buyback program expires? Haijian He: Thanks, Xiong. First of all, on your first question on asset impairment, the background is we are accelerating investments in the latest AI computing technologies without any hesitation. So as part of this effort, we have conducted a comprehensive review of our infrastructure portfolio. Some of the existing assets no longer meet today's computing efficiency requirements. So we actually proactively did some impairments. After this onetime of impairment, our asset base and portfolio profile is in a much healthy position and better aligned with advanced AI computing demand and higher value application scenarios going forward. Second, on the capital expenditures, we are maintaining a high level of investment. Just to give you one example. Since Baidu launched ERNIE in March of 2023, we have invested well above RMB 100 billion in the AI investment. Going forward, we will continue increasing our investment intensity in the AI area. We do expect to see greater operational leverage as our AI business scales. We're executing on 3 fronts. First of all, the asset review and impairments have left us with a leaner and more efficient asset base. Second, we are investing with a discipline to ensure capital efficiency. And of course, thirdly, we are enhancing utilization of our AI infrastructure, for example, through dynamic allocation of capacity across internal products and external cloud services. So as a result of these initiatives, we believe Q3 represents a low point for margins. Looking to next year, we will strive to improve our non-GAAP operational income and margins as these benefits start to flow through. So on your last point regarding shareholder returns, under the plan and program authorized in 2023, we have already bought back a worth of USD 2.3 billion in shares. We are currently reviewing the future buyback mechanism. We understand we also think it is important to provide a greater certainty and clarity to reduce volatility of buyback programs going forward. We're also actively exploring diversified return mechanisms, for example, setting a dividend policy potentially. Together, these efforts aim to deliver more consistent values to our shareholders. Thank you. Operator: Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may now disconnect.
Operator: Good day, and thank you for standing by, and welcome to Weibo Reports Third Quarter 2025 Financial Results. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the call over to your first speaker today, Ms. Sandra Zhang from IR. Thank you. Please go ahead. Sandra Zhang: Thank you, operator. Welcome to Weibo's Third Quarter 2025 Earnings Conference Call. Joining me today are Chief Executive Officer, Gaofei Wang; and our Chief Financial Officer, Fei Cao. The conference call is also being broadcasted on Internet and is available through Weibo's IR website. Before the management remarks, I would like to read you the safe harbor statement in connection with today's conference call. During today's conference call, we may make forward-looking statements, statements that are not historical facts, including statements of our beliefs and expectations. Forward-looking statements involve inherent risks and uncertainties. A number of important factors could cause actual results to differ materially from those contained in any forward-looking statements. Weibo assumes no obligation to update the forward-looking statement in this conference call and elsewhere. Further information regarding this and other risks is included in Weibo's annual report on Form 20-F and other filings with the SEC. All the information provided in this press release is occurring as the date hereof. Weibo assumes no obligation to update such information except as required under applicable law. Additionally, I would like to remind you that our discussion today includes certain non-GAAP measures, which excludes stock-based compensation and certain other expenses. We use non-GAAP financial measures to gain a better understanding of Weibo's comparative operating performance and the future prospects. Our non-GAAP financials exclude certain expenses, gains or losses and other items that are not expected to result in future cash payments or are nonrecurring in nature or are not indicative of our core operating results and outlook. Please refer to our press release for more information about our non-GAAP measures. Following management's prepared remarks, we'll open the lines for a brief Q&A session. With this, I would like to turn the call over to our CEO, Gaofei Wang. Gaofei Wang: [Interpreted] Thank you. Hello, everyone. Welcome to Weibo's Third Quarter 2025 Earnings Conference Call. On today's call, I will share with you highlights on Weibo's product and monetization in the third quarter 2025. On the user front, in September 2025, Weibo's MAUs reached 578 million and average DAUs reached 257 million. In the third quarter, Weibo's total revenues reached USD 442.3 million, a decrease of 5% year-over-year. Our total ad revenues reached USD 375.4 million, a decrease of 6% year-over-year. Our non-GAAP operating income reached USD 132.0 million, representing a non-GAAP operating margin of 30%. In 2025, our overall corporate strategy continued to focus on enhancing user value sustaining Weibo's leading position in hot topics and the entertainment content ecosystem while reinforcing the competitiveness of our social products. Building on this, we also leverage large language model to enhance our recommendation feeds and search products, aiming to increase our user base and engagement. Next, I'll share with you highlights in Weibo's product operation and monetization in the third quarter. On user growth and engagement, in 2025, our key product revamp is the upgrade of the homepage information feed, which put the recommendation feed as the default core feed. The revamp has largely rolled out in all users by late July. Alongside the information feed revamp, we also optimized our recommendation algorithm, especially for video content recommendation. During the summer vacation, leveraging the active entertainment events and hot topics during the summer vacation, we saw significant improvement in user engagement of the mid- and low frequency-user group. The per capita viewership, time spent and retention of the mid- and low-frequency user group grew double digits quarter-over-quarter, which in turn drove per capita time spent in recommendation feed for the whole user group to increase for Q3 quarter-over-quarter. In the third quarter, we implemented two key strategies. First, we enhanced the algorithm of the recommendation feed to improve user satisfaction with content, which matches their real-time interest. For example, in hot topic distribution, we established user behavior linkage between the recommendation feed and the search function. We use the view and engage with the hot topics in search function. They are showing more precisely targeted content in recommendation feed. This strategy has been proven particularly effective in enhancing engagement and retention among mid- and low frequency users of Weibo. Second, we enhanced our algorithm to better integrate video content into the recommendation feed, driving deeper content consumption. With the homepage information feed shifting from a relationship-based model to a recommendation-based one, video content could be distributed through our recommendation algorithms to reach more precise and broader user group on top of the traditional social distribution mechanisms. As a result, we saw a notable increase in the distribution of original and mid- to long-form video content in the recommendation feed. The enriched mid to long form video content extending user time spent in the recommendation feed and supporting healthy development of the content ecosystems. Meanwhile, we continue to enhance our interest-based content operation, strengthening large-scale content production by content creators around user interest and thereby improving the quality and diversity of content supplied to the recommendation feed. The restructuring of the information feed was strategic significance for Weibo, which is comparable to our transition from the chronological to algorithm-based sorting several years ago. In the short term, user experience for certain user group may face some challenges. However, from a long-term perspective, the increased weight of recommendation content and video content will strengthen Weibo's core competitiveness as a social media platform while laying a solid foundation for the sustainable and healthy development of our content ecosystem. While improving the efficiency of the homepage recommendation feed, we also strengthened social discussion in a relationship feed ensuring its role as the cornerstone of Weibo's differentiated competitiveness. In the third quarter, our efforts focus on two key aspects: driving interaction between content creators and their followers, and stimulating interest-based social engagement among users to fully boost the social engagement across the platform. First, to further drive the interaction between content creators and their followers, we upgraded the core fan mechanism and optimized the content reach and distribution. This significantly improved interaction efficiency in the relationship feed which is measured by the ratio of total interactions versus total viewership, resulting in double-digit growth of this ratio, both quarter-over-quarter and year-over-year in Q3 while further driving content creators' motivation to consistently produce high-quality content in text and image. Second, to enhance ordinary user social interaction around interest-based content, we continue to develop the Super Topics community, focusing on key summer events, concert and anime conventions, which young people are interested in. We encourage users to share meaningful and emotional content around their interest, positioning Super Topics as the front-end useful space for interest-based sharing and interaction. In the third quarter, the number of users who posted and engaged in Super Topics grew double digit year-over-year. This effective initiative has strengthened Weibo's differentiated advantages in text and image, complementing the homepage recommendation feed and contributing to the solid development of the platform's ecosystem. Turning to search products. In the third quarter, we continued to reinforce AI application in search function, focusing on technical infrastructure upgrades and integration across ecosystem scenarios. First, in upgrading technical infrastructure, we continue to enhance intelligent search capability to understand user search intent and content matching capability, which effectively improve the relevance and accuracy of search results and making it easier for users to find desired content. At the same time, we upgraded the search model from conventional onetime information search to continuous exploratory dialogue, enabling users to engage in coherent conversations with intelligent search and enjoy a more intelligent and seamless information across experience. Second, the integration across ecosystem scenarios, we focused on extending intelligent search application in information feed, fostering a Search as a Service user mindset. We deeply integrated intelligent search into the content consumption experience with enhanced content verification and the content summary features. The system leveraged AI to assess the authenticity of the original post, extract key information and provide extended insights, helping users quickly access structured and reliable information while consuming contents. In the third quarter, the MAUs of Weibo intelligent search product exceeded 70 million with its DAU and search queries increasing more than 50% quarter-over-quarter. This momentum not only reflects users' recognition of Weibo's intelligent search product, but also further contribute to the expansion of Weibo search ecosystem. As a result, the total search queries on Weibo increased 20% quarter-over-quarter in the third quarter. Looking ahead, we will continue to deepen the innovative application of AI in search products. On the technology front, we aim to make search more user aware. As for user experience, we strive to deliver a more seamless and intelligent usage journey. And in terms of the ecosystem, service will become more contextually relevant. These efforts will continuously provide users with a smarter, more convenient search experience and further unlock the value of Weibo's content ecosystem. Moving on to monetization. In 2025, the ad product and sales team focused on two main priorities: first, to expand and solidify customers' mindset of choosing Weibo as a go-to platform for content marketing across more industries and clients. Second, to continuously enhance the performance and conversion capabilities of our ad products. In the third quarter, due to the high base effect from the Olympic last year, Weibo's ad revenue decreased 6% year-over-year. From the overall market perspective, thanks to the stimulus policy aimed at driving domestic demand and consumption, e-commerce platform and related industry maintain a relatively high level of advertising spend, which supported our third quarter ad revenues. According to client feedback, after several years of substantial and continuous budget allocation towards performance ad, the bidding for the commercial traffic has become increasingly intense, which pushed their cost upward. In addition, the government recently issued tax policy that limit the cap of the feed ad spend for tax deduction purpose. This dynamic has driven clients to reevaluate their ad budget allocation, placing renewed emphasis on the value of the brand advertising. In particular, marketing approaches such as celebrity endorsement have generally become a key option for clients to consider. In light of this trend, leveraging Weibo's strength in celebrity resources, we aim to better facilitate clients' needs across the full celebrity endorsement and marketing life cycle. We hope to create richer celebrity marketing playbook together with clients, helping them enhance their marketing effectiveness. Let me share more color from an industry perspective. Competitive dynamics within the e-commerce sector has persisted since the second quarter, benefiting from deep partnerships with leading e-commerce platforms. Ad revenues from e-commerce sector achieved notable year-over-year growth in the third quarter. Meanwhile, we have been gradually cultivating partnerships with other business lines within this e-commerce group promoting a more balanced revenue mix and thus laying a solid foundation for the future revenue stability. Ad revenues from the automobile sector sustained year-over-year growth trend in third quarter. Weibo has continued to solidify its strength in the new energy vehicle content ecosystem. Revenue from traditional fuel vehicles also remained stable this year, contributing to improved revenue stability for the automobile industry. In the online game and smartphone sectors, revenue declined due to overall budget contraction. As for the food and beverage, dairy products and footwear and apparel sectors, revenue fell year-over-year primarily due to the tough comparable base from last year's Olympics. However, with the recovery and strengthening of celebrity marketing in clients' mindset, ad revenues from celebrity endorsements continue to grow year-over-year. On the ad product front, we have continually strengthened the application of AI technology across the entire advertising life cycle this year to enhance ad efficiency. By the third quarter, we have deployed AI capabilities throughout the process from the ad creative production and bidding model optimization to campaign performance improvement. Notably, Weibo's AI ad creative platform, Lingchuang, launched in the second quarter has been widely adopted, enabling even scalable and personalized ad production in both text and image formats. Furthermore, in the third quarter, we have extended AI-generated ad creatives to video contents. This upgrade enables intelligent extraction of key highlights for the pre-roll segments and the generation of eye-catching cover images. This not only improved the efficiency and diversity of video ad creative production, but also enhanced targeting precision and user viewing experience. As of the end of October, AI-generated ad creatives accounted for nearly 30% of the consumption. Besides this, to address the common needs of the brand clients, we launched new products via live stream the press conference. We leveraged AI to click live streams in real time, extract the most engaging highlights and transform them into high-quality material suitable for KOL distribution. These highlights are further distributed through our feed ad product, amplifying the overall content reach and influence. This model not only addresses clients' difficulties in efficiently converting live stream content into shareable materials but also enable clients to achieve secondary distribution of valuable live stream content through a combination of high-quality materials and precise targeting. For example, in live stream product launched by a smartphone brand, AI-generated material make up 10% of all materials. It contributed towards much as 30% of total interactions. We plan to roll out this model to more brand clients hosting product launch, thereby further unlocking the potential of AI in brand marketing. In terms of ad performance, the upgraded AI-powered ad performance model has demonstrated impressive results in key scenarios. Experimental data shows that the conversion efficiency of both app download ads and form submission campaigns have improved. AI-powered performance ad models have enabled us to better deliver on client campaign objectives. Entering into the fourth quarter, we will focus on capturing marketing opportunities from sector with high budget visibility such as the e-commerce sector. We will beef up our efforts to further expand the penetration of our brand plus content marketing approach across key industries, sustain the growth momentum in the automobile sector and strive for recovery in the consumer goods. At the same time, we will continue to drive the application of AI in ad creative generation and AI placement optimization with the hope of offering smarter and more efficient advertising solutions to clients of all sizes and thus further strengthening Weibo's differentiated competitiveness in the advertising market. Next, let me turn the call over to Fei Cao for our financial review. Cao Fei: Thank you, Gaofei, and hello, everyone. Welcome to Weibo's Third Quarter 2025 Earnings Conference Call. Let me start with operating metrics. In September 2025, Weibo's MAU and average DAU reached 578 million and 257 million, respectively, with a steady improving DAU versus MAU ratio year-over-year. The modest year-over-year decline in MAU was primarily due to the high traffic base during the Paris Olympic game in the same period last year. On the user product side, in the third quarter, we completed the revamp of our information feed and prioritized the recommendation feed for content consumption. We are encouraged by early signs of improvement in user engagement with interest-based feed and video content on Weibo in addition. User scale and search queries from Weibo intelligent search feature continued to grow robustly quarter-over-quarter with intelligent search MAU exceeding 70 million in the third quarter. This growth was mainly driven by our AI technology upgrades, which allow us to better meet users' content search and discovery needs on the platform. Turning to financials. As a reminder, my prepared remarks will focus on non-GAAP results. Commentary amounts are in U.S. dollar terms and all comparisons are on a year-over-year basis unless otherwise noted. Now let me walk you through our financial highlights for the third quarter 2025. Weibo's third quarter 2025 net revenues were USD 442.3 million, a decrease of 5% or 4% on a constant currency basis. Operating income was USD 132 million, representing operating margin of 30%. Net income attributable to Weibo reached USD 110.7 million and diluted EPS was $0.42. Let me give you more color on third quarter 2025 revenue performance. Weibo's advertising and marketing revenue for the third quarter 2025 was USD 375.4 million, down 6% or 5% on a constant currency basis, while value-added service VAS revenues was USD 66.9 million, up 2% Weibo's advertising business saw a modest decline, primarily due to the high base effect from last year's Paris Olympics. By industry, our top 3 verticals were FMCG, e-commerce and 3C products. In terms of growth drivers, e-commerce, Internet services, automobile and local services were the key contributors. Notably, the e-commerce sector recorded over 50% year-over-year growth, driven by similar policy amid a boosting domestic demand and consumption. We are pleased to see increased ad budget across multiple business lines within these platforms, including traditional e-commerce activities and local service initiatives. Weibo has continued to demonstrate its unique value in driving brand awareness and user acquisition for e-commerce platforms amid intensified market share competition. The automobile sector sustained solid growth this quarter, thanks to Weibo's thriving auto-related content ecosystem, a dynamic EV launch season and stable ad spend from ICE vehicle brands. On the other hand, we faced a significant year-over-year decline in the food and beverage and apparel industry, again, due to the high base effect from the last year's Olympics. And as for 3C products, this year, government-backed trade-in subsidies encouraged many consumers to upgrade their phones or home appliance earlier this year, which leads to softer shipments and lower ad spend from advertisers in the second half. Other underperforming sectors that weighed on overall top line recovery included online games, largely due to a tough year-over-year comparison and overall ad budget contraction in the sector. By ad product category, promoted feed ads remained the largest contributor followed by social display ads and topic and search placements. AI has progressively transformed the entire life cycle of Weibo's ad products from creative generation to ad placement. Notably, our real-time bidding feed products sustained double-digit growth, driven by AI-powered ad tech upgrades that enhanced conversion and ROI for advertisers, particularly for ad download and lead generation campaigns. Ad revenues from Alibaba reported robust growth of 112%, reaching USD 45.5 million in the third quarter. We are pleased with the strong momentum from Alibaba this year, driven by deeper collaboration during key marketing windows and Alibaba's increased ad spend on its local services initiatives. Value-added service VAS revenues grew 2% to USD 66.9 million in the third quarter, mainly due to modest increase in revenues from game-related business and membership services. Turning to cost and expenses. Total cost and expenses for the third quarter was USD 310.3 million, an increase of 3%. Operating income in the third quarter was USD 132 million, representing an operating margin of 30% compared to [ 36% ] last year. Turning to income tax under GAAP measure. Income tax expenses for the third quarter were USD 57.2 million compared to USD 32.2 million last year, primarily due to the recognition of USD 29.4 million deferred tax liability related to equity pick-up gains in the third quarter of 2025. Net income attributable to Weibo in the third quarter was USD 110.7 million, representing a net margin of 25% compared to 30% last year, primarily attributable to top-line pressure. Turning to our balance sheet and cash flow items. As of September 30, 2025, Weibo's cash, cash equivalents and short-term investments totaled USD 2.04 billion compared to USD 2.35 billion as of December 31, 2024. The decrease of Weibo's cash, cash equivalents and short-term investments was mainly resulted from the purchase of long-term wealth management products and the payment of the annual dividend to our shareholders and was partially offset by the operating cash flows in the past 3 quarters this year. In the third quarter, cash provided by operating activities was USD 200 million. Capital expenditures totaled USD 5.1 million and depreciation and amortization expenses amounted to USD 15.4 million. With that, let me now turn the call over to the operator for the Q&A session. Operator: [Operator Instructions] Our first question comes from the line of Alicia Yap of Citigroup. Alicis a Yap: [Foreign Language] Can management share with us the overall advertising outlook for the fourth quarter and also 2026. So any color that you can provide in terms of the growth rate for fourth quarter? And also how should we be thinking about the overall ad revenue growth into next year? And then what is your future strategy for the overall advertising product upgrade? How is AI been helping or will be benefiting the click-through rate or even the advertising monetization and also how AI could be also improving -- help advertisers to improve their ROI. Any color that you can share would be great. Gaofei Wang: [Interpreted] All right. Thank you for the question. So according to the financial report that we have just delivered in Q3, we've been seeing the overall decrease of the ad revenue primarily due to several reasons. The first one is that we had a high base last year due to the Olympic Games. And also, second is that even if we had a poorer performance of the headset industry and the verticals of gaming, and also, we had a little bit better performance from the e-commerce and automotive. But I think that on the overall basis, this is actually the performance within our expectations. Looking forward to Q4, we have been seeing that in the second half of this year, overall speaking, the overall figures and statistics of the consumption-related figures are actually slowing down. And we've been seeing that in some certain provinces and cities, the national subsidy policies have been seeing some kind of headwinds like the limitations on the spending as well as the exiting. So I think that this is going to have a continuous impact on the headset industry as well as the automotive industry next year because we are foreseen a kind of exiting of the national subsidy policy for this industry for certain regions. Okay. So these are some of the uncertainties that we've been witnessing, but still, except for these uncertainties, we could see some of the certainties for next year and also 2026 in specifics. So you know that in 2025, we did not have any hot topics or hot trends or events happening. But in 2026, we are expecting several important events like the Winter Olympics and also the World Cup as well. So this will be actually bringing a better placement of the advertisers from the consumer goods verticals. And you know that in Q3, the decreased performance of the ad revenue primarily was due to the decreased performance of the ad placement from the consumer goods industry. Okay. So as a result, it is very difficult for me to give you a very precise prediction of our performance in 2026. Having said that, in Q4, we've been seeing some of the important things. First of all, is that there are actually fierce -- more fierce competition for the e-commerce industry, especially from the off-line scenario and targeting the life service -- lifestyle service. We used to have -- Weibo used to have actually quite low percentage of the market share in this particular segment. But still, we do see fierce competition going on for the food delivery and lifestyle service as well as the other relevant ones. So that is to say that in Q4, we are expecting a huge demand increase in this particular area. Okay. And also for the e-commerce, of course, I've been already shared some of the colors on this. And second is that in terms of the automotive industry, we believe that it will be actually performing quite good in Q4. But first of all, due to the anti-evolution policies, we've been seeing at some of the customers or advertisers from this particular industry had issues like the price competition or price war. And in the first half of this year, those advertisers did not pretty much focus a lot of their revenues on the product promotion or the mindset establishment. So I think that this situation will be getting better in the second half of the year. I'm talking about the automotive -- I mean headset and also gaming industries. For headset industry, we know that this was primarily impacted negatively by the trend of exiting the national subsidy policy. So in the second half of this year, we'll be seeing that except for Apple, the rest of the other headset makers were having a deteriorating sales volume. And that's the reason why we do see a lower frequency of the new phone launch. And for gaming industry, you could see that from a financial report of NetEase or Tencent, they did not have that lot of new game release in the second half of this year. But of course, they are claiming that in 2026, Q1, we're going to see some of the new games launched from these two major game makers. But still as for whether or not they're going to be allocating more budget on this, this is still uncertain. All right. And second point on the overall strategies. So we're talking about two directions. The first one is that in the previous years, a lot of those budget of advertisements actually was pretty much placed on the performance-based ad and we did not see a lot of spending from those advertisers on the mindset related areas. And also after COVID-19, in order to consume more ad locks, we do see the behaviors of focusing on the live stream e-commerce. So I think that this year, we've seen a very obvious trend that there are more budget allocated to the areas of establishing and building the mindset. So as the traditional advantageous platform on this particular area, Weibo is definitely going to seize this opportunity. And I think that we are going to focus on the hot topics and KOL, especially top notch KOLs in terms of the integrated marketing. So we do actually see the trend of increasing budget from these advertisers on those fronts. Okay. And the second point is on the bidding ad and also performance-based ad. So last year, we've been seeing a decrease of our overall revenue -- ad revenue contributed to the overall ad revenue from the performance-based ad. But recently, in the past years, we've been dedicating a lot of efforts in making wonderful products in the performance-based ad and also increasing and updating our technologies. And also, most importantly, we've been applying a lot of AI technologies to really have a very good boost of the revenue from the performance-based ad. So you can see that in Q3, we had a lot of increase on this area. So because -- not only because of the overall data and traffic and also the adjustments of our strategies, but most importantly, I think that the overall use of the AI technology is really important. So we will be actually expecting a very good increase of this performance-based ad. All right, pretty much for the answer for this question. Operator: The next questions will come from the line of Leo You from CLSA. Yang You: [Foreign Language] I have two questions on the product commercialization. And first is on the strategy and the progress of intelligent search. Do we have the commercialization attempts already in the fourth quarter? And what other AI application could management share? And second question is on the information feed revamp. What are the initial feedback from users' content consumption, engagement? And how would that translate into revenue growth in the future? Gaofei Wang: [Interpreted] So thank you for this question. First of all, we could see that in terms of the intelligent search, as we already said that this has been increased a lot in Q3 in terms of the overall products. So resulting in a very good performance. For instance, in September, the MAU exceeded 70 million. And in terms of the DAU and also the query number, we had a quarter-by-quarter increase of over 50%. So of course, in terms of the monetization of the intelligent search, first point is that we do see a very good increase of the overall intelligence search-based volume, and that was resulted in the performance like in Q3, we had a query increase by about 20% quarter-by-quarter. And this actually provided with us a very good traffic to actually have a better performance on this. And second point is that, of course, at the current stage, we do not have the ability of all the consumers. I mean the customers are not having this particular requirement of placing the ad precisely just based on the intelligent search results. But this did actually provide some of the impacts to the customers because, for instance, we are able to use the GEO technology to actually facilitate better product and better content creations and helping the customers understanding or advertisers in understanding the new product-related issues and some of the other important things and also issues as well. So this is going to be generating a lot of ad assets for our advertisers so that they are able to use in the near future. Of course, this is not going to be directly charging from the customers, but I think in the future, the customers and advertisers are able to put more weight on this particular part of the intelligent search. So I do think that in the future, we are going to see a very good increase, be it the brand-based ad revenue or the overall budget of the performance-based ad. And also, the second question is pretty much based on the information feed. So as we have already stated that we have an updated version or modification of this information-based feed in 2025 and already provided to the users. So we've been already finishing the first stage switch for information feed in July. But of course, it takes time for the users to get used to this and nurture their habit of using. But still, I think that this particular new information feed is going to be very useful and beneficial to the overactivity of the users and also improving the overall retention and the total time spent on the consumption as well. So I think that this is also going to be lowering the threshold for the users of using Weibo. Okay. Of course, I think that this particular kind of modification or the version update is pretty much like what happened years ago from the time spent based to the non-time spent base. And of course, at the current stage, we think that there are a lot of variations between different versions. So it still takes time for the user to adopt this new kind of a platform or it takes time for them to nurture their habits of using. But still, I think that on the overall basis, this did have a lot of benefits impacting the overall consumption behavior. And also, of course, in Weibo, we are going to continuously focusing on the upgrades and optimization of our products as well. Okay. And also, I think that this is very good to have a certain kind of improvements on two fronts. The first front is that, of course, it is going to impact some of the new users using a process of this particular product because it used to be the case that the users need to log on the Weibo and establish following a relationship before they could take any action on consumption of the content. But at the current stage, this particular process is waived so that we are at the same starting point as the other competitors for this particular part. So the users are able to actually consume a very good quality or content at the very beginning. And second is that for the existing users, of course, from an experience standpoint, it still takes time for them to be adopted -- adopting this new concept and also establishing a new using habit. But still, I think that at the current stage, this has primarily given us better opportunities, especially for those new users to take actions on consumption more frequently without even establishing a following relationship as the prerequisite. Okay. And also, I need to add another point, which is the third point that is for the video-based consumption. So we know that in the past, for those of consumers, I think that the videos are actually very difficult for the users to actually consume upon so that was impacting a lot of the original social-based relationship. And you know that in the past, for those content creators, especially the video content creators, it is very difficult for them to establish a social relationship with the users and also consumers as well. So even if on the relationship-based feed, it is also very difficult for those video content creators to expose their content in front of the wide audience. So also for the hot topic search because of the real timeliness of their content, especially the video-based content, it is also very difficult for them to expose their content as well. But now after the change, we could see that we are going to proactively recommending more video-based content to the users. And this is going to be very, very important for Weibo in the long run, be it from a growth standpoint or from the standpoint of enhancing our core competitive edge. Operator: That's the end of the question-and-answer session. With that, I would like to conclude the conference call today. Thank you all for participating. You may now disconnect your lines. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]