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Operator: Welcome to ABN AMRO's Q3 2025 Analyst and Investor Call. Please note, this call is being recorded. [Operator Instructions]. I will now hand the call over to speakers. Please go ahead. Marguerite Bérard-Andrieu: Good morning, and welcome to ABN AMRO's Q3 results presentation. I'm joined today by our CFO, Ferdinand Vaandrager; and our CRO, Serena Fioravanti. After our presentation, we will hold a Q&A session to address all your questions. Let me begin with the highlights of the third quarter on Slide 2 before moving to the announcement of our intention to acquire NIBC. The third quarter was another solid quarter for ABN AMRO. Net profit reached EUR 617 million with a return on equity of 9.5%. The inclusion of HAL contributed EUR 26 million to our results across all products we managed to grow this quarter. Our mortgage portfolio increased by EUR 2.1 billion and corporate loans grew by the same amount. Net new assets increased by EUR 4.3 billion. Cost discipline remains a priority with FTEs declining by 700 in Q3 and by almost 1,000 year-to-date, excluding HAL. Credit quality remained strong with EUR 49 million in net impairment releases reflecting recoveries and improved macroeconomic variables. Our CET1 ratio stands at 14.8%, and we finalized the EUR 250 million share buyback in September. We will review our capital position in Q4 to assess the potential for further capital returns. Now turning to our other announcement of the day. I'm very pleased to announce that we have reached an agreement to acquire NIBC. This acquisition is fully aligned with our strategy and presents a unique opportunity to reinforce our leading position in the Dutch retail market, and accelerate our personal and business banking strategy. NIBC is a well-run, primarily Dutch-focused entrepreneurial bank with a strong specialization in mortgage lending and savings products. It serves around 500,000 retail clients and around 175 corporate clients with a high-quality portfolio mortgage and very low arrears. NIBC will add around EUR 28 billion of mortgages, significantly increasing our scale in these markets, further cementing our leading position in the Dutch mortgage market. Around half of the mortgage portfolio will be off balance as NIBC has an attractive originate-to-manage franchise with long-dated mortgages. The acquisition also brings an attractive savings platform, serving 300,000 clients across the Netherlands, Germany and Belgium. The savings offer an interesting cross-sell opportunity with our investment platform, BUX. Given NIBC's domestic focus and the overlap of service providers, there is substantial potential for cost synergies with limited execution risk. This transaction is expected to deliver return on invested capital of around 18%, 1-8, and will improve our group's financial profile. The capital impact of approximately 70 basis points is anticipated at closing. The acquisition is, of course, subject to regulatory approvals and is expected to be completed during the second half of 2026. We look forward to welcoming NIBC's clients and colleagues and to the opportunities this acquisition will bring to us all. Now turning to our third quarter results. I will start with the Dutch economy. While the Dutch economy continues to perform well, supported by a strong fiscal position and low unemployment, the housing market remains robust, with pricing still rising, though at a lower pace than in the first half of the year. Employment continued to rise and is at a record high. The debt-to-GDP ratio of the Netherlands remains very healthy -- and that's a French person telling you that, it is significantly lower than other European countries. The Dutch elections results have been announced and coalition talks have begun. Ideally, the quick and stable formation process will allow the new government to start addressing important national issues, for example, the housing shortage or the nitrogen issue. Given this economic context on the next slide, I will discuss our results. We again showed a quarter with strong mortgage production growth, thanks to a robust housing market. Our mortgage portfolio grew by EUR 2.1 billion in Q3 with our market share in new production rising to 19%. We made some important amendments to our mortgage terms. We now automatically adjust risk premium after repayments, reviewing it monthly instead of only at the end of the fixed rate period. This led our mortgage products obtaining the top rating in the intermediary market, which accounts for nearly 75% of new volume. We observed an immediate increase in new volumes following this. Today, we also announced the rationalization of our mortgage brand line-up. Going forward, we will focus on our core labels, namely ABN AMRO and Florius and we will discontinue the Moneyou brand. This allows us to focus investments in our core labels, in technology and innovation to further improve our services. Moving to corporate loans, further organic growth and the inclusion of HAL resulted in EUR 2.1 billion loan growth this quarter. Loan growth was partially offset by the wind-down of asset-based finance. This quarter, we sold our U.K. lease portfolio. Moving to deposits. HAL added close to EUR 11 billion of client deposits. Within Wealth Management, we also have provided targeted offerings starting in Q2, which have resulted in net new assets of over EUR 4 billion this quarter. Given this positive developments in our lending and deposit franchises, let's now look more closely how these have supported our net interest income. Our net interest income increased to EUR 1.5 billion. HAL's inclusion contributed positively to NII by around EUR 34 million. The inflow of NHG mortgages and the adjustments we made in the mortgage terms I just mentioned before, led to slightly lower margins. However, the strong growth in our mortgage book offset this. Deposit margins declined partly related to targeted offerings within Wealth Management at reduced margins. Treasury results increased during Q3. However, the increase was a bit lower than initially expected. Based on last quarter's forward rates, the inflection point of replicating portfolio yield was expected at the beginning of next year. However, current interest rates have brought this timing forward this quarter, bringing the decline in the replicating yield to a standstill. In the coming quarters, we expect the deposit margins will start to become a tailwind. Looking ahead to next quarter and assuming a modest increase in treasury NII and stable deposit margins, we expect full year NII of at least EUR 6.3 billion, including HAL. Now turning to fees. Looking at our third quarter fee income, the fee contribution from HAL becomes evident, increasing overall fee income by around 10%. These excluding HAL, continued to increase, with fee income for the third quarter, reaching its highest level in the past 2 years. Personal and Business Banking fees increased mainly from higher seasonal payment transactions. Wealth Management fees was primarily thanks to higher advisory and mandated business volumes. Other income is volatile by nature and ended at EUR 28 million for Q3. The decline was caused by a number of factors, all having a negative impact on other income this quarter. Specifically, we booked lower equity participation results, lower other income within treasury and a negative fair value correction of past bookings related to some mortgages. Now moving to our operating expenses. We have further reduced expenses as we worked on rightsizing our cost base. This quarter, FTE showed a significant reduction of 700, half of which related to contractors in Group Functions. Since the beginning of the year, the number of contractors have declined by 1,100. To a limited extent, we onboarded external for their skills, which explains the small increase in internal FTEs over the same period. The Dutch Collective Labor Agreement increased wages by 3.75% on the 1st of July, leading to an increase this quarter in personnel expenses. Thanks to our ongoing cost discipline, our underlying cost base declined this quarter. At the beginning of the year, we projected our underlying costs excluding HAL to be between EUR 5.3 billion and EUR 5.4 billion, and we are confident now of ending at the lower end of this guidance. Including HAL, this now translates to a full year cost guidance between EUR 5.4 billion to EUR 5.5 billion. Now turning to our credit quality, which again remained very solid. Prudent risk management supports our strong financial results. We recorded impairment releases of EUR 49 million this quarter, mainly related to recoveries in corporate loans and improved macroeconomic variables. We saw some inflow into stage 3 for specific individual files, although, this was lower compared to the last few quarters and fully offset by releases. The total Stage 3 ratio decreased slightly to 2% and our coverage ratio was broadly stable for each of our lending projects. Given the impairments year-to-date, the cost of risk for 2025 will likely end around 0 for the full year. Now moving on to our capital position on the next slide. Our CET1 ratio remains stable at 14.8%, well above the regulatory requirements of 11.2%. The impact of the consolidation of HAL was offset by the quarterly contribution of our net profit. The total impact of HAL on our CET1 ratio as of Q3 is 40 basis points, 7 basis points of impact were already taken in Q2. The formal move of certain loan portfolios to the standardized approach had no impact on our capital ratio, while RWAs increased by EUR 1.6 billion. This was offset by lower capital deductions in our CET1 capital. During Q3, data quality improvements were realized around EUR 1 billion of RWA reductions, mainly from data improvements on real estate collateral. Further progress on data remediation is anticipated, for example, related to the SME support factor, which may result in further reductions in Q4. Looking ahead, as I mentioned, NIBC will impact our capital ratio by around 70 basis points at closing, expected in the course of next year. Our capital position remains robust, and our capital generation is strong. In Q4, we will review our capital outlook and incorporate all the relevant capital and RWA developments. Now to summarize our third quarter results. For 2025, we expect net interest income of at least EUR 6.3 billion and costs between EUR 5.4 billion and EUR 5.5 billion, both including HAL. We are delivering on our cost discipline, improving our data quality and sourcing and are delivering profitable growth in mortgages and deposits. The seamless integration of HAL and closing the acquisition of NIBC are important strategic milestones as we build scale in our core markets. Looking ahead, we are excited to invite you to our Capital Markets Day in just 2 weeks' time. There we will present our updated strategy and financial targets with a sharp focus on rightsizing our cost base, optimizing our capital allocation and unlocking profitable growth opportunities. We look forward to sharing our vision for the future and the next chapter in our journey with you. With that, I would like to ask the operator to open the call for Q&A. Thank you. Operator: [Operator Instructions] The next question comes from Giulia Miotto from Morgan Stanley. Giulia Miotto: I'll start with a question on NIBC. Why do you think that the execution risk here is low? Like, can you give us any, I don't know, qualitative comment on, for example, do you have the same systems or -- anything that can give us confidence on essentially achieving this quite significant synergies? That would be my first comment. And then secondly, I wanted to ask on the costs. The quarter was very good. Was a beat versus consensus expectations, excluding the one-off, the EUR 55 million. However, the exit rate is actually quite high. If I take the mid-range, if I take basically EUR 5.450 billion and then I remove the EUR 3.9 billion that you've done so far, underlying would be EUR 1.55 billion for Q4, which is more than what I would expect. And then it's quite a high run rate for '26. So how should we think about the exit rate and yes, on the cost side? Marguerite Bérard-Andrieu: Thank you very much for your questions. I will start with your first question on NIBC, and Ferdi will take your question on costs. So on NIBC, bear in mind that this is an asset we know very well. We operate in the same market, in the same businesses, mortgages, savings. So this is an asset we know very well indeed. And you're right, we have evident synergies. I'm going to give you just one. We use, for instance, for mortgages, the same service provider Stater. So this is an evident synergy just to flag this one. It is too early to share all the details, of course, of the target operating model. Bear in mind that the transaction will be only closed in the second half of 2026. But we are indeed confident that this is below execution risk transaction for us. Now Ferdi to the cost this quarter and looking forward? Ferdinand Vaandrager: Yes, Giulia, I think the most important message on cost is that underlying our costs are going down, evidenced by the FTE reductions year-to-date. And this offsets the more than offset the CLA increase. As Marguerite said already earlier, we will end at the low end of the guidance range, excluding Hauck Aufhäuser Lampe, but if you add the cost of Hauck Aufhäuser Lampe, we will add in the range of EUR 5.3 billion EUR 5.4 billion. If you look at the exit rate in Q4, we always have some prudency in our guidance, specifically for Q4 because, as usual, you can always expect some seasonal cost increases. Last year, that was around 4%. So that's what you need to take into account if you look at the exit rate in the guidance. Giulia Miotto: Okay. But so just to clarify on the Q4 costs. So it will probably be higher than an exit rate for '26. It sounds like because there is some in Q4... Ferdinand Vaandrager: There can always be, Giulia, that is the question underlying, we expect the cost trend to continue as we've seen in the previous quarters. But normally, there is some prudency of the seasonal cost increase you can see in Q4. Giulia Miotto: Understood. Ferdinand Vaandrager: The guidance is fairly clear between the EUR 5.4 billion and EUR 5.5 billion, including the cost of Hauck Aufhäuser Lampe. Operator: The next question comes from the Namita Samtani from Barclays. Namita Samtani: The first one on the NIBC deal, thanks to the EUR 100 million of first run rate cost synergies in 2029. But when you speak about further upside from revenue synergies what are you referring to? Are these funding synergies? And do you have a sense of quantum? And also the legal merger of ABN AMRO Hypotheken Groep into ABN AMRO. Is that included in the deal maths that you've given today? And my second question, on the replicating portfolio, is it still EUR 165 billion in size? And how should we think about the long end part of the replicating portfolio? Is it more mechanical, for example, just a very simple 5-year swap rolling mathematically or in fairly even tranches? It's just that replicating portfolio slide on Page 16, it confuses me a bit. And I can't understand when year-on-year, I'm going to see a benefit from the hedge. Is it in 2027? So any color there helpful. Marguerite Bérard-Andrieu: Thank you very much. I will take your question on NIBC, and Ferdi will take your question on the replicating portfolio. So yes, we see this transaction on NIBC as very accretive indeed because there are synergies in costs as well as in revenues. Just to give you a few highlights, we are adding 500,000 new retail clients to the ABN AMRO Group. These are clients that have -- that are mass affluent clients. So they fit very well our group. We think that we can bring more products and services to these clients. We also see, as I briefly mentioned an opportunity in using BUX to serve these clients. Bear in mind that NIBC have clients, of course, primarily in the Netherlands, but also in Belgium and Germany. So BUX can really help with that. And yes, in terms of synergies, there are also funding synergies, both on the revenue side as well, I would say, on the cost side, just to hint at a few of the positives we see in the transactions. Ferdinand Vaandrager: Yes, maybe come back and to add to that Marguerite. Indeed, we're prudent in our assessment. So the EUR 100 million is the post tax cost synergies. Of course, there can be some funding synergies. For example, we can over time, refinance the debt securities at the lower rates and also potential reduced LCR targets. But also on the other hand, you might also see some dis-synergies from deposit churn. So overall, if you look at the synergies, it's negligible in our assumption on the revenue and the funding synergy side. If your question on the replicating portfolio, yes, I can confirm the size is still around EUR 165 billion. As you have seen some terming in, that means that it has increased somewhat over the past 2 quarters, and it's also still there around 40% to 45% of the replicating portfolio reprices within 1 year, and the overall duration is around 3 years. If you look at the sensitivity slide in the presentation. It's now an update on a quarterly basis. So the starting point is slightly different from the previous quarters. And there, you can see that we have seen the inflection point already on the income side. But if you purely look at the sensitivity, it does not take into account any changes in volume, and it does not take into account any cost changes, i.e., changes in deposit pricing. So you should just look at as a sensitivity on the replicating income as an 'as is' situation. Marguerite Bérard-Andrieu: And forgive me because I realized I forgot to answer your question on the legal merger and of course, yes the transaction with NIBC is subject to all regulatory approvals. And that, of course, includes the legal merger. Let's say, we do not anticipate difficulties on that front. Operator: The next question comes from Tarik El Mejjad from BofA. Tarik El Mejjad: Just another question on NIBC and one on cost base. I mean I guess you share with us more detailed math on the deal with the synergy expected with some time frame because, I mean, clearly, usually, at least on my M&A model, I mean revenue synergies is not something I would push too much. And on the cost sounds quite punchy here, but I mean, Marguerite, you gave some indications of what kind of synergies. But yes, if you can share with us would be helpful. I mean this is very important for your capital allocation, I guess. And my question is what's next? Because I was more expecting a deal on the Wealth Management to be honest. And in Bloomberg, you mentioned that this is it in terms of deals to be announced. So is this now back to focus on restructuring the bank and costs? Or should we expect more potentially destructive deals to come? So that's number one. And number two, on just maybe a question for Ferdinand. On the cost guidance, EUR 5.4 billion, EUR 5.5 billion, is that excluding incidentals or it's all-in reported guidance? Marguerite Bérard-Andrieu: Thank you. Thank you very much for your questions. A couple of things. Yes, this deal is highly accretive. The 18% return on invested capital, we are very confident is achievable. And indeed, what we primarily factored, I mean why we factored in this model was primarily cost synergies. So if there are revenue synergies on top of it, it is an upside. But I agree with you, this is not a primary thing that we looked at in this deal. And looking forward, we will be sharing yes, more details on the target operating model, but that will come in due course. Just to clarify the answer I gave to Bloomberg. This was more an answer on saying, well, we're not going to call every morning to announce to announce a new M&A deal. So it's just that -- I think the question I got from Sarah there was like, is there something else coming out at the CMD? So no, in the next 2 weeks, don't expect any other announcement from us. And as far as our strategy is concerned, organic and inorganic, we will share everything in 2 weeks when you come to our Capital Markets Day. Ferdinand Vaandrager: Yes. Tarik, to come back to your question on the guidance. Initially, the guidance was equal to last year. We expect to end up at the lower end of that range. Hauck Aufhäuser Lampe adds between the EUR 130 million and EUR 140 million. So this translates in the updated guidance. And clearly, the updated guidance is excluding the incidentals as announced today. Operator: The next question comes from Benoit Petrarque from Kepler Cheuvreux. Benoit Petrarque: So just to come back on NIBC, sorry for that. Just again, the strategic rationale. Because it sounds like a very financially attractive deal and it seems that from a strategic point of view, that was the main reason behind this deal. I was also a bit expecting a bit more other type of deals, let's say. And maybe I missed it, but do you see kind of any franchise value in NIBC or you see just purely 100% as a financial attractive deal with 10% accretion by '29. Just wanted to clarify that because I also see a very low fee base at NIBC. And I was also expecting a bit more fee business as target. And I was also wondering if you could provide some timing on the EUR 140 million pretax synergies, whether we'll start to see some positive effect from that in '27 or that will be more back-end loaded? And just second question on NII. So your guidance of more than EUR 6.3 billion implies roughly EUR 50 million quarter-on-quarter on NII in Q4. And I was just wondering if you could provide the moving parts, deposit margin, lending margin, treasury income. What will drive this improvement in the fourth quarter? Marguerite Bérard-Andrieu: Thank you very much for your questions. So on NIBC, it is indeed both, a financially sound deal, an accretive deal and also a strategic deal. I think it's a good -- it's a good way of proving how we look at M&A. M&A strategy will always be disciplined and we will only pursue it if we find it shareholder accretive. It will be -- this is one of our criterion. You see it with this deal and the 18% of return on invested capital that it brings to the bank. This being said, we see a natural strategic fit with NIBC. It brings us scale in our domestic market in mortgages and in savings. The NIBC brand is a very good brand in the Netherlands. This is a brand that has been existing for 80 years. It has an entrepreneurial flavor. It appeals to the client base that's also slightly different from the clients we already have at ABN AMRO. So it is a great way for us to keep growing and strengthen our position in our domestic market. To your question of -- yes -- to full -- when we see the full benefit of the synergies we mentioned, we express it as 2029 just because as I said, we do expect the closing of the transaction to only happen in the second half of 2026. So we do expect a full benefit of the synergies to be there in 2029. But it does not all happen in the last year, of course. Ferdinand Vaandrager: Yes. And Benoit, maybe on your NII. Arguably you could say NII for this quarter is slightly lower, but I want to reiterate here that is mainly by our own decision. So it was a targeted wealth management campaign. And there, you see a very good NNA growth of almost EUR 4.3 billion. So now it's key that we start transferring that in valuable assets. Number two is an acceleration in the ABF wind down, specifically portfolio sale in the U.K., which is ahead of plan. And what Marguerite already said that is the implementation of what we call here [ARNA]. And that has clearly a positive impact on our position with the intermediaries. Also, if you look at our market share now up till 19%, so for Q4, we expect a modest improvement in the treasury results, as well as stable deposit margins. And if you look at the update on the sensitivity slide, what we discussed earlier, the inflection point of the replicating portfolio is already reached this quarter or, I should say, a start of Q4. So that brings the decline in the replicating yields to a standstill. But if you look at the sensitivity, the tailwinds will be very limited initially and will be more pronounced in the second half of next year. Operator: The next question comes from Benjamin Goy from Deutsche Bank. Benjamin Goy: Two questions, please. So first, on NIBC, again, which over the last 6, 7 years, has built up a significant off-balance sheet mortgage book. Just wondering your thoughts on that part of the business because you very much rely on balance sheet growth? And then secondly, you also call it a low execution risk. I'm just wondering, when you look at capital return going forward, do you basically take your current capital ratio minus 70%? Or would you include a buffer given the uncertainties and execution risk? Marguerite Bérard-Andrieu: Thank you very much. So on the -- on your question of the originate-to-manage portfolio that NIBC has and that represents roughly half its portfolio. We see, it as actually an interesting and value-added opportunity for ABN AMRO because it's not something we were doing already, and we see opportunities with that. So we welcome that addition in our business model. And I confirm that we've been thoroughly assessing the CET1 impact of these transactions that amounts to 70 basis points. And this takes into account a very prudent approach to the transaction, including all form of day 1 provisioning and so on that may be needed. So I would say, so it's a fully loaded 70 basis points. Operator: The next question comes from Chris Hallam from Goldman Sachs International. Chris Hallam: Just a couple of follow-ups. So first, just on funding synergies. Ferdi, I think you said those have been negligible, i.e. not particularly incremental to the 18%, but I'm just wondering how that works given their funding mix, which is much less skewed to deposit funding than your own and their own deposit funding cost, which is higher than yours. So just is this a reason why either you wouldn't fully change the funding mix or why you would expect to see a very high level of deposit attrition? And then second, I acknowledge we've got the CMD coming up very soon. But just looking specifically into 2026, as you're going through the year-end budgeting process, what are the key items you're focused on for the cost side of the business? Are there any specific items or challenges for ABN AMRO that we should consider for 2026 in particular? Both for ABN I guess, on the one side, but also for the industry more broadly? Marguerite Bérard-Andrieu: Ferdi, I will let you take this. Ferdinand Vaandrager: Yes, Chris, I'll start with the first one. So absolutely, there is a potential. But again, the argument here that we try to be prudent and specifically look at cost synergies. Of course, there can be some revenue synergies, but also the funding synergies here. It's too early to start communicating on the potential here, and some of the funding synergies, arguably will be further out also beyond the indicated 2029. But for sure, this provides potential on top of the indicated cost synergies. Marguerite Bérard-Andrieu: And on your question. Well, '26 happens to be the first year of our strategic plans. So I promise we will share everything on '26 as well as for the following years at our CMD in 2 weeks. This being said, I believe in discipline and I believe in saying what we do and doing what we say. We've been very clear from the beginning that rightsizing our cost base, steering on capital and pursuing profitable growth are all 3 like motives. And so 2026 will look like that. Operator: The next question comes from Farquhar Murray from Autonomous. Farquhar Murray: Just 2 questions, if I may. Firstly, more broadly on M&A. You now have kind of 2 integrations with HAL and NIBC. Do you think there's sufficient management room kind of bandwidth for another deal in the near term? And then maybe coming back a little bit to HAL actually, as an integration given it's come on board post closing. I just wondered if you could give us an update on how that business is performing as compared to the original expectations of that acquisition. In particular, I'm thinking about the cost synergy target of EUR 60 million there? Marguerite Bérard-Andrieu: Thank you very much. So I'll take your first question on bandwidth, and I will let Ferdi comment on the HAL integration. I think that was your second question. So do we have the bandwidth? Yes, we do. We are moving at pace. We have a very strong management team. I'm very happy with our Executive Board. And basically, Choy, who is in charge of Wealth is very much involved in the integration of HAL and making it a success. We have colleagues that have been very much involved in the due diligence regarding NIBC, and who will be, in due time, fully ready also to be there for the integration. So we're very confident that we have all it takes to make this integration a success. With M&A, you don't necessarily plan in advance, but we will know how to be opportunistic, if needs be, as I said, always with discipline and only if it's shareholder accretive. Ferdinand Vaandrager: Yes. Maybe just on Hauck Aufhäuser Lampe, as indicated earlier, cost synergies, year 3, EUR 60 million. Also, if we look at the first quarter after consolidation, we're confident that we're going to reach that. So no unexpected surprises in here. We've also said that we need around one-off cost of around EUR 90 million, 1/3 integration cost and 2/3 restructuring cost. We booked so far this year around EUR 8 million in integration costs. The integration is fully on track. So the legal merger between HAL AG and ABN AMRO is to be completed by the end of 2026, and that will really simplify the further integration. So the bottom line is here over results, of the results what we see now is in line with expectations, and we're very confident we're going to reach the EUR 60 million run rate synergies in year 3, which is 2028. Operator: The next question comes from Delphine Lee from JPMorgan. Delphine Lee: My first question is just going back to NIBC and just your thoughts about M&A in general. I mean just wanted to understand kind of what areas of priorities you would have? Would it -- I mean, because is the intention in the long run to continue to strengthen the position in the Netherlands? Or would it mean more to kind of diversify a little bit away from your mortgage book through private banking or corporate banking? Just trying to understand a little bit kind of where your focus is M&A-wise? And my second question is just in terms of excess capital and the usage, and how you allocate capital more generally speaking, is the intention over the long run to sort of manage it to kind of increase the payout? Do you still think there is room with the transaction further down the line? Just trying to think about how you manage your capital with buybacks and what we should expect? Marguerite Bérard-Andrieu: Thank you very much. You are anticipating on what we are going to share in 2 weeks. I will only reiterate that, we only consider M&A when it is disciplined, when it is shareholder-accretive. We think that adding scale in our home market is a smart, strategic move, and back to how acquisition that the bank recently completed and Ferdi was commenting on. This is also a strong strategic fit for us as we grow in wealth in Northwestern Europe, which is part of our strategy. But we will describe all of this at our CMD. In terms of our capital position and our capital usage. Again, this will be the topic of CMD in 2 weeks. But basically, in a nutshell, we will continue to optimize our RWA both in data and from steering more to come on that. The outcome of our capital assessment will be communicated with our Q4 results, including potential capital distributions. But we have a strong balance sheet and a strong capital position. And I think, yes, the rest will come. Bear with us for 2 more weeks. Operator: The next question comes from Juan Pablo Lopez Cobo from Santander. Juan Lopez Cobo: First one is regarding NIBC. Probably I missed some of the KPIs, but you mentioned that the deal is highly accretive. Regarding EPS accretion, if we assume, let's say, EUR 100 million net income coming from NIBC and the EUR 100 million synergies lower post tax. Is it fair to assume an EPS accretion of around 7% to 8%. Does it sound reasonable for you? That's my first question. My second question is regarding the deposits campaign. If you could share some color on this deposit campaign? Volume can we assume around EUR 3 billion, cost probably around 2% or slightly above 2%. And maybe duration, if I got you right, I don't know if we can assume the NII impact in this Q coming from the deposit campaign could be something around EUR 15 million, EUR 20 million. So it will be interesting to know to listen the duration and what percentage of these deposits you think will stay in the bank? Marguerite Bérard-Andrieu: Thank you. Thank you very much. I will let Ferdi answer both your questions. Maybe just a clarification because I'm not sure that we fully agreed on the figure. But when we mentioned cost synergies, it's EUR 100 million post tax. So basically, pretax, it's higher, just to clarify that point. Ferdi, I'll let you go into the EPS accretion. Ferdinand Vaandrager: No. I think if you look at the underlying, how you come to your calculation, fully synergized a profit of around EUR 200 million, indeed, you would come in 2029 to around 7% EPS accretion. And then again, if you look at the overall deposits, yes, we assume some outflow, but we expect it to be limited from the overall deposit campaign. And the most important part of the targeted deposit campaign is increased our net new assets. It had an impact on our on overall margins, but now it should really translate into valuable assets. So that is a transfer into either discretely portfolio management either in advisory or private markets. Marguerite Bérard-Andrieu: But usually, what we observe is that it takes usually 6 months for bankers to actually transform into more valuable assets. Operator: [Operator Instructions] The next question comes from Anke Reingen from RBC. Anke Reingen: It's just 2 number questions, please. Firstly, on the other income, that was quite big this quarter. And I just wonder, is it sort of like a run rate? I mean, a number of banks talked about NII and other income of their value result, like mix effect. Should we see that the Q3 other income could be a run rate going forward? And then on the deposit costs, is there sort of like a change in trend where in the past, we were talking about cuts and savings rates. We're now talking about some selective campaigns on higher deposits with a benefit to volume? Would you say the trend has changed here? Marguerite Bérard-Andrieu: Thanks. Ferdi, on these 2 questions. Ferdinand Vaandrager: No, let me start on other income. It was low this quarter at EUR 28 million. So also quarterly-on-quarter significantly down. And we explained that the main impact here is number one, equity participation. You're always dependent when the revaluation is done. And in Q2, we had a successful exit of the portfolio. ALM results is always volatile. And in this quarter, it always depends on your economic hedges and hedging effectiveness. But the main driver this quarter was lower fair value revaluations on the IFRS 17 and it was specifically related to one-off correction of past bookings in the March fiscal, and that impact was roughly EUR 30 million. So if you look for the coming years, other income is volatile by nature. It also includes XVAs, ALM results and private equity revaluations. But overall, excluding incidentals in the past years, it was around EUR 450 million. And if you would also exclude volatile items around the EUR 400 million. Then if you look at changes on pricing. No, the deposit campaign was very targeted at Wealth Management. So we really target the specific client group. And as said earlier already, we are willing to do that at very low margins because there, we see the opportunity to transfer that in valuable assets. So it's absolutely not a change broader how you should look at our prices. Operator: The next question comes from Jason Kalamboussis from ING. Jason Kalamboussis: I'm coming back to what Tarik mentioned. While the deal is good value for money strategically and from a higher level, it looks like it distracts to what I thought was a clearer focus on wealth management. So if you have any additional thoughts, welcome there. So moving on to wealth. Could you please provide the split year-to-date of the inflows in custody and the rest? And is it something that we could see provided on a quarterly basis? The second thing is on HAL. What are the -- how does the AUMs that you brought in split again into -- can you split out the custody and cash elements, if possible? And my third question is, is the reasonable assumption to -- when I'm looking at your AUM to assume that most of the custody and cash assets above 75% are in the Netherlands, that will be very useful. Marguerite Bérard-Andrieu: Thank you very much. I'll take your first question, and we'll let Ferdi answer the 2 others. In terms of strategy, we believe that it is a perfect strategic fit to actually keep growing and at scale in our home markets. We have the platform for that. We already have 5 million clients in the Netherlands, NIBC adds, roughly 500,000 new retail clients. We do believe in scale and in using our platform, both in mortgages and savings in the Netherlands. This being said, we also do believe that wealth management is an extremely good business of ABN AMRO. I mean we have a strong #1 position in the Netherlands with the market shares of the 35%. We have now a strong #3 position in Germany. We also are present in France and to lesser extent in Belgium. So we will share our strategy for 3 businesses at our CMD. But indeed, we do like very much the wealth management business. Ferdi on the 2 other questions? Ferdinand Vaandrager: Yes, Jason, number one is the split between custody. Overall, you should see that there's the difference between core net new assets and total net new assets of core net new assets. So overall, core and net new assets we had a very strong quarter. As discussed earlier, mainly reflecting the cash inflow from targeted offerings and indeed, the majority of this was wealth management in the Netherlands. Total NNA plus EUR 4.3 billion. So the custody is included in here for this quarter was plus EUR 1 billion more or less. If you look at the total custody within Wealth Management of course that was also a question, I think that is around the EUR 50 billion today. Then I also think, but I didn't hear you that well this, client asset inclusion of Hauck Aufhäuser Lampe. So in total, this was around EUR 26 billion and the split there was around EUR 23 billion in securities and EUR 4 billion in cash. The majority of that inclusion is in securities. Jason Kalamboussis: That's very useful. Just a quick follow-up. I mean, on the NIBC deal, what I'm a bit surprised is that the fee element is quite small. So you have less than 10% that's coming in fees. So that was a bit the sense of my question that, yes, I understand the scale. And also it's a good deal financially. But on the other hand, I would have thought that your focus would have been towards increasing the fee side within your income, whereas this goes a bit the other way. But again, If you have any comments, that would be great. Marguerite Bérard-Andrieu: I understand your question. As I said, it adds scale, which is, I think, a very positive strategic move, and it's also financially very accretive. So we saw it as 2 very good reasons to pursue this acquisition. Ferdinand Vaandrager: Yes, maybe to add there, it's also had the addition of the savings account to the BUX platform, that might provide at least investment propositions there where we are absolutely focusing on transferring NII into fees. Operator: There are no more questions at this time. I will now hand the word back to the speakers for any closing remarks. Marguerite Bérard-Andrieu: Well, I thank you very much all for your questions this morning, and we look forward to welcoming you at our Capital Markets Day on November 25. And for the time on, goodbye. And thanks again. Have a great day.
Bianca Fersini Mastelloni: Okay. Good afternoon or good morning to everyone, and welcome to El.En.'s Third Q 2025 Financial Results Conference Call. Today's call will be recorded, and there will be an opportunity for questions at the end of the call. With me on the call, Andrea Cangioli, El.En.'s CEO; and Enrico Romagnoli, El.En.'s Chief Financial Officer and Investor Relations Manager. Before we begin, please note that there are management remarks during the conference call regarding future expectations, plans, prospects and forward-looking statements. Certain statements in this call, including those addressing to the company beliefs, plans, objectives, estimates or expectations of possible future results or events are forward-looking statements. Forward-looking statements involve known or unknown risks, including general economic and business condition in the industry in assumptions of -- in which we operate. These statements may be affected if our assumptions turn out to be inaccurate. Consequently, no forward-looking statements can be guaranteed and actual future results, performance or achievements may vary materially from those expressed or implied by such forward-looking statements. The company undertakes no obligation to update the content or the forward-looking statements to reflect events or circumstances that may arise after the date hereof. At the end of the presentation, if you need to ask a question, please book your question on the chat of Bianca Fersini Mastelloni raise your virtual hand you will have the floor in order of request. But at this time, I want to give the floor to Andrea Cangioli. Please go, Andrea. Andrea Cangioli: Thank you very much, Bianca, for your introduction and for hosting us. And thank you to everybody for being with us in this call following the release of our financial report as of September 30, 2025. Enrico Romagnoli will be on this call with me, and I thank him for taking care of the details of our financial reporting that he will be sharing with you in a very short time. Our third quarter came out really strong, especially under the profitability profile, confirming the trend of this 2025, a brilliant performance in the medical sector and a softer one in the industrial business. The reported numbers say on the 9 months revenues were up 4.6% in medical and just shy of 2% in Industrial. And that consolidated EBIT was down 3.2% on the 9 months, but up 3.8% in the quarter, marking the EBIT recovery that hints and supports our guidance for this year-end. If we look a little deeper inside these numbers, we have grounds to be extremely pleased with the performance in the medical sector, also on the revenue line. In fact, this 2025 -- in this 2025, we're facing the inorganic effect of the exit of consolidation from March 1 of the Japanese subsidiary with us. Net of such effect, growth in medical would have been equal to 7.1% on the 9 months. Moreover, we're also facing the moving away of the historic and very significant customer Cynosure as our OEM contract for the supply of high-power alexandrite laser systems for hair removal is only formally in place after Cynosure merged with a South Korean company, Lutronic, that is now providing and that is going to provide to Cynosure such technology for their distribution net. By removing the negative effect of this circumstance and cumulatively with the removal of the without effect, sales growth would have exceeded 10% on the 9 months. This on the revenue side. The other pleasing news of this period is that the revenue increase is achieved with the increase of revenues in higher margins bearing sales segments and products with an overall beneficial effect to consolidated gross margins and overall profitability. Growth in system sales was mainly generated by systems for anti-aging treatments in which the innovative content of both the technology and the application is bearing higher margin on sales for us compared to the main and slowly declining revenue stream of the hair removal devices. I'm talking at first place of the Onda product. The revisiting of our flagship body contouring device, Onda based on the microwaves technology, a revisiting that expanded the intended use of the device to anti-aging face treatments. Based on this, Onda Pro is experiencing a second use with respect to the original launch of Onda with amazing acceptance also in the most advanced markets for innovation in the aesthetic application, namely the Far East markets like the Korean market, which are extremely developed and sophisticated in selecting the most innovative and effective devices. But as our group does not rely on the peak performance of single product devices, Onda Pro was not alone in driving revenues toward the anti-aging demand. I'll give you just a couple more examples of other successful products and related procedures. Nano and picosecond devices like the Discovery Pico by Quanta System and the TORO by DEKA are innovation leaders in the pigmented lesion, skin toning area that is traditionally prominent for treating the signs of aging facial skins. CO2 microablative procedure cool peel performed by DEKA's Tetra PRO is now the golden standard for facial rejuvenation and is encountering increasing worldwide success starting from the U.S. market. Another significant contribution to the performance was provided by the surgical business, especially in the urological application, which are the treatment of stones. [Foreign Language] so another significant contribution to the performance was provided by the surgical business, especially in the urological application, which are the treatment of stones and BPH, the benign hyperplasia of the prostate, a business that within the group is mainly pursued by the market leader, Quanta System, but also by Elexxion Surgical, the brand managed by our German sub, Asclepion. Revenue for laser systems in urology was up roughly 7.5% in the 9 months. The side business of consumable sterile optical fiber was also growing smoothly along with the increasing installed base and it now accounts for more than half of our post-sales revenues of the medical business. which means roughly EUR 10 million per quarter or 10% of the overall revenues of our medical business. Moreover, this piece of revenues is bearing gross margins that are in the upper segment of our products margin mix. And since operation expense in terms of sales and marketing and labor is less intensive than for system sales, the accretive impact on EBIT and EBIT margins is also significant as testified by the profitability of Quanta System that is the main factor in this business for us. In terms of expenses involved in this business, there is CapEx going on and coming up in Quanta System as Quanta System is starting the construction of a new larger semi-robotized clean room at Samarate facility dedicated to the production of sterile optical fibers to increase its production capacity for its medical devices. EBIT margin for the industrial division, I am providing you an -- excuse me, for the medical division, I'm providing you an unaudited figure is improving in 2024, 2025 on 2024 and was roughly 16.9% on the 9 months and around 19% in the third quarter. We were not able to achieve similar results for our industrial business. The only activity bearing margin similar to the medical business is the identification marking activity led by Lasit, which continues to perform well both in revenues and in profitability. The other businesses within our industrial world have not performed according to expectation, the expectation we had in our yearly planning, missing the revenue targets and therefore, lacking also in terms of profit generation. The most dimensionally significant business is the cutting business, which despite expectation and decent order bookings has been slowing down both in revenues and in profits in each quarter this year. Since order bookings came quite late in the year and delivery lead times for our sophisticated and often custom design systems are not easily compressible, as of September 30, we incurred in a major sales cutoff, meaning the inability to recognize revenues for several systems that had been physically delivered to customers but had not cleared the final testing procedure within the end of the month. To give you an idea of this adjustment, which, to a certain extent, physiologically always takes place at the end of each quarter, we're talking at the end of September of almost EUR 8 million versus less than EUR 1 million at the end of June. EUR 7 million worth 22% on the quarterly business revenue and 7% on the year-to-date revenues as of September. I am not stating that without this adjustment, everything would have been okay in this business segment as the market is very competitive, and we need a great effort to maintain our competitive position and win our sales. But of course, it would have looked different under several profiles. In fact, we are continuing to invest in what we feel is strategically meaningful for the market positioning of Cutlite in the sheet metal laser business, which can be summarized in 3 CapEx -- in 3 points that lead to CapEx or profit and loss outflows in 2025. The purchase of a plant to expand the versatile production capacity of Cutlite Penta that we closed in the first quarter of 2025. The P&L expenses involved in the launch of the European sales subsidiaries in order to get closer to the customers in the countries of Spain, Germany and Poland. The profit and loss expenses involved in the managing of Nexam, the company dedicated to automation system complementary to our laser cutting system, an addition to the product range that is highly strategical for the product offering, but that for the time being, is far from being EBIT accretive, though improving its EBIT result in the third quarter. For what concerns the other smaller businesses in the industrial world, the laser marking system for special application and for large surfaces provided by Ot-Las and also by the industrial division of El.En. very often in combined supplies with the mid-power CO2 laser sources in these businesses, the performance continued to be weak. We are identifying new application niches to recover in a year that has been hit by the negative cycle of the fashion world customers and also hit by the down trimming of the expectation in the motors for electrical vehicle segment. Cash generation has been outstanding in the quarter as we benefited from the onetime cash inflow stemming from the sale of the majority stake in Penta Laser Zhejiang, which on the net financial position was worth already factoring in the possible future price adjustments, roughly EUR 26.4 million. As I mentioned before, had we closed before, I mean, in previous conference calls we held, had we closed the deal 3 months earlier, the foreign exchange level with the Chinese yuan would have been much more favorable as it quickly deteriorated by 10% around and after the Liberation Day. Cash flows from operations amounted to roughly EUR 20 million, contributing to the EUR 47 million quarterly increase of the net financial position. Under this profile, it is worth to mention that the quarter highlighted a slight decrease in the overall net working capital and accounted for roughly EUR 3 million in capital expenditure that were offset in the effect on the net financial position by the release of EUR 3 million of long-term cash investment that cannot show up in the net financial position. By the way, the balance of such investments that are not accounted for within the net financial position since they are long-term assets was around EUR 11 million at the end of the third quarter of 2025. I give the floor to Enrico, and I will be back with more general remarks after his section. Enrico Romagnoli: Thank you, Andrea. Good morning, everybody. As usual, I'm going to comment the financials we released last week. As for the year-end and for the half yearly report, the quarterly report has been prepared in accordance with IFRS accounting standards, excluding the consolidation line-by-line of Chinese activities, both in 2025 and in 2024 due to the negotiation for the sale of the division in accordance with IFRS 5. The majority stake of the Chinese companies was sold on July 15. So since July 2025, Penta Laser Zhejiang is consolidated with the equity method for the residual stake of 19.3%. In the first 9 months 2025, the group recorded consolidated revenue for EUR 422 million, up 3.9% compared to the EUR 406 million and the medical sector up over 4.6% when the industrial up 1.9%. The gross margin was EUR 188.3 million, up 6.5% compared to the EUR 177 million of September 2024, with an impact on revenue of 44.6% improving the profitability of 1% compared with last year. It should be noted that in 2024, the group recorded proceeds for insurance and government reimbursement relating to the damages of the flood of November 2023 for an amount of EUR 1.9 million, 0.5% of the revenue. In 2025, Asclepion accounted EUR 1.3 million of R&D grants, 0.3 percentage point on the revenue. So excluding both of this nonrecurring income, the impact of gross margin on sales would have improved more than 1% in 2025, attributable to an improvement in the sales mix. Operating expenses increased in value and an impact on sales, mainly in G&A, R&D and IT costs and sales and marketing activities. Staff costs increased due to an increase in headcounts and in salaries. EBITDA positive at EUR 65.6 million. The result is in line with last year, even though the EBITDA margin in 2025 slightly decreased from 16.2% to 15.6%. Depreciation, amortization and provision amounted to EUR 10.6 million in 2025 compared to EUR 9 million in 2024. The main reason of the increase was the reversal of the provision for risk and charges in 2024 for EUR 1.6 million due to some legal disputes that were resolved more favorably than expected. Net of this amount, the overall cost aggregate is in line with the previous year. EBIT for the first 9 months was EUR 55 million compared to the EUR 56.9 million for the first 9 months of 2024. The margin on revenue was 13%, down from the 14% with a decrease over last year of 3.3%, having the delay registered on June. Financial Management recorded a loss of EUR 1.8 million. In the first 9 months, the interest income generated by liquidity was EUR 2.8 million, while the interest expenses on debt was EUR 1.3 million. Exchange rate difference has a strongly negative balance equal to EUR 2.4 million. But in addition, we have a onetime exchange rate loss recorded -- already recorded in Q1 for EUR 908,000 following the release of the currency conversion reserve resulting from the sale of the majority of with us. The contribution of associated company is negative for EUR 1 million, mainly due with us, minus EUR 0.5 million and Penta Laser Zhejiang, minus EUR 0.6 million. In other income last year was accounted the onetime income of EUR 5 million due to the write-off of liabilities related to the earn-out to pay to former minority Chinese shareholders in case of IPO of Penta Laser Zhejiang. So at the end, income before taxes showed a positive balance of EUR 52.2 million, lower than EUR 61.2 million at the end of September 2024. In the third quarter, as already mentioned by Andrea, the group had a strong performance and recording growth in both revenue and above all, operating profit, plus 3.8% versus Q3 2024 with a strong recovery compared to June when the delay in terms of EBIT compared to the first 6 months of 2024 was 7%. In the third quarter, the main segment that performed better than last year were aesthetic in medical sector and marking in the industrial sector. Looking into the cash flow, the group net financial position on September 2025 was positive for EUR 137 million, an increase by EUR 47.4 million in the third quarter from the EUR 90 million at the end of June 2025. In the 9 months, the increase was EUR 26.8 million, thanks to the cash flow generated by current activities and the proceeds received for the sale of the majority stake in Penta Laser Zhejiang for a net amount of EUR 26.4 million. The main reduction incurred in the period are dividend paid for EUR 19 million in Q2, CapEx for the 9 months of EUR 13 million, increase in net working capital of EUR 20 million. Furthermore, the group invested the liquidity in insurance policy, mid- long-term investment accounted in noncurrent assets. So we have additional liquidity of EUR 10.7 million on September 30. What concerns the revenue breakdown by business in the medical sector, system sales showed strong growth in all major segments. In the aesthetics segment, plus 4%, the very favorable trend for anti-aging and body contour application continued. Among surgical applications, plus 8%, urology, ENT and gynecology system continued to record significant growth in sales. Asa's performance in physiotherapy, plus 5% was also very satisfactory, thanks to the significant innovation in the range of products offered, a more effective coverage of international market, together with the relaunch of sales in Italy. Sales of consumable and aftersales service remained very satisfactory, driven by the sales of optical fiber for surgical application, more than 50% of the sale of the segment, which kept service revenue growth to 4% despite the loss for service contract revenue from the Japanese company with us, whose majority stake was sold in February 2025. In the industrial sector, the cutting segment, which no longer includes Chinese companies, maintained growth of 2%, thanks to the excellent sales result of the Brazilian subsidiaries, plus EUR 4 million of revenue in the first 9 months. Lasit also performed well in the market segment with the increased weight of its subsidiaries. In the Q3, we had a significant recovery in sales in the segment of large footwear marking application where Ot-Las operates. In the Laser sources segment, the slowdown was more evident and was primarily due to decline in revenues from system integrators for fashion application and electric motor windings. Sales for Industrial Service returned to show an increase of 6% as expected due to the progressive increase in the installed base. Geographically, the most positive note came from the Italian market with an extraordinary growth of 27% in medical. In the industrial sector, Italian turnover also recovered in the quarter, up 6% in the 9 months, thanks to the increased confidence among manufacturing market operators, supported by the return of tax policies to support investment. The performance in European market was very satisfactory, particularly in the German medical and professional aesthetics beauty sector and in the industrial sector, thanks to the progressive consolidation of the sales subsidiaries activities, particularly by Lasit. The negative sign appearing on sales in the rest of the world has different determinants depending on the sector. What concerns the medical, Andrea already mentioned the inorganic operation that affected the sector. The result is a good result because it was achieved net of the exit of Withus in February and the loss of the supplies to Cynosure due to the M&A that brought it closer to Lutronic. Net of this departure, turnover, therefore, increased significantly. The situation is completely different in the industrial sector, where our order intake in the American market, the most significant in the rest of the world was negatively impacted in the first month of the year by the image projected on the market by the potential acquisition by a Chinese entity. Andrea, please go ahead for what concern the guidance. Andrea Cangioli: Okay. In closing my prepared remarks, I would like to touch 3 more topics. The role of the industrial division, especially of the cutting division within the group, the use of our cash and finally, the 2025 guidance. As the performance of the industrial division markedly of the cutting division is weaker than the one of the rest of the group, I would like to share with you the strategy short term and midterm of the group with respect of this business area. We are very proud of the results and the dimensions achieved by our cutting business unit, but we are also aware -- but we are also aware that its business, especially after the CO2 laser sources have been ruled out of cutting by the fiber laser sources technology is not fully consistent anymore with the other businesses of the group. There is no market correlation and the technological correlation is very limited as well. Therefore, we are convinced that the Cutlite's Penta organization, people and business would benefit of strategically cooperating with organizations that are more consistent to Cutlite's business. Along this path, we moved towards a transaction that would have placed Cutlite within a larger organization, developing a specific growth strategy for Cutlite. I'm talking of the sale -- potential sales to the Chinese end. But when we were faced by the material risk under the new organization, that one of the most promising businesses of Cutlite, the U.S. business, was bearing the risk of being completely jeopardized, we decided that for protecting the organization itself, we would have not sold Cynosure -- Cutlite anymore. So the short-term strategy now that Cutlite is still within our consolidation perimeter is to manage the potential of Cutlite and to continue to invest in what we feel is needed for Cutlite to flourish. The longer-term strategy is to resume and pursue the design of finding a strategic partnership for Cutlite a partnership that would enhance its peculiarities, capabilities and potential, giving the best opportunity to Cutlite's organization to continue to flourish or better to improve its opportunities and chances to flourish on its market that are quite competitive. What is evident from our reporting is the amount of investment involved in supporting Cutlite's strategy. What we can additionally tell you about the larger picture isn't much at all for the moment, but we will update you as soon as we will have something meaningful to report. For what concerns the businesses of Lasit, Ot-Las and industrial division of the mother company, El.En., we are planning to continue to pursue such businesses within the group. Now the quite wide cash position we are holding today, which is beyond the ordinary operational needs of our companies, also considering potential expensive investment activities like the one I mentioned for the fiber optical -- sterile optical fibres manufacturing plant. As usual, capital expenditure and operational needs for our operations are first in the list for us as we believe that interesting growth rates can be achieved by further improving the operational performance of our own business units. In order to enhance our growth rate, especially in terms of profits, we are investigating a set of small M&A opportunities that could be accretive to the development of the business units involved, especially in the medical sector but also in the industrial sector, as we mentioned before. We could be closing soon one or more small deals across -- along this path. More complex deals that could fall under the label of transformational are now being more closely considered, though there is nothing for the time being to report about. The Board of Directors has not yet resolved about any onetime cash distribution to the shareholders in any form. Therefore, I'm not in the position to elaborate any comment about. Finally, the guidance. I can keep it simple here. We are targeting and planning to beat 2024, both in the revenues and in EBIT. As you know, we are on schedule for the revenue target. We are just a little bit behind for what concerns the EBIT target, but we are recovering and confident to be able to hit the EUR 23 million figure in EBIT in the fourth quarter of 2025. Thank you for your patience, and I believe we are ready for your questions. Bianca Fersini Mastelloni: Andrea, the first question in our list comes from Giovanni Selvetti of Berenberg. Giovanni Selvetti: Can you hear me well? Andrea Cangioli: Yes. Giovanni Selvetti: Well, I had two, but then let's just say that the final remarks added a few extra questions, but maybe I'll jump in the queue and ask more after. These are two regarding the medical division. The first one is on Asclepion that based on the press release seems to be doing much better in Q3. And as far as I remember, Asclepion was also mainly involved in hair removal, which was the area that was struggling the most. So I was wondering what's changed exactly also because if I can remember, in the first half, the cost of personnel was going up also in relation to Asclepion. The second one is about Quanta. If I look at your press release, you're saying that now optical fibers account for more than 50% of medical services. So if we assume, let's just say, a figure around 35%, that is, let's just say, more than 50%. If we had to double this capacity, do you see already demand to fill it? Or how much should we think before the excess capacity gets filled? And maybe the last one is on the Lasit, let's just say, part of the business that, again, based on what you're saying, we are talking about margins based on what the press release say strongly above last year. So I was wondering what kind of margins Lasit is now running at? Andrea Cangioli: Okay. So starting from Asclepion. Yes, there was a recovery. Yes, the recovery was also tied to a better performance in the hair removal in the third quarter. So I mean, this is a good line considering the hair removal segment. And yes, the impact of the cost of staff in Asclepion is quite significant. It was increasing a lot in the second -- in the first half. Since the result for the third half was extremely good in terms of revenues. Now the difference of the impact of staff cost between Asclepion and the rest of the group is smaller. Most important and what actually made turnaround in the quarter, the business of Asclepion is the increase in revenue, which is due to aesthetics, but also to its surgical line, which is performing very, very well. Quanta System and Fibers, we -- as of today, we do not feel we are limited or materially limited in the deliveries of fibers by our production capacity. But we feel that given the rhythm of new installation and of the absorption by the market of our optical fibers, we needed to expand the capacity in order not to incur in a sales limitation due to capacity in the future. So we are progressively increasing the volumes, and we are placing this very large investment in order to improve the production capacity, but we don't have an impellent need. It's, I mean, a strategic programming that will allow us to continue to increase the stream of revenue over the time smoothly. Finally, your third question was about Lasit. Lasit actually is improving. It's not improving its sales volume over the 9 months, especially due to a slow behavior of the Italian market, while we are doing very well, especially in Europe, where the subsidiary that Lasit set up on the territory are now starting to be really accretive to the business. I recall we have subsidiaries in Poland, the oldest one, in Spain, Germany, U.K. and France, the last one. So we have 5 subsidiaries. And quarter after quarter, they are becoming accretive to revenues and especially to profitability. In terms of profitability, we had an EBIT margin just shy of 8% after the first 9 months of 2024. After the first 9 months of 2025, we are exceeding 11% as EBIT margins. Those are unaudited financial results referring to the consolidated financial results of Lasit and its subsidiaries. Giovanni Selvetti: I'll jump in the queue and then I have some questions. Bianca Fersini Mastelloni: The second question comes from Andrea Bonfa of Banca Akros. Andrea Bonfa: I hope you can hear me. Very quickly, I mean, connecting to your last statement on M&A, potential M&A. So if I understood correctly, transformational deal are -- might be considered but unlikely for the time being, but some bolt-on acquisitions are definitely more possible. Is that possible for you to comment on which sector niches, technologies are you looking for? Andrea Cangioli: No. Andrea Bonfa: Or in which geographies eventually? Andrea Cangioli: I'm sorry, I said all I can say. Andrea Bonfa: Okay. Okay. Andrea Cangioli: It's nothing -- the answer wouldn't change. I mean we are -- we have several things on our pipeline related, as I said, both to medical and to industrial and they are both on the European territory and in the rest of the world. But I mean, in answering by this means, I don't -- I cannot give you any more detail. It wouldn't be fair. I can only tell you that we are examining several situations. Andrea Bonfa: Okay. And if I may, as far as the industrial business is concerned, I mean, within now, let's say, the recent input that you just mentioned, is the U.S. still a potential important market or now with the duties and your, let's say, smaller size is less so. And the third one is on the U.S. duties. How is the trading environment in U.S. now with this new duties environment, if it's possible? Also in relative terms because, I mean, maybe there are other countries now less competitive than Europe. Andrea Cangioli: First of all, the U.S. market for our industrial cutting systems is still very interesting and still the main market -- international market for our systems. We have suffered, as Enrico said explicitly and as I confirm, the image that was projected during the negotiation with the YOFC for the sale of the company. And we spent quite a lot of time in convincing our U.S. customers that we were not becoming Chinese. And also after the deal that was going to have Cutlite Penta fall under Chinese control was canceled. Still, we have our hard time in discussing with our U.S. partners and I mean, partners because we have distribution partners and making them fully comfortable that we will be able to provide them on the midterm, a sound and price attractive and technologically attractive Italian-made product. This is -- by the way, they are visiting us on Wednesday in order to clarify again this situation because based on this, we have had some sort of fluctuation in order bookings from the United States, notwithstanding our efforts, which include a massive deployment of technical service people in order to serve at top quality with top quality our systems installed in the United States and also a strong investment in terms of fares. We participated to the FABTECH, which is one of the most expensive fairs that you can approach on the industrial systems market. And so after this long speech, I would say that, yes, the U.S. market, it's still an opportunity. It's still an important opportunity. And it's not an issue of duties. Duties are impacting us in the industrial sector, but it's not duties that today caused a slowdown in sales to the United States in the industrial business. For what concerns the duty question on the medical system, of course, duties are there. They are quite impacted. But we have seen increasing interest in the last months from our U.S. customers in our products. This speaks about the fact that even though each and every of our customers in the United States will try to negotiate a deal in order to have us participate to the "undue extra cost driven by duties. " They are still looking for us because we are able to provide them the innovative content of products that allows them to make margin, notwithstanding the extra cost. And so basically, in this moment, we are -- I mean, at least for the first 10 months of the year, we are very pleased with what we have done in terms of revenues and what we have done also in terms of order bookings. Then, of course, -- we will have to see how the hot seasons on the U.S. market, which is the month of December, will roll out for our distributors to have a final judgment on the total effect of duties on our U.S. business. But so far, we have -- we can notice an overall positive reaction of the U.S. market on the duty situation. Bianca Fersini Mastelloni: Next question comes from Carlo Maritano of Intermonte. Carlo Maritano: Can you hear me? Andrea Cangioli: Yes. Carlo Maritano: I just have a couple of questions. The first one is on the European performance in the industrial cutting business in the third quarter. I see that there is a decline compared to last year. I was wondering if it is related to the EUR 9 million of revenue that shifted from the third quarter to the fourth quarter. And the second one is again on the industrial business, in this case, on Italy. So recently, the government changed again the incentives related to [indiscernible]. So I was wondering if you expect any kind of impact on your clients from this change or if the order book remains healthy and that you do not expect any kind of disruption. Andrea Cangioli: Thank you for these two questions. About the first one, the decline in the European revenues in industrial, you see it in the third quarter. It's something which is, let's say, local. It's not related to the cutoff, which is mainly an Italian issue. It's mainly an Italian issue because we don't -- it's tied to the means of delivery we have in Italy. And what we could say, it has been driven by a softer activity in Europe and by the slower activity of the subsidiaries, we should be able to overcome the situation over the rest of the year. For what concern the Italian laws, the Italian, I mean, funding situation, I didn't want to go in this detail. But of course, we are examining the effects of the cutoff that the Italian government put on Industry 5.0, and this might have some effect. I'm not able to quantify. It shouldn't be determinant, but it could be material. The good news is that it looks like that the new law for 2026 could be interesting for the investors. And so we might suffer a marginal correction. I mean, we have an order book, a book of orders, but some of them may not convert in sales due to the change in the approach by the Italian government as the monies for Industry 5.0 is finished, but we should be supported, hopefully, without the hesitation that took place in 2025, also in 2026 for a certain level of investments. Bianca Fersini Mastelloni: Andrea, we have one more question from Emmanuel De Figueiredo. I will read for him for problem of connection. The question is, why was medical so strong in Italy versus other markets? Andrea Cangioli: Of course, this stands out. It stands out. And because we did extremely well and because I believe we performed exceptionally well in the distribution of DEKA Renaissance in Italy, which is going to hit a record target, a record amount. We also had some sales in the professional beauty that increased its volume smoothly, and we are still experiencing very, very strong demand. Why is this happening? I believe the team that we have in Italy now provides to our end customers an unparalleled level of services. We have, I believe, 8 product managers, which are traveling all the time around Italy if they are not stable in a region because, of course, the main regions have product specialists, which are always providing support to our customers. So we not only, as we mentioned before, limit our activity in providing the laser box to our customers, but we are providing continuous training. We are providing very, very -- I wouldn't say cheap, but affordable service in order for them to take the maximum benefit of the lasers that we have sold them. And so since they are happy, since they make money with our lasers, they come back and buy. This 2025 is going to be a record year for Italy. And this is the only explanation I have on this point. Bianca Fersini Mastelloni: Thank you, Andrea. We have one more question from Andrea Bonfa of Banca Akros. Andrea Bonfa: Andrea, very quickly, in the numbers that you provided at the beginning of the conference call, the like-for-like figure, 7.9% without Cynosure and more than 10% without -- sorry, 7.9% without the Japanese subsidiary and over 10% without Cynosure is related to the medical division only or to the group. Andrea Cangioli: Medical division. What I was saying is that we are hitting in stable situation, the 10% revenue increase target after 9 months. This was the message I wanted to -- for the medical business. This is the message I wanted to give with these comments. Bianca Fersini Mastelloni: And we have no more questions registered in this moment. I would like... Andrea Cangioli: Giovanni Selvetti has said he wanted to ask more questions. Maybe we answered already, but I don't know. He said he wanted to. Bianca Fersini Mastelloni: yes, Giovanni. Go on. Giovanni Selvetti: Part of it was already answered, yes. I mean let's just put it this way. I don't want to ask too much information on M&A, right, also because you cannot give much. But it was more about whether the companies are more, let's just say, technological company that will add technology or company with actual sales, right? It's more about whether you're investing in technology or in market share. But I'm not sure if you can answer that. So... Andrea Cangioli: It's -- we have everything in our basket. So in our potential basket, there's something of any flavor. So you've got both. I don't know what and if we will close. Again, don't have too wide expectation on this. We're talking of small transaction, but we have both technological and sales solutions and sales opportunities. Bianca Fersini Mastelloni: Then at this time, we have no more questions. I would like to ask once again, if there are any further questions from investors still connected. No more questions. Then ladies and gentlemen, the conference is now over. If you have any inquiries in the future, please do not hesitate to contact Enrico Romagnoli, who will be happy to assist you. Thank you for attending this conference, for your participation, and we hope to have you all again next time. Goodbye, everybody. Andrea Cangioli: Bye-bye. Thank you, Bianca. Thank you everyone.
Operator: Good day, ladies and gentlemen. Thank you for standing by, and welcome to the Niu Technologies Third Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, we are recording today's call. If you have any objections, you may disconnect at this time. Now I will turn the call over to Ms. Kristal Li, Investor Relations Manager of Niu Technologies. Ms. Li, please go ahead. Kristal Li: Thank you, operator. Hello, everyone. Welcome to today's conference call to discuss Niu Technologies results for the third quarter 2025. The earnings press release, corporate presentation and financial spreadsheets have been posted on our Investor Relations website. This call is being webcast from company's IR site as well, and a replay of the call will be available soon. Please note, today's discussion will contain forward-looking statements made under the safe harbor provision of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve risks, uncertainties, assumptions and other factors. The company's actual results may be materially different from those expressed today. Further information regarding the risk factors is included in company's public filings with the Securities and Exchange Commission. The company does not assume any obligation and update any forward-looking statements, except as required by law. Our earnings press release and this call included discussion of certain non-GAAP financial measures. The press release contains a definition of non-GAAP financial measures and the reconciliation of GAAP to non-GAAP financial results. On the call with me today are our CEO, Dr. Yan Li; and CFO, Ms. Wenjuan Zhou. Now let me turn the call over to CEO, Yan. Yan Li: Thank you, Kristal. Hello, everyone. Thank you for joining us today. In Q3, we delivered solid and sustained progress across all key strategic priorities, supported by disciplined execution in product innovation, channel expansion and brand elevation. Our results reflect the continued growth of our core China business and early signs of transition in our overseas operations, laying a strong foundation for the next phase of growth. For the third quarter of 2025, the total sales volume reached 465,000 units, representing a strong 49.1% year-over-year increase. This growth was driven primarily by exceptional performance in China, where sales rose to 451,000 units, up 74% year-over-year, supported by our strengthened product portfolio and effective channel expansion. Overseas volume reached 14,000 units, declining year-over-year, mainly due to weakness in the micromobility sector. Our total revenue grew 65% year-over-year to RMB 1.69 billion, accompanied by gross margin expansion to 21.8%, up 8.0 percentage points from the prior year or 1.7 percentage points sequentially. This improvement was driven by a favorable shift in the China product mix with increased contribution from higher-value models. Notably, sales of models priced above RMB 8,000 accounted for over 10% of China sales. Net profit for the quarter was RMB 81.69 million, extending the profitability momentum established in Q2. This improvement reflects daily efficiencies from higher volume and our continued focus on operational excellence. Those results underscore our ability to execute with discipline and resilience amid evolving market dynamics. We remain confident in our long-term strategy and the progress achieved this quarter provides a strong foundation for sustainable growth. China remained our primary growth engine in Q3 with unit sales rising 74% year-over-year to 451,000 units. A key driver was the channel inventory buildup ahead of implementation of the new national standard for electric bicycles, which provided a substantial short-term boost. This performance was also supported by successful product launches, strong brand-driven demand and steady channel expansion. The momentum built through 2024 and into 2025 reflects our refined strategy, enhanced competitiveness and growing consumer preference for Niu. In Q3, the China electric bicycle market entered a critical transition phase under the new national standard. While production of noncompliant models ceased after August 31, retail sales of existing inventories are permitted until November 30, 2025. This prompted distributors and retailers to build inventories in July and August, effectively pulling forward demand from October and November and created a temporary sales boost in Q3. Now to prepare for this regulatory shift, we emphasized on 3 actions: upgrading the existing high-end electric bicycle models to capture the short-term demand, rolling out the new electric motorcycles unaffected by this regulation to target lower-tier cities and redesigning and retuning our entire electric bicycle lineup to fully comply with the new standard for the rollout in Q4 2025 and Q1 2026. First, to capture is premium electric bicycle demand surge under the old standard, we launched the upgraded flagship models, the NXT Ultra 2025 and FXT Ultra 2025 version, each priced at RMB 11,999. The NXT Ultra 2025 introduced 10 major upgrades with 77% of core components redesigned to elevate the benchmark standards across safety, power intelligence. The FXT Ultra 2025 featured a futuristic performance-driven design on the same technology platform as the NXT Ultra equipped with automotive-graded millimeter-wave radar and dual-channel ABS setting a new safety benchmark for the segment. Together, those Ultra models contribute 8% of total Q3 sales, effectively serving high-end demand during this regulatory transition. Electric motorcycles are more prevalent in the lower-tier cities, Tier 3 and below due to a more relaxed regulations. This segment has historically been underserved in our portfolio and the channel footprint, making it a key growth priority for us. As highlighted in the previous earnings calls, expanding presence in lower-tier cities is a core strategy reflected in our store expansion and strengthened product line. In Q2, we completed a full N-Series motorcycle portfolio covering mainstream price points from entry-level NS at RMB 3,000 above and NL at RMB 4,000 and NXL at RMB 6,000 to the performance oriented NX just under RMB 10,000. Starting Q3, we extended the strategy to the F-Series, broadened the price band and enhanced the performance to value offerings. Now despite Q3 being a channel stocking period focused on electric bicycles, our enhanced motorcycle portfolio supported a healthy 14% revenue contribution from motorcycle sales. We expect this share to increase in the coming quarters. A key milestone in Q3 was the successful launch of FX Windstorm version on September 28. Known for its sharp distinctive styling that resonates strongly with Gen Z riders, the FX Windstorm reinforced F-Series' positioning as a performance powerhouse. Priced at RMB 4,799, it targets the RMB 4,000 segments at its first high-speed motorcycle for the young riders, equipped with 3,000 mass motor reinforced frame and a full-size TFT display and 4% disc brakes. It delivered performance comparable to model price above RMB 10,000, including mile 80-kilometer power top speed and 0 to 50 kilometer power in 4.7 seconds. The FX Windstorm was instant success with 14,000 units sold in the first 5 hours and generated RMB 68 million in GMV and ranked #1 on Douyin, Tmall, JD.com and Kuaishou in GMV and popularity. This success validates our strategic expansion into the electric motorcycles and create strong momentum for upcoming launches such as FS targeting the entry-level users. Now alongside the high-end electric bicycle motorcycles, we dedicated significant R&D resources to the new standard compliant electric bicycles. The updated regulation requires substantial redesigns from the limit usage of plastics to form factors. We now plan a full rollout of compliant products beginning in late November and extending through Q1 2026. The portfolio will include the renewed and new series offerings and also introduce new series designed to reach product consumer segments, including products optimized for female riders. Beyond the new product development, we continue to invest in core technologies, including the smart riding system, powertrain innovation and R&D platformization to enhance efficiency and capabilities. Our smart riding under AI efforts focus on 3 areas: expanding the foundational safety technologies such as ABS and millimeter-wave radar, developing assisted riding features for premium models such as the 2-way throttle and [indiscernible] Assist and building intelligent ecosystem to broader third-party integrations. Through partnership with Apple and Oracle with other industry leaders, we expand the cross-device connectivity, including the off-bike safety alert and Apple Wallet T access, enhancing overall user experience. In the powertrain system, we advanced several next-generation initiatives through a deeper motor controller R&D and the close collaboration with our battery partners. Our efforts focus on 2 key objectives: delivering higher peak current output for stronger acceleration and a fine-tune overall system efficiency to extend lower riding range under the diverse conditions. The NXT FX Ultra and FX Windstorm are the strong example of this R&D achievement. The enhanced powertrain architecture enables 0 to 25 kilometer power acceleration in just 1.92 seconds, setting a new benchmark for urban performance. For the FX Windstorm, the upgraded 3 kilowatts high-efficiency motor and optimized controller delivered top speed of 80 kilometer per hour while maintaining stable power delivery, improved thermal performance and consistent power output even during the extended high-speed riding. Those advancements not only elevate writings performance, but also form a foundation for the new generation of new powertrain platform that will scale across future product lines. Now lastly, our product-based R&D strategy continues to deliver a meaningful operational benefit. In Q3, it accelerated product iteration, strengthened manufacturing consistency and increased economy of scale. The improvement supported smooth delivery of 450,000 units, surpassing our previous peak by roughly about 20%, while enhancing margins through shared components and module design cross product lines. Now in Q3, we continued elevating the new brand and deepen engagement with our core audiences, particularly in premium consumers and Gen Z riders, our approach integrated lifestyle campaign, product launches and target digital engagement to strengthen brand equity and drive conversion. We acted on a series of youth-focused lifestyle campaigns, the Summer Ride and Splash campaign embedded new into the outdoor leisure experience such as lake diving and quick hiking across major cities generated 130 million impressions across online and offline channels. Following the FX Windstorm launch, we hosted large-scale test ride events in Chengdu and Chongqing engaged riders in real mountain environment. This created authentic word of mouth within the key user segment to provide valuable feedback. Our launch event continued to highlight news technology leadership. The June 17, Du Ultra flagship launch generated about 20,000 units sold in 5 hours with GMV exceeding RMB 228 million. The FX Windstorm launch delivered 14,000 units sold in 5 hours and 93% positive ratings, resonating strong with the Gen Z and delivery riders. Now strength in both offline and online channels as of Q3 Niu surpassed 4,500 stores nationwide with 238 net new stores added in Q3 and 800 year-to-date. Nearly half of new stores were in the lower-tier cities, supporting deeper market penetration. Our digital ecosystem also scaled rapidly. Niu now managed 9 official flagship accounts supported by 1,062 dealers operated accounts. In Q3, the network generated 30,000-plus live streams, 69,000 content pieces and [indiscernible] million impressions. The online sales representing close to 70% of our total work. We also expanded on to a new e-commerce platform Meituan, piloted with 10% stores generating RMB 40 million to RMB 50 million in monthly sales. We plan to expand store coverage and motorcycles next. On Kuaishou local services, over 2,200 stores have joined and FX Windstorm ABS launched ranked #2 nationally, reinforce our brand resonance among Gen Z riders in the lower-tier market. Now turning to our overseas market. Q3 unfolded as expected transitional quarter as we continue to optimize operation and preparing for our next growth cycle. The overseas sales volume reached 14,000 units with decline in micromobility, offset by encouraging progress in electric motorcycle. Despite Q3 being a seasonal low for European 2-wheeler demand, our electric motorcycle sales reached approximately 2,500 units, up 160% year-over-year. The self-operated sales accounted for 76% of total. We further accelerate our self-operated dealer network expansion. Dealers in those direct distributor regions grow from 120 at the start of the year to 289 in Q3, exceeding our initial target of 250. This reflects the strong brand recognition, product competitiveness and the growing retailer confidence in direct distribution model. With channel foundations now established, we will shift from capability building towards product rollout and deeper channel market penetration. The product lineup unveiled at EICMA position us strongly for multiyear growth. At EICMA, the largest 2-wheeler show in Milan, we showcased our international product road map, expanding from smart e-scooters to broader electric mobility portfolios. Highlights included 2026 NQi X-series with Google Map integration, featuring 125-kilometer per hour NQiX 1000 launching Q3 2026, the all-new FQiX Series for working commuters in L1e and L3e version for Q3 2026, the expanded XQi Series, including the 110-kilometer per hour XQi 500 Street version for second half of 2026. And lastly, the Concept 06, forward-looking 155-kilometer per hour platform featuring AI assisted intelligence, advanced safety. The new NQi 500 was awarded Top Award 2025 by German leading motorcycle media outlet 1000 PS, a strong validation of our product excellence. Our micromobility volume reached to 11,900 units, down 77% year-over-year, reflecting market headwinds in the U.S., Europe and Asia. Europe saw intensified price competition, while the U.S. shifted towards a lower price model due to tariff dynamics. In Q3, we intentionally reduced promotion and shipment to avoid overstocking and protect margin during a period of pricing pressure and supply chain transition. Given the current inventory levels in Europe and the U.S., we expect the structural adjustment to continue for the next couple of quarters. Now look ahead, we'll continue executing our strategy of driving fast growth in the China market and scaling our international electric 2-wheeler business while strategically adjusting the micromobility operation. We expect China to remain our primary growth driver of strong execution across the first 3 quarters. We break out product each quarter, demonstrating our capability in product definition, channel activation and brand influence. However, we expect some uncertainty and softening in Q4 this year due to the timing of the new standard implementation. The retailers are preloading inventory in Q3, shifting some demand from Q4. And a new standard compliant product will ramp up from late November through Q1 2026, shifting part of the Q4 demand into Q1 2026. Combined, those factors will likely result in a relative flat year-over-year volume in Q4. We expect growth to reaccelerate in Q1 2026 as the regulatory transition completed and the market stabilized. The fourth new standard electric bicycle lineup, along with 300 to 400 new stores additions in Q4 will support a strong momentum into 2026. Now turning into the overseas market. For electric 2-wheelers, we expect strong year-over-year growth in Q4, supported by ongoing expansion of direct distribution network. The new product introduced at EICMA will fuel the multiyear growth starting in 2026. In micromobility, we will continue prioritizing profitability or skills in Q4, reducing promotions that focus on clearing existing inventories. This will lead to a lower Q4 volume. We expect the adjustment to conclude in first half of 2026 with margin return to the normal level second half of 2026. Now with that, let me turn the call to Fion. Wenjuan Zhou: Thank you, Yan, and hello, everyone. Please note that our press release contains all the figures and comparisons you need, and we have also uploaded cell format figures to our IR website for your easy reference. As I review our financial results, I'm referring to the third quarter figures unless I say otherwise. And all mandatory figures are in RMB if not specified. As Yan just mentioned, our total sales volume for the third quarter was 466,000 units, up 49% compared to the same period of last year. Among this, 451,000 units sold in China and the remaining 14,000 units overseas. Nearly 50% of our sales volume in China came from our top 3 models this quarter and the number of franchise stores in China was 4,542 at the end of third quarter. Total revenue for the third quarter amounted to RMB 1.69 billion, an increase of RMB 670 million or 65% compared to the same period of last year, and the result came in slightly ahead of our guidance, primarily due to the robust sales volume growth in China during the peak season in third quarter. China revenues were RMB 1.62 billion, increased at 84% year-over-year and accounting for 95% of total revenues. Of this, the scooter revenue were RMB 1.48 billion, and this growth was primarily driven by a 74% increase in sales volume and coupled with a higher ASP. China scooter ASP was RMB 3,283, representing a nearly 7% year-over-year growth and remaining largely stable compared to the previous quarter. And this growth was primarily driven by a favorable shift in our product mix. In Q3, our top seller NT with a retail price range from RMB 3,699 to RMB 4,599 continue to perform well. In the meantime, complemented by a strong contribution from the new products like the [NLT] and NXT range from RMB 3,899 to RMB 6,299. Collectively, these 3 top sellers accounted for nearly 50% of our total sales volume this quarter. Overseas revenue was RMB 77 million, representing 5% of total revenue. Scooter revenues, including electric motorcycles and mopeds, kick scooters and e-bikes amounted to RMB 67 million, down from RMB 130 million in the same period of last year, and this decline was driven by decreases in sales volume and ASP of kick scooters. Overseas scooter ASP increased 90% year-over-year and 41% quarter-over-quarter to RMB 4,648 and driven by a greater proportion of revenue coming from the higher-priced electronic motorcycles and mopads. Revenue from accessories, spare parts and services were RMB 145 million, representing 8.6% of total revenue and a 51% increase compared to the same period of last year due to the increase in spare parts sales in China. Gross margin this quarter -- gross profit this quarter exceeded RMB 370 million, marking a significant improvement compared to RMB 142 million during the same period of last year and RMB 252 million last quarter. The gross margin was 21.8%, 8 ppt higher than the same period of last year and 1.7 ppt higher than the previous quarter, marking our best quarterly gross margin performance this year. And this improvement was driven by the ongoing cost reduction initiatives and the economy of scale from higher sales volume in China market. Operating expenses for the third quarter were RMB 297 million, increase of 48% compared to the same period of last year and the OpEx ratio down to 17.5% dropped from 19.6% in the same period of last year and 21.1% in the previous quarter. Selling and marketing expenses rose by RMB 87 million year-over-year to RMB 215 million, primarily driven by higher spending on marketing and online promotion campaigns in China. Selling and marketing expenses representing 12.7% of revenue compared to 12.5% in the same period of last year and down from 16.1% last quarter. R&D expenses increased by RMB 13 million year-over-year to RMB 43 million, primarily due to the higher staff costs and share-based compensation. R&D expenses representing 2.6% of revenue compared to 3% in the same period of last year and down from 3.5% last quarter. G&A expenses decreased by RMB 4 million year-over-year to RMB 39 million, mainly due to the improved cash collection from account receivable, which resulted in the reversal of bad debt provisions and G&A expenses representing 2.3% of revenue, down significantly from 4.2% in the same period of last year, while up from 1.5% last quarter as the company benefited largely from foreign currency exchange gains in the previous quarter. The net income was RMB 82 million with a net margin of 4.8% on the GAAP accounting compared to a net loss of RMB 41 million for the same period of last year and net income of RMB 5.9 million for last quarter. The non-GAAP net income was RMB 88 million. And turning to our balance sheet and cash flow. We ended the quarter with RMB 1.8 billion versus RMB 1.1 billion last year-end in cash, restricted cash, term deposits and short-term investments. And our operating cash inflow amounted to RMB 433 million. The CapEx amounted to RMB 73 million, reflecting an increase of RMB 32 million compared to the same period of last year. And this can be attributed primarily to an increase in the opening of new stores and modules cost in China. And now let's turn to guidance. We expect the fourth quarter revenue to be in the range of RMB 737 million to RMB 901 million, representing a year-over-year change of minus 10% to plus 10%. And please be aware that this outlook is based on the information available as of the date and reflects the company's current and preliminary expectations, which is subject to change due to uncertainties relating to various factors. And with that, we'll now open the call for any questions that you may have for us. Operator, please go ahead. Operator: [Operator Instructions] Seeing no more questions in the queue, let me turn the call back to Mr. Li for closing remarks. Yan Li: Thank you, operator, and thank you all for participating on today's call and for your support. We appreciate your interest and look forward to reporting to you again next quarter on our progress. Thank you. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect. Speakers, please stand by.
Hendrik du Toit: Good morning, ladies and gentlemen. Welcome to the Ninety One interim results presentation for the half year to 30 September 2025. I will highlight the key numbers before moving to the business review. Kim McFarland, our Finance Director, will then present the financial review. I will then update you on recent developments and conclude before we take questions. Those of you participating through the webcast can submit questions during the presentations via the chat function at the bottom of your screen. Assets under management rose more than 19% over the past year. Flows turned around strongly. We recorded net inflows of GBP 4.3 billion for this half year, resulting in adjusted earnings per share growing by 15%. This net inflow number consists of GBP 2.4 billion of organic inflows and GBP 1.9 billion that came from the Sanlam U.K. transaction. The dividend per share increased to 6p per share and operating margins expanded to 32.1%. Staff shareholding grew to 32.7%. The people of Ninety One are fully aligned with all our other shareholders. I'm delighted to report that our business is growing again, in terms of revenues, earnings and assets under management. This is supported by investment returns and a significant turnaround in net inflows. We are sticking to our core strategy and investing in our existing growth drivers, while selectively backing new growth initiatives across our ecosystem. Investment performance remains competitive. The Sanlam relationship is delivering, and Ninety One is poised for further growth. We always show the long-term track record of Ninety One to remind everyone that we are about growth over time and not growth all the time. The business has been built over many years in a patient and predominantly organic way. Markets have been supportive of late, but we are clear that sustaining growth over time takes focus, rigorous execution, discipline and belief. We remain committed to our people-centric, capital-light and technology and AI-enabled business model. Market conditions have improved over the reporting period. The panic that followed Liberation Day is now history, and animal spirits are back supporting overall equity market levels. More interestingly, we are observing a new openness to diversification of institutional portfolios, which includes interest in emerging markets. This interest seems to be driven by the desire to diversify geographically as well as a recovery in relative returns. Given the high concentration levels in indices, we are also witnessing a renewed interest in active strategies. A little over 1 year ago, I reported to you in a world in which active long-only and emerging markets across the capital structure would deeply out of favor. Therefore, Ninety One was experiencing a third consecutive year of hostile business conditions. I'm delighted to report that these conditions have improved substantially over the past year. Despite the strong performance from emerging markets and the rise in financial asset prices generally, we are some way off historic levels of demand at this stage. As mentioned at the end of the previous reporting period, our industry continues to be extremely competitive. Clients are setting high standards and continue to be price sensitive. Fee pressure remains a challenge. It goes without saying that Ninety One is exposed to market levels and how financial assets are priced. A sharp decline in markets will affect revenue generation and new business volumes. More generally, the Internet era is being replaced by the AI era. This touches every industry, including our own. At Ninety One, we are embracing this and look forward to reporting progress in more detail in due course. In summary, conditions have improved, while competition remains relentless in this industry. Equity markets have done well over the past 3 years with headline indices close to doubling. Over the past 6 months, our clients continued to benefit from strong performance. Emerging markets in general have outperformed developed markets and the strength in South Africa further contributed to our assets under management and driving these through the threshold of GBP 150 billion and $200 million, respectively. In fixed income, we have also seen positive returns, even though developed market bonds have had a tough time. Ironically, this is where most of the inflows in our industry have been over the past few years. Emerging market bonds are doing much better, and we expect demand to grow in this space. This is an area in which Ninety One is one of the market leaders. Since our listing, investors showed little interest in emerging markets. We're now seeing a decline in the active outflows in equities and an improvement in the environment for specifically active equities. For the second half year in a row, we're seeing positive active fixed income inflows. But as you can see, we are still well below the long-term demand levels for emerging markets. Judged by recent client engagements, we expect demand to pick up in due course. This assumes a world in which risk assets remain attractive. The outflows that have been with us from 2022 have started to reverse in the second half of the 2025 financial year, and inflows have now accelerated into the first half of the 2026 financial year. In addition, we have added GBP 1.9 billion of Sanlam U.K. assets with the completion of the acquisition of Sanlam U.K. We also benefited from the strongest year since 2020 in terms of market and portfolio growth. We are mindful of the fact that markets do not usually go up in a straight line, and we remain vigilant on the cost front. These slides show organic net flows, excluding the Sanlam take on. We had substantial equity inflows largely in our competitive global equity offerings, and positive flow in all asset classes, except multi-asset. This related to our own performance and general client demand. We have addressed the situation by bringing in new leadership and renewed focus on the multi-asset part of our business. The majority of our client groups were positive for the half year given the pipeline. And given the pipeline, I'm hopeful that U.K. will show positive results for the full year and that South Africa will return to positive net flows for the second half as well. Investment performance has been solid over the period, and we can compete in the areas where we need to compete for net inflows. As always, a few strategies have done outstandingly well while there are also laggards. Overall, we have a competitive offering, which has the potential to generate ongoing net inflows and meet the high standards of our clients. I now hand over to Kim McFarland, our Finance Director, to take you through the financial results. Thanks, Kim. Kim McFarland: Thank you, Hendrik. I'm here to present a set of strong financial results for the period ended 30 September 2025. I would like to highlight that our core operating business has again produced a solid outcome. Management fees and adjusted operating expenses both increased by 3%, resulting in the core business recurring results increasing by 2% on the prior period to GBP 82 million. Management fees were at GBP 290.7 million. This is as a result of the increase in average AUM from GBP 126.7 billion to GBP 139.7 billion, alongside a decline in the average management fee rate to 41.5 bps. More on this later, but worth noting that the increased closing AUM positions Ninety One's revenues well for the next 6 months. Adjusted operating expenses of GBP 208.7 million includes the interest expense on the lease liabilities for our office premises and the full bonus accruals. It does exclude nonoperating costs. The business produced an adjusted operating profit of GBP 98.8 million, up 12% from the prior period. This increase is predominantly as a result of higher performance fees of GBP 4 million. Other income is negligible and there's mainly a number of fair value adjustments on seed investments. There were FX losses as a result of the stronger GBP to USD in the period. So the adjusted operating profit margin increased from 30.5% to 32.1%. And at the finals for 2025, we reported an adjusted operating profit margin of 31.2%. So let me explain further the decline in the average management fee rate. This is calculated as a monthly average and over the 6-month period has shown a slow decline. However, there was a market fall at the end of H1 2026, which we have analyzed. During the period, daily average AUM upon which the management fees are generated, consistently lagged monthly average AUM upon which the average management fee rate is calculated due to the manner in which markets moved markedly during the period. And this effectively overstated the average management fee rate decline by an estimate 0.8 bps. Calculated on a daily averaging basis, the actual daily average rate is closer to 42.3 bps. So closer to a fall in 1 bp over the 6-month period, which is higher than our historic guidance. There were further factors that are impacted on the fee rate in the period, which were a significant AUM increase in lower-than-average fee rate clients. The Sanlam U.K. take on being an example, although this impact was small. However, the take on of large mandates at lower-than-average fee rates has and will have a material impact on our management fee rate, an AUM decrease for higher than average fee rate clients. The U.K. OEIC being an example, and this would have had an estimate 0.5 bp negative impact. And at the same time, there were some downward fee adjustments for existing clients who generally compensated with additional assets. Ninety One's profit before tax after considering the list of nonoperating adjustments, adjusting net -- adjusted net interest income, the small share scheme, net expense, corporate-related professional fees and now the amortization of the intangible asset as a result of the U.K. Sanlam transaction increased by 10% to GBP 102.2 million. At the interim, the share scheme is generally a net expense. And this is largely reflecting the amortization impact from prior year credits where staff bonuses were allocated to Ninety One shares. At the year-end, we have a better understanding of the share scheme and the allocation of annual staff bonuses to Ninety One shares. Remember, we fully expensed the bonus payments within adjusted operating expenses, irrespective of how settled. IFRS requires the amortization of bonus-related share awards over 4 years, which is then included in the share scheme expense. The effective tax rate for the year was 25%, down from 26.3% in the prior period, and this was driven by higher earnings in lower tax jurisdictions. And in the prior period, there were a larger number of nondeductible expenses. So the above factors resulted in a profit after tax of GBP 76.7 million, up 11% from the prior period. And our adjusted EPS shows a 15% increase to 8.4p, more than the increase of adjusted operating profit of 12% due to the lower effective tax rate on the adjusted operating profit and a lower number of ordinary shares for the calculation of adjusted EPS. So this analysis summarizes the absolute movement in adjusted operating profit from H1 2025 to H1 2026. It clearly shows that management fees, performance fees and other income increased. These increases were partially offset by the increase in employee remuneration, but noting business expenses were actually lower by GBP 2.7 million than the prior period. This is the analysis of the movement in adjusted operating expenses. Adjusted operating expenses increased by 3% to GBP 208.7 million. Employee remuneration represented 64% of the total expense base. In the prior period, it was 62%, and increased by GBP 9.5 million to GBP 134.1 million. This was driven by an increase in fixed remuneration consistent with the increase in head count and annual inflation increases as well as an increase in variable remuneration in line with increased adjusted operating profit. Over 50% of employee remuneration remains variable and the resulting compensation ratio was 43.6%, up from 42.9% in the prior period. Business expenses decreased by 3% to GBP 74.6 million. We began to analyze the cost changes, at a high level, we've broken this down -- the movement down as follows: inflation-linked increases of GBP 1.4 million for those costs that are impacted by inflation. FX-linked impact was negative GBP 2 million. And there's been a pickup in technology spend of GBP 1.7 million, with other costs then decreasing by GBP 2.8 million. Technology now is the largest business expense. Previously, it was third-party administration. Looking ahead, we're expecting business expenses to be impacted by inflation, ongoing technology spend and the move into the new offices in Cape Town planned for January 2026. Post the Sanlam integration in South Africa, there will be a cost impact, which will be predominantly headcount driven. So increases to employee remuneration as well as the resulting general operating costs. This is showing the business expenses and total expenses as a percentage of average AUM in basis points over a 5.5-year period. The adjusted operating profit margin over the period is also reflected here. Irrespective of the movement in AUM, business expenses have marginally decreased over the period, even noting the continual investments in our core technology system. Total expenses as a percentage of average AUM hav,e, in fact, declined aided by the growth in the denominator. The adjusted operating profit margin has remained in the range of 31% to 35%, reflecting ongoing cost management with the underlying AUM growth. Ninety One's qualifying capital was GBP 316.3 million at the end of September 2025. In line with our dividend policy, the Board has proposed an interim dividend of 6p, this is an increase of 11%. After this dividend payment, there will be an estimated capital surplus of GBP 155.3 million. This will result in a capital coverage of 245%. During the period, we continued with our buybacks, and this resulted in another return of capital of GBP 20.4 million and a reduction of 14.1 million shares. We did, however, issued GBP 13.7 million of plc shares for the U.K. Sanlam transaction in the period. In line with our capital-light model, since listing over 5.5 years ago, we have returned close to 60% of our initial market capitalization to shareholders. So a few updates regarding the Sanlam transaction. All regulatory approvals have now been secured. The U.K. transaction completed on the 16th of June 2025, with the result of GBP 1.9 billion of AUM on boarded and Ninety One plc issuing 13.7 million shares. It's planned for the SA transaction to be completed by the end of the financial year, which results in expected total onboarded AUM of circa GBP 17 billion and revenue in line with what we previously reported. An additional 112 million shares will be issued when the SA transaction closes. Now reviewing the position for H1 2026. The adjusted EPS and operating margin were accretive. There was a slight dilution on the average fee rate, which I mentioned earlier. And also, as previously mentioned, we will be waiting the shares issued to Sanlam for the determination of the adjusted EPS for the interim and then for the final 2026 results. For the interest, this looks as follows. So shares in issue, excluding Sanlam U.K. is GBP 882.7 million, weighting of shares issued for the Sanlam U.K. is 13.7 million times by 107, the days since the transaction in the period, divided by 183, so the days in the total period, which gives you 8 million shares. So shares in issue for adjusted EPS calculation is 890.7 million. The actual number of shares and issue at end of September 2025 was 896.4 million. The intangible assets arising on the balance sheet for the Sanlam transaction will be amortized over 15 years. To note, this is tax deductible in the U.K. but not in South Africa. And so on that final technical point, I will now hand you back to Hendrik. Hendrik du Toit: Thank you, Kim. At Ninety One, we think long term and our commitment to our strategic pillars do not preclude us from constant improvement and development of our firm. Over the period, we've continued to invest in talent. We've broadened the top leadership team and evolved accountability throughout our firm. We ensured that our 3 core opportunities international public markets, Southern Africa and private markets are adequately resourced to compete effectively as market-facing units, supported by our 3 pillars of investments, client group and operations. And so as we go into the second half of the year, we have formed a dedicated international public markets team, which can focus on the commercial opportunity for a recovery in demand for active investment management especially in international and emerging market strategies. We have a focused and strong Southern African team to take a market-leading business to an entirely new level. Finally, we've reinforced our private markets team with fresh talent and additional senior leadership and asked them to accelerate progress in this growth market. We are backing new growth opportunities out of the recently established Ninety One Foundry. These include in-region presence and partnerships in key emerging markets, allowing us to become domestic competitors in certain regions and deepen our investment insight in these fast-evolving markets. For example, we opened 2 offices in the Middle East in the previous reporting period. We have now put additional resources in, and we are building an on-the-ground domestic business in the Kingdom of Saudi Arabia, which includes a strong investment presence. In Asia, we're developing an exciting joint venture with a Singapore-based alternative investment firm with deep experience and relationships in the region and in particularly China. This will strengthen our investment capabilities in the region as well as positioning us to compete more effectively for capital flowing out of the region. We have established a digital finance unit with dedicated leadership to provide clients in certain markets with a far better experience than they traditionally have received from asset management firms. We've committed substantial resources to AI-related innovation which we will update you on further at the end of the year. I must stress that these developments are fully expensed through the cost line and are not consuming significant additional capital. Over the reporting period, we've made meaningful progress on the technology front, which includes a major systems migration. Now that this has been fully completed, significant resources have been freed up for further enhancements and innovation. These are the additional 3 areas of growth we're pursuing, which we believe will impact the way we run our business in years to come. What we're really trying to do is from strong foundations, build the active investment manager of the future. To become the active manager of the future, AI is key. At Ninety One, we approach AI on 3 levels: advocate, equip and use. So this is how we rate ourselves. We see quite high levels of adoption, we see reasonable levels of experimentation given the widely available AI tools to all our staff members, sort of 6 out of 10. Then our people have embraced it, and we are working hard to get our proprietary data organized for the effective deployment of AI across the firm. The proof of the pudding is in the transformational impact of AI. We have much to do on this front. The business is stronger than it was in the previous reporting period, supported by better business conditions and recovering demand. We plan to improve and modernize our business through disciplined investments in and adjacent to our core activities and markets. Emerging markets and the search for diversification are coming back into favor, which supports us. Active investing has a role to play in this world particularly within emerging markets and in the global equity opportunity set. The strategic clarity and simplicity of our business model enables us to seize the opportunity with pace and strength. In short, we see renewed opportunity for growth. Thank you very much. We can now move on to Q&A. We will take questions in the room first, and then will watch -- then we'll take questions from webcast viewers. [Operator Instructions] I think Angeliki, you had the hand up right in the beginning, so. Angeliki Bairaktari: This is Angeliki Bairaktari from JPMorgan. So your flows were much stronger than the previous semester, GBP 2.4 billion. And we -- you say in your presentation that you feel that active is back. Can you perhaps give us a little bit more color with regards to where you see that strength coming from I think you had APAC, Middle East and also equities. But if you can just give us a little bit more color on the pipeline that you're seeing for the next 6 to 12 months where you see the strength coming from? And that's my first question. And then maybe on the management fee margin outlook. There's a lot of moving parts there, relative to my expectations, the management fee margin followed more. I think we still have some dilutive impact to come from Sanlam once the further AUM gets onboarded on the platform. So how should we think about the run rate, management fee rate for next year perhaps? Hendrik du Toit: I think you've asked the real questions that we all need answers for. So I can give you color on what we see rather than a prediction, Angeliki. So firstly, the -- if I can go to the flow or the pipeline that we see. Firstly, the result is again emphasizing the strength of our diversity. We source capital from the same kind of client but in different regions around the world. They have slightly different perceptions on risk and on willingness to take risk at a point in time. And that's why we've seen equity up weightings from large clients in Asia. And that's really where we've seen it. In the rest of the world, particularly North America, where we've delivered some positive, we are seeing a significant search activity or investigating activity's about how to diversify's their portfolios. That flood's gate has not yet opened. We expect that given the sense that markets normalize over time, and we've come out of a long period of underperformance for the rest of the world relative to the U.S. And we know these things go into 10, 15-year cycles. There's a very good paper on our website about dollar cycles and dollar cycles and international investments seem to be highly correlated. You can go and read that. So -- but what we have seen in the last 6 months picking up from the previous 6 months, not the year ago, but the preceding half year is an intensity or intensification of client and search a client engagement and, call it, presearch engagement. What, of course, can change the flow picture is whether we, in this very competitive world win in the very final stage. I mean an example in the last 6 months, and it really hurts me to say it. But after eliminating all competitors, we came second for a sort of close to $5 billion mandate, one client that would have made this figure look a lot better. And so we are driven, and I think you should understand it Ninety One deals in the upper end of the institutional market. Small numbers of clients make a big difference. The fee on that depends on where they're already engaging with that client at scale, and therefore, the client gets a better deal and we price persistency as well. So clients that are persistent, and this is not price cutting, but clients that are persistent have proven themselves to be persistent over time, get a better deal than those who rent your capacity. And so sometimes, we would not do a deal, which we could do and create great inflows to make all of you happy because we know this client is a capacity renter. And they'll come for 3 years and then cause a problem for us when they go out again, whereas others deserve the respect of a value-for-money deal plus scale benefit. So it's very, very difficult to predict where we are. I think we still, with our underlying guidance of market fee pressure is around -- and I still think it's around the 1 where we are is 50% of our growth typically when we're in growth cycles is upweighting from existing clients, 50% is new. If those existing clients are the big ones, your fee goes lower, if they come from general market, mutual fund market, et cetera, your fees are a bit better. But I think over time, Ninety One is moving towards and increasingly institutional. So the breakdown in the addendum to the slide pack, the appendix where we show institutional versus adviser actually, we are trending towards a much more institutional business. And even in South Africa, where we have a strong advisory business, those advisory firms are getting bigger and bigger and behaving more like institutional multi-manager. So I think -- we're going through that lowering a fee process but hiring of what increasing of volume and therefore, increase operating margin but not necessarily on a fee basis. So I think the 1% we guide to is still the underlying fee compression in our industry. We might as of late, be hit by something a little more or less, but it depends. And it also depends on the growth of the alternatives business because that is a still and where I see the real fee pressure in our industry is actually on the alternatives business. I don't think the 2 and 20 models are going to hold because if clients look at their fee budgets, this is where. So what they're currently doing, just an interesting thing in private equity, private credit, et cetera. They pay the full fee, but then they do a deal on the side to co-invest for nothing. So what is the real effective fee of providing those services and your capabilities to a client for free. So I think about -- it would be a really interesting work -- a piece of work for you to do when you look at that side. So I think that's where the fee pressure is more than in ours, but we are preparing for a world where we have to be at least 1 basis point more efficient every year. And I can't tell you whether we're going to be at 40. Right now, I'll -- Kim, I think you've got the answer. We're running at a slightly higher fee level, maybe you can add here for me, then actually the number shown there. Kim McFarland: Yes. Well, I kind of explained that in my sort of daily -- I think I did that on the call this morning actually as well on the sort of daily, monthly factor. But I think you're sort of -- you're asking the question about looking ahead. And Hendrik is right, we are seeing pressure on the fees, both. You've got the standard 1 bp a year that we advise on. But when you're looking at both new mandates, but actually more so existing client mandates that are coming on board at lower rates and then giving us the asset to compensate. So hence, we're seeing the pickup in the AUM, but they are often negotiating at lower fee rates. So this is why we're definitely seeing more fee pressure. Hendrik du Toit: But for us, it is -- the value lies in embedding those relationships for the long term. And if you can do that, you have a higher-quality business. But what we're not doing is price-cutting to win volume. We don't going out there saying, "Hey, we're cheap". But this -- and I still believe, this market will settle down when nominal interest rates are on the rise again because actually, it's hard for a treasurer or someone to sign a check, when he earns it out of interest, it's easier. So I think there's a -- there is a link, which one day will prove statistically, but we can't give you an exact number now. The next step on the pipeline, we're seeing substantial opportunities against scale ones, so there won't be fee level enhancing ones, they'll probably be roughly where we are for the rest of the year that we should convert. What we don't know is where the unexpected redemptions or changes in strategy can happen with the client. And that's the problem when you deal with these large clients. They get a new CIO, they get staff changes and a new strategy comes in, you're being seen as okay, but not necessarily central to the strategy. So -- but I'm fairly comfortable that the visibility of the pipeline is better than it's been in recent reporting periods. Jonas Dohlen: Jonas Dohlen here from Deutsche Bank. Just one follow-up. Yes, just one follow-up on the fee margin. I was just wondering if that guidance now includes the Sanlam or if that's still on kind of the legacy assets on that 1 basis point... Hendrik du Toit: Sanlam is lower because it's a $20 billion deal. So it's lower, and it's largely fixed income assets. Jonas Dohlen: Yes. But on a group level, you expect 1 basis point... Hendrik du Toit: Yes, on an organic basis. So there's an organic basis and then there's the Sanlam transaction. And what I'm saying, the 1 basis point is the market pressure. If we were to ex Sanlam or if we were to get a big up weighting from a sovereign wealth fund where we already have a premium deal because they've got billions and billions with us, it's probably going to be below that fee level. If we win 500 million mandate chunks, it will be at or around or above that fee level. You see. So that's why I'm saying the market -- the institutional market pressure is roughly 100 basis -- or 100 basis points per year. The -- sorry, 1 basis point per year excuse me. 1 basis point per year. But the -- for us, Sanlam is a separate transaction and then obviously hugely accretive from a profitability point of view, and it depends then what kind of flow we get. Jonas Dohlen: Great. And then just on the tax rate as well. I think you mentioned... Hendrik du Toit: I don't understand... Jonas Dohlen: 25%. Kim McFarland: 25%. Correct. Jonas Dohlen: Being a reasonable number to go forward. I'm just wondering how to kind of square that circle. I mean you have a higher tax rate in South Africa, and that amortization part not being tax deductible as well? Kim McFarland: But we have tax in many other jurisdictions as well. So it's linking up the 2 of it. And -- you're right. When I'm looking at it, I'm looking for the next 6 months and the South African impact is only -- it's going to be in the results for a couple of months next year. I think looking ahead with the nondeductibility of the amortization piece, it will tick up a bit. Hendrik du Toit: Piers, you'll come back in new uniform. Piers Brown: Yes. Indeed, yes, it's Piers Brown from Investec. Hendrik du Toit: Very good. Piers Brown: So very happy about that. I might be greedy and actually, go for 3 questions. So the first one, yes, just back on to the fee rate conversations. So I guess, if you look at this from the perspective of the operating margin, you're -- I mean you printed 32%, which looks very good for the first half. If I take out the performance fees, you -- which I know is a slightly dubious calculation, but it looks like you're maybe sub-30%. But the question would be just on the fee rate outlook, do you think 30% is still the level you can protect? Hendrik du Toit: I think you have to compensate higher average assets under management, that compensates a bit because remember, the markets had a run close to the end, there was Liberation Day down than up. So your average AUM doesn't reflect your actual AUM. And you've got to look at where the sterling is strong or weak, which then deflates a big cost base. So I'm more comfortable than you. But you are right, there's -- the core revenues have not grown as much as they should have. So we don't run to a target actually. And therefore, it's not something we monitor daily. But I'm not at this stage, I'm comfortable that we're going to come back to you with a 25% operating margin, put it that way. Kim McFarland: I think that's too right. I think you've also got to recognize the fact that we're taking on the Sanlam assets, as I said, next year at a low cost. Hendrik du Toit: And I would remind everybody, we've bought I know we call the GBP 1.9 billion acquired growth, but we bought back those shares already. So if you think about it, it's just a mandate win, the big one is going to take a bit longer, but if we can do that, if we have the cash flows, then you know what, it's actually akin to an organic transaction. Piers Brown: Okay. Second one is just on the composition of flows. And sort of relating this into Sanlam, but I mean you've had GBP 1.3 billion of Africa outflows, offset by very strong inflows in Asia Pac. Is there anything in the Africa performance, which is maybe impacted by clients reallocating in advance of Sanlam or... Hendrik du Toit: No, no, it's not Sanlam. It's the -- South Africa is actually a very competitive market, and it's very transparent. When you know exactly what each competitor is doing and your cousin or your kid works at the competitor, you literally know what goes on. And so we had some performance pressure in 1 or 2 strategies, which didn't get -- the market goes quickly, moves quickly against you. We've had the back end of the so-called 2-pot system, which means money was released out of the pension system, where if you're a large provider, you have to suffer that. That is now gone. So that structural bit has left. And then, of course, there was the back end of the internationalization of the SA equity or SA investment market because the exchange controls were relaxed for international opportunities opened up for retirement funds. The Minister gave a big -- a few years -- 2 years ago, a big -- there was a big change in the -- what they call Regulation 28. And that means they could invest more. So there was a structural flow abroad. Typically, to new competitors rather than to someone already has a high wallet share with a client because it just makes sense for those clients. And actually, international passive was a big winner there where we don't compete. So I think those 2 forces are over, think on our investment side, we have all intends -- we intend to be very competitive, and we have recovered quite a lot in terms of competitiveness. So I think on all 3 factors, we're stronger in the second half than the first, but it is one of those markets where if you have a big share and you're not absolutely on top of it, the competitors come after you and we've got some very good competitors in that market. Piers Brown: Okay. Perfect. And just maybe a last one on capital. So 245% capital coverage ratio. I think you've sort of indicated 200% in the past is where you'd like to be. It doesn't feel like there's an awful lot of need for seed capital for some of the new initiatives. So the obvious question is, would you look to move closer to the [ 200% ]? Kim McFarland: We will -- I mean, as you noted, we've continued with buybacks in the actual period. We will continue to look for opportunities to use additional seed capital for buybacks when we're comfortable with the price, and obviously in agreement with the Board. Hendrik du Toit: If pricing is reasonable, we think reducing the denominator is always better than just paying out the cash. But we must look at where the market goes. And who knows, there may be opportunities. Any other questions? Investing definitely add value for money, you'll get your dividend. Varuni, are there any of online questions. Varuni Dharma: Yes. There are a few. First one is from Brian Thomas at Laurium Capital. Are you able to comment on the buyback program that was suspended during the half? Are there any metrics that you take into account in determining when you buy back stock that we should be mindful of? Hendrik du Toit: Before we answer that, there's -- Kim just reminds me, there is one thing in the Africa side. There was a 1 single client sort of -- and many clients pay out and eventually but reallocated away from us as well. So you should sort of have the impact of that number. And that's why I'm quite confident that it can turn around. Sorry, on the buyback, yes, we carefully -- we carefully look at value and value in the context of the industry and the context of what we see ahead because the one downside with buying back is if you overpay for your own stock. And therefore, it's always a consideration and a discussion with the Board. It's not an automatic buyback process. And -- but our industry has been so extremely -- I actually had benefit of last week in Paris when I went to watch the Rugby and I have to remind, I know the French listeners, it was a wonderful moment for South Africa and Paris. But in spite of referee against us, we're still -- but I actually went to watch the Rugby with someone who used to be one of the top financial analysts in the market about 25 years ago -- 20 years ago. And he's gone to private equity. He hadn't looked at valuations of asset managers. He was -- it's a bit like talking to someone who fell asleep 25 years ago because he was completely mind boggled by the relative valuation of asset managers against other financial firms particularly wealth today because in his time, it was exactly the opposite. We were the 20 multiple shops and the others were single digit. So I think broad -- and that reminded me again, that these cash flows, quality cash flows are still, in my opinion, or at least in our opinion, fairly cheap, which is why we have also been acquiring stock slowly and as a management team because we think the market is not appreciating the quality of the cash flows we generate. And so even though they don't -- may not grow as much organically there could be -- and there has been a re-rating of late. Now if the re-rating is too much, we will obviously step away. But our industry is still structurally very cheap compared to other cash flows of similar quality. I mean just close your eyes, 30%-plus operating margins is that's tech. Okay, what do you pay for tech? Palantir last when I looked at 185 PE multiple. So it's very different. And it's in that context that we think rather than in short 1 month, 1 week, 1 quarter valuation cycles. But there is a proper process, which Kim can talk to you about when she reports it again. Do you want to add something, Kim? Kim McFarland: Yes, that's fine. Hendrik du Toit: Any other questions? Varuni Dharma: Yes. Next question, Murray Winckler from Laurium again. Congratulations on returning to net inflows for the business. Headcount increased by 8%, which seems high. What should we expect going forward? Hendrik du Toit: Murray, well to done to you, by the way. You're one of those guys stealing business. We will have to come take it back. Just I mean that is one of the big questions. Can we get to a bigger -- a real efficiency for our business? That's about the digitization and the technology investment. But we should also remember that there was some preparation for -- although we're not taking on many people from Sanlam, there's a significant preparation for taking on a book of that size that -- and then there's also the improvement of our communication with end clients, which we had to invest in to make sure it's there. And again, technology over time will make that a lot easier but it was really important, and we've had challenges on -- with South Africa being on the gray list. We've had real challenges on dealing with our international funds into South Africa and our service capability had to just be much sharper, much better equipped to deal with it. And then we've also been building the private markets business, which is much more -- actually much more human intensive than certain public markets investment businesses. And that's about the reasons. I don't know Kim, are there any other ones that you pick up and you want to... Kim McFarland: I think that's right. I think the pickup in a lot of op staff on the IP platform in South Africa. Likewise, on the Sanlam. A lot of them are actually long-term contractors at this stage because I see it as a temporary thing. So I think the sort of more permanent headcount growth has been in private markets and within the actual business. So I think the question is what are we thinking about it looking forward? I'm not seeing an 8%. I wouldn't be looking at an 8% increase in headcount going forward, I think, would be my answer. Hendrik du Toit: And I think with a better use of technology, we could run the same quality service, leaner, that includes client acquisition, client service, investment processes, but it's very important to do these things very slowly over time. I'm not as bold as the big banks that say that they will run -- I mean, 2 of the big bank CEOs in Global Bank CEOs confirmed to me that they'll double their business over the next 5 years with the same staff levels. That has to be seen whether that's going to realize, but those are ambitious goals. I think we should have similar goals, but it's early stage saying it because the promise and the layer of technology is always there and then the delivery is slightly behind. And we've -- those of us who have worked in the markets a long time have realized that. But definitely don't budget for a 8% staff increase, Murray. That's not going to happen. Varuni Dharma: Next question from Jaime Gomes, Laurium Capital. Can you please explain the expected total onboarded AUM from Sanlam remaining the same as what it was this time last year, circa GBP 17 billion. Has the book experienced some outflows given the strong market performance over the last 12 months? Hendrik du Toit: The book is roughly -- it's the same number. There might be a little benefit rand to sterling exchange. So it might be a little more in sterling. But remember, it's a very fixed income, heavy book. There are also -- there could be a few wins associated as well, but we first got to deliver them. So we're very comfortable that the numbers will reflect what we told the market at least. Varuni Dharma: Next question from Hubert Lam. Can you give us an update on the alternatives business and new initiatives, including private credit? And he has a second question, which is, how should we think about further investments you need to make in AI and tech and what that means for your cost base? Hendrik du Toit: Hubert, nice to get a question from you. I know you have another meeting, so you're not here in person. I would say that my simple answer is private markets are hard. And I'm so glad we didn't buy an overpriced boutique to grow, which then doesn't grow, okay? Because the top guys dominate they've got such a strangle hold. And so that's my one point. I think we found niches which we can live in and defend and grow. And what we have actually done is put some of our -- to make sure they get the full support of the firm, put some of our top leadership very close to the private markets guys and they support them to get through and we build it around and particularly around our emerging markets positioning. Now what we know is the emerging markets haven't had huge flows as such. We think there will be appetite and there will be appetite coming. We modest net inflow have been consistently in that space. But we are building through our cost line, and it's fully reflected in our cost line, we are building capability to be actually -- to be fully competitive in our various areas. And I think our focus is private credit. And private credit and transition credit, and that is very clear, and we have built a market name and position there. So we would expect accelerating flows to follow. But those businesses take -- will take a while to impact -- to truly impact on the bigger Ninety One bottom line. If you model us, model us largely as a long-only business, long-only active business because that's still very dominant in terms of revenues and flows. Kim McFarland: Cost. Hendrik du Toit: And yes, but private market is costly to build. It's high fee, but costly, whereas public markets could be done very efficiently with slightly lower fee, and that's the sort of trade-off between the businesses. But we do see the merger. And so the partnership we announced in the joint venture we announced with in -- with the Singapore based, which we are about to announce because we'll probably -- will probably sign in the next few days, and that's why we haven't been long on detail because anything still -- things have to be -- until they're fully signed, you don't want to talk too much. But there, we have -- we're talking to a business which does long short and crossover between public and private. Now I think these universes are getting closer, and one just has to make sure you understand what happens to the other side of the liquidity fence rather than just staying in the curated even if you want to be a very good long-only business staying in the highly curated screen-based long-only part of life. You've actually got to get -- understand what entrepreneurs are doing and what's happening in the ever longer pre-IPO pipeline because we do know a lot more happens on that side of the fence now from venture right through to growth. And I think that's important for us. But as these things emerge, who knows what product constructs will look like, who knows what client appetite will look like. Clients today are still very organized in boxes between the so-called alternatives units, which is now quite frankly, mainstream and active long only, which is becoming increasingly alternative and passive. So they've got their different boxes. But as they start looking at the total portfolio approach, who knows how they are going to buy and that's what we need to be prepared for. Kim McFarland: And I think the question on uptick in technology spend or AI spend, which was the other one, I think Hendrik mentioned the fact that our big technology replatforming exercise did complete early this year. So those costs are now -- and the ongoing cost of that are actually largely built into our figures. AI has largely been a part of our operating cost line. So the gain, how you should think about it is really a continuation of what our cost base is right now. Hendrik du Toit: Yes. And we absorb in what is available or what can be bought. We don't go to bleeding edge development. The big thing is getting your data organized. And I mean it's been with -- that data story has been with me ever since I've been in this firm. Everyone said we have to organize our data better. But you can get so much more value if you are properly digitized as digital middle business models are showing, it is not trivial and that easy. But as a midsized business, if we can't get it right, nobody can get it right. So -- but we're spending resource and effort on it to make sure we can extract maximum value given the enhancements of the available tools. And they are genuinely moving very fast. And I think 5 years from now, we will be in an entirely different world, and we need to be ready for it. Any other questions, Varuni? Varuni Dharma: Yes, a couple. We have a couple of questions on buybacks. The first one from James Slabbert from Standard Bank. There was a slide on the existing capital stack in the business, would it be aggressive to model for annual buybacks far in excess of earnings remaining after the payout of dividends. I think you've touched on that. But -- so by modeling for buybacks in excess of earnings. And then whilst we're on buybacks, a question from Keenon Choonoo from Investec. Is there a preference between Ninety One Limited or PLCs when considering buybacks? Kim McFarland: So we look at both the plc and the limited lines as far as buybacks are concerned. In fact, we look at even PLCs on the JSE line when we look at buybacks. So we look at all three because there sometimes is a variation in price. So we look at all 3 -- effectively 3 lines, although there's obviously 2 shares to answer that question. As far as buybacks to ceding earnings, we look at buybacks from a capital position. So we -- it comes back to the question asked earlier by peers, you aim for a 200% capital position. We're in excess of that. So I'm rather looking at my capital position, understanding, yes, is there any seed? Is there any regulatory requirements. As you mentioned, there's not an awful lot of that at the moment, but we take that into consideration and at the same time, then look at opportunities for buyback based on surplus capital that we're holding on the balance sheet. Hendrik du Toit: Yes. But we -- what we don't do is this is a highly operationally leveraged business. It will only be an extreme that we will leverage the business. You remember, this is what sticks out asset managers. They go on leverage and then they get the fall in assets under management. They get outflows and the debt stays the same and the equity gets wiped out. So we will be very, very careful to ever go beyond what we can do out of our ongoing earnings or surplus capital. Some other industries, people get very brave. I think, yes, this is probably one of the reasons why we haven't bought the firm from the market yet, okay, because you don't leverage these businesses. . Varuni Dharma: Another question from James Slabbert for clarity on the 1 basis point fee margin compression. Would you apply that to the current fee rates that H1 2026 or the FY '25, so the year-end? Hendrik du Toit: I think we've already done this year, we've already done it. I mean we doubled it. So we think we could have a -- we're not 100% sure, but we could have a far lower decline in the second half, just given what's happened in flow dynamics, excluding the Sanlam. But -- and it's really a gut feel here. But that 100 basis points feels like the underlying trend in the market, not necessarily ours. And James, I wish we can't even forecast it to our Board where we're going to be -- it's very -- you've got a very hard job at doing that. I don't know whether Kim can give you any more wisdom except to say the trend is not up. Kim McFarland: Well, I think you're right. I think you're going to look at the most recent fee rate. And if it's in the half year, so you're taking half or 0.5 based on the most recent fee rate, but then you have to take into consideration, as we mentioned, the Sanlam assets coming on board, which will have a further impact and should we take on any large new mandates in the period. If we see those flows, there's likely to be further fee erosion, hopefully not, but there's likelihood. Hendrik du Toit: You see -- especially when you do the relationship deals, with a large insurance company or something like that. And they are genuinely sensitive because it hits their profit, but they can give you assurance about commitment, timing, i.e., embedded value or present value of the deal, that's different from when you get in the normal distributed pension market OCIOs most -- many of them are in -- or multi managers are different because you're not going to compete on price there at all. So it depends where the flow comes from. What we haven't seen, and I think that's the bit you should understand. We haven't seen the sort of -- I've hinted that there are opportunities to grow. But the good times aren't back yet. When you get into the good times and clients want to deploy fast and -- they just want to get the money out there. Then price sensitivity tends to take a backseat. At the moment, they have lots of time to deploy. They're thinking multiyear. They're not chasing markets. I think if you get up severe underperformance or you get -- and I don't think we're going to see it immediately, but if you get a big correction in the dollar, then that changes life. And that's the positive for us. But I don't want you to model that. Varuni Dharma: Last question from Herman [ Van Veltsa]. Do new clients favor fixed fees? Or do they tend to opt for performance fees? Hendrik du Toit: Herman, nice to hear from you again. Another old campaign. I wish clients wanted to give more performance fees because the way you could resolve this constant fee bickering and say, come on, pay us afterwards, pay us properly. But Interestingly, clients have typically been burned by performance fees because they end up paying more. And so they're reluctant to do that. They're also reluctant to go to the -- I mean, in mutual funds, where it's quite prevalent in South Africa, it's not actually encouraged in the rest of the world. ETFs are very difficult. You can't really do -- it's difficult to do, whereas institutional owners don't want to go and pay the big check and ask their Board to pay a large check to a manager unless it's in the alternative bucket. Now again, if those buckets fade and different kind of people contract with us, we could possibly push more performance fees. We think it's a way to align well, although buy-side analysts or sell-side analysts would say it's lower quality of earnings. But I think we could make more profit. They're very happy to do that when they buy Millennium or Citadel. But for some reason, there is a reluctance in our space because that's just what it is. So we would be quite open because we know, over time, 80% of our offerings beat the benchmark. So it's in our favor. But -- it's not the reality today. So I wouldn't model for much bigger performance fee component in our business. I'd roughly keep it similar, noting that a period of good performance, we will own more performance fees. Thank you very much. Thank you very much, and I'll see you after second half, and I hope the positive -- the positive hence, have realized, but it's up to the market. Thank you. Kim McFarland: Thank you. Hendrik du Toit: Thank you very much, guys.
Operator: Ladies and gentlemen, thank you for standing by. Welcome to the Israel Discount Bank Third Quarter 2025 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, November 17, 2025. If you have not yet done so, please access the presentation on the bank's website, investors.discountbank.co.il. I would like to remind everyone that forward-looking statements for respected company's business, financial condition and results of its operations are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated. Such forward-looking statements include, but are not limited to product demand, pricing, market acceptance, changing economic conditions, risks in product and technology development and the effect of the company's accounting policies as well as certain other risk factors, which are detailed from time to time in the company's filings with the various securities authorities. I would like to move first to Mr. Morris Dorfman, Executive Vice President, Head, Strategic and Finance. Mr. Dorfman, would you like to begin? Morris Dorfman: Yes. Thank you. Thank you all for joining us today. I extend my warm welcome to this investor call. Starting with Slide 2. Discount Group delivered strong Q3 results with net income of ILS 1.13 billion and ROE of 13.7%. Adjusted net income for one-offs amounted to ILS 1.25 billion, representing an ROE of 15.1%. Banking operations in Israel, comprising of Discount Bank and Mercantile recorded ILS 890 million and an ROE of 14.3%. Discount's cost efficiency ratio was 44% in Q3, while the cost-income ratio in the banking activity in Israel was slightly lower at 42.6%. Total credit in the group grew by 3.4%, accompanied by a solid credit quality metrics, while net interest income, NII, remained flat Q-o-Q. In light of these results, the Board decided to pay out 50% of Q3 net income. Moving to Slide 3. Despite 2 challenging years, Discount Bank has consistently shown double-digit ROE of 14% and stable net income. These figures exhibit the strength of bank and the resilience of the Israeli economy. At Slide 4. On the left side, 2025 GDP is now expected to grow by 2.5%. That said, Bank of Israel expects 2026 GDP to rebound notably with GDP growth at 4.7%. On the right-hand side, the job market remained resilient throughout this time, maintaining a healthy unemployment rate of 3.4%. On Slide 5, we summarized our credit portfolio growth and structure. In the third quarter, it's continuing its strong growth across most segments with a 3.4% growth rate quarter-on-quarter and 8.9% year-over-year. The corporate segment continued to show notable strength as credit grew by 5.6% quarter-on-quarter and 17.4% year-over-year. SME credit grew 1.6% and 4.6%, respectively, while household credit grew a healthy 4.3% Q-on-Q and mortgage grew by 2.2% Q-on-Q and 7.8% year-over-year. Operator: Mr. Dorfman, we can hear you. Morris Dorfman: Switching to Slide 6. This slide represents our credit portfolio quality. A stable economic environment is reflected in the consistent NPL ratio of 0.70%. The allowance ratio stands at 1.3% of total credit with a strong coverage ratio of 191%. On the right-hand side, credit loss expenses climbed to 28 basis points in the third quarter. The observed increase in provision is mainly due to 2 isolated corporate incidents made at Mercantile Bank amounting to approximately ILS 50 million. Excluding the Mercantile provisions, collective provisions amounted to almost 90% of all Q3 provisions, reflecting Discount's conservative stance on our credit portfolio. However, a 9-month year-over-year comparison revealed a decline in overall provisions as prior quarters exhibited comparatively lower provision levels. Moving to Slide 7 to discuss revenues. Total revenues increased by 0.9% Q-on-Q, while fee income grew by 2.5% Q-on-Q and 10.9% year-on-year, mainly from fees and commissions from financing activities. Net interest income, NII, slightly decreased by 0.2%, while CPI contribution remained stable. Ongoing pressure on lending and deposit margins is persistently eroding the bank's net interest margin. At the right-hand side, the income from regular financing activities decreased by 1.1% Q-on-Q despite a 3.4% expansion on our loan portfolio. Finance income declined primarily driven by the narrowing of credit and deposit margins. I apologize I had a problem with the line. I will move to Slide 8 to discuss expenses and cost-income ratio. Before we delve into this quarter figures, let's briefly review the bank's journey over the past decade, marked by significant improvement in its efficiency ratio from 67% to 52% post COVID and further reduction to 45 percentage following the divestiture of CAL. While they have come a far away, we think we can still improve our cost efficiency notably in coming years as we mentioned in our strategic plan announced earlier this year. Moving to Slide 9. Total expenses decreased by 3.8% quarter-on-quarter and by 1.2% year-over-year and the cost income improved to 44%. Salary expenses dropped 6% this quarter as we continue to maintain expense discipline. As previously communicated in the last quarter's report, the recently concluded wage agreement is expected to provide enhanced operational flexibility for management. Maintenance and depreciation expenses and other expenses are stable with changes mostly attributed to nonrecurring items. Moving now to Slide 10, you can observe our ample liquidity and diversified deposit base. On the left, you can see that 48% of our deposits are from our retail segment. On the right-hand side, our Tier 1 capital ratio stands at 10.47%, well above the 9.2% Bank of Israel requirements. Our liquidity ratios are well above the regulatory requirements, presenting a solid LCR of 1.7% and NSFR of 11.6%. Moving to Slide 13. I will briefly touch on our main subsidiaries, starting with Mercantile Bank that present a net income of ILS 234 million and ROE of 15.8%. The cost-income ratio stands at 37.5%. Mercantile grew its loan book by 7.6% year-over-year by a well-balanced portfolio. CAL is writing a net loss of ILS 88 million. The loss in the third quarter is attributed to the expenses related to the VAT assessment ruling, totaling ILS 137 million net and an increase in the Santam stock option provision of ILS 75 million after tax impact. As the VAT ruling loss recognized in the consolidated report in the previous quarter, CAL profit contribution amounted to ILS 40 million in this quarter. IDB New York Bank reported a net income of $24 million and ROE of 7%. The bank grew its loan book by 12.9% year-over-year and deposit by 30.9% year-over-year. To summarize my overview on Slide 12, I would like to emphasize the main takeaways from this quarter results. First, we delivered solid results with net income of ILS 1.13 billion and ROE of 13.7%. Second, our cost-income ratio dropped to 44%. Credit continues to grow at a healthy rate of 3.4% quarter-on-quarter and 8.9% year-over-year. Core Tier 1 equity remained stable at 10.5%, which allow further expansion next year, stable asset quality metrics with NPL ratio of 0.7%. The CAL sale is likely to boost our 2026 ROE by 1.2%, while stressing the Tier 1 ratio by 0.6%. And lastly, given our continued strong performance and the confidence we have in ongoing profitability, we announced a dividend payout of 50% of net income, reflecting a gross dividend yield of 5%. With this, I finish and would like to open to Q&A. Operator: [Operator Instructions] The first question is from Priya Rathod of Jefferies. Priya Rathod: I just have 2 questions, please. The first is on AUM, specifically for your small businesses section. There was a notable jump in AUMs quarter-on-quarter. Would you be able to give a bit more color on what is actually driving that AUM number, but then also what's driving the increase in the third quarter? The second question is on mortgages. Again, it was a really solid quarter in terms of growth in volumes, but how should we be looking at that number in the context of the sector data, particularly like the declining of new home sales? So I guess my questions are like what drove the higher mortgage volumes this quarter? And then how should we think about volumes going forward? Morris Dorfman: I didn't get your first question, but I will answer about the mortgages question, and then maybe if you can repeat the first one. So what's happening with mortgage as you understand, the real estate sector in Israel is at the moment, it's not moving too much. But most of the mortgages that have been sold this quarter -- the last quarter are one of the houses that were bought 2 years ago. there's this model in Israel when you pay 20% in advance and 80% just when the house is finished. So most of the people that bought houses about 2, 3 years ago, they took mortgages this year. So what you see now is the movement of money of the houses that we bought a couple of years ago. But I didn't hear your question -- the first question, I didn't understand the question. Priya Rathod: Yes. So the first question was on assets under management, AUM, particularly in the small business segment. There was quite a notable jump in AUMs quarter-on-quarter. I just wanted to ask what was -- what actually drives the AUM number and what drove the increase quarter-on-quarter? Morris Dorfman: Well, it's -- we don't see something special about the small businesses. It's part of our strategy, so we really focus on that. I can't say there's something unique in that. It's just our focus on this sector, if I got your questions right. Operator: The next question is from Chris Reimer of Barclays. Chris Reimer: Sorry if this was asked already, but how do you see dividends going forward in relation to the Bank of Israel announcement on the easing of restrictions for dividends? Morris Dorfman: Sure. So we -- of course, we had a discussion about it in our Board, and our thoughts and our decision is to be consistent in the way we pay dividends. So we thought it's better to keep the same level of dividend and not changing it every quarter. Therefore, we've chosen to pay 50%, and we plan to do it, of course, to keep the same in the future. Chris Reimer: Got it. And regarding expenses, aside from the divestment of CAL, do you see room for cost efficiencies in other areas? Morris Dorfman: Yes, of course, we -- well, as you know, it's part of our strategy to improve our efficiencies. So we're doing it both in bank and there's addition in -- Mercantile also working on that. And we're also examining what can be done together, Discount with Mercantile. And of course, also in IDB New York, there's also -- there's a new management team and they're working on new strategies, which will emphasize efficiency. Operator: [Operator Instructions] There are no further questions at this time. Thank you. This concludes the Israel Discount Bank Third Quarter 2025 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.
Operator: Hello, everyone. My name is Sophie, and I will be your conference operator today. At this time, I would like to welcome everyone to Meren's Third Quarter 2025 Results Presentation. [Operator Instructions]. This event is being recorded, and the recording will be available for playback on the company's website. I will now pass the meeting on to Mr. Shahin Amini, Meren's Head of Investor Relations. Please go ahead, Mr. Amini. Shahin Amini: Thank you, operator. Hello, everyone, and thank you for joining us for Meren's Third Quarter 2025 Results Presentation. I am joined today by Roger Tucker, our President and Chief Executive Officer; Aldo Perracini, our Chief Financial Officer; Oliver Quinn, our Chief Commercial and Operating Officer. We will begin with prepared remarks and then open the floor for questions. Before we start, I would like to remind everyone that this presentation contains forward-looking statements. These are based on current assumptions and expectations and involve risks and uncertainties that may cause actual results to differ materially. You can find a full discussion of these risks in our regulatory filings that are available in SEDAR+ and on our website. Also, all dollar amounts in this presentation on U.S. dollars unless otherwise stated. With that, I will now hand over to Roger. Roger, we are ready for you. Please go ahead. Roger Tucker: I am pleased to present another strong quarter with continuing delivery on shareholder returns and delivery. The completion of the prime amalgamation marked a step change for Meren, and we have now honored our enhanced dividend policy with the declaration of the fourth quarterly distribution of $25 million, taking the total payout for 2025 to $100 million. So together with our share buybacks year-to-date, we have delivered meaningful shareholder capital returns of approximately $109 million. We have also materially reduced our outstanding RBL debt amount to underpin a stronger, more agile company that is built to deliver long-term returns and withstand market volatility. These deliverables reiterate the quality of production assets in Nigeria and the company's financial strength and our disciplined capital management. Maintaining a strong balance sheet continues to be one of our top priorities. Overall, it's been a resilient quarter and we've delivered on we set out to do, reinforcing our financial position and our commitment to creating long-term value for our shareholders. I'm also pleased to report that we have completed the integration of Prime and the combined organization is working very well and seamlessly under the Meren banner. I will now hand over for Aldo to give a more detailed commentary on the quarter's performance. Aldo Perracini: Thanks, Roger. Now turning to our production performance. In the third quarter, we delivered production of 31,100 barrels of oil equivalent per day on a working interest basis and 35,600 barrels per day on an entitlement basis. This brings us to a working interest of 31,800 barrels of oil equivalent per day and 36,300 barrels of oil equivalent on an entitlement basis for the first 9 months of the year, both of which sit within our 2025 guidance, which remains unchanged from the second quarter. Performance remained steady quarter-on-quarter, supported by strong contributions from the newly commissioned Egina wells and a successful well intervention on an Akpo well. These gains helped offset temporary impacts on plant and maintenance activity. With the Akpo and Egina drilling campaign now on pause, work is focused on integrating for the seismic and well data to define and mature the next set of infield targets. Turning on to the next slide. In the third quarter, Meren completed 3 oil liftings for around 3 million barrels at a realized all-in sales price of $70.8 per barrel. Year-to-date, we have completed 9 liftings of around 9 million barrels at an average owing sales price of $74.9 per barrel, which compares favorably to the Dated Brent at an average of $70.9 per barrel. We have 3 cargoes scheduled for the first quarter of 2025. Two of these are hedged at $64.6 per barrel with 1 cargo unhedged that will be sold at spot. For 2026, we have hedged 2.6 million barrels of oil at an average Dated Brent of $62.4 per barrel. The sales achieved in the first 9 months, combined with our hedging strategy for the remainder of the year, creates a prudent balance between risk management and market exposure, reducing volatility risk while preserving potential upside. This approach ensures we remain well positioned to generate solid cash flows through to the end of the year regardless of market fluctuations. Moving on to the financials. For Q3, we delivered an EBITDAX of $120 million, bringing total EBITDAX year-to-date to $368 million. Cash flow from operations before working capital came in at $66 million for the quarter with reported CapEx of $22 million, largely driven by the web intervention in Akpo. Free cash flow before debt service and shareholder distributions was $126 million. Overall, for the first 9 months, free cash flow before debt service and shareholder return stands at $229 million. We are on track to meet our management guidance as revised in Q2, and our full year guidance ranges are unchanged. Let's now turn to cash flows for the period. We closed the quarter with a cash balance of about $177 million compared to an opening balance of $267 million at the end of Q2. We achieved about $66 million in cash flow from operations before working capital adjustments and interest and had positive working capital movement of $81 million, most of which about $63 million was due to trade receivables driven by the timing of cargo liftings and receipt of sale proceeds between the second and the third quarters. Our major cash outlays were RBL repayments, dealing distributions and capital expenditures. In line with our approach to disciplined balance sheet management we proactively paid down our RPO balance by $18 million, bringing our total debt to $360 million. This has been paid down further post quarter, which I will touch on shortly. In line with our new payout policy, we made our third dividend payment of $25 million, bringing dividend distributions to $75 million year-to-date. And as Roger had mentioned, we are pleased to have announced our fourth dividend distribution of $25 million to be paid next month. Through disciplined cash management, we have materially reduced our debt interest expenses strengthen the balance sheet and establish a solid platform for sustainable growth and value creation. Moving on to the next slide. Deleveraging the business has been a priority for us since assuming Primes are beyond facility following the amalgamation. The balance was $750 million at completion. We have looked to approach this proactively and in a disciplined manner. At the end of Q3, our RBL balance stood at $360 million, reflecting $390 million in repayments since taking this facility on, contributing towards a meaningful reduction in interest costs. Post quarter, we paid down $430 million, bringing total repayments to $420 million year-to-date. At the end of the quarter, we had a net debt of $183 million and a net debt-to-EBITDA ratio of 0.4x, well below our onetime ceiling for the year, demonstrating our strong credit profile. We will continue to optimize our capital allocation strategy, strengthening Meren's financial profile and positioning us to deliver value for shareholders. I will now hand over to Oliver to take you through our business outlook. Oliver Quinn: Thanks, Aldo. Turning to Slide 10 on Nigeria. Following the break in the Akpo and Egina drilling campaign in Q3, work is underway to restart the campaign. The current drilling break has provided time to fully interpret the latest 4D seismic data and identify several future infill drilling opportunities. Operationally, progress is being made to secure a deepwater rig to drill the Akpo Far East nearfield prospect, followed by further development wells on both Akpo and Egina in late 2026. Akpo Far East is an infrastructure-led exploration opportunity with an unrisked best estimate of greater than 150 million barrels of gross oil equivalent. If successful, it will deliver a short-cycle, high-return investment, leveraging existing Akpo facilities and potentially adding significant near-term production and reserves. Turning to the Preowei development. Project optimization work continues with recent seismic data indicating an increase in recoverable resources and likely better connectivity in the reservoir that may lead to a reduction in the development well count. This optimization exercise is continuing and will conclude through 2026. At Agbami, interpretation of recent 4D seismic is ongoing alongside rig and long lead item contracting in preparation for a 2027 infill drilling campaign. In addition to the infill drilling an appraisal well is planned on the Ikija discovery, which in a success case will be tied back to the Agbami FPSO. Let's move to Slide 11 for an update on Namibia. Joint Venture continues to advance the Venus development, which remains on track for FID next year with first oil expected in 2030. The environmental and social impact assessment is continuing to progress, which is a key step towards regulatory approvals. The plan outlined includes 40 subsea wells tied back to an FPSO with a peak capacity of 160,000 barrels of oil per day and once online, Venus could produce for more than 20 years, generating significant and sustained cash flow for Meren. As we get closer to the final investment decision, there will be scope for us to report contingent resources and ultimately reserves as part of our annual Canadian NI 51-101 reporting process. On the exploration side, work continues to plan for drilling on several remaining prospects with Olympe remaining the key target and testing a different geological concept from Marula and with a significant potential resource base. And importantly, we retained full exposure to these high-impact opportunities with no upfront cost as all exploration and development spending is carried through to first commercial production. Moving to Slide 12 and staying in the Orange Basin. Let's turn to South Africa and Block 3B/4B. In September last year, we received an environmental authorization to drill up to 5 exploration wells. And whilst progress is being made to move through the legislative appeals process, this has now been temporarily suspended pending a Supreme Court judgment in relation to Block 5, 6 and 7. Despite this pause, the operator continues to prepare for drilling with the Nayla prospect remaining the likely first target and with sufficient potential in a success case to support stand-alone development. To remind you and important to note, the transaction completed with TotalEnergies and QatarEnergy last year will cover Meren's costs for 1 to 2 exploration wells, so there will be no demand on our capital as drilling commences. In summary, across the Orange Basin, we maintain a leading independent E&P position with exposure to multiple near-term development and exploration opportunities and all without any near-term capital requirements. Now turning to Equatorial Guinea on Slide 13. Meren holds 2 licenses offering differing opportunities. In board, Block EG-31 offers a compelling low-risk appraisal opportunity that could unlock a low CapEx, short-cycle brownfield LNG project with a cost of supply competitive with U.S. gas exports. The block lives and shallow water, close to the existing onshore EG LNG facility and contains several further gas prone prospects in areas where historic wells have proven the presence of gas. The second position, Block EG-18 is a deepwater exploration opportunity with billion barrel scale oil potential. Recent seismic reprocessing and technical evaluation has unlocked a large Cretaceous age basin floor fan system with several stacked prospects identified within the same play that has been actively pursued by several majors across the border in São Tomé. A farm-down process for both positions has attracted strong interest, and we are actively engaged in discussions with potential partners for both blocks with the aim of reaching a conclusion on the farm-out process by the end of this year. With the right partnerships in place, drilling activity could take place in late 2026 or 2027. I will now pass you back to Roger for his concluding comments. Roger Tucker: Thank you, Oliver. It's been a solid quarter for the company. We ended the period with a strong liquidity position and net debt to EBITDA of 0.4x and we have significantly reduced debt to optimize interest expenses, underscoring both the strength of our balance sheet and our disciplined approach to cash management. I'm pleased to have announced our fourth quarterly dividend, which will see the completion of our $100 million dividend plan, a clear reflection of our ongoing commitment to shareholders. Looking ahead, we see meaningful value across our portfolio with excellent catalysts in the pipeline, each providing strong long-term growth potential. Thank you. And with that, let's move to the Q&A. Operator: [Operator Instructions]. Our first question comes from Jeff Robertson with Water Tower Research. Jeffrey Robertson: However, can you give some insight into the production profile in 2026 in fields in Nigeria? And what you anticipate the lifting schedule might be for the first couple of quarters of the year? Roger Tucker: Yes. Jeff, thanks for the question. So as we go in to '26, we've got activity commencing again in the fields. We've got 3 wells, if you like, 3 infill well activities, Akpo and Egina. Now we've got an Akpo Far East exploration well, which is important and likely in the Ikija well over on Agbami, which is appraisal. So I think the key thing is on those wells, they'll be back end of the year. So we don't expect to see a meaningful production impact from them until early 2017. So they're important, but they're late in the year. So where that takes is we'll see some natural decline through the year. And I think we're currently working through the final work program and budget with the operators in the next couple of weeks here, but we do anticipate kind of seeing decline into the kind of high 20s in terms of production at working interest level before, again, that picking up again as we come through the end of the year and into '27. I think on the second part, the lifting schedule, I think we're anticipating around 10 cargoes it's a pretty evenly spaced throughout the year. I think you'll note this year, we've lifted all our cargoes for the calendar year as of November, so we don't have any in December. And then I think our next cargo is coming in 2 cargoes, I think in Q1 next year. Aldo Perracini: And just to remind everyone, we'll do our full year management guidance for 2026, early next year, potentially in sort of late January or February. So we'll have more detail on the outlook for the 2026 for our business. Jeffrey Robertson: And is it correct to think that the Akpo Far East prospect is -- if that's a success that can be handled by the existing field infrastructure without any significant capital upgrades? Roger Tucker: Yes, that's right. So it's kind of super interesting. It's only just single-digit kilometers east of Akpo in the facility. It's a large kind of target that could, for a first phase, come on within 18 months, 2 years tied back to the Akpo facility. So it's very reachable. The timing has really been around age and availability over Akpo. That's now with Akpo's natural decline there's time and space, if you like, could come together. And so yes, that will be tied back very, very quickly. Operator: Next question comes from David Round with Stifel. David Round: A couple for me guys. The break from drilling in Q3, are you able to elaborate how that break has helped improve your thinking around future targets? And then also just I guess, more generally, are you noticing any different approaches between the different operators you've got in Nigeria? And then the second one, separately, just on EG as a clarification. Are you looking at farming down those blocks individually or together? Aldo Perracini: Yes. David, thanks for the question. So look, a good point, you take a step back on actually on Egina and Akpo, which is where the drilling break occurred this year. So again, we said this a lot, but kind of world-class fields kind of textbook petroleum engineering with 4D seismic over them. So that allows us to shoot surveys at regular intervals, of course. And in those fields, in particular, we can see fluid movement, we can see oil, water, gas, and that allows us to kind of really hone in on the infill targets. So specific to the question, we took a drilling break in Q3. We've had new 4D come in over the deals and the reason then to have that break and go back kind of Q3 next year drilling has been to allow that new data to be incorporated. It looks very positive from us. So I think we'll see the 2 -- well, 2 targets on Egina, and one on Akpo, again, Q3, Q4 next year, and then we'd anticipate running into '27 that there'll be some more follow-on drilling on the back of that data. So yes, it's been useful. I mean there is obviously a short-term impact at these middle-age fields from not drilling, but I think it allows us to come back with a more focused kind of target campaign. Just to move to the EG question. So the simple answer is we see them as separate processes. Now they have run kind of on a time line in very close parallel almost on top of each other. So look, there are parties that are interested in both. There are parties that are interested in one or the other and again, we touched on it in the presentation, but they're very different in nature. So EG-31 is kind of gas brownfield LNG tie back through existing facilities, et cetera, 18 in the outboard multibillion barrel kind of oil target, so a kind of material kind of catalyst if that comes in. So yes, very different opportunities, and therefore, we run a parallel but separate process, if you like. David Round: Okay. Very clear. Just in terms of the operator's approach in Nigeria, any differences there? Or are they kind of getting on with things in a similar kind of fashion? Aldo Perracini: Yes. Look, good question. I didn't mean to skip over it. Yes, I think they're both very active, which from an operator perspective is what you look for, right? I mean the fields, as we know, they're heading to midlife, they're in that kind of natural decline. What they need is a bit of care and activity. And I think on both -- from both operators, that's what we're seeing. So we didn't talk about Agbami so much, but the plan is to come back. Chevron will drill kind of 6 infill production injector wells in 2027. So it's a pretty big campaign given the age of the field and kind of speaks to, a, their activity as an operator, which is very positive; and b, the nature of the resource base. I think Egina and Akpo, again, slightly different. We're seeing the same infield activity focus from TotalEnergies. There's lots of opportunities there to mature, but there's a wider set of tieback and kind of organic growth opportunities around those FPSOs as well. So we're seeing, obviously, the Preowei which is ongoing. But there are several other discovered resources within the license that we see TotalEnergies is taking quite an active view on at the moment. So yes, look, I think we're comfortable that they're both engaged and active, which again is a nonoperator, really important to see that. Operator: There are no further questions at this -- there are no further questions at this time. I will now hand back over to Shahin Amini to read through your written questions. Shahin Amini: Thank you very much, operator. We've got a number of questions submitted over the Q&A facility and a couple of questions who were e-mailed to us earlier today. So I'm actually going to start with an e-mail question from one of our long-standing shareholders in Sweden. And I'm going to put to Aldo, what are your expectations in the common quarters for further reductions in net debt? Aldo Perracini: Okay. Thank you, Shahin. In relation to debt reduction and the leverage in the balance sheet, I think we have done focus -- we focus a lot throughout 2025. You have seen the amount of reduction we did with the existing RBL as is natural in this kind of instruments, as we progress towards the maturity of the facility we get compressed by the loan life cover ratio, and therefore, we have to continue to make payments or we continue to have a reduction in our borrowing base, and that will continue to happen throughout 2026. So in terms of what we plan for the next year compared to 2025, I think the main difference is that we have already started the process to refinance our existing facility. And so far, we have been getting strong indications from the banking syndicate. And if we're able to achieve that target, which we expect for the beginning of 2026. We then should be in a position to keep our borrowing base higher for a longer period of time, which will give us additional liquidity for whatever reason. So organic growth, inorganic growth and et cetera. So that's the plan in relation to that as we get into 2026. Shahin Amini: Thank you, Aldo, and the same investor, a couple of follow-on questions. I'm actually going to address this myself because these questions are kind of detailed about our 2026 estimates and outlook. As I mentioned earlier, we will give a more detail -- well, we will give a detailed management guidance next year. And Oliver, I think it's fair to say that right now, the team are very busy with the JV partners in sort of setting the Board program on budgets for next year, correct? So there's still some what we need to get through before we ready to give the share management guidance. Oliver Quinn: That's right. We'll play that out through the end of the year. And as you said early next year, there will be a clear forward plan on production forward vision on that production. Shahin Amini: Okay. Very good. And going back to Aldo. This is a long-standing point of debate base. And that's -- the question is that as you're lowering net debt in 2026, what is your expectations or what is your outlook for one in terms of capital allocation and shareholder returns? Can you sustain the dividend? Aldo Perracini: Okay. Good question, and we get that question a lot. I think the sense in terms of capital allocation, again, the focus in 2025 was to reduce the RBL as we were not utilizing the whole liquidity we have available under that facility. And then we achieved significant interest expense reduction throughout the year, which I think it's an important way to generate equity value for our shareholders. Now when we look forward, I think we all -- the way we look through capital allocation and distributions, we look at mainly 4 things. First, we look at the short term or the cash generation coming from the Nigerian agent assets and then how short-term production behaves, that's the first bit. The second bit would be in relation to organic growth through the existing portfolio. As you know, in Nigeria, we fund organic growth with existing cash flow from operations. And outside of Nigeria, we fund organic growth through the carry arrangements which we have put in place with partners, for example, in Namibia with TotalEnergies' true impact. The third part that we look, we then look at the debt obligations. Again, as I mentioned, we would continue to have a reduction in the borrowing base through 2026. So to address that, we have restarted the refinancing exercise, which will give us additional liquidity to go through that. And then the fourth part, which is a little bit of our control or a lot of our control is the oil price movements, right? I think we are looking at oil price forecast for 2026, which are very -- and most of them on the bearish side, which we see also reflected on the forward curve. So we're going to take -- we're going to be very, very careful when we look at additional distributions in 2026 or elsewhere as we prepare for a year where we expect to have a lot of cash flow volatility given the oil price. So that's the mechanism. Those are the -- that's the process that we go through when evaluating dividend distribution. So when we go through all of that, as of this moment, we don't foresee any surprises into 2026. But again, keeping an eye on oil price, which should be the major variance. Shahin Amini: Thank you, Aldo. And there's a couple of questions on M&A. As always, we can't go into detail. So -- but perhaps from a more philosophical and high-level point of view, Roger, perhaps you want to -- first, how does Meren see M&A opportunities in the market and 2 specific jurisdictions have been mentioned, but 1 continent, South America and Nigeria in 2 different questions. How do we view opportunities? Roger Tucker: Thanks, Shahin. So we are looking at a whole series of opportunities. But as I've said before and as Oliver has said, we're in no rush. We have a balance sheet, which allows us the opportunity to wait and find the right opportunity. I think in the short term, it is likely if we do anything, it is likely to be within West Africa and we are reviewing a series of opportunities there. But all I can say at the moment is that we are in -- have the luxurious position of being able to wait until we find the exact right opportunity. So no rush. We are reviewing very, very carefully, and it will -- whatever we do will fit with our investment criteria. Shahin Amini: Thank you. That's really -- I don't have any other questions that we haven't already answered from the webcast. So I'm going to hand back to the operator to bring this presentation to a conclusion. Operator: This concludes today's call. Thank you very much for joining. You may now disconnect.
Operator: Greetings. Welcome to the NextNRG Third Quarter 2025 Earnings Results Conference Call. [Operator Instructions]. Please note, this conference is being recorded. I would now like to turn the conference over to Sharon Cohen, Investor Relations. Thank you. You may begin. Sharon Cohen: Thank you, and good morning, everyone. Joining us today are Michael Farkas, our Chief Executive Officer and Executive Chairman; Joel Kleiner, our Chief Financial Officer. Before we begin, I would like to remind you that certain statements on this call are forward-looking in nature and subject to risks and uncertainties. These statements are based on current expectations and assumptions and involve risks that could cause actual results to differ materially. Please refer to our filings with the SEC, including our most recent Form 10-K and our Form 10-Q for the quarter ended September 30, 2025, for a discussion of these risks. With that, I'll now turn the call over to Michael. Michael Farkas: Thank you, Sharon, and welcome, everyone, to our third quarter earnings call. This quarter represents a significant step in NextNRG's journey as we continue advancing towards our vision. Our results clearly demonstrate that our strategy is working. Revenue is growing, margins are expanding, and our mobile fueling and energy infrastructure initiatives are driving strong measurable results across the business, making this our strongest financial performance to date. The results speak for themselves, and they set the stage for continued growth in operational excellence. I'd like to thank all of you for your confidence and take this opportunity to provide an overview of NextNRG. We're more than an energy company, we're a full-spectrum energy partner from generation and storage optimization and fueling, we give businesses the tools to be efficient, independent and the future ready. Our ecosystem combines power generation,, advanced batteries, wireless EV charging and on-demand mobile fueling to deliver energy wherever it's needed, smarter and faster than ever. We're not just following the energy transition, we're leading it. The momentum we've built continues. And as you'll hear today, the investments in our past initiatives are now delivering tangible results. Last quarter, I discussed our investments in expanding the fleet by 99 trucks and entering 10 new markets. You'll recall it was anchored in the strategic thesis than building operational density around our strongest customers will allow us to: one, optimize routes; two, enhance driving efficiency; three expand margins; and four, extend market presence of the sales of our largest customers. I'm proud to share that we are delivering on that vision, achieving our highest revenues and showing as margins days, marking the best performance in the company's history. In addition to the above, we have added 11 new markets for Miles, Florida. As we've grown and are increasing gallons delivered, we've been able to unlock volume-based supplier discounts, increasing profit margins from 8% to 11% and driving a 232% year-over-year revenue increase. Moving on to our emerging technologies, particularly our smart microgrid and battery storage solutions. We previously reported that we were working on various projects, including the California health care facilities, and I'm happy to report that we have just signed 2 power purchase agreements also known as PPAs, whereby we effectively replaced the traditional utility provider, supplying these locations with their full energy needs. Our systems are addressing a vital need, ensuring facilities remain efficient, compliant and operational around the clock. Most notably, these PPAs provide for 28 years of contractional profitable revenue to the company via energy sales, creating long-term revenue visibility. We continue to advance our Energy Division's pipeline driving meaningful progress across multiple fronts. As NextNRG evolves, our strategy is to be increasingly focused on high-demand sectors where reliability and resilience are nonnegotiable, particularly health care, assisted living and large-scale commercial facilities that require continuous mission-critical power. This approach has unified the company around a more focused sales approach within a massive TAM. Our active pipeline currently stands at over a dozen projects with several more qualified leads progressing through the pipeline. As time progresses and the market learns about NextNRG, we're watching our integrated energy ecosystem coming to life. As an example, we've been approached by solar installers who have deployed solar power generation solutions whose clients now require battery storage and/or charging solutions and the technology to optimize their energy generation, storage and usage. NextNRG is being asked to complete the energy ecosystem into a single intelligent platform. This growing interest validates our approach and reinforces the competitive advantage of our integrated energy model. As interest in our platform grows, we're strengthening relationships across the value team, expanding partnerships in solar hardware and battery storage to deliver cutting-edge technology at highly competitive pricing. These collaborations enhance our offering and position, NextNRG as a trusted full-service energy partner. Next, our much anticipated bidirectional wireless on charging initiative continues to advance. This quarter, we continued to make meaningful progress in the development framework and are moving closer to the launch of our first demonstration of this game-changing technology. While still in the planning and design phase, the groundwork that's being laid now positions us to move efficiently the execution as we refine partnerships and tech integration. We hope to provide a material update in the coming weeks. Looking ahead into 2026 and beyond, we find ourselves excited for the future a time when global and domestic energy demands are reaching unprecedented levels. I recently attended a conference where business and political is going to be, including President Trump and Eric Schmidt, the former Google CEO. They underscored the urgent need to expand our nation's capacity and energy generation and storage and distribution. We specifically mentioned the growing trend for developers of data centers and other energy-intensive sites to develop on-site fully integrated smart groups to ensure power reliability. The message was clear. Our current infrastructure cannot keep pace with the accelerating demand. In fact, following this conference, I was invited to an intimate dinner Eric Schmidt's home with a group of leading business executives in America. And as I discussed what NextNRG was building, the focus quickly came on nation's need for power generation, storage and distribution. To quote Eric, "We will run out of power before we run out of capital to invest in AI infrastructure," underscoring the urgency to generate power. NextNRG is uniquely positioned to help address that challenge. Our integrated approach spending generation, storage, distribution and fueling places us at the forefront of providing the critical energy solutions needed to power the next era of growth. Our strategy remains focused on expanding, scaling and optimizing. We are deepening our presence in key markets with mobile fuel delivery, advancing opportunities in renewable distributed infrastructure and strengthening partnerships that accelerate technology deployment while improving operating efficiency and margin performance. While our near-term focus is on disciplined execution, our long-term vision remains steadfast to create a fully connected energy ecosystem that produce today's fueling needs with tomorrow's clean intelligent infrastructure. As CEO, my goal is consistently to transparently articulate our current performance while also paving a clear picture of our commitment to disciplined growth and to deliver on our commitments. I am proud that all the things we laid out in last quarter's call, we have delivered I hope to do the same next quarter, consistent and reliable leadership. With that, I'll turn it over to our CFO, Joel Kleiner, for the financial review. Joel Kleiner: Thank you, Michael. Turning to the financials. Q3 was another quarter of outstanding growth with revenue of $22.9 million, up 232% year-over-year from $6.9 million in Q3 of 2024 and up $19.7 million in Q2 2025. To put that in perspective, our total revenue for the full year of 2024 was $27.8 million. So we're approaching nearly a full year's worth of revenue in just 1 quarter. Gross profit margins also continued to expand, increasing from 8% in Q2 to 11% in Q3. Not only did we grow revenue, but we also successfully lowered our cost of goods sold demonstrating that while growing top line revenue, we are also simultaneously improving our operational efficiencies. On the expense side, our loss from operation came in at $9 million, which includes a $5.6 million noncash stock-based compensation charge. As you recall, we introduced this program last quarter as a strategy to attract and retain top talent. And as expected, this quarter's charge is significantly lower in Q2 -- and then Q2. Excluding this item, our operating loss was $3.4 million, down from $5.2 million in Q2, reflecting our continued focus on disciplined cost management and operational efficiency as we move closer to profitability and positive cash flows. Cash used in operations for the first 9 months of 2025 was $14.1 million. Because of this figure reflects quarter end working capital timing, including inventory and prepaid expenses continuing just before quarter flows as well as Q2 invoices being paid in Q3, the reported number overstates our underlying burn rate. On a normalized basis, our year-to-date operating burn is closer to $11 million. We ended the quarter with roughly $650,000 in cash which similarly reflects those working capital timing dynamics. Since quarter end, we have taken deliberate steps to strengthening liquidity. We completed the refinancing of our truck fleet and continue to streamline our debt profile, converting portions of our debt to equity and reducing the overall complexity in the capital structure. These actions provide greater financial flexibility as we manage the business. Operationally, Q3 delivered solid progress. Revenue increased our energy pipeline continue to expand, and we began advancing several opportunities towards deployment as we scale revenue, expand margins and enhance operational efficiency, the underlying trend in our cash usage is moving in the right direction. While we still have work to do ahead of us, the trajectory of our business combined with the strength of our platform and the early validation we are seeing across both fueling and energy infrastructure position us well for continued momentum in the quarters to come. Thank you. Back to you, Michael. Michael Farkas: Thank you, Joel. It's been a fantastic quarter for NextNRG. On our last call, we outlined a series of goals that we sought to achieve and I'm proud to say that we've executed on every single one of them. Our operational performance, project pipeline and financial results all reflect the disciplined growth and momentum we've been building for us. Looking ahead, we're excited to be in a unique position, both in time and in capability to help drive the future of energy across the nation and ultimately on a global scale. On our -- our savings for structure continues to spend, our pipeline is growing and profit potential continues to strengthen each passing quarter. And on a personal note, as many of you may know, I spent much of my career pioning advancements in EV charging. I'm pleased to share that I'm no longer under any noncompete restrictions, which opens the door for NextNRG to participate fully in all forms of EV charging, both wired and wireless, and to pursue high-value, high-margin energy assets that align with our long-term vision. We're just getting started, and the opportunity ahead has never been greater. Thank you all for your continued confidence and support. Operator, we can now move on to the questions. Operator: Thank you so much. I understand there are some e-mail questions, Sharon. So I'd like to hand the call back over to you for the Q&A portion. Sharon Cohen: Thank you. Yes. I've gathered some submitted questions, and then we'll now direct them to you, Michael. The first question relates to our energy division. Can you give us more detail on the kinds of projects currently in your energy infrastructure pipeline? What types of facilities are engaging with you? And what solutions are they looking for? Michael Farkas: Absolutely. Our pipeline today includes projects for municipalities as well as a large range of commercial facilities. These opportunities span everything from literally layering new components over existing infrastructure to full green build-out, greenfield build-outs. It could really depending upon the need of the facility. These customers are typically asking for 3 core components. One is on-site power generation, basically to reduce dependence on the grid and improve overall reliability. Number 2 is advanced battery storage. This is to ensure continuity of power, especially during peak demand or outages. And then we're looking at the -- our smart microgrid control system. It's really -- it's optimizing how energy is produced, stored and consumed in the all time. Many of these facilities are operating with aging equipment and insufficient backup systems. So they're looking us to design modern methodologies and integrated solutions that meet both operational requirements and regulatory standards. We're also seeing a growing wave of commercial operators who have solar installed but now needs storage and intelligent controls. And they want a unified platform that ties everything together in one simple place to be able to follow everything. They also want a single partner to complete that ecosystem. You can't have different components, different people all over the place. It's not a sound system. And that's exactly what our energy platform does. It allows the integration of all the stuff. So these are not exploratory or one-off engagements. They're well-defined high-value infrastructure deployments that directly address the reliability gaps that are out there today. Next question. Operator: Sharon, can you check if you self-muted, please? Sharon Cohen: Yes. Sorry about that. Our next question relates to the margins reported. Michael, the company delivered the strongest margins in company history this quarter. How sustainable is this improvement? What are the main drivers of further margin expansion? Michael Farkas: Joel, you want to grab that? Joel Kleiner: Sure. As we -- thank you, Sharon. Can you repeat the question? Sharon Cohen: Yes, absolutely. How sustainable is this improvement in the margins? And what are the main drivers of further margin expansion? Joel Kleiner: Our margin expansion this quarter is absolutely sustainable because it's tied directly to structural changes in the business. As we build density around our anchor customers, we're optimizing our routes, improving driver efficiency. So reducing one of the greatest components of cost of goods sold, which is the actual driver expense. And the other side is increasing our gallons delivered which we have a great contract with where we're finally unlocking volume-based discounting. Both of those lower our per unit cost. These improvements are not a onetime thing as we're continuously working towards better utilization, improve scheduling and continued vendor site advantages. We expect these to continue to grow as we continue expanding our business. Sharon Cohen: Well said, Joel. Thank you. Our next question asks to discuss the conference that you attended Michael where leaders emphasize their urgent need for more power generation and infrastructure. How does this environment impact NextNRG? Michael Farkas: The message from the event and then the follow-on dinner was very, very clear. Energy demand, especially type AI, data centers, electrification is growing faster than the grid can support. When Eric Schmidt said that we will run out of town before we run out of capital, it underscores the scale of the opportunity. NextNRG is positioned exactly where the market is heading on-site power generation, storage and smart distribution, all integrated into a single platform. As developers, operators and corporations increasingly look for reliable, scalable, off-grade or grid-enhancing solutions, the demand for smart microgrids and infrastructure only intensifies. We're aligned with that, and we're already seeing the benefits in the pipeline for customers who need these kind of services. Sharon Cohen: And our final question is about operating losses. You've made progress reducing your operating loss this quarter, where you're still running at a multimillion dollar loss. Can you lay out a clear time line or framework for when investors can expect sustainable positive cash flow? Michael Farkas: Absolutely. The improvement this quarter was driven by both scale and tighter cost discipline. Revenue grew materially massively margins expanded and our underlying operating loss improved from Q2 to Q3. The path to positive cash flow is tied to 3 things: continued revenue growth, which we're seeing, further margin expansion as operational eventually increases and maintaining disciplined SG&A spend as we scale. The remaining hurdle is simply timing. As more new markets mature and as supply discounts continue to strengthen, the economics improved quarter-by-quarter. We're not guiding to a specific date today, but the trend is clear. Our losses are narrowing. Our margins are expanding, and each quarter brings us closer to sustained positive cash flow. The fundamentals are moving in the right direction and the model scales efficiently as we continue growing. Thank you. Operator: Thank you so much, ladies and gentlemen. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time.
Operator: Good day, everyone, and welcome to today's Flexible Solutions International's Third Quarter 2025 Financials Conference Call. [Operator Instructions] Please note, this call is being recorded, and I will be standing by if you should need assistance. It is now my pleasure to turn the conference over to Dan O'Brien. Please go ahead, sir. Daniel O’Brien: Thank you, Paul. Good morning. I'm Dan O'Brien, the CEO of Flexible Solutions. Safe harbor provision. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. Certain of the statements contained herein, which are not historical facts, are forward-looking statements with respect to events, the occurrence of which involves risks and uncertainties. These forward-looking statements may be impacted either positively or negatively by various factors and information concerning the potential factors that could affect the company is detailed from time to time in the company's reports filed with the Securities and Exchange Commission. Welcome to the FSI conference call for Q3 2025. I'd like to discuss our company condition and our product lines first, along with what we think might occur in Q4 2025 and Q1 2026. I will comment on our financials in the second part of the speech. NanoChem division. NCS represents the majority of FSI's revenue. This division makes thermal polyaspartic acid, called TPA for short, a biodegradable polymer with many valuable uses. NCS also manufactures SUN 27 and N Savr 30, which are used to reduce nitrogen fertilizer loss from soil. In 2022, NCS started food-grade operations. TPA is used in agriculture to significantly increase crop yield. It acts by allowing the fertilizer to remain longer for the plants to use. TPA is a biodegradable way of treating oilfield water to prevent scale and to keep oil recovery pipes from clogging. TPA is also sold as a biodegradable ingredient in cleaning products and as a water treatment chemical. A special version of TPA is sold as a wine stability aid in our food division. SUN 27 and N Savr 30 are our nitrogen conservation products. Nitrogen is a critical fertilizer that can be lost through bacterial breakdown, evaporation and soil runoff. Food products. Our Illinois plant is FDA and SQF certified. We've commercialized 2 food products. The first was our wine additive based on polyaspartates that was developed in-house. In August, we announced our second major food grade contract of 2025 and our third overall. As noted in the news release, it's a 5-year contract with protection from tariffs and inflation, has a minimum revenue of $6.5 million per year and a maximum if the customer requests it of greater than $25 million per year. The August contract has reached full production. It's running 24 hours per day and it is now our second food grade product after the wine product. We're reviewing methods of increasing production quickly if the customer requests it. Production began in very late Q3 after all setup and new employee training was completed. The first shipment and first invoicing was in very early Q4. Revenue has already reached more than $1 million. Production will utilize equipment that we have been buying and installing over the last 2 years, but had no customer for. Therefore, very little CapEx will be needed to reach $13 million to $15 million per year in sales and mild CapEx in the $2 million to $3 million range to reach $25 million. In January, we announced another larger food grade contract. In order to achieve the objectives of that contract, there are certain actions that must be completed. For example, we need to install new specialized equipment capable of manufacturing the product. In addition, we needed to install a new clean room because our current clean rooms are not suitable for the processes. There have been CapEx and expenses associated with our efforts to earn the January contract business because our food grade improvements over the last 2.5 years did not anticipate this new product category. We estimated additional CapEx of about $4 million for equipment and plant improvements combined. Most of the CapEx and expenses have been deployed already and the remainder will be spent in Q4. We have substantial cash on hand in our U.S. subsidiaries and access to an LLC. There will be no finance -- equity financing needed. CapEx involving equipment and improvements requires lead time for delivery and installation time prior to testing, leading hopefully to purchase orders for production. These lead times are being reduced as much as we can control and our estimate of the earliest that production could begin is late Q4 or early 2026. After we're satisfied that we can manufacture the product at scale and assuming that we can still meet our customers' pricing expectations, we then hope to begin receiving purchase orders. As such, we believe that revenue could begin in Q4 and could reach significant levels by the start of 2026. Earning these orders and hopefully growing them to the estimated maximum revenues of $30 million plus $25 million per year is the critical goal for the next 4 to 6 quarters. We hope to execute this to the customers' absolute satisfaction and obtain all their business before taking on additional major projects. So this does not mean that we're not looking for more customers. We're already doing R&D work in certain areas. However, it does mean that several quarters are likely to elapse before other major customers are found. We would also like to be clear regarding margins in the Food division. In order to obtain such large contracts from a very low base and in order to negotiate tariff and inflation protection clauses, we have lower margins than we prefer. We hope to be in the 22% to 25% range before tax. Future customers will be selected in order to increase our average margins now that we have a base in place. ENP division. ENP represents most of our other revenue. ENP is focused on sales into the greenhouse, turf and golf markets. We experienced strong revenue in Q3, which we estimate will continue in Q4. First half 2026 will likely have higher revenue than first half '25, but followed by strong sales in the second half of 2026, leading to year-over-year growth. The Florida LLC investment. The LLC had a small loss in Q3. The company is focused on international agriculture sales into multiple countries. Its management has advised us that they estimate a return to growth in 2026, which should translate into increased revenue for FSI. International markets like the U.S. market are stressed. So we expect the growth rate to be low. Agricultural products in the United States remain under pressure. Crop prices are still not increasing at the rate of inflation and extreme uncertainty is present due to tariff changes. Growers are facing a conflict between rising costs and low crop prices, aggravated by political actions. In some cases, sales have been lost for the whole season. As a result, we saw weakness in Q3, which we expect to continue in Q4 and on into the start of 2026. Tariffs. The current tariff on all our imports of raw materials from China into the United States is between 30%, 58.5% depending on the material. We will be careful not to import materials unless destined for U.S. customers who are certain to purchase and are aware that increased tariffs will be added to their invoices. We've now managed our transition to Panama to perfection, and we've had to import some raw materials into the U.S. in Q3. Some of this tariff costs will be passed on to customers. Some will qualify for the rebate program and some reduced our Q3 margins. The Panama factory for international sales. We've nearly completed a duplicate agriculture and polymer factory in the country of Panama that will be capable of producing nearly all the products we sell to international customers. We estimate that the first production from this factory could begin in Q4 2025. All of the equipment has arrived. Raw material inventory is on hand. Leasehold improvements are complete and equipment installation is close to finish. The remaining hurdle is obtaining an occupancy permit from the Panamanian government, which could slow startup. CapEx and expenses to develop the new plant have been funded by cash flow and retained earnings. There will be no need for debt or equity financing. Once operational, nearly all our product for international sales will be made in Panama using raw materials sourced without the U.S. tariffs. There will also be shipping advantages. The new plant is 30 minutes from the port, inbound raw materials and outbound finished goods will not have to be shipped across the United States to and from Illinois. For our international customers, delivery times will be shortened by many days. Reduced shipping time and no exposure to U.S. tariffs on international sales could allow us to increase sales to existing customers and obtain new customers over the next 2 years. We're already providing quotes for potential Q1 delivery. Moving most agriculture and polymer production to Panama, free space at the Illinois plant so that food grade production in the United States can be optimized and expanded substantially as more U.S. customers are found. Shipping and inventory. Shipping prices are stable. Shipping times are reasonable on the routes we use. Raw material prices are stable, but they're increasing in line with inflation. Highlights of the financial results. Sales for the quarter were up 13% compared to the 2024 period, $10.56 million versus $9.31 million. Profits. Q3 recorded a loss of $503,000 or $0.04 a share compared to a gain of $612,000 or $0.05 a share in Q3 '24. Many costs incurred to prepare for the potential new revenue from the food grade contracts announced in January and August negatively affected Q3 profits because they're being expensed as they occur. Some costs for the Panama factory also being expensed quarter-by-quarter. This will continue in Q4 for Panama and Q4 for food products, but at a lower level. We've done our best to maintain profitability as we built the new factory and repurposed the existing one for the new revenue streams in food products. Unfortunately, we did not manage it in Q3, and we are uncertain about Q4, because we don't know exactly when Panama will start or when revenue from the August contract will exceed costs. In Q1 2026, we do expect profits to revert to past levels and increase as our food product revenue grows. Operating cash flow. This is a non-GAAP number useful to show our progress, especially with noncash items removed for clarity. For 9 months 2025, it was $4.26 million or $0.34 a share, down from $5.91 million or $0.47 a share in '24. Cash flow has been reduced by the same costs as noted for profits, and it's expected to rebound in Q1 '26. Long-term debt. We continue to pay down our long-term debt according to the terms of the loans. The loan we used to buy our ENP division was paid in full in June this year. Our 3-year note for equipment will be fully paid in December 2025. This will free up over $2 million in cash flow per year for other purposes. Working capital is adequate for all our purposes. We have lines of credit with Stock Yards Bank for the ENP and NCS subsidiaries. We're confident that we can execute our plans with our existing capital and without resorting to any equity actions. The text of this speech will be available as an 8-K filing on www.sec.gov by Wednesday, November 19. E-mail copies can be requested from Jason Bloom at jason@flexiblesolutions.com. Thank you. The floor is open for questions. And Paul, will you make that happen, please? Operator: [Operator Instructions] And we'll take our first question from Tim Clarkson of Van Clemens Capital. Timothy Clarkson: Great quarter. In terms of getting ready for the new business. Obviously, losses are never good. So I was wondering when you talk about the margins being somewhat lower than your traditional business, 22% to 25%, are those gross margins or net margins? Daniel O’Brien: Those would be our expectation for gross margin before tax. So... Timothy Clarkson: Okay. So what kind of a net number after everything you think you'll make on this business? Would it be more like 5% or 10% or 15%? Daniel O’Brien: Well, let's just take the bottom end, our 20% anticipated gross before tax. In Illinois, we pay roughly 31% tax rates. So 28 x 0.69 is around 14%. Timothy Clarkson: Okay. Well, those are still good margins. Now you mentioned on the first food additive product, the wine product, it's kind of a preservative. What's the functionality on these food products, if you can say? Daniel O’Brien: I'm actually not allowed to say by contract on either of the food contracts. The companies involved really want to keep their -- themselves secret. So I'm sorry about that [indiscernible] customer. Timothy Clarkson: Yes. Well, I'm guessing it would be either a preservative or a taste kind of a thing would probably be what it would impact. Now are these chemicals, brand-new chemicals? Or are these chemicals that you guys have some legacy with? Daniel O’Brien: We have no legacy, but the chemicals are not new to the industry. The -- we've been targeted as a supplier because of our quality and our willingness to work with the customers. So this is an existing technology, and there aren't going to be any like health concerns or areas of that worry. Timothy Clarkson: Did you have some personal relationships with these guys? Or how did the relationships actually develop? Daniel O’Brien: We develop personal relationships based on meetings. One of them, the one I can talk about openly was a meeting at a trade show. So we go about to tell people that our second name is solutions and do they have any problems. And eventually, we find people with a problem, either quality, cost, performance, location. And we solve their problem, and we give them a solution and we get a contract. Operator: And our next question comes from David Marsh of Singular Research. David Marsh: Just wanted to touch on the new contracts. I wasn't following you entirely. It sounded like you've begun realizing revenue on one, but there's a second one that you have not yet begun realizing revenue. You are anticipating recognizing revenue on that in the fourth quarter. Is that correct? Daniel O’Brien: Yes. Maybe this is a great chance to explain how the time frames make this a confusing situation. We obtained a contract in January that we are not going to be able to begin providing product and getting revenue for until late in Q4 because we have to install all the equipment in the clean room. Then we got a second contract in August that we actually had all the equipment and clean room for. So we were able to get the second contract running before the first one was ready to go. And that's why it's as confusing as it can be. Have I explained that adequately? David Marsh: Yes. No, that's very helpful. Are you expecting to be able to recognize revenue on that January contract in the fourth quarter, though? Or is it possibly going to slide into Q1 just with getting the clean room ready and everything? Daniel O’Brien: We think that Q4 is possible. We know that Q1 is for sure. It might even just be weird things like Christmas breaks that caused us to slide into Q1, but it is that close. So no guarantees for Q4, definite guarantees for revenue in Q1 '26. David Marsh: Got it. And are you providing any guidance for Q4 at this time? Or are you just going to hold off for now just because of the uncertainty around that second contract? Daniel O’Brien: Yes, Dave, we almost never provide guidance unless it's about a specific item because we've been wrong in both directions so many times when we did it in the past that we feel it's -- we're too small, too nimble for our own good. And we just can't give guidance that we feel is valid, so we don't give it. David Marsh: No, I understand. Let me ask one other question around the top line, if I could. When all 3 of the contracts, the January, the August contract and then the ongoing wine contract are running and hitting on all cylinders. What do you think that the run rate annual revenue for those 3 contracts is going to look like? Daniel O’Brien: When and if -- now let's say if because it's up to the customers. But if we get all the business from the customers that they believe they have to -- for us to earn, it's -- the total is between $50 million and $60 million and the time at which we would hit that run rate would be in 2027, not 2026. Operator: Our next question comes from Greg Hillman, an investor. Gregg Hillman: Yes, 2 things. Going back to one of your older products, WaterSavr. On your PowerPoint recently, you're talking about WaterSavr saving up to like 40% of evaporation for like reservoirs and lakes. And I thought in some of your prior information you put out, it was only like 20% savings. Did that product improve over time? Daniel O’Brien: No. 40% is the largest that's possible. It is a biodegradable product. It's typically in a set of good conditions, you'll see 40% evaporation control on day 1. Day 2, it's likely to drop into the 20s and day 3 into the 10 to 15 to 20% range and then taper off rather rapidly unless it's reused. So the PowerPoint shows the best available situation. The average situation might be in the 20% range. The greater problem with that product is how to sell it to people who, a, can't see it because it is an invisible transparent layer; and b, our in bureaucratic situations where continuous proof of function is needed. And if it's already on the reservoir and you've already tested it, but you can't keep track of it on a day-to-day basis, it's an extraordinarily hard sell. I often tell people, bring me a partner who has satellite technology to show the actual evaporation rate off all surfaces all the time, and that's how we will convince the governments of the world. Until then, we're definitely going to have difficulties selling to governments. We are successfully selling to oilfield companies who know how much water they have for things like fracking and where the water is worth -- they know how much the water is worth and they'll spend to save the evaporation. So it's a difficult problem and a difficult product. It's certainly why we've taken emphasis off of it. Gregg Hillman: Okay. And then switching to your 2 grade aspartic acid with these new contracts. Can any other substance do a similar function like, I don't know, acrylic acid or I don't know if acrylic acid is used for food at all, but some other product? Daniel O’Brien: There are alternative systems. One uses a cellulose filtration program. There's another one that uses acrylic acid columns, not to add the acrylic acid directly to the wine, but acrylic acid ionic columns. The problem with that and also the best alternative is chilling the wine all the way down to, I believe, minus 3 Celsius and holding it for several days. All of these methodologies are more expensive than using a polyaspartate solution. And as you guessed, a polyacrylic solution is not allowed for food in several countries. And in the wine industry because things get shipped everywhere, it's not approved for food in any country, it's not going to be used by winemakers. Gregg Hillman: Okay. Okay. That's fine. And then in your recent press release about you had a deal that you called off and you gave the terms of. I was wondering how much of your time have you been spending on that deal over the past 12 months? Daniel O’Brien: Well, it was a 5-year -- sorry, a 5-month process. I would say I put a couple of hours a day in, so did our operations manager. It never reached the stage of documentation and full due diligence. So we came to a dead end before the major amount of the work had been done. We did set up financing subject to due diligence. But again, these are things that didn't consume a large amount of my time or the corporate time. Sad it didn't go through. It was extremely synergistic, and we were -- until close to the end, we thought it was working. So yes, sad about that. Gregg Hillman: But you never inspected their books, right? Daniel O’Brien: Yes, I saw their financials. Gregg Hillman: Okay. You did. Okay, fine. And also in regard to future deals, like -- do you have a pipeline of future deals you're looking at? Or are you working with an investment banker? Daniel O’Brien: We do not have an investment banker under contract looking for deals. We would only consider deals that we found ourselves or that were accidentally referred to us. It's too hard with an investment banker. They want to get paid, so they find you all sorts of stuff, and then you have to just keep saying no. As to your question about pipeline, we are always looking. We don't have a pipeline at the moment, but that can change momentarily as well. And I really would not want to call it a pipeline even if it did change. Let's just say we take it each target singularly and move through it because it's got to get through some pretty severe screens before we even look at it. Operator: And our next question comes from William Gregozeski of Greenbridge Capital. William Gregozeski: Dan, I've got a couple of questions for you. In regard to the more onetime expenses you mentioned in the third quarter from Panama and the food products, can you give an idea of how much of an impact that was on the expense line in the third quarter? Daniel O’Brien: Bill, I really -- giving numbers like that over the phone is not how I'd like to do it, but I'd be happy to give you after talking to our controller, give you a reasonable number by e-mail. I could tell you 2 things. You'll notice that our agriculture -- traditional row crop agriculture was pretty weak in Q3, including weakness in the LLC out of Florida. What that did was it weakened our financials. And you'll notice that our ENP division did a great job. It sells into the part of the agriculture market that is still vibrant. The turf for people to send their kids to play soccer on or football, ornamentals to keep their houses looking great and golf courses so that the golf courses are green and wonderful. So agriculture has become bifurcated. We're interested in growing in the area that is vibrant, and we're not going to put large amounts of effort and capital into growing the areas that are not vibrant until the cycle comes around and row crop agriculture becomes important again. So that was -- that split between our ENP division, which we only show 65% of the profits from and our row crop division where we get 100% of the profits, but had weakness, that was a big effect on Q3. And just for the actual numbers, I'd really like to take that to an e-mail stream and get you things that are not just off the top of my head. Does that seem fair? William Gregozeski: Yes. Yes. No, that's totally fine. And then with the E&P and how strong that was, that was a heck of a quarter. And you mentioned expecting similar numbers in the fourth quarter. Is that kind of a trend that you guys are focusing on is this a good number for like a Q3? Because obviously, it's somewhat -- it's not stable every quarter, but is this kind of a good base going forward, do you think? Daniel O’Brien: I think that would be a good, strong Q3. Q4, we're working through the early buy from the customer base. And I don't think it's going to be a barn burner like Q3 was, but it's going to be quite strong. And I think that, that's the way to look at that division going forward. It's going to have a much stronger second half than first half, and that's because our customer base is transitioning to a much more early buy-oriented system. And there -- so if the customers are tilting their sales towards Q3 and Q4, it automatically tilts our sales towards Q3 and Q4. So rather than saying, hey, we're going to just keep doing these same numbers. I think what I would like to say to you is that second half is always going to be stronger than first half and that's when we will show our growth for the year. William Gregozeski: Okay. On the kind of the core NanoChem product lines or previous ones, excluding food, is there -- because that was down quite a bit in the third quarter. Is there any hope for -- you talked about ag quite a bit already, but is there any hope that oil or any other industrial application will show growth in '26? Or is this going to be just kind of a weaker segment for you guys until things turn around? Daniel O’Brien: It's going to be very interesting to discover whether we are more competitive and as a result of being in Panama. And if we are and our historic customer base recognizes that, we believe that it's possible that we'll get back to historic numbers in oil. It's a little difficult to tell. And I'd really like to get Panama operational and see not only whether the customers appreciate us and appreciate the quicker shipping and the better service that we can do out of Panama. But I'd also like to find out whether that is actually the best use of our Panamanian production while we're spooling up. It may be that other product lines in the agriculture world are more profitable and growth is easier to come by. So you've seen us for -- I guess, we've -- you've known me for 22 or 23 years now. We are pretty opportunistic. We go where we're appreciated, and we try not to continue down paths that are not working properly. So it's going to be up in the air until we know what the customer base thinks of our Panama changes. William Gregozeski: Okay. And last question I have is, can you talk a little bit about the reason on the Mendota facility sale and leaseback? And then if you'd ever move your E&P production to Peru or if that will just stay outside of Peru, and Peru will just focus on the food products? Daniel O’Brien: Okay. Well, the first part -- or the second part of the question is easy. Peru is going to be food products. It will expand in food products. It won't do anything other than food products except accidentally. Mendota, we sold it because it was not central. We got a leaseback for 60,000 roughly of the 240,000 square feet. We removed the risk of expensive repairs to buildings that we were -- hadn't been able to lease yet. We have a new landlord who's going to have that responsibility. And we now have a single spot where ENP can do all the business and grow as needed without us having to take on the responsibilities and risks of being a landlord. So that was a very specific choice in order to limit risk and allow us to use our available bandwidth for things that we think are going to work a lot better than being a landlord in Mendota. Operator: [Operator Instructions] And our next question comes from Manny Stoupakis of Geoinvestments (sic) [ Geoinvesting ]. Manny Stoupakis: I have a couple of want to get through. Can you first touch on how much were the onetime costs associated with the contract ramp in the Panama move in Q3? Daniel O’Brien: See, that's not a number that I have in my brain for a phone call, but we happily will -- and we're going to be doing it for Bill Gregozeski. We'll happily respond to an e-mail from that. I can tell you that it was responsible for a very large percentage of the loss, if not all of the loss. So it was very significant. And you can imagine that starting a brand-new factory and rebuilding another factory in a food grade quality, in fact, right up almost to drug grade quality. It's not cheap. It's amazing we've done as well as we have this year. I got to compliment my team. They've just done a fantastic job of making sure that we're not spending money on anything we don't need to. Manny Stoupakis: Okay. Fair enough. We'll follow up with that. And then regarding the 2 new contracts, the gross margins on the 2 new contracts, were you preferring to them both being at that same level? Or was that just for the one as far as being lower? The lower gross [ new ] contract? Pardon me? Daniel O’Brien: Both margins will be similar. Manny Stoupakis: Okay. All right. And then I guess, lastly, and I'm just curious, is there a possible data center angle for parts of your business? Daniel O’Brien: None whatsoever. Manny Stoupakis: None, whatsoever. Okay. I just thought maybe with the energy conservation side that's possible, but I just thought I would ask -- I appreciate you taking the question. Daniel O’Brien: No. But hey, that's something that if you want to help the company, data centers use energy, energy often needs water, water evaporates if it's left out in the open. We don't have any connections, but if someone gave us one, we'd follow it and see if we could turn it into money. Manny Stoupakis: All right. Well, we'll do that. My Geoinvesting will reach out to you and we'll talk on the side then. Operator: Our next question comes from Raymond Howe of CFP, Inc. Raymond Howe: My question has mostly been answered. It was about the 317 Mendota sale. What -- the 60,000 square feet that you are leasing back, what gets produced there? Daniel O’Brien: That produces all the ENP products that result in the ENP revenue that we show in the financials. So of the roughly -- I think it's roughly -- we're expecting somewhere around $13 million to $15 million this year out of ENP, that 60,000 feet produces those $13 million to $15 million. Raymond Howe: Got you. And so that portion of the business there and then food products in Peru, correct? Daniel O’Brien: Correct. Operator: Our next question comes from Greg Hillman, an investor. Gregg Hillman: Yes, Dan, just another follow-up on ENP. The products for the turf and the golf courses, are any of those products biological in nature that increase the -- basically that affect the anaerobic [Audio Gap] Daniel O’Brien: [Audio Gap] The abuses that it gets. Was that helpful? William Gregozeski: Yes, that's helpful. And just -- is any of the products being used on football fields like college or pro football fields? Daniel O’Brien: Yes, absolutely. Operator: And our next question comes from Manny Stoupakis of Geoinvestments (sic) [ Geoinvesting ]. Manny Stoupakis: Just had one follow-up question regarding the gross margins on the contracts. Where would you expect margins to be on new contracts moving forward? Daniel O’Brien: We don't have anybody lined up. We -- as I mentioned in my speech, we're looking for new customers. We'd be much happier in the 30% to 35% margin range. I don't know if we can get it, but that's where we're going to be. Manny Stoupakis: That's the target, okay. Operator: And it appears that we have no further questions at this time. I will now turn the program back to our presenter for any closing remarks. Daniel O’Brien: Thanks, Paul. Everybody, thank you. That was an interesting Q&A session. I enjoyed it very much. Looking forward to talking to you next year when we reconvene for the full year financials. Thanks again for taking time to listen today and talk to you next year. Bye now. Operator: Thank you. This does conclude today's Flexible Solutions International's Third Quarter 2025 Financials Conference Call. Thank you for your participation. You may disconnect at any time.
Operator: Good day, and thank you for standing by. Welcome to the Q1 2026 Brady Corporation 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, Ann Thornton, CFO. Please go ahead. Ann Thornton: Thank you. Good morning, and welcome to the Brady Corporation Fiscal 2026 First Quarter Earnings Conference Call. The slides for this morning's call are located on our website at www.bradycorp.com/investors. We will begin our prepared remarks on Slide #3. Please note that during this call, we may make comments about forward-looking information. Words such as expect, will, may, believe, forecast and anticipate are just a few examples of words identifying a forward-looking statement. It's important to note that forward-looking information is subject to various risk factors and uncertainties, which could significantly impact expected results. Risk factors were noted in our news release this morning and in Brady's fiscal 2025 Form 10-K, which was filed with the SEC in September. Also, please note that this teleconference is copyrighted by Brady Corporation and may not be rebroadcast without the consent of Brady. We will be recording this call and broadcasting it on the Internet. As such, your participation in the Q&A session will constitute your consent to being recorded. I'll now turn the call over to Brady's President and Chief Executive Officer, Russell Shaller. Russell? Russell Shaller: Thank you, Ann, and thanks, everyone, for joining us today. This morning, we released our fiscal 2026 first quarter financial results. We had a good start to the year with organic sales growth of 2.8% and adjusted earnings per share growth of 8%. Our Americas and Asia region reported strong organic sales growth of 4.7%, and our Europe and Australia region reported a significant improvement in adjusted segment profit of 15%. This was a direct result of the actions we took to streamline our cost structure in the region last year. Our team executed well, and we have started the year on a positive note. . Before we go into Brady's financial details, I want to talk a bit about our connected products. Brady has spent the last several years building out a marking and tracing solution that is uniquely easy to use for our customers. As an example is our fantastic new app called BradyScan, which is available in Android and Apple versions. It is an industrial barcode scanning app that consolidates the entire scanning workflow and communicate seamlessly with our printers. You can instantly generate scannable barcodes with both image to barcode and speech-to-barcode technology. A built-in security check monitors from malicious QR codes and error correction automatically repairs damaged QR codes, resulting in maximum readability. You can scan and input barcode values directly into Google sheet with no download or export required. And every barcode scan is automatically geotagged, allowing for complete traceability with location accuracy. Our goal with this app is to make barcode reading, barcode generation and barcode printing an entirely seamless experience for our users, making track and trace easier than ever before. With this software, our customers can use their phone to create barcodes, instantly send those barcodes to a Brady printer, print them on our high-performance adhesive labels and create a time and location stamp with our geolocator. This is one of the many steps we are taking to integrate our lasers, readers and printers into a single easy-to-use platform. Now I'll turn it over to Ann to provide more details on our financial results. Ann? Ann Thornton: Thank you, Russell. We had a good start to the year. Organic sales grew 2.8% in the quarter, which was led by our Americas and Asia region with organic growth of 4.7% in the quarter. We also reported strong growth in our adjusted pretax income as well as our adjusted diluted earnings per share in the quarter, while funding a significant increase in R&D. And we finished the quarter in a net cash position, which continues to give us the ability to invest in both organic opportunities and strategic acquisitions in the future. Slide #4 details our quarterly sales trends. Organic sales were up 2.8%. Acquisitions added 3.2%, and foreign currency translation increased sales by 1.5% for total sales growth of 7.5% in the quarter. Turning to Slide #5. This details our quarterly gross margin trending. Our gross profit margin was 51.5% this quarter compared to 50.3% in the first quarter of last year. In last year's first quarter, we closed on the acquisition of Gravotech, which requires purchase accounting adjustments to recognize the fair value of inventory acquired. These adjustments reduced last year's reported gross profit margin by 110 basis points in the quarter. So without this acquisition-related adjustment, gross profit margin was 51.4% last year. Our gross profit margin continues to be strong as we realize the benefits from our sales growth coming from our engineered products. Turning to Slide #6, you'll find our SG&A expense trending. SG&A was $117.6 million this quarter compared to $111.8 million in the first quarter of last year. As a percent of sales, SG&A was 29% compared to 29.7% last Q1. If you exclude amortization expense from each of the periods presented as well as other nonrecurring acquisition-related costs incurred in last year's first quarter, and SG&A was 27.7% of sales in the first quarter compared to 28.3% of sales in last year's first quarter, which is a decline of 60 basis points. We continue to invest in growth through acquisitions and to our sales -- or excuse me, through additions to our sales force as well as selected geographic expansion in Southeast Asia, which we're more than funding with efficiencies throughout our SG&A support functions. Slide #7 details the trending of our investments in research and development. We continue to increase our investment in R&D within both our organic business as well as our acquisitions from last year. R&D expense was $23.3 million or 5.7% of sales this quarter, which was an increase from $18.9 million or 5% of sales last year. We funded a 23% increase in R&D in the quarter and still grew the bottom line. We've proven over time that our best ROI comes from our engineered products. Russell just discussed our new app, BradyScan, and we have a very exciting lineup of products set to launch this year. Turning to Slide #8. This shows the trending of our pretax earnings. Pretax earnings on a GAAP basis increased 16.5% from $58.8 million to $68.5 million in the quarter. If you exclude amortization from both periods and exclude other acquisition-related charges we incurred in last year's Q1, pretax earnings increased to 7.6% from $68.6 million to $73.8 million. Slide #9 details the trending of our net earnings and EPS. Our net income increased 15.3% in the quarter from $46.8 million to $53.9 million. Excluding amortization from both periods as well as the other acquisition-related charges from last year, our net income increased 7.1% from $54.2 million to $58 million. GAAP diluted earnings per share was $1.13 compared to $0.97 per share last year. Excluding amortization from both periods and the acquisition-related charges from last year, our adjusted diluted earnings per share improved from $1.21 per share from $1.12 per share last year, which was an increase of 8%. We had another strong earnings quarter resulting from our organic sales growth and the cost reduction actions that we took last year in selected parts of our business. Slide #10 details our cash generation. Operating cash flow increased 42.5% to $33.4 million in the first quarter of this year compared to $23.4 million in the first quarter of last year. And free cash flow increased 38.8% to $22.4 million in Q1 of this year compared to $16.1 million in last year's Q1. We're constantly focused on making the best cash-based decisions throughout our organization, which gives us the ability to invest in our business and return funds to our shareholders through share buybacks and dividends. Turning to Slide #11, you'll find the impact that our historical cash generation has had on our balance sheet. As of October 31, we were in a net cash position of $66.8 million. Our approach to capital allocation is consistent, which is to fund organic sales growth and efficiency opportunities. This includes investing in new product development, sales generating resources, capability-enhancing CapEx and automation-focused CapEx. We have the ability to invest throughout the economic cycle so that we're always positioned to drive future sales growth and profit improvements. And we're focused on consistently increasing our dividends. In September, we announced our 40th consecutive year of annual dividend increases, which was an incredible milestone and is a streak that we're very proud of. From here, we're disciplined and opportunistic for both acquisitions and share buybacks. We're focused on identifying acquisitions with clear synergies to Brady, and we have the ability to fund our organic business, our dividend, M&A opportunities and share buybacks. We repurchased 55,000 shares for $4.1 million in the first quarter, which was an average price of $73.69 per share. Slide #12 outlines our fiscal 2026 guidance. We are increasing the bottom end of our full year fiscal 2026 previously announced adjusted diluted EPS guidance range from $4.85 per share to $5.15 per share to -- with the new range of $4.90 per share to $5.15 per share, so a $0.05 increase to the bottom end. Our GAAP EPS guidance range was updated to reflect acquisition-related amortization as well as to increase the bottom end also by $0.05, which we now expect to range from $4.57 per share to $4.82 per share. Our adjusted diluted EPS guidance range represents a range of growth of between 6.5% to 12% over 2025. We expect organic sales growth in the low single-digit percentages for the full year ending July 31, 2026. Other elements of our fiscal year 2026 guidance include an income tax rate of approximately 21%, depreciation and amortization expense of approximately $44 million and capital expenditures of approximately $40 million. Potential risks to our guidance, among others, include potential strengthening of the U.S. dollar, inflationary pressures that were unable to offset in a timely enough manner or an overall slowdown in economic activity. Now I'll turn it back over to Russell to cover our regional results and to provide some closing thoughts before Q&A. Russell? Russell Shaller: Thanks, Ann. Slide 13 details the financial results of our Americas and Asia region. Sales were $268.9 million this quarter, which were up 9.6% from Q1 last year. Organic sales growth was 4.7% and acquisitions added the remaining 4.9% of our growth. We saw growth in most of our major product lines with significant growth of nearly 19% in the Wire Identification product line. Wire ID has been leading our organic sales growth company-wide for the last 3 years, with data centers being a key end market. Our high-performance adhesive materials are ideal for the critical labeling requirements in data centers. Our Asia business performed well with total organic sales growth of 11.9%, which was led by our business in Japan. We saw growth throughout the region, including China, where we grew slightly by 0.8%, which means that our business outside of China combined for nearly 20% growth in the quarter. Asia also contributed a significant amount of growth in segment profit in the Americas and Asia region in the quarter, which was a result of both organic sales growth and the cost reduction actions that we took in China last year. Our reported segment profit in Americas and Asia region increased 9% to $59.9 million and segment profit as a percentage of sales was 22.3%. If you exclude the impact of amortization in both the current quarter and last year's Q1 as well as our other nonrecurring acquisition-related expenses last year, segment profit increased 6.3%. Similar to past years, we are increasing our investment in R&D, which is the driving factor of our organic sales growth, both now and in the future. We are experiencing a tariff headwind in the U.S. compared to last year's Q1. While we continue to take steps to reduce their impact, last quarter, we projected net incremental expense of between $8 million and $12 million for fiscal 2026. As of the end of Q1, we are now projecting full year impact to be at the low end of this range, so approximately $8 million. Slide 14 details the financial results of Europe and Australia region. Sales were $136.4 million this quarter. Organic sales declined 0.8% and foreign currency translation added 4.3% for total growth of 3.5% in the region this quarter. Both Europe and Australia continue to operate in challenging macro conditions for industrial manufacturers, yet we nearly returned to organic sales growth in the quarter. Sales declined in our People Identification and Safety and Facility Identification product lines, but we saw growth in our Wire ID products in the quarter. Organic sales in Europe declined 0.9% and increased slightly by 0.3% in Australia. Despite the 0.8% decline in organic sales, we reported a significant improvement in segment profit in the region. Our reported segment profit in Europe and Australia increased 42.8% in the quarter to $18.7 million, and segment profit as a percentage of sales was 13.7%. If you exclude the impact of amortization in both the current quarter and last year's Q1 as well as other nonrecurring acquisition-related expenses last year, segment profit increased 15% compared to the prior year. We took several actions last year to reduce our cost structure in both Europe and Australia, and we're seeing this payback in our profit results this year. We started the year with some solid momentum. We're growing organic sales mid-single digits in America and Asia, and we're nearly returned to growth in Europe and Australia. Even with the subdued global macroeconomic environment for industrial companies, I am super excited about the business we acquired and over the past year as well as fantastic technology that we are adding to our portfolio, such as the BradyScan app that I truly believe the addition of our direct part marking product line and the ease-of-use features we are adding throughout our product portfolio enables us to help our customers improve their productivity. With that, I'd like to turn it over for Q&A. Operator, would you please provide instructions to our listeners? Operator: [Operator Instructions] Our first question comes from Steve Ferazani with Sidoti. Steve Ferazani: I appreciate the detail on the call. Russell, I was a little bit surprised on the strength of the gross margin better than it was in the second half, sort of flat versus if you adjust the year ago quarter, but the year ago quarter didn't include tariff impacts. So I'm trying to figure out, one, is it getting better compared to 3 and 4Q because you're more effectively offsetting with price? Or was it just a particularly strong mix quarter? If you can help us out a little more detail on the gross margin? Russell Shaller: Yes. The biggest impact was both price and working on our supply chain and moving things around a little bit. As a truly global manufacturer, we do have some ability to move things around and to look at which companies -- countries, excuse me, we should be producing and sourcing from. So I think like any good manufacturer, you do what you can to offset macroeconomic effects, and that's basically what we're doing. I'm happy to say we were projecting $8 million to $12 million. I think through a lot of efforts from a lot of people at Brady, we're headed towards the very low end of that range. And that was also contributed to why we bumped the bottom end of our guidance up $0.05. Steve Ferazani: Got it. That's helpful. The higher R&D we've seen over the last couple of quarters, is this a more reasonable run rate? And is that primarily because of the acquisitions you've made? Or you just feel like there's better returns that can be made from some of these product investments? Russell Shaller: So certainly, the 5%, 7% or so that we're at right now is due to the acquisitions. And over time, probably the next couple of quarters, we'll decide if there's overlapping R&D efforts, there's probably some at the margin. I would consider 5.5%, give or take, kind of the situation we should be in for the next few quarters. So there will be a little bit of a streamlining of that effort, not really significant. We did have some onetime events in R&D. But as you point out or as I point out in the call, R&D continues to be the absolute best investment we can make organically. And I don't really have a per se target on where it should be, but we can say directionally 5.5% for the next year or so. Steve Ferazani: Okay. That's helpful. When you're thinking about the cost-out actions you took last year, did we see most of it this quarter, that the plant consolidation and some of the workforce reductions? Have we seen the full benefit? Or is there more to come? Russell Shaller: I would say there's probably 80% plus you've seen in Q1. There's still some more things that we're going to get. We certainly don't need to and won't take any additional restructuring charges. We have nothing anticipated at this point. But again, like everybody that's managing their company, we continue to look for ways to improve our efficiency and drive a little bit more to the bottom line. So I'm going to say 80% done, still a little bit more to go. Steve Ferazani: Excellent. And if I could just ask briefly on cash conversion. It was better than it was the year ago quarter. Typically, Q1 is your lowest, but are you expecting you can get cash conversion back closer to 100% this year? Or is that a little bit too much of a reach? Ann Thornton: That's a reasonable target, Steve. And good observation on your part that usually it is a little bit lower for us in Q1. That's just due to timing of annual incentive payments and things like that. But we're definitely pleased with the improvement in Q1. We expected that to come. Last year was a little bit more suppressed than we would typically see in Q1. A lot of that was due to timing and our cash conversion kind of normalized out a little bit more toward the end of the year. So that's a reasonable expectation to see that cash conversion level improve this year. Steve Ferazani: If the inventory line still seems pretty high, is that because of the acquisitions or the consolidation or a few things? Ann Thornton: A few things, honestly, there's a little bit due to the acquisitions, but they're not overly very large either. So we made some decisions a few years ago to stock more of our absolute highest running products. It's like that's a few years some changes in our supply chain. We did move production of several printer lines as planned quite a while ago in Asia that also requires higher. So a little bit of everything kind of around the edges that's causing that increase in inventory. And we're always looking for opportunities to work on those levels, but we would -- and we would expect it to probably not increase too terribly much from here and kind of normalize working capital to more of a neutral level. Russell Shaller: I would say, if I could add one more piece of color. A lot of the traditional Brady businesses, the signage and the identification products are very quick conversion cycle from the time we get an order to -- through manufacturing and selling it. And so you don't need to have as much inventory as, say, a laser or a reader, which is really a finished good. So all things equal, we absolutely will be in a higher inventory position than what traditional Brady would have been, not a lot higher because that's still a small percentage of our sales, but that is going to add a couple of points to our overall inventory. Operator: Our next question comes from Keith Housum with Northcoast Research. Keith Housum: Russell, I noticed your guide for the Australia and -- I'm sorry, Europe and Australia segment suggests perhaps low single-digit growth by year-end, but you guys had a slight decline this quarter. Anything that you're seeing out there that gives you further confidence that, that segment will be able to turn it around based on some of the challenges they have in the macro environment as we see today? Russell Shaller: Yes. So I'm basing this on what I read in a lot of economists that have said that the calendar year of 2026 is supposed to be better than the calendar year of 2025. Frankly, we really haven't seen much. It hasn't gotten any worse over the last several quarters, but we haven't seen what euphemistically are called green shoots. The services sector, which we don't participate in, seems to be doing a little bit better in Spain and some of the vacation countries. But if you look at core manufacturing in Germany, France and the U.K., just not seeing a lot of movement. Not getting worse, not getting better, but we -- if we're going to turn the corner, it's at least 1 or 2 quarters out from now. Keith Housum: Great. And in terms of BradyScan, first off, congratulations. I know it's been on your list of things to get done for a while now. Is it out now? And I guess, perhaps any color you can provide in terms of who you think the target audience will be for that? Is it your entire base? Or is there a certain segment? And then finally, how many of your products will be linked to or be able to benefit from BradyScan? Russell Shaller: Yes. So there's 2 parts to it. One is we're being, I think, good friends to the economy in general. So the BradyScan app has a consumer version that has no adware, no bloatware and isn't trying to take your data backhauling it to wherever. So that's a free version for 50 scans or so a month, which I think for most consumers is more than enough. The industrial version actually is going to form part of the backbone of our connected products. Right now, it works seamlessly with our printers and our readers, which I talked about. The next step will get it to engage directly with our lasers and our other marking technology. So it's -- I'm going to say we're about halfway through it. There's still a lot more software that needs to get done. But I love the first iteration. I think it's a very clean and easy-to-use app. Understanding it's really more tailored towards industrial users. We just kind of threw in the consumer users as a nice freebie for some of our customers and friends. But you're encouraged to download it. It's got an Apple version and it's got an Android version. And as of this weekend, it had just gone up, and we only had 5-star reviews. So there you go. Keith Housum: Congratulations. And then it's been a year since you add Gravotech. You guys added Mecco, hopefully I was saying that right, early this quarter. Any line of sight to revenue synergies coming from the -- I guess, both of the acquisitions and then just the progress you've made over the past year? Russell Shaller: Yes. So a couple of things. We've absolutely gone through a product road map and decided which businesses focusing on which end markets. With that said, I think they are working in a very tough environment, in fact, more than Brady as a whole because the core segment that we're looking for them to excel at is heavy industrial manufacturing, which is amongst the weakest segments currently out there. So the fact they're doing okay in what I think is a pretty awful environment is good. We really need that to turn around. One of their key customers is the automotive and automotive supply chain, not a great place right now, but it will come back. We're very confident. And we -- more importantly, we're confident in going after midsized manufacturers, which is really kind of the heart of Brady's business. So we feel good, very, very early. Brady makes long-term strategic bets. We have a core thesis that we believe everything is ultimately going to get marked in production. And this is -- ensures that we have that capability over the next 5 to 10 years. So still a work in progress. We feel good initially, but with a lot more to go. Keith Housum: Great. Appreciate that. And final question for me. Gross margins, another solid quarter for you guys, even with the tariff headwinds. I know you guys are hesitant to suggest that gross margins can be above that 50% range, but yet you guys have been able to deliver that with the challenges that you've had. And I know you also merging -- a lot of your growth coming from your emerging products. Any more thoughts about gross margins and where they perhaps can go going forward? Russell Shaller: Yes. So -- and I sound like I'm very repetitive on this because I answered it always the same way. Our engineered products, all things being equal, are probably 60-ish percent gross margin versus our more commodity products are 40-ish. So the more we have engineered products, the more our gross margin will expand. But we don't have a target because all of these products are delivering significant cash flow and return on invested capital. So yes, there's a little bit of help due to our portfolio as it slowly changes. Right now, of course, the offsetting effect has been some tariffs that hasn't helped by any stretch. But I do not have a target. We know we could push pricing higher to expand our gross margins at the expense of demand reduction. So we're really trying to spend most of our time getting more Brady products into more people's hands because even at our gross margins, the money flows through to the bottom line. So we need to keep pushing on growth more than margin expansion. Thank you. Operator: I'm showing no further questions at this time. I would now like to turn it back to Russell Shaller, CEO, for closing remarks. Russell Shaller: Thank you for your time today and for your questions. Brady is on a journey to help our customers have a safe and productive workplace. Our visual Safety and Facility Identification portfolio, combined with Brady's productivity solutions help our customers comply with a wide variety of regulations, including the upcoming GS1 standards and new European Union product labeling requirements. Even with a challenging tariff regime and a tough manufacturing macro environment, we are growing sales and increasing profitability. As always, we're keeping our focus on what we can control and continue to move forward with long term consistently in mind. Our increased investment in R&D is a direct reflection of our view on the long term as our engineered products have proven to be the primary driver of our growth. We pride ourselves on the diversity of our end markets and our R&D investment gives us the ability to engage with an ever broader set of customers. We do expect to continue to be impacted by incremental tariffs, but we believe that our global manufacturing presence and largely in-country manufacturing as well as our geographic diversification helps us to mitigate some of this effect. We're being creative and we're adapting quickly, and I'm very proud of the team and their tireless efforts in this changing environment. I'm optimistic for the rest of the year and the long term for Brady's ability to continue to deliver improved results for our shareholders. Thank you for your time this morning. Operator, you may disconnect the call. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Good morning, and thank you for waiting. Welcome to Rumo's Third Quarter 2025 Earnings Presentation. [Operator Instructions] This presentation is being recorded and simultaneous translation is available by clicking on the interpretation button. [Operator Instructions] Before proceeding, we would like to reiterate that forward-looking statements are based on Rumo's Executive Board's beliefs and assumptions and information currently available to the company. These statements involve risks and uncertainties as they relate to future events and depend on circumstances that may or may not materialize. We recommend that you refer to the disclaimer on the second page of the presentation. Now I will turn the conference over to Mr. Felipe Saraiva, Rumo's Head of Investor Relations, to begin the presentation. Please go ahead, Mr. Saraiva. Felipe Saraiva: Good morning, everyone, and thank you for joining Rumo's Third Quarter 2025 Earnings Conference Call. Let's begin with the highlights on Page 3 of the presentation. We reached a new quarterly record for transported volume, 23.4 billion RTK, up 8% year-over-year. This performance was driven mainly by the Northern operation with the higher volumes in general cargo, especially hardwood pulp, bauxite and fuel. Our cash cost was another positive highlight this quarter. We continue to capture energy efficiency gains, reducing fuel consumption, the main component of our variable cost. In fixed costs and expenses, we recorded a nominal reduction of BRL 36 million, which combined with the volume growth translated into a 12% efficiency gain in our cost per unit. The combination of higher volumes and disciplined cost management allowed us to maintain a stable margin in a more competitive environment. Adjusted EBITDA reached BRL 2.3 billion, an increase of 5% year-over-year. We closed the quarter with BRL 1.5 billion in investments and net leverage of 1.9x. Moving to Page 4. Let's look at market share. Our market share this quarter reflects a more competitive grain logistics environment. We maintained a stable market share in Goiás and in the southern ports, while performance in Mato Grosso and the Port of Santos was lower than last year. On Page 5, I will share more details on the market dynamics in the Santos corridor, which is our core business. As a reminder, rail capacity is shared between Mato Grosso and Goiás working as communicating vessels. Grain exports from those markets increased compared to 2024, a year that was impacted by a crop shortfall in the Midwest of Brazil, but still remained slightly below 2023 levels. We transported 8.5 million tons with alternative corridors absorbing part of the difference versus the year of 2023. In the soybean complex, which includes soybean and meal, the market was stronger than usual this quarter, driven by the carryover volumes not exported in the first half of the year, and we captured that demand efficiently. For corn, despite a record crop in 2025, export volumes from Mato Grosso and Goiás were lower. Our performance reflected this more competitive landscape with some flow distribution across all of the logistic corridors, partially offset by growth in soybean complex, as I have mentioned. As you may see in the lower chart, our railway system remains the main logistics solution serving the Port of Santos. Moving to Page 6, we will review the operational indicators. Both the transit time and dwell time in Santos slightly increased during the quarter because of greater complexity of managing higher volumes in the system. In energy efficiency, we reduced unit fuel consumption by 2% with a solid performance across both the Northern and Southern operations. On Page 7, we will show operational results and volumes. We transported 23.4 billion RTK in the quarter, up 8% year-over-year. The Northern operation accounted for about 3/4 of this growth, mainly supported by higher general cargo volumes, particularly hardwood pulp, bauxite and fuel. In the agriculture portfolio, we transported more volumes of sugar and fertilizers. In the Southern operation, the main highlight was higher corn volumes, which had been impacted last year by crop shortfalls in the South. In general cargo, we continue to pursue new opportunities and optimize asset utilization of that system. Now on Page 8, we present revenues and tariff highlights. Net revenue amounted by BRL 3.8 billion, a 2% increase year-over-year. As we always say, the focus of our pricing strategy is on finding the right balance between volumes and tariffs to maximize the system profitability. This year export dynamics led to a stronger competition among logistic alternatives serving our key markets. In this context, we adjusted our commercial positioning in both operations to ensure competitiveness and attractiveness for the rail transportation. Moving to Page 9, we present the EBITDA. EBITDA grew 4%, reaching BRL 2.3 billion. Our efficiency in managing costs and expenses helped us maintain stable margins despite a more competitive environment. Additionally, we recorded a BRL 55 million in insurance recoveries related to the loss of profits in the Southern operation due to extreme weather events on May last year. On Page 10, we move to financial results and net income. The net financial result was a net expense of BRL 837 million, mainly reflecting higher net debt and interest rates. Despite the higher rates, we delivered adjusted net income of BRL 733 million, broadly in line with the last year figure. On Page 11, let's look at our net debt position. Net debt at the end of the quarter was BRL 14.9 billion, reflecting the quarter's cash generation. We closed the period with a healthy leverage of 1.9x. Our liquidity position remains very solid with BRL 7.2 billion in cash and a well-distributed debt maturity schedule with no major concentrations in the fiscal years of 2026 and 2027. On Page 12, we will present the investments in the quarter. We invested BRL 1.5 billion in the quarter, in line with our plan. Recurring CapEx was BRL 503 million, focused on asset maintenance and operational safety. In the Mato Grosso railway project, we invested BRL 575 million with the cash disbursements following the construction progress. Other expansion projects amounted by BRL 396 million with the focus of increasing capacity and modernizing the existing infrastructure. Now turning to the soybean market on Page 13. The next Brazilian soybean crop is expected to reach the all-time high level of 175 million tons in production. The state of Mato Grosso should account for roughly 51 million tons in production. And as we speak, the seeding is almost completed. Exports from the region are estimated at 32 million tons, pointing to a healthy logistics demand for the next season. On Page 14, I will present the corn market. The Brazilian corn crop is also expected to reach a record high level with an estimated production of 145 million tons in the next season. In Mato Grosso, production is forecasted at 59 million tons, driven by an expansion of roughly 400,000 hectares in planted area. Exports should remain stable around 25 million tons in the state of Mato Grosso. This concludes my presentation. Thank you, and we are glad to start the Q&A session. Operator: Joining us today are Mr. Pedro Palma; Mr. Guilherme Machado; and Mr. Felipe Saraiva. Before we begin the Q&A session, Mr. Pedro Palma would like to say a few words. Please go ahead, Mr. Palma. Pedro Palma: Good morning, everyone. This is Pedro Palma. Thank you for joining us in the earnings release for the third quarter. It's a pleasure to be here with you. Before we start the Q&A session, let me just summarize the quarter and how the company has been doing. Looking at how volumes have progressed, we're very happy to have gone over the 8 billion RTK volume at the company with major stake in the South and North operations making contributions to that increase. In the last few months, the South operation has been over 1.2 billion RTK, going back to very healthy and robust volume levels. And the North operation has been close to 7 billion RTK. That's a testament to our resilience, our ability to overcome challenges in the rail environment, which is becoming much more favorable, much more solid. And we have reached those volumes in the last quarter and the last few months despite a fiercer competition in the market, considering grains volumes, both in the North and South operations. As we said since the beginning of the year because of the carryover inventory of corn from '24 to '25, we also mentioned the delayed in volumes coming in, in terms of soybeans. And over the year, there's been a smoother, more linear export level. At the beginning of the year, we were still testing the market's pricing level to understand how we should position our own pricing levels. As of the second quarter, when it was clear to us what that new price level was going to be, we made the required adjustments to our pricing policy to make sure that we would have the required and suitable volumes to execute on our rail activities. And let me remind you, at very healthy margin levels. Our pricing journey has never been linear. Over the years, it's been through ups and downs. Let me remind you that in '22, '23 and '24, our prices went up by 60% in the grains market. And '25 has been a year of adjustments to pricing levels so that we can find the right level that will give us the right market share, the fair market share to ensure that we're growing and positioning ourselves competitively. So we've been doing that, and our rail operation has been responding accordingly with increasing volumes. Now let's take a look at the other portfolios, fertilizers, pulp, sugar, bauxite, they've all been growing at very consistent volumes, also increasing our system across volumes and margins and ensuring that our revenue is resilient and good diversification across all kinds of cargoes. Obviously, our main market is and will continue to be the grain market. Right now, as you can see in our market share charts shared by Saraiva, the corn market and corn exports from the Port of Santos has been less than historically, what has been putting additional pressure on our commercial structure. But these are circumstantial situations. We've dealt with them in the past, and we'll continue to deal with it by adjusting prices so as to ensure the best margin possible for our system. Obviously, price is a variable that is not under our control, but there are variables that are under control. One, capacity, and we have been proving that we have the capacity to operate as well as cost and fixed expenses discipline. As you can see, in an environment where volumes have been increasing, new operations have been coming and going up and running, we are healthy volume levels and increasing efficiency within the system. That's what a company such as ours has to do. Our improvements in -- our investments in improving assets and improving management has to, in the long run, be translated into structural -- lower structural unit costs so we can have healthy margins even in more volatile pricing situations. In the rail execution line, let me highlight our enhancement in safety, both rail safety and personal safety. In 2025, there's been a reduction in incident frequency, which is very closely related to the quality of management and discipline in execution. This is an ongoing journey. We will consistently continue to decrease frequency both in rail incidents and personal incidents. This is one of our values, and it's something we will continue to focus on increasingly more, but I am absolutely convinced that with our teams, both in the North and South operation, our organizational structure will make it even more robust and bring in even more quality in execution and a working environment that will continue to help us progress in reducing costs, increasing competitiveness and bringing in increasing more volumes to a safe system. And before we move on to the Q&A session, one last comment about our investments. As you've seen in Saraiva's presentation, our CapEx is in line with what we did last year. But more important than absolute figures, I just want to reassure you that we are keeping with our recurring CapEx, and we're doing the absolute necessary to have a robust and efficient operation. And our expansion CapEx is within the plan with the Mato Grosso rail works and requalifying also the Paulista Network and all the works at the Port of Santos to make sure that we are building the foundation for future growth and making sure that we are showing today the results that we will reach in the future. So in addition to CapEx, it all makes me confident that we are in line with our schedule and the figures that we had planned. Specifically for Mato Grosso rail next year, the BR-070 terminal will be going into operation. So this year, we have the first stage of this transformational and relevant project for the company and all the companies that we work with. So those are my opening remarks. And now we'll begin the Q&A session. Myself, Machado and Saraiva are here to take your questions. Thank you. Operator: [Operator Instructions] The first question is from Mr. Alberto Valerio from UBS. Alberto Valerio: The first question is what every investor wants to know. What is the company's pricing level? What can we expect for the next quarter, for next year? What is the competitive environment like? Do you think it's reached a sustainable level or not yet? Will there be further adjustments? And are you maintaining the guidance based on third quarter yields? If we see the same yields in the fourth quarter, things might be a bit challenging in terms of keeping the guidance. That's it for me. Pedro Palma: Thanks for the question. This is Pedro. Looking at the competitive scenario and based on my opening remarks, I think it's fair to say that the pricing scenario, especially considering the corn market will continue to be a bit more acid than we had planned. So looking at the current scenario in the fourth quarter to be objective, it is a bit more acid than it was in the third quarter. That said, I don't think that is material. Looking forward -- and let me touch on 2026. As Saraiva showed, the crop dynamics looks positive, different to 2025, where we went in without carryover inventory. And what we're seeing for 2026 will be a beginning of the year with higher volumes in the system, which should make the logistic pressure easier for next year. So I think the dynamics will be marginally better than we saw in 2025, thinking about the transition into 2026. Having said that, to be very transparent and objective, prices are not directly under our control. But what I do see is for 2026, we are beginning our commercial efforts for that journey at similar levels to what we have seen in the second quarter of 2025. And over time, as the market progresses, we will rebuild our pricing basis with more confidence in future prices and volumes. As for the guidance, obviously, we already have the numbers for the third quarter. There are challenges to execute on the fourth quarter volumes. The name of the game for us to conclude the year within the figures that we announced for the guidance will be totally related to executing on volumes, especially now in December and continuing to control costs and expenses. The challenge I see is that, honestly, there's still some uncertainty with regards to the volumes for exports, given that export volumes in December, sometimes clients prefer to execute them in January only based on international demand. So those volumes will have an impact on our numbers. But that said, we are confident that we will meet the guidance. We'll continue to work tirelessly to do so. I don't know if Gui would like to say anything, please feel free to jump in. Guilherme Lelis Machado: Yes. In terms of what we have been seeing in the fourth quarter, last Monday, we announced that October was an exceptional month for us. After May and August, it was our new record, and we'd have to repeat the same thing because our investments have been translated into absorbing capacity fluctuations in the market. November looks like will be a strong month in terms of volumes. As Pedro said, the uncertainty will be mainly concentrated in December. We imagine there will still be major volumes. If we have a healthy demand environment, especially considering the high product availability we have in land, rail will be ready to capture that demand, especially considering our performance in the third quarter and beginning of the fourth quarter. So our focus will be to continue executing sharply in terms of our operations, which is what has been happening and managing costs and expenses as we have been doing. So having said that, obviously, we should be delivering close to the midpoint of the guidance in terms of volumes. Our CapEx is solid and under control. And in terms of EBITDA, if we have a good risk balance in the fourth quarter, we should be able to meet the guidance close to the mid-low point and our efforts will all be towards executing on that at the end of the year. Operator: The next question is from Mr. [ Matteos Santana ] from Bradesco BBI. Unknown Analyst: Could you talk a bit more about corn? Looking at the figures, especially year-on-year in terms of exports, we see that volumes have been very low so far. So there wasn't a lot of corn transported in October. What do you expect for the fourth quarter? Do you think there will be more volumes? Or should we wait for the beginning of the year, January and February, where you'll be focusing more on corn exports? Pedro Palma: Matteos, this is Pedro. As I said in my previous answer, we do see a corn carryover -- a high carryover inventory for corn. Historically, the corn carryover inventory from 1 year to the next, let's just take a look at an example in Mato Grosso. It's about 5 million tonnes. If we look at a snapshot of today, in fact, if we look at October to November, there was a possibility of a 15 million tonne carryover inventory instead of 5 million. So there's an increase in the carryover inventory this crop year was 10 million tonnes. Now what will be exported additionally in December or what will only be exported at the beginning of next year. That's the question mark in the system. And it depends on international demand, and it also depends on the negotiations between producers and traders. So that's the uncertainty I mentioned and Gui mentioned with regards to December figures. How much of that corn will be available for export. What I can say is that we are fully able to transport whatever volume is available. As we have shown in previous months, we do have the capacity, and we are ready for higher volumes than we have transported in the last few months. So -- we're just waiting to see what those volumes will be. So even if we have higher volumes in December, the beginning of next year, in my opinion, we'll be seeing more corn to be transported than we saw in 2025 because the carryover inventory that we see right now by itself cannot be transported in December alone. Felipe Saraiva: Pedro, this is Felipe. In addition to the corn carryover inventory, soybean planting was early this crop year when compared to other crop year. So we'll have higher corn carryover inventories when we move into next year. So that volume might be transported depending on the international demand for that corn, but we'll also have an early soybean harvest because the soybean was planted earlier. So there should be a higher demand for logistics than we saw at the beginning of 2025 when soybean harvest was later. So biomass in general is looking more favorable in terms of logistics in Mato Grosso specifically. Operator: The next question is from Mr. Pedro Bruno from XP. Pedro Bruno: You mentioned your cost discipline. If I could touch on that, please, to understand, especially looking at SG&A plus fixed costs, the consolidated line. You gave us some numbers that don't really give us a lot of visibility. You talk about other operation costs, which I think is the more positive line in terms of how costs progress. It's maintenance, third-party services, security, facilities and others. There was a significant fluctuation, close to BRL 70 million year-on-year, depending on the window, but it looks like that line was highly efficient. But in general terms on fixed costs and SG&A, if you could give us a bit more color on what kind of initiatives we're talking about and what's been responsible for that efficiency? And if there is a trade-off among those initiatives or if there's something you had already planned on capturing. Guilherme Lelis Machado: Pedro, thanks for joining us, and thanks for the question. Yes. what we've been noticing in terms of reduction. And we started working on that since last year, and it's been translating into positive results this year. Throughout our journey and the company has had major projects and initiatives that have required an expansion of our structure. And we believe we have reached an adequate level. So from now on, we will be optimizing things and operating efficiently, always taking care of the company's operational leverage, which is what we do, maximize volume and decreasing unit costs. But what we have been doing is optimizing our structure our occupation, our capacity use because right now, we're at the right structure level. So we have been optimizing our personnel, simplifying processes and rationalizing company initiatives to prioritize those that create value and add to the company's core business. We have been managing inventory very efficiently and working on losses and compensation so that we can avoid losses. We don't want that to be a detractor to our overall structure. So there isn't one specific thing that's been leading to those gains, but -- there are several initiatives and many things the company has been doing that have helped us converge towards those efficient levels. So that's what we've been doing to optimize our cost and expenses this year. Operator: The next question is from Mr. Rogério Araúj from Bank of America. Rogério Araújo: My question is about your liability negotiation and the renewal of the South and West networks. Could you update us on those processes? What are the next steps? And we had the BRL 55 million loss of profit insurance proceeds. And I think the structure was also damaged due to force majeure because of the rains. Are you negotiating anything to that end in the South network? If you could give us more color on that, that would be very helpful. Guilherme Lelis Machado: This is -- Rogério. Thank you for the questions. I'll start by the end of your question. In terms of compensation for the South network claims, they should come to an end now. We recognize those in the second and third quarter. So that was all we had in terms of compensation. The team worked very closely to the insurance companies, and we were able to resolve those issues very swiftly within the regulation. In terms of other occurrences, we are complying with the regulation. There should be something else happened. We will announce that to the market, but there's nothing material to share at the moment. In terms of the South and West networks, there is no news for this half of the year. In the renewal and end of concession of the South network, let's remember that there was a working group with the company, the ministry and the regulatory agency. Those activities have been concluded. So we're not just waiting for the conclusions to be announced. In the South network, we do have the potential and the company is interested in continuing to operate it in a model that is financially feasible for us. Discussions will be ongoing with the stakeholders, and we'll be looking into different alternatives. And as things progress, we will be informing the market. There's nothing to announce for the time being, but this discussion should be taking place over the next few months. Let me remind you that the South network will be concluded in February 2027. So we still have a ways to go with these stakeholders. As for the West network, we do have an event in the short term, halfway through next year, June 2026. That's when the contract will come to an end. We've made it very clear so far in light of the fact that there has been no volumes transported in that operation. So there's no significant revenues or investments coming from there. So we should be giving that asset back to the government and then we'll assess the reconciliation in the assets and liability balance sheet for that operation. Discussions with the government are amicable. So now we just need to decide on the best design for that negotiation. We will let you know as things progress. Operator: The next question is from Mr. Daniel Gasparete from Itaú BBA. Daniel Gasparete: Touching on what Guilherme said about volume and unit cost. How are you coming to your tariffs for 2026, its competitiveness considering a scenario where things might be slower, given the pressure on the margin. What about the carryover of your tariffs from '25 to '26? I know you have the guidance, but if you could tell us a bit more on that dynamics. And also, how do fluctuations in tariffs affect your perception of CapEx investment projects and the projects for this year? Pedro Palma: Daniel, this is Pedro. Let me take your question. Well, let me start by the end to your point about our investment plans. Obviously, when we look at our CapEx execution and our expansion project, we need to calibrate those based on expectations of profit and the investments that are being made. I think the main point when we look at tariffs and when we look at the future interest rates, if we were to conduct a financial assessment of our investments, looking at our expansion plans, you have to have an expansion of volumes, competitiveness and pricing that you get from that structure. And often, investments can help you stabilize pricing. So pragmatically speaking, our journey in the rail system for both operations, especially in the North operation, pricing has never been linear because -- given any moment, when you go into any year and a specific year, there is an effect of the fluctuation of exports, crop failures. There are one-off circumstantial events that can change the pricing ratio within a semester, a year, a crop. But if we look at how our pricing has progressed over the years, you will see that pricing levels have been normalized and the tendency and our thesis that has been confirmed year over the year is that the world needs agricultural commodities and the best region to produce and export those is Brazil and the best region in Brazil for that starts in the Brazilian Midwest, and we want to be the best logistics company with the best structure with the lowest cost to be the best export solution. So to address a point that might not be exactly what you asked, but to give you more granularity, right now, we're fine-tuning our business plan for Stage 2 of our rail expansion project in Mato Grosso in light of the fact that we're moving towards concluding Stage 1. Next year, we will be delivering the BR-070 terminal as we had announced. So now coming into the new year, we'll be fine-tuning CapEx and what we expect from the next stages for the project in light of what's happening in terms of competition and what we expect looking forward. What I can share with you right now, this is not a decision that has been made because the Executive Board is still looking into things to then discuss it with the Board is that we're very constructive about how demand will grow in our markets and competitiveness and our structural profitability coming from investments that we can make. But obviously, we'll look into things stage by stage. We won't be making any dogmatic investments. Our investments are always based on an in-depth assessment of what the market has to offer in terms of demand, expected profitability and our ability to absorb those results and to seek fair share for our operations. Unknown Executive: Another important point is that throughout this journey and considering the tariff dynamics, we've had a very healthy journey after we went through that repositioning, like Pedro said during his presentation, that's taken place over the last few years. So obviously, in 2025, the level of our tariffs how we've traded our capacity. This is a very healthy level. There's been no value disruption. The company margins are still very solid and very healthy. In terms of investments, just to add to what Pedro said, we need to bear in mind that we are sensitive to the company's cash consumption. So all of our investment plans have to be assessed in light of cash generation. We're not going to put the company under any financial stress that is incompatible or that will take us to levels of debt that don't make sense. Also given that there's a persisting high level of interest rates. So we will be calibrating that as we look into market dynamics and making sure that we preserve the company's health. Daniel Gasparete: That was a very clear answer. If you could just touch on the first part of my question, which was about the carryover from '25 to '26 and maximizing volumes and minimizing unit costs. Do you think the trading cycle will be as slow as it was in '25? Unknown Executive: Yes, there will be a degree of carryover into '26 from '25, as I said in my answer to a different question. If we look at the baseline for '26, we're talking about similar pricing levels to the second half of '25. And carryover inventory volumes, good crops obviously put pressure on the system. But as we have shown in the past, we are totally able to increase prices if market opportunities arise. That's what we did from '22 to '24. We increased prices by more than 60% during that period, just as we repositioned it in the recent past in 2025 to make sure that we were capturing volumes as we have reiterated at very healthy margins, given that our pricing levels are very healthy going from '24 into '25. But to be objective, the baseline for '26 is what we had in the second half of '25. We'll have to wait for the market to operate and pressure levels. And in '26, we should be able to capture price recovery along the year. Operator: The next question is from Ms. Julia Rizzo from Morgan Stanley. Julia Rizzo: Can you hear me okay? I have a question about your tariffs, your competitive yield. I think you mentioned that in your institutional presentation in the third quarter, showing that the tariffs at the Rondonópolis terminal was very close to the market. You said it was the next best alternative and Rumo's nominal yield was 246 and the market was 244. What was that like in the third quarter? I just want to understand where the market is going and if what we're seeing now is a reflex if you have already reached market levels. What got my attention was the drop in tariffs and the loss of share. So my next question is what would be a fair or sustainable share for the company this year? We still have a quarter to go and good volumes to deliver, hopefully, and for next year. Unknown Executive: Julia, Thank you for the question. The company right now is operating considering alternative costs considering the regions we operate in Mato Grosso. Let me remind you that the rail volume captures volumes from across the state. And for each region of the state, alternative costs are different. Looking at the portfolio average, we're very close, slightly below the alternative costs to our clients. So looking at the price reduction we saw in the third quarter this year, there are two elements to it. First, price repositioning in the grains portfolio because we want to bring rail to a competitive level and to make sure that we are positioned as the best logistics solution to our clients and the effect of the mix in our portfolio with lower unit cost than the grains portfolio. So obviously, all of that leads to around 7% decrease in the tariffs this quarter. Now looking forward, we will continue to maintain rail as the best alternative to our clients. And that's the strategy we've been implementing for 2026. And market share is a consequence of that positioning and market dynamics. It's not a goal for the company. What the company is pursuing is to have a competitive tariff so as to make sure that we are using the rail system to full capacity. Now looking at the export market for Mato Grosso, we want to operate at about 40%, depending on the quarter, slightly below or slightly above, maybe close to 45%. That's the range we expect the market share to operate in. But again, to remind you, the market share is a result of exports and the rail operation. If the market is at a normal level, then we imagine that we'll be operating at about 40% in our grain portfolio in Mato Grosso. And as I said in my presentation, rail -- we'll be making sure that rail is the absolute best solution at the Port of Santos. We've been doing that at the Port of Santos and the Mato Grosso operation was just slightly below last year's, but very similar to 2023 when the market -- the export market was more similar to the current market. Julia Rizzo: Could you give me some reference in terms of reals per ton at the Rondonópolis terminal? Just so we have an idea of where the market is at and what the company is executing. Unknown Executive: We were very close, Julia. It's around BRL 230 per tonne in Rondonópolis. Some months, it's slightly above that. Some months, it's slightly below that. It's not linear. But right now, we're operating very close to competitive prices at that terminal. Operator: The next question is from Mr. Filipe Nielsen from Citi. Filipe Ferreira Nielsen: Most of my questions have been answered. If I could just touch on a point that hasn't been addressed yet. All those changes and discussions taking place at Cosan, Rumo's controlling company. There have been changes in the Board, management, new shareholders coming in. What have been the first conversations with the new shareholders and the controlling companies stance? Do you know what the strategy is going to be like and how strategies are thinking and how that fits with how you think, both in terms of pricing strategy and projects? Pedro Palma: Filipe, this is Pedro. Thank you for your question. Well, first point, we think it's very healthy that the controlling company be healthy, the Cosan Group be healthy. So with BTG coming in to Cosan's controlling share with Rubens. Rubens keeping the controlling stake in the structure is welcome news and very healthy for Rumo as well. Obviously, the 2 new shareholders have joined the company because they see value in Cosan Group and its portfolio, and they are bringing additional types of expertise, both BTG based on their historical experience and professionals. Their track record is amazing. And I'm absolutely certain that they will make huge contributions to the progress of the Cosan Group, and Rumo is no exception to that. Conversations have been very transparent. They're very incipient because the conclusion of that transaction, the election of the new members of the Board at Rumo only just happened at the end of last week. But what I can say is that preliminary discussions and conversations have been very positive. So we'll be discussing things together and working together on the next steps so that we have an increasingly better and more robust company. Talking specifically about Rumo, no one has any question about the rail asset in the logistic infrastructure and the role that Rumo can play in the markets it operates in. Everybody wants for this company to continue to grow and be better. So I'm sure Rumo's team, I can speak for myself and the whole team that everyone is very happy with the change in shareholders at the Cosan level. And with this new stage beginning now. Operator: This concludes the question-and-answer session. I would like to turn it over to Mr. Guilherme Machado for his closing remarks. Guilherme Lelis Machado: Well, thank you for joining us. And let me just conclude by saying a few things. I don't want to be repetitive and say the same things Pedro said in his opening presentation and everything we said during the Q&A session. The company has been delivering a very solid operational execution month after month. We have been attracting volumes to our operation after the beginning of the year when we realized and were able to swiftly adjust our commercial dynamics to recover the fair share and market share. This has been a very healthy and positive dynamics in our operation. And our projects will continue in line with what we've got planned for the year and delivering on the relevant projects for the company, such as the first stage of the Mato Grosso rail and all the other commitments to do with modernizing, creating capacity at the company, both at the Paulista Network and any other fronts we work on. Safety and operating efficiency are not only our priorities, but almost an obsession. And they have been translated into practical results. You've been able to see both in terms of incident frequency rate, as Pedro said, as well as capturing efficiencies, especially energy efficiencies as we have been sharing with you through our figures. The company's financial position is very solid, especially considering the high interest rates. We've been able to issue and restructure our debt very creatively, very efficiently. So our maturities are well balanced. The cost of capital is also very healthy. So having said all that, our focus for the end of the year will be on delivering results, and we have been making adjustments according to what the market presents us with. We're highly focused on delivering on our commitments. And we are aware that there will be higher risks in the fourth quarter. But in financial and operational terms, we know that the company is pretty ready to absorb those, but we are already looking into 2026, and we're paving the way towards positive execution, delivering value to the company and our shareholders. That is Rumo's objective, and that is how we have been facing challenges. We are fully dedicated to making sure that in 2025, we deliver a solid year. Thank you all for joining us, and we'll see you at the next earnings release call. Thank you. Operator: Rumo's Third Quarter 2025 conference call is now concluded. Thank you for joining us, and have a great day. [Statements in English on this transcript were spoken by an interpreter present on the live call.]
Operator: Thank you for standing by, and welcome to Kodiak's Third Quarter 2025 Earnings Conference Call. [Operator Instructions]. I would now like to hand the call over to Lauren Harper, Kodiak's Chief of Staff. Please go ahead. Lauren Harper: Thank you, and welcome, everyone, to Kodiak's Third Quarter 2025 Earnings Call. On the call today are Don Burnette, Founder and Chief Executive Officer of Kodiak; and Surajit Datta, Chief Financial Officer of Kodiak. Our press release and an earnings presentation were issued earlier today and are posted on the Investor Relations section of our website. This call is being broadcast live via a webcast, and a replay will be available on our website after the call. Before we begin, I would like to remind you that during today's call, Kodiak will be making forward-looking statements within the meaning of the federal securities laws about financial performance and future events, including our guidance for fiscal fourth quarter and full fiscal year 2025, as well as our long-term goals. Such forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statement made during this call that is not a statement of historical facts should be deemed to be a forward-looking statement. All forward-looking statements, including statements regarding our guidance for fiscal fourth quarter and full fiscal year 2025, our estimated total addressable market, our operational and product road map, our relationships with partners and suppliers, our ability to produce and deploy the Kodiak driver at scale, including the timing of launching driverless trucks for long-haul highway operations, our expansion plans and opportunities and our expectations regarding future business and financial performance, including future cash flows and our path to profitability, are based upon management's current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements. Accordingly, you should not place undue reliance on these statements. For a list and description of the risks and uncertainties associated with our business, please see our filings with the Securities and Exchange Commission. We disclaim any obligation, except as required by law, to update or revise any financial or operational projections or other forward-looking statements, whether because of new information, future events or otherwise. Any forward-looking statements made on this call speak only as of the date of this call. Further, in addition to discussing results that are calculated in accordance with generally accepted accounting principles, we may also refer to certain non-GAAP financial measures. For more detailed information on our non-GAAP financial disclosures, including reconciliations to most comparable GAAP measures, please refer to our earnings release, which can be found on our Investor Relations website. Our discussion today also includes references to forward-looking free cash flow. Such forward-looking financial measure is provided on a non-GAAP basis without a reconciliation to the most directly comparable GAAP measure due to the inherent difficulty in forecasting and quantifying certain amounts that are necessary for such reconciliation. I will now turn the call over to Don. Please go ahead. Don Burnette: Thanks, Lauren, and welcome to our first earnings call as a public company. Today, we're excited to share our third quarter results. But first, I'd like to introduce you to Kodiak and talk about our industry-leading technology, our strategy and why we believe we are positioned to capture the tremendous opportunity in the global trucking market. Kodiak delivers AI-powered driving technology that tackles some of the world's toughest driving jobs across vehicles and environments. We are a leading provider of autonomous trucking technology with 10 driverless trucks in customer operation with no human in the cab. These 10 trucks are the first to be delivered as we fulfill the world's largest known driverless trucking contract, a binding order to deploy our technology in 100 customer-owned trucks. Our differentiated technology allows us to seamlessly operate across a variety of environments, giving us the flexibility we need to focus on 3 large verticals: long-haul trucking, industrial trucking and defense. Across these verticals, we work with industry-leading customers such as J.B. Hunt, Werner, C.R. England, Martin Brower, Atlas Energy Solutions and the U.S. Army. Kodiak's core business is based on the Driver-as-a-Service or DaaS model, which is designed to replicate how customers pay their drivers today, either by the mile or by the vehicle. Our customers own and operate their own driverless trucks and pay us a recurring fee to utilize the Kodiak driver in their fleets. This DaaS model allows us to generate recurring revenue while keeping our balance sheet relatively asset-light. We initially launched this model with Atlas Energy Solutions, a leading logistics provider in the Permian Basin that is actively working to automate its supply chain. We intend to grow DaaS revenue, both as Atlas grows its fleet of Kodiak-powered trucks and as we expand driverless operations with new customers. I believe it is paramount to execute across 3 strategic pillars to launch a driverless business: technology, safety case and product. While technology is the most visible, each of these pillars is critical to successfully launching and scaling autonomous trucks. Let me address each of these, starting with technology. The Kodiak Driver, our autonomous system combines advanced AI-powered software with modular vehicle-agnostic hardware. We designed The Kodiak Driver to operate in challenging driving environments while integrating seamlessly into our customers' fleets. This single integrated software platform is designed for deployment across 3 verticals: long-haul trucking, industrial trucking and defense. It operates day and night in a wide range of weather conditions, including rain and severe dust storms and in some of the most complex scenarios in trucking. Our core technology allows the Kodiak driver to operate without high-definition maps commonly used in the AV industry. We believe this approach makes the Kodiak driver more adaptable to real-time changes on the road than traditional AVs that heavily rely on premaps to rain. It also makes the Kodiak driver better able to navigate unstructured off-road environments, uniquely enabling us to pursue opportunities in the industrial and defense verticals that would otherwise be challenging if we required high-definition maps. We integrate our software into our modular autonomy hardware kit that is adaptable to a wide range of vehicle types. We've already integrated the Kodiak hardware kit into Class 8 trucks, Ford F-150s and even treaded military vehicles. Our hardware kit includes Kodiak's proprietary sensor pods, which are self-contained modules that contain third-party cameras, radars and LiDARs and are designed to be quick and easy to swap in the field with minimal training. Our modular approach allows us to quickly install The Kodiak Driver's hardware kit into our customers' trucks, reducing the cost of deployment. Years ago, we decided that upfitting was the right go-to-market strategy to address a significant industry-wide challenge that today, none of the truck OEMs offer a driverless-ready platform. To implement this strategy, we partnered with Michigan-based Roush Industries, a leading automotive product development supplier. Roush is an industry leader in small to medium volume automotive manufacturing. Their deep experience building high-quality vehicles at scale brings efficiency and quality to our manufacturing that would be very difficult to match with in-house production. Now to our second pillar, safety. Safety is our core value at Kodiak. It is critical to building trust with customers, regulators and the general public. The most important part of the process is building a safety case, which is a comprehensive evidence-backed argument for why The Kodiak Driver is safe to deploy. Kodiak is one of only a handful of AV companies known to have completed a driverless safety case. Developing a safety case is a massive cross-functional effort, spanning software, systems engineering, hardware, functional safety, manufacturing, operations and even legal and policy. To help track our progress on launching The Kodiak Driver on long-haul routes, today, we are unveiling our Autonomous Readiness Measure, or ARM, which measures the percentage of claims and evidence in Kodiak safety case for driverless operations that are materially complete. Having completed our industrial safety case, our industrial arm is necessarily at 100%. Today, I am incredibly proud to report that our long-haul arm currently stands at 78%, and we expect to make steady progress in the quarters ahead as we prepare for long-haul driverless operations in the second half of 2026. Lastly, I'd like to turn to our third pillar, the product. We take a unique customer-centric approach that has allowed us to implement our technology and build a valuable product our customers can utilize efficiently. The operational experience we have gained over 7 years and 10,000 loads has enabled us to understand our customers' needs and build our products accordingly. For example, we developed our quick swap sensor pods after hearing from our customers about the importance of our hardware fitting into existing maintenance processes. Additionally, our driverless deployment with Atlas in the Permian has helped us pressure test core product features, including launching, driving, landing and maintaining driverless vehicles. We see this generating a flywheel effect, allowing us to leverage these features and our learnings across long-haul and defense deployments. As we have already discussed, the Kodiak driver operates on highways, local streets, dirt roads and off-road environments. This generalization enables seamless operations and shared learnings across industries. I'd like to address our unique experience and opportunity in each of these verticals. Kodiak started its journey with long-haul trucking, and this continues to be our primary focus. Given the trucking industry's $4 trillion global TAM, we see tremendous opportunity in this vertical. Today, we get paid to deliver freight from our Dallas operations hub to Houston, Oklahoma City and Atlanta using our own trucking fleet with a safety driver. Our highly respected customers include J.B. Hunt, Werner, C.R. England and Martin Brower. We also see a robust pipeline of customers interested in piloting and eventually deploying The Kodiak Driver in their fleets. We continue to make meaningful progress towards our goal of launching driverless operations in the long-haul vertical in the second half of next year and expect to subsequently transition our long-haul customers to our DaaS business model. The industrial trucking vertical, where we deployed our first driverless trucks includes oil and gas, mineral transportation and logging transportation. The $68 billion global industrial market is an ideal use case for our technology. Operators in remote industrial locations face even greater difficulties recruiting and retaining drivers than long-haul carriers, meaning that autonomy can offer significant cost savings and operational efficiencies. As I mentioned previously, The Kodiak Driver's technology is well designed to work in unstructured industrial environments where we see many challenging scenarios that are less common in long-haul trucking. These include oncoming traffic, narrow uneven roads, frequent pedestrians and the occasional count. We believe that this versatility sets The Kodiak Driver's AV capabilities ahead of the competition. In addition to being a significant revenue opportunity, our industrial trucking deployment in the Permian helps us mature The Kodiak Driver across all 3 of our strategic pillars. The Permian is a literal and figurative sandbox for honing our technology, our safety case and product, enabling a flywheel that is already accelerating our ability to implement our technology across verticals. The unstructured driving environment of the Permian produces more unusual edge cases compared to structured highway driving, progressing the technology through rapid learning and challenging the system. We've also gained significant product experience integrating into our customers' transportation management systems and developed processes for managing vehicle maintenance with operations personnel on the ground. We've been delivering loads with no human in the vehicle in some of the toughest weather conditions in trucking, including dust storms. This experience will enable us to provide greater value to our long-haul customers. Lastly, we're focused on adapting our virtual driver for defense purposes. The current administration has adopted a supportive posture for autonomous technology and defense use cases mirror long-haul and industrial trucking with both on-road and off-road operations. We have proven experience in defense exemplified by our $30 million contract with the U.S. Army, which we completed work on earlier in 2025. The need for autonomy and defense applications is obvious. And ultimately, we believe autonomy will be integrated into the entire Pentagon vehicle fleet. We believe Congress and the military support investments in autonomy, though the government shutdown has caused some short-term uncertainty around contracting timing. We will continue to pursue opportunities in this space going into 2026. Now turning to our Q3 results. We are pleased with our strong performance in Q3. During the third quarter, we deployed the Kodiak driver in an additional 5 trucks owned by our customer, Atlas Energy Solutions. We are now generating recurring gas revenue on a total of 10 driverless trucks equipped with the Kodiak driver, a 100% increase over Q2. As we move into 2026, we expect to accelerate our deployment as we seek to fulfill Atlas's initial order of 100 Kodiak-equipped trucks. We have also completed over 5,200 cumulative hours of paid driverless operations, which represents a 166% increase from the end of Q2. We view this as a key metric to measure the progress of an autonomous company regardless of the specific use case. Additionally, we have driven over 3 million autonomous miles and delivered over 10,000 loads for our customers, a 21% increase in cumulative deliveries over Q2. I'd like to address our recent progress by pillar. First, the technology pillar. At the beginning of Q4, we issued a new software release that, among other improvements, includes new features that allow us to reduce the need for remote assistance by 53%. This reduction in turn, improves our ability to scale our solution. Another feature included in this new software release is a new component of our perception system that leverages generative AI-based vision language models to identify and address novel complex edge case scenarios that are rare in the real world. We believe combining our proprietary multimodal AI perception model, Giga FusionNet, with these new high-level reasoning capabilities sets a new standard for physical AI. Using this new technology, The Kodiak Driver's AI can now identify scenarios like flooded roads and car fires, rare scenarios that can be a challenge for more traditional perception techniques. This new feature allows us to better handle the long tail of complex etch cases and gives us further confidence as we move down the path towards our long-haul driverless deployment. In Q3, we announced that we have integrated NXP's ISO 26262-compliant processors and interfaces into the architecture that powers The Kodiak Driver. The addition of NXP's automotive solutions have improved The Kodiak Driver's reliability and robustness while helping us to improve vehicle uptime. Last week, we announced an expanded partnership with global Tier 1 automotive supplier, ZF. Through this expanded partnership, we purchased steering systems with redundant components for 100 Kodiak-equipped trucks. These redundant steering components are critical to ensuring our ability to safely scale The Kodiak Driver. On the safety side, we were proud to announce the results of an evaluation by Nauto, a leader in AI-powered fleet safety technology. Kodiak received the highest VERA safety score among over 1,000 fleets in Nauto's network. In fact, The Kodiak Driver received a perfect score of 100 in 3 out of 4 Nauto VERA score categories and in 95 in the fourth. We believe independent safety evaluations like Nauto's help to validate what we already know. The Kodiak Driver is already among the safest drivers on American highways. Lastly, I'd like to address the product pillar. As we've discussed earlier, we continue to execute on the upfitting strategy we first articulated years ago. In Q3, Roush launched a dedicated manufacturing line to upfit trucks with Kodiak's hardware kit. With the Roush-built trucks already rolling off the line, we believe we have further solidified a leading position in building driverless trucks at scale. We also continue to strengthen our OEM relationships over the course of the quarter, and we'll continue to prioritize building those relationships. Additionally, we added the ability to haul 2 trailers at the same time. Pulling doubles, as it's called in trucking, is difficult for even highly skilled human drivers. In addition to extra length, the second trailer complicates every turn. This makes maneuvering extremely difficult. Pulling doubles is even more difficult in the Permian, which features rugged landscapes with narrow windy roads, and we achieved a significant technical milestone ahead of schedule. We also saw significant regulatory progress in Q3 and the early days of Q4. I'd like to highlight one item in particular. In early October, the U.S. Department of Transportation issued a waiver that allows AV truck operators to use flashing warning beacons as a replacement for reflective warning triangles. We integrated these warning beacons into our very first driverless-ready truck back in 2024. We are thankful for the administration support, and we want to thank them for their leadership on this issue. Finally, over the past few months, we made tremendous progress as we prepared Kodiak to operate as a public company. We are incredibly excited for this next chapter and look forward to sharing more updates on our next earnings call. I am proud of what we have accomplished thus far and believe we are well positioned for growth. In summary, Q3 showed Kodiak executing across our 3 pillars: technology, safety and product, positioning us to deliver meaningful growth and durable value for customers, partners and shareholders. We are converting our progress into real commercial traction, including delivering additional Kodiak driver-powered trucks under the world's largest known driverless truck deployment. We head into 2026 with strong momentum across the long-haul, industrial and defense verticals and are continuing to move toward the launch of driverless long-haul operations while scaling our industrial business. We believe these wins will allow us to grow as we remain capital efficient, providing a path to profitability and positive free cash flow in the future. I'll conclude my remarks by extending a huge thanks to all of our Kodiakers. The progress we have made is a reflection of your hard work, and I look forward to accomplishing even more with you in the future. Surajit, over to you. Surajit Datta: Thank you, Don, and good afternoon, everyone. I am pleased to share Kodiak's financial results for the third quarter of 2025, our first as a public company. This quarter marks an important milestone for Kodiak as we continue to successfully execute on our mission to accelerate adoption and commercialization of autonomous technology in a safe and reliable way. From a financial perspective, we are committed to delivering consistent value and building on the strong foundation already in place. We see potential for significant long-term growth, scale and operating leverage. We delivered strong performance, demonstrating our ability to scale and grow the business. We also continue to focus on deploying capital efficiently, most notably by partnering with leaders in the AV and trucking ecosystems. This allows us to focus on our core competency of developing advanced AI-powered autonomy software. Revenue for the third quarter was $0.8 million. This represents a 53% growth over the prior quarter, primarily driven by increase in Driver-as-a-Service revenue generated by our 100% quarter-over-quarter growth in customer-owned and operated driverless trucks. Let me take a moment to further explain our DaaS revenue model. Under this model, we charge our customers a single composite license fee to use The Kodiak Driver AV hardware and AI-powered autonomy software. We charge this fee on either a per vehicle or a per mile basis. This flexible pricing model is designed to align with our customers' diverse operational models. The DaaS model allows us to build predictable recurring revenue under multiyear contracts. We have already implemented the DaaS model with Atlas. In our long-haul operations, our customers currently pay us to deliver freight on Kodiak-owned autonomous trucks. We plan to transition our long-haul customers to the DaaS model once we commence our long-haul driverless operations. By integrating the Kodiak driver into customer-owned fleets, we expect to continue to build an asset-light business that scales with our customers' growth while limiting our CapEx outlay. Now turning back to the financials. GAAP operating loss for the third quarter was $30 million. Non-GAAP operating loss for the quarter, which excludes stock-based compensation, totaled $24.7 million, primarily due to continued investment in R&D and operational support for our industrial deployment. For a reconciliation of non-GAAP metrics to GAAP, please see our earnings release, which we filed prior to the call. We also incurred capital expenditures of $6.6 million, primarily to purchase AV components that we deploy on our customers' trucks. Free cash flow for the quarter was negative $40 million. This included high single-digit millions of onetime payments and public company-related costs. We ended the quarter with $146.2 million in cash and cash equivalents, including the proceeds raised as part of the de-SPAC transaction, net of fees and expenses. Turning to guidance of Q4 of fiscal year 2025. We expect to end 2025 with customer-owned and operated driverless trucks in the mid- to high teens. Q4 FY '25 free cash flow is expected to be in the range of negative $36 million to negative $38 million as we continue to invest in R&D and incur capital expenditures to purchase and deploy AV hardware on customer-owned trucks. Over the next few quarters, we expect to continue to deploy The Kodiak Driver to meet our initial contractual commitment of 100 customer-owned driverless trucks with Atlas. This is expected to drive meaningful increase in quarter-over-quarter revenue. As we look ahead, we expect our capital needs to be primarily driven by 4 factors: R&D investments, including safety validation, costs associated with scaling industrial commercialization, strategic initiatives to lower AV unit hardware expenditures and public company costs. We expect that these capital needs will be partially offset by increases in DaaS revenue as well as improvements in operating leverage from scale and efficiencies. We plan to provide more detailed guidance for fiscal year 2026 as a part of our Q4 FY 2025 earnings call. We'll opportunistically seek additional financing options to strengthen our liquidity and support the next phase of growth, particularly as we build out our customer pipeline and launch driverless commercial long-haul operations in the second half of fiscal 2026. Our financial priorities remain consistent with our strategic goals that Don had laid out earlier. We want to, first, grow Driver-as-a-Service revenue with existing and new industrial and long-haul customers to build a durable recurring high-margin business model over time. Second, invest prudently in technology, safety cases and commercial readiness to launch long-haul driverless operations in the second half of fiscal 2026. Third, implement scale and cost efficiencies into our capital-light model to achieve profitability and positive free cash flow over time. Lastly, maintain a strong balance sheet and enhance liquidity through disciplined capital planning and opportunistic financing. In summary, Kodiak is entering its next chapter with a strong foundation. Our momentum, technology leadership and competitive position remains strong, and we are delivering high growth with focus on improving operating leverage. We are executing with fiscal discipline and transparency as we build long-term value for our customers, partners, employees and shareholders. I want to thank you all for attending our first earnings call and for starting this journey as a public company with us. Operator, can you please open the line for questions? Thank you. Operator: [Operator Instructions]. Our first question comes from the line of Michael Ward of Citigroup. Michael Ward: Don, I wonder if you could talk a bit more about the ZF partnership that seems intriguing. How exactly is that going to work? Is it a supply relationship, development relationship? How is that going to work? Don Burnette: Thanks, Mike. The ZF relationship is primarily a supplier relationship. ZF, as you know, is one of the leading suppliers of steering columns and automotive components in general to the commercial trucking market. We have a long-standing relationship with them and use their components in our driverless trucks today. And this announcement further solidifies the partnership between Kodiak and ZF as we intend to scale our solution going into 2026. Michael Ward: That's a great. It's a great company. Surajit, as you look at the fourth quarter, it seems like your annualized run rate at year-end is going to be somewhere in that $5 million range just from the Atlas relationship. Is that about right? Surajit Datta: We expect meaningful growth in revenue. So Q4, as we have guided, we will be into... Michael Ward: As you exit -- as you exit, is that what we're talking about in that $5 million range for the annualized run rate? Surajit Datta: Yes. I think that could be close to that number. Michael Ward: Okay. And then from what I can tell, your cash burn was about $35 million, you had some unusual there in 3Q. So about $35 million a quarter, that's about right? Surajit Datta: In Q3, we had some high single-digit millions of onetime costs and public company-related costs. So we have guided for Q4 for free cash flow to be negative $36 million to negative $38 million. Michael Ward: Perfect. Okay. And just one last one, if I could, is I think you're on track to get to that 100-unit agreement with Atlas by the end of '26. That's your current target? Surajit Datta: Yes, that's our target. Operator: Our next question comes from the line of Andres Sheppard of Cantor Fitzgerald. Andres Sheppard-Slinger: Congrats on all the great progress and congrats on the first public quarter. Certainly, incredible achievement. Don, I wanted to maybe touch on the long-haul operations that you're targeting to launch in the second half of next year. Can you maybe help us understand what is needed between now and then between that, I guess, 78% and 100%. Anything that you can point that we should be focusing on? And how confident are you in that target? Don Burnette: Thanks, Andres. Yes, we're excited to finally come out with some tracking metrics around our progress toward long haul. We've been talking about this for the last several quarters, and we wanted to be able to provide the market with some visibility and transparency into our development process. The arm is effectively a measure of the material completeness of our safety case. And as you know, we don't launch a driverless product until our safety case is complete. Most of the work from here forward involves a lot of validation and testing of the system that includes simulation, that includes structured testing and other forms of testing validation as we build up to that launch. And so we'll be providing more detail along the way. For now, this is our first data point as we progress, but you should expect to see quarter-over-quarter improvement as we move toward our expected driverless launch in the second half of 2026, and we feel reasonably confident that, that is an accurate time line. Andres Sheppard-Slinger: Wonderful. That's super helpful. I appreciate all that color. And maybe just as one follow-up. A question on liquidity. So with roughly $150 million in cash and equivalents now, how are you thinking about kind of capital needs going forward? I realize you're not guiding cash burn going forward, but how should we think about that liquidity and any potential additional capital needs? Surajit Datta: Thanks for the question. This is Surajit here. I'll jump in here. As you see as a part of the de-SPAC transaction, which you just concluded, we had the largest capital raise in the history of the company, demonstrating our ability to raise across the capital structure and across several investors. And we feel excited about our momentum and the tremendous progress we are making in deploying our technology and scaling the business. So as we scale this business over both industrial and long haul, we should be able to also drive significant operating leverage and reduce our [ BOM ] cost. So we feel confident that as we execute on this strategy, we will be opportunistically seeking additional financings to strengthen our liquidity over the next 12 months, support the next phase of growth and execute against our road map. So we feel confident we're raising that additional capital for the next few quarters. Operator: Our next question comes from the line of James Mcilree of Chardan Capital Markets. James McIlree: When you think about the second half entry into the long-haul market relative to the ARM measure, do you need to be at 100% for some period of time before you can enter the market? Or can you enter the market with a sub 100% again, you have to have it at some period of time. I'm just curious how that -- how you're using ARM as a gating factor to the long-haul entry. Don Burnette: Thanks, Jim, for the question. We -- there's no specified period of time. It's more of a minimum requirement. So yes, we would need to get to 100% on the readiness measure in order to feel comfortable that we have closed out the safety case for launching our driverless product. That being said, there's no specified amount of time between getting to 100 and actually doing the first driverless run, so to speak. And so it's a little bit premature and early to kind of talk about specifics at that sign of a granularity. And so what I would say is we're shooting for the second half of next year. And as we get closer to that moment, we should be able to provide additional clarity and more certainty around the timing of when we actually do our first deliveries. James McIlree: That's very helpful. And then as far as customer additions are concerned, is it more likely that you enter the long-haul market before getting another industrial customer? Or is it the opposite that it's more likely to get another industrial customer first? Don Burnette: Well, we're dual tracking that. We're continuing to push to build our industrial business. As we talked about in our remarks earlier, we feel really good about growing that vertical. We have a great customer in Atlas, and this is really a crawl, walk, run approach to deploying autonomy. This is a safety-critical technology. We want to make sure that it's rightsized for our customers as our customers are learning with us. There's a lot in the product pillar that goes into actually efficiently deploying this product. And you can't just dump hundreds or thousands of vehicles on a customer overnight and expect them to be able to efficiently operate those vehicles to provide a useful benefit. And so there's a learning process as we go through this customer development, and that's really where we talked about the flywheel earlier on. And so we are looking to pick up additional industrial customers, and we'll have more on that as we continue to move through the quarters. At the same time, the team, especially the R&D team, the systems engineering team and our validation team are working really hard to get the truck to the appropriate level of safety for deploying driverless. And so I think it's really a dual track multipronged effort. Those are parallel efforts. I think the goal would be to announce additional customers in both of those verticals along the way. I can't really say exactly to what time frame one would come before the other. These are both top issues. Operator: Our next question comes from the line of Itay Michaeli of TD Cowen. Alright. We move to our next question, next question comes from the line of Mike Latimore of Northland Capital Markets. Mike Latimore: Congrats on the first call here and doubling the units in the quarter. That's great. I think Nauto's score was very positive. Can you leverage that? Are you leveraging that for marketing purposes after new prospects? And can that be helpful even, I don't know, in keeping insurance costs down? Don Burnette: Well, when you talk about new technology, especially within the safety -- safety critical realm like automotive driving, credibility and trust needs to be built over time. And we feel that the Nauto results really speaks to the safety of our system, especially as it compares to human driving. And that's one of those big question marks that people have had for many years, even over decades is how do these vehicles drive relative to existing humans, not just from a crash or accident percentage perspective, but what is the behavior by which they drive. And the exciting thing for us is I think this really demonstrates that not only are these vehicles not getting into accidents, which is kind of like your high-level metric, but they're also driving in a responsible, defensive and safe way. And that leads to better safety overall on our roadways. It also improves traffic and congestion. And so that's something that we think is really important as we deploy this technology more broadly and start to scale it. We want to be good citizens, not only to our customers, but also to the general motoring public. And this result simply speaks to the trustworthiness of the system for folks that don't have direct visibility into the system. Now how does that help Kodiak, of course, from a marketing perspective, but it helps from a regulatory perspective when we talk to regulators, they can get a sense for, hey, I have never seen this in action, and it's far away from where I drive day-to-day, but I can see that the score comprise over 1,000 fleets actually, they are the safest on the road. Same with our customers, right? We can take this data to our customers and show them not just 1 or 2 or 3 trucks, but we can say over the course of our entire operations of our fleet, we're actually behaving as safely and safer than human drivers on the road. And I think that really speaks to the credibility and trustworthiness of the system as a whole. Mike Latimore: Great. Obviously, a lot of focus on industrial and long haul. In the government vertical, a ton of focus just across the board on autonomous systems, whether it's in air, on sea, on the ground. Can you give a little more context or color around opportunities you might see in the government vertical? Don Burnette: Yes. It's been tricky as of late with the government shutdown, as we mentioned in our remarks. We still remain convicted that the defense vertical is a large opportunity for autonomy. The Secretary of Defense actually just made some remarks emphasizing the importance of contested logistics and actually prioritizing commercial solutions within the Army and other branches adoption of autonomy. We think this is the right approach, and we think that Kodiak has, we believe, the most mature, commercially viable autonomy solution that can be applied to defense applications. And of course, as you've seen, we've demonstrated that several times over across multiple vehicles in multiple different environments with our Ford F-150s and the versatility they bring, but also the Textron Systems RIPSAW platform, which is a fully threaded vehicle. We really demonstrated the ability to bring that commercial maturity into the defense market. And we believe that, that's what the defense market is ultimately looking for as they want to scale and productize this technology. So we remain very bullish in defense applications. It's an interesting world in the government space right now, but we think 2026 is going to be an exciting year. So I would say stay tuned for more. Operator: Our next question comes from the line of Ravi Shanker of Morgan Stanley. Nancy Hipp: This is Nancy Hipp on for Ravi Shanker. It would be helpful to hear a bit about how you're managing adverse weather, extreme environments or edge case scenarios in your autonomous system and how big a risk those are to scaling? I know you had a GenAI system to identify sort of these novel edge cases, but it would be helpful to hear more on that as you approach the on-highway launch in 2026. Don Burnette: Sure. Well, in our -- I'll use an example, our industrial launch back in 2024. So we delivered 2 -- the first 2 driverless trucks in December of 2024 and very quickly got those trucks to a level where they were capable of operating, firstly, around the clock, so 24/7, which is important to our customer, Atlas, which is a 24/7 operation, but also importantly, in adverse weather conditions. And so this has been something that The Kodiak Driver has already been able to handle for several quarters now in a driverless fashion. And so we expect to be able to bring those capabilities ultimately over to the highway environment when we first launch our driverless product in the second half of next year. So yes, the team is definitely working on validating those capabilities for highway. That is all encapsulated in our safety case, which, as we said, we're now at 78% on our readiness measure. And so we have already experienced and importantly, our AI system has experienced an adverse weather already. Nancy Hipp: Got it. That's very helpful. And then maybe for my second question, it would be helpful to hear about feedback you're receiving from your current partners after the launch with Atlas. And sort of how do you see that decision-making cycle for customers to go from initial discussions to adopting driverless trucks into a pilot to eventually scaling? Don Burnette: I think it's been an interesting journey, and the answer to that question has evolved quite a bit over the last decade, last several years and then to where we are today at the end of 2025. Our sense is that customers and the market broadly is excited about driverless deployment. It's more of a when can we get our hands on it as opposed to one of skepticism, which was not always true. If you go back several years, there was a lot of skeptical prospective carriers and truckload operators out there. These days, we don't -- we don't get as much skepticism. I think people realize that autonomy is the future of transportation broadly. That's true in the commercial market. That's true in the private vehicle market. And certainly, it's our belief at Kodiak that automation will make all the transportation modalities more efficient and safer over time. And of course, customers want to take advantage of that. They recognize that there's first-mover advantage and they want to move quickly. And of course, we want to be able to deliver a safe and efficient solution to them. More importantly, not just a safe solution, but one that they can actually utilize and hopefully utilize out of the gate. And again, this is where that flywheel effect comes in. Yes, we have an industrial application launched today, which is in a different domain than highway, but the customer interactions are largely the same for what we will bring to our over-the-road highway customers when we do eventually launch that product. And those are learnings that you can't really get other than doing -- and we think that this flywheel is going to accelerate our progress as we begin to scale our highway deployment. So I think customers are excited for it. I think they're waiting patiently to get their hands on the first driverless trucks that they can, and we hope to be the leading provider of those solutions for the customers broadly. Operator: Our next question comes from the line of [indiscernible]. Unknown Analyst: On those routes in Dallas, as you kind of prove out the safety case, Aurora, when they were proving out their safety case, I guess, got some pushback from their partner, PACCAR. Just curious if that's a risk scenario where you prove out your safety case, but the partner doesn't want it. And is there -- I'm going to extend that. I think you had mentioned kind of J.B. Hunt there as well. Do they have any saying this? Do they care? I mean I assume they're just -- if you're just delivering goods from one point to another, they shouldn't care, but who knows maybe they don't want the brand subjected to that risk. So if you can just talk about kind of who needs to sign off, if anyone, for you to go driver out on those trips from Dallas? Don Burnette: Thanks, Walter. It's a great question. I think there's like the legal sense of the question, who needs to legally sign off and then from a trustworthiness and good partnership perspective, there's who do you want to bring along. Our philosophy is we've always built our technology to be platform agnostic. We've shown that we can develop The Kodiak Driver and implement The Kodiak Driver across many different makes, models and form factors of vehicles. This gives us flexibility. So we haven't announced the platform that we will be using for our initial highway deployment. I think you asked, is this a risk? Everything is a risk. I would definitely say it's a risk. At the same time, we think building the right relationships and the safety of the technology in the right way and bringing people along, including them in the process is the right way to approach business. And so we think we have a path forward to deploy driverless vehicles without a driver and without an observer in the cab, and that's something that we definitely intend to do. But for sure, building trust with our partners is paramount in that process. Unknown Analyst: And then just kind of sticking with that partnership question, I guess. You've elected to upfit, right? And obviously, you've generated $800,000 of revenue. I think Aurora's revenue is like $1 million, so not even that much difference in the current quarter. I'm just curious like at what point, if at all, do you -- is it important to be integrated off the line, that type of stuff? I mean I know it's still early days, not a '26, not a '27, like do we just not worry about this or not consider this for some extended period of time? Or are there things in the works that you have planned for, I don't know, '27 or '28? Don Burnette: I don't think it's important to draw a line in the sand and pick a date like a switchover date. I don't think that's the right way to think about it. I think the right way to think about it is in terms of rollout and scale. In a lot of my conversations, there's this sense that thousands or even tens of thousands of autonomous trucks are going to fall from the sky and end up on our [ roadways ]. We're going to wake up on Monday morning and tens of thousands of autonomous vehicles are going to be out on the road. And we don't really think that's true. There's a progression to rolling this out, both from a safety, efficiency and operational perspective. And our current approach, we believe, scales into many, many thousands of trucks, which should be sufficient for the foreseeable future, short to medium term. And then -- that also depends on the development cycles for partners, OEMs and other providers within the autonomy space. And we don't control those time lines and something that I've said for a very long time is that I don't want to be beholden to time lines of other companies. I want to be able to take charge and control our own destiny. I think that's something that Kodiak has really done well, and we've executed on. We will continue to follow that philosophy over the next several years. We want to make sure that we have a product that we can deliver to customers when we are ready to deliver that product. And ultimately, when the ecosystem matures and when suppliers are ready, I think you're going to see access to broader scale, not just for Kodiak, but for the industry at large. And so I don't really think of it as a black or white or a line in the sand or a date on the calendar. It will come. It is a gradual progression. We are working hand-in-hand with suppliers, both on the Tier 1 side and the OEM side. We're tracking progress. They're tracking our progress. And so it's not something that we're losing sleep over, and we feel like the position we're in with the experience we've gained now developing an upfit solution and with our partner, Roush, that we've set ourselves up for success in the next coming years. Operator: Our last question comes from the line of Itay Michaeli of TD Cowen. Itay Michaeli: Can you hear me? Don Burnette: Yes, sir. We can. Itay Michaeli: Perfect. Sorry about before. Congrats on the first earnings call. So going back to the 78% long-haul arm, Don, I was hoping you could maybe share roughly where that metric was maybe 3, 6, 12 months ago. And then on the OTA that you did that reduced the remote assistance by over 50%, curious if you could talk a bit more about that as well and kind of what are some of the issues that were resolved with that update? Don Burnette: Yes, absolutely. Thanks for the question, Itay. I'm glad that we cleared up the mic issue. So we don't have any numbers, historical numbers to share, unfortunately. This is our first data point. And of course, we will share updated data points going into the future, so you can see the trends. So unfortunately, I don't have a number to share on the historical aspect of that. Obviously, over the first several quarters of the year, we were focused very hard on delivering additional driverless trucks to Atlas and really perfecting the operation of those vehicles in that environment. And as we turn our focus to highway and our highway customers over the course of 2026, we'll have a lot more updates for you as we go. In terms of the improvement, this is incredibly exciting because efficiency is ultimately what will drive margins. And while all autonomous vehicles today require some type of remote support in certain circumstances, remote assistance in certain circumstances. It is our job as R&D developers to drive down the moments that any kind of assistance is required. So there's no specific instances I can point to or specific cases. But you can imagine that these trucks are very conservative, and they often will come to a stop if they see something they're not sure about. There's a lot of potholes that are present in the Permian. And often our truck will stop and ask human assistance for confirmation that they can continue or should they drive around it or is it safe? And ultimately, we want that conservative behavior in our trucks. But as we improve the technology, as our AI improves, as our foundation model work improves, the scene understanding, and we gave several examples of these in our deck, our scene understanding improves dramatically. The trucks can start to handle those cases on their own, and they need to call for human support less and less. And so we've actually reduced that, as we said, over 50% in the last quarter, and that's a huge, huge win and a sign that the technology is accelerating very, very quickly, and we expect that type of acceleration to continue. Itay Michaeli: That's great and good to see the progress there. Maybe just a quick follow-up on the financials. Of the roughly $6.5 million of CapEx in the quarter, can you share roughly how much of that is for purchase for soon-to-be-delivered trucks versus kind of in-period delivered trucks? Surajit Datta: Thanks. It's a great question. Most of the CapEx is for future deployment as we need some lead time to acquire -- purchase the -- purchase the AV hardware components and then get it assembled. So most of that relates to the future deployment and ramp, what I would call it like success-based. So as we plan out the deployment for each quarter, we tend to make those purchases. But it's not exactly linear as well. Sometimes we may make some bulk purchases if the pricing is attractive or if there are potential tariff situations. So we look at that as well. Operator: Thank you. And ladies and gentlemen, this concludes Kodiak's Third Quarter 2025 Earnings Conference Call. Thank you for participating. You may now...
Operator: Good day, and thank you for standing by. Welcome to H World Quarter 3, 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to turn the call over to your first speaker today, Mr. Jason Chen. Thank you. Please go ahead. Jason Chen: Thank you. Good morning, and good evening, everyone. Thanks for joining us today. Welcome to H World Group 2025 Third Quarter Earnings Conference Call. Joining us today is our Founder and Chairman, Mr. Ji Qi; our CEO, Mr. Jin Hui; our CFO, Ms. Chen Hui; and our CSO, Ms. He Jihong. Following their prepared remarks, management will be available to answer your questions. Before we continue, please note that the discussion today will include forward-looking statements made under the safe harbor provision of the United States Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, our results may be materially different from the views expressed today. A number of potential risks and uncertainties are outlined in our public filings with the SEC. H World Group does not undertake any obligations to update any forward-looking statements, except as required under applicable laws. On the call today, we will also mention adjusted financial measures during the discussion of our performance. Reconciliations of those measures to comparable GAAP information can be found in our earnings release that was distributed earlier today. As a reminder, this conference call is being recorded. The webcast of this conference call as well as supplementary slide presentation is available at ir.hworld.com. With that, now I will hand over the call to our CEO, Mr. Jin Hui, to discuss our business performance in the third quarter of 2025. Mr. Jin, please. Hui Jin: [Interpreted] I believe many of you have noticed that 2 weeks ago, on the occasion of H World's 20th anniversary, we successfully held a partner conference being 20 years young forging ahead. Therefore, before diving into our third quarter performance review, I'd like to take a few minutes to once again share some of our thoughts on the long-term outlook of China's hotel industry and us. In summary, we believe H World has great long-term growth potential by deeply rooted in China market. Currently, we can observe that while the industry supply is relatively ample, high-quality supply is in noticeable shortage. Compared to the mature U.S. market, China still has low hotel trend penetration and the industry remains fragmented. As a unified large singular market similar to the U.S. but with an even larger population base, the increase in churn ratio and the phase-out of low-quality supply will inevitably become a long-term trend. More importantly, the demand for travel is gradually shifting from discretionary demand to necessity for Chinese consumers nowadays. China has the best infrastructure worldwide with extensive high-speed rail and highway network coverage. This has made traveling much easier and more convenient, facilitating the penetration of accommodation needs from major cities to country-level markets. Additionally, Chinese consumers are beginning to redefine consumption concepts and oriental aesthetics. We can see a substantial increase in the consumer desire in seeking sales pressure, which further drives the growth of experiential consumption such as tourism, exhibitions, concerts, and sports events. Apparently, the current supply quality in China's hotel industry is unable to fully meet consumers' increasingly upgraded and diversified demand. Therefore, supply side reform will be the main theme of the future industry development and this will undoubtedly bring tremendous growth opportunities for domestic branded hotels like us. As the leading players in China's hotel industry, we will continue deepening our roots in the China market, pursuing high-quality growth and delivering service excellence with a brand-led approach to reduce industry with centering on high quality and efficiency. We are full of confidence in the future development of China's hotel industry. After sharing our perspectives on the long-term outlook, now let's turn to our third quarter performance. We are pleased to see early signs of improvement in the overall market condition. On the demand side, data from railway, aviation and the number of tourists indicate that the domestic travel demand continuously to grow steadily with the increasing demand for travel being particularly evident during the National Day and mid-autumn festival holiday period. On the supply side, third-party data shows that the sequential supply growth has stabilized and the year-over-year growth rate has moderated. However, we still need more time to see if this trend is sustainable. We are glad to report that H World delivered good results across several key metrics in the quarter. In the third quarter, we achieved a year-over-year increase in ADR while maintaining a relatively stable occupancy rate driven by refined revenue management initiatives, including optimizing pricing strategies across flagship hotel, newly opened hotel and a mature hotel as well as refining promotional strategies and enhancing incentive programs. As a result, our RevPAR stayed largely stable compared to the same period last year. Breaking through in new cities and regions and further penetrating in the lower-tier cities, we achieved another quarter of high-quality network expansion driven by a 17.3% year-over-year increase in the number of rooms in operation. Our group hotel GMV grew by 17.5% year-over-year to RMB 30.6 billion. Meanwhile, along with our network expansion and the continuous enhancement of H Rewards membership program, our membership base exceeded 300 million by the end of third quarter, up 17.3% year-over-year and ranking #1 globally. In addition, room nights sold to the members rose 19.7% compared to the same period of last year, exceeding RMB 66 million and accounting for 74% of the total room nights sold, which is also a leading position in worldwide. More importantly, our monetized and franchised business delivered strong growth in its hotel network revenue as well as profit. Our third quarter group M&F revenue rose 27.2% year-over-year to RMB 3.3 billion, and the group M&F gross operating profit increased by 28.6% year-over-year to RMB 2.2 billion, contributing over 70% of the group's total gross operating profit. In terms of hotel network expansion, we remain steadfast in executing our strategic focus on economy and middle scale segments to serve the mass market. This strategic positioning aligns precisely with the current consumer behavior of seeking value for money products and services and can further demonstrate our competitive advantages. By continuously upgrading our core products and enhancing our excellent service with a customer-centric principle, we are enhancing the quality of our hotel portfolio and strengthening our brand positioning to achieve long-term sustainable growth. The new version of HanTing along with our middle-scale brands, Ji Hotel and Orange Hotel, will serve as the key growth engines for our expansion in the lower-tier cities and provides strong foundation for achieving our strategic goal of 20,000 hotels in 2,000 cities. At the same time, H World has also made rapid breakthrough in the upper-midscale segment. At the end of third quarter, our number of upper-midscale hotels in operation and in pipeline exceeded 1,600, up 25.3% year-over-year. More importantly, to meet the growing consumer demand for quality living or oriental aesthetics and unique experiences, we recently launched a brand-new upper mid-scale brand, Ji Icons during our 20th anniversary. The introduction of Ji Icon further enriched our upper-midscale brand portfolio and help us to achieve comprehensive coverage from oriental to Western brands and from selected service to lifestyle hotel offerings. Ji Icon's brand embodies a combination of subtle understated and elegant oriental aesthetic, enabling a value lift from accommodation functionality to a holistic lifestyle experience. The success of Ji Hotels has demonstrated Chinese consumers' ethnicity for oriental aesthetics and culture. We are confident that building upon Ji Hotels Foundation, Ji Icon will further deepen the expression of oriental aesthetics and the culture element. Moreover, our group's strong supply chain and modular construction capability as well as our global leading membership and direct sales capability will effectively support our Ji Icons to reach low construction cost, high operational efficiency, and high product quality. We believe Ji Icons will become one of the big driving force to support our penetration in the upper-midscale segment and has the potential to become another world-class brand after HanTing, Ji Hotel, and Orange brand. We remain focusing on strengthening our direct sales capabilities through H Rewards membership program. Our membership program and direct sales capability are vital to our sustainable long-term business growth. Our membership base has been growing as we expand our hotel network and entering into more cities. By the end of third quarter, H Rewards membership exceeded 300 million and the room nights sold to the members grew 19.7% year-over-year with enlarging portion of contribution to the total room nights sold. Going forward, we will further enhance our membership benefits, expand loyalty points usage scenarios, and explore cross-industry partnership to strengthen member engagement and enhance direct sales capability. This concludes the business update for H World's Third Quarter 2025. Now I will hand over the call to our CFO, Ms. Chen Hui, to present the group's financial performance for the quarter. Hui Chen: Thank you, Jin Hui. Good evening, and good morning, everyone. Let me walk you through our third quarter financial overview. During the quarter, our group revenue grew 8.1% year-over-year to RMB 7 billion and Legacy-Huazhu revenue grew 10.8% year-over-year to RMB 5.7 billion, both surpassed the high end of our previous guidance. It was mainly driven by better-than-expected RevPAR performance as well as hotel network expansion. Group adjusted EBITDA rose by 18.9% year-over-year to RMB 2.5 billion, with margin improved by 3.3 percentage points year-over-year to 36.1%. The faster adjusted EBITDA growth and margin expansion were mainly contributed to further enlarged profit contribution from our asset-light business. Cost savings from Legacy-DH, partially on the absence of RMB 81 million restructuring costs incurred in the third quarter last year as well as cost optimization efforts from Legacy-Huazhu. Looking into our asset-light manachised and franchised franchise business. In the third quarter, powered by our high-quality asset-light network expansion and better-than-expected RevPAR performance. Our manachised and franchised business revenue recorded a robust 27.2% year-over-year growth to RMB 3.3 billion. More importantly, manachised and franchised business gross operating profit rose by 28.6% year-over-year to RMB 2.2 billion with a margin of 68% in the third quarter. As a result, gross operating profit contribution from our manachised and franchised business further enlarged to 70% in the third quarter, up 11.1 percentage points year-over-year. Moving to our cash flow and liquidity position. In the third quarter, we generated RMB 1.7 billion operating cash flow. And at the quarter end, the group had RMB 13.3 billion cash and cash equivalents and RMB 6.6 billion net cash on the balance sheet. Lastly, on our guidance for the fourth quarter of 2025, we expect our group revenue to grow 2% to 6% compared to the same quarter last year and 3% to 7% if excluding DH. The manachised and franchised revenue in the fourth quarter of 2025 is expected to grow in the range of 17% to 21% compared to the fourth quarter last year. With that, we are ready to take your questions. Operator, please open the line for Q&A. Operator: The first question comes from the line of Dan Chee of Morgan Stanley. Dan Chee: My question is about RevPAR and demand trend. Firstly, on the company's fourth quarter China revenue guidance of 3% to 4% year-on-year growth, what's the implied RevPAR assumption? Can the management share any 2026 outlook for us, especially after seeing third quarter RevPAR decline turns almost flat, especially on the new experiential demand Mr. Jin mentioned versus the original business demand weakness. So which one is driving the RevPAR stabilization? Hui Jin: [Interpreted] So as many of you may notice that in the third quarter, our RevPAR is a bit stabilized. On a year-over-year basis, it's kind of flat. It's not further declining compared to last 2 quarters. And of course, we observed several trends during the quarter. In terms of the demand, obviously, the demand was mainly driven by the leisure travel demand, especially from the tourism activities starting from summer holiday to September and of course, the beginning of the October National Day and mid-autumn festival as well. But on the supply side, as I mentioned before, on a year-over-year basis from the third-party data, we saw the supply growth actually moderated, so it was not growing as fast as before. So it's becoming a bit moderated, so which brings some of the benefits to the RevPAR stabilization. But more importantly, for us, S1 has been putting a lot of efforts over the last 6 months in terms to further enhance our, for example, the revenue management, as I mentioned in my prepared remarks, in terms of setting a new pricing strategy among different tiers of hotels like flagship new hotels and mature hotels. And therefore, I think -- but looking to the fourth quarter, because we are entering into the low season, there is still some of the uncertainties, so as of now, based on our revenue guidance, it implies our fourth quarter RevPAR, which is somewhere around flattish to slightly positive for the fourth quarter. In terms of business demand and leisure demand, of course, there are still some of the macro uncertainties. So to be very frank, the business demand is not that strong yet. But on the other hand, for the leisure demand, it was continuously growing. As I mentioned previously, for the Chinese consumers nowadays, the leisure traveling demand has become -- gradually becoming a necessity instead of discretional demand and especially for some emerging new demand such as concerts, marathon, sports events, and inbound traveler as well. So the leisure remained very strong. In terms of the outlook for the next year, we think it's a bit too early. It still takes time to see whether the stabilization in terms of the RevPAR and the supply-demand equivalent is sustainable. So we will give more color for our fourth quarter earnings. Thank you. Operator: Our next question comes from the line of Sijie Lin of CICC. Sijie Lin: My question is about RevPAR breakdown. If we look at ADR and OCC, we see that ADR performed better recently. So trying to understand the reason behind this and the sustainability. Also, if we look at the gap between blended RevPAR and same-hotel RevPAR, the gap remained at similar level with last few quarters. So is there any chance that the gap narrows in the future? And what measures need to be taken? Hui Jin: [Interpreted] In terms of the ADR, of course, for 2025, the improvement of RevPAR has been a very key task for our top management team. And of course, they have been putting a lot of efforts on that. So in terms of ADR, as I mentioned earlier, so we have doing a lot of works on further enhancing our revenue management capability, especially on the pricing for different layer of the hotel and different products. And of course, on the front line, we give a lot of various incentives to our salespeople to further motivate them to do a lot of sales activities. However, apart from these things we have been doing over the 6 months -- over the last 6 months, actually, the ADR increase in the third quarter is a result from our continuous efforts on the product upgrades, the quality improvements as well as our service excellence because we have been doing these things for many, many years and continuously doing so, and we have more and more recommendations from our customers. So that's why in certain areas or in certain regions, our products and service is definitely in a leading position, which gave us some of the pricing power, which led us to achieve a better ADR for the third quarter. And in terms of the like-for-like hotel or mature hotels, the gap, we are glad to see the year-over-year decline was narrowed significantly in the third quarter. On one hand, we -- in terms of the pricing, we use a lot of different layer for pricing the different products. Over the last 1.5 years, we opened a lot of high-quality hotels, new hotels in some of Tier 1, Tier 2 cities, which is creating some of the cannibalization to the existing hotels. But through different pricing -- in different pricing strategy for different products, I think we are seeing some of the improvements for our mature hotels. And fourth -- and more importantly, we keep doing a lot of existing hotels upgrades to further improve the hotel quality itself in order to rise -- improve the RevPAR as a whole. Operator: The next question will come from the line of Lydia Ling of Citi. Lydia Ling: Lydia from Citi. So I have a question regarding the brand, especially for the newly launched upper-midscale brand, Ji Icons. So could you actually share some -- your plans for this brand and such as your store opening plan and also the store economics like the CapEx and the payback period? And how actually your advantage versus like the current other leading upper-midscale brand in the market? And how is the feedback from the franchisees so far? Hui Jin: [Interpreted] Okay. So in terms of the Ji Icons brand, so obviously, the launch of Ji Icons brand has shown a very strong determination for H World to break through and development in the upper-midscale segment with multi-brand strategy. This trend is very clear. And secondly, based on the current culture confidence or Chinese culture confidence and also the preference from the Chinese consumers on our oriental culture or oriental service as well as oriental lifestyle that also basically support the launch of the Ji Icons brand. And as I said before, Ji Icons is going to definitely become one of the core brands in our upper-midscale segment. And we hope this brand can be the best brand or the best hotel that Chinese customers will like the most. So in terms of the UE, in terms of the CapEx you asked, we hope we can share more information after the first hotels opened. Thank you. Operator: Our next question comes from Simon Cheung of Goldman Sachs. Simon Cheung: The question is related to the hotel opening. In the third quarter, they've done very well in terms of hotel opening over 700. And I think in the first 9 months, they opened more than 2,000 hotels. That's on track or even exceeded the 2,300 hotel that they have targeted for the full year. Wondering whether there's any update for that and in particular, also on the new signing as well. And then on the related questions, given the focus and the strong momentum that they have seen in the upscale segments -- upper-midscale segments where they achieved 1,600 hotels secure. And we have seen similarly HanTing, they've done like 5,000 and that Ji Hotel done 4,000. Wondering whether they have any targets for the uppermid-scale in the longer run. Hui Jin: [Interpreted] Benefiting from faster new signings in 2023 and 2024 post COVID as well as further improvements in terms of our supply chain capability, which resulted improvements in conversion ratio from the pipeline to new openings. So we achieved a quite good new openings for the first 9 months, which is slightly more than 2,000. So therefore, for the full year, we could possibly open a bit more than 2,300 hotels as what we guided previously. But again, so we emphasized several times over the last several quarters' earnings call. In terms of the new signings and openings, we will focus more on quality expansion instead only looking for scale. So that the never changed. So we're going to continuously implementing this strategy for high-quality sustainable growth. In terms of the upper-mid segment, as I said, we have reached 1,600 in both pipeline and the operations, which also achieved a pretty rapid growth. But however, if you look into a longer term, for example, 2030, we're going to still focus on the mass market with the economy and the middle scale. So in terms of the proportion, economy and middle scale going to still contribute the majority. But in terms of the growth rate, we hope our upper mid segment could grow the fastest in the industry and become the leading players in China market by 2030. Operator: Our next question comes from Ronald Leung of Bank of America. Ronald Leung: Let me translate my questions in English. So I have two questions. My first question is about cost and margins outlook. The company has achieved very decent margin expansion in the past 2 quarters. Could management share with us the latest outlook on cost control and also margins? My second question is about the membership program. So the overall membership has grown decently to over 300 million by the end of 3Q '25. Could management share an update on the strategy on how to further enhance memberships loyalty and also marketing strategies to improve the conversion rates? Hui Jin: [Interpreted] Okay. So in terms of our members, so definitely, direct sales and membership is one of our core strategy. We are glad to see in terms of the member base as well as the room nights sold to our members continuously to grow. But we think that's still not enough. So that's why we have been doing quite a lot of jobs over the past several months. First of all, we introduced a price guarantee program, which is going to ensure our members to get the best price and service as also the unique experiences at the hotel. And secondly, we're also trying to fulfill more diversified demand from the leisure travelers and some of the emerging demand, for example, as I mentioned earlier, like sports events, like inbound travelers. So basically, the H Rewards membership program is gradually shifting from only business travelers to fulfill more diversified demand. And thirdly, we are also enhancing our capability to receive more business clients and corporate clients to further enhance our exposures. And lastly, we have been experimenting a lot of cross-industry cooperation with a lot of top-tier vertical players trying to enhance members' experiences and improve their engagement. Operator: Our last question comes from... Jihong He: [Foreign Language] Operator: Sorry, please go, continue. Jihong He: [Interpreted] Okay. Let me do the translation. So overall, the adjusted EBITDA margin improvement was mainly because of our asset-light strategy. So obviously, the M&F has higher margin compared to leased and owned. In terms of the cost control, in terms of the hotel operating costs, by leveraging our strong supply chain capability, we continuously to reduce the cost per room night sold. And for our leased and owned hotels, we're continuously seeking for more rental reduction, just trying to improve the profitability level of our leased and owned hotels. And on SG&A perspective, we're continuously optimizing our mid and back office and headquarter, just trying to control the cost. In terms of sales and marketing, we will based on ROI and do some of necessary investments on, for example, the hotel brand membership as well as the user -- new user acquisition. So as mentioned by Jin Hui, so we have been systematically improved our capability to improve our revenue management so as in the cost control side. So we are also doing a systematic capability improvement. Thank you. Operator: Thank you. We have come to the end of the question-and-answer session. That concludes the conference call for today. Thank you for your participation. You may now disconnect your lines. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]
Operator: Ladies and gentlemen, thank you for standing by. Welcome to the Israel Discount Bank Third Quarter 2025 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, November 17, 2025. If you have not yet done so, please access the presentation on the bank's website, investors.discountbank.co.il. I would like to remind everyone that forward-looking statements for respected company's business, financial condition and results of its operations are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated. Such forward-looking statements include, but are not limited to product demand, pricing, market acceptance, changing economic conditions, risks in product and technology development and the effect of the company's accounting policies as well as certain other risk factors, which are detailed from time to time in the company's filings with the various securities authorities. I would like to move first to Mr. Morris Dorfman, Executive Vice President, Head, Strategic and Finance. Mr. Dorfman, would you like to begin? Morris Dorfman: Yes. Thank you. Thank you all for joining us today. I extend my warm welcome to this investor call. Starting with Slide 2. Discount Group delivered strong Q3 results with net income of ILS 1.13 billion and ROE of 13.7%. Adjusted net income for one-offs amounted to ILS 1.25 billion, representing an ROE of 15.1%. Banking operations in Israel, comprising of Discount Bank and Mercantile recorded ILS 890 million and an ROE of 14.3%. Discount's cost efficiency ratio was 44% in Q3, while the cost-income ratio in the banking activity in Israel was slightly lower at 42.6%. Total credit in the group grew by 3.4%, accompanied by a solid credit quality metrics, while net interest income, NII, remained flat Q-o-Q. In light of these results, the Board decided to pay out 50% of Q3 net income. Moving to Slide 3. Despite 2 challenging years, Discount Bank has consistently shown double-digit ROE of 14% and stable net income. These figures exhibit the strength of bank and the resilience of the Israeli economy. At Slide 4. On the left side, 2025 GDP is now expected to grow by 2.5%. That said, Bank of Israel expects 2026 GDP to rebound notably with GDP growth at 4.7%. On the right-hand side, the job market remained resilient throughout this time, maintaining a healthy unemployment rate of 3.4%. On Slide 5, we summarized our credit portfolio growth and structure. In the third quarter, it's continuing its strong growth across most segments with a 3.4% growth rate quarter-on-quarter and 8.9% year-over-year. The corporate segment continued to show notable strength as credit grew by 5.6% quarter-on-quarter and 17.4% year-over-year. SME credit grew 1.6% and 4.6%, respectively, while household credit grew a healthy 4.3% Q-on-Q and mortgage grew by 2.2% Q-on-Q and 7.8% year-over-year. Operator: Mr. Dorfman, we can hear you. Morris Dorfman: Switching to Slide 6. This slide represents our credit portfolio quality. A stable economic environment is reflected in the consistent NPL ratio of 0.70%. The allowance ratio stands at 1.3% of total credit with a strong coverage ratio of 191%. On the right-hand side, credit loss expenses climbed to 28 basis points in the third quarter. The observed increase in provision is mainly due to 2 isolated corporate incidents made at Mercantile Bank amounting to approximately ILS 50 million. Excluding the Mercantile provisions, collective provisions amounted to almost 90% of all Q3 provisions, reflecting Discount's conservative stance on our credit portfolio. However, a 9-month year-over-year comparison revealed a decline in overall provisions as prior quarters exhibited comparatively lower provision levels. Moving to Slide 7 to discuss revenues. Total revenues increased by 0.9% Q-on-Q, while fee income grew by 2.5% Q-on-Q and 10.9% year-on-year, mainly from fees and commissions from financing activities. Net interest income, NII, slightly decreased by 0.2%, while CPI contribution remained stable. Ongoing pressure on lending and deposit margins is persistently eroding the bank's net interest margin. At the right-hand side, the income from regular financing activities decreased by 1.1% Q-on-Q despite a 3.4% expansion on our loan portfolio. Finance income declined primarily driven by the narrowing of credit and deposit margins. I apologize I had a problem with the line. I will move to Slide 8 to discuss expenses and cost-income ratio. Before we delve into this quarter figures, let's briefly review the bank's journey over the past decade, marked by significant improvement in its efficiency ratio from 67% to 52% post COVID and further reduction to 45 percentage following the divestiture of CAL. While they have come a far away, we think we can still improve our cost efficiency notably in coming years as we mentioned in our strategic plan announced earlier this year. Moving to Slide 9. Total expenses decreased by 3.8% quarter-on-quarter and by 1.2% year-over-year and the cost income improved to 44%. Salary expenses dropped 6% this quarter as we continue to maintain expense discipline. As previously communicated in the last quarter's report, the recently concluded wage agreement is expected to provide enhanced operational flexibility for management. Maintenance and depreciation expenses and other expenses are stable with changes mostly attributed to nonrecurring items. Moving now to Slide 10, you can observe our ample liquidity and diversified deposit base. On the left, you can see that 48% of our deposits are from our retail segment. On the right-hand side, our Tier 1 capital ratio stands at 10.47%, well above the 9.2% Bank of Israel requirements. Our liquidity ratios are well above the regulatory requirements, presenting a solid LCR of 1.7% and NSFR of 11.6%. Moving to Slide 13. I will briefly touch on our main subsidiaries, starting with Mercantile Bank that present a net income of ILS 234 million and ROE of 15.8%. The cost-income ratio stands at 37.5%. Mercantile grew its loan book by 7.6% year-over-year by a well-balanced portfolio. CAL is writing a net loss of ILS 88 million. The loss in the third quarter is attributed to the expenses related to the VAT assessment ruling, totaling ILS 137 million net and an increase in the Santam stock option provision of ILS 75 million after tax impact. As the VAT ruling loss recognized in the consolidated report in the previous quarter, CAL profit contribution amounted to ILS 40 million in this quarter. IDB New York Bank reported a net income of $24 million and ROE of 7%. The bank grew its loan book by 12.9% year-over-year and deposit by 30.9% year-over-year. To summarize my overview on Slide 12, I would like to emphasize the main takeaways from this quarter results. First, we delivered solid results with net income of ILS 1.13 billion and ROE of 13.7%. Second, our cost-income ratio dropped to 44%. Credit continues to grow at a healthy rate of 3.4% quarter-on-quarter and 8.9% year-over-year. Core Tier 1 equity remained stable at 10.5%, which allow further expansion next year, stable asset quality metrics with NPL ratio of 0.7%. The CAL sale is likely to boost our 2026 ROE by 1.2%, while stressing the Tier 1 ratio by 0.6%. And lastly, given our continued strong performance and the confidence we have in ongoing profitability, we announced a dividend payout of 50% of net income, reflecting a gross dividend yield of 5%. With this, I finish and would like to open to Q&A. Operator: [Operator Instructions] The first question is from Priya Rathod of Jefferies. Priya Rathod: I just have 2 questions, please. The first is on AUM, specifically for your small businesses section. There was a notable jump in AUMs quarter-on-quarter. Would you be able to give a bit more color on what is actually driving that AUM number, but then also what's driving the increase in the third quarter? The second question is on mortgages. Again, it was a really solid quarter in terms of growth in volumes, but how should we be looking at that number in the context of the sector data, particularly like the declining of new home sales? So I guess my questions are like what drove the higher mortgage volumes this quarter? And then how should we think about volumes going forward? Morris Dorfman: I didn't get your first question, but I will answer about the mortgages question, and then maybe if you can repeat the first one. So what's happening with mortgage as you understand, the real estate sector in Israel is at the moment, it's not moving too much. But most of the mortgages that have been sold this quarter -- the last quarter are one of the houses that were bought 2 years ago. there's this model in Israel when you pay 20% in advance and 80% just when the house is finished. So most of the people that bought houses about 2, 3 years ago, they took mortgages this year. So what you see now is the movement of money of the houses that we bought a couple of years ago. But I didn't hear your question -- the first question, I didn't understand the question. Priya Rathod: Yes. So the first question was on assets under management, AUM, particularly in the small business segment. There was quite a notable jump in AUMs quarter-on-quarter. I just wanted to ask what was -- what actually drives the AUM number and what drove the increase quarter-on-quarter? Morris Dorfman: Well, it's -- we don't see something special about the small businesses. It's part of our strategy, so we really focus on that. I can't say there's something unique in that. It's just our focus on this sector, if I got your questions right. Operator: The next question is from Chris Reimer of Barclays. Chris Reimer: Sorry if this was asked already, but how do you see dividends going forward in relation to the Bank of Israel announcement on the easing of restrictions for dividends? Morris Dorfman: Sure. So we -- of course, we had a discussion about it in our Board, and our thoughts and our decision is to be consistent in the way we pay dividends. So we thought it's better to keep the same level of dividend and not changing it every quarter. Therefore, we've chosen to pay 50%, and we plan to do it, of course, to keep the same in the future. Chris Reimer: Got it. And regarding expenses, aside from the divestment of CAL, do you see room for cost efficiencies in other areas? Morris Dorfman: Yes, of course, we -- well, as you know, it's part of our strategy to improve our efficiencies. So we're doing it both in bank and there's addition in -- Mercantile also working on that. And we're also examining what can be done together, Discount with Mercantile. And of course, also in IDB New York, there's also -- there's a new management team and they're working on new strategies, which will emphasize efficiency. Operator: [Operator Instructions] There are no further questions at this time. Thank you. This concludes the Israel Discount Bank Third Quarter 2025 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.
Operator: Good morning, everyone, and thank you for participating in today's conference call discuss Jones Soda financial results for the third quarter ended September 30, 2025. Before we begin, let me remind everyone that the company's safe harbor disclaimer. Certain portions of our comments today will concern future expectations, plans, prospects of the company that constitute forward-looking statements for the purpose of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. Forward-looking statements include all statements containing verbs such as aims, anticipates, estimates, expects, believes, intends, plans, predicts, will, may, continue, projects or targets and negatives of these words and similar words or expressions. Forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those indicated by the forward-looking statements. Factors that could affect our results include, among others, those that are discussed under the heading Risk Factors in our most recently filed reports with the SEC, including our annual report on Form 10-K, our quarterly reports on Form 10-Q and our current report on Form 8-K. In addition, this call includes discussions of certain non-GAAP financial measures, including adjusted EBITDA, most directly comparable GAAP measures, reconciliations for non-GAAP measures and are available in the earnings release and other documents posted on the company's website under Investor Relations. A telco replay will be available after the call through December 1, 2025, and a webcast replay of today's webinar will also be available for 1 year via the link provided in today's press release as well as on our company's website. Now I would like to turn the call over to Jones Sodas, CEO, Scott Harvey. Thank you. Sir, you may begin. Scott Harvey: Thanks, Jerry. Good morning, everyone, and thank you for joining our third quarter 2025 earnings call. As you recall, the first half of this year, we primarily focused on disciplined cash management and strengthening our supply chain. These initiatives have proven highly effective for Jones, we reduced our selling, general and administrative expenses, rightsized our portfolio and completed the divestiture of our Marijuana assets, of which position the company with a stronger financial foundation. In the third quarter, we built on these operational gains and achieve further meaningful improvements. We consolidated myJones in the e-commerce under a single fulfillment partner, reducing costs and increasing efficiencies. We centralized warehousing and logistics, optimizing freight routes and enabling multi-SKU load pairing. And lastly, we improved forecasting and inventory management, supported by supplier renegotiations and a shift to just-in-time inventory model. The improvements made through the first 3 quarters of 2025 has strengthened operational efficiencies and position the company to scale effectively as order volumes are expected to increase. Under prior management, Jones faced challenges in maintaining margins during periods of heightened demand and as many of the operational efficiencies limited scalability. By addressing these issues in myself and Brian's first years of management, the company is now equipped to handle higher order volumes without the drag of significant rising cost. These enhancements create a stronger foundation for sustained top line growth while preserving margins. Furthermore, making these fixes has allowed us to shift our focus towards growth. This quarter, we expanded our Club and DSD distribution network to increase reach and volume in our core soda business. We achieved record D2C channel performance through our Bethesda partnership, and we broadened our Zero Sugar portfolio, meeting growing consumer demand. These initiatives support our overarching goal of driving sustainable growth across the 3 key categories of core, modern and adult beverages. Our strategy is to pursue controlled and disciplined expansion with each one of these categories. One of our biggest takeaways from this quarter is the success from our strategic partner and socially rooted marketing campaigns. Initiatives like Crayola and Bethesda were huge excesses, leading to record-breaking D2C sales. Today, consumers engage with brands as a form of personal expression, not just consumption, social currency is beginning to increasingly define category leadership. Collaborations roots in culture, virality and nostalgia have proven more effective than typical product innovations. Products designed with visibility, collectibility and community interaction are the products that we see the most success in the future, and Jones is strategically aligned with this shift. We see this alignment exemplified by the success of our launches like fallout and Crayola. This reflects our team's ability to anticipate consumer demand and deliver products that truly resonate. Looking ahead, we expect to continue similar launches in the quarters ahead. One of these upcoming rocket bottle launch is forthcoming in this quarter. The iconic rocket bottle from the follow-up series goes on sales in Q4, followed by additional flavor launches in 2026, is expected to become a collector-driven product supporting premium pricing and recurring demand. Before passing the phone over to Brian to cover our third quarter financial results, I wanted to cover 2 recent developments. The first major factor is the recent U.S. government ruling tied to new hemp regulations affecting HD9 products. This language was passed last week and was folded into the legislation for reopening the government with no debate. We are closely tracking evolving interpretations of the law and validating all effective dates, including that, the provision is set to take effect 1 year from the Bill signing, and we expect clear interpretation within the next 60 days to understand precisely how these changes may be applied. Until the final guidance is issued, it remains business-as-usual for our operations, including producing high-quality products, our fans consistently seek out and rely on. This period also allows us to work closely with other organizations to advocate for responsible science-based regulation across the industry. At the same time, we're prepared to activate our contingency plan immediately should the regulatory environment require it. While the situation is disappointing, we remain confident in the long-term strength and potential growth of our adult beverage category. The second development I want to highlight is the anticipated growth within our Core Soda segment in the fourth quarter. Through our strategic partnerships with Bethesda and the Fallout series and targeted marketing initiatives, we have secured a substantial volume of purchase orders scheduled to ship throughout this month and into December. When combined with strong performance across other channels, this is expected to generate more than $8 million in fourth quarter revenue. This achievement underscores our team's ability to identify and execute new growth opportunities. As we continue to deliver on similar orders, we not only strengthen our financial profile, but begin to develop credibility and build brand equity in the industry. Establishing this credibility in growing the brand is so important to our long-term mission as it opens up the door for opportunities that were unattainable before. This is a huge win for Jones, and we expect to build upon this momentum in the coming quarters. With that, I'd like to pass the call over to Brian to talk more about our third quarter financials. Brian? Brian Meadows: Thank you, Scott, and good morning, everyone. Net revenue in the third quarter increased 15% to $4.5 million compared to $3.9 million in the year ago period. The increase in revenue was primarily driven by sustained growth in our HD9, direct-to-consumer and fountain products. Scott mentioned, we expect to see increased net revenue in the fourth quarter, driven by higher volumes in our core soda category into 2026 for our very successful fallout related product lines, that includes Sunset Sarsaparilla and the exclusive Fallout Vault-Tec packs through our Club Channel. As we stated in our news release, our fourth quarter gross sales guidance is $8 million, driven by these Fallout products. Gross profit increased by approximately $0.6 million or 76.7% to approximately $1.3 million compared to $0.7 million last year. Gross margin as a percentage of net revenue increased significantly to 28.9% from 18.8% in the prior quarter or an incremental 10.1 percentage points. The major improvements to gross margin were driven by lower trade spend, lower product costs as well as lower freight and warehousing charges. As mentioned last quarter, our team issued RFIs for our freight lanes to further optimize transportation. We've continued to rationalize our warehousing to reduce costs, resulting increase in gross margin reflects these initiatives, along with ongoing efforts to lower COGS. The company continues to look for opportunities to decrease the cost of goods sold with it's co-mans, co-manufacturers and our warehouse and providers. Total operating expenses decreased approximately 20% to $2.7 million in the third quarter compared to $3.4 million in the year ago period. Additionally, G&A costs declined by 8 percentage points to the share of revenue year-over-year, and we remain focused on identifying further cost reduction opportunities. What's important here is the cost cutting, Scott and I implemented early in the year is sustainable. We are looking to now focus on growing the top line and continue to make improvements to the gross profit margins. As our top line growth is expected to accelerate in the quarters ahead, our volumes will increase and that means we'll have opportunities to negotiate lower co-manufacturing fees, ingredient and packaging purchase costs. We'll also continue to focus to hold down SG&A costs to get to a lower percentage of net sales in the coming quarters. Net loss for the quarter was $1.4 million or negative $0.01 per share compared to a net loss of $2.6 million or $0.02 per share. The improvement in net income was driven by a combination of higher gross margin and lower operating expenses. Adjusted EBITDA improved 65% compared to prior year to negative $0.9 million compared to a negative $2.2 million in the previous period. Lastly, I wanted to touch briefly on our balance sheet as of September 30, 2025, the company had approximately $0.2 million in cash and $0.6 million in working capital. Early on in my tenure as CFO, I made the decision to move to a different line of credit facility. This is an extremely important move for Jones as it increased our credit facilities from $2 million on a small base of assets to borrow against to $5 million on a larger base of assets to borrow against. Scott and I needed some time to ride the Jones ship and the extra room and -- the credit line has just done just that. We have reduced costs significantly and cut the EBITDA loss down by over $2 million for the 9 months. Credit facility is also financially supported the buildup of inventory for the sales forecast for Q4 of $8 million. We'd like to thank our partner, Two Shoes Capital for believing in the Jones leadership team to complete the turnaround in our business in 2025. I'd also like to highlight that with the change in HD9 legislation, Scott and I will carefully manage for this development to keep our inventory levels in HD9 as low as possible and continue to derisk our exposure in the coming months. Scott highlighted previously, we see a number of market opportunities for Jones in its core business with the success of the follow-up products in Club, DSD and the direct-to-consumer channels. Additionally, we plan to focus on the untapped opportunities Spiked Jones to build the alternative adult segment, and lastly, look to drive volume for the modern soda category in 2026. With all this momentum in the fourth quarter, I extend to see this growth take shape while continuing to focus on operational discipline. Scott, over to you for the final remarks. Scott Harvey: Thanks, Brian. The future of Jones remained in driving growth across our key focus areas, which are core Soda, modern and our adult beverage. Within our core soda, we continue to expand and grow our distribution partners while launching exciting and socially relevant initiatives. In modern soda, we're excited about the growth we see in our marquee products, Pop Jones and Fiesta and remain bullish about the functional beverage category as a whole. As we continue to sign new distribution partners for these products, we are excited to further align offerings with consumers' behavior and preferences. In the adult beverages, although we expect HD9 to be a smaller part of the category due to U.S. regulation, we are excited about Spiked Jones sits, and we will continue to look for ways to increase our market share in the adult beverage category. To wrap up, Q3 was a great quarter for Jones Soda. We continue to make significant operational improvements that have strengthened our business model and position us for success. Additionally, we're beginning to see some momentum across the brand in our sales channel, supporting by meaningful orders that will help elevate the company, drive revenue and create more opportunities ahead. This is an exciting time for Jones, and we look forward to building this progress and delivering sustained top line growth, increased profitability and long-term value creation for our shareholders. Before moving to Q&A, I want to take a moment to thank our team. Their resilience, passion and belief in what we're building have been the backbone of this turnaround. I'm equally grateful to our partners and our customers for their continued commitment and support. With that, we'll wrap up the call by addressing some of the questions that have been submitted via the live webcast. Scott Harvey: First question, Brian, it's probably a great question for you to take. Can you provide cash holding guidance given the large amount of accounts payable on the balance sheet? Brian Meadows: As I mentioned earlier, we have a $5 million credit facility that we utilize as we need to draw it to build up inventory. So we expect to have adequate cash resources to roll out our Q4 sales plan and into 2026. Scott, back to you. . Scott Harvey: Great. Thanks, Brian. Second question, it's great that Jones is being innovative with new product development, is there any thought about broadening the distribution footprint through independent DSD network in new markets and making investments in chain account teams to help distribution and authorization of new products? Great question. Yes, I mean, the independents are who we're targeting as well as we're still going after some of the larger distribution networks that are out there. We find that they're great partners with us. They believe in the brand. They're willing to go back and reinvest in the brand as well in order to put the products on to the shelves. When you start taking a look at independent chains, independent account teams. Again, it's just -- it's additional dollars that we'd add on to the -- on to SG&A lines. It's something that we are talking about internally whether or not we focused it on a specific region of the country and see how well it does within there to see the growth that we get out of there, but it's definitely something that we are actually taking a look at internally and continue to have those ongoing conversations about. Third question. Brian, is probably one for you. Where do things stand with the S-1 filing, any potential uplift to J-BEV fundraising efforts than anything material come out of the gateway conference? Brian Meadows: Start with the Gateway Conference. You'll see Scott and I attending these type of events as become available and makes sense for Jones to attend. We thought it was a good use of our time to meet potential new investors who are familiar with the brand from a consumer perspective, but not as familiar with it as a public company. So we think we made some good connections there with potential investors, and you'll see us out there in the future. In terms of the S-1 filing is paused at this stage. We're focused on delivering a great fourth quarter for Jones shareholders, and we will revisit sometime in '26. Scott Harvey: Great. Next question for Pop Jones and Fiesta, have store counts increase held steady or decreased and how well is the sell-through this quarter? Yes. So we've actually expanded our Pop Jones this quarter. We actually were able to get into a few different convenience and -- not convenient stores, but other channels for growth in there. We picked up about 4.3% on Jones year-over-year on Pop Jones moving through there. We were able to get into [indiscernible], which we saw a 96% lift Pop Jones. So it is moving through there. Again, the field is super, super competitive in there within the whole modern soda category. But again, I think the brand differentiator is our flavor profile that we're able to bring in to the consumers as we start to roll out there as well. On the next question, on the last earnings call, it is anticipated -- you anticipate Q3 revenue will exceed Q1 and Q2. What didn't materialize that may have caused that shortfall. Brian? Brian Meadows: The area that I could think, Scott, would be HD9 came in later than expected, and that was due to some co-man issues that were being resolved during the quarter. But I think will -- as you heard from our sales guidance in Q4, that is going to be significantly higher than last year's Q4 numbers. Scott Harvey: Great. Was the Southeast Costco test for core Jones Soda to successful, what were the sellout rate did you observe? It didn't meet the threshold of what Costco was looking for. They have a specific threshold. As I would say, it didn't perform poorly, but it did not achieve that threshold. And I attribute a couple of things to that is that we were into the Southeast, brand is not a lot of notoriety in the Southeast. But in some cases and had some great sell-through in some of the clubs, but not so much in some of the other ones that we were able to get through. How do we feel about that going forward? We're still optimistic. And again, we'll be able to share some more thoughts as we continue through our next conference call. But we've gone back and we're still pitching Costco on a few different ideas. And of course, one rotation through there that may not be successful does not bought you out from getting in there again. So again, more to come on that, some stuff that you'll hear forthcoming. But that initial rotation, yes, it wasn't -- did not meet the threshold that they were actually looking for. Brian Meadows: I just add some question, so there was a news release that we put out in October. I'd like to drive attention to on our success with the fallout exclusive Vault-Tec pack that we ran through the Costco Northeast region. That one exceeded the sell-through hurdle, Scott, right? And we are -- as the news release indicated, we're working around the clock to deliver additional products. So as Scott mentioned, just because one particular region, one product didn't work, there are other opportunities that we're exceeding -- we're selling with Costco. Scott Harvey: With Costco. Brian Meadows: Yes. That rotation that we did for them up in the Northeast was very unique. I mean it caused a bunch of fury online as to where you're able to find the product. We've seen it up on eBay. So I mean, it actually was a huge success, and we were very excited about that opportunity as was Costco just based upon the sell-through rights that they achieved. Scott Harvey: Next question. You recently hired a new CMO. What strategic and creative shifts do you expect this to bring. I think what Eric brings to us is the ability to be able to look at our current channels that we want to continue to focus on. We keep talking about the same thing, whether it's core, modern or adult, and really try to understand the consumer base that's within each one of those categories. So Eric's job will be is how do we communicate and we look at it from like this perspective, like I call it the 3Es really. For each of those categories, we want to understand how do we educate our consumers, how do we entertain them and how we engage them. And that's part of the pillars that Eric will be able to run after. One, it's identifying who those consumers in there, whether we think that they are or not, we need to validate that through data, figure out how do we go back and connect with them via social media or in-store displays or TPRs that we may do. So it's really about -- what he will bring to this is really that strategic vision as to -- how do we get the brand out there, how the brand gets notarized in notoriety. And as we mentioned, even with the Fallout Vault-Tec that we did with Costco and some of the others and some of the D2C stuff that we do, it's about building brand impressions, meaning getting that Jones name out in front of people where it becomes a household name where people begin to recognize it when they walk down their aisle. So his job will be is to strategically put us in place on how do we execute the 3Es and then how do we connect with our consumers to drive value and incrementality of each one of those categories. And then staying on top of flavors and profiles and brands and what do we need to change within our categories or add when new flavors are on the horizon, how do we adapt to stay relevant within our existing channels that we run after. So great question. Next question was previous leadership proposed a refreshed brand direction in modernizing Jones, look, while keeping key classic elements. Does Jones company plan to continue evolving the brand to remain culturally relevant to avoid a appearing outdated on the shelf. And I think quick response to this would be, yes, I mean there's -- I think it's a yes and no question. One, because one people recognize is for pictures that are on the bottles, right? So that brings back nostalgia. It brings back relevancy. It gives us the opportunity to be able to connect with our customers from them submitting in -- submitting in pictures that could potentially be on the bottles as well. But then you look on the flip of that when you looked at the Pop Jones and the Spike Jones that they're a little bit different. They don't have the pictures on there. couple of reasons for those could be the fact that, hey, when we do long production months and changing them out, maybe less frequently. But again, Eric, who's joined as the CMO is taking a look at those of how one stay relevant but don't lose who we are going forward. So I think that there's a combination of both and we have to find that medium in between as to how do we stay relevant with today's look and feel by not also raising our 30-year heritage of the brand that made Jones, which is, "Hey, I'm putting my -- somebody's photo up on one of our bottles. If we're able to come up with a way that we're able to define it as we continually talk about internally is that, we have to have a label strategy and a flavor strategy. If we're able to figure out how do we -- how we bring those pictures in and get them on the cans and rotate them more quickly, it's definitely something that we will continue to look at on an ongoing basis. Next one is sort of ties into the same one. Why did Jones steer away from including customer photos on top Jones and the Fiesta Jones. I'd literally just -- I just touched into that. And again, it's about quantity of production runs, cost of production runs, how do the pictures portray onto a can versus a printed paper label. So again, it's something that we're looking at and Eric is spending some time on how do we bring that to life, if possible. Because, yes, it does -- it is meaningful for people to see that on there and it really relates back to who we are. Next question, previously mentioned discussions with Walmart. Has that conversation advance? And what is the opportunity or has that opportunity been paused for now? Great question. We did have that meeting with them. There were 30 different brands that did the presentation to the Walmart buyer, which included all the better-for-you carbonated beverage. What Walmart came back with is that, hey, they were looking for strong regional retailers that are delivering sales in there, and we were able to point out that through some of the existing chains that we're in, how well that our performance did. They talked about a potential test to be able to roll that out, and they had great feedback on the 5 flavors that we have produced for them. Where is it today? Well, unfortunately, the buyer that we were speaking to has moved on. So now we are a bit in that -- a pause as they onboard that new buyer. And once they're in there, then we'll continue to get up in front of them and follow up as far as where we were within that queue of that potential product launch that we have there. If HD9 gets shut downs, can Jones repurpose the 800-plus coolers that have been deployed to pivot to Spiked Jones? Absolutely. Yes. So as a matter of fact, I was just at the National Association, the Convenience Store Operators convention a couple of weeks ago, and we had the coolers on site. The good news about the coolers is that they're not HD9 branded, they're Jones branded. So there other than some window claims that are on there, they can definitely be repurposed, not only for modern or spiked or core. So they can be reutilized and those are internal conversations that we are talking about as well. Brian Meadows: Sorry, I was just going to add, a number of our distributors carry multiple Jones products as well. So we wouldn't have to redeploy in those cases. Scott Harvey: Yes. Great. Thanks, Brian. What about Pop Jones, no mention of this. I did touch on Pop Jones. And just as an example, we launched Pop Jones in this past quarter, all 5 SKUs into Meijer, Jewel, Fiesta Foods as well. So there is movement on there. We are going back and taking a look to try to see how we improve the economics on that product as well to get us more competitive that's in there and whether or not that again, it's looking at the ingredients. We're not going to play with flavor because people love flavor, but we will look at trying to improve the COGS to get us to a better value proposition in order for us to be able to compete with, like I said, at Costco or at Walmart with those 30 different other manufacturers that are out there that are competing for that same space. Last question would be exactly why was the fundraise and uplist pause. Brian, can you add any additional color to that? Brian Meadows: Yes. I would say the following. First of all, Scott and I are, as you can see from our dialogue today, I'm pretty excited about the fourth quarter. We think -- and I use the word to complete the turnaround this year. We think we're going to be a better spot if we -- the Board wanted to raise additional capital once we complete the year and demonstrate what Jones has accomplished in 2025. Secondly, the NASDAQ, for example, has increased its uplift capital raise requirements to $15 million from the original $5 million. So these are the 2 reasons. But again, we've got the credit facility to help finance the increase in inventory that we need to do for the fourth quarter. So we're in good shape, and we are excited to complete the year, Scott. Scott Harvey: Yes. Great. Next question. A year ago, we were hearing about exciting growth with Jones Fountain. You mentioned Fountain as being part of the profitability. What is happening with this. Well, we actually launched a segment into a particular customer so far. And there is great excitement around that as well as that we've got some big things that we're working on within the convenience channel of open heads within some of those convenience channels to be able to launch fountain. And with great excitement. And it can either be carbonated or noncarbonated products. So again, the teams are working diligently on that to be able to see if that's another way for us to edge our way into space and unoccupied heads within some of the convenience stores that were in there. So more to come on that one, but it is something that the team is exploring as we go through. Next question, how often can you capitalize on Fallout opportunities do similar opportunities in the future? Fallout series is that we have a 3-year commitment with Bethesda, based who represents Fallout. So we still -- we're only in year 1 of year 3. So we will continue to capitalize as much as we can with Fallout. The question is, is there other opportunities? And the answer is absolutely yes. And we are going down those exploratory issues now with some really exciting potentials coming forward. We looked at Crayola. We did Crayola this year, too. So you look for us probably doing something again for the for the back-to-school coming up in next year with the Crayola as well. And the teams are actively out there talking to other potentials, which are getting us excited in there because we have the flexibility to be able to adjust, adapt and create. And again, going along those same lines about educating people about our brand and entertaining them and engaging them. So I really see that is an ongoing opportunity for us to be able to engage in these licensed properties opportunities for us on an ongoing basis, whether it's in a store and a club or on our D2C side or on their D2C site as well. So I think that there's great optimistic outlook on those abilities for us to be able to partner with these licensed properties on an ongoing basis. Brian Meadows: Scott, could I get you to maybe talk about one other thing. We talked about Fallout, the amount of the viral nature of how explosive that went in social media and how it brought people's attention to the Jones brand again and all that attention. I think you used the words that would have cost an awful spot in terms of formal advertising. They get the Jones name out there like that. I wonder if you could touch on that and then how that has elevated the Jones brand again to the other potential partners that have noticed and taken notice of the whole phenomenon. Scott Harvey: Yes. Great question. So yes, I mean, we -- when Fallout -- when we rolled Fallout out, we did put some allocate dollars behind how are we going to market this to be able to drive some social media buzz around this. So there is 2 ways that we were actually able to accomplish this. One was that direct investment in there about going out and paying to engage consumers to look at our post and paying for that. And what we saw was a minimal investment drove millions of impressions of the posts that we were able to put out there. We worked with specific influencers that were in the Fallout space. So hey, we went and engaged one of them. We pay them a fee. They did it post and that post just through their following, just explode it. What that did for the brand as it brought us back to relevancy is, hey, it's a Jones product, partnering with Fallout was able -- were able to drive these impressions all across. Each one of these -- and again, if you follow us on Instagram, you've seen a lot of posts over the weekend where we were in Vegas out in the desert where the Fallout series in a saloon where it all actually takes place and it's in the actual series itself. We had a booth. We were engaging with consumers. We debuted the rocket bottle that we're going to sell here in we actually had a picture of the rocket bottle in the stars, the star of the show stand behind the bar, and that just exploded as well. So all of that is, again, it's helping the fallout series itself, but it's also about helping the brand itself by one, building impressions of us getting that name Jones out in front of consumers where they go, Fallout and Jones. And it will drive consumers to us. And we did see this when we rolled out the Sunset Sarsaparilla on our website. Astronomical amount of sales. Again, it was associated with a follow-up, but we're able to capitalize on those benefits of selling our product and getting our name out in front of consumers on a go-forward basis. Brian, I don't know if I missed any part of the question that you had. Brian Meadows: The only -- and I know you can't name names, but we certainly saw other interested brands come forward as a result, I think, of Fallout, yes. Scott Harvey: Yes. Yes. Two different things. One is that we've had other licensed properties contact us already as to, hey, saw what you did there? Could you probably help it out with that? And we've had some really exciting conversations over the last week about that. So more on that. but not only on that side, but it also came from our customers. We've had customers that we've gone to approach before that didn't -- weren't really interested in Jones but came back to us since we've done this follow-up and saying, "Hey, how can you help us with something like that on a go-forward basis where before they wouldn't entertain a conversation with us. Now we're actually getting inbound phone calls from potential either big box clubs or such that are interested in how do we help them develop products for them to be able to draw consumers into their space as well. Great. Those are all the questions that were submitted today. And hopefully, we were able to answer your questions and again, provide you some insight and how things that Brian and I are working on. We'd like to thank everyone again for taking the time to listen today. Again, I'd welcome further questions or we'd be happy to take one-on-one calls later this week or in the next again, and please direct any inquiries to jsda@gateway-grp.com. I'd be happy to address accordingly. And again, if I don't speak to you soon, I look forward to addressing you all again when we report our full year and fourth quarter results in March. Again, thanks again, everyone, have a great day. And operator, back to you. Operator: Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.
Operator: Hello, ladies and gentlemen. Thank you for standing by for the Third Quarter 2025 Earnings Conference Call for XPeng Inc. [Operator Instructions] Today's conference call is being recorded. I will now turn the call over to your host, Mr. Alex Xie, Head of Investor Relations and Capital Markets of the company. Please go ahead, Alex. Alex Xie: Thank you. Hello, everyone, and welcome to XPeng's Third Quarter 2025 Earnings Conference Call. Our financial and operating results were issued by Newswire services earlier today and available online. You can also view the earnings press release by visiting the IR section of our website at ir.xiaopeng.com. Participants on today's call from management team will include Co-Founder, Chairman and CEO, Mr. He Xiaopeng; Vice Chairman and President, Dr. Brian Gu; Vice President of Corporate Finance and VW Projects, Mr. Charles Zhang; Vice President of Finance and Accounting, Mr. James Wu; and myself. Management will begin with prepared remarks, and the call will conclude with a Q&A session. A webcast replay of this conference call will be available on the IR section of our website. Before we continue, please note that today's discussion 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 involve inherent risks and uncertainties. As such, the company's results may be materially different from the views expressed today. Further information regarding these and other risks and uncertainties is included in the relevant public filings of the company as filed with the U.S. Securities and Exchange Commission. The company does not assume any obligation to update any forward-looking statements, except as required under applicable law. Please also note that XPeng's earnings press release and this conference call include the disclosure of unaudited GAAP financial measures as well as unaudited non-GAAP financial measures. XPeng's earnings press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited GAAP measures. I will now turn the call over to our Co-Founder, Chairman and CEO, Mr. He Xiaopeng. Please go ahead. He Xiaopeng: [Interpreted] Hello, everyone. In Q3 2025, XPeng reported record sales -- record results in key operating metrics with new highs in deliveries, revenue, gross margin and cash reserves. Vehicle deliveries for the quarter totaled 116,007 units, a 149% increase year-over-year. The all-new XPeng P7 launched recently quickly became one of the top 3 BEV sedans priced between RMB 200,000 to RMB 300,000 boosting monthly deliveries to over 40,000 units starting in September. Additionally, the company's gross margin exceeded 20% for the first time in Q3, and we reduced our net loss further. Our goal is to achieve breakeven for the company in the fourth quarter. These continuous operational improvements strengthen our focus on physical AI R&D, supporting the targeted mass production of our VLA 2.0 model, Robotaxi and humanoid robot in 2026. As AI models advance and become increasingly integrated with real-world data, machines are slowly gaining the ability to interact, communicate, transform and create within our physical environment. This development is reshaping the future of mobility and daily life. Over the past 11 years, XPeng has dedicated itself to building full stack technologies in-house evolving from software-defined vehicles to the emerging realm of physical AI. We understand that vehicles and humanoid robot, the 2 primarily applications of physical AI, share a homogeneous physical world model, SoCs and infrastructure, allowing for rapid iteration and evolution. Excitingly, new capabilities are continuously emerging from our physical AI technology stack. Over the next decade, my goal is to make XPeng a leading global company in embodied intelligence. Focused on physical AI applications, we're developing an extensive portfolio of technologies, products and supporting business ecosystem. Besides providing AI-powered vehicles to consumers worldwide, we aim to deploy pre-installed mass-produced Robotaxi on a large scale and achieve the mass production of humanoid robots. We believe that an open and dynamic ecosystem is crucial to unlocking the full potential of physical AI for humanity. To achieve this, we plan to open source our physical world model, launch Robotaxi services in partnership with mobility platforms and relieve our humanoid robot SDK. This approach will expand the physical AI application ecosystem through collaborations with business and technology partners and accelerate the value creation process. I'm also glad to report that as we introduce the one vehicle, dual energy product cycle for AI vehicles, we'll expand our scale and increase our NEV market share through a wider product range. On November 6, we launched presales for the XPeng X9 Super Extended-Range EV, an industry frontrunner in extended-range vehicles equipped with a 5C rate high-capacity LFP battery and a total range of up to 1,602 kilometers. It is the world's first large 7 seater to offer the longest range, highest AI computing power, smallest turning radius and most efficient space utilization in its category. We see super extended-range EVs as crucial for accelerating the shift from ICE vehicles to NEVs. Since presales began for the X9 Super EREV, we've experienced unprecedented interest, especially in northern regions and inland cities of China, attracting many customers who previously hesitated to switch to BEV models. To date, preorders for this model are nearly 3x higher than the presale of the previous X9. On a like-for-like basis, the X9 Super EREV will officially launch on November 20 with deliveries starting immediately afterwards. I anticipate reaching a new delivery record in December. We plan to introduce 3 super extended-range products in Q1 2026 focusing on alleviating key challenges for our EREV users by offering long, pure electric range and quicker 5C supercharging, thereby capturing more of the EREV market. We have put in more R&D expenses in 2025. As a result in 2026, we'll also launch 4 new one vehicle, dual energy models, including our first product launch in some key market segments. These innovative products will help us establish a presence in these markets and build leading products like the MONA M03. I'm confident that the 7 one vehicle, dual energy models with super extended-range technology debuting next year will greatly increase our total addressable market or TAM and provide significant sales growth opportunities. On the global business front, we maintained strong sales growth and established a solid foundation for long-term expansion through our localized approach. In September 2025, our monthly overseas deliveries exceeded 5,000 units for the first time, a 79% increase year-over-year. During the third quarter, we grew our global presence with 56 new overseas stores, expanding our sales and service network to 52 countries and regions worldwide. Additionally, our first European localized production facility at Magna plant in Graz, Austria, officially commenced operations with the initial batch of XPeng G6 and G9 rolling off the line. Simultaneously, XPeng's R&D center in Munich, Germany, officially began functioning, helping us better understand overseas customer needs and accelerate technological advancement and product launches. In 2026, we plan to introduce 3 new overseas models, including popular mid- to small SUVs that meet the diverse preferences of global consumers. Our strong focus on investing in AI large models, computing infrastructure and data set is driving the continuous emergence of advanced capabilities from our physical world model. Our upcoming VLA 2.0 model, which has 10x more parameters than its predecessors will substantially enhance safety and user experience in intelligent driving. From my own recent driving experience during very complicated and complex road conditions, we experienced very impressive and unparalleled driving experience from the intelligent VLA model. So starting from late December, we will initiate a co-creation program with our early adopters. In the early quarter of 2026, we aim to deploy the VLA 2.0 model across the entire Ultra lineup. I see the mass production of VLA 2.0 as a major breakthrough in physical AI models, offering a significant generational leap in user experience and attracting more people to choose XPeng for its leading intelligent driving technology. Going forward, XPeng will open source it's VLA 2.0 model to global commercial partners, aiming to provide industry-leading advanced driver assistance experience to a wider audience. Volkswagen will be the initial launch customer for the VLA 2.0 model. Additionally, XPeng's Turing AI SoC has earned a formal sourcing designation from Volkswagen with codeveloped vehicles expected to start mass production early next year. Revenue from licensing our technology to external partnerships will be reinvested into our R&D, mainly to support iteration and upgrades of the Turing SoC and VLA models. This fosters a positive cycle of innovation and commercialization. We invite more automakers and Tier 1 manufacturers to collaborate with us on the Turing SoC and VLA 2.0, working together to promote the adoption of advanced intelligent technologies in both Chinese and global markets. Traditionally, end-to-end models were able to maybe reach advanced Level 2 at its best; however, the rise of physical world model is speeding up the arrival of true autonomous driving. I believe that only pre-installed mass-produced Robotaxis with a strong ability to generalize can achieve widespread adoption and create a sustainable business model. In 2026, XPeng plans to launch 3 Robotaxi models. Our technology stack for Robotaxi does not depend on high-definition maps or LiDAR. This approach enables us to address current industry's challenges, including high cost, operational limitations and poor generalization, allowing for an efficient and scalable deployment worldwide. We intend to begin pilot operations of XPeng Robotaxi in China in 2026, continuously improving both software and hardware of Robotaxi while building an operational ecosystem. I believe that a collaborative ecosystem where all industry stakeholders' benefit is key to scaling rapidly. Therefore, we plan to open our SDK to our partners, and Amap will be the first ecosystem partner for XPeng Robotaxi. We also invite more companies in the mobility sector to explore Robotaxi collaboration opportunities with us. Our humanoid robots adopt a technology road map driven by physical world model. With full support from our vehicle and powertrain R&D teams, we unveiled our next-generation IRON robot at the latest XPeng Tech Day. The IRON's human-like posture and agile gait surprised and deeply moved many XPeng fans and also highlighted the great commercial potential of humanoid robots. Currently, IRON demonstrates only a very small fraction of its capabilities. In Q2 2026, we plan to achieve full capability integration through cross-domain innovation aiming for performance and user experience for far surpass current market offerings. Our target is to begin mass production of advanced humanoid robots by the end of 2026. Once produced, IRON will be first deployed in commercial scenarios, providing services like tour guiding, retail assistance and patrols. By the end of next year, I hope IRON will be working alongside us at XPeng stores, campuses and factories as our new team members. Additionally, XPeng Robotics will open its SDK to global developers, inviting partners from various industries to collaborate on secondary development. This will enable IRON to be trained and to evolve across diverse and long-tail real-world well scenarios, unlocking broader application possibilities. From a long-term perspective, I believe the market potential for humanoid robots will exceed that of automobiles. Once a new generation of robots reaches the inflection point just as China's EV industry did with electrification, we expect explosive growth ahead. I envision that by 2030, XPeng robots could sell over 1 million units annually. With the launch of our one vehicle, dual energy product cycle, I expect total deliveries in the fourth quarter to reach between 125,000 and 132,000 units reflecting a year-over-year growth of 36.6% to 44.3%. We project fourth quarter revenue to be roughly between RMB 21.5 billion to RMB 23 billion, up 33.5% to 42.8% from the previous year. XPeng's AI-driven vehicle business is in the early stages of rapid expansion in terms of scale and market shares, while Robotaxi and humanoid robot programs are swiftly moving forward and towards mass production. I'm confident that XPeng will establish itself as a leader in physical AI, both in China and globally, delivering greater value for our customers and shareholders worldwide. Thank you, everyone. With that, I'll now turn the call over to our VP of Finance, Mr. James, who will discuss our financial performance for the third quarter of 2025. Jiaming Wu: Thank you, Xiaopeng. Now let me provide a brief overview of our financial results for the third quarter of 2025. I'll reference RMB only in my discussion today, unless otherwise stated. Our total revenues were RMB 20.38 billion for the third quarter of 2025, an increase of 101.8% year-over-year and an increase of 11.5% quarter-over-quarter. Revenues from vehicle sales were RMB 18.05 billion for the third quarter of 2025, an increase of 105.3% year-over-year and an increase of 6.9% quarter-over-quarter. The year-over-year and quarter-over-quarter increases were mainly attributable to higher deliveries from newly launched vehicle models. Revenues from services and others were RMB 2.33 billion for the third quarter of 2025, representing an increase of 78.1% year-over-year and an increase of 67.3% quarter-over-quarter. The year-over-year and quarter-over-quarter increases were primarily attributable to the increased revenues from after sales services and technical R&D services rendered to the Volkswagen Group due to the successful achievement of certain key milestones in the current quarter. Gross margin was 20.1% for the third quarter of 2025, compared with 15.3% for the same period of 2024 and 17.3% for the second quarter of 2025. Vehicle margin was 13.1% for the third quarter of 2025, compared with 8.6% for the same period of 2024 and 14.3% for the second quarter of 2025. The year-over-year increase was primarily attributable to the ongoing cost reduction, while the quarter-over-quarter decrease was due to targeted promotion to clear outgoing inventory during product transition. R&D expenses were RMB 2.43 billion for the third quarter of 2025, representing an increase of 48.7% year-over-year and an increase of 10.1% quarter-over-quarter. The year-over-year and quarter-over-quarter increases were mainly due to higher expenses related to the development of new vehicle models and technologies, as the company expanded its product portfolio to support future growth. SG&A expenses were RMB 2.49 billion for the third quarter of 2025, representing an increase of 52.6% year-over-year and an increase of 15% quarter-over-quarter. The year-over-year and quarter-over-quarter increases were primarily due to higher commission to the franchised stores, driven by higher sales volume as well as higher marketing and advertising expenses. As a result of the foregoing loss from operations was RMB 0.75 billion for the third quarter of 2025, compared with RMB 1.85 billion year-over-year and RMB 0.93 billion quarter-over-quarter. Net loss was RMB 0.38 billion for the third quarter of 2025 compared with RMB 1.81 billion year-over-year and RMB 0.48 billion quarter-over-quarter. As of September 30, 2025, our company had cash and cash equivalents, restricted cash, short-term investments and time deposits in total of RMB 48.33 billion. To be mindful of the length of the earnings call, I will encourage listeners to refer to our earnings press release for more details on our third quarter 2025 financial results. This concludes our prepared remarks. We'll now open the call to questions. Operator, please go ahead. Operator: [Operator Instructions] For the benefit of all participants on today's call, if you wish to ask your question to management in Chinese, please immediately repeat your question in English. [Operator Instructions]The first question today comes from Tim Hsiao with Morgan Stanley. Tim Hsiao: [Foreign Language] So my first question is about the physical AI because in the past, the competitive advantages of other companies were reflected in several aspects like cost, brand and channels. Just wondering if the management could elaborate a bit more about what aspects XPeng's long-term competitive advantage in physical AI will be demonstrated? And how will the company continuously enhance its strength in these areas? That's my first question. He Xiaopeng: [Interpreted] I think this is definitely a big question. The traditional way for automakers to make money is completely different from the new physical AI model generated kind of business format. They come from different DNAs. Traditionally, older traditional automakers focus on their own positioning and also about how they target their user segments and then everything boils down to their integration of Tier 1 suppliers and all the other different parts of the supply chain. However, when it comes to a physical AI-generated model, the definition is different. We determine what the -- we -- everything boils down to the definition of the future tech. It involves full-stack technology capability and also custom integration. For example, the launch of our IRON robot is a great example of that. So that's why different DNA is going to generate different products and different growth momentum. In the future, I believe that cars will be a new format of robotics, and it's going to actually come to the real life in the coming 5 to 10 years as the next generation of robotics in our life. So traditionally, the integration of supply chain is completely different from what we are looking at right now, which is the physical AI technology integration across different domains and involves software, hardware and infrastructure upgrades, which will lead to a completely new set of products. As a result, traditionally, software were only a small percentage of traditional car development, whereas right now, it takes up a large part of new product development. And I believe that when you look at our future developments, we are actually going to see more and more physical AI components in the future for car development over 50%, and we are going to see that very, very soon. Thank you. Tim Hsiao: [Foreign Language] My second question is about revenue from the collaboration with Volkswagen. So first of all, congratulations on the project wins of Turing chips at Volkswagen. So may I know from which quarters the related revenue will start to kick in? And how should we think about the trend of the revenue contribution from the collaboration with Volkswagen in December quarter and the full year 2026? That's my second question. Charles Zhang: Tim, this is Charles. So in Q3, we delivered a few key development milestones on time. So you probably have seen that the revenue from the technology collaboration increased significantly quarter-over-quarter. And we continue to see that there are a few key development milestones to be delivered in Q4. So we believe that the revenue from technical collaboration in Q4 will be expected at a comparable level we see in Q3 2025. And then regarding your question on the Turing SoC. Yes, we were -- our Turing SoC was selected by Volkswagen for the 2 B class vehicles we're jointly developing. And we have already started to supply the Turing SoC to some of the -- our partners, the preproduction and verification vehicles. So therefore, the revenue -- we would expect that the revenue from Turing SoC will start to be recognized in Q4 and probably in the small amount. But however, as our jointly developed vehicle SOP from early next year, and we would expect the revenue from the Turing SoC will ramp up with the sales volume of the 2 vehicles we jointly developed. In terms of the revenue from the technical collaboration in 2026, and we expect that as long as we can deliver the key milestones that are scheduled in 2026, we would expect that the revenue -- the technical -- the revenue from the technical collaboration for the full year 2026 would be comparable to that of the revenue we recognized in 2025. So I think looking back, we have demonstrated that we can -- well, we delivered the revenue from commercialization of our technology for 7 consecutive quarters. And I think we believe that there are still opportunities we would like to explore to commercialize our technology and also as our CEO, Xiaopeng, mentioned, and we will reinvest such revenue from the licensing or technical collaboration back into our R&D. Thank you, Tim. Operator: Next question comes from Nick Lai with JPMorgan. Y.C. Lai: [Foreign Language] My first question is -- my 2 questions is actually related to humanoid robot strategy and ambition in the longer term. At a recent Technology Day, XPeng demonstrated our first humanoid robot IRON which worked really like human. And can you talk about our technology road map and compare with the comparable peers? And where is our competitive advantage comparing with the peers in the medium and longer term? That's my first question. He Xiaopeng: [Interpreted] Thank you. Because there are so many robotics companies in the market, to be honest, the technological and product development road map and strategy of XPeng's robotics is moving forward as we expect, according to our own plan. We have paid really little attention to any other differences in the robotics industry to other companies before we launch our own products. Now when we look at XPeng, for example, our product philosophy is highly theoretical. You can actually -- well, it's highly human-like. That is the goal of developing our own humanoid robot. What's interesting about our product is that we realize that when we incorporate muscles and very bionic skin on to our robots, we actually attracted a lot of people to dare to hug him. And this is very, very exciting because traditional robots really were not that attractive and appealing for human beings to give them a hug. In addition to that, we also would like to mention that in the future, I believe that across many aspects of lifeline work, we are going to see more and more robots that is working alongside us. So for the current generation of XPeng robots, last time that we launched it, it was actually the seventh generation, and we are going to begin mass production of the eighth generation of our humanoid robots. In fact, when we look at some of the available robotics in the market, I believe that a lot of them are between generation 3 and 5, which is mainly being driven by joints and all the operation of different hardware. And when you look at the operation of hardware and software, you can see that the available products in the market look very similar in the way that they walk and they move. And these kind of robots, I believe, are very, very hard or difficult to commercialize in the end. So in the future generations of our robot, we actually have been thinking about what kind of technological route we should be used, and we have fully integrated actually hardware and software driven by integrated AI. So this time, you can see that the robot that we showed to the market is based on our full-stack R&D capability and cross-domain integration. I believe that XPeng Motors has many advantages when it comes to our robotics and humanoid robot development. For example, our physical AI resources have a synergy effect with our AI cars. For example, we actually are considering may be producing higher than car grade performance for our humanoid robots. And also our thinking logic on how to conduct business and mass production of our humanoid robot is largely driven by our knowledge and industry know-how in the EV industry. For example, when we build the future sales and marketing layout and globalization, there's a lot of synergistic effects that we can enjoy from the existing layout with our car sales. Also I believe when it comes to the future robotics development, some company will still -- some of the players will come from auto-making industry. And I believe that XPeng will definitely have a first-mover advantage in this regard because of the data, the SoCs and the capability that we have. Thank you. Y.C. Lai: [Foreign Language] My second question is also related to humanoid robot long-term strategy and operations. And from here to commercialization, what are the key critical milestones that we should be mindful? And from now towards the end of '26, can you remind us what the capacity and expected scale of our human robot operations? And also in terms of use case, by, say, 2030, you mentioned that 2030 we target to deliver 1 million units, can you also talk about the use case in the longer term? He Xiaopeng: [Interpreted] Thank you. To be honest, IRON's mass production is probably the most challenging kind of vehicle or products I've ever worked on at XPeng Motors, if I have to make the comparison between mass-producing IRONs and other cars because there's still a lot of challenges. For example, our ultimate goal is for it to be easily trained with human language so that it can really help us in various ways, and there's a lot of room for improvement there when it comes to capability integration. For example, if this robot can walk or run in various safe postures that requires a lot of integration of capability as well. For example, it needs to have all the joints embedded in management and also full coupling of different wiring, et cetera. Also, if we need to allow it to have more generalized kind of dexterous hand movements, well, it will also require a lot of hand-based VLA, which we believe by beginning of next year will be integrated. We also need to allow it to have that kind of communication and language-based communication capability between the robot and humans. So that also will come from, for example, a lot of VLM and VLT, which is the small brain and large brain kind of modeling capability. But what I'm really excited to share here is that we will start entering the 1.0 stage of our new generation of mass-produced models next month. I believe that in the next 10 months, we'll be able to actually promote the robot development in an orderly manner during mass production. And I think that's the first part of my answer. Thank you. I think the ramp-up in robot production capacity is much simpler compared to cars. However, the commercialization of robots is indeed very, very challenging. It requires us to look for really new heights of technology and ultimately achieving more capabilities. Therefore, we hope to initially implement in several commercial scenarios included tour guiding, shopping or retail assistance, et cetera. In 2026, we hope that we actually can see a lot of our own robots working alongside us at our XPeng stores, campuses for the first stage of field testing. At the same time, we are also opening our SDK to more of our partners so that our partners can easily and simply buy our robots and train them for commercialization purposes. If your question is about future possibilities of scenario application, I think it's going to be even more than you think. For example, for commercialized robots, maybe you can switch their arms and allow them to go into the industrial production scenarios. And when will the robots go into our household setting? I think maybe 5 years' time, we still have a big chance of achieving that. And I hope that through opening our SDK, we can allow more kind of partners to help us tackle those diverse and long-tail scenarios of application so that we can all enjoy a better robotic future and build a better ecosystem. Thank you. Operator: The next question comes from Ming from Bank of America. Ming-Hsun Lee: [Foreign Language] Why does XPeng choose to launch Robotaxi service in 2026? Could you share your technology inflection point or how fast you lower your cost? And compared to other Robotaxi companies in China, what is XPeng's technology path or business model? What is your advantages? He Xiaopeng: [Interpreted] Thank you, Ming, for your question. I think that within our R&D strategy, there are 2 key aspects, which are full-stack self-development and also cross-domain integration. I believe that in 2026, we will be actually seeing a collection of inflection points within our own development system. For example, we are going to be able to launch our current models into the Robotaxi configuration of fleets, which, by that time, we believe that the inflection point will arrive. At the same time, our VRM models will continue to offer new capabilities for our future vehicles to be more robotic-like. In addition to that, our current second-generation VLA can actually train our intelligent driving Ultra cars and also in the future, maybe also train our mass version of cars using the same kind of large model, too. In other words, we have our cross-domain capability based on our robotic development, which really can solve a lot of Robotaxi current limitations, for example, the high cost of production and also the limitation of the mobility destinations. For example, current Robotaxi now cannot really handle very complicated and complex road conditions and also in residential areas that has a lot of unpredicted scenarios and also a lot of them currently require LiDAR for their perception capability and so on. So in 2026, we hope that by commercializing fully shared L4 capability in our Robotaxi. We actually can have the dual development of the driverless L4 model together with an assisted driving L4 model. With the launch of both method or road map in the future, I think very soon, it will be proven that XPeng has actually a better commercial logic thinking compared to other Robotaxi companies and that will give us a great competitive advantage. Thank you. Ming-Hsun Lee: [Foreign Language] So how does the management team think about the commercialization of your Robotaxi business? Especially in the future, what is your planned milestone, for example, like in terms of the number of fleet? Or when will you plan to roll out in different cities or overseas market? And also currently, you already have a cooperation with Gaode, Amap, and could you elaborate more about your cooperation? And in the future, do we expand -- do you plan to cooperate with small partners like other ride-hailing companies? He Xiaopeng: [Interpreted] Thank you. Actually, next year, XPeng is going to launch 3 different types of Robotaxi models at different price points to support different mobility purposes and demands. In the next phase of development, I believe, with the premise of regulatory approval, our priority is to really get everything running smoothly, when it comes to the whole technological and operation and business model. So in that scenario, we hope to work with more and more business partner in the ecosystem. For example, Amap will be a great partner. They are going to give us more development support when it comes to traffic and also payment and operation and services, et cetera. That really set us apart from a lot of the autonomous driving OEMs. And I believe that in the future, for different countries and regions and different steps of development, we are going to actually launch more partnership with different service providers across different lanes. And for XPeng, what we need to do is that we are building our toolbox really well, and we're opening up our interface capability so that we can work more with our ecosystem partners in the future across different countries and cities. And so once we really get everything up and running commercially in different environments, we can then quickly build our ecosystem. This is one of our considerations. Thank you. Operator: The next question comes from Tina Hou with Goldman Sachs. Tina Hou: [Foreign Language] Let me translate my first question. So first, I would like to understand, over the next 1 to 3 years, do we have a rough revenue estimate or breakdown for our new businesses, including Robotaxi, humanoid robot as well as eVTOL? Gui Hongdi: Tina, it's Brian. First of all, I would say that for these future development areas, we do not provide any numerical guidance at the moment. Clearly, all those 3 areas, we anticipate volume, scale level production and operations in the next 12 months. For example, the Land Aircraft Carrier from our flying car company is aimed to be delivered to end customers before the end of next year, will be in volume, also scale, which I would say, in the thousands of range. But the other 2, for example, the humanoid robot as well as autonomous driving Robotaxi, as we just discussed earlier, next year will be actually a year we'll see a lot of operational testing as well as scaling up process to make them ready for large quantity production and use. So I would say the contribution from next year will probably be limited. But I think the volume we'll expect to ramp up rapidly once the model and the stability of these products is proven in the use, consumer end as well as application end. So the long-term goal of having 1 million per year humanoid robots sort of sales by 2030 is our long-term goal. And that is something that we have good confidence given we see the quick ramp-up in terms of technology as well as multiple application areas in home, in offices, in factory settings. So with all these future areas, we believe the potential is immense. So at this moment, unfortunately, I cannot give you the exact breakdown as well as precise cost estimates because these are still, I would say, evolving. But I think the overall trend is very exciting for us. Tina Hou: [Foreign Language] So my second question is regarding our passenger vehicles. So wondering if we can get more details on the new models, their segment as well as price segment, both in the domestic market as well as overseas and also do we have a volume target for 2026? Charles Zhang: Tina, it's Charles here. I think we believe that one chassis, dual powertrain vehicles present very attractive opportunities. It is also one of our strategic initiatives to expand the volume and the TAM of our -- each of our vehicles. So I think on November 20, we are launching the X9 with pricing, that will be our first, we call it the Super EREV product to be launched. And then you probably also have noticed that we have -- we already have 3 existing vehicles, Super Electric model, already registered with regulators, and we plan to launch those 3 products in early 2026. As Xiaopeng also mentioned that we have 4 vehicles -- 4 new vehicles when we launch, it will be equipped with both BEV as well as EREV powertrain options. And those 4 new vehicles are positioned in the different various segment -- various pricing segments we're in. And we believe that, that will continue to enhance our product portfolio in each of the price segments we're targeting. So in terms of the growth into next year, and we believe that the huge -- the one chassis, dual powertrain vehicle models, the 7 models will significantly drive our growth next year. And also another growth driver we have seen is that the international market will continue to be a major growth driver for us. With our current products available in the international market, we have already hit 5,000 per month for September and also October, the 2 consecutive months already. And of the 7 new vehicles we're launching next year, 3 of them -- at least 3 of them will go to international market. And so we are confident that the international market volume will continue to be a very important growth driver for us into 2026. Operator: The next question comes from Pingyue Wu with Citic. Pingyue Wu: [Foreign Language] I have 2 questions. And my first question is about the new EREV model. And what do we think about the growth potential of our new EREV models in 2026? And my second question is about the humanoid robots. And how do we think about the fuel economy of the humanoid robots since we have implemented some new technologies, for example, the solid-state batteries and et cetera. And in terms of the affordability, will IRON robot be affordable for family, say, like RMB 200,000 or even less? He Xiaopeng: [Interpreted] First of all, regarding the first question, I think what's interesting that we discover from the sales figures that we gather from -- since the launch of X9 was that the targeted customers and also the actual users of BEV and EREV are quite different. So we believe that we can expect to actually see several times of quarter-over-quarter growth when the new version of X9 actually get delivered, and actually different customer groups, when they purchase BEV versus EREV, they are using the cars across different scenarios as well. And specifically, what I want to share is that, obviously, BEV and EREV users in different sizes or scale of cars are also different. In larger vehicles, the percentage of EREV adoption is higher, whereas for Class A vehicles, especially smaller passenger vehicles, BEV ratio is actually higher. So I think we'll have to wait for more numbers to show maybe by Q4 and also Q1 next year before we actually can give you a more concrete answer. Thank you. And the second part of your question, regarding the pricing affordability of robotics, I think, first of all, the pricing logic is very different between cars and robots. When we look at the BOM cost of our Gen 6 and Gen 7 robots, they remain very high last year. But by first half of this year, when we were preparing for true mass production, we actually have enough reasons for us to actually believe the future retail sales price of the robotics -- of the robots can be very similar to car prices. And the second point that I want to mention here is that the traditional way of pricing a car is weight-based. It involves how many kind of iron and lithium and all kinds of elements included and components included in making a car, whereas robots, it's very different because the percentage of software in a robot is over 50% since day 1, whereas the number is only 10% to 20% for a lot of cars. In other ways, you have to put in a lot of cost to train the software and the model, and you need to have the overall capability to do a lot of integration and also domain controller as well. For example, you need to be able to combine all 4 SoCs into a super domain controller so that you can make them as light as possible and as affordable as possible. And these remain very challenging for many industry players. In other words, we really have high hopes for our future when it comes to robotics development. Hopefully, we are going to -- we expect to handle a limited amount of SKU integration, not as many SKU as when you're making a car. And we also will try our best to make the pricing of robots as affordable as possible. So it really can truly help and empower thousands of households in the future. Thank you. Operator: The next question comes from Xiaoyi Lei with Jefferies. Xiaoyi Lei: [Foreign Language] I have just one question. Could you please provide an update on the progress of our overseas localized production for next year? And additionally, how do we plan to leverage our smart driving capabilities to drive the sales growth in international markets? Gui Hongdi: It's Brian, again. Just to address your question on overseas plan for next year. You're right, we actually initiated our local production this half -- second half of this year with first factory in Indonesia and also the -- another factory production facility with partnership with Magna in Austria. Those, I think, is slowly ramping up the capacity. So we anticipate the volume for next year's production in these 2 plants will continue to rise and support our overall sort of overseas growth. I think in the Europe, we are looking at the tens of thousands in terms of numbers of vehicle locally produced there. And in Indonesia, I think probably a smaller, but also a sizable number, high thousands is something that we want to achieve. Looking beyond those 2 plants, we continue to look at additional opportunities to have local capabilities in other markets as well as building local supply chain capabilities to support the localization in these key regions. So we will be increasing our local content, increasing our local stores materials and also looking for further localization strategy to be implemented. So that's something I think is ongoing. I think it's a must do for a company has global ambitions. Looking at the global product sales next year, I think, as Charles mentioned, we're looking for higher growth in the international markets compared to our domestic market. We're also looking for higher contribution economically from those markets. So I would say in the next year or the year beyond, we're looking at a faster growing, higher profit contribution for our international businesses. Operator: Since there are no further questions, I'd like to turn the call back over to the company for any closing remarks. Alex Xie: Thank you once again for joining us today. If you have further questions, please feel free to contact XPeng's Investor Relations through the contact information provided on our website or the Piacente Financial Communications. Operator: This concludes today's conference call. You may now disconnect your lines. Thank you. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]
Operator: Good day, and thank you for standing by. Welcome to H World Quarter 3, 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to turn the call over to your first speaker today, Mr. Jason Chen. Thank you. Please go ahead. Jason Chen: Thank you. Good morning, and good evening, everyone. Thanks for joining us today. Welcome to H World Group 2025 Third Quarter Earnings Conference Call. Joining us today is our Founder and Chairman, Mr. Ji Qi; our CEO, Mr. Jin Hui; our CFO, Ms. Chen Hui; and our CSO, Ms. He Jihong. Following their prepared remarks, management will be available to answer your questions. Before we continue, please note that the discussion today will include forward-looking statements made under the safe harbor provision of the United States Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, our results may be materially different from the views expressed today. A number of potential risks and uncertainties are outlined in our public filings with the SEC. H World Group does not undertake any obligations to update any forward-looking statements, except as required under applicable laws. On the call today, we will also mention adjusted financial measures during the discussion of our performance. Reconciliations of those measures to comparable GAAP information can be found in our earnings release that was distributed earlier today. As a reminder, this conference call is being recorded. The webcast of this conference call as well as supplementary slide presentation is available at ir.hworld.com. With that, now I will hand over the call to our CEO, Mr. Jin Hui, to discuss our business performance in the third quarter of 2025. Mr. Jin, please. Hui Jin: [Interpreted] I believe many of you have noticed that 2 weeks ago, on the occasion of H World's 20th anniversary, we successfully held a partner conference being 20 years young forging ahead. Therefore, before diving into our third quarter performance review, I'd like to take a few minutes to once again share some of our thoughts on the long-term outlook of China's hotel industry and us. In summary, we believe H World has great long-term growth potential by deeply rooted in China market. Currently, we can observe that while the industry supply is relatively ample, high-quality supply is in noticeable shortage. Compared to the mature U.S. market, China still has low hotel trend penetration and the industry remains fragmented. As a unified large singular market similar to the U.S. but with an even larger population base, the increase in churn ratio and the phase-out of low-quality supply will inevitably become a long-term trend. More importantly, the demand for travel is gradually shifting from discretionary demand to necessity for Chinese consumers nowadays. China has the best infrastructure worldwide with extensive high-speed rail and highway network coverage. This has made traveling much easier and more convenient, facilitating the penetration of accommodation needs from major cities to country-level markets. Additionally, Chinese consumers are beginning to redefine consumption concepts and oriental aesthetics. We can see a substantial increase in the consumer desire in seeking sales pressure, which further drives the growth of experiential consumption such as tourism, exhibitions, concerts, and sports events. Apparently, the current supply quality in China's hotel industry is unable to fully meet consumers' increasingly upgraded and diversified demand. Therefore, supply side reform will be the main theme of the future industry development and this will undoubtedly bring tremendous growth opportunities for domestic branded hotels like us. As the leading players in China's hotel industry, we will continue deepening our roots in the China market, pursuing high-quality growth and delivering service excellence with a brand-led approach to reduce industry with centering on high quality and efficiency. We are full of confidence in the future development of China's hotel industry. After sharing our perspectives on the long-term outlook, now let's turn to our third quarter performance. We are pleased to see early signs of improvement in the overall market condition. On the demand side, data from railway, aviation and the number of tourists indicate that the domestic travel demand continuously to grow steadily with the increasing demand for travel being particularly evident during the National Day and mid-autumn festival holiday period. On the supply side, third-party data shows that the sequential supply growth has stabilized and the year-over-year growth rate has moderated. However, we still need more time to see if this trend is sustainable. We are glad to report that H World delivered good results across several key metrics in the quarter. In the third quarter, we achieved a year-over-year increase in ADR while maintaining a relatively stable occupancy rate driven by refined revenue management initiatives, including optimizing pricing strategies across flagship hotel, newly opened hotel and a mature hotel as well as refining promotional strategies and enhancing incentive programs. As a result, our RevPAR stayed largely stable compared to the same period last year. Breaking through in new cities and regions and further penetrating in the lower-tier cities, we achieved another quarter of high-quality network expansion driven by a 17.3% year-over-year increase in the number of rooms in operation. Our group hotel GMV grew by 17.5% year-over-year to RMB 30.6 billion. Meanwhile, along with our network expansion and the continuous enhancement of H Rewards membership program, our membership base exceeded 300 million by the end of third quarter, up 17.3% year-over-year and ranking #1 globally. In addition, room nights sold to the members rose 19.7% compared to the same period of last year, exceeding RMB 66 million and accounting for 74% of the total room nights sold, which is also a leading position in worldwide. More importantly, our monetized and franchised business delivered strong growth in its hotel network revenue as well as profit. Our third quarter group M&F revenue rose 27.2% year-over-year to RMB 3.3 billion, and the group M&F gross operating profit increased by 28.6% year-over-year to RMB 2.2 billion, contributing over 70% of the group's total gross operating profit. In terms of hotel network expansion, we remain steadfast in executing our strategic focus on economy and middle scale segments to serve the mass market. This strategic positioning aligns precisely with the current consumer behavior of seeking value for money products and services and can further demonstrate our competitive advantages. By continuously upgrading our core products and enhancing our excellent service with a customer-centric principle, we are enhancing the quality of our hotel portfolio and strengthening our brand positioning to achieve long-term sustainable growth. The new version of HanTing along with our middle-scale brands, Ji Hotel and Orange Hotel, will serve as the key growth engines for our expansion in the lower-tier cities and provides strong foundation for achieving our strategic goal of 20,000 hotels in 2,000 cities. At the same time, H World has also made rapid breakthrough in the upper-midscale segment. At the end of third quarter, our number of upper-midscale hotels in operation and in pipeline exceeded 1,600, up 25.3% year-over-year. More importantly, to meet the growing consumer demand for quality living or oriental aesthetics and unique experiences, we recently launched a brand-new upper mid-scale brand, Ji Icons during our 20th anniversary. The introduction of Ji Icon further enriched our upper-midscale brand portfolio and help us to achieve comprehensive coverage from oriental to Western brands and from selected service to lifestyle hotel offerings. Ji Icon's brand embodies a combination of subtle understated and elegant oriental aesthetic, enabling a value lift from accommodation functionality to a holistic lifestyle experience. The success of Ji Hotels has demonstrated Chinese consumers' ethnicity for oriental aesthetics and culture. We are confident that building upon Ji Hotels Foundation, Ji Icon will further deepen the expression of oriental aesthetics and the culture element. Moreover, our group's strong supply chain and modular construction capability as well as our global leading membership and direct sales capability will effectively support our Ji Icons to reach low construction cost, high operational efficiency, and high product quality. We believe Ji Icons will become one of the big driving force to support our penetration in the upper-midscale segment and has the potential to become another world-class brand after HanTing, Ji Hotel, and Orange brand. We remain focusing on strengthening our direct sales capabilities through H Rewards membership program. Our membership program and direct sales capability are vital to our sustainable long-term business growth. Our membership base has been growing as we expand our hotel network and entering into more cities. By the end of third quarter, H Rewards membership exceeded 300 million and the room nights sold to the members grew 19.7% year-over-year with enlarging portion of contribution to the total room nights sold. Going forward, we will further enhance our membership benefits, expand loyalty points usage scenarios, and explore cross-industry partnership to strengthen member engagement and enhance direct sales capability. This concludes the business update for H World's Third Quarter 2025. Now I will hand over the call to our CFO, Ms. Chen Hui, to present the group's financial performance for the quarter. Hui Chen: Thank you, Jin Hui. Good evening, and good morning, everyone. Let me walk you through our third quarter financial overview. During the quarter, our group revenue grew 8.1% year-over-year to RMB 7 billion and Legacy-Huazhu revenue grew 10.8% year-over-year to RMB 5.7 billion, both surpassed the high end of our previous guidance. It was mainly driven by better-than-expected RevPAR performance as well as hotel network expansion. Group adjusted EBITDA rose by 18.9% year-over-year to RMB 2.5 billion, with margin improved by 3.3 percentage points year-over-year to 36.1%. The faster adjusted EBITDA growth and margin expansion were mainly contributed to further enlarged profit contribution from our asset-light business. Cost savings from Legacy-DH, partially on the absence of RMB 81 million restructuring costs incurred in the third quarter last year as well as cost optimization efforts from Legacy-Huazhu. Looking into our asset-light manachised and franchised franchise business. In the third quarter, powered by our high-quality asset-light network expansion and better-than-expected RevPAR performance. Our manachised and franchised business revenue recorded a robust 27.2% year-over-year growth to RMB 3.3 billion. More importantly, manachised and franchised business gross operating profit rose by 28.6% year-over-year to RMB 2.2 billion with a margin of 68% in the third quarter. As a result, gross operating profit contribution from our manachised and franchised business further enlarged to 70% in the third quarter, up 11.1 percentage points year-over-year. Moving to our cash flow and liquidity position. In the third quarter, we generated RMB 1.7 billion operating cash flow. And at the quarter end, the group had RMB 13.3 billion cash and cash equivalents and RMB 6.6 billion net cash on the balance sheet. Lastly, on our guidance for the fourth quarter of 2025, we expect our group revenue to grow 2% to 6% compared to the same quarter last year and 3% to 7% if excluding DH. The manachised and franchised revenue in the fourth quarter of 2025 is expected to grow in the range of 17% to 21% compared to the fourth quarter last year. With that, we are ready to take your questions. Operator, please open the line for Q&A. Operator: The first question comes from the line of Dan Chee of Morgan Stanley. Dan Chee: My question is about RevPAR and demand trend. Firstly, on the company's fourth quarter China revenue guidance of 3% to 4% year-on-year growth, what's the implied RevPAR assumption? Can the management share any 2026 outlook for us, especially after seeing third quarter RevPAR decline turns almost flat, especially on the new experiential demand Mr. Jin mentioned versus the original business demand weakness. So which one is driving the RevPAR stabilization? Hui Jin: [Interpreted] So as many of you may notice that in the third quarter, our RevPAR is a bit stabilized. On a year-over-year basis, it's kind of flat. It's not further declining compared to last 2 quarters. And of course, we observed several trends during the quarter. In terms of the demand, obviously, the demand was mainly driven by the leisure travel demand, especially from the tourism activities starting from summer holiday to September and of course, the beginning of the October National Day and mid-autumn festival as well. But on the supply side, as I mentioned before, on a year-over-year basis from the third-party data, we saw the supply growth actually moderated, so it was not growing as fast as before. So it's becoming a bit moderated, so which brings some of the benefits to the RevPAR stabilization. But more importantly, for us, S1 has been putting a lot of efforts over the last 6 months in terms to further enhance our, for example, the revenue management, as I mentioned in my prepared remarks, in terms of setting a new pricing strategy among different tiers of hotels like flagship new hotels and mature hotels. And therefore, I think -- but looking to the fourth quarter, because we are entering into the low season, there is still some of the uncertainties, so as of now, based on our revenue guidance, it implies our fourth quarter RevPAR, which is somewhere around flattish to slightly positive for the fourth quarter. In terms of business demand and leisure demand, of course, there are still some of the macro uncertainties. So to be very frank, the business demand is not that strong yet. But on the other hand, for the leisure demand, it was continuously growing. As I mentioned previously, for the Chinese consumers nowadays, the leisure traveling demand has become -- gradually becoming a necessity instead of discretional demand and especially for some emerging new demand such as concerts, marathon, sports events, and inbound traveler as well. So the leisure remained very strong. In terms of the outlook for the next year, we think it's a bit too early. It still takes time to see whether the stabilization in terms of the RevPAR and the supply-demand equivalent is sustainable. So we will give more color for our fourth quarter earnings. Thank you. Operator: Our next question comes from the line of Sijie Lin of CICC. Sijie Lin: My question is about RevPAR breakdown. If we look at ADR and OCC, we see that ADR performed better recently. So trying to understand the reason behind this and the sustainability. Also, if we look at the gap between blended RevPAR and same-hotel RevPAR, the gap remained at similar level with last few quarters. So is there any chance that the gap narrows in the future? And what measures need to be taken? Hui Jin: [Interpreted] In terms of the ADR, of course, for 2025, the improvement of RevPAR has been a very key task for our top management team. And of course, they have been putting a lot of efforts on that. So in terms of ADR, as I mentioned earlier, so we have doing a lot of works on further enhancing our revenue management capability, especially on the pricing for different layer of the hotel and different products. And of course, on the front line, we give a lot of various incentives to our salespeople to further motivate them to do a lot of sales activities. However, apart from these things we have been doing over the 6 months -- over the last 6 months, actually, the ADR increase in the third quarter is a result from our continuous efforts on the product upgrades, the quality improvements as well as our service excellence because we have been doing these things for many, many years and continuously doing so, and we have more and more recommendations from our customers. So that's why in certain areas or in certain regions, our products and service is definitely in a leading position, which gave us some of the pricing power, which led us to achieve a better ADR for the third quarter. And in terms of the like-for-like hotel or mature hotels, the gap, we are glad to see the year-over-year decline was narrowed significantly in the third quarter. On one hand, we -- in terms of the pricing, we use a lot of different layer for pricing the different products. Over the last 1.5 years, we opened a lot of high-quality hotels, new hotels in some of Tier 1, Tier 2 cities, which is creating some of the cannibalization to the existing hotels. But through different pricing -- in different pricing strategy for different products, I think we are seeing some of the improvements for our mature hotels. And fourth -- and more importantly, we keep doing a lot of existing hotels upgrades to further improve the hotel quality itself in order to rise -- improve the RevPAR as a whole. Operator: The next question will come from the line of Lydia Ling of Citi. Lydia Ling: Lydia from Citi. So I have a question regarding the brand, especially for the newly launched upper-midscale brand, Ji Icons. So could you actually share some -- your plans for this brand and such as your store opening plan and also the store economics like the CapEx and the payback period? And how actually your advantage versus like the current other leading upper-midscale brand in the market? And how is the feedback from the franchisees so far? Hui Jin: [Interpreted] Okay. So in terms of the Ji Icons brand, so obviously, the launch of Ji Icons brand has shown a very strong determination for H World to break through and development in the upper-midscale segment with multi-brand strategy. This trend is very clear. And secondly, based on the current culture confidence or Chinese culture confidence and also the preference from the Chinese consumers on our oriental culture or oriental service as well as oriental lifestyle that also basically support the launch of the Ji Icons brand. And as I said before, Ji Icons is going to definitely become one of the core brands in our upper-midscale segment. And we hope this brand can be the best brand or the best hotel that Chinese customers will like the most. So in terms of the UE, in terms of the CapEx you asked, we hope we can share more information after the first hotels opened. Thank you. Operator: Our next question comes from Simon Cheung of Goldman Sachs. Simon Cheung: The question is related to the hotel opening. In the third quarter, they've done very well in terms of hotel opening over 700. And I think in the first 9 months, they opened more than 2,000 hotels. That's on track or even exceeded the 2,300 hotel that they have targeted for the full year. Wondering whether there's any update for that and in particular, also on the new signing as well. And then on the related questions, given the focus and the strong momentum that they have seen in the upscale segments -- upper-midscale segments where they achieved 1,600 hotels secure. And we have seen similarly HanTing, they've done like 5,000 and that Ji Hotel done 4,000. Wondering whether they have any targets for the uppermid-scale in the longer run. Hui Jin: [Interpreted] Benefiting from faster new signings in 2023 and 2024 post COVID as well as further improvements in terms of our supply chain capability, which resulted improvements in conversion ratio from the pipeline to new openings. So we achieved a quite good new openings for the first 9 months, which is slightly more than 2,000. So therefore, for the full year, we could possibly open a bit more than 2,300 hotels as what we guided previously. But again, so we emphasized several times over the last several quarters' earnings call. In terms of the new signings and openings, we will focus more on quality expansion instead only looking for scale. So that the never changed. So we're going to continuously implementing this strategy for high-quality sustainable growth. In terms of the upper-mid segment, as I said, we have reached 1,600 in both pipeline and the operations, which also achieved a pretty rapid growth. But however, if you look into a longer term, for example, 2030, we're going to still focus on the mass market with the economy and the middle scale. So in terms of the proportion, economy and middle scale going to still contribute the majority. But in terms of the growth rate, we hope our upper mid segment could grow the fastest in the industry and become the leading players in China market by 2030. Operator: Our next question comes from Ronald Leung of Bank of America. Ronald Leung: Let me translate my questions in English. So I have two questions. My first question is about cost and margins outlook. The company has achieved very decent margin expansion in the past 2 quarters. Could management share with us the latest outlook on cost control and also margins? My second question is about the membership program. So the overall membership has grown decently to over 300 million by the end of 3Q '25. Could management share an update on the strategy on how to further enhance memberships loyalty and also marketing strategies to improve the conversion rates? Hui Jin: [Interpreted] Okay. So in terms of our members, so definitely, direct sales and membership is one of our core strategy. We are glad to see in terms of the member base as well as the room nights sold to our members continuously to grow. But we think that's still not enough. So that's why we have been doing quite a lot of jobs over the past several months. First of all, we introduced a price guarantee program, which is going to ensure our members to get the best price and service as also the unique experiences at the hotel. And secondly, we're also trying to fulfill more diversified demand from the leisure travelers and some of the emerging demand, for example, as I mentioned earlier, like sports events, like inbound travelers. So basically, the H Rewards membership program is gradually shifting from only business travelers to fulfill more diversified demand. And thirdly, we are also enhancing our capability to receive more business clients and corporate clients to further enhance our exposures. And lastly, we have been experimenting a lot of cross-industry cooperation with a lot of top-tier vertical players trying to enhance members' experiences and improve their engagement. Operator: Our last question comes from... Jihong He: [Foreign Language] Operator: Sorry, please go, continue. Jihong He: [Interpreted] Okay. Let me do the translation. So overall, the adjusted EBITDA margin improvement was mainly because of our asset-light strategy. So obviously, the M&F has higher margin compared to leased and owned. In terms of the cost control, in terms of the hotel operating costs, by leveraging our strong supply chain capability, we continuously to reduce the cost per room night sold. And for our leased and owned hotels, we're continuously seeking for more rental reduction, just trying to improve the profitability level of our leased and owned hotels. And on SG&A perspective, we're continuously optimizing our mid and back office and headquarter, just trying to control the cost. In terms of sales and marketing, we will based on ROI and do some of necessary investments on, for example, the hotel brand membership as well as the user -- new user acquisition. So as mentioned by Jin Hui, so we have been systematically improved our capability to improve our revenue management so as in the cost control side. So we are also doing a systematic capability improvement. Thank you. Operator: Thank you. We have come to the end of the question-and-answer session. That concludes the conference call for today. Thank you for your participation. You may now disconnect your lines. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]
Operator: Good morning, ladies and gentlemen, and welcome to the Verrica Pharmaceuticals' Third Quarter 2025 Corporate Update Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I will now turn the call over to our host, Kevin Gardner of Lifesci Advisors. You may begin your conference. Kevin Gardner: Thank you, operator. Hello, everyone, and welcome to Verrica Pharmaceuticals Third Quarter 2025 Corporate Update Conference Call. With me on the line this morning are Jayson Rieger, President and Chief Executive Officer; Noah Rosenberg, Chief Medical Officer; John Kirby, Interim Chief Financial Officer; and David Zawitz, Chief Operating Officer. As a reminder, during today's call, management will make forward-looking statements. These forward-looking statements are based on the company's current expectations and involve inherent risks and uncertainties. Verrica's actual results and the timing of events could differ materially from those anticipated in such forward-looking statements. Please see Verrica's SEC filings for important risk factors. Verrica cautions you not to place undue reliance on forward-looking statements and undertakes no duty or obligation to update any forward-looking statements as a result of new information, future events or changes in expectations. In addition, during today's call, management will discuss certain non-GAAP financial measures. These non-GAAP financial measures are in addition to and not a substitute for or superior to measures of financial performance prepared in accordance with GAAP. There are a number of limitations related to the use of these non-GAAP financial measures compared to their closest GAAP equivalents. The earnings release that the company issued Friday includes GAAP to non-GAAP reconciliations for these measures and is also available on the Investor Relations section of Verrica's website. I'll now turn the call over to Verrica's President and CEO, Jayson Rieger. Jayson Rieger: Thank you, Kevin, and good morning, everyone. Thank you for joining us for our third quarter 2025 corporate update call. In the third quarter, Verrica achieved multiple commercial, corporate, scientific and regulatory milestones, providing a strong foundation for future growth in YCANTH as well as significant upside potential for our late-stage pipeline. Throughout the past year, we've advanced our clinical programs in two of the highest unmet needs in dermatology for future development. We are excited to embark on the first of these programs our global Phase III clinical program of YCANTH or VP-102 in common warts. This is with our Japanese development partner, Torii Pharmaceutical and is expected starting -- to be starting later this year with first patients targeted for dosing in December. Also, as I'll discuss in more detail later on in this call, we've received clear and positive feedback from the FDA about the Phase III development program for our oncology asset, VP-315, for basal cell carcinoma, the most common form of skin cancer. Even while advancing these two programs to Phase III readiness, we've reduced our spending by about half in the past year, while more than doubling dispensed units of our commercial product, YCANTH for molluscum contagiosum. I couldn't be more proud of our team's simultaneous achievement of these goals, and we are excited to see what's ahead for Verrica in 2025 and beyond. In the third quarter, we continue to see growth in the adoption of YCANTH by health care providers in the U.S., with quarter-over-quarter growth in dispensed applicator units of about 5%, compared to last year, dispensed applicator units increased to 37,642 for the 9 months ended September 30, 2025, a 120% increase over that same month in 2024. This year-over-year growth reflects the progress of our commercial strategy to expand distribution through the pharmacy channel and the concerted effort to expand beyond dermatology into pediatric and primary care offices. While the incremental growth in pull-through was softer in Q3 versus the prior quarter, we powered through seasonality and competitive headwinds to help providers treat more patients with what we view to be is the best-in-class therapy for molluscum. The growth and adoption of YCANTH for molluscum serves as the foundation for our strategy of establishing YCANTH as a valuable tool for treating multiple types of skin lesions as the same clinicians familiar with YCANTH will also be those who treat common warts if that is approved as an expanded indication. Through our amended agreement with Torii, we have received $18 million in cash milestones payments in 2025, of which $10 million was received in the third quarter upon the approval of YCANTH for molluscum in Japan. Torii continues to be an outstanding and highly collaborative partner to Verrica, and this additional non-dilutive capital has helped our cash position and supported our YCANTH activities in the United States. The financial arrangement for the global Phase III program in common warts, where by Verrica and Torii split the cost of the program with the first $40 million funded by Torii has unlocked the development of this key indication with first patient dosed in the United States expected by the end of the year. It's also important to note that Verrica retains exclusive global rights to YCANTH outside of Japan. The recent approval of YCANTH in Japan for molluscum is the first of what we hope to and expect will be multiple approvals across the major pharmaceutical markets, including the European Union. We recently received a significant regulatory milestone towards YCANTH approval for molluscum in the EU. Feedback from the European Medicines Agency on October 20 indicated that no further Phase III clinical studies would be needed to proceed with the filing of a Marketing Authorization Application for YCANTH as a treatment for molluscum, and we anticipate the filing could occur as early as the fourth quarter of 2026. The feedback was based on compelling efficacy from the well-controlled Phase III studies successfully conducted in both the United States and Japan. Europe represents a large and underserved market for patients who at present have no approved therapy for the treatment of molluscum as well as a large commercial expansion opportunity for Verrica. While we've been optimizing our cost structure and building the foundation for YCANTH as a best-in-class therapy for molluscum in common warts, our clinical teams have been developing VP-315, or ruxotemitide, our novel oncolytic peptide immunotherapy as one of the most exciting late-stage assets in oncology. We recently announced new data from our Phase II study evaluating VP-315 for basal cell carcinoma at the Society of Immunotherapy of Cancer, or SITC, at their 40th Annual Meeting. The presentation revealed supportive immunologic mechanistic data that helps explain why VP-315 shrinks treated basal cell carcinomas in many patients as evidenced by a 97% objective response rate and an 86% reduction in overall tumor size. We also observed a potential abscopal-like effect in non-treated lesions, which strongly suggests immune system engagement. We are also excited to announce that we reached alignment with the FDA on an efficient Phase III study design. We couldn't be more excited about VP-315 and its prospects to potentially become standard of care for the most common form of skin cancer. We believe the tremendous promise of these pipeline assets may present robust partnering opportunities to advance these programs through development and commercialization as well as bring in meaningful non-dilutive capital. and we are currently exploring these opportunities wherever they present themselves. I'd like to provide a more detailed update now on our commercial activities for YCANTH. During the third quarter, YCANTH dispensed applicator unit reached a total of 14,093, which represents approximately 5% sequential growth over the prior quarter. Not surprisingly, we experienced some seasonality in August. As in-office treatment, times of the year where there are generally fewer visits for doctors, largely driven, we believe, by scheduled vacations by both providers and patients and fewer sick child visits will have an impact on our volumes. I believe the seasonality did modestly impact our volumes in August. But as we enter the back-to-school season in September, we saw a return to the previous levels of pull-through which is consistent with the expected product utilization patterns for this indication and patient population. We also saw that momentum continue into the beginning of the fourth quarter. Turning to reimbursement. As noted on our last conference call, the substantial investments we have made in our commercial copay assistance program continues to give providers a consistent path for treating their patients with YCANTH. As a reminder, our copay assistance program allows all eligible patients with commercial insurance to pay just $25 per YCANTH treatment for up to two applicators, which provides physicians with comfort knowing that their patients will find affordable access to YCANTH. As previously indicated, our commitment to patient affordability and ease of access to YCANTH for health care providers had an incremental impact on our gross to net and by extension, revenue for the quarter. We view this investment as the best way to get YCANTH in the hands of providers to use as their frontline treatment for molluscum and to minimize concern for clinicians whether the prescription will be filled for their patients. One new development on the commercial front that we are excited to share is YCANTH Rx. Our new non-dispensing pharmacy that we expect to launch in the fourth quarter of 2025. YCANTH Rx will give prescribers a single place to write all YCANTH prescriptions and will assist with benefits investigations, processing any prior authorizations and enrollment in our copay program. Prescriptions written to YCANTH Rx will then be routed to a dispensing pharmacy in our pharmacy network that is contracted with the patient's insurance plan. We believe YCANTH Rx can improve speed to therapy for patients by navigating the prior authorization process with fewer delays. Prescribers will also enjoy this simplified, seamless experience that will reduce the paperwork burden on their offices and let them spend more time doing what they do best, treating patients. I'm also pleased to note that recent expansion of our sales force, which will continue into the next year. Our total sales force has risen to 45 sales reps this quarter, and we plan on increasing it to 50 in 2026. For the third consecutive quarter, YCANTH inventory remained at normalized levels with YCANTH applicator units shipped to distributors continuing to closely track underlying market demand of dispensed applicator units. I will now provide an update on our pipeline programs. Regarding our common warts program, as I mentioned earlier, we remain on track to enroll our first patient in the Phase III program in the U.S. in the fourth quarter. We provide updates on estimated timing of completion of the program and estimated availability of top line data as those items become clearer in the future. Moving to our novel oncolytic peptide, VP-315, which is being developed for basal cell carcinoma. As we have previously discussed, BCC is one of the most common skin cancer indications with over 3.6 million cases per year, representing a potential multibillion-dollar opportunity. As I mentioned, last week, we presented an oral presentation and a poster on VP-315 at the SITC 40th Annual Meeting. The new data presented at SITC underscores VP-315 potential to redefine how basal cell carcinoma is treated. We are particularly encouraged by the immunologic profile we're seeing with VP-315, which supports our view that this local short-term therapy not only destroys tumors directly but also stimulates a potent local immune response. The histological assessment in non-injected lesions suggests a potential abscopal-like effect. These data help explain the mechanism for the clinical safety and efficacy data previously reported and support the development of VP-315 as a potential non-surgical immunotherapy option for patients with BCC and further reinforces our confidence in VP-315's ability to address significant unmet need in dermatologic oncology. As this data release has prompted significant inquiries into the VP-315 program and the nature of our Phase III development plan, we are also pleased to share feedback with respect to our end of Phase II meeting with the FDA and our plans to advance the asset. In the meeting, the FDA confirmed alignment with our plans for the Phase III program to encompass two placebo-controlled Phase III studies with approximately 100 subjects each and a primary endpoint of complete clearance as assessed at week 14. Based on the FDA feedback, we expect these studies will be adequate to support an NDA filing with long-term follow-up studies to be conducted as post-approval commitment. We are extremely pleased with this collaborative and thoughtful discussion with the FDA, which provides us with an efficient path to making VP-315 available for patients with BCC. We are continuing our preparatory activities for the BCC program and are exploring new funding opportunities, which may include strategic non-dilutive partnerships for both the development as well as post-approval commercialization. As we finalize our preparation for Phase III with CROs and clinical site investigators, we will provide additional details on costs, timing and other key aspects of this exciting oncology program. As we approach the new year, we believe our company remains well positioned to realize strong organic growth as YCANTH continues to establish itself as the leading therapy for the treatment of molluscum. We are also excited about the value creation surrounding YCANTH's potential label expansion into common warts, the potential for expansion of YCANTH for molluscum around the world and the nearly universal positive feedback we are receiving for VP-315 for basal cell carcinoma. I'll now turn the call over to our Interim Chief Financial Officer, John Kirby. John Kirby: Thanks, Jayson. I'll now take a few minutes to summarize our financial results for the quarter ended September 30, 2025. For the third quarter of 2025, we reported total revenue of $14.3 million compared to total negative revenue of $1.8 million in the third quarter of 2024. Total revenue for the third quarter of 2025 primarily consisted of $10.7 million of Torii milestone and collaboration revenue and net YCANTH revenue of $3.6 million, compared to $84,000 in collaboration revenue from Torii and negative $1.9 million of net YCANTH revenue in the third quarter of 2024. Net YCANTH revenue in the third quarter of 2025 reflects shipments to our distribution partners, offset by standard gross to net adjustments, including actual or anticipated product returns, off-invoice discounts, distribution fees, rebates and copay assistant program expenses. Recall that in the third quarter of 2024, negative net YCANTH revenue was due to an increase in our returns reserve for estimated returns from certain distributors and no revenues from ex-factory sales. This year, as Jayson mentioned earlier, net YCANTH revenue represents orders from our distribution partners to meet demand from their customers. Gross product margins for the third quarter of 2025 were 79.1% and cost of product revenue was $0.8 million, including $0.4 million of obsolete inventory costs. Research and development expenses of $2.2 million in the third quarter of 2025, increased by $0.1 million when excluding the impact of stock-based compensation, which is in line with the third quarter of 2024. Selling, general and administrative expenses of $9.4 million in the third quarter of 2025 decrease compared to the third quarter of 2024 by $5.8 million, excluding the impact of stock-based compensation, driven primarily by the implementation of our more focused commercial strategy for YCANTH, including decreases in compensation, benefits and travel due to reduced sales force of $3.5 million, decreased commercial costs of $1.2 million and decreased marketing and sponsorship costs of $0.8 million. Before I discuss net income and net loss per share, I will note that on July 24, we effected a reverse stock split at a ratio of 1 for 10 shares of our common stock. As a result, every 10 shares of our issued and outstanding common stock were automatically combined into 1 share. The 2025 and 2024 per share amounts I will note reflect the impact of the reverse stock split. GAAP net loss was $0.2 million or $0.03 per share for the third quarter of 2025, compared to a GAAP net loss of $22.9 million or $4.88 per share for the third quarter of 2024. On a non-GAAP basis, which excludes stock-based compensation, non-cash interest expense and change in fair value of embedded derivatives, the third quarter of 2025 net income was $1.2 million or $0.13 per share, compared to a net loss of $20.2 million or $4.30 per share for the third quarter of 2024. And finally, as of September 30, 2025, Verrica had aggregate cash and cash equivalents of $21.1 million. As Jayson mentioned earlier, we received a total of $18 million in cash milestone payments from Torii during 2025. In consideration of the $10 million minimum liquidity covenant in our debt facility, on a GAAP basis, our cash balance as of September 30, 2025, funds operations into the late fourth quarter. We will continue to apply discretion in our uses of cash and explore opportunities to further bolster the strength of our balance sheet while still advancing our commercial and clinical development efforts. I'll now turn the call back over to Jayson for closing remarks. Jayson Rieger: Thanks, John. Since my appointment as CEO, just over 1 year ago, I'm incredibly proud to report that Verrica has plotted a course to build a foundation in our commercial stage asset, YCANTH and further advance our pipeline of potential products for two of the largest unmet needs in dermatology. The Verrica team is always focused on delivering best-in-class therapies, and I can say that with confidence that we are fully executing on this strategy, and doing so utilizing a highly efficient operating model that prioritizes growth while prudently allocating capital resources to the growth. We will enter 2026 with significant accomplishments across all facets of our business in 2025 that I believe will lay the foundation for continued growth and success. With that, we'd be happy to take any questions. Operator? Operator: [Operator Instructions] We'll take our first question from Stacy Ku with TD Cowen. Stacy Ku: And great to hear about the stepwise sales for expansion in YCANTH patient hub. But first, can you further speak to the YCANTH demand that you're seeing in Q4. And then second, maybe go into more detail on the competitive headwinds. What kind of detailing are you seeing? And what has been the prescriber feedback on Zelsuvmi and maybe the efficacy that you're seeing when it comes to the competitor. Jayson Rieger: Sure. Thanks, Stacy. Nice to talk to you again. In terms of Q4, as we indicated earlier, the momentum we saw rounding up September, we've seen continue into this quarter. In terms of the competitive landscape, we continue to view the largest competitor to the treatment of molluscum as being watch and wait, and converting doctor behavior from simply watch and wait or referral to actual treatment. The Zelsuvmi launch is, in our view, a positive for the marketplace as there's now shared voice talking about the need to treat and the ability to treat molluscum, and we're still excited about the prospects of YCANTH as being a best-in-class option for those patients with most patients seeing their disease addressed in as few as one to two treatment. Operator: Our next question comes from Dennis Ding with Jefferies. Yuchen Ding: I have two. Number one, just on the recent sales force expansion, I'm just curious when you expect productivity to fully ramp? And is 2026 sort of the right way to think about it? And then number two, on EU, I appreciate the guidance around filing in Q4 '26, but that's still in 12 months despite no additional clinical trials, et cetera, required. So just curious, why do you need the 12 months? And is that a situation where you could find a partner first before filing? Jayson Rieger: Sure. No problem. So in regards to your first question, sales productivity, yes, it typically takes a few months for any rep to be up to speed. So we would expect that many of our reps that we've hired recently to be hitting the ground running and being quite productive in the early part of next year. In terms of the EU, there are some mechanical things that relate to filing in the EU that require sequential steps in time. One of those, in particular, is around securing the pediatric waiver, even though our drug is already been completed in pediatric patients, we have to go through the process of securing that waiver in the EU, and that adds a few months to the beginning of the time line. We're doing everything we can to expedite the process, but there are a number of sequential steps in Europe that require you to go through step 1 before you go to step 2, and we're continuing to do all those things actually right now. And also in terms of your question about partnership. In terms of that general run rate, that would provide us to fund a commercial plan ourselves or work with a partner and give us sort of that time line to prepare for commercial launch. So we don't believe it's going to adversely impact the time line to commercial. Operator: We will move next with Serge Belanger with Needham & Company. John Todaro: This is John on for Serge today. So first on YCANTH Rx, I guess it's kind of getting ramped up in the next month or so. Curious what some of your feedback has been from KOLs that you've spoken to that kind of led you to instilling this mechanism and how it could start -- could kind of kick start further dispensed applicator growth moving forward? And then back on the expansion of the sales force, just curious if this -- the goal here is kind of an expansion in the breadth of your current call points or more so an increase in depth in prescribing from your current prescribers? Jayson Rieger: Sure. Thanks. So we're very excited about the YCANTH Rx. The feedback has been, in general, we've worked very hard over the past year to continue to simplify the process for clinicians and their patients. And we believe a single point of referral for writing these prescriptions to a non-dispensing pharmacy will make that continue to be easier for the clinicians. And make it easier for their patients. So there'll be one stop shop that has familiarity with the commercial payers, the contracts, the insurance for the patients and also to facilitate expeditious ways to get that fulfilled for the patients. And the general feedback we've seen so far is it's been very positive. But it's still at early stages, and we'll continue to explore and share details as that rolls out. In terms of the breadth and call point, I would say it's still a bit of both. The -- we're seeing greater demand. And given that we're expanding into both the pediatric primary care, in addition to our core business in dermatology, this allows our reps to spend more time calling on the existing customers, but also to expand in some of their call points and high-value opportunities in the commercial space. What we see, as I mentioned earlier, in terms of the largest competitor being doing nothing or watch and wait, this means there's lots of clinician targets out there for which there is no deciling of data, and we just need to engage with them through conferences, through trade shows and through social media and marketing efforts as well as simply knocking on the doors in the old-fashioned way. So we're excited about that opportunity. There's plenty of targets for our reps, and I think that we'll start to see that traction going into this year. Operator: [Operator Instructions] We'll move next with Brian Kemp with Brookline Capital Markets. Brian Kemp Dolliver: Can you hear me all right? Jayson Rieger: A little bit. Brian Kemp Dolliver: Okay. A couple of questions for me, how should we think about seasonality impact in Q4 sales? And another one is on YCANTH Rx. Do we have any benchmark from a similar pharmacy model and a similar kind of indication? And what kind of KPI will you be tracking to measure on YCANTH Rx success in the first 6 to 12 months? Jayson Rieger: Can you please repeat the first part of the first question. It was static, I didn't hear it. Brian Kemp Dolliver: All right. So my first question was, how should we think about seasonality impact in Q4 sales? Jayson Rieger: Okay. No problem. So in terms of Q4, we would expect some of the traditional slowdown you could see in November, December based on vacations and holiday times and sort of the calendar in general. But we expect that, that momentum will continue into the first part of next year for prescriptions, especially as we believe that molluscum is often a secondary diagnosis for patients. And as we get into cold and flu season, we expect there'll be more doctor visits and could be more diagnosis of molluscum going forward. In terms of the NDP, at this point, we're not giving any expectations or metrics at the moment, but you would expect that we would follow all the core metrics of time to fill, the number of scripts that are fulfilled, et cetera. And as we get more data on that, we'll continue to evolve and monitor that process. But those are the expectations of a typical NDP. Operator: And this will conclude our Q&A session. I will now turn the call back to CEO, Jayson Rieger. Jayson Rieger: Thank you, operator. I'd like to thank all of you for joining us this morning, and we look forward to providing updates on our progress in 2026. Have a nice day. Operator: Thank you. And this does conclude today's program. Thank you for your participation. You may disconnect at any time.
Operator: Good morning, and thank you for waiting. Welcome to Rumo's Third Quarter 2025 Earnings Presentation. [Operator Instructions] This presentation is being recorded and simultaneous translation is available by clicking on the interpretation button. [Operator Instructions] Before proceeding, we would like to reiterate that forward-looking statements are based on Rumo's Executive Board's beliefs and assumptions and information currently available to the company. These statements involve risks and uncertainties as they relate to future events and depend on circumstances that may or may not materialize. We recommend that you refer to the disclaimer on the second page of the presentation. Now I will turn the conference over to Mr. Felipe Saraiva, Rumo's Head of Investor Relations, to begin the presentation. Please go ahead, Mr. Saraiva. Felipe Saraiva: Good morning, everyone, and thank you for joining Rumo's Third Quarter 2025 Earnings Conference Call. Let's begin with the highlights on Page 3 of the presentation. We reached a new quarterly record for transported volume, 23.4 billion RTK, up 8% year-over-year. This performance was driven mainly by the Northern operation with the higher volumes in general cargo, especially hardwood pulp, bauxite and fuel. Our cash cost was another positive highlight this quarter. We continue to capture energy efficiency gains, reducing fuel consumption, the main component of our variable cost. In fixed costs and expenses, we recorded a nominal reduction of BRL 36 million, which combined with the volume growth translated into a 12% efficiency gain in our cost per unit. The combination of higher volumes and disciplined cost management allowed us to maintain a stable margin in a more competitive environment. Adjusted EBITDA reached BRL 2.3 billion, an increase of 5% year-over-year. We closed the quarter with BRL 1.5 billion in investments and net leverage of 1.9x. Moving to Page 4. Let's look at market share. Our market share this quarter reflects a more competitive grain logistics environment. We maintained a stable market share in Goiás and in the southern ports, while performance in Mato Grosso and the Port of Santos was lower than last year. On Page 5, I will share more details on the market dynamics in the Santos corridor, which is our core business. As a reminder, rail capacity is shared between Mato Grosso and Goiás working as communicating vessels. Grain exports from those markets increased compared to 2024, a year that was impacted by a crop shortfall in the Midwest of Brazil, but still remained slightly below 2023 levels. We transported 8.5 million tons with alternative corridors absorbing part of the difference versus the year of 2023. In the soybean complex, which includes soybean and meal, the market was stronger than usual this quarter, driven by the carryover volumes not exported in the first half of the year, and we captured that demand efficiently. For corn, despite a record crop in 2025, export volumes from Mato Grosso and Goiás were lower. Our performance reflected this more competitive landscape with some flow distribution across all of the logistic corridors, partially offset by growth in soybean complex, as I have mentioned. As you may see in the lower chart, our railway system remains the main logistics solution serving the Port of Santos. Moving to Page 6, we will review the operational indicators. Both the transit time and dwell time in Santos slightly increased during the quarter because of greater complexity of managing higher volumes in the system. In energy efficiency, we reduced unit fuel consumption by 2% with a solid performance across both the Northern and Southern operations. On Page 7, we will show operational results and volumes. We transported 23.4 billion RTK in the quarter, up 8% year-over-year. The Northern operation accounted for about 3/4 of this growth, mainly supported by higher general cargo volumes, particularly hardwood pulp, bauxite and fuel. In the agriculture portfolio, we transported more volumes of sugar and fertilizers. In the Southern operation, the main highlight was higher corn volumes, which had been impacted last year by crop shortfalls in the South. In general cargo, we continue to pursue new opportunities and optimize asset utilization of that system. Now on Page 8, we present revenues and tariff highlights. Net revenue amounted by BRL 3.8 billion, a 2% increase year-over-year. As we always say, the focus of our pricing strategy is on finding the right balance between volumes and tariffs to maximize the system profitability. This year export dynamics led to a stronger competition among logistic alternatives serving our key markets. In this context, we adjusted our commercial positioning in both operations to ensure competitiveness and attractiveness for the rail transportation. Moving to Page 9, we present the EBITDA. EBITDA grew 4%, reaching BRL 2.3 billion. Our efficiency in managing costs and expenses helped us maintain stable margins despite a more competitive environment. Additionally, we recorded a BRL 55 million in insurance recoveries related to the loss of profits in the Southern operation due to extreme weather events on May last year. On Page 10, we move to financial results and net income. The net financial result was a net expense of BRL 837 million, mainly reflecting higher net debt and interest rates. Despite the higher rates, we delivered adjusted net income of BRL 733 million, broadly in line with the last year figure. On Page 11, let's look at our net debt position. Net debt at the end of the quarter was BRL 14.9 billion, reflecting the quarter's cash generation. We closed the period with a healthy leverage of 1.9x. Our liquidity position remains very solid with BRL 7.2 billion in cash and a well-distributed debt maturity schedule with no major concentrations in the fiscal years of 2026 and 2027. On Page 12, we will present the investments in the quarter. We invested BRL 1.5 billion in the quarter, in line with our plan. Recurring CapEx was BRL 503 million, focused on asset maintenance and operational safety. In the Mato Grosso railway project, we invested BRL 575 million with the cash disbursements following the construction progress. Other expansion projects amounted by BRL 396 million with the focus of increasing capacity and modernizing the existing infrastructure. Now turning to the soybean market on Page 13. The next Brazilian soybean crop is expected to reach the all-time high level of 175 million tons in production. The state of Mato Grosso should account for roughly 51 million tons in production. And as we speak, the seeding is almost completed. Exports from the region are estimated at 32 million tons, pointing to a healthy logistics demand for the next season. On Page 14, I will present the corn market. The Brazilian corn crop is also expected to reach a record high level with an estimated production of 145 million tons in the next season. In Mato Grosso, production is forecasted at 59 million tons, driven by an expansion of roughly 400,000 hectares in planted area. Exports should remain stable around 25 million tons in the state of Mato Grosso. This concludes my presentation. Thank you, and we are glad to start the Q&A session. Operator: Joining us today are Mr. Pedro Palma; Mr. Guilherme Machado; and Mr. Felipe Saraiva. Before we begin the Q&A session, Mr. Pedro Palma would like to say a few words. Please go ahead, Mr. Palma. Pedro Palma: Good morning, everyone. This is Pedro Palma. Thank you for joining us in the earnings release for the third quarter. It's a pleasure to be here with you. Before we start the Q&A session, let me just summarize the quarter and how the company has been doing. Looking at how volumes have progressed, we're very happy to have gone over the 8 billion RTK volume at the company with major stake in the South and North operations making contributions to that increase. In the last few months, the South operation has been over 1.2 billion RTK, going back to very healthy and robust volume levels. And the North operation has been close to 7 billion RTK. That's a testament to our resilience, our ability to overcome challenges in the rail environment, which is becoming much more favorable, much more solid. And we have reached those volumes in the last quarter and the last few months despite a fiercer competition in the market, considering grains volumes, both in the North and South operations. As we said since the beginning of the year because of the carryover inventory of corn from '24 to '25, we also mentioned the delayed in volumes coming in, in terms of soybeans. And over the year, there's been a smoother, more linear export level. At the beginning of the year, we were still testing the market's pricing level to understand how we should position our own pricing levels. As of the second quarter, when it was clear to us what that new price level was going to be, we made the required adjustments to our pricing policy to make sure that we would have the required and suitable volumes to execute on our rail activities. And let me remind you, at very healthy margin levels. Our pricing journey has never been linear. Over the years, it's been through ups and downs. Let me remind you that in '22, '23 and '24, our prices went up by 60% in the grains market. And '25 has been a year of adjustments to pricing levels so that we can find the right level that will give us the right market share, the fair market share to ensure that we're growing and positioning ourselves competitively. So we've been doing that, and our rail operation has been responding accordingly with increasing volumes. Now let's take a look at the other portfolios, fertilizers, pulp, sugar, bauxite, they've all been growing at very consistent volumes, also increasing our system across volumes and margins and ensuring that our revenue is resilient and good diversification across all kinds of cargoes. Obviously, our main market is and will continue to be the grain market. Right now, as you can see in our market share charts shared by Saraiva, the corn market and corn exports from the Port of Santos has been less than historically, what has been putting additional pressure on our commercial structure. But these are circumstantial situations. We've dealt with them in the past, and we'll continue to deal with it by adjusting prices so as to ensure the best margin possible for our system. Obviously, price is a variable that is not under our control, but there are variables that are under control. One, capacity, and we have been proving that we have the capacity to operate as well as cost and fixed expenses discipline. As you can see, in an environment where volumes have been increasing, new operations have been coming and going up and running, we are healthy volume levels and increasing efficiency within the system. That's what a company such as ours has to do. Our improvements in -- our investments in improving assets and improving management has to, in the long run, be translated into structural -- lower structural unit costs so we can have healthy margins even in more volatile pricing situations. In the rail execution line, let me highlight our enhancement in safety, both rail safety and personal safety. In 2025, there's been a reduction in incident frequency, which is very closely related to the quality of management and discipline in execution. This is an ongoing journey. We will consistently continue to decrease frequency both in rail incidents and personal incidents. This is one of our values, and it's something we will continue to focus on increasingly more, but I am absolutely convinced that with our teams, both in the North and South operation, our organizational structure will make it even more robust and bring in even more quality in execution and a working environment that will continue to help us progress in reducing costs, increasing competitiveness and bringing in increasing more volumes to a safe system. And before we move on to the Q&A session, one last comment about our investments. As you've seen in Saraiva's presentation, our CapEx is in line with what we did last year. But more important than absolute figures, I just want to reassure you that we are keeping with our recurring CapEx, and we're doing the absolute necessary to have a robust and efficient operation. And our expansion CapEx is within the plan with the Mato Grosso rail works and requalifying also the Paulista Network and all the works at the Port of Santos to make sure that we are building the foundation for future growth and making sure that we are showing today the results that we will reach in the future. So in addition to CapEx, it all makes me confident that we are in line with our schedule and the figures that we had planned. Specifically for Mato Grosso rail next year, the BR-070 terminal will be going into operation. So this year, we have the first stage of this transformational and relevant project for the company and all the companies that we work with. So those are my opening remarks. And now we'll begin the Q&A session. Myself, Machado and Saraiva are here to take your questions. Thank you. Operator: [Operator Instructions] The first question is from Mr. Alberto Valerio from UBS. Alberto Valerio: The first question is what every investor wants to know. What is the company's pricing level? What can we expect for the next quarter, for next year? What is the competitive environment like? Do you think it's reached a sustainable level or not yet? Will there be further adjustments? And are you maintaining the guidance based on third quarter yields? If we see the same yields in the fourth quarter, things might be a bit challenging in terms of keeping the guidance. That's it for me. Pedro Palma: Thanks for the question. This is Pedro. Looking at the competitive scenario and based on my opening remarks, I think it's fair to say that the pricing scenario, especially considering the corn market will continue to be a bit more acid than we had planned. So looking at the current scenario in the fourth quarter to be objective, it is a bit more acid than it was in the third quarter. That said, I don't think that is material. Looking forward -- and let me touch on 2026. As Saraiva showed, the crop dynamics looks positive, different to 2025, where we went in without carryover inventory. And what we're seeing for 2026 will be a beginning of the year with higher volumes in the system, which should make the logistic pressure easier for next year. So I think the dynamics will be marginally better than we saw in 2025, thinking about the transition into 2026. Having said that, to be very transparent and objective, prices are not directly under our control. But what I do see is for 2026, we are beginning our commercial efforts for that journey at similar levels to what we have seen in the second quarter of 2025. And over time, as the market progresses, we will rebuild our pricing basis with more confidence in future prices and volumes. As for the guidance, obviously, we already have the numbers for the third quarter. There are challenges to execute on the fourth quarter volumes. The name of the game for us to conclude the year within the figures that we announced for the guidance will be totally related to executing on volumes, especially now in December and continuing to control costs and expenses. The challenge I see is that, honestly, there's still some uncertainty with regards to the volumes for exports, given that export volumes in December, sometimes clients prefer to execute them in January only based on international demand. So those volumes will have an impact on our numbers. But that said, we are confident that we will meet the guidance. We'll continue to work tirelessly to do so. I don't know if Gui would like to say anything, please feel free to jump in. Guilherme Lelis Machado: Yes. In terms of what we have been seeing in the fourth quarter, last Monday, we announced that October was an exceptional month for us. After May and August, it was our new record, and we'd have to repeat the same thing because our investments have been translated into absorbing capacity fluctuations in the market. November looks like will be a strong month in terms of volumes. As Pedro said, the uncertainty will be mainly concentrated in December. We imagine there will still be major volumes. If we have a healthy demand environment, especially considering the high product availability we have in land, rail will be ready to capture that demand, especially considering our performance in the third quarter and beginning of the fourth quarter. So our focus will be to continue executing sharply in terms of our operations, which is what has been happening and managing costs and expenses as we have been doing. So having said that, obviously, we should be delivering close to the midpoint of the guidance in terms of volumes. Our CapEx is solid and under control. And in terms of EBITDA, if we have a good risk balance in the fourth quarter, we should be able to meet the guidance close to the mid-low point and our efforts will all be towards executing on that at the end of the year. Operator: The next question is from Mr. [ Matteos Santana ] from Bradesco BBI. Unknown Analyst: Could you talk a bit more about corn? Looking at the figures, especially year-on-year in terms of exports, we see that volumes have been very low so far. So there wasn't a lot of corn transported in October. What do you expect for the fourth quarter? Do you think there will be more volumes? Or should we wait for the beginning of the year, January and February, where you'll be focusing more on corn exports? Pedro Palma: Matteos, this is Pedro. As I said in my previous answer, we do see a corn carryover -- a high carryover inventory for corn. Historically, the corn carryover inventory from 1 year to the next, let's just take a look at an example in Mato Grosso. It's about 5 million tonnes. If we look at a snapshot of today, in fact, if we look at October to November, there was a possibility of a 15 million tonne carryover inventory instead of 5 million. So there's an increase in the carryover inventory this crop year was 10 million tonnes. Now what will be exported additionally in December or what will only be exported at the beginning of next year. That's the question mark in the system. And it depends on international demand, and it also depends on the negotiations between producers and traders. So that's the uncertainty I mentioned and Gui mentioned with regards to December figures. How much of that corn will be available for export. What I can say is that we are fully able to transport whatever volume is available. As we have shown in previous months, we do have the capacity, and we are ready for higher volumes than we have transported in the last few months. So -- we're just waiting to see what those volumes will be. So even if we have higher volumes in December, the beginning of next year, in my opinion, we'll be seeing more corn to be transported than we saw in 2025 because the carryover inventory that we see right now by itself cannot be transported in December alone. Felipe Saraiva: Pedro, this is Felipe. In addition to the corn carryover inventory, soybean planting was early this crop year when compared to other crop year. So we'll have higher corn carryover inventories when we move into next year. So that volume might be transported depending on the international demand for that corn, but we'll also have an early soybean harvest because the soybean was planted earlier. So there should be a higher demand for logistics than we saw at the beginning of 2025 when soybean harvest was later. So biomass in general is looking more favorable in terms of logistics in Mato Grosso specifically. Operator: The next question is from Mr. Pedro Bruno from XP. Pedro Bruno: You mentioned your cost discipline. If I could touch on that, please, to understand, especially looking at SG&A plus fixed costs, the consolidated line. You gave us some numbers that don't really give us a lot of visibility. You talk about other operation costs, which I think is the more positive line in terms of how costs progress. It's maintenance, third-party services, security, facilities and others. There was a significant fluctuation, close to BRL 70 million year-on-year, depending on the window, but it looks like that line was highly efficient. But in general terms on fixed costs and SG&A, if you could give us a bit more color on what kind of initiatives we're talking about and what's been responsible for that efficiency? And if there is a trade-off among those initiatives or if there's something you had already planned on capturing. Guilherme Lelis Machado: Pedro, thanks for joining us, and thanks for the question. Yes. what we've been noticing in terms of reduction. And we started working on that since last year, and it's been translating into positive results this year. Throughout our journey and the company has had major projects and initiatives that have required an expansion of our structure. And we believe we have reached an adequate level. So from now on, we will be optimizing things and operating efficiently, always taking care of the company's operational leverage, which is what we do, maximize volume and decreasing unit costs. But what we have been doing is optimizing our structure our occupation, our capacity use because right now, we're at the right structure level. So we have been optimizing our personnel, simplifying processes and rationalizing company initiatives to prioritize those that create value and add to the company's core business. We have been managing inventory very efficiently and working on losses and compensation so that we can avoid losses. We don't want that to be a detractor to our overall structure. So there isn't one specific thing that's been leading to those gains, but -- there are several initiatives and many things the company has been doing that have helped us converge towards those efficient levels. So that's what we've been doing to optimize our cost and expenses this year. Operator: The next question is from Mr. Rogério Araúj from Bank of America. Rogério Araújo: My question is about your liability negotiation and the renewal of the South and West networks. Could you update us on those processes? What are the next steps? And we had the BRL 55 million loss of profit insurance proceeds. And I think the structure was also damaged due to force majeure because of the rains. Are you negotiating anything to that end in the South network? If you could give us more color on that, that would be very helpful. Guilherme Lelis Machado: This is -- Rogério. Thank you for the questions. I'll start by the end of your question. In terms of compensation for the South network claims, they should come to an end now. We recognize those in the second and third quarter. So that was all we had in terms of compensation. The team worked very closely to the insurance companies, and we were able to resolve those issues very swiftly within the regulation. In terms of other occurrences, we are complying with the regulation. There should be something else happened. We will announce that to the market, but there's nothing material to share at the moment. In terms of the South and West networks, there is no news for this half of the year. In the renewal and end of concession of the South network, let's remember that there was a working group with the company, the ministry and the regulatory agency. Those activities have been concluded. So we're not just waiting for the conclusions to be announced. In the South network, we do have the potential and the company is interested in continuing to operate it in a model that is financially feasible for us. Discussions will be ongoing with the stakeholders, and we'll be looking into different alternatives. And as things progress, we will be informing the market. There's nothing to announce for the time being, but this discussion should be taking place over the next few months. Let me remind you that the South network will be concluded in February 2027. So we still have a ways to go with these stakeholders. As for the West network, we do have an event in the short term, halfway through next year, June 2026. That's when the contract will come to an end. We've made it very clear so far in light of the fact that there has been no volumes transported in that operation. So there's no significant revenues or investments coming from there. So we should be giving that asset back to the government and then we'll assess the reconciliation in the assets and liability balance sheet for that operation. Discussions with the government are amicable. So now we just need to decide on the best design for that negotiation. We will let you know as things progress. Operator: The next question is from Mr. Daniel Gasparete from Itaú BBA. Daniel Gasparete: Touching on what Guilherme said about volume and unit cost. How are you coming to your tariffs for 2026, its competitiveness considering a scenario where things might be slower, given the pressure on the margin. What about the carryover of your tariffs from '25 to '26? I know you have the guidance, but if you could tell us a bit more on that dynamics. And also, how do fluctuations in tariffs affect your perception of CapEx investment projects and the projects for this year? Pedro Palma: Daniel, this is Pedro. Let me take your question. Well, let me start by the end to your point about our investment plans. Obviously, when we look at our CapEx execution and our expansion project, we need to calibrate those based on expectations of profit and the investments that are being made. I think the main point when we look at tariffs and when we look at the future interest rates, if we were to conduct a financial assessment of our investments, looking at our expansion plans, you have to have an expansion of volumes, competitiveness and pricing that you get from that structure. And often, investments can help you stabilize pricing. So pragmatically speaking, our journey in the rail system for both operations, especially in the North operation, pricing has never been linear because -- given any moment, when you go into any year and a specific year, there is an effect of the fluctuation of exports, crop failures. There are one-off circumstantial events that can change the pricing ratio within a semester, a year, a crop. But if we look at how our pricing has progressed over the years, you will see that pricing levels have been normalized and the tendency and our thesis that has been confirmed year over the year is that the world needs agricultural commodities and the best region to produce and export those is Brazil and the best region in Brazil for that starts in the Brazilian Midwest, and we want to be the best logistics company with the best structure with the lowest cost to be the best export solution. So to address a point that might not be exactly what you asked, but to give you more granularity, right now, we're fine-tuning our business plan for Stage 2 of our rail expansion project in Mato Grosso in light of the fact that we're moving towards concluding Stage 1. Next year, we will be delivering the BR-070 terminal as we had announced. So now coming into the new year, we'll be fine-tuning CapEx and what we expect from the next stages for the project in light of what's happening in terms of competition and what we expect looking forward. What I can share with you right now, this is not a decision that has been made because the Executive Board is still looking into things to then discuss it with the Board is that we're very constructive about how demand will grow in our markets and competitiveness and our structural profitability coming from investments that we can make. But obviously, we'll look into things stage by stage. We won't be making any dogmatic investments. Our investments are always based on an in-depth assessment of what the market has to offer in terms of demand, expected profitability and our ability to absorb those results and to seek fair share for our operations. Unknown Executive: Another important point is that throughout this journey and considering the tariff dynamics, we've had a very healthy journey after we went through that repositioning, like Pedro said during his presentation, that's taken place over the last few years. So obviously, in 2025, the level of our tariffs how we've traded our capacity. This is a very healthy level. There's been no value disruption. The company margins are still very solid and very healthy. In terms of investments, just to add to what Pedro said, we need to bear in mind that we are sensitive to the company's cash consumption. So all of our investment plans have to be assessed in light of cash generation. We're not going to put the company under any financial stress that is incompatible or that will take us to levels of debt that don't make sense. Also given that there's a persisting high level of interest rates. So we will be calibrating that as we look into market dynamics and making sure that we preserve the company's health. Daniel Gasparete: That was a very clear answer. If you could just touch on the first part of my question, which was about the carryover from '25 to '26 and maximizing volumes and minimizing unit costs. Do you think the trading cycle will be as slow as it was in '25? Unknown Executive: Yes, there will be a degree of carryover into '26 from '25, as I said in my answer to a different question. If we look at the baseline for '26, we're talking about similar pricing levels to the second half of '25. And carryover inventory volumes, good crops obviously put pressure on the system. But as we have shown in the past, we are totally able to increase prices if market opportunities arise. That's what we did from '22 to '24. We increased prices by more than 60% during that period, just as we repositioned it in the recent past in 2025 to make sure that we were capturing volumes as we have reiterated at very healthy margins, given that our pricing levels are very healthy going from '24 into '25. But to be objective, the baseline for '26 is what we had in the second half of '25. We'll have to wait for the market to operate and pressure levels. And in '26, we should be able to capture price recovery along the year. Operator: The next question is from Ms. Julia Rizzo from Morgan Stanley. Julia Rizzo: Can you hear me okay? I have a question about your tariffs, your competitive yield. I think you mentioned that in your institutional presentation in the third quarter, showing that the tariffs at the Rondonópolis terminal was very close to the market. You said it was the next best alternative and Rumo's nominal yield was 246 and the market was 244. What was that like in the third quarter? I just want to understand where the market is going and if what we're seeing now is a reflex if you have already reached market levels. What got my attention was the drop in tariffs and the loss of share. So my next question is what would be a fair or sustainable share for the company this year? We still have a quarter to go and good volumes to deliver, hopefully, and for next year. Unknown Executive: Julia, Thank you for the question. The company right now is operating considering alternative costs considering the regions we operate in Mato Grosso. Let me remind you that the rail volume captures volumes from across the state. And for each region of the state, alternative costs are different. Looking at the portfolio average, we're very close, slightly below the alternative costs to our clients. So looking at the price reduction we saw in the third quarter this year, there are two elements to it. First, price repositioning in the grains portfolio because we want to bring rail to a competitive level and to make sure that we are positioned as the best logistics solution to our clients and the effect of the mix in our portfolio with lower unit cost than the grains portfolio. So obviously, all of that leads to around 7% decrease in the tariffs this quarter. Now looking forward, we will continue to maintain rail as the best alternative to our clients. And that's the strategy we've been implementing for 2026. And market share is a consequence of that positioning and market dynamics. It's not a goal for the company. What the company is pursuing is to have a competitive tariff so as to make sure that we are using the rail system to full capacity. Now looking at the export market for Mato Grosso, we want to operate at about 40%, depending on the quarter, slightly below or slightly above, maybe close to 45%. That's the range we expect the market share to operate in. But again, to remind you, the market share is a result of exports and the rail operation. If the market is at a normal level, then we imagine that we'll be operating at about 40% in our grain portfolio in Mato Grosso. And as I said in my presentation, rail -- we'll be making sure that rail is the absolute best solution at the Port of Santos. We've been doing that at the Port of Santos and the Mato Grosso operation was just slightly below last year's, but very similar to 2023 when the market -- the export market was more similar to the current market. Julia Rizzo: Could you give me some reference in terms of reals per ton at the Rondonópolis terminal? Just so we have an idea of where the market is at and what the company is executing. Unknown Executive: We were very close, Julia. It's around BRL 230 per tonne in Rondonópolis. Some months, it's slightly above that. Some months, it's slightly below that. It's not linear. But right now, we're operating very close to competitive prices at that terminal. Operator: The next question is from Mr. Filipe Nielsen from Citi. Filipe Ferreira Nielsen: Most of my questions have been answered. If I could just touch on a point that hasn't been addressed yet. All those changes and discussions taking place at Cosan, Rumo's controlling company. There have been changes in the Board, management, new shareholders coming in. What have been the first conversations with the new shareholders and the controlling companies stance? Do you know what the strategy is going to be like and how strategies are thinking and how that fits with how you think, both in terms of pricing strategy and projects? Pedro Palma: Filipe, this is Pedro. Thank you for your question. Well, first point, we think it's very healthy that the controlling company be healthy, the Cosan Group be healthy. So with BTG coming in to Cosan's controlling share with Rubens. Rubens keeping the controlling stake in the structure is welcome news and very healthy for Rumo as well. Obviously, the 2 new shareholders have joined the company because they see value in Cosan Group and its portfolio, and they are bringing additional types of expertise, both BTG based on their historical experience and professionals. Their track record is amazing. And I'm absolutely certain that they will make huge contributions to the progress of the Cosan Group, and Rumo is no exception to that. Conversations have been very transparent. They're very incipient because the conclusion of that transaction, the election of the new members of the Board at Rumo only just happened at the end of last week. But what I can say is that preliminary discussions and conversations have been very positive. So we'll be discussing things together and working together on the next steps so that we have an increasingly better and more robust company. Talking specifically about Rumo, no one has any question about the rail asset in the logistic infrastructure and the role that Rumo can play in the markets it operates in. Everybody wants for this company to continue to grow and be better. So I'm sure Rumo's team, I can speak for myself and the whole team that everyone is very happy with the change in shareholders at the Cosan level. And with this new stage beginning now. Operator: This concludes the question-and-answer session. I would like to turn it over to Mr. Guilherme Machado for his closing remarks. Guilherme Lelis Machado: Well, thank you for joining us. And let me just conclude by saying a few things. I don't want to be repetitive and say the same things Pedro said in his opening presentation and everything we said during the Q&A session. The company has been delivering a very solid operational execution month after month. We have been attracting volumes to our operation after the beginning of the year when we realized and were able to swiftly adjust our commercial dynamics to recover the fair share and market share. This has been a very healthy and positive dynamics in our operation. And our projects will continue in line with what we've got planned for the year and delivering on the relevant projects for the company, such as the first stage of the Mato Grosso rail and all the other commitments to do with modernizing, creating capacity at the company, both at the Paulista Network and any other fronts we work on. Safety and operating efficiency are not only our priorities, but almost an obsession. And they have been translated into practical results. You've been able to see both in terms of incident frequency rate, as Pedro said, as well as capturing efficiencies, especially energy efficiencies as we have been sharing with you through our figures. The company's financial position is very solid, especially considering the high interest rates. We've been able to issue and restructure our debt very creatively, very efficiently. So our maturities are well balanced. The cost of capital is also very healthy. So having said all that, our focus for the end of the year will be on delivering results, and we have been making adjustments according to what the market presents us with. We're highly focused on delivering on our commitments. And we are aware that there will be higher risks in the fourth quarter. But in financial and operational terms, we know that the company is pretty ready to absorb those, but we are already looking into 2026, and we're paving the way towards positive execution, delivering value to the company and our shareholders. That is Rumo's objective, and that is how we have been facing challenges. We are fully dedicated to making sure that in 2025, we deliver a solid year. Thank you all for joining us, and we'll see you at the next earnings release call. Thank you. Operator: Rumo's Third Quarter 2025 conference call is now concluded. Thank you for joining us, and have a great day. [Statements in English on this transcript were spoken by an interpreter present on the live call.]
Operator: Ladies and gentlemen, welcome to Richemont Financial Year 2026 Interim Results Presentation. I am Sandra, your call operator. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it is my pleasure to hand over to Richemont. Please go ahead. Alessandra Girolami: Thank you, Sandra, and good morning, everyone. Thank you for joining us for Richemont's half year results presentation for the period ended 30th September 2025. Here with us today are Johann Rupert, Chairman; Nicolas Bos, CEO; Burkhart Grund, CFO; and James Fraser, Investor Relations Executive. We would like to remind you that the company announcement and results presentation can be downloaded from richemont.com, and that the replay of this audio webcast will be available on our website today at 3:00 p.m. Geneva time. Before we begin, please take note of our disclaimer regarding forward-looking statements in our ad hoc announcement and on Slide 2 of our presentation. Turning now to the presentation. Burkhart will begin by discussing key highlights and group sales. I will then provide further detail on the performance of our Maisons. And finally, Burkhart will take you through the financials and offer some concluding remarks. This presentation will then be followed by a Q&A session. Burkhart, over to you. Burkhart Grund: Thank you, Alessandra. Good morning to everyone, and thank you for joining us today. Richemont delivered solid results in the first half in a complex macroeconomic and geopolitical environment. Sales for the period reached EUR 10.6 billion, up by 10% at constant exchange rates and by 5% at actual exchange rates. Operating profit stood at EUR 2.4 billion, up by 7% compared to the prior year period or up by 24%, excluding the significantly adverse foreign exchange movements. Operating margin reached 22.2%, improving by 30 basis points. Profit from continuing operations at EUR 1.8 billion was 4% higher than the prior year period. Cash flow from operating activities amounted to EUR 1.9 billion. Finally, our net cash position remained very robust at EUR 6.5 billion after the EUR 1.9 billion dividend paid in September. Turning to our highlights, starting with the top line. The group posted double-digit growth at constant rates, led by continued success at Jewellery Maisons and sustained local demand across most regions. In the second quarter, in particular, the group and its Maisons experienced strong momentum with sales up by 14% at constant rates. In Q2, we saw higher sales across all business areas, including a remarkable 17% increase at the Jewellery Maisons. Sales at the Specialist Watchmakers were up 3%, posting their first quarter of growth in almost 2 years, while sales at other business area rose by 6%. In addition, all regions posted double-digit increases in Q2, including Asia Pacific, supported by a return to growth in China. In the period, the group showed its ability to maintain a robust financial position. Operating profit in the first half increased to EUR 2.4 billion, reflecting the positive contribution from the strong top line growth, combined with effective cost discipline. This was achieved despite external headwinds, including unfavorable FX movements, increasing raw material costs and to a lesser extent, the initial impact of additional U.S. duties. Consequently, the group maintained a solid net cash position at EUR 6.5 billion, an increase of EUR 0.4 billion over the prior year period. In this context, our Maisons continued to demonstrate agility while investing for the long term. Showing their persistent drive for creativity and product innovation, they introduced strong novelties with craftsmanship at their core. They further nurtured their brand equity through impactful yet disciplined communication spending. They continue to cultivate future growth prospects through strategic investments. This drove a higher share of our CapEx envelope towards internal boutiques and manufacturing capacities, primarily for the Jewellery Maisons. Let me now discuss the group sales performance in more detail, first by region and then by distribution channel. Unless otherwise stated, all comments refer to year-over-year changes at constant exchange rates. Most regions posted solid performances in the first half, benefiting from double-digit growth across all regions in Q2, led by strong local demand. Sales in the Americas maintained their momentum throughout the first half and posted 18% growth with strength across all business areas, all channels and all markets in the region. Of note, Jewellery Maisons and Specialist Watchmakers posted double-digit performances while several Fashion & Accessories Maisons showed encouraging signs. In Q2, the Americas region posted its seventh consecutive quarter of double-digit growth with sales up by 20%. The Americas made up 25% of group sales, up from 23% in the prior year period. Asia Pacific returned to growth in the first half, up by 5% compared to the prior year period, fueled by a 10% rise in the second quarter. Of note, sales in China, Hong Kong and Macau combined stabilized in the first half, a notable improvement to 7% growth in Q2, led by the Jewellery Maisons. The performance was solid elsewhere in Asia Pacific with notable double-digit growth in the South Korean and Australian markets. Sales in Asia Pacific made up 32% of group sales, down from 34% in the prior year period. Sales in Europe increased by 11%, driven by double-digit growth at the Jewellery Maisons and single-digit increases at the Specialist Watchmakers and other. All major markets in the region posted higher sales, notably in Italy. Growth was led by strong local demand in addition to a positive contribution from tourist spending, particularly from the American clientele. Overall, the performance in Q2 was consistent with that of Q1 at plus 11%. Sales in Europe represented 24% of group sales, a tad higher than the 23% in H1 '25. Japan ended the first half with sales down by 4% after returning to double-digit growth in the second quarter, led by an acceleration in local demand, particularly at Jewellery Maisons, where spending, while improving in Q2 declined in the first half, reflecting demanding comparatives and a stronger Japanese yen. Japan's contribution to group sales decreased slightly to 10% compared to 11% in the prior year period. Middle East and Africa posted the strongest regional growth for the period with sales up by 19%, slightly ahead of the Americas. The performance was led by the Jewellery Maisons with positive Specialist Watchmakers sales at constant rates. All markets were up with the United Arab Emirates being the key contributor. Sales in the region made up 9% of group sales, in line with the prior year period. The largest contributors to sales growth in value terms were the Americas and Europe, each adding over EUR 200 million in incremental sales, followed by the Middle East and Africa region with a contribution of over EUR 100 million. Combined with broadly stable sales in Asia Pacific and a limited decline in Japan, the group was able to generate over EUR 500 million of additional sales in the first half despite a significant negative impact from currency movements. Let us now turn to sales by distribution channel with growth expressed at constant exchange rates. Overall, the 3 channels experienced broadly similar performances in the first half, leading to a stable contribution from direct-to-client sales at 76%. Let's start with retail, which accounted for 70% of group sales, unchanged from the prior year period. Sales rose by 10%, driven by double-digit growth at the Jewellery Maisons and mid-single-digit growth at the other business area, while sales at the Specialist Watchmakers declined slightly. All regions, except Japan, posted solid performances, led by double-digit growth in the Americas and Middle East and Africa. Online retail at 6% of group sales grew by 7%. Strong performance at the Jewellery Maisons more than compensated for softness in the other business area. Sales at the Specialist Watchmakers were broadly stable in the period. All regions posted growth, led by Europe. And now moving to wholesale, which includes sales to external mono-brand franchise partners and third-party multi-brand retail partners, sales to agents and royalty income. Wholesale sales represented 24% of the group sales and were up by 9%, supported by growth at both the Jewellery Maisons and the other business area. By region, the strongest contribution came from the Americas, Europe and Middle East and Africa. Now back to you, Alessandra. Alessandra Girolami: Thank you, Burkhart. I will now review the business areas with all comparisons at actual rates unless otherwise specified. Let me start with the Jewellery Maisons, which include Buccellati, Cartier, Van Cleef & Arpels and Vhernier. Sales reached EUR 7.7 billion, an increase of 9% in the first half. At constant exchange rates, sales were up by 14%, with all regions posting double-digit growth, except for Japan, which was nearly flat. Q2 was particularly strong with sales up 17% at constant rates after a solid plus 11% in Q1. In the first half, sales grew across all distribution channels. The Jewellery Maisons generated an operating result of EUR 2.5 billion, up 9% versus the prior year period or up by 21% at constant exchange rates. Facing significant adverse currency movements, higher raw material costs and to a lesser extent, the initial impact of additional U.S. duties, the Jewellery Maisons implemented balanced price increases while aiming to maintain long-term value for clients. In parallel, they continue to invest in their network while managing their cost effectively as demonstrated by the level of communication expenses only slightly above the prior year levels. Coupled with strong top line momentum, this allowed the Jewellery Maisons to mitigate the unfavorable impact of external headwinds, resulting in a stable operating margin at 32.8%. Let's now look at the main developments over the past 6 months. Both jewelry and watch collections posted strong growth, fueled by the success of timeless lines, such as Opera Tulle and Macri at Buccellati, Clash, Panthère and Santos at Cartier and Alhambra, Perlée and Flora at Van Cleef & Arpels. Blending heritage with creative spirit, the Maisons pursued persistent innovation to foster desirability. Cartier launched its new branding campaign featuring the Panthère. And later in September, the Love Unlimited line, bringing a bold new look to the Love collection that was imagined over 50 years ago. Also in September, Van Cleef & Arpels displayed their artistic and craftsmanship savoir faire with the launch of their new Flowerlace jewelry collection. In the first half, high jewelry sales were supported by impactful and curated events in Europe and Asia for the En Equilibre collection at Cartier and l’Ile au Trésor collection at Van Cleef & Arpels, while Buccellati also hosted exclusive events in Italy. Vhernier has now celebrated an intense first full year within the group. The performance is very encouraging, and the integration is progressing as planned. Vhernier has now internalized several boutiques and refurbished one of its [ astodiers ] among other initiatives, thereby continuing to build a strong foundation for future growth. The Jewellery Maisons continue to upgrade and expand their network in strategic locations. Notable renovations, including Cartier's boutique on Collins Street in Melbourne, while key openings featured Buccellati at the Mall of the Emirates in Dubai and Van Cleef & Arpels in Goethestrasse in Frankfurt. Let's now turn to Specialist Watchmakers, where sales were down by 6% in the first half. At constant exchange rates, sales were down by 2% with a notable return to growth in Q2 at plus 3%. Regional performances continued to show contrasting trends. Double-digit growth in the Americas partly offset lower sales in Asia Pacific and Japan, 2 regions that combined account for over 50% of sales in the prior year period. Of note, all regions improved sequentially in the second quarter. By channel, retail and wholesale experienced slightly lower sales, while online retail was stable at constant rates. The operating results amounted to EUR 50 million, corresponding to an operating margin of 3.2%. Gross margin was impacted by the combination of unfavorable foreign exchange movements, of which the weaker U.S. dollar and the stronger Swiss franc, rising gold prices and an initial effect from higher U.S. duties. Ongoing cost discipline visible through a slight decrease in operating expenses partly mitigated the deleveraging impact of lower sales on the fixed operating cost structure. Reflecting their varied regional footprints, the Maisons experienced mixed trends. However, they maintained a 100% sell-in, sell-out ratio over 12 months, demonstrating disciplined inventory management. Novelties drawing on the Maisons' strong heritage and showcasing their craftsmanship contributed positively. The Lange & Söhne Odysseus Honeygold limited edition, for example, was fully allocated within 1 week of its launch. IWC introduced new references of the Ingenieur and Pilot's watches. Jaeger-LeCoultre released the Reverso Duoface Small Seconds and Piaget, its new jewelry watch collection, the Sixtie. Of note, Piaget has seen 5 of its creations nominated for the '25 Grand Prix d'Horlogerie de Geneve, which recognizes watchmaking excellence. 2025 also marks the 270th anniversary of Vacheron Constantin celebrated through worldwide events and new launches. Worth noting is the creation of La Quête du Temps, a mechanical marvel 7 years in the making and currently displayed at the Louvre, showcasing the Maisons' ability to combine history, craftsmanship and engineering. In parallel, while the overall number of stores was largely stable in the first half, the Maisons continue to enhance their network. Notable examples, including IWC's new booking in Taichung, Taiwan, Vacheron Constantin strategic relocation in Seoul, and Jaeger-LeCoultre's major renovation at the Kuala Lumpur Pavilion. Let's move to the other business area, comprising the Fashion & Accessories Maisons, Watchfinder & Co., and the group's watch component manufacturing and real estate activities. Overall sales were down by 1% at actual exchange rates, but rose by 2% at constant exchange rates. Regionally, Europe was the main contributor to growth and trends in the Americas were encouraging. By channel, sales in both retail and wholesale increased slightly. Growth at constant rates was driven by a double-digit rise at Watchfinder and modest growth at the Fashion & Accessories Maisons. Trends improved sequentially across all regions in Q2, leading to a 6% increase in sales at constant rates. Overall, the other business area reported an operating loss of EUR 42 million. Fashion & Accessories Maisons posted a EUR 33 million loss, improving at constant rates, thanks to controlled operating expenses while continuing to invest in the desirability of the Maisons. Turning now to Maisons' highlights. Alaïa saw its sales grow by double digits, fueled by sustained success and brand heat of its icons such as La Ballerine and Le Teckel. It is also worth highlighting the continued solid performance at Peter Millar, thanks to its lifestyle positioning and success in its crown crafted collection. Chloé saw improved momentum led by ready-to-wear, confirming that its strategy to reconnect with its roots is resonating well with clients. Overall, ready-to-wear across the Maisons achieved double-digit growth in the first half, fueled by a sustained focus on creativity. Montblanc made progress on its transformation program, comprising a greater focus on writing instruments and leather goods categories in direct-to-client channels while streamlining its wholesale network. Gianvito Rossi has been increasingly recognized as a leading global luxury female footwear brand, underscored by the enthusiastic reception of its latest golden edge fashion collection. The Maisons continue to enhance their distribution networks over the period. Openings, including Chloé in Saint Tropez, Peter Millar expanding to San Diego and Columbus, and Watchfinder, launching its first U.S. internal boutique in Soho, New York City. This concludes the review of the first half performance of each business area. Burkhart, over to you. Burkhart Grund: Thank you, Alessandra, and well done on the pronunciation of Goethestrasse. Alessandra Girolami: Thank you, Burkhart. Burkhart Grund: Let me walk you through the rest of the P&L, starting with gross profit. Gross profit increased by 2% to EUR 6.9 billion and represented 65.3% of sales, a decrease of 190 basis points compared to the prior year period. This is the result of several moving parts, which have evolved considerably in the past 6 months. Starting with our production costs that were affected by rising raw material prices, particularly that of gold and to a lesser extent this period, higher U.S. duties. With a time lag between production and effective sale, our inventory levels acted as a partial natural hedge in a period of rising material costs. Compensating for the higher production costs, we benefited from positive impacts related to pricing and favorable sales mix. This was not sufficient, however, to compensate for the material adverse currency movements of a negative 180 basis points we faced in the first half, notably driven by a weaker U.S. dollar and Chinese renminbi, next to a strong Swiss franc, one of our main manufacturing currencies. Before we move on to the rest of the P&L, let me add a few words on U.S. duties. In the first half, the impact of increased U.S. tariff rates was limited to some EUR 50 million, thanks to our proactive inventory management since April and due to the phasing of the implementation of different tariff rates, starting with 10%, then 15% for Europe-made products, followed by 39% in August for Swiss-made products. With this phasing in mind, we anticipate a greater unfavorable impact in the second half, particularly if the 39% tariffs on Swiss origin products are maintained. Based on the current levels of our U.S. inventories and planned shipments, we estimate the full adverse impact of the increased U.S. tariff rates to be around EUR 0.3 billion for the full current fiscal year. Let us now look at net operating expenses, which were stable compared to the prior year period in value and increased by just 3% at constant exchange rates. Operating expenses stood at 43.1% of sales, down 220 basis points, driving positive flow-through from higher sales. Selling and distribution expenses were up by 3% or by 6% at constant exchange rates. The rise in cost was primarily related to continued retail store network expansion as well as salary increases. As a percentage of sales, selling and distribution expenses were down 70 basis points. Communication expenses decreased by 4% or 2% at constant rates, reflecting the Maisons' efficiency in allocating the resources and to a lesser degree, some impact from the phasing of specific events from 1 year to the next. As a percentage of sales, communication spend was 8.2% down -- sorry, 8.2%, down 80 basis points and below our typical range of 9% to 10%. Administrative and other expenses decreased by 2% at both actual and constant rates amounted to 9.2% of sales, down 70 basis points, reflecting lower valuation adjustments and fewer nonrecurring costs than observed in the prior year period. This resulted in an operating profit of EUR 2.4 billion, up by 7% at actual exchange rates and by 24% at constant exchange rates. Overall, the strong sales growth contribution and the effective cost control mitigated the impact of external headwinds in the first half, namely of unfavorable foreign exchange movements, the sharp increase in the price of gold and to a lesser degree, additional U.S. duties. As a consequence, operating margin remained robust at 22.2%, a 30 basis point improvement versus the prior year period. Let us now review the rest of the P&L items below the operating profit line, starting with finance costs. Net finance costs reduced slightly to EUR 158 million for the first half, down from EUR 173 million in the prior year period. This EUR 15 million improvement is mainly comprised of the following items. On the one hand, higher net FX losses on monetary items for EUR 162 million, primarily due to a weak U.S. dollar in addition to the impact of lower fair value adjustments for EUR 129 million. The latter relates to the group's investments in externally managed bond funds and money market funds. On the other hand, more than compensating those 2 items were the EUR 326 million increase in net gains on FX hedging activities. Turning to discontinued operations, which consists of YNAP until the completion of its sale on -- at the end of April of this year. Profit for the period stood at EUR 17 million. As a reminder, last year's results included a EUR 1.2 billion noncash write-down related to the transaction. Figures presented here are the estimated final closing adjustments related to the disposal, our 33% stake in LuxExperience being now recorded as an equity accounted investment. Let's now review the profit for the period. Profit from continuing operations stood at EUR 1.8 billion, 4% higher than prior year period. This included the rise in operating profit and the improvement of net finance costs that I've just described. The evolution of the share of equity accounted results was down EUR 34 million, primarily reflecting lower gains than in the prior year period on equity-accounted businesses and to a lesser degree, the result of our stake in LuxExperience, which was included for the first time. The group's effective tax rate for the first half stood at 19.5%, in line with our expectations for the full year, absent any special unforeseen items occurring in the second half. Finally, profit for the period was EUR 1.8 billion, up from EUR 0.5 billion in the prior year period that included a EUR 1.2 billion noncash write-down from discontinued operations. Cash flow generated from operating activities came in at EUR 1.9 billion, an increase of EUR 600 million compared to the prior year period, driven by higher operating profit and lower working capital requirements. Indeed, inventories rose, but less than in the prior year period, notably as the Jewellery Maisons experienced strong sales growth. Specialist Watchmakers also demonstrated effective production management, contributing to controlled inventory levels. To a lesser extent, higher cash inflows from foreign exchange derivatives also contributed to the reduction of working capital needs. Let us now turn to our gross capital expenditure, which amounted to EUR 0.4 billion and represented 3.6% of group sales. Our CapEx was broadly in line with the prior year period. A higher share was allocated to distribution and manufacturing. Investments in our distribution network dedicated to renovations, relocations and openings of directly operated stores represented 55% of gross capital expenditure, a share 8 percentage points higher than the prior year period. The share of manufacturing spend increased to 30% of overall CapEx compared to 24% in the prior year period. The investment mostly related to the Jewellery Maisons. Other investments represented 15% of CapEx, down compared to the prior year period, the decrease mainly reflecting the completion of several noncommercial Maisons projects. Let us now turn to free cash flow. At EUR 1 billion, free cash flow was about EUR 0.8 billion higher than in the prior year period. The increase primarily reflected the EUR 0.6 billion benefit from cash flow from operating activities that I described earlier, in addition to the nonrecurrence of last year's real estate acquisitions in London. Our balance sheet remained solid. Shareholders' equity accounted for 54% of total assets. Net cash amounted to EUR 6.5 billion at the end of September, down EUR 1.7 billion compared to the end of March 2025. This decrease is more than explained by the EUR 1.9 billion dividend cash outflow in September that reflected an ordinary dividend of CHF 3 per A share, which was approved by shareholders at the latest AGM. Before turning over to the Q&A, I would like to offer some concluding remarks. Richemont delivered solid results in the first half in a complex macroeconomic and geopolitical context. Our sales growth, largely fueled by sustained local demand in most regions speaks to the strength of our Maisons' positioning built with consistency over time. And we will continue to nurture their brand equity and cultivate their potential through investing in quality locations and manufacturing capacities. While we continue to navigate uncertain times and face demanding comparatives, we maintain the course and remain focused on leading the group with the same discipline as in the past. We have full confidence in our talented team's dedication to continue to enchant our clients with craftsmanship and creativity at the core to deliver sustainable value creation for our stakeholders. Now this concludes our presentation. Thank you for your attention, and I will now hand back over to Alessandra. Anne-Laure Jamain: Thank you, Burkhart. We now start the Q&A session. [Operator Instructions] Operator: [Operator Instructions] The first question comes from Ed Aubin from Morgan Stanley. Edouard Aubin: So Ed Aubin from Morgan Stanley. So first of all, congratulations, obviously, for the strong set of results. And Mr. Rupert, congratulations for the opening of the [ former ] Cartier building in Paris. I think it's really stunning. And I guess, for your support of the art world. So just going back to the question. So Burkhart, on the exit rate and kind of the start of Q3, which I know you don't really like to comment about. But yes, if you could comment in terms of how things have been trending over the past few weeks. You're going to be facing a much higher, much more difficult comparison basis for the quarter ending December, particularly in the U.S. So are you already seeing some slowdown on the back of that and so on. So that would be question number one. And then question number two, on the gross margin, which was down 190 basis points. Burkhart, if you could just -- I know you've helpfully provided a profit bridge, but on the input cost inflation and particularly related to gold, if you could provide a little bit of color because ahead of the results, people were struggling a bit with the modeling. And related to that, you helpfully given some tariff -- quantified the tariff headwind for H2, which I guess is EUR 250 million. The consensus is currently assuming a lower rate of decline for the gross margin, only 150 basis points in H2. Does that seem realistic given that the tariff impact should be substantially higher in H2 versus H1? Burkhart Grund: Yes. Good morning. Let me -- okay, let me try to help you within the limits of what we usually do, right? I mean, forward-looking and looking at Q3 sales, you know that we will not give you that color because there is too much uncertainty going forward. What I can point out is and remember that we had a very strong third quarter last year, a growth of 10%. And I think we're confident again in the long-term prospect of the Maisons, but we cannot, at this stage, give you any indication of how we're trading. The performance across the second quarter was pretty uniform with a bit of slightly higher growth in the month of September, but that has something to do also with past year's comparison. So really nothing much to add to that. Now the gross margin, I think we have been giving some indications. Let me try to be helpful. So overall, we have a 190 basis point drop in the gross margin in the first half, out of which 170 basis points really are linked to the FX impact, so the translation effect. And it's a mixed bag between obviously weaker dollar and dollar-linked currencies, but also for example, the renminbi, to a much lower extent, the Japanese yen this year and some other currencies such as the Korean won, for example, combined with the relative strengthening of the Swiss franc, which you know is one of our major manufacturing currencies. The other drivers in the first half are about 20 basis points negative, all combined, right? The biggest downward pressure on the gross margin came from gold, which is about north of 2 percentage points. And as we pointed out, for the time being, a very minor impact from U.S. tariffs around EUR 50 million plus, which, as you know, is linked to, let's say, the inventory cycle. It sits in inventory today and will then when we sell the inventory, be recycled into the cost of goods line later. The stock revaluation and price increases for the time being roughly compensate for these negative impacts. That's why the overall decline of the gross margin not linked to FX is about 20 basis points in the first half. Now on tariffs, we will not speculate about that. We know the current rates. And answering your question, actually, your question is answered through what you put on the table saying, is that realistic to estimate that gross margin will be weaker -- with a weaker drop in the second half if we have a disproportionate impact of tariffs. So I think the answer lies in the question there. Operator: The next question comes from Antoine Belge from BNP Paribas. Antoine Belge: Yes. It's Antoine Belge at BNP Paribas. So 2 questions. First of all, can you talk a bit about China, Chinese, Greater China. I know it's a bit complicated. So in Q2, I think Greater China was up 7%. My understanding is actually Hong Kong and Macau were quite strong. So -- but so was Mainland China locally a bit positive. And what about the Mainland Chinese cluster, if you take into account maybe the impact of tourism? And more generally, what's your view on China, there is improvement, just easy comps? Are you seeing some macro impacts, better consumer confidence? And my second question is a bit of a follow-up on the topic of gross margin. So I understand that there will be some headwinds that are going to be greater in H2, but you passed quite a hefty price increases, I think, in September. So could you quantify those? I mean, according to our estimates in September globally for Jewellery Maisons, it was around a high single digit coming on top of around 3%. So I'm slightly surprised by the comment that the gross margin would be declining more than they did in H1 because there should be at least, in my opinion, more impact from pricing. So am I getting something wrong here? Nicolas Bos: Nicolas Bos here. I will answer your -- try to answer your first question although everybody would love to have a final view on China and its evolution. We've definitely seen an improvement, particularly in the last quarter, definitely on the region, what we refer to as Greater China. As you mentioned very well, it was driven by an improvement of business in Hong Kong and Macau, both touristic, so Mainland Chinese traveling to Hong Kong and Macau and also domestic clientele, particularly in Hong Kong. All in all, we see -- I don't know if it's a stabilization, but we are back to a positive performance for the region, including slightly positive in Mainland China on the very end of the period and clearly driven by the Jewellery Maisons. In general, we've seen some repatriation of purchasing, notably from Japan to Hong Kong for our Mainland Chinese clients. But it seems -- and it will be difficult to predict the future, but it seems that we are now at a more stable level of purchasing from our Japanese -- or Chinese clients, sorry. What we see at large, but maybe it's a wider discussion is that there is an evolution of consumption in China connected probably to the economic situation, but also to an evolution in taste where we see Chinese clients becoming much more demanding, discerning and differentiating when it comes to their choice of brands and collection. That affects positively the Jewellery Maisons. We still see on some of the watch Maisons a more challenging situation. And what we foresee, if we're able to foresee anything is that it's really a market that is reaching another new level of sophistication and of quality of demand, very much at par with what we see in the rest of the world. And that has an impact really brand by brand, category by category, collection by collection. But all in all, it seems to be quite stabilizing. Burkhart Grund: And Antoine, just picking up on your second question. Listen, we're not going to guide on any gross margin in the second half because we have uncertainty and volatility on currencies, on gold, et cetera. What we have pulled out or pointed out is that at current rates, we will have a disproportionate impact of tariffs in the second half. As for the first half, we have been shielded by inventory holdings and, let's say, proactive inventory management. So that's really all I can say on this topic. Antoine Belge: But maybe on the price increases, I mean, could you maybe confirm that what was taken in September at high single-digit overall global number for Jewellery Maisons, is that what happened? Nicolas Bos: Well, we had some -- as you noticed, we had some price increases because we discussed it before that we want to maintain price increases as limited as possible because for us, keeping the affordability of certain collections and the attractiveness of the Maisons is really what comes first. But regardless, we had to implement some price increases. There were some in May, low single digit. There were some in September, particularly for Cartier, quite limited on a worldwide basis to try to reflect some of the increase in the price of gold, notably. But then including also some specific local adaptation, we need to keep in mind that the dollar has depreciated 8% in 1 year. So we need also to maintain kind of fair international pricing and reflect the evolution of exchange rates. So that came on top of the slight international price increase. So we haven't seen a true impact, let's say, in desirability of traffic in the stores, meaning by that, that we didn't necessarily notice a specific spike of purchasing before the price increase nor decrease afterwards. We believe it's because it was quite reasonable and the desirability of the collection comes really first. So we'll see in the second half how that unfolds. Operator: The next question comes from Thomas Chauvet from Citi. Thomas Chauvet: A couple of questions, please. The first one, a follow-up on pricing and maybe your pricing philosophy. Nicolas, you said you're trying to maintain affordability and to try to limit price increase because obviously, you can't cut prices once you've increased them. So you're very careful. Nevertheless, do you think the consumer, not just in China but globally is also starting to buy jewelry a bit differently than in the past for other reasons than the beauty of the Cartier, Van Cleef design or the emotional value that you talked about before or simply gifting purposes or the big events of life, but also as a commodity investment? So very strategically to invest has more than as more than a store value, but maybe even an investment in an unprecedented rising gold and precious metal market. So -- and how would you react to that? Because we've seen some of your Chinese luxury competitors, if I can call them competitors. We know the way they operate, [ La Portugieser ], they increase prices by 20% today, tomorrow, mechanically, they'll reduce prices because gold prices have decreased. I know that's not how Richemont operates, but we're in a very different gold market now. So curious to hear your thoughts. And secondly, perhaps also for you, Nicolas or for Mr. Rupert. It's been over a year that Nicolas, you've been appointed as group CEO. Are there any areas where that you've identified where the group or perhaps the individual business areas, divisions could do differently, could evolve, could be a bit more efficient? Obviously, there's been huge cost efficiency in the first half, as we know. Could you share some high-level thoughts on your also perhaps portfolio review, particularly within Specialist Watchmakers and Fashion & Accessories? Are there any obvious brands that may need financial or strategic support or brands that you think maybe might prove challenging to turn around? I'm thinking perhaps Dunhill, Montblanc or Roger Dubuis. Nicolas Bos: Thank you very much for your questions. I think that would require probably a few hours to answer. But starting with the first one, I mean, the pricing philosophy has not changed. We really believe in what we call fair pricing, which is that the price of any of the creation should reflect its interest [ rate ] value. And of course, we need also to take into account variations in the price of raw materials and exchange rates. I have to correct what you said, it does happen that we decrease prices, and it has happened in the past because that fair pricing policy includes that as well. So it has happened. It's true, it's not something easy to implement, but it does happened. And on the very high end, high jewelry, exceptional watches, we do actually adjust prices up or down on a monthly basis from a European pricing that we translate into local currencies. So we have fluctuations that can go up and down. Of course, the primary focus is to limit the increases to make sure that the fair pricing is still there and the attractiveness of the collections is maintained. So we will continue to look at that. We really truly believe that our clients have a really precise understanding and assessment of value. And unlike what we sometimes hear is not because a piece is expensive and a client or collector has significant resources that elasticity is endless and that the price doesn't matter on the opposite. So we are very attentive to that, and we will continue to do so. I don't know if that answers your question. On the second part, maybe Johann will want to say something. But what I can say is that -- and we talked about it before, Richemont is very much about long term and continuity. And then I came after more than 30 years already in the group. So not here to make any form of revolution. I think that's not expected at all. We've seen a period where we had very, very unexpected and strong phenomena during COVID -- after COVID that actually led to a very, very strong ups and downs in performance across the board. And we were seeing also global purchasing trends in Asia, in America and Europe. What we see in the last period, clearly in the last year, 1.5 years is that we come back to a much more differentiated performance by brand, by category, by collection, by geography, in a way, back to what we used to see before that whole period and the pre-COVID and COVID period. So what I'm very, very attentive to with all of my colleagues is to make sure that we maintain or sometimes bring back all of our Maisons to really their core identity, their core expertise that they all have a very, very distinctive offer and complementary offer. We don't see today a global phenomena where everybody does well or everybody is challenged anymore. And my belief and our belief at Richemont is that each and every brand is much stronger when they are occupying their respective territories. And of course, the territory of expression of Panerai is different from Lange and the one of Jaeger-LeCoultre already different from Vacheron Constantin. Same for the Jewellery Maisons or the Fashion & Accessories Maisons. So this is the primary focus to make sure that they are all really playing in their specific respective field. And then taking with Burkhart and the team and all my colleagues, a very differentiated approach. Some of them are very successful, mature international brands. Some of them require still some more support because they are in development phase. Some of them are in redevelopment in some areas. You were mentioning Dunhill with this new, and I must say, fantastic designer, Simon Holloway. We also talk about Montblanc, where we do a lot of work with Giorgio Sarne, the new CEO and the team to see how Montblanc can revolve around the auto writing and the expertise in laser. And you've seen with renewed communications and identity where we try to bring back Montblanc in a way to its core expertise. So this is very much the kind of long-term work, but nothing at the end of the day, different from the previous decades, I believe. Operator: The next question comes from Erwan Rambourg from HSBC. Erwan Rambourg: Congratulations on such a standout performance. If I could just make a comment, you're sounding very low volume-wise. So -- and I don't think I'm the only one suffering from this. So if you don't mind speaking slightly louder. I'll keep it to 2 questions as asked. So one on Van Cleef. We've had pushback from people who are bearish talking about the Alhambra dependence, ubiquity, potential fatigue. Obviously, you're probably fed up with this, Nicolas, since you've probably heard these comments when you were running that brand. But I'm wondering if you could talk about maybe relative performance within Jewellery Maisons. I suspect, Buccellati is booming from a low base, but can you sort of compare and contrast what you're seeing from Van Cleef relative to what you're seeing at Cartier, please? And then second question on Cartier. Obviously, a management change there as well with now Louis being in the seat replacing Cyrille. I'm wondering, if you could talk maybe about -- I know there's no revolution going on, but maybe what the areas of focus can be and what has changed? I think people looking at the group from outside will possibly think that there's greater SG&A discipline at Cartier, that would maybe be a bit simplistic. But what would you call out in terms of maybe the 2, 3 focus points for Louis in running Cartier? And if I can cheekily add another very small question related to Cartier, Love Unlimited seems to be a pretty resounding success. Should we consider this as permanent or more in animation on the range? Nicolas Bos: Thank you very much. It's a lot of questions. And of course, we don't discuss so much performance and results by Maisons. Of course, on the Van Cleef & Arpels side, I need to answer. I don't feel any fatigue about Alhambra. So we have been seeing quite a few of them for 25 years. And I believe that most of our clients and stakeholders share the same view. So to have an icon is a blessing. So it's very often referred to as kind of liabilities. Is there a risk attached to it. At the end of the day, it's a blessing. I mean, the brands that do have iconic clients, in jewelry, in watches, in ready-to-wear or accessories are usually the ones that are very successful in the long-term if they manage to maintain the desirability and the creativity around these iconic lines. So Alhambra is, I can talk about Alhambra for some time, but I'm not going to. But it's -- to me, an extraordinary collection that's been here for more than 50 years and has offered over this more than 5 decades, almost endless opportunities for creativity with sizes, colors, styles. And that will continue, and we see that there is renewal within that collection, and that's widely appreciated. Needless to say, Van Cleef & Arpels like other Maisons is working on other collections. We've seen collections like Perlee. We were talking a bit earlier in the presentation about Flowerlace and Floral collection, some of the watch collections also at Van Cleef & Arpels that established themselves around Poetic Complications. So Alhambra is not the only collection far from that, but it's true that it's probably the most recognizable and iconic one, and it's something that we will continue to develop and protect. At Cartier, the same. Cartier is blessed with having several very iconic collection. Love is definitely one of them, created pretty much in the same period, Alhambra '68 and Love in '69. And Love Unlimited is actually a very important development within that universe of the Love collection. It's not the way I see it with the team and animation. It's really a new expression within Love. Love is a bangle bracelet. And for the first time, it has become so-called and articulated. And I believe personally, and I like jewelry, as you know, it's a fantastic piece and fantastic collection even with my Van Cleef shares, I've been quite -- I have to say and to acknowledge it's really a fantastic collection. And we've seen the response among existing clients of the Love collection or new clients actually entering the world of Cartier. And it's so far, a very, very positive response. So we'll see how it goes. But we believe it's here to stay for the long-term, and the team is already working on the further development around Love Unlimited. As for Louis and Cartier, I think Louis is doing a very good job. The transition with Cyrille is going on extremely smoothly and I pay tribute to both of them. Cyrille is still very involved with some activities at Cartier, if you think of the women's pavilion and all the philanthropic and artistic activities of Cartier. And they work really hand-in-hand with the current team. Once again, Cartier has the other Maisons is evolving and adapting to this new environment. I mean, there is always a new environment and typically the slowdown in China, which was a very, very strong market and still a very strong market for Cartier, something that the team is really addressing now and to see how we can make sure that Cartier will be ready for the next phase of the luxury industry in China. We've seen the strength of Cartier in America and the United States, which is quite impressive over the period. And they're also working there, renovating and improving the retail network and operations. So yes, he has a lot on his plate, but it's very much once again question of continuity with the previous management and the whole history of Cartier, and I'm quite confident it will continue to be very successful. Erwan Rambourg: Very useful. Best of luck. Nicolas Bos: Thank you very much. Operator: The next question comes from Jon Cox from Kepler. Jon Cox: It's Jon Cox with Kepler here. A couple of questions for you. The first one, just on the -- you had a very tight grip on costs, including on the CapEx side of things in the first half of the year. It's clearly an unprecedented environment, potentially maybe looking a bit better with China and Hong Kong coming back. Just wondering how we should think about the costs going forward in terms of you guys have a fantastic track record when things get a bit more difficult. You tend to look very closely at costs and cash flow and that sort of stuff. Is it more about maybe relaxing a little bit more? Or has the... Johann Rupert: Sorry, Jon -- it's Johann here, Jon. What makes you think that it's during tight times that we look at cash flow and cash. Jon Cox: I know you tell all the time, Johann. Johann Rupert: I just want to [indiscernible] your leg. Jon Cox: Because Nicolas is adding a bit more on the cost side maybe than you have historically done. That's the sort of gist of the question. Johann Rupert: No, no. No, then ask it directly. I think you've got to look at Burkhart as the gentleman that's managed to keep the costs under control through COVID up till now. Burkhart Grund: Yes, Jon, and we're not going to give you any guidance going forward, but we intend to confirm the reputation that you just cited and mentioned by keeping focused on that. But remember, this is not a cost-saving initiative that is disconnected from what our Maisons need to grow. And we will always continue to invest where we need to invest to make our -- prepare our Maisons for the future with the right level of resources that they need. So we would never suppress activities that will impact the future readiness, so to say, of the Maisons. We have done during COVID, have deployed an approach that have been executed by all the Maisons with a high level of responsibility and auto responsibility of how to make through a very challenging time. And the same approach is what the Maisons are driving today that they are aware of the external factors, and they know best what resources they need to deploy for the future of the Maisons. And I think this is built into the philosophy of our management teams in the Maisons and in the businesses. Jon Cox: Okay. And then maybe just as a bit of an add. You mentioned a potential EUR 300 million charge if the existing 39% tariff is maintained. If that tariff sort of goes back to 15% next week or in the next couple of days, should we just think it will be 6 weeks' worth of EUR 300 million costs? And just as an add, Johann, you're on the call. I saw your comments earlier to the media saying this misunderstanding between the Swiss and the U.S. could be resolved in the next day or 2. Any further comment on that at all? Johann Rupert: Yes. [indiscernible] those of us, Jon, that were on the call, I -- it was selective. You know what subeditors do. It could be today, but I say the comprehensive agreement would probably take up to February. But I have absolutely no idea. It's in the hands of third parties. So I'm not predicting anything. It was selective editing. Burkhart Grund: Yes. And Jon, based on what we know, which is the current rates, we expect for the full year roughly EUR 300 million impact. Again, after a good EUR 50 million in the first half, where, again, I pointed out that we're pretty much shielded in time from -- through our inventory. But that obviously, once we sell the inventory, we recycle it into the income statement, and that's where we expect overall at current rates, again, current rates, a total cost of about EUR 300 million for the full year. Jon Cox: Okay. I'm just going to throw in a cheeky one. Trade receivables have gone up a lot in that half compared to a year ago, certainly a couple of hundred million. Is this any sort of indication you guys are looking forward to a good Christmas period? Burkhart Grund: I'll answer that question right away, Jon. I just want to add one more thing on tariffs. Let's not forget that the biggest impact of tariffs comes from the tariffs -- the European tariffs, which is, as you know, 15% because we produce a significant amount of jewelry, fashion and accessory items and one watch brand as well in the European Union or inside the European Union. So that impact will stay. Here, the same logic applies. What has been in inventory will be recycled into the income statement, and that is where the biggest part of our sourcing actually comes from, right? So let's not equate just tariff impact with Swiss tariff impact. Second question, we have wholesale debt of around EUR 600 million, wholesale debt, meaning receivables, which are highly current. So this has -- is really on the back of the wholesale channel performance. We have pointed out that retail and wholesale are roughly growing at the same rate, which means that we also have a healthy recovery of sell-in, again, strictly controlled, which is watches, but which is also linked to the very strong performance of our ready-to-wear lines. And I would say this is pretty current. Our inventory -- our receivable days are quite low, talking about 40 days on average. So this is more, I would say, the expression of a healthy business in wholesale today, and I would not interpret that as pointing to the future. Jon Cox: Great. Well done on the figures. Well deserved. Burkhart Grund: Thank you. Operator: The next question comes from Luca Solca from Bernstein. Luca Solca: Luca Solca from Bernstein. Looking at the U.S., I wonder how you're thinking about American demand and whether there could be a reason to think that because of the stock market, because the crypto American consumers are very strong? Or is there also an element of consumers wanting potentially to avoid price increases and buying ahead of those price increases on the back of the tariffs that have been introduced? And how you separate which is which. I wonder if just myself thinking about the possible contribution from demand being brought forward or if that is not really a point that you would see from your retail activity in America. And congratulations, Johann, for apparently sounding the right tone with President Trump seeing the picture of you and Ponte and Dufour and a few others in the overall office with President Trump was clearly refreshing. If that goes through, I think you should be seen as a Swiss hero, but well done. On another point, and that would be my second question. There's a lot of talk about the K-shaped society coming forward. Artificial intelligence applications could possibly make wealth and income polarization and inequality even greater. You have a very broad range of prices to take care of the very rich and the middle class, and you stated that you're very careful to maintain accessibility for all consumers. Are you seeing in the way you're selling, and I'm referring to the different price points at which you sell that this K-shaped reality is indeed appearing and that you have the highest demand growth at the 2 extremes of your offer? Johann Rupert: Luca, as usual, Johann here, a very perceptive question. Plural, but please don't think that I had much to do with whatever the eventual outcome between Darren and Washington is. The -- like you, I'm really concerned, if I could put it like this, about the possible unintended consequences of the AI economy. We know that there will be winners. And -- but perhaps it's easier to spot the losers than the winners 5 years ends. Now -- and the hollowing out and polarization, I would say, especially in the United States, the biggest visible effect that I've seen is a hollowing out of the middle class. If you look at the malls and if you look at -- and I hesitate to mention names of companies. But if you speak to mall owners, they will tell you that Costco and Cartier are still doing very well. It's in the middle that the hollowing out has occurred. And this was clearly reflected in the anger displayed by the voters in the last presidential election. There is a hollowing out of the middle class. That's more evident if you look at where they're spending their money. Clearly, and I won't and worried about this in 2015. Societies cannot live with that massive differential between rich and poor. The problem is that in the new economy, and it's before AI, it's a winner takes all economy. In the past, the bricklayer who made 80 bricks an hour earned x, but if you did 120 or 100, you were paid more, but the person who laid 20% less still had an income. Today, if you write software that's 20% less effective, you get 0. And especially when you have an economy and an intellectual property-based economy where you can increase production at 0 marginal cost. It's a winner takes all economy. And if you look at, let's say, the top 10 companies in the United States and you look at their percentage of capital allocated and how it's circular amongst them, one does get a problem that how concentrated is this capital allocation and the wealth generation. I think I read somewhere that NVIDIA has created in the last year, 1.5 years, 100 billionaires amongst the staff. Now good luck to that. It does indicate that in 5 years' time and if you start looking at the differential between winners and losers because of AI, I think we're going to have more polarization. I suspect that we're going to have abundance. The real question is how is that abundance shared. That will be the real question, any case. Nicolas Bos: Luca, Nicolas here to continue on your first question. We haven't seen so much movement and variations of trends and sales linked to the timing of price increases. So there might be, to your point, some kind of global feeling that you might as well, particularly in the U.S. these days, buy before additional price increase or tariff impact materialize. It's clearly something that's in the air. But we didn't feel a massive impact of that. And over the last 6 to 9 months. We've had different price increases in the respective brands at different timings, but we haven't seen spikes or downs that we could see sometimes before that we used to see, as you know, for instance, in Japan, where a few years ago, if you are planning a price increase, you knew that the month before would be phenomenal and the month after will be really down. We didn't see any of that -- at that level in the U.S. So there is definitely that feeling, but I think it's not so important. And we feel that in a way, if I may, we have clients that -- and collectors that if they can afford and they have a good reason to buy and they want to enjoy it's the right moment. They don't know what the future is made of. So they say we might as well enjoy now and make that purchase because who knows how it's going to go. So this is pretty much what we hear. And so far, it's very much down to the desirability of the brands and the collections and the perceived wealth or actual wealth of the buyers and the clients. And we are discussing a bit earlier today with Burkhart. It's true that we see in a few countries, clients, collectors that are buying much more from their wealth's and their assets or their perceived wealth's and the stock exchange does play a role, of course, into that more than by -- according to their income and the variations of their income. And that's pretty much the case in the U.S. these days. Burkhart Grund: And Luca, if I just want to add one thing. If it were a quarterly spike, we would probably come to a different conclusion, but this is 7 quarters in a row with double-digit growth. So this is probably reshooting a bit that argument. Luca Solca: Absolute Absolutely. I understand the point on American demand. That is very reassuring. Thank you, Burkhart and Nicolas. I also think -- and thank you, Johann, for your explanations that artificial intelligence is proposing monumental questions to politics and society. So we'll see how that is taken care of. Operator: The next question comes from Patrik Schwendimann from Zürcher Kantonalbank. Patrik Schwendimann: Congrats for these outstanding numbers. And thank you, Johann, especially for your support for Switzerland. If the gold price stays where it is currently, how much more pressure on the gross margin do you expect for H2 and also for next year? And how much more price increase would you need? That's my first question. And second question, again, on China, the Chinese luxury consumption has improved recently. How sustainable do you think is this? I mean we've just seen this morning real estate market is still down. Burkhart Grund: Patrik, I really don't want to speculate. So can't really and won't really answer that question. I mean, gold pressure or gold price increase, we've seen it. Maisons have, I think, adjusted to it quite well in the first half, trying to find the right balance between limited price increases, efficiency gains, strong inventory management and strong cost management. And I think the way the mix has come out is quite favorable. And we will continue to apply that approach by our Maisons. And going into the numbers gain, how much would you need it would reduce the quality of the mix in a way. I mean it's not price increases to offset as a singular item, but we're working on many more items of the mix. And I can only confirm that this will be the policy and the approach going forward. But I would refrain with the high volatility that we have and the many moving pieces to -- and I know you have to feed your models, and I don't blame you for that at all. But it's a bit more complicated to actually run these businesses than just applying a simple model. Patrik Schwendimann: But just the recent price development, I would assume that the pressure is increasing, right, because you have a time lag. Burkhart Grund: Well, we have a time lag. Yes, that's the mechanics of it. And price increases also have a time lag because, as you know, most of them were applied pre-summer, during summer and after summer, so a bit later in the first half than from April 1. So that also has a time lag, or a stronger impact later in the year. Patrik Schwendimann: Okay. Nicolas Bos: And Patrik, if I may add, Nicolas here, to that, impossible to predict the volatility of the gold price. As you know, in others -- one of the specificities of jewelry is that gold, which is for many people, an investment vehicle, for us is a working material. So it has always been the case, will always be the case. So we have to see the fluctuations of the gold price and that they impact our cost of goods and our margins. On the other hand, as we discussed before, the desirability of gold and its investment value also, we believe, impact positively the attractiveness of jewelry. Of course, we prefer, and we will welcome your support in advising clients to buy gold under the form of jewelry instead of under purely a financial form because then they get the best of both worlds. But apart from that, we can only react afterwards. As for China, we believe that -- first of all, we've seen a stabilization of our sales. Is it going to last that we've seen the bottom of it? We never know and we cannot predict, but it seems to be stabilizing, both in Mainland China and in general, sales to Mainland Chinese, whether domestic sales or touristic, although we've seen some movements and, for instance, repatriation of sales from Japan to Hong Kong in the last quarter quite significantly. What we see is the strength of certain brands remains extremely, extremely important and that the desirability of certain lines, certain collection and probably the most iconic, the most historic the lines, the more attractive they are these days. We've seen that continue to strengthen. So we are very -- I wouldn't say optimistic, but -- yes, to some extent about China. It's a very, very sophisticated culture. Obviously, there is high purchasing power. It's impossible to predict how it's going to evolve quarter-by-quarter. But we continue to invest in our presence in China in the quality of our presence in the development of the visibility and desirability of our brands, retail network, exhibitions, activities. And we believe it's going to remain a very, very important market, although we're probably not going to see the type of growth that obviously we've seen during a few years before. Operator: The next question comes from Atiyyah Vawda from Avior. Atiyyah Vawda: I have 2 questions. The first one is on the Specialist Watchmakers store network. I noticed that the number of stores have been reduced by 14 during the period. Can you give us a bit more color on what that related to? And then the second comment is on the jewelry business. From a strategic perspective, how easy is it to launch maybe platinum versions of the products, for example, in the Love range or in the others from a manufacturing perspective, but also from the ability of the brand to actually have platinum versions of the current products? Nicolas Bos: Thank you very much. Maybe I would start with the second part, which is a bit more technical, and thank you for that. It's true that platinum that somehow decreased or almost disappeared in the jewelry [indiscernible] category a decade ago is becoming, again, a very interesting material to work with. But availability is still limited, and the workability is very different from the gold. So for instance, you are talking about the gold bracelet or if I'm talking about certain other collections, there are a lot of motives that you can create in gold that are very, very difficult to create in platinum is much harder material to work, and it's also a much heavier material. So it's less adapted to certain lines. So -- but you're right, there is a thinking behind that. And there are lines that are -- that always existing in platinum, but were a bit less visible and that become quite interesting and attractive again. But it's not going to replace gold anytime in the future for sure. It's going to complement at most. And we see that also in the watchmaking, some beautiful opportunities for platinum versions of some iron watches. Burkhart Grund: Yes. Let me just circle back on the Specialist Watchmaker network. Now just a bit of context between internal, meaning directly operated stores and external stores or franchise stores at the Specialist Watchmakers. We're talking about a good 920 stores. So 14 is a slight downward adjustment, which is primarily or a bit more than half is driven by some closures or adjustments on the franchise store network and some very few internal stores that we have closed. It's not in one market. There is a bit in China, but there's a bit in outside of China as well. I'd say, overall, it's pretty much what we do every year. We review the -- or the Maisons review their store network and adjust when they see the need. And this is not something very major that has happened here. Operator: Next question comes from James Grzinic from Jefferies. James Grzinic: I just had 2 quick questions. The first one, Burkhart, you talked to reduced building inventory at the end of half 1, if you compare it to last year, given that strong growth in jewelry sales in Q2. Can I just check that if demand were to grow as strongly in the peak quarter as it did in half 1, your machine really could feed that demand? That's the first question. And secondly, can you perhaps more generally talk to what the customer response has been to those meaningful Cartier price rises through mid-September. Any markets where there's been more resistance than others or vice versa? Nicolas Bos: James, Nicolas here. On the second question, we mentioned before that we haven't seen real significant trends around the price increases. So maybe a very, very case-by-case basis, some slight acceleration before the price increase and slight deceleration after. But even on a monthly basis, it pretty much averages. So we didn't see any noticeable movement there. Burkhart Grund: On the inventory, let me kick off and then Nicolas will complement. Just look at -- let's look at the numbers. First of all, there's about a EUR 600 million increase in inventory. A good half of that, so a bit more than EUR 300 million is linked to either FX, meaning valuation or revaluation of inventories due to the higher input costs, notably gold. So that automatically revalues or increases the value of our inventory. The other half is increased inventory per se. And the split there is between the biggest part of that in really underlying inventory increase is work in progress, meaning in the production or manufacturing process today and a smaller part is finished goods. So this is really just the number side. And when you see the inventory coverage, it's gone from close to 20 months to about 18. So that's really the financial frame of it, so to say. You know that we have been investing over the last years in -- primarily in additional capacity for jewelry making. And you've seen as well in the first half of the year that a bigger part, a bigger share of the CapEx went not just into distribution, but also into manufacturing, and that manufacturing was concentrated in the Jewellery Maisons. So we have been focusing over the last years already also because we've had shortage in lines to rebuild the inventory holdings to the right level and have had good success in it, but this is an ongoing process that we continue to complete. Does that cover, Nicolas, or do you have? Nicolas Bos: No, very much so then we could go more in detail, but it's very much the investment in production workshops that you will find for the Jewellery Maisons at Cartier and Van Cleef & Arpels and Buccellati and also at Vhernier and Valenza recently. So we are definitely -- we are very -- we are being cautious. We don't want to build overcapacity, obviously, but we want to make sure that we are ready for the future. And if trends continue to be positive, we can answer to them. With limitations that will remain, availability of craftsmanship for handmade jewelry remains an issue. And then it's a very lengthy process that we tackle of identifying young talent, training them, being involved with the schools and so on. But this is more a 3-, 5-, 8-year journey to train craftsmen. But it's been an ongoing process for years and years. So we're quite confident that we will probably continue to see some scarcity and some shortage on some collections, but that's the nature of the activity. But all in all, our capacity to supply will follow the demand, the way we look at it. James Grzinic: That's great. Thank you, Nicolas. So to paraphrase you, if top line turns out to be demand would support double digit in peak trade, you'll be able to feed that basically given your production capability now and notwithstanding the inventory balance at the end of September. And I presume you are satisfied with price elasticity since those price rises at Cartier in September that will allow you to continue to, I think, that -- use that fine balance of value, affordability, et cetera, et cetera? Burkhart Grund: James, are you trying to find out if you should buy now Christmas present or later? James Grzinic: I already had. So I'm kind of assess that. Burkhart Grund: Okay. So rest assured, that's fine. Operator: The next question comes from Chris Huang from UBS. Chris Huang: Chris Huang from UBS. Congratulations on the results, and I will stick to 2 questions. My first one, sorry, Burkhart, just to come back on the commentary you made on September faster than the quarter. I assume that's a group level comment. So could you perhaps please talk specifically about the Jewellery Maisons as you had newness from Love Unlimited at the end of the quarter, and that should be quite mix accretive. So just wondering if you can touch on the cadence of Jewellery Maisons to help us think about the momentum ahead. The other question I have is a clarification on pricing. Nicolas, you mentioned the pricing you did in September. So thank you for that. But just to clarify, what's the incremental contribution from pricing in Q2, specifically versus Q1 for the division? I'm just trying to understand within that 6 percentage point sequential acceleration, how much of that actually came from pricing? Was it more of a low single digit or mid-single-digit contribution, please? Burkhart Grund: Chris, I'm not sure if we can be really helpful on these questions. They're very, very short-term oriented. I understand where you're coming from, but commenting on a single month and then by -- with a high level of granularity by Maisons is not something that we recommend to do because it can lead to conclusions that are do not reflect the reality of our business. Our business is always be it by year, be it by quarter, cyclical and has as much to do with the current trends as well as the comp base of the prior year. And this is the way I would leave it today. I would not endeavor to go further. Sorry for not being more helpful than that. Chris Huang: No worries, understood. Operator: We will now take the last question from Carole Madjo from Barclays. Carole Madjo: Carole Madjo from Barclays. Two questions, please. The first one, can you share a bit more color on the state of the watch market? Do you feel like the market has finally stabilized, I guess, mostly in China and that the positive growth you are able to deliver in Q2 can be sustained? That's the first question. And then number two, just to come back on communication costs, which was lower in H1. Are you still happy with the ratio of around 10% of sales for the full year, which is what you have been doing over the past few years? I know you talked about some phasing effect. So are there any particular events worth flagging that you will do in H2 to push top line as again, you will be facing tougher comps? Nicolas Bos: Nicolas here, on the watch market, I mean, we would love to be able to predict how that market is going to evolve. What we've seen definitely in the recent period is a stabilization for most of our Maisons. They come from very, very different situations, the respective weight of the geographies. For instance, some of the Maisons were extremely successful in Asia and in China in the past. And of course, the slowdown in China did hurt them more than the ones that had more of an American or European footprint. So we see all the Maisons pretty much coming back to a more healthy and better balanced situation. As I mentioned before, also very much refocusing and focusing on their core collection, core identities and delivering a strong and clear message to the -- their collectors and their stakeholders. So we are seeing some positive impact of all this. How it's going to evolve in the future is difficult to predict. We see, for sure, a more and more differentiated watch market, where it's much more difficult to see a global trend even at the scale or the level of one country or one price category. And if you see, for instance, the success of Cartier watches in the past period, be it in sale or even in attractiveness and buzz around the Cartier collection, it's extremely high and shows also an evolution or kind of coming back in terms of taste towards smaller shaped watches that had a bit disappeared for a period. So we very much have individual and singular trend Maison by Maison, and we try to very much follow them on a very granular level. Difficult to say how it's going to evolve. For sure, what we see, and we see that also through the activities of Watchfinder, which is the secondhand watch business that we own. Burkhart Grund: Pre-loved. Nicolas Bos: Pre-loved, sorry, Mr. Chair. Pre-loved watches. We see for sure that the speculative bubble on watches that followed the COVID period has burst and is gone now, and we are back to a much more, let's say, rational and a bit more predictable consumer behavior when it comes to whether pre-loved or first love watches. Johann Rupert: If I may just make a final observation. These successes at, for instance, Cartier, it's not turn on, turn off. It takes years to develop. And I really would like to pay homage to not only obviously Louis, but Cyrille and what they have prepared. And what you are witnessing is really the power of Cartier. There are only so many Maisons in the world that have the power and the reach and the influence and the trust of consumers across all continents that if they have good products, these products sell and sell at scale. So I mean, this comes from Alain Perrin says, Cartier is a machine, and you are seeing the results of decades of work, really decades. And I'd like to pay homage to all of those people. That's why when you have something very, very good like the new Love's range, it can sell, and it can sell at scale. Alessandra Girolami: Thank you very much. This will now conclude the call. Please do not hesitate, of course, if you have any further questions, and talk to you soon. Thank you. Burkhart Grund: Thank you very much. Nicolas Bos: Thank you. Burkhart Grund: Thank you.
Operator: Good afternoon. Thank you for joining us today to discuss LifeMD's results for the third quarter ended September 30, 2025. Joining the call today are Justin Schreiber, Chairman and Chief Executive Officer; and Marc Benathen, Chief Financial Officer. Following management's prepared remarks, we will open the call for a question-and-answer session. Before we begin, I would like to remind everyone that during this call, the company will make a number of forward-looking statements, which are subject to numerous risks and uncertainties that may cause actual results to differ materially from those projected. These risks and uncertainties are described in the company's 10-K and 10-Q filings, and within other filings that LifeMD may make with the SEC from time to time. Forward-looking statements made during this call are based on current information available to the company as of today, November 17, 2025. The company assumes no obligation to update or revise any forward-looking statements after today's call, except as required by law. Also, please note that management will be discussing certain non-GAAP financial measures that the company believes are important in evaluating LifeMD's performance. Details on the relationship between these non-GAAP measures to the most comparable GAAP measures and reconciliations thereof can be found in the press release issued earlier today. Finally, I would like to remind everyone that today's call is being recorded and will be available for replay in the Investor Relations section of the company's website. Now I'd like to turn the call over to LifeMD's CEO, Justin Schreiber. Please go ahead. Justin Schreiber: Thank you, and good afternoon, everyone. After the market closed, we issued a news release announcing our third quarter financial results and posted an updated corporate presentation on our website at ir.lifemd.com. LifeMD made considerable progress executing on our strategic plan in the third quarter. Our RexMD business returned to growth adding approximately 10,000 net new subscribers, and our weight management offering has stabilized and is now well positioned for significant growth in 2026. We also continued to deliver strong year-over-year performance with telehealth revenue up 18% and adjusted EBITDA increasing 30% compared to the prior year period. That said, the most exciting thing about LifeMD today is not our past performance or even the results this quarter, but the important foundational steps we have taken to set the company up for an exceptional 2026. During and following the third quarter, we made substantial progress on our women's health and behavioral health offerings, two verticals that we believe have the potential to each become 9-figure businesses over the next 3 years. We also advanced the development of our LifeMD+ membership and in-app health marketplace, which we expect will meaningfully enhance patient experience, deepen engagement and strengthen long-term retention. In addition, we secured regulatory approval for our nonsterile 503-A compounding pharmacy, a major milestone that will dramatically expand our ability to produce personalized medications at scale and a significantly improved economics compared to relying on third-party pharmacy partners. We were also pleased to successfully divest our majority interest in WorkSimpli. This transaction strengthened our balance sheet and allows us to operate as a pure-play virtual care and pharmacy company. While it was a difficult decision, the opportunity in front of our core business is so substantial that we felt it was essential to dedicate 100% of our focus and resources to our core health care platform. As we look ahead to 2026, our strategic priorities are clear. One, accelerating high-quality growth in our weight management offering by leveraging our collaborations with Novo Nordisk, Eli Lilly and others. Two, scaling our virtual women's and behavioral health businesses built around synchronous care delivered by highly trained providers and personalized therapies. Three, expanding and diversifying RexMD, particularly through personalized compounded medications and hormone therapies. And four, launching a more robust unified LifeMD platform and marketplace designed to increase patient engagement, improve cross-care participation and deliver a significantly enhanced experience across both mobile and desktop applications. LifeMD has made a deliberate decision to play the long game in the GLP-1 space. We are one of the few virtual care providers fully integrated with both Novo Nordisk and Eli Lilly. And we believe these collaborations represent a significant and durable competitive advantage, especially as prices come down on branded therapies and oral therapies come to market. The last 2 quarters have been challenging in the weight management category due to intense competition from low-cost and, in many cases, low-quality compounded GLP-1 makers offering prices we cannot and will not match. While many of these compounded products are less effective and in some cases, unsafe, aggressive marketing and artificially low entry price points have drawn in a portion of consumers and created near-term pressure. Despite this environment, we have maintained our market share, remained disciplined and continued investing in the high-quality, clinically sound weight management model that we believe will create long-term shareholder value. We have consistently believed that branded GLP-1 manufacturers would ultimately reduce pricing to broaden patient access. And that moment is now clearly underway. Just this morning, we announced that through our collaboration with Novo Nordisk, LifeMD will begin offering Wegovy and Ozempic to self-pay patients for $199 for the first 2 doses, a 60% reduction from current prices. Higher doses will be available to self-pay patients for $349 per month, representing a 30% reduction. Eli Lilly also recently announced that self-pay patients will be able to access the Zepbound multi-dose pen, if FDA approved, at $299 for the lowest dose and up to $449 for the highest dose. Even more exciting is the expected approval of the Wegovy pill with a PDUFA date in late December. Analysts widely anticipate FDA approval and commercial availability in early January. LifeMD will be among the first virtual care providers to offer oral Wegovy through our collaboration with Novo Nordisk. While formal pricing has not been publicly released, we expect lower dose levels to be approximately $149 per month based on recent public remarks from President Trump. The Wegovy pill is expected to be the most effective oral medication for weight loss ever approved by the FDA. In clinical trials, patients achieved on average 15% weight loss over 68 weeks with side effect profiles comparable to the injectable formulation. In addition, Eli Lilly plans to launch its oral GLP-1, orforglipron, later in 2026, which we also anticipate offering through our platform at accessible pricing. The bottom line is clear. oral therapies combined with substantial price reductions will fundamentally broaden access, accelerate demand and reshape the GLP-1 landscape. With more than 130 million Americans eligible for treatment, LifeMD is uniquely positioned to be a leading virtual destination for high-quality longitudinal care. Care is essential for patients to achieve the long-term outcomes these medications can deliver. Our men's health platform, RexMD, also had a strong quarter overall. Demand for our personalized ED medications, which combines sildenafil and tadalafil has been exceptional. And these formulations now represent 25% of all new ED prescriptions on the platform. These medications are currently fulfilled through a third-party pharmacy partner, so we plan to bring the majority of this fulfillment into LifeMD's in-house pharmacy in early 2026. This transition will meaningfully reduce COGS, improve gross margins and give us full control of the end-to-end patient experience. Our hormone replacement therapy offering is also demonstrating strong momentum and clear signs of future scalability. Early patient retention has been strong. New patient acquisition continues to grow. Demand is robust across age groups, and we have expanded into men's HRT coverage to 35 states. In addition, RexMD continues to broaden its portfolio with new men's-focused pharmacy products across behavioral health, weight loss, dermatology and more. We believe that our recently licensed 503-A compounding pharmacy will be a major enabler of RexMD's growth, allowing us to offer personalized therapies, lower-cost compounded options and superior margins across multiple men's health categories in 2026 and beyond. In addition to our weight management and men's health businesses, we are very optimistic about the 2026 opportunity in both women's health and behavioral health. Demand in both categories is very strong. And while these businesses are not yet contributing meaningfully to revenue, the initial engagement metrics, interest levels, click-through rates and acquisition costs are on par with categories like ED and weight loss that scaled rapidly within their first year. In both verticals, our focus is on building high-quality, high retention revenue streams. In my view, industry-leading retention is driven by 3 things: an exceptional product, great patient care and customer service, and transparent pricing and strong value proposition. We also believe that enabling patients to use their commercial or government insurance is a critical part of the equation. While insurance enablement has been slower to deploy in our platform than planned, it remains a top strategic priority and will be an important component of our 2026 story. Our women's health business is highly differentiated. We have built and continue to expand an exceptional advisory Board of national leaders in women's hormonal health, menopause, bone health and longevity. We've also assembled a dedicated, highly trained clinical team to deliver this care, and we are confident in our ability to scale as demand accelerates. Patients can choose between bundled care and prescription cash pay programs or flexible models where they pay a la carte or use insurance to cover visits, lab work and commercially available medications. In addition, our in-house compounding pharmacy will enable affordable access to compounded therapies for hormone optimization, sexual health, dermatology and more. We believe this will be the highest quality, most comprehensive and most accessible virtual women's health offering in the country, and we expect demand to be extremely strong. Our psychiatry offering follows a similar structure, combining a la carte consults with bundled care plus medication programs that deliver discounted access and long-term, high-quality care. Most patients begin with a synchronous consultation with a state license provider before transitioning into asynchronous message-based ongoing care. While the current patient count is small relative to our overall business, we saw meaningful quarter-over-quarter traction and expect psychiatry to become a sizable business in 2026. We believe this category will be another powerful, durable growth engine for LifeMD. Given the strength of our balance sheet and the promise of these new offerings, we intend to invest in growth in these verticals early on in 2026 to rapidly build the patient base in these 2 verticals and in our offering to drive superior long-term retention. Lastly, we are investing significant energy and resources into launching the core functionality and features that will enable LifeMD to execute on its long-term vision, building the leading integrated marketplace for virtual care, pharmacy, laboratory services and wellness. Much of this functionality, including a comprehensive relaunch of the LifeMD website and mobile app, we'll be rolling out between now and early Q1 2026. These upgrades will allow patients to effortlessly participate across multiple care programs, access a broad suite of pharmacy offerings and order convenient in-home lab testing through a partnership we expect to formally announce early next year. Enabling seamless navigation across cash pay and insurance supported workflows is not easy, but it is essential to our long-term strategy. When completed, these enhancements will not only broaden the depth and breadth of services we provide, they will also deliver a significantly improved patient experience with clear pricing, more flexibility and expanded a la carte options. Our objective is for patients to view LifeMD as a true virtual care destination, a place where they can access synchronous or asynchronous visits with trusted clinicians; obtain generic, branded or compounded medications at transparent prices; and conveniently order the labs that support their health goals and inform long-term care plans across both primary and specialty programs. We believe the integration of these capabilities will meaningfully differentiate LifeMD, deepen patient relationships and serve as a key driver of sustainable growth as we move into 2026 and beyond. With that, I'll now turn the call over to our CFO, Marc Benathen, to provide more detail on our third quarter financial results and outlook. Marc? Marc Benathen: Thank you, Justin. Good afternoon, everyone, and thank you for your flexibility as we rescheduled this call from November 6 to today. Our third quarter telehealth business results were solid with year-over-year growth of 18% in revenue and 30% in adjusted EBITDA. Our Rex business rebounded from its late second quarter lows with a net gain of 10,000 new members in the third quarter. We've also executed initiatives to significantly strengthen our balance sheet, including the divestiture of our majority ownership position in WorkSimpli and the payoff of all of our debt. Following these transactions, LifeMD has the strongest balance sheet and liquidity position in the company's history. This will enable us to operate from a position of strength in 2026 as we continue to invest in scaling our core offerings, plus further diversifying our platform through growth and recently launched offerings. Now turning to third quarter numbers. Consolidated revenue grew 13% versus the year ago period to $60.2 million. Telehealth revenue increased 18% to $47.3 million with telehealth adjusted EBITDA growing 30% to $2.9 million. Telehealth subscriber growth remained strong with the number of active subscribers increasing 14% year-over-year to over 310,000 at quarter end. Gross margin for the third quarter was 88%, a decline of 290 basis points versus the prior year due to revenue mix. Gross profit was $52.8 million, an increase of 9% from the year ago period. Telehealth gross margin was 86% as compared to 89% in the year ago period, driven by the revenue mix. Our GAAP net loss attributable to common stockholders for the third quarter of 2025 was $4.6 million or a loss of $0.10 per share. This compares with a GAAP net loss attributable to common stockholders for the third quarter of 2024 of $5.4 million or a loss of $0.13 per share. Adjusted EBITDA as a non-GAAP measure we define as income or loss attributable to common shareholders before various items as outlined in today's news release. Adjusted EBITDA totaled $5.1 million for the third quarter of 2025 as compared with $4.3 million in the year-ago period. Telehealth adjusted EBITDA as a non-GAAP measure defined as adjusted EBITDA for only the ongoing telehealth business, excluding WorkSimpli. This measure was $2.9 million for the third quarter of 2025 as compared to $2.2 million in the year ago period. We exited the third quarter with $23.8 million in cash and no debt. As previously disclosed on November 5, we identified adjustments following system migrations related to the recognition of revenue with offsetting related balance sheet accounts for 2022, 2023, 2024 and 6 months ended June 30, 2025. This resulted in an approximate $4.6 million impact in over recognition of revenue attributable for the total period. This adjustment had no impact on the company's cash flow or cash position. Turning to financial guidance. Following the divestiture of our majority ownership in WorkSimpli, resulting in a pure-play, stand-alone telehealth business, we expect fourth quarter revenue in the range of $45 million to $46 million, with adjusted EBITDA in the range of $3 million to $4 million. For the full year 2025, we expect revenue in the range of $192 million to $193 million and adjusted EBITDA in the range of $13.5 million to $14.5 million. Full year guidance represents growth of 24% for revenue and 254% for adjusted EBITDA versus 2024. With that, let's now open the call to your questions. Operator? Operator: [Operator Instructions] Our first question comes from David Larsen with BTIG. David Larsen: Congratulations on a good quarter. Can you talk a little bit about the mix of telehealth product revenue, especially in like weight loss, like how much is coming from branded scripts? How much is coming from compounded scripts? There was obviously a sequential decline. Just any color of why that happened? Just any thoughts around 2026 in the obesity health sort of product line. Marc Benathen: Yes. David, this is Marc. I'll let Justin take the second part of the question on go-forward product strategy. As far as the revenue mix, so weight management still is more than 50% of the company's total revenue mix. Yes, there was a slight sequential decline that we had quarter-on-quarter. The subscriber base was roughly flat. It was down about 1,000 quarter-on-quarter, although that has stabilized and looks to be stable through the balance of Q4 and then with some of the product innovation in 2026 should return back to growth levels. The biggest, I'd say, mix-wise, as far as new patient sign-ups, we're seeing more than half of them coming in through branded therapy. It's less than half of the total revenue because that -- the new patient base obviously needs time to build up relative to the existing base on the patients that are coming through branded therapy of which obviously, there's a substantial portion at this point. As we mentioned, we -- the only real difference in the economics is the fulfillment fee that was on the personalized compound. So obviously, we do lose that. That was roughly -- for the majority of the time period was roughly about $50 in orders. So we have had some impact from that. That we expect to have some additional impact in Q4, which is reflected in the guidance that we put out today. And then we expect ourselves, particularly with a lot of the product innovation going on in the market and where we're positioned with our collaboration partners to be able to capitalize upon pretty solid growth heading into next year. Justin Schreiber: This is Justin. I'll just add quickly on 2026. I mean there are 2 big things that we expect to drive the weight management business. The first, as we emphasized in the call, is better pricing for branded therapies, which, as you know, we've made a kind of big investment in. And so I think you're already seeing the writing on the wall there. I also think that as pricing for the cash pay programs comes down, I think you'll see more and more payers covering these medications. We've also, obviously, seeing the outline of a program for Medicare to cover these drugs, which is also something that LifeMD is set up for. So I mean we're generally like really, really positive on 2026. The other -- like the other big thing that would help us would be the Trump administration doing something. And I think this is likely, not just possible, but likely that as these -- as the branded therapies that are FDA approved become more affordable to patients, I think it is highly likely that you see FDA crack down on compounding, which would be an amazing thing for our business if FDA were to slow that down. Right now, we're getting beat up every single day by just a lot of these very low-priced semaglutide and tirzepatide offers out there that are all compounded, and it's very difficult for us to compete in that kind of a marketplace. David Larsen: So Justin, I think you had been talking at one point about the percentage of new obesity health members coming on the platform in December of '25, expected to be around either 50% or 75%. Does that -- is that still true, like the majority of new patients are on branded products? Justin Schreiber: Yes. I mean that's what Marc just said. I don't have the precise number as of the last 30 days, David. But I mean, I still think that, that range is certainly extremely likely. I think we're at the lower end of that range now. But I think as these prices come down and especially when the initial doses come down into the $200 to $300 range per month, it makes it very competitive with a lot of the other compounded offers that are out there. So I mean, I think you easily could see that number going to 75% or even higher in the very near future. David Larsen: Okay. That's very helpful. And then in terms of your coverage, your insurance coverage like Medicare, Medicaid, commercial, just I mean, it seems to me like now that Medicare and Medicaid apparently will cover these branded products in 2026. I'm not sure when that's going to start in '26, but assuming that it does happen, I mean, it seems like that could be a significant revenue stream for you. What portion of your revenue now is, I guess, Medicare or Medicaid or insurance covered versus cash pay? And by the end of '26, what percentage of your revenue do you think will be insurance related? Justin Schreiber: Yes, I mean, Dave, I'm not really prepared to -- Marc nor I are prepared today to give you an exact number for -- on a percentage by the end of '26. What I can say is that we are 100% ready to go with Medicare once these drugs are covered. So I think that's going to be a very significant thing for our business. And we have actually been seeing -- I don't think traction is the right word, but like we did turn on -- we have right now, it's somewhere between 100 -- I think it's somewhere between 100 million and 150 million lives under coverage right now. And we actually turned this on for the first time broadly last week. And we saw over a 1/3 reduction in our CPA. So it actually is a very, very positive thing for acquisition costs. So I think that -- I don't want to say I think, but the team at LifeMD is really energized around this. It's one of our differentiators. It's been frustrating how long it's taken for us to get these programs live. But I think that also speaks to like the difficulty for others that try to launch a 50-state payer network, right? So I think it's going to be a very positive thing for the business. And I'm really hopeful that we'll start to see that in the coming quarters and be able to talk in more detail about that becoming a greater share of our patients. David Larsen: Any sense for what percentage of the members that are on your platform now actually have insurance? Or what percentage that would -- that perhaps don't join the platform, don't because they wanted insurance, but now that you take it, they can join in '26? Just any -- can you put some numbers or anything around the potential lift in revenue we might see with insurance coverage? Justin Schreiber: Well, I can tell you, Dave, a decent percentage, I mean almost at least 25% of patients that sign up for our program end up not continuing with the program because they don't have insurance coverage for the medication. So that's a big thing. And as coverage increases these medications, it's going to be a massive thing for our business. So on the care side, I think it's significant. I mean I think that -- look, I mean, the stat I just gave you, we saw a 33% ballpark reduction in customer acquisition costs when we turned on the ability to use your health insurance for like, I don't know, 1/3 of the population, probably even less. So I mean that's a great sign. Like there's massive demand out there. And that once we get these programs live and functioning the way we need them to function of scale, like it actually will have a really positive repercussion on the overall business. David Larsen: And then just one more before I hop back in the queue. Can you talk about your clinical services and your retention levels amongst members? So let's say these GLP-1s go solid oral in early '26. Like the value that LifeMD brings to members that, say, for example, an Amazon would not or a typical like Costco maybe would not. Can you maybe just talk about the value you bring and the retention levels or the weight loss that your members typically see that they may not see otherwise at a different platform? Justin Schreiber: Sure. So I mean, some of the other partners like the Costcos of the world are going to have these drugs inventory, just like I think it's pretty likely at some point that LifeMD will be able to direct ship these medications as well from our pharmacy directly to patients. So not a big differentiator there. Where I think there is a really big differentiator is in the portfolio of services and products that LifeMD offers. So the way I envision it, Dave, is like people may come to LifeMD and -- or they make as an alternative to Costco or their family Doctor's office, they start with -- they typically start with an amazing visit with a state license provider, and they're going to use that to access -- initially, the goal might be to access the GLP-1 medication and use their insurance for the pharmacy coverage maybe even use their insurance to cover the cost of the visit. But no one has one need. And most people that are using a GLP-1 have many other health needs, whether it's preventative care, whether it's lab work for -- it could be something that most of these people have never had a provider speaking to them about their hormone health. LifeMD is also launching a cardiovascular offering in late this quarter, early January, which is going to be an incredible program. There's an incredible shortage right now of cardiologists throughout the country. So we're very excited about that. The ability to get a different medication. So we obviously don't compound GLP-1 medications, but we have a full-blown compounding pharmacy here that if somebody needs a hormone or a dermatology product, we can compound that at a fair price, ship it directly to them. So like this is the type of thing that I think many of these other retailers that you mentioned, I don't want to name names, but I think they would all love to have this type of marketplace and even the brand associated with that marketplace. So that's going to be the big difference between LifeMD and these other places. Also it's worth pointing out that Costco doesn't have a doctor or a nurse practitioner, like they don't have the provider that can write the script. So you can go pick up your drug at Costco or some other or CVS, right? But like you still need a provider. And that's where LifeMD comes into play. I think with Amazon, you obviously get the provider. But look, there's a big difference in the LifeMD brand and Amazon's brand. And there are certainly people that are going to be very loyal to Amazon. And -- but it's a big space, right? I mean there's going to be room for a number of high-quality players in this market. David Larsen: Great. And last one, Marc, was there any revenue impact from that, I guess, restatement, we'll call it? Was there a -- would revenue have been $4 million higher? Or was it -- there was no impact? Marc Benathen: No. So it was not a restatement, it was a revision. The revision had a $1.1 million impact on this year. However, the revisions were made in the quarters that they applied to. So there was no impact to this quarterly results from it. Operator: We'll now move on to Steven Valiquette with Mizuho. Steven Valiquette: So I think you kind of touched on this a little bit, but I guess I was kind of curious just also on kind of like the brand uptake, how that's going to track relative to your expectations. You gave some comments on less than half is still on brand. But I guess what kind of jumps out to me is just the fact that since you guys announced your brand drug partnership deals with Novo back in April and May, we've seen Novo Nordisk sign partnership deals for low-cost branded drive with a whole bunch of other companies in the virtual care space and pharmaceutical supply channel. So I'm wondering if some of those deals have diluted your expected uptake in any way, some of those other deals actually helped you in some ways again. Just trying to get a better sense of your ability to capture your fair share of customers seeking the lower-cost brand drugs in the weight management category and diabetes, too. Justin Schreiber: Sure. This is Justin. I'll answer that. So I think we knew that Novo and Lilly would do multiple deals. I think -- look, I don't think that them collaborating with other retailers and pharmacies and telehealth companies has an impact on the demand or the take rate on -- or the conversion rate on our platform. I think it's all about -- I think -- and I can tell you that I'm pretty sure they agree with me. Look, I think it comes down to price. And in a world where FDA ignores what's happening in the compounding world, and you can go out there and get a compounded therapy for, I don't know, even half the price or more a lot of times of what -- where the branded therapies are priced. It just makes it really difficult. And the competitiveness of even the compounding world, something that we didn't expect as -- since these drugs have come off of -- since these drugs have come off the shortage list, the number of players out there, the number of direct marketing firms that are competing in the compounded GLP-1 world has skyrocketed. I don't have an exact number, but it's just gotten -- we expected it to get better, and it actually just got a lot worse and a lot more competitive. So when people are seeing a branded therapy that's priced at $349 to $499, they're seeing -- while they're purchasing and immediately after they purchase while they're waiting for a visit, right, they're seeing 10, 20 other ads, right, for these drugs sometimes as low as $99 for the first month. And usually, the prices quickly escalate, a lot of times in ways that aren't clearly disclosed to the consumer. But that's the current landscape. So we're really optimistic about branded therapy continuing to -- these branded therapies continuing to like perform on our platform. I think there's a big demand. We think the price point, they need to be in the $200 to $300 range to be competitive with a lot of these offers. We need to see better coverage. We think oral therapies, and I mean, most importantly, we think that the Wegovy pill that's likely to be launched in January is going to be -- could be a massive catalyst for the business. And so that's kind of where we're at today. Operator: We'll now move to Anderson Schock with B. Riley Securities. Anderson Schock: So first, on the return to RexMD growth, how much of this volume has been driven by the men's HRT offering versus the ED business returning to historical levels? And how does ED patient acquisition outlook compared to historic levels? I know you previously mentioned it was back to around 80% to 90% of historic levels as of the call in August. Marc Benathen: Yes. This is Marc. Most of the growth, so the 10,000, about 8,000 came from the sexual health business, which is mostly ED. The balance of it came from a mix of the HRT business, hair loss and insomnia. As far as the acquisition volume, I mean, the acquisition volume is very close to where it was at historical levels. I'd say the caps are about $5 to $10 higher than what they had been, but still healthy unit economics comparable to where they have been, and the levels are very close to where they have been historically. Anderson Schock: Got it. And then telehealth's gross margin declined around 350 basis points. Could you provide some more color on what drove this? And how should we think about the telehealth? Marc Benathen: Yes. So this is Marc. Nothing in the business drove it. Like-for-like product lines or service lines, the margins are the same, but it was really -- it was a couple of fold. One, as we mentioned, we're shifting more to branded product in the weight management business. That branded product, obviously, doesn't carry with it some of the medication processing or medication processing fulfillment fees that we had on the personalized compounds. That contributed probably about 150 basis points of that change. And we had always mentioned that before when we had spoken about the change from compounding to branded. The balance of the rest of it is mix in business. So today, weight management is over 50% of the company's total revenue. If you were to flip back a year ago, Rex was the biggest part of our revenue. Rex, particularly Rex sexual health will have the highest gross margins that will sit in the upper 80s. So the mix in that business and the shift there contributed to the rest. Anderson Schock: Okay. Got it. And how should we think about the telehealth margins going forward with the new offerings in women's and behavioral health and also as you scale the 503-A compounding pharmacy? Marc Benathen: Yes. So in general, we would expect gross margins on a rate basis to probably be slightly below where they are today. And the reason for that is a fewfold. One, mental health is a big area of opportunity for us, which will be very accretive to the company's top line and bottom line. But with that being said, gross margins in that business are not going to be 85% to 87% or so. They are going to be lower. They'll typically have a 7 in front of them from a gross margin standpoint, which is if you operate very well, which we do operate our business very well. Secondly, some of the compounded offerings, the gross margins will be slightly lower even after we transition. Although after we transition fully to our pharmacy, they'll probably get back to where the generic is or very close there. But in the interim, there will be -- the gross margins will be slightly lower and we expect that ratio shifting to branded therapy and weight to continue to go up and up to gross margins under current arrangements today where the product is a complete pass-through to the end customer, that would also have a mild impact on gross margins. All of these businesses, we do expect to be accretive to the bottom line and they all have massive ability to scale and growth opportunities. Some of them have lower advertising costs than some other businesses that we've been in. So there are puts and takes there. But from a pure GM rate standpoint, we would expect a mild erosion in the rates just due to mix of business. Operator: We'll now move on to Sarah James with Cantor. Sarah James: Earlier, you mentioned turning on insurance broadly last week and you talked about an observation of customer acquisition costs being down 33%. I'm wondering if you have any other observations from turning it on broadly. And then just if you could clarify the 33%, was that the lower cost of customers with insurance coming on? Or was it that the cost per customer, customer acquisition costs for those with insurance would be even lower and you just had a big mix shift to those with insurance. Justin Schreiber: Sarah, it's Justin. I'll take that one. Look, I think what it demonstrates -- I think what it demonstrates is that a lot of patients that are coming through the medical intake process that have clicked on LifeMD ad or business because it's something they sell on TV. I think it just demonstrates that a lot of these -- a lot of people like want to use their insurance for health care. And one of the unique things about the platform that we have that is still mostly synchronous is that we can participate in the benefits world. So it's just a function of more people getting through the flow, being able to check the insurance route versus the self-pay route, obviously, they're seeing a lower price point as well if they choose the insurance route. So there's also like a kind of exercise that we need to go through to kind of rework the financial model and see how that all plays out. But it was super encouraging and I think there's a lot more optimization that we could do as well. And so where I get really excited about this, especially is things like Medicare where if you have broad coverage for these drugs, and we know we're going to get paid for a consult, and it's really just about the patient going through the initial benefits verification process. And then you have the visit and the medication that are covered and then we can ship the medication directly from our pharmacy to the patient. I think that's super exciting. And I think it just -- I think we've always known that this would have a big impact. We were just pleasantly surprised to see that it was that big of an impact without optimizing it more. Sarah James: Great. And the new consumer-facing app and website that you're launching, do you have any thoughts on how that could impact cross-selling ability? Justin Schreiber: Yes. I mean it's massive. I mean, the number of kind of cross-care sign-ups per day. I mean I think it could easily be 50 or 100 consults per day off the bat and various care programs without us doing any work except for just the technology functioning. So I'm really excited about it. I mean, I think I know that it has the -- I know that it's the potential to like totally change the profile of the business. And also just totally LTV and retention rates across the business. So it's been a big effort and the new app is going to be beautiful. It's going to look -- I mean, I think our current app looks good. But what we're launching is just leagues ahead of where we are today. And I think it's going to have a big impact on the brand and also on the cross-care rate and ultimately the LTV for the business. Operator: We'll now move on to Yi Chen with HCW. Eduardo Martinez-Montes: This is Eduardo on for Yi. I had a question regarding the 503-A pharmacy. You mentioned that you're licensed in 14 states now. I'm just curious if you have an anticipated time line to reach the 50-state coverage and how much margin impact do you think that will have once you're fully scaled. Justin Schreiber: Yes. I think -- this is Justin, again. The licensing process is pretty quick for a pharmacy that's already licensed up across the country like we are. So I would expect to be 35 state licensed in the next 60 to 90 days at the latest, could be even sooner. And then the next kind of 15 states will trickle in, I think, let's just say another 30, 60, 90 days from there with 1 or 2 like California being the most difficult. So it's not a long-term thing, let's just say, I think we can be 50-state licensed for compounding, maybe with the exception of 1 or 2 difficult states in the next couple of months. Eduardo Martinez-Montes: Got it. And then regarding the... Justin Schreiber: And your question on the margin, I mean, the reality is it does have -- I mean owning and operating a 503-A compounding pharmacy is a big, big competitive advantage for us. It's extremely difficult to get the COGS to where you need them to be for our type of business, working with a third-party pharmacy. We do have some great third-party compounding pharmacy partners, and they're not going anywhere. But again, being able to bring these things in-house, control the patient experience, really leverage kind of our supply chain capabilities as well, which are really good, especially in pharmacy to drive down COGS. I mean it just makes these things so much more accessible for patients. Eduardo Martinez-Montes: Got it. And regarding the oral obesity products that we anticipate coming on to market soon. Do you have any visibility? Is there any market research to indicate what kind of bump -- like what fraction of patients are really holding back because they don't like the needle, right? I'm just trying to get a feel for your impression of how much these orally bioavailable obesity products are going to have on uptake of these therapies. Justin Schreiber: I think it's big, but I think your guess is as good as mine and probably as good as the drug manufacturers, right? I don't think there's never been an oral medication for weight loss with the type of efficacy profile that Wegovy pill will have that's been approved by FDA. So it's really difficult. I think it's enormous. I mean in my social circles, especially people that are a little bit older, I think it could expand the market by 25% to 50%. I personally know a number of people that I would never think would avoid a very small needle like this or injectable, but that are just waiting for the oral product to come to market. So I think it's going to be very big. I mean to put a number on it, it's very difficult, but there is going to be massive demand is what I think. Operator: Thank you. At this time, we've reached our allotted time for questions. I'll now turn the call back over to Justin Schreiber. Justin Schreiber: Thank you for your questions and for your interest in LifeMD. And we look forward to speaking with you once again when we report our third quarter results -- or sorry, when we report our fourth quarter results in March of next year. Have a great evening. Operator: Thank you. This brings us to the end of today's meeting. We appreciate your time and participation. You may now disconnect.