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Operator: Thank you all for standing by. The Vertiv Third Quarter 2025 Earnings Conference Call is going to be starting in about four minutes' time. Good morning. My name is Breeka, and I will be your conference operator today. At this time, I would like to welcome everyone to Vertiv's Third Quarter 2025 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. Please note that this call is being recorded. I would now like to turn the program over to your host today, to begin, Lynne M. Maxeiner, Vice President of Investor Relations. Please go ahead. Lynne M. Maxeiner: Great. Thank you, Breeka. Good morning, and welcome to Vertiv's Third Quarter 2025 Earnings Conference Call. Joining me today are Vertiv's Executive Chairman, David M. Cote, Chief Executive Officer, Giordano Albertazzi, and Chief Financial Officer, David J. Fallon. We have one hour for the call today. During the Q&A portion of the call, please be mindful of others in the queue and limit yourself to one question. And if you have a follow-up question, please rejoin the queue. Before we begin, I'd like to point out that during the course of the call, we will make forward-looking statements regarding future events, including the future financial and operating performance of Vertiv. These forward-looking statements are subject to material risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. We refer you to the cautionary language included in today's earnings release, and you can learn more about these risks in our annual and quarterly reports and other filings made with the SEC. Any forward-looking statements that we make today are based on assumptions that we believe to be reasonable as of this date. We undertake no obligation to update these statements as a result of new information or future events. During this call, we will also present both GAAP and non-GAAP financial measures. Our GAAP results and GAAP to non-GAAP reconciliations can be found in our earnings press release and in the investor slide deck found on our website at investors.vertiv.com. With that, I'll turn the call over to Executive Chairman, David M. Cote. David M. Cote: Good morning, all. Well, this is a very strong quarter by any measure. Although I have to say, by looking at the stock price reaction right now, I wonder what would have happened if we hadn't blown the doors off of every single metric. We exceeded guidance across all metrics in a very convincing way. I continue to say I'm more excited now than ever, and you're seeing why. We're in the early stages of the digital age, and Vertiv's position today reflects the years of focus on customer relationships, disciplined investment, operational excellence, and R&D expansion. Selecting a good strategy, sticking with it day by day, and reinforcing it with monthly growth days works. Our technology leadership comes from consistently staying ahead of where the industry is going. This digital transformation is just beginning. The scale and speed of what we're seeing in AI and data centers today is just a preview of what's ahead. Data will continue to increase rapidly, and data centers are essential to storage and processing. We are very well positioned to continue to lead through it. I've seen many business transformations over the years, and what's clear is that our strategy is working. As our technology focus grows market share, investments we've made in R&D and capacity are delivering results today, and more importantly, we believe they're building a sustainable competitive advantage that will serve us well for years to come. I'm more confident than ever that we're in the early stages of what I believe will be a multiyear period of significant growth and value creation. And we couldn't have a better leadership team than Gio and his group to make it happen. So with that, I'll turn it over to Giordano Albertazzi. Giordano Albertazzi: Well, thank you, Dave. And welcome, everyone. We go to Slide three. Our Q3 performance demonstrates the strength of our strategy and execution. Our adjusted diluted EPS of $1.24 was up about 63% year over year, driven by higher adjusted operating profit. Q3 organic sales grew 28% with a strong Americas up 43% and APAC up 21%. EMEA declined 4%, relatively in line with our expectations. Particularly encouraging is the 1.4 times book-to-bill ratio in Q3. Our trailing twelve-month organic orders growth of about 21% demonstrates strong momentum with Q3 orders up 60% year over year and 20% sequentially. The market growth ranges from our November 2024 Investor Day remain valid, though tracking at the higher end with the Kola Cloud share expanding as the fastest-growing segment. The overall market growth is accelerating. We continue to outgrow the market through superior technology and execution. Q3 adjusted operating profit reached $596 million, up 43% year on year with a 22.3% margin and exceeding guidance. Adjusted free cash flow of $462 million was up 38%, reflecting our strong operating performance. Our 0.5 times net leverage demonstrates our strong balance sheet. Given our momentum heading into Q4, we're raising full-year guidance for adjusted EPS, net sales, adjusted operating profit, and adjusted free cash flow. And with that, we go to Slide four. Vertiv's order momentum and pipeline continued to outpace the strong market. While orders can be lumpy, our Q3 about 21% trailing twelve-month organic orders growth and the 1.4 times book-to-bill ratio showcase our competitive advantages. As mentioned in July, starting next year, we'll move to providing full-year orders projections with quarterly updates to better reflect our long-term strategic focus. Our sales grew 29% in the quarter while building an additional $1 billion in backlog from Q2. Our total backlog now stands at $9.5 billion, up about 30% year on year and 12% sequentially. This clearly gives us a strong visibility into 2026. The phasing of our backlog remains consistent with historical patterns, a healthy backlog in a healthy market. Our application expertise and proven track record have positioned us as a preferred partner for strategic projects. Early involvement in project technology and in project planning further drives our above-market growth. Pricing remains favorable, expected to exceed inflation. EMEA sales continued to be muted as a market due mainly to power availability and regulatory challenges. Here, we're implementing regional restructuring programs to have the right structure for future strong growth. Though acceleration may not come until the second half of 2026. When we talk about tariffs, we view them as another cost to our business. The situation remains fluid. And we're addressing it with comprehensive mitigation actions. And pricing programs. We expect to materially offset current tariffs impacts as we exit Q1 2026. While optimizing our supply chain and manufacturing footprint. We are progressing well in addressing the operational and supply chain challenges we experienced in Q2. We are accelerating manufacturing and service capacity investments across all regions, and particularly in The Americas. While maintaining disciplined fixed cost management. Our engineering and R&D spending continues to accelerate to further strengthen our industry leadership. And speaking of leadership, let's go to Slide five. And let me elaborate on our services capabilities. Services turn market complexity into opportunity. From liquid cooling to higher voltages, services are fundamental to our competitive position. We support the complete customer journey from consultancy through implementation to life cycle and optimization. Our advanced technology platform combines remote monitoring, predictive analytics, and energy optimization. Our advanced diagnostic and predictive capability, including thermal mapping and power quality analysis, are helping customers maximize reliability and efficiency with a similar system integration. What truly sets us apart in combining this technology with our unmatched global scale. The recent WeiLay acquisition accelerates this advantage by analyzing real-time machine data, identifying operational trends, and proposing predictive actions from maintenance to energy optimization. As rack densities increase and systems become more complex, this integration of AI-enabled capabilities with our established field service becomes even more advantageous. But technology alone is not enough, presence and capacity in the field are fundamental. We're scaling our service capacity in parallel with manufacturing, staying ahead of the demand curve. Services, combining advanced technology, global reach, and growing capability is truly one of Vertiv's superpowers. And with that, over to you, David Fallon. David J. Fallon: Thanks, Gio. Turning to slide six. Let me walk you through our strong third-quarter financial results, starting with adjusted diluted EPS of $1.24, up approximately 63% from last year's third quarter with the improvement driven by higher adjusted operating profit and a lower effective tax rate, primarily from progress with tax planning and timing of some discrete items in the quarter. Organic net sales were up 28% with continued momentum in The Americas up 43%, while APAC was up 21% as we continue to drive top-line expansion across that region. EMEA was down 4%, but as Gio mentioned, we continue to see encouraging signs of accelerated growth in that region likely looking to 2026. Our adjusted operating profit of $596 million was up 43% from last year and $86 million higher than guidance. Adjusted operating margin of 22.3% exceeded prior year by more than 200 basis points primarily driven by operational leverage on the higher sales, positive price cost, and productivity, but partially offset by the negative tariff impact. And as we summarized last quarter, operational inefficiencies driven by supply chain actions to mitigate tariffs. This 22.3% adjusted operating margin was 230 basis points higher than guidance. Aided by operational leverage on the higher sales, but also by strong operational execution, including addressing supply chain inefficiencies more quickly than expected just three months ago. Still work to do, but we are encouraged as we move into the fourth quarter and 2026. Importantly, our year-over-year incremental margin in the third quarter was approximately 30%, a good indication that we continue the path towards full-year adjusted operating margin target of 25% in 2029. And finally, on this page, we generated $462 million of adjusted free cash flow. That's up 38% from last year, and that translates into approximately 95% free cash flow conversion. And that is consistent with our long-term expectations. Net leverage was 0.5 times at quarter end and we expect to exit the year at 0.2x providing significant flexibility with future capital deployment. Moving to Slide seven. This page illustrates our segment results. And as mentioned, Americas delivered strong organic top-line growth of 43% driven by accelerated AI demand across product lines and customer segments. And margin expanded 400 basis points despite the tariff headwinds, as we continue to drive operating leverage productivity and positive price cost. Moving to the right. Operating leverage was critical for margin expansion in APAC, which saw 21% organic growth as AI infrastructure continues to drive current and future expected growth across that region. In EMEA, organic sales were down 4% due to continued industry challenges. However, sales were higher than expectations heading into the quarter, reason for optimism as we expect EMEA to reaccelerate in the back half of 2026. Driven by the latent, although inevitable, AI infrastructure demand there. Third quarter adjusted operating margin was significantly below prior year and we think at a low point. Driven by deleverage on lower sales and higher fixed cost as we continue to invest in regional capacity to ensure readiness for the anticipated market recovery. As Gio mentioned, we are implementing a restructuring program primarily in EMEA, but also impacting other regions. And this global program, which commenced in the third quarter cost approximately $30 million and we expect an annualized benefit of approximately $20 million commencing in 2026. Now let's move to guidance, where we will address the midpoint of our guidance ranges for both 4Q and full year in slides. Eight and nine. Turning to Slide eight. Our fourth quarter guidance. We expect adjusted diluted EPS of $1.26 up approximately 27% from prior year and primarily driven by higher adjusted operating profit. We project net sales at $2.85 billion with organic growth of approximately 20%. Looking at regional growth rates, we expect momentum to continue in The Americas up high 30s. With APAC up mid-single digits and EMEA down high single digits but up mid-teens sequentially from the third quarter. Adjusted operating profit is expected to be $639 million up approximately 27% year over year with adjusted operating margin of 22.4%, ten basis points higher than the third quarter despite higher sales, due to headwinds from new tariffs announced since our last earnings release. Including those implemented under Section 232, and also a sequential quarterly increase in growth investment as we ready for future strong customer demand. Next, turning to Slide nine, our full-year guidance. We are raising our projection for adjusted diluted EPS to 4.1044% higher than 2024. This improvement is primarily driven by higher adjusted operating profit with benefit from lower interest expense and a lower effective tax rate. Are raising our expectations for net sales to $10.2 billion translating into 27% organic growth for the full year we expect adjusted operating profit of $2.602 billion up 33% from last year and full-year adjusted operating margin of 20.2% approximately 80 basis points higher than 2024, demonstrating strong expansion despite the negative impact from tariffs. We are raising our adjusted free cash flow guidance to $1.5 billion with free cash flow conversion at approximately 95%. And before turning it back to Gio, I do note that this guidance assumes tariff rates active on October 20 are maintained for the remainder of the year. So now with that said, back to you. Giordano Albertazzi: Well, thank you very much, Dave. And we go to Slide 10 to share some thoughts on 2026. So the data center market continues to show remarkable strength. Driven by accelerating AI adoption. Globally. Our order pipeline and market indicators give us confidence. In this trajectory. Though EMEA remains softer, and we expect it to rebound in 2026. Based on our substantial backlog and clear visibility of pipeline, when anticipate continued significant organic sales growth in 2026. To anticipate and stay ahead of our customers' evolving needs and timelines we expect to accelerate our investments in supply chain and services capabilities and capacity. Tariffs remain dynamic but we have a clear action plan and strong execution. Our mitigation strategies are progressing well. And under current conditions, we expect to materially offset their impact as we exit Q1. On profitability, multiple drivers support continued margin expansion. Strong operating leverage, certainly at these growth levels, ongoing productivity initiatives and effective price cost management. We remain fully committed to our November 2024 Investor Day margin targets. Our robust free cash flow provides significant strategic flexibility. And let me elaborate on this a little bit more on page 11. So let's go to slide 11. And we are accelerating our investments for growth. Along three dimensions: Capacity, we're investing globally, with a significant focus on Americas across multiple technologies. Some examples. Our infrastructure solutions capabilities are growing. With prefabricated solutions for both gray and white space and entire data center. Vertiv Infrastructure Solutions enable faster deployment, shorter time to revenue and alleviate skilled labor constraints on-site. Smart Run, our innovative prefabricated white space system shared with you in July exemplifies this acceleration capability. The Great Lakes acquisition strengthens our IT systems offering and deepens our white space presence. We are scaling these capabilities as we have done with previous acquisitions. A playbook that we know quite well. In general, our capacity expansion strategy keeps us six months, twelve months ahead of demand curves. Maintaining technology leadership while driving operational efficiency. The other axis of course is technology, And our engineering and R&D spending will grow 20% plus in 2026 with flexibility to accelerate further. Through aggressive R&D investment, we're committed to stay in multiple GPU generations ahead. We are accelerating our funding for the system layer, connecting all critical infrastructure elements and this is a crucial advantage as data centers are becoming increasingly complex. When it comes to M&A, our strong balance sheet enables us both opportunistic bolt-ons and the largest strategic acquisitions. All according and in line with our value creation framework. We maintain a vibrant pipeline across technologies, regions and deal sizes. As the industry accelerates we need to stay ahead whether through smaller technology acquisitions or larger scale opportunities. This strategy strengthens our complete system solution offering. Expands our TAM and enhances our global reach. So we will continue investing to expand our technology leadership and deepen our capabilities to serve customers in ways no one else can. So let's now go to Slide 12. I'll last slide. And we're we're certainly pleased with our performance this quarter. Confidence with what we see leads us to raise our full-year guidance. Our 2025 execution demonstrates the strength of our strategy. And it positions us well for 2026. Our strategic acquisitions and increased investment in CapEx and engineering R&D reflect a sense of urgency. In capturing opportunities ahead. While the global landscape presents complexities, from tariffs to geopolitical shifts, our approach remains unwavering. Develop robust mitigating strategies assign clear accountability, and execute with precision. We are pleased with our progress but there is more work to do And as you know, we're never satisfied. Looking ahead, our 800 volt DC portfolio planned for release in the 2026, aligns directly with NVIDIA's 2027 rollout of their Rubin Ultra platforms. Are collaborating closely with NVIDIA to advance these platform designs. This is about staying ahead of where the industry is going not just where it is today. What sets Vertiv apart is our system level expertise across AC and DC power combined with our thermal management and service capabilities. Delivering solutions that address the complete power and cooling infrastructure. Our team understands that leadership means constantly raising the bar for tomorrow. And that's exactly what we'll continue to do. So with that, I'll turn it over to Breeka for our question. Operator: Thank you, Gio. We will now begin the question and answer session. In the interest of time, please limit yourself. Your first question comes from Amit Daryanani with Evercore. Your line is open. Amit Daryanani: Morning, everyone. Thanks for taking my question. Impressive set of results here despite the stock reaction today. Do have hoping you could just maybe help us understand the order of that you're seeing that you're talking about today up 60%. What is driving this And really the part I would love to understand is, when you see Oracle reported $300 billion plus RPO number or OpenAI announced a 10 gigawatt deal with NVIDIA, what's the cadence for these big announcements to flow into orders and revenues for Vertiv? I suspect none of these multiple recent announcements have really made it to orders for the ecosystem yet. But love to understand just a little bit on what's driving this order growth in September and the timeframe for when these big headlines we're seeing start to become orders for the company? Thank you. Giordano Albertazzi: So good morning, first of all, Amit. Thank you for your question. So certainly the drivers are a combination of things. Very good market. Certainly, technology evolution in the market that goes into in our direction. Certainly, an industry that trusts the scale that Vertiv is displaying. And, you know, what we have multiple times being vocal about our competitive advantages, our service, our technology, etcetera. So all things that certainly drive that demand combined with a reliable execution. On the Oracle side, as an example, I don't want to go too specific, but in general, we see some of the players, many of the players, the large players in this space that talk about backlog expansion that really has to do with their service agreements. So I don't want to go into details of what these customers and how they look and measure their backlog. But typically those are different types of backlog, different types of agreements. And on the back of this, in the back of these plans and facts and commercial situations, we have an that is being built. And that build-out is rapid, but gradual nonetheless. So the dynamics of the orders to Vertiv or to the likes of us relative to the dynamics of the order intake and the backlog of our customers can be very But there are two sides of the same very positive coin, if you will. But they beat to a slightly different drum, you see what I mean. Amit Daryanani: Great. Thank you. Operator: We now have the next question from Scott Reed Davis with Melius Research. Line is open. Scott Reed Davis: Hey, good morning, guys. And congrats on having a great year so far. Giordano Albertazzi: Thank you. Scott Reed Davis: Gio, since you emphasized it on Slide five, kind of the services opportunity here, could you give us a little bit more color on perhaps the margin structure of services versus equipment, the growth rate? Is it outgrowing equipment? Or since we're in such a hyper-growth period for equipment, perhaps it's not, but it comes in later. Just a little bit more color about how that service opportunity kind of flows through the P&L over the next few years. Thanks. Giordano Albertazzi: Yes. Thanks for the question, Scott. So clearly, we love our service business a lot. We believe it's a unique competitive advantage, uniquely strong competitive advantage. Certainly accretive. Now if you go to Page five, you see there are various components to our services portfolio. Of course, different slightly different dynamics in the various components. But certainly, overall, accretive to our business and certainly generating a lot of recurring revenue in everything that is linked to everything lifecycle services optimization. It's a very robust business. But in times where the product system side of the business is growing at this pace typically and it's very normal that the service business lags. But again, it's a very strong flywheel. That is catching up speed. So it is it's almost you know, bound to happen. It's going to happen. We see it accelerating. We like the direction in which it is going. And quite frankly, I'm really let's say excited about the technology that we're bringing about. So it's really the combination of technology and capacity and presence and customer experience. So expand that to continue to accelerate that flywheel continue to accelerate. I think an important element is that the type of equipment that is being deployed, the density of technology that is being deployed nowadays is new and newer data centers certainly conducive to more business service penetration. Scott Reed Davis: Helpful. Thank you. Operator: Your next question comes from Charles Stephen Tusa with JPMorgan. You may proceed. Charles Stephen Tusa: Hey, good morning. Giordano Albertazzi: Good morning, Steve. David J. Fallon: Just you guys had said, I think in the release maybe in the presentation that you're on track for, I think it was the margins that are embedded in kind of the long-term outlook. I would assume that that means that's more of a that's kind of more of an absolute margin comment. So if revenues are looking better that we should assume that those margins are good, but that would obviously imply a bit lower decremental margin. I guess I'm just curious as to kind of the outlook for sorry, incremental margin. The outlook for incrementals and once you get through these tariffs, can we kind of get back on the horse of 35%? Or are we now in a at a point where with the types of projects you're doing and all the modular work and things like that that maybe a little bit less than more revenue, same margins, which is still very good, but not quite the incremental. Giordano Albertazzi: Same incremental. David J. Fallon: Yeah. Yeah. No. Understand your question, Steve. This is David. I would say our path to the 25% long-term margin target in 2029 stays intact. I think we certainly had some noise this year specifically as it relates to tariffs, not only with the tariffs themselves, but also some of the supply chain countermeasures to address those. Our long-term model assumes incrementals in that 30% to 35% range. I think low 30s gets us to that twenty-five percent and twenty-nine If we're at the upper end of that range, we could do it sooner. But I would say everything that we see certainly based on Q3 and what we see shaping up for Q4 certainly keeps us on that path. The one variable, and we were very clear with this, in both Investor Days, is going to be the timing of growth investments. And their investments. So you invest upfront, you get the return over time. But even with that, we would believe going into any given year, our expectation is to be in that 30% to 35% range. Maybe the one dynamic for next year is we certainly wouldn't anticipate a headwind from tariffs. They continue to remain volatile and uncertain, but that was probably the most significant headwind that got us below that $30.35 dollars percent range in 2025. Operator: Thank you. We now have Christopher M. Snyder with Morgan Stanley on the line. Christopher M. Snyder: Thank you. I wanted to follow-up on the prior margin commentary. The one thing that really stood out to me Q2 to Q3 was the sequential margins. Operating profit up more than revenue sequentially. So I know margins are swinging around a lot with tariffs and how that's being phased in. But I guess kind of the question is if we step back, do you think the price conversations or negotiations versus the customers have changed versus a year ago? Specifically, do you think they've gotten any harder? Or is this kind of still the same environment where they're paying for speed of supply and innovation of the technology? Thank you. Giordano Albertazzi: Thank you for the question, Chris. So I'd say that first and foremost, we continue to be focused on and deliver on a on a price cost positive type of performance. When it comes to the conversation with a customer, I think we have to be all very, very, very careful. In the sense that I don't think we should think about as price conversations ever being easy. I mean, we have very professional knowledgeable, savvy customers And they correctly behave as such. So the price that one can achieve is really in the back of the value that is being delivered to our customers. And very commercially savvy, technically savvy customers I don't see a dramatic change in that respect. What is absolutely critical is really innovation, but the innovation not in and of itself, but innovation that enables additional value creation for them, for our customers, It is a service level It is a quality you bring to the party. We think we're doing a very good job in that respect across all axes. But our customers more or less price sensitive. They're very business sensitive. They've always been very business sensitive. So it's up to us to deliver. Value to them that enables price to be achieved for us. Christopher M. Snyder: Thank you. I appreciate that. Operator: Thank you. Thank you. Your next question comes from Jeffrey Todd Sprague with Vertical Research. You may proceed. Jeffrey Todd Sprague: Have two questions on my mind. I guess I'll ask one, actually. Just curious on Europe, actually. Your apparent confidence that it does, in fact, get better 2026 sounds like a long way away. Mean, watching France, think, is on on their fourth government here in twelve months. So just your confidence that they get their act together, do you actually see a product pipeline, coming together there? And maybe just address a little bit, I guess, the restructuring you're doing prepare for that eventual growth that you're expecting? Giordano Albertazzi: Sure. Well, Jeff, thanks a lot. So I probably have been more sanguine about the Europe reacceleration in the past that have been now. So saying it is going to be a year from now, I mean, year from now when we sit around the same table and phone summarizing our twenty-six Q3 twenty twenty-six performance, that means that we are building some wiggle room therefore thanks to to really come back. And I truly believe that they will come back because the market is in a bad need for capacity AI capacity. And there are very stringent data sovereignty reasons why that capacity for inference needs to be in country, in region, in the EU or in The UK etcetera. So vacancy rates are extremely, extremely low. And, oh, by the way, new technology data center design need to be built. Pipelines, are encouraging in terms of the total size of the pipeline. But what I see different is there is a certain vibrancy in the conversation with customers that was not there to the same extent. So one of the things I've said in the past to say, hey, the people, our customers have many open fronts and the American front is so demanding that it's absorbing them a lot. While that continues to be the case, I think that they are making headroom, if you will, or let's say, the dedicated few more brain cycles to the rest of the world and Europe is certainly one of those. We are positive also about The Middle East landscape from a margin standpoint. We will not go into the details of the restructuring. For obvious reasons. But rest assured that it means making sure that as the market accelerates in the direction of AI infrastructure build out, want to have an organization that from a delivery and execution and also go to market standpoint is exactly tailored to that. So I want to make sure that we do not miss any opportunity and certainly are agile in our full year reacceleration. So but I will not go too much into these. Jeffrey Todd Sprague: Bye. Thank you. Operator: Thank you. We now have Andrew Burris Obin with Bank of America. Your line is open. Andrew Burris Obin: Hi, guys. Good morning. Giordano Albertazzi: Hey, Ender. Andrew Burris Obin: Yeah. Just a question on services, the team services, part of your moat, being the industry leader. As you're getting the strong equipment orders, could you just comment on your investment in services and specifically any KPIs you can give us on headcount, you know, how are you scaling up your support function to keep up with the top line? Thank you. Giordano Albertazzi: Yes. Well, certainly, those big orders and A orders in general infrastructure requires a service for in sometimes installation, not always. Certainly, all the time, very often project management and commissioning and start So very, very important. I agree with you. That is moat or as we like to call it, superpower. When it comes to the headcount, we were talking about 4,000 engineers globally I think we were on 4,400. So there we go. We are certainly accelerating and continue to invest. The way we approach that is really when we do our SIOP for product demand, on the back of that, there is SIOP for services. And SIOP for services has also a geographic dimension by which we have to understand where our backlog will land and where we will need to increase capacity. So it's of course a much more disposed than a manufacturing capacity for obvious reasons, but they are all dimensions that we'll that we are taking into consideration. So if you think about that call it about $4,400 4,500 field engineers expect that to continue to expand. By the way, just like just like we talked about productivity in the manufacturing environment, there is productivity in the service environment. So we really look at services. From a from a way we run it. In terms of a distributed supply chain, distributed factory. So we are very rigorous in terms of how we measure the performance in terms of the service level, in terms of time it takes to be on-site relative to our contractual commitments, etcetera. Very, very, very experienced, mature and paranoid about our service level in the field. Andrew Burris Obin: Thank you. Operator: Thank you. We now have Andrew Alec Kaplowitz with Citigroup. Andrew Alec Kaplowitz: Good morning, everyone. Giordano Albertazzi: Hi, Andy. Hi, Andy. Andrew Alec Kaplowitz: Gio, can you give us a little more color into your capacity investments that you talked about that you're making, particularly North America? You mentioned you're increasing R&D by 20% plus but how do we think about CapEx growth in 2026? And we have enough capacity to keep up with your current backlog growth of 30%. With the assumption that your revenue growth may not slow much, if at all, think, high twenties this year? Giordano Albertazzi: So we will not be explicit when it comes to CapEx in 2026, Andy. But clearly, as usual, there are two things at play. One is more footprint and CapEx. The other is productivity and vertical operating system. So that's not get the second part because to us it's very, very, very common. But you're right. I mean, clearly with the backlog, it's expanding with the comments that I made, very encouraging comments on the pipelines. We clearly are expanding our capacity. And that's particularly true in North America. The expansion as we have said in other occasions is predominantly expansion of existing sites That's something that we like a lot in terms of the speed that it enables from the decision to having that capacity available and the ability to scale very experienced teams that are already running running Vertiv Vertiv plan. So that will continue. That is our philosophy. I don't rule out of course, brand new locations. But in general, what we do and what we do well is grow the footprint six to twelve months ahead of when the footprint is needed. Now I think we do a very, very good job. Never perfect, It's never perfect. There's always multiple product lines, multiple regions, but we're pretty satisfied with direction of travel. And we believe it will it will well sustain our future trajectory. That That's that's really don't know. If I'm ready because, Eddie, that I can that I can have that. Andrew Alec Kaplowitz: Helpful. Thank you. Operator: We now have Nigel Edward Coe with Wolfe Research on the line. Nigel Edward Coe: Thanks. Good morning, everyone. To go back to margins. Obviously, very impressive outcome in 3Q. Maybe, David, give us an update on sort of where we are on plank reconfiguration. I think was meant to be completed by the end of the year. And just on the 4Q margins specifically, you did take it down by maybe a point versus the original what was embedded in the 4Q plan. Just wondering if that's tariff inflation, some of these secondary tariffs or whether there's an EMEA mix there. And I know I'm rambling a bit here. I just clarify the points about 2026 Because tariff mitigation, maybe yeah. Yeah. So so Do we think '26 can be above above stage of phase out? Sorry. Do we think '26 can be above the bar in terms of that incremental margin guiding Got it. David J. Fallon: Yes. Would say you weren't rambling until the last five to ten seconds. But, no. I think all your questions are are are very much very much linked together. But, looking at Q4 margins, we did take those down versus prior guidance about 100 basis points as you mentioned. I would say half of that on the contribution margin side. And certainly, driven by the incremental tariffs that we saw post earnings last time. In addition, and we're very proud of our operating leverage but we're not afraid to invest in fixed costs. And are planning to accelerate fixed cost investment into Q4. That were previously planned in the first half of next year. So if you put those two together, it's probably half related to contribution margin, with tariffs and the other half related to operating leverage. And if you look at margins sequentially, relatively flat Q3 to Q4. Once again, we see benefit as it relates to addressing the operational challenges, but we do have the additional tariff headwinds. Your question related to incrementals for 2026, probably premature to provide any specific numbers. But once again, we'll reiterate, we expect to be in that 30% to 35% range in any given year over the next three to five years that the 25% target is pertinent. We're still evaluating the impact of tariffs, but we do anticipate to materially offset the tariffs that we have line of sight to today. With countermeasures we're enacting with both pricing and also transitioning the supply chain. We expect to be materially offset exiting Q1. Which would imply certainly tariffs not being a headwind year over year. And despite uncertainty, we would expect that actually to be somewhat of a tail tailwind. So again, too soon to give any specific numbers as it relates to incrementals. But if you backtrack a year, there's nothing in particular that we're looking at, at 2026 that would be different than any other year as it pertains to incrementals. Nigel Edward Coe: Great. Thanks, David. Yep. Operator: We now have a question from Nicole Sheree DeBlase with Deutsche Bank. Your line is open. Nicole Sheree DeBlase: Yeah. Yeah. Thanks. Good morning, guys. David J. Fallon: Good morning. Operator: So I just wanted to ask on EMEA margins. I think David, the opening remarks, you kind of shared confidence that 3Q was kind of below watermark for EMEA margins. So what is the path back to mid-20s? Can we get there without volume growth driven by what you're doing on restructuring? Or do we really need volumes to come back to kind of get back to where margins were within EMEA? Thanks. David J. Fallon: I would say a combination of both. And we we we did mention that we do anticipate number one, a sales acceleration in EMEA in I think I mentioned in my comments up mid-teens That certainly facilitates improved operating leverage versus Q3. And I would say overall that we do anticipate margins in Q4 in EMEA to be significantly higher than what we we saw in Q3. Including addressing operational inefficiencies. So when we talk about the operational inefficiencies as we put in place to address some of the tariffs. We have a global supply chain and a lot of those actions have been put in place to address those inefficiencies. In EMEA. And we would start to certainly see some definitive impact in Q4. Nicole Sheree DeBlase: Thank you. David J. Fallon: Thank you. Operator: We now have a question from Mark Trevor Delaney with Goldman Sachs. You may proceed. Mark Trevor Delaney: Yes. Thank you very much for taking my question. I was hoping to circle back to the order and pipeline topic. Do you, I think, you said in your remarks that the backlog phasing is within typical levels for Vertiv at this point. And I think that implies backlog that is project related would typically be for shipments that are up to twelve to eighteen months forward. And so when I take that comment on the phasing of your backlog, it would seem to imply that most of these bigger data center that have come out in recent months and are often for projects that are over the next many years have not yet been fully booked by Vertiv. So one, is that right? And two, is that what's underpinning some of your comments about the pipeline being healthy? Giordano Albertazzi: Let me elaborate a little bit on this, Mark. Thank you for the question. So when we talk about the phasing of the backlog is if you take a snapshot now of the $9.5 billion backlog, and you look at what is in the twelve months, eighteen months, twenty-four months, whatever, And you look at the same picture, for the backlog a year ago, you will see pretty much a similar shape, clearly bigger 30% bigger, but similar shape. That means that our backlog has not grown by virtue of, let's say, elongation or overstretching. So that's good. For us. We believe that, that is good because that represents the way the industry works. Now clearly, have seen a lot of very strong, very credible announcement and projects. And one would expect Vertiv to be involved in many of those. And that would probably be a very reasonable expectation. Let's put it this way. But those projects are then deployed in phases. And if we go back to our pretty maniacal let's say sticking to sticking to the rule of only a PO is a legally binding PO constitute backlog, then you'll see that that backlog pretty much mimics the way and the speed at which deployments occur. So I in that respect, there's certainly a lot of the more that will be done to fulfill those announcements in our pipeline. And as those projects mature, as those projects projects mature in terms they are ready for deployment maybe the next two fifty megawatts in a one gigawatt deployment, that's the time when orders start to flow in the likes of us and hopefully for us. Hopefully, addresses your question, Marc. Mark Trevor Delaney: Thank you. Operator: We now have Michael Elias with TD Securities. Go ahead when you're ready. Michael Elias: Great. Thanks for taking the question. So, Geo, on the ground, I'm seeing a massive acceleration in data center demand. Think in the third quarter, run rate data center demand is up close to 4x. So it's great to see you guys investing in production capacity. My question for you is that as you think about adding production capacity, could you help us understand from when you make the decision to expand capacity? How long does it take to have the first unit come off the lot in that new production capacity? And as part of that, what's the earliest that you could book into that new production capacity? I only ask if I think you're going to need the equipment in a hurry. Giordano Albertazzi: Well, Mike, first of thank you for for the question. We like the reinforcement about the market trajectory. We wholeheartedly agree on a very, very strong market, too. To the point of capacity. I wouldn't say I would that there is one answer. To that. A lot of our capacity expansion is used more use that 25%, 30% of capacity that we have latent in the way we build things. If you think about our capacity build out, do not please think of it inaccurate as one discrete step happening sometimes. That's been going on for forever. We continue to expand. What we are saying expand the expansion rate will accelerate, but expansion has always been going on. It depends again the time to first unit, let's say, the time to revenue for new capacity. Is it can vary from a few months for line reconfiguration, like, three, four, five months. Two, maybe twelve months for for larger expansion that require building from scratch. Again, one thing that we like a lot and that's why we like a lot is that if we just expand existing facilities that is really the just a technical time to have the new equipment available. But, you know, we have the systems, the people, the leadership, all ready to go and and really expanding their their their volume of business, a lot of scale and a lot of speed. So think about something that can go from a few months to maybe nine to fifteen months window. So we of course build on on our backlog, but also on on the visibility that we have in a pipeline. Hopefully addressing your question Mike. Michael Elias: Yes, it does. Thank you. Really appreciate it. Giordano Albertazzi: Thanks. Operator: We now have Amit Singh Mehrotra with UBS on the line. Amit Singh Mehrotra: Thanks, operator. Hi, everybody. Gio, I wanted to maybe ask you to address, you know, the competitive environment across all your products and only reason I asked that, seems like every three or four months, there's some announcement or some innovation that gets everybody to question the entire thesis around Vertiv's position in the market. You know, there was obviously AWS in in row heat exchangers a few months ago. Recently, Microsoft Microfluidics and people are talking about 800 volt DC eliminating the need for PSUs. May maybe address all of those, if you don't mind. Obviously, not AWS, microfluidics and the 800 volt DC dynamic and and and kind of how your content is evolving against that $3,000,000 per megawatt, and and maybe what your message is to to folks when they on the receiving end of these innovations every three or four months that causes them to question the entire thesis? Giordano Albertazzi: Oh, well, we will use the next two hours Amit, for this. This is a great question. But I'll try to be super concise here. We love the innovation intensity in the industry. We love it because we are at the center of it. If anything, we drive it. And that's exactly we go back to one of the questions we had. How do you make sure that the the price equation, I think it was Chris, the the price equation stays favorable. That's exactly what innovation does. And being ahead in the innovation curve enables us to continue down that path. So very important that's why we relentlessly invest more and more in innovation. That's why we nurture our relationships so intensely as you know we do. When it comes to specific examples, take microfluidics take 800 volt DC, different stories. For example, take microfluidics and you say, oh, if anything, this is exactly direct to chip direct to chip liquid cooling just done with other means than a cold plate. It preserve everything, thermal chain. Vertiv is a thermal chain absolutely intact if anything. Would have probably smaller microchannels and more pressure drop and more cleanliness needs in the system. So let's not be afraid of innovation. Innovation is absolutely our friend. Our friend certainly is the 800 volt DC, leveraging our decades-long DC power and AC power experience and DC power specifically. So being at the forefront as our page 12, I think it was explains at the forefront of it is a competitive advantage. When we think about our TAM per megawatt, start to see really a range that goes from three to 3.5 megawatts sorry, million per megawatt. So So if you will narrowing a little bit on the upper end of the spectrum that we have given you in the past. And that's a good thing. Again, it's because of that technology. Clearly, the industry is becoming more interesting. To many players, but also we think better we see a better delineation of the competitive landscape. If we compare, for example, everything thermal and liquid cooling now compared to what it was a year and a year and a half ago, So that is in the direction of more consolidated, more rational players not bad. And again, we continue hold true to our competitive advantages and reinforcing them, service, innovation, ability to scale, all the things that you heard from us. So absolutely intact. If anything, we love this environment. This innovation intense environment. Amit Singh Mehrotra: Okay. Thank you very much, Gio. Appreciate it. Giordano Albertazzi: Thank you. Operator: Thank you. This concludes our question and answer session. I would like to turn it back over to Gio Albertazzi for any closing remarks. Giordano Albertazzi: Enrique, thanks a lot. And thanks, everyone, for your for your questions. And time today. But before I wrap up, I want to take a moment to express my sincere gratitude to David J. Fallon our CFO, who will be retiring So whoever has been kind of 12 earning calls together. Probably 12 plus one. I was kind of a semi in the row. So big thank you. David has been instrumental in our success, bringing great financial leadership and strategic insight during a period of significant wealth transformation and acceleration and growth. So David, thank you wholeheartedly for your partnership and for your dedication. Absolutely excited to welcome Craig Chamberlain as our incoming CFO. Craig brings strong experience and capabilities that will help drive Vertiv's next phase of growth. I couldn't be more excited about our future. We continue to demonstrate our ability to execute and adapt in every in an ever-evolving market. While our progress has been strong, we stay focused on doing more. Opportunities ahead are extraordinary. With our technology leadership, global scale and deep customer partnership, Vertiv is uniquely positioned for the future. A big thank you to team Vertiv constantly focused on delivering value for our customers and investors. And with that, thank you, and have a great rest of your day. Operator: The conference has now concluded. Thank you for attending today's presentation. May now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the BankUnited, Inc. Third Quarter 2025 Earnings Conference Call. At this time, participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session. To ask a question during this session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Jacqueline Bravo, Corporate Secretary. Ma'am, please go ahead. Jacqueline Bravo: Thank you, Michelle. Good morning, and thank you, everyone, for joining us today for BankUnited, Inc.'s Third Quarter 2025 Results Conference Call. On the call this morning are Rajinder P. Singh, Chairman, President and CEO; Leslie N. Lunak, Chief Financial Officer; Jim Mackie, Incoming Chief Financial Officer; and Thomas M. Cornish, Chief Operating Officer. Before we start, I'd like to remind everyone that this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, that reflect the company's current views with respect to, among other things, future events and financial performance. Any forward-looking statements made during this call are based on the historical performance of the company and its subsidiaries, or on the company's current plans, estimates, and expectations. The inclusion of this forward-looking information should not be regarded as a representation by the company as the future plans, estimates, or expectations contemplated by the company will be achieved. Such forward-looking statements are subject to various risks, uncertainties, and assumptions, including those relating to the company's operations, financial results, financial condition, business prospects, growth strategy, and liquidity, including as impacted by external circumstances outside the company's direct control, such as adverse events impacting the financial services industry. The company does not undertake any obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments, or otherwise. A number of important factors could cause actual results to differ from those indicated by the forward-looking statements. These factors should not be construed as exhaustive. Information on these factors can be found in the company's Annual Report on Form 10-K for the year ended December 31, 2024, and any subsequent quarterly report on Form 10-Q or current report on Form 8-K, which are available at the SEC's website. With that, I'd like to turn the call over to Mr. Rajinder P. Singh. Rajinder P. Singh: Thank you, Jackie. Welcome, everyone. Thanks for joining us. Third quarter results were pretty solid. I will try not to get into the level of detail that Leslie and Tom will but just hit the highlights. For the quarter, earnings are up, ROA is up, EPS is up, ROE is up, margin is up, and expenses are very controlled, and credit is flat. So if I was to summarize this, this is, you know, as good a quarter as I could have expected even just a month ago. This is, you know, if there if there's oh, by the way, deposits did exactly what we've had expected them to do, almost to a T. Loans CRE was up modestly. Mortgage warehouse was up nicely. C and I was down, unfortunately, not because of production, but of the ongoing payoffs that we've been seeing. So hitting margin 3% a quarter early, I think that's sort of the highlight. We're very happy about that. We kind of hinted on that. Even on our last call, we were running further ahead. We've been running further ahead all year, so we're very happy that we're at 3%. And by no means is 3% the destination. This was just a waste of, we want to get further, and we will get further, and we'll give you more guidance in January where margin can get to. In the short term. ROA of 82 basis points is improvement over last quarter certainly a big improvement over last year. ROE of 9.5%, EPS of $0.95 I think our I checked a couple of days ago. The consensus was 88¢. So happy to beat that. Capital continues to grow. Set one is now at 12.5%, and tangible capital book value per share is up to $39.27 I think total book value per share is now over 40. The buyback is in place, though we didn't really hit much of it, or any of it, in the third quarter. We're being more opportunistic with the buyback. Rather than in the past, our buyback strategy has been by a little bit every day. This time around, we have a strategy because the amount of volatility we see in the marketplace, we think it's better to be more opportunistic and lean in hard when there is the opportunity to do so. So you'll see that play out over the course of next few months. What else am I missing? Like I said, with credit, everything was about as flat. You know, criticized, classified, NPLs, our ACL, our charge offs, everything was like when I first looked at the numbers, I I thought maybe there a typo, but it's not. Everything has been just very, very flat this quarter. So we have put in some new disclosures around NDFI, Leslie and Tom will walk you through because those are the kind of questions we're expecting. But, again, there also there is not much sensational news either. But with that, I'll turn it over to Tom, and and then Tom will turn it over to Leslie. Great, thank you, Raj. So before I dive into a little bit of details about Thomas M. Cornish: the quarter, just a couple of comments from an environment perspective that we're operating in right now. And what we kind of see as we look forward into this coming quarter and the start of next year. So Raj and I have done a number of events with major clients over the last few weeks. We've visited almost all of our offices, including the new office locations that we've been announcing. We've seen a fair amount of hiring that's really good quality hiring that we're starting to see a really good build. In those areas. So we have traditionally been an early of the year deposit grower an end of the year asset grower on the loan side. And I would expect that we would see that based upon what we're looking at right now. We've got very, very good pipelines in commercial teams across the bank. We've got very good pipelines in the real estate team. Real estate's been a good growth area for us all year long. Deposit pipelines look strong. From an operating account perspective in the fourth quarter. So I think the and when we track business sentiment of clients both on the commercial side and on the CRE side, I think businesses are feeling pretty optimistic. Right now. And we had a lengthy session for the group of CRE clients the other night, probably over 100 clients. And I think the optimism in the free markets heading into the end of this year and next year is is very strong. So we're quite optimistic about what we expect to see in the near term environment. A little bit more detail on the quarter. As Raj said, total deposits were basically flat for the quarter. Declined by $28,000,000 We did experience the normal seasonal fluctuations that we always see in the title business at this point in the year and to a lesser extent HOA and government banking, the municipal quarters generally and outgo during the third quarter. Overall, are pleased with $1,200,000,000 in non brokered deposit growth that we've had over the last twelve months We expect to see seasonality continue. In the fourth quarter, but kind of broadly across the bank, the level of market penetration, new relationships, net new relationships in each of our operating segments and geographies, is really very strong and very encouraging. On the loan side, as Raj mentioned, of course CRE and C and I loan portfolio declined by $69,000,000 for the quarter, CRE being up 61 while C and I segment declined by 130,000,000 For the quarter, we still see payoffs larger than we have historically seen, but we also see those kind of coming to a close as it relates to relationships that we may have decided to exit. We are seeing a little less utilization than we've traditionally seen on the book. I think part of that is because we are continuing to focus on relationships that tend to be more deposit rich. That's one of the reasons. But we're seeing a slight dip in utilization. But nothing that I don't think new business opportunities in production can outrun as we move forward. Mortgage warehouse grew by $83,000,000 in the quarter, which was a good quarter. And the resi franchise equipment in the municipal finance were down in line with what we have guided to in the past and what we expect Overall loan to deposit ratio, finished at 82.8% for the end of the quarter. Raj mentioned NDFI, so there's been a lot of talk about that recently. So we added some information on slide 16 in the supplemental deck about our NDFI exposure. In total, we have 1,300,000,000.0 in NDIF exposure as of ninethirtytwenty five. Which excludes mortgage warehouse lines, That's about 5% of our total loan portfolio. The largest components are B2B credit and subscription lines or subscription line outstandings as you look at the exhibit. Are almost all predominantly investment grade very high risk graded from a quality perspective portfolio. And our B2B portfolio is predominantly secured lending facilities that we have to real estate investment funds. We're not really in the kinds of larger lending to private credit that people are reading about and talking about. Our facilities are more moderate in size and generally secured by the pledges of assets and real estate collateral. That we have Substantially all of the September only one loan was on non accrual for 26,000,000 through a real estate investment fund. Brief comments on CRE exposure. Our CRE exposure totaled 6,500,000,000.0 or 28% of loans and 185% of risk based capital. Pretty consistent with the prior quarter. I think if you look at Page 11 of the supplemental deck, you can see we've got a well balanced portfolio. It's kind of interesting. It's almost $1,000,000,000 in every major asset class from retail to to industrial to office, including medical office, and to multi family when you include the construction portfolio. Which is predominantly multifamily. So very balanced overall real estate portfolio. Consistent with last quarter at September 30, the weighted average LTV of degree portfolio was 55%. Weighted average debt service coverage was one point seven seven, 49% of the portfolio was in Florida. 22% in the New York Tri State area. And these numbers are becoming a little less concentrated in those two as we do more real estate in the Atlanta market, the Southeast market and the Texas market. Over a period of time. Office exposure was down $122,000,000 or 7%. From the prior quarter end criticized classified CRE loans declined by $41,000,000 in the third quarter primarily as a result of payoffs and pay downs. We are seeing a more normalized refinancing market in the office market. I think everybody has seen positive comments about most of the office markets that we're in, particularly the New York market. In the recent months, the CMBS market, has picked up and there are more players involved in looking at new office. So that's part of the reason why the portfolio continues to trend down. We're seeing a little bit more of a normalized refinancing market out there. Pages 11 through 14 of the deck have more details on the CRE portfolio including the office segment. And with that, I think I'll turn it over to Leslie. Leslie N. Lunak: Thanks, Tom. Just one quick point. That $41,000,000 decline was specifically CRE office, not CRE overall in size and classified. So to reiterate, net income for the quarter was $71,900,000 or $0.95 per share. Net interest income was up $4,000,000 and as Raj said, we're very happy to report that the NIM was up seven basis points to 3%. So we hit that target that we had put out there for you a quarter sooner than we thought we would at the beginning of the year. To reiterate what we've been saying for a while now, margin expansion has been and will continue to be primarily driven by a change in mix on both sides of the balance sheet rather than by the Fed's actions with respect to rates. Continued execution on this has continued to remain our priority in the static balance sheet remains modestly asset sensitive. We've done some hedging to protect the margin if rates should decline more than the forward curves would suggest. And there'll be details about those in the upcoming 10 Q filing. This quarter margin expansion was mostly attributable to an improved funding Average NIDDA grew by $210,000,000 and average interest bearing liabilities declined by $526,000,000 On average, higher cost brokered deposits were smaller part of the funding mix this quarter. We did redeem the $400,000,000 of outstanding senior debt in August, that improved the funding mix from a cost perspective. The yield on that was 5.12. So that was helpful also. The average cost of interest bearing liabilities declined to three fifty two from three fifty seven, and the average cost of deposits declined by nine basis points to 2.38 The average cost of interest bearing deposits was down eight basis points to three forty And on a spot basis, the APY of deposits continued to trend down to two thirty one and with the rate cuts that we expect in the fourth quarter, that trend should continue. The average rate paid on FHLB advances did increase and that was mainly due to the continued expiration of cash flow hedges. Again, there'll be details on all of that in the the queue. The average yield on interest earning assets was flat at five thirty eight this quarter. While the yield on loans decreased marginally, the yield on securities was up a little bit to offset offset that. All of our guidance assumes two additional rate cuts in 2025, one in October and a 75% chance of another in December. On the provision and reserve, the provision this quarter was $11,000,000 The ACL to loans ratio was 93 basis points, consistent with the prior quarter end. And I'd refer you to slide 17 of the deck for a waterfall chart that talks about the changes in the ACL for the quarter. Couple of things that were driving the movement in the ACL and provision for the quarter. We had improvement in the economic forecast. Offset largely offsetting an increase in specific reserves, and the majority of that increase in specific reserves was related to one C and I credit and, to a lesser extent, one office loan. That C and I credit appears to be idiosyncratic in nature, Doesn't seem to be any kind of common thread with respect to industry. Or geography emerging there. We also had increases in certain qualitative overlays and obviously net charge offs. Reduced the reserve. Net charge offs totaled 14,700,000.0 The net charge off rate was 26 basis points. For the nine months ended September thirty and twenty seven basis points for the trailing twelve months, so pretty consistent. And those net charge offs primarily related to those same two loans. The one C and I loan and the one office loan. The commercial ACL ratio was pretty consistent with last quarter at 135. And the reserve remains a little more than double historical net charge offs over the weighted average life of the portfolio. As Raj mentioned, NPLs were essentially flat quarter over quarter, up 3,000,000. Of $136,000,000 in total CRE non accruals, 119,000,000 is office and the other 17,000,000 is New York rent regulated multifamily. NPA ratio was pretty flat quarter over quarter, 99 points this quarter compared to 98 last, excluding guaranteed SBA loans. Nothing of note to point out in non interest income or expense this quarter. I will point out, however, that year over year noninterest income for all categories combined other than lease financing, which we know is running down as expected, is up 24% as some of our commercial fee businesses start to gain traction. So I think I think that's very noticeable. We've been pointing that out. Think that 24% increase is worth noting. And that's early innings for us? Yes. Very much so. Yep. And noninterest expense remains well controlled. Couple of comments on guidance. For the fourth quarter. We expect margin for the fourth quarter to be flattish, essentially flat. Double digit NIDDA growth for the year is what we have guided to. We're at 13% year to date. And while we do expect some headwinds to that in the fourth quarter, I think we'll easily hit that double digit guidance that we gave you for the full year. Total loans likely flat year over year. And core C and I we expect year over year to end with low single digit growth, which echo Tom's comments that we do expect pretty strong core commercial loan growth in the fourth quarter. Because of some opportunistic purchasing activity, I think know, the securities portfolio will be down in Q4, but still up slightly year over year. Non interest expense, we had guided to being up mid single digits for the year. I think we'll do a little bit better than that, probably closer to the 3% area. So those remain well controlled. So with that, I will turn it over to Raj for any closing comments. Rajinder P. Singh: No. Listen, I'll I'll I'll close with where I started. And I'll just add one thing to to it, which you just alluded to, which is 20% growth in core fee income is something we're very happy about and celebrating. And and but not again, it's a it's not a destination. This is just this maybe the first or the second inning what we wanna do in the in the in that category. So we're very off you know? Optimistic about long term prospects for fee income. But like I said, I'll I'll end where we started you know, strong EPS growth ROA, ROE got better, margin got to 3% a little earlier than we thought. And the balance sheet for the most part behaved like we had expected it to, and credit remains pretty stable. So and capital continue to accrue. So the other thing I would like to say is this is Leslie's last earnings call. And I talked to her yesterday. I wanted to make sure she tear up. I am a little bit. She has been my partner as CFO for thirteen years. Yep. Thirteen years. So they've come you know, they've gone by very fast. But I just wanna thank her for her partnership helping me build what we have and not just a strong finance department, but a strong company. And the transition to Jim is going very well. It's been a couple of months. And over the next couple of weeks we will see the transition actually officially happen. Leslie will be with us through the end of the year. And will be a friend of the company forever. So I'll probably still reach out to her for advice into next year. Wherever she is traveling. But Good luck finding me. I'll find you. I'll find you. But but thank you. Thank you for everything you've done for the company and and for me specifically. Leslie N. Lunak: Thanks, Raj. And just one thing I would add to that, Seriously, and I mean this very sincerely, one of my favorite parts of this job has been interacting with and working with and getting to know all of you in the analyst and investor community. I really have enjoyed that. I've enjoyed working with each and every one of you. And that's one of the parts of this job that I'm gonna miss the most. With that, let's, turn it over, for Rajinder P. Singh: Q and A. Operator: Thank you. Star one one on your telephone and wait for your name to be announced. To withdraw your question, please press 11 again. One moment while we compile our Q and A roster. Our first question is going to come from the line of Benjamin Tyson Gerlinger with Citi. Your line is open. Please go ahead. Benjamin Tyson Gerlinger: Hi. Good morning. Leslie N. Lunak: Good morning. Thomas M. Cornish: Thanks again, Leslie, for all the help and really, really dumbing, dumbing, dumbing things Benjamin Tyson Gerlinger: down for me. Appreciate that. Not to start on credit, but I'm gonna start on credit. When you think about the the one C and I and CRE, you have a specific reserve, and you're also charging off. But the reserve was the build was bigger than the charge off. Is it fair to anticipate a potential charge off in four q or another one down the road as we wait for those two loans? Leslie N. Lunak: Yeah. I think with the one c and I credit yes, there will be an additional set few million dollars charge off in April. Related to that loan, but it's been fully reserved for And then with the other one, the office loan, the charge off has already been taken. Benjamin Tyson Gerlinger: Oh, got it. Okay. And then as we kind of finish out the year, I know you gave some preliminary guidance When you just think about the loan opportunity, when you think are clients becoming more comfortable with the environment we're working in? And are are you seeing it increased traction in Atlanta? And I know the Charlotte one is is fairly new, but just kinda think, like, longer term, is is the opportunity set getting better over because, I mean, you're arguably the most competitive area in The United States. So I'm just trying to think, like, is it risk adjusted spread that's not meeting the hurdles? Or why why are loans so kinda stuck? I get there's payoffs, but what what can we expect over the road? Rajinder P. Singh: I'll I'll have Tom answer this, but I just wanna start by saying our without being in markets outside Florida, the the opportunity set is actually bigger. And, yes, these are competitive markets, but they're also healthy growing markets. Right? That that that's a trade off. You wanna be in good markets, but good markets are competitive markets. So you know, we've chosen these markets intentionally and we'd rather be in growing markets that are healthy that are competitive than the opposite. So I'll let Tom speak specifically where we're seeing the opportunities and we are being very disciplined about pricing. Right? Because we have one eye on margin and the other on volume. So it is a it is you have to and, of course, credit is always front and center. So you have to balance all those three things But I would still say that it is the miss that we've had in specifically in C and I, is not about missing on production. It has been mostly because of a large amount of runoff Some of it that we don't control, but some that we do control, which is you know, pricing and credit and letting those things run out prudently. But, Tom, you just add some more color to it, please. Thomas M. Cornish: Yeah. I would say when you talk about opportunity in markets, Raj has asked me to find great markets that are not competitive and I've not been able to do that yet. Every every great market we're in is pretty competitive but I think if you look at the pricing piece of it for a second, I think we have held there is a lot of price compression and there is a lot of price competition When we look at pricing through the end of the third quarter, I was actually very happy with where we held spreads. At the end of the third quarter and we had some key segments that actually had a couple of basis points of spread increase for the quarter and that might not seem too exciting, but this is a game of inches. In keeping spreads at the level that we're keeping them is a big part of making the overall margin numbers we're looking at. I think the environment is is very good. I am always heavily impacted by ensuring that we're hitting overall production numbers. Because I believe as long as we're hitting overall production numbers, we will will see growth over the long run and we're also growing core relationships which are really, really critical to the bank. I think new markets we've invested a lot in new markets and we're investing even in markets that were maybe older markets that we were a bit under invested in. Like Tampa in the past, we're investing in new producers. In these markets. So I'm very optimistic about what we're going to see The environment's good. Business owners and executives are optimistic. About what they see in the economy and they're optimistic about what they see in companies. To some extent, it is a very complicated answer, but to some extent mix plays a big role in what we've seen in loan growth, particularly on the upper end of the C and I market more towards the corporate banking market. In terms of a lot of times you're in deals and you're approving deals that have delayed term funding in it, they have acquisition components in it. So your production on some of these kinds of opportunities doesn't immediately turn in the funding. It almost looks like a construction loan. In many ways. But I feel very good about what we're looking at in the very near term and in the next year in terms of business environment, where clients are, where we're positioned in the market, and actually how we're doing from a spread perspective and a competitive perspective in the in the market. I feel very, very enthused about where we are. Leslie N. Lunak: And I will reiterate on a little bit shorter term focus, Q4 has traditionally and historically been a stronger loan production quarter for us. With respect to next quarter in particular, that's another factor that comes play. We're a big Q4 player. Benjamin Tyson Gerlinger: Gotcha. Thank you again. Operator: Thank you. And one moment for our next question. Our next question comes from the line of David Rochester with Cantor. Your line is open. Please go ahead. David Rochester: Hey. Good morning, guys. And, Leslie, know I've already told you this before, but, it's been a real pleasure of the the years working with you. You've been extremely helpful. Good luck in retirements. And, Jim, looking forward to to picking it up with you. Thanks. Just Yeah. Absolutely. On expenses for next year, know you may still be working on those at this point, but is there any reason for expense growth to accelerate next year just given everything you want to do in the new markets or upgrading systems, anything like that? And then is there anything big that's coming that people should be aware of? Thanks. Leslie N. Lunak: I mean, Dave, I we're not prepared to give any 2020 guidance on this call. We'll you'll hear all that from Jim in January. But but there you know, we've talked about some investments in in teams and, you know, platforms and whatnot, but it's not like any giant rip everything out and replace kind of investment that we're looking at. But we'll give more specific guidance on the January call. David Rochester: Yep. That sounds good. I figured I'd try one last time. On deposits, if you could give an update on the title business on some of the trends this quarter, just from a customer growth perspective. Know you gave the balance of title, which is great. But be great to hear just what the customer acquisition was this quarter. I know you typically grow around 40 customers plus or minus. Yeah. And then, how how many customers do you have at this point? And and what's your outlook there? Rajinder P. Singh: It's very similar to the run rate that we've over the last many quarters. So I don't have the exact number in front of me, but I also am looking at you know, I'd I'd gotten an update on the pipeline for the next couple of quarters and very strong. So that title business is doing just great. And you know, it's total customers. You know, we have about 10% market share. If not more. Of the entire industry already. I'll leave it at that. Yeah. And that's the best we can tell because nobody publishes it to the to the perfect accuracy. But this business is growing It's growing at the same speed as it has over the last two, three years. And I don't I don't expect anything to slow down. Slow us down. Someday, hopefully, the mortgage market will come back, and that'll help us. But but David Rochester: yeah. Not counting on it. We're we're not counting on it. We're just when that happens, it happens. Yep. It'll it'll be nice. Just one last one on on capital. At this point, trading below tangible book, it's about a 6% discount right now. It seems like a great time to lean into that. Your capital levels are very strong. Just wanted to get your thoughts there. Rajinder P. Singh: Yeah. Like I said in my comments, we are being opportunistic with the buyback because there's been a a lot of volatility in the marketplace. So the 10 b five one plan we have out there is designed to take advantage of that opportunity of that volatility. David Rochester: Sounds great. Thanks, guys. Thanks again, Leslie. Rajinder P. Singh: Yep. Operator: Thank you. And one moment for our next question. Our next question will come from the line of Wood Neblett Lay with KBW. Your line is open. Please go ahead. Wood Neblett Lay: Hey. Good morning, guys. Good morning, Steve. Wanted to start on fee income. I I appreciate you sort of highlighting the core growth trends because it does get masked a little bit just with lease financing Yep. Cuts down. So that so that growth rate is pretty impressive. And I know a lot of it gets lumped into the other noninterest income bucket. So I was just curious if you could sort of break down some of those initiatives and given we're in the early innings, what are what are some what's the growth potential of those businesses? Rajinder P. Singh: Yeah. I'll tell you what is in that, like, the big buckets. Without breaking it out like dollars and cents, but things that are in there. It's lending fees, syndication fees, capital markets, interest rate derivatives, business capital markets, FX business, which is very new and very small so far, but could be much bigger. There's capital commercial card purchasing card businesses in there. All of that Effects more broadly, not just the derivatives? Yeah. Exactly. The FX, the spot business as well. So all of those are investments that were made over the last three, four years, some as recently as just twelve months ago, some about four, five years ago. But they're all different levels of their I'd say they're all in early innings, question is, what is in first inning and what is in second So there's a lot of room to grow. And, you know, probably the most exciting part of the bank right now growing that. Lease financing business absolutely is something which is being wound down you can see quarter over quarter, those numbers are coming down. And the deposit business, the deposit service charges, that's more related to DDA. Some of the benefits of growing DDA get picked up at margins, some in that fee income. But that's also growing at a healthy clip, not at 24%, but it's also growing. So overall fee income, should grow very nicely, especially once that lease finance drag is behind us, which we're getting close to. So we're excited about this contributing to profitability in a meaningful way very soon. Leslie N. Lunak: Yeah. And I would say all of those buckets that Raj mentioned are complementary to our core commercial lending and deposit businesses. Yeah. And Yeah. I and I think that's an important Rajinder P. Singh: And there's no, like, gain on sale type of stuff in there. We don't a mortgage origination business that can you know, go up and down on a on a moment's notice. It's all related to a core commercial business. You're making a loan, you sell a swap. You're moving money around internationally, you sell an FX product. You know, purchasing card, it's it's an annuity. Once some you know, once you sell it you know, it's a recurring income item. So we focus on trying to build stuff that is recurring, and it's closely tied to our core business, didn't just go out there and say, let's start something totally different and just generate fee income. So we don't have wealth management. We don't have some funky servicing income in here. It's very, very core to what we are doing with our clients. Leslie N. Lunak: And I do think the derivatives business, the FX business, the card business, the syndications business, all of those have tremendous growth potential. Yeah. Thomas M. Cornish: Yeah. Would add that, you know, if you look two years ago, we have invested a lot in syndication's capability. If you look two years ago, we were normally either in a bilateral deal where we were the only bank or we may have been in in a deal led by somebody else. Today, are leading more and more deals on both the CRE side and the corporate side, and that's what's driving the syndication revenue. And FX is brand, brand new. It's a baby business. Wood Neblett Lay: Yeah. Leslie N. Lunak: And, you know, not even make you know, making today a pretty insignificant contribution and that's one of the areas where we see the biggest growth potential in the markets we're in. Thomas M. Cornish: We're in high international business markets where you have a lot of international trade. And I think this gives us the opportunity to focus on when you're in places like Miami and New York and Atlanta and Dallas. You're in big international trade markets and having this capability allows us to not just take advantage of sort of daily transactions, but to focus on this kind of a client base that will drive that revenue. Business we can win that Leslie N. Lunak: we couldn't have won when we didn't have the capability as well. And, you know, like I said, I Jim will now be looking forward to the day when those numbers are all big enough that we have to break them out on the P and L. Right now, they're still new and they're a bit lumpy, but Wood Neblett Lay: Right. That that's really great color. I I appreciate it. And, obviously, there's a bunch of sub verticals there. But if I kind of just track, you know, compensation from a year ago, it feels like the fee income growth is is you know, growing a lot faster than the expense side. Yeah. So how do you how do you expect sort of, like, the efficiency ratio impact of those businesses. It feels like it should help drive improvements. Leslie N. Lunak: A 100%. I think all of those businesses are very efficient from that you know, from a cost revenue relationship perspective without question. And I do expect you know, operating leverage to continue. Wood Neblett Lay: Alright. That's great to hear. And then last I appreciate the updated disclosures on the NDFI lending book. I I was just interested on sort of how that portfolio has grown over the past several years. Is it been pretty stable? Or has it just any note on the growth trends over the years in that specific portfolio? Thomas M. Cornish: Yeah. I'd say there's been modest growth in it. Leslie N. Lunak: Yeah. I don't have all the numbers in front of me, but I would agree with that. I mean, there are certain segments Thomas M. Cornish: that have grown more. There are certain segments that have grown less when we look at that. We have grown more in business to business and sort of real estate underlying businesses and we've reduced substantially the portion of it that was consumer lending related over the last couple of years as we had more concerns about what was happening at consumer level. In some of those. So the overall bucket has grown modestly, but there's been some shifts within those buckets to kinda reflect portfolio strategy. Wood Neblett Lay: Got it. All right. Well, for taking my questions and congrats, Leslie, on the upcoming retirement. Really appreciate all all the help you've given given me in my seat. Thanks, Woody. Operator: Thank you. And one moment for our next question. Our next question is going to come from the line of Jared Shaw with Barclays. Your line is open. Please go ahead. Jared Shaw: Hey. Good morning, everybody, and congratulations also, Leslie. I guess, you know, maybe on on the CRE side, where's your appetite for incremental CRE here, multifamily balances? Rajinder P. Singh: Were down quarter over quarter. The office was down Jared Shaw: quarter over quarter. Where do see sort of opportunity and and, you know, within those subsectors. Thomas M. Cornish: I I would say it's in, three areas. I think the retail market has been very strong, particularly the gross anchored urban market and every market that we're in. We've seen good growth in that asset segment over the last eighteen months, twenty four months. We continue to feel good about the industrial segment, which has had good growth over the last few years. Industrial is performing well in virtually every market that we're in and even in the Northeast as well in places like New Jersey. The industrial market is very good. And multifamily has shifted a bit because we have a little bit less in stabilized lending and a little bit more in construction. When you look at the construction line, that's virtually all multifamily. Most stabilized loans are now moving to permanent markets. But we still see in all the markets that we're in, for the most part particularly in the South, you're still seeing good population migration You're seeing good development of new multifamily. And when you look at big picture data, around the cost of owning versus the cost of renting, In most of the markets we're in, we still see a very big differential in cost of owning versus cost of renting for homeowners. So we see continued growth in multifamily in virtually all of the markets that we're in. So those would be the three you know, primary points of emphasis that we would have. We we will still be open to a little bit of medical office But I would say the big three will be retail, industrial, and multifamily. Leslie N. Lunak: Yes, Jared, I think the decline in multifamily, the quarter wasn't any anything intentional or by design. It's just the way the chips fell for the quarter. Jared Shaw: Okay. Alright. Great. And then on the on the the non performers in office, I know it's relatively small numbers overall, but what drove sort of the incremental weakness that caused that that uptick in non performers? Was it Leslie N. Lunak: I I don't know. Or vacancy or rate? I don't even know if I'd really call it an incremental weakness, Jared. I I I think it was just episodic as these things work their way through the resolution process. I don't think it was a trend or, you know, if anything, looking forward over the medium term, I would expect it to trend down as opposed to up. Wouldn't make that comment necessarily for any one quarter specifically. But I don't think it was a trend or or incremental weakness. I think it was just the kind of episodic things that are going to happen as we work through that portfolio. Yeah, there's a small batch of loans Rajinder P. Singh: Yeah. If you look at the overall portfolio and look at the average debt service coverage ratio, Thomas M. Cornish: obviously, overall portfolio is performing pretty well to be over 1.5 We you know? But there are a handful of assets Rajinder P. Singh: that can move up or down, and there are situations where you, you know, you lose a Thomas M. Cornish: tenant in any one building and now you're in abatement period even if you bring in a new asset that things can shift up and down. Just step aside. Yeah. Overall, when we look at the whole portfolio, which I'm staring at the printout right now, the general trends in most markets are improving each quarter as abatements run off. That's the big driver is abatement runoff. Leslie N. Lunak: Yeah. And I would say the one we took the charge off on this quarter Jared, that's one that's been sitting in workout for a long time, and it finally just reached its final resolution. And yeah. So that that's what was going on with that one. Jared Shaw: Okay. And then just finally, going back to the capital discussion, we've seen a steady increase in capital CET1 and TCE. And I guess if we're assuming that the buyback is more limited in opportunistic, Any other uses of capital we should be thinking of, whether that's accelerated increase in dividends or a special dividend or M and A? And I guess what would be the upper end of capital where you would start to be more interested in the buyback versus opportunistic? Rajinder P. Singh: Yeah. I I I don't think my answer is gonna be very exciting. It's going to be the same that I've given in the past. Which is, yeah, you know, dividend growing dividend is a priority for us. And that usually we do early in the year, so stay tuned for that. Special dividends are not on the table We have gotten feedback from investors that has been very clear that don't do special dividends. Buyback is certainly something that is one of the tools that people use, though opportunistically. M and A has never really been a lever for us. As demonstrated by our history of building the bank organically. So my number one priority would be to grow. Right, organic growth. And but if it is not that, then buybacks and dividends but not special ones, just regular ones, Those will be the way to deploy it. Leslie N. Lunak: And the only other thing I would add to that, Jared, I know we're being a little maybe vague we're right in the thick right now of our annual business and capital planning process. Yeah. So you know, probably maybe a little bit more to say about this on the January call when we give you guidance for 2026. Jared Shaw: Yep. Okay. Thank you. Appreciate it. Operator: Thank you. And one moment for our next question. Our next question comes from the line of Timur Felixovich Braziler with Wells Fargo. Your line is open. Please go ahead. Timur Felixovich Braziler: Hi. Good morning. Rajinder P. Singh: Good morning. Leslie N. Lunak: Good morning. Timur Felixovich Braziler: Looking at you know, margin over 3%, reach on equity, if you round up, you're you're you're at that 10% level. I know you'll give us more detail as to the margin trajectory on the January call, but for the 10% return on equity, benefited a little bit this quarter, maybe from a lower provision. But is that pretty sustainable here going forward? Are are we kind of at that level where we're gonna continue grinding that higher? Or is there still going to be potentially some kind of back and forth the either provision expense or PPNR or whatever else? Rajinder P. Singh: I expect it to grow. Yeah. A 100%. Margin to grow. I expect ROA to grow, and I expect ROE to grow. Leslie N. Lunak: Yep. Absolutely. And I would say with respect to provision, I don't think it was abnormally low this quarter. Because we have largely a commercial lending base and things can be episodic, you can see some volatility quarter over quarter. But I don't know that I would characterize this quarter's provision overall as being abnormally low in terms of the range of what we could one could expect. Timur Felixovich Braziler: Okay. Got it. That's good color. A couple on credit. Just the $26,000,000 NDFI loan that was called out for the real estate investment fund. Can you just give us some more detail there? What's driving that MPL status? And then The underlying the underlying assets or office? The underlying what? Leslie N. Lunak: At real estate assets or office. That's what? The underlying That's that's the answer. And that that's the only one we have with an office concentration. Timur Felixovich Braziler: Okay. And then the bucket that b to c I guess, how big is that bucket and and just in terms of underlying collateral there, is there any exposure to the subprime consumer? Maybe just talk me through kind of what's in that bucket more broadly. Thomas M. Cornish: Yeah. The if you look at the b to c Which is in other in that chart. Which is Yeah. That portfolio is relatively small. Timur Felixovich Braziler: Okay. Timur Felixovich Braziler: Okay. Leslie N. Lunak: And then maybe the And it's been substantially reduced over the last few Timur Felixovich Braziler: Okay. Timur Felixovich Braziler: But in terms of in terms of of borrower type, is there any kind of distribution either by FICO or collateral type? Leslie N. Lunak: It's literally a handful of loans. Timur Felixovich Braziler: Okay. Yeah. We've been negative on the lending space for a couple of years, so we've been working that portfolio down is why it's not even making the chart. In that other, there are a lot of different categories, but, you know relative. All of which are are tiny. But it it it's you know, if we had done this chart, years ago or three years ago, that would have been you know, bigger and would have stood out here. Timur Felixovich Braziler: But now it's it's a rounding error. We say handful. It's only one handful. Leslie N. Lunak: Got it. Timur Felixovich Braziler: Okay. How about on the commercial side? Commercial delinquencies, you know, ticked up across the board. You had the the the charge and reserve for one c and I credit, but allowance looks like it's it's down kinda couple quarters in a row in the C and I book. Can you just maybe talk through is that an indication that maybe we're getting through some of the more kind of ringed in credits and and the outlook is is improving indicative of the reserves, or is there, maybe a chance for commercial allowance has to catch up on the back end of the year just given some the way the delinquencies? Leslie N. Lunak: So I really I'm pulling up this slide now, but I think the commercial reserve overall was pretty consistent quarter over quarter. The slight downtick in C and I was really because of charge off that we took. For the one loan. So I I don't think really there's anything changing at a high level about how we think about the reserve for that that portfolio. I think the delinquencies are exactly what you said. They're just you know, the normal ins and outs. I did actually ask for a list of them. It's you know, a couple loans and, I I don't think there's anything going on in there that feels like a trend. Timur Felixovich Braziler: Got it. And then just last for me, Raj, one of your Southeast peers made a comment last week that there's a lot more banks potentially for sale in the Southeast. Maybe just talk through that dynamic. Are you getting more inbounds? How are you just thinking about the the broader m and a environment in the Southeast? Rajinder P. Singh: I think mostly, I'm getting calls from investment bankers trying to you know, do the best that they can to to, you know, they're feeding the FOMO sentiment if anything else, like, everybody's doing a deal. Everyone's you better be talking. So that's the the sentiment I would say. It's mostly driven from innocent bankers Having said that, I will say it. There will be more deals. I've been saying that for for better part of a year that there's a pent up demand for deals. And we're seeing it, and we'll see more of it in the coming weeks, months, And as a buyer, you know where I stand. We're we're we're we're we wanna build the bank organically. We've had that stand for ever since we started the company. But any other deal that makes sense for us, we're always open to having a discussion. But we don't spend our day to day thinking about a deal, because if you do that, you're not gonna build a company. So we're focused on building, and if a deal ever comes along that makes sense, whether it's tomorrow or ten years from tomorrow, we're always here. To talk about it. Timur Felixovich Braziler: Great. Thank you. And and, Leslie, again, just echo the, congratulations on on retirement. Leslie N. Lunak: Thank you. And just a quick follow-up on your delinquency question in the c and I bucket. It's actually three loans, and they've been in the criticized classified bucket, but paying for a while. And so not unexpected. Timur Felixovich Braziler: Great. Thank you. Thomas M. Cornish: Nor nor are we seeing any trends No. With the language perspective that we're gonna Trevor doesn't like a trend. Yeah. Operator: You. And one moment for our next question. Our next question comes from the line of Jon Glenn Arfstrom with RBC Capital Markets. Your line is open. Please go ahead. Jon Glenn Arfstrom: Thanks. Good morning. Leslie N. Lunak: Good morning, John. Congrats, Leslie. Rajinder P. Singh: Thank you. Jon Glenn Arfstrom: Yep. Just a few follow ups. This can be rapid fire as well, but has your buyback appetite changed at all? Or is it just your approach and timing? Rajinder P. Singh: Our approach. Yeah. Jon Glenn Arfstrom: Okay. And and do you wanna grow the balance sheet over time, Raj? Or are we still kind of in the medium term in the loan mix shift mode? Rajinder P. Singh: I I we certainly wanna grow the balance Hold on one second. Getting weird music. Yeah. Emphatically, yes. We wanna grow the balance. Jon Glenn Arfstrom: Yes. The investment bankers calling, Raj. They are entertaining if nothing else. Okay. And then I I I think I know the answer but you touched a little on CRE optimism and some slower utilization as well. But is borrower sentiment better? Than it was a quarter ago? Is it generally improving at this point? Or is it Yeah. Kinda the same as it was a quarter ago? Thomas M. Cornish: I wouldn't necessarily compare it to quarter ago as much as I'd compare it to the beginning of the year. There was a lot more concern about tariff issues and which way the economy was going to head and would interest rates decline as much as people expected that was particularly in CRE investors' mind. So I would say clients have a more clear and optimistic view. That's getting a little bit better every day. Mhmm. Okay. Good. Jon Glenn Arfstrom: I guess, Raj, on the balance sheet growth question, I guess, back to that, we were interrupted. But medium term, do you expect to grow the balance sheet? Is it still a near term mix shift? What are your thoughts there? Yes. Rajinder P. Singh: Yes. I expect the balance sheet to grow in the medium term. I do expect the balance sheet to also keep changing the mix. Because we're not gonna stop on the resi runoff. So that'll keep happening, but I eventually expect C and I growth to overtake that runoff. Jon Glenn Arfstrom: Okay. Okay. Thanks a lot. I appreciate it. Operator: Thank you. And one moment for our next question. Our next question will come from the line of David Jason Bishop with Hovde Group. Your line is open. Please go ahead. David Jason Bishop: Yes. Thank you, and congrats again Leslie. You've enjoyed the working with you over the years, and, I I think I will cry if you tell me Isis is leaving as well. Hey. Quick follow-up question on the NDFI. Appreciate the color there. Just curious in terms of the the granularity of both the other and the b two b NDFI. Is that comparable average loan size to the rest of the commercial bank? Just curious if you have granularity there you can share. Leslie N. Lunak: Probably. I would say if Thomas M. Cornish: you looked at the NDFI portfolio, the average credit size is maybe slightly larger but not much. It's pretty comparable. Pretty comparable. You know, it's a fairly granular portfolio as you look at the entire like the overall loan portfolio is. We're generally prudent about taking very large exposures and credits. And if you look at this portfolio or the remainder of the whole, portfolio, you'll see a lot of mid sized credit exposures. You will not tend to see extremely large individual credit exposures. Leslie N. Lunak: Is it fair to say, Tom, that we're really not in the business of or we're really not concentrated in lines to private credit fund? Thomas M. Cornish: Yeah. No. No. We're not at all. I mean, our our b two b exposure would look like a small handful of BDC corporations which are very modest facilities. In size and we would have credit facilities that are predominantly to real estate investment funds largely in the Northeast. That have been long term historical clients and major depository clients. Of the institution and were secured by pledges of assets. These are not like not to say anything negative about any of the large private credit funds. But we're not in, you know, the $2,000,000,000 fund to, you know, whatever fund you wanna pick. That's an unsecured facility for, you know, supporting their general obligations. We're not in those kinds of deals. David Jason Bishop: Got it. Appreciate the color then. Tom, maybe a a a follow-up question, final question for you. You noted some of the headwinds on the some of the runoff in the C and I segments and such. Just curious, I don't know if you have a dollar basis or maybe what inning we're maybe in, in terms of runoff from some of those maybe noncore portfolio. Thanks. Thomas M. Cornish: Yeah, I'd say we're in the bottom of the ninth inning on that We're we're we're pretty much finished with the work that we wanted to do. From a rate perspective or a risk perspective or, you know, client focus perspective, we're at the very bottom of the game. David Jason Bishop: Got it. Thank you. Operator: Thank you. And one moment for our next question. Our last question will come from the line of Stephen Scouten with Piper Sandler. Your line is open. Please go ahead. Stephen Scouten: Thanks, guys. So Tom, your last comment was encouraging, kind of similar to what I was curious about. You know, thinking about you guys in, man, 2013, '14, was a strong double digit kinda loan grower. Haven't you know, loans have basically been flat since 2019. So what's kind of the spectrum of how we could think about potential loan growth if we really are kind of past all the needed remixing? Is it is it kind of a mid single digit run rate in a perfect world, or or could it be better than Rajinder P. Singh: We'll give you the exact guidance in January. Leslie N. Lunak: But expect growth. Yeah. Yeah. Yeah. Thomas M. Cornish: And I would say expect balanced growth across the segments that we're in, across geographies that we're in. And when you look at the CRE book, expect us to keep a very balanced portfolio. And as the overall size of the bank grows, decree book will grow, but it will remain reasonably in line with a 28% to 30% kind of size range. And when you look at the asset distribution that we have today, it will be evenly spread among major asset categories. We will We will not be overly indulgent in chasing any one asset category. It will be a balanced growth portfolio. Stephen Scouten: Got it. But it sounds like 2026 could kinda be the inflection point from versus what we've seen the last, you know, five or six years in terms of loan and balance sheet growth. Is that fair to say? Leslie N. Lunak: I think that's fair. Thomas M. Cornish: Yeah. And you you should remember during that five to six year time frame, we were taking the leasing portfolio from $2,000,000,000 to a couple $100,000,000 and we were taking multifamily rent regulated multi Leslie N. Lunak: family. That dropped dramatically by Thomas M. Cornish: three plus Minor matter of a global pandemic. Three plus billion dollars in we're awful happy to be sitting where we are. Yeah. Yeah. No. For sure. I think that's why the remix question is important to know if if if that process is kinda completed after all the puts and takes. And then maybe last thing for me, just you know, obviously, we we've seen a bit of an uptick in in the banking space in terms of more activism from investors. Stephen Scouten: I'm kind of curious if you've seen any incremental pushback from your around the path and the pace of progress and kind of what your response would be you know, if anyone were to get more more aggressive in terms of you know, asking you guys where where's profitability and what's really the pace of improvement to come? Leslie N. Lunak: I'll take the first part, then I'll let Raj take the second part. We have not been getting any increase level of pushback, and I will let Raj answer what we say if we did. We engage. We we hope we're we're Rajinder P. Singh: we're we're happy to engage with anyone. Yeah. And and we actually reach out and, you know, do as many conferences as we can. And try and go see investors as often as we can. So, you know, what I wanna make sure is that our investors understand the approach that we've taken and the progress that we're making, I wish I could just do, you know, give you a catalyst that tomorrow everything will improve. This is as Tom said in his earlier remarks, this is a game of inches. But that's how you build a franchise. It's not something know, this is a nuts and bolts business, one client at a time business. And but that's how you build something which sustains in value for a long time. So we're we're open to engaging with any investor who wants to talk to us. We do. And we do all the time. And when we sit down and talk to them, I rarely have I come across an investor saying, don't agree with what you're doing. Yeah. No. They've been very supportive of what we've been doing. You know? And they've asked some of the same questions Leslie N. Lunak: that you guys are asking. What's our more medium and longer term thoughts about growth? But but we haven't gotten you know, I think there's been supportive of what we've done thus far. Yeah. Stephen Scouten: Perfect. Thanks, guys. Appreciate the transparency. And, Leslie, congrats on the retirement. Leslie N. Lunak: Thank you. Thank you. Operator: Thank you. And I would now like to hand the conference back over to Rajinder P. Singh for closing remarks. Rajinder P. Singh: Thank you all for joining me and joining us And we will talk to you again minus Leslie in ninety days. I'll be listening. She'll be listening. She'll be asking questions. Yeah, know. I'm getting Q and A. Thank you so much. But if you have any more detailed questions, you know how to reach, either Jim or Leslie. Feel free to call us. Thank you. Bye. Yep. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.
Operator: To all sites on hold, appreciate your patience, and please continue to standby. Please stand by. Your program is about to begin. If you require assistance throughout the event today, please press Good morning. Thank you for joining OFG Bancorp Conference Call. My name is Chloe, and I will be your operator today. Our speakers are José Rafael Fernández, Chief Executive Officer and Chairman of the Board of Directors, Maritza Arizmendi, Chief Financial Officer, and Cesar Ortiz, Chief Risk Officer. A presentation accompanies today's remarks. It can be found on the homepage of the OFG website under the Third Quarter 2025 section. This call may feature certain forward-looking statements about management's goals, plans, and expectations. These statements are subject to risks and uncertainties, outlined in the Risk Factors section of OFG's SEC filings. Actual results may differ materially from those currently anticipated. We disclaim any obligation to update information disclosed in this call as a result of developments that occur afterwards. All lines have been placed on mute to prevent any background noise. Instructions will be given at that time. I would now like to turn the call over to Mr. Fernández. José Rafael Fernández: Good morning and thank you for joining us. We are pleased to report our third quarter results. Let's go to Page three of the presentation. We had a strong quarter with earnings per share diluted of $1.16, up 16% year over year on a 5.6% increase in total core revenue. Loans and core deposit balances increased year over year with particular growth in commercial loans, which has been a strategic focus as auto loans moderated, something we have been anticipating for a while. Performance metrics continue to be strong. Credit was solid. Capital continued to grow, and we repurchased $20.4 million of common shares. Business activity remains strong in Puerto Rico with a continued outlook for growth. Please turn to Page four. Our Digital First strategy is making significant strides expanding our positioning as leaders in banking innovation in Puerto Rico. As a result of our digital first strategy, we're gaining strong momentum in both adoption and new accounts. During the third quarter, nearly all our routine retail customer transactions were made through our digital and self-service channels. This is driven by continued year-over-year growth in digital enrollment at 8%, digital loan payments at 5%, virtual teller utilization at 25%, net new customer growth at 4.6%. All this is being enhanced by two related strategies. The first is our innovative product service offerings. Last year, we introduced the Libri account for the mass market and the Elite account for the mass affluent. Both offer reward programs unique to Puerto Rico and have been successful in attracting deposits from new and existing customers. The number of Libre new customers increased 17% year over year, 27% of Libre accounts have been opened digitally versus 19% last year. And new Libre accounts generated a 14% increase in related deposits. The Elite account continues to lead the market as a unique alternative for clients who want to maximize their financial progress. We have also enhanced our oriental biz account suite making treasury management easier and secure for small businesses driving higher new account openings and deposits. The second strategy is leveraging AI. Customers now receive tailored insights based on cash flows and payment habits, helping them monitor their budgets and access value-added tools to improve their finances directly from their mobile phones. We are providing an average of nine insights per month per account. Customer feedback has been running 93% positive. This quarter, we also launched internal initiatives to apply AI to boost efficiency across all banking operations and make it faster and easier to solve our customer questions and needs. All this has directly contributed to our increased market share in retail deposits and positions OFG for continued success in the coming years. Now here's Maritza to go over the financials in more detail. Thank you, José. Maritza Arizmendi: Let's turn to Page five to review our financial highlights. All comparisons are to the second quarter unless otherwise noted. Core revenues totaled $184 million driven by solid performance across key areas. Total interest income was $200 million, an increase of $6 million. This mainly reflects higher balances of loans and investments and $1 million from one additional business day. Total interest expense was $45 million, an increase of $3 million. This mainly reflects higher average balances of core deposits, higher average balances of wholesale funding, and a $500,000 impact from the extra business day. Total banking and financial services revenues were $29 million, a decrease of $1 million. This mainly reflects a decline in mortgage banking revenues due to a change in MSR valuation. Compared to a year ago, when we were first subject to reviews interchange fees under Derby, total banking and financial services revenues were up $3 million or 11%. Other income category was $2.2 million. This included gains from OFG Ventures investment in FinTech-focused funds. Looking at non-interest expenses, they totaled $96.5 million, up $1.7 million. This reflected a strategic investment of $1.1 million in technology, people, and process improvement. Dollars 1,100,000.0 tied to increased business activity and marketing and an $800,000 reduction in foreclosed real estate costs. Income tax expenses were $9.5 million with a tax rate of 15.53%. This reflects a benefit of $2.3 million in this great items during the quarter and an anticipated rate of 23.06% for the year. Looking at some other metrics, tangible book value was $28.92 per share. Efficiency ratio was 52%. Return on average asset was 1.69%. Return on Tangible Common Equity was 16.39%. Now let's turn to Page six to review our operational highlights. Total assets were $12.2 billion, up 7% from a year ago and steady compared to the second quarter. Average loan balances were $8 billion, up close to 2% from the second quarter. End of period loans held for investment totaled $8.1 billion. Sequentially, loans declined $63 million or 0.8%, mainly due to repayment of commercial lines of credit funded in the second quarter. Year over year, loans increased 5% reflecting our strategy to grow commercial lending in Puerto Rico and the U.S. Loan yield was 7.9%, down one basis point. New loan origination was $624 million. As José mentioned, this reflected in part moderation in auto loans that we have been anticipating and an expected easing of our auto sales after a surge of pre-tariffs purchasing in the second quarter. Year over year originations were up 9% and the commercial pipeline continues to look good. Average core deposits were $9.9 billion, up close to 1%. End of period balance $800 million decreased $76 million or 0.8%. This reflected increased retail and government balances and reduced commercial deposits. By account type, it reflected increased savings deposit and reduced demand and time deposits. Compared to the year-ago quarter, core deposits were up $287 million or 3%. Core deposit cost was 1.47%, up five basis points. Excluding public funds, the cost of deposit was 103 basis points compared to 99 basis points in the second quarter. The increase in costs mainly reflects higher average balances in savings accounts within the upper pricing tiers. Investments totaled $2.9 billion, up $151 million. This reflected purchases of $200 million of mortgage-backed securities yielding 5.32% partially offset by repayments. Cash at $740 million declined 13% reflecting the new securities purchases. Average borrowings and broker deposits totaled $769 million compared to $672 million. The aggregate rate paid was 4.11%, level with the second quarter. End of period balances were $746 million compared to $732 million. The third quarter reflected increased variable rate borrowings and decreased brokered deposits. Net interest margin was 5.24% compared to 5.31%. This quarter NIM reflected increased interest income from the securities portfolio and slightly higher cost of deposits and increased variable rate borrowings. Please turn to Page seven to review our credit quality and capital strengths. Credit quality continues to be stable. Provision for credit losses was $28.3 million, up seven reflected $13.5 million for increased loan volume. Maritza Arizmendi: $5.6 million for specific reserves on two commercial loans, the impact of two items from our annual assumptions update to $300,000 from updated repayment assumptions in commercial loan and residential mortgage portfolio. And $2.9 million for macroeconomic factors. Provision also included $1.3 million due to the auto qualitative adjustment related to the seasonal increase in early delinquency not captured in the model. Net charge-offs totaled $20 million, up $7.4 million. Total net charge-off rate was 1%, up 36 basis points sequentially. This includes $3.6 million from one of the two commercial loans mentioned before. Year over year, the net charge-off rate improved in consumer and auto portfolios. Recovery rate in mortgage. Looking at other credit metrics, the early and total delinquency rates were up from the second quarter but in line with the range over the past year. The non-performing loan rate was 1.22%. On the capital side, our CET ratio was 14.13%. Stockholders' equity totaled $1.4 billion, up $41 million. And the tangible common equity ratio increased 35 basis points to 10.55%. Now to summarize the quarter. The third quarter. Net interest income continued to grow reflecting our strategy of an increased volume of loans in particular commercial more than offsetting our lower NIM. We continue to anticipate annual loan growth in the range of 5% to 6%. While deposits were down sequentially, they increased year over year. We continue to expect annual growth driven by both retail and commercial accounts. Net interest margin was 5.32%, for the nine months. In line with our target range of 5.3% to 5.4% for the year. During the fourth quarter, we anticipate a range of 5.1% to 5.2%. Credit quality remains stable. Reflecting the strong economic environment in Puerto Rico. Third quarter, non-interest expenses were a little above our range, but we continue to anticipate that will be between $95 million to $96 million a quarter. As I mentioned, we now anticipate our effective tax rate for the year to be 23.06% compared to our previous expectation of 24.9%. Capital continued to build we anticipate continuing to buy back shares on a regular basis. Now, here's José. Thank you, Maritza. José Rafael Fernández: Please turn to Page eight. The Puerto Rico economy continues to perform well. Wages and employment remain at historically high levels. Consumer and business liquidity is solid. The economy also got a boost this summer from a surge in tourism. More importantly, new developments in onshoring confirm Puerto Rico's position as a world leader in medical device and pharmaceutical manufacturing. Turning to OFG, we will continue to pursue our differentiated unique customer-centric strategies, our Libre and Elite accounts and our Oriental commercial accounts are helping to grow core deposits and loans. Our commercial pipeline and credit trends are solid. And our risk management capabilities and asset liability management discipline are strong. Combined with the level of business activity, all this continues to position OFG well for growth and expanded market share. Having said that, we continue to be watchful regarding all the global macroeconomic and geopolitical uncertainties. As always, we could not have achieved these results without the hard work of our dedicated team members. We are thankful to them and excited about the future. With this, we end our formal presentation. Operator, let's start the Q&A. Operator: Certainly. Star two. We will take our first question from Erin Cyganovich with Truist. Your line is open. Erin Cyganovich: Good morning. Thank you. Maybe you talked a little bit about the deposits in the quarter, the costs of your deposits rose modestly. Is that driven by the competitive environment? Maybe you could talk a little bit about the dynamics impacting that? José Rafael Fernández: Yes. First of all, welcome to our call. Your first call with OFG and thank you for covering us at Truist. So appreciate that. To answer your question regarding the higher deposit cost, it's really driven by our strategy. When we talk about the Libre account, which is mass but we talk about the elite account, which is mass affluent, we really are strategically positioning ourselves to attract mass affluent clients through that account paying a little higher rate and that's kind of the short-term cost of it. But also betting on a long-term strategy of deepening that relationship with the customer. And that's how that product is structured. So what you're starting to see is a little bit of a higher cost on the savings side because we're being very successful with our strategy. We're really happy with the results. And we'll continue to leverage the added features that we're adding to our positive customers in terms of the insights and the predictive insights that we provide through AI are unique to each customer. And that's actually something that no other bank in Puerto Rico offers and it's giving us great momentum for us to attract new customers and potential for deepening. So that's a little bit of what's driving some of that higher customer cost on the savings side. Erin Cyganovich: Okay. That helps. And then in terms of the commercial loan originations, those were solid, but yet some pay downs on lines of credit. Maybe you'd talk about the dynamics for commercial and outlook for commercial loan growth ahead? José Rafael Fernández: Sure. So as Maritza pointed out in her remarks, part of what occurred in the third quarter was the repayment of some of the commercial lines that were drawn in the second quarter. So that's a little bit of what drove the balances to be to go down. But going forward, we have a very solid pipeline. We continue to see great business activity in Puerto Rico. And Oriental going after those opportunities. So we're very confident about our commercial pipeline in the fourth quarter and starting to build the 2026 pipeline also. Erin Cyganovich: All right. Thank you. José Rafael Fernández: Yes, you're welcome. Thank you. And again, welcome to the team. Erin Cyganovich: Appreciate it. Operator: We'll take our next question from Timur Braziler with Wells Fargo. Your line is open. Timur Braziler: Hi, good morning. Thanks for the question. José Rafael Fernández: Good morning, Timur. Timur Braziler: Just a follow-up on paying up for some of the savings account deposits. Can you just maybe talk us through what type of rate is being required to win some of those balances? And as you think about from a competitive landscape, where are you really targeting to take some market share here? José Rafael Fernández: Yes. So as I explained earlier a little bit, just we go after the mass market with a zero-cost account. It's a checking account and we drive the growth through our uniqueness in terms of the offering. On the Elite account, average cost is around 1% plus, let's say, 0.5% on average. Let's just say. And it's targeting the mass affluent. And again, it's us driving value add and focusing on the customer just to attract those customers to OFG and be able to deepen those relationships as we build trust with them. And that is again, paying playing very nicely for us on our strategy. And the key here is deepening, right? And how do we be are able to deepen that relationship through debit card utilization, auto loans, mortgage loans, wealth management, etcetera, which we offer throughout. And that's kind of what's driving that higher cost on the savings side. There's nothing else to it. Timur Braziler: Got it. Thanks. And then maybe two questions around credit. The first, if you could just provide any kind of additional color on the commercial loans. And then looking at that commercial portfolio, on the mainland in particular, two out of the last three quarters, we saw some pretty large charge-offs out of that portfolio. Can you just maybe speak a little bit more broadly about what you're seeing within Mainland CRE? José Rafael Fernández: Yes. So let me answer your second question first. On the Mainland portfolio, we do see some very good opportunities for us to continue to build the book and use it as a geographic diversification. We do small participations on the small and mid-sized commercial lending. With some partners and that strategy continues to play out. On the second on the first part of your question, where you've seen some charges in the last several quarters. It's part of our way of managing risk within that portfolio. And it's actually started like a couple of years ago when we started to feel pressure in the U.S. economy and felt that we should reduce some of those risks and it required some charge-offs. So that's kind of we don't see that as we see it more idiosyncratic than being more market-wide. And feel comfortable with our team and the efforts that we're doing. Now in particular to the quarter, the two commercial loans. One is a U.S. loan and one is a Puerto Rico loan. The U.S. loan it's a $5 million loan where we basically took a provision and the charge-off this quarter because we sold it. And the second loan is a Puerto Rico commercial loan. It's a company that acquired a large did a large acquisition. They're having some operating and financial weaknesses and we're proactively provisioning for that loan. So these are idiosyncratic. We see them as being market related. Timur Braziler: Okay. Thanks. And then just lastly on auto loans, the pickup in charge-offs there, it's kind of more in line where it had been 3Q, 4Q, 1Q. Is this kind of just getting back to that type of rate? I know you've been calling for origination sales down in auto for quite some time. We finally got that there. Just talk a little bit more about just broader auto trends, both from a growth standpoint and then from a credit standpoint? José Rafael Fernández: So I'll talk about the growth and I'll pass it to Cesar to talk about the credit. On the growth side, we were expecting the slowdown. I think on the auto lending side, what we're seeing is we see the bottoming coming in right now in terms of loan originations. And we might see a slightly higher in the fourth quarter. But these are more normal levels in our view. And we feel comfortable with the originating levels that we're having right now, Timur. Can you talk about the credit? Cesar Ortiz: Yes. On the charge-offs, what we're seeing is seasonal dynamics of the retail portfolios. Usually at the lowest levels of the first quarter and then gradually those statistics come up and they peak towards the fourth quarter. So what we saw quarter over quarter is a modest increase on charge-off and all the statistics. But when we compare it to last same period last year, we see a better trend. So we're optimistic, based on those comparisons. Timur Braziler: Great. Thanks for the color. José Rafael Fernández: Yep. Thank you, Timur. Thank you for the call. Operator: We will take our next question from Kelly Motta with KBW. Your line is open. Kelly Motta: Hey, good morning. Thanks for the question. José Rafael Fernández: Hi, Kelly. Kelly Motta: Maybe circling back to the Q4 margin guidance, 5.10 to 5.20. Wondering, Maritza, what that what that what the Fed funds assumption is in that given that you guys are asset sensitive? One. And then two, maybe you could talk a little bit about I think we on on the last quarter call, you were calling for some margin expansion provided we got some loan growth all else equal. Just with the margin being down kind of if there was anything in that that you know, differed from your expectations maybe three months ago that that drove that? Thank you. Maritza Arizmendi: Yes. Thank you, Kelly, for your question. And first, I think one point when we look back at the quarter and the inflows into the deposits that has been better than expected in the savings account that one of the deviation from our original estimate. So that's the answer to that. So the second part relates to what we are expecting in the fourth quarter. And the reality is that we are asset sensitive on the last cut was end of September. So we will have most of that impact during the fourth quarter. The repricing, the full effect will be on the cash and in the variable rate portfolio that we have in the commercial that is half of it. So that's why we are reviewing our guidance towards 5.1 to 5.2 and always depending on the funding mix. So right now, everything remaining equal is mostly related to the 25 basis point cuts. José Rafael Fernández: And I don't know if you realize too, but we do have inflows and outflows throughout the quarter. Of large deposits. And that is also part of what creates a little bit of the quarter volatility. But as Maritza said, fourth quarter guidance as as the one that she mentioned, $510 million to $5.20. Kelly Motta: Does that just to clarify, does that $5.10 to $5.20 contemplate any additional cuts here in fourth quarter? Maritza Arizmendi: Well, we are expecting 50 basis points cuts, but since it won't be outstanding most of the quarter, the most of this impact relates to the 25 basis point that was made late September. José Rafael Fernández: Yes, we are modeling 50 basis points reduction in Fed funds in the fourth quarter. Kelly Motta: Great. That's really helpful. Maybe one for you José. You've highlighted the investments you're making in AI to drive some efficiencies ahead and that drove expenses a bit higher. I know that's over time to generate greater revenues or recognize better improvement on the expense side. So maybe if you could talk a bit more about that and kind of, like, the cadence because I know it takes some time to realize that. So how how you strategically approaching? Thanks. José Rafael Fernández: Yep. Thank you. Not only, you know, just to clarify, we are making the investments, but we're also delivering on the features and the benefits for our customers on the value proposition that we provide and it's unique. And no other bank in Puerto Rico is actually today providing any insights to their customers based on their cash flows and their payments and whatnot. So that's a very big differentiation that we're going to continue to drive forward. Now regarding the investments that we're making in technology, we will continue to make those investments but we are also starting to see opportunities for us to bring efficiencies in our banking operations and we will be guiding you guys into the expenses of 2026 in the fourth quarter. But we're starting to see opportunities for us to bring efficiencies and be able to pass those efficiencies as part of our investment in technology. So we're very cognizant of the investments that we're making in technology, but we're equally cognizant of the importance of bringing efficiency and we're seeing it in the operating side of the bank particularly with people efficiencies. Kelly Motta: That's really helpful. Maybe last question for me. You guys were more active on the buyback this quarter. Given capital is strong, you're generating a ton of earnings, like what's the go forward outlook? Can you remind us of capital priorities here, including M&A? José Rafael Fernández: Sure. I mean, capital is strong. We feel that we have great opportunity to fund loan growth and that's our priority. But we're seeing we're going to be a lot more active on the buyback in the fourth quarter and into 2026. Because the earnings momentum that we have and the earnings power that we're having puts us in a great spot in terms of capital management. Also backed up by Puerto Rico economy that remains pretty good and it's driving infrastructure investments. We mentioned the onshoring benefits that are starting to become somewhat of a reality. It will take some time, but it's moving along. We're also seeing Puerto Rico well positioned given the current geopolitical challenges in The Caribbean and Puerto Rico being the hub for that. All those things give us confidence on the Puerto Rico economy. And certainly, it's going to drive our business forward. So from a capital management perspective, loan growth number one, buybacks and dividends number two and number three. Because we really are in a good spot right now. Kelly Motta: Great. Thank you so much for all the color. I'll step back. José Rafael Fernández: Yep. Thank you, Kelly, for your question. Operator: We'll move next to Anya Pellshaw with Hubd. Your line is open. Anya Pellshaw: Hey, guys. I'm asking questions on behalf of Brett here. I know you guys already talked about loan growth, but I was hoping you could expand on any payoff activity that might also affect commercial in the future? José Rafael Fernández: I'm sorry, I could not understand well your question. Can you repeat it? Anya Pellshaw: Yes. You've already talked about loan growth. But could you expand and talk about any payoff activity that might also affect commercial from here? José Rafael Fernández: Yep. Payoffs are hard to predict. But what we are seeing is there's usually some small seasonality on the lines of credit in the third quarter, given some clients that we have that receive funds, federal funds either for construction services or education. And they kind of draw on the line of credit in the second quarter. Then they get the funding in the third quarter and pay them off. That's usually on the third quarter. But we are not expecting any significant variability on the lines of credit in the fourth quarter. Anya Pellshaw: Thank you. And you've talked about charge-offs a little bit. But is there anything else you guys might be seeing as far as credit quality goes? José Rafael Fernández: As I mentioned, we're not seeing anything apart from a couple of idiosyncratic commercial loans that I mentioned earlier, the rest on the consumer book and the auto book we're not seeing anything that concerns us. We're seeing, again, supported by an economy that has a lot of activity. So and liquidity in the system. So not seeing anything that drives us to be concerned on credit. Anya Pellshaw: Thank you. Appreciate it. José Rafael Fernández: Yep. Thank you for your questions. Operator: At this time, there are no further questions. I will now turn the call back over to management for closing remarks. José Rafael Fernández: Thank you, operator. Thanks again to all our team members. Thank all our stakeholders. Who have listened in. Operator: My apologies. We do have a follow-up from Timur. Timur Braziler: Thank you. Got in there at the last second. José, you made a comment on new onshoring investments in Puerto Rico. Can you just maybe talk us through what those have been and maybe how that's progressed? In the Trump two point o administration? José Rafael Fernández: What we are what we know is what we hear and read in the papers. We are seeing around 10 or 11 multinationals that are already announcing investments in Puerto Rico. Some of them are medical devices, others are pharmaceuticals. We're seeing solar panels. We're seeing textiles. It's a little bit broader than what we have seen in the past. Again, it points out to Puerto Rico's positioning in terms of manufacturing that we've been for many years and is an opportunity for these companies to expand their production lines. Some of them have already operations. There's one or two that are going that have announced new operations in Puerto Rico, but the majority are existing companies that are announcing investments in additional production lines in the island. So overall, I think it's all driven because of the onshoring benefits that provide the tariffs, the tariff threats and all the tariffs that have been imposed. And Puerto Rico being a U.S. jurisdiction and being a manufacturing hub for medical devices and pharmaceuticals is just the right hub for those companies to invest further in the island. So it's something new for Puerto Rico because we haven't seen this in several decades. And for the first time, we're starting to see those announcements. So it's encouraging. And that will drive indirect benefits because there's a lot of hires with well-paid employees. It also drives indirect suppliers to these companies and all that. So it has a trickle-down effect to the economy that is pretty positive. So we're encouraged with that. Again, this is not flowing in now. But it's a great way of starting to see the light at the end of the tunnel when federal funds start to fade away and we have some private investments coming in. To us, it's a win-win. Timur Braziler: That's great color. Thank you. José Rafael Fernández: Yes. Thank you, Timur. Well, thank you everybody for the call. I appreciate everyone participating and looking forward to the fourth quarter results. Have a great day. Operator: This does conclude today's program. Thank you for your participation. You may disconnect at any time and have a wonderful afternoon.
Operator: Good day, everyone, and welcome to the Moody's Corporation third quarter 2025 Earnings Call. At this time, I would like to inform you that this conference is being recorded and that all participants are in a listen-only mode. At the conclusion of the prepared remarks, we will open the conference up for Q&A. As a reminder, the call will last one hour. I will now turn the call over to Shivani Kak, Head of Investor Relations. Please go ahead. Thank you. Good morning, and thank you for joining us today. Shivani Kak: I'm Shivani Kak, Head of Investor Relations. This morning, Moody's released its results for 2025 and updated guidance for select metrics. The earnings press release and the presentation to accompany this teleconference are both available on our website at ir.moodys.com. During this call, we will also be presenting non-GAAP or adjusted figures. Please refer to the tables at the end of our earnings press release filed this morning for reconciliations between all adjusted measures referenced during this call in U.S. GAAP. I call your attention to the safe harbor language, which can be found towards the end of our earnings release. Today's remarks may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In accordance with the act, I also direct your attention to the management's discussion and analysis section and the risk factors discussed in our annual report on Form 10-Ks for the year ended December 31, 2024, and in other SEC filings made by the company which are available on our website and on the SEC's website. These, together with the safe harbor statement, set forth important factors that cause actual results to differ materially from those contained in any such forward-looking statements. I would also like to point out that members of the media may be on call this morning in a listen-only mode. Rob, over to you. Robert Scott Fauber: Thanks, Shivani, and thanks everybody for joining today's call. This morning, I'm going to start with the highlights from Moody's strong third quarter results, and I'm going to provide some insights from our latest refunding wall studies as well as some examples of how we're winning in the deep currents that we're operating in. But let me give you the punch line. We delivered record quarterly revenue, we're raising our full-year guidance across almost all metrics, and we continue to drive significant innovation throughout the firm all at the same time. Now following our prepared remarks, Noemie and I, as always, will be glad to take your questions. So with that, let's get to the results. We finished the third quarter on a high note. Markets closed with the busiest September on record, and Moody's notched a new record of our own. We exceeded $2 billion in quarterly revenue for the first time ever in our history, that was up 11% from the third quarter of last year. Moody's adjusted operating margin was almost 53% in the third quarter, up over 500 basis points from a year ago demonstrating the tremendous operating leverage that we've created in our business. We delivered adjusted diluted EPS of $3.92 in the third quarter, which was up 22% from last year. And that's particularly impressive given the tough comp in 2024 when we posted 32% year-over-year growth on top of the 31% growth in 2023. And just to put this in perspective, we've more than doubled adjusted diluted EPS from the same quarter just three years ago. Consistently strengthening the earnings power of the firm year after year after year. And all of this while investing to harness the immense opportunities and the deep currents that we've talked about over the past several years. Now on to the highlights for our ratings business. MIS delivered 12% revenue growth for the quarter and surpassed $1 billion of quarterly revenue for the third consecutive quarter, setting an all-time record. Our position as the agency of choice enabled us to capitalize on a healthy issuance environment and record tight spreads. And the strategic investments we've made in technology, analytical tools, and talent are equipping us to meet surges in issuance volume and capital markets innovation. Now looking forward, the issuance pipeline is robust. Demand is solid with spreads hovering around near record lows. And the refi walls continue to build. Additionally, demand for debt financing remains strong in areas that we've consistently spotlighted over the past year or two. That includes private credit, AI-powered data center expansion, infrastructure development, and transition finance. And you can see this coming through in some of the marquee deals that we rated in the quarter. First, we were the sole rating agency on the first of its kind emerging market CLO in APAC for the International Finance Corporation, which is a member of the World Bank Group. And that was a very innovative financing vehicle for frontier markets. Second, our corporate ABS team rated a more than $1 billion data center securitization, also the first transaction of its kind. Which is backed by three high-quality newly constructed data centers and their related leases. And third, we rated the largest Asian corporate bond ever issued at almost $18 billion with much of the proceeds being used for data center investment. And all of these are notable examples of deep currents driving demand for debt financing. And while those deep currents are driving new issuance, refunding needs continue to grow as well. Our most recently published refunding study shows that refunding needs over the next four years are projected to surpass $5 trillion, which represents a compound annual growth rate of 10% from 2018 to 2025. That number is approximately double the dollar volume seen in 2018 and this gives us some real confidence in the medium-term growth trajectory for MIS. Now there's typically a lot of interest in these reports, on this call, so let me just share a few key findings with you. First, non-financial corporate refinancing walls in both the US and EMEA grew 6% over the upcoming four-year maturity horizon. Overall, investment-grade maturities are up 5%, while spec-grade maturities are up 7%. And notably, within spec-grade, US bond maturities have increased by more than 20% and in EMEA, spec-grade bonds and loans each rose by approximately 20%. And all of this points to a favorable backdrop for future issuance and the mix is especially encouraging. Given that spec-rate issuance tends to be more accretive to our revenue profile. So for those of you interested in exploring the full reports, they're available on moodys.com. Or through our investor relations team. Now beyond the refunding walls, we remain well-positioned to meet the evolving market needs in private credit. And that's a theme that we've consistently highlighted on prior calls. Private credit continues to be a growth driver for ratings. In the third quarter, the number of private credit-related deals grew almost 70%. Notably, direct lending remains the smallest portion of our private credit-related activity, while fund finance and securitization are leading the way in both deal counts and issuance volumes. Revenue tied to private credit grew over 60% in the third quarter across multiple MIS business lines, albeit off a relatively small, but expanding base. We're also seeing a growing number of private deals returning to the public debt markets for refinance. And according to Bloomberg's left Fin Insights, issuers are realizing material savings. On average, something like 200 basis points, but in some cases, as much as 400 basis points. When compared to private market rates. And as I've mentioned before, this dynamic effectively acts as a deferred maturity wall as we see unrated private direct lending deals refi into the rated BSL market. And as this market continues to grow, we continue to invest in experienced analytical teams and methodological rigor to ensure ratings quality. Now turning to Moody's Analytics. We delivered strong results again this quarter. Revenue growth was 9% year over year, including 11% in Decision Solutions. ARR is now nearly $3.4 billion, which is up 8% versus last year. And we're delivering margin improvement ahead of our plans just earlier this year. Our cross-MA initiatives are yielding results, delivering a 34.3% adjusted operating margin up 400 basis points versus last year, and as a result, we're increasing our full-year margin outlook for MA to approximately 33% and we believe this puts us solidly on track to meet our medium-term margin commitments. Now we're continuing to invest in scalable solutions across high-growth end markets, while at the same time simplifying the product suite and optimizing our organizational structure. So one example of that simplification in the third quarter, we entered into a definitive agreement to sell our Learning Solutions business to Fitch. We had a good run with our learning business, but we felt it no longer fit the profile of where we're seeking to invest in scalable recurring revenue businesses. In parallel with these portfolio simplification efforts, we remain very focused on the deep currents driving demand for our analytics offerings. And in MA, that includes an increasing focus on fiscal climate risk, and enhancing and expanding our solutions to help customers embed AI more deeply into their workflows. On a recent trip to Asia where we celebrated forty years of Moody's in the region, I heard firsthand about two customers who are investing in our physical risk solutions to understand the impact of extreme weather events and both of these are outside of the insurance sector. First, one of the largest banks in Japan and for that matter, the world, is using the RMS models that are traditionally used by our property and casualty insurance customers to understand physical climate risk across lending and portfolio management. Second, we recently won a multiyear deal with an Asian regulatory agency to deliver physical climate risk data to 11 banks and insurers. And this marks the first time globally that a regulator has purchased Moody's Climate Solutions on behalf of its financial sector. And this initiative enables the integration of physical risk analytics into regulatory reporting, and core business functions and also establishes a precedent for further regional adoption and collaboration. Now on AI, you've heard me talk before about the very encouraging engagement that we have with a number of large banks who are interested in leveraging our data and models their internal AI-enabled workflows. And while these discussions have taken time to move through banks' risk governance frameworks, we're now seeing some tangible momentum. In the third quarter, we signed over $3 million in new business with a Tier one U.S. Bank, which included solutions to automate credit memo creation and to deploy early warning systems across its real estate portfolios. These solutions are driving meaningful efficiency gains for our customers, are accelerating time to decision, and delivering a competitive edge. And this is a powerful example of how Moody's is uniquely positioned to bring together proprietary data advanced analytics, software and now GenAI capabilities and agents into our customers' mission-critical workflows. Now these Agenza capabilities are just one part of a broader investment strategy, one that's focused on unlocking the full potential of our data and analytics estate. And we're not only investing in how we build intelligent AI-powered workflows, but also in how we package and deliver our proprietary data and analytics, embedding that directly into our customers' internal systems and our partners' platforms. As we've discussed on recent calls, partnerships are an important part of this strategy. And we're embedding our data into partner ecosystems extending our reach while preserving the depth of our domain expertise. And this approach not only scales our impact, it also deepens customer integration, improves retention, and it will help to continue to drive durable growth across our portfolio. So a prime example this quarter is our partnership with Salesforce, where we continue to see strong growth from our integrated suite of connectors, includes company firmographic data news and other content. And this supports third-party risk management and compliance monitoring among other functions. Bringing Moody's unique data and intelligence directly into Salesforce workflows. With great success. We're now expanding our partnership to make available our proprietary GenAI-ready data and analytics within Salesforce's AgentForce 360, and in addition, Moody's will make available on agent exchange our new agentic AI sales tool, that I think I've talked about on prior earnings calls, and that elevates sales teams by automating lead prioritization and delivering predictive insights. Leveraging our data. And this is one part of our broader AI strategy. So zooming out, there are a few dimensions to that AI strategy. The first is our foundational AI agent builder platform that all of our employees can use to reimagine workflows and increase productivity. As we've highlighted before, we're delivering efficiencies in engineering and customer support, and we're now setting our sights on sales, product development and a variety of corporate functions as well as ratings workflows. The second dimension is our AI Studio factory, which is a platform designed for agentic product development. And the third is our recently announced AgenTic solutions, enabling us to commercialize smart APIs, MCP servers, and domain-specific agents that leverage our vast proprietary data and content estate and deep subject matter expertise. So switching gears, we also continue to invest in growing our ratings footprint in emerging markets. And this past quarter, we signed a definitive agreement to acquire majority interest in MIRAS, the leading ratings agency in Egypt. And this transaction will deepen Moody's presence in The Middle East and Africa giving us a very strong first-mover advantage across all of the region's domestic debt markets. And you've heard me say this before, these are generational investments. As emerging markets, including China, are expected to account for more than 60% of global GDP by 2029. And to that end, of the approximately $30 trillion of debt outstanding in those markets, only about 10% is cross-border. That means that the remaining 90% is issued locally, and rated locally. And that's why these domestic market investments are so important. So before I hand it over to Noemie for more details on the numbers, a few key takeaways. This past quarter, we delivered strong growth, significant operating leverage, and we have good momentum heading into next year. And of course, just a quick shout-out to all of my teammates for the fantastic work this quarter helping deliver one of the strongest quarters in Moody's history. Noemie, over to you. Thanks, Rob, and hello, everyone. Noemie Clemence Heuland: Q3 was outstanding. We showcased the full force of our earnings power. We are lifting both our top and bottom line guidance. And we're proving we can invest for growth and expand margins at the same time. Let's dive right in. Starting with MIS, revenue grew 12%. A very strong result, especially given the typical softness in Q3. All Ratings lines of business contributed to the growth, supported by the constructive issuance environment. The largest increase came from leveraged finance activity, followed by financial institutions driven by heightened issuance from infrequent issuers including fund finance and BDCs. Issuance totaled nearly $1.8 billion marking the highest third quarter on record. This reflects a combination of factors we've previously discussed, including historically tight spreads, strong investor demand, and the announced rate cut near quarter end as well as a pickup in M&A activity. MIS transaction revenue rose 14% slightly trailing the 15% growth in issuance due to high volume of repricing activity this quarter. As noted before, simpler and less complex bank loan repricings typically yield lower revenue and are less favorable from a mix perspective. MIS recurring revenue increased 8% year over year, reflecting the impact on ongoing pricing initiatives portfolio expansion and sustained monitoring fees. Foreign exchange contributed to a favorable 1% uplift consistent with the benefits seen in the second quarter. Now some color on Q3 transactional revenue by asset class. Corporate Finance transaction revenue increased by 13% supported by a 29% rise in bank loan revenue compared to 58% issuance growth. This issuance surge was largely driven by repricing activity which rebounded following subdued levels in Q2. Spec grade revenue rose 43% marking the strongest quarter for rated issuance since 2021. This was fueled by positive investor sentiment and robust market access for these issuers. Investment grade revenue declined 176% drop in issuance. Despite the decline, overall activity remained solid supported by several large M&A transactions. Notably, Q3 of last year was the second highest third quarter on record for investment grade. Driven by significant yield volume in the energy, oil and gas sector, creating a bit of a challenging comp base. In Financial Institutions, transactional revenue grew 34%, significantly above the 3% issuance growth. This was driven by the strongest volumes in a decade from frequent issuers within the banking sector. Public, Project, and Infrastructure finance transactional revenue remained relatively flat reflecting weaker activity in Project Finance and Sovereign. However, this was partially offset by strong performance in U.S. Public finance especially within the Regional and Muni space. Structured Finance transaction revenue rose 10%, supported by strong activity in CLOs especially new deals driven by growth in leveraged loan formation. This was complemented by improving activity in U.S. RMBS, underpinned by sustained investor demand and healthy deal flow. As Rob mentioned, private credit continues to be an important driver of MIS revenue growth, mainly from fund finance and business development companies or BDC activities. First-time mandates reached 200 in Q3, that's up 5% year over year. Growth was strong across both North America and LatAm, putting us on track to reach $700 million to $750 million for the full year. This momentum was partially driven by private credit-related mandates across financial institutions structured finance, and private investor requested ratings in PPIF. As a reminder though, with the growth in private credit, some issuance activity will not be captured in rated issuance figures, reported by external data providers. Now turning to margins, MIS delivered an adjusted operating margin of 65.2%, which is an expansion of 560 basis points year over year. And as a result, we are raising our full-year guidance to a range of 63% to 64%. Looking forward, and as shown on this slide, we are updating our issuance outlook by asset class. Our forecast for the remainder of 2025 assumes continued momentum from the quarter, even as we approach the typical and expected normal seasonal slowdown towards year-end. We expect issuance growth to be mid-single digit for the full year, with notable updates in investment grade, leveraged loan and high yield bond issuance bolstered by improving M&A activity. As previously noted, we expect spreads to remain near historic lows, despite some modest widening. Investor demand remained strong and size of renewed M&A momentum are emerging. That's actually reflected in the uptick in our Rating Assessment Service or RAS business, which often serves as a leading indicator for M&A. In fact, Q3 marked record quarterly revenue for RAS, this reinforces our expectation that M&A will be a positive contributor as we head into 2026. In the near term, we're raising our estimate of M&A issuance to a range of 15% to 20% for the full year 2025. Now translating this to revenue, we now anticipate full-year MIS revenue growth in the high single-digit range, and that's an upward revision from our previous outlook. Overall, we remain optimistic about issuance activity, but it's important to note that our guidance doesn't factor in a significant disruption like the one we've experienced earlier this year. Risks remain with ongoing tariff and trade negotiations, and the full impact of a prolonged government shutdown on market conditions is difficult to predict. That said, we believe we've accounted for the broad spectrum of the most plausible scenarios in our updated guidance. Turning to Moody's Analytics. This business continues to deliver an impressive financial profile. 93% recurring revenue, a 93% retention rate, and consistent growth at scale. Reported revenue grew 9% year over year, while recurring revenue grew 11% or 8% on an organic constant currency basis. As we've talked about a lot in recent years, we've been actively reshaping the revenue mix by downsizing lower margin services, and increasingly leveraging implementation partners across regions. As a result, transactional revenue continues to decline, down 19% this quarter. ARR growth of 8% is consistent with last quarter, you'll notice some quarter-to-quarter movement in individual line of business growth rates. Often driven by large new business wins or large attrition events. Across the portfolio, though, retention rates consistently hold in the low to mid-ninety range, and that supports high single-digit AR growth. Now let me double click into each of the lines of businesses to give you a clearer view of the underlying dynamics. First, Decision Solutions, which includes our banking, insurance and KYC delivered double-digit AR growth this quarter at 10%. KYC continues to be the fastest growing part of Decision Solutions, with sustained growth in the low to high teens over the last several quarters. This quarter, we reported 16% AR growth and I want to highlight two recent sales in the tech sector that illustrate the appetite for our KYC solutions beyond financial service customers. First, a large technology company signed a major deal to integrate Moody's Orbitz data into its denied party screening system. Helping block transactions with entities in countries of concern. This deal positions Moody's as a trusted provider of critical data for regulatory compliance, and showcases our ability to address complex challenges with innovative solutions. Second, a global social media platform is using Moody's to strengthen fraud detection and business verification across its ecosystem. Our data helps uncover hidden ownership structures, circular directorships, and brand inconsistencies streamlining investigations, reducing minor review, and accelerating decision making. Insurance delivered 8% AR growth this quarter and there are a few dynamics worth noting, given the diversity in the end markets we serve. First, growth in our Life business remains strong and has been bolstered recently by customers adopting more sophisticated models and increased usage. On the Property and Casualty side, 2024 was a standout year for both new business and retention, with several large cross-sell wins and retention rates in the high 90s, presenting a bit of a tougher comp. In our banking line of business, which includes our lending suite, as well as risk regulatory and finance solutions, we delivered ARR growth of 7% in Q3. Reported revenue was flat in the third quarter versus last year, influenced by the revenue accounting for multiyear sales of on-premise solutions. With risk, regulatory and finance solutions growing at mid-single digit, the headline growth rate masks the strength of our lending business, including Credit Lens, which continues to grow AR at a low to mid-teens pace and is the largest revenue contributor. We're investing to expand our offering into a more comprehensive solution that spans the full lending workflow. This approach is resonating with our core customer base. Mid-tier banks, and is increasingly enabling us to cross an upsell across our solution set. Next, turning to Research and Insights, we delivered AR growth of 8%, and that's an improvement as we lapped last year's attrition events. Growth was further supported by strong upsell execution fueled by our ongoing investments in CreditView, including research assistance and our suite of organic adjunctive solutions. Finally, Data and Information ARR grew 7%, and continues to be affected by cancellations from earlier this year. On the positive side, we still see strong pricing power, sustained demand for ratings data feeds and strong Orbis new business volume. Moving on to margin, We delivered ahead of our initial plan so far this year with a 400 basis points improvement in Q3, and we now expect approximately 33% for the full year. This represents over 300 basis points of year-over-year margin expansion before absorbing a headwind of about 100 basis points from the three M&A deals within the last year. But let me be clear, we're not stopping there. This progress is rooted in programs designed to maximize investments in strategic growth areas, and realize a more efficient organization footprint. We remain focused on expanding margins towards our medium-term commitment of mid to high 30s over the next two years. To get there, we are prioritizing and redeploying R&D spend across our portfolio, redesigning enterprise processes with GenAI, deploying productivity tools, and optimizing vendor relationships. We remain confident in Moody's Analytics' high quality, predictable ARR growth our ability to deliver sustained margin expansion strengthening the earnings durability. Now, to help with modeling, I'll walk through a few additional details behind our updated outlook assumptions. You can see the MIS and MA guidance updates here on slide 13. We now expect MCO revenue to grow in the high single-digit percent range. We are reaffirming our operating expense guidance which supports an adjusted operating margin of about 51% highlighting the strong operating leverage of our business. At the MCO level and excluding restructuring charges, we anticipate operating expenses to increase by $10 million to $20 million quarter over quarter consistent with expectations we shared in the second quarter. We also expect incentive compensation to be approximately $100 million in line with Q3. As demonstrated by our margin performance, particularly in MA, our efficiency program continues to deliver meaningful improvements. We have already executed over $100 million of annualized savings, helping offset annual salary increases and variable costs. We're updating our adjusted diluted EPS guidance range of $14.5 to $14.75 which implies roughly 17% growth at the midpoint versus last year. One modeling note on our tax rate. In October, a statute of limitations expired related to certain pre-acquisition tax exposures Moody's assumed in a prior year M&A transaction. This will result in a one-time approximate 200 basis point favorable impact on our full-year 2025 effective tax rate. Please note, this benefit will be fully offset by the release of the indemnification asset so there will be no impact to net income or EPS. Turning to cash flow, we now anticipate our free cash flow to be approximately $2.5 billion and we are increasing our share repurchase guidance to at least $1.5 billion. That puts us on track to return over 85% free cash flow to our shareholders this year. To wrap it up, this quarter's results reflect the strength of our strategy and execution. We are approaching transformative shifts in technology from a position of financial strength, allowing us to invest in innovation while continuing to expand margins and grow revenue as seen again in Q3. And with that, operator, we're now happy to take any questions. Operator: Thank you. Star one on your telephone keypad. If you are on the speaker phone, please pick up your handset and make sure your mute function is turned off so that your signal reaches our equipment. We ask that you please limit yourself to one question. The option to rejoin the queue will be unavailable. Again, that is star one to ask a question. Our first question will come from the line of Mona McNayat with Barclays. Please go ahead. Brendan: Good morning. This is Brendan on for Manav. Just wanted to ask, oh, just to get your guys' thoughts on just pros and cons of AI in your analytics business? It sounds like you had some recent wins, but just curious how you're thinking about seat-based exposure, whether or not it's explicitly tied to your contract or not, and just and just what you're hearing from your key financial services customers. On the topic. Robert Scott Fauber: Yeah. Hey, Brendan. So first of all, we've really never had, you know, kinda seat-based exposure. That's generally not the way the contracts have been structured. So, you know, AI is not gonna be any different. I would say maybe just to kinda zoom out in terms of how we're thinking about it and going about it. First of all, we're embedding AI into a bunch of our own workflow solutions and software, obviously, we've done that with research assistant. We now have something like 20 different standalone or AI-enabled applications. So we're that that gives us an opportunity to monetize there. But we also just launched what we call agentic solutions. So we've got smart APIs and MCP servers, and think about that as, like, tools that are built on top of Moody's data. You know, this huge data estate that we talk about all the time. And they can power LLMs and third-party agents with that Moody's data. And then we, we have been building a suite of highly specialized workflow agents. We've got more than 50 domain-specific agents already today. That leverage our proprietary data and subject matter expertise. And support all that automation and can be embedded into customers' internal workflows. I gave one example of that. On the call. So and I think what you're seeing from us is you know, we have this massive content estate. AI is really an unlock and we're trying to meet our customers where they are. Whether they need to have access to that content through our own workflow and supported by AI, whether they want it on partners platforms, or whether they want it embedded into their own internal AI workflow or orchestration. So everything we're doing is to try to meet our customers where they are. Operator: Our next question comes from the line of Peter Knutson with Evercore. Please go ahead. Peter Knutson: Hi. Thanks so much for taking my question. I'm just wondering if you could help me think about what extent, if any, did third quarter's record issuance reflect pull forward activity? And then within that as well, what you guys are assuming for CLO activity maybe in 4Q, but more broadly in 2026? Since that was such a large driver of that upside? Robert Scott Fauber: Yeah. I can start with the kind of the pull forward. I would say, you know, and I we've talked about this before that there's a lot more pull forward that goes on in spec grade than there is investment grade. Understandably, right, because investment grade issuers tend to always have market access, and that's less true for spec grade issuers. So we tend to see pull forward more in spec rate. I would say the pull forward that we've seen in 2025 is pretty consistent with what we've seen over the last, call it, four years. So it's in line with that. Very little pull forward from investment grade. As we've talked about, we've got some pretty healthy maturity walls going forward. Operator: Our next question comes from the line of Jason Haas with Wells Fargo. Please go ahead. Jason Haas: I wanted to focus on the KYC business. Can you talk about what data sets were within that business are proprietary? And are you seeing the longer tail of competitors there stronger by being able to integrate AI. That's a concern that we've been hearing, so I was hoping you could you could weigh in on that. Thank you. Robert Scott Fauber: Yeah. So there there's a few datasets that really go together for our KYC solutions. The first is Orbis, which is our massive company database. And I think it's we think of that as derived data, first of all. It's accessed through a global commercial ecosystem where we've got the right to use and aggregate the data, and then we cleanse it and we normalize it. And that really enhances the value of all that data. So it's not as easy as just going out and web scraping that content. That's first of all. And the second dataset that we have is around politically exposed people and risk relevant people. That's a fairly unique dataset that we have. That was originally that that was actually part of our RDC business that we purchased years ago that was formed by a consortium of banks after nine-eleven. Who wanted to combat, terrorist financing. And so that business grew out of that. And then the third is our AI curated news. And then I think part of the secret sauce is that we then link that together, and we have really the world's best beneficial ownership in a hierarchy data. And that really gives our customers a 360-degree view of who they're doing business with. That I think is relatively unique in the marketplace. Operator: Our next question comes from the line of Andrew Steinerman with JPMorgan. Please go ahead. Andrew Steinerman: Hi, Rob. If you saw, there's a Wall Street Journal article from October 15 that wrote up the Moody's report on refi walls. And the way they portrayed it, was for US companies that there was a decline in refi walls Again, I don't know if you saw the article. It caught my eye. But, obviously, that's framed a lot differently than slide six. Where you're seeing a really favorable environment for refi walls And if you could try to square the difference that would be helpful and, you know, mention something about The US refi walls. Robert Scott Fauber: Yeah. Andrew, I think that article was citing US spec grade which was down, call it, five to 6%. That's right. Yeah. That's right. So it was really a subset of the of the broader maturities. And, you know, I think I might point out, you know, a couple things that there there's actually as we kinda look farther out, there's actually a significant portion of maturities that are actually a good bit farther than four years out. And that's because of the basically the steepening of the yield curve you know, the last, know, call it year or so. So we've actually seen average tenors shortening. We've seen issuance less than seven years being more attractive than issuance out past, you know, kinda seven to ten years. We've seen average tenors shorten up. And all of that ultimately is going to be, I think, positive. As we think about the stock of what needs to get refinanced over you know, not only the four-year walls that we quote, but even beyond. Operator: Our next question comes from the line of Toni Kaplan with Morgan Stanley. Please go ahead. Toni Michele Kaplan: Thanks so much. Rob, usually during the third quarter, you talk about your early thoughts into 2026 for issuance and just in light of that, you know, refi wall is still healthy, but maybe less of a tailwind next year and M&A, though, could provide a nice uplift. And then wanted to also get your thoughts on the data infrastructure financing and if that's gonna be a meaningful driver in '26 and how you think about that opportunity overall. Thanks. Robert Scott Fauber: Yeah. Thanks, Toni. So you know, it's as always, in October, it's a little too early for us to actually give guidance for next year, but we can kind of tell you how we're thinking about next year. And I would say that and you've heard me use this, you know, kind of framework in years past. Right now, I think there are more tailwinds than there are headwinds going into 2026. So we're thinking it's going to be a pretty constructive issuance environment into 2026. And let me talk about let me start with the tailwinds because we think they're they're more tailwinds. So first of all, we've we've got spreads at at at very tight ranges right now. We have Fed easing, so we have the potential for lowering benchmark rates. You touched on M&A. We've certainly seen the M&A environment really pick up in the third quarter. You heard Noemie talk about our RAS pipeline is very robust. We're hearing very positive commentary from the bank about the M&A discussions and pipelines that they have. So 2026 may be the year that we really see not just M&A, but sponsor-backed M&A come back into the market We've talked about what a positive that will be. We do have the potential for further resolution in some of these geopolitical conflicts that I think could provide a little bit more market confidence. You know, kind of a mixed sentiment really around economic growth, a slowdown, the current thinking is that we're not looking at a recession while there's been a little bit we think the current levels of growth across the G20 are generally sustainable into next year. You mentioned the refi walls And we do think that the default rates will continue to decline. They're a little bit above historical averages at the moment, but we look for that to continue to decline. So all that feels pretty good. And just in terms of what the headwinds could be, I mentioned economic growth. And obviously, we're looking at things like job growth and consumer confidence and spending to get a sense of whether there could be actually you know, a further deceleration of economic growth. Obviously, we've got some headline risk around global trade dynamics, particularly with The US China that creates volatility in the markets. That's usually a negative for issuance. It can create some risk-off environments. It can widen out spreads. So in general, Toni, feeling pretty good about it. And you asked the last thing you asked about data centers. That's why we talk about these deep currents. You're seeing tens and hundreds of billions of dollars going into infrastructure investment and particularly around digital infrastructure and data centers. And we're having a lot of dialogue all around the world, and we expect that to continue into 2026. So that'll that'll be a deep current that continues. Operator: Our next question will come from the line of Alex Kramm with UBS. Please go ahead. Alexander Kramm: Yes. Hi. Good morning, everyone. Just coming back to Moody's Analytics. A lot of things going on there. It seems that things are maybe tracking a little bit slower than your expectations at the beginning of the year. Correct please, me if I'm wrong. And I know I know you you mentioned a couple of things, but but maybe just talk about relative to expectations at the beginning of the year, what maybe are the things that the surprised you negatively and how we should be thinking about those items as we get into 2020? Thanks. Thank you. Noemie Clemence Heuland: Yes. Maybe, Alex, I'll start, and then Rob can add if needed. So if I look at the top line for the third quarter in MA, we were right on our expectations in Q3. You may recall earlier in the year, we took slightly down our guidance for the full year because of some attrition in 8%, very in line with with the second quarter. We have a strong pipeline for the fourth quarter growing nicely, very strong coverage. So pretty heavy weighted in December. I think there's a very strong focus on execution. The way we look at the portfolio, I know there's a few puts and takes in each of the different lines. But overall, we're managing to a high single-digit growth. We're investing in our lending, underwriting, KYC for corporate. We had a few very nice wins in the third quarter. So that balances out to a high single-digit growth, and we're pretty confident with the outlook for the full year. And we'll talk about next year bit more color in February, but we're delivering as expected. Operator: Our next question comes from the line of Scott Wurtzel with Wolfe Research. Please go ahead. Scott Darren Wurtzel: Hey, good morning, guys, and thank you for taking my question. Just wanted to ask one on private credit. You know, we're starting to hear more you know, see more headlines, hear more concerns about just the health of private credit. I'm wondering if you can talk about you know, how you see that potentially impacting your growth there. Like, I think there's potentially a school of thought that if there is more concern around the health there, there could be more demand for understanding of risk and ratings. There could also be more debt as you said, moving from public or private to public markets. Just wondering if you can kind of, tease out some of the potential ramifications of that. Thanks. Robert Scott Fauber: Yes, Scott, it's Rob. I think you started to nail it there. You know, we've been talking for a number of these calls about you know, how important it is to have a rigorous you know, third-party independent assessment of credit risk in the private credit market. And that was the driver behind what we did with MSCI and you know, it's interesting. I mentioned on the in my prepared remarks, we don't have a lot of rating exposure in the direct lending market. Right? And that's, again, one of the reasons that we partnered with MSCI to be able to provide investors with that third-party view. And I mentioned that so I'd say two things. You know, whenever you start to see a little bit of credit stress in the market, and I talked about at least in the public markets, the spec rate default rate is higher than historical averages. So you can imagine that there's some similar, you know, stress in the private credit market, that drives more demand for credit insight and research. We see that with the usage of our website and all sorts of things, the engagement that we have with investors. So I would say that's true. And then second, you're right. I mean, we're now seeing a little bit of a flow back into the public markets because at the end of the day, those coupons that you can get in the public markets are typically represent a fairly substantial savings versus, you know, funding in the private market. So, you know, I think we could see an ebb and flow between the private and public markets. But I think we're pretty well positioned to serve the needs of investors and issuers, whether it's you know, in the private market or the public market. And that's what we've really been working on over the last you know, call it two years. Operator: Our next question comes from the line of Jeff Silber with BMO Capital Markets. Please go ahead. Jeffrey Marc Silber: Thanks so much. I just wanted to shift back to the MA discussion we talked about a bit earlier. Noemie, I think you said that you're managing MA growth top line to high single digits If I remember correctly, before you came, there was an Investor Day. I think the medium-term guidance for that business was low to mid-teens. Has that changed? Or should we be looking more medium-term MA growth the high single digits? Thanks. Noemie Clemence Heuland: Yes. We've updated our medium-term outlook for MA earlier this year in February. So we're looking at a high single-digit growth for AR and revenue. That said, there's different dynamics within the portfolio. We are obviously having printing more higher growth rates in areas where we're strategically investing. And that was also the logic behind the restructuring program and looking at our organizational footprint. The way we deploy our engineering teams, the way we deploy our product groups, our sellers to the areas where we think we can generate higher growth. But overall, the growth rate is expected to be high single-digit. And we've also expanded margin quite significantly We've updated that also in February, and we are now going very well on track to meet those commitments. As a matter of fact, we've increased our full-year guidance for MA margin to approximately 33% So that's another thing we've also updated along the top line. Robert Scott Fauber: Yeah. And I would just say, you know, we talked to a lot of investors, and you know, over the over the years, and we had heard about this idea of the kind of the sweet spot being kind of high single-digit growth and getting some further margin expansion. And so that's what you see reflected in the medium-term targets, and that's where what you see us executing on. Operator: Our next question comes from the line of Craig Huber with Huber Research Partners. Please go ahead. Craig Huber: Great, thank you. Rob, I want to ask you, there's a school of thought out there with investors for the last year plus that AI on a net basis is bad for your company. And for other information services stocks. So I wanna give you a chance to just talk about that, about the moats around your businesses, both on the rating side as well as MA. You could fight that off any new potential entrants out there. And then secondly, just wanted to quickly ask, what in your mind was better about debt issuance so far this year versus your original expectations coming into the year? Thank you. Robert Scott Fauber: All right. So first on the AI is bad for our business. I'd love to double click with you on that. I just don't see that. You know? And I've been pretty consistent about it. You think about we have a massive, mostly proprietary data and analytics estate. And remember, what anchors that, Craig, is it starts with the ratings agency. We're producing unique proprietary rating content and research every single day. That is our largest content set. And then I talked about Orbis and how it's not just aggregating publicly available company data. This is a complex curated web of information providers where you have to have the rights to this data. And then we're aggregating it and normalizing it and creating value. You know, even where we've got workflow software. Right? Let's so let's talk about you know, let's talk about our insurance franchise. Yes, we're delivering our solutions through software, but at the core of what we do in insurance, are, I would say, you know, mission-critical models. Right? It's the access actuarial models. And it's the RMS physical risk and catastrophe models. That is really, really unique IP. That's delivered through software. And so, Craig, I actually think about in some ways, we have a lot of this content that has been effectively trapped in our workflow software. Right? If you wanted to get access to our cat models, you had to be a subscriber to our software. And you're a cap modeler. Guess what? Now we have the ability to democratize that access to this content. To commingle the access and get unique insights. So it makes it much easier to access our content, in many more channels as you heard me talk about, that's gonna open up new ways for us to monetize the content on different platforms with different customer segments. Where there's different value that they derive out of our content. And it's also gonna allow us to have unique insights as this content is commingled. So I feel very good about AI. And that's why, Craig, we've been really trying to be so front-footed on this. From back in 2022 is because we believe that this ultimately is an unlock. And you know, we've talked about this on these calls. It takes a little bit of time, we're working with the regulated financial industries But we are seeing some good signs of traction. Your second question was you know, what is driving you know, the issuance? I'd say, look. In the first four months of the year, obviously, April, we had a lot of in the market with the tariffs. That was, in a way, kind of a lost month. Right? And, you know, we hadn't factored that into the guidance at the time. But you've seen, I think, and you see it with the equity markets. The markets have gotten much more comfortable with the current environment. You've seen I said default rates are a little bit above average, but still fairly close to the long-term average. So spreads are tight. You've got and you've got a real pickup in M&A activity. And you remember back in February, we had talked about our M&A assumptions and that this would be back half loaded. And so I think we are starting to see that M&A volume and activity that's supporting issuance and business investment that we had been thinking we would see back in the that call in February. It's just that we hadn't anticipated the volatility in the first half of the year. Yeah. And to that point, we if you look at our Q4 implied guidance for MIS, that's pretty consistent with what we had at the beginning of the year. We've always had a pretty strong fourth quarter with low teens MIS transaction revenue growth, and that's been pretty consistent throughout the year. Operator: Our next question will come from the line of Russell Quelch with Rothschild and Co Redburn. Please go ahead. Russell Quelch: Hi, guys. Thanks for having me on. Noemie, you cut out some headwinds around slowing retention and sales driving that slowdown in insurance ARR. I wonder if you can elaborate on that a little bit more, given insurance has been a strong pillar of MA growth over the last twelve months. Wondering how you're thinking about insurance growth into 2026, given the slowdown in premium growth in the underlying P&C market and normalization in storm activity. Noemie Clemence Heuland: Yeah. Insurance, we have few dynamics going on in the third quarter, and that translates into the full-year outlook that I talked about. We have actual data and models, so access is running very nicely. We have high double-digit growth. We continue to see customers switching to a higher definition. Models, and that's been really driving growth this quarter. The RMS and the RRP migration, we had a lot of significant transactions in 2024 and early 2025. There's bit of pull forward of pipeline. So now there's a digestion going on with our customers. We're going after the largest the remaining pool of customers who haven't yet moved to the platform. So that's one driver. So we have a lot of pipeline there that we expect will drive growth of that business in long term. There's just a it's not so much of a headwind in fact, it's just more like tough comparison from 2024 where we had a lot of those customers migrating into the RMS platform and we still have a lot of pipeline with the remainder as we head into 2026. Yeah. Russell, I would also I mean, I spent a lot of time, with our insurance customers, and I feel pretty bullish about what we can do in that industry. You've got insurers who I would say are behind the banks in terms of their adoption of digital platforms know Amy talked about moving to the cloud. But, but also just sophisticated third-party data and analytics. And so there's a lot of interest from insurers in thinking about how they can leverage a lot of our content to get signal value to help them understand risk. And you've seen us broaden from really a property focus with our cat business and obviously we have a have a life business as well. But in the P&C business, we've moved into casualty. There's a lot of interest from insurers to have a more data-driven approach to thinking about casualty risk, and that's what we did when we acquired Predicate. We've pulled together a cyber working group, across the industry. I think there's still a lot of opportunity for that market to grow in terms of GWP and so do the insurers. But they need to have models and data that they can be very confident in to help that market grow. So, I feel very good about it. Over, you know, let's call it the medium term. Operator: Our next question comes from the line of Sean Kennedy with Mizuho. Please go ahead. Sean Kennedy: Thanks for taking my question and nice results. I had a follow-up on Moody's Analytics. So I believe last quarter, you mentioned that sales cycles were lengthening a bit. I wanted to ask if anything has changed there as we got further away from the spring. Also, how's the general demand environment for banking? Thank you. Robert Scott Fauber: Yes. So I'll with the demand environment for banks. It's actually pretty good. We're having some very good discussions and wins, frankly, with our banking customers. I talked about that one kind of marquee deal, but actually we're seeing very good engagement and growth from our biggest banking customers. For the reasons that I talked about. And so I'd say I'm not sure there's much of a change from the last quarter in terms of how we talked about kind of sales cycles. I think we talked about you know, there was a little bit of a lengthening in the sales cycles, know, over the, you know, call it last year. But there was also an expansion of the size and the complexity and number of products that we're pulling together as solutions for our customers as well. So, you know, to me, when I look at those together, you know, I feel fairly comfortable, you know, when those things are moving in tandem. And I would say the last thing I would say, spend a lot of time with our customers. There's a lot of focus right now on growth. And that, at the end of the day, and we get asked about is it regulatory drivers that drive the growth of your solutions, There's nothing better than being able to talk to your customers about how you can drive growth. And that ultimately means that there's a more positive sentiment across the customers as they're thinking about you know, the future and investing in their business. Operator: Our final question will come from the line of Jeff Meuler with Baird. Please go ahead. Jeff Meuler: Yes. Thank you. Rob, you had a couple of callouts on climate solution wins outside of PNC Insurance. That was one of the thesis points of the RMS acquisition. Is the message behind the message that you feel like you're at an inflection point where you expect that to really start taking off, or are you just kind of conveying some large ones that you had in the quarter? And then just to be clear, does that revenue when you sell climate solutions outside of insurance does that get reported within insurance or elsewhere? Thank you. I guess, you know, one of the reasons I brought it up is, you know, that was as you as you noted, that was one of the theses that we had when we bought RMS was that this content the this the models and the data to help institutions really understand the physical risk of extreme events was gonna be important beyond just the insurance business over time. And so we you know, I've been trying to give some examples of where we've had some wins of banks who are taking these solutions. Would say that that started with the biggest, most sophisticated banks who are who are who are using the RMS models. We've been thinking about how do we take some of that content and package it differently so that we can make it more useful and available to a broader segment of banks over time. But, you know, you can you know, we hear from banks as they're underwriting loans that they're interested in understanding physical risk of the collateral they're taking. We hear from corporates. They're interested in understanding the physical risk of locations across their supply chain and across their own physical footprint. We're engaging with governments who want to understand vulnerability of communities to various extreme events. And of course, we're starting to hear that from investors as well. So you know, there's some product development work as we start to see the demand from these other sectors to be able to package the content in a way that's useful for those different customer segments. So I'd say it's still relatively early, but I am giving examples of demand outside of insurance. Yep. And we're gonna continue to lean in on the last point on two point, On your question about where that the revenue goes, goes into the insurance line within Decision Solution. And then the other thing I'd add is we when we acquired RMS, we had revenue synergy targets that we've published, and we are well on track to achieve those. Operator: And that will conclude our question and answer session. I will turn the call back to Rob for any closing remarks. Robert Scott Fauber: Okay. That's a wrap everybody, for joining. We'll talk to you next quarter. Bye. Bye. Operator: This concludes Moody's Corporation third quarter 2025 earnings call. Immediately following this call, the company will post the MIS revenue breakdown under the Investor Resources section of the Moody's IR homepage. Additionally, a replay will be made available after the call on the Moody's IR website. Thank you. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the PROG Holdings Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please note that today's conference is being recorded. I will now hand the conference over to your speaker host, John Baugh, Vice President of Investor Relations. Please go ahead. John Baugh: Thank you, and good morning, everyone. Welcome to the PROG Holdings third quarter 2025 earnings call. Joining me this morning are Steve Michaels, PROG Holdings' President and Chief Executive Officer, and Brian Garner, our Chief Financial Officer. Many of you have already seen a copy of our earnings release issued this morning, which is available on our Investor Relations website, investor.progholdings.com. During this call, certain statements we make will be forward-looking, including comments regarding our revised 2025 full-year outlook, our guidance for 2025, the health of our lease portfolio, our capital allocation priorities, and the benefits we expect from our sale of the Vive Financial portfolio to Atlantica Holdings Corporation, such as improving our capital efficiency and profitability profile. Listeners are cautioned not to place undue emphasis on forward-looking statements we make today, all of which are subject to risks and uncertainties that could cause actual results to differ materially from those contained in the forward-looking statements. We undertake no obligation to update any such statement. On today's call, we will be referring to certain non-GAAP financial measures, including adjusted EBITDA and non-GAAP EPS, which have been adjusted for certain items that may affect the comparability of our performance with other companies. These non-GAAP measures are detailed in the reconciliation tables included with our earnings release. The company believes that these non-GAAP financial measures provide meaningful insight into the company's operational performance and cash flows and provides these measures to investors to help facilitate comparisons of operating results with prior periods and to assist them in understanding the company's ongoing operational performance. With that, I would like to turn the call over to Steve Michaels, PROG Holdings' President and Chief Executive Officer. Steve? Steve Michaels: Thanks, John, and good morning, everyone. Thank you for joining us today as we report our third quarter results and share our perspective on how we are positioned heading into the final stretch of 2025. I'll also provide context around the recently announced sale of our Vive portfolio and how that decision aligns with our long-term strategic priorities. In the third quarter, we surpassed the high end of our outlook for revenue and earnings. These results were driven by continued strength in portfolio performance and strong momentum within our BNPL business for technologies. Non-GAAP diluted EPS of $0.90 exceeded our outlook range of $0.70 to $0.75 per share, marking our third consecutive earnings beat this year. This quarter's outperformance reflects the discipline of our team, the strength of our business model, and our ability to execute through macroeconomic volatility. Throughout the quarter, we navigated persistent consumer challenges marked by ongoing inflationary pressures, growing financial stress among lower-income households, and early signs of labor market softening, all of which impact discretionary spend in our leasable verticals. While the overall unemployment rate is still low, the heightened financial stress and greater caution among lower-income consumers across our leasable categories is a headwind to GMV. As I shared in July, two primary factors weigh on Progressive Leasing GMV this year, including in the third quarter. The first is the previously disclosed Big Lots bankruptcy, which created a significant GMV headwind. The second is our intentional tightening actions of lease approvals, a necessary step to preserve portfolio health in an unpredictable environment. Adjusting for these two discrete items, underlying GMV in Q3 grew in the mid-single digits, reflecting strong operational execution and healthy demand across other areas of the business. We are growing balance of share with key retail partners, strengthening existing relationships, and scaling our omnichannel ecosystem. As Brian noted in July, we expected approval rate comparisons to ease slightly in Q3, and they did. Our progressive leasing two-year GMV stack improved from negative mid to low single digits in the first half of the year to flat in Q3, which had the toughest year-over-year compare given the strong growth in Q3 2024. These trends give us confidence in the durability of our go-to-market strategy and the long-term scalability of our platform. Progressive Leasing's portfolio performance remains strong and within our targeted 6% to 8% annual write-off range. Q3 write-offs of 7.4% improved both sequentially and year-over-year. These results reflect the success of our ongoing refinements to our decisioning posture and risk analytics. We are encouraged by the early stage performance indicators and believe we can deliver consistent portfolio outcomes while driving profitable GMV. Consolidated revenue came in at $590.1 million, which reflects a slight decline compared to the same period last year. This result was driven by the impact of the Big Lots GMV loss and a smaller portfolio entering the quarter for our leasing business, offset by another standout quarter from four Technologies, which again delivered triple-digit revenue growth. Consolidated adjusted EBITDA was $67 million, and non-GAAP EPS was $0.90, both exceeding the high end of our outlook. Before diving deeper into the Q3 business results, I want to take a moment to address today's announcement regarding the sale of our Vive Financial credit card receivables portfolio to Atlantica Holdings Corporation. This transaction represents a meaningful step in our long-term strategy to improve our capital efficiency as we focus on opportunities with the greatest economic returns. While Vive has been part of our ecosystem since 2016, we believe this decision enhances our overall profitability profile and positions us to deploy capital more effectively. We are pleased to be partnering with Fortiva, the second look credit offering of Atlanticus, to ensure continuity for our retail partners and consumers, allowing us to maintain access to a comprehensive set of flexible payment options to underserved consumers while aligning our resources with the future of the product platform. The sale of the Vive receivables strengthens our balance sheet, giving us additional flexibility to invest in strategic priorities. Brian will speak to the capital implications shortly, but I want to underscore that we are committed to deploying capital in ways we believe will drive sustainable shareholder value through investments in growth, strategic M&A, and disciplined return of capital through share repurchases and dividends. I want to take a moment to thank the entire Vive team for their contributions. Their hard work and commitment played a critical role in helping us serve customers who may not have otherwise had access to credit, and we are proud of the positive impact they have made. We have made every effort to support Vive team members through this transition, including identifying some opportunities within the broader PROG Holdings organization. We wish them all the best as they move into this next chapter. Moving back to the business, we made significant progress in our strategic pillars of grow, enhance, and expand in Q3. Under grow, we continue to ramp direct-to-consumer performance, saw strong returns from our omnichannel partner marketing initiatives, and increasing e-commerce penetration. Our marketplace team also onboarded additional affiliate and e-commerce partners. E-commerce GMV is at 23% of total progressive leasing GMV in Q3 2025, up from 20.9% in Q2 and 16.6% in Q3 2024. Additionally, we launched or signed three recognizable new retail partners since our last earnings call, each representing GMV expansion opportunities. These exclusive partnership wins, all earned through a competitive selection process, underscore our leadership position, the strength of our value proposition, and our ability to drive incremental sales. Our pipeline is healthy, with a focus on converting near-term opportunities and deepening engagement with existing accounts as we expand our footprint across both national and regional segments. We strengthened our position within existing retail relationships by extending long-term exclusive agreements with several of our major national partners, reinforcing our role as their exclusive lease-to-own provider. We have successfully renewed nearly 70% of our Progressive Leasing GMV to exclusive contracts reaching to 2030 and beyond. With these additional renewals in place, we can focus on integrations and accelerating our initiative roadmap with these partners to drive future growth. As I have mentioned previously, millennials and Gen Z make up a growing share of our customer base, and we are evolving our marketing, product design, and engagement strategies to meet the expectations of these digitally savvy consumers. Their strong preference for mobile and self-service is driving increased adoption of our digital application flows and mobile platform, emphasizing our omnichannel strategy and validating the investments we made in personalization and seamless user experiences. Steve Michaels: PROG Marketplace, our direct-to-consumer platform, remains a meaningful growth engine, delivering another quarter of strong double-digit GMV expansion. This channel not only broadens our reach beyond traditional retail partnerships but also plays an increasingly important role in building relationships with consumers and enabling us to direct consumers to our POS partners through a new renew channel. We are investing in brand building, personalization, and lifecycle marketing to increase customer engagement, and we are seeing encouraging trends in repeat usage and retention as a result. PROG Marketplace is helping us create a more durable and self-sustaining customer ecosystem, one that supports growth across our leasing, BNPL, and cash advance offerings alike. Under our enhanced pillar, we made strategic investments in technology that improve both customer and employee experiences across the Progressive ecosystem. Our innovation team at PROG Labs is at the forefront of these efforts. Our AI-powered transactional consumer chat platform has now handled over 100,000 customer interactions, supporting customers from the approval stage through conversion into the servicing of their lease agreements. We are proud of how this tool is already enhancing our ability to deliver timely, personalized support, and it is reducing friction in our service model. With new capabilities introduced in Q3, customers can now make payments, request approval amount increases, and inquire about the account status directly within this chat platform. These initiatives are already proving valuable, but we believe we are still in the early innings of what is possible. We expect these AI-driven capabilities to be a key differentiator as we scale customer personalization, drive efficiencies, and set the bar for digital innovation in lease-to-own. Under our expand pillar, our multiproduct ecosystem is maturing, growing connectivity between offerings. Our cross-marketing campaigns between PROG and Progressive Leasing have proven effective in increasing repeat usage and driving incremental GMV. Turning to our BNPL platform, four technologies have exceeded expectations once again, delivering its eighth consecutive quarter of triple-digit GMV and revenue growth. As we first shared last quarter, engagement trends are strong, with an average purchase frequency of approximately five transactions per quarter for the last year and more than 160% growth in active shoppers year-over-year. We are seeing strong momentum in unique shoppers and merchant relationships, driving high engagement across the platform and contributing to overall GMV. Additionally, our four-plus subscription model continues to be a key driver, with over 80% of GMV coming from active subscribers. Importantly, four's take rate of approximately 10%, defined as revenue generated as a percentage of GMV over the trailing twelve-month period, is a strong indicator of monetization efficiency. Four has operated profitably year-to-date, and its role in our broader ecosystem is expanding meaningfully, not just as a standalone business but as a cross-sell driver for Progressive Leasing and as a catalyst for customer acquisition. From a profitability standpoint, four generated year-to-date adjusted EBITDA of $11.1 million through Q3 2025, representing a 23% margin on revenue. As we look ahead to Q4, we are forecasting an adjusted EBITDA loss driven by seasonal dynamics that require an upfront provision for credit losses for new originations. Despite this anticipated Q4 loss, we believe four will have positive adjusted EBITDA for the year. Given that the peak holiday season will account for more than 20% of four's full-year GMV, this provision creates a timing impact on profitability. This pattern is well understood and consistent with our operating model, as these holiday originations generate the majority of their revenue in Q1, we expect to see a meaningful rebound positioning four to deliver its highest quarterly adjusted EBITDA margin of the year in 2026. Looking ahead, we are closely monitoring the macro environment, especially as consumers face ongoing liquidity constraints and shifting spending behavior. The demand environment remains soft across many durable goods categories, which will likely continue in Q4. That said, we are not waiting for the environment to improve. We are leaning into the areas we can control: portfolio health, disciplined spending, deepening partner engagement, and driving sustainable profitable revenue through our multiproduct ecosystem. Our capital allocation priorities are unchanged. We are investing to drive long-term growth through sales initiatives, marketing investments, AI and other innovation, digital infrastructure, exploring strategic M&A opportunities that strengthen our ecosystem, and returning excess cash to shareholders through share repurchases and dividends. We did not repurchase shares during the quarter due to ongoing discussions with Atlanticus regarding the sale of the Vive portfolio. Those discussions began in January and progressed to a stage in Q3 that restricted our ability to be in the market until the transaction was publicly announced. As Brian will outline, we ended Q3 with a strong cash position and generated meaningful free cash flow, reinforcing our capability to fund growth while maintaining financial flexibility. To close, we are confident about how we are executing across the business. We delivered strong earnings, improved portfolio performance, and successfully executed the strategic divestiture of a portfolio business, allowing us to reallocate capital towards our highest conviction opportunities. At the same time, we are building momentum in our fastest-growing segment, four technologies. I am proud of what we have accomplished this quarter and confident in our ability to sustain this momentum into the future, which we expect will create long-term value for our customers, partners, and shareholders. With that, I'll turn the call over to Brian for more details on Q3 results and our 2025 outlook. Brian? Brian Garner: Thanks, Steve, and good morning, everyone. Our third quarter results highlight execution and innovation across our product offerings. Once again, we exceeded the high end of our guidance on revenue and earnings, despite pressures on consumer demand across our key categories. Non-GAAP diluted EPS at $0.90 per share beat the high end of our outlook by $0.15 and was up approximately 17% compared to the same period last year. This outperformance reflects a combination of three key factors: strength in our portfolio performance, mostly monitoring levels of spend, and momentum from our buy now, pay later and direct-to-consumer initiatives. We are focused on profitable growth and actively managing the business to optimize returns while staying agile in a dynamic operating environment. Let me start with the Progressive Leasing segment. GMV came in at $410.9 million, which represents a year-over-year decline of 10%. However, as Steve noted, the underlying performance tells a more compelling story. Adjusting for the loss of GMV related to the Big Lots bankruptcy and the impact of our deliberate tightening of approval rates, the business would have delivered mid-single-digit growth, driven by solid balance of share gains within key retail relationships and growing traction among e-commerce and direct-to-consumer channels. PROG Marketplace, our direct-to-consumer channel, delivered 59% year-over-year GMV growth for the quarter. Q3 revenue for Progressive Leasing was down approximately 4.5% at $556.6 million compared to $582.6 million in the prior year. Revenue benefited from slightly better customer payment performance. This tailwind, however, was offset by GMV headwinds, primarily driven by the Big Lots bankruptcy and tightening actions we took in '24 and early 2025. Portfolio performance remains strong, with write-offs coming in at 7.4%, representing an improvement sequentially and year-over-year. This result reflects the impact of our deliberate tightening actions. As always, we are actively monitoring early performance indicators to ensure our decisioning posture is consistent with delivering write-offs within our targeted annual range of 6% to 8%. Progressive Leasing's gross margin in Q3 came in at 32%, representing an approximately 80 basis point improvement year-over-year. This margin expansion was driven in part by a higher proportion of customers staying in their lease agreements longer as well as higher year-over-year yield from our lease portfolio. Progressive Leasing's SG&A for the quarter was $79.3 million or 14.2% of revenue, compared to 13.1% in 2024. As we have discussed in prior quarters, we have made targeted investments to support long-term growth focused on customer-facing capabilities, technology modernization, and partner enablement, while maintaining cost discipline across the organization. EBITDA for Progressive Leasing came in at $64.5 million or 11.6% of revenue, landing within our 11% to 13% annual margin target and improving by 20 basis points year-over-year. This performance underscores our ability to deliver profitability through disciplined execution, even in the face of challenging year-over-year GMV comps and a softer demand environment. Turning to consolidated results, Q3 revenue was $595.1 million, which reflects a slight decline compared to the same period last year at $606.1 million. That came in at the high end of our guidance range. The year-over-year decline is driven by the impact of the Big Lots GMV loss and a smaller lease portfolio entering the quarter, largely offset by another triple-digit revenue growth quarter at four Technologies. Consolidated adjusted EBITDA was $67 million or 11.3% of revenue, compared to $63.5 million or 10.5% of revenue in 2024. This year-over-year improvement reflects strong adjusted EBITDA performance of four and year-over-year margin improvement at Progressive Leasing. Non-GAAP diluted EPS came in at $0.90, exceeding the top end of our outlook, driven primarily by strong underlying earnings performance. As Steve noted, we did not repurchase shares during the quarter due to the ongoing discussions with Atlanticus related to the Vive portfolio sale, which restricted our ability to be in the market until the transaction was finalized. Let me now turn to the divestiture of the Vive portfolio, which was announced earlier this morning. The transaction will be reflected in our Q4 financial results and classified as discontinued operations. As I'll discuss later, our updated outlook reflects the impact of the divestiture. The proceeds of approximately $150 million provide incremental liquidity and strengthen our balance sheet, bringing greater flexibility as we assess opportunities through our capital allocation framework. In the near term, we will continue our investments across our ecosystem of products. As always, we remain disciplined in our capital allocation approach. Our priorities are unchanged. We are focused on funding impactful growth initiatives, pursuing selective high-return M&A opportunities that complement our ecosystem strategy, and returning excess capital to shareholders through our ongoing share repurchases and quarterly dividends. These actions reflect our commitment to driving long-term profitability and delivering sustained shareholder value. Moving to the balance sheet, we ended Q3 with $292.6 million in cash and $600 million of gross debt, resulting in a net leverage ratio of 1.1x, which is comfortably within our target range. We maintained ample liquidity during the quarter and had no borrowings outstanding on our $350 million revolver. In Q3, we paid a quarterly cash dividend of $3 per share. As of quarter-end, we had $309.6 million of unused capacity under our $500 million repurchase program. For our 2025 consolidated outlook, in light of this morning's announcement regarding the Vive divestiture, we have removed Vive from our outlook for both the fourth quarter and full year 2025. Our revised outlook has consolidated revenues in the range of $2.41 billion to $2.435 billion, adjusted EBITDA in the range of $258 million to $265 million, and non-GAAP EPS in the range of $3.35 to $3.45. This outlook assumes a difficult operating environment, soft demand for consumer durable goods, no material changes in the company's current decisioning posture, an effective tax rate for non-GAAP EPS of approximately 27%, and no impact from additional share repurchases. To summarize, Q3 was a strong quarter across the board. We delivered earnings above expectations, maintained healthy portfolio performance, advanced key initiatives aimed at supporting long-term growth, and subsequent to the quarter-end executed a strategic divestiture. With a solid balance sheet, scalable cost structure, profitable growth in our buy now, pay later business, and a proven multiproduct ecosystem, we are well-positioned to deliver sustained value for our customers, retail partners, and shareholders. With that, I'll turn the call back over to the operator for questions. Operator? Operator: Thank you. And wait for your name to be announced. To withdraw your question, simply press 11 again. Please stand by while we compile the candidate roster. Operator: Our first question is coming from the line of Kyle Joseph with Stephens. Your line is now open. Kyle Joseph: Hey. Good morning, guys. Thanks for taking my questions. Given all the headlines we've seen around the consumer, I was just looking to get an update and I recognize there's some moving parts. But you know, we're looking at write-offs coming down for you guys, you know, even though you guys have headwinds from Big Lots on that front. And then it sounds like, you know, GMV ex Big Lots are underwriting. There's some positive trends there. And then just weighing that with some of your commentary in terms of macro data and some of the headlines we've seen in the consumer finance arena, just kind of looking for an update on the pulse of the consumer in your opinion. Steve Michaels: Yeah. Thanks, Kyle. And, yeah, it's certainly been in the headlines, and it's something that we are constantly battling and analyzing. But to your point, we're pleased with where the portfolio is. I'm really proud of our data science teams, and they do a job delivering that consistent portfolio in a very dynamic environment. The write-offs did improve both sequentially and year-over-year due to the, you know, our deliberate actions that we took earlier this year for the most part. Some of them late last year. But we're watching it very closely. I mean, we feel pretty good about where we are right now. But we are seeing some stress in the consumer as you said, there's lots of headlines around liquidity pressures and just macro pressures on the consumer, especially in the cohort that we serve. Our DQs are elevated at this time compared to previous years, including last year. And we're watching it very closely. We haven't found the need or seen the need to tighten additionally yet. I'm not saying that that won't happen based on how the data comes in the door, and that's one of the great aspects of our short-duration portfolios across our products. And the fact that we get quick feedback loop that we can adjust very quickly to trends we're seeing in the data. So I mean, we're defensively postured and kind of braced for potentially having to tweak additional dials, but we have not done that in any material way since earlier this year. We always are looking for, you know, we're always adjusting dials, some positive and some negative. But in what I would call a tightening action, we haven't had to do that since earlier this year. But we're not ruling it out based on what we see for the rest of the year. Kyle Joseph: Got it. Really helpful. And then in terms of the GMV outlook for the rest of the year, I think Steve, you highlighted that 3Q was a tough comp in terms of 03/2024 growth. But, you know, just factoring in the timing of Big Lots and the timing of underwriting changes, should we think about 3Q as kind of the bottom point or similar headwinds into 4Q before things really ease up into 2026? Steve Michaels: I think the comps really don't clear up until Q1. We put out that supplemental slide page with Big Lots, and Q4 is a similar headwind to previous quarters this year. And the tightening, while we did do some of it in late last year, most of what we're referring to was in Q1 of this year. So from a comp standpoint, I don't think the pressures are still roughly the same. I will say that, you know, our Q3 GMV did come in slightly below where we expected it to, and we were updating you in July. I think a lot to do with some of those pressures that you're talking that you were referring to on the consumer. And so we've adjusted some of our view on Q4 as well. We're continuing to fight every day, and we have big plans for the holiday season. But there's mixed reports out there about what to expect from a consumer discretionary spend during the holiday as well. So got some internal initiatives, some things we're trying to get across the goal line with existing retail partners before we go into code freeze for the holidays. And we're pleased with where we are, but the macro is a challenge and has been impacting GMV in addition to the discrete headwinds that we've called out. Kyle Joseph: Got it. One last one for me. Just in terms of the guidance on other, it looks like better revenue guidance and then marginally lower profitability. Is that just a function of timing and growth math really? Steve Michaels: Yeah. We tried to address that in the prepared remarks. Our four business is we're very pleased with what it's doing, how it's growing, and its profitability year-to-date. And then there's just a very understandable seasonal dynamic in Q4, and more specifically, in kind of November, December with the surge of GMV that we have observed in last year as well as are predicting for this year. And how that upfront provisioning with very little revenue recognition will cause four to swing to a loss for Q4. Nothing to be concerned about. It's just the dynamic of the model. And it'll swing back in Q1 of next year. But the strength of BNPL business year-to-date is undeniable, and it's going to continue. But there will be some P&L dynamics, which have been reflected in the other segment and are impacting our PROG Holdings level guidance for the full year or implied for the fourth quarter because of that swing to adjusted EBITDA loss. Kyle Joseph: Yep. That all makes sense. Great. Thanks a lot for taking my questions. Brian Garner: Thanks, Kyle. Operator: Our next question is coming from the line of Bobby Griffin with Raymond James. Your line is now open. Bobby Griffin: Good morning, guys. Thanks for taking the questions. Hey, Steve. I guess good morning. I wanted to just maybe talk more on the current environment. I you know, your comments on the low end and some of the pressure make a lot of sense. I didn't hear much on trade down. So can you maybe just touch on that? Is part of what's going on here, you guys are having to be a little bit tighter or incrementally tighter as you did this year. You're not seeing that happen in the tiers above you. Just trying to get a sense of how this environment might be evolving versus some of the earlier trade down we saw when everybody started tightening together. Steve Michaels: Yeah. It's a good call out, Bobby, and we certainly saw the impacts of the supply above us tighten in 2024. And then kind of stayed static while they saw what their portfolios were doing. Earlier this year, I think there were calls that folks may be loosening here in the back half of 2025. I think providers are reevaluating that potential strategy. But based on the headlines that we've seen over the last I don't know, six to twelve weeks, which would indicate some stress out there. And auto portfolios and elsewhere. We have not yet seen or observed in the credit stacks where we participate and have good visibility any trade down or any tightening with the supply above us. So we did have to tighten earlier this year. We have not seen any additional benefit from supply above us tightening so far. I think it's you know, just my opinion is it's unlikely that they will loosen in the holiday season, but I'm not we haven't seen any evidence of them tightening and creating more of that trade down for us. Bobby Griffin: Okay. That's helpful. And then maybe on just the GMV cadence through the quarter, I mean, interesting or notable kind of how the month played out and anything in October to help us think about you know, kind of the early I know we're still a little early for holiday, but just anything in October as well. Steve Michaels: Yeah. Nothing on holiday yet. You know, obviously, it's difficult right now, but this is the case every year. That such so much of the quarter is made in the five weeks between Black Friday or the seven days of Black Friday, whatever you want to call it, to Christmas Eve for the leasing business. The quarter for Q3, it was fairly similar, but it did you know, September was lower than August and July from a negative standpoint. But you know, I don't know if the headlines and the psychology from the pending government shutdown and all those things kind of played into people's confidence and sentiment. But, you know, we did see some softness. Bobby Griffin: Okay. And then lastly for me, Brian, I hate to be the guy that asks about 26, but I'm going to do that here just because there's a lot of moving parts. But, like, when you think about 26 and you just want to maybe level set the model, not ask for guidance, of course, but, like, you got Vive flowing out. Got a smaller portfolio because of this GMV, but then you have the Big Lots headwind coming off. So just help us frame up, you know, kind of all those moving parts and, you know, to keep kind of in line with the smaller portfolio, but potentially GMV actually starting to show growth again? Brian Garner: Yeah. I think starting with the tailwinds, you look at '26. And, again, not providing guidance, but just you know, as things are shaping up. I think you're right. So from a decisioning standpoint, as Steve alluded to, the biggest relief from a year-over-year comp comes in Q1. That was the most meaningful tightening that we did here in 2025. So as that rolls off, should start to see some relief there. Along with that, and obviously getting past the Big Lots comp, which we've provided information about in our supplemental deck. And I think the other positives are the portfolio is being managed effectively. So, you know, we've as we talked about, we're down year-over-year and sequentially with the 7.4% that we posted this year. So I think a similar kind of write-off posture is probably appropriate. You've also got this growth in four that's really exciting and buoying the results here in the quarter. And I think we've got a trajectory there that's encouraging. And, you know, I think the offset or, you know, what we're paying attention to a little bit is this macro. And the impact on leasing just more broadly that'll I think, continue to serve a challenge here in Q4, and we'll see what 02/2026 holds. But I think that's how it's shaping out from a you know, we talked about this 11, 13% EBITDA margin target for the leasing segment. There's not been an intent to revisit that, at least at this point in time. So that's our mandate is to actively manage the cost structure in light of what our top line allows. And that's you know, those are really the inputs as I shape up 2026. The buy portfolio, as you said, is really not consequential to earnings. It's about a $65 million haircut off of revenue from a run rate perspective, and so that's how I'd size that up. Bobby Griffin: Perfect. That's very helpful. Appreciate the details here, and congrats on the transaction and the portfolio management. Best of luck, guys. Brian Garner: Thanks, Bobby. Appreciate it. Operator: Thank you. Our next question is coming from the line of Anthony Chukumba with Loop Capital Markets. Your line is now open. Anthony Chukumba: Good morning. Thank you for taking my question. Guess my first question, you mentioned the three new retail partners. Can you tell us who those retail partners are? Steve Michaels: Hi, Anthony. Good morning. And I had money that you would be the one that noticed that and talked about that, so I appreciate that. Yeah, we're not going to name them. We just wanted to highlight because our biz dev teams are out there working their tails off all the time, and they can't control the timing of when we get things across the goal line. But it's not for, you know, a lack of effort and a lack and or quite frankly. So we were pleased with the results in the quarter. And actually, one of them was subsequent to the quarter end. But we use the term recognizable retail logos on purpose because while they may not have been, you know, standalone press releases, they are logos that you would recognize. And so we're pleased with those wins, those competitive processes, and prevailing in those processes. And while they'll have very minimal impact in 2025, they will be part of the building blocks of how we're building the GMV picture and profile for 2026. And the teams also have a number of other opportunities in the pipeline that we're excited about. And unfortunately, as you've observed with us for many years, the timing is very choppy on when those things come across. Anthony Chukumba: Got it. Okay. So I guess that's a new project for my research associate to figure out who those retailers are. So second question. Okay. So you got $150 million for the Vive portfolio, that's more than 10% of your market cap. And then you've got this nine-figure windfall coming from the one big beautiful bill, which makes me feel dumber every time I have to say that. I guess my question then becomes, you know, how do you think about capital allocation? Right? You mentioned you're at 1.1 times leverage. You're very comfortable with that. I would think, particularly given where your stock is, that you would, you know, back up the truck in terms of buying back stock. But how do you sort of think about that? Brian Garner: Yeah, you're right. And that 1.1 times leverage was previous to the sale of the Vive portfolio. So but point taken. Yeah, I mean, you set it up. We look at it through the lens of net leverage ratio, right, which we think is kind of one and a half to two turns is kind of a comfort level. But then we look at our capital allocation priorities. And growing the business is priority one. And, obviously, we're in a negative GMV situation currently with leasing, but we don't expect that to be the case for, you know, forever. So, hopefully, we'll have some working capital requirements to grow GMV within the leasing business. Four is obviously a juggernaut. And while very short-duration transactions, will need some capital here, especially in the fourth quarter. And so but we're fortunate in that our business models do allow us to kind of check that box when it comes to organic growth and reinvesting in the business. Second, we have said that strategic or opportunistic M&A is something that's on our radar. And we would look for something synergistic to our ecosystem and that fits into our strengths of serving this below prime and underserved customer and assessing risk. And then absent those two first things, then we would define excess capital and look to return it to shareholders, and our history has been through repurchases. And, you know, obviously, we initiated a dividend about two years ago. So the capital lens and capital allocation priorities haven't changed. We just have a high-level problem of having more of it on the balance sheet right now, and so we'll look to check those three boxes and be good stewards of capital. Anthony Chukumba: Got it. That's helpful. Thanks, and good luck with the remainder of the year. Brian Garner: Thanks, Anthony. Operator: Thank you. Our next question is coming from the line of Hoang Nguyen with TD Cowen. Your line is now open. Hoang Nguyen: Good morning, team, and thanks for taking my questions. I guess you are now seeing some softness from maybe the consumers, the lower-end consumers. So but then you haven't tightened yet. So can you talk about the difference between now and maybe this time a year ago when you guys started to tighten? What's the difference that hasn't made you guys do additional tightening at this point, given the pressures that are starting to surface? Steve Michaels: Yeah, I mean, I think the difference is that the portfolio is in a different place than it was last year because of the tightening. So as you know, it turns over fairly quickly. And so the actions that we took in the back half of 'twenty-four, but more specifically in 'twenty-five, have helped to make the portfolio more healthy. We are seeing some elevated DQs, the delinquencies, but one of the good achievements of our data science teams are some of the changes they made to the approvals, approval amounts, is that we have been able to choke off, if you will, kind of some of the straight rollers or the no-pays that roll right to charge off or write off. So the idea that you can have some elevated delinquencies but not negative dispositions or negative outcomes, those things can be true at the same time. And so we are again, we're white-knuckled like we always are because portfolio is job one. We're watching the portfolio and poised if we have to do something, but the early indicators are showing us things that we should be paying attention to but have not just have not told us that we need to do additional tightening at this point. Brian Garner: Yeah. And I would just add to that. Dynamic Steve just illustrated is coming through in that 80 basis points of gross margin expansion. And so you asked what from a year-over-year perspective, what's the dynamic? We're certainly seeing a more favorable mix in the way that this plays out, and those changes we've made from a decisioning scientist standpoint are playing through. And so I think that's an important element in comparing and contrasting last year to this. Hoang Nguyen: Got it. And follow-up is on the Vive sales. Given that you guys are getting $150 million, and you guys didn't do buyback in 3Q, I mean, should we expect catch-up buyback in 4Q, and what you plan to do with this proceed going forward? Steve Michaels: Yeah. I mean, I guess I would just kind of refer to the answer previously about what we're going to do with the capital and just kind of go back to our capital allocation priorities. And then we don't really guide or speak to what we're going to do in the future about repurchases in any given quarter. And we would just look to the three-pillared strategy on capital allocation. Hoang Nguyen: Got it. Thank you. Operator: Thank you. Our next question is coming from the line of Brad Thomas with KeyBanc Capital Markets. Your line is now open. Brad Thomas: I wanted to follow-up on four. And first of all, congratulations on the nice momentum in that business, a really exciting outlook that I think is still underappreciated by many investors. I was curious, Steve, as you continue to grow that business, there's this sort of ongoing question of does BNPL compete with lease-to-own? And so I was curious as you have success cross-marketing, what your new learnings are as you have more overlap in who those customers are. Steve Michaels: Yeah. Thanks, Brad. And, yeah, we're very excited about four and its current state, but also its potential and where we're going to where we think we can take it. Yeah, I mean, it's been interesting to have that product in our ecosystem to be able to watch it because I you know, before well, we've had it for four years, but it's you know, it was very small in '21, '22, and '23. And the view has always been that BNPL and more specifically, the pay in four providers not you know, not some of the longer installment sales that people call BNPL. Are not really a competitor to leasing. Most very simply because of the average order value. Right? And the average order value is still in the 125 to a $140 range. Which is materially different than an $1,100 average ticket for our leasing business. Also, the categories that are predominant in our four business are different. Right? You have consumables and cosmetics and apparel and sneakers, and it's provided us a nice insight into those shopping patterns. And I think that is also a reason why they have diverging growth rates currently because people are still consuming those things that I mentioned at a $140 purchase, but they're maybe more reluctant or deferring purchases of the larger ticket durable goods that are traditionally in the leasing business. We are excited and encouraged by our cross-sell motions and developing those further. Because there is overlap in the consumer for four will serve a low prime consumer all the way up to a super prime consumer. But there is considerable overlap with the leasing customer. And to the extent that they can come to us if they need a new refrigerator from Samsung versus, you know, a shoe drop on a Saturday afternoon for some new Jordan. And use our different products for that is, we think, a big opportunity for us. And we're doing that currently, and we have plans to do it more and better in the future. But we don't really see the Pay in four as a competitor to leasing. It's and we believe that it can be complementary. Brad Thomas: That's very helpful. Thank you, Steve. And maybe a follow-up for Brian. I know you're not giving 2026 guidance, and Bob, you already took a stab at this. But as we think about the margin side of things, I guess, is there anything you would call out? Again, as you talked about with Bobby, it does feel like the revenue outlook at the beginning of next year would be challenging if the GMV is down at the end of this year? Outside of the leverage side of things, are there any broad steps that we should keep in mind as we think about margins? Brian Garner: Yes. No, it's a good question. It's something that we're very focused on and trying to make decisions internally to balance the investments that need to get made in this business that have high ROI potential and also adhering to this 11 to 13% for the lease certainly, for the leasing segment that we have set as a standard for prior years. And, you know, as implied in our guidance, I think we're right around the bottom end of that 11 to 13%. And as we look into 2026, the factor that really breathes some oxygen into the room is getting GMV moving in the right direction. You've got this right now in part of the headwind we're facing is a bit of a deleveraging just from a revenue perspective. And so that's task number one is to reinject a positive of, you know, a more favorable trend in GMV and working towards that end. And that's not stating, you know, anything for '26. That's just the mission as we try and improve that result. I think the other factor that I would point to, and Steve also offered some color in the prepared remarks, which was you know, four is north of 20% here in the quarter in terms of EBITDA margin. And so the ability to grow that business profitably and the contributions that we believe it can offer particularly as it gets scale, I think is really encouraging. You know, as you go kind of down to P&L, gross margin, we obviously had a really strong gross margin print here for the quarter. And I think there are some things that we have done internally around decisioning and trying to optimize that. And so I think that may very well be something that we can maintain into next year, which is encouraging. So all that being said, I think there are certainly the building blocks for us to maintain that 11 to 13% is the north star and, you know, try to work against this deleveraging component, build for and keep our costs in line while addressing the investments that need to get made. I think that's the task at hand. But we understand the mandate of not growing costs substantially faster than revenue. But we think we've got some good things in the hopper that'll help GMV going forward. Operator: Thank you. Our next question is coming from the line of John Hecht with Jefferies. Your line is now open. John Hecht: Good morning, guys. Thanks very much for taking my question. I guess just a little bit more into four just because, I know, Steve, you gave us some of the seasonality facts and so forth, but, you know, it's had very, you know, eight quarters of really good kind of growth patterns. Maybe can you give us some, you know, some insight as to, like, customer acquisition and Steve, you even mentioned, like, some the opportunity to cross-sell maybe just a little bit more into that opportunity. Steve Michaels: Sure. Yeah. And one of the really nice things about four so far, and we think it can continue, is just the organic growth that it's seeing in its MAUs, its installed the app downloads. And, ultimately, the GMV has really been driven primarily by referral and word-of-mouth, and user-generated content that wasn't paid for. We have a lot of good ambassadors out there that are really happy with four and getting their friends and family to use it. And that's evidenced by, you know, sometimes the four app in the App Store for iOS will be a top 10 shopping app for a period of time because of some TikTok video or something that we didn't pay for. We are leaning into some marketing as much to prove that we have the sophistication of that muscle in case we need it. Not really to sustain or to juice the growth rates. And so far, we're very pleased with the cost per download and the cost of customer acquisition in the small dollars that we're spending, but we believe that that's a lever that we can pull in the future if necessary. So the referral rate, the word-of-mouth, has been really strong. Four plus has been a very pleasant adoption rate. We introduced it in early 2024. And we have a very growing subscriber base. And as we said, about 80% of our GMV coming from four plus subscribers, which certainly helps that take rate metric that's prevalent in the industry. The cross-sell is an exciting area as well. It's an internal initiative for all of our teams. And we're doing some marketing primarily from the Ford acquired customers to the leasing business. But there's certainly opportunities to go bidirectional. And those are things that we'll be looking at, you know, for 2026 as well to go in both directions across the ecosystem of products. But four is, you know, really becoming a standout in the ecosystem. And getting more integrated. And we think that there's a lot of opportunities across the products. But one of the really nice things has been this organic word-of-mouth and referral marketing or sorry. Customer acquisition without paid marketing that we've been able to achieve. And it's kudos to the brand that the team has built. And the user acceptance and the frictionless experience. John Hecht: Okay. That's super helpful. And then I guess, follow-up maybe, Brian. I think you mentioned if you correct for Big Lots, and some of the tightening that your GMV growth is mid-single digits. I think I heard, you know, in a normal environment, and I know that's a tough question, to define what's a normal environment, but, you know, maybe if you think about the period of 2015 to 2020 or something, what do you perceive as kind of normal secular growth trends for GMV growth relative to that mid-single-digit number? Brian Garner: Yeah. I appreciate you directed that at me versus Steve, but that is a tough question. You know? And, look, the period that you're referring to for 2015 to 2020, that was an environment where I think it was certainly, there was a lot of momentum on the enterprise level. Retailers. And in 2019, launching Lowe's and Best Buy was certainly a high growth period. So it's tough to normalize for it. I guess what I would say is we're looking at the GMV opportunity. We see the pipeline is strong. We see conversations with meaningful retailers that while the sales cycle is long, we are engaging them. And we think there's a lot of opportunity still within our current installed base. As we look at, you know, the metrics across the board, whether it's levels of conversion, or leases per door productivity type metrics, there's a lot of opportunity there. And I'm not giving a satisfying answer about a specific range that you can take, say, into '26 and beyond. I would just say that, you know, if we're growing mid-single digits with the headwinds that are existing today, when you adjust for decisioning and the Big Lots bankruptcy, it gives it's encouraging to me to think about what still leverage still exists for us to penetrate the existing book and beyond? And it makes you feel comfortable that we should be able to drive that north. And that's you know, our best days are not behind us, and I think we've got a lot of opportunity ahead. So that's probably the color I would offer, and welcome any thoughts you might have on that. Steve Michaels: No. I mean, you nailed it. We've got good growth available to us from within our installed base. And, you know, we'd love to rerun the 2015 to 2020 time frame because it was a growth period of, you know, our retailers had positive comps, and we were adding new retailers to the platform all the time. So that's certainly what we're rooting for now. John Hecht: Right. Thank you guys very much for the context. Operator: Thank you. Our next question is coming from the line of Vincent Caintic with BTIG. Your line is now open. Vincent Caintic: Hey. Good morning. Thanks for taking my questions. Kind of first one on GMV, and I guess a two-part question. We talked earlier about the underwriting posture and that you know, feel the needs to tighten yet just kind of wondering if you can put give us some sort of framework for what your underwriting posture, I guess, currently can absorb and maybe in terms of what how we think about the macro or consumer deterioration and maybe what would cause it you have to have to tighten further. And then, second part, so you mentioned those retailers that you signed up. And if you could maybe disclose, like, what the potential opportunity is in terms of the GMV size, that would be very helpful. Thank you. Steve Michaels: Yeah. I mean, Vincent, on the decisioning side, I mean, we've got all kinds of indicators that we look at from first pay bounces to four-week delinquencies to roll rates from bucket to bucket, all the things that you would imagine we're looking at. And, you know, we don't just look at one. We look at all of them because, as I mentioned, DQs are elevated, but it's not something that is impacting overall portfolio yield or negative disposition outcomes currently. So it's, you know, it's a mosaic, if you will, of all those things. And we know what we need to see in order to tighten. And I want to be clear, though. It's when we say like, we may see something to tighten, but it won't be, like, a broad brush stroke changing internal risk scores across every retailer. It could be pockets. It could be in a particular vertical. It could be in a particular retailer. It could be in particular geography. It's very dialed in. Credit to the team for that. So are the things we're looking at, and we look at them very, very frequently. With a lot of folks around the room and on the Teams meeting weighing in. So the three retailers, I would say that we would look at those. They're recognizable logos, so they're not some two-store mattress chain in Denver. And of the three, it's new to them. So as you probably remember from previous when someone adopts a new payment type, it doesn't go from zero to 60 overnight. It kind of ramps up through training and productivity gains. And so we will be working with the counterparts at those retailers to make sure that we move up that productivity curve as fast as possible. I guess you kind of look at them as, like, a super regional, if you will, from a sizing standpoint. Vincent Caintic: Okay. Perfect. That's super helpful. Thank you. And then last question. I wanted to go back to four. So great GMV results over the past eight quarters, and then it was nice to see that strong EBITDA margin this quarter. I know there's variability as you're growing that business significantly. But I'm just wondering if you can maybe talk about how you think of that business at some point in the future when it reaches maturity. What sort of what's the economics? What's the maybe the EBITDA margins of that business? Because I guess when I look at it, I'm making comparisons to some of the other public buy now pay later companies like, you know, Sezzle and Affirm and seeing their high EBITDA margin. So I'm just kind of wondering how you're thinking about that framework, if you can help us out. Thank you. Steve Michaels: Yeah, Vincent. I mean, I think that, you know, the public comps are certainly a place to look. And four has pivoted over the last several years to a direct-to-consumer model. So probably similar, but several years behind, Sezzle. And so if you think about where we were year-to-date with four from an EBITDA margin standpoint, and even though it's going to swing to a loss here in Q4, which like I said, is not a surprise to us and is nothing to be worried about, but it'll bring probably that full-year EBITDA margin down into the mid to, you know, mid-ish single digits. But we do expect with two dynamics scale, as you mentioned, and then with that scale comes more GMV coming from repeat shoppers, so scale and improving loss rates over time we believe, can will result in margin improvement over the next several years. And the unknown is just the rate of growth. Right? So we've been growing, you know, of a 150% GMV each quarter this I guess, it was, like, one forty-seven in Q1, but been over one sixty in Q2 and Q3. You know, just from the law of numbers, you would expect that to decelerate in 2026. But you know, whether there's an opportunity for us to it decelerates a lot, then you'd have more margin expansion. But if we keep the growth there in an effort to get to that scale faster, then we'll have margin expansion, but not as much as you would if you really throttled the growth. So we're not in the business of throttling growth as long as we feel good about the unit economics of each deal we're putting out. And so but over the next several years, we see no reason why we can't look more like those public comps that you're citing there. And that's an exciting opportunity. Vincent Caintic: Okay. Great. Very helpful. Thank you. Operator: Thank you. And I'm showing no further questions in the queue at this time. I'll now turn the call back over to Steve Michaels for any closing remarks. Steve Michaels: Yeah. Thank you very much. Appreciate everybody joining us today. Your interest in PROG. We delivered another strong quarter and are excited about our opportunity to finish the year strong and then set up for 2026, which we'll talk more about here in February. Thank you so much, and have a great day. Operator: This concludes today's conference call. Thank you for your participation. And you may now disconnect. Goodbye.
Operator: Greetings, and welcome to the Lithia Motors, Inc.'s 2025 third quarter Earnings Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance, it is now my pleasure to introduce your host, Jardon Jaramillo. Thank you. You may begin. Good morning. Thank you for joining us for our third quarter earnings call. Jardon Jaramillo: With me today are Bryan DeBoer, President and CEO; Tina Miller, Senior Vice President and CFO; and Chuck Lietz, Senior Vice President of Driveway Finance. Today's discussion may include statements about future events, financial projections, and expectations about the company's product, markets, and growth. Such statements are forward-looking and subject to risks and uncertainties that could cause actual results to materially differ from the statements made. We disclose those risks and uncertainties we deem to be material in our filings with the Securities and Exchange Commission. We urge you to carefully consider these disclosures and not to place undue reliance on forward-looking statements. We undertake no duty to update any forward-looking statements that are made as of the date of this release. Our results discussed today include references to non-GAAP financial measures. Please refer to the text of today's press release for reconciliation of comparable GAAP measures. We have also posted an updated investor presentation on our website investors.lithiadriveway.com, highlighting our third quarter results. With that, I would like to turn the call over to Bryan DeBoer, President and CEO. Bryan DeBoer: Thank you, Jardon. Good morning, and welcome to our third quarter earnings call. This quarter was all about execution at speed. We improved our same-store revenue across all business lines, focused on cost control, and deepened the integration of our adjacencies within store operations. The result is a high-quality earnings mix with more profits coming from recurring streams to create compounding cash flows. Quarterly revenue was $9.7 billion, up 4.9% year over year, and adjusted diluted EPS was $9.50, up 17%. These outcomes reflect the power of our ecosystem in combining local market leadership with a unique omnichannel platform. This quarter highlights an inflection in our performance with strong top-line growth across all business lines, highlighted by the accelerated growth in our highly profitable used vehicle and aftersales segments, demonstrating our focus on execution. We look to continue to capture market share and increase customer loyalty, finishing strong in 2025 and springboarding into 2026. Tina Miller: Our team is quickly converting our momentum into share gains, faster throughput, and sustained cost efficiency so earnings power builds from here. Our unique and diversified earnings engine is the industry while also being more durable, despite a mixed customer backdrop of normalized GPUs and customer affordability issues. The gross profit growth in our recurring aftersales department, resilient F&I attachments, and a focus on increasing market share created strong top and bottom-line results. Combined with tight SG&A control and a focus on fast-turning used cars, we have multiple levers to expand margin and cash flow in any environment. Our results reflect our momentum in building value for customers through simple, empowered, and convenient solutions. As such, same-store revenues for the quarter increased 7.7%, driven by growth in every business line. Despite continued normalization of front-end GPUs, total gross profit also increased 3.2%. Total vehicle GPU was $4,109, down $216 year over year, consistent with industry trends. Note that all vehicle operation results are on a same-store basis from this point forward. New and used volumes both contributed nicely to top-line growth. New retail revenue grew 5.5% with units up 2.5%. New GPU was $2,867, down $348 sequentially. The past few quarters of lagging domestic brand performance shifted this quarter and drove most of our year-over-year improvement. Adversely, luxury brands performed the weakest year over year and import brands were relatively flat. Our used vehicle performance continues to improve nicely, now considerably outperforming the industry with used retail revenue increases of 11.8% over last year. This was driven by a 6.3% increase in unit growth and higher average selling prices. Our value segments continue to deliver high growth with a 22.3% unit increase year over year. Well done, team Lithia. Lastly, used front-end GPU was $1,767, declining by $90 sequentially. Our strategic focus on used vehicles provides another durable layer in any cycle and affordability level. Bryan DeBoer: We will continue to prioritize high ROI used vehicles, keeping all price levels of our vehicles in our ecosystem, turning inventory efficiently, and increasing the F&I and aftersales attachment to deliver more connected and repetitive ownership experiences with our customers. F&I also continues to grow with F&I revenue up 5.7%, reflecting our continued focus and opportunity in this high throughput area. F&I per retail unit reached $1,847, up $20 year over year, which includes the impact of lower F&I from increasing penetration of EV leases and strengthening DFC penetration in the quarter. Vehicle inventory and carrying costs improved nicely with new day supply at 52 days, a decrease of 11 days sequentially. Used DSO was 46 days versus 48 in Q2. Floorplan interest expense declined $19 million year over year due to tailwinds from decreases in inventory balances and slightly lower interest rates. Aftersales continues to be the largest single driver of customer retention and earnings growth. Aftersales revenue increased 3.9% while gross profit rose a hefty 9.1%, with margins expanding to 58.4%, up 280 basis points year over year. We saw strength in all key aftersales categories with customer pay gross profit up 9.2% and warranty gross profit up 10.8%. The strong growth across both categories shows the resilience and opportunity of aftersales and illustrates the value of increasing the number and frequency of customers in our ecosystem. Cost discipline driven by productivity gains and managing performance through people is a key element of our earnings engine. North America's adjusted SG&A was flat sequentially at 64.8%, as we bent the cost curve even as GPUs continued to normalize. In The UK, our teams are responding to market conditions and regulatory labor costs that increased in the year by improving productivity and managing performance through people. Globally, we are increasing market share and growing our high-margin aftersales business as we simplify the tech stack with Pinewood AI, retire duplicative systems, and increase sales efficiency without compromising the customer experiences to drive incremental SG&A leverage. This leverage is amplified by our digital platforms, where we're unifying the customer experience across driveway.com, green cars, and our My Driveway owner portal to make shopping, financing, and service simpler and faster. The sale of our North American JV back to Pinewood AI streamlines the path to market for North America rollout, creating a single industry platform for stores and customers, reducing duplication, and increasing speed of delivery by empowering associates and customers. Together, these steps deepen retention, support SG&A leverage, and reinforce the power of our ecosystem. Driveway Finance continues to build a growing base of stable earnings, with healthy spreads and disciplined underwriting. The path to higher penetration is clear as our focus on growing market share provides us a larger funnel of high-quality loans as we move towards our long-term targets, converting retail demand into recurring stable earnings through any economic cycle. I'm happy to congratulate our DFC team and our store leaders for achieving our 15% penetration rate milestone a few quarters earlier than expected. Well done, team. Turning to capital strategy. We remain focused on investing where we can create the most shareholder value. With our stock trading at a meaningful discount, this quarter we prioritized repurchases, buying back 5.1% of our outstanding shares at prices that will drive significant long-term accretion. This quarter, we issued low-cost, well-priced bonds, increasing our flexibility without stretching risk. Looking ahead, we'll keep making incremental accretive decisions, buying back more when the discount is wide, funding selective acquisitions when returns are clear and more affordable, and continuing to invest in technology. Each element of our ecosystem is building traction and momentum. We're increasing market share and productivity, building stable earnings power in our service drives, accelerating high ROI, value autos, and scaling our adjacencies while improving SG&A leverage. Optionality in our free cash flows and expertise in M&A provides a strong foundation to grow durable EPS and cash flow in any environment. Strategic acquisitions remain a core pillar and key differentiator of our growth model. From $12.7 billion of revenue in 2019 to approaching $40 billion today, we've paired scale with consistent EPS compounding in one of the most unconsolidated retail sectors. This growth was accomplished while also building a much more diversified and profitable business model. Today, our cash engine and unique ecosystem give us the flexibility to both accelerate buybacks and continue to grow organically through exceptionally high return targeted acquisitions. We remain disciplined and U.S.-focused in our acquisitions, prioritizing stores that strengthen our network, especially in the Southeast and South Central regions, where population growth and operating profits are strongest. Alongside these additions to our network in the quarter, we reiterate our $2 billion acquisition revenue estimate for 2025, expecting a strong finish with some complementary acquisitions by year-end. Our acquisition financial hurdle rates are unchanged to acquire at 15 to 30% of revenue, or three to six times normalized EBITDA with a 15% minimum after-tax return. It is important to note that our track record over the past decade has yielded high rates of return, nearly doubling these hurdle rates. Over the long term, we continue to target $2 to $4 billion of acquired revenue annually, deploying capital where each incremental dollar compounds value per share the fastest. If seller expectations stay elevated, we'll lean harder into repurchases. When fit and value align, we move with speed to integrate accretive acquisitions. With the foundation set, and strategic design now providing meaningful tailwinds, Lithia Motors, Inc.'s differentiated model is delivering. Our long-term $2 of EPS per $1 billion of revenue targets are powered by a consistent set of levers. Lift store level productivity and throughput, expand our footprint and digital reach to grow U.S. and global market share, increase DFC penetration, reduce costs through scale efficiencies, SG&A discipline, and an optimized capital structure, and capture rising contributions from omnichannel adjacencies. Together, these levers will continue to convert momentum into durable EPS and cash flow growth. Our nationwide network of amazing people, paired with industry-leading digital tools, is driving engagement across the full ownership life cycle. Strengthening used vehicle aftersales in our captive finance business deepens customer economics and smooths out any economic cycles while inventory and network scale improve speed and choice. Operational leaders across the network are driving store and departmental towards potential, integrating adjacencies, leveraging our ecosystem, and elevating our customers' experiences. The result is a model with consistency, resilience, flexibility, and visible compounding power that will deliver accelerating shareholder value. With that, I'll turn the call over to Tina. Tina Miller: Thank you, Bryan. Our third quarter momentum is clear. Year-over-year EPS improved, financing operations delivered continued growth on solid credit and healthy spreads, and we made progress on SG&A efficiency. Strong free cash flow generation supported meaningful share repurchases, and our balance sheet remains flexible with ample liquidity to fund growth and returns. These outcomes reflect disciplined cost actions, a maturing captive finance platform, and balanced capital deployment. Taken together, they position us to continue compounding value per share. Adjusted SG&A as a percentage of gross profit was 67.9% versus 66% a year ago. On a same-store basis, SG&A was 67.1% compared with 65.1%. As Bryan mentioned, sequential SG&A in North America was essentially flat at 64.8%, which reflects the cost discipline of our teams considering the sequential decrease in total vehicle GPU of $315. Our teams continue to focus on managing costs through growing market share and gross profit as we start to lap prior comps that reflect our sixty-day cost saving last year. In The UK, macro and mixed headwinds pressured margins and labor costs, we are focused on actions to increase gross profit, including increasing market share in used autos and aftersales and reducing SG&A through efficiency and cost control. We've seen solid SG&A results as we bend the cost curve in North America, we're making improvements across our network. Particularly in The UK with specific levers raising productivity through performance management and technology, simplifying the tech stack, and retiring duplicative systems, renegotiating national vendor contracts, and automating back-office workflows. These actions should build benefits each quarter, containing the SG&A trend even if front-end GPUs continue to normalize. Driveway Finance Corporation continues to scale profitably, underscoring the differentiation of our model. Financing operations income was $19 million in the quarter, with portfolio growth offsetting seasonal trends and profitability. We achieved $52 million in financing operations for the year to date, hitting the low end of our full-year expectations a quarter early. Net interest margin of 4.6% was up 70 basis points year over year, while North America penetration reached 14.5%, up 290 basis points year over year. Our disciplined underwriting and credit management practices resulted in strong provision experience, and we have not seen meaningful changes in consumer credit trends within our portfolio. Our position at the top of the demand funnel and high-quality originations keep credit risk low and capital efficient, managed receivables now above $4.5 billion, the maturing portfolio is delivering profitability that our earnings trajectory with steady, consistent growth. Strong origination flow, improving margins, and a clear runway to increase retail penetration rates gives us confidence in the path of our long-term DFC profitability targets. Now moving on to our cash flow and balance sheet health. We reported adjusted EBITDA of $438 million in the third quarter, a 7.7% increase year over year, primarily driven by lower flooring interest. We generated $174 million of free cash flow, converting operating momentum into liquidity, that lets us both return capital and invest for growth while maintaining a strong balance sheet. This steady self-funded cash engine keeps us nimble and focused on deploying dollars where they compound value fastest. This quarter, we strengthened our capital allocation commitment to focus on share buybacks. With our share price significantly lower than intrinsic value, we allocated approximately 60% of capital deployment to share repurchases, buying back 5.1% outstanding shares at an average price of $312. So far in 2025, we have repurchased 8% of outstanding shares at an average price of $313. Slightly less than one-third of capital was deployed to high-quality acquisitions in targeted regions and the remainder to store capital expenditures, customer experience, and efficiency initiatives. Our capital allocation philosophy is to act opportunistically and with leverage in our target range and ample liquidity, accelerated share repurchases to capitalize on the meaningful disconnect between our stock price and the fundamental value of our business. This quarter, higher buyback pace allows us to compound returns for shareholders while still preserving capacity for high-return strategic acquisitions. Our strategy remains consistent while we continue to grow. Generating differentiated stable earnings from an omnichannel platform that serves the full ownership cycle. With talented teams, class-leading digital and financing capabilities, and a strong flexible balance sheet, we're scaling core operations and high-margin adjacencies with measured discipline. Our omnichannel model creates durability and flexibility as business conditions evolve. Preserving capital flexibility to deploy where returns are highest. As we move into 2026 and beyond, we will continue our focus on translating share gains and throughput into cash flows compounding value per share. This concludes our prepared remarks. With that, I'll turn the call over to the operator for questions. Operator? Operator: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press 2 to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. One moment, while we poll for questions. Our first question comes from the line of Ryan Sigdahl with Craig Hallum Capital Group. Please proceed with your question. Ryan Sigdahl: Hey. Good morning, Bryan. Tina. Nice to see the operational improvements. Wanna start with EVs. EVs were given the tax credit expiration. But it seems like Lithia Motors, Inc. cleared through most of their EV inventory or refreshed a lot of it anyways. But can you talk through kind of what you saw in the quarter, what that meant from a sales standpoint and then also GPU standpoint, and then how you think about that category going forward? Bryan DeBoer: Sure, Ryan. This is Bryan. Thanks for joining us today. Believe it or not, our electrified vehicles in the quarters were back to 43% of our total new car mix. Which was a nice number. We actually started the month of September and this is close to correct. Okay? I think we had 6,000 electrified vehicles that qualified for the $7,500 federal credit. Going into the month, and then we ended at just under 2,000. With really the only product that's remaining is a little bit of the higher price stuff. Which we spoke to in the past. The other thing that's pretty important to remember is manufacturers incentivized those cars quite nicely as well. Many of the manufacturers are carrying over those incentives plus that we they're basically replacing the $7,500 credit on top of that. To be able to keep that volume, hopefully, somewhat static. I imagine it's gonna drop a little bit, and I don't have the preliminary October results, but I would imagine it'll drop a little bit. But the important thing to remember is that the way that they push those units out the door and what the impact is of the $7,500 is basically an affordability issue because most of those vehicles were leased. So our lease penetration I think, was the highest we've ever had on a blended basis. We were almost 40% lease penetration on new vehicles, which was quite nice, which means most of those customers are coming back in the next twenty-four to thirty months or whatever the length of those terms are. So need to see that we can move the market when we need to. And I think what I would take away from it is those vehicles, those 4,000 vehicles or so that we pushed out, in September were really first-generation BEVs. A lot of first-generation BEVs, Hondas, Toyotas, Subarus, and some of the domestic products that now second-generation cars are coming either in the twenty-sixth model cycle by the end of the year or early in 2026. So we're gonna have rather than a 200-mile range car, we're gonna have three to 400-mile range car. For about the same price. Ryan Sigdahl: Yeah. It's great color, and not just consumers coming back, but like you said, the first rate of refusal for that inventory on the used side coming in the door for you guys. Wanna switch over to The UK. Appreciate the disclosure on kinda North America SG&A to gross. If I back into it, I think it implies The UK was something in the high 80 range. Understanding kind of the margin challenges there, the labor challenges, etcetera. But sounds like a lot of company-specific initiatives from cost efficiencies focusing on parts and service and used and things that The US did, you know, a decade ago. But do you see any kind of line of sight to improve market conditions there, or is it really kind of a self-help do what you can do given the Chinese mix and kind of the constraints in the market? Bryan DeBoer: No, Ryan. Great questions. And I think the insights on the labor market really happened in January. And it was twofold. One was a minimum wage, and then one was a payroll tax. And the actual impact to the organization was $20 million. For us. Okay? And they curbed about $11 million of it in the first six months, sheerly through headcount reductions and productivity gains. They've now earmarked another 8 or $9 million, but it'll get them beyond what the impact was, but there's another 3 million coming in 2026. So they're really working on how to do that. And I think even though our SG&A is higher than last year, and the market has shifted, our team's doing a pretty nice job relatively speaking of how to respond to that. And a lot of the increases I think we were up $1,010 million dollars approximately in operational net profit in parts and service. So big improvement there. Our used cars are beating the market by a little bit, and our new cars are in line with the marketplace. And I would say this, last year, we had let's see, we had three BYD stores and an MG store which are Chinese brands. This year, right now, we have seven total brand total Chinese stores with, I believe, five more that open in the next sixty days. So unlike The United States where you have to go buy and pay goodwill to be able to shift your manufacturer mix in The UK If you've got a facility and you've got good relationships, with manufacturers, you have the ability to add and respond pretty quickly to the marketplace. So we're pretty pleased about what we're seeing there and our team there is doing a really nice job responding. So we should exit the year with almost a dozen Chinese brands, which are up a pretty nice amount. Now some brands like Ford and stuff are up quite nicely as well. So you know, I think we're able to respond to the market. But like you said, it's our response. It's not necessarily coming from strength in the marketplace right now. Ryan Sigdahl: Helpful. Thanks, Bryan. Good luck. Bryan DeBoer: Thanks, Ryan. Operator: Thank you. Our next question comes from the line of Federico Merendi with Bank of America. Please proceed with your question. Federico Merendi: Good morning, everybody. We've seen some turmoil in the supply market, and today, there were more news on that front. So what my question is, Bryan, could you give us an overview of the used market and how subprime can impact it? I understand that your higher credit quality, but what are the ramifications for this the credit portfolio? Bryan DeBoer: Would love to, Federico. And I think let me speak directly to the used car market as a whole. And as a whole for Lithia Motors, Inc. not specifically to our DFC part of our organization. Okay? Because their buying behaviors are different in the marketplace. Of more of a prime type of lender. What we're seeing in the in the marketplace, in the used car marketplace, is a lot of opportunity. This is from a Lithia standpoint. In the value auto segment. Okay? And the value auto segment is our most affordable cars. And I think there's a general belief in the industry that value autos are driven off of low-quality credit. It's the exact inverse of what you think. Okay? Lower-priced vehicles are only financed about 50% of the time. Okay? Whereas a certified vehicle is typically financed 90% of the time. The reason why is that lower-priced vehicles or what we call value auto are typically quite scarce. Okay? They take money to recondition. So your price to book value is typically quite high, meaning it's difficult to finance. Okay? And I got Chuck sitting next to me here shaking his head that those are really hard cars to finance because you know, at a $15,000 car, if you've got $3 in disequity, you're now financing 20% over LTV with profitability and without down payment. So you've got some big anomalies that remember that value autos are driven off a higher credit quality customer typically saves their money or has the ability to finance at a fairly high LTV. Loan to value. Okay? So really interesting dynamic, and this is what we teach our stores and why our value autos were up 22% on a unit basis. In the quarter. And a lot of our real strong tailwinds. Other market dynamics that are important to remember. We actually achieved 74% of our used car sourcing. In the quarter was bought directly from consumers. Okay? And that's trade-in, obviously, or buying them directly off the street from consumers. Or off-lease vehicles. So on and so on. That's the highest we've had all year. Okay? Meaning, that our teams are keeping pretty much every vehicle that they can make stop, steer, and go. So you're selling a safe vehicle, but you're digging into the affordability landscape of these high-quality customers that ultimately you make pretty good money on because the vehicle is scarce. Okay? Some other little tidbits of information Our margins on used vehicles, and I believe this is more of a Lithia thing because we now have driveway and green cars to be able to spread our wings and get more eyes in front of every type of car. And this is a little better than what we've been in the past. We made 5.1, 5.2% margins on both certified and core product. Okay? As a percentage. Right? Our value auto this quarter was almost 16%. Okay? And remember, that's a lot lower-priced car So our actual annual return on our value add is a 130% cash on cash return. Okay? Massive improvement. Relative to certified and core, that's under 50%. Okay? So nice improvements. We're pretty excited about what's happening in that space. To finish that thought, Federico, remember that the mix in the market nationally in North America only 11% of used vehicles sold are one to three-year-old vehicles. Okay? Only 11%. Okay? So we spend very little of our time, and it only makes up about a fifth of our total sales. Selling those. We do it because we've got the off-lease returns, and it's easy People expect us to have those certified cars. Another quarter of the market comes from Coradas or three to eight-year-old vehicles. Okay? And we were about you know, that makes up 26% of the market which leaves over nine-year-old vehicles makes up 63% of the marketplace. Okay? That's a huge amount. Okay? That's a number that's bigger than new car star. Okay? So remember, that's where the big money is in the business, and as a new car retailer, we're top of funnel to get the first waterfall effect of trade-in and then the second waterfall effect and ultimately, that second and third trade-in, which is really that value auto that brings those nice returns that we're looking at. Hopefully, that helped, Federico. Thanks for your question. Federico Merendi: Thank you, Bryan. It was super helpful. And the second question I have is on The UK and the regulatory environment. I mean, we have seen that in The US, the EV regulatory environment has changed. And Continental Europe is it seems that they're moving to that direction. What do you think is going to happen in The UK over the next I don't know, eighteen months in the regard of EVs. Bryan DeBoer: Yeah. So, Federico, let me just reiterate for everyone that UK makes up a little over 10% of our revenue and makes up about five to 6% of our net profit. So we don't have a ton of impact coming from The UK. But what we're seeing is growth of the Chinese brand but it's not coming from the electrified segment. It's coming from their introduction of ICE vehicles, into the marketplace. So and I think when they when BYD when MG and those others first came in the market, they were electrified vehicles. Okay? Today, the reason why they're gaining market share is they're selling ICE vehicles and plug-ins. Okay? And I was there four weeks ago, okay, and traveled the marketplace. We now have a cherry franchise there as well. Looking at the product and what I see in the electrified vehicles. At the price point that they're selling them for in The UK, they have zero ability to compete in North America. Okay? And that may change, and they may have margin that they can still take out of the formula. But I looked at a cherry vehicle that was £37,000, which is an equivalent to almost $48,500 American dollars. Okay? It was an electrified vehicle that had about a 256, 57-mile range. Okay? And wouldn't hold a candle to any of the imports or the domestic cars at about $10,000 less. Okay? So we're actually not as concerned, and it's great to be able to see what's happening in The UK. Remember this also. In China and UK, they've plateaued in terms of electrified vehicle sales. They both sit at about 55%. Penetration rates. Okay? And that's the same as it was last year. Okay? So, really, the impact that's happening is coming from the ICE vehicles that I don't think that message gets out there. I do believe that the labor Party in The United Kingdom is definitely into sustainable vehicles. You know? At times, I wish we were a little bit more into that as well, but you know, that's probably now five to seven years out in in The United States. But you know, it is making it hard expense-wise. In the in The United Kingdom, and I imagine they'll embellish that further with more quotas on electrified vehicles. Federico Merendi: Thank you very much, Bryan. Bryan DeBoer: Thank you. Operator: Thank you. Our next question comes from the line of Michael Ward with Citi Research. Please proceed with your question. Michael Ward: Good morning, Bryan. How are you, sir? Bryan DeBoer: Good. Did you Two things. On the USB EV sales, you mentioned there are about 4,000 units. If I believe what I hear of the industry, the margin on those is very light. So if you take that out, you probably your overall gross new vehicle gross has been relatively flat. If I'm doing the math right, over the last couple of quarters. Is that correct? Bryan DeBoer: I believe you're correct, Tina. Do you got any insights there? I'm looking here real quickly. Tina Miller: Yeah. I think that that's a fair assumption, Mike, that the BEVs are a little bit lighter, and we're pushing those out the doors. Our manufacturers are asking us to help them meet their CAFE standards so they can ultimately continue to build other higher demand cars at the current time. Michael Ward: You know? And Yeah. Now we need better cars. It is. It is. What kind of plan? It's a much higher repeat buyer too. Right? The EVs? Like, once they people buy them, they love them. Bryan DeBoer: I think you're right about that. The big thing is is we're conquesting second and third-generation Tesla customers. Massively conquesting them. So that's a positive thing, especially in the West where Tesla penetration is high. And I would say our managers and store leaders are not as opinionated of whether they should sell an electric car plug-in hybrid, or an ICE engine. You know? They seem pretty savvy on being able to convert customers. And I think what a customer gets is a wonderful service and aftersales experience. So the life cycle of the ownership is a much different experience than maybe their first one or two experiences with the Teslas. And to be fair, most manufacturers now have competitive product in price in range, and in speed, which is something that a man that a lot of consumers are looking at that the performance elements of the car are quite excited and we're really excited about the next gen of the of the Japanese and Korean imports that are hitting in the next couple months. Okay, to really be able to start to push those vehicles out to the consumers at really affordable levels. Michael Ward: And it sounds like the profitability aspect probably bottomed with the three q. With the the rush to buy. So maybe that's just a little bit. The second thing is, you kind of alluded to that you have about it sounds like, about $1 billion in acquisitions that could close by year-end. Is that what you're seeing? And is have the multiples come back into check? And it looks like it sounds like you have a lot of opportunity there. Bryan DeBoer: Yeah. You know us. I mean, we don't use these threats on deals. We're fortunate that we've got great relationships with our manufacturer partners, allows us to fish in every possible pond. And I think in North America, we've been real fortunate to be able to find a few deals in the first March of the year. But we've got some really nice deals coming in Q4. And are pretty excited that you can find them in this type of market, especially the quality of the deals and you know, it's those long-term relationships that may take three to five years to be to be get into that point where certain things start to drive the decisioning of those sellers. And we're fortunate that they chose us to be able to be their suitors. And their successors at what we would look at as, you know, well within our 15% hurdle rates on ROI and three to six times EBITDA and on and so on. Michael Ward: Well, you're keeping that allocation plan tight. It's nice to see, so thank you. Bryan DeBoer: Thank you, Mike. Michael Ward: Appreciate it. Operator: Thank you. Our next question comes from the line of Rajat Gupta with JPMorgan. Please proceed with your question. Rajat Gupta: Great. Thanks for taking the questions. I just wanted to dig in a little bit more on The U.S. Versus UK performance. Anything more you can share in terms of, you know, how the GPUs were in US versus UK? And how was the services growth, I appreciate the SG&A comment, but just any more clarity around the profit performance would be helpful. And then, relatedly, any more color on US in terms of how you feel you're doing versus the marketplace now? Particularly given, like, historically, you've had some tough exposure in terms of your regional mix. So curious, like, how that's doing versus the broader market. And I have a quick follow-up. Thanks. Bryan DeBoer: Yeah. Sure, Raj. I think maybe I'll spend most of the time on what we think of our North American performance and where we where we sit in the marketplace. I mean, the it does look like that we massively beat on used cars. The market is showing flat. Okay? So think we sit quite nicely at 11.8% revenue increase and almost 7% unit increase. Also, you reflect back on the used-only retailers that have reported so far, remember, they were down 6%. So it speaks to the strength of our model and ability to respond to the marketplace in a little bit tougher conditions. We're pretty excited about that. Also, if you look at our aftersales business, we were up over 9% in gross profit. Okay, which was a really really nice number as well. And that's driving a lot of the profitability. In The United States. Which is great. I mean, really, the new car market was where maybe a little bit of weakness lied. Okay, because ultimately, our GPUs did come down. Even though we were up five or 6%, that also looks better than what the marketplace was. So I'd say this. I think our team is responding and you know, to be fair, last quarter, our results were kind of middle of the pack. This quarter, I believe that we're going to be we're going to look nice in terms of top-line revenue growth and we'll see tomorrow and next week of where we sit. And no matter what, I believe that we've got lots of opportunity I think our team believes there's lots of opportunity. And they're really driving towards that two to one ratio. In terms of The UK, The UK's profitability was only was down 2.4% year over year. So it wasn't that much, and it didn't affect things that much in terms of our overall numbers. So most of the $300 in GPU was truly North America. Okay, which is the sound byte. Now we did we have read some third-party information. It appears that the GPUs as a whole were down almost 16% on new vehicles. Okay, for the nation. Okay? So if that's true, we probably beat by five to 7% in terms of GPUs and obviously on the top-line side on new unit volume, we beat on a pretty good amount there as well. So all in all, I can tell you this. My team is looking forward to the challenge, and I think being back in operations and getting to know a lot of our operational middle leaders and top leaders a little bit better. We've got great people. That understand the opportunity and know it's game on and are looking for how to show that Lithia Motors, Inc. is the best operator in the segment. And most importantly, how to leverage the ecosystem and the massive amounts of acquisitions that we've added over the last five years, to really differentiate ourselves as operators. Rajat Gupta: Got it. Got it. That's helpful color. I just wanna follow-up on, you know, Mike's question around just m and a. Just a little more finer point on that. If possible. You reiterated your $2 billion target for the year. But you also noted, like, you're very return focused. So I'm curious, like, is that, like, a hard target that you wanna meet here in the fourth quarter? If not, like, would we expect that excess cash flow to go into buybacks? I'm just curious, like, know, how much of I mean, is that something you're, like, you're forcefully working towards to achieve? Know, in the fourth quarter? Thanks. Bryan DeBoer: Yeah. I think the return thresholds at any given time are balanced. But we that is a hard number. We don't flex. Okay? And we haven't had to flex even over the last three or four years where earnings were elevated and as such prices were elevated, we've always bought off normalized earnings. We have not put in the value creation that comes from the ecosystems in our return metrics still. Okay, which gives us another 50% of lift when we think about, where we stand there. So you know, there's good opportunity out there. You just gotta be able to fish in a bigger pond. To find the opportunities that are great. Okay? And I think you know, one thing that I know about how we think about our network is we do look at density. We are starting to gain market share and expand loyalty. Okay? And at about 188 miles from over 95% of the population in our in in, The United States. We sit in a nice place to be able to grow and push market share. And I think our team spent the last three or four years getting to understand the benefits of what driveway.com can do what the My Driveway consumer portal can do, and how DSC can help drive sales. While still being extremely controlled in what we buy. In DFC to be able to get there. So we're pretty pleased and you saw that we bought, what, 5.1% of our shares back in one quarter. Okay? The implications of that, we buy the whole company back in five years. Okay? That's 20 quarters. Okay? So I don't believe that can happen. And if but if the world can't see what we built, and can't see that we know what we're doing and that we had the courage and the boldness to be able to redesign our organization for a higher profit model that has lower costs okay, and can't see that the synergies that are coming from DSC and Driveway and Fleet Management businesses and Pinewood experiences and partnerships I'm not sure what they're looking at, but this management team and our board believe that we have the we have a rocket launching into space. And if people don't get it, we'll continue to buy our shares back. Rajat Gupta: Understood. Thanks for all the color, and good luck. Operator: Thank you. Our next question comes from the line of Glenn Chin with Seaport Research Partners. Please proceed with your question. Glenn Chin: Good morning, folks. Finally. Can we just scroll down a little more into your use performance? So you know, as you pointed out, very promising 6.3% same-store unit growth. I mean, that's the best number you've put up in almost four years. Can you just tell us what drove that, Bryan? Was it a change in focus? Change in process? It doesn't sound like it was a change in market. Bryan DeBoer: Well, I can tell you this. Adam did a nice job kicking off used car focus. And to be fair, that's my love. Okay? So everyone's getting the message and it's very clear that we know what we're doing. It's a matter of keeping those. And remember this, Glenn. We bought $25 billion in revenue, with not a lot of messaging to the stores over that first three or four years of ownership. That we keep every car. Okay? And we bring people into our ecosystem through affordability, and then they eventually step up to buy better or newer cars then eventually buy new cars. Okay? And that is our model. And I think I'm proud of that $25 billion that joined us to be able to clear their mind that they can actually sell these cars in a respectful way and it's a higher quality car than 16% profit margin on those value auto cars. We're gonna continue to push, though, in all three of the buckets. Okay? And I know that our team can do it, and it's truly a focus. On being able to walk, chew gum, and then eventually run at the same time. And I think our top our teams in the walk stage and we'll continue to get to jog and run on used cars. But it's the biggest area that we built the ecosystem for. Okay? And even our sustainable vehicles and used cars is looking like a quite quite nice number at almost 20%. Of our sales were electrified and used cars as well. Glenn Chin: And you've emphasized that messaging to me the last several quarters that was it was going to be a point of focus for you and the team. I mean, so so is last quarter the inflection point? Meaning, I mean, should we expect positive comps from from here on out? Is that a safe assumption? Bryan DeBoer: Absolutely. Okay. If you remember pre-COVID, Clint, pre-COVID, the company the company basically for eight years. Had high single-digit, low double-digit, increases in used cars quarter over quarter. I don't remember a quarter that we were ever below seven and a half, 8%. Okay? I mean, the market is there. Remember, we have less than 2% of the used car market. Okay? And we're top of funnel. Okay? We we built our ecosystem to be able to grow used cars out by finding the best cars reconditioning them closest to the consumer, meaning I don't got the fees to transport cars because I got 350 reconditioning locations in North America. Okay? And on top of that, 75% of our cars or three-quarters of our cars are coming directly from consumers, so we don't have to pay option fees. Okay? It's about a thousand dollar advantage over used car retailers. Okay? Important thing to remember and we're just getting started. Glenn Chin: Yep. And to your point, I mean, I'm looking at my model here. You have positive comps every quarter prior to COVID. Apologize for the noise. Back to as far as my model goes from so from 2012 through 2020, you have positive comps every quarter. Bryan DeBoer: Well, great. Well, since I've got everyone on the call, in October, we're trending up 10% in unit sales. Okay? And we've got tough comps. Okay? And we had tough comps last quarter. Because we had all the carryover units from CDK. That gave us a bigger number last year in used car sales. So we're just getting started. Glenn Chin: Very good. Thank you. Operator: Thank you. Our next question comes from the line of Christopher Bottiglieri with BNP Paribas. Please proceed with your question. Christopher Bottiglieri: Hey, guys. Thanks for taking the question. Two quick ones for me. The self-sourcing was 74%. This quarter, the highest of the year. Can you just remind us what that looked like pre-COVID? Bryan DeBoer: Actually, pre-COVID, we were low seventy percentile. The area that's grew is what we procure directly private party. Meaning, what we buy directly from a consumer, they don't actually trade in the car. And buy a car from us. And that was three or four percent if I remember pre-COVID. And that's pushing eight to ten percent in most quarters now. A lot of that is driven off of the driveway ability to be able to procure a couple thousand cars a month. Okay? And that driveway procurement is really retraining a lot of our store leaders that cars are worth more than what they think. And when they pay a little bit more on a trade-in, somehow they sell them for a little bit more. Because remember, our thesis on our design elements ten years ago is that we buy cars for about 12 to $1,500 less than what the used-only retailers. Primarily driven off what I just spoke about of reconditioning closer to the customers and closer to what car sale not having auction fees, having more of our cars come off trade-in, okay, that gives us a distinct advantage. But unfortunately, we pass it all through to the consumer, and we sell cars for about a thousand to $1,500 less than what Carvana and CarMax sell them for. Okay? And that's purely because we believe because they've got more eyes on cars and it's a pretty nice transparent selling process that they have much like what we have in Driveway. Christopher Bottiglieri: Gotcha. Okay. Yeah. That's what my I show that too, that thousand $15 gap in my price surveys and whatever believes me. But, anyway, my follow-up question would be can you just give elaborate more on the net losses as percentage of managed receivables this quarter and then also the allowance for the end of the quarter? A percentage of ending receivables. Just wanna get a sense. Sure. Great. Check with You had a, yeah, you had a really good quarter last quarter. The allowance didn't really move much. Just wondering if that's conservatism or just you're a little bit spooked by maybe some of the fringe part of the subprime market. You guys don't really play there, but just kinda curious how you're thinking about that allowance going forward. Chuck Lietz: Yeah. Chris, this is Chuck. I would say know, there's a lot of noise in the marketplace, but we're very happy how our portfolio is performing. Just a couple of quick data points. Our first payment default, which is the biggest in the of fraud and highly likely fraud, is actually down year over year. Our delinquency rates are down year over year. On a sequential basis, and our default rates, which leads to the provision that you're talking about, are also at or below at each credit segment year over year after we adjust for seasonal adjustments. So this really speaks to the power of our ecosystem. Of being top of funnel, Chris. And that this credit discipline while still increasing our originations by 33% over last year, That's pretty much, you know, key to DFC's ability to drive and hit our long-term goals of 500,000,000 of pretax profit. And as it relates back to the provision, we're very comfortable that keeping that at where we've got it should be more than enough to cover what our losses are on a go-forward basis. So thanks for your question, Chris. Operator: Thank you. Our next question comes from the line of Jeffrey Lick with Stephens Inc. Please proceed with your question. Jeffrey Lick: And the rest of the team. Good morning, Bryan. Congrats on a great quarter. Bryan, I was wondering if we could if you wouldn't mind just drilling down a little more on the new GPUs as we go forward, I think we're gonna be lapping a tougher Q4 than last year with the election bump and I think the OEMs had some dealer incentives. And you know, then we as we get into next year, I mean, we there really hasn't been any talk on this call of tariffs, which is amazing in itself. I'm just curious how you see the outlook for new GPUs as we go through Q4 and 2026? Bryan DeBoer: I think that's a good insight Jeff, that Q4 of last year did have some nice numbers in it. But to be fair, when we think about how we grow our business, it's taken us a year or so to get back to Performance Through People. And our store leaders out there are making good people decisions, and a lot of those were made in the summer and are now taking hold. Now what happens in the in the quarter? Will we'll we'll have to see. I would say this, when we look at tariffs, and the impact of those tariffs on GPUs I would say it's offset more by the competitive environment that manufacturers are all dealing with new entrants. They're dealing with new product lines. It feels like incentives are starting to creep even though they only show up slightly year over year. We feel like there's a turn there I just got from one of the Korean manufacturers this morning that dropped that dropped their APR on their two highest moving products. Down to 0% again. On top of the big rebates that they already have on the table. So I'm feeling like that could help offset some of the some of the the comparative numbers that came from the election period last year So we're feeling pretty good. I would also say that the tariffs though there is some pretty big implications and it does look like some of those may stick, I think the biggest sound bite is to whether we're at 50% or 150% tariffs on China the North American market is not gonna behave. Like Europe or the rest of the world. Okay? Knowing that those vehicles are selling for a certain price and the rest of the world, and then adding on a doubling factor to the cost of that vehicle there's no chance that I think that Chinese manufacturers are here in the next half decade at or so at scale. Okay? Someday, they may be able to do that. And the product quality that I saw was pretty good. I mean, it was it was up there with the Koreans and the Japanese, which are truly some nice high-quality vehicles. So we'll see what happens there. The good news is I believe that the Koreans and the Japanese are responding to the market nicely. They are not raising prices. I think our increases in two of the main import Japanese brands talking about 250 to $300 increases. On their main product lines like CRVs RAV fours, and so on. And these cars are now full hybrids or they're plug-in hybrids that are just better and more economical cars. So on an affordability level for a consumer, I don't think tariffs I think tariffs can be overcome by better gas mileage and lower bills at the pump or electrification. To be able to help with the affordability. Component and offset that or maybe even more than offset that. Jeffrey Lick: And just a quick follow-up. Any elaboration on the 300 basis point improvement service and parts gross margin percent, that's obviously pretty impressive. Just curious what's driving that? How sustainable you view it? Any details would be great. Bryan DeBoer: Yeah. A lot of times, Jeff, that's driven off of the mix between the 30% margin inventory or parts business. And the 65% labor businesses. And our labor portion of our business was up a lot more. But will say this, we are retaining more growth. And our manufacturer partners, because of inflation, it they are increasing our labor rates on warranty. And corresponding, we will increase our customer pay labor rates. And as a competitive environment, we're able to maintain pretty good profit margins because generally speaking, inflation and our labor costs are going up. Yeah. K? And we're able to bring that to the bottom. Mike, go ahead, Tina. I would add to that, Jeff, too. We had strong performance both in customer pay and warranty in the third quarter. And those are more heavily labor-based. And so that shift and that overall performance also drove some of the margin improvement. Tina Miller: Yeah. That outpaced by seven, 6%. Yeah. Jeffrey Lick: That's a good point. Great. Well, it was a great quarter. I'm happy for you guys, and I look forward to catching up later. Bryan DeBoer: Thanks, Jeff. Operator: Thank you. Our next question comes from the line of Bret Jordan with Jefferies. Please proceed with your question. Bret Jordan: Hey, good morning, guys. As you build out the Chinese brand mix in The UK, could you talk about the rooftop economics of BYD or an MG, the sort of seen as lower price point or lower ASP units maybe in some cases. Are you getting similar GPUs and aftersales and mix out of those brands as you do out of your legacy UK product? Bryan DeBoer: Good question, Brett. And the answer is yes, on GPUs. Are getting margins similar to what the mainstream brands are getting. Now BYD is a little bit different. They are a little bit higher priced Chinese brand. So they kinda fall in this area between The US manufacturers and the Japanese and Korean and other European mainstream manufacturers. And luxury cars. Okay? So important to remember that. Here's the difficult thing. So even though our volumes are increasing quite nicely, with the Chinese brands, there's no units in operation. Okay? So the way that we're making a difference is we're going out and doing what Lithia Motors, Inc. does best and we've got this great mainstream leader, Gary, who knows how to sell used cars. In fact, I probably could learn some things from Gary because he's selling almost three to one used to new. In the mainstream or Evans Hallsha brand. In The United Kingdom. So a lot of our business model, when we think about adding Chinese or opening those points, is in the interim, why you build your units and operations, which is what drives your aftersales business, you've gotta sell used cars. And he's doing a nice job being able to quickly get to those two, three, and four to one one ratios. Keep it up. It's neat. It's neat to be able to see that in set the buy bar maybe even a little higher for our North American store stores because ultimately, I'll tell you this, we sit at 1.2 used to new ratio on in in North America. The marketplace is at 2.5 to one. Okay? Just to put in in reference of what we're looking at, that's what we believe the potential is. Okay? And in The UK, it's a little bit better use to new ratio, and Gary gets all of it. Okay? Which tells us that we should be able to get that. So Gary and Neil in The UK, big shout out to you guys. Bret Jordan: Okay. And then a question on aftersales, the growth rate. Could you parse that out between price and car count? You know, how much is, just same service price inflation versus incremental traffic in the bay? And I guess, how do you see the price on a year-over-year basis in the fourth quarter on a same service basis? Are you seeing tariff impact or labor inflation flowing through? Bryan DeBoer: Good question, Brett. A little bit more than half is coming from price increases. With a little less than half coming from, from customer count. And RO. Bret Jordan: Okay. And we continue to sort of see inflation being a comp driver at the end of the year, or we seen most of it play out already? Guess, what what how long is the tailwind from price? Bryan DeBoer: I think that the way that we go to market and the way that my presidents and vice presidents are thinking about things, is we've gotta grow our RO count. And you know, our top performing or what we call our Lithia Partners Group stores they somehow seem to be able to do both, and they're carrying a lot of that 9.1% year-over-year same-store sales gross profit growth. But they're also carrying along with it most of the improvements in top-line growth. Okay? And that shouldn't be that way. Our Northeast and Northwest regions are a little bit softer in terms of RO count. But we're challenging them, and I think they see the opportunity. And there could be some nice tailwinds there that that that that come into play as you know, we really start to help people see a more bright future on growing your customer base. Bret Jordan: Great. Thank you. Bryan DeBoer: Thanks, Brett. Operator: Thank you. Our next question comes from the line of Daniela Haigian with Morgan Stanley. Please proceed with your question. Daniela Haigian: Thanks. Just squeezing one in here on forward demand. Bryan. As we pass through the peak tariff fears from April. Excuse me. And now we're seeing OEMs revise up their guidances. It kinda clears the bar. On this, and I appreciate the color on sales tracking 10% higher in October. Just wanted to get your commentary on how you're seeing pricing on these new model year vehicles and how you're thinking about demand going into '26? Bryan DeBoer: Sure. Sure. Daniela, real quick, the 10% was used vehicle. Volume. Okay. Okay? Thank you. So just to clarify that to make sure that was clear. And that's an early October number where two-thirds of the way through the month. In terms of peak tariff, I think when we think about the tariff impact, I think we're through most of the impact. I think that it's going to get better. I think the manufacturers need to know how stable the ground is that they stand on. And then determine what their three to five-year product cycle is going to look like. To decide where they're gonna ultimately build those cars. Okay? And I think we sit in a nice position as new car retailers and we have to remember this. We're a new car retailer. But less than a quarter of our profitability is derived from new cars. Okay? Remember that 61% of our profitability is coming from aftersales business. I think that's why we spend a lot of time in aftersales. New cars is somewhat a function of your marketplace. Okay, and what your manufacturer's incentives are. So as a retailer, I'd love to be able to say that I could take a bunch of market share in new We, to some extent, we can be plus or minus 10%. But outside of that, our manufacturers and our mixed base is what dictates that. In our geographic base. So, hopefully, that helps you a little bit, Daniela. You have a follow-up on that? Daniela Haigian: Thanks. No. That's alright. We went through a lot of topics here. Bryan DeBoer: Great. Thanks for your question. Operator: Thank you. Our next question comes from the line of Michael Albanese with Benchmark Company. Please proceed with your question. Michael Albanese: Yeah. Hey, guys. Thanks for taking my question. Hung with you till the end here. Just a quick one circling back on used, specifically the value autos. Just given what you said about the, you know, typical credit quality of a buyer there and generally how much is financed, Are the value autos or value auto demand inversely or, you know, correlated with consumer affordability. Or maybe a better way to ask the question is, if new and used again a question. Go ahead. Bryan DeBoer: Go ahead. That's a yes on the first question. Go ahead and balance sheet. Yeah. Okay. Michael Albanese: And to take that a step further, I guess, and maybe a better way I thought to ask it was you know, if the gap between new and used pricing kinda widens and there is a trade down, you know, where does value fit within that? And you know, is there a segment within your mix, CPO core value that generally sees a pickup in demand or, you know, does it depend on a host of different variables at any given time? Bryan DeBoer: Yeah. I would say that value auto vehicles have very little impact caused by new vehicles. It's too different of customer. Okay? It's too different levels of affordability. So definitely certified vehicles and some of the you know, I would say one to five-year-old vehicles. Have an impact based off new vehicle pricing. Tariffs, so on and so on. But value auto is so far downstream. Remember this, value auto, that 63% of the market that I told you is based off what, 41 million units. Okay. 42 million units, something like that. You're talking about 24 million units or a 160% of what your new car SAAR is in that segment. It is a bulletproof segment. Okay? It's where it's where probably most of the money is made in used car. Okay? And it's something that everyone can do. As a new car retailer or as a used car retailer. Keep the car that you take in on trade is the way to do it. I mean, we get 80, 90% of those cars from trade-in. Okay? So it's a very stable thing. But again, we have a third of our stores that probably don't keep those cars. You know? We've gotta help them understand that you're making 16% margin, and you know, yeah, I get it that you make a little bit less in f and I. But as a whole, the returns are massively better than any other segment. Michael Albanese: So does it come down to essentially sourcing being able to source these vehicles? And hold on to them and right? Like, what's driving demand specifically above the office? It's sourcing, but remember, the sourcing is right under your nose. Bryan DeBoer: It's just the it's it's it's a mindset of your sales department leaders and then a mindset of your service department leaders that they can make this car stop, steer, and go and that they can lower the expectations that I don't just sell new cars. Okay? And then you've got a secondary problem. Once those two people decide, then your salespeople and your technicians are gonna convince you you shouldn't do it. Why? Because they get comebacks. Okay? Meaning that there's a car that breaks forty-five days later or four days later, and they're trying to keep a car deal together rather than just take the person out of the car sell them another car, okay, and go fix that car so it's an easy experience for your consumer. Okay? So that sets you back. So we've always said that it typically takes a couple years to get people on that treadmill. To be able to keep all different all three of our categories. Okay? And I would say this, most of our growth was growing in value. It shouldn't. It should also be growing in certified. It should also be growing in late model conquest vehicles. And it should be growing in core product. Okay? All three of those buckets have the potential to grow in a double-digit manner, and we'll get those there. Michael Albanese: Do you generally see if you have a customer in value over time move up into core or CPO? Or You do. I think there's half of the customers that are always gonna buy a car that's depreciated and that they can buy that's a value. Okay? And they don't care that the car is scarce, and they don't really care what Kelley Blue Book says or what Black Book says. They just buy the card that's $10,000 because they're using it for transportation. They're not using it for status. The other half of the cars are using it as a stepping stone. A lot of parents will pay cash for cars for their kids. And it's an entry-level car. And then, hopefully, next time they're buying a certified used car and maybe eventually they buy new cars. So the waterfall, believe it or not, goes both ways. That as a new car retail abreth we look at affordability and how do we keep everyone in the Lithia Motors, Inc. life cycle at every affordability level. And I think as you see us move through economic cycles, affordability will shine and reign supreme at Lithia Motors, Inc. Because of our ability and the behavioral mindset of most of our stores today that understand that we can walk and chew gum at the same time. Meaning, new car, sell core product, sell value auto products, and then sell a certified product. Michael Albanese: Got it. Thank you, Bryan. Nice quarter, guys. Bryan DeBoer: Appreciate it. Operator: Thank you. Our next question comes from the line of Mark Jordan with Goldman Sachs. Please proceed with your question. Mark Jordan: Hey. Thanks for fitting me in here. Just a quick one on m and a. Bryan, you mentioned you don't buy dealerships based on expected value creation. But can you talk about what the drivers of value creation are when you bring a dealer into your system? You know, whether it be instituting best practices, putting inventory on the driveway platform, or maybe just consolidating systems. What are the drivers there that you expect when you bring a new dealership on? Bryan DeBoer: Sure. So, typically, the way that we get the returns that we're expecting and it's typically two to three times lift in net profitability, about a quarter of it comes automatically from scale synergies, lower interest rate costs, better vendor contracts, getting consolidation of vendors where you've got duplication even within the store that you buy, and that comes in the first, I would say, six months. Okay? The other two key drivers and like I said, they support each other. Is used vehicles. I mean, it's the ability to sell late model conquest cars, meaning if you're a Honda store, you sell Toyotas and you sell Fords too. Okay? Most new car dealers get spoiled off of selling the cars that they sell new. Okay? I believe our current run rates on all the stores that we bought it's somewhere north of two-thirds of the cars that they sell when we buy them. With it that they sell used or the same like model that they sell new. Okay? And for reference, when a store is mature at Lithia Motors, Inc., it's a sixty-forty split the other way. Meaning we sell about 40% of the brand we sell new We sell about 60% of Conquest vehicles. Okay? A lot of that comes from the ability to keep an over five-year-old car. Okay? Because of those that alignment of your consumer your service advisers, your salespeople, your other personnel that it's just a mindset that you have to get past. Okay? Alongside that all also, is this new car retailers, it's really easy to get spoiled off of maintenance in service. And off of warranty work. It makes great profit. Okay? So why do warranty work after the sale? It's more difficult. It takes more time. You've gotta do diagnostic. There's drivability issues, so on and so on. Okay? Well, we sell non-OEM parts for a reason. Keep our customers at an affordable level post-warranty period. Okay? So that's the other big lift that we get. Believe it or not, both of those things help embellish the life cycle of a customer which helps us sell more new cars as well. Okay? And then we can get into the gross profit part of the equation and if you've got more eyeballs looking at cars when we've got 10 million eyeballs looking at an average car, And when we buy a dealership, they've got 10,000 eyeballs looking at a car. Are you following me? So there is a supply and demand issue that comes from selection. Okay, that helps us as well in terms of what our price to market is. Is relatively better than what they're able to get. On an individual basis. So, hopefully, that gives you some color on how do we get that two to three times improvement in profitability. That's how we get it. Mark Jordan: Great. Thanks very much. Operator: Thanks, Mark. Thank you. Our next question comes from the line of Colin Langan with Wells Fargo. Please proceed with your question. Colin Langan: Oh, oh, thanks for taking my questions. If I look at your full-year targets, most of them seem pretty wide, but SG&A to gross, it's actually been trending pretty close to the high end of that target. And, usually, Q4, things tend to step up seasonally. So is the outlook that SG&A actually could even Seasonality hold in in Q4? Or is it just a more muted increase sequentially that should be looking at? And then how should we think about SG&A maybe longer term? Bryan DeBoer: Sure, Colin. Thanks for the question. I think when we think about SG&A, or we most importantly think about $2 of EPS for every billion dollars of revenue? We've given light guidance. I think it's on slides 14, if I recall from the slide deck. Okay. As to where we believe it can be, but that's not how we manage our business. We manage our business on a net profit basis year over year and a top-line basis that will ultimately generate more net profit in aftersales and reciprocal trade-in values and our reciprocal businesses like DFC and our wheels, you know, fleet management businesses. And those type of things. So that's it is an important delineation. But we purely look at that our goal is to get to $2 of EPS for every billion dollars of revenue. And the easiest way that I can get there is to have quarters like this where we grow top line at seven and a half percent. And we continue to grow used cars at double-digit numbers, and grow our gross profit in the in the aftersales space. So in terms of the quarter, we'll see where it comes out. A lot of that is dictated based off volume and GPUs. As well. So, hopefully, that gives you some insights and remember, slide 14 helps lay out our pathway to the $2. And you know, I would say this. The entire foundation is built, and like I said, we're just getting started. Colin Langan: Just one quick modeling follow-up. Tax is really low in the quarter. Is that what's driving that? And is that sustainable, I guess, as we move forward? Should we put in the new rate, or is that just a one-off? Bryan DeBoer: Colin, don't I think we got a half an hour later together. We're running awfully we'll get we'll get you that information. On our one and one. Colin Langan: Yeah. No problem. Thanks, Colin. Operator: Thank you. And we have reached the end of the question and answer session. I would like to turn the floor back to Bryan DeBoer for closing remarks. Bryan DeBoer: Thank you, everyone, for joining us today. Look forward to seeing, you on Lithia Motors, Inc.'s here, and results. And believe it or not, February. It was a vast year. Looking forward to continue to delight you. Operator: Thank you. This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.
Operator: Good day, and thank you for standing by. Welcome to the Q4 2025 UniFirst Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Steven Sintros, President and Chief Executive Officer. Please go ahead. Steven Sintros: Thank you, and good morning. I'm Steven Sintros, UniFirst's President and Chief Executive Officer. Joining me today is Shane O'Connor, Executive Vice President and Chief Financial Officer. I'd like to welcome you to UniFirst Corporation's conference call to review our fourth quarter results for fiscal year 2025. This call will be on a listen-only mode until we complete our prepared remarks. But first, a brief disclaimer. This conference call may contain forward-looking statements that reflect the company's current views with respect to future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties. The words anticipate, optimistic, believe, estimate, expect, intend, and similar expressions that indicate future events and trends identify forward-looking statements. Actual results may differ materially from those anticipated depending on a variety of risk factors. For more information, please refer to the discussion of these risk factors in our most recent Form 10-Ks and 10-Q filings with the Securities and Exchange Commission. We closed our fiscal 2025 with a solid fourth quarter that modestly exceeded our expectations in top-line performance and was in line with our expectations on the profit side. We accomplished a lot as a team in fiscal 2025 that will help strengthen and grow our company as we move forward while advancing our investments in technology and other organizational initiatives. I want to sincerely thank all our team partners who continue to always deliver for each other and our customers as we strive towards our vision of being universally recognized as the best service provider in the industry. All while living our mission of serving the people who do the hard work. We serve the people who do the hard work as they are the workforce that keeps our communities up and running. They are our existing and prospective customers as well as our own UniFirst team partners. Our mission is to enable those employees and their organizations by providing them the right products and services to do their jobs successfully. Whether that means providing uniforms, workwear, facility services, first aid and safety, clean room, or other products and services, our goal is to partner with our customers to ensure that we structure the right program, products, and services for their business and their team. All while providing an enhanced customer experience. Shane will soon share further regarding our quarterly performance. However, I would like to provide a brief overview of the fiscal year. Full-year revenues reached $2,432,000,000, representing an increase of 2.1% compared to fiscal 2024 after adjusting for last year's additional week of operations. While this level of top-line growth does not yet reflect our long-term ambitions, we are confident that we are establishing a strong foundation for elevated performance in the years to come. From an adjusted EBITDA perspective, our performance reflects solid progress in operational execution and gross margin. In fiscal 2025, both the sales and service saw improvements in key performance metrics. We installed more new business than we did in fiscal 2024, even though fiscal 2024 included an additional week of operations and the installation of a top-three account. Although fiscal 2025 started slowly, the year concluded with the highest quarter of new account installations providing momentum into fiscal 2026. We also saw notable improvements in retention in fiscal 2025 after two years of lost business. We remain confident in our ability to drive continued improvement in customer retention as key leading indicators such as NPS scores and customers under contract continue to trend positively. Recent enhancements to our growth strategy are delivering progress. Though the pace of improvement has been moderated by a softer employment environment impacting parts of our customer base. As noted over the past few quarters, reductions in wearer numbers have become more pronounced and continue to affect overall growth rates. Nonetheless, fluctuations in employment cycles are a familiar challenge to our company and we remain committed to concentrating on factors within our control to drive improved performance. During fiscal 2025, we made some important organizational changes that generated positive momentum in our overall execution during the year and more importantly, positions us well going forward for greater improvements in overall performance. Earlier this year, the organization welcomed Chief Operating Officer Kelly Rooney, a strategic addition to our leadership team. Kelly has unified our operational approach and accelerated the company's transition toward a process-oriented and results-driven operating model. She introduced the UniFirst Way, a growing collection of service-focused procedures designed to enhance the customer experience and promote operational excellence. The positive impact of her contributions is already evident as we anticipate further advancements in retention, customer growth, efficiency, and overall performance as these initiatives progress. Equally important, Kelly has successfully preserved and strengthened the core aspects of UniFirst culture, which remain a competitive advantage and essential to our long-term success. Her extensive operational expertise combined with her commitment to empowering employees aligns seamlessly with our dedication to always deliver both to our customers and our team partners. Aligning operations under Kelly has enabled the change in ownership and structure of our sales organization as well. Direct oversight over local sales resources is now moving from our operations team to the sales organization led by our Executive Vice President of Sales and Marketing, David Katz. This adjustment is intended to clarify responsibility for performance within both sales and operations with ongoing collaboration between both functions. The sales team will continue advancing toward a tiered selling model to align each sales representative's skills and experience with the most appropriate prospects. This model has already delivered measurable improvements in sales effectiveness and conversion rates. Building on this momentum, further investment, including strategic headcount growth, is planned for fiscal 2026, positioning the organization for stronger customer acquisition and overall revenue growth in the future. In addition to sales, we are making other investments impacting fiscal 2026 to ensure we can support our primary near-term goal of accelerating organic growth. For example, during 2025, we invested in strengthening our service teams, expanding both capacity and stability. These enhancements position us to drive improved performance across all key aspects of our growth model, expansion of products and services for existing customers, customer retention, and strategic pricing approaches. We will accomplish this through key initiatives targeting each of these areas of opportunity. Together, these initiatives are designed to continue improving our promise to provide a differentiated level of service and business partnering with our customers to ensure we provide all the value we can to their business. We further expect to enhance overall operating performance and create a stronger foundation for continued growth in the years ahead. Near-term profitability will also be impacted by the ongoing investments in costs related to completing the remaining phases of our technological transformation. Over the next couple of years, we expect these investments will reach their peak as we complete the implementation of our ERP system and other related efforts. These efforts are essential to building a more efficient, data-driven foundation that will enhance performance and scalability over the long term. Looking ahead, we also expect the influence of tariffs will impact our short to medium-term profitability. Through 2025, newly imposed tariffs have not had a significant impact on our results primarily because goods procured at higher costs require time to move through our supply chain and then are usually amortized over an estimated useful life. We believe we are better positioned to navigate the evolving trade situation with our efforts over the last several years to improve the diversification within our supply chain. However, the situation remains dynamic with continued developments. Depending on how the situations evolve, the impact of tariffs on fiscal 2026 could escalate from our current estimates. We continue to take patient and prudent steps to minimize the impact of any cost increases through leveraging the most advantageous sources for our products as well as by working with our customers where appropriate to share the cost increases we are seeing. As we move through fiscal 2026, we will continue to provide updates on the impact that these factors are having on our results. Beyond the near-term impact of the items I discussed, we remain highly optimistic about our ability to drive meaningful improvements in overall profitability. As we look ahead, several key areas have been identified that are expected to strengthen margins and enhance returns in the coming years. Notable examples include robust incremental profitability resulting from accelerated growth, particularly through improved customer retention and increased adoption of products and services by existing customers, which delivers higher returns compared to new account installations. Focused operational leadership committed to promoting execution, consistency, and continuous improvement in line with the UniFirst Way, optimized procurement, inventory management, and sourcing facilitated by our Oracle ERP platform, strategic rationalization of resources and infrastructure that was built to support our multiyear digital transformation, and advancing our commitment to safety and operational efficiency through the ongoing implementation of our telematics program which will soon cover our entire vehicle fleet. This initiative features both inward and outward-facing cameras in every vehicle, representing a strategic investment that delivers multiple long-term benefits. Most importantly, it enhances the safety of our team partners while also contributing to improved profitability by reducing claims, insurance costs, and boosting fuel efficiency. This is also a good example of where we are incurring costs today which will provide measurable returns for the organization in the years ahead. To summarize, we are laser-focused on our goal of driving organic growth to mid-single digits and driving meaningful EBITDA margin improvements into the high teens. We are confident over the next couple of years we can make steady progress, particularly towards those top-line goals. While fiscal 2026 is expected to reflect a temporary step back in profitability, we are resolute in our belief that investments in growth are essential to achieve our longer-term objectives and unlock a new set of opportunities in the years to come. We also believe that working through the current sourcing and cost environment will require time, patience, and thoughtful execution to ensure we are taking care of both our customers and our shareholders as we work through these changes. Although most of my comments thus far have focused on our largest segment, Uniform and Facility Service Solutions, we also continue to be excited about our First Aid and Safety Solutions segment which offers significant potential for sustained growth and enhanced profitability. Adjusted for the additional week in the previous year, we achieved close to 10% growth in fiscal 2025 and anticipate double-digit expansion again in fiscal 2026. Investments in sales and service infrastructure, along with the completion of several small acquisitions, continue to strengthen our market presence enabling us to better serve both existing UniFirst customers and prospective customers seeking these solutions. Our first aid and safety products and services play an integral role in addressing customer challenges through comprehensive integrated services. By improving route density and increasing customer adoption of our full range of services, we expect continued improvement in this profit segment's profitability. Notably, we saw incremental advancement in first aid's adjusted EBITDA during fiscal 2025, and while further growth investments will mute significant profitability improvements in fiscal 2026, we do expect the inflection point to sustain higher profits is within reach. Our balance sheet and overall financial position remain robust, supported by a strong year of operating cash flow. We intend to continue deploying cash flows and making strategic investments that enhance our company's strength and increase shareholder value. We continue to identify several promising opportunities for investment including infrastructure enhancements and automation initiatives to promote growth, efficiency, and profitability, strategic acquisitions aiming at expanding scale and improving efficiency, and increased activity in our share buyback program reflecting our confidence that investing in UniFirst stock will deliver significant long-term returns as we execute on our strategic focus on accelerated growth and sustainable profitability. In conclusion, we are confident in the company's strategic direction to deliver enhanced performance in fiscal 2026 and beyond. Our initiatives are designed to accelerate growth, strengthen profitability, and deliver a differentiated experience for our customers. By embracing our always deliver philosophy, we remain committed to creating value for all stakeholders including our employees, customers, the communities we serve, and our shareholders. With that, I'll turn the call over to Shane, who will provide more details on our outlook as well as our fourth quarter results. Shane O'Connor: Thanks, Steve. Consolidated revenues in our 2025 were $614,400,000 compared to $639,900,000 a year ago. The 2025 had one less week of operations compared to the prior year due to the timing of our fiscal calendar. Excluding the extra week in fiscal 2024, revenue growth in 2025 was approximately 3.4%. Consolidated operating income for the quarter was $49,600,000 compared to $54,000,000 in the prior year. And net income for the quarter decreased to $41,000,000 or $2.23 per diluted share from $44,600,000 or $2.39 per diluted share. Consolidated adjusted EBITDA for the quarter was $88,100,000 compared to $95,000,000 in the prior year. Our fourth quarter results or our financial results in 2025 and fiscal 2024 included $1,400,000 and $1,800,000 respectively, of costs directly attributable to our key initiatives. The effect of these items on 2025 and 2024 decreased operating income and adjusted EBITDA by $1,400,000 and $1,800,000 respectively. Net income by $1,100,000 and $1,300,000 respectively diluted EPS by $0.05 and $0.07 respectively. As announced in last week's press release, starting in 2025, we are reporting our results under three segments entitled Uniform and Facility Service Solutions, First Aid and Safety Solutions, and Other. Our primary segment, Uniform and Facility Service Solutions, now includes our clean room operations along with our industrial operating locations. Due to it having a similar business model as well as having shared customers, resources, and technologies. This new structure aligns with our management approach and resource allocation. This change will also allow investors more visibility to our Nuclear Services division which is now broken out in the Other segment and experiences more volatility on an annual and quarterly basis. For further details on this change and our segment methodology, please see the Form 8-Ks filed with the SEC on 10/17/2025. Uniform and Facility Service Solutions revenues for the quarter were $560,100,000, a decrease of 4.4% from 2024. Organic growth, which excludes acquisition-related revenues, the impact of any fluctuations in the Canadian dollar, and the impact of the extra week, was approximately 2.9%. Uniform and Facility Service Solutions organic growth rate benefited from solid new account sales and improved customer retention. In addition, we discussed last quarter that our growth was impacted by the timing of direct sales which trended lower in the third quarter compared to the same period in fiscal 2024. As expected, the timing of those direct sales contributed to our fourth-quarter growth. As did a large customer buy-up. Uniform and Facility Service Solutions operating margin decreased to 8.3% for the quarter from 8.7% in the prior year. And the segment's adjusted EBITDA margin decreased to 14.8% from 15.3%. The cost we incurred related to our key initiatives were recorded to the Uniform and Facility Service Solutions segment, which decreased its operating and adjusted EBITDA margins for 2025 and 2024 by 0.2% and 0.3%, respectively. The segment's operating and adjusted EBITDA margins in 2025 were down from 2020 which benefited from the extra week of operations. Furthermore, quarterly results reflect some of the additional investments that Steve discussed that are intended to accelerate growth, improve customer retention through operational excellence, and support our digital transformation. Energy costs for the quarter were 4% of revenues, down from 4.1% a year ago. Our First Aid and Safety segment's revenues in 2025 increased to $31,100,000 with organic growth of 12.4%, driven by the segment's van business. Operating income and adjusted EBITDA during the quarter was $500,000 and $1,500,000 respectively, as the results continue to reflect the investments we are making in the business. Revenues from our Other segment, which consists of our nuclear services business, were $23,300,000, a decrease of 5.3% from 2024 due to lower activity out of the North American nuclear operation. As we mentioned in the past, this segment's results can vary significantly from period to period due to seasonality as well as timing and profitability of nuclear reactor outages and projects. At the end of our fiscal year, we continued to reflect a solid balance sheet and financial position with no long-term debt, and cash, cash equivalents, and short-term investments totaling $209,200,000. In 2025, we generated solid cash flows from operating activities totaling $296,900,000. Capital expenditures totaled $154,300,000 as we continue to invest in our future with new facility additions, expansions, updates, and systems. During the year, we capitalized $26,400,000 related to our ongoing ERP, which consisted primarily of third-party consulting costs and capitalized internal labor costs. During fiscal 2025, we also purchased approximately 402,000 shares of common stock worth $70,900,000. At this time, we expect our full-year revenues for fiscal 2026 to be between $2,475,000,000 and $2,495,000,000. And fully diluted earnings per share will be between $6.58 and $6.98. This guidance includes $7,000,000 in costs that we expect to incur directly attributable to our key initiatives, which at this point relate primarily to our ERP project. Our guidance further assumes at the midpoint of the range, that net income is $124,100,000, consolidated operating income and adjusted EBITDA $158,800,000 and $319,700,000 respectively. Uniform and Facility Service Solutions organic revenue growth is 2.6%. Uniform and Facility Service Solutions operating and adjusted EBITDA margins are 6.6% and 13.3% respectively. Energy costs will be 4% of revenues in fiscal 2026, in line with 2025. And fiscal 2026's effective tax rate is expected to be 26%, an increase from 2025 primarily due to lower expected tax credits benefiting the upcoming year. As Steve discussed, additional investments we are making in our Uniform and Facility Service Solutions segment to accelerate growth, improve customer retention, and support our digital transformation, contributing to a margin headwind in 2026. In addition, our operating results also reflect our current expectations of the impact of tariffs. Share-based compensation increased in fiscal 2025 and a larger increase is anticipated in fiscal 2026. These increases are primarily due to a change the company made last year in our share-based grants vesting lives. As a result of the change over the next couple of years, share-based compensation expense will be elevated prior to returning to a more normalized level. As a reminder, increases in stock-based compensation impact operating income but are excluded from adjusted EBITDA. Our First Aid and Safety segment's revenues are expected to be up approximately 10% compared to 2025, as the ongoing investments in our van business are expected to drive continued double-digit growth. The segment's profitability is expected to once again be nominally positive as the results continue to reflect the investments we are making in the business. The Other segment's revenues are forecast to be down from 2025 by 16.3%. This assumes that our nuclear service business will take a step back in fiscal 2026 primarily due to the expected wind-down of a large reactor refurbishment project during the year, as well as a cyclically lower number of reactor outages in 2026. The top-line headwind will have a more meaningful impact on the profitability of the segment due to the high fixed cost nature of the nuclear services business. Although 2026 is expected to be a down year, we feel we are well-positioned to capitalize on this segment's unique capabilities as future projects become available as well as with the recent resurgence in nuclear investments in the market. We expect that our capital expenditures in 2026 will again approximate $150,000,000, to remain elevated as a percentage of revenue primarily due to higher application development investments we are making, most significantly related to the ERP implementation. For an update on our ERP initiative, our project continues to progress largely in line with our intended schedule. That has the implementation continuing through 2027. As of 08/30/2025, we had capitalized $45,300,000 related to this initiative. Midway through fiscal 2026, we expect to go live with our current release, which is focused on moving our general ledger and finance capabilities into the new Oracle Cloud solution. On deployment of the system, we will start to amortize the amount capitalized. As a result, the outlook includes an additional $4,000,000 in fiscal 2026 related to the amortization of the system. Our guidance assumes our current level of outstanding common shares and no unexpected changes generally affecting the economy. This concludes our prepared remarks, and we would now be happy to answer any questions that you might have. Operator: Thank you. As a reminder, to ask a question, please press 11 on your telephone, and wait for your name to be announced. To withdraw your question, please press 11 again. And our first question comes from Manav Patnaik of Barclays. Your line is open. Ronan Kennedy: Hi, good morning. This is Ronan Kennedy on for Manav. Thank you for taking our questions. Can I confirm please at a high level, perhaps the puts and takes to the guided 2.6% organic for Uniform Facility Services? Given the constructive commentary on positioning the company for stronger organic through better acquisition retention. Already seeing some measurable improvements in the sales effectiveness and the conversion rates. Is it that the initiatives will take time, or is there also an element of the environment and what you alluded to as the more pronounced reductions in errors and anticipating further fluctuations in the employment cycles kind of a high-level characterization of the drivers for that outlook, please. Steven Sintros: Yes. I think you covered it pretty well there, but you're right. I think the momentum we're getting on the sales and retention side. We talked about elevated or reduced retention, I should say, over a couple of years. It improved meaningfully in '25. We're projecting additional improvements in '26. That will affect 2026 and into 2027. Your comment about the economic outlook in terms of impact on wearer adds versus reductions, over the last quarter or two. Based on limited hiring. We've been negative in adds versus reductions. And effectively, you're assuming a similar situation looking at kind of employment outlook over this year. So we're not expected to get any pull and probably or are expected some headwind in that area. So that is part of the formula that leads to the current year organic growth. But as we sort of build on some of the initiatives and investments we're making that I talked about, we expect to gain momentum to put us in a position to accelerate growth in the following years as well. Ronan Kennedy: That's helpful. Thank you. And then a similar question, if I may, please, on margins. In terms of for '26, the puts and takes, in terms of the improved execution, consistency, the continuous improvement, and then other things such as the optimized procurement inventory management, offset by, I think, you know, the investments on growth retention, digital transformation, and then also the tariff impact. If you can kind of size how to think about the puts and takes from those drivers for 26 for margins, please? Steven Sintros: Sure. A couple of the items you mentioned there on better inventory management and so on. These opportunities are more ERP enabled that will tail this year a bit. But in general, on the items impacting the year most significantly, we really mentioned four things as being the primary factors. We mentioned tariffs, we mentioned sales investments, service investments, and a peaking of investments to kind of get through the digital transformation that we're going through. All of those things probably contributed reasonably evenly to the call it, you know, 80, 90 basis points impact on our margins. Now it's not a perfect characterization across all of those items, but generally it's in that range. We do expect some offsets to those things. In terms of the operational efficiency and so on. But again, we're really trying to unlock that better retention, improved selling to our existing customers. We are seeing momentum in those areas that we think can expand growth, particularly beyond this year's guidance. And so really, we view this year as a transitional year of making some of those investments. And to your point, know how this business works. As you build momentum it builds through your numbers. It doesn't sort of hit all of a sudden in a quarter, in some cases even a year. But again, those investments, sales, service getting to our digital transformation and then the tariffs, all have a pretty, you know, call it 20 basis points or so impact then offset by some of the other positives. Ronan Kennedy: Thank you. Appreciate it. Steven Sintros: Thank you. Operator: Thank you. And our next question comes from Kartik Mehta of Northcoast Research. Your line is open. Kartik Mehta: Hey. Good morning. Steve. Just maybe to add a little bit more color to the margin impact and investment. Would you like to any of those benefits occurring in the latter part of 'twenty six? Or do you think the way the investments are scheduled, it will take till '26 before you start seeing some of the benefits. Steven Sintros: Until '27. Is that what you're referring to? Kartik Mehta: Yeah. I apologize. Yeah. Till '27. Yeah. Steven Sintros: Yeah. No. Look. I mean, I think as we as we you can use sales or service I think the technology ones that are ERP enabled, which we've been talking about, for the last year or so. Are not going to emerge in 2026 as much. We're talking about going live with part of our ERP system, which is really the financial core. But as we move into more of the inventory management procurement and other things, those are really '27 and beyond benefits. In terms of the investments we're making in sales and service, those will start to build throughout the year. We've been ramping up in some of those areas. We've made good momentum in sales efficiency and retention improvements in the last year. And in my comments, I sort of talked about how some of those improvements have been offset by some of the challenges from a wearer and employment growth perspective. But part of the reason we're making those investments is to make sure we can sort of power through maybe what might be a bit of a softer employment environment in '26 and then start to see more momentum in the back half and as we get into the following year. Kartik Mehta: And so maybe this is a little bit harder, but is there a way to quantify the benefits you'll get from the investments in the sales and servicing? Part of the business. Steven Sintros: Yeah. That that that is a little tougher. I mean, I certainly from the sales and the service, it's a balance. Right? Like, we are driving toward mid-single-digit growth. When you look at our sales organization, I'll start there. It's a little bit easier to talk about. When you look at our sales organization, we continue to look at ways to drive sales effectiveness and efficiency. With the heads we have. But also recognizing as we grow and as we shift our sales organization, I alluded to this, to one where we have more of a tiered selling model with different sellers responsible for different prospects. That transition is causing us to probably run a little bit heavy on the sales side as we kind of go through that transition. We want to make sure we carry that momentum and that's why I talked about a couple of times that driving that organic growth higher is really our top priority right now. We do believe that the benefits on the margin side are there for the taking. But without that strong organic growth, which we think these investments are necessary to make sure we achieve, the profit benefits in and of themselves would be nice. But not as sustainable as if we can get this growth to the places we think we can. On the service side, similarly, it's a balance. Right? We have benefited from a more stable service organization this year, and we've talked about that a little bit from the perspective of if you go a few years before that, the overall employment environment was stronger, but also led to more challenges and employee turnover and things like that. That has stabilized. And now we're capitalizing on that stability with some additional investments to ensure that we can unlock all the different areas of growth that exist in our service team. When you think about growth, sales is obviously the one that stares you in the face. But the other three aspects of the growth model retention, selling to our existing customers, through our service team, as well as managing price in an effective way are really on our service team. We want to make sure we're strong enough there to capitalize on all of those avenues. Kartik Mehta: Perfect. I appreciate that. Thank you very much. Steven Sintros: Thank you. Operator: Thank you. And our next question comes from Tim Mulrooney of William Blair. Your line is open. Luke McFadden: Hi. Good morning. This is Luke McFadden on for Tim. Thanks for taking our questions today. My first was just on price. Shared in recent quarters that pricing remains challenging. I'm curious if you're expecting that to alleviate as we move through 2026 just maybe as customers find their footing with tariffs or is this the go-forward dynamic you're expecting to operate under for the foreseeable future here? Steven Sintros: Yeah. It's a good question, Luke. I think, you know, as you reiterated, we had gone through a couple of years of heavy inflation. Which made a more call it, productive pricing environment. That has certainly shifted and we were experiencing that. I think the environment with the tariffs as I alluded to a couple of times is still pretty fluid. I think many organizations, as we certainly are, are trying to take a patient and prudent approach particularly because the impact of our tariffs on our business sort of flow in over time. And the dynamics around changing trade regulations and trade agreements is fluid in their development seemingly every week. And so we are going to manage our approach during that. I think historically, customers have been good partners to us. When we've been good partners, and managed through periods of increasing cost. And so we do anticipate that being an avenue that we will work through. But I think in general, there also is some inflation what's the right word, inflation fatigue. Thank you, Shane. Oh, from the last few years, so it's sort of a difficult inflection point where I think a lot of people are looking to recover from the inflationary period. And now seeing some of the tariff impact I think it does make it a challenging environment in that regard. Which is why we're trying to be patient and deal with the dynamics of the situation over time. So I know it's a little bit of a long-winded answer, but I think we will be working through things and expect our partners our customers to partner with us. Luke McFadden: No. Yeah. That's great. Really helpful color. And kind of maybe building off that, more nuanced question specifically around know, client bases. I wanted to ask, about any changes you're seeing with in your manufacturing clients. I know earlier you had talked about kind of a pullback from these clients due to those tariffs. Being more impacted. But starting to see some headlines from some larger manufacturers that this group might be adjusting to and acclimating to the current situation. Has that at all aligned with what you're seeing, around this client group specifically? Steven Sintros: Yeah. Probably too nuanced at this point to really say one way or the other, Luke. I would say that looking at the broader employment trends across kind of our more traditional uniform-wearing industries, I spoke to sort of the weakness we're seeing in the hiring there. I think a lot of companies are digesting and look over the long term, is there an impact that some of these manufacturing operations digest and potentially bring some tailwind to employment back here in North America. I think that's possible. I think at this point, probably too nuanced and we're not seeing big momentum one way or the other. Luke McFadden: Understood. We'll leave it there. Thanks so much. Steven Sintros: Thank you. Operator: Thank you. And our next question comes from Jason Halk of Baird. Your line is open. Justin Hauke: It's Justin. Hi. How's up? Steven Sintros: Good morning. Operator: Good morning. I just Steven Sintros: I guess I'm still confused on the sales service investments that you're talking about for 26. That is outside of the $7,000,000 key initiative costs. Right? I mean, the key initiative is still just the ERP and the system investments you've already been making. And I just want to make sure I understand that. Steven Sintros: Yeah. Absolutely. The $7,000,000, and at this point, I think it's a good clarify that the $7,000,000 is really very specifically directly related to the ERP. And it really is from as you go through a large project like that, there are aspects that are not capitalizable. And it's really the fallout from those additional costs we're spending with some of our primary contractors for that project. Sales and service investments, I mean, is a very simplistic way of looking at it, Justin, is in both of those organizations, we're making investments a bit ahead of the projected revenue growth for next year. Designed to accelerate the growth in years to come, right? It's really finding that right balance of each of those organizations. Quite frankly, sales is the best example. You could pull back on sales and probably show similar growth next year and better profits. But that's not going to get you to the more sustainable high levels of growth that we're working to get to. But those are two completely different things, just to clarify and answer your question. Justin Hauke: Okay. Alright. That's that's that's that's helpful. And then I there was a comment you made in maybe an missed it. I apologize. But I thought you said that you guys had record new sales this year, and I guess, just confirming if if that's what you said or or if I misunderstood that. And then where that's primarily coming from? Is it is it cross sell? Is it new business? Just you know, any color on vertical maybe? Steven Sintros: Yep. The comment I made about sales is that we did exceed our total selling new business from a year ago. Even though a year ago had the extra week and a very large account installed from a national perspective. If you look at the results this year, is it the biggest year of sales ever? I'd have to go back and look been a couple of other large ones. But it is probably one of the best install years that we've had. When you look at where it's coming from, yeah, it's it's pretty broad-based. I think we continue to have some success on the national side. Over the last couple of years, we've had some good larger wins. But the bulk of the business still comes from what I'll call the local and regional business. I think that line between national and local is becoming a little more blurred and that goes back to that tiered selling approach as we have diversified our rep base to include reps in that middle ground that are specifically focused on what we'll call major accounts versus national accounts. And those are more the larger regional accounts. And I think we've had some real good success there. That helped this year's sales. And that's the organization we're continuing to build out and causing some of that cost investment. Justin Hauke: Got it. Okay. Appreciate it. Thank you. Steven Sintros: Thank you. Operator: Thank you. And as a reminder, to ask a question, please press 11. Our next question comes from Brianna Kandam of UBS. Your line is open. Good morning, Steven and Shane. This is Brianna Candom on for Josh Chan. Thanks for taking my questions. Can you provide some color on the trajectory of margins in fiscal 2026? Are you expecting to see margin expansion at any point during the year? Steven Sintros: That's a good question. We don't typically give that quarterly breakdown, particularly at this point. I think our margins and the trajectory of them will probably reasonably follow our prior patterns. One thing I will say, and I have this fully quantified but as I talk about the impact of tariffs, those probably do become a bit more pronounced in the back half of the year based on what I said. Right? You bring in more products that are at a higher cost base. They sit in your distribution center for a month or two. They start getting amortized into your merchandise and service. And so that impact of the tariffs does build throughout the year. I'd have to kind of go back to the model to give you a best answer on the rest of it. But it's something we can give you updates on as we move throughout the year for sure. Shane O'Connor: Yeah. I would I would probably I would echo that, the fact that it's probably or the a good is that it's going to follow our margin trajectory that we've historically had. Most notable difference would be that second quarter. Where the profitability is down because of a number of costs that that we incur specifically in that in that quarter. So that that would probably be the best assumption. Brianna Kandam: Thanks for that. And and then for a follow-up, you mentioned softer results in nuclear. Can you frame out what impact you expect to have in fiscal 2026? And can you remind us which quarters are more likely to see softness understanding that this is a more volatile business? Thank you. Steven Sintros: Sure. I think when you look at the nuclear business, we talk about the expected wind-down of a large project, we expect that wind-down to occur over the first quarter. Our first quarter and third quarter for that business is always seasonally the best quarter. It may be a little more pronounced in the first quarter this year because that project is still active. Other than that, we expect the normal seasonality in that business across the quarters. Brianna Kandam: Great. Thank you, and good luck in the next fiscal year. Steven Sintros: Thank you. Operator: Thank you. I'm showing no further questions at this time. I'd like to turn it back to Steven Sintros for closing remarks. Steven Sintros: Again, I'd like to thank everyone for joining us today to review our results and about our fiscal 2025 and our outlook. We look forward to speaking with you all again in January when we expect to report our first-quarter performance. Thank you and have a great day. Operator: This concludes today's conference call. Thank you for participating, and you may now disconnect.
Operator: Good morning, ladies and gentlemen, and welcome to the Thermo Fisher Scientific 2025 Third Quarter Conference Call. My name is Claire, and I will be coordinating your call today. During the presentation, you can register a question by pressing star followed by one on your telephone keypad. If you change your mind, please press star followed by two on your telephone keypad. I would like to introduce our moderator for the call, Mr. Rafael Tejada, Vice President, Investor Relations. Mr. Tejada, you may begin the call. Rafael Tejada: Thank you for joining us. On the call with me today is Marc Casper, our Chairman, President and Chief Executive Officer, and Stephen Williamson, Senior Vice President Chief Financial Officer. Please note this call is being webcast live and will be archived on the Investors section of our website thermofisher.com, under the heading News, Events and Presentations, until February 1, 2026. A copy of the press release of our third quarter earnings is available in the Investors section of our website under the heading Financials. So before we begin, let me briefly cover our Safe Harbor statement. Various remarks that we may make about the company's future expectations, plans, and prospects constitute forward-looking statements within the meaning of applicable securities laws. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in the company's most recent reports on Form 10 and Form 10-Q under the heading Risk Factors. These forward-looking statements are based on our current expectations and speak only as of the date they are made. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even in the event of new information, future developments, or otherwise. Also, during this call, we will be referring to certain financial measures not prepared in accordance with generally accepted accounting principles or GAAP. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures is available in the press release of our third quarter 2025 earnings and also in the Investors section of our website under the heading Financials. So with that, I'll now turn the call over to Marc. Marc Casper: Thank you, Raf. Good morning, everyone, and thanks for joining us today for our third quarter call. As you saw in our press release, we delivered an outstanding quarter that included excellent operational performance reflecting our active management of the company. Strong execution from our team was ongoing focus meaningfully advanced a number of our customer relationships. And we made significant progress advancing our proven growth strategy, which continues to strengthen our foundation and build an even brighter future for our company. So first, let me recap the financials. Our revenue grew 5% in the quarter to $11.12 billion. Our adjusted operating income grew 9% to $2.59 billion. Adjusted operating margin expanded by 100 basis points to 23.3% and we grew adjusted EPS by 10% to $5.79 per share. Our performance in the third quarter enables us to raise our full year guidance. Now turning to our end markets. In pharma and biotech, we delivered another quarter of mid-single-digit growth. Performance in the quarter was led by our bioproduction and analytical instruments businesses, as well as our research and safety market channel. Turning to academic and government, revenue declined in the low single digits, representing a modest improvement versus last quarter. To provide some additional context, conditions in the U.S. in this end market were similar to Q2. In Industrial and Applied, revenue grew in the mid-single digits store in the quarter, representing a nice sequential step up. Performance in the quarter was led by our electron microscopy business, as well as our research and safety market channel. Finally, in Diagnostics and Healthcare, revenue growth improved over Q2, though it remained down low single digits for the quarter, largely due to conditions in China. Highlights in this quarter included strong growth in our transplant diagnostics and immunodiagnostics businesses. Wrapping up my comments on end markets, our team executed very well to capture the opportunities during the quarter. Let me turn to our growth strategy, which consists of three pillars: high-impact innovation, our trusted partner status with customers, and our unparalleled commercial engine. Starting with innovation, it was another excellent quarter for our company. Our new offerings demonstrate our continued leadership and further enable our customers to unlock scientific breakthroughs, advance precision medicine, and enhance productivity in their labs. In clinical next-gen sequencing, we continue to expand our offerings, strengthening our ability to help clinicians and researchers advance targeted care for patients. The OncoMindDx Express test on our iNTRON GenexisDx integrated sequencer received FDA approval as a companion diagnostic for a targeted therapy used to treat non-small cell lung cancer and for broader tumor profiling applications. We also introduced the Oncomine Comprehensive Assay Plus on the GeneXus system, providing clinical research labs with an all-in-one comprehensive genomic profiling solution that delivers next-day results. This capability provides clinical researchers with faster, more actionable insights to advance precision medicine. For proteomics, we launched the OLINK target 48 neurodegeneration panel to advance research into conditions such as Alzheimer's, Parkinson's, and multiple sclerosis. The new panel helps address the need for reliable detection and measurement of biomarkers that can unlock insights into these and other complex neurological diseases, while also enabling researchers to monitor disease progression and therapeutic responses. In analytical instruments, we unveiled two new electron microscopes at the recent Microscopy and Microanalysis Conference. These include the Thermo Scientific CALOS-twelve transmission electron microscope. This powerful new platform built on our popular Talos line and delivers exceptional image quality and ease of use for structural cellular analysis and biological research, pathology, drug development. We also introduced the Thermo Scientific SkyOS three, focused ion beam scanning electron microscope. Engineered with advanced automation precision and ease of use, this instrument accelerates material science research supports the development of new materials used across clean energy, aerospace, and digital devices. In chromatography and mass spectrometry, we launched 7.4, the first enterprise-ready compliance-focused software platform that unifies chromatography and mass spectrometry workflows. This system offers centralized secure data management and remote access across labs, empowering regulated bio clinical and environmental labs to streamline workflows, improve their productivity, and accelerate scientific decision-making. This launch is a great enabler for both our mass spec and chromatography instruments. Let me give you a quick update on our trusted partner status and our unparalleled commercial engine. We have a unique relationship with our customers, one that has been earned over many years through a relentless focus on anticipating, understanding, and meeting their needs. Our trusted partner status provides us with unique insights to guide our strategy and continually strengthen our capabilities. At the same time, our entry-leading commercial engine enables us to deliver those capabilities at scale. I'll share a few highlights of the actions we've taken recently to deliver even greater value to our customers and position our company for the future. One example is our strategic collaboration with OpenAI. The collaboration is focused on two broad areas. The first opportunity is to embed these capabilities into our products and services to make an even bigger impact for our customers. And the second opportunity is to make Thermo Fisher even more productive. As part of this collaboration, we are embedding OpenAI in advanced technology into critical areas of our business, including product development, service delivery, customer engagement, and operations. Our initial focus is on clinical research, to help improve the speed and success of drug development, ultimately enabling customers to get medicines to patients faster and more cost-effectively. We are deploying these capabilities to improve the cycle time of clinical trials. We'll also look to leverage OpenAI's capabilities to unlock value in our deep repository of data and experience to enable customers to focus on the most promising opportunities in their drug development pipelines. To enable the second focus area, we've launched ChatGPT Enterprise internally across the company to drive productivity, innovation, and ultimately, smarter customer engagement. I'm really excited about the ways Thermo Fisher and OpenAI, two innovation leaders, will work together to make a real difference in advancing science and bringing new medicines to patients. Another good example of our trusted partner status this quarter was the recently announced strategic partnership with AstraZeneca BioVenture Hub in Gothenburg, Sweden. This partnership will leverage the combined expertise of Thermo Fisher and AstraZeneca to drive innovation and strengthen the life sciences ecosystem. A dedicated team from Thermo Fisher will co-locate with AstraZeneca scientists to work on collaborative R&D projects with an initial focus on chromatography, molecular genomics, and proteomics. And it was also great to celebrate the grand opening of our Manufacturing Center of Excellence in Nevin, North Carolina this quarter. A high-volume, low-cost facility, this site was developed with support from the U.S. Government and is capable of producing at least 40 million laboratory pipette tips per week to support life science research and diagnostic laboratories and adds to the U.S. National supply chain resilience. So wrapping up our growth strategy, this was an excellent quarter where our actions strengthened our industry leadership today and positions our company for an even brighter future. Moving on now to capital deployment. We also had a very active quarter successfully executing our proven capital deployment strategy, which, as you know, is a combination of strategic M&A and returning capital to our shareholders. In September, we completed our acquisition of our filtration and separation business from Solventum, which is now part of our Life Sciences Solutions segment. As you know, this business expands our bioprocessing offering for pharma and biotech, as well as industrial filtration capabilities. The integration is progressing smoothly, and the early feedback from our customers has been incredibly positive. We also closed our acquisition of the Ridgefield, New Jersey sterile finish site from Sanofi, expanding our U.S. Drug product manufacturing. This is an excellent addition to our industry-leading sterile fill-finish network within our pharma services business. At this site, we'll continue to manufacture a portfolio of Sanofi's therapies and we'll invest in additional production lines to meet the growing demand for U.S. Manufacturing from our pharma and biotech customers as they reassure more activity to the U.S. Also in the quarter, we repurchased $1 billion of our shares. This brings our total repurchases to $3 billion for the year. So overall, a very active quarter of capital deployment. We have a company culture based on continuous improvement through our PPI business system, which once again was a key enabler of outstanding execution. We made great progress in the quarter leveraging PPI to manage our cost base and deliver very strong earnings growth. The PPI business system continues to drive great impact. And with the OpenAI collaboration, it will have even more impact going forward. The practical application of AI will enhance our colleagues' ability to find a better way, increasing our productivity and improving the customer experience. As I reflect on the quarter, I'm proud of what our teams accomplished and grateful for their contributions to our success. Let me now turn to our guidance. Given our strong performance in the quarter, we are raising both our revenue and earnings guidance for 2025. Steven will take you through the details in his remarks. I'll cover the highlights. We're raising our revenue guidance to a new range of $44.1 billion to $44.5 billion and raising our adjusted EPS guidance to a range of $22.6 to $22.86 per share. So to summarize our key takeaways from Q3, this was a terrific quarter. We delivered excellent operational execution reflecting consistent and active management of the company and the power of the PPI business system, which resulted in outstanding earnings growth. We continue to advance our growth and capital deployment strategies. And we're raising our full-year guidance and remain confident in our midterm and long-term outlook and the proven strength of our strategy to create meaningful value for our shareholders and continued success for our company. With that, I'll now hand the call over to our CFO, Stephen Williamson. Stephen Williamson: Thanks, Marc, and good morning, everyone. I'll take you through an overview of our third quarter results for the total company, then provide color on our four business segments, and I'll conclude by providing our updated 2025 guidance. Before I get into the details of our financial performance, let me provide you with a high-level view of how the third quarter played out versus our expectations at the time of our last earnings call. In Q3, our team executed really well and delivered results significantly ahead of what we'd assumed at the midpoint of our prior guidance on both the top and bottom line. Q3 reported revenue was approximately $300 million ahead of what we'd included in the midpoints of the prior guide, driven by stronger FX tailwind, a benefit from our recent acquisitions, and a slight beat on organic revenue. The beat on the bottom line was even more significant. We delivered $0.30 of adjusted EPS ahead of what was included in the midpoint of our prior guide for Q3. $0.11 of that beat was from a lower impact of tariffs and related FX than had been assumed in the prior guide. $0.20 of the beat was from very strong operational performance, and this was partially offset by $0.01 of dilution from the recent acquisitions. So to summarize, in Q3, once again delivered excellent operational performance. Let me now provide you with some additional details on Q3. Starting with earnings per share. In the quarter, adjusted EPS grew 10% to $5.79. GAAP EPS in the quarter was $4.27, in line with the prior year quarter. On the top line, Q3 reported revenue grew 5% year over year. That included 3% organic revenue growth, a 1% contribution from acquisitions, and a 1% tailwind from foreign exchange. Turning to our organic revenue performance by geography, in Q3, North America grew low single digits, Europe and Asia Pacific both grew mid-single digits with China declining mid-single digits. With respect to our operational performance, we delivered $2.59 billion of adjusted operating income in the quarter, an increase of 9% year over year. Adjusted operating margin was 23.3%, 100 basis points higher than Q3 last year. The very strong earnings results reflect our active management of the business and the power of our PPI business system. Total company adjusted gross margin in the quarter was 41.9%, 10 basis points higher than Q3 last year. We delivered very strong productivity, which enabled us to fund strategic investments further advance our industry leadership, and offset the impact of tariffs and related FX and unfavorable mix. Moving on to the details of the P&L. Adjusted SG&A in the quarter was 15.5% of revenue, R&D expense was $346 million in Q3. Reflecting our ongoing investments in high-impact innovation, R&D as a percent of our manufacturing revenue was 6.9% in the quarter. Looking at results below the line, our Q3 net interest expense was $113 million. As expected, the adjusted tax rate in Q3 was 11%, and average diluted shares were 378 million, approximately 5 million lower year over year driven by share repurchases net of option dilution. Turning to free cash flow on the balance sheet. Year-to-date cash flow from operations was $4.4 billion and free cash flow was $3.3 billion after investing $1 billion of net capital expenditures. Q3 was a very active quarter of capital deployment, we deployed approximately $4 billion of capital through the acquisition of our filtration and separation business from Silventum and the sterile fill-finish site from Sanofi. In addition, we repurchased $1 billion of shares during the quarter and returned $160 million of capital through dividends. Ended the quarter with $3.5 billion in cash and short-term investments, $35.7 billion of total debt. Our leverage ratio at the end of the quarter was 3.2x gross debt to adjusted EBITDA and 2.9 times on a net debt basis. Completing my comments on our total company performance, adjusted ROIC was 11.3%, reflecting the strong returns on investment that we're generating across the company. I'll provide some color on our performance of our four business segments. In Life Sciences Solutions, Q3 reported revenue in this segment increased 8% versus the prior year quarter, and organic revenue growth was 5%. Growth in this segment was led by our bioproduction business, which had another quarter of excellent growth. Q3 adjusted operating income for Life Science Solutions increased 15%, and adjusted operating margin was 37.4%, up 200 basis points versus the prior year quarter. During Q3, we delivered very strong productivity and volume leverage, which is partially offset by unfavorable mix strategic investments and the impact of the acquisition of our filtration and separation business. Which is included within this segment. In the analytical instruments segment, reported revenue increased 5% and organic revenue growth was 4%. Growth in the quarter was led by electron microscopy, and chromatography and mass spectrometry businesses. In this segment, Q3 adjusted operating income decreased 5% adjusted operating margin was 22.6%. Down 230 basis points versus the year-ago quarter. But this is a sequential improvement from Q2 2025. The majority of the year-over-year margin change was driven by the impact of tariffs and related FX. Outside of that impact, strong productivity was partially offset by strategic investments. And unfavorable mix. Seniors and Specialty Diagnostics in Q3 reported revenue grew 4% year over year, and organic revenue growth was 2%. In Q3, growth in this segment was led by our transplant diagnostics, and immunodiagnostics businesses. Q3 adjusted operating income for Specialty Diagnostics increased 10% and adjusted operating margin was 27.4%, 150 basis points higher than Q3 2024. During the quarter, we delivered strong productivity and volume leverage. Finally, in the Laboratory Products and Biopharma Services segment, reported revenue increased 4% and organic revenue growth was 3%. Growth in this segment was led by a research and safety market channel. The runoff of pandemic-related revenue had a 1% impact on the revenue growth in the segment in the quarter. Q3 adjusted operating income in this segment increased 12% adjusted operating margin was 14.5%. 100 basis points higher than Q3 2024. In the quarter, we delivered very strong productivity, which is partially offset by unfavorable mix, strategic investments. Turning to guidance. As Marc outlined, we're raising our 2025 full-year guide on both the top and bottom line, reflecting our continued active management of the company. Let me provide you with the details. We're raising our revenue guidance to an expected range of $44.1 to $44.5 billion. Organic revenue growth at the midpoint of the guide continues to be 2% for the full year, and as a reminder, that includes a one point of headwind from the run-up of pandemic-related revenue. Increasing our outlook for adjusted operating margin in 2025 to a new range of 22.7% to 22.8%. And we're raising our adjusted EPS guidance to a new range of $22.6 to $22.86. The increase of the midpoint of the guidance range reflects $420 million higher revenue than the prior guide. Driven by the benefit of our recent acquisitions, and an increase in the tailwind from FX. From an earnings standpoint, the increase in the midpoint of the guide reflects 20 basis points of improved adjusted operating margin expansion and $0.20 of higher adjusted EPS. This change includes $0.05 of dilution from the recent acquisitions. Continue to actively manage the company drive excellent operational performance once again enabling us to increase our guidance for the year. I'll now move on to an update of some of the modeling elements for the full year. Our guidance now includes the impact of the recently closed acquisitions, these deals added $260 million to revenue to our prior full-year guide, $20 million of adjusted operating income, and as I mentioned earlier, $0.05 for adjusted EPS dilution. In terms of tariffs, our guidance reflects the tariffs that are currently in place as of today. This includes the increase in tariff rates between the U.S. and Europe that occurred since the time of our last guidance. The changes in tariffs and trade policy once again caused intra-quarter volatility in FX rates in Q3, as a result, FX in Q3 was $220 million revenue tailwind to our prior guide, and a $0.10 adjusted EPS headwind. So for the full year, we now expect FX to be a year-over-year tailwind to revenue of $230 million and a headwind to adjusted operating income and adjusted EPS of $110 million and $0.37 respectively. Below the line, we now expect net interest expense to be $440 million in 2025, and we continue to expect an adjusted tax rate of 10.5% for the full year. We expect between $1.4 billion and $1.7 billion of net capital expenditures and around $7 billion of free cash flow for the year. Then in terms of capital deployment, our guidance now assumes that we deploy $7.6 billion of capital in 2025. $4 billion on the recently closed acquisitions, $3 billion on already completed share buybacks, and $600 million of capital return to shareholders through dividends. Finally, we estimate that full-year average diluted share count will be approximately 378 million shares. So to conclude, we delivered an excellent Q3, we're in a great position to deliver on our 2025 objectives. With that, I'll turn the call back over to Raf. Rafael Tejada: So with that, let's get started for the Q&A portion of the call. Operator: Thank you. When preparing to ask your question, please ensure your device is unmuted locally. The Thermo Fisher management team, please limit your time on the call to one question and only one follow-up. If you have any additional questions, please return to the queue. Our first question comes from Michael Ryskin from Bank of America. Your line is now open, Michael. Please go ahead. Michael Ryskin: Great. Thanks for the question and congrats on another strong print guys. I'll start just on market conditions and what you're hearing and what your customers' mark. I mean a lot has changed since we last spoke on the 2Q call. Especially on pharma, there's been a lot of progress in, I would say, de-escalation on some of the MFN and tariff concerns with pharma. Just wondering if anything has changed in your conversations with your major customers. Over the last couple of weeks and months. Talk of reshoring longer term. Could you just talk about how Thermo would benefit from that? Both from a facility build-out perspective, but also from Patheon and some of the other pharma services, some of your fill-finished capacity in the U.S. Just sort of how that come up in conversations? Marc Casper: Mike, thanks for the question. Very topical. So in terms of our dialogue with our pharma and biotech customers, as you know, we're very engaged, right, with this customer set, the senior executives, and if I say, what are they focused on? Probably is the first thing. Right? A lot of, you know, excitement around scientific breakthroughs. A lot of confidence actually in their pipelines. And they're partnering with us to help them drive their success. As we talk about the actual environment, right, which is a part of how they think about the world and the decisions they make, you know, there's a quiet confidence, actually, that they're going to be able to navigate the government policies effectively. And you're seeing that in some of the announcements that have been made on pricing as well as on reshoring more activity in the U.S. in terms of not being exposed to potential tariffs. On that dynamic, what I would say is we're very engaged in helping those customers think about, you know, new sites, how to best equip them, and support our customers. In that effort. And, you know, that will benefit our channel business, it will benefit our bioproduction business, analytical instruments businesses, will all benefit from those new construction. And that's really largely 27%, 28% by the time ground is broken on new things. For expansions, within existing facilities, it could be a little bit faster than that. So that is something we're actively engaged in, but it takes some time to gestate. More rapidly than that and in a way more cost-effectively for our customers, is leveraging our pharma services network to be able to move more of their volume to the U.S. You know that we are the industry leader in drug products sterile fill finish. We have very strong capabilities here. We've had very strong demand for those capabilities and our arrangement with Sanofi where we acquired one of their sites gives us another production node in the U.S. That is well trained, great workforce, and the ability to expand that facility as well. So we're excited to be able to enable our customers and pharma biotech has been a good environment for us. So thanks, Mike. Michael Ryskin: Okay. Thanks. That's all really helpful. And then maybe on the academic and government front, I mean, think you called out a low single-digit decline in the quarter. It seems like slight improvement from last quarter. But a lot of updates there as well. It looks like we're on track for hopefully flat budget next year, which is encouraging. But on the other hand, you've got the government shutdown over the last couple weeks now. So just give us an update on what you're hearing there. Is there any risk from government shutdown starting to hurt some of that? Potential recovery in A and G? Just sort of how you think about that playing out? Thanks. Marc Casper: Yeah. So, when I think about academic and government, in the quarter, the improvement was really slightly better in Europe. U.S. was very similar. China was very similar. To what we experienced in Q2 in both of those markets have headwinds, obviously different drivers of those headwinds. And when I think about so that government shutdown is kind of post-quarter. So I'll talk about that in a moment. But I say what's going on in the environment, in Q3, in the US, customers actually feel better about the idea of a more stable funding environment. Obviously, we'll have to get a budget in place and all of those things. But I think there's more consensus around relatively a flattish budget. And I think that will remove a headwind over time as the market stabilizes, once we get that funding in place. So I actually say from that perspective, while the conditions were, muted, I would say actually the noise or the it's less noise in a way. It feels a little bit better. On government shutdown, the way I would say is, obviously post-quarter, we're in the middle of it. Right now. I think it adds a little bit to customer hesitancy, right? It does add some uncertainty. And it obviously will delay some expenditures by the US government as well. On the things that they actually purchase. We put into our implied guidance range for the fourth quarter a reasonable set of action outcomes based on the government shutdown and based on our own experience. And how we think it's playing out and feel well positioned to navigate that. So that's how we thought about it. At this point in time. Michael Ryskin: Thank you, Mike. Thank you so much. Thanks. Operator: Thank you. Our next question comes from Tycho Peterson from Jefferies. Tycho, your line is now open. Please go ahead. Tycho Peterson: Hey. Thanks. Mark, I wanna maybe unpack some of the analytical instrument strengths. We're certainly better we've been modeling. Appreciate your comments on academic and pharma. But maybe just a little bit more color. Is this mostly mass spec? Is it cryo EM? Any particular segments that are emerging? And I guess, importantly, how do you think about kind of momentum on analytical instruments in the year-end? Any thoughts on budget flush and '26 at this point? Obviously, little bit too early to see a real pickup from onshoring, sounds good. Marc Casper: Yes. So Tycho, thank you for the question. So the team has been doing a good job in our analytical insurance business I'm proud of the efforts. The innovation that we've been talking about is really being incredibly well adopted. Say what is one of the drivers? Great launches in both mass spec and cryo electron microscopy. You know, it makes a real difference. And many of you have heard me say over the years, irrespective of funding environments, because they ebb and flow over time, you have relevant innovation and you think about what our customers are actually doing, they're doing their life's work. With this innovation. And if they don't have the best tools, effectively, they're really wasting their time. And because of that, you see an incredibly resilient and entrepreneurial set of customers getting funding. So the team's done a good job on that respect, and I'm proud of the mid-single-digit growth that we delivered in the quarter. When I think about what drove it really electron microscopy and chromatography and mass spectrometry. Were the drivers. We still have headwinds in our chemical analysis business. It was a little better. Than the previous quarter, but still pressure in some of the industrial and environmental segments. So largely, the two big businesses drove the strong performance. I think about the momentum going into the fourth quarter, really the only thing that's different, we have a much stronger comparison in the fourth quarter. We had very strong high single-digit growth last year. So comparison is difficult. Different. So that really is the will be the factor. But the underlying health of the business is quite good. Tycho Peterson: Great. And then a follow-up on Diagnostics You did flag China. Obviously, this has been a pressure point for some of your peers in China Diagnostics. Maybe Just Give Us A Sense Of What's Going On, You Know, On The Ground There. What If What Would Especially Specialty Diagnostics Have Done Ex That China drag? And then overall, I guess, just what are your assumptions around China for remainder of the year and early twenty six? Marc Casper: Yeah. So when I think about our specialty diagnostics, business, we provide high value medically relevant, critical testing. Right? And you think about that it's transplant diagnostics, it's immunodiagnostics, It's our protein diagnostics, which is our multiple myeloma business, which is part of our clinical diagnostics business. Our biomarkers for sepsis. These are just critical capabilities. And businesses that are, you know, a healthy long-term set of prospects. When I think about the environment in China, we have a much smaller presence than the market average for the diagnostic businesses in China in terms of what we do. So we saw very weak conditions based on the pricing and reimbursement environment. It's not different than what we expected. And those pressures flow through, but it's relatively modest portion of our business. And saw a little bit of improvement relative to the prior quarter in terms of what the growth rate was in the business. So think we're well positioned there over time. And you know, not much beyond that, I would say. Tycho Peterson: Okay. Thank you. Operator: Thank you. Our next question comes from Jack Meehan from Nephron Research. Your line is now open. Please go ahead. Jack Meehan: Thank you, and good morning. First question Good morning, Jay. Mark, just wanted just wanted to test your pulse You know, last quarter, you gave some initial framing thoughts around 2026 and kind of progression around the 3% to 6% organic growth. I guess just based on everything you've seen and the dialogue that you've had with customers, just great to get your latest thoughts on how you felt like you were tracking relative to that. Marc Casper: Yeah. So you know, when I think about the progression and the midterm outlook in the long-term outlook, we feel very good about that. Right? So nothing has changed about our confidence in the next couple of years. 3% to 6% organic is the right level of assumptions and strong operating margin and operating income growth coming out of that. So that's consistent. When I think about the first few agreements, on MFNs between the pharmaceutical companies, and the industry and the government in the US, that's what we expected to happen. Right? So that's a good thing, right, which is we expected that companies or the vast majority of companies would navigate the environment successfully. You're seeing the early ones do that. And that gives us confidence that the market conditions will continue to progress. I think it's worth remembering that today, we're basically at 2% organic and is about full point headwind from the COVID runoff, which doesn't which won't repeat next year. So we're kind of running at the 3% range. And over time, over this next couple of year period, the absence of negatives, meaning that academic and government won't decline as much, China at some point will stabilize, that in and of itself, without even improving the market conditions, ultimately gets higher in the range and then ultimately continued share gain in market conditions will get us further and further in the range over time. I feel very good about the position. I think for Stephen, it's worth commenting a couple of things that have changed. Stephen Williamson: Yes. So Jack, a couple of things to think about when you're doing the modeling for 2026. So based on current FX rates, there'll be a tailwind to revenue of a couple of million dollars. Obviously, I'd obviously monitor how rates change between now and the end of the year. We'll give more detail in terms of the current view in early 2026. Then in terms of the recent M&A, maybe it's worth actually taking a step back and giving a little bit more detail on kind of the implications for the current guide '25 and some thoughts in terms of modeling for you going forward. Starting with the filtration and separation business, revenue for this business for the full year 2025, not just the period we own but as I think about the full calendar year, expected to be just under $750 million in scale, so good sized business. When I think about going forward, the revenue growth there will be likely around or above the average for the company going forward. A good growing business. For the first twelve months of ownership, we continue to expect the transaction to be $0.06 dilutive, just under half of that is occurring in 2025. And then we're bringing this company this business into the company as a low double-digit margin business, and that quickly gets up to mid-teens and above. Once the integration stand-up costs are behind us. At that point, strong top-line growth, including strong synergies, will be nicely accretive to both margins and earnings for the business. Then moving to the Sanofi site acquisition. This comes with, as Mark mentioned, an existing book of business from Sanofi, approximately $75 million. And over the next couple of years, we're investing in additional lines that we're drive much stronger utilization of that site going forward. And as we go through the investment phase over twelve months of ownership, we expect the transaction to be dilutive by about $0.05. To get into 2027, the revenue profitability builds nicely as the new lines start to generate revenue there. So hopefully, that's some good color that will help you with modeling here. Jack Meehan: Yeah. That was all great. Wanted to follow-up and talk about the clinical research business. Mark, just any additional color you can share on trends and new authorizations, how you feel like pharma customers are feeling about getting back to work on trials, and any any just color around traction there would be great. Marc Casper: Thanks. Jack, thanks for the questions. They never stop working. It's really the business has progressed really well, very very proud of how the team is executing. The year has played out strongly. When I think about Q3, revenue growth stepped up. So we're growing in the quarter. Remember, we were just slightly positive in Q2. We're back to low single-digit growth. Authorization is incredibly strong. So ahead of that. So that positions that step up that we're expecting over time is playing out nicely. Are also innovating in what we do in clinical research. Right? And if you think about why that's relevant is because it is the lifeblood of the pharmaceutical and biotech industry is to be able to improve the speed and efficiency of the drug development process because that creates opportunities to improve the ROI on drug development. Which creates a virtuous cycle of more investments by our customers. A couple examples in the clinical research business where one is actively being, you know, implemented. We talked about accelerated drug development about a year ago. We're winning significant business. It's resonating incredibly well. Because what it's allowing us to do is shave time and cost out for our customers and leveraging our capabilities of not only our CRO business, but also our pharma services business to help our customers bring exciting medicines to market. The OpenAI collaboration is what we're creating together and what's new. Right, which is where, you know, deploying artificial intelligence in a way to help improve the cycle time of our clinical trials. We're co-creating new capabilities, right, in terms of effectively leveraging the large repository of data that we have to be able to add new value to our customers. So it's a super exciting time. Clinical research business, and the business is progressing nicely. During the course of this year. Jack Meehan: Yeah. It seems interesting. Talk to you. Marc Casper: Thank you. Operator: Thank you. Next question comes from Daniel Anthony Arias from Stifel. Your line is now open. Please go ahead. Daniel Anthony Arias: Hey, good morning guys. Thank you. Mark, maybe just following up on your biopharma comments. I'm just curious whether demand from small and emerging biotech is getting any better from where you sit. I mean, obviously, the BTK index is doing better, but I'm wondering if spending is loosening up at all. Marc Casper: Yeah. So, Dan, in terms of biotech, I'm sure it's a strong quarter. Right? When I look at what was going on sort of in the more detail, we really saw very nice momentum in our clinical research business. Of the early activities in pharma services. Obviously, in pharma services, it's going be smaller dollars as you get going. But there was a really nice progression there, which I feel good about. So I think that is encouraging. Actually think some of the M&A transactions that were done by large pharma acquiring biotech also helps sort of the ecosystem more broadly. So if I say not only do the equities perform better, but I think also you're seeing deal activity. And that deal activity ultimately will help drive a reinvestment cycle or cycling in of new capital. The market over time. So I think Q3 was a nice progression from that perspective. Daniel Anthony Arias: Yeah. Okay. That's great. Then maybe just taking the other side of Tycho's China question as it relates to pricing and just the initiatives that they have going on over there to control price. You know, the diagnostics markets are evolving, obviously, but what are you seeing on the research and industrial side? Is that fluid in a way that you think introduces some additional risk, or do you have your hands around the pricing dynamic? Such that you can think about it being stable into year-end or into the beginning of '26? Thanks a bunch. Marc Casper: Yeah. Dan, thanks for the question. So maybe if I step back on China. Right? Because we've been able to deliver stronger growth, around the world now for some period of time, China has become a smaller percentage of the company's total. Still an important market, but smaller. When I look at what's going on in China, know, academic and government, does benefit from some of the stimulus programs, but relatively pressured. As the government has tried to manage its own economic challenges, which are meaningful. But what was encouraging was that pharma biotech grew in the quarter modestly, but it was nice to see that happen. When I think about the quarter we declined in the mid-single digits. That was an improvement versus Q2. Really, the difference over those trends was we had that month of succession of trade activities back in the April timeframe. That absence really allowed us to have a bit more moderate declines. I would expect China for this year full year, to be down between mid and high single digits. The pricing dynamics, less government affected in the industrial sector, in pharma and biotech. They're more private enterprises or state-backed enterprises, but they don't have the same reimbursement dynamics. That you would see in the diagnostics and health care market. So that's a bit more manageable. Thanks for the questions. Operator: Thank you. Our next question comes from Daniel Gregory Brennan from T. D. Cohen. Line is now open. Please go ahead. Daniel Gregory Brennan: Great. Thank you. Thanks for the questions. Congrats, Mark and Stephen. Maybe, Mark, just going back to the onshoring announcement since it's been tremendous focus in the investor community. How to think about that? You gave a lot of color already in to some questions. I was hoping you can elaborate a little bit on two parts. First is, you know, we all ultimately think, like, kind of CapEx and, you know, capacity following drug volumes. So if drug volumes aren't necessarily changing, just trying to understand how to think about like what will be incremental in the U.S. Versus kind of that wasn't there before. So any way to help us think about that at this point? I know you talked about for the greenfield that would come with time, maybe like '27 and beyond. Just trying to think about that. And then I know you did talk about maybe more near term, maybe some of the brownfield there could be some equipment uptake. 'twenty six. Anyway, just help frame sizing magnitude or just any way to kind of contemplate what this can mean for Thermo Fisher? Marc Casper: Yeah. So, Dan, thanks for the question. So when I think about what is the aggregate dynamic, let's say, what the dollars are for us, but just what's going on. It is true incremental onetime demand. Right? And what I mean by that is there's gonna be new equipment new initial stocking inventory, new labs, all these things. I mean, none of these things are material in itself, but, you know, you just go through that process of getting a facility online. You do qualification runs. You just there's just a bunch of activity. That will generate demand over the next few years. But the volume in the industry hasn't changed. You do they're just real incremental in terms of that start up. But effectively, it doesn't mean that your ongoing consumables business grows more quickly because you're producing the exact same amount of medicines around the world, you're just producing in different sites. So from that perspective, it's kind of an unexpected positive over the next few years. We have a strong presence there. And interestingly enough, have a much stronger presence today than when those facilities were built many years ago in Europe. Right? Just if you think about how strong our bioproduction business is how strong the capabilities we're bringing in from solventum and filtration, the product launches around Dynaspin, which is our bioreactor technology. These are great things that position us actually have a higher share in the new facilities than the existing installed base. So I feel very good about the prospects. And we do it site by site in terms of what the opportunity is. So I don't have a good number to say how big is it in total, but should be a tailwind a bit in bioproduction. What I would say is our bioproduction is doing incredibly well, right? So when I able to look at a few of the companies that I've reported, very strong growth in Thermo Fisher. Clearly faster than what the others have reported. Broad-based strength geographically across our different businesses there. Really, the team did an excellent job. Bookings outpacing the strong, you know, teens growth in revenue is really the Teams are just doing great work. So it's an exciting business for us, and one with great momentum in the market. Daniel Gregory Brennan: Terrific. And then just a follow-up maybe to Steven. Just on the EPS impact and tariffs, could you just kind of level set? I know you gave the impact in the quarter, you said you mark to market the European tariffs, but you had the $0.50 potential from China. Think you recaptured some of that. Could you just kind bottom line, like how much ultimately kind of the tariff changes occurred and kind of what's happening in 4Q? Thank you. Stephen Williamson: Yes. Thanks, Dan. So when I think about the tariffs and the kind of the actual experience in Q3 came in favorably to what we'd had in the prior guide. In my prepared remarks, called out the $0.11 pickup, and that's a combination of tariffs and the related FX to, in terms of the changes in the kind of tariff and trade environment. Looking to Q4, given the tariffs increased from the time of our last guide most materially between U.S. and Europe. Our initial view is that that kind of assumptions we had around tariffs pretty much hold for Q4. So I'm not expecting a significant pickup in Q4. That's kind of how we've kind of framed the guidance for in terms of this update. Operator: Great. Thanks, Sam. Our next question is from Andrew Tupa from Raymond James. Your line is open. Please go ahead. Andrew Tupa: Great. Thanks everybody for the time. Just first, would love a little bit more color on the contract research side of the house and maybe in particular, how that accelerator bundled program has gained traction and kinda layering that into the context of all the discussion that's already occurred in terms of onshoring, how that changes the applicability to customers, and how they look at know, that kind of wraparound March partnership versus, CRO and CDMO kinda separately historically? Marc Casper: Yeah. So, Andrew, thank you for the question. So when I think about accelerator, right, we are one of the largest clinical research organizations. We are also one of the largest pharma services organizations that's developing medicines on the physical side, from early development all the way through commercial scale production. Both in drug substance and drug product and all of the physical clinical trials like activities around there. So we are touching these pipeline, these molecules in many different ways. And a hypothesis that we had at the time of deciding to acquire PPD back in 2021 was that there would be insights and capabilities that could streamline the way that companies develop medicines and how they produce them ultimately. We didn't bake that into our models, but we had a strong hypothesis. We spent a couple years doing a significant number of co-creation with our customers to bring that to life. We launched the official capabilities a year ago, and the adoption has been very strong. You see it very aggressively in biotech. Because, effectively, they outsource pretty much all of their work. Right? So when they think about it, they are looking for a partner that can help them bring insights, not only in how to design and execute their trials, but on also how do you develop and produce the medicines. And it's been very compelling. It's built us a nice book of authorizations. That turns into revenue over time. Takes a while for this flow through the pipeline. And in large pharma, there's been great interest in our leading clinical trials, physical capabilities, the logistics packaging, distribution of experimental medicines. And what that has allowed us to do is continue to drive share and gain momentum because, again, there, the linkages with clinical research shaves time and cost out of the process as well. So it's been, you know, it's early days, but they've been very positive. Andrew Tupa: That's helpful. Thank you. And then maybe just one of financial question. Your $0.2 operational beat in 3Q, you had the FX and tariff tailwinds as well. But you're raising the range about 20¢ in the midpoint as well. Maybe what's going on to off some of that operational traction as we think about 4Q? Is it reinvestment? Is it a little bit of mix? Is there something different to think about knowing we have that $5 of dilution from the acquisitions you called out as well? Just would love a little bit of color on kind of 3Q to 4Q. Stephen Williamson: Yes. Understood. We beat by $0.30 in Q3. As you mentioned, we have $0.05 of additional dilution from the acquisitions. And overall $0.20 raise in midpoint given where we are in the year, how we're performing, what the end markets are like, I think this is an even stronger raise on the low end of our guide. I think that's a good to be in as I think about going into the Q3. Q4 quarter. Operator, we have time for I just we're in a good position for finish the year. I don't overread into raising our guidance by $0.20 in the midpoint, but significantly raising on the low end I think that's a strong statement. Andrew Tupa: Thanks, Andrew. Okay. Thank you. Operator, are set for one more question? Operator: Lovely. Our next question comes from Patrick Donnelly from Citi. Your line is open. Please go ahead. Patrick Donnelly: Great. Thanks for taking the questions, guys. Mark, maybe one for you on just the capital allocation side. Obviously, continue to buy back stock as you talked about. You just talk about the M&A appetite, what those discussions look like? Any areas you're focused on? I know you guys always have a good pulse on that front, just curious what appetite there looks like for the conversations. And I just have a quick follow-up. Marc Casper: Yeah. So we have been active all year. We have deployed about $7.5 billion on M&A, $3.5 billion on return on capital through buybacks and dividends. We have a very busy pipeline. It's exciting. I like this environment because there are good companies that you know, struggle in environments where it's all about execution. And so we're busy, and we're looking at some interesting things. Obviously, those things will always fit well with our strategy. Going to be whether we can generate really good returns. And for those that feel good about, you'll see us continue to be active. Are many parts of the company given how fragmented our industry is, to expand our offerings that would be highly valued for our customers. So we're going to execute well against what we closed. And, at the same point in time, continue to look for great opportunities build more value. Patrick Donnelly: Okay. That's helpful. And then as we look ahead, it seems like the exit rate for 4Q somewhere at two or 3% organic. Obviously, you talked a little bit about 26% last quarter. Is the view that growth just continues to accelerate throughout next year? It sounds like China is turning the corner to a degree. Pharma sounds a little bit better. I guess, what segments are holding you back, if any, in terms of when you look at what's improving right now? And again, as that acceleration happens next year, are the key drivers? And what are you looking for still turn the corner? Thank you guys so much. Marc Casper: We are looking forward to our call at the beginning of the year to give you all the details. We'll benefit from, obviously, the perspective on how we exit the year. And our view is, over the next couple of years, growth is going to build over time. And I'm very excited about exiting this year. A couple percent organic and 3% when you have the non-repeats of the final bits of COVID runoff. So we entered the year at a good part, and going to execute really well in turning the revenue growth into excellent, excellent earnings growth. And we did in the quarter and finish up on a great note in '25 and set ourselves up for a great '26 and beyond. So Patrick, thank you for the final question. Let me wrap up. Thanks, everyone, for joining us on the call today. We're very pleased to deliver another strong quarter. We're well positioned to deliver differentiated performance in 2025 and continue to create value for all of our stakeholders and build an even brighter future for our company. Look forward to updating you on the fourth quarter and the full year performance early 2026. And as always, thank you for your support of Thermo Fisher Scientific. Thanks, everyone. Operator: This concludes today's call. You all for joining. You may now disconnect your lines.
Edra: Hello, everyone, and welcome to the SmartFinancial, Inc. Third Quarter 2025 Earnings Release and Conference Call. My name is Edra, and I will be your coordinator today. We will be taking questions at the end of the presentation. I will now hand you over to Nathan Strall, Director of Investor Relations, to begin. Please go ahead. Thanks, Edra. Nathan Strall: Good morning, everyone, and thank you for joining us for SmartFinancial, Inc.'s third quarter 2025 earnings conference call. During today's call, we will reference the slides and press release that are available in the Investor Relations section on our website, smartbent.com. William Carroll, our President and Chief Executive Officer, will begin our call followed by Ronald Gorczynski, our Chief Financial Officer, who will provide some comments and some additional commentary. We will be available to answer your questions at the end of the call. Our comments include forward-looking statements. These statements are subject to risks and uncertainties. The actual results could vary materially. We list the factors that might cause these results to differ materially in our press release and in our SEC filings, which are available on our website. We do not assume any obligation to update any forward-looking statements because of new information, early development, or otherwise, except as may be required by law. During the call, we will reference non-GAAP financial measures related to the company's performance. You may see the reconciliation of these measures in the appendices of the earnings release and investor presentation filed on 10/21/2025 with the SEC. And now I'll turn it over to William Carroll to open our call. William? William Carroll: Thanks, Nathan, and good morning, everyone. Great to be with you. And thank you for joining us today and for your interest in SmartFinancial, Inc. I'll open our call today with some commentary, then hand it over to Ronald Gorczynski to walk through the numbers in some greater detail. After our prepared comments, we'll open it up with Ronald, Nathan, Rhett Jordan, Miller Welborn, and myself available for Q&A. It's been a busy quarter for us, and we've had a number of very positive things happening with our company. The focus on execution that's going on right now is outstanding. Our team continues to have a keen focus on hitting targets we've set for this year in regard to revenue, returns, and prudent expense growth, and I remain very bullish on our outlook. So let me jump right into some of our highlights. First, and in my opinion, one of the most important metrics, we continue to increase the tangible book value of our company. Moving up to $26 per share including the impacts of AOCI, and $26.63 excluding that impact. That's growth of over 26% annualized quarter over quarter. For the quarter, we posted operating earnings of $14.5 million or $0.86 per diluted share. This is our sixth consecutive quarter of positive operating leverage and hit our $50 million quarterly revenue target in Q3, which we had set for our team this year. We actually hit it a few months early, and I look forward to seeing that number continue to grow. We had outstanding growth on both sides of the balance sheet, posting 10% annualized growth in loans and 15% annualized growth in deposits. Our history of strong credit continues. Only 22 basis points in nonperforming assets. I'm pleased to see these numbers continue at exceptionally low levels. Total operating revenue came in at $50.8 million as net interest income continued to expand and noninterest income was solid again. Our operating noninterest expenses also came in on target at $32.6 million. Looking at the charts on page four and five, you'll see very nice trends. We're building our return metrics and most importantly, growing our total revenue, EPS, and as I mentioned earlier, tangible book value. All those charts are great graphics to illustrate our execution. I'm looking forward to and expecting these trends to continue. So just a couple of additional high-level comments from me. On growth, our continued balance sheet expansion is a direct result of the focus of our sales team. I've enjoyed watching this company transform into a very good organic grower. As we have hired well over the last several years, we've also built an outstanding foundational process that includes aggressively going after new client relationships, growing existing ones along with a very diligent prospecting process. As I stated, we grew our loan book at a 10% annualized rate quarter over quarter. As sales momentum stays strong and balanced across all of our regions. Our average portfolio yield, fees, and accretion, was up to 6.14% and our new loan production continues to come onto the books accretive to our total portfolio yield levels. Regarding deposits, again deposits were up 15% annualized or $179 million for the quarter inclusive of reducing some of our brokered CD positions. It's important to recognize how we're building this bank with core relationships as we have an intense focus on both sides of the balance sheet. We've made investments in our treasury management team over the last several quarters and it's nice to see this line of business gain outstanding momentum. Our loan to deposit ratio was at 84% which is actually down quarter over quarter even with 10% loan growth. This strong position gives us continued flexibility to leverage a great balance sheet. Our pipelines continue to look good, and I'll discuss these a little bit more in closing comments. But, also, when you look at the highlight bullets, in our earnings release, we've had a lot going on this quarter. All of it tied back to building the foundation of a bank that is on track to becoming one of the Southeast's strongest regional community banks. Everything accomplished this quarter is part of our focus on efficiency and growth. A well-executed sub-debt issuance, a sale with a subsequent minority reinvestment on our insurance platform, a repositioning trade with our bond portfolio that did not impact our book value as we leverage the gain off the insurance deal. And continued contract evaluations and renegotiations. Including our core data processing vendor interchange payment rails, and some new tech token tech-focused initiatives looking into 2026. So all in all, a very nice third quarter for our company. And I'm gonna stop there, hand it over to Ronald Gorczynski to let him dive into some greater detail. Ronald? Ronald Gorczynski: Thanks, William, and good morning, everyone. I'll start by highlighting some key deposit results. For the quarter, we had strong non-broker deposit growth of $283 million representing more than 24% growth on an annualized basis. This increase resulted from both new deposit production and seasonal client liquidity build following the previous quarter outflows. The cost of new non-brokered production was 3.47%. This growth gave us the opportunity to pay down $104 million of brokered deposits which had a weighted average cost of 4.27%. Our overall interest-bearing cost rose by three basis points to 2.98% but were down to 2.93% for the month of September. Despite funding almost $100 million of loan growth, and paying down $104 million of brokered deposits, our overall liquidity position which includes cash and securities, at quarter end was approximately 21%. Included in our liquidity position was $98 million in net proceeds from our sub-debt issuance which closed in August. As we look ahead to Q4, we anticipate our liquidity position normalizing as we already retired $40 million in our existing sub-debt on October 2, and we expect to pay down an additional $111 million in brokered deposits with a weighted average rate of 4.28% during the fourth quarter. As William had mentioned, we utilized the gain generated from the sale of our insurance operations to offset losses associated with selling $85 million of securities with a weighted average rate of 1.4%. The proceeds of the security sale were reinvested in securities yielding 4.95% which will generate $2.6 million of additional annual interest income and increase our overall weighted average securities portfolio yield to 3.7%. During the quarter, our net interest margin experienced some temporary compression declining four basis points to 3.25% primarily as a result of timing differences between issuing new sub-debt prior to paying off our existing sub-debt and higher rates for new deposit production. However, the average rate of new loan production was 7.11% which continues to push the yield on our overall portfolio higher. Furthermore, any future cuts to the Federal Rates Fund will positively impact our deposit portfolio costs as approximately 45% is variable cost adjusting in lockstep with any Fed actions. We believe these factors in conjunction with anticipated broker deposit pay downs and enhanced yields on our overall securities portfolio has our balance sheet well positioned heading into the fourth quarter and into 2026. Looking ahead, we're projecting our fourth quarter margin to be in the 3.3% to 3.35% range. Our quarterly provision expense decreased to $227,000 from $2.4 million reported in the previous quarter. The growth-related provision this quarter was offset by the adjustment to our qualitative factors specifically an improvement in our CRE concentration ratio which decreased to 271% from 301% in the previous quarter. This decrease was due to the downstream of $45 million of proceeds from our sub-debt issuance to the bank as equity capital. Additionally, our asset quality continues to remain robust with non-performing assets comprising 0.22% of total assets and net charge-offs to average loans of 10 basis points on an annualized basis. Our allowance for credit losses is now at 0.93% of total loans. Operating non-interest income after adjusting for the gain in sale of our insurance operations and the loss on the securities restructuring was $8.4 million which is $500,000 lower than the previous quarter. As a result of the sale. All other income items remain consistent with our expectations. Operating non-interest expenses after adjusting for previously noted items totaled $32.6 million aligning with results from the prior quarter. We made progress again in our operating efficiency ratio which improved to 64% compared to 66% from the previous quarter. Our ongoing commitment to expense management has allowed us to maintain a level of expense base over the past four quarters and continue to trend positively towards our long-term efficiency goals. For the fourth quarter, with insurance operations removed, non-interest income is projected to be approximately $7 million and non-interest expense is expected to be in the range of $32.5 million to $33 million. Salary and benefit expenses are anticipated to range from $19 million to $19.5 million comparable to the previous quarter due to higher levels of variable compensation and anticipated costs associated with the new hires. Both our bank consolidated Tier two capital ratios increased during the quarter primarily due to the sub-debt issuance. Our total consolidated risk-based capital ratio rose to 13.3% up from the 11.1% in the previous quarter and the company's TCE ratio also improved to 7.8%. Looking ahead, we are confident that our capital ratios are appropriately balanced and well-positioned to sustain growth while optimizing returns on equity. With that said, I'll turn it back over to William. William Carroll: Thanks, Ronald. I want to reiterate again the value proposition with our company, drawing your attention back to page seven of our deck. We are successfully executing on the leveraging phase of growth for our company. We hit our 112% ROE and ROE targets this quarter. And have confidence that this will build from here as we gain even more operating leverage. We're building a great franchise. We're in arguably some of the most attractive markets in the country. And have put together a team that is rapidly moving us forward. You've heard me say before, I believe we are one of the Southeast's brightest stories. Outstanding markets, strong experienced bankers, coupled with a great operational and support team, plus very nice complementary business lines. We expect the remainder of 2025 to have a similar look to what we've seen in the last few quarters. And I believe this will continue into 2026. Our focus will be on doubling down on this current strategy. Getting deeper into our markets and our business lines. As I mentioned, pipelines are good and I think we can continue growing at this high single digits plus pace. On talent acquisition, this continues to be a focus as well. Recruiting is a process. We've added a number of great bankers this year, and have several more in our pipelines. Made some outstanding additions in the third quarter. And I believe we are included with a very small handful of banks that have built a culture where outstanding regional bankers want to work. We will continue to look for these organic growth opportunities and will remain very focused on recruiting. One of the reasons for our successful execution on adding great people is our culture. Arguably, one of the biggest highlights for the quarter for us internally was our company being named to Fortune's list of best workplaces. It is an honor we don't take lightly, and a big shout out to our people team led by Becca Boyd as we continue with huge accomplishments with the culture of our company. So to summarize, we're positioned well for our clients, our associates, our shareholders. We are executing, growing revenue, EPS, and book value while staying prudent on expense growth. We remain optimistic around our margin, as new production stays strong and as we see the tailwind coming with rate reset on our loan portfolio, over the next couple of years. Credit continues to be very sound and we're seeing great new client acquisitions coupled with great overall energy around our company. I appreciate the work of our SmartFinancial, Inc., SmartBank team and the efforts of all of our associates. I'm very proud of what we have going on here at SmartFinancial, Inc. And I'll stop there and open it up for questions. Edra: Thank you very much. Our first question comes from Brett Rabatin with Hofde Group. Your line is now open. Please go ahead. Brett Rabatin: Hey, good morning, guys. Thanks for the question. Wanted to start maybe, William, you mentioned some hires, and I think in the past, you've said the Alabama franchise could double in size over time and you felt pretty optimistic about Alabama. Can you talk maybe about where the hires were in the geographies? And then just, thinking about Alabama, just any update on the growth outlook for that franchise in particular? William Carroll: Yeah. Brett, thanks. It has. You know, as far as just geography, it's really been fairly evenly spread. You know, I think last quarter, I think we've talked about we had we hired several, and then we had several in the pipeline. We continue to add those. We added a couple in Alabama, added a couple in Tennessee, over the last little bit. And so it's really been throughout all of our zones. I do think we're still extremely bullish on Alabama as we're getting started. We're bullish on all of our markets. But we're seeing a lot of this Alabama growth starting to catch stride, especially with some of these teams that we've got in the Birminghams. In the Auburns, the Dothans, the Montgomery's. Those offices really are starting to generate some great momentum in Mobile too. I know Miller and I have been we've done we've been on we've been on the road a lot the last several weeks. And so we've been in most all of those markets over the last little bit. And it's exciting. A lot of new folks coming on. We had a new ad in Panama City. Did have a new ad in Murfreesboro as well. So it's really been across the board, Brett. But we're continuing to focus not just on Alabama, really all of our zones. That had you know, like I said, Florida as well. We're seeing some nice Panhandle opportunity there. And don't see that slowing down. Yeah. Yeah. It's just really been across the board. So again and I made the comment in here the momentum that we've got really everywhere in the company is just really good right now. Our culture's good. We're attracting some great bankers and you know, and our existing legacy teams are performing extremely well. So we're kinda hitting on most all cylinders. Still got always still got work to do and gaps to close, but it's been really good. Brett Rabatin: Okay. That's helpful. And then on the margin guidance for the fourth quarter, obviously a lot is going into that. Wanted to make sure I understood of the guidance relative to the liquidity that you added in 3Q. How much of that drains out? How should we think about maybe the average balance sheet size in the fourth quarter, you know, and how that might impact NII. Yeah. William Carroll: Ronald, do you wanna talk a little more on the margin detail? Ronald Gorczynski: Yeah. You know, a lot of our cash on the balance sheet today will be more deployed. You know, we did $40 million for the sub-debt. Another $100 million for brokered, and we expect to shrink some of the cash put into loans. So I don't think our asset size of our balance sheet's gonna move anything materially. We're just gonna use really the cash on hand to fund most of the production for Q4. Brett Rabatin: Okay. That's helpful. Then if I could sneak in one last one, you mentioned, William, you know, focused initiatives and next in the next year. Does that increase productivity, like AI, so you can have bots doing work that maybe frees up FTEs or any thoughts on how much that might add to an expense base? William Carroll: You know, it really you know, what we've done, Brett, over the last little bit, as I said, we've really worked and had some very favorable outcomes with some new contract renegotiations on several fronts across the company. But some of the stuff that we're doing in tech I think, is allowing us to get some expense reduction so we can reinvest. I obviously, Ronald will continue to quarterly kind of give our quarterly non-interest expense guidance moving forward. I don't see it having a really meaningful impact from an increase standpoint, even these new initiatives. I think we've got those kind of built in kind of where we think run rates are today. But, we've got some great platform enhancements. We're looking at AI. We've started using bots. I think we will continue to do more of that. We're looking at some new things on the digital front as well from a consumer-facing digital piece. We're leveraging Copilot a lot. In our company today. And I do think it overall, I think it increases efficiency. I don't know yet if it doesn't necessarily don't think it necessarily impacts you in from a spot where we're gonna look to reduce that. But I do think it continues to allow you not to add staff as you scale. And I think that's the biggest thing. We're seeing a lot of tools that we're starting to use. I know we've got great support stuff going on, our risk platform tools. Are very helpful. We're spending a lot of time, you know, evaluating risk, evaluating fraud in your company. So a lot of those technologies, I think, will allow us to continue at current staffing levels. Or maybe add just a few instead of adding a lot over the coming year. So it's kind of a mix it's a mixed bag. There's a lot of different moving parts to it, but I'm really excited. I think our technology team is as good as we've ever had it in our company today. And I feel really good about our ability to advance that while still staying within a very reasonable expense profile. It's as much a reallocation and reinvestment as it is. Ronald Gorczynski: Well, additionally, the first sliver of this will be to you know, we wanna provide our clients with better experience, easy to do business easier to do business with. So that's really our first focus when we're going down this path. Brett Rabatin: That's all really helpful. Thanks so much, guys. Ronald Gorczynski: Thanks, Brett. Edra: Our next question comes from Russell Gunther with Stephens. Your line is now open. Please go ahead. Russell Gunther: Hey, good morning, guys. I wanted to begin with just a follow-up on the expense. So six consecutive quarters of positive operating leverage. You've talked about continuing to hire bankers as the opportunity arises. We just touched on the expense initiative the tech initiatives. So how are you thinking about that streak of positive operating leverage going forward? Is that something we should expect to see over the course of 2026 alongside this franchise investment? William Carroll: Yeah. I'll start, and then, Ronald, maybe you can add some additional color as well. Yeah, Russell. I think so. I mean, you know, when you look at where the company's positioned today, we're really bullish on our ability to continue to grow that revenue line. Again, the production that we're seeing happen throughout all of our markets, the repricing that we've got going on, we're gonna get we're gonna continue to get that revenue lift. You know? And it's definitely gonna outweigh our expense run rates. Now we're gonna wanna continue to invest and add people but we're gonna do that balanced as we grow this revenue line. I think it's really important for us right now to continue hitting these operating leverage targets over the next few quarters. We really believe we can do that. We feel good. We're starting to run Air 26 models and feel very good about where our company can be. Again, we've gotta execute. We've gotta do the right things to do that. But, we've demonstrated our ability to do that. In '24 and '25. We think we can continue that in '26. So, yes, I do think we can continue to increase this consecutive streak of gaining operating leverage. But Ronald, I have any additional comments that you've got. Ronald Gorczynski: Yeah. No. Exactly right, William. You know, we're probably you know, again, we're not going into '26 guidance, but we're probably keeping our band tight. We've been focused on containment for the prior four or five quarters. And we're probably looking around the 34, if you want numbers, 34 to max $35 million range for the full year next year. So yes, we will be focused on containing it with our growth. Russell Gunther: That's great color, guys. I appreciate it. And then just switching gears, to the margin. Appreciate the sort of level set for 04/2025 given the moving pieces in March. You give great detail in the deck, around the average earning asset repricing schedule. And in the past, you've talked about how that would translate to about two to three basis points of margin expansion quarterly. Is that still sort of the range you're thinking about as we move beyond April, or have some of the actions taken this quarter changed that in any way? Ronald Gorczynski: No. Actually, you know, the prior quarters was two to three basis points. We're pretty bullish in our margin expansion going into 2026. Overall, I think we're probably looking at five to seven basis points expansion quarter over quarter for '26. Russell Gunther: That's very helpful. Scott. Thank you, guys. Okay. Thanks for taking my question. Thanks, Russell. Edra: Our next question comes from Catherine Mealor with KBW. Your line is now open. Please go ahead. Catherine Mealor: Thanks. Good morning. Ronald Gorczynski: Good morning. Edra: Maybe just one follow-up on the margin on the deposit side. With growth improving as much as it has into next year, how do you think the deposit beta could be on the next 100 basis points of cuts versus what we've seen on the past 100 basis points of cuts? Just given I think we'll see better growth rates coming, you know, in the next the next course of the year. Ronald Gorczynski: Yeah. I think I think, for the variable intend to, as best we can, is to really follow dollar or basis point per basis point. So we're still targeting 45%. I know we're probably in the thirties right now, but we wanna target that 40% range beta. Catherine Mealor: Okay. And from the past twenty-five of cut, I know it's early, but have you already seen the ability to do that? Ronald Gorczynski: Yes. Yes. We have. William Carroll: Yeah. We've been trying to step down, Catherine, a little bit as we were. You know, we've got we have we have some of the deposits are tied directly to, the rates or market rates. And so those come down as rates come down. Some are more correlated. Some and that gives us the ability to move a little bit faster in some other too. So, yeah, we've been able to move those down and still pick up the growth that we've needed. Teams have done a nice job to be able to do that. And I think, yeah, we're still staying right there in market and staying on top of of what's going on in all of our different zones, and each of our different zones have different competitive pressures. And different competitors, but, but we've done a nice job being able to pull that down. Catherine Mealor: Okay. Great. Then just a quick question on fees. Any outlook for fees as we go into next year of just things to be aware of that could drive better fee growth? I know that the insurance fees settled be over the moving piece. I was just kind of curious on how we're seeing that fee growth into twenty-six. William Carroll: Yeah. I'll start, and then, Ronald, I'd love to get your you know, some color Catherine as well on that. We yeah. We've got several things working. Again, yeah, we'll kinda reset without that insurance component line item going forward. But, yeah, we've got I think we still got some really good plans when you look at fees for us on the whole. Continue to think that that's gonna, have the ability to trend up. I know you know, we've talked a little bit about payment rails and renegotiation. I think we've got some things that we're working on on our, on our interchange income. I did mention I think there's some opportunities there. And I did in my comments our mortgage unit. I'll tell you. Our mortgage unit is having probably as good a year as we've ever had. And really excited about what that mortgage team is bringing to the company. We're seeing, as we've grown our footprint, grown our platform, we continue to add some, great new sales team members on the mortgage side, and our legacy team continues to perform well. So that's a, that's I think that'll be a plus. You know, our investments arm continues to really execute, you know, continue to grow our AU in there. We've added a really nice producer in one of our Alabama markets. New FA down there this year. Yes. And, you know, Ronald, I know we talk we always talk about TM. Well, TM is a piece of it as we continue to grow that TM platform. I know that those dollars continue to just kinda build and become a really nice annuity. So Catherine, I think there are several pieces. I don't know, Ronald, if there's any others that you think of, but I do think we'll continue to get some nice growth. We'd love to see that accelerate. That's going to be a strategic focus for us next year. But I know, Ronald, any comments on that from you? Ronald Gorczynski: Other than, you know, more like more looking at the customer fees and making sure more market. But, no, you hit all the highlights, William. Yeah. Catherine Mealor: Okay. Great. Thank you. William Carroll: Thanks. Edra: Our next question comes from Steve Moss with Raymond James. Your line is now open. Please go ahead. William Carroll: Maybe just starting here on loans, just on the pipeline here, Bill, you sound really optimistic on things. So I'm assuming it's going to be likely to be a really good fourth quarter. Just kind of curious as to is that pipeline enough to support double-digit growth into 2026 Again, I keep guiding to kind of the high singles. We've been able to beat that a little bit. You know? And you know, I think we'll be right there I think we'll be right there at that plus minus 10 number. You know, that's and that's a that's a big bogey as we get larger. I'll tell you, one of the things that we talk about a lot internally you know, the production levels that we've had have really been outstanding. Again, the teams are doing a nice job. You know, we're still seeing the payoffs in paydowns that that, you know, that'll you know, a lot of our as we read and look at other releases, and see a lot of other things going on the market, you know, we're not immune to that. We're getting a lot of pass paydowns. It's just our production is so strong It's still allowing us to get up there and kinda hit this 10% ish number. So, you know, that's know, that's that's a lot to continue to ask our team to do. But as we look over the at least the near term, I do think we can continue at at or around that pace. Again, pipelines are solid, you know, when you're out when you know when we're out in these markets and and with the rents at renting a lot of them, the miller and I are in a lot of them. I mean, we're out, and there's just there's a there's an energy and a really good calling effort. Going on throughout, throughout the company. So, yeah, I think we can continue that know, there might be a quarter that we're a little lighter. Little heavier, but I still think we'd be right around that plus minus 10. Ronald Gorczynski: Yeah. I like the markets. Okay. And they're just all so positive, and the teams seem to be so positive. It does get harder to feed the beast, but I think we're certainly up for. William Carroll: Right. And maybe just in terms of being the beast, I hear you guys in terms of hiring as well. Just curious, you know, as you think about I know you guys are always opportunistic, but know, you obviously have merger disruption in your markets. You'll kind of do you think there's a possibility of a step up in hiring over the next twelve months Just kinda curious. I know you guys are talking about positive operating leverage, but just curious on that aspect expense. William Carroll: Yeah. I'll tell you. See, we're we we're all we're very selective as we go through this hiring process. I you know, I don't necessarily think it's gonna pick up dramatically. I think couple of reasons. I think that it you know, you the disruption that you we see in the market I mean, these are these are good banks, they're gonna be they're gonna be fighting to hold on to good talent. And, you know, and I just and I think over the over a period of time, you may see some you know, dislocation in in in some different bankers and some of those, you know, different markets throughout the Southeast. But I don't think there's a lot. I think we're just gonna continue to be diligent and trying to find just incrementally good bankers that that fit our culture, that fit our teams, And I think we're probably gonna be I would imagine, looking into 26. Kinda keeping the same tight pace that we saw in '25, which will just be just, you know, add great talent. We can find it. Like I said, I think we probably in the process. I think we've added Nate, I think we stopped. We're probably maybe 12 to 15 net for, you know, kind of what we've done, you know, in the pipeline or on we've added this year, I think we'll continue to do that. And, I I think Steve, for us, it's just gonna be just continuing to be diligent. Again, find the right types of bankers that fit the types of of of deals that we wanna look at. William talks off about ADR, always be recruiting. Always be recruiting. That's talent and clients, and I but I think it's it takes a special we're recruiting the quality, not the quantity. And I think that's important for us, culture fit and who they are. Yeah. Alright. Appreciate appreciate that color there. William Carroll: Maybe just one more for me here on the loan loss reserve release. Ronald Gorczynski: Did I understand that correctly because you did I hear correctly that downstream some capital and therefore a lower reserve ratio lower, CRE concentration ratio, that was kinda one of the qualitative factors that drove the reserve lower. Ronald Gorczynski: Yeah. Our, our share concentration ratio one of our qualitative factors was there was our because we're over to 300 that we downstream $45 million from, you know, the parent to the bank, it lowered it to $2.71. Yeah. That was a that was one of the main factors. Okay. William Carroll: Okay. So going forward, you know, relatively stable to maybe a modest build on reserve ratio as as you continue to grow here? Ronald Gorczynski: Yes, sir. Correct. Okay. Awesome. Well, I'll step back in the queue. I really appreciate all the color here, and nice quarter, guys. William Carroll: Thanks, Steve. Thanks, Steve. Edra: Thank you very much. Our next question comes from Stephen Scouten with Piper Sandler. Your line is now open. Please go ahead. Stephen Scouten: Good morning, guys. Just wanted to clarify a couple of things real quick. Ronald, did you say that 45% of your deposits are variable costs? And is that to say, if I heard that right, that those are directly indexed? Ronald Gorczynski: We have the ability to move 45%. We have about 32% that are directly indexed, and we have the remainder that's tied to internal index that will move with the rate moves. So, yeah, 45% all in, though. Stephen Scouten: Okay. Great. Perfect. And then on the on the NIM trajectory, I think you said five to seven basis points a quarter in 2026. Is that your expectation each quarter in 2026? Or just wanna make sure I'm hearing that right. Ronald Gorczynski: Yes. Each quarter in 2026. Stephen Scouten: Great. Fantastic. Okay. And then last thing, think I know Catherine maybe had asked this on the on the fee revenues and insurance. Did you give a guidance for expected fourth quarter overall fee revenues? Ronald Gorczynski: Yes, $7 million. Stephen Scouten: $7 million. Great. Okay. Perfect. And then, on the broker deposit front, you obviously had some nice reductions here this quarter. Sounds like think you said maybe another 111 next quarter. So I'm doing math remotely correct. Like maybe a $120 million or so left in that ballpark. What's the plan for the remaining broker deposits? Would the objective still to get those down from here? Or is that kind of an acceptable level moving forward? Ronald Gorczynski: Yeah. We were at $268 million in June. September at $164 million. Minus the $111 million. Yeah. We intend to as soon as they are due, we're gonna pay those down. So yes, we're looking not to have brokered deposits at someday. That's our goal objective is not have those. Stephen Scouten: Okay. Great. And then I guess last thing for me, you know, the stock's been trading fantastically. The results have been great, kind of ahead of schedule on our operating revenue line. Sounds like hiring has continued well. Do you think about M&A as a piece of that puzzle at all? I think there were some a note maybe in the slide deck, that said you know, maybe more trying to find the verbiage. Maybe more strategic than it was previously. M&A focus shifted to strategic and or needle moving opportunities. I guess, maybe if you could kind of speak to that comment and what that might look like? William Carroll: Yeah. Steven, us, it really and I'm in my comments, said we've our strategy really hasn't changed a ton. A lot of it is just, again, doubling down on this organic strategy, deeper into the markets. That's strategy one a. You know? Yeah. Yeah. I think, you know, we're really not shifting that to really look at M&A. But we've said and continue to say, you know, we will evaluate you know, needle moving opportunities that make sense. I've said you know, before, we don't necessarily, you know, we don't wanna do M&A just to be bigger. You know, we want if we did it, we'd want it to make us better. And sometimes that's just tough to find. You know, if we find that unicorn, we find the right piece that fits us and we would evaluate. But, really, I mean, it's I say that because, you know, you never know what could come down the road. But, man, our strategy is really focused on continuing just to lever you know, this balance sheet and grow as we've done the last couple of years the way we've done it. That's the primary focus. You can't ever say you're not gonna look. I think we are open to look. But William talks often about now, you know, organic is one a and M&A would be one b. M&A might be one c, but we're continuing to look. Yeah. That makes a lot of sense. Well, the strategy is working, so I guess if it ain't broke, don't fix it. Right? So great job, guys. Stephen Scouten: Well, it is. You know, it is. But I but I think I do think you know, and as we've talked to you and a lot of your colleagues, I mean, it's just you know, it's really important for us to message what we've messaged. It's you know, we've built this company by design. We were, again, a little bit kinda mile wide inch deep. By design for a reason. And we it's been very important for us gain this operating leverage and do that. And that's done that. We've executed well. We're executing well. We still got room to grow, and we've got wanna continue to see this move forward. So not really changing anything, on our outlook moving forward. It's just we're gonna just keep doubling down on what we're doing. Stephen Scouten: Perfect. Thanks a lot. Edra: Thank you very much. Miller Welborn: Thanks. Edra: Currently have no further questions. So I will hand back over to Miller Welborn for any closing remarks. Miller Welborn: Thanks, Edra, and thanks, everybody, for being part of the call today. We are very excited about where we are and where we're going. Thank you for being part of the SmartBank family, and have a great day. Edra: Thank you very much, Miller, and thank you to all the speakers for joining today's line. That concludes today's conference call. Thank you, everyone, for joining. You may now disconnect your lines.
Operator: Good morning, ladies and gentlemen, and welcome to the M/I Homes third Quarter Earnings Conference Call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press 0. This call is being recorded on 10/22/2025. I would now like to turn the conference over to Phil Creek. Please go ahead. Phil Creek: Thank you for joining us today. On the call with me is Robert Schottenstein, our CEO and president, and Derek Klutch, president of our mortgage company. First, to address regulation for disclosure, we encourage you to ask any questions regarding issues that you consider material during this call because we are prohibited from discussing nonpublic items with you directly. As to forward-looking statements, I want to remind everyone that the cautionary language about forward-looking statements contained in today's press release also applies to any comments made during this call. Also, be advised that the company undertakes no obligation to update any forward-looking statements made during this call. With that, I'll turn the call over to Robert Schottenstein. Robert Schottenstein: Thanks, Phil. Good morning, and I too want to thank you all for joining us today. Despite the continued challenging market conditions and choppy uneven demand environment, we had a very solid third quarter. We generated $140 million of pretax income, though down 26% from last year's record third quarter results. Our pretax income percentage was a very solid 12% of revenue with gross margins of 24% and resulted in a strong return on equity of 16%. Consistent with our first and second quarter commentary, and also consistent with what our industry peers have reported, housing demand and overall market conditions remain somewhat challenging. In our view, housing conditions are just okay. Certainly not great, but still just okay. Probably about a C plus. We continue to incentivize sales and drive traffic primarily with mortgage rate buy downs. The cost of such buy downs is the primary reason for the decline in our gross margins. We will continue to use such rate buy downs where necessary on a subdivision-by-subdivision basis in order to drive traffic and generate sales. In terms of our third quarter performance, we closed a third quarter record 2,296 homes, a 1% increase compared to a year ago. Our third quarter total revenue decreased 1% to $1.1 billion. We sold 1,908 homes during the quarter, down 6% compared to 2024's 2,023 homes sold. Our monthly sales pace averaged 2.7 homes per community compared to a monthly pace of 3.2 homes in 2024. Year to date, we have sold 6,278 homes, down 8% from a year ago. Encouragingly, we continue to see quality buyers in terms of creditworthiness with a strong average credit score of 745 and average down payments of around 16%. Our Smart Series, which is, as we've stated previously, our most affordable line of homes, continues to be an important contributor to sales performance. During the third quarter, Smart Series sales comprised about 52% of total sales compared to just about 50% a year ago. We continue to make important progress in our cycle time. Our third quarter cycle time was about ten days better than last year as well as about ten days better than this year's first quarter. We ended the quarter with 233 communities and remain on track to grow our community count, balance of 2025 by about 5% from 2024. As Derek Klutch will review in a few minutes, our mortgage and title operations had a very strong quarter, highlighted by capturing a record 93% of our business in the quarter. Now I will provide some additional comments on our markets. Our division income contributions in the third quarter were led by Columbus, Chicago, Dallas, Minneapolis, Orlando, and Cincinnati. New contracts for the third quarter in the Northern Region decreased by 17% and new contracts in our Southern Region increased by 3% compared to last year's third quarter. Our deliveries in the Southern Region increased by 8% and our deliveries in the Northern Region decreased by 7% from a year ago. 59% of deliveries came out of the Southern Region, 41% out of the Northern Region. We feel very good about all 17 of our markets. That said, we are expecting particularly strong full-year results in Columbus, Chicago, Dallas, Minneapolis, Cincinnati, Orlando, and Charlotte. We have a strong land position. Our owned and controlled lot position in the Southern Region decreased by 6% compared to last year and increased by 3% versus last year in the Northern Region. 36% of our owned and controlled lots are in the North, the other 64% in the Southern Region. Company-wide, we own approximately 24,400 lots, which is slightly less than a three-year supply. In addition, we control approximately 26,300 lots via option contracts resulting in a total of 50,700 owned and controlled lots, equating to about a five to six-year supply. With respect to our balance sheet, we once again ended the quarter in excellent shape. During the quarter, we extended our bank credit facility by five years to 2030 and increased the borrowing capacity under that line from $650 million to $900 million. We ended the third quarter with an all-time record $3.1 billion of equity, equating to a book value per share of $120, up 15% from a year ago. We had zero borrowings under the $900 million unsecured line and over $700 million in cash, all resulting in a very strong debt to capital ratio of 18%, down from 20% last year, and a net debt to capital ratio of negative 1%. As I conclude, let me just say, we remain quite optimistic about our business and continue to believe that our industry will benefit from the undersupply of homes and growing household formations throughout our markets. Our backlog remains healthy and with our strong balance sheet and strong liquidity, we have tremendous flexibility as conditions evolve. We are well-positioned as we begin 2025. With that, I'll turn it over to Phil. Phil Creek: Thanks, Bob. Our new contracts were down 6% when compared to last year. They were flat in July, up 4% in August, and down 18% in September. Our cancellation rate for the third quarter was 12%. Last September sales were strong, it was our second highest September in our history. During the third quarter, our sales were really pretty consistent. We sold 618 in July, 660 in August, and 630 in September. 50% of our third quarter sales were to first-time buyers, and 75% were inventory homes. Our community count was 233 at the end of the third quarter, compared to 217 a year ago, up 7%, with the Northern Region up 9% and the Southern Region up 6%. The breakdown by region is 96 in the Northern Region and 137 in the Southern Region. During the quarter, we opened 14 new communities while closing 15. We currently estimate that our average 2025 community count will be about 5% higher than last year. We delivered a record 2,296 homes in our third quarter, delivering 89% of our backlog. About 35% of our third quarter deliveries came from inventory homes that were sold and delivered in the quarter. At September 30, we had 5,000 homes in the field versus 5,100 homes in the field a year ago. Revenue decreased 1% in the third quarter and our average closing price in the third quarter was $477,000, a 2% decrease when compared to last year's third quarter average closing price of $489,000. Our third quarter gross margin was 23.9%, down 320 basis points year over year, with 60 basis points of the decline due to $7.6 million of inventory charges. The breakdown of the inventory charges is $6 million of impairments and $1.6 million of lot deposit due diligence costs that were written off. Our construction costs were down about 1% in the third quarter compared to the second quarter. Our third quarter SG&A expenses were 11.9% of revenue compared to $11.2 million a year ago. Our third quarter expenses increased 6% versus a year ago. Our increased costs were primarily due to higher community count and higher selling expenses. Interest income, net of interest expense for the quarter was $4.5 million. Our interest incurred was $8.7 million. We had solid returns for the third quarter given the challenges facing our industry. Our pretax income was 12%, and our return on equity was 16%. During the quarter, we generated $157 million of EBITDA compared to $198 million in last year's third quarter, and our effective tax rate was 23.8% in the third quarter compared to 22.9% in last year's third quarter. Our earnings per share per diluted share for the quarter decreased to $3.92 per share from $5.10 last year, and our book value per share is now $120, a $16 per share increase from a year ago. Now Derek Klutch will address our mortgage company results. Derek Klutch: Thanks, Phil. Our mortgage and title operations achieved pretax income of $16.6 million, an increase of 28% from $12.9 million in 2024's third quarter. Revenue increased 16% from last year to a third quarter record $34.6 million due to higher margins on loans sold, a higher average loan amount, and an increase in loans originated. The average loan to value on our first mortgages for the third quarter was 84%, compared to 82% in 2024's third quarter. We continue to see an increase in the use of government financing, as 55% of the loans closed in the quarter were conventional, and 45% FHA or VA, compared to 66% and 34% respectively, for 2024's third quarter. Our average mortgage amount increased to $406,000 compared to $403,000 last year. Loans originated increased to 1,848, which was up 9% from last year, while the volume of loans sold increased by 19%. Finally, as Bob mentioned, our mortgage operation captured 93% of our business in the third quarter, and this was up from 89% last year. Now I'll turn the call back over to Phil. Phil Creek: Thanks, Derek. Our financial position continues to be very strong, highlighted by Moody's recent upgrade of our credit rating and the extension of our unsecured credit facility to September 2030, which increased our borrowing capacity from $650 million to $900 million. We ended the third quarter with no borrowings under this facility and had a cash balance of $734 million. We continue to have one of the lowest debt levels of the public homebuilders and are well-positioned with our maturities. Our bank line matures in 02/1930, and our public debt matures in 2028 and 02/1930. Our unsold land investment at 09/30 is $1.8 billion, compared to $1.6 billion a year ago. At September 30, we had $931 million of raw land and land under development, and $859 million of finished unsold lots. During the third quarter, we spent $115 million on land purchases and $181 million on land development for a total of $297 million. At the end of the quarter, we had 776 completed inventory homes and 3,001 total inventory homes. Of the total inventory, 1,245 were in the Northern Region, and 1,756 were in the Southern Region. At 09/30/2024, we had 555 completed inventory homes and 2,375 total inventory homes. We spent $50 million in the third quarter repurchasing our stock and have $100 million remaining under our current board authorization. Since the start of 02/2022, we have repurchased 15% of our outstanding shares. This completes our presentation. We'll now open the call for any questions or comments. Operator: Thank you. Ladies and gentlemen, we will now begin the question and answer session. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. Your first question comes from Kenneth Zener with Seaport. Good morning, everybody. Kenneth Zener: Good morning. If we could talk about orders a little bit, you had, as we measure, kind of normal seasonality, which is, you know, pretty impressive, and they so-so market, you reflect. Can you talk to that dynamic of you wanting to achieve right, what we see as seasonality? I mean, you might look at it differently. But and the use of incentives, and if you could quantify the incentives level in general and the mix between price and mortgage buy down closing costs, please? Robert Schottenstein: Yeah. Great question. Clearly, a somewhat challenging market, unpredictable too. You know, from week to week, a fair amount of intramarket volatility within our divisions. One month, certain of our divisions might have stronger sales and unexpectedly, things slow down then they pick back up. As I said, I think things are just okay. That said, it's critically important for us to drive traffic and do everything we can to incent sales in this market. And I don't think we're alone in this, but we have concluded that there is no better way to do that than through the selective use of mortgage rate buy downs. We have not offered any specifics on the exact amount that we're spending. It tends to change over time based upon what's happening in the market. You can go on our website and you can see that both with respect to conventional as well as FHA, we're offering rates in the very high fours. And that has we have found that to be a pretty good sweet spot to do what we are currently doing. Absent the inventory charges that Phil mentioned that accounted for about 60 to 70 basis points of our gross margin decline, our margins are down about 250 basis points year over year. And I would just simply say, that the majority of that is due to mortgage rate buy downs. There is some subdivision by subdivision incentivization, you know, that might be going on here and there. But the significant majority of it is rate buy downs. And then, frankly, some of the other decline is just increased cost on the land side. We've had a lot of success. I don't think we're alone on this, which is also encouraging. You don't want to be the only one doing something because it may not be sustainable. But we've had a lot of success on our sticks and bricks. Our, you know, our raw materials and cost with our subcontractors and suppliers relatively flat to down. Which has been very encouraging notwithstanding all the chatter about the impact of tariffs. We have seen no impact of tariffs to date. I think the jury's out on how things shake out as we move into next year. But thus far, we haven't seen any of that flow through to our results. But you know, we're gonna continue, as I said, Ken, to use rate buy downs as the primary driver for both traffic and sales as long as it keeps working. And, you know, if rates were to drop, there's been a little bit of movement recently. It didn't seem to have that much of an impact on demand. That's a bit of a fit and start kind of a situation. But if rates begin to drop, the cost of such buy downs hopefully will drop as well. And then more importantly, if we do see a drop in rates, that could help unlock the existing home market which, you know, we're getting these results really without much help from the sale of existing homes. That could be a big tailwind for housing if and when that begins to unlock because even though inventory levels of existing homes in our markets are not anywhere near the all-time highs, they are up considerably year over year and over the past two years and past three years. It's a long answer to your question. I hope it tells you most of what you asked. Kenneth Zener: Yes. And appreciate it. My second question, because you report this South, as a segment versus the North, the South obviously has Texas, Florida, which can be different which are different markets. Gross margins were about the same last quarter in those regions, EBIT a little different. But could you comment on kind of prior to the Q coming out, the gross margin trends we're seeing in those two segments? And if you any comments you could to illuminate, you know, the aggregation of Texas and Florida would be appreciated. Thank you, sir. Robert Schottenstein: I'll say a couple things about it. For us, Orlando on the East relative East Coast is stronger than Tampa and Sarasota. Fort Myers, we have a relatively new operation. So it's not really that meaningful in terms of results. But demand and margins for us are clearly holding up better in Orlando than they are in Tampa and Sarasota. I think Austin in Texas, that market was red hot a couple of years ago. And over the last twelve to eighteen months, it's cooled considerably. It's probably struggling the most in Texas. We have seen margins drop also in Houston and Dallas. But comparatively, I think they're still holding up quite well. We're expecting, as I said, a strong year in Dallas. Charlotte and Raleigh have both been pretty good. And as I also mentioned, we're expecting a strong year in Charlotte. So, you know, it's a not to be snarky, but it's a bit of tale of 17 cities. They're all a little bit different. And, you know, we've long said that this business is a subdivision business. We got about 233 of them, and we try to manage them that way. But within the cities, what I've just described is probably a pretty good snapshot from 10,000 feet. If you look also this is Phil. If you look at community count, you know, last year, our average community count was up about 7%. And this year, you know, our estimate is we'll be up about 5% on average. We feel good about that. If you look inside those numbers, as I said, both regions do have community count growth. Our Florida community count has actually been down a little bit this year. Our Texas community count's been up a little bit. And as Bob said, in general, you know, our Midwest and Carolina business as far as pricing and margins and so forth held up a little better than Texas Florida. But overall, we feel really good about where we are. Thank you. Kenneth Zener: Thanks. Operator: Your next question comes from Alan Ratner with Zelman and Associates. Your line is now open. Alan Ratner: Hey, Bob. Hey, Phil. Good morning. Thanks for the information so far. So, Bob, a lot of chatter over the last few weeks about some tweets from our administration and the FHFA about the homebuilders business. And I'm just curious, have you had any discussions with the administration or have any thoughts on, I guess, what some of the headlines are out there? Robert Schottenstein: We have not had any discussions at this point, and nothing is currently planned for us. Obviously, we're aware of it. Look. I think the I don't know if I can comment much more. I read what you read. I think that the good news from my view and this is both at the local and state level as well as federal, there's a lot of talk right now about what can be done to help unlock, if you will, housing improve affordability. We're seeing it, you know, in a lot of different levels. I was in an event last night where that was the primary topic of discussion as it relates to markets in the Midwest. I'll be at an event in another week or two as it relates to just Ohio, where that is a primary topic. I think people understand how important housing is as a driver of the overall economy. And that, you know, housing while it's certainly by no means dead, it's underperforming. And we need to be building more homes and we need to make sure we do the smartest and best things to help create that environment. I think we'll get there eventually. But if there could be some policies here or there at the local level, you know, we certainly would welcome those. We have long said and I think this view is widely shared, but we have long said that the greatest impediment in my in our judgment to affordability and to improve volume levels is local zoning regulations. And some markets are more favorable than others, but that to me remains the biggest impediment. You know, we're all sick of the NIMBY term, but the NIMBYism and the antigrowth. Again, some markets, the situation is more acute than in others. I think there's a reason why Texas has led the nation in housing production. I don't know if it's 15, 18% of total new home production, but it's a big number. And I think in general, while it's not easy there either, there's just been a much more favorable zoning climate that has contributed to more development, frankly, more affordability. Alan Ratner: I appreciate your thoughts. And, yeah, that seems to be the general sentiment so far is that, at least builders are happy to see it being talked about. So, hopefully, there could be some real change implemented from whatever discussion. Robert Schottenstein: Right. It's always bad when no one wants to talk to you. Be careful what you wish for. And as long as there's conversation, you got a chance. Alan Ratner: Exactly. Alright. Couple quick ones on just the margin both gross and SG&A. So on gross margin, it looks like this quarter, obviously, things are still under a little bit of pressure, but looks like things are stabilized a bit quarter over quarter. I know you don't guide, but, you know, maybe just if you could talk to the puts and takes going forward in terms of land costs flowing through? It sounds like construction costs are stable. Pricing and incentives, I mean, should we are we kind of getting a little closer to the bottom here on margin, do you think? Or is there more room for margins to drop in over the next handful of quarters? Robert Schottenstein: Well, I think we're a lot closer to the bottom than we were last quarter. How close are we? That remains to be seen. Look, going into this year, even though we didn't share this, internally, we believe that our margins would be under pressure somewhere. This was internal budgeting. Between two and three hundred basis points. Because we knew we were gonna have to spend a lot of money on mortgage rate buy downs as we've talked about this call, second quarter, first quarter. Absent the impairments, they're about 250 basis points down year over year. You know, could they drop a little more perhaps? I think we're getting close to some point. And the other thing that's hard to gauge and no one knows the answer to this is, you know, even though we may continue to be spending money on rate buy downs, if the cost drops by 50 to 100 basis points, that's a big plus on the margin side. And Phil, I don't know if you have anything to add on that. Phil Creek: Yeah. The pressures we have really, you know, we said in the third quarter, we sold 75% specs. The second quarter was, like, 73%. So it is up a little bit. And in general, our specs have a lower average sale price than our to be built and they also have a lower margin. So the amount of specs continues to be a pressure. Also, Bob mentioned higher land cost. We do have higher land cost coming through than we did a year ago. The good news is the last couple of quarters, land development costs, which actually were increasing more than the raw land, land development cost seemed to have stabilized. And, obviously, we're being very careful as far as buying new land parcels since we do feel very strong about our land position and also the choppy market conditions. So we're doing all we can. You know, you're always market pricing. We always need a certain amount of volume to come through. But, overall, we think our margins are holding up pretty well. But, again, there do continue to be pressures. And, you know, we have certain internal targets. We want to always have hopefully, double-digit pretax income percentage. We were 12% for the quarter. Given the market, we feel really good about that. Given our size, we feel particularly good about our return on equity. It's lower than it was a year ago, but it's still a very, very, I think, respectable 16%. We've got minimum targets on that that we're hitting. And, you know, we're gonna keep aiming to hit those targets. Alan Ratner: Absolutely. Alright, guys. Well, appreciate all the thoughts, and best of luck in happy holidays if we don't talk before then. Robert Schottenstein: Yeah. Take care of yourself, Alan. Operator: Your next question comes from Buck Horne with Raymond James. Your line is now open. Buck Horne: Good morning, guys. Wanted to go back to those regional splits on the order growth trends between the North and the South, just if I heard correctly, I believe you still had higher year-over-year community count in the North region, but orders dropped off 17%. I know there was a tough comp against last year, but just, you know, sounded like, you know, markets like Columbus and Cincinnati and Chicago were doing better, but just wondering if you can add any color kind of that divergence in order trends. Robert Schottenstein: I think we're very pleased with how well our Midwest markets have held up. You know, they may be off from where they were a year ago, but I think they're, you know, a very strong operation in Columbus since, frankly, Indianapolis. I didn't call out Indianapolis, but we have a much improved operation in Indianapolis over where we were several years ago. Very bullish about that market as well. Chicago is having a very strong year for us as is Minneapolis. And, you know, there's sometimes there's little noise in these numbers, you know, given when new communities open up and, you know, you gotta sort of look over a longer period of time. But, you know, we remain bullish about the Midwest. Bullish about the Carolinas, I don't think Florida's, you know, Florida's has a few struggles here and there, particularly on at least for us on the West Coast. And Texas is a little bit of a transition, but there's still tremendous economic vitality generally speaking, throughout nearly every one of our markets. You know, we're a relative newcomer in Nashville. We've got high hopes for Nashville going forward. Lots of job growth there. Lots of projected household formations. You know, Houston and Dallas continue to be very strong markets. In terms of just total macroeconomic conditions, off a little bit. I get that. Austin slowly coming back. You know, in general, in migration still in Austin. Terrific place. Glad we're there. If we weren't, we'd open up there. So we feel very good about all of our markets. And I think the diversity, you know, you never hit, you know this. You never hit on all cylinders. And if you do, it's lucky. Always something somewhere. And I think it's important to have the geographic diversities, the geographic diversity that we have. And I think it's particularly helpful to us right now. Where, you know, there's a little bit of a slowdown in Florida and, you know, parts of Texas as well, but the Midwest is, you know, as a Midwestern, I'm glad to see the Midwest, you know, standing pretty tall these days. Phil Creek: Hey, Buck. This is Phil. When you actually look at the numbers, as I said, our third quarter sales overall really were pretty consistent. You know, 618 in July, 660 in August, and 630 in September. The real last September, we sold, like, 775 homes. Last September. And the Midwest was really strong last September for different reasons. We do run periodic sales events. Last September was the start of a sales event. So that is really the reason that you're seeing the down sales quarter to quarter. The Midwest sales, as Bob said, really were fairly decent. Pretty consistent through the quarter. It's really just last September was a little unusual. Buck Horne: Gotcha. That's very helpful color. Appreciate that. Phil Creek: Yeah. Thanks for all the details there. Really good. Going to SG&A and kind of selling cost, I think one of your competitors noted that just in this competitive environment, you know, there's a lot of spec homes and a lot of, you know, builders are trying to clear before year-end. And they're one of the tools they utilize is more co-brokers and, you know, utilizing more realtors to try to get those inventory homes cleared before year-end. Are you guys pursuing a similar strategy? Should we think about that being an added cost into the fourth quarter in terms of just selling expenses? Robert Schottenstein: Phil's gonna give you the best and most detailed answer, but I just want to say a couple things first. You know, we've got over 200 more completed specs today than we did a year ago at this time. And, it's probably a little more than we'd ideally like to have. We're very, very careful from a management standpoint on our paying close attention to that broker coop percentage. You know, I wish, frankly, we welcome brokers. We need brokers. Company-wide, we're in the low to mid-seventies, I think, 75, 76 maybe. 77%. I know the exact percentage Phil does. I wish it were lower. We have a lot of, you know, programs that we think are effective in bringing that down without alienating an important part of our selling efforts, which is the third-party brokers. Phil, I don't know if you want to comment any further. Phil Creek: Yeah. When you look at the SG&A, as I said, the actual expenses were up 6% versus a year ago. We have 7% more communities, and you do have cost for every store, maintaining those stores. We have 3% more people. Again, you know, we have 7% more stores, those type of things. We also did have a slightly higher sales commission rate internal and external. Again, trying to drive traffic in sales. So that's how we kind of get to that 6% increase, Buck. Robert Schottenstein: One thing we have not done, there might be one or two minor exceptions, we're not out there incentivizing traffic or sales by offering more money to the third-party brokers. Some of our peers have. We're not doing that. Don't feel we need to do it. And we also think that, it's like a lot of things in life. Once you start, it's hard to stop. Buck Horne: Right. Yep. Alright. That's really helpful. Appreciate that added color. My last, if I can sneak it in, is just given the strength of the balance sheet here and the cash position and the increased financial flexibility you got with the credit facility, is there anything that's necessarily holding you back from, you know, accelerating repurchases into year-end? Working capital needs or otherwise, or, you know, you just want to continue to be very programmatic and consistent on that. Robert Schottenstein: Yeah. I mean, I'll say one thing, and then I think Phil's gonna add to this, which he should. Job one is to grow the company. Job and to do so with a very strong balance sheet. We thought we had a strong balance sheet back in 02/1956. Only to learn that we didn't. Our debt to cap was in the high forties, low fifties. So were many of our peers. We're not going back to that movie. And we're gonna maintain a very, very strong balance sheet with comparatively low debt levels as we are right now. That is our goal going forward. We also want to grow the company. But, you know, when we have this excess cash and for all these other reasons, we think we can also, at the same time without compromising growth, selectively buy back shares. Phil, if you want to add anything. Phil Creek: Exactly. We continue every quarter with our board, you know, to talk about stock repurchases and so forth. We have consistently for the last few quarters, repurchased, you know, $50 million a quarter. As far as the bank line, the bank line was going to mature in December '26. We really did not want to get within a one-year window of that. We just offer safety and flexibility, plus it now is a five-year term. We thought it made sense to go from $650 to $900. We're definitely kind of low leverage, conservative type people. We do like to keep that leverage low, especially during these times. You know, I do have, you know, 3,000 specs, compared to, you know, 2,300 or so a year ago. We think that makes a lot of sense in today's market. Especially take advantage of these rate buy downs, which are a lot more effective, you know, in shorter periods of time. So we're just gonna continue to adapt as best we can to market conditions but, you know, keeping a strong balance sheet and strong liquidity is, definitely job one. Buck Horne: Alright, guys. Congrats. Good luck. Thanks for the color. Robert Schottenstein: Thanks so much. Operator: Ladies and gentlemen, your next question comes from Jay McCanless with Wedbush. Your line is now open. Jay McCanless: Hey. Good morning, guys. Robert Schottenstein: Good morning, Jay. Jay McCanless: Just wanted to ask where your gross margins are right now on spec versus your build-to-order homes. Robert Schottenstein: They're a little lower. You know, it really depends on the community. Every location is a little different. But in general, they're just a little lower than to be built. Jay McCanless: And then, Bob, you were talking about some of your competitors increasing co-broker spend. I guess, in terms of some of the larger competitors who said they might be pulling back a little bit. Are you seeing any evidence of that in the field? Or is everyone selling pretty hard to get lighter ahead of the spring season? Robert Schottenstein: I don't think I made a comment about pulling back. What I said is that we have not elected to pay brokers more to drive traffic and incent sales. Our co-op rate has remained consistent throughout all of our divisions. Probably over the last five years. We've tried to be very consistent on that. Do what we can to have the best relationships we can but not interested in buying the business and fearful of how you go back to where you once were if you start that as I made comment. I don't know if and I'm not saying a lot are doing it, but I know there's a few examples out there of some that are. Whether they've pulled back, I don't know. I don't have current information on that. What was the other part of your question? Jay McCanless: Well, just the, you know, our people we've heard that some of your competitors are slowing down starts. But at the same time, we're hearing a lot of conversation about aggressively selling into year-end. I mean, to me, feels like this is just a normal year where the industry is a little heavy on inventory. People are gonna have to sell aggressively in the year-end. Is that what you're seeing out in the field right now? Or people being a little more reasoned with some of the discounts and incentives they're trying to offer? Robert Schottenstein: A community that's always a community by community discussion. I mean, some builders 100% spec, you know, they're fairly aggressive. Some are not. It just depends on the location, etcetera. And you just need to be aware of what's going on in the marketplace. You know, getting back to kind of our sales effort, we're trying to focus very much on internally, to make sure we're getting all the leads that we can, that we follow-up on the leads, as best we can. We have more people focused on those leads. We have in most of our communities, you know, more than one salesperson. We try to be focused very much on controlling all the things we can control. We're spending more money today on sales training, and driving leads online than we ever than we have in a long, long time. And we're gonna continue to. That's the blocking and tackling of our business. Don't often mention that on calls like this. But I'd rather spend money on that than on realtors. I'd rather spend money on that than on incentives. Now we may have to do both sometime, but it all starts with us. And, it's easy to get complacent during hot markets. But now more than ever, focusing on us is just absolutely the most important thing we can do. And we have an opportunity. I mean, last year, we opened about 75 stores. You know, this year, we're gonna open more than 75 stores. So, again, different location, different product, different price point in many situations. Those are the things we control. So those are the things we focus on, you know, every day and yeah, we do have higher spec limits, but, again, we don't accept going in that specs have to be a lower margin. Hopefully, we're putting the best products on the best lots. And that we're getting paid for that. Because that's the way the business is right now. And, you know, I want to give an I'm gonna give a very specific example. I bragged about the fact that our mortgage and title operations had a tremendous quarter because they did. And I mentioned that we had a record capture rate of 93%. I think a year ago, it was, like, 84% or something like eighty-nine. On the one hand, you could say, well, it should be higher. Because you're so aggressively using mortgage rate buy downs. And that is true. It should be higher. But I think it's even higher than it would be because of the training and the efforts that we're putting on the side of making certain that at each branch, each mortgage and mortgage branch, that we're doing the best we can to help people figure out the financing that's best for them. In this somewhat challenging market. And you know, we could easily be happy with a capture rate of 85 or 88%. It probably be at or near best in class. But with this higher capture rate, not only does that contribute to profitability, but we think it's contributing to sales performance. And every buyer is different. Some buyer, especially more affordable homes, they may very well need help in closing costs. Some builder some buyers do need help, they want a thirty-year fixed lowest rate possible. Some buyers are okay with ARMs. Some are okay with buy downs. So, you know, again, it just depends on what the customer needs. We're not just throwing the most money at every deal we have. Jay McCanless: Understood. And thank you for that. I guess the last one for me, with the balance sheet as strong as it is right now, is there any thought to doing some M&A, especially in the Midwest down into The Carolinas where you're already seeing pretty strong performance? Robert Schottenstein: There's nothing on the horizon. You know, if something happened to show up in one of our existing markets or perhaps in a market that we're not in, that we thought made a lot of sense, I think we take a very serious look at it. I mean, in the last six months, we've probably looked at a couple of deals. But right now, our job is to make sure we keep our balance sheet really strong, to your point, and to grow in our existing markets. Every one of our existing markets has growth goals. You know, we've said this before, and I'll say it again right now, our run rate today is around 9,000 units. You know, we believe in the 17 markets that we're in, that we can grow 13, 14,000 units without opening up in any new markets, just with the headroom that we have within our existing geographic footprint. That if we could grow that way, that would be the one that would be the most desirable. On the other hand, if something showed up and it made sense, you know, we'd analyze it like any other land dealer opportunity. But there's nothing planned at this point. Jay McCanless: Okay. And then one more just to kind of follow on that. Any inclination to talk about 26 community count especially with the amount of lots you guys have built up? It feels like y'all can grow count and unit volumes in 26. Any thoughts on that? Robert Schottenstein: You mean you're asking for guidance on projected community count growth? For 2026? Jay McCanless: I would never ask you for guidance, Bob. I'm just asking for how you're feeling about potential growth for next year. Robert Schottenstein: I think there will be community count growth next year. Yeah. I mean, we own 24,000 lots and we expect to have community count growth next year. Target is always to, you know, grow community count, you know, in that five to 10% range a year. Like I said, last year was seven. This year is probably gonna be about five. Even though we've slowed land purchases down the last couple of quarters. You know, we're still in great shape to continue growth. Jay McCanless: Sounds great. Okay. Thanks, guys. Appreciate it. Robert Schottenstein: Thanks, Jay. Appreciate it. Operator: There are no further questions at this time. I will now turn the call over to Phil for closing remarks. Phil Creek: Thank you very much for joining us. Look forward to talking to you next quarter. Operator: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.
Operator: Ladies and gentlemen, welcome to Avery Dennison's Earnings Conference Call for the Third Quarter Ended on 09/27/2025. During the presentation, all participants will be in a listen-only mode. Afterward, we will conduct a Q&A session. If you have joined via Zoom, please use the raise hand function. As a reminder, this webcast is being recorded and will be available for replay on the Avery Dennison Investor Relations website. I'd now like to turn the call over to William Gilchrist, Avery Dennison's Vice President of Investor Relations. Please go ahead, sir. William Gilchrist: Thank you, Karina, and welcome to Avery Dennison's Third Quarter 2025 Earnings Conference Call. Please note that throughout today's discussion, we will be making references to non-GAAP financial measures. The non-GAAP measures that we use are defined, qualified, and reconciled from GAAP on schedules A-4 to A-8 of the financial statements accompanying today's earnings release. We remind you that we will make certain predictive statements that reflect our current views and estimates about our future performance and financial results. These forward-looking statements are made subject to the Safe Harbor statement included in today's earnings release. On the call today are Dion Stander, President and Chief Executive, and Greg Lovins, Senior Vice President and Chief Financial Officer. I'll now turn the call over to Dion. Dion Stander: Thanks, Gilly, and hello, everyone. Delivered a solid third quarter with earnings up 2% year over year and above the midpoint of expectations while continuing to execute in a dynamic environment. This outcome underscores the strength and durability of our franchise, demonstrating our ability to activate multiple levers in our portfolio to deliver across a range of macro scenarios. As expected, our business continues to be impacted by ongoing trade policy changes. Encouragingly, we fully mitigated direct cost increases through strategic sourcing adjustments and select pricing surcharges. Moreover, while base apparel volumes were still in the third quarter, we did see improvement sequentially relative to the organic growth headwind in the second quarter. In Materials Group, operational excellence was key to margin expansion during the quarter. A sustained focus on productivity and benefits from modest volume mix growth drove margins up 50 basis points year over year. Modest revenue declines in high-value categories were primarily driven by low single-digit declines in graphics and performance tapes, which faced headwinds from isolated customer and distributor inventory management adjustments. This is partially mitigated by continued strong growth in specialty durable labels and adhesives. We expect the inventory adjustments impacts to be short-lived and to see high-value categories return to growth in the fourth quarter. Overall, Materials Group and base label materials volumes were up slightly compared to the prior year. Importantly, we continue to see growth in our differentiated films volumes, which is a positive mix driver for the business. Solutions Group delivered organic sales growth of 4% driven by high single-digit growth in high-value categories. VESCOM continued its momentum, growing over 10%, and Embellix delivered more than 10% growth as well. Overall, apparel sales exceeded expectations, rising low single digits in the quarter. As you can see on Slide seven, our apparel business is seeing divergent trends. High-value category apparel sales grew high single digits, benefiting from strength in Embellix with strong growth related to next year's World Cup and mid-single-digit apparel IL growth. While base apparel sequentially improved as expected, it remains down low single digits, reflecting soft retail retailer and brand demand as they continue to navigate the impacts of tariff policies. Solutions margins performed better than typically sequential declines, were down 90 basis points compared to the prior year. Profitability was impacted by higher employee costs, continued growth investments, and network inefficiencies stemming from tariff policy changes. Turning to enterprise-wide Intelligent Labels, sales grew approximately 3% compared to the prior year, in line with our expectations. We are encouraged by the sequential improvement in the business, which was driven by key growth market segments. Specifically, apparel and food, logistics, and industrial grew at mid-single digits rate. In apparel and general retail, both market segments are still being impacted by tariff policy changes. However, apparel partially recovered in the quarter while general retail remained soft. Strong growth continued in food as our strategic collaboration with Kroger ramps up as expected. Longer term, our conviction in this large addressable market continues to grow. This morning, we jointly announced a major partnership with Walmart to leverage Avery Dennison's RFID innovation and solutions in their fresh grocery categories of bakery, meat, and deli. This adoption of IL in fresh food in the second large grocer is a key industry milestone and reinforces our conviction in the growth potential of this large addressable market. In logistics, the business expanded sequentially but was down slightly compared to the prior year. Our share in this market segment remained strong, and we have a robust pipeline of opportunities. As we highlighted in the second quarter call, executing initiatives to reduce identified network inefficiencies and associated costs created by the tariff policy changes. These improvements will help drive profitable growth while maintaining high quality and reliability for our customers. Looking forward, we anticipate the fourth quarter will deliver an improved rate of year-over-year growth versus what we saw in the third quarter. While growth will likely continue to remain constrained by trade policy uncertainty, particularly in apparel and general retail market segments, we view this as a temporary headwind. Our conviction in the long-term growth of this high-value category platform remains strong given the value we are creating for our customers and the adoption we see across new segments. Turning back to the total company. Taking into account the continued dynamic environment, we are anticipating both overall sales and earnings per share growth in the fourth quarter. We remain prepared for a range of scenarios, leveraging our proven playbook to safeguard earnings in the near term while accelerating initiatives to drive differentiation and growth over the cycle. Shifting to our core strategies. I am confident that we have the initiatives, innovation, capital allocation framework, and team in place to consistently deliver strong profitable growth and top quartile returns across the cycle. Progress in each of these strategies was evident in the fourth quarter, further cementing our conviction. Our business is positioned for success with secular growth tailwinds that fundamentally outweigh cyclical events over the cycle. Key trends including item-level digitization, enhanced consumer engagement, product customization, and business productivity needs are aligned with a growing portion of our business. The drivers in our high-value categories are clear, and our exposure to them continues to expand. These categories now represent 45% of our total business year to date. An increase compared to the prior year, underscoring our strategic shift towards higher growth and higher margin opportunities. Intelligent Labels adoption is accelerating, with our largest addressable market segment in food now gaining significant traction. Our focus on innovation outcomes and commercial excellence is creating differentiation across our businesses. Examples include introducing new RFI innovation in food, our stalling software in VESCOM, and expanding our Clean Flake adhesive adoption in filmic labels for recycling purposes. Finally, we continue to harness the power of our disciplined capital allocation approach and balance sheet strength to return capital to shareholders and strategically expand our presence in high-value categories where we hold competitive advantages. Year to date, repurchased approximately $454 million in stock and have grown our dividend by 7%. Concurrently, we closed the $390 million Taylor adhesive bolt-on, immediately strengthening our materials group high-value category adhesives franchise with clear cost synergies and strong growth potential. In summary, while the current backdrop has muted our overall growth in 2025, we have further strengthened the resilience of our franchise, deployed capital into attractive opportunities, and advanced our strategic priorities. This underpins our confidence in returning to strong growth and maintaining top quartile returns for our business and shareholders. I want to extend my gratitude to our entire team for their unwavering focus on excellence, dedication to overcoming the challenges at hand, and relentlessly focusing on executing our strategic priorities. Over to you, Greg. Gregory Lovins: Thanks, Dion, and hello, everybody. We delivered adjusted earnings per share of $2.37, up 2% compared to the prior year and above the midpoint of our expectations. Results were driven by productivity and higher volume mix, partially offset by higher employee-related costs investments. While trade policy uncertainty continued to present a headwind to our results, the impact improved sequentially. Compared to the prior year, reported sales were up 1.5%, and sales were comparable to the prior year on an organic basis. As positive volume mix was offset by deflation-related price reductions. Adjusted EBITDA margin was strong at 16.5% in the quarter, up 10 basis points compared to the prior year. And we again generated strong adjusted free cash flow of nearly $270 million in the quarter. Our balance sheet remains strong with a quarter-end net debt to adjusted EBITDA ratio of 2.2. And during the quarter, we issued a €500 million note to pay down some commercial paper and to fund the Taylor Adhesives acquisition closed earlier this week. We continue to effectively execute our disciplined capital allocation strategy, successfully balancing significant cash return to shareholders with strategic M&A. In the first nine months of the year, we returned roughly $670 million to shareholders through the combination of share repurchases and dividends, and we allocated $390 million to the Taylor Adhesives acquisition. Turning to segment results for the quarter. Materials group sales were down 2% on an organic basis. As modest volume mix growth was more than offset by low single-digit deflation-related price reductions. Organically, both high-value categories and the base businesses were down low single digits. Turning now to regional label materials organic volume mix trends versus the prior year in the quarter, continued soft consumer product demand led to roughly comparable volume in both North America and Europe. Offset by continued growth in emerging markets. With Asia Pacific up low single digits and Latin America up mid-single digits. High-value categories declined at low single digits compared to the prior year. Graphics and Performance tapes declined low single digits were impacted by customer inventory adjustments, which we expect to normalize in Q4. The Materials Group once again delivered strong margins with an adjusted EBITDA margin of 17.5% in the quarter, up 50 basis points compared to the prior year. Regarding raw material costs, including the cost of tariffs, we experienced modest sequential global raw material cost deflation in the third quarter. Mitigated tariff cost through strategic sourcing adjustments and the implementation of select pricing surcharges. Overall, including tariffs, our outlook is for relatively stable sequential material cost in Q4. Shifting to Solutions Group. Sales were up 4% organically, and high-value categories were up high single digits. And base solutions were down low single digits. Improving sequentially from down mid-single digits in the second quarter but still impacted by tariff-related uncertainties. Within High-Value Categories, VESCOM was up more than 10% driven by the continued benefit from new program rollouts. Embellix was also up more than 10% as we saw a ramp ahead of the World Cup next year and apparel intelligent label sales recovered to mid-single digit growth. Enterprise-wide, intelligent label sales expanded approximately 3% compared to the prior year. In addition to apparel improving to mid-single digit growth, food, logistics, and industrial categories combined were also up mid-single digits. General retail categories continued to experience tariff-related softness. With sales down mid-teens which impacted both Solutions Group and Materials Group Intelligent Label sales. Solutions Group adjusted EBITDA margin was 17%, relatively flat sequentially but down 90 basis points compared to the prior year. As benefits from productivity and volume were more than offset by higher employee-related costs such as wage inflation, and growth investments. Shifting to our outlook. For the fourth quarter, we expect reported sales growth of 5% to 7% with the following contributing factors: sales growth excluding currency of 1% to 3% with organic growth of 0% to 2%. With approximately 2% from currency translation, approximately 2% from extra days in the quarter due to the shift to the Gregorian calendar next year, approximately 1% from the Taylor Adhesives acquisition. We expect adjusted earnings per share to be in the range of $2.35 to $2.45 above the prior year at the midpoint as benefits from organic growth, productivity, and share count are partially offset by wage inflation, investments, and higher interest expense. Our Q4 guidance incorporates seasonality and incremental productivity, which is partially offset by higher interest expense and less favorable currency. We've outlined some contributing factors to our full-year results on Slide 14 of our supplemental presentation materials. To highlight a few of the key drivers, we now anticipate a $5 million currency translation benefit operating income slightly below our previous projection of a $7 million tailwind. We now expect restructuring savings net of transition costs of approximately $60 million, up $10 million from our previous expectation as we continue to ramp our productivity efforts. And we continue to expect strong free cash flow targeting roughly 100% conversion for the year. We now expect interest expense to be $135 million, an increase from our prior outlook largely driven by interest expense from the €500 million notes we issued in September. And finally, expect tailored adhesives will have an immaterial impact on Q4 earnings per share due to the timing of the close in the quarter and expected intangible amortization expense. In summary, we delivered a solid third quarter achieving EPS above the midpoint of our expectations through a continuing dynamic environment. Expect slight improvements in organic sales growth and continued year-over-year EPS growth in the fourth quarter. And we remain well prepared for a variety of macro scenarios. We're strongly positioned to execute our profitable growth in disciplined capital allocation strategies, which we expect to deliver exceptional long-term value to all of our stakeholders. And now we'll open up the call for your questions. Operator: Thank you. Ladies and gentlemen, if you've joined via telephone, and would like to register a question, you will hear a confirmation of your request. Please press star followed by the number 6 to unmute your line. If you have joined via Zoom, please raise your hand using the raise hand function. If your question has already been answered, and you would like to withdraw your registration, please press star followed by the number 9 again, use the raised hand function. To accommodate all participants, we ask that you please limit yourself to one question and then return to the queue if you have additional questions. One moment for the first question. Your first question comes from the line of Ghansham Panjabi from R. W. Baird. Your line is open. Please go ahead. Ghansham Panjabi: Hey, guys. Good morning. Can you hear me okay? Gregory Lovins: Yeah. We can, Ghansham. Good morning. Ghansham Panjabi: Okay. Good morning. Sorry. Just getting used to the new system. First off, as it relates to the materials segment, is it your sense that volumes are starting to how are how are volumes progressing on a sequential basis just given the macro uncertainty in and so on and so forth? I know you called out the impact on apparel as you have over the last couple of quarters, but is it your sense that materials are starting to sequentially weaken as well? Dion Stander: No. Ghansham, I'd say in the third quarter, volumes, while positive overall, were less than our expectation and pretty much across all regions. And I think there's a couple of factors playing into that. One of which is certainly, we see we continue to see lower retail volumes overall, particularly in North America and Europe, and our scanner data also suggests that there's lower muted demand coming from CPGs overall and when they think about volume. The second thing is, in our high-value categories, we also had a couple of episodic events that happened really around our graphics and reflective business, which we know will remediate as we get into the fourth quarter. Our outlook for the fourth quarter is actually to see kind of similar growth as we move forward. I think the final thing I'll say is it's certainly clear in certain pockets that we're emerging markets have had exposure to tariffs those economies and the consumers in those economies are more cautious as they look into the impact of what those tariffs mean for those countries. And so we're seeing slightly lower volume in those areas as well. I think fundamentally for us as we look forward, I'll just remind everybody, our materials business is really anchored in consumer staples. And so over time, it's been a GDP plus business. And I anticipate that changing once the trade environment, the trade policy normalizes. Operator: Your next question comes from the line of George Staphos from Bank of America. Your line is open. Please go ahead. George Staphos: Hi, everybody. Getting used to the new technology here. For the time, the details. I guess with one question at a time, I'll go with the Walmart news today. If you can talk a little bit about that. And what it might mean for you over the next couple, three years. We're doing some quick searching over the last hour or two it be fair to say that the the opportunity here, recognize you're not going to get that next quarter or the following, would be roughly maybe a million and a half packages when you think about, you know, the Walmart protein cabinet and other related end markets, how would you have us size that? Thank you. Dion Stander: Yes. Thanks, George. I think it's for us, we see this as twofold. First of all, I think it's a critical validation of the effectiveness of our technology and solutions to solve challenges that all grocers really have, which is around freshness of perishable products, labor effectiveness, gross margin expansion, and Net Promoter Score increases because consumers are getting the products that they want, which is the freshest they need. And we saw that start in Kroger, and now I've been manifest in Walmart and our partnership announcement this morning. So we see it both strategically important because we believe it will further catalyze the largest growth segment there is which is in food, which we estimate to be about net order of 200 billion units. And the second large growth are going really sends a signal that the technology has application, the returns are there and the rollout now will commence. In terms of Walmart specifically, while we don't necessarily always comment on exact details of partnership, perhaps I can just frame the scale of what we think it could be. Our estimates are and this will be subject to typical rollout timing, what will happen intra quarter, the number of stores that goes, the individual pieces of those departments of bakery, deli and protein and sorry, meat and when they go. We would typically see this across a two-year period being in the order of sort of high single digit to low double digits growth on our total 25 enterprise IL revenue. And we typically would see that ramping as we go through the couple of years. One other point I'd make on this is we are driving this partnership because we to provide differentiation in the market. A lot of our differentiation over here is anchored in what we've been able to do from an innovation perspective as it relates to activating proteins and meats, particularly for intelligent labels, something that had been very challenging in the past that we've been able to solve for. And so we look forward to seeing the results of that partnership and the results of our effort we've been leaning forward for very long in the market to make sure that we continue to drive activation. Operator: Your next question comes from the line of John McNulty BMO Capital Markets. Please go ahead. John McNulty: Yeah. Good morning, Thanks for taking my question. Can you speak to what you're seeing in the IL pipeline right now? Obviously, there's been a lot of chaos around tariffs and delays in certain programs and yet it seems like there may be some acceleration. So other areas as people try to get better understanding of supply chains, etcetera. So I guess, can you speak to that? And also, just given the size and scale of the Walmart program that's being added in, do you have to start thinking about putting new capital to work around intelligent label capacity, etcetera? I know you put some in a while ago. I guess, where do we stand on that need now? Dion Stander: Thanks, John. So in terms of pipeline, we continue to see our pipeline grow actually both by number of opportunities and by dollar value across all of the key segments. I'm just once again reinforcing that when the benefits are obvious, and they're implementable, then we tend to see good traction because it fundamentally solves challenge of our supply chain visibility, inventory accuracy. And then when you're into the store, specifically labor productivity, fresh produce, waste reduction, and employee and associate experience is much better as well. So from a pipeline perspective, we continue to see good progress overall. In terms of Walmart size and scale, yes, it's a substantial add to the adoption now within the overall food and more broadly the IL market. I'll remind you that in terms of capital allocation, we typically, from a roofline perspective, have added capacity from an infrastructure perspective, typically three to five years out. Hence why we added our Queretaro facility in Mexico to we started that two years ago. When it comes to individual assets for production, we tend to be investing twelve months to eighteen months ahead of the curve. So in the initial phase of this, I don't anticipate us needing additional capacity. As we get through to the end of the second year, we'll revisit that and adjust accordingly. For us, that's much more of a modular approach. These are assets where we've significantly improved our capital reduced our capital intensity billion units produced over the last five years. And so I'm looking forward to that continuing to take advantage of the scale manufacturing that we have in this regard. Operator: Your next question comes from the line of Jeff Zekauskas JPMorgan. Your line is open. Please go ahead. Jeff Zekauskas: Hey, Jeff. Can you hear us? Thanks. Gregory Lovins: I can. Thank you very much. In the in the press release that that came out over the Walmart announcement, there was, a phrase about joint sensor technology. Is there something about technology that you're using with Walmart that's really unique to your relationship with them Or maybe another way of saying this is is is what you're doing with them something that would constrain you in being able to use the same technology with other customers? Dion Stander: No. Jeff, what we've done with Walmart is we've really focused on the three areas that in much of our pilots and trials up until this point. And those are around bakery which is very similar to what we do with some other customers as well. Protein specifically is where we've had to lean into our innovation capability, both on our material science side think about adhesive technology required in cold environments, and then environments that ultimately will be defrosted and even microwaved at that stage. So from material science, have put a lot more effort into solving some of those problems. And then more specifically from what we call the RF side things, radio frequency side of things is how do we make sure that our uniquely designed antennas are capable of being able to sense within very, very densely packed items that are very high dielectrics meet has those properties. And so how do you make sure that you're able to read everything even within a freezer container or a fridge container as well? And those are presented significant challenges in the past. So our ability to generate innovation in this area I think, is going to help us unlock not just the Walmart partnership, but also more broadly across the market as we look forward as well, Jeff. Operator: Your next question comes from the line of Matt Roberts Raymond James. Your line is open. Please go ahead. Matthew Roberts: Morning, Matt. Operator: Mister Roberts, you'll need to unmute yourself. Matthew Roberts: Can you hear me now? Dion Stander: Yes, Matt. Thank you. Matthew Roberts: Okay. Good morning, everybody. Sorry about that. I may, in regard to intelligent labels, so understand you're probably not going give the 2026 guide here and understanding visibility is limited. 2025 certainly had its unique headwinds from tariffs but we're starting to see some momentum that you referenced for Walmart and others. So maybe more broadly in Intelligent Labels, how much of the initial five points that you expected in 2025 from new programs have shifted into 2026? How many incremental points could you get from new program rollouts other than Walmart that you just gave? And given weak comps in apparel and general and some of the headwinds you've seen there, do you believe 2026 could support at or above the long-term growth rate? Or if you only want to give one quarter ahead, any color on 4Q could be helpful as well. You for taking the question. Dion Stander: Yes, Matt. Specifically, we talked to remember those are incrementally about those five basis points that will come through through. Program rollouts. Largely, those actual rollouts are on track through this year. And they came really in a couple of buckets. One bucket was in apparel themselves, some new rollouts new technology deployments, The second bucket was really in some of our food rollouts, which we've talked about. The third bucket was also in some of the additional general merchandise rollouts that were happening as part of the compliance programs with some of our customers. Across all three of those, if you exclude the impact of tariffs, we're actually roughly on track. Now in apparel, we haven't seen any rollout delay, but what we've seen is some of the volume being a little bit more muted than we would expected given, as I'm sure, you recognize the tariff implications. It's a little early for us to look out currently to 2026 as well. And I said in the context, I think the environment remains highly uncertain. Just call everybody's attention to fact that the tariff policy changes have only impacted India more recently by up to 50%. And as all you know, we're on the road currently with China being currently 100% again. And so I think that uncertainty certainly limits our near-term visibility. What I am confident in is our continued ability to drive not only innovation that secures our differentiation, but drive adoption, particularly with things like Walmart, that will certainly help deliver growth as we go through next year. We'll characterize and wrap that all together when we get to the January outlook as well, Matt, for you. The other thing I would just add to what Dion's earlier comments in his prepared remarks, Matt, is that we talked about Q4 expecting our growth rate in IL to be better than what we grew in Q3 versus prior year. Operator: Your next question comes from the line of Anthony Pettinari, Citigroup. Your line is open. Please go ahead. Anthony Pettinari: Good morning, Good morning, Anthony. Hey, just another question on the Walmart partnership. You know, during the quarter, they they had a a press release talking about deploying IoT technologies with Williotte and and know, Avery has a strategic partnership with Willyot. And I'm I'm just from a big picture perspective, can you talk about how RFID and maybe other IoT technologies, you know, coexist in an environment like Walmart Are are you kind of agnostic to what wins in the market? Or how do they interact with each other? How should know, investors think about those two sets of technologies? Dion Stander: Yes, Anthony, I think I've always said from the start, we fundamentally believe that UHF RFID is the most ubiquitous best placed sensing technology for item level identification visibility through supply chain and in a store environment. But we've also said that there are other sensing technologies particularly when it relates to ambient issues, things you want to monitor temperature pressure and so forth, that will also have a specific use case. Now Williard is a strong partner of ours. We have strengthened our strategic partnership. We're going to be supporting them in their rollout that they have fact, we're gonna be managing part of the rollout for them with Walmart as well overall. And that is really orientated around palette and case level. So at a high level, think about UHF RFID being applied at an item level, most likely set broader sensing devices like WILIA technology we provided at the palette and case level. And we're involved in both of those areas I think they present a suite of solutions that in the long term are going continue to drive to what I think will be the end outcome, which is digital identities, on all physical objects. In time. Operator: Your next question comes from the line of Mike Roxlin Truist Securities. Your line is open. Please go ahead. Michael Roxland: Hi, can everybody hear me? Dion Stander: Hey, Mike. Thanks, Mike. Thanks. Yes. Thank you, guys. And getting used to the new congrats on all the progress and the new Walmart deployment. Michael Roxland: Thank you. Just one question for me in terms of logistics. Obviously, was a little bit weaker in this quarter. As you mentioned. Any potential for new deployments in the near term? Any comments you may have on potential like share gains? Obviously, there was some share loss last year. Any insights as to whether maybe you're going to regain some share from that business? Anything you can help around logistics and what's happening with deployments and potential share gains on the horizon? Thank you. Dion Stander: Yes. Sure, Mike. We continue to do really solid work in our partnership with UPS. And that fact that partnership continues to grow. My sense is through the end of this year, we'll actually expand our share with UPS. It's a good performance by both our team, both on service quality, delivery and some new innovation we've even brought to UPS as well in terms of how they can drive higher speed application to their packages relative using our technology as well. If I think more broadly about the logistics environment, I think we've been very clear. We didn't anticipate another rollout during 2025. And we're going to be assessing what the likelihood of that will be during 2026. We'll give more color on that as we get to the January. But I'd say overall, we continue to make really good progress with a number of the key logistics providers. Our pilots and trials have expanded with almost all of them And we spent a lot of time engaging around all the various use that could come out of not just managing last mile fulfillment accuracy, but also how do you originate parcels that go back to source at shipper, what role can we play in that. So as always, I'm encouraged by what I see when I look across the business and our relationship we have with all the large logistics providers. And for me, it's just going to be a case of when we're able to get them to adopt at scale. We'll be able to give a broader update, I think, by the time we get to January, Mike. Operator: Your next question comes from the line of Josh Spector from UBS. Your line is open. Please go ahead. Joshua Spector: Hey, good morning guys. Can you hear me? Dion Stander: Yeah, we are. Joshua Spector: Okay, great. So I wanted to ask kind of a technical one around the quarter and the guide here. Is I think from a sales perspective, you're guiding sales up about $100 million maybe a bit more sequentially But from an EPS perspective, you're close to flat I think historically there's some accretion of margins in fourth quarter So I know with the M and A piece of it that maybe creates a bit of noise as Meridian layers in. But are there other factors that we need to consider, like some lagged price downs or Some other costs that maybe mute the accretion q on q? Gregory Lovins: Yes. Thanks, Josh. So when we look at sequentially, there's a number of puts and takes, of course. Seasonality, as you mentioned, is historically, has been a little bit positive. I would say this quarter, we're probably expecting a little less than typical. Since we saw apparel have a bit of a catch up in Q3. From the tariff impacts that we had in the second quarter. We'll still have some positive logistics volume improvement sequentially into Q4 materials is usually a little bit of a headwind Q3 to Q4 given the holiday period. On the biggest parts. Of that business in North America and Europe. So sequentially, expect seasonality to be relatively flat this year, I think. When we looked in, have some slight positives from share buyback that we've been doing across the year. And continuing to do as we enter the fourth quarter here. We've got some slight favorability from restructuring. I talked about ramping that up we're moving through the back half. And then we've got a little bit of a slight headwind quarter over quarter I think Dion talked about our network inefficiencies we've had related to some of the tariff moves and our sourcing moves or our production moves accordingly with that. We've got a little bit higher inventories in the system over the last few quarters. And as we're bringing that down, we'll have a little bit of an inventory absorption impact on the P and L in the fourth quarter. Sequentially. Otherwise, price deflation, somewhat immaterial sequential impact those are kind of the big puts and takes when we look Q3 to Q4. Operator: Your next question comes from the line of John Dunnigan from Jefferies. Mr. Dunnigan, please press 6 unmute your line. John Dunnigan: Hey, guys. Thank you very much for all the details. I just wanted to ask a quick one on the Walmart collaboration, and then have one other here. So the the collaboration, when when will that start flowing through? Is that more of a 2026 event? And then it just looking at Embellis, I mean, the inflection in volumes was pretty impressive, not to something that we were necessarily expecting. I get that it's related to the World Cup, but is that that kind of trend kind of high single digit, low double digit expected going into 4Q twenty twenty six. Kind of what your expectations are for that business would be helpful? Dion Stander: Thanks. Sure, John. Yes, on the Walmart collaboration, we've been piloting a trial, as I'm sure you sense for a while now. And the full the rollout will start sequentially at very small amount in the fourth quarter really, and then we'll go from there as we go through 2026 and 2027. The current plan. Again, that may be subject to change into quarter shift depending on what stores rollout at what pace and which departments go in which sequence in order. In terms of AmbelliX, yes, I've been very pleased with our AmbelliX performance in the third quarter. Largely, on the performance that we have as related to the World Cup. So we do a lot of preparation for the key World Cup teams and the brands that support them. In advance. And that typically happens a little bit in the second quarter, the majority in the third quarter and a small amount happen in the fourth quarter. What we would call happening at source. The garments are produced at source. They're decorated at source. And then as we get into next year, when the actual World Cup happens, there will be a smaller opportunity for us to do what we call on in stadium venue customization, the names and numbers that you can do when you go there. We haven't necessarily given a perspective on how that decides that, but an opportunity certainly for us as we get into next year. Aside from that, on our base Imbellx business, we continue to see improvement is largely anchored in our Performance Brands as they start to ramp up as well. And then separately, in our Embellis business, we continue to make progress in what we call our in venue and consumer customization applications. I'll give you an example of that. We recently launched a NFC connected device in a garment for a Turkish football club We've done the same thing again for the San Francisco 49ers. And this really helps clubs and fans engage more directly on a one to one basis. So leveraging our technology with some of our adhesive science and our Embellics business overall. And in the long term, we continue to see this as a kind of mid- to high single digit growth segment for us as we move forward. Operator: Your final question comes from a follow-up from Jeff Zekauskas from JPMorgan. Your line is open. Please go ahead. Jeff Zekauskas: Great. Thanks for taking my call. Another question about the Walmart arrangement. Different RFID tags have different prices. In that, you know, apparel tags, you know, tend to be priced higher than logistics tags. Where do tags on Meet fall? Are they in the middle or higher? Or lower? And then for Greg, what calendar are you switching over to for next year? Dion Stander: Jeff, so let me address the warm up one and Greg can take on the calendar question. Yes, I mean, typically across our estate, we have I'd characterize our products as kind of good, better, best. And ranging in differentiation from good all the way through to best. There's also unique circumstances, which certain products or certain inlays are put into more complex tags or format. So an inlay that goes on to, let's say, plain white label has less complexity and typically a lower price point than something that goes into a highly decorated graphic tag to make an apparel. So you can see a range of ASPs across them. As it relates to meat, given some of our proprietary innovation, would see these as typically products that are in the best range. And our AS there will probably be a little higher there's also mix in with the bakery products that we have and some of the deli products. And so overall, anticipate our ASPs across that program to really reflect our portfolio largely at an aggregate level and with profitability to be in a similar aggregate range we currently see across our IL portfolio as as well. Gregory Lovins: Thanks, Ian. And Jeff, on your question on the calendar, we are moving from our historical fourfourfive calendar to a fiscal calendar that aligns with the actual calendar, the Gregorian calendar. So we're making that shift at the end of this year. So this year, we'll extend to the December 31. Then from now on, heading into 2026, we'll be following the Gregorian calendar. And if I go back to Josh's question a little bit earlier, that does add about two points of growth in our fourth quarter sequentially and versus prior year. By adding those extra days into the fourth quarter They're not really high quality days. We had four days to the calendar this year. That includes a Sunday and it includes New Year's Eve, so they're not really high quality days. But nonetheless, we'll get some incremental revenue from that Not a huge flow through because we'll have four or so days of fixed cost with less than that of actual revenue given the softness of those typical days. But that's the impact we're we're shifting to the Gregorian counter next year. Operator: Your final question comes from the line of George Staphos from Bank of America. Your line is open. Please unmute. George Staphos: Hi, Thanks for taking the follow on. A two part one. And again, thanks for all the details. First of all, can you talk a bit about where you're seeing deflation in materials such that prices are a touch lower And kind of where you sit right now, how would you gauge what is normal deflation versus price competition given the macro Related point, the last couple of quarters, again, third quarter was nice to see the improvement. But apparel's weakness in base was one of the reasons that IL is having some difficulty growing. This quarter, with apparel being up 3%, on IL, base is down Why is it why are we getting a positive disconnect this quarter that we were not getting in prior quarters with IEL relative to apparel. Thanks and good luck in the quarter. Gregory Lovins: Thanks, George. I'll start with your deflation question. Overall, what we've been seeing and we've talked about from a year over year perspective, think the biggest drivers we've seen are in paper. Particularly in Europe and Asia. Where overall we've got low single digit deflation year over year in the third quarter Paper is a little bit more than that specific to a couple of regions. And we saw pulp kind of coming down through the quarter in those areas as well. We've got a little bit of year over year benefit on chemicals and films as well also primarily in Europe and Asia. And then in The U. S, we've got some tariff related inflation that we've put surcharges through as we talked about. We do have a little bit from a price perspective then We've got a little bit of low single digit impact on pricing as well. And net net, we've got a slight headwind between price inflation. And I think some of that is still over the cycle when we look over on multiyear horizon we had a lot of inflation a few years ago. It's been slightly deflationary for a couple of years now. And prices have come down to go with that. So that's something we expected as we've gone through the quarters this year. We'll probably have another quarter or so as that continues from a year over year perspective in Q4. Dion Stander: And George, on your second question, even in the second quarter, our base apparel performance was lower than our apparel IL performance, both were down. And as you saw, our base apparel performance has improved, it's still low single digits, the base apparel piece. And our aisle performance is now sort of low single digits around 3%. The difference there really is in rollouts, not necessarily relative to the absolute volume of the base apparel. It's new rollout. For example, we extended our rollout with the Inditex Group, leveraging our new proprietary loss detection technology that they've introduced. And separately, we've also got continued rollout in new apparel customers, a couple of them small, one of them large, that have been rolled out through the third and then the fourth quarter increasingly as well. Operator: Mr. Gilchrist, there are no further questions at this time. I will now turn the call back to you for any closing remarks. William Gilchrist: Thank you, Karina. Just to recap, we delivered a solid third quarter in a dynamic environment. We are well prepared for a variety of macro scenarios. And well positioned to deliver superior value through the cycle. We want to thank you for joining today's call. This now concludes our call. Operator: Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.
Operator: Good morning, and welcome to the EQT Third Quarter 2025 Quarterly Results Conference Call. All participants are in a listen-only mode. After the speakers' remarks, we will conduct a question and answer session. As a reminder, the conference call is being recorded. I would now like to turn the call over to Cameron Horwitz, Managing Director, Investor Relations and Strategy. Please go ahead. Cameron Horwitz: Good morning, and thank you for joining our third quarter 2025 earnings results conference call. With me today are Toby Rice, President and Chief Executive Officer, and Jeremy Knop, Chief Financial Officer. In a moment, Toby and Jeremy will present their prepared remarks with a question and answer session to follow. An updated investor presentation has been posted to the Investor Relations portion of our site, and we will reference certain slides during today's discussion. A replay of today's call will be available on our website beginning this evening. I'd like to remind you that today's call may contain forward-looking statements. Actual results and future events could materially differ from these forward-looking statements because of factors described in yesterday's earnings release, our investor presentation, the Risk Factors section of our most recent Form 10-Ks and Form 10-Q, and subsequent filings we made with the SEC. We do not undertake any duty to update forward-looking statements. Today's call also contains certain non-GAAP financial measures. Please refer to our most recent earnings release and investor presentation for important disclosures regarding such measures, including reconciliations to the most comparable GAAP financial measures. With that, I'll turn the call over to Toby. Toby Rice: Thanks, Cam, and good morning, everyone. Third quarter results built upon EQT's strong track record of operational and financial outperformance. Our performance this quarter resulted in $484 million of free cash flow attributable to EQT, which is net of $21 million of one-time costs associated with the Olympus transaction. We have now generated cumulative free cash flow attributable to EQT of more than $2.3 billion over the past four quarters with natural gas prices averaging just $3.25 per million BTU, highlighting the differentiated cash flow generation capabilities of EQT's low-cost, integrated business model. Production was near the high end of guidance despite price-related curtailments as we continue to benefit from robust well productivity and compression project outperformance. Our tactical approach to volume curtailments in response to volatile local pricing resulted in another quarter of significant price realization outperformance, with our corporate differential coming in $0.12 tighter than the midpoint of guidance despite local basis widening after we provided Q3 guidance. Operating costs were also lower than expected across the board, driving record low total cash cost per unit and underscoring ongoing benefits from water infrastructure investments and midstream cost optimization. Capital spending came in roughly $70 million below the midpoint of guidance, supported by further upstream efficiency gains and midstream optimization. Our team set multiple EQT and basin-wide records during the quarter, including our highest pumping hours ever in a month, our fastest quarterly completion pace on record, and the most lateral footage drilled and completed in a 24-hour period. Simply put, our execution machine is firing on all cylinders. Turning to our acquisition of Olympus Energy, we closed the transaction on July 1 and completed the full integration of all upstream and midstream operations in just 34 days. This marks the fastest operational transition in EQT's acquisition history. Our teams have already achieved significant operational improvements since taking control of the assets. An example of this is in the Deep Utica, where we drilled two wells during the third quarter at a pace that was nearly 30% faster than Olympus' historic performance, driving an estimated $2 million of per well cost savings. Deep Utica inventory represents significant long-term upside optionality on the Olympus assets, which we ascribed zero value to in the purchase price. Olympus' production also provides a significant supply source to feed the Homer City data center project that we announced last quarter, underscoring how assets can become more valuable once they are part of EQT's platform and our ability to unlock sustainable growth. Shifting to our growth project pipeline, we have made significant progress with the various in-basin power projects that we announced last quarter and are seeing additional opportunities to provide natural gas supply and infrastructure to service new load growth in Appalachia. We have also completed an exceptionally strong and oversubscribed open season on our MVP boost expansion project. Demand far exceeded our initial expectations, and as a result, we collaborated with our vendors and partners to upsize the project by 20%, increasing capacity to over 600,000 dekatherms per day. Even with the additional capacity, the region's appetite for Appalachian natural gas remains greater than what we can currently provide, a clear signal of continued market strength and long-term demand growth. The MVP boost project is 100% underpinned by 20-year capacity reservation fee contracts with the leading Southeastern utilities, highlighting the depth and durability of these customer commitments. We estimate a three times adjusted EBITDA build multiple for the expansion project, highlighting how strong the economics are for low-risk infrastructure investments in our midstream business. Once expanded by the Boost project, MVP will have a total capacity of 2.6 Bcf per day of gas, which is more than one Bcf per day greater than current flow rates on the MVP mainline due to downstream bottlenecks, which will be solved when the Transco southbound and northbound expansion projects are completed in 2027 and 2028. This additional takeaway should come online at the same time that in-basin power demand is inflecting higher, which we expect will drive improvement in Appalachian pricing over the coming years. In fact, the futures market is already starting to take note, with M2 basis futures in 2029 and 2030 tightening by more than $0.20 over the past few months. In summary, our third quarter performance once again demonstrates the power of EQT's integrated model and our relentless drive for continuous improvement. From record-setting operational efficiency to seamless acquisition integration and advancement of strategic growth projects, all aspects of our business are performing at a high level. The strength and consistency of our results, even in a moderate gas price environment, reflects the quality of our company, the durability of our low-cost structure, and the depth of our opportunity set. The foundation we've built at EQT is strong. Our strategy is working, and our future has never been brighter. I'll now turn the call over to Jeremy. Jeremy Knop: Thanks, Toby. Our strong financial results and free cash flow outperformance left our balance sheet in a stronger than expected position during the third quarter. Despite approximately $600 million of cash outflows from closing the Olympus transaction, the previously disclosed legal settlement, and working capital impacts, our net debt balance ended the quarter just under $8 billion. We continue to target a maximum of $5 billion of total debt, which is three times unlevered free cash flow before strategic growth CapEx at a $2.75 natural gas price. With $19 billion of forecasted cumulative free cash flow attributable to EQT over the next five years at recent strip pricing, we have plenty of capacity to execute on our capital allocation priorities, which include investing in high-return strategic growth projects, further deleveraging, steadily growing our base dividend, and building cash to opportunistically buy back shares. Last week, we increased our base dividend by 5%, to $0.66 per share on an annualized basis, as we begin returning permanent cost structure improvements and synergy capture to shareholders. Our credit ratings are stabilized, and we are on a glide path of further balance sheet strengthening. We have now grown our base dividend at an approximate 8% compound annual growth rate since 2022. This is a testament to our confidence in the sustainability of our business and a corporate free cash flow breakeven price that is among the lowest in North America. We will continue to look for ways to recycle structural cost savings into future growth, ensuring that our base dividend is bulletproof through commodity cycles. Turning to LNG, we signed offtake agreements with Sempra's Port Arthur, Next Decade's Rio Grande, and Commonwealth LNG beginning in the 2030 and 2031 time frame. These SPAs represent patient execution of the LNG strategy that we began formulating in 2022, as we waited for the right time to gain exposure to high-quality facilities with geographic diversification, competitive pricing, and favorable credit terms. We intentionally positioned our exposure to begin after the 2027 to 2029 window, which we have flagged for several years as a potential period of global oversupply. This oversupply should result in a trough period of new LNG FID activity, and lower prices should stimulate new international demand, setting the stage for tightening fundamentals concurrent with the commencement of our contracts. While we remain bullish on domestic demand growth, we believe that international growth will increase even faster, and it is important to have the right exposure in our portfolio to these markets. Our strategy of signing SPAs on tolling arrangements provides direct connectivity to the international markets, with less downside risk and greater upside optionality than netback deal structures. Our structures give us complete end-market flexibility, allowing us to provide tailor-made solutions to end-market customers globally, with varying contract tenors and price benchmarks over the 20-year lives of these contracts. We are taking the same direct-to-customer approach to LNG we have deployed domestically with utilities and data centers. We expect to enter into sales agreements and regasification capacity covering a large portion of our LNG exposure in the coming years, leaving us with a geographically diversified portfolio of customers and pricing exposure. Our recent discussions with international buyers give us confidence in the long-term LNG demand outlook and suggest a desire to contract with an integrated US-based natural gas producer that can offer greater flexibility than legacy LNG suppliers due to their short exposure at Henry Hub. It's worth noting that EQT is the second-largest marketer of natural gas in the U.S., ahead of all upstream and midstream peers as well as the super majors. LNG marketing is a natural bolt-on to our existing capabilities, and we've been building our expertise over the past several years. While the U.S. market has significant demand tailwinds over the near and medium term, global growth in natural gas demand should far outpace the domestic market over the long term. We expect natural gas demand outside the U.S. to rise by 200 Bcf per day between now and 2050, highlighting the tremendous opportunity for U.S. producers that can directly access international markets. However, that access will only be available to producers that have the combination of low-cost structure, multiple decades of quality inventory, an investment-grade balance sheet, and strong environmental attributes, all of which are hallmarks of the differentiated platform we have built at EQT. Turning to the natural gas macro, we see a supportive setup emerging as we head into year-end, with a tightening balance driven by factors including surging LNG demand and slowing associated gas supply growth as crude oil prices weaken. On the demand side, the U.S. is on track to exit 2025 with over 4 Bcf per day of incremental LNG demand compared to year-end 2024, the largest annual increase since the U.S. began exporting LNG almost ten years ago. The startup of Golden Pass and continued ramp-up of the Corpus Christi Stage 3 expansion are expected to add another 2.5 Bcf to 3 Bcf per day of demand by year-end 2026, providing a further tailwind for U.S. natural gas prices. Looking ahead to winter weather, several major forecasters are calling for one of the coldest winters in over a decade, as early indications suggest a transition from El Nino to a moderate La Nina phase. This transition tends to produce below-normal temperatures across key U.S. consuming regions, including the Midwest and Northeast. A return to sustained cold could drive a meaningful rebound in residential and commercial heating demand, tightening inventories and accelerating the drawdown pace by late Q1. Finally, on the supply side, we anticipate flat associated gas volumes through 2026. The rig reductions and capital discipline we've seen across major oil basins this year are beginning to translate into lower associated gas growth, particularly from the Permian. Should Brent and WTI prices remain in the 50s as OPEC increases production and geopolitical tensions in the Middle East ease, oil prices could approach breakeven economics for many producers and further discourage incremental oil activity. Together, these trends point to a tighter supply picture emerging into 2026 and 2027, supporting a more durable recovery in U.S. gas prices. In sum, the U.S. gas market is entering a critical inflection point. Rapidly growing LNG demand and slowing associated gas production point to a constructive setup in 2026, which could be bolstered further should a cold winter manifest. That said, we remain vigilant over the medium term due to the wave of new Permian pipelines scheduled to be completed by 2026 and an increasing risk of LNG oversupply later this decade, which we believe could temporarily back up gas supply into U.S. storage and set up another short down cycle. Wrapping up, I want to point out a couple of items on our updated guidance and provide a few thoughts as we think ahead to 2026. Our fourth quarter production and operating expense guidance includes the impact of 15 to 20 Bcfe of strategic curtailments during October, as our teams continue to optimize around in-basin pricing volatility. Additionally, recent IRS guidance suggests that we will not be subject to AMT in 2025, and thus, we now expect to pay minimal cash taxes this year, which will save nearly $100 million relative to our prior forecast. Looking ahead to 2026, we expect to maintain production volumes at a level consistent with our 2025 exit rate. We expect maintenance CapEx in line with 2025 plus the full-year impact of the Olympus acquisition. As our compression projects are completed and base declines shallow, we expect maintenance CapEx to decline towards $2 billion later this decade. As we highlighted last quarter, we have an expanding backlog of high-return infrastructure growth projects which will unlock sustainable growth for our upstream business. We are excited to allocate the first dollars of our free cash flow after maintenance CapEx to these opportunities, which we believe will create more long-term shareholder value than any other reinvestment opportunity available to us today. Our total capital spend in the years ahead will be based on the quality of the investment opportunity set in a given year, and we hope to continue sourcing opportunities and unlock differentiated value across our integrated platform. Our pipeline of projects provides a low-risk, high-return reinvestment opportunity that is unique to EQT, allowing us to drive sustainable cash flow per share growth and compound capital for shareholders for years to come. With that, I'd like to open the call to questions. Operator: Thank you. Our first question will come from Arun Jayaram from JPMorgan. Please go ahead. Your line is open. Arun Jayaram: Jeremy, Toby, I was wondering if you could start with the open season and talk about some of the key demand takeaways that you saw from the utilities during that process? Toby Rice: Yes. Arun, I think it's really interesting just to look at what took place with MVP compared to what took place with this MVP boost. I think the most significant signal is the fact that to get the MVP project going, it required a producer, EQT, to sign up for over 60% of the capacity to make sure that volumes were spoken for to get that pipeline built. In contrast with MVP boost, 100% of the shipping capacity is taken by the utilities. It just represents the fact that we're in a pull environment and should not be surprising just given the tremendous amount of demand that we're all seeing. We're seeing that show up in our projects with utilities. Arun Jayaram: Great. And then maybe just a follow-up. Jeremy, you provided some soft 2026 outlook commentary. I guess one question is how are you thinking about strategic midstream capital in '26 and over the next, you know, maybe through '28? Do you have any visibility on that spending in the midstream bucket? Jeremy Knop: Yeah. Arun, we're still working through that. We're not going to give any specific guidance today. But I would say it's going to be something at our discretion based on the quality of projects. We certainly don't need to spend any of it if we don't want to. But I think when we look at the full cycle returns, both on those projects but also the demand it unlocks for our products from our upstream business, the holistic return is so attractive and allows us to grow in a really differentiated way. We're going to be pretty disciplined about how we invest in those, but we also recognize it's a key differentiator for EQT to be able to bring those online. So we're going to keep it in balance. But we're continuing to see that opportunity set grow, which is pretty exciting. Arun Jayaram: Great. Thanks a lot. Operator: Our next question comes from Devin McDermott from Morgan Stanley. Please go ahead. Your line is open. Devin McDermott: Good morning. Thanks for taking my questions. I wanted to start on the commercial side. It's already been a big year for you guys on the commercial front, solidifying some of the power opportunities. I think, Toby, you mentioned in your prepared remarks that you're seeing additional opportunities still here. And I feel like you just the headline since the last call, I think there was another large data center site through a project in Greene County, Pennsylvania that actually did call out a new supply contract with EQT. So not sure if you can comment on that, but maybe broadly, the kind of trends you're seeing on incremental opportunities, any updated thoughts on price structure and how this all fits into your views on in-basin demand growth through decade end? Toby Rice: Hey, Devin. How are you doing? Good morning. Yes, so we have a robust opportunity pipeline. I mean, what we've announced to date has been pretty large. Our midstream growth teams are working multiple opportunities. I expect us to have more announcements in the future, can't say when. But I'll tell you this, I mean, the focus still is on scale and speed. That has been the factor. So as these projects are still trying to get as large as they can, figuring out exactly what they need once schedules get put in that baseline gets put in place, then people will be working on moving things to the left. As far as structuring on gas prices here, I think on that Robina site specifically, you talked about some structure on gas prices we talked about. We think that entering into conversations about structure on pricing, like specifically getting into more fixed nature, is an opportunity down the road. But the focus right now is on the scale and the speed. But I do anticipate once the dust settles, that will be a great optimization opportunity for these hyperscalers to solidify that a part of their cost structure. We'd be open to having those conversations. All of this would be a tool for us to continue to bring more durability to the cash flows at EQT. So it's a good strategic fit for us. Devin McDermott: Okay. Got it. Makes a lot of sense. And then sticking with the commercial side, but shifting over to LNG is an active quarter for LNG deals for you all. I mean, Jeremy, maybe could you comment on what you've done so far kind of solidifies your strategic goal of diversifying price exposure and giving some direct access to international markets? And then a little bit more clarity on how you think about terming this out and the evolution of your direct-to-customer sales strategy as you place these volumes over time. Jeremy Knop: Yes, absolutely. So look, we've been talking about LNG as a company for several years now. And we've been laying the groundwork in terms of team and expertise in negotiating with a lot of projects for that duration of time. You know, we've been very intentional about the time of these projects coming online. If you look back at our prior commentary over the last couple of years, we've been pretty eyes wide open about what we think will be a relatively well-supplied LNG market between, call it, 2027, 2029. So we've intentionally tried to partner with and take capacity out on projects that come online after that window. That's one of the reasons we've been so patient. But it's not only that, it's getting the right credit terms, making sure the right EPC is building these contracts. You have the right financial sponsor behind the facility itself. We think we got that with all of these facilities. We think they're really some of the best along the Gulf Coast. I think with what we signed up for today, our bucket is full now. We moved really swiftly once we saw that opportunity come up. I wouldn't anticipate we sign anything else near term. And our focus really going forward is getting our team fully built out, finishing the build-out of our systems, which we've been working on for really about a year now on the LNG side, and been working on those long-term sale agreements with customers around the world. And we're having a lot of really productive conversations there, seeing a lot of good traction in those discussions, and it's going to give us a lot of flexibility to diversify that exposure around different markets in the world, while giving us that direct-to-customer model that we've been talking about and developing domestically. So it's going according to plan, and we're really excited about the momentum. Devin McDermott: Okay, great. Thanks so much. Operator: Our next question comes from Doug Leggate from Wolfe Research. Please go ahead. Your line is open. Doug Leggate: Good morning. Thanks for having me on. I guess, Toby or Jeremy, whoever wants to take this, my first question is on marketing because obviously you guys had a phenomenal quarter in terms of marketing optimization. I'm trying to understand is this kind of a new normal for you guys and I wonder if I could bolt on to that. When you pivot into LNG, I mean, guys like Shell are your competition on this, confident on how that gives us some color, know it's some way off, but give us some color as to how your domestic gas marketing translates to a successful international marketing business? That's my first one. And my follow-up very quickly, Jeremy, you mentioned buybacks again, know where I'm going with this. We're heading into a much more volatile gas price environment one suspects. I think you've acknowledged that yourself. Where is the priority on the net debt balance sheet sit versus the priority for getting back to buybacks? And I'll leave it there. Thanks. Toby Rice: I'm going to count that as three questions, Doug. Yeah. Let me just state, I think one of the things coming into this year, we were most excited about this company is seeing Jeremy really spend a lot more time and attention on the commercial front. And I think you're seeing the results of that. So we'll save comments on marketing for him. But as it relates to just our positioning on the LNG marketplace, we think that we're going to be very competitive in this space. We've got the scale to be able to be meaningful here. I mean, just to give you some perspective, some of these customers with us being able to deliver up to over 800 million cubic feet of gas a day in LNG form, we are relevant. We've been networking in the LNG space for years now. You all remember the unleash US LNG campaign. We've been part of the global conversation about energy. We've made a ton of contacts and had a lot of meetings with energy leaders around the world. And now as we've solidified our offtake agreements, those conversations are now advancing, and we're excited about keeping people up to speed with how that portfolio shapes up over time. Jeremy Knop: Yes. Doug, I'll hop in on the other part of your question too on marketing. Look, I think we're in the early innings of the potential of the team here. We have the right leadership in place. We're redeveloping some systems internally. It's giving a lot of visibility to the team. I mean, our total trading team size today is about 45 people. So they're getting really dialed in, taking advantage of a lot of great opportunities. I mean, even stuff we've done in the past week, and the amount of volume, the amount of money we're making doing that's really exciting to watch. I would correlate the performance of that team with volatility. So for example, winter volatility and, like, winter's remain, fall shoulder season volatility, I think you'll see the most benefit in realizations relative to where you would just assume basis shakes out first a month. As the team optimizes around what we're seeing in the daily markets and capturing those spreads. And again, as you and I have talked about, the more volatility we see develop in the markets over the coming years, the more profitable that business will become. I expect it to be pretty consistent. It's not trading so much in a speculative sense. It's really just optimization. Very proactively in the markets. So I hope it becomes something that is more and more consistent. But again, I think we're in the early innings of the potential that that team has. And then your final question as it relates to balance sheet, capital allocation, look, as we said in the prepared remarks, we see $5 billion as our maximum total debt level going forward. Don't really have a view that when you look at valuation in the industry today, the companies get any benefit from having much debt on the balance sheet. In fact, I would argue there's really a ding in valuation that comes from that. So we're very focused on converting that liability into equity value and reducing that equity volatility. And at the same time, what that does is it opens up the optionality for us to take aggressive and decisive action when you see pullbacks in our stock price. Just look at what our stock has done over the course of this year. I mean, we've traded between the DeepSeek pullback, Liberation Day, what's happened over the summer between a range of, like, 45 and sixty dollars a share, is a lot of really great opportunities for us to step in and buy the stock once we have the capacity to do so. So that's what we intend to do as we go about executing that buyback once we have the capacity to do it. But I think, you know, a core tenet of our strategy is having low leverage and being able to act with conviction during down cycles and pullbacks like that. We think over the long term, that creates the most value for shareholders. Doug Leggate: Great answers. Thanks for taking my two and a half questions. Thank you. Cheers. Operator: Thanks. Our next question comes from Betty Jiang from Barclays. Please go ahead. Your line is open. Betty Jiang: Good morning, team. Want to ask about the growth capital and how you guys are thinking about allocation capital there. Jeremy, you mentioned earlier that you're looking at full cycle returns and not just the midstream, but the demand unlock for the upstream business. So can you just expand on how you assess the value of these? And is the flow through to upstream benefits coming from pricing uplift or volume growth? And is that like and are you looking at opportunities above and beyond the billion-dollar investment identified last year? Sorry, last quarter? Jeremy Knop: Yes, great question. So whether it's LNG or whether it's power, our teams have done a lot of work over the last couple of years to understand where along that value chain a lot of the value is accruing to. And, you know, I think the one thing that really jumps out to us is that the most value really comes back to being able to grow sustainably our base volumes and ideally into premium markets or premium contracts. And so what we're trying to do is use our midstream business to connect our upstream production to those markets and opportunities. Whether you have a really good low-risk return, which is a foundation for then allowing us to steadily and methodically increase our base upstream business by increasing volumes into that over time when the market needs it. So that's in essence what we're trying to do, just create this virtuous cycle, sort of a flywheel effect there. But I would argue the majority of that long-term value uplift comes from unlocking our multiple decades of upstream high-quality inventory and being able to pull that forward. But again, doing it in a sustainable way. So that is really what we're trying to unlock through these opportunities. And yes, I would say that growth pipeline, specifically on the midstream side, which is what then unlocks the upstream side, that continues to grow. We're working on a number of really high-quality opportunities right now. We're not ready to talk about them yet. But we're trying to increase the number of shots on goal to see what shakes loose and continue to increase that optionality and the amount of value we can create by growing the business in the years ahead. Betty Jiang: Got it. That's helpful. And then my follow-up is actually on the MVP boost. Just talking about that flywheel effect, you got the utilities signing up for the PIPE FTE, but do you see opportunity to sign separate sales agreements on the upstream side? For you guys to lock in premium pricing similar to what you have done in the past? Jeremy Knop: Yeah. We'll look. We'll see where those negotiations go. But if you think about where it connects to, it's really fed by our pipeline systems in Appalachia upstream. So I think there's opportunity both on further pipeline expansions upstream as well as sales deals, so I think this has set the stage for that next stage of negotiations for our business holistically. Betty Jiang: Got it. Thank you. Operator: Our next question comes from Josh Silverstein from UBS. Please go ahead. Your line is open. Josh Silverstein: Just on the LNG side, you had highlighted the four to $4.50 cash flow breakeven on pricing there. I was curious, can you not get the spread with the tolling agreement versus an offtake agreement? And maybe the suggestion is, you know, tolling agreements are more like a 5 to $7 range, and so the cash flow breakeven there would be much higher. I was curious about that. Thanks. Jeremy Knop: Yeah. Good question. Just to give us a chance to clarify this. So economically, they're, I mean, virtually the exact same. I would argue that the spread is the same needed to breakeven on the contracts. The difference in tolling is that we are responsible for delivering the physical molecules to the facility. In that case, we need to take out additional Feet and probably take out storage capacity nearby just to help with balancing. With an offtake agreement, we don't have to worry about any of that. So it just makes it a bit more of a pure expression on the international spread and diversifying into that pricing market. But that's why, look, we're open to both. I think something like tolling, we're more open-minded about on the Texas Coast market just because you have so much long-term Permian supply. I think as you move towards Louisiana, our appetite for offtake increases because we do have concerns about long-term just gas supply in the region because you have so much demand pull relative to a Haynesville play, which is pretty short inventory at this point. So we're trying to sort of match contract structure with where we see the risks long-term. Make sure we have the best exposure for EQT. But I would say in both situations, whether it's the tolling agreement we have at Texas LNG, which again is on the Texas Coast side, versus something more like Commonwealth on the Louisiana side, the spreads we need to breakeven are virtually the same. Josh Silverstein: Got it. Thanks for that. And then you had highlighted tighter Appalachia pricing a few years out from now. Given that you see this and that you have the ability to further ramp supply into that market, how do you think about your consolidation strategy in the basin as part of this? You've obviously had a lot of integration success with recent transactions, and that could provide a further uplift to you guys beyond tightening diff. So I was just curious how you're thinking about that going forward. Thanks. Jeremy Knop: Yeah. I'll make a comment or show on basis and let Toby talk about, you know, future strategic moves. I would encourage you to look at what has happened to M2 basis. If you look at, like, cal twenty-nine, twenty-thirty, that is tightened by, call it, cents. I mean, you're trading in the sixties now. Over the past six months, it's been a material move in response to these demand projects getting built. Discussion of new pipeline capacity out of basin. So I think you're already seeing the impact of that. Effectively around the time frame and beyond after these projects come into service. That is accruing entirely to the value of our asset base. A way that's not been factored in historically and is not really factored into our forecast today. So that tailwind is already in full effect and we hope continues. Toby Rice: Yes. And as it relates to acquisitions and strategically expanding, what is a pretty remarkable story that we have right here. I think you get to start with the story that we've created. You know, strategically, when we look at what we're doing, I mean, it's very simple, getting access to the best markets and supplying the best energy. With our asset base we have right now, we've got a lot of runway across all of those fronts that we can do organically. So it's easy for us to stay disciplined here, but there are, I think we're seeing the opportunities of scale. You're seeing that with our capture of these data center demand opportunities within our footprint. You're seeing scale coming from our more robust trading platform that we're leveraging. You're seeing the benefits of scale with our operations teams, the number of reps that they're getting. They're exceeding execution capabilities on the operational front. So, I mean, there's wins across the board from this company. Firing all cylinders. So, you can look and see the opportunity for us to replicate that in other assets. But we'll continue to make sure we make the best decisions and stay disciplined to value creation with what we have now. Operator: Our next question comes from Neil Mehta from Goldman Sachs. Please go ahead. Your line is open. Neil Mehta: Yes. Good morning, Toby, team. I just want to talk a little bit more about the 4Q outlook here. And you elected to take some curtailment in the quarter. And so I just talk about what the mechanism or what would be triggered to lower that near-term production is and what you're looking to bring some of that supply back on? And then any comments around CapEx as well where it did come in a little bit hotter than we expect in the quarter, but I think some of just probably reflected timing. Jeremy Knop: Yes, great questions. So first of all, on curtailment, so we went into the quarter assuming we base load a Bcf a day of curtailments. When you look at where pricing was a week ago, sub a 1.5, we were effectively fully curtailed. Where we sit today with pricing in basin, call it two fifty, we're fully online. So we have been very tactful about shifting production on and off in response to this. That is also what drives, you know, in many ways, our improved realizations that you've you saw in Q3 and hopefully in Q4 as well. So we're very responsive to market conditions and making sure a reliable supplier. As it relates to CapEx in, I mean, there's just some lumpiness in there to some degree. But you're also approaching the end of the year where typically when there are dollars that have been allocated, we and we have, call it, two to three months left in the year. We typically don't trim those back. We leave the option open for teams to spend that and finish up projects for the year. Some of that might not get spent or might get pushed, but we've left it in the budget for now. Look, there is a chance for being conservative, but we feel good about the guidance we've given. And hope to consistently beat that. Neil Mehta: Thank you. Apologies for the background noise, but the follow-up is just around 2027 and I know, Jeremy, you've been very consistent in your view that LNG markets could flip the U.S. gas market into oversupply potentially as well if there is any backup as well. So I know you're leaving '26 more open and that's been a really good call as the curve has strengthened up. But does this make you want to be more aggressive around hedging '27 now that the '27 curve rally as well? Jeremy Knop: Look, we're going to all options are open. Again, our approach to hedging is to be opportunistic and tactical. Right now, we don't have a specific plan in place, but we're watching the markets as always. And we continue to be patient. And look, I think what we're doing with price realizations and optimizing how every physical molecule is sold right now, also should continue to provide a big uplift there. And again, the more volatility that we see, the more we can optimize. So we'll see and if we decide to add some hedges, you'll see it in our quarterly results. But right now, we remain pretty bullish over the near term. Neil Mehta: Makes sense. Operator: Our next question comes from Kalei Akamine from Bank of America. Please go ahead. Your line is open. Kalei Akamine: Hey, good morning, guys. I want to come back to 2026. There have obviously been some portfolio changes over the last twelve months with Northeast non-op coming out, Olympus coming in, strategic curtailments here in 4Q. So that's quite a few moving parts. And I appreciate the call out for maintenance CapEx, but for fair can we also get your view on maintenance production? Jeremy Knop: Yeah, Kalei. Good question. We expect next year to be approximately flat to where we are 2025, so you could extrapolate forward our Q4 guidance adjusted for the curtailments. Kalei Akamine: Got it. I appreciate that. Next, I want to ask on data centers. So Homer City and Shippingport were obviously big wins, there's more in development. There's some attention on Ohio. Some would say that you don't have the same presence in Ohio as you do in Southwest PA. And, therefore, those projects might be out of reach. But you guys do have Feet and the ability to build lateral pipelines. I'm wondering if that expands your range for those kinds of sales agreements. Toby Rice: Yeah. I think you're exactly right. You know, we look at these opportunities that come to EQT sort of across three different tiers. Our option footprint, across our midstream footprint, the 3,000 miles of pipeline network that we have, and then also looking at opportunities across our commercial footprint, factors into all the pipelines that we have selling gas anywhere East Of Mississippi, which includes Ohio opportunity. So we're engaged in conversations on that now. I think the biggest focus has been around our midstream footprint, but we are having conversations around the commercial footprint as well. Kalei Akamine: Toby, a while back, you guys called out several smaller projects on the XCL midstream system. Parenting connector, Oakgate, and the purpose was to get more gas over to Rex in West Virginia. Just what's the latest on those projects? Toby Rice: So on Clarrington, that's a project that we're planning on putting in place in the next in 2026 budget. So, hopefully, we'll have we'll do a little bit of spend here in '25 and then that'll be bigger in 2026, so that will get completed. Our midstream team is going to continue to look inside the operational footprint we have to look for ways to continue to debottleneck the system. I mean, you look at where we're optimizing the energy systems, what started with the sites has now evolved to the gas systems and now obviously with Feet and debottlenecking some of those points like this Clarrington connector, we'll continue to look for more of those opportunities because those will be really great high rate of return low capital type projects. Kalei Akamine: Got it. Thanks, Stephanie. I appreciate it. Operator: Next question comes from Phillip Jungwirth from BMO Capital Markets. Please go ahead. Your line is open. Phillip Jungwirth: Thanks. Good morning. With the very successful open season for MVP Boost, wondering if you could give us an update on MVP Southgate here. And whether the changes in the marketplace, greater pull on gas demand, more favorable permit regime, provide any reason to maybe revisit the project scope? Toby Rice: Yes. So Southgate, I think the results of MVP Boost specifically, the fact that we're seeing a strong pull environment gives us more excitement over the future potential of Southgate. And the opportunity to potentially expand that pipeline system in the future. But when you look at this region here, I mean, there's some big things that are happening. Obviously, the customers are demanding more gas supply into this area. You see what happened in this region this last winter with MVP flowing above max rate. So the demand is there. MVP boost oversubscribed. And then on a federal level, you're seeing the drive for more reliable lower-cost energy systems. So I mean, I think all the factors are there. We're going to be looking at ways to optimize. Just like we did in taking advantage of upsizing the MVP boost project by increasing that by over 20%. So we're studying that right now. We'll report back. Jeremy Knop: Yeah. I would just say for the lack of clarity though, I mean, you know, we're moving ahead on Southgate. I mean, that's a project that we are counting on happening. And I think as Toby said, Boost open season I think just further underscores how important that is. And there is I would expect there to be overlap in customers there as well. So it just further highlights how much that gas is needed in that region. Phillip Jungwirth: Okay, great. And then you guys have talked about an LNG strategy a couple of years now really, only recently had announced some numerous agreements. Wondering if you could talk about how offtake terms have evolved maybe before and after the LNG export pause? And are you generally seeing a lot more favorable deals and structures than you would have a couple of years ago you'd signed up some of these arrangements. Jeremy Knop: Yeah. Look, I think the one thing that held us in a major way were some of the credit conditions that we were going to have to sign for with some of these projects in the past. And it was very much a seller's market where if you wanted to be an off-taker or have tolling capacity, it was very difficult to get it on terms that we were comfortable with. As you saw that LNG pause get released and a lot of these projects move rapidly towards FID, in our mind, it shifted to be more of a buyer's market. Shifting in the favor of the likes of EQT. And so that's why we tried to move pretty quickly in response to this. Also have a view that contracts of this quality at this cost LNG build-out it kind of happens in waves. And so once you get beyond this wave, if you do see a period of oversupply, that will probably put a chill on new FIDs for a couple of years. That next wave that comes up, I would expect the pricing on those projects to probably increase another level as well. So what we're trying to do is get in at the tail end of this wave, capacity comes online, post any sort of risk of LNG glut, we have the right credit terms, the right EPCs, and the right partners on the LNG facilities. And then I think we will be structurally advantaged long term as the cost of building equipment and facilities like this inevitably just goes up over time. So that I mean there's a culmination of factors leading to why we made the decisions we did at the time we did. But again, we feel really good about just the totality of the terms we've got. Phillip Jungwirth: Makes sense. Thanks, guys. Operator: Our next question comes from Bob Brackett from Bernstein Research. Please go ahead. Your line is open. Bob Brackett: Good morning. You guys highlight that you're the number two gas marketer in the U.S. If you look at your peers, they use that scale and that market insight to extend into gas trading, gas storage, even power marketing. There's a lot of adjacencies. What's your appetite to explore some of those adjacencies, and maybe what time frame? Jeremy Knop: Yeah. Look. We're not looking to get into speculative trading and things away from our base business. We're looking at optimizing the value of our production. So, again, we're sticking to our knitting and where we really have an edge. That's why we're able to produce the results we did and realize pricing this quarter as an example. You know, as it relates to LNG too, because there's been a lot of questions around the overlap between that business and LNG where you have a lot of big players like Shell internationally. In our view, you need to have a minimum of about four MTPA of LNG capacity on the water to where you can really start to optimize and be a real player and be competitive. That's part of what also held us back signing in the past is we didn't think that the cost structure and the balance sheet and everything else was lined up within EQT with enough scale to be able to do that. We thought we might be overextending ourselves by doing it. We were very patient until we could get to the point we could sign up for at least four. But we do think there's a lot of synergies between the two, and I think the discussions we've been having with international buyers of gas are proving that out. Toby Rice: Yeah. And I would just say, when we think about just strategically what we're trying to do with the best energy, you know, making it cheaper, making it more reliable, making it cleaner, we've spent a lot of time focusing on making our energy more affordable, lowering the cost structure of this business. That's been a huge focus. We focused a lot on making the energy cleaner. All the work we've done to become the first company of scale to achieve net-zero scope one and two emissions. And I think now you're seeing a little bit more focus for us on the reliability of the energy that we produce. And that simply put is just making sure the market has the energy when it needs it, and trading will be a big function there. And it's a part of the story here that we're spending a little bit more time improving the reliability of the energy systems we develop and work in. Bob Brackett: That's great. Appreciate the color. Operator: Our next question comes from Sam Margolin from Wells Fargo. Please go ahead. Sam Margolin: Good morning. Thanks for taking the question. Hey, Stan. There's a question on commercial. And it kind of relates back to an earlier comment Toby made. You know, one of the things that turbine manufacturers are talking about is a shift in customer mix. And, you know, data center customers, hyperscalers directly ordering turbines. And I wonder if that's the catalyst to change pricing structure around gas supply deals. Utilities are comfortable with variable pricing maybe the hyperscalers directly would prefer something a little more bracketed or stable. I just maybe if you could elaborate on that comment you made earlier, that'd be great. Toby Rice: Yes. What we're seeing on the turbine side of things is we're actually seeing some opportunities for turbines that have been put on order lock up that are actually looking for homes. You know, hyperscalers, I think, are going to be looking to relieve whatever constraints that they're facing. You know, for them getting into actually developing the power themselves, would be an interesting move for them. I wouldn't put a pass just given the cost, but that is outside their area of expertise. I mean, perspective is that if hyperscalers had it their way, they would be able to sign up and just pay a rate for every kilowatt that they use and keep it very simple because they've got so many other bigger things to focus on. But in the spirit of simplifying the story for them, yeah, I think that could create opportunities for EQT in creating more structure on pricing, increasing the durability of our cash flow. So we're certainly willing to entertain those conversations. Jeremy Knop: Yeah. I think from what I've heard in the market, whether it's I know Amazon has done a little bit of this, Meta might have. Some of these big facilities specifically down along the Louisiana, Mississippi corridor, you have to order a lot of this equipment multiple years ahead of time and it's very costly. Utilities are not in the business of speculating like that. And so whether it's done through like a PPA offtake or whether it's one of the hyperscalers stepping in and making the order, basically guaranteeing the cost, I think that kind of has to happen for these mega projects. So I wouldn't say that means the hyperscaler is building or owning the power themselves. I think it's more so inherently providing the credit support one way or the other for what are very large capital expenditures. Again, it really just speaks to the demand for power, and the necessity for all this stuff to get built as quickly as possible. So it's all positive either way. Sam Margolin: Got it. Thank you. And then, just on the marketing side, you know, you pointed out that on the curves, diffs are tightening. And I guess, in the past, that might have compelled you to hedge basis. If not, if not the flat price? And I guess the question is like with the evolution of this marketing team and the success it had, you know, should we expect basis hedging to really be reduced and deemphasized just given what your capabilities are now? Jeremy Knop: Yeah. In the past, I mean, we never provide a lot of clear disclosure on what we do in basis. Just because we don't want to influence the markets in any indirect way. But we, in the background, had usually hedged up to about 90% of our in-basin sales just to provide that stability. We are not doing that anymore. We will hedge basis and we do have some basis hedged. But it will be likely far less than that in 2026 and beyond. Just due to those dynamics. And if you think about it, we can also effectively hedge basis by just shutting gas in. And that is kind of a new paradigm shift in the ability to coordinate between our traders, our production control center, midstream control center, and make sure we're not just selling gas at a price that doesn't make sense when you can shut in for a month and sell it into winter. I mean, provide that reliability during the winter months when you can surge above your baseline of production capacity. So it is an evolution for us, but the need to hedge basis to protect that downside is just not there in the same way. And instead, we're turning it from, like, a defensive strategy to more of an opportunistic proactive strategy through what we're doing with curtailments. Sam Margolin: Thank you so much. Operator: Next question comes from Scott Hanold from RBC. Please go ahead. Your line is open. Scott Hanold: Yeah. On MVP boost and potentially Southgate, can you talk about do you expect that EQT will be the supplier for those pull volumes? If so, how do you think about where you source that? Is it pulling it from in Basin Appalachia or would you grow into that and just give us a sense of if it's a grow option kind of the timeframe at which it starts? Jeremy Knop: Yeah. Great question. So MVP again pulls off systems and comes out of the Mobley plant. So I would expect it to be at least majority EQT volumes, if not all of it. And that provides us the opportunity to grow. We're not committing to growing to fill that yet. We have to ultimately see how the markets balance out. But whether it's the data center projects or whether it's more egress out of basin, what that is doing is teeing up the opportunity for us to grow with confidence. And do so in a sustainable way. Scott Hanold: Yeah. To quantify that, from where MVP is flowing today, through the end of boost coming online, that we see over a Bcf a day of greater takeaway from the MVP complex and you pair that up with another $1.5 a day of data center demand, it's a pretty, pretty attractive demand setup. Jeremy Knop: Yes, that's right. Scott Hanold: Okay. And then real quickly, you talked that you feel you're good with the LNG offtakes right now, which I think is circa 10% of your production. And you've obviously done some of these power deals. Can you talk a little bit about like industrial types of deals? Have you seen any interest in there? How much are you willing to allocate toward those initiatives? Jeremy Knop: Yes. I mean, look, we're seeing opportunities across the board. I think our sort of reinvigorated commodities team and our gas origination efforts are turning up a ton of opportunities. Whether that ultimately manifests in a midstream deal or a supply deal, you know, we're open-minded about both. We're trying to be a sort of one-stop-shop solution for gas supply. Look, we're pretty flexible and open-minded about it. Scott Hanold: Thank you. Operator: Our next question comes from Jacob Roberts from Tudor Pickering Holt and Company. Please go ahead. Your line is open. Jacob Roberts: Good morning. Good morning. On LNG, you've laid out some thoughts on demand through 2050. And Jeremy, touched on this a few questions ago, but we were curious if you could comment on global supply over that timeframe? And maybe more specifically your assumptions on the cyclicality of the global LNG market over the contract life with respect to the outcomes on Slide 12? Jeremy Knop: Yeah. Great question. So, you know, what's interesting when a lot of people are focused on the risk of LNG oversupply right now, and I think rightly so. It is a short window where I think that is at risk. But just say haircut our assumptions in half if you want to. Right? The amount of new LNG that has to get built to serve that market means that that spread needs to be in excess of four fifty at a minimum. To justify new projects getting built. And as the cost of those projects goes up in time with inflation, that just means that spread has to widen out. So that spread has to structurally stay wide as long as you do have additional demand growth. Otherwise, the demand growth cannot be served. So that's why, like, structurally, we're really bullish on that setup long term. Ultimately, it just comes down to what that export ARB incentive is for new projects to get built though. And ultimately, a question of where does the gas come from. We think the U.S. is advantaged in many ways whether it's gas from Appalachia or gas from the Permian. That really will be the biggest source of demand over the next two decades. We are certainly bullish on the domestic opportunity, but when you think about the, call it, 20Bs of growth, we could see from domestic demand not including LNG over that time period. We think that global market is going to dwarf even what a really bullish domestic outlook will be. And that's why we're so excited about getting into that LNG market even in a small way because even a small increase in that export ARB can have meaningful impacts on our profitability and realize pricing. So it's a really good way for us to extend our exposure and further improve the profitability of EQT over the long term. Jacob Roberts: Great. Thank you. And then a quick follow-up on the Olympus results, the two Deep Utica wells, you point to in the presentation, you classify those as having met the EQT standard in terms of efficiencies and cost? And then how are those results shaping thoughts about development going forward? Toby Rice: Yeah. I would classify that as early innings for us. I mean, have not got a ton of reps on Deep Utica. So it's really encouraging to see the teams come out the gate and cut drilling times by over 30% in shape dollars 2,000,000 per well. In that area, we've got a pretty hefty amount of acreage, hundreds of potential sticks. So that's a starting point is the way we'd look at it. Where we're going to get to is going to be where we're at with Marcellus relative to peers. And that's going to be peer-leading setting operational records both on the CapEx side and peer-leading LOE. I think the table is set. We just need to get some more reps and it's something that we'll sprinkle and give the teams the opportunity to lightly touch improve themselves over time. But in the meantime, the core story is going to be continuing on the success that we've had with our core Marcellus in Pennsylvania and West Virginia. Jacob Roberts: Great. Appreciate the time guys. Operator: Next question comes from Bert Donnes from William Blair. Please go ahead. Your line is open. Bert Donnes: Hey, morning, guys. I'll keep it pretty short. I just want to follow-up on the potential for the data center fixed gas price agreements. It sounds like your view is that the structure might ultimately fit better for both parties involved. But is there also a discussion to potentially take some equity in a power project? Or is that not even on the table? Toby Rice: Yes. Right now, I mean, strategy is the same when it comes to vertical integration, whether it's LNG or power plants. We're taking a very capital-light approach towards creating value in these arenas. Infrastructure continues to get funded by others. Returns do not compete with our core business. And we're able to access the value potential of these arenas without taking the equity stake. So that's the situation right now. We'll continue to be capital light, but those are the factors that we're watching that drives our decision. Bert Donnes: Perfect. That makes sense. And then on the same topic, at a time, there was an idea that maybe a consortium of smaller E and Ps could potentially piece together a power deal. Is that no longer the case? You really need the midstream side of things in order to sign these deals? Or is there room for maybe smaller projects to work that way? Toby Rice: I mean, every project that we look at, the projects are only getting bigger. I mean, if we were in a situation where 50 megawatt data centers make sense, I guess, could say that would be an opportunity. We're talking about gigawatts, multiple gigawatts at a time. You're going to need large scale. I mean, 1.5 Bcf a day is a tremendous amount of natural gas. EQT is unique in the sense that we could say we've already got that gas flowing above ground at local markets, we could just allocate that to you when you're ready. The credit requirements here, again, investment-grade balance sheets matter. That's something that's not available to smaller peers. I look at this as sort of a big player opportunity, and it's a big response for EQT to make sure that we get our tech customers all the energy they can. Jeremy Knop: Yeah. I would also just add that I think one of the biggest obstacles to getting all these data centers specifically built out is you have too many parties already involved when you think about the needs for an $80,100,000,000,000 dollar project. Adding more chefs in the kitchen doesn't improve efficiency. I think one of our edges at EQT is really simplifying this and being a one-stop shop. So I think a strategy like that would actually be moving the wrong direction and make it even more challenging to get something done. And it doesn't solve the credit quality either. So I don't think that really holds water. Operator: Our last question today will come from David Deckelbaum from TD Cowen. Please go ahead. Your line is open. David Deckelbaum: Thanks for squeezing me in, guys. I did want to just ask on the margin. You guys have seen some outsized performance on the well productivity side, but we've seen an increase in liquids recovery. Is that happening from benefits on the midstream side? Or is that something that's more geologically driven? Perhaps if you could speak to that going into next year? Toby Rice: Yes, I think that would be more driven from just where we've been developing. If I'm being honest with you. And on that front, we have been reassessing some of our parts of our asset base and looking at opportunities we see from the Equinor trade, we just got done looking at that. Probably not a lot of running room from the Ohio Utica there, but have identified the prospect of the Ohio Marcellus be very perspective over 80,000 acres. This would be big upside. It would give us even more exposure to liquids. So, I mean, it's something that we're looking at and how we're shaping it. But just given the size of our base, we're going to be a dry gas story. David Deckelbaum: I appreciate that, Toby. Then maybe Jeremy just a high level, I think there's been a lot of questions around firm sales and LNG and data centers and I guess as you see all the market forces progressing here, do you see a long-term target? Obviously, you guys give guidance all the way up to 2050 on demand. As you enter into like the next decade, do you have an expectation for or a target for what percent of total EQT gas volumes will be on firm sales agreement in the direct-to-customer model? Jeremy Knop: Yeah. I mean, if I'm honest with you, we're seeing more opportunities pop up like, literally every single week. I consider it to be a bit of a, you know, what we call internally, like, an all-you-can-eat opportunity. We can grow volumes if there's really that much demand that comes up. We can market it, whether it's third-party gas, I wouldn't say there really is a limit. Our job as it relates to just what's best for EQT and shareholders is just to capture as much of that growth opportunity as possible. And I would say that continues to ramp up, and I think the teams are doing an amazing job just increasing the frequency of conversations and getting in front of every potential customer and making sure we capture. David Deckelbaum: Thanks, guys. Operator: We are out of time for questions today. I would like to turn the call back over to Toby Rice for any closing remarks. Toby Rice: Thanks for your time, everybody. This quarter stepping back just thinking about it, it's probably one of my favorite quarters just because of the fact that every is a really great example of the total team effort that's taking place here at EQT. We're seeing wins across the board from every department, CapEx, OpEx, volumes, the back office team is getting in the mix with lightning-fast strategic integrations of Olympus. Our commodities team, grinding wins on the trading front. It's a really great example of the culture we built of teamwork and trust in delivering for our stakeholders. So we look forward to continuing the success going forward. Thank you, guys. Operator: This concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Welcome to TrustCo Bank Corp NY earnings call and webcast. All participants will be on a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key. After today's presentation, there will be an opportunity to ask questions. Before proceeding, we would like to mention this presentation may contain forward-looking information about TrustCo Bank Corp NY that is intended to be covered by the safe harbor forward-looking statements provided by the Private Securities Litigation Reform Act of 1995. Actual results, performance, or achievements could differ materially from those expressed or implied by such statements due to various risks, uncertainties, and other factors. More detailed information about these other risk factors can be found in our press release that preceded this call and in the Risk Factors and Forward-Looking Statements section of our annual report on Form 10-Ks and as updated by our quarterly reports on Form 10-Q. Forward-looking statements made on this call are valid only as of this date hereof, and the company disclaims any obligation to update the information to reflect the events or developments after the date of this call, except as may be required by applicable law. During today's call, we will discuss certain financial measures derived from our financial statements that are not determined in accordance with U.S. GAAP. The reconciliations of such non-GAAP financial measures to the most comparable GAAP figures are included in our earnings press release, which is available under the Investor Relations tab of our website at trustcobank.com. Please also note that today's event is being recorded. A replay of the call will be available for thirty days, and an audio webcast will be available for one year, as described in our earnings press release. At this time, I'd like to turn the conference call over to Mr. Robert J. McCormick, Chairman, President, and CEO. Please go ahead. Robert J. McCormick: Morning, everyone, and thank you for joining the call. I'm Robert J. McCormick, President of TrustCo Bank Corp NY. I'm joined today as usual by Michael M. Ozimek, our CFO, who will go through the numbers, and Kevin M. Curley, our Chief Banking Officer, who will talk about lending. It is often said that actions speak louder than words. TrustCo Bank Corp NY's performance this quarter and year to date speaks volumes about the tactical effective application of our corporate strategic vision. TrustCo Bank Corp NY's mission is to deliver the best possible loan and deposit products, making the dream of home ownership come true for customers who we treat with respect. It is a fundamental principle of our company that loans are underwritten with professionalism and care to ensure fair lending outcomes and solid credit quality. This is true both in our residential and commercial lending areas. Looking back just five years, we have never exceeded annualized net charge-offs of more than 0.02% compared to our average loan portfolio. Throughout this year, our strong customer relationships have enabled us to grow deposits and loans while holding the line on cost of funds as the loan portfolio repriced. All of these elements have combined to generate these stellar financial results we proudly announced today. Both our profitability and efficiencies improved greatly over the quarter, compared to this time last year. Our return on average assets increased 21.4%, return on average equity grew 20%, and our efficiency ratio decreased by almost 9%. This is all done while staying focused on high-quality underwriting standards and loan processing functions, sticking to our lending philosophy by never sacrificing credit quality. We improved our nonperforming loans to total loans by 5% over the quarter, and our coverage ratio increased to over 280%, up 9% from the third quarter last year. Also, part of our longstanding TrustCo tradition, we do not rest upon our successes. Throughout this year, our management team has demonstrated we are not satisfied with simply delivering outstanding corporate performance in the present term. We always have an eye on building long-term shareholder value. Toward that end, we sought and received approval to repurchase 1,000,000 shares of our company's stock. So far, we have repurchased nearly half of that number. Further, we anticipate that the company will complete the currently authorized buyback and expect to seek approval for further substantial repurchase. It is our view that the stock is significantly undervalued and presents an outstanding investment opportunity without exposing us to the risks inherent with another investment. Could not be more pleased with the driving corporate value in the safe, sound, and strategically purposeful manner. Now Michael will go over the details with the numbers, and some impressive numbers. Michael? Michael M. Ozimek: Thank you, Robert, and good morning, everyone. I will now review TrustCo Bank Corp NY's financial results for the 2025Q3. As we noted in the press release, once again, the company saw strong financial results for the 2025Q3, marked by increases in both net income and net interest income of TrustCo Bank Corp NY during the 2025Q3 compared to the 2024Q3. This performance is underscored by rising net interest income, continued margin expansion, and sustained loan and deposit growth across key portfolios. This resulted in third-quarter net income of $16.3 million, an increase of 26.3% over the prior year quarter, which yielded a return on average assets and average equity of 1.02% and 9.29%, respectively. Capital remains strong. Consolidated equity to assets ratio was 10.9% for the 2025Q3, compared to 10.95% in the 2024Q3. Book value per share at 09/30/2025 was $37.30, up 6% compared to $35.19 a year earlier. During the 2025Q3, TrustCo Bank Corp NY repurchased 298,000 shares of common stock under the previously announced stock repurchase program, resulting in 467,000 shares repurchased year to date, and we have the ability to repurchase another 533,000 shares under the repurchase program. And as always, we remain committed to returning value to shareholders through a disciplined share repurchase program, which reflects our confidence in the long-term strength of the franchise and our focus on capital optimization. Credit quality continues to improve. As we saw nonperforming loans decline to $18.5 million in the 2025Q3 from $19.4 million in the 2024Q3. Additionally, nonperforming loans to total loans also decreased to 0.36% in the 2025Q3, from 0.38% in the 2024Q3. Nonperforming assets to total assets also reduced to 0.31% in the 2025Q3 compared to 0.36% in the 2024Q3. Our continued focus on solid underwriting within our loan portfolio and conservative lending standards positions us to manage credit risk effectively in the current environment. Average loans for the 2025Q3 grew 2.5% or $125.9 million to $5.2 billion from the 2024Q3, an all-time high. Consequently, overall loan growth has continued to increase, and leading the charge was the home equity credit lines portfolio, which increased by $59.9 million or 15.7% in the 2025Q3 over the same period in 2024. The residential real estate portfolio increased $34 million or 0.8% of average commercial loans, which also increased $34.6 million or 12.4% over the same period in 2024. This uptick continues to reflect a strong local economy and increased demand for credit. For the 2025Q3, the provision for credit losses was $250,000. Retaining deposits has been a key focus as we navigate through 2025Q3. Total deposits ended the quarter at $5.5 billion and was up $217 million compared to the prior year quarter. We believe the increase in these deposits compared to the same period in 2024 continues to indicate strong customer confidence in the bank's competitive deposit offerings. The bank's continued emphasis on relationship banking combined with competitive product offerings and digital capabilities has continued to stable deposit base that supports ongoing loan growth and expansion. Net interest income was $43.1 million for the 2025Q3, an increase of $4.4 million or 11.5% compared to the prior year quarter. Net interest margin for the 2025Q3 was 2.79%, up 18 basis points from the prior year quarter. The yield on interest-earning assets increased to 4.25%, up 14 basis points from the prior year quarter, and the cost of interest-bearing liabilities decreased to 1.9% in the 2025Q3 from 1.94% in the 2024Q3. The bank is well-positioned to continue delivering strong net interest income performance even as the Federal Reserve signals a continued potential easing cycle in the months ahead. The bank remains committed to maintaining competitive deposit offerings while ensuring financial stability and continued support for our communities' banking needs. Our wealth management division continues to be a significant recurring source of non-interest income. They had approximately $1.25 billion of assets under management as of September 30, 2025. Non-interest income attributable to wealth management and financial services fees represent 41.9% of non-interest income. The majority of this fee income is recurring, supported by long-term advisory relationships and a growing base of managed assets. Now on to non-interest expense. Total non-interest expense net of ORE expense came in at $26.2 million, down $42,000 from the prior year quarter. ORE expense net came in at an expense of $8,000 for the quarter as compared to $204,000 in the prior year quarter. We are going to continue to hold the anticipated level of ORE expense to not exceed $250,000 per quarter. All of the other categories of non-interest expense were in line with our expectations for the third quarter. Now Kevin will review the loan portfolio and non-performing loans. Kevin M. Curley: Mike, good morning to everyone. Our loans grew by $125.9 million or 2.5% year over year. The growth was centered on our home equity loans, which increased by $59.9 million or 15.7% over last year, and residential mortgages, which increased by $34 million. In addition, our commercial loans grew by $34.6 million or 12.4% over last year. For the second quarter, actual loans increased by $35.1 million as total residential loans grew by $38.5 million, and commercial loans were slightly lower for the quarter. Overall, residential activity is picking up. We are seeing additional refinance volume as mortgage rates remain in the 6% range. Our home equity lending also continues to grow steadily as customers continue to use their equity for home improvements, education expenses, or paying off higher-cost loans such as credit cards. In all our markets, rates have fluctuated within a 25 basis point range, with our current thirty-year fixed rate mortgage at 6.125%. In addition, our home equity products are very competitive, with rates starting below 6.75%. Our products are well situated across our markets, as we are ready to capture more growth as activity picks up. As a portfolio lender, we have the flexibility to manage pricing and implement targeted promotions to increase loan volume. Overall, we are encouraged by the loan growth in the quarter and remain focused on driving stronger results moving forward. Moving to asset quality. Asset quality of the bank remains very strong. At TrustCo Bank Corp NY, we work hard to meet strong credit quality throughout our loan portfolio. As a portfolio lender, we have consistently used prudent underwriting standards to build our loan portfolio. Our residential loans originated in-house, focusing on key underwriting factors that have proven to lead to sound credit decisions. These loans are originated with the intent to be held in our portfolio for the full term rather than originated for sale. In addition, we have no foreign or subprime loans in our residential portfolio. In our commercial loan portfolio, which makes up just about 6% of our total loans, we focus on relationship-based loans secured mostly by real estate within our primary market area. We also avoid concentrations of credit to any single borrower or business and continue to require personal guarantees on all our loans. Overall, our disciplined underwriting approach has produced strong credit quality across our entire loan portfolio. Here are the key metrics. Our early-stage delinquencies for our portfolio continue to be steady. Charge-offs for the quarter amounted to a net recovery of $176,000, which follows a net recovery of $9,000 in the second quarter and $258,000 in recovery in the first quarter, totaling a year-to-date net recovery of $443,000. Non-performing loans were $18.5 million at this quarter-end, compared to $17.9 million last quarter and $19.4 million a year ago. Non-performing loans to total loans was 0.36% this quarter-end, compared to 0.35% last quarter and 0.38% a year ago. Non-performing assets were $19.7 million at quarter-end versus $19 million last quarter and $21.9 million a year ago. At quarter-end, the allowance for credit losses remained solid at $51.9 million with a coverage ratio of 281%, compared to $51.3 million with a coverage ratio of 286% at year-end and $49.95 million with a coverage ratio of 157% a year ago. That's our story. We're happy to answer any questions you might have. Operator: Thanks very much. We will now begin the question and answer session. Before pressing the keys, our first question comes from Ian Lapey from Gabelli Funds. Your line is open, Ian. Please go ahead. Ian Lapey: Good morning, Robert and team. Congratulations on the great financial results. I was hoping maybe you could quantify a little bit. The release mentions that you expect meaningful net interest income upside for quarters to come. You mentioned the rates on the fixed rate and home equity. What about the CDs that are going to be maturing over the next quarter? What's sort of the average rate for that compared to what you're paying on new CDs that you're issuing? Robert J. McCormick: The highest rate we're offering right now, Ian, is 4%, and that's a three-month rate. And there's about a billion dollars in CDs that are coming due over the next four to six months. So we expect, based on what happens with the Fed and some competition, there should be opportunity in that CD portfolio to reprice. Ian Lapey: What's roughly the average, so for the billion coming due, what is the average roughly rate on those? Robert J. McCormick: The average rate on the billion coming due is about 3.75%. Okay. And then on the recoveries, obviously, very impressive. I was just hoping you could unpack that a little bit. For example, for the quarter, in New York, you had $194,000 in recoveries. Just curious, like how many homes typically would that relate to? Is this just a function of borrowers defaulting with significant equity still in the home? Maybe you can just explain a little bit. Robert J. McCormick: A lot of that, as you can imagine, Ian, in the real estate market, Upstate is still very, very strong, and there's still great demand with relatively limited inventory. So a lot of the transactions happened before we even end up taking the property back, which is the best possible scenario. But the $194,000 is probably around five properties we've taken back, and I think there was one commercial property in there and four residentials. Ian Lapey: Okay, great. And then I guess my only follow-up, my only remaining question. So it looked like branches were flat at 136 sequentially. What are you thinking about in terms of expansion, if at all, and would Florida still be sort of your targeted range for growth? Robert J. McCormick: We're looking at, well, Pasco County is something that we're very interested in, Ian. I'm sure you're tracking this, but on the West Coast of Florida, because of development and prices and things like that, people are being pushed further and further out from Tampa. We're seeing opportunity in loan demand in Pasco County. And then there are a couple of other infill locations that we would like to find something in Florida. But, you know, we are pretty cheap people, so we want the right transaction if we can in the right location. So and then there's always opportunity throughout Downstate New York as things open up there as well. So those would be the two opportunities we're seeing right now. Ian Lapey: Okay. Terrific. Thank you. Operator: Thank you. We currently have no further questions at this time. Now I'd like to turn the conference back to Robert J. McCormick for any closing remarks. Robert J. McCormick: Thank you for your interest in our company, and we hope you have a great day. Thank you. Operator: The conference call has now concluded. Thank you very much for attending. You may now disconnect your lines.
Operator: Good day, and welcome to the Northern Trust Corporation Third Quarter 2025 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Jennifer Childe, Director of Relations. Please go ahead. Jennifer Childe: Thank you, operator, and good morning, everyone. Welcome to Northern Trust Corporation's Third Quarter 2025 Earnings Conference Call. Joining me on our call this morning is Michael O’Grady, our Chairman and CEO; David W. Fox, our Chief Financial Officer; John Landers, our Controller; and Trace Stegeman from our Investor Relations team. Our Third Quarter Earnings Press Release and Financial Trends Report are both available on our website at northerntrust.com. Also on our website, you will find our Quarterly Earnings Review Presentation, which we will use to guide today's conference call. This October 22 call is being webcast live on northerntrust.com. The only authorized rebroadcast of this call is the replay that will be made available on our website through November 22. Northern Trust disclaims any continuing of the information provided in this call after today. Please refer to our Safe Harbor Statement regarding forward-looking statements in the back of the accompanying presentation, which will apply to our commentary on this call. During today's question and answer session, please limit your initial query to one question and one related follow-up. David W. Fox: This will allow us to move through the queue and enable as many people as possible the opportunity to ask questions as time permits. Thank you again for joining us today. Let me turn the call over to Michael O’Grady. Michael O’Grady: Thank you, Jennifer. Let me join in welcoming you to our Third Quarter 2025 Earnings Call. Our third quarter results underscore the momentum and disciplined execution of our One Northern Trust strategy. For the fifth consecutive quarter, we delivered positive organic growth and operating leverage, demonstrating our ability to capitalize on a constructive market environment while advancing our transformation agenda. Supported by favorable equity markets and well-managed expense growth, third quarter revenue increased 6%. Our pretax margin expanded by nearly 200 basis points, and our earnings per share grew 14%, each as compared to the prior year and excluding notable items. Return on equity reached 14.8%, and year to date, we have returned 110% of earnings to shareholders, contributing to a 5% decrease in shares outstanding. Our strategy is firmly rooted in our mission to be our clients' most trusted financial partner, powered by a culture of high performance. Our enterprise growth program is driving steady improvement in organic growth, particularly within private markets, where our integrated solutions are gaining traction across all business lines. The transition to a client-centric, capability-driven operating model is already yielding measurable productivity gains. For example, in our enterprise COO organization, we have created approximately 40 capability teams, moving thousands of people from regional reporting structures to global capability reporting lines. This has enabled us to create a baseline for improving resiliency, process efficiency, and quality. AI is rapidly becoming a catalyst for innovation and efficiency. Our early investments, inclusive of providing all employees with access to Copilot, are already generating measurable results. Across the organization, AI is embedded in more than 150 use cases, enabling teams to more efficiently service client requests, automate workflows, analyze data, and digitize documents, saving our partners tens of thousands of hours and allowing them to focus on higher value initiatives. As we continue to deploy AI across the company, we expect it to accelerate these improvements, driving greater efficiency, further bending the cost curve, and unlocking additional capacity for reinvestment in growth initiatives. Let me turn to our businesses, starting with wealth management. We advanced key strategic priorities in the third quarter, adding experienced leadership and strengthening our geographic strategy. Our value proposition continues to resonate most with the highest wealth tiers, driving elevated win rates and client retention. Our deep expertise, institutional-grade capabilities, and high-touch service culture position us to offer services across the entire continuum of family office structures, from the largest stand-alone single-family offices supported by our GFO business to virtual and outsourced solutions offered by our new Family Office Solutions Group. This offering for ultra-high-net-worth families is most mature in the Central Region, where robust demand has translated into several high-profile wins this quarter. Building on this momentum, we see significant runway for future growth as we replicate our playbook across other regions. Client appetite for alternative investments within wealth management is accelerating, fueling both innovation and adoption. We continue to expand the number of third-party fund offerings in the quarter and are on pace to more than double the number of funds we have had in market within a calendar year. This builds upon the substantial amount of alternative assets raised by 50 South Capital this year, with wealth and GFO clients making meaningful commitments. Notably, 50 South Capital introduced a feeder fund structure in the third quarter, giving wealth clients direct and exclusive access to top-tier alternatives managers. Overall, new business activity remains brisk, contributing to healthy growth in core advisory fees. However, this positive momentum has been tempered by ongoing challenges at the investment product level. Moving to asset management. In September, we announced the transition in leadership, appointing Mike Hundstedt, a 25-year industry veteran and proven leader within Northern Trust, as President of NTAM. Under his leadership, NTAM will continue its focus on strengthening foundational core capabilities, including liquidity, indexing, and quant equity, while accelerating growth across alternatives, custom SMAs, and our ETF platform. The third quarter was marked by product innovation, including the launch of 11 new ETF strategies, eight of which are industry-first fixed income distributing ladder ETFs, developed in collaboration with wealth management investment leaders to address the needs of taxable clients seeking more tax and cost-efficient cash flow management. Liquidity continues to be a standout area, with NTAM reporting its eleventh consecutive quarter of positive flows. We expanded our global money market fund platform in the quarter with the launch of a US dollar treasury liquidity strategy for European clients, building on the success of our onshore US treasury instrument strategy, which has already amassed more than $6 billion since its launch in June 2024. Beyond liquidity, we saw positive flows in ETFs and custom SMAs, both key areas of focus, and fixed income, including two large high-yield mandates. And finally, moving to asset servicing. Our Asset Servicing business delivered strong results this quarter, executing on a disciplined strategy centered on scalable growth across key focus areas, including large asset owners, capital markets, and alternatives. Success with large asset owner clients continued, with year-to-date revenue from front office solutions increasing materially relative to the prior year period. This growth was driven by the strategic appeal of our integrated product offering, differentiated service model, and ability to deliver meaningful efficiencies for clients. Notable third quarter custody and fund administration wins included the $14 billion Sacramento County Employees Retirement System, a $16 billion Atlanta-based private foundation, and the $19 billion New Mexico Educational Retirement Board. Not-for-profit health care was another highlight, with strong third quarter wins bringing our coverage to 75% of the nation's top 50 not-for-profit health care systems, a clear testament to our competitive positioning and deep commitment to the space. Capital markets activity remains strong, with more than 100 new clients added year to date, primarily through cross-sell, driving significant growth in core brokerage and FX trading. Capitalized businesses that carry highly attractive margins. Momentum in the alternative space also remained robust, with our hedge fund services and private capital practices generating double-digit year-over-year increases in both reported revenue and won but not funded business. This included continued success in the LTIP and LTAPH space, highlighted by a marquee win in The UK, extending our market-leading position in this attractive high-growth area. Our commitment to exceptional client service was recognized with the Best Administrator Overall Service Award at the US Hedge Fund Management Service Awards. We were also honored as Custodian of the Year by the European Pensions Awards, our third win in six years, further validating our leadership and reputation in the industry. Our disciplined strategy to drive scalable, profitable growth continues to yield tangible results. While recent wins may be smaller in scale compared to some of our prior asset manager mandates, they remain meaningfully accretive to pretax margins. We are also selectively allowing noncore and underperforming business to roll off as contracts expire. Therefore, we expect to see a continued gradual trajectory of margin improvement and overall growth. To wrap up, as we enter the fourth quarter, our foundation is strong and our momentum is unmistakable. Nearly two years into our One Northern Trust strategic journey, I am deeply encouraged by the progress we have made and grateful to my Northern Trust partners for their hard work and dedication. This decisive, collaborative spirit that defines our organization is unlocking new opportunities to accelerate execution and fully capitalize on our core strengths. Looking ahead, we remain laser-focused on the disciplined execution of our strategy, which is positioning us to deliver consistently strong financial performance and create enduring value for our stakeholders, regardless of the broader economic environment. And with that, I'll turn it over to Dave to review the financials. David W. Fox: Thanks, Mike. Let me join Jennifer and Mike in welcoming you to our Third Quarter 2025 Earnings Call. Let's discuss the financial results of the quarter starting on Page five. This morning, we reported third quarter net income of $458 million, earnings per share of $2.29, and our return on average common equity was 14.8%. Our third quarter results reflect another quarter of solid progress toward achieving our financial objectives and enhancing the durability of our financial model. We delivered positive operating leverage of 110 basis points, 120 basis points of year-over-year improvement in our expense to trust fee ratio, which was down to 112% in the third quarter, and returned nearly 100% of our earnings. Relative to the prior year, currency movements favorably impacted our revenue growth by approximately 50 basis points and unfavorably impacted our expense growth approximately 30 basis points. Relative to the prior period, currency movements were immaterial to both revenue and expense growth. Trust and investment and other servicing fees totaled $1.3 billion, a 3% sequential increase and a 6% increase compared to last year. Interest income on an FTE basis was $596 million, down 3% compared to the prior period and up 9% year to date from a year ago. Excluding notables in the prior year, other noninterest income was up 10% year over year, largely reflecting stronger capital markets activities, particularly securities commissions and trading, and FX trading income, reflecting our focus on driving growth in these areas. Our assets under custody and administration were up 1% sequentially and up 5% compared to the prior year. Our assets under management were up 4% sequentially and up 9% year over year. Overall, our credit quality remains very strong, with all key credit metrics in line with historical standards. We recorded a $17 million release of the credit reserve in the third quarter, largely reflecting changes in macroeconomic projections. On a year-to-date basis, our provision remained essentially unchanged. Our effective tax rate was 26.1% in the third quarter, up 70 basis points over the prior period's rate as a result of higher tax impacts from international operations. Expect the full year's effective tax rate to be in line with the year-to-date effective rate. Relative to the prior year period and excluding notable items, revenue was up 6%, expenses were up 4.7%, our pretax margin was up 200 basis points, earnings per share increased 14%, and our average shares outstanding decreased by 5%. Turning to our wealth management business on page six. Wealth management had a healthy quarter with particular strength in the regions. Assets under management for our wealth management clients were $493 billion at quarter end, up 11% year over year. Trust investment other servicing fees for wealth management clients were $559 million, up 5% year over year, primarily due to strong equity markets. Trust fees within the regions were up 7% year over year and are up 6% year to date, with strength mostly attributable to favorable equity markets. Within 1% year over year and are up 5% year to date. Sequentially, GFO growth was muted by a combination of asset allocation changes and portfolio restructurings. Importantly, the underlying business remains very healthy. We generated positive flows of $2 billion in September alone, and new businesses on pace to break last year's record levels. Average wealth management deposits were flat, and average loans were up 2%, both relative to the second quarter. Wealth Management's pretax profit increased 11% over the prior year period, and the pretax margin expanded 250 basis points to 40.5%. Moving to asset servicing results on page seven. Our Asset Servicing business delivered another strong quarter. As expected, transaction volumes normalized from elevated second quarter levels. Capital markets activities remained robust, on pace to beat 2024's record levels, and new business generation continues to be healthy and margin accretive. Assets under custody and administration for asset servicing clients were $17 trillion at quarter end, reflecting a 4% year-over-year increase. Asset servicing fees totaled $707 million, reflecting a 6% increase over the prior year. Custody and fund administration fees were $483 million, up 7% year over year, largely reflecting the impact from strong underlying equity markets, net new business, and favorable currency movements. Assets under management for asset servicing clients were $1.3 trillion, up 9% over the prior year. Investment management fees with asset servicing were $160 million, up 5% year over year, due mostly to favorable markets. Average deposits within asset servicing declined 6% sequentially, while loan volume decreased by 7%, albeit off a small base. Asset servicing pretax profit grew 14% over the prior year period, and the asset servicing pretax margin was up 150 basis points year over year to 24.7%. This reflected the benefit from favorable markets, that pivot in our new business approach, including our focus on cross-selling high-margin capital markets and other adjacent products and services, and our efforts to streamline operations. Moving to page eight and our balance sheet and net interest income trends. Our average earning assets were down 4% on a linked quarter basis, as softer deposit levels drove a decline in cash held at the Fed and central banks. At the same time, we opportunistically added fixed price securities to the portfolio to provide downside protection. Fixed floating breakdown of the securities portfolio is now 54% to 46%, including the impact of swaps. The duration of the portfolio remained flat at 1.5 years, and the duration of our total balance sheet continued to be under one year. Net interest income on an FTE basis was $596 million, down 3% sequentially but up 5% as compared to the prior year. Sequentially, NII was unfavorably impacted by the lower deposit levels. This was partially offset by favorable deposit pricing actions we have taken outside of rate cuts. The quarterly contribution from transactional and other one-time items normalized in the third quarter following elevated second quarter levels. Our net interest margin increased sequentially to 1.7%, reflecting the favorable deposit pricing actions taken, partially offset by unfavorable change in asset mix. Deposits performed largely as we expected. Average deposits were $116.7 billion, down 5% compared to second quarter levels, reflecting typical seasonal patterns coupled with normalization from elevated second quarter levels. Within the deposit base, interest-bearing deposits declined by 5%, and noninterest-bearing deposits decreased by 3%, but remained at 14% of the overall mix. Turning to our expenses on page nine. Expenses increased 4.7% year over year in the third quarter. There were no notable expenses in the current or prior periods. Excluding unfavorable currency movements, expenses were up 4.4%. Turning to page 10. Our capital levels and regulatory ratios remained strong in the quarter, and we continue to operate at levels well above our required regulatory minimums. Our common equity Tier one ratio under the standardized approach increased by 20 basis points on a linked quarter basis to 12.4%, driven by capital accretion and a decrease in RWA. Our tier one leverage ratio was 8%, up 40 basis points from the prior quarter. At quarter end, our unrealized after-tax loss on available-for-sale securities was $437 million, and we returned $431 million to common shareholders in the quarter, through cash dividends of $154 million and common stock repurchases of $277 million, reflecting a payout ratio of 98%. Year to date, we returned over $1.3 billion, reflecting a 110% payout ratio, which puts us on track to return at least 100% for the full year. Turning to our guidance. Continue to expect our operating expense growth to be below 5% for the full year, excluding notable items in both periods and regardless of currency movements. We now expect full year NII to grow by mid to high single digits over the prior year. And with that, operator, please open the line for questions. Operator: Thank you. If you would like to ask a question, please signal by pressing star one on your tone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question. We'll pause for just a moment to assemble the queue. We will take our first question from Ebrahim Poonawala with Bank of America. Ebrahim Poonawala: Hey, good morning. Morning. I guess maybe this first Dave, where you ended on the NII outlook. The mid to high. Maybe address it two ways if you could. One, on the deposit trends, it felt like this the runoff was more than we expected. Are you seeing in terms of growth outlook and the mix shift in deposits going forward? And how should we think about the asset sensitivity of the balance sheet the Fed were to cut three or four times in quick succession? Does that put negative pressure on the NII? As we think about the first half of next year? Thanks. David W. Fox: Yeah. Sure. Happy to answer that. You know, deposits actually did perform pretty much in line with what we had previewed. And they're actually up from last year at this time. So from that perspective, may be less than you had anticipated, but I think generally, in the area we we had anticipated. You know, we've already seen a slight pickup in deposits in Q4, and we ended, obviously, September at $135 billion. But we think that Q4 deposits are gonna be, I think, a little bit higher on average during the quarter. You know, and since we've already posted a 9% year to date year over year NII growth, that's why we feel comfortable tweaking our our guidance a bit to mid to high single digits in NII. And then which would imply, frankly, that would be about flat to marginally one to 2% up in the fourth quarter. As far as 2026 is concerned, we have some mitigating factors that we can take going forward. We obviously have a rate cuts built into our in into our projections. We not anticipating more than two rate cuts, in The US, next year, for example. We have carry in, that we've done in terms of our repricing initiatives that we've taken. We have deposit pricing initiatives as well. We have all the securities that we know are gonna be rolling off in in that quarter in the in the various quarters in '26. So when you do the puts and takes, we feel that NII in 2026 should be you know, flat to up one to 2%. Ebrahim Poonawala: Got it. That's helpful. I'm not sure if I caught this when you were in in your prepared remarks when talking about when you go into sort of wealth management, then you talked about some of the challenges at the investment product level. I was wondering if you could just kind of elaborate on what the issues were when it on that front. And what sort of what are the actions you're taking to kind of get that back on track? Michael O’Grady: Sure, Ebrahim. It's, it's Mike. I'll take that. And so as you know, through NTAM, we offer a number of different, investment solutions and products to our wealth management clients. And we're also open architecture. So that we're offering, you know, the products of of other asset managers as well. And where we tend to focus is on those core foundational areas. So think about liquidity, index, quant, other areas like that. And the areas where we've seen pressure some of it on the index, where it can be a combination of just asset allocation, but also pricing pressure. Fee pressure, and that then, causes flows to lower fee products. And then second is asset allocation when it comes to areas of whether it's growth versus value. And on that front, we offer a multi manager platform solution and it tends to lean more towards the value side of the equation. And there where we've seen know, a very narrow market, as you well know, it's difficult for those active managers to to outperform. And so we've seen some flows out of that multi manager platform and so that's been a drag as well. Now as to what we're doing to, address that, in addition to just focusing on those areas and making sure the the products are not only performing but pricing, at the right level. Also, as we've talked about, focus on ETFs. SMAs, for the wealth management clients. But also alternatives. And that's an area as you heard, where we've, increased the number of offerings for our clients on the alternatives platform, for our wealth clients. Ebrahim Poonawala: That's good color. Thanks, Mike. Operator: We will take our next question from Kenneth Michael Usdin with Autonomous Research. Kenneth Michael Usdin: Thanks. Good morning. Just wanted to ask you to talk a little bit about just some of the the the moving pieces of this quarter. I know it might just be temporary, but, AUCA up 1%. I know you're talking about new business wins. You saw also in the press release some some outflows. So is that just kind of a the normal state of kind of getting some wins and some losses every quarter? Just a a dynamic for this quarter that you saw just relative to the market strength that we saw? Thanks, guys. David W. Fox: Yes. I would say that you take a look at the AUCA growth, there were you know, a number of individual clients that drove those, AUCA numbers. And had they not done that, we would have probably been on par with our peer group. These are asset management clients, and there was one client in particular that represented know, two thirds of, I think, of the degradation in the in the AUC. You have to remember that not all AUC is created equal. You know, not all AUC creates the same level of fees. And in this particular case, the vast majority was a was a restructuring that an asset manager made you know, moving from mutual funds through a like kind conversion into a CIT structure that's less expensive to the participants. And so still we didn't lose clients. We lost assets. And that happens, as you as you mentioned, the the the sort of puts and takes. Of the asset manager space. One other loss was really just a redemption by one large client as part of a fund. That fund has actually started to fill back up again. And so you add it all up in terms of impact, the total AUC that we're talking about is is the fee realization on that AUC is gonna be less than 10%. What we would normally see on a normalized AUC. And so, you know, you have to just take into consideration the type of business that is. And so you wanna translate that into dollars, all combined, all the degradation that we saw won't amount to more than 3 to $400,000. You know, a month of, of, you know, of of fee changes. You know, of fee decreases. Some of that could be earned back by the next quarter. So, yeah, I I think it's it's a lot of ebb and flow in the asset manager space is the way I would put it. Kenneth Michael Usdin: Great. That that's that's really great. Helpful, Dave. Second point, you're obviously firmly committed to that sub five. We saw it again this quarter. And just as you're starting to think about looking forward, I know you've said that you're strongly committed to it inclusive of FX translation. I just any any any incremental thing we should think about, you know, that as we go forward just know you're gonna be thinking about positive operating leverage. We don't know what the markets will do from here. They've obviously been a big helper. But as you continue to kind of, you know, hone that messaging around the expense base, Any new thoughts about, like, where you can kinda try to hold that level on expense growth overall? Thank you. David W. Fox: Yeah. So for fourth quarter, we're pretty locked in. We're not changing our expectations at all. We feel like we have the measures in place to flex if necessary. And so I'm sticking very strongly to the below 5% growth number for for Q4 and for the full year. So I think we feel very good about that. Nothing nothing in particular that I would really cite We're just starting to think about 2026. We're we're just getting into the the the planning of that. And I one thing I would say is that, you know, we continue to bend the cost curve down on expenses. If you if you look at where I started, I think we were coming off a 6% growth. Down to 5% or five and a half. It's been grinding down every quarter and without currency, we would have been closer to four than we are to five. Right? So and we're not done. I think the message there is we're not done bending that cost curve down. The productivity that we have have are going to realize in twenty five, is great, but '26 will probably be greater. And and so I think that we're just know, we're we're still seeing some opportunity there to keep grinding that expense curve down going going forward. Kenneth Michael Usdin: Got it. Thanks, Dave. Operator: We will take our next question from Brennan Hawken with BMO. Brennan Hawken: Good morning. Thanks for taking my questions. Mike, I'd love to drill into a comment that you made in your prepared remarks where you talked about sort of allowing more marginal business to roll off So it's and you you you spoke to that aiding growth. Is that growth comment, like, an indication that it's gonna be more about profit growth than top line growth? Do you expect that some of these efforts might result in more of a top line headwind, but you're gonna be able to make it up for it in the, you know, sort of better unit economics. On each of the new businesses that you're focused on? Can can you help me maybe think through some of that? Michael O’Grady: Sure. So it is definitely a focus on profitability. So we have a great asset servicing business. But right now, the margins are below the level that we think the business should be performing at. We're seeing nice improvement in that So we were, you know, at one point, kind of, like, 22%. We moved up to 23. Saw this this quarter moving up, closer to 25%. That's a combination of, I'll I'll say, a number of factors. First is the new business that comes in. We're making sure that it's coming in at very accretive margins. And that to your point, that can have an impact on you know, the the gross top line growth that you're going to get. In our view at this point, again, we wanna see greater profitability and growth and profitability. Second, I would say is in the the business that we do have and the activities that we do have, just trying to look very carefully at those areas and see if, one, if we can improve on the situation, either the activity, or with the economics with the client. But to the extent that we're not achieving that, then it is something where, you know, we'll have to look over time to transition that that business out. And so that that's the second piece of it, which, again, will aid profitability. And then the third, you know, Dave touched on it a little bit just with his comments around expenses, but really, you know, focusing on the efficiency of our operations. I and so I talked to my comments as well, Brennan, about our client centric capability operating model. You know, everything around that is is trying to be organized in such a way that we can deliver our services in a way that is both resilient, but also efficient. And so that that's where a year ago, we reorganized in a way that brought a lot of those activities together, and centralized them under a COO organization. So that we could be, you know, more aligned both between operations and technology to drive the scalability and efficiency that's necessary to see that continued improvement in, profitability. Brennan Hawken: Great. Thanks for that, Mike. And then you you there's there's been a lot of movement in the markets. You you already spoke a bit to GFO and some of the changes that happened within some portfolios, but but we did see fee rates the way at least the way we're able to calculate them, and I know that that's sort of flawed given how you guys bill. Because we don't have intra quarter visibility. But but did you guys see fee rate pressure in some of the other businesses this quarter as well. Or was it just around the mass in how you bill and how much the markets moved? If you could help maybe disentangle that a bit. Thank you. David W. Fox: Yeah. So think about GFO, in particular, as resembling a little bit more of the asset servicing side of the business than the wealth management side of the business. They've got extremely strong pipeline, and and they're gonna produce a record year of new business. Off another a previous record year. And so what you do see in GFO is large shifts in portfolio composition. And a higher sensitivity to cash. And so Q2 is pretty volatile, and then there's a lot of movement going in there. Other thing I'd say about GFO is they're much they're less exposed, at least at Northern, to fixed income and equity, movements. They are very cash focused. And so unlike the regions, not as influenced as much. By the overall equity market. A better way to look at the business like a GFO business would be look at their year to date fees. So year to date fees are up 5% and revenues are up 9%. And then, you know, GFO had Brennan Hawken: Yeah. Hey, I'm I'm I'm sorry. I'm sorry. I'm I'm probably boarded my question poorly. I was looking at the businesses aside from GFO. Like, I I get that GFO had some of those I mean, like, in the servicing business and the investment management business, we felt a little fee rate pressure there too. So I was just curious about whether that was the mass, you know, in markets or whether there was actually some you guys experienced fee rate pressure. Michael O’Grady: Sure. I what I would say, Brennan, is on the asset management side, you know, there's consistently, you know, persistent pressure on fees overall. Nothing, that I would note in the quarter. I did mention know, in a previous question just about making sure that our pricing is competitive for all of our clients but particularly within wealth management. So from time to time, yes, we will, you know, bring down the fees on an investment management product to to make it more more competitive. On the servicing side, I would say, you know, once again, there's always, you know, it's a competitive marketplace. But there's nothing that transpired in the quarter that necessarily you know, resulted in a reduction in fee levels. And in fact, if anything, Brennan, you know, to your to your first question, you know, we're we're trying to be very disciplined around pricing and economics to make sure that the the business we're bringing on is at those accretive margins. Brennan Hawken: Makes a lot of sense. Thanks for taking my questions. Michael O’Grady: Absolutely. Operator: We will take our next question from Michael Mayo with Wells Fargo Securities. Michael Mayo: Hi. Just want to make sure I understand the big picture correctly. So I think you're running you know, asset management and wealth, especially GFO, for growth. And you're running, asset servicing, relatively more for profitability. And to get there, you're putting some low margin business runoff. Did I get that correctly? Michael O’Grady: Yes. Michael Mayo: Okay. So I guess the question is, you know, under what circumstances would you say, you know what? The the custody business you know, maybe you should downsize even more or disinvest. And I know this is an old question, and you I think you've usually said, look. You might not have scale in absolute terms, but you have scale where you wanna compete. I think that's kind of where you've been. But does does that still hold and under what circumstances? Would that change? Michael O’Grady: Yeah. So it absolutely still holds. And if anything, Mike, I would say, you know, the both the market, if you will, and what we're doing it takes it even more that direction, I e, that we have the necessary, scale, to be able to deliver these services efficiently. And what I mean by the market part, first, of all, is just everything that's happening around both digital assets and AI make these activities more scalable. And and when we talk about, you know, our operating model, it's just trying to make sure that we're then organized in such a way to take advantage of those things. So of all, when you think about digital assets, tokenization, and even stablecoins, The whole idea there is around you know, greater efficiency in the marketplace. And so as that happens, again, that that leads to you know, more straight through activities, more liquidity in those markets, in those products, etcetera. And we're certainly making sure that we have the capabilities to do that. With AI, it's about, you know, automating processes and taking things that right now maybe not be so straight through. So if you take an example like you know, private capital and and the processing of private capital, for our clients. So thinking, you know, we're their LPs, and they're invested in literally you know, hundreds of funds, and a lot of that activity is still paper based. Mean, I would say we could estimate that right now, only maybe a quarter of that activity that we do for our clients on that front is straight through. What we're focused on is how do we turn that into, you know, 50%, 75% automated, and that's where we're utilizing AI. To be able to do that. So all of those things take us to a model that I think gives us the necessary scale, meaning that as you grow, the unit economics, improve. And to your point, you know, these are all measurable things both from a I'll call it, internal perspective, but also from a financial performance perspective. That if it's not, you know, proving to be the case there, you certainly have to look at it differently. Michael Mayo: And then last follow-up. If the the one liner why someone of your size can compete with the the Goliaths of the industry, I mean, it's always skill versus scale, the the argument. Why can you win in in tech and AI if you don't spend as much money? Michael O’Grady: Yeah. It's I first of all, it's differentiation. Right? So our strategy is focused on delivering a unique value proposition to our clients. I and in doing so, that requires greater focus for us. So as I think you pointed out in one of your earlier comments, we're not looking to compete in every segment across the globe. We're picking areas like asset owners in The United States, like pension funds in The UK, like Global Family Office, you know, like hedge fund services, where we believe that that value proposition, that differentiation resonates because there's still it's still about, you know, the overall package. What do they get when it comes to you know, not only the technology, but the service that goes with that and who that financial partner is. But then can we deliver it in an efficient way such that the value they're getting overall is more attractive relative to other alternatives. So there's no doubt in my mind that in the marketplace, that clients want differentiated, offerings, and we believe that that's what we offer. And we just focus on those areas where we think that we can be successful with it. Michael Mayo: Alright. Thank you. Michael O’Grady: Sure. Operator: We'll take our next question from Betsy Graseck with Morgan Stanley. Betsy Graseck: Hi, good morning. Michael O’Grady: Morning. Betsy Graseck: So just one more question on this thread. Regarding AI. I know at the beginning you highlighted that AI is already generating measurable results with 150 plus use cases. Could you give us a sense as to where, you see AI helping the you know? Well, let me put it this way. Is there any differentiation within the organization about how much AI will be helping out. In other words, do you expect to see it more in the servicing services side or wealth side or it's equal across the organization. I'm just wondering if the efficiency improvements coming from AI are different materially different between the different businesses that you run. Michael O’Grady: Sure. So, Betsy, what I would say what's so exciting about this is it is impacting all of the areas of the company. And just to give you, you know, some idea because you know, how it's being utilized, is different, and and maybe the results yes, they may vary in different groups, but the applicability is basically across the board. So, you you know, we talked about operations there. I talked a little bit about know, what we're doing in the private capital space. So that gives you some idea, but think about so many processes that are involved in operations. It clearly lends itself there. And know, arguably a very high level. That you'll get. I'm gonna do another easy one, which is within technology. You know, utilizing GitHub and other types of, of AI, we're seeing you know, I'm gonna call it about 20% improvement in the the programming, the engineering part of technology there. And I think, again, still in the the earlier days of that. But as you move to the businesses, take asset management. That's an area where a lot of the activity can be automated. Think about what we're even doing here with you know, investor calls. We're already utilizing AI in our fixed income muni, area within asset management to essentially you know, summarize and analyze all the transcripts for all of the investor calls, where they have investments. And this is, you know, in the hundreds of calls that normally you know, an analyst has to listen to calls, summarize them, and and most importantly, take away the key points. Well, so much of that now has been automated, so it saves dramatic you know, time, but also provides better insights. Within wealth management, this is making, at this point, our advisers much better. And much more efficient. Because in advance well, first of all, in thinking about where the opportunities might be and prospecting, You know, AI is enabling that process to happen in such a way that it's highlighting, you know, where the best prospects are. But then from there, it's how to prepare for that. And so it can go in and it can pull the information both from our internal databases, but also what's publicly available about a particular, prospect and do so much more quickly than someone could do you know, say, on their own to be able to do that. And when they have a question, you know, once again, we're working on the ability for our advisers essentially to be able to tap in to proprietary databases that we have, like the Northern Trust Institute, to be able to immediately answer those questions. So it makes them better at serving the client. On that front. You think about risk, you know, again, and whether it's AML, KYC, whether it's fraud detection, these are all things right now where we have you know, hundreds of people who do this activity, and we'll still have plenty of doing, but they'll be using better tools to be able to do it better. And faster. So know, cuts across I I would say, the entire company. And I think at this point, we're still in the early days. Betsy Graseck: Okay. And then just to follow-up on the technology impacts on the business. Could you give us an update on how you're thinking about the outlook for how you would utilize a stablecoin? Do you your own? Do you get involved with the industry consortium? As we move towards $24.07 trading? Having a stable coin cash leg is gonna be critical. So I wanna understand how you're thinking about that dynamic as we roll forward here. Thank you. Michael O’Grady: Sure. So I think that what's happening in the digital asset space there there are four key drivers from my perspective. Innovation, regulation, client demand, and then interoperability. And on the innovation front, to your point, you know, whether it's stablecoins or tokenizations, there's so many things that are coming out and the technology is getting much better, much more scalable. Things like blockchain becoming more scalable. Going from private blockchains to public blockchain. So the innovation front, I think, is you know, probably leading. What's been lagging is more on the regulation front. And, obviously, now with the the the Genius Act, this is going to change. And that is going to I think, significantly facilitate further demand on the client front. And then you get to the idea of interoperability. Which the point on that is you know, our clients don't wanna have to, I'll say, operate in two worlds. They wanna be able to utilize whether it's stable coins or a tokenized asset, with their other assets. And so we're just making sure that our platform can do both of them. Now specifically to Stablecoin, know, I would say stablecoin will, you know, find the areas that have the greatest friction. And a lot of that, as you know right now, is, you know, probably you know, cross border or outside The US. And I I'll say we'll we'll have the ability to you know, utilize stablecoin, but we're not planning to issue a Stablecoin on that front. Where we're more focused is on tokenization. Because we believe that that will impact multiple asset classes. And a good place to start would just be around money market funds. Thinking about a tokenized money market fund, know, that's an area where I'd say we would look to be an issuer of a tokenized money market fund. So that gives you some idea of the the direction that we see. Betsy Graseck: Thank you so much. And, yeah, tokenized money market fund is a type of stable coin cash like too. Michael O’Grady: Exactly. Betsy Graseck: Appreciate that. Thank you. Operator: We will take our next question from Glenn Schorr with Evercore. Glenn Schorr: Hi, there. Michael O’Grady: Hi. Glenn Schorr: Hello. Small but interesting one, re regarding the deposit rate paid on saving money market. And other deposits. So so after going down for four quarters straight because rates have been coming down it was actually up six basis points, and we had a cut in the quarter, I think. So it's just a it's interesting. I'm more thinking about the go forward. But what what caused the the that saving in money market rate to go up in a quarter when there's a rate cut. And I know you gave us the the your thoughts on next year, so I appreciate that. I'm just curious what's going on on on these deposits. David W. Fox: Yeah. Well, deposits are also multicurrency. They're not just US dollar. Right? So may be some some differences there. You might wanna take a look at, but we could certainly get more granular with you. But on the top of it, I can't I can't say in particular. I'd have to look at each currency in each particular investment that we made to to kind of give you that read. Glenn Schorr: No worries. We can move on to the the bigger question. You've been talking about some of the initiatives that you've picked up pace on on private market side across wealth, asset management, and asset servicing. You dangled a little bit with your comment on the fifty South Feeder Fund. I would love to know a little bit more about what that is, what's on it, and, what's in it. If it's a fund to fund structure, things like that. And then maybe you could also just complete the thought on what's going on in terms of the asset servicing side as well. Thanks. Michael O’Grady: Sure, Glenn. So the the feeder fund, basically, as you know, 50 South, historically, was focused on fund to fund. And that business has performed very well and has been I'll say, a perfect fit for our wealth clients. And continues to be. And they've continued to expand their offering, both for our wealth clients, but then for other wealth platforms and and institutionally as well. Specifically, what happened in the in the third quarter is they have the relationships and have done the diligence and everything on hundreds of managers. And as a part of that, we're now using those relationships to be able to have specific single fund offerings for our wealth clients. And this enables us, I'll say, to pick, like, the best of the best, funds, where access is all often an issue. But through our relationship and by having, you know, the diligence done, we're able to to offer it to our wealth clients. And so this was one of the, I'll say, you know, high performing, venture funds that, that was offered to wealth clients in the quarter. And then to you said to the to the broader picture there, say, just first of on the on the wealth front in 50 South, once again, an area of a lot of innovation. And, I think you know, coming our direction when you think about evergreen funds and other things that just have greater liquidity, that only enables our clients to get more comfortable, I'll say, investing in, alternatives. And then on the asset servicing side, you know, there, you know, not only is it the work that we're doing with as I mentioned, hedge fund hedge funds, but then also private capital administration, for other private equity funds, private capital funds. But then specifically, around the vehicles, the LTAP and the LTIP vehicles. And I would say that, is a similar you know, trend phenomena, if you will, in the European markets where there's, the introduction of more vehicles that have greater liquidity. So that it allows for greater distribution and expansion of alternatives. So we think it's still kind of earlier days for those vehicles as well. But whether it's you know, The UK vehicle or the Luxembourg vehicle, we're we're well positioned to be able to provide those, capabilities for the asset managers. Glenn Schorr: Okay. Thanks very much. Michael O’Grady: Sure. Operator: We will take our next question from Steven Alexopoulos with TD Cowen. Steven Alexopoulos: Good morning everyone. Michael O’Grady: Morning. Steven Alexopoulos: I wanted to start so I know on the pretax margin, and I know it bounces around quite a bit. But when you look at the revenue trajectory, expense trajectory, right, the guidance you're giving for 4Q and full year, you're bending the cost curve down. Do you guys think you could remain fairly comfortably above that 30% medium term target moving forward? And even if the Fed's cutting rates? Michael O’Grady: So to your point, Steve, that there there's certainly the impact of of markets and and rates. And levels of liquidity in the marketplace. So there's lots of factors out there. But our view is that the financial model that we have definitely, should operate in that 30 plus percent pretax margin on an ongoing basis. So you have a quarter like this where you know, we we got there somewhat because of the environment, but also because of the provision release. That bumped it up a little bit. All the same, the the longer term trend longer term meaning over the last you know, couple years, has been an improvement in the pretax margin. So when you look at the year to date margin, it's closer to kind of 29%. And, we expect to move into to 30%. And then even though we're in that 30%, it doesn't mean that we're not still trying to drive positive operating leverage. We very much are. And so, yes, the the objective is to stay above that 30%. Steven Alexopoulos: Got it. That's helpful. And and then going back to all the commentary on AI and productivity gains, terms of the financial impact, so far, is this material Like, is this helping you this year keep expenses below 5%? Or is 99% of that benefit still to comp? Michael O’Grady: Yeah. So it's a great question. Because it's it's what I call capture. So, you know, we have these efficiencies, and everybody's utilizing Copilot and other tools to become more efficient. How do we make sure that we're capturing that? And to your to your point, know, it's it's difficult if somebody's, I'll say, you know, 3% more efficient as a result of it, well, how does that actually affect your your financials and and your need for resources? And so that's why you know, we've also been, you know, very disciplined around head count, around span of control, around how we're organized. So that it's a way to to capture that. So that you know, as you go forward and as you add new business and you grow, you know, you're not adding more know, people, in order to service that, but instead you're capturing the efficiencies that you're getting from utilizing those tools. Some areas are easier to do than others. So know, we talked about GitHub and with the programmers. Like, those are the areas, Steve, where I'd say yes. We're getting savings now. But to your point, it it's still in the earlier days of capturing the the efficiencies that you're gonna get. Steven Alexopoulos: Got it. That's great color. Thanks for taking my questions. Michael O’Grady: Of course. Operator: We will take our next question from David Charles Smith with Truist Securities. David Charles Smith: Good morning. Michael O’Grady: Good morning. David Charles Smith: Is there any more color you can offer on the relative strength in FX trading and securities commissions and what you're what you've been doing to drive this? You mentioned some initiatives to drive growth here. I wonder if you could just kind of help us frame how much of the strength you feel like is a result of share gains and other things that are more result of things that were in your control, as opposed to just simply benefiting from broader market volumes being healthy. Thank you. Sure. Michael O’Grady: Sure. So capital markets our capital markets business has performed extremely well. And it's a combination of both execution of their strategy and then also the favorable market conditions. But on on the strategy parts specifically, what the the team has been doing there over the last several years is building out a more durable capital markets business. So what I mean by that is yes, know, historically, the business has performed well when the the markets and volatility are strong, but then you know, has gone down when it's not there. What they've tried to do is turn it into more of a service, if you will, in the activities that they, that they pursue. And so what that means, for example, on the trading side, on the brokerage side, is being the outsource provider of trading for the asset manager. So instead of some of our asset manager clients having their own trading desk, they've outsourced that to us. And as a result, that's when I talk about adding a 100 clients A number of those clients are where they've outsourced, the trading to us. And that produces a more kind of recurring predictable stream of know, brokerage commissions as a result of that. On the FX front, we're you know, we've always, in that business, basically enabled our clients to hedge positions that they want in one currency or another. But it's in the past, done just on a transactional basis, where what we've, done over the last few years, several years, is to turn that more into a service again by providing currency management as a service where it becomes automated and it's just done over time. As opposed to, you know, a transactional business. So that has also built up over time. And then also from a liquidity perspective, we've expanded our liquidity capabilities know, certainly, we talk all the time about, deposits and and, money market funds and being able to be on that side of it. The other side is at times, they need over, overnight liquidity the other direction. So not only securities lending, but also, thick repo has been an an area where we've added capabilities. To be able to serve those clients, but then create a business that's, both, I would say, diversified from the other activities we have, but also attractive financial profile. David Charles Smith: Got it. Thank you. Michael O’Grady: Sure. Operator: We will take our next question from Gerard Cassidy with RBC. Gerard Cassidy: Good morning, Dave. Good morning, Mike. Morning. Kinda different questions for you guys. I always like to get the perspective from folks like you because you know, I have a big exposure to this area. There's been a lot of talk this quarter about loans to nondepository financial institutions, and, of course, your in the top 20 banks. You're at the lowest. You've got the least amount of exposure. Can you give us some color on what you know, I'm not asking you to talk about other banks, but these categories that are within this NDFI whether it's private equity or mortgage, credit intermediaries, etcetera, What how do you guys look at that NDFI category? David W. Fox: Yeah. That's a good question, and I'll I'll start, and then maybe Mike can talk about the broader, industry, issues. There was a reclassification in the reporting methodology implemented by the FDIC that moved some loans into other categories, that were into the n FDI category. So when you look at Northern you know, the vast majority of what we do are subscription lines to private equity firms. And those are lines of credit backed by the LP's capital commitments. And on top of that, there's borrowing bases that reflect uncalled capital as well. And so that is not the same thing as lending directly to a you know, a private credit fund. Right? There's also sometimes loans to management companies that we do. But in that case, you've got the the management fees that secure your loan. Right? And then thirdly, on the wealth side, we have, obviously, some NAV loans that we do. The advance rates are extremely low. Like, I wanna say around 30%. Those could have some private credit funds in them, but they're highly across their entire private equity portfolios. We don't lend against one particular fund. So that that's sort of how Northern has looked at that business. Individually. I'll let Mike talk broader about the industry in terms of what's what's going on. But we don't have we don't have any of the similarities as you pointed out to what's going on with everybody else. Gerard Cassidy: Correct. No. I I would agree, Jared. The and then as a follow-up question, the IMF has come out as as well as the Bank of England with reports in the last couple of weeks citing I hate to use the word bubble, but really inflated asset prices. And they point out then we've gotta be careful of some maybe serious corrections. Obviously, when you look at your wealth management business, it's not all equities. You've got fixed income and cash in there. Can you share with us how you guys approach you know, managing wealth management should a big correction come or or or just your view on how you approach it with your clients. Michael O’Grady: Sure. So to your point, you can never you know, say, time the markets or predict the markets. There's gonna be volatility. Valuation is know, one one person may say it's a bubble, another person say, you know, there's still tremendous upside, you know, to that. And as a result True. That's why with our wealth clients, we take a different approach which is what we call goals driven wealth management. And that is it's not only an approach, but it's also a technology. It's a a platform that is utilized with those clients where upfront, we go through the process of really determining what their needs are going to be. Not just in the next year, but literally over their lifetimes and often cases then, you know, into next generations. And as a result of that, we can then back into what is the right asset allocation. As a part of that. And one of the most important components of it, Gerard, then is knowing that there will be drawdowns in the equity markets over time, how do you make sure that you have the right reserve capacity in essentially risk off assets? Such that you, you know, do not get into a liquidity situation, not get into a situation where you don't have the the funds necessary for achieving what your objectives are. Frankly, at that point, it's a lot easier also to have the conversation with the client. And make sure that, you know, they're they're able to digest what's happening in a volatile market and, you know, be able to stay focused on what their long term goals are. And not, I'll say, overreact which, again, the empirical you know, research would tell you that, you know, overreacting to market volatility is not the best long term strategy. Gerard Cassidy: Great. Thank you for the insights, Mike. Michael O’Grady: Sure. Operator: And there are no further questions in the queue at this time. I will now turn the conference back over to Jennifer Childe for closing remarks. Jennifer Childe: Thanks, operator, and thanks, everyone, for joining us today. We look forward to speaking with you again soon. Operator: This concludes today's call. Thank you for your participation. You may now disconnect.
Operator: Good morning, and welcome to the Bridgewater Bancshares, Inc. 2025 Third Quarter Earnings Results Call. My name is Megan, and I will be your conference operator today. After Bridgewater's opening remarks, there will be a question and answer session. Please note that today's call is being recorded. At this time, I would like to introduce Justin Horstman, Vice President of Investor Relations, to begin the conference call. Please go ahead. Justin Horstman: Thank you, Megan, and good morning, everyone. Joining me on today's call are Jerry Baack, Chairman and Chief Executive Officer; Joseph M. Chybowski, President and Chief Financial Officer; Nicholas L. Place, Chief Banking Officer; Katie Morell, Chief Credit Officer; and Jeffrey D. Shellberg, Deputy Chief Credit Officer. In just a few moments, we will provide an overview of our 2025 third quarter financial results. We will be referencing a slide presentation that is available on the Investor Relations section of Bridgewater Bancshares, Inc.'s website investors.bridgewaterbankmn.com. Following our opening remarks, we will open the call for questions. During today's presentation, we may make projections or other forward-looking statements regarding future events or the future financial performance of the company. We caution that such statements are predictions and that actual results may differ materially. Please see the forward-looking statement disclosure in the slide presentation and our 2025 third quarter earnings release for more information about risks and uncertainties which may affect us. The information we will provide today is as of and for the quarter ended September 30, 2025, and we undertake no duty to update the information. We may also disclose non-GAAP financial measures during this call. We believe certain non-GAAP financial measures, in addition to the related GAAP measures, provide meaningful information to investors to help them understand the company's operating performance and trends, and to facilitate comparisons with the performance of our peers. We caution that these disclosures should not be viewed as a substitute for operating results determined in accordance with GAAP. Please see our slide presentation and 2025 third quarter earnings release for reconciliations of non-GAAP disclosures to the comparable GAAP measures. I would now like to turn the call over to Bridgewater's Chairman and CEO, Jerry Baack. Jerry Baack: Thank you, Justin, and thank you, everyone, for joining us this morning. In the third quarter, our team continued to demonstrate our ability to take market share by growing deposits and generating loans, which resulted in steady net interest income growth. We saw strong core deposit growth with balances up 11.5% annualized. This continues to be a testament to our talented banking teams and the relationship model we prioritize. The relatively steady pace of core deposit growth we have seen over the past year has positioned us to be more aggressive on the loan front as our loan-to-deposit ratio remains near the lower end of our target range. We generated strong loan growth of 6.6% annualized during the third quarter as we continue to see growth across multiple asset classes, including the affordable housing space. This helped drive a $1.6 million increase in net interest income during the quarter. We also saw one basis point of net interest margin expansion to 2.63%. Joe will talk more about the margin in a minute, but we are optimistic about our ability to see more meaningful expansion in the coming quarters. Asset quality continues to be a strength as non-performing assets remained at consistently low levels and net charge-offs were just 0.03% of loans. We continue to see some modest risk rating migration within the portfolio, which our Chief Credit Officer, Katie Morell, will touch on shortly, but we continue to feel good about the portfolio overall. Lastly, we've developed a reputation for consistently building tangible book value, which you can see on Slide four. As tangible book value per share increased 20% annualized in the third quarter, and is up 14% annualized year to date. This continues to be how we drive shareholder value. Before I turn it over to Joe, I want to share an update regarding the successful completion of two significant initiatives in the third quarter: the launch of our new retail and small business online banking platform in July, and the systems conversion of our acquisition of First Minnetonka City Bank in September. The new online banking platform gives our clients an updated, robust platform to enhance the way they manage their finances at Bridgewater. In addition, it provides our smaller entrepreneurial clients with a platform designed specifically for them. The team worked tirelessly to ensure smooth migrations initially for Bridgewater clients and then convert to our newly acquired clients a few months later. The success of both conversions reinforced my confidence that we have the right team to take advantage of future M&A opportunities as they become available. In August, we also announced some transitions to our strategic leadership team. Most notably, Mary Jane Crocker, our Chief Strategy Officer, and Jeffrey D. Shellberg, our Chief Credit Officer, will both be retiring in 2026. Mary Jane will join our Board of Directors next year while Jeff will continue to work alongside Katie in a Deputy Chief Credit role until his retirement, ensuring Bridgewater's credit culture remains consistent. Jeff and Mary Jane have been with me at Bridgewater since founding the bank in 2005. I'm so appreciative of their contributions and quite simply, Bridgewater would not be what it is without them. By executing the succession plan we have been working on for a few years, I am confident in the leadership of the bank going forward. We elevated Katie Morell to Chief Credit Officer, Jessica Stetskull to the new role of Chief Experience Officer, and Laura Aspisov to her role of Chief Administrative Officer. All three are talented individuals with strong work ethics bringing a diverse set of skills. I am thrilled that we have the internal talent to continue to drive our unconventional culture and continue our growth trajectory. Overall, I believe Bridgewater is well-positioned as we head into the fourth quarter and in 2026. Our outlook for loan and deposit growth remains very strong as we continue to see opportunities from M&A disruption in the Twin Cities. Our goal is to grow to become a $10 billion bank by 2030, and we believe we are on track to get there. Our balance sheet is well-positioned for meaningful net interest margin expansion in this rate-down environment. With the systems conversions behind us, we look for expense growth to return to more normalized levels in line with asset growth. And the Twin Cities market trends remain favorable, which will hopefully support continued strong asset quality. With that, I will turn it over to Joe. Joseph M. Chybowski: Thank you, Jerry. Slide five highlights another quarter of strong net interest income growth, driven by annualized average earning asset growth of 16%, and one basis point of net interest margin expansion to 2.63%. As we mentioned last quarter, we were not expecting much margin expansion in the third quarter as we anticipated the higher asset yield repricing to be mostly offset by a couple of specific headwinds, which is what we saw. The most notable headwind was the $80 million of subordinated debt at 7.625% we issued in June, which we used to redeem $50 million of outstanding subordinated debt at 5.25%. This created a six basis point net drag on margin in the third quarter. We also continued to see the ongoing benefit of the purchase accounting accretion diminish as it contributed just four basis points to margin during the quarter. In addition, we had higher than expected average cash balances in the third quarter due to our strong deposit growth. While this put added pressure on the margin, we view it as a good thing as it created more net interest income dollars and gives us more funding to deploy into future loan growth. Looking ahead, we are well-positioned for more meaningful net interest margin expansion in the fourth quarter and into 2026, especially given the full quarter impact of the September rate cut and the potential for additional cuts. In fact, we believe we have a path to get to a 3% margin by early 2027. Combining our margin expansion with the loan growth outlook that Nick will talk about in a few minutes, we are in a great position to continue driving net interest income growth from here. Turning to slide six, our loan yields continue to reprice higher even in the current environment. Loan yields increased five basis points during the third quarter, which was a slower pace than the second quarter as we saw less new originations and payoffs, resulting in less overall churn of the portfolio. With $68 million of fixed rate loans scheduled to mature over the next twelve months, at a weighted average yield of 5.69%, and another $140 million of adjustable rate loans repricing or maturing at 3.85%, we still have more loan repricing upside ahead of us as new originations in the third quarter were in the mid-6s. We would expect this repricing to be a tailwind to margin going forward, especially as the portfolio continues to turn over. Overall, total earning asset yields increased seven basis points to 5.63% as we also saw an increase in securities yields during the quarter. The cost of total deposits was 3.19%, continuing the stabilization trend we have seen throughout 2025. However, we should see deposit costs decline in the fourth quarter as we have $1.7 billion of funding tied to short-term rates, including $1.4 billion of immediately adjustable deposits, that we repriced lower immediately following the recent rate cut in mid-September. Turning to Slide seven, we continue to see strong revenue growth trends, driven by the momentum in net interest income. Fee income has also been a contributing component to revenue growth in recent quarters due to increased swap fee income and investment advisory fees. We did see fee income decline in the third quarter, however, due to the lack of swap fee income. We mentioned last quarter that swap fees would continue to be part of the revenue mix going forward, and we expect that to continue to be the case. However, this just highlights the lumpiness of these fees. Over the past five quarters, swap fees have averaged about $300,000 per quarter, but have ranged from $0 to nearly $1 million. I can say that we expect a rebound in swap fees in the fourth quarter as we have already booked some in October. On slide eight, as expected, the higher than usual increase in noninterest expenses we have seen year to date continued in the third quarter as we have had some redundant expenses this year leading up to the core conversion. We added 17 full-time equivalent employees during the quarter, which drove an increase in salary expense. Marketing expenses were also elevated during the quarter due to advertising directly related to our focus on bringing talent and clients from the Old National and Bremer disruption, which have been bearing fruit. We feel much of the higher expenses in the third quarter were really opportunistic in nature as we continue to position the bank for ongoing growth. Now that the systems conversion is behind us, we would expect expenses to return to growing more in line with asset growth over time. With that, I'll turn it over to Nick. Nicholas L. Place: Thanks, Joe. Slide nine highlights the strong core deposit momentum we have seen over the past year, which continued in the third quarter as core deposits grew 11.5% annualized and are now up 7.4% annualized year to date. Core deposits are the lifeblood of what we do here. This more consistent growth we have seen recently provides us the ability to grow the bank in a more profitable way. You can see it from a deposit mix shift standpoint. During the third quarter, non-interest-bearing deposits increased approximately $35 million while brokered deposits declined by about the same amount. Overall, we continue to feel good about the core deposit pipeline, especially given opportunities out there related to the local M&A disruption. Turning to Slide 10, as we mentioned last quarter, we expected loan growth to be in the mid to high single digits in the second half of the year, after outperforming these expectations in the first half. And this is what we saw in the third quarter as loan balances increased 6.6% annualized and are now up 12% annualized year to date. Generating loan growth has never been a problem for Bridgewater. With more consistent core deposit growth, loan pipelines that remain at three-year highs, opportunities from M&A disruption, and a 98% loan-to-deposit ratio that is in the lower half of our target range, we are in a good position to continue being aggressive on the loan front. We also had several deals we expected to close in the third quarter that were pushed out a quarter. As a result, we should have a bit of a head start here in the fourth quarter. Overall, we continue to expect near-term loan growth to be in the mid to high single-digit range. This will, of course, be dependent on the ongoing pace of core deposit growth, as well as loan payoffs, which can be difficult to predict. Turning to slide 11, you can see our loan origination activity, which was down a bit in the third quarter, primarily due to some deal closings sliding from the third quarter to the fourth quarter, as I mentioned earlier. We would expect this to pick back up in the fourth quarter as our pipeline remains at a three-year high. Payoffs have also trended a bit lower recently. While payoffs are a drag on loan growth, these recycled dollars will allow us to continue to fund new loan originations at attractive yields. Turning to Slide 12, the loan growth we saw in the third quarter was spread across several key asset classes, including construction, multifamily, non-owner-occupied CRE, and even one to four family. As mentioned last quarter, construction was an area where we would be seeing more balance sheet growth following an increase in new construction projects in 2024. These projects are now starting to fund, driving an increase in balances in the third quarter. We would expect this to continue being a catalyst for loan growth throughout 2026. While it isn't called out in its own section of the portfolio, we continue to have success in our national affordable housing vertical as this drove much of the multifamily growth during the quarter. With that, I'll turn it over to Katie. Katie Morell: Thanks, Nick. Slide 13 provides a closer look at our multifamily and office exposure. We continue to see positive multifamily trends in the Twin Cities. This includes lower vacancy rates, which recently dropped below 6%, strong absorption, and reduced use of concessions, all of which suggest a favorable outlook for higher levels of net operating income. We continue to expand our affordable business both locally and on a national basis. The portfolio now totals $611 million, with $467 million in multifamily, while the rest is in land, construction, or non-real estate. The total portfolio has grown at a 27% annualized pace year to date. We feel good about this portfolio from a credit standpoint, as we continue to work with experienced developers across the country and because of the shortage of affordable housing nationwide. Our non-owner-occupied CRE office exposure remains limited at just 5% of total loans. We continue to work through the one Central Business District office loan that is rated substandard and on non-accrual, but overall, we feel good about our office portfolio. Turning to Slide 14, our overall credit profile remains strong. Our reserve level of 1.34% is conservative compared to peers, and our nonperforming assets held steady at just 0.19% of total assets, well below peer levels. Net charge-offs also remained very low at 0.03% of average loans. The minimal amount of charge-offs we had during the quarter were related to the legacy First Minnetonka City Bank portfolio. Turning to slide 15, our classified loans remain at relatively low levels. We did have one multifamily loan that migrated from special mention to substandard during the quarter. This was the loan that we moved to special mention last quarter while it was under a purchase agreement. Unfortunately, that purchase agreement was canceled, and we decided to move the loan to substandard. We actively monitor new sales prospects for the property. The borrower remains engaged with the bank and is committed to moving the asset quickly. Importantly, we do not see any systemic credit issues as our overall portfolio is performing well and the multifamily sector continues to show favorable trends. I'll now turn it back over to Joe. Joseph M. Chybowski: Thanks, Katie. Slide 16 highlights our capital ratios, which remained relatively stable in the third quarter, with our CET1 ratio increasing slightly from 9.03% to 9.08%. We did not repurchase any shares during the quarter given our strong organic growth pipeline and where the stock was trading. As of quarter end, we still have $13.1 million remaining under our current share repurchase authorization. In the near term, we expect capital levels to hold relatively stable given retained earnings and our stronger growth outlook. Turning to slide 17, I'll recap our near-term expectations. Given our strong loan pipelines and opportunities we continue to see in the market, we believe we can continue to generate mid to high single-digit loan growth in the near term. Core deposit growth will continue to be a governor here, but we feel we are in a good spot to be offensive-minded, as our target loan-to-deposit ratio remains 95% to 105%. While net interest margin increased just one basis point in the third quarter, we feel bullish about more meaningful margin expansion over the next several quarters. We believe we have a path to get back to a 3% margin by early 2027, driven both by loan yields repricing higher and deposit costs declining, with additional Fed rate cuts. At the end of the day, our focus is on driving net interest income growth, which will come from both the margin expansion and our stronger loan growth outlook. Non-interest expense growth has been higher than what we have typically seen due to the later systems conversion, but now that that is behind us, we expect to return to growing expenses relatively in line with asset growth over time. We also feel we are well-reserved at current levels and would expect provision to remain dependent on the pace of loan growth and the overall asset quality of the portfolio. I'll now turn it back to Jerry. Jerry Baack: Thanks, Joe. Finishing on Slide 18, I want to provide a quick update on our 2025 strategic priorities. As we suggested earlier, we have clearly returned to a more normalized level of profitable growth in 2025, with 12% annualized loan growth and 7% annualized core deposit growth year to date. With a strong marketing campaign and talented team of bankers, we continue to take market share in the Twin Cities, both on the loan and deposit fronts. Our brand is stronger than ever. We continue to build strong relationships and we are taking advantage of the ongoing M&A disruption. Our technology and operations team successfully rolled out our new retail and small business online banking platform, while also completing the systems conversion of our First Minnetonka City Bank acquisition. As we look forward, we do plan to close one of the two branches we acquired from First Minnetonka City Bank. This will provide some additional efficiencies as we have branch coverage in the area. While this brings us to eight branches, we will be bumping back up to nine when we open a De Novo branch, expanding our footprint into the East Metro of the Twin Cities in early 2026. With that, we'll open it up for questions. Operator: The first question comes from the line of Jeffrey Allen Rulis with D.A. Davidson. Jeffrey Allen Rulis: Jeff, are you there? We can't hear you. Jeffrey Allen Rulis: Hi. Can you hear me now? Joseph M. Chybowski: There you go. Hello? Jeffrey Allen Rulis: Yep. We can hear you. Okay. Sorry about that. On to the margin path that you outlined towards 3%. Wanted to see if appreciate the visibility there, but I guess over the course of a year plus, you expect that improvement to be fairly measured? Or is ramp later? Any sense, I know there's a lot of inputs there with rates and such, but any idea how that kind of that path towards there transitions? Joseph M. Chybowski: Hey, Jeff. This is Joe. Yeah, I think generally it's fairly steady. I mean, it's two basis to three basis points a month. I will say we are assuming those cuts happen just two of them happened in October and in December. So the deposit piece might be more front-loaded, but the asset side as we lay out our portfolio, roughly $750 million of fixed and adjustable rolling off kind of in the mid-5s. So I think that'll happen pretty steady throughout 2026. But, yeah, we think it's very much achievable with just two cuts assumed early on. Jeffrey Allen Rulis: Got it. Thanks. And then maybe rate related and turning towards the credit side and maybe for Katie or Jeff, just on kind of a clumsy question, but I would assume rate cuts would offer some relief to your borrowers. Have you run any analysis of the percent of borrowers sort of a tangible benefit of 50 basis points of cuts or more? I don't know if there's a or come in the form of upgrades with cash flow relief. Anything you could quantify on the expected rate cuts and what that might mean for the health of the loan portfolio? Katie Morell: You know, I don't think we have anything quantified to share, but, I mean, we are proactively getting ahead of any loans with repricing risk. We feel like that's getting materially better since the last eighteen to twenty-four months. So certainly any further reduction in rates will only benefit those loans that are repricing and currently at a fixed rate over the next year. And a lot of those also with the repricing risk we potentially had action plans already in place with borrowers due to covenant failures or the pending reprice. So we feel really good about having gotten ahead of any from a credit risk standpoint that have repricing risk. Jeffrey Allen Rulis: Appreciate it. Yes, probably a little early, but that's helpful. And maybe just one last one, just sort of a housekeeping. Trying to map the merger costs, was that truly in other? I know you kind of broke out in Slide eight that the cost. I was just trying to mesh that with the press release. Anything in professional and consulting? Or was it truly absent out of comp, out of professional consulting? Truly other? Joseph M. Chybowski: Yes. The slide in that we lay out noninterest expense pulls it out and just highlights it. So those costs that were specifically related to the merger itself. So I think when we talk about this quarter, kind of the increase in expenses was more salaries related ordinary course marketing given our offensive-minded efforts around ONB and Bremer. Advertising specifically and then just general consulting fees. I don't know if that's answering your question. Jeffrey Allen Rulis: Yes. I guess to go forward, messaging is that obviously we think the merger costs kind of go away and you're talking about the core costs even coming down or normalizing with the pace of growth. Joseph M. Chybowski: That's essentially the message. Yes, definitely. I think this was kind of the last quarter where we had that redundancy in expenses. But I think as we look forward into 4Q and then into 2026, we view expenses growing similar to how they did pre-deal where it's assets and expenses growing in line. You can see that in the core kind of NIE to average assets. It's been steady at one and forty-three the last couple of quarters. We envision we grow at a mid to high single-digit pace next year that expenses would grow in line. Jeffrey Allen Rulis: Great. Thank you. Operator: The next question comes from the line of Brendan Nosal with Hovde Group. Please go ahead. Brendan Nosal: Hey, good morning, folks. Thanks for taking the question. Hope you're doing well. Just to circle back to kind of the margin outlook. We really appreciate you guys putting a stake in the ground a little further out than you typically do. Just kind of on the moving pieces of that 3% margin, get the rate cut commentary out of the Fed that's underpinning that. Can you just speak to kind of assumptions for what the belly of the yield curve does and how that impacts back book lowering pricing? And then if we look at that roughly 40 basis points of margin improvement that you're kind of calling for, can you just bifurcate that between relief on the funding side and yield pickup on the loan side? Joseph M. Chybowski: Yes, Brendan, this is Joe. You know, I think we envision kind of the belly of the curve really staying where it is. Maybe some slight decline. But I think there I think slope as we've always said is our friend certainly. So if we kind of have a terminal fed funds rate in the mid-3s and the five ten-year part of the curve where it's at. I mean, that's what our assumption is. Now granted you get more cuts or you get some flattening or steepening, I think obviously those have impacts too. But nonetheless, I think slope is certainly our friend. On the other side in terms of bifurcating loans and deposits, I just think the comment is similar to earlier where there's continued repricing throughout 2026 on the asset side. Both fixed and adjustable rate loans. Also think just given the pickup in origination activity, the churn of the portfolio certainly buoys or increases earning asset yields specifically in the loan book. And then the deposit portfolio, I think is most sensitive that $1 billion that we highlight will obviously benefit with those first two cuts that we're assuming here in October and December. And then the rest of the portfolio we continue to rationalize lower in a different rate environment. So I think it's both sides coordinated effort, I think very achievable as we think about it. Throughout 'twenty six. Like I said, it's two to three basis points a month. Considering the dynamics of composition of the balance sheet, for putting on loans low to mid-6s. And kind of incremental additional new funding in the low threes. We think that spread in itself is very much accretive to the existing margin. So all of that coupled together is how we can feel confident about that path to early twenty twenty seven. Brendan Nosal: Yes. Okay. Okay. Thanks for the color there. That makes sense. Maybe just kind of switching gears to the affordable housing piece. Just kind of curious what the comfort level is and kind of growing the national piece of that book. I think the national piece is only like 4% of loans today maybe that are kind of out of market at this point. Just kind of curious how high you're comfortable taking this over time? Nicholas L. Place: Brendan, this is Nick. Yeah. This has been maybe somewhat recent that we've been sharing our activity level. Within this space, but it's certainly not a new business line for us. It's something that we've been involved with going back to probably 2007. So we have a deep history in working knowledge within the space. So I think that is sort of a foundational piece that gives us a lot of comfort in understanding not only the transactions that we get involved with, but vetting through the borrowers that we're meeting with that are new to us as we've expanded our reach beyond, you know, the Minneapolis St. Paul market. So the quality of borrower that we've been focusing on, is really top tier and we feel really good about the pieces of that we're getting involved with on those transactions. Relatively short term in nature, refinancing stabilized properties as they're coming out of their compliance period. Or providing sort of ancillary pieces of debt that are short term that turn pretty quick. So overall, we feel really good about how we're positioned in that space. We feel like it's an underserved market that we're well-positioned to be able to provide our banking services to and grow on both sides of the balance sheet. Certainly, the loan side is maybe what we shared within the prepared remarks, but that has been a really good source of growing core deposits as well. As those client relationships are eager for a relationship bank that understands their business and are open to moving their deposit balances to us even if they are based outside of the Twin Cities. So it certainly is a relationship game for us. And we're not looking for transactional business there. So for a lot of those reasons, we feel good about where we're positioned in that space and how we see it providing a growth path for us in the future. Brendan Nosal: Okay. Well, thank you for your thoughts, Nick, I appreciate you guys taking the questions. Operator: Next question comes from the line of Nathan Race with Piper Sandler. Nathan Race: Good morning, everyone. I appreciate taking the questions. Just going back to the loan growth outlook, I appreciate your term expectations haven't really changed, but it seems like you're guys are being pretty offensive in terms of some of the hires that you completed in the quarter and you're maybe there's more to come on that point. So just curious if we can expect any step change function in terms of kind of the growth trajectory into next year. Is it possible we can get back to kind of a stronger pace of growth that we saw both in terms of loans and deposits prior to the rate hiking cycle starting in 2022? Nicholas L. Place: Yes. Hey, Nate. This is Nick. I mean, feel really good about where we're at. From a loan growth outlook perspective. I think one thing that we're mindful of is and I think we made a lot of progress in the last eighteen months about aligning our loan growth to be more consistent with our deposit growth, specifically on the core deposit front. So I think that that's a strategy that trying to employ as we think about our future loan growth. That does provide us with a more profitable path on a go-forward basis. So I think it's certainly that engine is there and the potential is there to grow faster than that. We're just trying to be both selective on sort of the client relationship front and the profitability front as we think about our loan growth to ensure that we're not putting ourselves in a loan or deposit position that forces us to really pull back hard on growth in a quarter or two just as we if we outperformed our expectations. So we feel good about a lot of the verticals that we're in, the disruption that we talked about, within the Twin Cities, is real and you know, we've been able to have great conversations with both clients that are impacted and production staff. And I think those conversations will continue here over the next year as clients are transitioned over and as personnel find their new normal at the new organization. And, we're expecting to be beneficiaries on both of those fronts. So that certainly something that could impact the amount of our loan growth as we bring on production staff hopefully over the next year or so. Nathan Race: Got it. That's really helpful. And Nick, maybe just touch on where you expect to see these hires impact? I mean, are these more C and I related? Or color in terms of potential growth impacts that we can see across the balance sheet? Nicholas L. Place: Yes. I mean, that's certainly something that we've had as a strategic priority to improve our expertise and depth of knowledge in that space. So yeah, there's conversations within that front. But we've always been opportunistic in our hiring and that's really across the bank. Whether that's production staff or operations folks compliance and BSA, I mean, there's a lot of really talented banking personnel here in the Twin Cities and we're open to having conversations with all of them. Specific to the production front though, I think, you know, we've tried to differentiate ourselves by thinking about sort of niche business lines and to the extent that we can expand into a new vertical through the acquisition of a person or a team, we're definitely open to that as well. And we're having conversations sort of across all of those fronts now and hopeful that some of those will pay off here in 2026. Nathan Race: Okay, great. Then a couple of questions for Joe. There's some differences in the end of period average cash balances. I've mentioned the sub-debt impact has some relevancy there. Curious if you can touch on kind of where you'd like to run in terms of cash levels going forward? And then also, it looks like securities yields ticked up nicely in the quarter. Just any thoughts on the securities yield trajectory from here in light of the rate outlook? Joseph M. Chybowski: Yes. I think on the cash side, I think we were generally just really pleased with the core deposit growth that translated during the quarter. I think a lot of that we'd message with some seasonal outflows in the second quarter would come back in the third. So we did certainly have higher average cash balances throughout the quarter. I think we're always ultimately loan growth being top priority and given pipelines where they're at, I think we when we think about cash and securities, we always want to have liquidity such to fund that growth. From the security standpoint yields going forward, there were opportunities I think given where rates were at kind of more mid-quarter where we saw some opportunities to put on some longer duration paper. So part of that contributed to the higher boost in securities yields during the quarter. And then I think where we're at today, we're definitely active just kind of redeploying as there's pay downs, payoffs, maturities. Some of that's also just recycling FMCB's portfolio which we had always kind of planned once we closed the deal last year. So I think we're opportunistic in the security space as well, but I think ultimately we want to support the loan growth outlook. And think where the pipeline is at, I think that's certainly bullish on continued growth there. Into 2026. Nathan Race: Okay, great. And then maybe a couple for Katie. On the loan that we've talked about a couple quarters now, I believe you guys have a specific allocation there. Just curious if you're still expecting some charge-offs there at some point in the future and if there's any specific reserves on the credit that moved to substandard in 3Q? Katie Morell: So yeah, starting with the office loan, our specific reserve hasn't changed on that one. It's just under $3 million. And we continue to see leasing prospects and some interest. There's been more return to the office in Downtown St. Paul. So we're not planning a charge-off at this time on that loan. And then in regards to the multifamily loan that we moved this quarter, that one does not have a specific reserve. And like we shared in the prepared remarks, the borrower is sort of moving quickly to reengage a new buyer and hopefully sell that asset quickly. Nathan Race: Okay. I appreciate all the color. Thanks, everyone. Operator: This concludes our question and answer session. I will now turn the call back over to Jerry Baack for any closing remarks. Jerry Baack: I want to thank everybody for joining the call today. Really excited about our ability to take market share in the Twin Cities market and believe the fourth quarter in 2026 will certainly be a good year for us. Do want to call out and thank some of the team members that we have here, our deposit operations, technology, and operations team have really busted their butts these last few months to get the conversions done successfully. And also just want to do another shout-out for Mary Jane Crocker and Jeffrey D. Shellberg and how incredible they've been as partners for me. Considering twenty years ago we started this bank in our basement. It's great to still both be on the board supporting us going forward, but a great shout-out to them. Thanks for everybody taking the call today. Thanks. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: To all sites on hold, we appreciate your patience. Please continue to stand by. To all sites on hold, we appreciate your patience. Continue to stand by. Tulsi is on hold. We appreciate your patience, and as you continue to stay by. Please stand by. Your program is about to begin. Welcome to the Lennox Third Quarter Earnings Conference Call. All lines are currently in a listen-only mode. You may enter the queue to ask a question by pressing star and one on your phone. Exit the queue, please press star and two. As a reminder, this call is being recorded. I would now like to turn the conference over to Chelsey Pulcheon, Lennox Investor Relations. Chelsey, please go ahead. Chelsey Pulcheon: Thank you, Katie. Good morning, everyone. Thank you for joining us as we share our 2025 third quarter results. Joining me today is CEO, Alok Maskara, and CFO, Michael P. Quenzer. Each will share their prepared remarks before we move to the Q&A session. Turning to slide two, a reminder that during today's call, we will be making certain forward-looking statements which are subject to numerous risks and uncertainties as outlined on this page. We may also refer to certain non-GAAP financial measures that management considers relevant indicators of underlying business performance. Please refer to our SEC filings available on our Investor Relations website for additional details, including a reconciliation of GAAP to non-GAAP measures. The earnings release, today's presentation, and the webcast archive link for today's call are available on our Investor Relations website at investor.lennox.com. Now please turn to Slide three as I turn the call over to our CEO, Alok Maskara. Alok Maskara: Thank you, Chelsey. Good morning, everyone. I'm proud to report that Lennox International Inc. maintained resilient margins and high customer service levels amidst a very challenging external environment. Our talented team worked tirelessly with our loyal customers and channel partners to deliver these results, and I'm very grateful for their hard work. Our results were also fueled by our recent investments, which will accelerate our growth and expand our margins as the industry turns the corner into a brighter 2026. Let us turn to slide three for an overview of our third quarter financials. Revenue this quarter declined 5% as growth initiatives and share gains were unable to fully offset the impact of soft residential and commercial end markets. Ongoing channel inventory rebalancing and weak dealer confidence following the regulatory transition created more complexity for the quarter. Our segment margin was 21.7%, a record for the third quarter. Operating cash flow was $301 million, which was lower than last year as a sharp industry decline has temporarily elevated our finished goods inventory levels. Adjusted earnings per share was a third quarter record of $6.98, a 4% year-over-year increase. HCS segment profit margin expanded by 30 basis points as the team executed meaningful cost actions to offset industry headwinds. HCA's revenues declined 12% as the residential industry faced a weak summer selling season, and as both contractors and distributors rebalance inventory post-regulatory transition. BCS segment results were impressive as profit margins expanded 330 basis points and revenue grew 10% even though the end markets remained weak. The team was able to offset end market conditions with rigorous execution of growth initiatives such as share gains in emergency replacement, business development in refrigeration, and full life cycle value proposition in commercial services. Given current end market conditions, we are adjusting our full-year outlook to reflect an anticipated sales decline of 1%. We now expect adjusted earnings per share in the range of $22.75. Now, let's move to slide four to discuss how our recent acquisition will increase the attachment rate for our parts and accessories. Differentiated growth at Lennox International Inc. is driven by four growth vectors: heat pump penetration, emergency replacement share gains, higher attachment rates for parts and services, and total addressable market expansion through joint ventures such as Samsung and Aristang. Our bolt-on acquisition of AES Industries in 2023 helped accelerate the attachment of commercial services and was a tremendous success based on financial and strategic metrics. As a result, our commercial services business has more than doubled over the past three years. Similarly, the recent acquisition of Durodyne and Subco will help accelerate attachment of parts and accessories across both HCS and BCS segments. The acquired business has annual revenues of approximately $225 million and a solid growth trajectory with strong margins. This acquisition meets our discipline criteria and will be accretive in 2026. The acquired business provides Lennox International Inc. with additional products, brands, and distribution scale to accelerate the growth of our parts and accessories portfolio. We see a significant opportunity to increase the attachment rates, one of our four key growth vectors. The integration of Durodyne and Subco will also lead to meaningful cost synergies that make this transaction even more attractive to Lennox stakeholders. Our integration team has already identified sourcing opportunities, and we are confident about creating additional value as we align the business with Lennox's standard infrastructure and implement our unified management system. Now let me hand the call over to Michael who will take us through the details of our Q3 financial results. Michael P. Quenzer: Thank you, Alok. Good morning, everyone. Please turn to Slide five. As Alok outlined, in the third quarter, we continued to navigate a dynamic operating environment characterized by uneven demand due to the new refrigerant transition, and broader macroeconomic uncertainty. These pressures resulted in a 5% decline in revenue. However, our team acted decisively and maintained operational discipline delivering 2% growth in segment profit and achieving margin expansion. This profit improvement was primarily driven by favorable product mix and pricing supported by the successful launch of our new R254B products. We also saw benefits from improved cost management, including reductions in selling and administration expenses. These gains were partially offset by lower sales volumes and increased product costs, largely due to ongoing inflationary pressures. Let's now turn to slide six to review the performance of our Home Comfort Solutions segment. Home Comfort Solutions experienced softer demand in the third quarter with revenue declining by 12% primarily due to a 23% decline in unit sales volumes. While we anticipated a decline in sales volume, the extent was greater than expected due to several contributing factors. Contractors and distributors actively reduced inventory levels. Macroeconomic softness weighed on both new and existing home sales. Moderate weather dampened demand, and there was a clear shift towards systems repair rather than full replacements. Despite these challenges, mix and pricing remained favorable, supported by ongoing transition to the new R454B products. On the cost front, inflationary pressures on materials and components continue to weigh on product costs. These headwinds were partially offset by successful tariff mitigation strategies and sustained improvements in operational efficiency driven by targeted cost actions. We also benefited from SG&A cost reductions, though these were partially offset by ongoing investments in our distribution network. Moving on to slide seven. Building Climate Solutions gained momentum in the quarter, delivering a strong 10% revenue growth driven by a 10% benefit from favorable product mix and pricing, while volumes were flat. Like commercial HVAC, which represents approximately 50% of BCS revenue, continued to see year-over-year declines in industry shipments. Despite these market headwinds, we maintained volume levels through share gains in emergency replacement products and solid growth across our refrigeration and service offerings. On the cost side, material inflation remained elevated, but was partially offset by gains in factory productivity as our new facility continues to enhance operational efficiency. Turning to slide eight, let's review cash flow and capital deployment. From a free cash flow standpoint, we are revising our full-year 2025 guidance to approximately $550 million. This adjustment reflects elevated inventory levels driven by lower than expected sales volumes. We expect inventory levels to normalize in 2026 while continuing to support strategic investments in commercial emergency replacement and the launch of our new Samsung ductless product line. The $550 million of free cash flow includes approximately $150 million in capital expenditures, primarily focused on expanding our distribution network, enhancing the customer digital experience, and establishing multiple innovation and training centers designed to help our customers succeed in their local markets. On capital deployment, we have repurchased approximately $350 million in shares year to date and with $1 billion remaining under our current authorization, we will continue to opportunistically repurchase shares. We also continue to evaluate strategic bolt-on acquisition opportunities that enhance our distribution capabilities and expand our product portfolio. As we pursue these initiatives, we remain committed to preserving a healthy debt leverage across all capital allocation decisions. If you'll now turn to slide nine, I'll review our full-year 2025 guidance. In response to evolving market conditions, we are updating our full-year guidance to reflect deeper inventory destocking trends and continued macroeconomic weakness, particularly in home sales and consumer confidence. Starting with revenue, we now expect full-year revenue to decline by 1% compared to our previous guidance of 3% growth. This revision is primarily driven by lower total sales volumes in Home Comfort Solutions, which are now expected to decline in the mid-teens range compared to our previous guidance of a high single-digit decrease. With the successful closing of our Durodyne and Subco acquisition, we expect an approximate 1% contribution to full-year revenue growth with a minimal impact on EBIT due to purchase price amortization of approximately $10 million. On mix and price, we continue to expect a combined benefit of 9%, consistent with our prior estimate. Turning to cost estimates, we now expect cost inflation to increase total cost by approximately 5%, down from our prior estimate of 6%. This improvement is driven by successful tariff mitigation efforts and additional cost actions. Looking at other key metrics, we now expect interest expense to be approximately $40 million reflecting our recent $550 million acquisition and lower free cash flow due to elevated inventory. Our tax rate is projected to be around 19.3%. On earnings per share, we are updating our EPS guidance to a range of $22.75 to $23.25, down from the previous range of $23.25 to $24.25. And finally, as mentioned earlier, we now expect full-year free cash flow to be approximately $550 million, revised from our prior guidance of $650 million to $800 million. In summary, while 2025 remains challenging with industry softness and double-digit declines in sales volumes, our continued focus on operating discipline positions us to grow earnings per share, and we remain optimistic about a return to market growth in 2026. With that, please turn to Slide 10, and I'll turn it back over to Alok. Alok Maskara: Thanks, Michael. As we reflect on this quarter, I want to acknowledge the challenges we have faced as a company and an industry. The environment has been tough, with destocking, higher interest rates, and shifting consumer patterns, all of which have weighed on our results. However, I am confident that these headwinds are temporary. Our team has navigated this period with discipline and resilience, and the actions we have taken have positioned us for a strong rebound next year. Looking ahead to 2026, we expect channel inventory to normalize, and with the prospect of lower interest rates, both new and existing home sales should begin to recover. We are also moving past the disruption of this year's refrigerant transition. While dealers were understandably cautious due to industry-wide canister shortages and supply chain friction, we expect dealers to regain confidence as the transition-related component shortages are finally in the rearview. We are positioned to gain share through several avenues, including a renewed focus on new product introductions and contributions from joint ventures, including ductless products and water heaters. Of course, we are mindful of some headwinds. As economic pressures persist, we anticipate higher demand for value-tiered products along with elevated repair activity in lieu of system replacements. As federal energy efficiency incentives sunset, they may create some additional uncertainty. However, we do not expect them to materially impact overall demand, especially as some states and utility incentives for energy efficiency are expected to continue. On the margin side, we expect mix improvement from carryover of our 454B refrigerant products, particularly in the first half of the year. In addition, we also anticipate customary annual pricing actions to offset inflation. Beyond pricing, we are driving disciplined cost productivity efforts to sustain margin resiliency. Optimization of our distribution network will lead to lower logistics costs, higher fill rates, and better customer experience. Targeted SG&A cost actions will streamline our processes and enhance efficiency across the organization. With our new commercial factory in Saltillo now fully operational and delivering measurable improvements, we expect additional manufacturing productivity in 2026. At the same time, we are making strategic investments that strengthen our foundation for future growth, including digital front-end tools that simplify how our businesses work with our dealers. Expansion of our distribution network enhances our capabilities and reach, and the addition of new innovation and training centers accelerates product development and dealer loyalty. We continue to closely monitor inflation, tariff, and rising input costs across commodities, components, health care, and benefits. However, our disciplined cost management, effective pricing, and focus on operational excellence give me confidence in our ability to navigate these pressures while sustaining margin resilience. Now let's turn to slide 11 for why I believe Lennox International Inc. outperforms the industry. As highlighted last quarter, our strategic focus has not wavered. Even with recent challenges, we continue to execute ahead of schedule on the commitments outlined in our transformation plan. Looking forward, we expect growth to accelerate, supported by consistent replacement demand and initiatives across digital enablement, ductless solutions, commercial capacity, and the parts and services ecosystem. Cost productivity has become increasingly important to maintain resilient margins, and we are achieving this without compromising growth investments. We continue to make targeted investments to elevate customer experience and product availability. Simultaneously, we are scaling our digital capabilities across both product offerings and customer touchpoints, leveraging proprietary data and broadening our portfolio of intelligent controls. This progress is made possible by a highly talented team and a culture rooted in accountability and results. I remain confident in our strategic direction, and I am committed to delivering sustained value for our customers, employees, and shareholders. I firmly believe our best days are ahead. Thank you. We'll be happy to take your questions now. Katie, let's go to Q&A. Operator: Thank you. You may remove yourself from the queue at any time by pressing star 2. Our first question will come from Ryan Merkel with William Blair. Your line is open. Ryan Merkel: Hey, everyone. Thanks for the question and nice job on margins. Alok Maskara: Thanks, Ryan. Good morning. Ryan Merkel: My first question is just a little, can you put the residential volume declines into perspective a little bit more? Comment on what was the performance of one step versus two step? And then if you excluded the destock, any sense for what sell-through volumes would be for resi in the quarter? Michael P. Quenzer: Hey, Ryan, what I can do is I'll give you some clarity. On the total sales, within Q3, we saw total sales and sell-through down about 10%. And about 20% down on sell-in. So that's total sales, would include the price mix benefit. Alok, did you want to talk about that? Alok Maskara: Yeah. And I think, Ryan, one thing that's been very clear to us during this quarter is when we look at our sales to our contractors, whom we call dealers, they also were holding inventory. And in some cases, it was more than we thought. So as we've gone around and spoken to hundreds of our contractors and dealers, we have realized they have done some destocking as well. It's not purely as the numbers are coming through. So I think there was destocking happening on both sides. But if your question is taken differently and said, what do we believe the consumer demand for this looks like? We do think it's weak. Impacted by interest rates, impacted by housing stock that's not turning over as it used to be. And in some cases, impacted by the type of a summer we had. You know, for the past ten summers were the hottest summer on record for the ten years. So I think that also impacted our relative sales. And Ryan, I'll just add on parts and supplies. We did see some growth on parts and supplies in our business, which suggests that there is a bit of a trend toward more of a repair versus replace. Ryan Merkel: Okay. Thanks for that. And then my follow-up would be on fourth quarter margins. Third quarter was much better than I expected, but sequentially, the margins are coming down a little more than I would have expected on sort of similar volume declines in 4Q versus 3Q. So what are some of the key assumptions there that you can unpack for us? Alok Maskara: Sure. I think, Ryan, the biggest one is we are pulling back on manufacturing to rightsize our inventory level. And that's the absorption benefit that we had in Q3 would be less as we look forward to Q4. Probably the single largest factor, Ryan. Ryan Merkel: Got it. Right. Thanks. I'll pass it on. Operator: Thank you. Our next question will come from Damian Karas with UBS. Your line is open. Damian Karas: Hey, good morning, everyone. Alok Maskara: Good morning, Damian. Damian Karas: So just a follow-up question thinking about this channel inventory destocking, what's your sense on when those inventory levels will be more normalized? Is that gonna happen kinda sooner rather than later? Is this gonna kinda be a trend that we see through the first half of next year? And you know, getting the sense that you know, the destocking is not just kind of a two-step. I think you mentioned also on the one-step side. Is the reality that like, maybe some of the contractors out there just have been carrying more inventory than you guys have suspected. Alok Maskara: Yeah. I think we talked about in the past that many of our contractors rented barns and put inventory in the barns during the COVID situation. Now that the supply chains have improved and our own lead times are down to one or two days, they no longer feel the need to maintain that extra barn full of inventory. So these are not months of inventory that our contractors were carrying, but they were carrying a few weeks of inventory. And that destocking did take us a little bit by surprise. But I think, in a way, it's testament to the improved industry lead times. And just the lack of confidence they had after a weak summer selling season. Damian Karas: Okay. That's helpful. And then I wanted to ask you about the BCS segment. Obviously, you're seeing some nice trends there in relative strength. You know, when the dust settles on 2025, where do you think you'll be in terms of the emergency replacement market share? And what do you view as achievable thinking about 2026? Michael P. Quenzer: Yeah. We're really pleased with the progress in emergency replacement. It started the factory, getting inventory availability, getting it all deployed. So we saw significant growth, nearly 100% growth on a very small base of emergency replacement in the quarter. To put in perspective, you look at the total 5% of the revenue is emergency replacement. We see a lot more growth potential there. Because we didn't fully catch the full season with emergency replacement. So we're ready for next year. We've got the inventory deployed, and we see multiple multiyear growth within that channel. Damian Karas: Thank you very much. Good luck. Operator: Thank you. Our next question will come from Nigel Coe with Wolfe Research. Your line is open. Nigel Coe: Thanks. Good morning. And really, really good job on the margin preservation. Really impressive, Alok. And Mike as well, of course. Just on the going back to the inventory, obviously, your inventory levels are quite high. Pretty flat q by q, which is very unusual. I'm just wanna make sure that the bulk of that would be within your captive distribution network. Which seems to suggest that maybe inventory levels across the industry are still at a pretty high level. So I just wanna maybe just, you know, kind of double click on that inventory number. You know, is it a buildup of emergency replacement inventory? Just some context, it does look like we got a fair way to go here on the destock. Alok Maskara: Yeah. I think from our inventory levels, it's true. It's mostly in the direct to contractor level. And I think we were cautious and optimistic going into the quarter as we have got more inventory than we would have liked to be. I didn't fully answer the question that was asked in the last question as well. You know, it's hard to predict when the destocking would be over. If I had to guess right now, I'd say the destocking would probably be over by Q2 of next year. So not the entire first half, but I think this is gonna continue for a while, and we are preparing accordingly. And I think that's the same forecast we have for our inventory. Is that we'll be back to normal levels by Q2 next year. Nigel Coe: Okay. That's helpful. And then just quickly on the repair versus replace dynamics. Maybe just your perspective on why now? Is it consumer confidence? Is it more around the A2L dynamics? Is it the price? Is it all three? Any context there would be helpful. Alok Maskara: Yeah. I mean, clearly, by the way, this is a difficult thing to come back and give you a database, and I think it is all three, but the primary reason in our view was the A2L conversion. Our contractors and dealers who are the ones who convince homeowners that replacement is a better economic decision in the long term were just hesitant to sell new products because of canister shortages, everything else that was going on. So they were not as effective as they normally are. There is obviously some impact of consumer confidence, as you know, is now in multi-month low. So it will be all three, but I think the primary was the confidence of our own dealers. Michael P. Quenzer: And I'll just add one more on the existing home sales. Some of these homeowners have very low interest rates. They're wanting to move into new homes, but they don't wanna put a whole new system investment in it. The next two years, interest rates come down, and they can move to a new home as well. Nigel Coe: Okay. Thank you. Operator: Thank you. Our next question will come from Joseph John O'Dea with Wells Fargo. Your line is now open. Joseph John O'Dea: Hi, good morning. Thanks for taking my questions. I just wanted to start on trying to take a step back and think about what normalization means from a volume standpoint in the industry. And so, when we look at resi volumes over the past number of years, it's been anywhere from kinda 8 million to 10 million units. This year is probably pacing below that eight. But, you know, as you think about a setup for a return to normalization as we head next year, how do you think about that? And in particular, if we're still in a period of time where we've got lack of turnover in existing homes or waiting on interest rates, just how it all comes together to think about industry volumes for you next year. Alok Maskara: Yeah. You know, as you know, that's been a hard thing to predict. And our goal, being one of the smaller players in the HVAC industry, has always been to outperform the industry no matter where the industry goes. I mean, the eight to 10 range, as you mentioned, has been the range, and this year is abnormally low. And that we can be 100% confident is due to destocking. Then if you look at the actual number of units that go on the ground, I think that's obviously a higher number. I would say the normal next year that we are gonna be working through and will probably have more details when we are declaring Q4 results in January. We look at a number closer to our $9 million to $10 million number for the industry as a normal year for 2026. A lot more to come. We want to see how Q4 comes through. But I do think a normal is closer to a 9 million to 10 million for next year. Joseph John O'Dea: Perfect. And then also, just wanted to touch on pricing and how you think the industry will approach pricing moving into next year, when you think about coming out of a period with minimum efficiency and then A2L, the amount of inflation that customers have faced. I think, you know, we think about a normal algorithm where maybe we're looking at list that's kind of mid-single in realization that's sort of one to two. Are we in a place where that can repeat? Or, you know, just given the amount of price that's hit the market, is that something that could be difficult? Alok Maskara: Sure. So I would first say I was pleased with the industry's pricing discipline. In this year, both for A2L conversion and to offset tariff. We saw a uniform approach across all the key competitive players. So we were pleased with that. In some pockets, such as residential new construction, we chose to walk away from businesses where we were losing money or were low margin. And I think that's probably the one area you would see some impact for us going forward is we would not be taking negative margin businesses that are often associated with new construction. The answer to your broader question for next year, I do think we would all be looking at pricing to offset inflation. I mentioned that in my script a little bit. And I think it's gonna be similar to what has happened in the past. Now keep in mind, 2026 will have some carryover effect. Both from tariff-related pricing and from A2L-related mix. But I do think 2026, you will find pricing would again offset inflation. Which would probably be the range that you were referring to earlier. Joseph John O'Dea: Great color. I appreciate it. Thank you. Operator: Thank you. Our next question will come from Julian C.H. Mitchell with Barclays. Your line is open. Julian C.H. Mitchell: Maybe just wanted to start with the sort of operating margin trajectory. So I think the guidance implies sort of flattish operating margins year on year in the fourth quarter. Wondered within that if you could unpack maybe any sense of magnitude around how much HCS is down year on year because of that underproduction. And when we're thinking about the margin headwinds from underproduction and also from acquisition amortization, how severe or how long through next year or the next several quarters are those expected to last? Michael P. Quenzer: Sure. I'll take that one, Julian. Yes, on the full-year guide, we're still projecting our gross to expand, our profit margin expansion of about 50 basis points. And that includes some headwinds that we have with the Breeze acquisition where we're picking up revenue with zero EBIT on that. And within that guide of 50 basis points improvement for the segment, we have the HCS full year up slightly from a gross expansion, BCS kind of flat. Then on the corporate expenses, we see them go corporate gains losses and other going from about $120 million last year closer to the $105 million to $100 million this year. So still real pleased with the margin trajectory and implies about a 20% decremental in the fourth quarter. So we think that's a good guide. And then your second question for next year, yes, we'll continue to see some absorption go through the first quarter. Normally, we do in the first quarter of every year is we grow inventory by about $150 million to achieve the summer selling season. We already have that inventory, so we'll see a little bit of absorption headwind in the first quarter of next year as well. Julian C.H. Mitchell: That's very helpful. Thank you. And then just, a second question, you know, trying to understand, on that HCS side of things, when you're looking at sort of sell behavior, you know, maybe help us understand how you've seen that change in recent months and help us understand, I suppose, how quickly you think you can get back to some kind of volume growth in the coming quarters, assuming inventory reduction takes maybe another six months? Alok Maskara: Sure. I mean, I will try and tell you, like, you know, things are no longer getting worse. So let's start with that. I mean, we are now at a stage where we have bounced along the bottom, and I'm starting to see some green shoots and looking at some growth going forward. And that's obviously driven by multiple factors. We have moved from air conditioning to furnace season, in many of the areas where the inventory generally was low. So there's not that much destocking. And, also, I think some of the bad news around consumer confidence, tariffs, and all that's kind of coming up in the rearview mirror. So if you put that all together, we remain confident about growth next year, especially as there's no destocking. I do think it will be about Q2 next year where destocking ends. And we start looking at meaningful growth numbers. But net net, I would expect 2026 to be a growth year for both the segments. Julian C.H. Mitchell: That's great. Thank you. Operator: Thank you. Our next question will come from Thomas Allen Moll with Stephens. Your line is now open. Thomas Allen Moll: Good morning and thank you for taking my questions. Alok Maskara: Good morning, Tommy. Thomas Allen Moll: On the fourth quarter outlook, really the implied outlook you can infer from your guidance for the HCS volumes. Is there a finer point you can give us on the direct versus two-step expectations? It's only a quarter, but the comps there are substantially different if we just look at the 4Q performance from last year. Just so we're not surprised, a quarter from now, is there anything you would frame for us in terms of the expectations there? Alok Maskara: You know, Tommy, I'll start by saying our forecast in Q2 and expectations did not turn out to be true. So it's hard for us to like, you know, give you something with a lot of confidence. We simply took our Q3 direct versus indirect and applied that to Q4. So we took a Q3 actuals, applied that to Q4, which would mean that obviously, the two-step would decline more than one-step. So that part is gonna be true. We do see the part and accessories growing. Growing across both, but growing more in the two-step than in the one-step. And the one-step where we have higher exposure to residential new construction, that seems to impact us as well. Because that has remained pretty weak. So net net, I mean, essentially took our Q3 performance on one-step versus two-step. And applied that to Q4 as the kind of best guess we can have at this point. And so far as we have looked at three weeks of October, I think we are right close to our expectations. Thomas Allen Moll: Thank you, Alok. Wanted to follow-up with a question on the acquisition. No, you don't wanna get too specific on what the accretion might be in '26 but similar to my last question, just anything you can do to frame the art of the possible or what's reasonable here. Are we thinking low single digits just on a percentage for increase for accretion in '26? Or is there anything you would do to frame expectations for? Michael P. Quenzer: Yeah. We're going through and doing a lot of the work on the final purchase price allocation. I think that's gonna be the amortization around that a big driver for the year. But overall, we do see accretion. I mean, it could be somewhere to the 30 to 40¢ range. We have some more work to do on it, but it's a great business. 25% EBITDA margins before we look at purchase price amortization. So it should be incremental from an EBITDA margin perspective as well and definitely on the top-line growth accretion as well. Thomas Allen Moll: Thank you, Michael. I appreciate it. I'll turn it back. Operator: Thank you. Our next question will come from Christopher M. Snyder with Morgan Stanley. Your line is open. Christopher M. Snyder: Thank you. Alok, earlier you were talking about, you made part of the pressure this year is that the dealers' incentives maybe weren't aligned with the OEM incentives and they were pushing more repair given the supply chain challenges. I guess do you think there is risk into 2026 that these incentives will remain misaligned just because, you know, as we move through the refrigerant transition and homeowners have to replace both the indoor and the outdoor unit, that delta between the repair and the replace bill is widening. Which we just kind of keep that maybe misalignment in place? Thank you. Alok Maskara: Thanks, Chris. I think the biggest cause of why our contractors did not push replacement as much as they do normally was the shortage of canisters. They were just not comfortable selling a 454B unit when they were not sure if they would have a canister and be able to top off the system as required. So they were more willing to do that. That's formally behind us at this stage. There is sufficient supply of 454B canisters. So I think it was less about incentives, more about just product availability, and in some cases, just training. We have taken up some contractors got trained well earlier, others just delayed their training to a different date, and they needed tools and preparedness. So I think from an incentive perspective, it was less of an issue. The indoor versus outdoor thing, I mean, that's kind of settled down pretty well. I mean, they've all figured out how to best serve the customer at the lowest cost by being able to use older furnaces and put the sensors like RDS kits in the system. Of course, the coil is almost always replaced with the outdoor unit anyway. So I think that's less of an issue. It was mostly around part shortage. Christopher M. Snyder: Thank you. I appreciate that. And then I guess maybe turning to Q4 and I know this is a very difficult market to forecast. But I guess, it seems like we're effectively calling for unchanged volumes in resi versus a comp that's about 10 percentage points harder in Q4 versus Q3? And the destock doesn't seem to be letting up. It seems to be going into about Q2 of next year. So obviously, two-year stack in Q4 versus Q3. Are there any positive offsets here that could keep that growth unchanged versus the more difficult comp into Q4? Alok Maskara: I think from our perspective, putting the destock thing aside, because I think all the OEMs, we were caught with like, you know, greater surprise and the destock was more than we expected. We do see the green shoots. Right? I mean, the lower interest rates and the resulting impact on mortgage rates, that's been positive. All the conversations with our customers are more optimistic these days given where the mortgage rates are trending. We also see, like, you know, homebuilder confidence finally turning the corner. I mean, it's still not great, but it's turning the corner. I expect new home sales to maybe languish, but existing home sales to pick up from next year. So we see those. And I think finally, when a lot of units got repaired instead of replaced, all they did is tag on a year or two to the life of the unit, and that creates a pent-up demand situation. Which will start coming loose as well. So net net, that's what gives us confidence in 2026 being a growth year despite all the factors that we talked about earlier. Christopher M. Snyder: Thank you. I appreciate that. Operator: Thank you. Our next question will come from Noah Duke Kaye with Oppenheimer. Your line is open. Noah Duke Kaye: Thanks for taking the questions. I guess on the 2026 early thinking, you highlighted meaningful JV growth from Samsung. Can you what meaningful would look like? Is that a point or two of growth? Top line? Alok Maskara: You know, as you know, we launched the product this year. We still spend the majority of the year selling the old 410A product, and we were faced with inventory shortages in that. So this year is gonna be sort of neutral compared to the previous year on that category. Over the long term, you've talked about, I mean, expect that to add like a point or so of growth every year for the next multiple years. I think 2026 would be the first year where we would have the full portfolio and then launch it. So I think that's kind of the range I would look at is half point to a point of growth with Samsung JV. Ariston JV adds value only in 2027 in a meaningful way, but it's gonna get some growth next year. Because that's when the product will be launched. Michael P. Quenzer: Just to add within the HCS segment. The ductless product represents about 2% of our sales. If you look at the industry, ductless is closer to 10%. So we have a multiyear benefit here within the ductless product, and we saw growth in our Samsung product for the first quarter for the first time in Q3. So really pleased with that progress. And the sales force is really pleased with the progress on selling that with customers really appreciating the brand name. Noah Duke Kaye: Thank you both. And then also indicated rationalizing the low margin RNC accounts which seems prudent. But know that it's about typically 25% or so of sales. RNC total. Can you help us understand or dimensionalize what level within that we'd be talking about in terms of a tier of low margin accounts? Is this, you know, like the lowest 10% or so? We're just trying to understand what kind of a headwind that could be for next year. Alok Maskara: Yeah. I think the lowest 10% to 15% is a good way to think about it. I mean, we were overweight on RNC compared to the industry, especially when it came to our one-step model. So I think first of all, we don't give up any easily. We only give up when we feel like we are taping dollar bills to every outgoing box. So, again, those are not easy decisions for us. I think 10 to 15% of RNC volume over multiple months is the way to think about it. Noah Duke Kaye: Oh, okay. So you said over multiple months or years? I just wanna clarify. Alok Maskara: Multiple months. Noah Duke Kaye: Okay. Thank you. Operator: Thank you. Our next question will come from Jeffrey Todd Sprague with Vertical Research. Your line is open. Jeffrey Todd Sprague: Maybe just wanted to come back to channel and inventory, maybe one last time. Maybe somebody behind me has another one. But you know, it just looks to me, you know, you overproduced in Q3. Right? It sounds like it was unintentional. Things kinda really dropped off. But if you're looking at, you know, kind of this hangover lasting into the first half of next year, is there not scope to more severely cut production in Q4 and just clear this up more quickly? Or, you know, are you just kinda facing labor retention or other issues that maybe are not popping to mind? But it just seems to me like you could take it down a lot harder in Q4 than what implied in the guide and just really set up 2026 instead of having this lingering issue through the first half. Alok Maskara: Yeah. No, Jeff. That's a good question and good observation. I think the issue is more around the mix of the products because in Q4, as you know, most of our production and sales plans are switching towards furnaces. We ramp up air conditioning back in Q1 again. So I think we have done a balanced job with fairly aggressive actions. I mean, headcount across factories is down by more than a thousand people, and if you look at some of the WARN notices, in fact, we have ratcheted back pretty fast. But at the same time, if we go any further, we believe it will crimp our ability to restart production next year. So I think by Q2, and Q1, when we have heavy production months, we'll just go slower at that point. Net net, by the end of Q2, we'll be back to normal level. So we think that's just a better approach. To make sure we don't face challenges that Lennox International Inc. has faced in the past where we couldn't ramp up in time. Jeffrey Todd Sprague: Mhmm. Yeah. No. That makes sense. And then just thinking about your comment about the value tier, I think the value tier has shrunk over the years, right, as the SEER levels have moved up and up and up. But, how big is that tier for you now, in 2025? Like, how much of your business would you characterize as operating in kind of the lowest possible price point in your portfolio? Alok Maskara: So if you think about the overall portfolio, 70% of the business now is what we call the lowest SEER. And that's not the way we think about the value tier, though. So value tier would be within the lowest SEER, what's like, you know, value product with no bells and whistles, limited warranty, cages versus casing across on the outdoor units. And I think that's dropped probably in the 10 to 20% range. And we expect it to remain in that range. As, like, you know, other products with better warranty, better controls, continue to be the majority of the business. But that business, even taking from 10 to 20% is a trend that we are prepared for, and we wanna make sure we address it appropriately. Jeffrey Todd Sprague: Great. Thank you for the color. Appreciate it. Operator: Thank you. Our next question will come from Joseph Alfred Ritchie with Sachs. Your line is now open. Joseph Alfred Ritchie: Hey, good morning, guys. Alok Maskara: Good morning. Hi, Joe. Joseph Alfred Ritchie: So, yeah. So sorry to disappoint Jeff, but I did wanna ask another question on inventories. So just thinking about this, quantifying the fact that your inventories are up roughly $300 million year over year. And the sales growth for the company is gonna be, let's just call it, roughly flattish, down modestly. How do I think about, like, what is kind of, like, the right size of inventories heading into 2026? And then I guess, really just my follow-on question, is more of a clarification for Michael. I heard you say 20% decrementals in the fourth quarter. Was that for the entire business? Was that for HCS? And then how do we think about the decrementals in HCS as you're continuing to wind down inventories through the beginning part of next year? Michael P. Quenzer: Sure. I'll answer that one first. Yes, the 20% decremental was the entire business within the fourth quarter. So it's a little bit more of a decremental on the HCS side. Mostly because the absorption impact there will be more than the BCS side. Alok Maskara: And I think on the inventory question, first of all, we'll acknowledge that our inventory is higher than where we expected and wanted. Let me just acknowledge that part. If we look at the $100 million or so number that you came, I think it's about $150 to $200 million. Is what we wanna bring down. The other is a result of just like, in our investment trying to get into emergency replacement. Making sure our fill rate is higher, and that's the number we expect to normalize by Q2 next year. So I think you kind of break it up into two-thirds, one-third of the 300 number. Joseph Alfred Ritchie: Okay. That's helpful. And I guess just as part of the two-part question I asked, I guess, in you're thinking about decremental margins then as you're bringing down your inventory, is there an appropriate way for us to think about that within HCS in the first half of the year? Alok Maskara: I would say the first half usually has the opposite, has a benefit of production, but at the same time, we are structurally at a lower cost situation because of all the changes we have made. But as we finish Q4 and we come back in January, we can give you a lot more color at that point with a lot more confidence. Right now, everything has just got too many error bars on any of the numbers I'll give you. Joseph Alfred Ritchie: Okay. Fair enough. Thank you, guys. Operator: Thank you. Our next question will come from Jeffrey David Hammond with KeyBanc Capital Markets. Your line is open. Jeffrey David Hammond: Hey, good morning. Alok Maskara: Hi, Jeff. Jeffrey David Hammond: Hey. Maybe just to start with price. I mean, I think the last, you know, five years that the price increases, the levels between COVID regulatory changes have been pretty eye-popping. And, you know, now we're kinda finally seeing this kinda consumer tightening, shift to value repair or replace. I'm just wondering, you know, when you think if at all the industry kinda starts to think about price elasticity more and taking a breather from pricing actions. Alok Maskara: Yeah. Jeff, I mean, that's a fair point. If you look at over the past four, five years, if the price from OEM to the channel has gone up 40%, the price from the channel to the consumer in some cases, has gone up 100 to 200%. So as we look at where the pricing pressure is gonna be, it's gonna be more between the consumer and the channel. Less so between OEM and the channel. And we are seeing consumers getting multiple quotes. During COVID, they're very happy. One contractor came in and gave them one quote. And they would go with that. Today, consumers are definitely getting more quotes than they were getting last year. And often, it's about three quotes versus the one quote that I was referring to in COVID. So I think that's where you're gonna see some price adjustments that will need to happen on the installation of the consumer price. Keep in mind, the OEM price has gone up much, much less than the price that the consumer is paying today. Jeffrey David Hammond: Okay. That's helpful. Just on the 26 moving pieces, I'm just wondering if you can put any kind of quantification or numbers around just the commercial plant getting to full efficiency, you know, all the transition R454B transition noise. Like, what is the delta on that, you know, 25 to 26? Seems like a pretty big tailwind. Alok Maskara: It is gonna be a good tailwind. I mean, first of all, we talked about having $10 million in productivity from like, you know, the new Saltillo plant and avoid a bad news, and we delivered that. So I think we are pleased to say that we are on track to deliver that productivity. I think that continues going into next year. Have to balance it out with any absorption impact, and we'll give you greater color next year. I mean, we do historically, we've always talked about like, about $20 to $30 million in productivity with MCR and other factors. And I think next year is gonna look more normal versus the past recent year where there were too many moving pieces. Jeffrey David Hammond: Okay. Thanks a lot. Operator: Thank you. Our next question will come from Deane Michael Dray with RBC Capital Markets. Your line is open. Deane Michael Dray: Thank you. Good morning, everyone. Alok Maskara: Hi, Deane. Deane Michael Dray: I was hoping you could help us understand the magnitude of the free cash flow guidance cut that implies a pretty low 70% conversion. Is this all the destocking, you know, higher finished goods? Is there anything else going on there that you can share? Alok Maskara: No. It's all destocking. I think we cut it by about $150 million compared to the previous number, and that's all finished good inventory, and we expect to recover all of that by Q2 next year. And as you know, I mean, our depreciation has been lower than our CapEx for the past few years. And I think that continues as we have invested more in the business. Deane Michael Dray: Great. I appreciate that. And then on the new factory, you said it's fully operational. So what kind of efficiencies are you expecting to be realized in 2026? And maybe just kind of give us some examples. Alok Maskara: Sure. So I think there are two specific things that I'll point out too. Right? One is we had startup inefficiencies all through the first half of this year. We won't have that. So I think that's part of it what you're gonna see immediately. There were transfer costs, especially in Q1 of 2025, where we had talked about and we had some moves go wrong, and we had taken some hits to a margin, significant hits to our BCS margin in Q1 because of that. And then finally, keep in mind that the labor arbitrage that we get by making these products in Saltillo versus making them in Stuttgart, that's gonna add too as well. So one whole bucket is startup inefficiency, and the other is just the labor arbitrage. Michael P. Quenzer: And I'll just add to that. It's taking some pressure off the existing factory in Stuttgart, Arkansas, which is helping drive some efficiencies there as well. Deane Michael Dray: That's real helpful. Thank you. Operator: Thank you. Our next question will come from Charles Stephen Tusa with JPMorgan. Your line is open. Charles Stephen Tusa: Hi, good morning. Alok Maskara: Good morning, Steve. Charles Stephen Tusa: Can you just maybe help, like, quantify what you think the overabsorption benefit was? I mean, you said you're going to get some under absorption, but any kind of like rough math, I would assume it's in the kind of tens of millions, there's kind of a wide range on how that calculation could be kind of complex. Maybe just a bit of help on that front. Michael P. Quenzer: Yeah, so within Q3, there really wasn't an absorption kind of benefit or hit. It's the fourth quarter where we're going to see an impact. And if you think about our cost of goods sold, 15% to 20% of our cost of goods sold are factory costs. So you can kinda do some math there to figure out depending on how much we're going to reduce down the factory to normalize inventory. It will have an impact within the fourth quarter. Charles Stephen Tusa: Okay. But I mean, you don't get a benefit from kind of overproducing though and putting that cost in inventory? Alok Maskara: No. I think in the beginning of Q3, we had higher production, and we did ramp it down substantially towards the second half of Q3. So I think Q3, I would call it neutral. Q4 is when we see the full hit. Most of the inventory growth was by the second quarter. Charles Stephen Tusa: Okay. That makes sense. Are you guys seeing any in the channel? I mean, there are some online pricing stats that look relatively weak. I mean, are you seeing anybody kind of get out of line from a price competition perspective? Here? I mean, guys are not chasing the low margin RNC business I guess. Anywhere else where you're seeing competitors try and pick away from a market share perspective? Alok Maskara: I mean, the industry remains competitive. I mean, we see account by account battle everywhere. But in general, all OEMs have maintained the pricing that we got to A2L pricing due to tariff, and we think that's continue. A lot of the online and skirmishes are again between the contractor and the consumer, less so between the OEM and the contractor. So no change in any behavior that we can call out. Besides the low margin RNC business that I called out earlier. Charles Stephen Tusa: Okay. Great. Thanks a lot for the color as always. Appreciate it. Michael P. Quenzer: Thanks. Operator: Thank you. Our next question comes from Brett Logan Linzey. Your line is open. Brett Logan Linzey: Good morning. Yeah, thanks. Wanted to follow-up on free cash flow. Obviously, a lot of moving pieces this year with the regulatory transition and the ramp on emergency. But sounds like that normalizes next year. But you also do have potentially some load in from NSI. As you move through the one-step. So hoping you could maybe frame some of those moving pieces in the next year and what the conversion could look like. Alok Maskara: Yeah. We expect good conversion next year. I mean, NSI will sort of clearly call out, but NSI, we are getting it at a fairly healthy or even better than healthy level of inventory. So I don't expect any specifically load and impact of NSI. If anything, I think once we get through all the accounting and intangible amortization and inventory setup, I expect NSI to convert free cash at a pretty high level. So I think the biggest impact would be reduction in finished goods inventory level whatever we reduce this year would be a gain next year. Brett Logan Linzey: Understood. Just one more on resi, and I'm to maybe drill down on the magnitude and the scope of the consumer trade down. I guess in the context of regional variances or any correlation to regions that maybe had cooler weather conditions as a determinant for the repair decision. Or was it, you know, it's fairly broad-based on this trade down that we're seeing? Alok Maskara: We saw more of that in the Northeast and I'm not sure if it's related to the weather pattern. I think it's probably more related to just different states of the economy. We don't see as much of that in the Southern states. Because that's where, I mean, air conditioning is just super important and people know that this thing will break versus in other areas. They might look at that. So I wouldn't say there's a specific regional trend. Also, I mean, as you know, all of this is a bit of a guesswork and based on anecdotal data. There's no scientific data that's available, but what we have seen is an increase in spare parts sales, an increase in our coil sales, which is typically used for replacement, and I think that's how we put this hypothesis together. We do think a lot of that turns around next year. When the canister availability is no longer an issue. Our contractors are fully trained on R454B, and I think the lower interest and consumer confidence will also help. Brett Logan Linzey: Alright. Appreciate the detail. Operator: Thank you for joining us today. Since there are no further questions, this concludes Lennox International Inc.'s 2025 third quarter conference call. You may disconnect your lines at this time.
Operator: Good day and welcome to the Westinghouse Air Brake Technologies Corporation Third Quarter 2025 Earnings Conference Call. All participants will be in a listen-only mode. After today's presentation, please note today's event is being recorded. I would now like to turn the conference over to Ms. Kyra Yates, Vice President of Investor Relations. Please go ahead. Kyra Yates: Thank you, operator. Good morning, everyone, and welcome to Westinghouse Air Brake Technologies Corporation's Third Quarter 2025 Earnings Call. With us today are President and CEO, Rafael Ottoni Santana, CFO, John A. Olin, and Senior Vice President of Finance, John Mastlers. Today's slide presentation, along with our earnings release and financial disclosures, were posted to our website earlier today and can be accessed on the Investor Relations tab. Some statements we are making are forward-looking and based on our best view of the world and our business today. For more detailed risks, uncertainties, and assumptions relating to our forward-looking statements, please see the disclosures in our earnings release and presentation. We will also discuss non-GAAP financial metrics and encourage you to read our disclosures and reconciliation tables carefully as you consider these metrics. I will now turn the call over to Rafael. Rafael Ottoni Santana: Thanks, Kyra, and good morning, everyone. Let's move to Slide four. I'll start with an update on our business by perspectives on the quarter, and progress against our long-term value creation framework. And then John will cover the financials. We delivered a very strong quarter evidenced by continued growth in our backlog, sales, margin, and earnings. Sales in the third quarter were $2.9 billion, which was up 8% versus the prior year. Revenue growth was driven by both the Freight and Transit segments, including the acquisition of Inspection Technologies, which we closed at the beginning of the third quarter. And adjusted EPS was up 16%, driven by increased sales and margin expansion. Total cash flow from operations for the quarter was $367 million. The twelve-month backlog was $8.3 billion, representing an increase of 8.4%, while the multi-year backlog achieved an all-time high. These results demonstrate sustained revenue and earnings momentum and provide enhanced visibility for the fourth quarter and into the future. Shifting our focus to slide five, let's talk about our 2025 end market expectations in more detail. While key metrics across our Freight business remain mixed, we are encouraged by the underlying momentum of our business and the continued strength of our pipeline of opportunities across the globe. Despite the strong momentum that we are experiencing, we are continuing to exercise caution to navigate a volatile and uncertain economic landscape as we move into the final quarter of the year. North America traffic was up 1.4% in the quarter. Despite this traffic growth, Westinghouse Air Brake Technologies Corporation's active locomotive fleets were down slightly when compared to last year's third quarter. However, up sequentially. During the quarter, Westinghouse Air Brake Technologies Corporation outperformed the industry in terms of share of active locomotives running. Looking at the North America railcar builds, last quarter, we discussed the industry outlook for 2025, which was for approximately 29,000 cars to be delivered and which has again been reduced by the industry sources to approximately 28,000 cars. This forecast represents a 34% reduction from last year's car build. Internationally, activity is strong across core markets such as Asia, India, Brazil, and CIS. Significant investments to expand and upgrade infrastructure are supporting a robust international locomotive backlog and orders pipeline. In mining, an aging fleet continues to support activity to refresh and to upgrade the truck fleet. Finally, moving to the Transit sector, we continue to see underlying indicators for growth. Ridership levels are increasing in key geographies along with fleet expansion and renewals. Next, let's turn to Slide six to discuss a few business highlights. International demand for our products and services remained strong, highlighted in the quarter by the $4.2 billion order secured with Kazakhstan's National Railway, the largest single rail order in history. This historic agreement embodies KTZ's visionary approach for the country's rail network as the primary link between Europe and Asia, which is supporting the growth momentum that we are continuing to see in the region. By delivering advanced locomotives and long-term service solutions, Westinghouse Air Brake Technologies Corporation is a proud partner in Kazakhstan's progress, helping to unlock the region's enormous potential and developing the engineering competencies in the country's rail industry. Moving to mining, we secured a $125 million multi-year agreement for ultra-class drive systems. In transit, we secured $140 million brake orders driven by increased activity in India. Also in the quarter, the first four Simandou locomotives arrived in Guinea. These events marked the first quarter of heavy haul locomotives assembled and exported at our best cost facility, the Marora India locomotive plant. This milestone is a tribute to a global team that designed and built these locomotives specifically tailored to meet the customer demand of the largest untapped iron ore reserve in the world. All of this demonstrates the underlying strength across our businesses and the strong pipeline of opportunities which we continue to execute on. Moving to slide seven, before turning it over to John, I want to take a few minutes here to highlight the Transit segment's attractive value creation framework. Transit sustained orders growth is supported by unprecedented backlogs at car builders, rising passenger growth in key markets like Europe and India, and ongoing public investment in rail infrastructure around the world. Similar to the car builders, our transit backlog has been growing, and along with the consistent growth, we are experiencing increased quality and margin expansion with our backlog reflecting our commitments to deliver value and innovation. The team also remains focused on enhancing competitiveness and driving innovation. Through our integration initiatives, we are streamlining operations and achieving significant cost efficiencies, all while maintaining excellence in execution of our orders. We target leadership positions in segments where we offer clear differentiation, which positions us for long-term success. This is not only an organic story; our ongoing efforts in portfolio optimization alongside accretive bolt-on acquisitions are further strengthening our business and expanding our capabilities. This disciplined strategy is delivering tangible financial results. We are executing on our commitments with our value creation framework driving both top-line growth and margin expansion. Year to date, our revenue is up 7.5% and our operating margins have grown to the mid-teens. Given this momentum, we are confident that we will continue to expand our margins into the high teens of our planning horizon. And with that, I'll turn the call over to John to review the quarter segment results and our overall financial performance. John? John A. Olin: Thanks, Rafael, and hello, everyone. Turning to slide eight, I will review our third quarter results in more detail. Our third quarter played out largely as we planned with revenue, and with slightly better than expected operating margins. As we discussed in our last quarter call, we expected second half new locomotive deliveries to provide robust growth while being partially offset by lower mod production in the second half. This is exactly how the third quarter played out and we expect the fourth quarter's revenue cadence to be similar to the third quarter but at a higher growth rate in the fourth quarter. Sales for the third quarter were $2.89 billion, which reflects an 8.4% increase versus the prior year. Sales growth in the quarter was driven by both the Freight segment, including Inspection Technologies, and the Transit segment. Our operating margin expansion came in slightly better than expected. For the quarter, GAAP operating income was $491 million. The increase versus prior year was driven by higher sales, improved gross margin, and proactive cost management. Adjusted operating margin in Q3 was 21%, up 1.3 percentage points versus the prior year. This increase was driven by improved gross margins of 2.3 percentage points, which were partially offset by operating expenses, which grew at a higher rate than revenue. GAAP earnings per diluted share was $1.81, which was up 11% versus the year-ago quarter. During the quarter, we had net pretax charges of $6 million for restructuring, which were primarily related to our integration and portfolio optimization initiative, as well as $33 million of charges related to M&A activity. In the quarter, adjusted earnings per diluted share was $2.32, up 16% versus the prior year. Overall, Westinghouse Air Brake Technologies Corporation delivered a very strong quarter, demonstrating the underlying strength of the business. Now turning to slide nine, let's review our product lines in more detail. Third quarter consolidated sales were up 8.4%. Our quarter results were driven by growth in our equipment, digital, and transit businesses, partially offset by our service business. Services revenue was down 11.6% from last year's third quarter. This decline was planned and driven by the timing of modernization deliveries, which we expect to be down in the second half. As mentioned earlier, we expect services revenue to be down again in Q4 as a result of lower mod deliveries on a year-over-year basis. Services lower mod deliveries are expected to be offset by significant growth in new locomotive deliveries. Equipment sales were up 32% from last year's third quarter. This robust sales growth was driven by higher year-over-year new locomotive deliveries as well as the partial catch-up of delivering the new locomotives that were delayed from last quarter. We also expect this double-digit growth rate to continue in the fourth quarter as well. Component sales were up 1.1% versus last year due to growth seen in industrial products offsetting the impact from significantly lower North American railcar build and lower revenue associated with our portfolio optimization initiative. Digital Intelligence sales were up 45.6% from last year. This was driven by the Inspection Technologies acquisition. When excluding Inspection Technologies, digital continues to see growth internationally with continued softness in the North America market. In our Transit segment, sales were up 8.2% in the quarter, driven by our Products and Services businesses. Foreign currency exchange had a favorable impact on sales of 3.0 percentage points. As a key to our value creation strategy, we have been focused on optimizing our portfolio by divesting and exiting low-margin non-strategic businesses. We believe portfolio transformation will lead to improved growth resiliency. We adjust the third quarter's revenue for these divestitures and exits that we have executed; our revenues are up roughly an additional 0.5 percentage point of growth to 8.9%. Moving to Slide 10, GAAP gross margin was 34.7%, which was up 1.7 percentage points from the third quarter last year. Adjusted gross margin was also up 2.3 percentage points during the quarter. In addition to higher sales, gross margin benefited from cost recovery through contract escalation and the addition of Inspection Technologies, while mix was a headwind in the Freight segment as expected. Raw materials were unfavorable due to higher material costs largely due to increased tariffs. Foreign currency exchange was a benefit to revenue in the quarter, as well as to gross profit and a marginal impact on operating margin. During the quarter, we also benefited from favorable manufacturing costs. Turning to Slide 11, for the third quarter, GAAP operating margin was 17%, which was up 0.7 percentage points versus last year. Adjusted operating margin improved 1.3 percentage points to 21%. GAAP and adjusted SG&A expenses were higher versus the prior year. Both GAAP and adjusted SG&A expenses were impacted by the addition of Inspection Technologies, while GAAP SG&A also experienced increased transaction costs related to the acquisition. Engineering expense was $59 million, which was up $9 million versus last year as a result of the addition of Inspection Technologies. We are committed to allocating engineering resources toward existing business opportunities with high returns and we prioritize strategic investments that position us as an industry leader in fuel efficiency and digital technologies. These advancements are designed to enhance our customers' productivity, capacity utilization, and safety. Now let's take a look at segment results on Slide 12. Starting with the Freight segment. As I already discussed, Freight segment sales were up 8.4% during the quarter. GAAP segment operating income was $414 million, driving an operating margin of 19.8%, down 0.4 percentage points versus last year. GAAP earnings were adversely impacted by purchase accounting charges resulting from our acquisition of Inspection Technologies. Adjusted operating income for the Freight segment was $513 million, up 9.9% versus the prior year. Adjusted operating margin in the Freight segment was 24.5%, up 0.4 percentage points from the prior year. The increase was driven by improved gross margin behind contract escalation and the addition of Inspection Technologies, partially offset by unfavorable mix between services and equipment businesses. Finally, segment twelve-month backlog was $6.09 billion. Our twelve-month backlog was up 9.5% on a constant currency basis, while the multi-year backlog reached a record level of $20.91 billion, up 18.4% on a constant currency basis. Turning to Slide 13, Transit segment sales were up 8.2% at $793 million. When adjusting for foreign currency, Transit sales were up 5.2%. GAAP operating income was $115 million. Restructuring costs related to integration and portfolio optimization were $3 million in Q3. Adjusted segment operating income was $123 million. Adjusted operating income as a percent of revenue was 15.5%, up 2.7 percentage points. The increase was driven by higher adjusted gross margin behind integration and portfolio optimization efforts as well as strong operational execution. Over the past couple of quarters, the Transit team has focused on more appropriately balancing production across the year, and as such, we do not expect the typical lift that we have seen in the fourth quarter. We expect fourth quarter adjusted margins to be relatively flat prior year. Additionally, we expect adjusted margins to expand to the mid-teens on a full-year basis. Finally, Transit segment twelve-month backlog for the quarter was $2.18 billion, which was up 3.9% on a constant currency basis. The multi-year backlog was up 1% on a constant currency basis. Now let's turn to our financial position on Slide 14. Third quarter operating cash flow generation was $367 million, which was lower on a year-over-year basis resulting from higher tariffs and increased working capital. We continue to expect greater than 90% cash conversion for the full year. Our balance sheet and financial position continue to be strong as evidenced by first, our liquidity position, which ended the quarter at $2.75 billion, and our net debt leverage ratio, which ended the third quarter at 2.0 times. After the funding of the purchase of Inspection Technologies for approximately $1.8 billion, we expect our leverage ratio to remain in our stated range of 2 to 2.5 times upon closing of both the Delner and Frauzer Sensor Technology acquisitions, which we believe will close within the next couple of quarters. We continue to allocate capital in a disciplined and balanced way to maximize return for our shareholders. With that, I'd like to turn the call back over to Rafael to talk about our 2025 financial guidance. Rafael Ottoni Santana: Thanks, John. Now let's turn to slide 15 to discuss our 2025 outlook and guidance. As you heard today, our team delivered a very strong quarter while continuing to navigate through a challenging environment. Our global pipeline remains strong, and our twelve-month and multi-year backlogs provide visibility for profitable growth ahead. We remain encouraged by the pipeline of opportunities that remains ahead of us. Our team's commitment to product innovation, disciplined cost management, and partnership with our customers has been instrumental in driving our ongoing success. As we look to the fourth quarter, in light of our strong third quarter results and our ongoing underlying momentum, we are raising our full-year adjusted EPS guidance. We now expect adjusted EPS to be between $8.85 to $9.05, up 18% at the midpoint. Looking ahead, I'm confident that Westinghouse Air Brake Technologies Corporation is well-positioned to drive profitable growth to close out 2025 and beyond. Now let's wrap up on Slide 16. As you heard today, our team continues to deliver on our value creation framework thanks in large part to our resilient installed base, world-class team, innovative technologies, and our continued focus on our customers. As we move into the final quarter of the year, we remain focused on our commitment to creating value for our stakeholders and maintaining the momentum we have generated. Our team's dedication positions us to continue driving Westinghouse Air Brake Technologies Corporation's success even in a dynamic and uncertain economic environment. With that, I want to thank you for your time this morning. And I'll now turn the call over to Kyra to begin the Q&A portion of our discussion. Kyra? Kyra Yates: Thank you, Rafael. We will now move on to questions. But before we do, and out of consideration for others on the call, I ask that you limit yourself to one question and one follow-up question. If you have additional questions, please rejoin the queue. Operator, we are now ready for our first question. Operator: Thank you. We will now begin the question and answer session. First question is from Angel Castillo, Morgan Stanley. Angel Castillo: Hi, good morning and congrats on another strong quarter here. Just wanted to touch on one of the primary concerns that we sometimes hear from I think so this year your organic growth has been in the low single digits versus your algorithm of kind of mid-single digits here. So Rafael, could you just talk about maybe why you do not share this concern by unpacking two key things that I think are important here? So just first maybe you give us more color on the strong pipeline of opportunities that you talked about and just kind of what that tells you about the magnitude or the pace of kind of ultimately orders that you anticipate particularly in North America freight? And then two, your backlog itself already seems to imply a reacceleration in organic growth, I think, next year toward kind of high single digits range. So is that correct? And any preliminary thoughts you can share on just kind of organic growth expectations? For 2026 and just kind of the shape across your businesses? Rafael Ottoni Santana: Hal, as you speak here, I mean, you have got to look into the pipeline dynamics and it continues to be strong. I think one of the elements is the twelve-month backlog. The growth in the twelve-month backlog has outpaced the growth we saw last year. And with that, we have a stronger coverage right now this year than we had a year ago. So that's a positive right there and stronger coverage as we look into 2026. I think the other element is the total backlog, which even though it reached an all-time high in the third quarter, our pipeline of opportunities remained strong and we actually expect further growth moving to the fourth quarter. And the reason for that is really tied to I'll start first. I mean, we're bullish across some key international markets. Kazakhstan continues to see strong demand and that's driven not just by volume growth, I mean, you've got new rail lines, you've got fleet renewal, we're seeing similar momentum. Where if you look across CIS countries, in East Asia, you take for instance Brazil, we're saying the same things on fleet renewal in iron ore. We are seeing volume growth in agriculture, which remains strong. In Africa, we continue to see opportunities to expand the revenues in the continent. In mining, demand for ultra-class is another bright spot and it's right where we play. On transit, you see we continue to grow profitably. We're continuing to enhance the competitiveness of the business. So all in all, I think there are elements of the pipeline, which continues to be strong. Our total active fleet is running harder and we're continuing to expand our fleets around the world. We now expect combined volumes for both new locomotives and mods to keep growing as we head into 2026. And backlog numbers support it. I think you continue to see international outpace North America. And I think with that, they're both positive. Angel Castillo: That's very helpful. Thank you. And maybe just a quick follow-up on the services side. You just unpack what core services versus maybe the mod are in kind of second half 2025? And as you look at I think you just mentioned for 2026, you expect margins and equipment to grow or locomotives to grow next year. You expect mods to grow within that as well next year? Rafael Ottoni Santana: So the valuation you see there on the results in the quarter for services is exactly tied to mods and we expect that to continue to vary and it's going to be really a function here of where our CapEx is allocated. It's more towards new or some elements of modernizations. You asked about the core services. We continue to see that growth in the 5% to 7% range. As we look forward. And I think we continue to have fundamentals that drive that, which is ultimately connected to the age of the fleet, the innovation that allows customers to have a return on those investments. And we're continuing to win share of wallet with customers. Even when fleets are down, we see us last down the overall market. So, I think the dynamics and the fleet dynamics do not change. International continues to expand. And the North America market, the fleets continue to run hard. Angel Castillo: Very helpful. Thank you. Operator: Next question is from Ken Hoexter, Bank of America. Ken Hoexter: Hey, great. Good morning. And I concur, a great job on the quarter and the 8.5% growth in sales and backlog. So I guess similar questions, just want to focus on that backlog and thoughts on what we have in this upcoming, I guess twelve-month process. So how should we think about the two upcoming acquisitions? And then organic growth after that is maybe talk about your near-term backlog a little bit or your view on organic growth there? Rafael Ottoni Santana: I'll start and I'll let John comment on the specifics here. But as I said, as we stand here today, we've got stronger coverage for '26 than we did a year ago coming to 2025. So that's a positive. I think we're seeing stronger momentum. You asked about acquisitions in that regard. Evidence is really more of a flow business. So minimum really impact in terms of the total backlog. But with that, let me pass it on to John. Ken, with regards to the acquisitions, when we look at Evident, obviously, we've built in the first quarter has the first quarter of our ownership, the third quarter has progressed on track. Volumes are right where we expected them to be. And we're seeing in the first quarter of ownership both accretive margin to the overall company as well as slightly accretive EPS. So things are checking there really well. Through one quarter of ownership. We've got two more to go, as you know, Ken. With regards to Frauzer, we'd expect by the end of the year and Delner sometime prior to the within the 2026. Neither of those are in our guidance today. And we will include those when we close on them. And that will provide obviously inorganic growth as we move into 2026. And I also expect those two to be accretive from a margin standpoint as well as slightly accretive from EPS. But everything is tracking well. On the three acquisitions. Ken Hoexter: And then for my follow-up, you talked about the shift to builds versus mods, you telegraphed that well. Obviously, we're not seeing maybe as much of the margin impact. John, you kind of mentioned that in prepared remarks. That more a cost offset in the cost programs? Was it something else in terms of better margin on pricing that you can walk us through? I think you noted more muted margin expectation for the fourth quarter. I know if that was just for freight. Overall. So I don't know if you want to dig into the margin view though. A couple of things Ken. Number one is, as we certainly felt the impact of unfavorable mix in the third quarter. We had a lot of other things going well. Which we had anticipated overall. From our expectations, we came in slightly favorable in terms of margin in the third quarter, but largely on track. And again, that was running by driven by running the business very well. Operational excellence was very strong in the quarter. We had some favorable timing with regard to price escalation. And then the integration programs are dropping a fair amount of favorability. So that was offset by that unfavorable mix. As we look to the fourth quarter, very similar as we talked about last quarter, Ken, is we expect margin margins to expand the margin growth to expand in the fourth quarter from what we've seen in the third quarter. Now on an absolute basis, as you know, margins will be down absolute basis. On our fourth quarter you seasonally lower largely because of fewer production days and the absorption that goes along with that. So again, we're tracking to where we expected for the fourth quarter. Raised guidance a little bit this period and that was for the fact that we're coming in a little bit favorable on margins in the third quarter. We'd expect that to carry forward. Ken Hoexter: Great. Thanks, John. Thanks, Rafael. Operator: Next question is from Bascome Majors, Susquehanna. Bascome Majors: Thanks for taking my questions. Rafael and John, release and the deck talk a bit about tariff pressure on cash flow as it seems to be flowing into inventory. Can you talk about where we are on your net offset and just as that flows into the P&L over the coming quarters, how should we think about the impact on both the top line gross profit and ultimately the bottom line of the business? Thank you. John A. Olin: Sure, Bascome. So let's kind of talk about the cadence of the tariffs coming in. When our product comes across the border, the tariff is owed, right? So that hits cash first. We're certainly seeing pressure on overall cash. As that increased expense comes through. Now what that does is that gets inventoried and flow through our regular inventory. And it being a long cycle product as we are, or a fair amount of our products are. It typically is going to take two to four quarters for that to come through the P&L. So in the third quarter, are seeing the financial impact of tariffs and certainly have seen the cash impact. Now that's the kind of the gross impact, right? And then the net impact is couched with what we're doing to offset those tariffs or to mitigate them. And we've talked Bascome in the past and worth repeating I think today, is there's four-pronged approach that we're spending a lot of time on and working very hard at all facets. The first one is to get all the exemptions that we're entitled to. And I think the best example of that Bascome is the USMCA. And this is for Canada and Mexico tariffs and qualifying our products. I think our team has done an extraordinary job of getting off and getting that done, and we've a very high percentage that qualify there. The second area is on the supply chain. Right? We can move products around, not always easy, not always cheap, but we're looking at those opportunities in given the shifting landscape of tariffs should we be sourcing in other jurisdictions. And that's going on and that will continue to go on, as we move through the next several quarters. The third area is sharing costs with our customers. And so we've been doing a fair amount of that. As well. And the fourth area, Bascome, I'd call it kind of a wraparound. Is we are taking the entire enterprise and making sure that we make our commitments, and we're being incredibly prudent on spending that we do and very cost-focused on everything across the company. To again assure that we can do our best to cover the tariffs that are coming at us. Bascome Majors: Thank you for that comprehensive answer, John. And just to clarify something from earlier, Rafael, you said new locos and mods, expect units to be up again next year. Was that a North America comment or a global comment? And as you roll out the new mod product, I think later next year in North America, do you think that mix kind of shifts more balanced back into mods as that grows? Thank you. Rafael Ottoni Santana: It was a comment with regards to total. So if you look at the combination of mods and new units, and with that, I mean, the stronger variation we see between those dynamics between new and mods is in North America. In that regard. But dynamics are positive. As we look at the total and the backlog certainly supports that from both twelve-month backlog and special as some of those products have longer lead times. Operator: Next question is from Rob Wertheimer, Melius Research. Rob Wertheimer: Hi, thanks. Good morning. So there's a lot that went well in the quarter. To me, I guess the gross margin was maybe the most and I know you touched on it. John just mentioned some of the contract issues in your prepared remarks, but seemed like you had some headwinds on mix and material. I wonder if you could expand on what went right in gross margin? And then is that escalation contract escalation steady thing that continues over the years? Was there a lumpiness to it? Maybe just comment on that. Thank you. John A. Olin: Yes. In terms of the escalation, it is exactly what it means is it's recovering our costs. So there's no net benefit, but the timing of it does have an impact, Rob. Right? These are typically annual escalators. And so there's differences sometimes between when the cost hit and when we recover that money, there's typically a lag. But we saw a little bit of positive there. The other thing that you're seeing in gross margin is a favorable mix as we bring inspection technologies in. Inspection Technologies comes at a significantly higher gross margin than the rest. So we're seeing a little bit of a mix favorability with Inspection Technologies. But again, the biggest piece of all of this Rob, is just the company is running well. Everyone is in the company is focused on cost. And the momentum that we've got is we continue to see and it's coming out of the first and second quarter seeing it in the third quarter and we'd expect that to continue into the fourth quarter and into 2026. Rob Wertheimer: Okay. Thank you. Operator: Next question is from Scott Group, Wolfe Research. Scott Group: Hey, thanks. Good morning. So John, I thought that last answer on tariff was really helpful. I just I had a follow-up. When you think about the gross impact of tariff in the timing issues, what quarter would you say is like the peak gross impact of tariff? And then given all the mitigation efforts, is the is the quarter of like the biggest like net impact any different meaning is that is the net impact sooner or later if you understand what I'm trying to figure. John A. Olin: Yes, I do, Scott. I don't think we're that precise to start with. But I think the highest gross the highest net would be the very similar. And certainly the gross part of the tariffs is a driver of the movement. Right? And it's hard to tell exactly what quarter that's going to be because of how everything's flowing through inventories. But we're focused on doing everything we can to mitigate them and the entire company is working hard, at doing that. Scott Group: Maybe just ask like a little differently, like do you think we've seen the biggest impact yet? Or I know like last quarter you said like you think the net impact of tariff after mitigation is sort of immaterial. Do you still feel that way? John A. Olin: I don't think we've seen the largest gross or net impact on tariffs. I think that's still in front of us over the next couple of quarters. And that's why we continue to work a lot of our cost out plans, a lot of the elements in terms of supplier mitigation as John described and make no mistake pricing. Is a key element of that too. Scott Group: Makes sense. And if I could just ask one last one, you've done like such a good job getting these transit margins better, like do you think those can go over the next couple of years? I know you've got long-term margin guidance for the consolidated business. Should think about similar sort of upside in terms of couple of 100 basis points more to go in transit? That the right way to think about. Rafael Ottoni Santana: Hey, we see it as continuous improvement. You go back four, five years ago, we had given really a direction of heading to mid-teens. We're now heading to high teens. And I think it really not just a function of running the business better which we'll continue to do it. The other piece is also how you continue to rethink the. And as John has highlighted, we've exited also some businesses starting the process of acquiring better businesses into that portfolio. So we look at this as continuous improvement. We look at this as an evolution of the portfolio. Scott Group: Good stuff. Thank you guys. Appreciate it. Rafael Ottoni Santana: Thank you, Scott. Operator: Next question is from Saree Boroditsky, Jefferies. James: Good morning. This is James on for Saree. Thanks for taking questions. So you gave a great color on international pipeline. But you also kind of talked about strong pipeline in North America. So can you kind of talk about what you're seeing in terms of like customer activity, order trends? Or any key drivers in the North America pipeline? Rafael Ottoni Santana: Yes. So I think, well, I'm not going to make any comments with regards to specific customers. But what I'll tell you is, the view that the fundamentals of the fleet, they remain the same. I mean customers are running aged fleets. If you look at the fleet running in North America right now, over 25% of that fleet is over twenty years old. And that's excluding the two thousand modernizations we've done since 2015. So that's a significant element. The other one is, if you think about the fleet that's running, also a similar amount of over 25% are still DC locomotives. And you know, you can replace here for every three locomotives you could have two AC running. So the sense of modernizing units to AC, upgrading control systems, that actually allows the Class 1s to cut fleet sizes. It not just addresses things like obsolescence, it improves asset productivity, it improves reliability, and if you think about services, it lowers maintenance cost. So the way we look at it, I mean, I don't see fleet renewal it's not discretionary. I think it's actually a key lever for how they improve their operating ratio, how they improve quality in terms of the service and the overall competitiveness. So think we see this very much aligned those dynamics have not changed. James: Great. That's a great color. And I guess kind of on the international side, it's great to see like $4.2 billion like Kazakhstan contract win. Like can you kind of talk about what exactly is included in that contract? And when do you expect it to kind of begin to convert into revenue? Rafael Ottoni Santana: So I'll let John go into the specifics of each contract. But the way we look at it, very much this is providing us coverage for a region that continues to grow. And it's not just an element of volume that's growing. There's new projects and new lines that will accelerate that growth further. There are elements of just fleet renewal fleet that continues to age in that context. So I think those are all positive. And most importantly, we also have the service agreements where we ultimately support those fleets from an availability and reliability perspective. John A. Olin: Yes. And Jason, the contract the deal with Kazakhstan is made up several contracts. One is for locomotives, for 300 locomotives over a ten-year period of time. The other contracts are for the service, as Rafael had just mentioned. So what we've done is re-upped the service for all the existing re-upped it and extended it. All the existing locomotives that we're currently servicing there. We've also added a new service contract for all those 300 that will be coming in. And those will average over a fifteen-year period of time. James: Great. Thanks for taking questions. Thank you. Operator: Next question is from Brady Steven Lierz, Stephens. Brady Steven Lierz: Thanks. Good morning, everyone. Rafael, recently we've seen a change in FRA leadership and I wondered if you could give us an update on the regulatory environment. Are you seeing any increased momentum or desire from your customers to implement kind of some of these advanced technologies Westinghouse Air Brake Technologies Corporation has worked to develop? I think of Zero to Zero as a great example. Is that something we could see implemented here in 2025 or 2026? Or is there more kind of wood to chop on the regulatory front? Rafael Ottoni Santana: I think, yes, we are. It's good to see that momentum and pointed absolutely right. I think zero to zero is the first one, but we've got other digital tools that we've been working with customers and it's great to see the new leadership with the new incoming administrator. And I think the support is there. To focus on really advancing what I'll call both rail safety and supporting innovation there. So dynamics are positive and that certainly will contribute to the digital business here as we gain momentum in North America. Brady Steven Lierz: Thanks. Maybe just as a follow-up, you've had a full quarter with Inspection Technologies now you just talk about how integration has gone so far and maybe any customer feedback. Are you seeing kind of signs of cross-selling momentum or is it a little too early for that? Rafael Ottoni Santana: I think it's been a positive. I mean it's early days. It's still, but it's a positive. I think we've described how well we knew some of the leadership team and the leadership team knew some of us. So I think it's been a good process and full edge in a lot of ways. There's a lot what the teams are working on right now but it's good to see the first quarter. The first results, which are really I'll call very much aligned a bit ahead but aligned to what we touch. And I think it's a testament to the quality of really the acquisitions we've looked into it and the quality of the leadership team. That are involved in this. Brady Steven Lierz: Great. Thanks so much. Leave it there. Operator: Next question is from Ben Moore, Citigroup. Ben Moore: Yes, good morning. Thanks for taking our questions and congrats on a great quarter. Going back to the gross margin discussion, very strong deep there above consensus and year over year. Appreciate your color on the contract escalation and adding inspection technologies and mix was a headwind. Along with the unfavorable materials on the higher tariffs. But can we maybe hone in on how pricing is trending as part of that gross margin growth? You're working together with your customers on kind of sharing the tariffs. Would love to hear any color you share on how pricing is trending? John A. Olin: Yes. Ben, we are working all of those four levers. Certainly pricing is one of them. And with that, in the third quarter, we are seeing a marginal amount of pricing that's included in the revenue side. And again, it's still work to be done ahead of us. But I would not say that's any a core driver of what we're seeing in the third quarter, but pricing is certainly included in the results. Ben Moore: Really appreciate that. Maybe as a next one, you raised your EPS guide with a hold on your revenue guide, implying more opportunity on the cost side. The guide slide in presentation mentioned adjusted operating margin up but the implied 4Q EPS would be at $2.08 below consensus at $2.12. Is that due to below the line items? John A. Olin: Number one, Ben, typically we don't comment on consensus. What we've talked about is where what we've said and versus what we've said, we feel better about the fourth quarter and have raised our consensus by $0.1. And with that, we would expect when you look at kind of the implied fourth quarter we expect a very strong fourth quarter. Matter of fact, when you look at what's implied is a midpoint of 11.25% in terms of revenue growth and we'll see very strong organic growth during that period of time. And on a bottom line, we're looking at about 24% on EPS growth. Ben Moore: Okay. Really appreciate that. Maybe if I could squeeze in just one last one. With the UPNS proposed merger progressing, can you comment on your experience with CPKC as they merged in 2023 and increased their locomotives and active service in their first year combined winning volume from truck and how might your experience with a potential UPNS or BNCSX be similar as they potentially increase their locomotives and active service as they grow volume from truck in their first year combined? Rafael Ottoni Santana: Well, couple of comments. First, I'm not going to comment on any specific mergers here. But we continue to see this as a significant opportunity for what I'll call increased carloads and rail volumes over time. Which would be a positive for us. So I'll start there first. I think what's most important is as you look into any consolidation, I think the sense that temporarily you could see fleet reductions and pacing of near-term investments I think that misses that bigger picture view which is the one I gave you on the fleet dynamics. Which is both associated with the age of the fleet. It's associated with the fact that you still have a lot of DC locomotives. And customers can actually gain from those investments. And as I said before, I don't see fleet renewal as discretionary. It's actually a core lever ultimately. I mean, you're bringing those units that are 25 years of age or older and they're running hard. I mean it becomes highly costly to maintain those units. And that's what really triggers the elements of modernizing and sometimes really having to shift more towards the acquisition of new. Ben Moore: Really appreciate your time and insights. Rafael Ottoni Santana: Thank you. Thanks, Ben. Operator: Next question is from Tami Zakaria, JPMorgan. Tami Zakaria: Hi, good morning. Thank you so much. I wanted to touch on the component segment. It's great to see it inflected to growth in the third quarter. Should we expect this growth to accelerate in the fourth quarter and maybe build momentum in 2026? Or asked another way, how should we think about components growth on a normalized basis, if you could comment? Rafael Ottoni Santana: I think, Tami, a couple of things. I mean, you're looking to the year, I'd say our businesses are largely really tracking to plan in terms of growth. I think the notable exception has been the railcar builds, which is really rough what $100 million impact for us versus last year. Which I mean it was kind of expected, but it gotten worse. Since the beginning of the year. So I think that's one of the elements to keep in mind. And overall business, we continue to be pleased with the progress. I think the team has continued to take action here. To adjust operations to new volume realities. We're doing very well internationally. On that business and the team is finding opportunities here to continue to grow in that. And I think the other element of the components business is the dynamics you see on industrial. They are positive and that's really a function of demand that comes from especially the heat exchanger business and that's both for mining. If you look at the L and M acquisition, we did, but it's also from power generation with more demand for heat exchangers in that context. And that's to a large extent AI driven. Tami Zakaria: Understood. Thank you. If I may ask one more, the Kazakhstan deal, very impressive, definitely boosted backlog, total backlog. I'm just curious, the 300 locomotives under that contract, is that also over the next fifteen years or could the delivery of those could be more front-end loaded? Rafael Ottoni Santana: I think the way we look at the contract and the way it has played out even with the previous agreement, it provides us more coverage to support. So the previous agreement we ended up exhausting it a lot sooner and it's really a function of the continued growth. You see in Kazakhstan which is threefold. One is the volume growth on the existing lines. You've got new lines and new projects that are being built. And you've got some locomotives that are quite old. I mean, some of the first locomotives we worked in Kazakhstan they're like early two thousand. Those were modernizations that they've really exhausted their life. So it's really threefold what we've seen the dynamic and it's a market we continue to expect acceleration into it. John A. Olin: Tami, the 300 are for ten years. So now again, as Rafael had mentioned, the last contract ended prior to its natural end because they exhausted those. But right now, this is kind of a think of it as a baseload over the next ten years. Tami Zakaria: Appreciate the time. Thank you. Rafael Ottoni Santana: Thank you. Operator: Next question is from Steve Barger, KeyBanc Capital Markets. Steve Barger: Hey, thanks. Good morning. Good morning, Just a follow-up on Kazakhstan. Did that deal for the new locomotives include the full suite of digital products upfront? And with subscriptions in the service part. And then can you just give us an update on digital penetration for international more broadly? Rafael Ottoni Santana: Yes. So it does not include the digital products. So that's actually an opportunity we have, but capitalize on it. And it goes from, I'll call some very much proven products, such as STO and well, zero to zero and so forth. But I mean, we also continue to have opportunities with PTC and those are some of the things that are being discussed. I think what's most exciting here is the fact that could all remains there besides Kazakhstan. We're seeing that in the CIS countries. We've got a lot of support from what I call governments here to make sure that we land those fleets in other countries around the region. So that's a positive. And on the digital electronics, as per your question, I think we continue to see opportunity here to expand penetration on that. And that touches both onboard electronics which speaks for TL, smart HPT, zero to zero but PTC is also continues to be a bright spot in terms of how railroads look at improving safety of their operations around the world in a cost-effective way. Steve Barger: Yes. That's good detail. Thanks. And just I know it's early to talk about Frauzer and Delner, but just high level, does the technology side of those deals integrate to your existing software and service stack easily do you think? Just trying to get a sense of how fast you can kind of get that going for cross-selling? Rafael Ottoni Santana: It does. It integrates very well. And I think we've got really, I think, the element of scale to help those business get further momentum which would really spell growth into various markets that were present. We see the opportunity here not just to deliver on the cost synergies, is really what we based acquisitions on, I think there is really momentum to be gained here in terms of growth and share gain, share of wallet gain with customers in overall markets. Steve Barger: Great. Thank you. Appreciate the detail. Rafael Ottoni Santana: Thank you. Operator: This concludes our question and answer session. I would like to turn the conference back over to Ms. Yates for any closing remarks. Kyra Yates: Thank you, Alicia, and thank you everyone for your participation today. We look forward to speaking with you again next quarter. Operator: Conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Welcome and thank you for standing by. At this time, all participants are in a listen-only mode. Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now I will turn the meeting over to Olympia McNerney, IBM's Global Head of Investor Relations. Olympia may begin. Olympia McNerney: Thank you. I'd like to welcome you to International Business Machines Corporation's third quarter 2025 earnings presentation. I'm Olympia McNerney, and I'm here today with Arvind Krishna, IBM's chairman, president, and chief executive officer, and Jim Kavanaugh, IBM's Senior Vice President and Chief Financial Officer. We'll post today's prepared remarks on the IBM investor website within a couple of hours, and a replay will be available by this time tomorrow. To provide additional information to our investors, our presentation includes certain non-GAAP measures. For example, all of our references to revenue and signings growth are at constant currency. We provided reconciliation charts for these and other non-GAAP financial measures at the end of the presentation, which is posted to our investor website. Finally, some comments made in this presentation may be considered forward-looking under the Private Securities Litigation Reform Act of 1995. These statements involve factors that could cause our actual results to differ materially. Additional information about these factors is included in the company's filings. So with that, I'll turn the call over to Arvind. Arvind Krishna: Thank you for joining us today. In the third quarter, International Business Machines Corporation delivered strong results across revenue, profit, and free cash flow, exceeding our expectations. Revenue growth accelerated to 7%, our highest growth in several years, with all our segments accelerating sequentially. These results underscore the strength of our business model and portfolio, and the innovation we are delivering to clients. Clients continue to turn to IBM as a trusted partner to help them modernize, embed AI, and build resilient infrastructure. Let me touch on the economy before I turn to our execution. Last quarter, I said we had moved from being cautiously optimistic to optimistic. Technology remains a key driver of growth and competitive advantage. AI adoption is accelerating, and hybrid cloud remains the foundation of enterprise IT. Clients are leaning on enterprise technologies to scale, innovate, and drive productivity. There are always macro uncertainties, but overall, we continue to see broad-based demand from clients and remain optimistic. Now turning to our execution this quarter. Our strategy remains focused on hybrid cloud and artificial intelligence. Our products and services fuel growth and productivity for our clients. You can see this in our results for the quarter. Software growth accelerated to 9%, led by strength in automation. Automation was up 22%, highlighting our end-to-end portfolio of leading solutions that optimize operations, automate infrastructure and workflows, build resiliency, and drive cost efficiency for clients. Many of our automation products are infused with AI, enhancing their capabilities. HashiCorp also continues to accelerate within IBM, benefiting from our go-to-market distribution and joint product innovation, highlighting our synergy potential. Consulting accelerated, reflecting growing demand for AI services as clients need help designing, deploying, and governing AI at scale. And infrastructure delivered robust performance, growing 15%, driven by continued strength in z17, our strongest February launch in history. The Spire Accelerator, which will be available in Q4, will bring advanced generative AI and real-time inferencing capabilities inside IBM Z, redefining how enterprises capture AI value within their most mission-critical environments. In addition to being a demand driver, AI is also a powerful productivity driver for IBM, contributing to our strong financial performance. In 2023, we set out on a goal to achieve $2 billion of productivity savings, and today, we are well ahead of that with an expectation of $4.5 billion of annual run rate savings exiting this year. I believe we have significant opportunity ahead of us to continue to become even leaner and more nimble. Our client zero approach sets us apart as we have internally identified and addressed pain points on data readiness, siloed and vertical workflows, application and IT sprawl, using our own technology and domain expertise. Clients see these results and look to us to help them on their own transformations, driving over 1,000 client zero engagements this year. The breadth of our AI offerings is a key differentiator, combining an innovative technology stack with consulting at scale and our client zero journey. Our Gen AI book of business continues to show momentum, at over $9.5 billion inception to date. In consulting, we are embracing disruption and leading the way with our digital asset and services and software strategy. While we are early in this journey, we have over 200 consulting projects using digital workers at scale. In software, demand for Watson X and Red Hat AI remains strong, with early momentum in our agentic platform WatsonX Orchestrate. WatsonX Orchestrate helps enterprises deploy AI by connecting agents, models, and workflows with governance and security. Orchestration will be critical as enterprises run a variety of models to optimize cost and performance. Our hybrid approach to models enables clients to use the best option for each use case. IBM's Granite models, third-party models, or open models from Hugging Face, Meta, and Mistral. We recently launched Granite 4.0, our next-generation family of open small language models. Granite 4.0 delivers high performance and cost efficiency using 70% less memory and offering twice the inferencing speed of conventional models. We also partnered with Anthropic to infuse Chloride into IBM products to unlock new Gen AI features and capabilities. This week, we announced a partnership to run Watson X on Grok, giving clients access to their inferencing technology, which provides ultra-high-speed, low-latency AI capabilities at lower costs. All this leads to real tangible value for clients. Companies like Deutsche Telekom and S&P Global are embedding Watson X into core workflows. In infrastructure, clients such as Nationwide, State Street, and Credit Agricole are turning to AI to manage increased workloads and use z17 for its advanced AI inferencing capabilities and enhanced resiliency. Accelerating innovation remains a core focus for IBM. At our recent IBM Tech Exchange Developer and Builder Conference, we showcased how we are helping clients and partners with innovation that blends enterprise strength and AI speed. We had almost twice the number of participants as last year, with speakers including United Airlines, T-Mobile, Prudential, UPS, Morgan Stanley, Verizon, and Cigna. We announced Project Bob, facilitating AI-powered software development, helping teams ship higher quality code faster. We have more than 8,000 developers within IBM that are using Project Bob, reporting productivity gains averaging 45%. Another powerful client zero use case. We also announced new automation capabilities, including a real-time infrastructure graph connecting applications, services, and ownership through HashiCorp Terraform. As outlined at our Investor Day, we are on a path to demonstrate the first error-corrected quantum computer by 2028 and continue to deliver key milestones in our quantum roadmap. As we collaborate with our ecosystem of over 280 partners, we are making tangible progress on near-term use cases. For example, HSBC achieved a notable improvement in bond trading predictions using IBM's Heron quantum processor. Vanguard announced a breakthrough in optimizing portfolios using IBM's quantum computing as a service. We recently announced a partnership with AMD to build quantum-centric supercomputing architectures leveraging IBM's quantum expertise and AMD CPUs, GPUs, and other accelerator technologies. Just last week, IBM and the BaaS government unveiled Europe's first IBM Quantum System Two. This marks the second installation outside The United States and underscores our commitment to global leadership in quantum computing. In closing, we are executing on our strategy of accelerating revenue growth and delivering higher profitability. Given these results and the momentum in our portfolio, we are raising expectations for revenue growth to more than 5% and free cash flow to about $14 billion for the year. With that, let me hand it over to Jim to go through the financials. Jim Kavanaugh: Thanks, Arvind. In the third quarter, our revenue growth accelerated to 7%, our highest growth in several years, with all of our segments accelerating sequentially. Revenue scale, mix, and productivity drove 290 basis points of adjusted EBITDA margin expansion, 22% adjusted EBITDA growth, and 15% operating earnings per share growth, highlighting the significant operating leverage in our business model. And through the first nine months, we generated $7.2 billion of free cash flow, our highest nine-month free cash flow margin in reported history. We exceeded our expectations on revenue, profitability, adjusted EBITDA, earnings per share, and free cash flow, reflecting the strength of our portfolio and the disciplined execution across our business. Software revenue grew 9%, fueled by accelerating organic growth, up a few points since last quarter, and continued contribution from our high-value annual recurring revenue base, which grew to $23.2 billion, up 9% since last year. Growth in automation accelerated to 22%, driven by strength in the organic portfolio and early synergies with HashiCorp, which maintained momentum and delivered its highest bookings quarter in history. Red Hat bookings growth accelerated to about 20%, and revenue grew 12%. This performance was driven by a softening in consumption-based services and Rell trending back towards single-digit growth as we wrap on last year's exceptional double-digit performance. Demand for our hybrid cloud products remains strong, and all three of our major subscription offerings gained market share again this quarter, with growth accelerating for both OpenShift and Ansible. OpenShift ARR is now $1.8 billion, growing over 30%. Data was up 7%, driven by continued strength in our AI portfolio. And transaction processing revenue declined by 3%, reflecting another quarter of z17 outperformance as clients continue to prioritize hardware spend on our latest IBM Z system. While this dynamic impacts near-term revenue, we're encouraged by a healthy pipeline that positions us well for future demand. Infrastructure delivered another strong quarter, growing 15%. Hybrid infrastructure grew 26%, and infrastructure support was flat. Within hybrid infrastructure, IBM Z delivered its highest third-quarter revenue in nearly two decades, up 59% year to year, fueled by the early success of our z17 platform, purpose-built for AI and hybrid cloud, with breakthrough capabilities in real-time inferencing, quantum-safe security, and AI-driven operational efficiency. Clients are investing in z17 not only for its reliability and scalability but because it enables secure high-performance computing at the core of their digital transformation strategies. Distributed infrastructure, up 8%, reflects broad-based growth across our storage portfolio as clients scale capacity to meet rising data and AI demands. Consulting returned to growth in the third quarter with revenue up 2%, improving sequentially and marking a positive inflection point in performance. Intelligent operations was up 4%, while strategy and technology revenue stabilized, with both lines of business showing quarter-over-quarter momentum. This growth reflects solid demand for our strategic offerings: business application transformation, application modernization and migration, and application operations as clients focus investments on solutions that accelerate AI transformation and maximize return. As Arvind mentioned, we are embracing AI disruption and leading with the software-driven services delivery model. We are transforming into a hybrid model of people plus software that delivers efficiency and scale. This approach is already driving internal productivity, reflected in the 220 basis points of segment profit margin expansion year to date, and resonating with clients seeking to operationalize AI strategies. By combining domain expertise with scalable technology platforms, we reinforce our role as a strategic provider of choice in this evolving landscape. Our consulting generative AI book of business accelerated to over $1.5 billion in the quarter, with the number of projects more than doubling year to year, underscoring our momentum. While total signings declined this quarter, the quality of signings continued to strengthen, with more strategic wins from new clients and expanded engagements within existing ones. Turning to profitability, we have delivered nine consecutive quarters of operating pretax margin expansion, highlighting the evolution of our portfolio mix and our laser focus on productivity, which again played out this quarter. Revenue scale, mix, and productivity drove expansion of operating gross profit margin by 120 basis points, adjusted EBITDA margin by 290 basis points, and operating pretax margin by 200 basis points, ahead of our expectations and well above our model. Segment profit margins expanded by 420 basis points in infrastructure, 270 basis points in software, and 200 basis points in consulting, with consulting margins at the highest level in three years. Revenue scale and mix contribution from IBM Z is a significant source of profitability and free cash flow, and combined with the three to four times stack multiplier, helps fuel our investment in innovation and drive growth. Productivity is also a key driver of profit margin expansion, as we deploy AI at scale across IBM in areas including finance, supply chain, sales, HR, service delivery, and customer support to improve efficiency and reduce costs. While we have made progress on this journey and expect $4.5 billion of run rate savings exiting this year, there is still significant opportunity ahead for us to drive even more efficiency and cost savings. Through the third quarter, we generated $7.2 billion of free cash flow, up about $600 million year over year, resulting in our highest year-to-date free cash flow margin in reported history. The largest driver of this growth is adjusted EBITDA, up $1.8 billion year over year, partially offset by proceeds from the Palo Alto Q Radar transaction, which resulted in a reduction in CapEx in the third quarter of last year, and working capital dynamics. Our strong liquidity position, solid investment-grade balance sheet, and disciplined capital allocation policy remain a focus for us. We ended the quarter with cash of $14.9 billion. Our debt balance ending the quarter was $63.1 billion, including $11.3 billion of debt for our financing business, with the receivables portfolio that is over 75% investment grade. In addition, year to date, we returned $4.7 billion to shareholders in the form of dividends. Now let me talk about what we see going forward. Through the first nine months of the year, we delivered 5% revenue growth, 17% adjusted EBITDA growth, 10% operating earnings per share growth, and 9% free cash flow growth. The strength and diversity of our portfolio, disciplined capital allocation, and relentless focus on productivity continue to drive the durability of our revenue and free cash flow performance. Given the strength of this performance, we are raising our expectations for revenue, adjusted EBITDA, and free cash flow. We now expect to deliver revenue growth of more than 5%, adjusted EBITDA growth of mid-teens, and free cash flow of about $14 billion for 2025. Let me focus on full-year growth for the segments. We continue to expect software revenue growth of approaching double digits for the full year. Through the first nine months, we delivered growth above our model of 17% in automation and inline model growth of 7% in data. And these trends should continue. And we continue to expect mid-teens growth for Red Hat, albeit at the low end. This is underpinned by strong bookings growth in the third quarter of about 20% and our revenue under contract, which is growing in the mid-teens. As we wrap an elevated growth in consumption-based services last year, we expect double-digit revenue growth in the fourth quarter, with an accelerated growth profile heading into 2026. While transaction processing was down 1% year to date, as clients prioritize spend on our high-value innovation z17, the strength of the new cycle provides future monetization value across the z stack. We are seeing this strength in our pipeline as we enter the fourth quarter, which we expect will return to growth. With continued strength in z17, we now expect infrastructure to contribute over 1.5 points to IBM's revenue growth this year. In consulting, we are encouraged by our return to growth this quarter and continued progress in our Gen AI book of business. And now we see an inflection in growth going forward, with fourth-quarter revenue performance similar to our third-quarter growth. Now turning to profitability. We started this year expecting over 50 basis points of operating pretax margin expansion, and through the first nine months of this year, we delivered 130 basis points of expansion, well ahead of our expectations. This performance is driven by our revenue scale, portfolio mix, and progress with productivity initiatives, enabling operating leverage while providing investment flexibility. We are raising IBM's full-year operating pretax margin expansion to over a point, and our operating tax rate expectation for the year remains in the mid-teens. For the fourth quarter, we are comfortable with consensus estimates for constant currency revenue growth and profitability. Let me conclude by saying we are pleased with our continued disciplined execution and look forward to capturing growth opportunities ahead of us. Arvind and I are now happy to take your questions. Olympia, let's get started. Olympia McNerney: Thank you, Jim. Before we begin Q&A, I'd like to mention a couple of items. First, supplemental information is provided at the end of the presentation. And then second, as always, I'd ask you to refrain from multi-part questions. Operator, let's please open it up for questions. Operator: Thank you. At this time, we'll begin the question and answer session of the conference. And our first question comes from Amit Daryanani with Evercore ISI. Please state your question. Amit Daryanani: Yes. Thanks a lot. Good afternoon, everyone. I guess maybe just want to focus on free cash flow. So I really appreciate the guidance of free cash flow at $14 billion for the year. And if I get my math right, this sort of implies free cash flow is up double digits in '25 and your conversion rates are around 125% give or take. Can you just touch on if there's any one-off dynamics that we should be aware of that are helping in free cash flow in 2025? I'm really just trying to think that as we get into 2026 and if your growth is in line with your longer-term models, is there anything that could preclude free cash flow from growing a few points higher than sales growth, sort of the way you have talked about it? I'd love to just kind of spend a little bit of time on free cash flow. And if anything alters on the capital allocation as well. Thank you. Jim Kavanaugh: Thanks, Amit. I appreciate the question. It's right at the heart of how Arvind is repositioning this company around the two key measures. One, accelerating revenue growth, and two is driving that free cash flow engine that's going to fuel the investments for us to continue to make to drive long-term sustainable competitive advantage. But if you take a step back first, as we said in prepared remarks, we're very pleased with our free cash flow engine starting out the next evolution of our journey coming off the midterm model. Year to date, $7.2 billion, up $600 million year over year, highest free cash flow margin reported history through three quarters for our company. And I'll just state that underneath it, we overcame in the third quarter a $500 million headwind from last year as a result of the Palo Alto QRadar transaction that was recorded as an asset sale and reduction in CapEx. So we got through 2025's headwind around that. What's driving that free cash flow? Probably the most important thing is the underlying fundamentals of our business. An accelerating top-line revenue growth profile and an operating leverage engine that is driving productivities like we haven't seen in a long period of time. I think we're nine quarters in a row of driving operating leverage and significant margin productivity. So I would tell you high quality, high sustainable free cash flow. And that's what gave us the confidence for the second quarter in a row to take up our free cash flow estimate for the year. Now about $14 billion. Why do we do that? We took up revenue, we took up operating margin, we took up adjusted EBITDA, we took up our profitability, and all that leads to free cash flow. When you take a look at what's driving that $14 billion, $2.5 billion give or take year-to-year growth in adjusted EBITDA. Mid-teens growth, well above our model. And underneath that, you take a look at some of the dynamics we've been talking about since back in January. Yes, higher profitable-based engine will pay higher cash tax. Yes, we're investing long-term for this business, we are going to have higher CapEx outside of the QRadar transaction. And, yes, we made a significant strategic acquisition. We've got acquisition-related charges and foregone interest. All of that is embedded in 2025's guidance. Now you take a step back to the heart of your question of 2026. 2026, I would tell you, what is our free cash flow generation engine flywheel? It's accelerated revenue growth, the 5 plus percent in this company, is driving operating leverage and it's leveraging an efficient balance sheet. We see all that continuing to play out in 2026. And those underlying fundamentals, yeah, they deliver a sustainable realization number by the way, in the mid to high one twenties. Kinda to your question. By the way, we've been there for four years in a row already. So we can handle that. So you bring that all together, I think it talks to the statement and the confidence of our focused portfolio. Our disciplined capital allocation, the diversity of our business model, and the relentless focus of us driving productivity and operating leverage that gives us the investment flexibility to continue driving long-term sustainable competitive advantage. So thank you very much for the question. Olympia McNerney: Great. Operator, let's take our next question. Operator: Thank you. And your next question comes from Wamsi Mohan with Bank of America. Please state your question. Wamsi Mohan: Yes. Thank you so much. Arvind, you said AI adoption is accelerating right at the top of the call. And I'm wondering if you can maybe help us think through the financial impact in maybe revenue terms for IBM, how we should think about the progression for that. Are we hitting some kind of inflection that we should see meaningful upside into 2026 on the AI front? And maybe quickly, your quick thoughts on maybe the impact of the federal government shutdown if there is any materiality to that to IBM here in the fourth quarter? And if I could, Jim, if you could just clarify the organic growth in software in the third quarter and expectations for transaction processing going into the end of the year? Thank you so much. Arvind Krishna: Wamsi, thanks for those questions. Let me try and unpack it. Let me go with the easiest one first. The easiest one is on the current government shutdown. I would tell you that we see a de minimis impact to IBM. It's always hard to say zero because something could happen. We still got two months to go in the quarter. But so far, we have not seen any impact from the shutdown. And the reason for that is the makeup of our business. Our technology business is largely comprised of hardware as well as software, software mostly on a subscription basis. These are running critical systems. Payments for social security, benefits for the VA. All of these are considered essential, so I don't really see that at risk. A little bit over half the business is consulting projects. But the consulting we do is of a similar nature. ERP, benefits, helping people reduce paper, reduce errors. Back to payments. These are all considered essential. And that is the reason that we may be in the minority of not seeing any direct impact so far. Now just leave it at that because so far we have not. Nobody has come to us about any of these projects. And so that's the first question that is straightforward. Next, you asked about AI. Look, our book of business, we talked about it being over $9.5 billion. Adjusted consulting piece was $1.5 billion in the quarter itself. These are very real numbers. So as those consulting projects start to get executed, as that backlog builds up, certainly the contribution to consulting is going to be very real. We talked about another number tied there, which is not a different number, is the 200 projects in consulting which are already using digital workers which effectively are the AI agents that we have built that get deployed by our consultants on behalf of our clients. About not quite, but close to 20% of our overall book of business is technology and software. And there, that is mostly subscription revenue, as well as products that people are purchasing from us. So those numbers certainly begin to add up. And I will tell you that a big fuel behind both our OpenShift growth as well as our automation growth is due to the AI capabilities that are infused inside those products. So if I sort of put the first two pieces together, de minimis on the government shutdown, and definitely the AI piece is a strong contributor to the software growth and I believe it's a big piece of why consulting is beginning to return to growth. Because we called the play to move towards AI almost two years ago. So as that book of business has built up, it is overcoming the headwinds from staff augmentation projects going away and people getting rid of discretionary spending and consulting. Jim, I'll let you take the third piece. Jim Kavanaugh: Yes. Just to amplify the last piece and then I'll get into your question about software organic and TP. To Arvind's point, you know, year to date from a software perspective, we're growing 8.5% overall. Approaching 9% right now. About two points of that growth is coming out from our GenAI book of business. So we're getting very good realization and penetration. Arvind's point on consulting, north of a $7.5 billion book of business I'd put that up against any consulting company right now. We called that play to Arvind's point a few years ago. We do think we have a differentiated competitive value proposition of a company with an integrated tech stack plus strategic partnership AI plus a consulting business at scale with an integral part of IBM client zero that drives distinctive use cases and references. We've already had over a thousand client engagements year to date around GenAI from an enterprise software and consulting perspective overall. In consulting, it's already north of 22% of our $31 billion backlog. And in this quarter, we eclipsed double-digit composition of our revenue, 12% of our revenue growing very nicely at still a two to three-point competitive advantage in terms of margin overall. And by the way, you see that play out in our consulting margins. You know, year to date up 220 basis points, the highest margins we've had in a long time. Now to your point about software. Software you know, we're very pleased, 9% in the quarter. We accelerated about three points organically quarter to quarter. This wasn't an inorganic contribution. In fact, our inorganic contribution came down as we wrapped on some of these. It's being driven by the strong contribution of our high-value recurring revenue, now a book of business, $23 billion, up 9%. And when you look underneath it, you know, TP right now given the strength of the mainframe cycle, driving cycle dynamics. We're very encouraged, around the future monetization value opportunity. And as you heard in prepared remarks, calling a return to growth in TP in the fourth quarter with the strong pipeline we got. By the way, if you map it back to the z16 cycle, what happened in '22? Our TP revenue was flat. In '23, we grew high single digit. In '24, we grew double digit. Look at '25 right now, we're calling back to growth probably a quarter early compared to a historical cycle. We feel very good about that growth profile. And given the strong z17 where we've shipped over 100% more MIPS than the z16 cycle, actually feeling pretty good about that valuation opportunity moving forward. Olympia McNerney: Great. Operator, let's take our next question. Operator: Your next question comes from Ben Reitzes with Melius Research. Please state your question. Ben Reitzes: Hey guys, thanks a lot. Appreciate the question. Arvind, I appreciate that fourth-quarter reported software growth is set to accelerate in your guidance, sounds like above 10%. I was just wondering about next year. You do wrap the Hashi acquisition in the spring, I think March. Are there signs that it can accelerate from here? Obviously with Red Hat decelerating a little, I just think folks would like to know broadly if you can keep double-digit next year or even accelerate based on the portfolio realizing that you're wrapping the acquisitions that timeframe? Thanks so much guys. Arvind Krishna: Yes, Ben, great question. So let me decompose it into the four parts of software that we talk about. And then we'll touch on acquisitions and their contribution. And then I'll ask Jim to try to put it all together back into the financial model for you. So let's take Red Hat. We talked about 20% signings growth this quarter. We had similar numbers in the previous quarter. As that becomes the bulk of the Red Hat book of business entering 2026, we do expect to see Red Hat returning to mid-teens or close to mid-teens growth. So that would be an acceleration from where we are this quarter. Then next, we talked about and in the last question, Jim touched on transaction processing, or mainframe software. We have seen this happen multiple times. In the first couple of quarters of a new cycle, TP tends to come down because people are very much focused on getting their hardware capacity. As that hardware capacity gets deployed, then the TP revenue begins to come up, along with some of the ELA cycle dynamics that are there. And we begin to see that. So I expect to see TP grow. Not quite in double digits to be clear, but let's call it low single digits for sure into next year. Automation has been growing in this last quarter at 22%. Yes, the HashiCorp acquired revenue was a piece of it. And as you point out, that'll go away in the second quarter. However, the acquired properties we have tend to provide continued growth for quite a while. Because of the Hashi bookings, which are significantly ahead of where we had planned them to be, I expect we'll continue to see growth out of Hashi through 2026 as well. Now not quite as much as an acquired growth, but I do expect that we'll continue to see automation in the double digits for sure. If but maybe not north of '20. And we've continued to see the data and AI portfolio grow in the mid to high single digits. Now that does put aside what other acquisitions we will do. Part of our model for software is we'll get a couple of points of growth from acquired revenue and we see a good market for targets, yes, that is yet to play out. But in the current regulatory environment, combined with what we can see out there, expect that we should be able to do that as well. So that was sort of giving you color on the portfolio and the different pieces I'll ask Jim to get into them closing it back up in terms of sort of what is the organic and inorganic and overall software numbers. Jim Kavanaugh: Yeah. Thanks, Ben, for the question overall. I mean, obviously, we are a software-centric platform company overall. So it's at the heart of both our top-line growth factor profile and also more importantly, from a free cash flow, generation engine overall. It delivers about three-quarters of our profit. And you take a look at '25, I think we positioned extremely well with regards to accelerating revenue growth through our throughout the year. Off of tougher comps at the '24. We gotta remember that. And I think that's a reflection of the strength that our portfolio, the diversity, of our portfolio across the board, and to the disciplined execution. Now when you look at '26, early indicators, I'll put them in some big buckets. Arvind went into some of the detail. First, I think we shouldn't forget, and Arvind called this out ninety days ago, which I think surprised many of you. We're operating in an attractive TAM and a positive backdrop from a technology perspective. Overall, we feel very good about technology being a source of competitive advantage, and you're seeing that play out in areas around hybrid cloud modernization, around AI, around automation. In many areas, we see that continue. So the market backdrop, we couldn't be more optimistic around twenty-six. Two, the strength and diversity of our portfolio not only has it been repositioned over the last three or four years to accelerate growth, what is happening? More and more of our composition is software is now aligned to higher growth end markets. Which gives us a better vector of growth even as we go into '26. Three, our annuity portfolio. And I don't think we get a lot of value for this, and we keep bringing it up. Over a $23 billion ARR book of business, feel we're gonna exit the fourth quarter at double digits. That's a great indicator for 2026 because that is 80% of our software portfolio overall. Four, new innovation, GenAI. I already talked about GenAI, the book of business and the acceleration we got, and all of the capital investment going into the infrastructure providers, I think, is just gonna accelerate the innovation curve for enterprise AI overall. And we are a leader in enterprise AI just given our tech stack, portfolio, and consulting, and that should deliver a few points. Five, Red Hat. You know, our bookings are three-month, are six-month, are nine-month, are twelve-month RPO shows accelerating growth coming off a 20% bookings overall. By the way, we actually had more opportunity to do even better than that 20%, and that fuel an inflected growth. Next, M&A. Now point I would bring up on M&A, Arvind already talked about, it's embedded in our model. We've said that all along. But, I think we've gotta continue selling the investor narrative because that M&A drives a much higher organic growth engine because those synergies play to those acquisitions. That's how we pay for control premiums. That's how we get an accelerated top-line growth. That's how we get an accelerated bottom-line growth. And we get accretive value in free cash flow in two years. So our organic engine continues to grow. And then finally, TP monetization. Arvind wrapped up on it. Let's just remind all the investors. TP gets monetized based on hardware installed MIP usage. I already said two quarters in, albeit early, we're a 130% program the program on z17. Off of a z16 was that was the most successful program in the history of IBM. We're at a 130%. So I do my math and calculation. Higher capacity opportunity creates higher monetization opportunity creates higher price opportunity, creates higher value creation opportunity. So I think when you look at it, we feel pretty good about delivering our model and software. Olympia McNerney: Operator, let's take the next question. Operator: Your next question comes from Eric Woodring with Morgan Stanley. Please state your question. Eric Woodring: Guys, thank you very much for taking my question. Just one quick clarification question there, Arvind. The growth rates you just provided in the response to that question for 2026 or into 2026, I just wanted to confirm those were all organic growth rates or whether they included M&A embedded in them. And then my question, just taking a step back Arvind is, we've seen cloud providers experience exceptional growth recently, particularly in infrastructure services and large-scale AI workloads. How does IBM view that trend? And do you see a similar opportunity for IBM Cloud to capture long-term infrastructure-driven demand? Thanks. Arvind Krishna: The growth rates that we talked about we tend not to do much M&A or any in both our mainframe or TPS. Well as in some of the other areas. The growth rates I mentioned, would call it are largely organic without having any significant M&A. But tuck-ins, small M&A are probably all included in there, but if we do anything substantial, it would help accelerate those growth rates. That's just put it that way. I'll also let Jim comment on it after I talk about the cloud opportunity. We actually partner deeply with all the hyperscalers. A thing that we haven't talked about, but it's certainly no secret, for example, we are one of CoreWeave's large clients. We also tend to use a lot of infrastructure at AWS, at Azure, as well as at GCP. So as opposed to that it's an opportunity for us, Eric, is the flip. We got a huge opportunity to do both consulting projects as well as deploy our software on those infrastructures for our clients. As an example, if I take one of our very large health insurance clients, as they think through where they're going to deploy their AI models, they do not like deploying in a public instance. But they are perfectly fine getting a private instance in a cloud and deploying models there, deploying our software stacks there, and getting growth. So we tend to do that. We also tend to, in some cases, for example, with Grok, we are deploying Grok in people's own data centers. So that's a big opportunity that comes there. That'll show up in revenue for us both in consulting as well as in software because on top of the Grok infrastructure, we tend to put our software stacks. In some instances. So it's less about us getting an opportunity in our cloud only but much more that that's a growth vector that we are able to ride and that helps increase overall growth rate in both software as well as in consulting. And lastly, let's not forget our biggest beneficiary of AI infrastructure is our mainframe, and our storage portfolio at this time. The latest generation mainframe we will surprise you with some of the numbers. This quarter, fully populated single system is capable of doing 450 billion inferences per day. As clients purchase that capability, that will be both a further accelerant to mainframe infrastructure growth but it also comes with a software stack that helps them do all of that inferencing. If I look at our storage portfolio, as many people have realized, you need a lot of storage to be able to do AI training. And we are gonna be beneficiaries of that. Inside our storage portfolio as people deploy that. So I would much more say, we are actually the direct beneficiary of the hyperscaler growth of AI capability and capacity as enterprises use this capability. And two, we will be a beneficiary in our mainframe and storage stack in a direct way. I think that that would I hope Eric addressed that part of the question. Jim Kavanaugh: Eric, and just to the numbers piece. I mean, overall, we are all focused here to execute a very important fourth quarter. To finish a very successful 2025 for IBM. But we both Arvind and I are given some color about '26, about the confidence we have in our portfolio. But let me just take a step back and remind you on software. Our software model shared at Investor Day approaching double digits, that is all in. That has two to three points give or take at each year, maybe a point more and maybe a point less depending on our disciplined capital allocation around M&A. Of inorganic contribution and six to seven to eight points of organic. When you look at 2025, you go do the math, work probably gonna be approaching six plus percent organic growth overall. We're gonna have somewhere three to four points this year because we took advantage of a very strategic opportunity with HashiCorp this year. But when you take a look at 2026, the TP growth monetization value that I talked about, the Red Hat accelerated growth profile that's on our revenue under the annuity growth profile, that is, you know, approaching or now gonna be double digits at the exiting the year. Each of those are gonna fuel that organic growth engine overall. So I think, you know, big picture, the model, is pretty much what we kinda look at right now for 2026. Olympia McNerney: Great. Operator, let's take the next question. Operator: Your next question comes from Jim Schneider with Goldman Sachs. Please state your question. Jim Schneider: Good evening. Thanks for taking my question. Arvind, I was wondering if you could maybe elaborate a little bit on how you're thinking about M&A from a target perspective. You've previously stated that you're looking to accelerate growth and you're looking for things that fit strategically with the portfolio. But on the margin, anything in any way you're thinking about differently about either the portfolio or the product piece of it or the potential size of transaction you might like to undertake? And specifically, would you consider undertaking a somewhat larger, transformative transaction not quite as big as you did with Red Hat, but of sort of similar scale relative to your overall portfolio? Thank you. Arvind Krishna: Yes. Jim, thanks for the question. Look, M&A is an extremely important part of our strategy. So I want to just perhaps reiterate because this has come up on prior calls as well. We look at it always in a multiyear window. So we gotta look at what is our excess cash flow over a few years. And once we have that window, that means we can sort of buy ahead, which means we can sort of lean in. Or if we don't find a good target like we didn't, for example, I think in 2023, then we actually spent much less than we could have. So that's just a backdrop to the amount of financial flexibility that we have which if I remember at our Investor Day earlier this year, we laid out that we have somewhere in the mid-twenties perhaps a bit more flexibility over a three-year window. That's kind of a way to start to look at it. Next. We are very focused on the areas that we have already explained as our strategy. Very top level, we say hybrid cloud and artificial intelligence. That translates into our hybrid portfolio, our automation portfolio, and our data and AI portfolio. And you've seen us do acquisitions in there. For example, we bought an AI company that does VLLM, but it fit into our hybrid portfolio. Because it's a direct part of the Red Hat and OpenShift portfolios. We did HashiCorp, which fits directly into automation. We did data stacks fits into data. When I look at the target lists, there is, I think, a pretty rich list of opportunities that are out there in the private markets, in the PE world, and public markets across those opportunities that we think will some of them will be actionable. It's hard to predict upfront. Which are and which are not. I think that if I put it that way, and just to be clear, anything that is of size has to fit three criteria. It has to fit with the strategy we just laid out, there has to be synergy aka the growth rate inside IBM will be above what it was as a standalone entity. Some of that comes from our geography spread. We have a sales team in most countries in the world. Some of it comes by the ability to bundle more attractive offerings together and it comes from faster deployment for example, leveraging our consulting team or the rest of our sales team. All three will be able to add to more to a faster growth rate. Third, if it is of size, then we are very disciplined also that we like it to become accretive to cash by the end of the second year. So those are the criteria. But as you've seen, we have found plenty in the last few years that do fit that whole criteria. So I hope that that gives you a sense. Now your question on larger, I'll just use that word larger, we will never rule anything out but it has to meet all the criteria that we just laid out. It is not for size alone. Red Hat allowed us to enter a new space helped accelerate IBM's overall growth rate by the way, both in software and in consulting. So that was the sort of the synergy piece that was there. And you many people forget Red Hat also had a very attractive free cash flow profile that we have been able to leverage since the acquisition. Olympia McNerney: Great. Operator, let's take one final question. Operator: Thank you. And that question comes from Brian Essex with JPMorgan. Please state your question. Brian Essex: Hi, good afternoon and thank you for taking the question. Arvind, maybe as a follow-up as to part of Eric's question, and I appreciate your hybrid exposure here. But could you generalize what you're seeing with regard to mix as enterprises focus on AI readiness? Are cloud-native ISP ISV-based agentic applications maybe targeted at task and point solution automation? Are those low-hanging fruit prove ROI before pursuing self-hosted projects? And then maybe within the IT budgets, where is the spending coming from? What's at risk of getting trimmed as companies focus on adopting AI-based technology? Arvind Krishna: So Brian, let me address the first part of your question with a bit of depth. I actually think that these are an and. Are people going to leverage ISV? Otherwise, I'll call it SaaS applications for getting exposure to AI and agents either as part of those entities or as added value onto them. And there are hundreds, if not thousands of little boutique companies that provide some of those agents that are out there. I think they would absolutely do that. They'll kick the tires on it. They'll get some value. But at the end of the day, to get real value from AI, people have to be able to integrate their existing applications. How do they tie what is happening in their payroll system and HR system to perhaps something that is happening in the CRM system, perhaps something that is happening in their ERP system? People begin to want to build much more profound agents, that that is where a lot of the action that we see is happening. As people try to build those agents out, then they get deeply concerned about what is that data, where is that data going. And they are going to deploy those either in their own data centers or in a private instance. Note, a private instance of the cloud is quite protected. People do deploy a lot of critical applications that are there. But if I think about our clients, in the regulated industries, banking and insurance, still is very much data center as well as a cloud picture. If I look at healthcare, healthcare data tends not to go out very much from their own data centers. If I look at telecom, most people build their own backbones. And their data and applications reside there. But certain other things like marketing may well reside in the public cloud. So as we begin to look upon all that, I believe that we are at the very beginning. I would actually characterize this, Brian, that if I was to use the baseball analogy, we in the first innings of enterprise AI rollout. And I expect that we'll be seeing and we will see more SaaS AI usage. We will see more public cloud AI usage. And will begin to see a lot more private AI usage as people begin to get into more critical applications and agents. On the IT budgets, look, IT budgets have been growing ahead of GDP. That's simply observation. I think this began four or five years ago. But IT budgets are growing typically two to three points ahead of GDP growth. You combine that then with inflation because GDP after all is real, not nominal. I see IT budgets staying healthy. So a lot of the growth comes from the fact that the IT budgets are growing as opposed to the cost of something else. That said, think people are getting very, very effective at trying to run and maintain with lower costs and putting more money towards newer projects. Five, ten years ago, that ratio used to be seventy thirty. 70 are running what is, 30 are new. I think that is shifting more towards the sixty forty spread. And where it'll go, is where we'll get the benefit. That is why our automation portfolio and our hybrid portfolio get a lot more growth because people are using that. So it's sort of substituting for labor and, in some cases, for services by letting those capabilities move into software. Olympia McNerney: Great. Operator, I think we have time for one last question. Operator: Thank you. And the next question comes from Mark Newman with Bernstein. Please state your question. Mark Newman: Hi, thanks for taking my question. Very good to see the growing AI book of business and thanks for those comments just now. Arvind, I don't think you've given any specific breakdown yet on the breakdown between software and consulting of the AI book of business. Is there any clarity on that? I think it used to be eighty-twenty, want to clarify, there's any clarity you've given on that today. And then a follow-up on consulting. I think there's two quarters in a row now where we are seeing the book to bill ratio a touch below one. I know you point in the earnings to a book to bill ratio greater than one if you're looking at the trailing twelve months. But I would just like to understand more on a shorter-term basis, last six months, it seems like the book to bill ratio is below one. And if you could explain kind of why maybe why that's the case, why we shouldn't be worried especially considering, I think, around 30% of signings you mentioned are AI which I believe are longer duration. So just a little bit of clarity around consulting and how AI plays into the book bill ratio and that recent number being below one would be appreciated. Thanks very much. Jim Kavanaugh: Okay. Mark, this is Jim. I'll take both of those. Well, let's start with the second one first, and then I'll come back to your clarify question on Gen AI. And in particular, around the software portfolio overall. I want to dive a little bit deeper in that. But, you know, when we take a look at consulting, let's dial back ninety days ago. I think we surprised many just compared to what many other consulting companies have been talking about publicly. We talked about green shoots. That we saw entering second half. But I think at that time, we were prudently cautious about how we were gonna monitor client buying behaviors and we didn't expect growth in the second half, although we saw many green shoots overall. Now we posted I think, a marked inflection point of consulting back to growth, up 2% and it's been driven by what we're seeing as continued opportunity for growth as clients accelerate investment in AI-driven transformation, what we've been talking about on many of these questions here. Why? Companies are looking to unlock efficiency, business model innovation, and growth, growth, growth. And AI is accelerating overall. When we take a look at right now fourth quarter, and more importantly, early parts of '26, we again see momentum around those key metrics, our backlog position, our Gen AI book, strategic partnerships, and around productivity. You know, backlog, $31 billion. Healthy growing 4% right now. Our best ever erosion in, I think, multiple years. What does that say? Clients' commitment to IBM Consulting, the quality of our delivery, and the value of our different offerings are doing extremely well. Now to your point about signings, signings were down 5%. By the way, signings been down five in the last six quarters, something like that. But as I've said many times before, why do I always start with backlog? That to me is the most critical component that's closest to the outcome measure. The outcome measure is revenue. Revenue growth, revenue growth. As Arvind always likes to say in this room with our operating team. Indicators are backlog. Indicators are signings. But signings are not all equal. And those signings numbers have been driven down think we posted down 5% based on lower large deal renewal. Volume. By the way, I would argue that's at best no revenue realization. And probably worst, dilutive revenue because renewals typically drive more price and more productivity. But underneath that, what are we seeing? We're seeing a tremendous improvement in the quality of our signings. Our net new business penetration, again, another quarter in a row, up double digits year to year on a penetration. Over 300 new clients year to date fueling our backlog. Our backlog realization is up over four points year over year. And when we take a look at our backlog run out, it's pretty healthy growing at market level growth rates here over the next three, six, nine, twelve months. Lot of work still to go. To sell and bill within quarter, but a lot of good indicators. And that GenAI to your point, over 22% of our backlog, 30% of our signings, 12% of our revenue, that's what's inflecting the growth overall. So we feel pretty good, and that's why we called the mark inflection, and we said we're gonna grow consulting here in the fourth quarter. And we feel pretty good about getting back to market growth levels in 2026. Now, GenAI, the over $9.5 billion book of business, Arvind already talked about over $7.5 billion in consulting. Well over $1.5 billion, almost approaching $2 billion in software. You know, we're, what, seven, eight quarters in here. That number might vary quarter by quarter as far as the composition. But we're still pretty damn close to that twenty-eighty overall. But the underpinnings behind that of the software book in the generation, you know, you see that play out and how it's accelerating automation growth. But also Red Hat. I know there's been a lot of questions around Red Hat. Let me just spend a minute just to close the call on Red Hat. Red Hat, we delivered 12% growth. We were down a couple points quarter to quarter. And year to date, we're at 13% low teens. Right? Let me break down some of the performance. One from a physician strength, and Arvind talked about a few points. OpenShift up nearly 40% bookings. Our ARR $1.8 billion up mid-thirties year over year, accelerating profile. Virtualization, now we've closed total contract value of bookings over $400 million. We got a $700 million pipeline over the next five plus quarters. And Ansible, 20% bookings in the quarter, accelerating the high teens. So what happened on the sequential decline? One, as we knew we were facing tougher comparison on the consumption-based services. That impacted us by about a point. And Rell, about 50% of our portfolio. We've been talking about we've been growing web rel abnormally in the mid-teens. We reverted back to our model growing 6% and had about a point. Now taking a step back Red Hat models mid-teens. When you look at it, our 80% subs business we gotta grow low end of that high teens. The consumption base, we gotta grow high single digit. When you look at our year to date, Arvind talked about our bookings year to date, we're well positioned on that subscription-based business growing high teens already on bookings. And when you look at that six, nine, twelve-month revenue under contract, we're accelerating that growth as we go into '26. That gives us confidence in that acceleration comment that Arvind talked about and I talked about as qualitative statements about confidence in '26. And when you look at fourth quarter, let's put this in perspective. We're gonna accelerate Red Hat growth in '25. It's gonna be a nice acceleration on the subs and we got about a two-point headwind on consumption-based services. We knew about that. Because last year, we grew consumption-based services high teens. And when you look at fourth quarter, we're gonna wrap on that. We've known about that all year long. So when we look at fourth quarter, double-digit solid double-digit growth in Red Hat. Low teen growth for the year, nice composition of where that acceleration is. But the most important thing, we're well positioned 2026. So with that, I'll turn it back over to Arvind to close out the call. Thanks, Jim. Arvind Krishna: Look. To close out, we are pleased with our performance this quarter. All of our segments accelerated sequentially, our portfolio strength business model and relentless focus on productivity reinforce our confidence in the trajectory. I look forward to sharing our progress as we close out the year. Olympia McNerney: Thank you, Arvind. Operator, let me turn it back to you to close out the call. Operator: Thank you for participating on today's call. The conference has now ended. You may disconnect at this time.
Kimberly Esterkin: Greetings, and welcome to the ASGN Incorporated Third Quarter 2025 Earnings Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance, please press 0 on your telephone keypad. It is now my pleasure to introduce your host, Kimberly Esterkin of Investor Relations. Thank you. You may begin. Good afternoon. Thank you for joining us today for ASGN's third quarter 2025 conference call. With me are Theodore S. Hanson, Chief Executive Officer, Sadasivam Iyer, President, and Marie L. Perry, Chief Financial Officer. Before we get started, I would like to remind everyone that our commentary contains forward-looking statements. Although we believe these statements are reasonable, they are subject to risks and uncertainties. As such, our actual results could differ materially from those statements. Certain of these risks and uncertainties are described in today's press release and in our SEC filings. We do not assume any obligation to update statements made on this call. For your convenience, our prepared remarks and supplemental materials can be found in the Investor Relations section of our website at investors.micron.com. Please also note that on this call, we will be referencing certain non-GAAP measures such as adjusted EBITDA, adjusted net income, and free cash flow. These non-GAAP measures are intended to supplement the comparable GAAP measures. Reconciliations between GAAP and non-GAAP measures are included in today's press release. I will now turn the call over to Theodore S. Hanson, Chief Executive Officer. Theodore S. Hanson: Thank you, Kim, and thank you for joining ASGN's third quarter 2025 earnings call. ASGN delivered solid performance in the third quarter, with revenues reaching $1.01 billion and an adjusted EBITDA margin of 11.1%, both at the high end of our guidance ranges. Our IT consulting business continues to be a key growth driver, representing approximately 63% of total revenues in the third quarter, up from 58% in the same period last year. Commercial consulting bookings totaled $324 million, translating to a book-to-bill of 1.2 times on a trailing twelve-month basis. While bookings remain weighted towards renewals, we are seeing the volume of new lands grow as we take on more complex multi-capability engagements and assessment projects. In our federal segment, new contract awards totaled $461 million for the third quarter, or a book-to-bill of one times on a trailing twelve-month basis, and 1.5 times for the quarter. As anticipated, bookings increased in the third quarter, coinciding with the end of the government fiscal year. Federal contract backlog was approximately $3.1 billion at quarter-end, or a coverage ratio of 2.6 times the segment trailing twelve-month revenues. Although IT spending levels remain steady quarter to quarter, our commercial and government clients continue to acknowledge the importance of executing their key initiatives despite macroeconomic conditions. Strong quarterly bookings reflect the demand across our client base, and ongoing investment in AI highlights a significant commitment to digital advancement. Reflecting upon this ongoing trend, ISG highlighted on their third quarter 2025 index call that AI spending is not merely a passing fad but a fundamental replatforming of enterprise technology. We are witnessing this firsthand. We deploy a growing number of AI use cases on behalf of our client base and are witnessing an increasing volume of data and cloud initiatives flowing through our pipeline as clients prepare for their next phases of digital and AI growth. That said, even with this continued drive towards AI, the path to enterprise-wide AI adoption is not without its challenges. Organizational readiness and operational governance remain hurdles as companies work to streamline and integrate these new technologies into their stacks. In addition, many commercial enterprises and government agencies lack the skills and engineering talent needed to successfully deploy AI. This reality is driving greater reliance on IT service partners like ASGN that can offer the breadth and depth of capabilities needed. On the topic of specialized skill sets, we are actively tracking the potential changes to the H-1B visa application process and believe that any changes to the process will be an incremental positive to ASGN. To further illustrate the demand for our expertise, I would like to turn the call over to our president, Sadasivam Iyer. Sadasivam Iyer: Thanks, Ted. It's great to speak with everyone this afternoon. Let me begin with an overview of our commercial segment industries. Our consumer and industrial accounts saw the greatest improvement in the third quarter, posting mid-teens growth year over year. This strong performance was driven by gains across our material utilities, industrial, consumer discretionary, and consumer staples clients. Healthcare was our second-best performing industry, up high single digits as compared to the year ago, to double-digit growth amongst our healthcare provider, pharmaceutical, and biotech clients. Financial services, TMT, and business services all experienced year-over-year declines. Looking sequentially, we saw growth in three of our five commercial industries. The healthcare industry saw the largest sequential growth and was led by our provider clients. Consumer and industrial accounts also posted modest sequential gains driven by our work with utility, materials, and consumer staples customers. In TMT, growth was supported by our e-commerce group, as well as incremental gains in telecom hardware and equipment accounts. Beyond these three industries, we continue to watch financial services closely as these customers are some of the largest spenders on IT. While our financial services revenues declined from the second quarter, new wins for the industry outpaced renewals in Q3, with much of this work in our federal segment slated to begin in Q4. We track our revenues across four customer types: defense and intelligence, national security, civilian, and other clients. In the third quarter, defense, intelligence, and national security accounts comprised approximately 70% of our total government revenues. Notably, national security revenues improved 12% year over year, driven by our work with the Department of Homeland Security. Looking ahead, we are encouraged by the future of our federal segment, particularly due to the increased defense budget under the one big beautiful bill, as well as the strong quarterly bookings that Ted highlighted earlier. Also of note, given the mission-critical nature of the work we perform, the government shutdown to date has had an immaterial impact on our operations. That said, we continue to stay very close to our clients and monitor what is a very dynamic situation. Let's now turn to our solutions capabilities. For the quarter, we saw an increase in projects focused on data and AI, application development and engineering, customer experience, and cybersecurity. I'd like to share a few examples of each. Beginning with our data and AI work. For a Fortune 500 managed care organization, we partnered to develop a centralized data supply chain platform leveraging Databricks, AWS, Snowflake, and MongoDB. Through this engagement, not only did we modernize our client's core data capabilities, but we also laid the groundwork for advanced AI and machine learning workflows that will enable our client to offer smarter, faster, and more efficient healthcare delivery. Our deep expertise in platforms like Databricks and Snowflake, along with our ability to tailor these solutions to each client's unique environment, truly sets ASGN apart in the marketplace. Additionally, our suite of AI-embedded developer productivity tools created for specific industry use cases provides a competitive edge. For example, when a global privately held hospitality company sought to modernize its loyalty application, our AI accelerators shortened the discovery phase by 25% and captured 40% more of the project's detailed requirements than traditional manual methods. This approach reduced project risk and laid a solid foundation for faster modernization of the new loyalty application. We're also building accelerators and custom AI solutions for our government clients. In the third quarter, we secured an extension with DHS to continue supporting the agency's enterprise data warehouse. Our team provides a range of data engineering, data science, and data analytics capabilities to DHS and is leveraging both commercial and our own custom-built AI solutions to advance DHS's mission-critical initiatives. Our data and AI work is closely aligned with the work we are conducting in our application development and engineering space. As an example, under the FBI's information technology supplies and support services contract, a recompete won during the third quarter, we're delivering enterprise-scale software development and application modernization services to help the FBI accelerate DNA analytics delivery across federal, state, and international partners. On the commercial side, with a leading US crop insurance provider, we secured our largest application engineering services contract to date. Our selection was based on our deep industry experience, proven accelerators for legacy modernization, and cost optimization through a blend of onshore, nearshore, and offshore delivery. This three-year contract will modernize policy administration, claims, and customer engagement platforms, enabling real-time data access and insights that enhance underwriting accuracy, claims efficiency, and customer experience. Using AI to reinvent customer experience represents a growing area within our creative digital solutions portfolio. For a Fortune 250 pharmaceutical company, we're leading a full-scale transformation of their in-house agency, reimagining how customer experience is delivered globally. Using our in-house agency excellence framework, we embedded Adobe-powered personalized and AI-driven operations into their workflows, combining translation, reasoning, and execution with human strategy and creativity. This project is one of our many customer experience projects that demonstrate in the AI era, human creativity isn't replaced; it's amplified with AI. Just as we help our clients elevate their own customer experiences, we strive to provide the highest level of service to our clients. This approach often helps us outpace the competition during the proposal process. For example, our cloud and infrastructure team recently replaced a long-standing incumbent as the new level three network support for a Fortune 500 athletic footwear and apparel company. Our deep understanding of this client's business needs was a key differentiator during the selection process. Now, as this retailer's highest level network support, our team of network engineers is responsible for everything from network triage, strategic decisions, and network optimization across the company's distribution centers, stores, and headquarters. Similarly, broader network protection or cyber remains in demand across our client base, particularly among our federal government customers. In the third quarter, we won a recompete contract with the US House of Representatives to support their 24 by 7 security operations team. As the House's first line of defense, our teams provide real-time network security monitoring, endpoint detection and analysis, and cyber incident response and reporting for more than 20,000 geographically dispersed endpoints. These are just a few of the many projects our commercial and government teams secured over the past three months. The breadth of this work underscores our deep industry expertise and engineering capabilities. It also highlights the growing strength of our ecosystem and alliance partnerships, all of which position our business for continued growth. With that, I'll turn the call over to our CFO, Marie Perry, to discuss ASGN's third-quarter segment performance and fourth-quarter guidance. Marie L. Perry: Thanks, Shiv. For the third quarter, revenues totaled $1.01 billion, a decrease of 1.9% year over year but at the top end of our guidance expectations. Revenues from our commercial segment were $711.3 million, a decrease of 1% compared to the prior year. Assignment revenues totaled $376.4 million, a decrease of 13.2% year over year, reflecting continued softness in portions of our commercial segment that are more sensitive to changes in macroeconomic cycles. Revenue from our commercial consulting, the largest of our high-margin revenue streams, totaled $334.9 million, an increase of 17.5% year over year. Excluding Toplot, which we acquired in March 2025, consulting revenues improved mid-single digits year over year. Revenues from our federal government segment were $300.1 million, a decrease of 3.9% year over year. Turning to margins, gross margin for 2025 was 29.4%, an increase of 30 basis points from the third quarter of last year. Gross margins for our commercial segment were 33.2%, up 40 basis points year over year, reflecting a higher mix of consulting revenues. Gross margin from our federal government segment was 20.3%, a decline of 40 basis points year over year due to the loss of higher-margin work related to Doge and the completion of certain projects. SG&A for the quarter was $212.2 million, compared to $207.5 million in 2024. SG&A expenses included $4.2 million in acquisition, integration, and strategic planning expenses. These items were not included in our previously announced guidance estimates. For the third quarter, net income was $38.1 million. Adjusted EBITDA was $112.6 million, and adjusted EBITDA margin was 11.1%. Also, at quarter-end, cash and cash equivalents were $126.5 million, and we had approximately $460 million available on our $500 million senior secured revolver. Our net leverage ratio was 2.4 times at the end of the quarter. Our strong free cash flow provides a strategic advantage that enables ASGN to fund growth initiatives, invest in strategic M&A, and opportunistically repurchase shares, all while maintaining a healthy balance sheet. Free cash flow was $72 million for the third quarter, a conversion rate of approximately 64% of adjusted EBITDA, well within our target of 60 to 65% conversion. We deployed roughly $46 million of free cash flow to repurchase 0.9 million shares at an average share price of $51.46. At quarter-end, we had approximately $423 million remaining under our $750 million share repurchase authorization. Turning to guidance, our financial estimates for 2025 are set forth in our earnings release and supplemental materials. These estimates are based on current market conditions and assume no further deterioration in the markets we serve. In addition, estimates do not include any acquisition, integration, and strategic planning expenses. Guidance also assumes sixty-one billable days in the fourth quarter, which is the same number of billable days as the year-ago period and two and a half days fewer than the third quarter. We typically see a larger sequential decline in billable days between the third and the fourth quarter due to holidays. The fourth quarter had the lowest number of quarterly billable days. In terms of our business segment, on a same billable day basis, our estimates assume a slight sequential improvement in our commercial segment from the third to the fourth quarter. For 2025, we are estimating revenues of $960 million to $980 million, net income of $32.1 million to $35.7 million, adjusted EBITDA of $102 million to $107 million, and adjusted EBITDA margin of 10.6% to 10.9%. Thank you. I'll now turn the call back over to Ted. Theodore S. Hanson: Thanks, Marie. As we progress through 2025, I'm genuinely excited about the path ahead and eager to share more about our vision for sustainable growth and long-term value creation. On November 20, we'll be hosting an investor day in New York City, where we'll offer an in-depth look at our strategy and unveil new three-year financial targets. I encourage you to listen to the webcast and hear directly from our expanded leadership team about the next phase of our growth journey. A link to register for the webcast is available on our Investor Relations website. This concludes our prepared remarks. I want to express my deep gratitude to every one of our employees for your steadfast dedication throughout this past quarter. Your hard work has been instrumental in strengthening our client partnerships and driving our continued move into high-value technology and engineering solutions. With that, we'll open the call to questions. Operator: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press 2 to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. One moment, please, while we poll for questions. Jeffrey Marc Silber: Our first question comes from the line of Jeffrey Marc Silber with BMO Capital Markets. Please proceed with your question. Theodore S. Hanson: Hey. Thank you so much. This is Ryan on for Jeff. Just wanted to dig a little bit more into the H-1B situation. Particularly, what gives you the confidence that you're a beneficiary there, and how do you see the situation evolving in the coming months based on just your conversations with clientele? Thank you. Theodore S. Hanson: Brian, thank you for the question. I think, you know, from our standpoint, almost all of our delivery is onshore, nearshore. We have very little presence, you know, most of the H-1Bs are coming from India. At the end of the day, anything that tightens the program, whether it's, you know, enforcing all the regulations the right way, maybe making the program a little smaller and tougher to get in, increasing the fee, which ultimately would, you know, tighten the program. All those put a focus back on onshore and nearshore technical, you know, skill capabilities, and that's really where we sit. We're at the intersection there. And I think it just makes our services that much more important to the client. Without diminishing anything, if you will, on the other side. And the other side of this, you know, at the end of the day is, you know, better enforcement of those regulations. It's gonna create also pricing improvements because a lot of the things that are going on there in terms of the way the program is used to skirt, you know, certain situations where the client would wanna pay a prevailing bill rate. Again, it just highlights our services and our core capabilities. Jeffrey Marc Silber: Great. Thank you very much. And just one more follow-up. On the federal government. Heard the comments that there's a little bit of caution factored into the fourth quarter guidance. Was wondering if any of that is just any lingering DOGE stuff or it's mostly just on the government shutdown and the longevity of that. Thank you. Theodore S. Hanson: Yep. Nothing on the DOGE side. I think it's just around the shutdown. You know, the government shutdown does two things. One is, you know, certain nonessential activities get furloughed, and, you know, as we mentioned in the script, as Marie said, it's really immaterial to us right now at this point. But the other thing it does is slow down the cycle of new awards and the ability to ramp up on awards you've either just won or may win. And so I think all those things put together, you know, while we think it's, you know, not a mid or long-term blip, but could cause some caution here in the near term. So Jeffrey Marc Silber: Thank you. Thank you. Operator: Our next question comes from the line of Tobey O'Brien Sommer with Truist Securities. Please proceed with your question. Tobey O'Brien Sommer: Thank you. Let me start off by following up on that government shutdown question. Do you assume that the shutdown extends through the fourth quarter and, you know, maybe more specifically, how long do you assume it lasts? Theodore S. Hanson: Well, we didn't really make an assumption on the length of it, Toby. But it did keep us from stretching in the forecast, if you will. So I don't think we, because it's an immaterial impact at this point, we didn't cut numbers, if you will, but we did say this is not a quarter to stretch. So I think that's probably a better context for it. Tobey O'Brien Sommer: Sure. But immaterial at this point, it's the "at this point" part that we're interested in. Okay. Yeah. Right. Within commercial consulting, which software implementation softwares are you implementing that are experiencing the best demand right now? And where, when you look at your portfolio of services and how you map out against your customers and, frankly, the available software market in terms of implementations, where might you want to add capability to be able to participate in those other areas? Sadasivam Iyer: Oh, it's a great question. So the areas that, as we called out in the, we're seeing continued demand are in, you know, data and AI. Clearly in things like Snowflake and Databricks, where we're actually actively partnering. We continue to see active demand on some of our enterprise platforms. So you look at Workday with Toplot or even with GlideFast and ServiceNow, we're seeing an uptick in demand in both of those areas. We see continued demand on the cloud side, both from a migration perspective as well as from a custom app development perspective. We continue to ramp up on our Salesforce capabilities because we do see Salesforce as an active player in both the agentic world and also in the experience world. So, Tobey, really, that's where we're seeing continued demand. So I think the partnerships that we've lined up ourselves against are very much in line with where we see our clients continuing to invest in. Tobey O'Brien Sommer: And then, just to anticipate your investor day but not steal all the thunder, would a feature of the next several years, do you expect commercial IT consulting to continue to be a larger percentage of total company sales and therefore a driver of margin expansion over time? Theodore S. Hanson: Absolutely. Even if you look at this quarter, I mean, despite, you know, maybe a little contribution, you know, more in federal towards the full quarter than we expected, slightly. We, and still the same state of affairs with high-margin services like perm placement and creative, you saw our sequential margin here increase about 70 basis points, and that's really due to the strength in commercial consulting. And so I think that's been the driver of margin, will continue to be the driver of margin. It's going to be where we're allocating capital. Obviously, we'll talk more about that in the Investor Day. So it's definitely an underlying pillar here of the strategic plan. Tobey O'Brien Sommer: Thank you. Sadasivam Iyer: Thank you. Tobey O'Brien Sommer: Thank you. Operator: Our next question comes from the line of Jason Daniel Haas with Wells Fargo. Please proceed with your question. Jason Daniel Haas: Hey. Good afternoon. Thanks for taking my questions. There's been some headlines recently about companies not seeing a great ROI on many of the AI projects that they've undertaken. So I was curious if you could weigh in on that, if that's something you're hearing from your customers. And, you know, where can you help on, if that's the case, where can you help, you know, where's the roadblock? What can you guys do to help companies, you know, see a better ROI on these projects? Thank you. Sadasivam Iyer: Look. I think there are multiple reasons why the ROI isn't materializing. Right? So I think, let me start by saying that we are hearing that, and clients are doing a lot of proofs of concepts and, you know, pilots around this. You know, almost 70% of what they're trying requires a deeper level of integration into their architectures. That's sort of one. Second, many of them have challenges with the data and the way their data is lining up. Right? The third is it requires integration of these, whatever they're doing, with the workflows that they have, and the logic of these workflows typically sits within enterprise platforms. So our view on this is the fastest path to ROI at the moment, where with agentic AI and agents, is really around harnessing the core capability of those platforms around which those workflows are built. Right? Because, you know, despite all the marketing hype that you hear about, you know, end-to-end process automation and multi-platform AI orchestration, we're simply not seeing the returns on those things. So, really, the challenges are all around, and, of course, that's a big part of it also is technical talent. So the challenge is for technical talent, the complexity of integrating these things into their architectures, data, and then the fourth thing is just the ability to make these work with complex workflows. The logic for which is embedded within the enterprise platform. So that's the fastest path to ROI in our opinion. Jason Daniel Haas: Hey. Thank you. That's great color. Sounds like a great opportunity. And then as a follow-up, I wanted to switch over to the federal government segment. Sounds like there's some moving pieces there with the shutdown, maybe, you know, potentially turning into a headwind at some point. But I'm curious about the one big beautiful bill. And, you know, to what extent has that started to help the bookings that you're seeing, and over what time frame could you see more benefits, or at what point do those turn into revenue? If you could just give some more color on the timing of how that could help that segment, that'd be really helpful. Thank you. Theodore S. Hanson: Yeah. Look. I think that in the areas where we play, we're about 75% of our business in defense and intel and national security. Those are the areas that are gonna get the biggest increase from what was passed in the big beautiful bill. Gonna have to get past this shutdown and, you know, subsequent continuing resolution to a final budget, which we hope will happen sooner than later. But once we get to that point, let me, let's just say it's sometime in the early first quarter, end of this year, then those agencies will be funded at these higher levels. So I think really in the first half of next year, you know, subsequent to that, you're gonna see those things begin to get competed, awarded, and out on the street and really contribute to revenues probably the midpoint or second half of next year. Jason Daniel Haas: That's great. Very helpful. Thank you. Sadasivam Iyer: Thank you. Operator: Our next question comes from the line of Surinder Singh Thind with Jefferies. Please proceed with your question. Surinder Singh Thind: Thank you. A question about the staffing business versus the consulting business. Obviously, we're seeing some good growth on the consulting side on an organic basis. But it seems like there's still some challenges on the staffing side. How would you characterize that in the context of the current environment? Is this a situation where maybe complexity is requiring more outside expertise and maybe less willingness to augment internal staff, or how should we think about that? And is that something that with, you know, increased complexity in the tech stack, that trend just kinda continues from here? Sadasivam Iyer: Look, Surinder, there are a few things. Right? Let me start by saying that, you know, the staffing business for us as we look at our numbers has been stable. Year on year, obviously, we're declining. But from a sequential basis, you know, our leading indicators are relatively stable. But I think there are multiple dynamics at play here. Right? The first is clients, our customers, are looking to partners to drive to outcomes. And really start to think about how do we drive outcomes, how do we drive deliverables. So the trend is the con that we see a continued shift in buyer behaviors where partners are looked at more to as partners who drive value and outcomes versus simply augmentation. And, you know, from our vantage point, that's a trend that is a benefit for us on the consulting side, and we're obviously, as you can see, benefiting from it. But it creates headwinds on the staffing side. And, you know, Ted can opine on this, but I don't see that buying behavior shifting tremendously. Theodore S. Hanson: I think especially, Surinder, in today's macroeconomic environment, if the client's really gonna invest in something, they want a short time to value. Meaning they want an outcome. They want it in as soon as they possibly can. They're really focused on total cost of ownership. And, you know, getting to a certain outcome if they're gonna green light something. So I think we see just a higher level of rigor around that from clients than we've ever seen before. And part of that is because of the increasing cost within their IT environments. And part of that is because they're wary around the macroeconomic backdrop here. And concern about where their business may go in the future. Surinder Singh Thind: That's helpful. On the general side, can you maybe talk about the cost reimbursable contracts? The percentage there continues to trend higher. Back in your peak levels. Can you talk about what's driving the change? And its impact on margins? Because it's interesting when I look at the federal margins, the gross margins, those were up pretty materially quarter over quarter. Theodore S. Hanson: Yes. So we're really not seeing an impact on margins from that. I think that's just the natural ebb and flow of certain contracts ending and certain contracts being won during the quarter and subsequent quarters. I think overall, the government is gonna be more focused on fixed-price outcome-based work, but, you know, just naturally here, we've seen a slight tick up in the cost plus, and I think that's mostly because of either the prior DOGE activities, which, you know, some of the work that was started was fixed-price work, and also, you know, just the natural ebb and flow of what's won and what's completed. Marie L. Perry: And Surinder, remember, last quarter we had a surge in license revenue on the federal side. And so we talked about that. And so when you kinda look at Q3 federal margins, they're really back to their kind of more normal state. Surinder Singh Thind: Got it. Thank you. Sadasivam Iyer: Thank you. Operator: Our next question comes from the line of Alexander J. Sinatra with Baird. Please proceed with your question. Alexander J. Sinatra: Hi. I'm on for Mark Marcon. I was just wondering, you know, you went through a couple of big projects. I was wondering if you could describe who you're competing against to get those big projects and how the competitive dynamics have maybe changed. Things on pricing. And then also on the Toplot and GlideFast side, who do you run into and, you know, is pricing working there as well? Sadasivam Iyer: Look. I think, you know, it varies by client, but, you know, a lot of these are with our larger clients. And you would find that the people we run into typically are the competitors that you would expect. A combination of Accenture or the Big Four, in some cases, the India-based pure plays. Certain platforms, also smaller competitors we run into. So it's the traditional set that you would expect from these clients. Right? On these clients. And we're seeing pricing both from a GlideFast side and a Toplot side really hold up. We're not seeing pricing pressures on the work that we're doing. Partly because of just the quality of what we're doing. And sort of our approach to how we do these things, which is very much around assets and accelerators that we bring, sort of are truly different from what you would see. So most of the competitors are the standard competitors that you would expect in any of these large clients. Alexander J. Sinatra: Gotcha. Thank you. And then I was also wondering, on the Mexican facility side, has that been impacted at all by the political climate and just kind of what you're looking at there going into the future? Sadasivam Iyer: No. Not at all. Not at all. It has no impact. Alexander J. Sinatra: Alright. Thank you. Marie L. Perry: Thank you. Operator: Our next question comes from the line of Maggie Nolan with William Blair. Please proceed with your question. Maggie Nolan: Thank you. Maybe a slightly different angle on the pricing question. As it pertains to accelerators. As you're incorporating more and more of these into the development process, are there active discussions about changes in pricing related to this? Or if not, do you expect that maybe to be a discussion point in the future? Sadasivam Iyer: Great question, Maggie. We are exploring those opportunities, but we're not seeing a big uptick today. Right now, these assets and accelerators are really allowing us to deliver work more rapidly, more effectively, as I mentioned in, you know, one of the examples I gave about sort of this whole code legacy code modernization where we're able to do things 25% faster and gives us better quality assurance. Now, as these assets and accelerators evolve and mature, we have the opportunity to position some of these on a more stand-alone basis. I mean, we have some good examples. We have something called Pathfinder, which is an AI-driven cybersecurity product, which we've invested in. Which we are actively engaged in conversations about pricing differently. More, you know, maybe on a product basis. But those are still early days. Maggie Nolan: Thank you. And then it seems like some momentum is building on the commercial consulting side. Could you maybe comment on whether you think that's sustainable? What are the drivers there? You know, is this more of a point in time or a potential trend on a multi-quarter basis? Thank you. Sadasivam Iyer: No. We actually see it sustaining and continuing, but I don't wanna make that a broad-based statement. We see that sustaining and continuing in specific areas where we see client investment being directed. So whether it's data and AI, whether it's custom engineering, whether it's some of the platforms that I alluded to. Right? So and we've been very, very thoughtful and focused on those areas where we see the growth and the market opportunity happening. Right? So I think that's how I would characterize it, Maggie. We do see continued momentum in that space. Because, you know, all the work that's happening and AI is a big, big tailwind, which is driving a lot of work for us, whether it be data, whether it be cloud, whether it be cybersecurity, whether it be, you know, integration associated with putting them and getting it to work in the environments that our clients have. Theodore S. Hanson: I would add to that just to even think about a platform like Workday, which is gonna be a leader in agentic AI. I think customers more and more are thinking, hey, you know, I've sat on my legacy systems here for many years, but I'm not gonna get to take advantage of agentic AI if I don't have modern enterprise, you know, platforms in my environment, like a Workday or ServiceNow or Salesforce. Or right on down the list. Maggie Nolan: That's helpful. Thank you. Thank you. Sadasivam Iyer: Thank you. Operator: And, ladies and gentlemen, we have reached the end of the question and answer session. I would like to turn the floor back to CEO, Theodore S. Hanson, for closing remarks. Theodore S. Hanson: Well, thank you for being here this evening to talk about our third-quarter results, and we look forward to speaking with you in the first quarter on our fourth-quarter results. And I will remind you as well that we have our Investor Day on November 20. And so we look forward to being with you if you can be present with us in New York City. Have a great evening. Operator: Thank you. And this concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.
Operator: Good day, and welcome to the Lam Research Corporation September Quarter 2025 Earnings Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. To withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Ram Ganesh of Investor Relations. Please go ahead. Ram Ganesh: Thank you, and good afternoon, everyone. Welcome to the Lam Research quarterly earnings conference call. With me today are Tim Archer, President and CEO, and Doug Bettinger, Executive Vice President and Chief Financial Officer. During today's call, we will share our overview on the business environment, and we'll review our financial results for the September quarter and our outlook for the December quarter. The press release detailing our financial results was distributed a little after 1 PM Pacific Time. The release can also be found on the Investor Relations section of the company's website along with the presentation slides that accompany today's call. Today's presentation and Q&A include forward-looking statements that are subject to risks and uncertainties reflected in the risk factors disclosed in our SEC public filings. Please see accompanying slides in the presentation for additional information. Today's discussion of our financial results will be presented on a non-GAAP financial basis unless otherwise specified. A detailed reconciliation between GAAP and non-GAAP results can be found in the accompanying slides in the presentation. This call is scheduled to last until 3 PM Pacific Time. A replay of this call will be made available later this afternoon on our website. And with that, I'll hand the call over to Tim. Tim Archer: Thanks, Ram, and good afternoon to everyone on the call. Lam delivered a solid September quarter, highlighted by record revenues of $5.3 billion, a gross margin of 50.6%, and a record operating margin of 35%. We also achieved record combined spares and services revenue, and growth in total CSBG revenue outpaced the increase in installed base units. Inclusive of our guidance for the December quarter, we expect to close calendar 2025 with three consecutive quarters of greater than $5 billion in revenue. Our performance reflects strong company-wide execution and the critical role that our products and services portfolio plays in enabling the industry's technology roadmap and in addressing the rapid increase in semiconductor manufacturing complexity. Our December guidance does contemplate roughly a $200 million revenue impact from the recently announced 50% affiliate rule restricting shipments to certain domestic China customers. Currently, we expect this rule to impact our calendar year 2026 revenues by approximately $600 million. This impact, together with the strong growth anticipated in worldwide fabrication equipment, or WFE, spending, leads us to expect the China region to represent less than 30% of our overall revenues in calendar year 2026. Turning to WFE, spending in calendar year 2025 is shaping up to be slightly better than our prior view of $105 billion, predominantly due to better-than-expected high bandwidth memory or HBM-related investments. As we look ahead, we see a robust setup for equipment spending in calendar year 2026. AI-related demand should support sustained strength in leading-edge foundry logic and DRAM as well as continued NAND upgrade spending. The strong leading-edge growth we see across all three device segments is forecasted to be partially offset by a decline in domestic China-related investments. We plan to provide our detailed 2026 WFE spending outlook and subsegment color on our January call, per our usual practice. AI and its impact on the semiconductor industry continues to be a major topic of interest. The data center CapEx investments already announced are expected to drive significant expansion of manufacturing capacity over a multiyear period. In recent months, we have seen an acceleration of activity. AI data centers require the most advanced CPU and accelerator capabilities, low latency, high bandwidth memory, and high-speed ESSD storage, all integrated through 2.5D and 3D advanced packaging. We estimate these needs translate to roughly $8 billion of WFE spending for every $100 billion in incremental data center investment. Most importantly, deposition and etch, the area of Lam's core product differentiation, play an increasingly critical role in enabling the higher performance, more scalable semiconductor devices required for AI. We see the surge in AI data center demand creating billions of dollars of served available market expansion and share gain opportunity for Lam in the coming years. I will share a few areas of strength we are seeing. In NAND, customers are continuing to upgrade existing fabs to meet the need for higher layer count, higher performance devices. We have estimated that these conversions will require $40 billion of WFE spending over the next several years. And as we have previously said, Lam should capture a high percentage of this conversion spend due to our large installed base position. Our upgrades business is projected to remain strong into 2026, as NAND bit demand looks to be trending higher than prior expectations. Device makers have already announced enterprise-grade SSDs with 256 terabytes of storage capacity to satisfy growing data center demand for high-capacity storage. Availability of clean room space will likely act as a limiter to the pace of NAND supply growth, but we believe that capacity additions to meet rising bit demand may be needed sooner than previously thought. Lam is in a great position for both upgrade activity in the near term and new capacity builds in the future. We have the industry's largest installed base of NAND systems, and our comprehensive NAND product portfolio features several industry-first advances. Notably, Lam recently earned the 2025 SEMI Award for our pioneering Lam Cryo 3.0 dielectric etch technology, a process that has quickly become the industry standard for advanced NAND devices. We're also seeing solid demand for our atomic layer deposition, or ALD products, including a recent key win at a major NAND manufacturer for a critical high aspect ratio dielectric deposition application. Lam's differentiated conformal fill capability using a higher temperature process was fundamental in securing this win. On the metal side, Lam's ALD tool has been selected as the tool of record for three consecutive nodes at a leading customer, including for devices with more than 500 layers. This further reinforces our leadership in the 3D NAND word line application, a step that is fundamental to building the higher performance devices required for ESSDs. The performance demands of AI devices are also spurring investment in foundry logic and DRAM manufacturing inflections. Over the last several years, we have focused on expanding our product portfolio to target these opportunities and believe we will benefit as the technology transitions unfold. For example, Lam's Ether Dry Resist EUV patterning solution has demonstrated the ability to resolve features of less than 15 nanometers at the highest density and pattern fidelity. Ether also enables a more than 10% reduction in EUV exposure dose, boosting scanner productivity and reducing the cost of patterning per wafer. Lam's Ether technology is already ramping in the HBM high volume production line of a major memory manufacturer, and we see more opportunities ahead as we look further out on the roadmap. For instance, we believe high NA EUV in combination with Ether for single patterning of sub-ten nanometer features will be critical to addressing the complexity and cost challenges associated with the transition from gate all around transistors to CFET in foundry logic, as well as the anticipated migration from 6F squared to 4F squared in DRAM. In September, we announced a key partnership with JSR Corporation, an innovative semiconductor materials company, to collaborate on the integration of our Ether technology with novel EUV patterning materials and metal oxide resists. In addition, Lam and JSR are partnering to explore new precursor materials for advanced ALD applications, which we believe can further enhance our capabilities and differentiation for future technology inflections. In the case of low K ALD films, Lam's high productivity single wafer solutions are enabling our customers to move past traditional furnace-based approaches. As logic transistor sizes scale down to achieve greater compute power, higher capacitive coupling in the gate module degrades overall performance. Similarly, as DRAM devices shrink, there's a detrimental increase in capacitance between the bit line and capacitor contact. To resolve these issues, deposited low K films must be very thin, five nanometers or less, and conformal in high aspect ratio structures. Furnace-based films at these thicknesses are often fragile and unable to withstand the harsh chemistries used in subsequent process steps. Lam's low K ALD solution employs a unique single wafer remote plasma reactor and a novel precursor to deposit thin, defect-free films with the desired silicon-carbon bonding structure. As a result, Lam's ALD films have demonstrated superior durability throughout the remainder of the chip-making process, and we recently secured critical wins at foundry logic and DRAM customers for low K applications using this process. Beyond traditional device inflections, Lam is also benefiting from healthy growth in advanced packaging. Our SABER 3D plating and Cindian etch systems are industry leaders and should continue to see strong demand in 2026 as AI-related spending grows. Looking further ahead, we are investing in new advanced packaging opportunities. Today's packaging production lines primarily use 300-millimeter diameter wafers, but as AI and high-performance computing demand larger chips to integrate more accelerators, memory, and interconnects, panel-level packaging is emerging as a scalable solution. By processing multiple units on larger format panels, it significantly improves manufacturing efficiency and supports the integration of increasingly complex and larger semiconductor devices. Lam's SABER 3D Callisto and 20 customers worldwide. Our growing installed base of panel packaging tools is rapidly building experience and maturity that should prove valuable as this technology becomes mainstream in the future. So to wrap up, Lam is poised to close out a record calendar year 2025, and our setup is strong heading into 2026, where we expect solid WFE growth. The technology requirements of AI play extremely well to Lam's product strengths, and we are excited by the breadth of opportunities we see ahead for the company. Now here's Doug. Doug Bettinger: Thank you, Tim. Good afternoon, everyone, and thank you for joining our call today during what I know is a busy earnings season. We executed well in the September quarter, delivering gross margin performance of 50.6%, which is a record in the post-Novellus period. Financial results for the quarter came in above the midpoint of all of our guidance ranges. We also delivered many financial records throughout the P&L. The company truly performed well in the quarter. Let's turn to the details of our September results. Revenue for the September quarter came in at an all-time record of $5.3 billion, which is up 3% from the June quarter. The deferred revenue balance at quarter-end was $2.77 billion, up slightly from the June quarter due to increases in services and system-related transactions where revenue recognition was not yet complete. This was partially offset by approximately $100 million of reduction in customer advanced down payments. We do expect to see these down payments continue to decline in the December quarter. From a market segment perspective, foundry accounted for 60% of our systems revenue in the September quarter, up from 52% in the June quarter. This marks our third consecutive record quarter, underscoring the strength of our strategic focus and execution in foundry. Foundry strength came from investments at the leading edge in addition to mature node spending in China. Memory was 34% of systems revenue, which was down from 41% in the prior quarter due to the timing of customer investment plans. Within memory, nonvolatile memory contributed 18% of our system revenue, which was down from 27% in the June quarter. The trajectory of the NAND spending this year is broadly consistent with our expectations coming into the year. And as the industry transitions to devices above 200 layers, we continue to estimate over $40 billion in upgrade spending will be required over the next several years. DRAM increased from the June quarter, accounting for 16% of systems revenue compared to 14%. Investments in high bandwidth memory continue to remain strong, driven by AI-related customer demand. We're also seeing traditional node migrations to the 1B and 1C nodes, enabling the transition to DDR5. The 6% of systems revenue in the September quarter, roughly in line with the 7% we reported in the June quarter. Let's turn to the regional breakdown of our total revenue. China came in at 43%, an increase from the prior quarter level of 35%. While the multinationals in China remained steady, the domestic Chinese customers grew, and the majority of our China revenue continued to come from them. The next largest geographic concentrations were Taiwan at 19%, which was flat sequentially, and Korea at 15%, down sequentially from 22%, again due to the timing of customer investment plans. The customer support business group generated approximately $1.8 billion in revenue for the September quarter, slightly higher sequentially and year over year. This is being driven by continued strength in spares and upgrades. CSPG remains a key part of our growth strategy, given the expanding installed base and our innovation in advanced services. We expect CSBG to deliver year-over-year growth in 2025. And I just mentioned that in the thirteen years since we brought Lam and Novellus together, CSBG has grown every year except for one. Let's look at profitability. Gross margin in the September quarter was 50.6%, at the higher end of our guided range and improving from the June quarter level of 50.3%. The increase is primarily driven by favorable customer mix, partially offset by the impact of tariffs. I expect the impact from tariffs to continue to increase somewhat in the December quarter. Operating expenses for September were $832 million, which was up from the prior quarter level of $822 million. The increase is primarily due to increased headcount and incentive compensation, which is tied to the company's improved profitability. R&D accounted for 68% of the total operating expenses. We're investing in innovations like Vantex, Aqara, Halo, and Dextro to continue our leadership in providing a differentiated product portfolio for our customers. The September operating margin was 35%, at the high end of our guidance. This operating profit represents a record level for Lam in both dollars as well as percentage terms. The non-GAAP tax rate for the quarter came in at 14.2%, generally in line with our expectations. We continue to see the tax rate in the low to mid-teens for the near term. We do expect, however, with the increase in the GILTI rate in the United States, as well as the advent of the global minimum tax regime outside of the United States, you will see a slight increase in our effective tax rate as we get into calendar year 2026. Other income expects for the September quarter was approximately $8 million in income compared with $4 million in income in the June quarter. The slight increase in OI&E was primarily the result of increased interest income tied to a higher cash balance. As we've talked about in the past, you should expect to see variability in OI&E quarter to quarter. Let's look at capital return. In the September quarter, we allocated approximately $990 million to share buybacks through open market share repurchases. Our average buyback price in the quarter was approximately $106 per share. Year to date, we've repurchased nearly 30 million shares at an average price of a little more than $88 per share. We also paid $292 million in dividends in the quarter. I'll remind you that we increased the dividend from $0.23 to $0.26 per share earlier this month. Moving forward, we remain committed to returning at least 85% of free cash flow to our shareholders over time. The September diluted earnings per share were $1.26, above the midpoint of our range. Diluted share count was 1.27 billion shares, which was a reduction from the June quarter and consistent with our guidance. We have $6.5 billion remaining on our Board-authorized share repurchase plan. Let me pivot to the balance sheet. Cash and cash equivalents totaled $6.7 billion at the end of the September quarter, an increase from $6.4 billion at the end of the June quarter. The main reason for the cash increase was cash generated from operating activities, which was partially offset by cash allocated to capital return as well as capital expenditures. Day sales outstanding was sixty-two days in the September quarter, which was up slightly from fifty-nine days in the June quarter. September inventory turns improved to 2.6 times compared with 2.4x in the prior quarter, and up from the levels two years ago of 1.5 times. We've remained focused on driving asset utilization during this time frame, and I was pleased to see us deliver this outcome. Our non-cash expenses for the September quarter included approximately $97 million for equity compensation, $89 million for depreciation, and $13 million for amortization. Capital expenditures in the September quarter were $185 million, which was up $13 million from the June quarter. Spending was primarily focused on lab investments in the United States, along with expansion of manufacturing sites in Asia. This remains consistent with our global strategy to be close to our customers' development and manufacturing locations. We ended the September quarter with approximately 19,400 regular full-time employees, which was an increase of approximately 400 people from the prior quarter. Headcount increases were in R&D to support our long-term product roadmap. Additionally, we had increases within the field organization to support customer growth and a higher volume of tool installations. Let's turn to our non-GAAP guidance for the December 2025 quarter. We are expecting revenue of $5.2 billion, plus or minus $300 million. We expect a decline in China revenue offset by stronger spending from the global multinationals. We're expecting a gross margin of 48.5%, plus or minus one percentage point. I expect customer mix and tariffs will be contributing to the sequential decline in gross margin. We're expecting operating margins of 33%, plus or minus one percentage point. And finally, earnings per share of $1.15, plus or minus $0.10, based on a share count of approximately 1.26 billion shares. I want to give you a few things to think about as you build your 2026 models. While we are not yet quantifying the level of growth in WFE, I will tell you that calendar '26 looks somewhat second-half weighted as we sit here today. The newly restricted China entities would have been weighted to the first half of next year. Customer mix will be a headwind to gross margin a bit year as the China mix normalizes. And the tax rate will likely tick up very slightly, as I previously mentioned. We'll give you better color on all this during the December call. So let me wrap up. Lam delivered another strong quarter, highlighted by record levels of revenue, record gross, and operating profit. Inclusive of our December guidance, we're on track to deliver calendar year 2025 at an all-time high watermark in financial performance, closing with three consecutive quarters of revenue above $5 billion. We remain focused on strategic investments that extend our technology leadership, operational efficiencies, and long-term value creation. Operator, that concludes our prepared remarks. Tim and I would now like to open up the call for questions. Operator: Thank you, sir. Ladies and gentlemen, if you would like to ask a question, please press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the star keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. And the first question comes from the line of C.J. Muse with Cantor Fitzgerald. Please proceed. C.J. Muse: Yes, good afternoon. Thank you for taking the question. I guess, first question, very helpful guidepost for thinking through incremental WFE tied to AI infrastructure spending. But I guess over the last six, eight weeks, would love to hear how your conversations with customers have progressed. Are you seeing expedited meetings? Are you seeing actual orders? Would love to see how the announcements around infrastructure spending are translating into visibility on your business. Tim Archer: Sure, C.J. Let me take that. I mean, obviously, when we talk about announcements that are made recently, there's not physical space. There's not near-term demand for those. Those are things that give you a guidepost as to where demand is going further in the future. I think to look at the conversations that we're having today about near-term needs for equipment, it's a lot of the things I talked about, which is enterprise SSDs and the impact on NAND. You've heard some of our customers, I believe, speak to bit demand that might be a little bit higher than expectations. I just said that our view of NAND upgrades is well on track for a good 2025 and a strong 2026. So it's really down. When we talk about our equipment demands, it's near-term needs with those longer-term announcements being an opportunity in the future. But they're along the same technology transitions. Those data center investments are going to require faster GPUs, aided smaller nodes for foundry logic. They're going to be made with higher capability HBM. And that's where all of our products come into play. How we participate in gate all around, our ALD tools, high aspect ratio conductor etch, on the DRAM side, work we're doing in HBM to enable higher stacking of HBM devices. And so again, we're seeing very robust demand, as we mentioned, going into 2026, but it's for things that are real and here today. C.J. Muse: Very helpful. And then maybe thinking through your relative outperformance to WFE, based on your guide, it looks like you're tracking on a tool shipment basis up 40%. And I think many investors think we're growing 10% overall. So tremendous outperformance. I guess, are you thinking about 2026? And as part of that, what would be the critical drivers to drive relative outperformance? Thanks so much. Tim Archer: Yeah, sure. I'll let Doug add in here as well. But I guess I would just say that you have to remember that as fabs get built and equipment is brought in, there often are timing issues. And so it's a little bit hard to speak to any near-term like outperformance, underperformance, but certainly because it depends on what other suppliers are going to be doing and when they're shipping and what their lead times are. But what we can say with quite a bit of confidence, and I think we laid it out at our Investor Day earlier this year, is that over the longer term, Lam's markets, etch and deposition will outgrow WFE because of nearly every trend that's taking place technology-wise in semiconductor manufacturing, whether that's 3D devices, in foundry logic, in NAND, stacking using advanced packaging in DRAM, whether it's advanced packaging itself. They're all deposition and etch intensive products, and, therefore, I think over the longer term, confidence to outperform WFE is very high. Doug Bettinger: Nothing to add, Tim. You nailed it. Thanks, C.J. Operator: The next question comes from the line of Tim Arcuri with UBS. Please proceed. Tim Arcuri: A lot. Doug, when we talked three months ago, you were thinking that December would be, like, 04/07. You were saying it'd be sort of back to where March was. Now it's coming in at, you know, five two. So the incremental 4 to 500,000,000, where did that come from? It sounds like maybe a little bit of it pulled in from the first half of next year. Can you just sort of give us a sense, like, what's actually better than what you thought three or some months ago? Doug Bettinger: Yeah. Listen. I think, Tim pointed that WFE is a little bit stronger. We think high bandwidth memory in DRAM is a little bit stronger. And maybe everything else was just a little bit stronger, Tim. It's not any one thing that I would point to. I would tell you though, honestly, it would have been even higher if not for the restricted entities in China. So things did strengthen for sure. As we look into next year, clearly, next year is a growth year. And whether we pulled anything in from the first half, I honestly think so, Tim. Because as we sit here today, I think the first half of next year is flat to maybe slightly up from the second half of this year. So it's going to continue to be pretty good. Tim Arcuri: Got it. Great. Thanks, Doug. And then on the 2026 WFE in China, I know you and everyone else has the same message that it's, you know, gonna be down. But to be honest, that's what everybody said at this time last year too, and you're growing, like, 20% this year. I know that there's some others that are more close to flat, but, I mean, you know, you're up a ton in virtually everyone else is up a ton too. So it seems like we keep saying that China will digest and that it'll be down, but they keep finding ways around these bans. So like, why would China be down next year? I guess I'm just trying to figure out, is there something different next year that you're seeing that maybe gives you the confidence that finally China is gonna be down because it hasn't happened yet? Thanks. Doug Bettinger: I guess what I'd say, Tim, it's twofold. First, the global multinationals outside of China are going to be pretty strong next year. So that's part of it, right? Everything else is going to be stronger in 2026, I think, than it was in 2025. And honestly, as we sit here right now and look at the stack up of everybody's plans in China, it's going to be less. That's the best I can tell you. And yep, you're absolutely right. A year ago when we were sitting here, we would have seen the same thing and then to strengthen through the year. I just right now don't see where that's gonna come from next year, Tim. Tim Arcuri: Okay, Doug. You. Doug Bettinger: Thanks, Tim. Operator: The next question comes from the line of Vivek Arya with Bank of America Securities. Please proceed. Vivek Arya: Thanks for taking my questions. The first one, Tim, you gave this interesting statistic $8 billion of WFE for, I think, every $100 billion in data center. How much of that $100 billion of data center spend is in semiconductors? Basically, what is the WFE intensity in an AI data center versus kind of the mid-teens, you know, WFE intensity? All semiconductors. And then off that $8 billion, what is Lam's opportunity? Tim Archer: Okay. Well, maybe I'll go ahead. Doug, you can add here, but I guess just to clarify, the $8 billion was WFE for a $100 billion of data center investment. So that would represent the equipment portion that we could target. And again, given that data centers and especially those focused on AI applications require leading edge across all three device segments. Again, that's an area where Lam's SAM as percent of WFE continues to increase at every technology node. And so all the things I'm talking about, whether it's high aspect ratio etches, it's ether, dry UV resist, it's ALD, all of those are growing our opportunity in that $8 billion. And so that's where a lot of our focus is these days, is the products that are required to do well through that spend. Doug Bettinger: Vivek, was that your question? Did that answer your question? I'm not sure we got it. Vivek Arya: My question is different. You know, because if you look at WSE overall as a percentage of semiconductors, it's about mid-teens percent. And when we talk about a $100 billion in data spend, there's a lot of non-semiconductor spend as part of that. My question is, of that $100 billion, how much is semiconductor spend? And what does that imply for WFE intensity in an AI environment? And of that $8 billion, how much is Lam's opportunity? Doug Bettinger: Yeah. Listen, Vivek, if I'm honest, I don't know the precise answer to your first question, how much is semiconductor content as part of that $100 billion. It's a decent amount, right? It's GPUs, it's HPM, it's enterprise SSDs. I don't know the precise number, but I know it's a decent amount. And then relative to our intensity in all these things, it's very similar to what you've seen from us across the rest of semis, which is you've got the move to gate all around. You've got high bandwidth memory. You've got a growing stack in NAND. It's part of the contribution of our share of WFE going from the low 30s to the high 30s. This would be representative of it to the best of my ability to answer your question. Tim Archer: Yes. I think that would be the best way to think about it is at the Investor Day, we said that as you move to these leading-edge nodes, Lam's SAM as percent of WFE, our opportunity would grow from the low thirties to the high thirties through those transitions. So assuming these are at the leading edge, then you're starting to create an opportunity that's at that high thirties level. Vivek Arya: Okay. For my follow-up, I think in the past, you have mentioned the $40 billion TAM for NAND upgrade. Much of that will be completed by the end of the year, like, will a third be completed? You know, will half be completed? Just any rough sense of where we are in the journey of that conversion. And as you look at next year, I know you have you're not giving a specific WFE view. But what would you know, cause NAND growth to be different, you know, higher or lower than what you saw in what we have seen so far in '25? Thank you. Tim Archer: Well, here's what we said. So we were at the Investor Day back in February. We said that $40 billion would be spent. And obviously, we didn't exactly put a date on it, but we said over several years to satisfy the upgrade of the installed base to 200 plus layer level. What I said in my remarks today is that this demand being a little bit higher than prior expectations, we've likely seen a little bit of an acceleration of that upgrade. I also said that in 2026, our upgrade business in NAND would remain strong. So we're not going to tell you exactly how far we are through that several-year period. But compared to February, it's accelerated. And as I also mentioned, I think that if this demand for high-capacity storage continues and the $40 billion when we gave that in February, targeted kind of a mid-high teens bit demand. And I think that what you're hearing publicly right now is maybe demand that's a little bit higher than that. So that would suggest it's being accelerated. And all we can speak to is our demand would suggest the same thing. Vivek Arya: Thank you. Doug Bettinger: Thanks, Vivek. Operator: The next question comes from the line of Harlan Sur with JPMorgan. Please proceed. Harlan Sur: Good afternoon. Thanks for taking my question. Maybe as a follow-up to CJ's question, given all of these data center infrastructure announcements, you know, I think for example, Sam Altman's recent trip to Asia, he had a view that, you know, DRAM and advanced foundries supply requirements over the next several years would be x amount, right, which positively surprised all of us. And it actually does imply significantly more capacity requirements across advanced foundry, memory, and advanced packaging. You would think that your customers would wanna start to put this in place as quickly as possible, maybe starting next year. But Tim, I think you did bring up a good point, right, which is on NAND, for example, that growth might be limited by tight clean room space. So do you think that overall, growth in calendar '26 WFE might be limited by availability of clean room space not only in NAND but across DRAM, advanced foundry, and advanced packaging? Tim Archer: Well, I would say that look. I can't speak for the customers. This would be a much better thing to ask them they can do amazing things. But I would say that, generally, you know, there's a time that it takes to put in physical infrastructure. We suffer from the same thing, whether we're expanding labs or expanding manufacturing. So depending on what the demand is, it could be limited. I think what we're trying to respond to is the point of how much could you accelerate. And that's a function of probably more physical space than it is ability for like, the equipment supply chain to respond. And that's simply because our lead times are generally within the lead time of building a facility. That was kind of my general comment. Maybe we're not going to be the bottleneck. But, yeah, clearly, we've seen some accelerated demand as a result of, you know, the current demand, but also in anticipation of those future opportunities. I would imagine this year, you'll see some of those plans come to fruition. I would suggest you talk to the customers and find out what their physical plan, investment plans are. Harlan Sur: Yeah. That's a fair point. And then maybe for Doug, you know, good to see the CSPG dynamics still on track to drive growth this year. I think first nine months of this year, CSBG was up 7% year over year, but includes Reliant. I assume that core spare services and upgrades are growing at a faster rate anyway. Maybe quantify how much faster it's growing. Then maybe if you could just true us up, I believe CSBG has been neutral to Accretive to your overall operating margins, but you've had similar cost benefits as you've moved CSBG support. Closer to your customers, especially with the Malaysia build out. Given all of this, on a relative basis, where do CSBG op margins currently sit relative to corporate average? Doug Bettinger: Yes, Harlan. Let me unpack that a little bit. Just to remind everybody on the call, and Harlan, I know you know this, but for others, there's four components to CSPG, spare service upgrades and then Reliant. Three of the components of CSPG are clearly growing. One is not, which is Reliant, largely because of maybe mature node spending across the whole world. Tim mentioned in his scripted remarks record spares and service combination. I said in my scripted remarks, hey, upgrades are pretty strong given what you got going on in NAND. So that's the way to think through all of the kind of ups and downs and if DG is gonna grow this year. You're right. CSBG is a creative operating margin. I've never quantified that for anybody, but that continues to be the case. Harlan Sur: Appreciate the color. Thanks, Tim. Thanks, Doug. Doug Bettinger: Yes. Thanks, Harlan. Operator: The next question comes from the line of Jim Schneider with Goldman Sachs. Please proceed. Jim Schneider: Good evening. Thanks for taking my question. I was wondering if you could maybe just give a little bit of color on the NAND market and what you're seeing. I think clearly given all the announcements that are out there in the market, there's an expectation that NAND orders could accelerate at some point and sort of wondering your view on whether you're seeing that yet or whether you're any kind of initial signals from customers in terms of longer-term forecasts. And when we might start to see that show up in the numbers? And maybe as a follow-on to that, maybe comment on whether you expect 26 growth in NAND to be led by upgrades or whether you see any potential for new tools starting to lead that? Thank you. Tim Archer: Yes. Thanks for the question. I think that I addressed some of that in my comments about NAND, but just to kind of go back and say that of the $40 billion of conversion spend that we had anticipated, I think the demand signal right now is a little bit accelerated to what we originally saw. That's based on the fact that bit demand is, people are speaking about bit demand that's a little bit higher than probably prior expectations. I think our business is going to continue to be predominantly upgrade focused, you know, not only in 2025, but through 2026. And that's primarily because there was a very large install base that had not been upgraded for a number of years. So there are quite a few tools that can still be upgraded to provide those higher layer count devices. Now as you do those upgrades, you tend to lose wafer out capacity. And so at some point, if demand remains as high as maybe people anticipate with these data center announcements, then I would think you'd transition to capacity additions. But my comment about floor space, physical infrastructure, again, a better question for our customers, but I would anticipate that everyone will remain focused on upgrades since it's the lowest cost and likely easiest way to achieve higher performance growth in bits through 2026. And then beyond that, you know, it's again, better question for all the NAND providers to speak to their plans. Jim Schneider: Great. Thank you very much. Doug Bettinger: Thanks, Jim. Operator: The next question comes from the line of Krish Sankar with TD Cowen. Please proceed. Krish Sankar: Yes. Hi. Thanks for taking my question. Tim, I just want to on the NAND thing. I understand clean room space is limited, maybe Kyosha is only on there as a new fab. But it also seems like the NAND utilization rate for most of your customers is heading towards 100%. So I'm kind of curious, in that scenario, should we assume that there might be a quarter or two where your NAND orders or shipments drop off? Or do you think it's going to be not, like, an lock lock and separate? It's gonna be pretty smooth transition. Doug Bettinger: Maybe I'll jump in and then Tim, you can add. Krish, nothing goes up into the right every single period. In fact, if you looked at the most recently reported quarter, NAND was actually down a little bit. It's going to continue to kind of trend towards that $40 billion, maybe a little bit more. But every quarter we'll have some level of variability depending on who's investing and what. All these guys or most of these guys also have DRAM investments. So they're going to modulate what happens in what quarter. But things have strengthened somewhat relative to what we were describing a quarter ago. And Tim, I don't know if you want to add anything. Tim Archer: Yeah. No, I think that's fair. I mean, I think the important thing to remember is that as we move above 200 layers, the drivers for our business aren't just the increased bit demand. Basically is that to produce each of those bits, the intensity of Lam's equipment actually rises. Well. And so, again, above 200 layers, we've talked about the fact that we start introducing several new types of products to deal with wafer stress, to deal with the higher gap fill requirements from the higher layer count devices, I talked a little bit about Moly in my prepared remarks. And so for us, as we see more interest and perhaps a bit of acceleration in those upgrades, we think that it's a combination for us of upgrades to existing installed base and the addition of some new tools. So you'll see it within our business both in systems and in upgrades. Krish Sankar: Got it. Got it. Thanks for that. And then a follow-up for Doug. Maybe it's a hypothetical question for you. You said next year, WFE is going to grow kind of makes sense. Seems like most folks assume mid to high single digits growth in calendar 2026. I'm assuming that's set up understand Lam's revenues are going to grow year over year. With less China being a gross margin headwind and higher tax rate, can Lam's EPS also grow year over year in that situation or outgrow revenue? Doug Bettinger: You're funny, Krish. I'm not going to answer that question. Listen, but you have it right. And I don't wanna over position the tax rate. Tax rate's gonna go up just a little bit. Okay? Don't go too far with it. And of low mid-teens, maybe it's approaching mid-teens or maybe a little bit towards the higher end of the low mid-teens. Don't go too far with that. The reduction of customer mix will be a headwind for gross margin. Right? We just took you down to 48 and a half percent. Depending on how each quarter progresses, we're probably in that range for a while. As things grow, that's going to be beneficial. From a fixed cost standpoint. We don't have huge fixed costs. There's going to be a customer mix headwind. And then probably in the next year, tariffs are a little bit a headwind, too. So I don't know, anchor yourself plus or minus where we just guided you in December, I think, and that'll be a good spot for you to start your models. Krish Sankar: Got it. Thanks a lot, Doug. Appreciate it. Doug Bettinger: Thanks, Krish. Operator: The next question comes from the line of Stacy Rasgon with Bernstein Research. Please proceed. Stacy Rasgon: Hi, guys. Thanks for taking my questions. Doug, my first one, I wanted to zero into something you said about next year. So you said second half loaded year. But then you said the first half would be sort of flat to maybe up a bit. Versus the second half of 25. But then if it's the second half of the year, it feels to me like the second half ought to be up you know, more materially than that. Am I sort of characterizing that trajectory correctly? Doug Bettinger: Oh, I haven't given you any numbers for the second half, Stacy. I just said it's a second half weighted year, and I said the first said second half weighted, Stacy. Yeah. And that the first half was flat to slightly up from the second half of this year. Stacy Rasgon: The second half weighted to me means at least the second half of next year should be higher than the first half of next year. Correct? Doug Bettinger: That's what that means. Yep. Stacy Rasgon: Okay. Got it. So then I want to dig into the implications of that with regard to China. You said China drops below 30% next year. It's probably gonna be what? I don't know. 36 or something. Like, this year. So that drop would have dropped to, like, 29. It'd be something like a billion and a half dollar headwind. Maybe more. It's probably a high single digit headwind to revenue growth. But from what we just heard, like, revenue overall should be growing. And, I mean, it should should be it feels like it should be growing okay. Given the trajectory you just laid out at least qualitatively. Again, I just wanted to know, do I do I have that dynamic correct? And, like, can you give us maybe a little more color on the non-China offsets that are enabling you to overcome a headwind from China, but, like I said, it has to be at least a billion and a half, probably something in that range. Doug Bettinger: Yeah. Stacy, what you just described is largely consistent with what I believe is gonna happen next year. So, yeah, China's gonna be down. Your numbers probably aren't too far off. The global multinationals, though, are going to offset that. Right? More than offset that is ours, you know, as we sit here today. Right? And just think about what's going on. We've been talking about NAND a ton on the call. We've been talking about high bandwidth memory. We've been talking about accelerators and all that kind of stuff going to more advanced nodes. So that's what's gonna be offsetting it, Stacy. Stacy Rasgon: I was actually just hoping to get a little more color on the granularity there, but maybe you're saving that for the next next quarter. Doug Bettinger: Yes. Let us leave a little bit in our pocket for next quarter. Stacy Rasgon: Alright. Alright. Sounds good. Thank you, Doug. I appreciate it. Doug Bettinger: You bet, Stacy. Thanks for trying. Operator: The next question comes from the line of Blayne Curtis with Jefferies. Please proceed. Blayne Curtis: Hey, thanks for letting me ask questions. I want to ask on China. Maybe I had it wrong. I was you didn't really answer last quarter, but I thought the strength that you highlighted for September was going to be multinational spending in China. That's clearly not the case. So maybe you could just walk through why such a big bump to China revenue in September now that it's done. Doug Bettinger: Yeah. No, Blayne. If it came across that we were suggesting it was a multinationals in China, that wasn't what we intended to communicate. If we did, apologies for misrepresenting it. Listen, the multinationals in China stayed relatively steady. So call it flattish. The growth in China was largely driven by the domestic Chinese customer base. Blayne Curtis: Got you. And then just the driver of the second half weighted, is that across all your segments? Or is that more of a foundry logic comment? Doug Bettinger: It's listen. We'll give you more granularity. I know everybody wants it but we'll give you more granularity on the December call. It's just a description of what we see totality of the spending in the industry. WFE in total. Blayne Curtis: Okay. Thanks. Doug Bettinger: Yep. Thanks, Blayne. Operator: Next question comes from the line of Melissa Weathers with Deutsche Bank. Please proceed. Melissa Weathers: Hi there. Thanks for letting me ask a question. I wanted to check-in on some of the new products that you introduced at the start of the year at your Analyst Day. Now that it seems like we're getting a little bit more momentum on the WFE side, have you seen any acceleration in engagements on those new products, the Acara and the Altus Halo products? Tim Archer: Yeah. It's a great question. And we have. I mean, Acara and Halo these are both products that are very focused on inflections that are taking place in foundry logic, DRAM, and NAND. Aqara for conductor etch, high aspect ratio, very well suited as we scale Git all around and also heavily used in DRAM. We've talked about a couple of wins since February. In some key DRAM conductor etch applications. Again, remember, we introduced some of these products specifically to improve our performance and revenue growth in foundry, logic, and DRAM because of the drivers there. Halo, I talked about on this call. Again, continuing to make progress in securing 3D NAND word line applications, which is an important step for the ESSD performance. And so I would say where, you know, where I sit right now, there's a long way to go to deliver on the Investor Day full model. But I think from a product perspective and how we see the trend playing out, we're feeling pretty good about the progress we've made since February. Melissa Weathers: Thank you. And then maybe one more on the backside power side of things. It looks like backside power nodes are gonna start to ramp in volume next year, maybe the year after. So has anything changed on either the timing or the magnitude of what you're expecting for backside power contributions? In the next couple quarters or years? Tim Archer: No, no, not really. I think in terms of change, I think, again, as you move forward and you hear all about the requirements for and challenges of power in these very compute-intensive devices. Just gives us further confidence that need solutions like backside power. I mean, it directly addresses some of the issues that customers have in scaling performance of high compute devices. So it's an edge depth intensive inflection, and therefore, it's important for us, and we're focused on it. And I think we'll do well those nodes ramp. Melissa Weathers: Thank you. Doug Bettinger: Thanks, Melissa. Operator: The next question comes from the line of Mehdi Hosseini with SIG. Please proceed. Mehdi Hosseini: Yes. Thanks for taking my question. All the good questions have been asked I have a quick follow-up. Going back to your slide number I know. I know. Going back to your slide number six. Interesting observation. I understand the lead times are in a one to two year, and that's almost in a ballpark as, a leading edge fab. I would also argue that there is increased concentration within that $8 billion of WFE for every $100 billion of incremental AI. And that increased concentration would, in my opinion, give your customers some leeway. They don't have to rush to secure capacity or to release all their POs. And I'm just wondering if you have any additional thoughts to it. Is that a factor? Doug Bettinger: Mehdi, that's a good question. Not exactly sure how to answer it. I think Tim has been meeting with a lot of customers over the last couple of weeks and having conversations about, okay, what do you think next year looks like? What where where are you going and so forth? I don't know that lead times have been all that different, so to speak, at least not yet. I'm not sure I'm answering your question. I'm just kind of rambling here a little bit. Mehdi Hosseini: I was at the your customers don't have to worry about running out of capacity among their suppliers. Tim Archer: Well, I think that look. In whether it's whether it's us and how we work with our customers or I'm sure our customers, how they work with theirs, everybody wants to make sure they have what they need. So we spend a lot of time with our supply chain, making sure they have the capacity their ramp, they understand the plans. Can anticipate that our customers do the same thing with us. To ensure that when they take an order, they can deliver it. I think we're in a period right now, as we talked about, of some acceleration. I think, you know, I don't believe most people anticipated the number of announcements that have come in recent months for, you know, AI infrastructure. It will take time for those. But I can guarantee when people hear those announcements, it ripples through the supply chain to make sure that capacity is going to exist. And I think everybody goes to work. And if there's one thing that Lam has been good at, it's executing to the needs of our customers, and that continues to be our focus. Mehdi Hosseini: Got it. Thank you. Doug Bettinger: Thanks, Mehdi. Operator: The next question comes from the line of Vijay Rakesh with Mizuho. Please proceed. Vijay Rakesh: Yeah. Hey, Doug and Tim. Just a quick question on 2026. As you look at the strength that you mentioned into next year, is that being driven by memory or foundry, logic, logic foundry as well? Because it looks like DRAM and pricing have been especially strong. So just wondering what you're seeing on the memory side as well. Doug Bettinger: I think it's probably gonna come from both. And, again, we'll give you more color on the December call. Vijay Rakesh: Got it. And then as you look at '26, obviously, there's a US it looks like a US ITC that kicks in December 31 for a higher investment tax credit, like 35%, and looks like some chipset money is starting to flow again. Are you seeing that as a tailwind for WFE into next year? Or Doug Bettinger: Maybe only on the margin, Vijay. No, what's driving WFE next year is end demand. At the end of the day. Yes, I'm sure the investment tax credit is going to maybe influence a little bit of the geographic distribution of that, maybe a little bit. But end demand is what matters right now. Vijay Rakesh: Got it. Thanks. Tim Archer: Thanks, Vijay. Doug Bettinger: Operator, we will take one more call. Or one more set of questions. Sorry. Operator: And the final question will come from the line of Brian Chin with Stifel. Please proceed. Brian Chin: Hi. Thanks for taking our questions. Appreciate it. Maybe first one, going back to that popular slide in the slide deck. Of the $8 billion in WFE spending, on a kind of rough cut, could you partition that across on a percentage basis, advanced logic, DRAM and NAND? Doug Bettinger: Brian, more than half of it is coming from memory. More than half? SSD. Enterprise SSD is in high bandwidth memory. And clearly, the great big GPU accelerators, the ASICs and whatnot, are part of it, but more than half is memory. Brian Chin: Okay. That's helpful. And you know, going back to the $40 billion mass in terms of upgrades over several years, do you view that as having to the industry having to sort of exhaust that and then capacity of spending capacity spending occurs? Or can they be somewhat concurrent maybe towards the back end of that? Maybe kind of more customer by customer basis. Of customer Tim Archer: Yeah. Just as you said there, it's going to be a customer by customer situation. And already today, we're seeing some capacity additions. And that has nothing to do with end to end. That was the customer's plan all along. And so I think you find different customers at different points of where they are with their installed base. Where they are with the needs of their customers and end markets. And the great thing for Lam is that we can work with customers in a very agnostic way as to whether it's whether they're gaining the bits and performance they need through upgrades or through capacity ads. We participate in both and in a meaningful way. And so I think you'll see both. However, what I said was upgrades to install base tend to be the fastest, and lowest cost means of achieving it's at the higher performance. And so I think that most customers will prioritize that first they get to capacity, but there will be some concurrence and maybe instead towards the back end of that upgrade rollout. Brian Chin: Great. Thank you. Doug Bettinger: Yes. Thank you, Brian. Operator, with that, we're going to conclude the call. Thank you everyone for joining today. I know Tim and I will be talking to a lot of you during the remainder of the quarter before we get into the quiet period. But thanks for your interest in Lam Research. Operator: Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Tim Archer: Yes. Thank you.