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Operator: Welcome to the third quarter of 2025 Earnings Conference call for Amphenol Corporation. Following today's presentation, there will be a formal question and answer session. Until then, all lines will remain in a listen-only mode. At the request of the company, today's conference is being recorded. If anyone has any objections, you may disconnect at this time. I would now like to introduce today's conference host, Mr. Craig Lampo. Sir, you may begin. Craig Lampo: Thank you very much. Good afternoon, everyone. This is Craig Lampo, CFO, and I am here together with Adam Norwitt, our CEO. We would like to welcome you to our third quarter 2025 conference call. Our third quarter 2025 results were released this morning. I will provide some financial commentary, then Adam will give an overview of the business and current market trends. Then, of course, we will take your questions. As a reminder, during the call, we may refer to certain non-GAAP financial measures and make certain forward-looking statements. So please refer to the relevant disclosures in our press release for further information. The company closed the third quarter of 2025 with record sales of $6.194 billion, a record GAAP and adjusted diluted EPS of $0.97 and $0.93, respectively. Third quarter sales were up 53% in US dollars, 52% in local currencies, and 41% organically compared to the third quarter of 2020. Sequentially, sales were up 10% in US dollars and local currencies and up 9% organically. Adam will comment further on trends by market in a few minutes. Orders in the quarter were a record $6.111 billion, up a strong 38% compared to the third quarter of 2024 and up 11% sequentially, resulting in a book-to-bill ratio of 0.99 to 1. GAAP and adjusted operating income were both $1.702 billion in the quarter, and operating margin was a record 27.5%. On an adjusted basis, operating margin increased by a strong 560 basis points from the prior year quarter, and 190 basis points sequentially. The year-over-year increase in adjusted operating margin was primarily driven by strong operating leverage on significantly higher sales volumes, which was only modestly offset by the dilutive impact of acquisitions. On a sequential basis, the increase in adjusted operating margin reflected strong conversion on the higher sales levels, as well as further progress on profitability improvement on acquired businesses. I am extremely proud of the company's record operating margin performance in the third quarter, which reflects continued strong execution by our team. Breaking down third quarter results by segment compared to the third quarter of 2024, sales in the Communication Solutions segment were $3.309 billion and increased by 96% in US dollars and 75% organically. Segment operating margin was 32.7%. Sales in the Harsh Environment Solutions segment were $1.516 billion and increased by 27% in US dollars and 19% organically, and segment operating margin was 27.1%. Sales in the Interconnect and Sensor Systems segment were $1.369 billion, increased by 18% in US dollars and 15% organically, and segment operating margin was 20%.The company's GAAP effective tax rate for the third quarter was 23.5%, and the adjusted effective tax rate was 27%, which compared to 21.4% and 24% in the third quarter of 2024, respectively. The increase in our adjusted effective tax rate this quarter is due to some shift in income mix to higher tax jurisdictions during 2025. The third quarter includes an adjustment to bring the year-to-date taxes to a 25.5% adjusted effective tax rate, which resulted in a three-cent impact to our third quarter EPS. Our fourth quarter and full-year guidance assumes this higher 25.5% tax rate, and we expect this higher tax rate to continue into 2026. EPS was a record $0.97 in the third quarter, up 102% compared to the prior year period. And on an adjusted basis, EPS increased 86% to a record $0.93 compared to $0.50 in the third quarter of 2024. This was an outstanding result. Operating cash flow in the third quarter was $1.471 billion, or 117% of net income, and free cash flow was $1.215 billion, or 97% of net income. Also, an excellent result. From a capital standpoint, inventory days, days sales outstanding, and payable days were all within a normal range.During the quarter, the company repurchased 1.4 million shares of common stock at an average price of approximately $109, and when combined with our normal quarterly dividend, total capital return to shareholders in the third quarter of 2025 was $354 million. As noted in the earnings release, the company has increased its quarterly dividend by 52% to $0.25 per share, effective for payments beginning in January of 2026. Total debt on September 30th was $8.1 billion, and net debt was $4.2 billion. Total liquidity at the end of the quarter was $10.9 billion, and this included cash and short-term investments on hand of $3.9 billion plus availability under our existing credit facilities, including the $4 billion term loan facility recently put in place in anticipation of the acquisition. Third quarter 2025 EBITDA was $2 billion, and our net leverage ratio was 0.7 times at the end of the quarter. As of September 30th, the company had no outstanding borrowings under its revolving credit facility or its commercial paper programs. I will now turn the call over to Adam, who will provide some commentary on current market trends. Adam Norwitt: Well, thank you very much, Craig. And thank you to everybody for taking the time to join our call today. And I hope that all of you are having an enjoyable fall. I can tell you it's a beautiful day here in Connecticut. I'm going to highlight our achievements in the third quarter. I'll discuss our trends and progress across our served markets, and then comment on our outlook for the fourth quarter and the full year. And then, of course, we'll have time for questions thereafter. There's no doubt that our results in the third quarter were much stronger than expected, exceeding the high end of our guidance in sales and adjusted diluted earnings per share. Sales grew from prior year by a very strong 53% in US dollars and 52% in local currencies, reaching a new record $6.194 billion, or nearly $6.2 billion. On an organic basis, sales increased by a very strong 41%, the same level that we actually achieved in the second quarter. And this was driven by double-digit organic growth in all but one of our end markets. We're very pleased that the company booked a record $6.111 billion in orders in the third quarter, and that represented a book-to-bill of 0.99 to 1. Orders grew by a very strong 38% from prior year, and were also up 11% sequentially. I have to say that we're particularly pleased to have delivered record operating margins of 27.5% in the quarter, an increase of 560 basis points from our prior year adjusted operating margin and 190 basis points sequentially. This strong profitability is a direct result of the outstanding execution of the team around the world, all of whom continued to manage extremely well in a very dynamic environment. As Craig mentioned, our adjusted diluted EPS also grew very strong, 86% from prior year, reaching a new record of $0.93, and the company converted those earnings into record operating and free cash flow in the quarter of $1.471 billion and $1.215 billion, respectively. Both clear demonstrations of the quality of the company's earnings. Finally, I'm very pleased that our board has approved a 52% increase in the company's quarterly dividend to $0.25 per share. I just can't express enough my pride in the team. I would just say that our results this quarter, once again reaffirmed the value of the passion, discipline, and agility of our entrepreneurial organization as we continue to drive superior performance. Now, as we announced in mid-August, we're very excited that we signed a definitive agreement to acquire Trexan for approximately $1 billion in cash. Trexan is a leading provider of high-reliability interconnect and cable assemblies, primarily for the defense market, and expects to generate 2025 sales in EBITDA of approximately $290 million and 26%, respectively. We're very excited about the incremental potential that Trexan capabilities will bring to Amphenol, and we look forward to welcoming the entire Trexan team to the Amphenol family. We continue to expect this acquisition to close by the end of the fourth quarter. We're pleased as well to announce that we closed on the acquisition of Rochester Sensors earlier in the third quarter. Based in the Dallas, Texas area and with annual sales of approximately $100 million, Rochester is a leading manufacturer of highly engineered, application-specific, liquid level sensors for the industrial market, with a particular focus on propane, heavy vehicle, and refrigeration. The company has a strong and long-respected brand in the sensor industry, and no doubt will be a great complement to our already broad sensor offering. In addition, we remain excited about the pending acquisition of the business from Commscope. Given our good progress on the path towards closing, we now expect to close CCX by the end of the first quarter of 2026. About a quarter sooner than originally anticipated. We remain confident that our acquisition program will continue to create great value for Amphenol. In fact, as our ability to identify and execute upon acquisitions and then to successfully bring these new companies into the Amphenol family, that remains a core competitive advantage for the company. Now, turning to our trends across our served end markets, I would just note that we continue to be very pleased that the company's end market exposure remains diversified, balanced, and broad. This diversification continues to create great value for the company, enabling us to participate across all areas of the global electronics industry while not being disproportionately exposed to the volatility of any given market or application. The defense market represented 9% of our sales in the quarter, and sales grew from prior year by a strong 29% in US dollars and 23% organically. And this is really driven by robust growth across virtually all segments of the defense market, with the contributions in particular related to space, naval communications, and ground vehicle applications. Sequentially, our sales grew by 8%, which was higher than our expectations coming into the quarter. And looking into the fourth quarter, we expect a mid-single-digit increase in sales from these already lofty third quarter levels. And for the full year 2025, we expect sales to increase by more than 25%. I would just note that this outlook does not include any impact from the Trexan acquisition. We remain encouraged by the company's leading position in the Defense Interconnect market, where we offer the industry's widest range of high-technology products. Amidst the current dynamic geopolitical environment, countries around the world continue to expand their investments into both current and next-generation defense technologies. With our existing offerings as well as the complementary capabilities that Trexan will bring, we're positioned better than ever to capitalize on this long-term demand trend. The commercial aerospace market represented 5% of our sales in the quarter. Sales increased by 17% from prior year and 16% organically, as we benefited from increasing production levels of our customers together with our continued progress in expanding our content on next-generation commercial aircraft. Sequentially, our sales grew by 7% from the second quarter, which was better than our expectations coming into the quarter. Now, looking into the fourth quarter, we expect a mid-single-digit sales increase from these third quarter levels. And for the full year 2025, we expect sales to increase in the high 30% range from last year, helped by the acquisition of Sit back in 2024. I'm truly proud of our team working in the commercial air market. With the ongoing growth and demand for jetliners, our efforts to expand our product offering, both organically and through our acquisition program, continue to pay real dividends. In particular, I just want to mention that we're very pleased with the progress of the Sit team, who's now completed more than a full year as part of the Amphenol family. We look forward to further capitalizing on our expanded range of product solutions for the commercial air market long into the future. The industrial market represented 18% of our sales in the quarter, and sales in this market grew by 21% in US dollars and 11% organically. And that was really driven by organic growth in all three geographies. In particular, our organic growth was driven by strong performance in factory automation, medical instrumentation, industrial electric vehicles, and our heavy equipment segments. On a sequential basis, sales grew by 5% from the second quarter, which was better than our expectations coming into the quarter. As we look into the fourth quarter, we expect sales to moderate slightly from these third quarter levels. And for the full year 2025, we expect our sales to grow by approximately 20%, reflecting both strong organic growth as well as the benefit of acquisitions. We remain encouraged by the company's strength across the many diversified segments of this important market. As demand continues to recover, I'm confident in our long-term strategy to expand our high-technology, interconnect, antenna, and sensor offering, both organically as well as through complementary acquisitions. Indeed, with the acquisition of Rochester Sensors, we have further broadened our sensor offering for the industrial market, and that strategy has really enabled Amphenol to capitalize on the many electronic revolutions that are taking place across the diversified industrial market, thereby creating continued opportunities for our outstanding team working in this important area. The automotive market represented 14% of our sales in the quarter, and sales in the third quarter grew by 13% in US dollars and 12% organically, as we once again drove growth in all regions. Sequentially, our sales grew by 8% from the second quarter, which was actually much better than our expectations coming into the quarter. And that really reflected the ability of our team to quickly execute on a wide range of opportunities around the world. For the fourth quarter, we expect a moderate sales decline from these third quarter levels. And for the full year 2025, we expect sales to increase in the mid to high single-digit range from 2024. I remain very proud of our team working in this important market. And you know well, there are no doubt many areas of uncertainty in the global automotive market. Our team continues to be focused on driving new design wins with customers who are implementing a wide array of new technologies into their vehicles. We look forward to benefiting from our strengthened position in the automotive market for many years to come. The communications networks market represented 11% of our sales in the quarter. Sales grew from prior year by 165% in US dollars and a strong 25% organically, as we benefited from the Andrew acquisition that we completed earlier this year, as well as from increased spending by both communications network operators and equipment manufacturers. Sequentially, our sales grew by 8% from the second quarter, which was better than our expectation for sales to remain flat. As we look into the fourth quarter, we do expect sales to decline in the low teens range on normal seasonality, and for the full year 2025, we expect more than 130% growth, driven by the acquisition of Andrew, together with robust organic growth. With our expanded range of technology offerings following the acquisition of Andrew earlier this year, we were well positioned with both service provider and OEM customers across the global communications networks market. Our deep and broad range of products, coupled with an expansive manufacturing footprint, have positioned us to better support customers around the world. And as those customers continue to drive their systems to higher levels of performance, we look forward to enabling these important networks for many years to come. The mobile device market represented 6% of our sales in the quarter, and sales moderated by 3% in US dollars and organically, as growth in wearables, as well as basically flat sales, enhanced year over year, was more than offset by moderations in sales related to laptops and tablets. Sequentially, our sales did grow by 18% from the second quarter, which was much better than our expectations coming into the third quarter. As we look into the fourth quarter, we expect sales to increase modestly from these levels, and for the full year 2025, we expect sales to grow in the low single-digit range compared to 2024. I remain very proud of our team working in the always dynamic mobile devices market, as their agility and reactivity have once again enabled us to capture incremental sales in the quarter. I'm confident that with our leading array of antennas, interconnect product, and mechanisms designed in across a broad range of next-generation mobile devices, we're well positioned for the long term. And finally, the IT Datacom market represented 37% of our sales in the quarter. Sales in the quarter grew by a very strong 128% in US dollars and organically, and that was driven by the continued acceleration in demand for our products used in artificial intelligence applications, together with continued robust growth in our base IT Datacom business. I'm really proud of our team's outstanding execution here in the third quarter, as we were once again able to significantly outperform our expectations in this very exciting market. On a sequential basis, sales increased by 13% from the second quarter, and that was substantially better than our expectation for mid to high single-digit decline. This outperformance is actually driven both by sales of AI-related products, as well as by growth in our base IT Datacom business. As we look towards the fourth quarter, we expect sales to increase slightly from these very strong third quarter levels. And for the full year of 2025, we expect our IT Datacom sales to more than double compared to the prior year. We are more than ever encouraged by the company's position in the global IT Datacom market. There's no doubt that our team has done an outstanding job securing future business on next-generation systems with a broad array of customers. The revolution in AI continues to create a unique opportunity for Amphenol. Given our leading high-speed and power interconnect products, whether high-speed, power, or fiber optic interconnects, our products are critical components in these next-generation systems, and that creates a continued long-term growth opportunity for the company. Turning to our outlook, and obviously assuming the continuation of current market conditions as well as constant exchange rates for the fourth quarter, we now expect sales in the range of $6 billion to $6.1 billion, and adjusted diluted EPS in the range of $0.89 to $0.91. This would represent a sales increase of 39 to 41%, and an adjusted diluted EPS increase of 62 to 65%, compared to the prior year fourth quarter. Our fourth quarter guidance also represents an expectation for full-year sales of $22.660 billion to $22.760 billion, and full-year adjusted diluted EPS of $3.26 to $3.28. This outlook represents full-year sales and adjusted EPS increases of 49 to 50% and 72 to 74%, respectively. There's no doubt that 2025 has been a very strong year for Amphenol thus far. I remain confident in the ability of our outstanding management team to adapt to the many opportunities and challenges in the current environment and to thereby continue to grow our market position, all while driving sustainable and strong profitability through this year and into the long term. Finally, I'd like to take this opportunity once again to thank our entire global team for what were truly incredible efforts here in the third quarter. They worked unbelievably hard to deliver this level of growth and performance, and I'm truly grateful to each and every one of them. And with that, operator, we'd be very happy to take any questions that there may be. Operator: Thank you, Mr. Norwitt. The question and answer period will now begin. Please limit to one question per caller. To ask a question, please press star followed by one on your telephone keypad now. If you change your mind, please press star followed by two. When preparing to ask your question, please ensure your device is unmuted locally. We have a question from Steven Fox from Fox Advisors. Please go ahead. Steven Fox: Hi. Hi. Good afternoon. Thanks for taking my question. As you guys mentioned, your margins are quite impressive. Another record. I was wondering if you could zero in on the incrementals a little bit from two aspects. One is the harsh environment and communications incrementals were 40%. Obviously, volumes are helping, but what else is helping produce that? And then secondly, it seems like you mentioned, Adam, there's a lot of product complexity. We just saw, you know, a lot of your products at OCP last week. How does that either help or make it harder to deliver like these types of incrementals as you get into next-generation data centers, aerospace, things like that? Thank you. Adam Norwitt: Thanks, Steve. Yeah, no, listen, we're super proud, obviously, of our results this quarter and specifically the profitability we were able to achieve here in the third quarter after coming off of a really strong quarter, actually in the second quarter, you know, at 25.6. So, you know, the 27.5% profitability for the company is something that certainly will take a lot of work. And I think really is driven by, you know, certainly a few factors. Number one, you know, obviously we're growing quickly. We had a really great quarter from a growth perspective. And we're continuing to execute in order to leverage that into strong profitability. And I think that's what you saw in the quarter. You know, and, you know, and the other part of it is our acquisitions also are doing really well. I mean, you mentioned the segment. I mean, that's kind of where the CET business sits. And I would tell you that business is performing very well. And certainly as contributing to the margins and the conversion margin that you just mentioned in your question. So, you know, I think the overall profitability of the company is kind of hitting on all cylinders. You know, it's the execution, you know, related to the growth of the company in addition to acquisitions that we're starting to see real progress on from a profitability perspective. So, you know, these are things that, you know, certainly proud of. I think that, you know, certainly the value we're adding to our customers, the technology that we're bringing to the table here is being reflected in these margins. And that's, you know, that's kind of the results you're seeing here. And these really great results. Yeah. Well, thank you, Craig and Steve, thank you for the question. And thanks for stopping by the booth at OCP. We really appreciate that. Look, you saw a slice of our products there, which certainly reflect an increasing complexity primarily related to the IT Datacom market. And there's no doubt that as interconnect products have become more fundamental to the performance of the systems, the networks into which they are incorporated, there is more being demanded of those products. They become more complex. Whether those are higher speed products, whether those are high power products. And to make those products, to design those products, to innovate around those products, to develop the manufacturing processes, to make these and to ramp those products up at scale and at the speed that our customers and the market would like to have. This is not a trivial task whatsoever. And I'm just so proud of our team for really working over many, many years to build the fundamental building blocks that have ultimately allowed us to be so successful. But I would also say this, it's not confined to that market. We see interconnect products across all of our end markets, becoming increasingly high technology, having increasing complexity around them, whether you're talking about in the defense market, in commercial air, where we can now offer a broader suite of value-add interconnect products to our customers, in part because of the Sit acquisition and what that brought. If you look at the Trexan acquisition that we announced this quarter, which brings us into even more advanced complex interconnect assemblies for customers in the defense market. We see that across the industrial market as well, the automotive market, and certainly in the communications networks, with the complexity of the products, the antenna products, the interconnect products that came along with the Andrew acquisition, I would tell you that today, more than ever before, customers recognize the importance they rely upon the technology value of interconnect products, and they represent a bigger hurdle for many of our customers, one that we can solve. You know, you asked, interestingly, that question around margin at this out of the same breath as that question around product complexity. And I don't think the two are unrelated. Yes, it's hard to do that. But if you are creating more value for your customers through the technology of your product, by creating that value, then maybe those customers will be willing to share some small part of that value also with you that's embedded in that complex technology of the products. And I think that's something that Amphenol, that we certainly, as a company, are seeing more of today than ever before. Operator: Thank you. Our next question goes to the line of Amit Daryanani with Evercore. Please proceed. Amit Daryanani: Yep. Good afternoon, everyone. Thanks for taking my question. Yeah. Adam, last quarter, I think, you know, we talked about about $150 million of AI performance in the June quarter was driven by out execution. And that resulted in, I think, initially guiding it. Datacom revenues down mid-single digits or so. As you think of the better performance you just had in that segment, I think you folks, it's up 13%. How much of that do you think was driven by the traditional IT Datacom markets doing well versus AI? If there's a way to parse that out, it would be really helpful. And then how do you feel about the broader inventory levels in the AI ecosystem as you wrap this year? Get into calendar 26. Thank you. Adam Norwitt: Well, thank you very much, I appreciate the question. And look, I think if you think about our performance in the third quarter, I'd say it's pretty balanced. I mean, I can't get super granular about this. You never know on the exactly the margins of what product does it exactly go into. But I would say our impression is that it's pretty balanced. Our upside in the quarter between AI related and then more traditional Datacom. And look, relative to inventory. What we don't see any signs of anything abnormal. And there's no doubt, you know, in the third quarter we obviously beat our expectations. And there's there was clearly more demand from our customers. And we were able to satisfy that demand. And so even though we came out of the second quarter with, as you talked about it, maybe shipping a little bit ahead to what our customer demand was anticipated, the demand got better here in the third quarter. And our team was able to flex to really react to that. Both on the AI as well as the more traditional IT Datacom side. Operator: Thank you. Our next question goes to the line of Guy Hardwick from Barclays Capital. You may proceed. Guy Hardwick: Hi. Good afternoon, Adam and team. Obviously with so much of the incremental growth coming from AR, it Datacom, it's natural for investors to kind of fret on about major architectures in AI. Can you kind of allay any concerns about Amphenol content on, say, the the Khyber architecture due to coming 2027 versus the Oberon architecture? Adam Norwitt: Yeah. Thanks very much, Guy. Look, I'm not going to talk about specific customers and specific architectures. There's a lot of different design activity going on. And what I can tell you is this, you know why we have been so successful in establishing ourselves as a leader in this unique and high-value architecture of interconnect products in accelerated compute AI, machine learning, whatever you want to term it is a very long-term, multi-decade build-up of our capabilities on high-speed and also power products, and then also commensurate with that building up the capabilities to make these advanced products and to ramp those products up when our customers need them. And those capabilities have enabled us to continue to win with customers up and down the stack of the AI ecosystem. And, you know, people want to talk about one or another platform, but you know that there are lots of things going on in AI. We treasure our relationships with each of those customers, and we work directly with customers up and down the stack from the folks who are really the service providers, all the way down through the equipment manufacturers, the data center builders, and down through to the folks who are designing and specifying the chip-based architecture. And I can tell you that we have a strong position today, and we have a strong position in future platforms really up and down that stack. Operator: Thank you. Our next question comes from the line of Luke Junk from Baird. You may proceed. Luke Junk: Good afternoon. Thanks for taking the question. Maybe a simple question, but more complex answer. I'm just wondering how you think about book to Bill at this level of growth. I mean, it just seems like at these levels, maybe that becomes a less meaningful metric to look at. And also, I think some of your sales are shorter term in nature, especially in IT. Datacom. Just how that's impacting the book to bill measure as well. Thank you. Adam Norwitt: Well, thanks, Luke. Actually, it's a very good question. And I think you're kind of spot on like with these growth levels, the fact that our bookings grew also in the quarter on a year-over-year basis by 38%, and that we had so much upside in the quarter in terms of our revenues to what our expectation. And yet we still manage to have a book to bill that was really just under one. I think it rounds to 0.99. But I mean, more than $6.1 billion in orders in the quarter. I would say that when we were in the earlier part of the ramp-up of, in particular, this ramp-up related to IT Datacom and specifically related to AI. There's no doubt that our book to bill was a very strong book to Bill in particular because we were making a lot of significant investments, and it was very much on the. Com and our customers, you know, wanted to give us the confidence that we would make those various investments. Now, look, I can't tell you what the cadence of bookings will be. You know, here in the fourth quarter. We don't give guidance for bookings for that reason, it's very hard to tell. Maybe, maybe it'll be above one or below one. And we shall see. You know, is it a shorter cycle? What I would say about this, IT Datacom specifically is there's no question that as we've gone through this cycle of the build-out and the ramp-up, our lead times have certainly come down relative to what they were early on as we were building out the capacity. And as your lead times come down, that naturally has an impact on your book to bill. And it's a slightly shorter cycle. And so I think that's not also totally far off base either, Luke. Operator: Thank you. Our next question comes from the line of Samik Chatterjee from JP Morgan. You may proceed. Samik Chatterjee: Oh, great. Hi, thanks for taking my question. Maybe just putting IT Datacom aside, the recovery and the strong organic growth that you had in the other end markets as well, like industrial communication networks, like really strong growth in all of them. Maybe one, how are you sort of overall looking at the landscape right into 90 days ago? Have things in those underlying markets improved and then what is the visibility? I get that maybe book to bill is in the best metric to look at for IT Datacom. But what is the visibility of the book to bill in those end markets, giving you in relation to future demand? Is the visibility improving with the book to bill numbers as well? Thank you. Adam Norwitt: Yeah. No, thank you very much. I mean, look, it's hard to say that we don't have a more positive view today than we would have had 90 days ago. Really broadly across the company with the performance that we had here in the quarter. I mean, growing sequentially as we did by 10%, is really, you know, an outstanding performance. Especially compared to what our expectations were coming into the quarter. And if you look at our performance across really all of our end markets with the small exception of mobile devices, which was slightly down year over year, all of our end markets were up in double digits organically. And honestly, if you even took IT Datacom totally out of our performance in the quarter, we would have organic growth in the mid-teens levels, which to me sounds like pretty good performance. And so there's no doubt that we feel, you know, incrementally positive on the overall landscape in terms of books to book to. Bill's in the other markets. I mean, I would say that, you know, we had some favorable book to bills in particular. I would say, like defense. We have pretty strong book to bill in that market. I'd say others are, you know, plus or minus, but certainly not negative. And so I think we feel incrementally encouraged and that, you know, ultimately goes into our expectations where we look next quarter, for example, in the defense market, commercial air market, those two in particular to be up kind of, you know, in the mid-single digits on a sequential basis, which is a very strong finish for each of those areas. Operator: Thank you. Our next question comes from the line of Mark Delaney from Goldman Sachs. You may proceed. Mark Delaney: Yes. Good afternoon, and thank you very much for taking my question. Adam, you mentioned the company saw better than expected strength in the auto market in the third quarter, and you spoke to some of that being a function of Amphenol executing well against opportunities that came up in the quarter. Could you speak a bit more on what some of those opportunities were? And what was supporting that strength that the company saw in 3Q and then maybe just give a bit more color on what you're seeing in the auto market for the fourth quarter, please. Thanks. Adam Norwitt: Well, thanks very much, Mark. I mean, look, I think our team did well on a global basis in automotive in the third quarter. I mean, growing really sequentially in all regions, growing pretty strongly in all regions on a year-over-year basis, including, by the way, we saw double-digit organic growth in Europe. Which is maybe not what one reads in the papers every day. And so we feel really good about the performance. And I'm really pleased with our team there. And, you know, look, there's a lot of moving pieces in automotive right now. You hear about lots of different things, you know, different government policies impacting certain automotive demand. You hear about different supply chain things going on plus or minus. In that area. And you know, so as we look into the fourth quarter, taking all of that into account, you know, we expect it, you know, sort of modest sequential reduction here in the fourth quarter, which is not totally abnormal. You know, sometimes we'll see that in a fourth quarter for automotive. But our position is really strong. And in addition, I would tell you that we're really pleased to see, you know, a kind of growth in that market in new kind of platforms. You know, EVs where we've had strong performance in our automotive last quarter. But also in traditional and hybrid vehicles around the world. And so I think it's a pretty broad-based, positive view that we had, which I think does contrast with maybe some of the more cloudy things you read about every day in the paper. But I tried not to read all these cloudy things too often. Operator: Thank you. Our next question goes to the line of Andrew Buscaglia with BNP Paribas. Andrew, your line is open. Andrew Buscaglia: Hey, good morning, everyone. Adam Norwitt: Morning, Andrew or good afternoon, I should. Andrew Buscaglia: Say. Yeah. Good afternoon. Yeah, I want to check on your margins have been great. And you're talking about this kind of higher incremental margin shift. But yet your guidance to get to the midpoint of your guidance, it does imply margins would step down. If you look historically, usually they're flat or up, you know, from Q3. And I'm just wondering are there some dynamics in there that are causing that or anything you want to call out? You know, ahead of that. Craig Lampo: Yeah. Thanks a lot, Andrew. Yeah. No, listen, you know, our fourth quarter kind of guidance here certainly I think is actually very strong both from a top line and the bottom line perspective. I mean, we're guiding down slightly our margins in the fourth quarter kind of implied are slightly down. But also revenue is slightly down. And we're talking about, you know, not a significant I think a 2% I think on the high end sequential decline. So I guess I wouldn't call out anything too specific. I mean, the reality is that these at these revenue levels, that these growth levels, I mean, there will be some variability in margins. And we're going to, you know, I think we talked about our 30% kind of conversion, you know, or approaching 30 on the growth. And I would think on, on the, you know, when we have some declines, you're going to see a little bit higher conversion on the decline. And you would typically see at these margin levels that we're at. But so I wouldn't call anything out too specifically. I mean, we are, as I've mentioned before, adding some level of cost, you know, kind of given the significant growth we've seen in the inability to necessarily add some cost as quick as you can when you're growing kind of 40% organically or 41% in this quarter. So I would say maybe that's having a slight impact, but maybe I would say modest, but I mean, this implied margins, I think still would be close to 27%. So I mean, this is not a significant drop in margin. And I think this is still a very good overall profitability for the company. And certainly we believe sustainable. And, you know, as we continue to grow and but there will be some level of variability for sure. Operator: Thank you. Our next question comes from the line of Wamsi Mohan from Bank of America. You may proceed. Wamsi Mohan: Yes. Thank you so much. Adam, can you talk a little bit about the opportunity that you see on the power side as these AI data centers and standing up racks that are consuming maybe 2 to 3x of 100 kilowatt rack, which itself used to be a lot lower just a year ago. And maybe you can just address some of the products that are driving that opportunity for you. And if I could, Craig, could you just talk about the CapEx trajectory? It was slightly down quarter on quarter. I think you'd expected it to be flat. How should we think about the trajectory from here? Thank you so much. Craig Lampo: We spent I would say we spent in the range of what we expected to spend in the quarter. I mean, there's no precision around exactly what you're going to spend in the quarter. We expected kind of in the ballpark of what we had in the second quarter. And we were, you know, slightly under that. But I think still kind of roughly where we expect it to be. I think we hadn't really I haven't mentioned the fourth quarter. I mean, I guess I would expect kind of to be in a similar range, maybe slightly higher than we were in the third quarter and the fourth. But, I mean, these are given the level of growth we've had, given the revenue that we've had, we're kind of growing into our capital spending right now. Which we would expect to do. And that's certainly, you know, so we're closer to kind of again, the higher upper end of that kind of 4% kind of target that we would typically have. And that's what we did here in the third quarter. And I kind of would expect it, you know, roughly in that range, kind of as we move forward, certainly into the fourth quarter here. Adam Norwitt: Yeah. And look, relative to power, I mean, look, power is a big story here. I'm not saying anything. None of any of you don't know. But there's no doubt that power in these next-generation architectures is a really fundamental part of the operating of the systems. And we've been involved in power connectors essentially since the birth of the company. If you think about our legacy back into military and industrial high power, high voltage, I mean, we've been making interconnect products related to really high power consumption systems for most of the modern history of Amphenol, which means that we have dialed in the knowledge of what it means to be handling so much power. The safety, the efficiency, the throughput of the power. You know, this concept of millivolt drop and all of that that goes along with it. And so, you know, we're involved in a very complex way across a lot of different interconnect products, complex interconnect assemblies, Busbars board level interconnect, bringing power, you know, as soon as the power gets to the side of a building, you know, we're helping it get all the way around there all the way until it gets to the board of the chips. I mean, as you mentioned, AI is only going to increase in the needs of power. And I have to say, you know, I use these tools probably more than most. I am just dived in head and shoulders into using AI. And I will admit that once in a while when I'm doing something pretty complex and it's waiting a little bit, I get a little pang of guilt that I might be using a little more power. I mean, I was making, you know, immunology models for my daughter who's studying for a test last night. And, you know, I see the little thing thinking and know that, you know, that's probably burning a few light bulbs of power while doing that. And I think our job at Amphenol, our job at Amphenol to do this is to make sure that as little as possible of that energy that comes in the building is lost through the interconnect products that ultimately our products are the most efficient and the safest. So that the maximum amount of electrons can make their way to where they need to go, which is to the GPUs and to the associated things that go on these systems. And if we can do a good job at doing that, we're pretty good at doing that. We've been developing that skill for many decades. You know, our customers are going to keep relying on us to support them. And I'm really proud of what our team has done here. And, you know, I look forward to more opportunities related to power in the future. Operator: Thank you. Our next question comes from the line of Asiya Merchant from Citigroup. You may proceed. Asiya Merchant: Great. Thank you very much. Great results here. If I may, Adam, I know you talked a lot about, you know, how the interconnects are now creating more value. And I think it's pretty well understood on the AI side. But I do get questions from investors on, you know, the other end markets, you know, where is that extra value that is being created that can sustain the incremental margins that you're talking about and sort of related to that? You know, how do you think about the competitive dynamics now? You know, what, whether it's within the IT Datacom or outside within the other end markets, that you participate in? Thank you. Adam Norwitt: Well, thank you very much, Asiya. And I hopefully I pronounce your name correctly. There. Sorry about that. Look, there's no doubt that as I mentioned earlier, we see interconnect becoming increasingly embedded with more technology. Increasingly complex and thereby increasingly creating value for our customers across the entire gamut of this wonderful array of markets that we serve. And, you know, how is that happening and why is that happening? It gets to just the intensity of electronics that our customers are embedding in their products to create more functionality, more value for the end customers. Everything from a combine that is cutting down soybeans or corn in the Midwest. Now operating as an autonomous vehicle where one driver can drive five of these massive farming machines, as opposed to having to have five drivers to do that. Mining equipment. The same, you know, with autonomy, with hybridization of the drive trains across the defense industry. I mean, we just see so much more complex adoption of electronics that thereby then requires a more complex interconnect system. The density, the number of different nodes, the sensors that and the processes that are being associated therewith. All of this adds up together to create a complexity and a need, and ultimately an opportunity for us to create value for our customers. Now, look, we have a lot of competition. To your second question, and everywhere that we operate, and it's up to us to create a sustainable advantage for our company through our technology. Number one, through our capability and capacity to build that technology. Number two, and then ultimately through our agility, reactivity, and speed. And that last piece of it, that last piece of it comes from that unique culture that I talked till I'm blue in the face about because it ultimately is the nucleus of what makes this company successful. And so we will always have competition, and we respect those competitors. And there's some wonderful companies, large, medium, and small around the world with whom we have really wonderful competition. But at the end of the day, if we can develop a better product, if we can build that product at scale and if we can do that in an agile, fast, and flexible fashion, I believe that we'll continue to be able to win more than our fair share and thereby be able to outperform the market. We've done that for more than a quarter century, and I have a lot of confidence that we will be able to do that for many years to come. Operator: Thank you. Our next question comes from the line of Joe Spak from UBS. You may proceed. Joe Spak: Thanks. Good afternoon. I just want to go back to some of the incremental margin commentary from before, particularly by segments, because I understand growth's really the largest driver here, but is there anything structural between the segments that we think can impact incremental margins, like, you know, if you look at com services and harsh environments, you know, similar incrementals quarter, but you know, Com services grew three times as fast as harsh. So is there some more investment that's needed there. And then, you know, if we think about the interconnect and sensor. Segment, is there anything that ultimately preventing that segment from also hitting, you know, 30% plus incrementals if they achieve. Faster growth? Thanks. Craig Lampo: Yeah, thanks for the question. I mean, I think the short answer is I don't think there's anything structural in any of the segments that's limiting them from or enhancing their, their profitability. I mean, there's no doubt that the segment has had a significant amount of growth. And when we talk about kind of adding cost to support, kind of 40% plus organic growth, we're talking about also adding costs of support. I think the 74% organic growth or whatever they had in the quarter. So certainly there's some of that kind of in that segment that maybe is more than some other segments in terms of adding some of those costs that will catch up a little bit over time. But these are modest amounts. These aren't things that are going to have a super meaningful impact on overall, the overall profitability of segment or on the company. I mean, I think, you know, all of the segments have the ability to, you know, grow, continue to grow their margins and continue to expand over time. I mean, I'm actually I say I would say I'm particularly proud of this quarter, you know, achieving 20%, you know, profitability, operating margins in the quarter. I mean, just outstanding, you know, performance by that, by that segment. And actually they did achieve, I believe sequentially about 30% conversion margin. You know, in that segment. So they absolutely have the capability and the opportunity to continue to do that. I think, you know, in the future. So I would say all three of our segments have the opportunity to continue to expand margins. And, you know, certainly the level of growth that, you know, each of those have will have some impact on the margin expansion. But overall, I think this 30% kind of, you know, targeted long-term target we have here as we kind of come down to normal levels of growth over time, I think we're doing much better than that right now. Is something that, you know, all of them will contribute to. Operator: Thank you. Our next question comes from the line of William Stein from Truist Securities. You may proceed. William Stein: Great. Thanks for taking my question and congrats on the great quarter and outlook. Adam, in the last couple of meetings, we had you discussed incremental automation that you're doing in the IT Datacom business. I think you noted that it helps you meet high product performance requirements, high quality standards. I think you talked also about time to market and time to volume. Maybe that even helps your print position with customers overall. But I'd love to hear any further clarification on that effort. Especially if there's anything afoot to extend what you're doing there beyond the IT Datacom end market, which is where it came up. Thank you. Adam Norwitt: Well, thanks very much, Will. And thanks for your kind comments. Yeah, we did talk about this and I think I mentioned this in the past in our quarterly calls that when I think about the building blocks of our success, I mentioned, you know, it's about having a great product and building the fundamental engineering elements, the technology elements that go into those products. But then it's about how do you make those products at volume, at quality and ramp those in a time that's expeditious and especially in this kind of, you know, hyper speed, speed of light kind of world that we are in right now. And over the last, you know, I don't know, ten, 15 years plus, you know, we've been kind of around in our sort of typical Amphenol, decentralized way, developing an enormous amount of in-house capabilities related to automation. And I wouldn't even say that those capabilities started out necessarily related to IT Datacom. I mean, we were doing a lot of automation in our mobile business and others. But no question that as we design these next-generation products as the product life cycle shortened, it became imperative that we have our own capabilities to automate so that we could do that automation in lockstep with the product design and validation, as opposed to design and validate a product, then go outside and ask someone to make an automation machine for you, which could take another year plus. And then at the end of the day, it comes back and it's not what you wanted. And so working hand in hand between our design engineers, our automation engineers has allowed us to really shorten that cycle. And it has allowed us to make sure that when you have these products that are operating at the highest levels of performance, high speed, for example, you know that those products are so sensitive. There's such a delicacy and a precision to those products that really they need to be automated in order to ensure that the good performance of the product. Now, in terms of going beyond it, I mean, we've been doing this for a long time as well. I mean, as entrepreneurial and decentralized as we are, we also talk about the company as being collaborative entrepreneurship. And there's been an enormous amount of collaboration, unstructured, not incented in any funny way. It's not like some matrix structure of an automation corporate team or anything like that, but there's a really organic kind of efforts around the company to work with each other to see where automation really makes sense. And I would tell you that in every one of our end markets as products get more complex as, as sort of the, the sort of cost environment changes as, as the trade environment changes, whatever. I mean, we are adopting automation in places where it really makes sense now, are we just saying, you know, from above, thou shalt automate everything? Absolutely not. I mean, this is a decision left to our general managers who know their products, who know what their customers need, who know where they make the products, who know the life cycles and who ultimately own the financial, the financial assets that they're creating when they make these automation. And having that push down to 140, general managers. But enabling that through the collaboration across the company has been a really good recipe. And so we see a lot of automation around the company, but it's reasonable automation. It's homegrown automation, it's lower cost automation. And thereby allows us kind of to have our cake and eat it too. In terms of the flexibility and the low cost of the company. Operator: Thank you. Our next question comes from the line of Joseph Giordano from TD Cowen. You may proceed. Michael: Good afternoon. Thanks for taking my question. This is Michael on for Joe. Adam Norwitt: Hi, Michael. Michael: You mentioned earlier. Thank you. You mentioned earlier strong year-over-year and sequential performance on the commercial aero side. And I mentioned some potential for like content or share gains in that area. Do you mind just diving through the different parts of Aero or the applications that are related to some of those content gains or share gains? Thank you. Adam Norwitt: Well, thank you very much. Look, we're really pleased with our commercial air business and in particular, you know, the, the, the really quantum increase in the breadth of our products that came from the Sit acquisition a year ago. And so, you know, as we, as we have conversations with customers around the global commercial air market, you can imagine we're having conversations at every part of the plane where there's electronics. And today, you know, there's very few parts of a big airplane that don't have some degree of electronics from, from the engines to the avionics to the entertainment systems, cabin management systems, safety systems, you know, the all the way to something as mundane as, like a coffee maker or a laboratory. These things all have now electronics on them. And with Sit joining Amphenol, together with our interconnect, our, our, our wonderful value add business that we already had the connector products, the cable and wire products that Sit brings and very complex interconnect assemblies as well that we can now do together with them. You know, we really have the broadest product offering of interconnect products for the commercial air market at a time when you know that technology and the push of electronics into planes continues to grow. And so I think that just puts us in a very strong position. And in addition, I would tell you that our global footprint has been also a great asset because customers are very sensitive to making sure that you can support them around the world. And so now having even a broader footprint, again, with Sit and other steps that we've taken internally, you know, we have not only the right product, not only the right breadth of product, but also the right capability to make those products for our customers need them to be made. Operator: Thank you. Our last question will go to a line of Scott Graham from Seaport Research. Your line is open. Scott Graham: Hey. Good afternoon. Great quarter. Thanks for taking my question. Squeezing me in. So really, you've answered a lot of the questions I had around, you know, incremental margins. And their movement. I was just if you can just maybe flip the script a little bit and talk about acquisitions, you guys have obviously been very active the last couple of years. To the extent, that you're able to comment on perhaps what you're missing, you know, your wish list and does that wish list, perhaps include some of the end markets that you have? Kind of imported with new acquisitions, sort of either new or end markets that we've talked about with the deal flow or markets where you're already in, but you've really increased your critical mass in them with the deals. So could acquisitions be more tuned toward some of these newer verticals going forward? Adam Norwitt: Yeah. Well, thanks very much, Scott. Look, M&A is something near and dear to our heart. And there's no doubt that over the last three years, the company has made more acquisitions and also more fundamentally large acquisitions. And you know, I don't want to use the word transformative because none of these are at that level that you would say that's a merger of equals or anything like that. But we've clearly accelerated the expansion of our offering for our customers across our end markets. At the same time, even with the growth that we have had and the great array of wonderful new companies that we have brought into the Amphenol family, or we will soon bring into the Amphenol family in terms of those that haven't closed yet, like Intrexon, you know, there's a lot of opportunity in this industry. This is a highly fragmented industry. The interconnect industry is just such a wonderful place. When you think about the fact that interconnect products go into every place where you have electronics. I mean, we estimate it's a market of more than a quarter trillion dollars in size. And even with, you know, our relative growth this year, we still see a lot of room to grow, both organically as well as through our M&A program. And, you know, do I have a wish list of companies? You know, I'm certainly not going to articulate names of companies here. But I can tell you this. You know, we look at great companies across all of our end markets. We never put all our eggs in one basket. We don't chase a thing of the moment in M&A. We take a very, very long-term view of our acquisition program. We look for companies, we develop relationships with them. For many, many years. I mean, I have been developing certain relationships with companies since I was an intern in the company. 27 years ago. And, and we'll continue to do that. And my team will continue to do that. And we take a very, very long view on M&A, because at the end of the day, when we make an acquisition, it's for life. And we're not a trader. We're not buying and selling things all the time. You know, if it doesn't work out, we develop long-term relationships and then we're not chasing what's the right thing in the market at that moment. And I think that's been a great recipe for us for a long time. It's been a great return on the wonderful cash that we have generated. And it's one where we continue to see great potential for many years to come. Operator: Thank you. We currently have no further questions, so I'll hand back to Mr. Norwitt for closing remarks. Adam Norwitt: Great. Well, thank you very much. And thanks to all of you for spending a small part of your beautiful fall day with us. And we appreciate your interest in the company, and we look forward to getting back together with you. Amazing to say it in 2026. In just 90 days from now. Thanks, everybody. And we'll talk to you soon. Operator: Thank you. Bye bye. This concludes today's call. Thank you for joining. You may now disconnect your lines.
Operator: Ladies and gentlemen, thank you for joining us. And welcome to the LendingClub Corporation Q3 2025 Earnings Conference Call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please raise your hand. If you have dialed in to today's call, please press 9 to raise your hand, 6 to unmute. I will now hand the conference over to Artem Nalivayko, Head of Investor Relations. Please go ahead. Artem Nalivayko: Thank you, and good afternoon. Welcome to LendingClub Corporation's third quarter 2025 earnings conference call. Joining me today to talk about our results are Scott C. Sanborn, CEO, and Drew LaBenne, CFO. You can find the presentation accompanying our earnings release on the Investor Relations section of our website. On the call, in addition to questions from analysts, we will also be answering some of the questions that were submitted for consideration via email. Our remarks today will include forward-looking statements, including with respect to our competitive advantages, demand for our loans and marketplace products, and future business and financial performance. Our actual results may differ materially from those indicated by these forward-looking statements. Factors that could cause these results to differ materially are described in today's press release and earnings presentation. Any forward-looking statements that we make on this call are based on current expectations and assumptions, and we undertake no obligation to update these statements as a result of new information or future events. Our remarks also include non-GAAP measures related to our performance, including tangible book value per common share, pre-provision net revenue, and return on tangible common equity. You can find more information on our use of non-GAAP measures and a reconciliation to the most directly comparable GAAP measures in today's earnings release and presentation. Finally, please note all financial comparisons in today's prepared remarks are to the prior year-end period unless otherwise noted. And now, I'd like to turn the call over to Scott. Scott C. Sanborn: Thank you, Artem. Welcome, everybody. We delivered another outstanding quarter with 37% growth in originations, 32% growth in revenue, and a near tripling of diluted earnings per share. Innovative products and experiences, compelling value propositions, a 5 million strong member base, consistent outperformance on credit, and a resilient balance sheet are all coming together to deliver sustainable, profitable growth. I'm excited to share more on our vision and our many competitive advantages at our upcoming Investor Day in two weeks, so I'll keep it brief today. Quarterly originations of $2.62 billion came in above the top end of our guidance, reflecting strong demand from both consumers and loan investors, our increased marketing efforts, and the power of our winning value proposition and customer experiences. With competitive loan rates enabled by our sophisticated credit models and a fast, frictionless process, we continue to be very successful at attracting our target customers. In fact, when our loan offers are made side by side on a leading loan comparison site, we close 50% more customers on average than the competition. We continue to be disciplined in our underwriting. Our asset yield remains strong, and our borrower base continues to perform well. In fact, we're delivering our originations growth while also demonstrating roughly 40% outperformance on credit versus our competitor set. Consistent strong credit performance on a high-yielding asset class has allowed us to confidently build our balance sheet, which now stands at over $11 billion, delivering a durable, resilient revenue stream that nonbanks can't replicate. In fact, this quarter we generated our highest ever net interest income of $158 million, enabled by a growing balance sheet and expanding net interest margin. Our loan marketplace is also thriving, with our reputation for strong credit performance and innovative solutions attracting marketplace investors at improving loan sales prices. We grew marketplace revenue by 75% to our highest level in three years and had our best quarter ever for structured certificate sales totaling over $1 billion. We also secured earlier in the quarter a memorandum of understanding by which funds and accounts managed by BlackRock would purchase up to $1 billion through LendingClub Corporation's marketplace programs through 2026. What's more, our new rated product, specifically designed to attract insurance capital, is capturing strong interest, which should help us to continue to improve loan sales prices and further boost marketplace revenue. As excited as I am about our financial performance, I'm equally excited about what we're seeing in member engagement and behavior. Our mobile app, combined with high engagement products and experiences like LevelUp checking and DebtIQ, are successfully encouraging members to visit us more often and are driving new product adoption. We launched LevelUp checking in June as the first of its kind banking product designed specifically for our borrowers. Members are responding positively, with a 7x increase in account openings over our prior checking product. In a recent survey, 84% of respondents said they were more likely to consider a LendingClub Corporation loan given the offer of 2% cash back for on-time payments through LevelUp checking. And what's really encouraging is that nearly 60% of new accounts being opened are being opened by borrowers. Our efforts are driving a nearly 50% increase in monthly app logins from our borrowers, and with that engagement, an increasing portion of our repeat loan issuance is now coming through the app. That's proof that these investments are enabling lower-cost acquisition from repeat members, keeping pace with our new member growth as we continue to ramp our marketing efforts. We'll share more examples at Investor Day of how our intentional product design, coupled with an engaging mobile experience, is creating a flywheel to increase lifetime value. Before I turn it over to Drew, I want to thank all LendingClubbers for their incredible execution and dedication to improving banking for our more than 5 million members. Their efforts are paying off, and I look forward to building on our momentum. With that, I'll turn it over to you, Drew. Drew LaBenne: Thanks, Scott, and good afternoon, everyone. We delivered another outstanding quarter, extending the momentum we built throughout the first half of the year. For the third quarter, we generated improved results across all key measures, including originations, revenue, profitability, and returns. Total originations grew 37% year over year to over $2.6 billion, reflecting the impact of our growth initiatives, scaling of our paid marketing channels, and continued expansion of loan investors on our marketplace platform. Revenue grew 32% to $266 million, driven by higher marketplace volume, improved loan sales prices, and expanding net interest income. Pre-provision net revenue, or revenue less expenses, grew 58% to $104 million, reflecting the scalability of our model. The net impact of all these items is that we nearly tripled both diluted earnings per share and return on tangible common equity to $0.37 per share and 13.2%, respectively. The business is firing on all cylinders, demonstrating the earnings power of our digital marketplace bank model. Now, let's turn to Page 12 of our earnings presentation. We will go further into originations growth. We delivered our highest level of originations in three years. Borrower demand remained strong, as the value we are providing in the core use case of refinancing credit card debt continues to be compelling. Loan investor demand also remains strong, with marketplace buyers looking to increase orders and prices steadily improving. Demand for our structured certificate program continues to grow as we added the rated product attracting new insurance capital. In addition to $1.4 billion of new issuance sold, we also sold $250 million of seasoned loans out of the extended seasoning portfolio, which included a rated transaction supported by Insurance Capital. Our consistently strong credit performance sets us apart from the competition and is one of the reasons we have been able to sell all of these loans without any need to provide credit enhancements. Leveraging one of the benefits of being a bank, we grew our held-for-sale extended seasoning portfolio to over $1.2 billion, consistent with our strategy to grow our balance sheet while maintaining an inventory of seasoned loans for our marketplace buyers. Finally, we retained nearly $600 million on our balance sheet in Q3 in our held-for-investment portfolio. Now let's turn to the two components of revenue on Page 13. Non-interest income grew 75% to $108 million, benefiting from higher marketplace sales volumes, improved loan sales prices, continued strong credit performance, and lower benchmark rates. Fair value adjustment of our held-for-sale portfolio benefited by approximately $5 million in the quarter from lower benchmark rates. Net interest income increased to $158 million, another all-time high, supported by a larger portfolio of interest-earning assets and continued funding cost optimization. The growth in this important recurring revenue stream is expected to continue into the future as we leverage our available capital and liquidity to further grow the balance sheet. If you turn to Page 14, you will see our net interest margin improved to 6.2%. We continue to see healthy deposit trends, and total deposits ended the quarter at $9.4 billion, a slight decrease from last year. The change was primarily attributable to a $100 million decrease in brokered deposits, which was mostly offset by an increase in relationship deposits. LevelUp savings remains a powerful franchise driver, approaching $3 billion in balances and representing the majority of our deposit growth this year. We are maintaining a disciplined approach to deposit pricing while providing meaningful value for our customers. Turning to expenses on Page 15, non-interest expense was $163 million, up 19% year over year. As we signaled last quarter, the majority of the sequential increase was driven by marketing spend as we continue to scale, test, and optimize our origination channels to support continued growth in 2026. We continue to generate strong operating leverage on our growing revenue, and our efficiency ratio approached an all-time best in the quarter. Let's move on to credit, where performance remains excellent. We continue to outperform the industry with delinquency and charge-off metrics in line with or better than our expectations. Provision for credit losses was $46 million, reflecting disciplined underwriting, stable consumer credit performance, and portfolio mix. Our net charge-off ratio improved modestly again this quarter to 2.9%, and we continue to see strong performance across our vintages. I would highlight that the net charge-off ratio also continues to benefit from the more recent vintages we've added to the balance sheet. We expect the charge-off ratio to revert upwards to more normalized levels as these vintages mature. These anticipated dynamics are already factored into our provision. On Page 16, you will see that our expectation for lifetime losses is also stable to improving across all vintages. Turning to the balance sheet, total assets grew to $11.1 billion, up 3% compared to the prior quarter. Our balance sheet remains a competitive strength, allowing us to generate recurring revenue through retained loans while maintaining the flexibility to scale marketplace volume as loan investor demand grows. We ended the quarter well-capitalized with strong liquidity and positioned to fund future growth without raising additional capital. Moving to Page 17, you can see that pretax income of $57 million more than tripled compared to a year ago, hitting a record high for the company. Taxes for the quarter were $13 million, reflecting an effective tax rate of 22.6%. We continue to expect a normalized effective tax rate of 25.5%, but we may have some variability in this line due to the timing of stock grants and other factors. Putting it all together, net income came in at $44 million, and diluted earnings per share were $0.37, which nearly tripled compared to a year ago. Importantly, return on tangible common equity of 13.2% showed continued improvement and came in above the high end of our guidance range, and our tangible book value per share now sits at $11.95. As we look ahead, the business enters the fourth quarter with significant momentum. Loan investor demand remains strong, loan sales pricing continues to trend higher, and our product and marketing initiatives are driving high-quality volume growth. As a reminder, in Q4, we typically see negative seasonality on originations due to the holiday season. With that in mind, we expect to deliver originations of $2.5 to $2.6 billion, up 35% to 41% year over year, respectively. Our outlook for pre-provision net revenue is $90 million to $100 million, up 21% to 35%, respectively. Our outlook assumes two interest rate cuts in Q4 and includes increased investment in marketing to test channel expansion, which will support originations growth in future quarters. We expect to deliver an ROTCE in the range of 10% to 11.5%, more than triple year over year. We will provide additional details on our strategic and financial framework at our Investor Day on November 5, where we hope you will join us. With that, we'll open it up for Q&A. Operator: We will now begin the question and answer session. A reminder that if you would like to ask a question, please raise your hand now. And star six to unmute. Your first question comes from the line of Bill Ryan with Seaport Research Partners. Your line is open. Please go ahead. Bill Ryan: Hello. I think you're on mute. Drew LaBenne: Got it. Operator: Thanks. So first question, I just want to ask about the disposition plans. Looking into the future between your various channels, structured certificate, whole loans, and extended seasoning, and what your plans are to continue to grow the held-for-investment portfolio on the balance sheet. Looks like there's a little bit of mix shift last couple of quarters dialing back on the whole loan sales focusing on the other two. And if you could also kind of maybe talk about the economics of what you're seeing between the various disposition channels. Drew LaBenne: Yeah. Great. Hey, Bill. Thanks for the question. So, you know, for HFI for Q4, it's kind of steady as she goes in terms of what we plan each quarter. So we're targeting, you know, roughly $500 million in HFI, and that sort of just depends on how the quarter evolves. Sometimes that's a little higher, a little lower. I'd say, generally, it's been a little higher the past couple of quarters. The other programs are roughly in line with where we've been for the past couple of quarters. We see demand for structured certificates being strong. We're seeing good pickup in the rated product as well, and as I mentioned, we sold one of those out of extended seasoning this quarter, a rated deal that is. So demand is strong and still there, and with issuance being targeted to be roughly the same, kind of the mix and disposition should also be roughly the same. I guess, Bill, to make sure you're tracking, you probably are. Not all of these sales are equal. Historically, whole loan sales to banks would come at a different price than, say, whole loan sales to an asset manager. As the insurance-rated transactions have been coming in, those prices, as we mentioned in the script, are really approaching bank prices now. And in those cases, we're generally not retaining the A note. So effectively, it is a whole loan sale, and it's coming at a higher price. So it's really the mix is based on where we're getting the best execution, and, you know, we are looking to certain channels. So that's a channel we're developing, and it's going in the direction we like, which is building demand and higher prices there. Bill Ryan: Okay. Thanks, Scott. And just one big picture follow-up. If you can maybe kind of touch on the competitive state of the market. I mean, origination volumes have increased quite a bit across the board. You've heard about some companies maybe have opened their credit boxes a little bit. Some with product structure, if you will. Fixed income investors' allocation more capital to the sector. I mean, if you could kind of give us an overview of have you seen any pressure on your underwriting standards at all? Scott C. Sanborn: No. We haven't. I'd say, you know, as we say every quarter, this has always been a competitive space. In our case, our growth is coming off of a low, and it's coming off of a low that's been informed not just by tighter credit underwriting, which, you know, we're maintaining the discipline there, but also because we just pulled back on marketing. So our ability to grow is if you still look at, you know, where you can see volume levels, you'll see we're still running below historical levels of spend and volume. In a TAM that's larger than it ever was. So we're not seeing the space as competitive. It's no more competitive than it was last quarter or the quarter before. As usual, we see a mix in who we're competing with in different environments. So when the interest rate environment shifted, we were competing more with banks and less with fintechs. I'd say now we're competing a bit more with fintechs and a little bit less with some of the banks, but that doesn't it's not changing certainly not affecting our underwriting standards. You know, we are absolutely in this for the long game. And as you know, we're bringing our own cooking here. So we are looking to make sure we are delivering the returns for ourselves as well as for our loan buyers, and we don't view the way we get rewarded long term is by posting a temporary jump in growth through short-term making on credit. Bill Ryan: Okay. Thanks for taking my questions. Operator: Next question comes from the line of Tim Switzer with KBW. Tim, your line is open. Please go ahead. Tim Switzer: Hey, good afternoon. Thanks for taking my questions. My first one is, can you explain what drove the higher loss in the net fair value adjustment? And, you know, I think you mentioned earlier on the call that pricing seems to be holding up on loan sales. So just curious what drove that adjustment line. Drew LaBenne: Yeah. So keep in mind, we had a positive fair value adjustment in Q2 that I believe was about $9 million in the quarter, and we had $5 million this quarter. So positive adjustments in both quarters, but it was larger in Q2 than it was in Q3. And so that's a big part of the delta right there. You know, as we said, prices moved up a little bit, so it's not price that's driving that. The other piece is as we have a larger extended seasoning portfolio, there is natural roll down that happens, and that comes through that net fair value adjustment line. So that's also a little bit of the change that we're seeing quarter over quarter. It's just a larger portfolio. Tim Switzer: Got you. Is there a good way for us to be able to model the impact of the extended seasoning portfolio? Drew LaBenne: There is. It's probably a little complicated to get into the details on this call, but we can follow up with you afterwards. Tim Switzer: Appreciate that. We can do it offline. Scott C. Sanborn: Yeah. Tim Switzer: And then can you also walk us through the loan reserve dynamic a bit this quarter because it went up quite a bit, but if we look at your slide 16 that indicates lower loss expectations for those legacy vintages, I guess, and you obviously didn't grow the HFI book a whole lot. So I'm just curious on, you know, what was that reserve going up for, I guess? Drew LaBenne: Yep. So two factors. Again, last quarter, there was a one-timer that we called out in the provision line because we had a re-estimation of the lifetime losses, and that caused a positive benefit in the provision line. And so I think there's about $11 million. Right, Artem? Yeah. $11 million last quarter that you know, credit was great again this quarter, but we didn't do a change in the reserve on the previous vintages. So that's one factor. The other is just as we're growing some of our businesses, like, for example, our purchase finance business into HFI, the duration's a little longer, so it has a little higher upfront CECL charge, but also fantastic economics on balance sheet. And so those are the two main drivers. Tim Switzer: Gotcha. Thank you. And, one last one real quick. Can you explain what drove the increase in diluted shares? And the period went up a little bit, but not nearly as much as diluted share count. Sorry if you said this earlier on the call. Drew LaBenne: Yeah. No. I think share price is probably the biggest factor. Right? If you just do the treasury, if you just think of treasury stock method on the diluted shares, the higher the share price, the more dilution you effectively get on the outstanding, you know, grants that have been issued. So there wasn't there was no step change in terms of kind of the, you know, the vehicles that cause diluted share count. Tim Switzer: Got you. Alright. Thank you. Drew LaBenne: Thank you. Operator: Next question comes from the line of Giuliano Bologna. Your line is open. Please go ahead. Giuliano, your line is open. Please go ahead. Joanna, I think you're on mute too. Okay. We can come back to Giuliano. We'll move on to Vincent Caintic of BTIG. Line is open. Please go ahead. Vincent Caintic: Hi. Great. Can you hear me? Scott C. Sanborn: Yes. Vincent Caintic: Yes. Having some tech issues. I have a feeling maybe others are as well. But yeah, so thank you for taking my questions. First question, kind of a follow-up on that funding side. And I want to ask it, kind of the demand for, you know, your marketplace loans, the structured certificates, and the seasoned portfolio. It's great to see that there's so much demand. And, you know, I think a lot of there's been a lot of investor questions over the past months where, you know, we've seen some other companies have some issues, some bankruptcies, and so forth. And so there's been some concerns broadly about institutional investor appetite for fintech originated loans. So it looks like your demand is great. And I was wondering if you can maybe talk about kind of the broad industry and if you're seeing any differentiation. And if maybe that's a competitive advantage of your funding vehicles and mechanisms versus the rest of the industry. Thank you. Drew LaBenne: Yes. So thanks for the question, Vincent. A lot there. So I'd say, first of all, the comments I'm gonna make are really just focused on our asset class in our industry, so not, you know, auto securitizations or any of the other things that are going on. But, you know, we just actually our team was just at a conference yesterday talking to, you know, loan current investors and potential investors, and I'd say the appetite is still very strong. I don't think there's any fade on the appetite at all for, you know, the various vehicles that are out there, whether it's a structured product, the rated product, or, you know, whole loans out of extended seasoning. So demand is definitely there. I think track record matters. So the demand is there for us. I think it's certainly there for other issuers as well. But I'd say on the margin that issuers are also being maybe slightly more cautious on who they're partnering with, and we're hearing that in we've been the partner of choice for years and I think continue to be. So I think that plays to our advantage. Obviously, we're always watching the ABS markets to see if there's any, you know, major disruption there. And haven't seen much. Certainly, there's been a little noise as you indicated over the past couple of weeks, but summary demand remains good. Prices are strong, so we're feeling good going into the fourth quarter. Vincent Caintic: Okay. Great. Thank you. That's very helpful. And I guess also, real quick. Scott C. Sanborn: Think just a little added color. We're certainly hearing that some capital providers are further narrowing their selection of who they're working with. But, you know, hard for us to kind of but, you know, we remain in the wallet and remain a really primary important partner there, but certainly hearing some chatter of that. Vincent Caintic: Okay. Great. That's super helpful. Thank you. And, actually, kind of related to, you know, the volatility we've been hearing over the past month just in broader consumer credit. Just wondering if you could talk about, you know, your credit performance and what you're seeing. So it was great to see charge-offs at 2.9% this quarter. That's great. Just wondering if you're noticing maybe not in the loans that you're that are on your balance sheet already. But as you get applications, maybe has the quality of that changed? Are you noticing maybe any themes in terms of delinquency evolution like, maybe with lower credit tiers or any comments you might say be seeing with that relative to press trend? Scott C. Sanborn: Yeah. No. I mean, I'd say for us, you know, reminder, we remain very, very restrictive compared to, you know, pre-COVID. And that is even more so the case in sort of the lower credit area. So I acknowledge there's definitely been a decent amount of press about a bifurcated economy and, you know, where certain subsets of consumers could be struggling. But, you know, in our portfolio, given how we're underwriting today, I mean, just for an example, there's talk about, you know, consumers earning less than $50k a year. I think that represents 5% of our originations right now. So very, very small. Same thing with student loans. As you know, we've restricted underwriting to that group. So the percent of that are, you know, delinquent on a student loan and current on us is, you know, now measured in basis points and is shrinking. So we on our book, aren't seeing anything more than the normal kind of, you know, variability that you adapt and continue to manage to, which our platform is set up and our team is set up to do that quite well. So no not, you know, no kind of broad themes. Despite, again, we're reading the same thing you are, but we're not seeing it in our book. And I think that's based on how we're underwriting. Vincent Caintic: Great. Thanks. And maybe I'll sneak one more in, and this might end up having to be for the investor meeting. We want to leave some meat on there. But your CET1 of 18% is very healthy. I'm just wondering how much is too much. Thank you. Drew LaBenne: We'll see you in November. Vincent Caintic: Sounds good. Alright. Thanks, guys. I appreciate it. See you then. Drew LaBenne: In all seriousness, I think, what you know, a little bit on that is, we do have what we would say is some excess capital, and our plan is to use that for growing the balance sheet as we ramp up originations. And, you know, if we have enough capital to satisfy that primary goal and more than enough after that, then I think we'll consider other options. Vincent Caintic: Okay. Great. And, see you November 5. Thanks very much. Operator: Okay. Thank you. Our next question comes from Giuliano Bologna from Compass Point. Your line is now open. Giuliano Bologna: Sounds good. Hopefully, you guys can hear me now. I have the unmute notification this time. Congratulations on a great quarter. You know, it's great to see that, you know, continued, you know, great results. When I look forward, I mean, there's obviously a tremendous amount of demand, you know, through the marketplace, whether structured certificates or whole loan sales. I'm curious in a sense how much more do you think you'd want to grow that versus grow the kind overall HFI pie? Because, you know, the outlook is called 45% between HFI and extended seasoning. Which is a pretty, you know, healthy amount, and it looks like that could, you know, keep growing balances. But just trying to think about, you know, how you think about the balance going forward because you have a lot of dry powder, a lot of liquidity, a lot of capital to kind of keep pushing. So I'm curious how you think about how much you do want to, you know, push both sides there? Drew LaBenne: Yeah. Yeah. And we'll get into this more at investor day. So but to give you an answer now for, you know, for Q4, the or even longer term. I mean, the end goal is to grow originations enough that we can feed all of our desires to grow the balance sheet and we can feed all the investors in the marketplace that are paying the appropriate price for the loans we're originating. So our goal is to be able to do both. And then, you know, if we're not quite there on total originations, then it's a bit of a balancing act. Right? We still want to see healthy growth on the balance sheet, but we originate loans that are better off in the marketplace on the sheet, and we're going to sell those. And we have long-term investors that we want to keep our relationship with, so we're going to make sure we're able to allocate to them as well. So, you know, always a bit of a balancing act while we're still ramping originations. The end goal is we have enough originations to feed both sides. Giuliano Bologna: That's very helpful. One thing I'm curious about, when I look at your marketing spend, as a percentage of volume, it, you know, came up a little bit, but it's still, you know, much lower than I would've expected, you given that pushing some new marketing channels. I mean, I'm calculating it, you know, 1.55%, 1.553%. You know, you obviously, you know, highlighted that you're gonna push a little bit more harder on the marketing side. In April, you know, in anticipation of, you know, growth in '26. Scott C. Sanborn: Know, Giuliano Bologna: looks like, you know, I mean, HFI was down, so there should be, you know, a little bit less of a benefit from more, you know, capitalization or amortization of that through, you know, on HFI. But seems like that's, you know, continued to be very efficient, you know, from a, you know, percentage of volume perspective. I'm just curious, you know, how I should think about that, you know, going over going forward over the next few quarters. Scott C. Sanborn: Yeah. So as I mentioned, I think we, you know, excitedly, I'd say we still see a lot of opportunity there. Right? We are coming from a place of reasonably low activity into a market that I think is pretty attractive in terms of the value proposition to the consumer, the experience we've got. We, you know, it's our efforts are working well. We are still, I mean, we're only two quarters into restarting direct mail as an example. We're on the third version of our response model. We will be on our fourth as we exit the year, you know, building the creative optimization library, optimizing the experience, and, you know, then take that across some of the other channels like digital and all the rest. So we still have a lot of opportunity in front of us. I think what you're also seeing in Q3 is not just the performance of those channels being, you know, positive. But also some of our other efforts. I touched on it in my prepared remarks. Our other we are growing we, you know, we delivered 37% growth year on year. That was both in new and in repeat marketing over indexes to driving new. But repeat is coming at a, you know, much lower much lower cost. So our ability to scale that at an equivalent pace, we're still at fifty fifty to jump in year on year marketing spend. We're still, you know, drive roughly fifty fifty with new versus repeat. So both of those efforts are working in the external marketing efforts. And then the efforts to drive repeat and lifetime value from our customers. Giuliano Bologna: That's very, very helpful. I appreciate it. And, yeah, congrats on team performance. I'm looking forward to seeing you guys, you know, in a couple of weeks. Scott C. Sanborn: Great. Thanks, Giuliano. Operator: Thank you. And your next question comes from Reggie Smith of JPMorgan. Your line is open. Please go ahead. Reggie, your line is open. Vincent Caintic: You're on mute, Reggie. Reggie Smith: There we go. Operator: Can you hear me now? Scott C. Sanborn: Yes. Operator: I'm sorry. I wanted to follow-up on the, on the last question. So Reggie Smith: kind of thinking about marketing, you know, obviously, it costs less to reengage a previous customer. I guess thinking about that expense ratio, you know, the 1.5 that we see on the income statement, my sense is that it's not evenly distributed and that, you know, maybe your incremental or your marginal loan is a little bit more. Help me understand, I guess, how inefficient that is, or where where is the marginal cost to underwrite a loan? And then maybe frame that against you could sell one for. Like, it's my my sense and my gut is that despite the fact that that your marketing channels are not optimized, that it's still, there's still room there to kind of kind of go, almost as though you're leaving money on the table possibly. Not in a bad way, but just just thinking about the opportunity there. So maybe talk a little bit about what the marginal cost to acquire a new loan is and then maybe frame that against, you know, what you can sell these loans for. Looks like origination, your marketplace ratio is about 5%. So there seems to be a lot of room there. But anything you could share there would be great. Thank you. Scott C. Sanborn: Yeah. So you're certainly thinking about it the right way. We're underwriting marginal cost of acquisition that reflects the lifetime value of the customer. And, you know, the part of this process, you know, book. And what we are very, very focused on is profitable sustainable growth. Right? We're not looking to just post inefficient volume that we can't rinse and repeat and drive further. So as we push into these new channels, we're where we'll find that efficient frontier and then we work to basically bring it in, right, by improving our targeting models, improving our creative and response rates, improving our pull-through on the experience and the conversion rate on the experience so that we can then go deeper and push harder in those channels. So I think you're right that we have more room to go, but it is it is very mathematically and or scientifically backed. Right? It's we've got a very good handle on what we can expect to get from our customers. Now that that number is going up. Right? As we and we'll share a little bit more info on this. But as we get better and better, you know, these repeat customers are not only lower cost to acquire, they're also lower credit loss. And, oh, by the way, if we get you back once, it's likely we're gonna get you back three or four times. So you know, there really is a real long-term benefit here. That will drive up the lifetime value, which will drive up our ability to pay up at acquisition, but we're building towards it. And we're building towards it incrementally every quarter. Reggie Smith: That makes sense. And if I could sneak one more in, I'd love to hear more about the BlackRock program and the insurance sales channel. Vincent Caintic: If I'm thinking about Reggie Smith: that right, I guess, this is a way for civilians to get exposure to these types of notes? Like, as liquidity the liquidity there for the consumer, they able to sell that stuff back? Like, how does that kind of work? And then on the insurance side, like, do you think we'll get to a point where you're announcing, you know, a committed number from the insurance channel. Like you do for, you know, kind of private credit, today. Vincent Caintic: Thank you. Drew LaBenne: Yeah. So a couple of things there. One, this is not this is not direct to consumer sales that's happening. This is really, you know, in the BlackRock example, I think they have many different ways that they may, you know, represent other clients where they're managing money to purchase this program. So I wouldn't want to box it into just one use case for them, but it's not a, you know, direct or indirect to consumer investors that's happening in any way. I think the insurance pool is extremely deep. And so the, you know, these are insurance companies who are taking premiums for various insurance policies. And investing that money. So, you know, it's a massive pool. It is, as Scott was saying, it usually, the price is not quite as good as banks, but generally, it's still a very low cost of capital. And so we think we can make progress in terms of growing that channel and helping our overall price that we're selling loans at as well. Reggie Smith: And I guess on the direct to consumer point, is that possible? I could maybe not with BlackRock, but is that, like, a channel that one day be a thing, or are there things that prevent that, regulatory wise that would prevent that or make that difficult? Scott C. Sanborn: So there is capital in our loan book today that is provided by it's usually coming through funds that are managed by RIAs. At some of the wealth managers and, you know, hedge funds and all the rest. So there is private individual investor capital coming in to purchase the asset. So that's one. Going direct to consumer retail would be, you know, going back to our original model. And if you recall, you know, it is doable. Then the loans become securities, which comes with a lot of overhead and disclosure requirements, and we have been able to operate a much better business without that because we're what I mean by that is you we are required to announce when we make pricing changes. We're required to announce when we make credit changes. We had all of our competition downloading our publicly available data and using it to compete against us because we had to tell them what we were doing. So it's not something I would gladly go back in that old structure. But, certainly, high net worth individual through funds is a source of capital today. I was thinking about how I would love to, to pick up some yield, versus what I get in my savings account now. Reggie Smith: So I think there's something there. I don't know. Scott C. Sanborn: We could open it up. Operator: Thanks a lot. Listen. Great quarter, guys. Reggie Smith: We'll talk soon. Thanks. Drew LaBenne: Thanks. Operator: Thank you. And a reminder that if you'd like to ask a question, please raise your hand. Our next question comes from Kyle Joseph of Stephens. Line is open. Please go ahead. Kyle Joseph: Hey. Good afternoon. For taking my questions. You guys have touched on this a bit, but just looking at looking at Slide 10 and kind of delinquency trends amongst FICO bands. Obviously, at least amongst the competitor set, you saw a pretty big increase on the lower band there. Just give us a sense for how that impacts your originations, and investor demand and, you know, where you're seeing kind of the best bang for your buck in term across the FICO band score? Scott C. Sanborn: Yeah. So that doesn't directly affect us as I touched on before. You know, we're certainly hearing some chatter about, maybe people consolidating with a smaller handful of originators that have shown themselves to have more stable and predictable performance. What you know, always looking at is what does the application profile look like coming at us? Is it shifting? Is it shifting in a way we like, we don't like? So, you know, when you see an uptick like that, it's generally gonna result in somebody else pulling back. It's we don't know. Is that one platform too? Three? Like, hard for us to say, but we'll be monitoring and adapting to is making sure we continue to get a consistent through the door population. And that that we want. And because it may provide some opportunity. It might provide some risk, and that's part of, you know, what our day job is. Kyle Joseph: Got it. Helpful. And then, just one follow-up for me. Talked a lot about marketing expenses today, but just, you know, and imagine you'll cover this at the investor day as well. But just, you know, a sense for the operating leverage you have on the remaining expense items. Drew LaBenne: Yeah. We think it's pretty significant. We will get into it more at investor day. I think you can already see it happening right now in terms of, you know, the revenue growth we've produced year over year compared to expenses. And that's certainly not to say that other expenses won't go up as we grow the company. But I think marketing is where you'll see the most variable cost as we scale up. Kyle Joseph: Got it. That's it for me. Thanks very much for taking my questions. Scott C. Sanborn: Great. Operator: Thank you for your questions. I will now turn the call to Artem for some questions via email. Artem Nalivayko: Alright. Thanks, Kevin. So Scott and Drew, we've got a couple of questions here that were submitted by our retail investors. First question is, we noticed a difference in origination growth rate across issuers and originators. To what do you attribute differences in growth? Scott C. Sanborn: Yeah. So first, thanks to all the retail investors for submitting. I understand from Artem that we got quite a few this quarter, so that's great. Yeah. As we talked about on the call, not all originations are created equal. Our focus is on profitable sustainable originations growth, and, you know, I think 37% growth in originations to a level that's, you know, really getting close to our highest over the last several years. Is also coming with record high pretax net income and also coming with outperformance on credit by 40%. So it's we're not just looking at one number, which is dollars originated year on year. We're looking at a combined balance of what we think makes for a sustainable, profitable business. Artem Nalivayko: Perfect. Alright. Second question. You talked a little bit about potential rebrand coming up. Any updates on the status? Scott C. Sanborn: Yep. I'm only talking about it because you all keep asking. But I would say we're yes. We have done quite a bit of work this year, and we're in the final stages of the let's call it, the research and development phase and landing on, you know, where we want to take it. Very excited about it. We're now entering the planning and execution phase. Which we're gonna be pretty deliberate about as it won't surprise anyone on this call. We built up equity in this brand after almost twenty years. We think a new brand will give us a broader permission set with our customer base and kind of create new opportunities for us, but we gotta make sure we don't lose the, you know, tens of thousands of positive reviews and awards and our conversion rate that we finally honed across all these channels and so lots of work to do. So when will it be, you know, out in the ether will be probably of next year. Don't hold me to that date exactly, but we're doing the planning phase to make sure we know exactly what we're gonna get and can support it with the, you know, marketing oomph that it's gonna need to be successful. Artem Nalivayko: Alright. Perfect. And last question. Just any updates on the product road map or launching any new products? Scott C. Sanborn: Yeah. So, obviously, this year, as we've been getting back to growth, we've also been, you know, expanding our ambitions on the product mix. We talked about LevelUp checking on the call today. Of savings has been a big driver, which I think Drew talked about that IQ this year. So there is absolutely more to come. That's part of the reason we're gonna be investing in a new brand. What I'd say is, you know, stay tuned for investor day where we'll talk a little bit more about some opportunities we're gonna be pursuing in the years to come. Artem Nalivayko: Alright. Perfect. Thanks, Scott. Alright. So thank you, everyone. With that, we'll wrap up our third quarter earnings conference call. Thanks again for joining us today. And if you have any questions, please email us at ir@lendingclub.com.
Operator: Good afternoon, ladies and gentlemen. Welcome to the Century Communities Third Quarter 2025 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 for the operator. This call is being recorded on Wednesday, October 22, 2025. I would now like to turn the conference over to Tyler Langton. Please go ahead. Tyler Langton: Good afternoon. Thank you for joining us today for Century Communities earnings conference call for the third quarter of 2025. Before the call begins, I would like to remind everyone that certain statements made during this call may constitute forward-looking statements. These statements are based on management's current expectations and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those described or implied in the forward-looking statements. Certain of these risks and uncertainties can be found under the heading Risk Factors in the company's latest 10-K as supplemented by our latest 10-Q and other SEC filings. We undertake no duty to update our forward-looking statements. Additionally, certain non-GAAP financial measures will be discussed on this conference call. The company's presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. Hosting the call today are Dale Francescon, Executive Chairman; Rob Francescon, Chief Executive Officer and President; and Scott Dixon, Chief Financial Officer. Following today's prepared remarks, we will open up the line for questions. With that, I'll turn the call over to Dale. Dale Francescon: Thank you, Tyler, and good afternoon, everyone. In the third quarter, we performed well in a challenging environment and generated solid financial and operational results, meeting or exceeding the expectations detailed on our second quarter conference call. We delivered 2,486 homes, hitting the high end of our guidance, and our adjusted homebuilding gross margin of 20.1% was up slightly on a sequential basis as reductions in our direct costs offset higher incentives in the quarter. We continue to control our fixed G&A costs and successfully refinanced our 2027 senior notes with the offering of our 2033 notes at a slightly lower interest rate. We also repurchased an additional $20 million of our shares this quarter, bringing our year-to-date repurchases to 6% of our shares outstanding at the beginning of the year. While homebuyer demand has been more muted this year due to weaker consumer confidence, we continue to believe there is pent-up demand for affordable new homes supported by solid demographic trends. Buyers remain hesitant and cautious given the current level of economic uncertainty but still have the desire to own a new home. As a result, we expect that any interest rate relief and improvement in consumer confidence will start to unlock buyer demand. Before turning the call over to Rob, I wanted to briefly talk about our current strategy and some recent achievements. While we will remain disciplined in slower markets like we are experiencing now, we are still positioning the company for future growth as demonstrated by our expectations for our 2025 year-end community count to increase in the mid-single-digit percentage range. As we have said in the past, we expect this growth to come primarily from increasing our share within our existing markets. We currently hold top 10 positions in 13 of the 50 largest U.S. markets, with a goal of further increasing this penetration. We have also continued to invest in people, processes, and systems that will drive top and bottom-line improvements going forward. And we have made significant progress even in this difficult environment. While the operational benefits of our strategy are already apparent, as Rob will discuss, some of the financial benefits have been clouded by the higher incentives we've been offering this year and the impact of lower deliveries on our fixed G&A. Once the market begins to normalize, we are confident the value of these investments will be fully realized. I'll now turn the call over to Rob to discuss our operations and land position in more detail. Rob Francescon: Thank you, Dale, and good afternoon, everyone. We are encouraged by the operational improvements that continue to accrue at the company and believe Century is well-positioned to further leverage these gains as the market normalizes. These improvements run throughout the organization, including continued success in reducing our costs in the third quarter. Our direct construction costs on the homes we delivered are down 3% on a year-to-date basis. Through the third quarter, we have not seen any material increases in direct costs from tariffs and do not expect any impacts in the fourth quarter given the price protection agreements with our preferred supplier partners. During the third quarter, our cycle times also continued to improve on both a year-over-year and sequential basis and currently sit at an average of 115 calendar days, with one-third of our divisions at 100 calendar days or less. Our customer satisfaction scores are at all-time highs, which leads to more referrals for both homebuyers and brokers as well as lower warranty costs. We have and continue to make meaningful improvements to both cost structures and cycle times and are proud of the best-in-class operations our teams have built. Our third-quarter net new contracts of 2,386 homes declined by 6% on a sequential basis, better than our historical average decline of 9% from 2019 through 2024. We saw a month-over-month increase in our web traffic from June to September, and in line with typical seasonality, our net orders and absorption rates were the lowest in July, with both August and September levels ahead of July. So far in October, our orders are seasonally consistent with August and September levels. Even with headwinds from the market and seasonal pressures, our incentives on closed homes in the third quarter came in lower than the 100 basis point increase we forecasted on our second quarter conference call and averaged roughly 1,100 basis points in the third quarter of 2025. Looking forward, we continue to expect incentive levels to be the largest driver of changes to our gross margins in the near term, given our success in managing costs. We currently expect incentives to increase by another 100 basis points in our fourth-quarter deliveries as we compete with other builders for year-end closings. In the third quarter, we started 2,440 homes and, similar to the past several quarters, have continued our focus on maintaining an appropriate level of spec home inventory by generally matching our starts with our sales. Our third-quarter ending community count of 321 communities increased by 5% on a year-over-year basis. We continue to expect our year-end 2025 community count to increase in the mid-single-digit percentage range, which, coupled with our 28% year-over-year growth for the full year 2024, will position us well for the upcoming spring selling season and provide a strong base for future growth in the years ahead. On the land side, our finished lot costs on the homes we delivered in the third quarter increased in the mid-single-digit range on both a year-over-year and sequential basis, and we expect our finished lot costs in the fourth quarter to be roughly flat on a sequential basis. We ended the third quarter with over 62,000 owned and controlled lots. Our owned lot count has remained relatively steady since the third quarter of last year. We have remained disciplined on the land front and continue to underwrite deals to current market assumptions. Land sellers are adjusting terms, and we are starting to see some in our raw land and development costs. I also want to briefly talk about a trend that we have recently seen with mortgages in our financial services business. In the first quarter of this year, adjustable-rate mortgages accounted for less than 5% of the mortgages that we originated. In the third quarter, however, ARMs accounted for close to 20% of the mortgages we originated. Given the length of time that the average first-time buyer stays in their home and the lower interest rates of ARMs, they can make sense for many of our homebuyers and help partially address the market's affordability challenges. We are pleased with the results we achieved in the third quarter. Our focus on cost reductions and controlling increases in incentives allowed us to improve our homebuilding gross margin as well as pretax and net margins on a sequential basis. Our team has done a good job operating within a difficult market environment, and I want to thank them for their hard work and dedication. I'll now turn the call over to Scott to discuss our financial results in more detail. Scott Dixon: Thank you, Rob. In the third quarter, pretax income was $48 million, and net income was $37 million, or $1.25 per diluted share, up 710% respectively, on a sequential basis. Adjusted net income was $46 million, or $1.52 per diluted share. EBITDA for the quarter was $70 million, and adjusted EBITDA was $82 million. Sales revenues for the third quarter were $955 million, down 2% on a sequential basis. Our deliveries of 2,486 homes declined by 4% on a sequential basis, while our average sales price of $384,000 increased by 2% on a quarter-over-quarter basis, benefiting from a higher percentage of deliveries from our West and Mountain regions and a lower percentage from Century Complete. At quarter-end, our backlog of sold homes was 1,117, valued at $417 million, with an average price of $373,000. In the third quarter, adjusted homebuilding gross margin was 20.1%, compared to 20% in the second quarter of this year. GAAP homebuilding gross margin was up 30 basis points, 17.9% versus 17.6% in the second quarter. The improvement of our third-quarter gross margin versus second-quarter levels was driven by lower direct costs offsetting higher incentives and finished lot costs. Purchase price accounting associated with our two acquisitions in 2024 reduced our third-quarter 2025 gross margin by 30 basis points. We would expect purchase price accounting to have a similar impact on our homebuilding gross margin in 2025. We took an inventory impairment charge of $3.2 million in the third quarter related to several closeout communities. The $6.1 million of other expense this quarter was comprised of $5.2 million with the abandonment of lot option contracts and $1.4 million for the loss of extinguishment of debt, with a partial offset from other income. For the fourth quarter of 2025, we expect our homebuilding gross margin to ease on a sequential basis up to 100 basis points compared to our third quarter, primarily due to higher levels of incentives. SG&A as a percent of home sales revenue was 12.6% in the third quarter and benefited from ongoing cost reduction efforts. Assuming the midpoint of our full-year home sales revenue guidance, we expect our SG&A as a percent of home sales revenue to be roughly 13% for the full year 2025, with SG&A as a percentage of home sales revenue of 12.5% for the fourth quarter. Revenues from financial services were $19 million in the third quarter, and the business generated pretax income of $3 million. We currently anticipate that the contribution margin from financial services in the fourth quarter will be similar to our third-quarter results. Our tax rate was 21.8% in the third quarter of 2025, which was driven by 45 percentile tax credits received in excess of previous estimates. We expect our full-year tax rate for 2025 to be in the range of 24.5% to 25.5%. Our third-quarter 2025 net homebuilding debt to net capital ratio improved to 31.4% compared to third-quarter 2024 levels of 32.1%. Our homebuilding debt to capital ratio also improved to 34.5% in the third quarter compared to year-ago levels of 35.8%. We ended the quarter with $2.6 billion in stockholders' equity and $836 million of liquidity. During the quarter, we completed a private offering of $500 million of 6.58% senior notes due February 19, 2033, with the proceeds being used to redeem our $500 million 6.5% senior notes due 2027. With this transaction, we have no senior debt maturities until August 2029, providing ample flexibility with our leverage management. During the quarter, we maintained our quarterly cash dividend of $0.29 per share and repurchased 297,000 shares of our common stock for $20 million at an average share price of $67.36, or a 23% discount to our company record book value per share of $87.74 as of the end of the third quarter. Assuming similar attractive valuations, we expect to continue repurchasing our shares in the fourth quarter. Through the first nine months of the year, we have repurchased 1.9 million shares, or 6% of our shares outstanding at the beginning of the year. Turning to guidance, we are narrowing our full-year 2025 home delivery guidance to be in the range of 10,000 to 10,250 homes and home sales revenues to be in the range of $3.8 billion to $3.9 billion. In closing, our healthy balance sheet allows us to both return capital to our repurchases and dividends, as well as continue to invest in our business to generate future growth. We believe we are well-positioned to navigate the current headwinds facing the market and prosper when the market rebounds. We remain focused on our strategy of deepening our share in our existing markets, growing our community count, lowering our direct costs and cycle times, and maintaining an adequate supply of land while controlling our finished lot comps. With that, I'll open the line for questions. Operator: Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the one on your touch-tone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press the star followed by the two. If you are using a speakerphone, please lift the handset before pressing any key. One moment, please, for your first question. Your first question comes from Alex Rygiel with Texas Capital. Please go ahead. Alex Rygiel: Hey, Alex. Can you hear us, Alex? Tyler Langton: Yes, I can. Sorry about that, guys. Appreciate it. As it relates to your adjusted gross margin that came in a bit above your guidance, was this more due to sort of prudent cost controls? Or was it due to, you know, incentives to some of the new sales? Rob Francescon: Yeah, Alex, great question. A handful of factors obviously running through that line item. I think we were very pleased with the continued success that we've seen on the direct cost side in terms of sticks and bricks, not only in the third quarter, but really earlier in the first and second quarter as well. So we really saw some of that benefit come through in the third quarter. I think in our prepared remarks, we mentioned that from a year-to-date perspective, we're down 3% on the direct cost. We did see and anticipated that we would see some additional pressures from a competitive standpoint on incentives, that we certainly did see that during the quarter. I believe we were up about 50 basis points on incentives or so. But really, it was moderated by the cost savings that came through the P&L during the quarter. So we were pleased with that result. Our teams have been doing tremendous work really to get as much cost out of our homes as possible as we navigate the current environment. Alex Rygiel: And then secondly, you brought up the shift here in the buyers' use of adjustable-rate mortgages. Can you talk about how that might change going into the fourth quarter and talk about how that sort of impacts your business? Are they generally more profitable, less profitable, the margins a little bit better or less, and so on? Rob Francescon: Yes, Alex, the way we really look at it is it's a product that has certainly continued to gain wider consumer acceptance this year. Especially for our buyer type, from a first-time homebuyer perspective, really when you look at historical trends in terms of how long they're in the home, there's not a lot of need for us to buy down a fixed rate for a thirty-year period of time. So it allows us to get a buyer into a home that maybe a little bit of a lower rate initially, go ahead and buy down that rate and provide that really exceptional benefit to the buyer from a monthly payment perspective, but not need to do it over the entire thirty-year term. So something that we're excited to see the consumer continue to have some acceptance with. We're seeing acceptance on 7/1 ARMs, on 7/6 ARMs as well as 5/1 ARMs. So really across the different opportunities that are out there, we're certainly seeing good momentum. A little difficult to tell what that will look like in Q4, but I would expect it to continue to be a meaningful part of the loans that we're originating with our financial services side. Alex Rygiel: Thank you very much. Rob Francescon: Absolutely. Operator: Your next question comes from Rohit Seth with B. Riley Securities. Please go ahead. Rohit Seth: Hi. Thanks for taking my question. Execution in the quarter, guys. On the community count guidance, you mentioned if I heard this correctly, the community count going up mid-single digit by year-end. Is that right? Rob Francescon: That's correct. That's a year-over-year from beginning of the year to end of the year number, so around that 5% mark year-over-year. So that does imply a significant ramp-up in the fourth quarter. A pretty sizable one. Can you help me bridge that? Rohit Seth: Yeah. Correct. And it's, you know, when that number specifically isn't ending, community counts and not necessarily the average during the quarter? And it's something that we've been monitoring really throughout the year and been pretty consistent with anticipating those communities continuing to come online. Rohit Seth: Okay. Absorption rates are also, I guess, pretty good, sequentially into the quarter. Just maybe any color on what you're seeing in the consumer side and how the consumer is behaving? You did mention that didn't need as much incentives in the quarter, but then you're raising incentives in the fourth quarter. And so just help me understand what's happening on the consumer level. Rob Francescon: Well, we're still seeing a very uncertain consumer at the entry-level price points that we serve. And if we look at the fourth quarter, the reason we're putting that out there that it could be up another 100 basis points as all the builders compete for year-end closings. We just think that there's going to be more incentives in the market. But generally speaking, from a consumer standpoint, the entry-level consumer has been the hardest hit along the chain of the various price points. And we're hopeful that going into next year that starts to settle down a little bit. But just based on some of the uncertainty out there, people are a little more cautious right now. Rohit Seth: Understood. Okay. Alright. I'll pass along. Thank you. Operator: Thank you. Your next question comes from Natalie Kulzicker with Zelman Associates. Please go ahead. Natalie Kulzicker: Hey. Congratulations on a good quarter. I wanted to drill in a bit more on the SG&A upside you saw this time around and what drove your cost lower year-over-year. Is it operational efficiencies that you've been working on in the back end, or is it, you know, through maybe headcount reductions, which we've heard in the past? And just wanted to get your thoughts on what would be a sustainable rate for this going forward. Scott Dixon: Sure. Absolutely. Let me touch on a handful of things, and this is Scott. So really, when we look at the SG&A line item, it's certainly been, as we've mentioned on previous calls, a pretty big focus area for us this year just given overall market and the tightening on the consumer side. So we have discussed at various points in time this year various different cost control activities that we've initiated, and we do believe that we're seeing some of the benefits of those coming through here in the third quarter. Those kind of are across the board from back-office efficiencies to ensuring that our headcount is really where we think it needs to be to support the current organization. Some additional compensation-related benefits that came through the quarter as well that are in there. And then when we look at go forward, we have given some specific outlines in terms of where we anticipate the fourth quarter to come in at. There's a handful of things that could potentially drive the numbers. From a fourth-quarter perspective, we're looking at about 12.5% at the midpoint of our guide. It does assume continued use of broker commissions as well as potentially utilizing a little bit more on the advertising line just given the competitive market set that's out there. So a line item that we're continuing to focus on to ensure we're as efficient as possible. Natalie Kulzicker: All right. Got it. And one more for me. You drill in a bit more on the lots that you walked away from during this quarter? Are you pretty sizable similar to the second quarter as well? Like, maybe about, like, what year these communities set to come online and, you know, what stage of, like, due diligence they were in. Scott Dixon: Yeah. So as we mentioned in the prepared remarks, we're underwriting to current market conditions. So as we look at that, our owned lots have remained fairly steady for some period of time right now at just under 37,000. But our control lots have changed. We still have almost 26,000 uncontrolled lots. But that has come down, as you mentioned. And the vintage of those, a lot of those would have been near-term projects that just didn't think they fit the underwriting today. And so those were positions we exited. And so I wouldn't say that we had necessarily a larger spike in Q3. This is something that's kind of been going on for the most part of '25. And as we look going forward, we're still looking to grow in our various markets, have plenty of land that's owned on our balance sheet to handle us over the next couple of years. But as we look at projects, we're looking for things, projects that would come on potentially a little bit later in the timeframe as opposed to immediate. Operator: Got it. Thank you. Please press 1. The next question comes from Michael Rehaut with JPMorgan. Please go ahead. Andrew Azzi: Hi, everyone. This is Andrew Azzi on for Michael. Congrats on the quarter. Just wanted to touch a little bit on the order ASP. Looks like there was a little bit of a sequential lift. Would love to just get some more context on that number. Was that driven more so by incentives, or were there any mix dynamics that might have driven that improvement? Scott Dixon: Yeah. Andrew, thanks for the question. Really, from an ASP perspective, any volatility that we're seeing currently within various different metrics is a little bit more driven by mix. The incentives commentary that we walked through in our prepared remarks, while we certainly have some regions that may be a little bit higher on the incentive, from a trend perspective, it's fairly consistent across the board. So what you're seeing on the ASP is really a little bit more driven by mix. For instance, on the delivery side, we're a little higher here in Q3 than we had been in Q2. And a lot of that is just a little bit more from the West and Mountain regions coming through this quarter as compared to our Century Complete business line. Andrew Azzi: I appreciate that. And then sorry. I didn't mean to cut you off if I did, but just maybe moving on to kind of the tariff impact, I believe you said earlier in your prepared remarks that there isn't really an expected impact in 4Q. I was wondering if there's any way you can kind of size or estimate maybe an impact towards next year, or is it a little bit too early? Would love to hear your thoughts there. Scott Dixon: Yeah. It's really too early to tell for next year. It's obviously a fluid environment as it relates to the tariffs. But for Q4 and historically, we have not had an impact this year. But going into next year, it's really too early to say exactly what an impact could be. Andrew Azzi: Got it. I appreciate that. I'll pass it on. Thank you. Operator: There are no further questions at this time. I will now turn the call over to Dale Francescon for closing remarks. Please continue. Dale Francescon: To everyone on the call, thank you for your time today and interest in Century Communities. To our team members, thank you for your hard work and dedication to Century and commitment to our valued homebuyers. Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Good afternoon, and welcome to the Alcoa Corporation Third Quarter 2025 Earnings Presentation and Conference Call. Participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note that this event is being recorded. I would now like to turn the conference over to Louis Langlois, Senior Vice President of Treasury and Capital Markets. Please go ahead, sir. Louis Langlois: Thank you, and good day, everyone. I'm joined today by William Oplinger, Alcoa Corporation President and Chief Executive Officer, and Molly Beerman, Executive Vice President and Chief Financial Officer. We will take your questions after comments by Bill and Molly. As a reminder, today's discussion will contain forward-looking statements relating to future events and expectations and are subject to various assumptions and caveats. Factors that may cause the company's actual results to differ materially from these statements are included in today's presentation and in our SEC filings. In addition, we have included some non-GAAP financial measures in this presentation. For historical non-GAAP financial measures, reconciliation to the most directly comparable GAAP financial measures can be found in the appendix to today's presentation. We have not presented quantitative reconciliation of certain forward-looking non-GAAP financial measures for reasons noted on this slide. Any reference in our discussion today to EBITDA means adjusted EBITDA. Finally, as previously announced, the earnings press release and slide presentation are available on our website. Now, I'd like to turn over the call to Bill. William Oplinger: Thank you, Louis, and welcome to our third quarter 2025 earnings conference call. Let me begin with safety. In late July, we experienced a tragic loss with the passing of a colleague due to a fatal incident at the carbon plant of our Alumar smelter, our first workplace fatality since 2020. This event has deeply affected the entire Alcoa family; our thoughts remain with his loved ones, friends, and colleagues. Following the incident, safety leaders from across Alcoa, supported by independent external experts, conducted a comprehensive investigation. We held a town hall with employees to share findings, address concerns, and reinforce our safety protocols. Already, the implementation of the associated actions is well advanced at Alumar, and a series of global measures have been introduced to prevent such incidents in the future. This loss is a solemn reminder of the critical importance of safety in everything we do. We remain steadfast in our commitment to provide a safe working environment. In the third quarter, we delivered strong operational performance and stability, achieving year-to-date aluminum production records at five of our smelters. These additional tons are particularly valuable as they carry higher margins and contribute meaningfully to our bottom line. With increases in the Midwest premium this quarter, related revenue on our U.S.-produced tons more than offset the net unfavorable tariff impacts on imports of aluminum to the U.S. from our Canadian smelters. We had three one-time items impacting the quarter, which Molly will cover: the permanent closure of the Kwinana refinery, the closing of the sale of our 25.1% interest in the Ma'aden joint venture, and a sizable increase in asset retirement obligations, primarily related to our Brazil operations. Looking ahead to the fourth quarter, we anticipate higher shipments and a sequential release of working capital. The recent rise in the Midwest premium is now sufficient to cover the full cost of logistics for importing aluminum into the U.S., including the 50% Section 232 tariff. While we continue to evaluate the most profitable placement of our spot volumes and direct those shipments accordingly, the Midwest premium now covers costs on the shipments to our U.S. customers on contracts supplied by our Canadian smelters. Earlier this week, we announced that the United States and Australian governments will provide funding to develop a gallium plant, which will be co-located at our Wagerup alumina refinery in Australia. This follows the support by the Japanese government, which we announced in August. The partners will receive a gallium offtake in proportion to their interest. This project has strategic benefits for Alcoa and the governments supporting it. The support from all three governments underscores Alcoa's role in the development of the critical mineral supply chain and enables us to provide maximum value from the bauxite resources we already extract in Australia. The continuity and competitiveness of Alcoa's Australian mining and refining operations not only support the aluminum industry but also support manufacturing, technology, and defense industries. Additionally, earlier today, we announced a new long-term energy contract for our Massena operations, as well as a $60 million investment in the anode bake furnace. Securing long-term, competitively priced energy is essential to supporting investments like the rebuild and modernization of the furnace, an initiative that will enhance operational efficiency. This energy contract and major investment commitment are a big deal. Alcoa is taking steps to further strengthen the United States' primary aluminum production capabilities. I made a commitment to the Massena employees to secure power and to invest in their operation. Now I will ask them to respond with their commitment to continuously improve the operation's profitability. We look forward to celebrating this step and certainly welcome President Trump, Governor Hochul, Senator Schumer, and the entire New York congressional delegation, as well as members of the New York Power Authority and Empire State Development, to visit our Massena operation to see what great U.S. manufacturing looks like and to thank them for their support. The Australia mine approvals process is moving forward with the completion of the public comment period in August. We are preparing our responses and expect to submit to the Western Australia EPA by year-end. The Western Australia EPA has indicated that it will publish its assessment and recommendations by the end of 2026, and we anticipate ministerial approvals by year-end 2026. In summary, this quarter brought both sorrow and progress. The tragic event at the Alumar Smelter underscores the importance of our unwavering commitment to safety. Despite challenges, we achieved record aluminum production and took strategic steps to strengthen our future. Looking ahead, we're focused on increasing profitability through higher shipments, improved operations, and key investments such as the Massena Energy contract and anode bake furnace. Now I'll turn it over to Molly to take us through the financial results. Molly Beerman: Thank you, Bill. Revenue decreased 1% sequentially to $3 billion. In the Alumina segment, third-party revenue decreased 9% on lower volumes and price of bauxite offtake and supply agreements. In the Aluminum segment, third-party revenue increased 4% on an increase in average realized third-party price, partially offset by lower shipments and unfavorable currency impacts. However, this was lower than our revenue expectation for the segment, primarily due to certain aluminum shipments from Canada to U.S. customers being in transit at quarter-end. This also explains why our tariff costs sequentially were lower than expected. Third-quarter net income attributable to Alcoa was $232 million versus the prior quarter of $164 million, with earnings per common share increasing to $0.88 per share. The results reflect a $786 million gain on the sale of our interest in the Ma'aden joint venture and a subsequent favorable mark-to-market change of $267 million on the Ma'aden shares, partially offset by restructuring and related charges of $895 million for the permanent closure of the Kwinana refinery in Australia. On an adjusted basis, net loss attributable to Alcoa was $6 million, or $0.02 per share. Adjusted EBITDA was $270 million. Let's look at the key drivers of EBITDA. The sequential decrease in adjusted EBITDA of $43 million is primarily due to increased U.S. Section 232 tariff costs on aluminum imported into the U.S. from our Canadian smelters, adjustments to asset retirement obligations, unfavorable currency impacts, and lower alumina prices, partially offset by higher aluminum prices. The Alumina segment adjusted EBITDA decreased $72 million, primarily due to adjustments to asset retirement obligations, primarily in Brazil. Also, lower volumes and price of bauxite offtake and supply agreements and lower alumina prices were only partially offset by lower production costs related to the timing of maintenance activities. The Aluminum segment adjusted EBITDA increased $210 million. Higher metal prices and lower alumina costs were partially offset by tariff costs, which reflect a full quarter at the 50% tariff rate after its increase from 25% on June 4. In addition, production costs improved due to the timing of maintenance activities. Outside the segments, other corporate costs increased, while intersegment eliminations changed unfavorably, primarily due to the absence of a benefit in the prior quarter resulting from a lower average alumina price requiring less inventory profit elimination. Moving on to cash flow activities for the third quarter. We ended the third quarter with cash of $1.5 billion. Cash used for operations was $85 million, including a slight working capital use of $25 million. We also received a tax refund of $69 million from the Australian Tax Office for the deposit held during the five-year transfer price dispute that was resolved in our favor in April. Cash from investing included $150 million from the sale of the Ma'aden joint venture, shown here net of transaction costs. Cash used for financing activities included a $74 million full repayment on a term loan, which was the last borrowing associated with the AWAC joint venture structure. Let's look at other key financial metrics. The year-to-date return on equity was 14.5%. Days working capital increased sequentially by three days due to an increase in accounts receivable days, primarily due to higher aluminum pricing. Our third-quarter dividend added $26 million to stockholder capital returns. We closed the quarter with $1.635 billion in adjusted net debt, making progress toward the top end of our target of $1 billion to $1.5 billion. Cash flow for the quarter includes an increase in capital expenditures to $151 million. Turning to the outlook. We have a few adjustments to our full-year outlook. First, we are decreasing our annual outlook for interest expense to $175 million. Second, we have adjusted our total CapEx for 2025 to $625 million, down from $675 million, primarily due to less spending on mine moves in Australia. Third, we have adjusted our payment of prior year income taxes for 2025 to zero, previously $50 million, to reflect the tax refund from the ATO matter mentioned earlier. And last, the outlook for total ARO and environmental spend in 2025 is expected to increase by $20 million to approximately $260 million, consistent with the guidance update we provided in the Kwinana closure press release. For 2025, in the Alumina segment, we expect performance to improve by approximately $80 million due to the absence of charges recorded in the third quarter to increase asset retirement obligations, as well as higher shipments and lower maintenance costs. In the Aluminum segment, we expect a sequential unfavorable impact of approximately $20 million due to restart inefficiencies at the San Ciprian smelter and lower third-party energy sales, partially offset by higher shipments. While current Midwest premium pricing and higher shipments of our Canadian metal into the U.S. are expected to have a favorable impact on the fourth quarter, we expect tariff costs to increase by approximately $50 million due to increased shipments. Further tariff impacts from changes in LME pricing during the quarter can be calculated from our tariff sensitivity. Alumina costs in the Aluminum segment are expected to be favorable by $45 million. Below EBITDA, other expenses in the third quarter included favorable foreign currency gains of approximately $10 million, which may not recur. Based on last week's pricing, we expect fourth-quarter operational tax expense of $40 million to $50 million. Now I'll turn it back to Bill. William Oplinger: Thanks, Molly. Let's discuss our markets, starting with alumina. Alumina prices have declined significantly over the past month, with recent prices around $315 per metric ton as the market remains under pressure due to ample spot availability and refinery expansions in Indonesia and China. Outside China, the timing mismatch between new refining capacity coming online in Indonesia in 2025 and additional smelting capacity expected only in late 2025 or into 2026 is creating a short-term imbalance. In China, most previously curtailed capacity has been restarted since May, adding further supply pressure. Many Chinese refineries operate at the top of the cost curve. Continued downward pressure on domestic prices may prompt further supply-side response, resulting in curtailments. Looking ahead, alumina demand will be supported by new smelting capacity in Indonesia and anticipated to come online in 2026. However, uncertainty around the Mozal smelter could weigh on demand and pricing. Meanwhile, bauxite prices remained firm, supported by seasonal supply disruptions in Guinea and the market working through stockpiles accumulated earlier in 2025. Alcoa continues to deliver on strong fundamentals, consistent quality in our smelter-grade alumina products, and preferred supplier status due to our reliability. We remain on track for a record year in third-party bauxite sales volumes. Let's now move on to aluminum. LME prices rose approximately 7% sequentially and have continued to increase, recently reaching $2,775 per metric ton, reflecting a combination of factors: a weaker US dollar, expectations of monetary easing, and persistent supply tightness amid resilient global demand. In the U.S., the Midwest premium continued to increase during the third quarter and recently reached import parity. This reflects declining inventories and reduced aluminum imports following the Section 232 tariff increase earlier this year. European premiums also rebounded from earlier lows, signaling improving market fundamentals. Demand remains steady across Europe and North America. Packaging and electrical sectors continued to show healthy demand growth in both regions, while construction and transportation remained soft. The automotive sector is weak based on tariff uncertainty. On the supply side, growth remains constrained. Outside China, restarts and ramp-ups have been moderate, while China is approaching its smelter capacity ceiling. Additionally, potential disruptions at the Mozal smelter could further tighten the market. Looking ahead to 2026, the impact of increasing supply from Indonesia is expected to be limited, given constrained growth elsewhere, including in China, and the expectation of continued demand resilience. Importantly, our core markets in Europe and North America are expected to remain in regional deficit. Specific to Alcoa, we had an overall stable order book of value-add products in the third quarter, with the exception of foundry. In North America, demand for slab and wire rod remained strong, while billet demand is steady but spot activity is subdued. In Europe, wire rod demand is robust, slab performance is mixed, with strength in packaging but weakness in automotive, and billet demand remains cautious with customers maintaining short order visibility. I'm very excited to host you on October 30 for our Investor Day 2025. It's been almost four years since Alcoa has had its last Investor Day. It's a great opportunity to discuss why Alcoa is the investment choice in aluminum. We will discuss our strategic vision and market position, operational excellence and innovation, talent, the long-term market, and our financial outlook. We will also provide additional details on our Spanish operations and our Australia mine approval process. Please visit our website for additional details. To conclude, in the third quarter, Alcoa maintained strong operational stability, took strategic actions to strengthen the company, and continued our engagement with trade policymakers. Looking ahead, we will focus on safety, stability, and operational excellence, deliver fourth-quarter financial improvement, and progress our Australia mine approvals. I look forward to welcoming you to our Investor Day event on October 30. With that, let's open the floor for questions. Operator, please begin the Q&A session. Thank you. Operator: We will now begin the question and answer session. Chris LaFemina: And our first question will come from Chris LaFemina with Jefferies. Please go ahead. Chris LaFemina: Hey guys, thanks for taking my question. Hi Bill. Just wanted to ask about, I guess, capital allocation. I mean, you're approaching your net debt target range. You could be in a position where you're able to start returning capital a bit more aggressively in 2026. You're obviously focused on further operational upside. I know you're going to give us a lot more detail around this at the upcoming Investor Day, but just wondering about how you think about potential M&A opportunities in the market? And to the extent that you think about that at all, is it any particular spot in the supply chain that you'd be focused on? Would you be interested in bauxite and alumina? Is it more in the downstream? Or is that really not even on your mind right now because of all the stuff you have going on internally? Thank you. William Oplinger: So Chris, let me let Molly address the capital allocation and then we'll come to the M&A question. Molly Beerman: Hi, Chris. We are $135 million away from the top of our adjusted net debt target of $1.6 billion, and the top target is $1.5 billion. We do have a priority to continue to pay down debt. We have notes, the 2027 notes, with $141 million remaining, and on the 2028 notes, $219 million remaining. That will be our first priority. But as we stay within the net debt target, we will certainly be evaluating additional returns to stockholders in parallel with pursuing some growth options. William Oplinger: And Chris, to address the M&A question, we did the Alumina Limited transaction last year, and that showed that we have the ability to successfully do M&A work. That transaction, if you look back upon it, allowed us to do the Ma'aden transaction where we're swapping out the Ma'aden equity interest for shares. As I look forward, we will look at opportunities for M&A across the spectrum of the product line. I would not say at this point that we have any particular part of the product line that we need to add to. But we will look at opportunities as they come up, and we'll do the evaluation. And what we'll do is, where we have opportunities to create significant synergies that aren't available to our shareholders otherwise, we would look at those opportunities from the acquisition perspective. Chris LaFemina: That's very helpful. Thanks, Bill. See you next week in New York. William Oplinger: Yes. Thanks. Operator: Your next question today will come from Lawson Winder with Bank of America. Please go ahead. Lawson Winder: Great. Thank you very much, operator. Good evening, Bill and Molly. Nice to hear from you both. Could I ask about the U.S.-Australia Alcoa partnership? Would you be able to provide some background on how this came together? Was that an initiative driven by Alcoa? William Oplinger: It was an initiative that really began between Alcoa and the Japanese. The Japanese were looking for the potential offtake of gallium. We got that joint development agreement put together a little while back. And we've been talking to both the U.S. and the Australian governments for a number of months now. The real strategic advantage of this deal is that it provides a supply chain outside of China for gallium that is around 10% of the world's gallium market. It will be at our Wagerup facility in Western Australia. That solidifies the importance of that facility in Australia. And it really strengthens the relationship between, and you saw this in the press conference yesterday and in the joint signing ceremony between President Trump and Prime Minister Albanese, strengthens the relationship between the U.S., Australia, Japan, and really shows the importance of Alcoa in Australia. Lawson Winder: Thank you for that. And then as a follow-up, can you give us an idea of what sort of approvals or permits might be needed and the timeline to first production on that facility? William Oplinger: So that's one of the reasons why Wagerup was chosen. The approvals, we have line of sight to get the approvals done fairly quickly. We are pushing to have first metal by 2026. We think we will be first to market outside of China on an aggressive schedule. The next step is that we need to get final documents signed, but we're pushing to be able to create, to extract gallium by 2026. Lawson Winder: Okay. Thank you, Bill. William Oplinger: Thanks. Operator: And your next question today will come from Timna Tanners with Wells Fargo. Please go ahead. Timna Tanners: Yes. Hey, good evening. I'm looking forward to hearing more about Australia and Spain as you teased for next week's Investor Day. But I didn't hear mention of Canada or the U.S. I thought I would probe those topics. Didn't hear mention, in particular, on the negotiations with Canada regarding any carve-out of aluminum. So I'd like to hear about that export opportunity, the latest there. And then given that the U.S. now has arguably the lowest aluminum smelter production costs in the world, just if there's any rethinking of expanding capacity domestically, like at Warrick with that idle hotline? Thanks. William Oplinger: Wow, there are a lot of questions there, Timna. So as far as the Canadian-U.S. negotiations that are going on, we are providing information to both sets of governments so that they have the right information, the right data to make the right decisions. And we're working with both administrations to ensure that they understand the trade flows because we're probably the world's expert on the trade flows between Canada and the U.S. when it comes to aluminum. I'm a little bit surprised by your comment around the lowest cost in the world for aluminum. We have not yet seen, with the exception, and I'll cover the Massena Project, we have not yet seen significantly competitive energy prices available for the long term in the United States. You know that globally, we would be shooting for energy prices between $30 and $40 a megawatt hour. We've not seen those available yet for long-term packages in the U.S. In fact, the opposite of that is occurring because some of the data centers and the AI centers are able to pay $100 a megawatt hour, whereas we're looking for $30 to $40. And then lastly, around your question around Warrick, the Warrick restart is a complex restart for that fourth line. It will cost us probably about $100 million, and it'll take anywhere between one to two years to get that fourth line up. We'll continue to evaluate it, but we won't make an investment decision simply on a tariff. Tariffs can and do change over time, so we won't be plowing $100 million into the ground at this point based on a tariff cost. Did I answer all of that? Timna Tanners: That's helpful. I think you did, and I should clarify that that comment on the lowest production cost is adjusted for tariff and actually came from CRU, but that's helpful detail. I appreciate it. William Oplinger: Oh, and I should have highlighted Massena. And let me just take a second to highlight Massena. Really big deal. And I said this in my prepared remarks, but maybe it didn't come out as exciting as I wanted it to. Really big deal in Massena. We have a ten-year contract that has two potential extensions of five years each. That allows us now to make long-term decisions associated with Massena, and we've decided to invest in the bake furnace in Massena. So really excited for the people of Massena. And as I said in my prepared remarks, I committed to them. We're going to get them a globally competitive long-term power contract. They've committed to me that they're going to work on the profitability of that plant, the safety of that plant, and the production of that plant. And I'm looking forward to getting up to Upstate New York and celebrating here soon. Timna Tanners: Okay. Thanks again. William Oplinger: Thanks. Operator: And your next question today will come from Carlos De Alba with Morgan Stanley. Please go ahead. Carlos De Alba: A question on gallium. Do you have any color that you can share on the economics of that project? And if it is too early, maybe when do you expect a technical report or feasibility study that you can share, given that it could come up rather quickly? And maybe related to that, does this project change in any way the ongoing mining permitting process you have going on in Western Australia? William Oplinger: I missed the second half of that. Does it impact our approvals at all? Carlos De Alba: Like, if it changes the ongoing mining permit process that you have in Western Australia? William Oplinger: Right. So let me go there fairly quickly. The approvals process that we're going through currently is related to Huntley and Pinjarra. Huntley, the mine, Pinjarra, the refinery. So this would have no impact on that approvals process. In Wagerup, we will be going through an approvals process there at a later date. And this should have no impact on that approval process either. When it comes to the economics, Carlos, this is not a large plant. It is not a large plant. It is going to be financed via a couple of the Japanese entities, the U.S. government, and the Australian government. Alcoa will have a small part of the financing. The really critically important thing here is to have a supply chain of gallium outside of China. And this is what the governments want, and they will be taking an offtake of that gallium. So Japan, Australia, and the U.S. will all have an offtake of the gallium. Molly Beerman: I'll just add that the structure for that offtake is a cost-plus margin, which is still in the process of negotiation. Carlos De Alba: Great. Thank you for that. And then one more, if I may. Maybe related to the last question, didn't ask. Any intention to maybe look at getting back into the rolling business and unfortunate situations from some of the current producers there maybe highlighted the need for having a more robust supply chain? William Oplinger: Hey, my attorneys always tell me not to make unequivocal statements. But I will make an unequivocal statement. No. There's no interest in getting back in the rolling business. Carlos De Alba: Fair enough. Thank you very much. See you next week. William Oplinger: See you. Operator: And your next question today will come from Daniel Major with UBS. Please go ahead. Daniel Major: Hi, Bill, Molly. Thanks for the questions. I think most have been answered, but discussed most of the strategic elements. Next week. But just one follow-up, just on the comment you made on gallium. Would you you said that the pricing would be an offtake agreement at a cost-plus or a fixed margin. Is that for all of would that be for all of the volumes associated with the project? Is that the right way to think about it? William Oplinger: All of the volume. Alcoa and we still have to get through definitive agreements. So we're making these comments based on the MOU that was signed. Alcoa will have a very small offtake, very small offtake, the rest will be cost-plus. Daniel Major: Okay. And just one follow-up on the gallium dynamic. Can you give any insight on the ownership structure of the JV and your equity participation in the 100 tons? William Oplinger: So the ownership structure is two entities will own the plant. The Japanese will own 50%. The combination of the U.S., Australia, and Alcoa will own the other 50%. We have not publicly said the ownership of that second 50%. And the offtake will be similar in line with the ownership percentages. Daniel Major: Right. So I'll go yeah. Comfortably less than 50% of the economics of the joint venture. William Oplinger: Yes. To put it in perspective, we would anticipate taking again, this is all in negotiation. Something like five tons of the 100-ton capacity. Daniel Major: Okay. Thank you. And then your second question, again, trying to front-run next week. Can you still confirm the target for San Ciprian smelter running at steady state is mid-2026? Is that still correct? Molly Beerman: Yes. That is our target that we will have full run rate mid-2026, trying to get to the level of profitability at the smelter in the back half of '26. Daniel Major: Okay. And then yes, last we've seen a bit of an uptick recently in both Midwest and European premiums. Can you give any color on what's trying to drive that? Are you seeing any green shoots in end demand? Or is this some tightening in the supply chain? What would you attribute that uptick to? William Oplinger: So in the Midwest, the Midwest has finally risen to a level where it covers the full tariff cost. In Europe, we're seeing some uncertainty around Mozal, the potential Mozal shutdown. And then the Century shut that's occurred within the last day or two, that could put further pressure on the European premium. Molly Beerman: Both markets are still in deficit, and the supply is very tight. So I think you're seeing the price react to that. William Oplinger: Yeah. In the U.S., I think our days' consumption has gone down to something like thirty-five days, which typically triggers it's below a level where it typically triggers higher pricing. Daniel Major: Very clear. Thank you. Operator: And your next question today will come from Alexander Nicholas Hacking with Citi. Please go ahead. Alexander Nicholas Hacking: Yes, evening Bill and Molly. Look forward to seeing you next week. Congratulations on the agreement at Massena. Just one question for me. Your geographic mix of shipments from your Canadian smelters, I know at one point you were rerouting some of that material away from the U.S. With the MWP back where it is, are those kind of flows back to normal again? Thanks. William Oplinger: So we had redirected about 135,000 tons during the course of the year so far. But at this point, with the Midwest premium as high as it is, it would be back to normal shipments in the United States. Alexander Nicholas Hacking: Thank you. Operator: And your next question today will come from Nick Giles with B. Riley Securities. Please go ahead. Nick Giles: Thank you, operator. Bill, coincidentally, net income attributable to Alcoa was $232 million this quarter. My question is, what do you think the administration needs to see from here to ultimately come to this agreement with Canada and reach a resolution on the tariffs? William Oplinger: You know, Nick, I'm not going to speculate on what the U.S. needs to see. The position that we're in, and I was in Washington over the last two days, and I was meeting with key decision-makers on both sides of the table. The position that we're in is we're explaining to them the market flows. And just so everybody knows, and I'm sure you've heard these numbers, the U.S. is short roughly 4 million metric tons on an annual basis. Canada provides around 3 million metric tons out of that 4 million metric tons. I know there's been some discussions, and you've probably heard some of the rumors around lower tariffs or potentially a tariff wall around North America, potentially tariff rate quotas. We are a resource to both to help them understand the impacts of those, and that's the function that we've been fulfilling. Nick Giles: Appreciate that, Bill. My second question was, you've noted some production records at several of your assets year-to-date and assume that's the result of all the productivity and competitiveness work over the past twelve months. But what assets would you still consider to be underperforming today? And any other commentary about how much more you could improve at some of those other assets? William Oplinger: So I am very pleased with the operations globally. It starts with stability, and that gets reflected in generally higher production levels and lower costs. When I look around the world, if I just take you on a tour around the world, our Western Australian refineries have dealt with really, really poor bauxite quality. This is bauxite that we would have typically thrown away in the past, and they've been able to offset a massive amount of that deterioration with better operating procedures and technology. If I then go to, and I should have stopped in Spain just for a second. The startup in Spain is going really, really well. You know, we've never questioned the ability of our workers in Spain to run that facility extremely well, and the startup is going well. We've hit production records in Quebec. We've hit some production records in Norway. And the U.S. is running well from a smelting perspective. It all starts with stability, a focus on the relaunched Alcoa business system, really focusing around maintenance and getting maintenance done right. And I should highlight down in Brazil, we hit a production record in our refinery, our Alumar refinery, in September. Fantastic performance there. And the smelter is up to around 93%, 94% starting. Start at capacity. And every day, they just add a pot or two. So are there areas? Yeah. There are definitely areas across the patch. As I look at opportunities for improvement, Brazil now has to get the stability and take the cost out. We still have opportunities to serve our customers better out of the cast house in Massena, New York, for one, and in Mosjøen in Norway. So as I look across the system, there's still a lot of opportunity for improvement. Nick Giles: Bill, that was a great tour. I appreciate all the color and continuing best of luck. William Oplinger: Thanks. Operator: Your next question today will come from John Tumazos with John Tumazos Very Independent Research. Please go ahead. John Tumazos: Could you give us some color on the continued ten-year agreement in Massena? Is it a region where the demand for electricity has risen? Are there data centers or other new uses, new buyers? And is there new electricity capacity such as wind or natural gas or solar? And then secondly, does any of the infrastructure from the old prior Massena West plant still exist? Is this a candidate, or are there any candidates among your properties where old capacity could be brought back? William Oplinger: Oh, wow. You ended that in a different way than I thought you were going. So let me address each one of those, and Molly, feel free to jump in on any of this. The agreement that we have with the New York Power Authority extends the power contract for Massena out ten years, plus two opportunities to extend it another five and five. So Massena can have very competitive, low-cost green energy for the next twenty years. That allows us line of sight to be able to make the bake furnace investments. So we're going to invest $60 million in the bake furnace. So as I talk to people, for instance, in the U.S. administration, this is what aluminum needs in the United States. It's competitive, globally competitive electricity, preferably green, because at some point, we will get a green premium that's significant in the U.S. But this is exactly what's needed for investment in the United States, and that's why we've announced it and why we've done it. Your second part of that question is, is there competition for the electricity in Upstate New York? There absolutely is. I think New York Power Authority and the state of New York, and you remember New York Power Authority is part of the state of New York, understands the commitment to jobs in the North Country. Unlike a data center, we actually employ people. And we have approximately 550, 600 direct employees up in Massena, and this solidifies the future for them. They have to now deliver on a lot of things that I'm going to ask them to deliver upon. You then went to Massena, you said West, it's actually Massena East that's the curtailed capacity there. Massena East, there is no potline left, so we are not going to be restarting aluminum production. What we do have opportunities in Massena East is around data centers and AI, and there is electrical infrastructure still in place, and we're looking at opportunities there along with everywhere else in North America, but we're really looking at opportunities at Massena East. The electrical infrastructure is there. John Tumazos: Thanks, Bill. Congratulations. William Oplinger: Thanks, John. Good to hear from you. Operator: And your next question today will come from Glyn Lawcock with Baron Joey. Please go ahead. Glyn Lawcock: Good morning from Australia, Bill. William Oplinger: Hey, Glyn. Glyn Lawcock: Bill, on the call, you said the public review period has closed. Have you been privy to what was in the public review period? And has there been anything that you've seen, you know, been outside what your expectations, etcetera, in the review period that you have to respond to? William Oplinger: For the question, Glyn. Yes, the public review period is closed. We have received the comments from the EPA. Rough numbers, 60,000 comments, which is a very large number of comments to come in through a public review period. We had originally thought out of those 60,000, about 5,500 were individual comments. We've subsequently had the time to go through each of the comments and use a set of tools that can help us go through those comments. There's probably around 2,000 individual comments that have been submitted. We have a very large team in Western Australia that is completely focused on replying to those comments and addressing those comments. As you can imagine, there's probably two or three areas that those comments are focused on. One is proximity to water. And just so that everybody knows, we've been mining in Western Australia for sixty years. We've never impacted the water supply at Perth. But I understand the concern around proximity to water. That's why we've agreed to step back some of the mining farther away from the water sources. The second is really around mining in the jarrah and that's rehabilitation and any potential impact on black cockatoos. I think, Glyn, you were probably out on our tour that we took you through. You've seen it for yourself. I would invite anybody else that wants to take a tour of Western Australia. We have public tours to show you the rehabilitation in Western Australia. It is world-class. And that's one of the two areas that people are focused on. Glyn Lawcock: Alright. Thanks, Bill. If I could squeeze in a second and staying in Australia, you announced the Kwinana permanent closure the other day. You talked about the potential for a significant offset from the land sale. Just two questions. $1.6 billion seemed a lot of money for the closure. Was there anything that's specific to the closure versus other refineries? And then secondly, when you say significant for the land sale, is it commercially zoned? And could it be rezoned to make it more valuable? Or do you not think there's a zoning opportunity change as well? Thanks. Molly Beerman: So, Glyn, I'll take this one. So the significance of the closure costs for Kwinana, we have a large water management with the RSAs there, and this is the largest that we've seen in any of our prior refinery closures. So that's the accelerated up. Higher cost that you are seeing and our accelerated attempts to remediate that as quickly as possible. As far as the zoning, it's in an industrial park, so it is already a part of a large complex. We do believe the land will be quite valuable. It has port access, rail access. And because in Kwinana, we have the residue areas physically separated from the refinery site, we will focus on remediating the refinery site and preparing that for redevelopment and resale there to try to get a full recovery of those closure costs and possibly exceed it. Glyn Lawcock: Alright. Thanks very much for the response. Operator: And your next question today will come from William Chapman Peterson with JPMorgan. Please go ahead. William Chapman Peterson: Yes. Hi. Good afternoon, and I look forward to the update next week on the longer-term areas. Maybe as a snapshot and picking up on an earlier response on hyperscalers and maybe interest in idled assets or some of the interconnections. Have you seen hyperscaler interest pick up in recent months? You mentioned specifically Massena. So I'm just wondering how the dialogue is proceeding and is a snapshot relative to earlier this year when you first started up? William Oplinger: So the interest in data centers and AI centers hasn't really mitigated at all, hasn't come off at all over the last six months. We have spent a significant amount of time within the company trying to completely dimension what the opportunities are for our sites and how we aggressively market those sites to the right customers, the right developers for that land. So more to come on that in the future, but a lot of work going into what are the opportunities that we have, what electrical infrastructure we have, what interconnect that we can provide, and who the best developer or buyer of the site would be. And these are the closed and commissioned sites, not so much the active sites. William Chapman Peterson: Yes, understood. Earlier in your prepared remarks, you talked about the demand profile. And I guess specific to the U.S., you spoke of strength in packaging and electrical weakness in construction and transportation. Is this a sign of demand destruction? Or potentially substitution given tariffs and high Midwest premium? Is this kind of more of a cyclical statement? Trying to get a sense of how the higher Midwest premium could be contributing to some of this demand weakness, if at all? William Oplinger: We don't think it's demand destruction at this point. When and I think you ran through the end markets pretty well. When I look at the end markets, packaging and electrical conductor are very strong. Building construction hasn't gotten worse. We were expecting, as probably most people were expecting, lower interest rates in the second half of this year. Those have not materialized. That will spur residential construction. The real weakness that we're seeing both in Europe and in North America is the automotive. And is that demand destruction, or is that in the case of Europe, really substitution by electric vehicles coming out of China? It's really hard to say. But, at this point, we're not seeing significant demand disruption. William Chapman Peterson: Okay. Thanks for that. And, again, look forward to next week. William Oplinger: Thanks. Operator: And your next question today will come from Nick Giles with a follow-up of B. Riley. Thanks. Nick Giles: Please go ahead. Thanks for taking my follow-up. Obviously, we've gotten some updated measures in the EU on safeguards for steel. So I was curious if there are any updates you could share on what we could see on the aluminum side or how those discussions have progressed? William Oplinger: No. I can't give you any update on that in Europe. The next big set of regulations will be coming into Europe is CBAM. And our company's position is that we think CBAM will go into effect as of 2026. There are still some pretty big loopholes in CBAM, and anybody that wants to discuss that next week with me, we can. But the two big loopholes are scrap and end-user and product production. We think that CBAM will raise the Midwest not the Midwest, the European premium probably $40 or $50 a ton in 2026. That will be a slight positive for us. Ultimately, costs will go up too as carbon costs creep into the overall cost structure. So CBAM, we think, will be coming in, in 2026 and at least in the near term have a positive impact for Alcoa. Nick Giles: Thanks a lot, Bill. Appreciate it. Operator: This will conclude our question and answer session. I would like to turn the conference back over to Mr. Oplinger for any closing remarks. William Oplinger: Thanks, operator, and thanks to everybody for joining our call. We hope that you will join us for Investor Day next Thursday. I really look forward to seeing many of you there in New York. And that concludes the call, so thank you. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good day, and welcome to the Crown Castle Quarter III 2025 Earnings Conference Call. All participants will be in listen-only mode. To withdraw your question, please press star then 2. Please note this event is being recorded. I would now like to turn the conference over to Kris Hinson, Vice President of Corporate Finance and Treasurer. Please go ahead. Kris Hinson: Thank you, Chloe, and good afternoon, everyone. Thank you for joining us today as we discuss our third quarter 2025 results. With me on the call this afternoon are Chris Hillebrandt, Crown Castle's President and Chief Executive Officer, and Sunit Patel, Crown Castle's Chief Financial Officer. To aid the discussion, we have posted supplemental materials in the section of our website at crowncastle.com that will be referenced throughout the call. This conference call will contain forward-looking statements, which are subject to certain risks, uncertainties, and assumptions, and actual results may vary materially from those expected. Information about potential factors which could affect our results is available in the press release and the Risk Factors sections of the company's SEC filings. Our statements are made as of today, 10/22/2025, and we assume no obligation to update any forward-looking statements. In addition, today's call includes discussions of certain non-GAAP financial measures. Tables reconciling these non-GAAP financial measures are available in the supplemental information in the Investors section of the company's website at crowncastle.com. I would like to remind everyone that having an agreement to sell our fiber segment means that the fiber segment results are required to be reported within Crown Castle's financial statements as discontinued operations. Consistent with last quarter, the company's full-year 2025 outlook and third-quarter results do not include contributions from what we previously reported under the Fiber segment, except as otherwise noted. To aid in the review of our third-quarter results, our earnings materials include year 2024 results on a comparable basis. As we indicated last quarter, within the 2025 outlook, and in our quarterly results, all financing expenses are included in continuing operations and do not reflect the impact of any expected use of proceeds from the sale of our fiber business. Additionally, SG&A has been allocated between continuing and discontinued operations to develop our outlook. However, these allocations may not represent the run rate SG&A for Crown Castle as a standalone tower company. As a result, adjusted EBITDA, AFFO, and AFFO per share in our 2025 outlook and quarterly results may not be representative of the company's anticipated performance following the close of the sale. With that, let me turn the call over to Chris. Chris Hillebrandt: Thank you, Kris, and good afternoon, everyone. It's an honor to address you for the first time as CEO of Crown Castle. As you've seen from my background, I've been in the telecommunications industry for many years, and I have long admired Crown Castle and its high-quality portfolio of approximately 40,000 towers, both as a customer and as a previous competitor. In my first forty days, I've traveled across the country to host town halls and hear from many of Crown Castle's employees and customers, and I've gained several key insights. First, I am really pleased by the high level of engagement of our employees and their excitement about our goal to become a best-in-class US tower company. We believe that the fiber-owned small cell transaction remains on track to close in 2026. Second, I believe that the US wireless communications infrastructure industry is entering a period of significant opportunity, supported by solid fundamentals, continued growth, and customer demand. Third, Crown Castle is uniquely positioned to drive attractive risk-adjusted returns during this period, as the only large publicly traded tower operator with an exclusive focus on the US. In September, CTIA, a leading wireless industry association, reported that mobile data demand in 2024 had increased by more than 30% for the third consecutive year. We believe mobile data demand is the best indicator of long-term demand for our assets, as incremental network investment by our customers is required to enable higher levels of mobile data traffic. As data demand continues to grow, it will require operators to expand network capacity by both deploying new sites and adding new spectrum bands to existing sites. We're seeing this dynamic unfold in real-time. Over the past year, each major mobile network operator has acquired additional spectrum despite having collectively secured approximately 700 megahertz of spectrum less than five years ago, the same amount of spectrum acquired in the prior forty years combined. Looking ahead, the FCC has said it plans to auction at least 800 megahertz of additional spectrum beginning in 2027. As we saw during the early stages of the 5G deployment cycle, spectrum acquisitions by well-capitalized carriers tend to create significant opportunities for tower operators. With this in mind, I am excited by Crown Castle's long-term value creation opportunity. As the only large publicly traded tower operator with an exclusive focus on the US market, I believe we have an opportunity to generate attractive long-term risk-adjusted shareholder returns by focusing on becoming the best operator of US towers with the following strategic priorities: First, to empower the Crown Castle team to make the best and timely business decisions by investing in our systems to improve the quality and accessibility of asset information. Second, strengthen our ability to meet the business' needs by streamlining and automating processes to enhance operational flexibility. And third, as the team has already started doing, drive efficiencies across the business. We will advance our data management and process engineering capabilities to deliver on these strategic priorities, and over the long term, we expect to maximize cash flow by unlocking additional organic growth while driving continuous improvement in profitability. This strategy is supported by our previously announced standalone tower capital allocation framework, which balances the predictable return of capital to shareholders with the financial flexibility to invest in our core business. Following the close of our sale transaction, we intend to grow our dividend in line with AFFO, excluding amortization of prepaid rent, by maintaining a payout ratio of 75% to 80%. Additionally, we continue to expect to spend between $150 million to $250 million of annual net capital expenditures to add and modify our towers, purchase land under our towers, and invest in technology to enhance and automate our systems and processes. We believe these enhancements, which are already underway, are fundamental to our strategic priorities to improve the quality and accessibility of asset information, enhance operational flexibility, and drive further efficiencies. Lastly, after paying our quarterly dividend and pursuing organic investment opportunities, we intend to utilize the cash flow we generate to repurchase shares while maintaining our investment-grade credit rating. So in conclusion, I am excited by the opportunity ahead for both the US wireless infrastructure industry and Crown Castle specifically. As the only large publicly traded tower operator with an exclusive focus on the US, we are well-positioned to deliver attractive risk-adjusted returns over the long term, with our strategy designed to maximize organic growth while enhancing profitability and our capital allocation framework which balances the predictable return of capital to shareholders with financial flexibility. With that, I'll turn it over to Sunit to walk us through the details of the quarter. Sunit Patel: Thanks, Chris, and good afternoon, everyone. We delivered solid third-quarter results and are increasing our full-year 2025 outlook as demand for our assets remains strong, and we continue to identify opportunities to operate more efficiently. Starting on page four, the tower business performed well in the third quarter, highlighted by 5.2% organic growth or $52 million, which excludes the impact of Sprint cancellations, and benefits from a $5 million timing-related uplift to core leasing activity in the quarter. However, this was more than offset at the site rental revenues, adjusted EBITDA, and AFFO lines largely due to an unfavorable $51 million impact from Sprint cancellations, a $39 million reduction in non-cash straight-line revenues, and a $17 million decrease in non-cash amortization of prepaid rent. Moving to page five, our updated full-year 2025 outlook includes increases at the midpoint of $10 million to site rental revenues, $30 million to adjusted EBITDA, and $40 million to AFFO. The higher site rental revenues are driven by continued strong demand for our assets, which we expect will result in a $10 million increase to full-year straight-line revenues and fourth-quarter leasing activity and non-renewals in line with the first half of 2025 results. We also expect a $40 million increase at AFFO consisting of a $5 million increase in services gross margin, driven by higher services activity, a $15 million decrease in expenses, and a $5 million decrease in sustaining capital expenditures as we continue to identify opportunities for greater operational efficiency in the tower business. And finally, a $15 million decrease in interest expense largely due to lower than expected floating rates and a push out in the assumed term out of our floating debt. Included in our updated full-year 2025 outlook is a $30 million reduction in discretionary capital expenditures from spend that has been pushed into next year. The updated outlook for 2025 discretionary CapEx is $155 million or $115 million net of $40 million of prepaid rent received. In conclusion, we are pleased with our third-quarter results and believe we are well-positioned to meet our increased outlook for full-year 2025, and our range for estimated annual AFFO following the fiber business sale closing that we reiterated last quarter of $2.265 to $2.415 billion. Longer term, we're excited by the opportunity for Crown Castle as the only large publicly traded tower operator with an exclusive focus on the US to deliver attractive risk-adjusted returns with our balanced capital allocation framework, investment-grade balance sheet, and focus on operational execution. With that, operator, I'd like to open the line for questions. Operator: We will now begin the question and answer session. If you're using a speakerphone, please pick up your handset before pressing the 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. The first question comes from Michael Rollins with Citi. Please go ahead. Michael Rollins: Chris, congratulations on becoming CEO of Crown Castle. Chris Hillebrandt: Thank you. Michael Rollins: So a couple of questions. First, Chris, it'd be great to get your perspective. You shared some of the course already in terms of some of your priorities and your initial takes. But as you look at the growth opportunities for Crown, can you frame maybe in more detail what are the opportunities to grow further with your existing customers and how that opportunity rates relative to the efficiency gains by divesting the fiber operations and just looking for more opportunities to be more efficient and effective? And then just a second topic, if I could. Just curious for an update on the relationship with EchoStar. Have you received any feedback in terms of what their approach to the network may be and how you look at collecting the rest of the contractual commitments that you have with that customer? Chris Hillebrandt: Yeah, great. Thanks, Michael. So I think four questions in one, if I counted them up correctly. Let's start with the growth one that you mentioned. I think, look, one of the reasons why we're so excited about becoming a large public US tower operator is that we believe that we can really unlock the value on both revenue and the profitability side. Fundamentally, we will be focusing in on almost the back to basics to just maximize the revenue opportunities that we have with the existing portfolio overall. And I think we feel good, as recognized by the results that you just heard today. In terms of efficiency, look, this is one of the things that we have a huge focus on. Not only in terms of what we promised to deliver as part of this, and so we need to get through first the actual fiber sale itself. This is our number one priority as a management team to get this over the finish line here by the end of the first half of next year. But then we're already starting to focus on those efficiency areas. And again, you saw that in the results that we're reporting this quarter. We started to accelerate those activities where we can. And we as a company will spend a great deal of focus on looking for the opportunities to drive efficiency across our platforms, both through process changes and new tools, but also just execution and delivering against customer expectations in what will be a best-in-class tower co. And then finally, the EchoStar question that you asked, look, we have a good agreement in place. It runs through 02/1936. And the bottom line is we expect to be paid for the terms of the agreement. Operator: Thanks very much. Thank you. The next question comes from Benjamin Swinburne with Morgan Stanley. Please go ahead. Benjamin Swinburne: And welcome to the earnings calls, Chris. Nice to hear your voice. Wanted to ask you guys a couple of questions. AT&T this morning talked about deploying 3.45 from EchoStar kind of prior to close. In fact, we talked about getting that to two-thirds of their pops by mid-November. I'm curious. I know you can't talk about specific carriers, but as we see the EchoStar spectrum get deployed, particularly where it's simply a software upgrade, is there any opportunity for Crown Castle from a revenue point of view? How do you think about this migration of spectrum from Boost to the majors? I was just wondering if Sunit could talk a little bit about the one-timer in the quarter. I think you said it was $5 million. Any color on sort of what drove that would be interesting. Thank you. Sunit Patel: Yeah, I'll take both. Yeah, I saw those remarks. Look, I think in general, what I would say, because it's tough for us to comment on AT&T's specific plans over the next years. But in general, I would say, the massive investment in Spectrum, which is usually followed by depends generally. And, you know, it depends on whether they would do a software upgrade to existing coverage areas or they want to go into more coverage areas, again, I wouldn't know. But what I would say over the long term is most spectrum bands get occupied and as mobile data demand continues to grow, in general, that's favorable for the tower sector, and we hope we'll do a good job of serving AT&T for whatever its plans are. So I think that's the main point there. On the one-time benefits, yeah, it's a combination of different things happening in the third quarter with several of our carrier customers. So we had a one-time benefit. As we said, we expect to revert back to the sort of activity levels we saw in the first half of the year in the fourth quarter. So these things are never linear. Sometimes, you can have lumpiness, and that's what you saw in the third quarter. Benjamin Swinburne: Got it. Great. Chris Hillebrandt: Well, thank you very much. Operator: The next question comes from Michael Funk with Bank of America. Please go ahead. Michael Funk: Yeah. Hi. Good evening. Thank you again for the question. And Chris, congratulations on your new role. Chris Hillebrandt: Thank you, Mike. Appreciate it. Michael Funk: Yeah. So a couple if I could. Sort of, you know, following on the last one, you know, we've heard carriers talk about less densification due to spectrum that they're acquiring. And just wondering if that's filtered through to your conversations with them, either maybe pulling back on plans that they had or discussions that they were having, or if it's too early and you wouldn't necessarily already have those, the conversations around densification. Chris Hillebrandt: I don't think we've seen anything. As you can see, leasing is continued strong for us. We're seeing solid demand for our assets and no material changes at this time. Michael Funk: Great. And then, Sunit, a lot of discussion about efficiency efforts. Where would you say we are in that process today? If you had to put it in innings? Sunit Patel: Yeah. I mean, I think we are you can see with our progress every quarter, we are basically taking down the execution risk on the guidance that we've provided for next year's AFFO for the period, July 1, next year to June 30 of the following year. So think where we are is we keep looking for opportunities to drive efficiencies, various automation systems implementations in a phased approach. But clearly, big benefit comes as we simplify from, you know, running three businesses to one business. So I think that you'll start seeing benefiting us as we get to the close of the transaction and beyond that. But meanwhile, there's plenty to do within our entire business, our corporate segments, and that's where we are focused on. Michael Funk: Great. Thank you, Chris and Sunit. Operator: The next question comes from Ric Prentiss with Raymond James. Please go ahead. Ric Prentiss: Thanks. Good afternoon, everyone. And, Chris, yeah, always nice to start on a beat and raise quarter, so good talking to you again. Chris Hillebrandt: Timing is everything. It is. Ric Prentiss: Wanna follow Mike's question earlier. On the DISH MLA, clearly, you've got a contract. It's written well. You expect to get paid. Sunit Patel: Putting the spectrum on the towers was really critical to make sure they kept the spectrum rights and be able to sell it. My question was to go at it we look at your 24 actuals and your 25 guidance, I know you've said in the past, your boost this boost contract had some step-ups in it. How should we think about how much was in the 24 actual and the 25 guidance that was kinda related to DISH activity that we should be thinking about that's continuing to grow while the contract's in place in 2627? Any kind framework can give us even rough basis points what it might have been. Sunit Patel: Yeah, Ric. So mean, as we as we've said before, you know, DISH represents about 5% of our revenues on the tower side. And so I think as we look forward, you know, we'll see what happens with DISH EchoStar. We feel really good about our contract. And beyond that, it's tough to get into too many specifics given the confidentiality with our clients. Ric Prentiss: Sure. Okay. So I'd try. When you think about dealing with Charlie Ergen and Hamid and the EchoStar Boost folks, are you willing and open to saying, well, let's look at maybe an NPV basis Let's look at what you owe me. Can we have some kind of discussion? And I guess the extra piece of the question would be help us understand what decommissioning cost ballpark might be because I think the contract also includes that they're supposed to return the towers remove the equipment. Sunit Patel: Yeah. So what I would say, you know, tough to tell what direction when, what discussion would go, and tough for me to comment on any discussions with them generally and then, you know, and similarly to comment on specific contract provisions on some of the things you're talking about just, you know, all of these things are confidential, but we are we feel very good about the contract we have with DISH. Chris Hillebrandt: Rick, maybe the other way to put it is, you know, look, our goal here as management is to maximize shareholder value and we're always open to working with our customers to accomplish that. Right? So right. Yeah. Maybe leave it open-ended like that. Ric Prentiss: Okay. Last one for me. Touched on it briefly to Feng's question. That famous slide seven from the fourth quarter deck, where you laid out kind of that pro forma second half twenty-six, first half twenty-seven. There's that one stack bar in there that talks about SG&A stand-alone. You'd mentioned, I think, previously that you'll update that slide. Are we still waiting for the deal to close, or how should we think about when do we get more granularity on that I'll call it, my famous slide seven from your four q deck? Sunit Patel: Good question. I think that when we report next quarter, obviously, we'll provide guidance for 2026, and I think you can expect a little more detail then. Ric Prentiss: That'd be great. Okay. Thanks, guys. And, again, welcome, Chris. Sunit Patel: Thanks, Rick. Operator: The next question comes from Jim Schneider with Goldman Sachs. Please go ahead. Jim Schneider: Chris, I was just wondering if you could maybe give us a sense of given your prior experiences, how would do those inform your role at Crown Castle And you've been very clear about the strategic goals of the company, but on the margin, are there any areas where you might look to sort of slightly shift those goals, whether they be at the operational level, at the capital allocation level or otherwise relative to what's already been laid out there? Chris Hillebrandt: The short answer is no. We are focused on becoming the best-in-class US tower operator, you know, full stop. You know, I think once we close the transaction, we achieve all our operational objectives, even then the bar for say, like, and a will remain high. And really limited to The US for the foreseeable future. Right? So the fact that I have that experience is great, but, you know, the clear strategy that we've embarked on is clearly the right strategy and the winning strategy for Crown. Jim Schneider: Great. And then just a quick follow-up. Can you maybe just comment on the impact of the T-Mobile's acquisition of U.S. Cellular on the business over the next several quarters and years? Thank you. Chris Hillebrandt: Yes. I'll just start, maybe Sunit can bring it home. But, you know, this is fairly de minimis for us from our perspective. It should be very little impact from what we see, at this time. Sunit Patel: Yep. That's correct. Chris Hillebrandt: Thank you. Operator: The next question comes from Nicholas Del Deo with MoffettNathanson. Please go ahead. Nicholas Del Deo: Hi, thanks for taking my questions and I wanna echo others and congratulate Chris, on your appointment. I guess, Chris, you know, you described improving Crown Castle's and information availability as your number one priority, in your prepared remarks. I guess how would you describe the state of the company's systems today relative to those of some of the other firms that you've led what you think best-in-class systems can offer? Chris Hillebrandt: Yeah. It's a great question because having just literally gone through a multiyear journey at Vantage Towers where we were focused on the exact same types of issues. The good news is that many of the same platforms that we're in the process of utilizing over there Crown has already started in that journey to deploy those systems here. So overall and I feel like we're on the right track. This will take some period of time. There's a lot of work to be done. Defining what best-in-class looks like in terms of the cycle times on how we deliver to our customers and the efficiency in how we spend our capital and OpEx dollars, so that they're the most efficient use of that money. This is really our challenge over the next year. Us really to lay out, what great looks like. And then bringing the team along on that transformation. The good news is I've just seen how this works because I just lived through it the last few years. And hope to be able to bring that same level of discipline and leadership to the team here. In executing those plans. Nicholas Del Deo: Okay. That's very, very encouraging. Can I ask one more kinda high-level philosophical question maybe? You know, most of your business today is contracted under holistic master lease agreements. Some of those may roll off over the coming years. Just wondering how you think about MLAs and the puts and takes or what you find important Just so we understand how you might think through that as deals potentially roll off over time. Chris Hillebrandt: I think in the end, we will always look to do good business for Crown. And so for any future MLA renegotiations or extensions, we're always gonna look for win-win with our customers on finding both long-term value creation. What we won't do is just go run after an MLA for the sake of an MLA. We'll only do it where we see value creation for the company. And ultimately, driving that customer experience, the winning combination is ultimately to have a strategic partnership with your customers. And, again, maybe something I have some fairly unique viewpoints on having been both in the operator space in the OEM space, and now here in the tower space. But in the conversations I've had with customers so far, it's been very warm and welcoming and looking for ways to partner into the future in ways that both companies can profit. So I'm encouraged by the direction we're headed in. I mean, you know, stay tuned to the space. Nicholas Del Deo: Okay. Great. Thank you, Chris. Operator: Thank you. The next question comes from Richard Choe with JPMorgan. Please go ahead. Richard Choe: Hi. I wanted to see if we can get a little more color on application volumes, kind of what are you seeing. And then also just wanted to clarify, do you expect ex the $5 million that the second half of the year is gonna be the same as the first half of year in new core leasing, or what should it be higher? Sunit Patel: Yeah. So the answer to the second question is, as I said, we expect the fourth quarter to be consistent with what we saw in the first half. If you look at the first two quarters of the first half, they were about the same. So I think that's what we meant that the third quarter was lumpy or higher, but that the fourth quarter will be consistent with what you saw in the first two quarters. And then on the application levels, I think you've heard us say previously, application levels do not necessarily correlate to our leasing activity per se. But, yeah, we've seen healthy levels of activity as we pointed out in the last couple of quarters. You can see the benefit of that in our service business. So and, you know, it was a good quarter also. In the third quarter. Richard Choe: Got it. Thank you. Operator: The next question comes from Batya Levi with UBS. Please go ahead. Batya Levi: Great. Thank you. Can you provide a little bit more color on how should think about the 5% organic growth ex Sprint churn tracking into next year, maybe kind of the pieces in terms of the amendments and leasing mix? And then how do you think about your scale in the Tier two, three markets where incremental activity seems to be going right now? Like how would you approach maybe adding to your footprints either organically or through M&A? And finally, one clarification question. The new leasing activity of about $115 million this year does that include any take or pay contribution from EchoStar? Sunit Patel: Yeah. I'll let me take through that. So, you know, as far as organic growth in the next year, we'll come back to that when we report fourth quarter and provide guidance for 2026. So not much to comment there, but we'll have more to talk about that then. On the scale, tier two, tier three, you know, all of us have different footprints, but our general goal is to make sure that we can support our customers where we do have coverage or towers in tier two, tier three markets and we suddenly have very active conversations with our clients of that. And two, we are open to, as Chris mentioned, his comments, to add towers where it makes sense. So we continue to engage with clients to look at that. And then I think your third question was on sorry. Oh, the leasing activity. Yeah. I mean, I think, as we said, we didn't change guidance for that. So I think we will continue to see good leasing activity line with the guidance and the expectations we've laid out. Hence, the guidance that we provided for the year. Batya Levi: Yeah. Just to follow-up on that, I think there is a bit of a good confusion if EchoStar's contribution is in the base, or is it also in the growth? In the core leasing piece, 115? Is there some part of the contract that's embedded in there from EchoStar? Sunit Patel: Yeah. So, I mean, generally, we don't comment on specific client contracts, but all our leasing activity includes activity from all our clients. So I'm sorry. That's tough to get into detail on specific. Right? Each of our clients and the contracts. Batya Levi: Thank you. Operator: The next question comes from Brendan Lynch with Barclays. Please go ahead. Brendan Lynch: Great. Thank you for taking my question and congrats Chris. I look forward to working with you. In terms of laid out kind of the bull scenario where, CPI data is supportive of growth, spectrum auctions are in acquisitions of spectrum. Continue to be supportive. Maybe you could just help us frame some of the risks that exist in the industry related to additional spectrum swaps or efficiency gains via technology or spectral efficiency? It seems there's a lot of negative sentiment in the industry and maybe you can kind of tackle some of these risks head on in think and inform us how we should think about them? Chris Hillebrandt: I mean, overall, the biggest risk is we don't have the detailed knowledge of what any of these new spectrum purchase owners are planning to do. And the correlation that we're drawing here is the fact that spectrum that wasn't being put into use is now being put into use. Something that will generate incremental leasing for infill sites or capacity growth and or lease up amendment revenue. Is something that is, again, based on what we've seen this year, seems to be in a very steady state. What could happen where the technology will go and allow for? Again, the customers have very defined space on the towers. And as they continue to deploy additional capacity, it represents a growth opportunity for us as a business. Brendan Lynch: Great. Thanks. That's helpful. Maybe another question. You sound very committed to the pure play U.S. Tower business as being your core. Can you talk about any ancillary services that would fall within the realm of tower exposure that you would be willing to or interested in scaling more? Now that Crown Castle has scaled back on services, maybe there's an opportunity to expand that in the future or build to suits or anything that would kind of be within that realm. Chris Hillebrandt: Yeah. Let's start with the fact of, like, we are our goal is to really maximize the revenue opportunity of our existing base of assets. And we think that there's room to go there, and that's what we'll be focusing on developing. Much of what I'm focusing on doing now over the next couple of months is meeting with our customers and to engage to understand where their unmet needs. And you're right, there are things that are services related. There could be things like, you know, shared power systems. There's a whole slew of potential opportunities that are out there. We need to do, I think, in a very disciplined way, is to make an inventory of what those opportunities are working with our customers and prioritizing them. And then making sure that there's good business to be done. Because I'm confident that there is business to be had, but I think it's, you know, specifics are probably a little bit early, at least in my tenure, to be able to share with you what those But know that this is a high priority for us. You know, we wanna really maximize the opportunity on our sites. And again, based on the earlier question that somebody had on my experiences, I've seen what the art of possible is. Of really providing great partnership with your customers. To be able to generate those incremental revenues. Brendan Lynch: Great. Thank you. That's helpful. Operator: The next question comes from Eric Klubchow with Wells Fargo. Please go ahead. Eric Klubchow: I appreciate it. And Chris, great to connect over the phone. So I just wanted to check again on the cost efficiency program. I know it's in your pro forma AFFO guide you put for less next into next year, but you could talk about opportunities beyond what you've guided to. As we look at your margins relative to your two tower peers in the public market, is there any reason why can't get SG&A efficiency or gross margins to kind of similar levels? I know there's some structure and structural differences some of the sale leasebacks you have. But just wanted to get your perspective on how much runway you have on the cost side the next few years. Sunit Patel: Yeah. So I think first as it pertains to the guidance we provided, you know, when that was provided at the announcement of the transaction, there were efficiencies factored in going from running three businesses to one business. I think we're just executing a little earlier on that. But if you look out over the next couple of years, two or three years, there are several things. There's the implementations of systems, process automation, all of that, I think, will yield benefit over the next several years. There's the opportunity for us to buy out ground leases as we talked about. I think that can help us. So, you know, we so we comparison to our peers. So I think we bought quite a few things over the next couple of years, but certainly the guidance that we provided for next year incorporated the sort of efficiencies you'd expect. Moving from running three businesses to one business. Eric Klubchow: Gotcha. And I guess I know it's a little early for 2026 guide, but, you know, just wondering, you know, if you see anything kind of takes you off the expectation that you've talked about where you can grow kinda four to 5% organically pretty consistently even if we assume the EchoStar contribution continues to wane. Just based on everything they've announced, do you think that's still a reasonable assumption based on all the activity you have in your pipeline? And I guess related to that, is there any kind of mix shifting you're seeing between new colos and amendments as you look out into Q4 and into next year? Thank you. Sunit Patel: Yeah. So on the last question, we're not seeing any big changes in the mix. Between those two items. And then again, we haven't really provided guidance for next year. So we'll come back and talk about it. There's obviously terrible things happening that we're excited about with our clients, but yeah, we'll when we get to reporting fourth quarter, we'll have a much better sense of where we are and cover that then. Operator: The next question comes from Brandon Nispel with KeyBanc Capital Markets. Please go ahead. Brandon Nispel: I think the efficiency one has been asked. Answered multiple times, so I'll refrain from that. I wanted to just maybe ask on the discretionary CapEx guide decrease this year. You know, why was that? And, really, why is the right number? I think Chris, you said a 150 to 250 million. So I guess, yeah, why decrease this year, and then why so much going forward? Thanks. Sunit Patel: Yeah. I think some of that is timing when you look at those capital expenditures there. There are several buckets. There's, you know, whether you're buying out ground leases, whether they are tower modifications, different things. But again, as we said, that's just more timing and it's pushed out to next year. Nothing fundamental happening per se. But it's just a push out to next year. Brandon Nispel: Timing? Sunit Patel: Got it. Thank you. Operator: This concludes our question and session as well as our conference. Thank you for attending today's presentation. You may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by. Good day, and welcome to the WD-40 Company Fourth Quarter and Full Fiscal Year 2025 Earnings Conference Call. Today's call is being recorded. At this time, all participants are in a listen-only mode. At the end of the prepared remarks, we will conduct a question and answer session. Please make sure your mute function is turned off to allow your signal to reach our equipment. If at any time during the conference, you need to reach an operator, I would like to turn the presentation over to our host for today's call, Wendy D. Kelley, Vice President, Stakeholder and Investor Engagement. Please proceed. Wendy D. Kelley: Thank you. Good afternoon, and thanks to everyone for joining us today. On our call today are WD-40 Company's President, Chief Executive Officer, Steven A. Brass, Vice President and Chief Financial Officer, Sara K. Hyzer. In addition to the financial information presented on today's call, we encourage investors to review our earnings presentation, earnings press release, and Form 10-Ks for the period ending 08/31/2025. These documents will be made available on our Investor Relations website at investor.wd40company.com. A replay and transcript of today's call will also be made available shortly after this call. On today's call, we will discuss certain non-GAAP measures. The descriptions and reconciliations of these non-GAAP measures are available in our SEC filings as well as the earnings documents posted on our Investor Relations website. As a reminder, today's call includes forward-looking statements about our expectations for the company's future performance. Actual results could differ materially. Company's expectations, beliefs, projections are expressed in good faith but there can be no assurance that they will be achieved or accomplished. Please refer to the risk factors detailed in our SEC filings for further discussion. Finally, for anyone listening to a webcast replay, or reviewing a written transcript of this call, please note that all information presented is current only as of today's date, 10/22/2025. The company disclaims any duty or obligation to update any forward-looking information as a result of new information, future events, or otherwise. With that, I'd now like to turn the call over to Steven A. Brass. Thank you, Wendy, and thanks to all of you for joining us this afternoon. Steven A. Brass: Fiscal year 2025 was marked by complexity and resilience. A tale of navigating global headwinds while making strategic progress. Despite challenges ranging from geopolitical tensions to shifting economic policies, WD-40 Company seized opportunities and continued to build on the strong foundation that has supported our success for more than seventy-two years. Today, I'll start with an overview of our sales results for the fourth quarter and full fiscal year 2025. And then provide an update on the progress we've made against our 4x4 strategic framework. Then Sara will dive deeper into our financial performance, review our business model, give an update on the divestiture of our Home Care and Cleaning businesses, and share our outlook for fiscal year 2026. After that, we'll open the floor for your questions. Today, we reported consolidated net sales of $163 million for the fourth quarter and $620 million for the full fiscal year. Each reflecting approximately 5% growth compared to the prior year. This performance represented a record quarter for the company and underscores the continued strength of our brand and the resilience of our business. As you know, maintenance products remain our primary strategic focus accounting for approximately 95% of total net sales in both the fourth quarter and the full fiscal year. Net sales for these products reached $156 million in Q4 and $591 million for the year. Each reflecting a 6% year-over-year increase. This performance is consistent with our long-term growth target of mid to high single digits and reinforces the strength of our core business. In addition, I'm pleased to report that our gross margin continues to improve and has now surpassed our target of 55%. For the full fiscal year, we delivered a gross margin of 55.1%. Gross margin would have been 55.6% if we remove the financial impact of the assets held for sale. For the fourth quarter, delivered a gross margin of 54.7%, an impressive 730 basis point improvement from 2021 when we hit our inflection point and our long-term gross margin recovery plan began to take hold. Sara will share more details about gross margin in just a few minutes. Now let's talk about fourth quarter sales results in dollars by segment starting with The Americas. Unless otherwise noted, we will discuss net sales on a reported basis compared to the fourth quarter of last fiscal year. Sales in The Americas, which includes The United States, Latin America, and Canada, decreased 2% to $77 million compared to last year. In reported currency, sales of maintenance products decreased 2% or $1.2 million to $74 million compared to last year. The decline was primarily driven by lower sales in Latin America influenced by the impacts of foreign currency exchange fluctuations, the timing of customer orders, and broader macroeconomic challenges especially in Mexico. Sales of maintenance products in The United States and Canada also down slightly primarily due to the timing of customer orders and in Canada, broader macroeconomic challenges. In The Americas, sales of WD-40 Specialist remained constant to the same period last year. Home care and cleaning product sales declined $600,000 compared to last year, reflecting our strategic shift towards higher margin maintenance products in alignment with our 4x4 strategic framework. In total, our Americas segment made up 47% of our global business in the fourth quarter. For the full fiscal year, maintenance product sales in The Americas totaled $277 million reflecting a 4% increase compared to the prior year. Although this growth was slightly below our long-term target of 5-8% annual growth for the region, we remain confident in the TradeBlock's long-term growth potential. Now let's take a look at sales in EMEA, which includes Europe, India, The Middle East, and Africa. Total sales grew 7% or $4.1 million to $63 million compared to last year. After adjusting for the impact of foreign currency translation, EMEA net sales were unchanged in the same quarter last year. In reported currency, sales of maintenance products increased 8% or $4.6 million to $60.7 million compared to last year. The strong growth is driven most significantly by higher sales volumes of WD-40 Multi-Use Product in our direct markets. Sales increased most significantly in DACH, France, and Benelux which were up 20%, 19%, and 23% respectively. Strong sales in our direct markets were offset by softer performance in our EMEA distributor markets driven by the timing of customer orders and ongoing instability in certain regions. In EMEA, sales of WD-40 Specialist increased 18% compared to last year driven primarily by increased demand and higher volumes across several direct markets especially in DACH and France where targeted promotional activity with key customers proved highly effective. Home care and cleaning product sales declined approximately $500,000 compared to the same period last year. In the fourth quarter, we completed the divestiture of our U.K. Home Care and Cleaning product businesses to Supreme Imports Limited. This strategic move allows us to sharpen our focus on higher growth, higher margin maintenance products and reinforces our commitment to growing the blue and yellow brand with a little red top. In total, our EMEA segment made up 38% of our business in the fourth quarter. For the full fiscal year, maintenance product sales in EMEA totaled $230 million, a 9% increase compared to the prior year. This growth aligns with our long-term target of 8% to 11% annual growth. Now turning to Asia Pacific. Sales in Asia Pacific, which includes Australia, China, and other countries in the Asia region, grew 28% or $5.1 million to $23 million compared to last year. Foreign currency translation had no material impact on our fourth quarter results. Sales and maintenance products increased 30% or $4.8 million to $21 million compared to last year. This growth was primarily driven by a 44% increase in sales of the WD-40 Multi-Use Products in our Asia distributor markets where we saw strong demand across nearly all countries, particularly in Indonesia, Malaysia, Singapore, and The Philippines. Fueled by geographic expansion, broader distribution, and the timing of customer orders. Sales and maintenance products also grew in Australia and China, increasing by 12% and 6%, respectively, compared to the same period last year. In Asia Pacific, sales of WD-40 Specialist increased 38% compared to last year, due to higher sales volume from successful promotions and marketing efforts in our Asia distributor markets and China. Sales of home care and cleaning products, including No Vac Carpet Cleaners and Solvol Hand Cleaners sold in Australia, increased 15% or approximately $300,000 compared to the same period last year. Our Home Care portfolio in Australia benefits from strong brand recognition, a solid competitive position, and meaningful growth opportunities. In total, our Asia Pacific segment made up 15% of our global business in the fourth quarter. For the full fiscal year, maintenance product sales in Asia Pacific totaled $84 million, a 6% increase compared to the prior year. While this growth falls short of our long-term target of 10% to 13% annual growth for the region, we remain confident in the strong fundamentals of this high-growth trade block. Now, let's take a look at the strategic progress we made in fiscal year 2025 against our 4x4 strategic framework. As you recall, this framework was designed to drive profitable growth and sustainable value creation. And is built around our four Must Win Battles and four strategic enablers. Must Win Battles focus on what we do to increase sales and profitability and these are long-term growth drivers. We will focus on full-year results. Starting with Must Win Battle number one, the geographic expansion. Global sales of WD-40 Multi-Use Product in fiscal year 2025 were $478 million, representing growth of 6% over the prior year. We experienced solid sales of our signature multi-use product brand in all three trade blocks with 8% growth in EMEA, 4% growth in The Americas, and 6% growth in Asia Pacific. We saw solid sales growth this year, 12% in Latin America, 10% in China, 14% in France, and 20% in India. But what's most important to emphasize is that we still have significant room to grow. Geographic expansion is our most significant long-term growth opportunity. Over the last five years, we've achieved an annual growth rate for net sales of WD-40 Multi-Use Product of 9.4%. Our path forward is clear. We're expanding availability across more channels and geographies while deepening product penetration by increasing brand awareness through sampling and putting more cans in the hands of end users around the world. We estimate the global attainable market for the WD-40 Multi-Use Product to be approximately $1.9 billion based on our updated benchmark sales potential. And to date, we've achieved only 25% of our benchmark growth potential, leaving a growth opportunity of approximately $1.4 billion. Our second Must Win Battle is accelerating premiumization. Innovation is at the core of this strategy. We developed products like Smart Straw and Easy Reach with our end users at the center of every decision. Their needs drive our product development efforts, enabling us to deliver high-performance solutions that solve real-world problems. End-user focused innovation fosters brand loyalty and contributes to gross margin expansion and differentiated offerings. In fiscal year 2025, global sales of Smart Straw and Easy Reach when combined were up 7% over the prior year. Premiumized products currently account for approximately 50% of WD-40 Multi-Use Product sales and 40% of units sold, leaving considerable room for continued growth. Over the last five years, we've achieved a compound annual growth rate for net sales of premiumized products of 9.4%. On a go-forward basis, we'll be targeting a compound annual growth rate for net sales of premium format products of greater than 10%. Our third Must Win Battle is to drive growth in WD-40 Specialist. This product line is a strategic extension of our trusted core brand. Designed to meet the evolving needs of professionals and industrial users. When we introduced the WD-40 Specialist alongside the WD-40 Multi-Use Product, we're not just adding variety, we're strengthening our brand, capturing new segments, and offering end users more choice without diluting what makes our core brand iconic. By leveraging the strength of the WD-40 brand, we're driving category leadership and expanding market share in adjacent segments. In fiscal year 2025, global sales of the WD-40 Specialist products were $82 million, up 11% over the prior year. Once again, we saw growth of WD-40 Specialist products across all three trade blocks with growth of 6% in The Americas, 15% in EMEA, and 12% in Asia Pacific. Over the last five years, we've achieved a compound annual growth rate for net sales of the WD-40 Specialist of 14.4%. On a go-forward basis, we'll be targeting a compound annual growth rate for net sales of WD-40 Specialist of greater than 10%. As the WD-40 Specialist has matured and its market base has expanded, we've recalibrated our long-term growth expectations to reflect the product line's evolution within its life cycle. We estimate the global attainable market for WD-40 Specialist to be approximately $665 million based on our updated benchmark sales potential. And today, we've achieved only 12% of our benchmark growth potential, leaving a growth opportunity of approximately $583 million. Our fourth and final Must Win Battle is to accelerate digital commerce. Our digital commerce strategy is a catalyst for growth across the business. Not merely a channel for online sales, it plays a vital role in advancing each of our Must Win Battles by increasing brand visibility, improving accessibility, and driving deeper engagement with end users across global markets. In fiscal year 2025, e-commerce sales increased 10%, reflecting strong momentum in our digital strategy. But digital is more than a transactional platform, it's a powerful engine for brand building and education. For example, the digital space serves as a dynamic environment for product discovery. It allows us to showcase new applications for our products while fostering peer-to-peer learning. Many of these insights originate from our end users themselves, who continually uncover innovative ways to use our products, often in ways we hadn't imagined. By leveraging digital touchpoints, we're deepening engagement, enhancing product understanding, and strengthening brand affinity across the globe. Turning to the second element of our 4x4 strategic framework, our strategic enablers. Our strategic enablers focus on operational excellence and they collectively underpin and drive the success of our Must Win Battles. Strategic Enabler number one is ensuring a people-first mindset. At WD-40 Company, our most powerful competitive advantage is the commitment of our 714 employees. We've long said we're a purpose-driven, values-guided organization, and that's not just a tagline. Our values are the foundation of our culture. They shape how we lead, how we collaborate, and how we make decisions every day. In our February 2025 Global Engagement Survey, 94% of our people reported being engaged in their work, more than four times Gallup's global average of 21%. 90% said they feel a strong sense of belonging and 95% expressed pride in our purpose, mission, and values. This deep connection to who we are and what we stand for translates directly into growth and opportunity. Nearly 40% of our people experience career progression within their first five years at the company. To our employees, thank you for consistently showing what it means to live our purpose. To create positive, lasting memories in everything you do. What our investors and stakeholders see in our performance is a direct reflection of your commitment to doing meaningful work the right way. Strategic Enabler number two is to build an enduring business for the future. At WD-40 Company, long-term value creation means operating with a clear commitment to balancing economic growth, environmental responsibility, and social impact. One of our primary objectives under this strategic enabler is to lead our category with high-performing products designed for environmental sustainability. I'm excited to share that in the upcoming fiscal year, we'll introduce a new innovation under the WD-40 Specialist product line, which will be our first bio-based format of our multi-use product. Our latest maintenance product is designed to reduce our environmental impact and to have a reduced carbon footprint, utilizing ISO standard 14,067 while still delivering the trusted performance expected from the WD-40 brand products. The product will launch in select European markets later this fiscal year, and we look forward to sharing updates with you in the quarters ahead. Strategic Enabler number three is achieving operational excellence in our supply chain. Profitable growth at WD-40 Company depends on a supply chain that is optimized, high-performing, and resilient. In fiscal year 2025, this strategic enabler played a vital role in protecting gross margins. We delivered several million dollars in economic value through cost reduction initiatives such as packaging enhancements, logistics efficiencies, and strategic sourcing. These efforts helped to offset the financial impact of tariffs, underscoring the importance of this enabler. Operationally, in fiscal year 2025, we achieved global on-time delivery of 96.4%, above our current target, and also inventory levels of ninety-nine days on hand, coming closer to our target of ninety days. Strategic Enabler number four is to drive productivity through enhanced systems. At WD-40 Company, technology is a key enabler of productivity and resilience. We're building a scalable digital infrastructure designed to support global growth and enhance operational agility, accelerating our strategic execution. By partnering with leading technology companies, we're investing in proven AI-enabled systems such as D365 and Salesforce that we believe will drive future gains in productivity. While we are taking a pragmatic approach to adopting AI across our organization, we've already identified several promising use cases that will help us to boost employee productivity, build our brand more effectively around the world, and accelerate learning and improve collaboration within our global community. With that, I'll now turn the call over to Sara. Sara K. Hyzer: Thanks, Steve, for that overview of our sales results and strategic framework. I'm pleased to share that we delivered a strong fourth quarter performance, culminating in an excellent bottom-line finish to fiscal year 2025. Today, I'll walk through how we performed against our fiscal year 2025 guidance, share insights into our business model, and highlight key takeaways from our fourth quarter financial results. I'll also provide an update on the divestiture of our home care and cleaning business in The UK and close with our outlook for fiscal year 2026. Let's start with a discussion about how we performed against our fiscal year 2025 guidance. As a reminder, we issued our guidance in fiscal year 2025 on a pro forma basis. I encourage investors to review our earnings presentation, which includes a pro forma view. Since we issued our fiscal year 2025 guidance on a pro forma basis, I will provide the following summary on a non-GAAP pro forma basis. We expect net sales growth adjusted for currency to be between 6-9%, with net sales of between $620 and $630 million over our pro forma 2024 results. Today, we reported pro forma net sales adjusted for currency of $603 million, a 6% increase over the 2024 pro forma results. If we include the assets held for sale, consolidated net sales adjusted for currency were $622 million in fiscal year 2025. We expected full-year gross margin to be in the range of 55% to 56%. Today, we reported a gross margin of 55.6%, in line with our expectations. We expected our advertising and promotion investment to be around 6% of net sales. Today, we reported an A&P investment of 6%. We expected operating income to be between $96 and $101 million. Today, we reported operating income of $98.1 million, in line with our expectations. We expected diluted EPS of between $5.30 and $5.60. Today, we reported diluted EPS of $5.50, in line with our expectations. I'm pleased with the resilience and performance of our business in what has been a volatile and uncertain environment. Throughout fiscal year 2025, we navigated a range of challenges, from tariffs and macroeconomic instability to geopolitical tensions and a shifting policy landscape. Despite these headwinds, we grew our top line, expanded margins, and delivered solid bottom-line growth. Thank you to all our employees for their focus, adaptability, and commitment to delivering meaningful results for our stakeholders. Let's start with a look at our business model. Our business model is a strategic tool we use to guide our business. The model is built around three core areas: gross margin, cost of doing business, and adjusted EBITDA. Let's look at our fourth quarter gross margin performance. In the fourth quarter, our gross margin was 54.7% compared to 54.1% last year, which represents an improvement of 60 basis points and was most significantly impacted by the following favorable factors: 110 basis points from lower specialty chemical costs, 110 basis points from higher average selling prices, including the impact of premiumization, and 60 basis points from lower input costs. Offsetting those benefits to gross margin were a few unfavorable factors: 140 basis points from unfavorable sales mix and other miscellaneous mix impacts, and 60 basis points from higher warehousing, distribution, and freight costs, primarily in The Americas. I'm happy to share that gross margin performance this quarter was strong across all three trade blocks, with results either exceeding our stated target or showing year-over-year improvement. In The Americas, gross margin increased by 70 basis points compared to the prior year fourth quarter, reaching 53.2%. EMEA held steady at 55.5%, remaining above our target. And in Asia Pacific, gross margin increased by 110 basis points compared to the prior year fourth quarter, reaching 57.5%. For the full fiscal year, gross margin was 55.1%, compared to 53.4% last year, which represents an improvement of 170 basis points. As Steve mentioned earlier, we're very encouraged by the consistent improvement to gross margin we've seen over the past three years. Today, we're proud to report full fiscal year gross margin over the high end of our targeted range of 50% to 55%, recovering our gross margin a year ahead of schedule and marking a significant milestone in our recovery journey. It's important for stakeholders to understand that while certain risks, such as cost volatility, tariff uncertainty, and inflationary pressures, will always be part of the operating environment, we're actively pursuing a range of initiatives designed to help us mitigate those risks and strengthen gross margin over time. These include supply chain cost reduction projects, cost optimization efforts, progress on asset divestitures, new product introductions, premiumization strategies, and geographic expansion. Each of these levers contributes positively to gross margin and reinforces our confidence in its long-term potential. Supported by our current performance and strategic initiatives, we're confident in our ability to sustain gross margin above 55% in fiscal year 2026. In addition, gross margin enhancement remains a key priority for senior leaders who continue to be incentivized to drive further improvement. Now turning to our cost of doing business, which we define as total operating expenses plus adjustments for certain non-cash expenses. Our cost of doing business is primarily driven by three key areas: strategic investments in our people, global brand-building efforts, and freight expenses associated with delivering products to our customers. In the fourth quarter, our cost of doing business was 36% compared to 38% in the prior year quarter. In dollar terms, our cost of doing business remained relatively stable period over period. For the full fiscal year, the cost of doing business was 37% compared to 36% last year. In dollar terms, our cost of doing business increased $19 million or 9% period over period. In the fourth quarter, advertising and promotion expenses increased $1.6 million or 15% period over period. As a percentage of net sales, A&P investment was 7.6% this quarter compared to 7% in the same period last year. The phasing of our A&P investments is not evenly distributed over the course of the year. And in recent years, our brand-building activities have been more heavily weighted in the second half of the year. For the full fiscal year, our A&P investment remains within our annual expectations. While our long-term goal is to manage the cost of doing business within the 30% to 35% range, we continue to make thoughtful strategic investments to support long-term growth. WD-40 Company has long been committed to operating with discipline and efficiency, a commitment reflected in our ability to manage the business with just 714 employees, each generating approximately $860,000 in revenue. This level of productivity speaks volumes about the strength of our culture, the effectiveness of our operating model, the awareness of our brand, and the value we deliver across our global footprint. What continues to evolve is our need to operate as a global business in an increasingly complex and uncertain environment. To reduce risk and drive top-line growth, we've implemented a number of structural changes in recent years to strengthen and sustain our business for the future. We're investing with discipline across technology, sustainability, innovation, research and development, legal risk management, and brand building to strengthen our foundation, build brand awareness, and ensure long-term resilience and growth. We also need time to absorb the loss of revenues associated with the home care and cleaning divestitures. These investments have pushed our cost of doing business above our target range. However, we believe they've strengthened the business, enhanced its resilience, and positioned us to deliver sustainable long-term value to our stakeholders. Turning now to adjusted EBITDA margin. We believe adjusted EBITDA as a percentage of sales is a valuable metric for assessing both profitability and operational efficiency. It reflects our operating performance and cash-generating ability, providing the clearest view of our company's underlying financial health. Our 25% target for adjusted EBITDA margin is a long-term aspiration. However, we continue to believe we can move adjusted EBITDA margin back to our mid-term target range of 20% to 22% once we have absorbed the loss of revenues associated with the home care and cleaning divestitures. In the fourth quarter, our adjusted EBITDA was $30.5 million, up 16% from the same period last year. Our adjusted EBITDA margin this quarter was 18% compared to 17% in the same period last year. For the full fiscal year, our adjusted EBITDA was $114.4 million, up 8% from the same period last year. Adjusted EBITDA margin this year was 18%, which is the same as last year. Now let's turn to other key measures of our financial performance: operating income, net income, and earnings per share in the fourth quarter. Operating income improved to $28 million in the fourth quarter, an increase of 17% over the prior period. Net income improved to $21.2 million in the fourth quarter, an increase of 27% compared to the prior period. Diluted earnings per common share for the quarter were $1.56 compared to $1.23 in the prior period, reflecting an increase of 27% over the prior period. Our diluted EPS reflects 13.6 million weighted average shares outstanding. Now let's review our balance sheet and capital allocation strategy. We maintain a strong financial position and healthy liquidity, enabling a disciplined capital allocation approach that both fuels long-term growth and generates significant value for our stockholders. Maintaining a disciplined and balanced capital allocation approach remains a priority for us. For the foreseeable future, we expect CapEx of between 1-2% of sales per fiscal year. Our cash flow from operations this quarter was $30 million, and we elected to use approximately $9.5 million of that cash to pay down a portion of our short-term higher interest rate borrowing. Although our usual target for debt to adjusted EBITDA is one to two times, we are currently slightly below that range. This provides us with strategic flexibility as we explore opportunities to return capital to stockholders and drive long-term growth. We continue to return capital to our stockholders through regular dividends and buybacks. Annual dividends will continue to be our priority and are targeted at greater than 50% of earnings. On October 9, the Board of Directors approved a quarterly cash dividend of $0.94 per share. During fiscal year 2025, we repurchased approximately 50,000 shares of stock at a total cost of $12.3 million under our share repurchase plan. We have approximately $30 million remaining under our current repurchase plan, which is set to expire at the end of this fiscal year. Looking ahead, we intend to accelerate our buyback activity and fully utilize the remaining authorization, underscoring our strong conviction in the long-term fundamentals of the business. We're focused on accretive capital returns that reflect our confidence in the long-term value of our stock. In fiscal year 2025, excluding the positive impact of the one-time non-cash income tax adjustment, our return on invested capital was 26.9%, improving from 25.5% last fiscal year and ahead of our target of 25%. Steven A. Brass: In September, we announced the sale of our 1001 and 1001 Carpet Fresh brands in The UK to Supreme Imports Limited, a Manchester-based consumer products company. The all-cash transaction valued at up to $7.5 million was completed in 2025. WD-40 Company is providing limited transition services for up to three months. This divestiture reflects our continued focus on optimizing our portfolio and directing resources toward areas that drive long-term value. We continue to make progress on the sale of our America's home care and cleaning product brands. Our investment base continues active discussions with multiple potential buyers. Although there's no certainty of the deal, we remain optimistic, and I will provide further updates as appropriate. Now moving to FY '26 guidance. Given the anticipated divestiture of our America's Home Care and Cleaning brands, we are continuing to present this year's guidance on a pro forma basis excluding the financial impact of the assets held for sale. We're also providing a pro forma view of fiscal year 2025 excluding the brands we divested in The UK in the fourth quarter, the brands currently held for sale, and the impact of the one-time tax benefit recorded in the second quarter, to help with modeling and period-over-period comparison. Please refer to our fourth quarter and full-year earnings presentation on our Investor Relations website for those details. Now with that backdrop, let's take a closer look at our guidance for fiscal year 2026. We're excited about what lies ahead in fiscal year 2026. By balancing strong performance today with thoughtful investments for tomorrow, we're building a foundation for lasting growth and long-term value creation. For fiscal year 2026, we expect net sales growth from the pro forma 2025 results is projected to be between 5-9% with net sales between $630 and $655 million after adjusting for foreign currency impact. Gross margin is expected to be between 55.5-56.5%. Advertising and promotion investment is projected to be around 6% of net sales. Operating income is expected to be between $103 and $110 million, representing growth of between 5-12% from the pro forma 2025 results. The provision for income tax is expected to be between 22.5-23.5%. And diluted earnings per share is expected to be between $5.75 and $6.15, which is based on an estimated 13.4 million weighted average shares outstanding. This range represents growth of between 5-12% over the pro forma 2025 results. This guidance assumes no major changes to the current economic environment. Unanticipated inflationary headwinds and other unforeseen events may affect our view of fiscal year 2026. In the event we are unsuccessful in the divestiture of The Americas Home Care and Cleaning brands, our guidance would be positively impacted by approximately $12.5 million in net sales, $3.6 million in operating income, and $0.20 in diluted EPS on a full-year basis. That completes the financial overview. Sara K. Hyzer: Now I would like to turn the call back to Steven A. Brass. Thank you, Sara, for that update. Steven A. Brass: As we close another fiscal year at WD-40 Company, I'm reminded how fortunate we are to lead such a remarkable business. We have a world-class brand with a sustainable competitive advantage, a highly diversified global footprint, and a long runway for growth. Our capital-light efficient business model generates significant cash, providing a strong financial foundation that allows us to invest in growing our brands and accelerate the development of our future leaders while continuing to prioritize returning capital to our investors. And if that's not enough, what did you hear from us on this call? You heard that we reported currency-adjusted pro forma net sales of $603 million, a 6% increase over FY 2024 results and right in line with our expectations. You heard that sales of our maintenance products were up 6% in both the fourth quarter and fiscal year and that this performance aligns with our long-term growth target. You heard that we estimate the benchmark sales opportunity for WD-40 Multi-Use Product to be approximately $1.9 billion and that we have achieved only 25% of that benchmark opportunity. You heard that we estimate the benchmark sales opportunity for WD-40 Specialist to be approximately $665 million and that we've achieved only 12% of that benchmark opportunity. You heard that we sold our UK home care and cleaning product brands. You heard that the full fiscal year delivered a gross margin of 55.1% or 55.6% if we remove the financial impact of the assets held for sale. You heard that for the fourth quarter, delivered a gross margin of 54.7%, an impressive 730 basis point improvement from 2021. You heard that supported by current performance and our strategic initiatives, we believe we're well-positioned to target a gross margin of above 55% in FY 2026. You heard that by looking ahead to fiscal year 2026, we intend to accelerate our buyback activity and fully utilize the remaining authorization, underscoring our strong conviction in the long-term fundamentals of the business. And you heard that we're issuing guidance for fiscal year 2026 on a pro forma basis excluding the brands we expect to divest this year. Thank you for joining our call today. We'd now be pleased to answer your questions. Operator: Ladies and gentlemen, please make sure your mute function is turned off to allow your signal to reach our equipment. If your question has been answered and you would like to withdraw your registration, please press the pound key then the number one on your telephone keypad. Your first question comes from the line of Daniel Rizzo from Jefferies. Hey, guys. Thanks for taking my question. Daniel Rizzo: I just need a clarification. So when you guys gave your initial guidance last year, that excluded the home care sales. Same thing as this year. But when you reported throughout the year, you reported including the home care sales. Is that correct? Sara K. Hyzer: Hi, Daniel. Yes. So in the press release and in the 10-Q, you'll see those include them, obviously, because those are reported on a GAAP basis or U.S. GAAP basis. In the investor deck on every quarter, we showed a pro forma view so that you could back out those sales, although you can easily see those sales in our footnotes because we do break out the HCCP sales in both The Americas and EMEA regions. But the pro forma view went a step further to take you all the way down in the P&L, you could actually see the impact down to EPS. Daniel Rizzo: Okay. So I'm looking at now. So the pro forma is $5.50 in EPS in 2025. Right? Sara K. Hyzer: That's correct. Daniel Rizzo: Alright. Sorry. I just wanted clarification on that. Thanks. Thank you for that. So then with you mentioned that I said kind of a mixed headwind. I was wondering if you could provide color on that. I mean, I've assumed the premiumization is kind of a mixed tailwind, but I was wondering what's kind of countering that that you pointed out in the gross margin. Sara K. Hyzer: Oh, on the gross margin from a tailwind for the year? Daniel Rizzo: Well, you said there was a mixed headwind there and all the things. I was wondering what that what that what you're referring to. Sara K. Hyzer: Oh, I think the mixed what I, so maybe it clear. The mix is a sales mix and other miscellaneous sales or other miscellaneous mix impact. So yes, so the premiumization, if you look at it for the full year, it's more for the quarter, the impact for the quarter, the sales mix, and other miscellaneous mix impacts had a headwind of about 140 basis points. Daniel Rizzo: I'm sorry. Was just looking what what exactly that is. Is that, like, is that I mean, just going distributor versus direct or or how? Sara K. Hyzer: It's a mix. So, yes, it's a mix of both, how the market play out, so direct and distributors, but then there is also a mix of product. So premiumization, into that, but also bulk and specialist and MUPs. It's just a general product sales mix in addition to the market mix. Daniel Rizzo: Okay. And then my final question, you know, with premiumization, that's doing fairly well with the multi-use product. I wonder if premiumization like an easy reach straw or or something like that would be applied to, like, the specialist product line. Is that something that's being considered? Or are we kind of far from that, or how we should think about it? Steven A. Brass: Hey, Daniel. It's Steve. And so the specialist the specialist yeah. The whole specialist line, you know, sells at a higher gross margin as well. So effectively, that is a premium. Every kind of the WD-40 Specialist we sell is margin accretive. And so that is a separate form of premiumization. Having said that, we already in several countries around the world, we've also launched particularly Easy Reach delivery system on things like our penetrant product, which you have in The U.S. and one or two other countries around the world. And so and certainly, Smart Straw, we leverage as part of our specialist premiumization strategy. So yes, it applies to both the core product and to specialists as well, Dan. Daniel Rizzo: Alright. Thank you very much. Operator: Your next question comes from the line of Keegan Cox from D.A. Davidson. Your line is open. Hi, guys. Keegan on for Michael Allen Baker today. Keegan Cox: I just wanted to ask if you could, you know, give any color or thoughts on potential gross margin headwinds and tailwinds that you're expecting within your 2026 guidance? Sara K. Hyzer: Hi, Keegan. This is Sara. So yes, I would say in our guidance, we have, you know, we have built in both headwinds and tailwinds. We are seeing stability from a cost input standpoint. And when you look at what we've built into our gross margin guidance, if oil stays at the levels that they're at right now, that could be a small tailwind for us since we've tried to be a little bit conservative in what we've built in for an oil assumption because you just never really know which direction that is going to go. There are a number of cost-saving initiatives that we have in the pipeline based on actions that we've taken in FY 2025. That will feed into FY 2026 along with new actions that we've built around cost supply chain optimization and continuation of the efforts that we've had in FY 2025 on the sourcing side. We had a lot of success this year from a global sourcing standpoint and our cost savings expectations that we had this year. Some of those will then benefit our margin going into FY 2026. Keegan Cox: Got it. And then as I looked at kind of the sales results in Asia Pacific specifically, say that five times, it looks like the distributors accounted for, you know, most of the growth there. What what did kind of the runway left for, I guess, the that distributor market? Steven A. Brass: Sure. It's a very, very long runway. And so China also had a good well, all three areas were up, right? So Australia, I believe, was up 6% for the year. China was up in double digits. And then yes, for the fourth quarter in particular, we had a very strong comeback in distributor. And so as we look at all of those markets, there's a very, very long runway for growth. In places like Indonesia, where we've introduced our new kind of hybrid business model, it's been growing at a CAGR of around 20% over the past few years. Many of those other key markets across the Asia region have a very, very long runway for growth. And so the improved performance in the back half in Asia and there may be some kind of impact in terms of customer distributors are a little more lumpy, right? And so going into the first quarter, you may see some kind of pullback. That's just really, again, kind of inventory management in Asia for Q1. But beyond that, we see a really strong rebound in Asia Pacific later in the fiscal year. Keegan Cox: Got it. Thank you. Operator: Ladies and gentlemen, that does conclude our conference for today. We thank you for your participation on today's conference call. We ask that you please disconnect your line.
Travis Axelrod: Good afternoon, everyone, and welcome to Tesla's third quarter 2025 Q&A Webcast. My name is Travis Axelrod, Head of Investor Relations. I am joined today by Elon Musk, Vaibhav Taneja, and a number of other executives. Our Q3 results were announced at about 3 PM Central Time in the Update deck we published at the same link as this webcast. During this call, we will discuss our business outlook and make forward-looking statements. These comments are based on our predictions and expectations as of today. Actual events or results could differ materially due to a number of risks and uncertainties, including those mentioned in our most recent filings with the SEC. We urge shareholders to read our definitive proxy statement, which contains important information about the matters we voted on at the 2025 annual meeting. During the question and answer portion of today's call, please limit yourself to one question and one follow-up. Please use the raise hand button to join the question queue. Before we jump into Q&A, Elon has some opening remarks. Elon? Elon Musk: Thank you. We are at a critical inflection point for Tesla and our strategy going forward as we bring AI into the real world. I think it's important to emphasize that Tesla really is the leader in real-world AI. No one can do what we can do with real-world AI. I have pretty good insight into AI in general. I think that Tesla has the highest intelligence density of any AI out there in the car. And that is only going to get better. We are really just at the beginning of scaling at a quite massive level, full self-driving and robotaxi, and fundamentally changing the nature of transport. I think people just do not quite appreciate the degree to which this will take off. It's honestly going to be like a shock wave. So it's because the cars are all out there. We have millions of cars out there that, with a software update, become full self-driving cars. We are making a couple of million a year. In fact, with the advent of what we see now as clarity on achieving full self-driving, unsupervised full self-driving, I should say, I feel confident in expanding Tesla's production. So that is our intent, to expand as quickly as we can our future production. I was ready to do that until we had clarity on achieving unsupervised full self-driving. But at this point, I feel like we've got clarity, and it makes sense to expand production as fast as we reasonably can. We are also making a huge impact on the energy sector with battery storage. With both Powerwall and especially with the Megapack, we are dramatically improving the ability to generate more energy from the grid. Let me sort of talk a little bit about that, which is if you look at total US energy capability, for example, there's roughly a terawatt of continuous power available in the US. But the average usage over a twenty-four-hour cycle is only half a terawatt because of the big difference between day and night usage. If you buffer the energy with batteries, you can effectively double the energy output in the United States just with batteries, pulling no incremental power plants. It's very difficult to build power plants. They take a long time. There's a lot of permitting. It's not an industry that's used to moving fast. We see the potential there for Tesla battery packs to greatly improve the energy output per year for any given grid, US or otherwise. We are also on the cusp of something really tremendous with Optimus, which I think is likely to be, has the potential to be, the biggest product of all time. It's a difficult project. It's worth noting that it's not just automatic. I'm unaware of any robot program by Ford or GM or, you know, in the by USC of car companies. People might think of Tesla as a car company that mostly makes cars and battery packs. It's not just an obvious fall of a log thing to make Optimus, but we do have the ingredients of real-world AI and exceptional electrical mechanical engineering capabilities and the ability to scale production, which I don't think anyone else has all of those ingredients. With version 14 of self-driving, people can see the reactions of people online. They're quite amazed. Actually, anyone in the US can get version 14 if they just go and select "I want the advanced software" in their car. If you're listening right now and you'd like to try it out, just go into settings and say, "I want the advanced software," and you will get version 14. On the Megapack front, we unveiled Megablock, Mega Pack three. We also have exciting plans for MegaPack four. MegaPack four will incorporate a lot of what is normally in a substation and be able to output at probably 35 kilovolts directly. This greatly improves our ability to deploy Megapack because it's not dependent on building a substation up through 35 KB for MegaPack four. That's the engineering priority for Megapack. We look forward to unveiling Optimus b three probably in Q1. I think it'll be ready to show off. That, I think, is going to be quite remarkable. It won't even seem like a robot. It'll seem like a person in a robot suit, which is kind of how we started off with Optimus. It'll seem so real that you'll need to poke it, I think, to believe that it's actually a robot. Obviously, the real-world intelligence we've developed for the car, most of that transfers to Optimus. It's a very good starting point. In conclusion, we're excited about the updated mission of Tesla, which is sustainable abundance. Going beyond sustainable energy to say, sustainable abundance is the mission, where we believe with Optimus and self-driving, we can actually create a world where there is no poverty, where everyone has access to the finest medical care. Optimus will be an incredible surgeon, for example. Imagine if everyone had access to an incredible surgeon. Of course, we make sure Optimus is safe and everything, but I do think we're headed for a world of sustainable abundance. I'm excited to work with the Tesla team to make that happen. Travis Axelrod: Great. Thank you very much, Elon. Vaibhav also has some opening remarks. Vaibhav Taneja: Thanks, Travis. Q3 was a special quarter at multiple levels. We set new records not just for deliveries and deployments, but also around a range of financial metrics from total revenues, energy gross profit, energy margins to fresh free cash flow. This was the result of continued confidence of our customers in our products and the relentless efforts of the Tesla team. The strength in deliveries was attributed to strong performance across all regions. Greater China and APAC were up sequentially 33%, North America was up 28%, while EMEA was up 25%. The pace in deliveries was the function of continued excitement around the new Model Y. I had previously talked about 2025 being the year of the Y, and we have since delivered on that promise. Model Y was released in Q1, followed by Model Y long wheelbase and performance, and more recently, Standard Y in North America and EMEA. We are now operating a robotaxi in two markets, Austin and most various cities. We have already expanded our coverage area in Austin three times since the initial launch and are on pace to continue expanding further. Unlike our competitors, our robotaxi fleet blends in the markets we operate in since they don't have extra sensor sets or peripherals which make them stick out. This is an underappreciated aspect of our current vehicle offerings, which are all designed for autonomous driving. We feel that as people experience the supervised FSD at scale, demand for our vehicles, like Elon said, would increase significantly. On the FSD adoption front, we've continued to see decent progress. However, note that the total paid FSD customer base is still small, around 12% of our current fleet. We are working with regulators in places like China and EMEA to obtain approvals so that we can deploy FSD in those regions as well. Now covering a little bit on the financial side, automotive revenues increased 29% in line with the growth in deliveries. While regulatory credits declined sequentially, we entered into new contracts and continued delivery on previously entered contracts. Our automotive margins, excluding credits, increased marginally from 15% to 15.4%. This was attributed to improvements in material cost and better fixed cost absorption due to higher volumes. The energy storage business continued to deliver with record deployments, gross profit, and margins. As discussed before, this business has a bigger impact from tariffs, as measured by percentage of COGS since currently all sales procured are from China while we're still working on other alternatives. However, as the ramp of mega factory Shanghai is happening, this is helping us avoid tariffs. We are using this factory to supply the non-US demand. Like Elon said, grid-scale storage is the only way we can get to electricity fastest by using storage. The other thing to keep in mind is we are seeing headwinds in this business given the increase in competition and tariffs. The total tariff impacts for Q3 for both businesses were in excess of $400 million, generally split evenly between them. Services and other demonstrated a marked improvement sequentially. This was a function of improvements primarily in our insurance and service center businesses. Note that while small, our robotaxi costs are included within services and other along with our other businesses like paid supercharging, used car, parts and merchandise sales, etc. Our operating expenses increased sequentially. The largest increase included in restructuring and other related to certain actions undertaken to reduce cost and improve efficiency to convergence of our AR AI chip design efforts. Additionally, we incurred legal expenses related to proceedings in certain legal cases. As incremental cost incurred preparation for our shareholder meeting. Such costs are recorded within SG&A. Further, our employee-related spend is increasing, especially in R&D. We have recently granted various performance-based equity awards to employees working on AI initiatives. Therefore, such spend will continue to increase forward. On other income, our other income decreased sequentially primarily from mark-to-market adjustments on BTC Holdings, which was a much smaller gain of $80 million in Q3 versus $284 million in Q2. With the rest of the movement attributable to FX movements in the quarter. Our free cash flow for the quarter was approximately $4 billion, which was yet another record. Our total cash and investments at the end of the quarter were over $41 billion. On the CapEx front, while we are expecting to be around $9 billion for the current year, we're projecting the numbers to increase substantially in 2026 as we prepare the company for the next phase of growth in terms of not just our existing businesses, but our bets around AI initiatives, including Optimus. In conclusion, note that bringing AI into the real world is hard. But we have never shied away from doing what is hard. We are extremely excited about the future and are laying down the foundation, the benefits of which will be realized over years to come. I would like to end by thanking the Tesla team, our customers, our investors, and supporters for the continued belief in us. Thank you very much, Vibhav. Now let's go to investor questions. Travis Axelrod: From say.com, the first question is, what are the latest robo taxi metrics fleet size, cumulative miles, rides completed, intervention rates, when will safety drivers be removed? What are the obstacles still preventing unsupervised FSD from being deployed to customer vehicles? Elon Musk: I'll start off with that, and then Ashok can elaborate. We are expecting to have no safety drivers in at least large parts of Austin by the end of this year. So within a few months, we expect to have no safety drivers at all in at least parts of Austin. We're obviously being very cautious about the deployment. Our goal is to be actually paranoid about deployment because, obviously, even one accident will be front-page headline news worldwide. It's better for us to take a cautious approach here. But we do expect to have no safety drivers in the car in Austin within a few months. I think that's perhaps the most important data point. We do expect to be operating robotaxi in, I think, about eight to ten metro areas by the end of the year. It depends on various regulatory approvals. You can actually think most of our regulatory applications are online. You can kind of see them because they're public information. We expect to be operating in Nevada, Florida, and Arizona by the end of the year. Ashok? Ashok Elluswamy: Yeah. We continue to operate our fleet in Austin without anyone in the driver's seat, and we have covered more than a quarter million miles with that. In the Bay Area, we still have a person in the driver's seat due to the regulations, and we've crossed more than a million miles. We continue to see that the robotaxi fleet works really well. Customers are really happy, and there are no notable issues. On the customer side, we have FSD supervised for a total of 6 billion miles as of yesterday. That's a big milestone. Overall, the safety continues to be very good. As Elon mentioned, we are on track to remove the person from inside the car altogether, starting with Austin. Travis Axelrod: Great. The next question is, what is the demand and backlog for Megapack, Powerwall, solar, or energy storage systems? With the current AI boom, is Tesla planning to supply power to other hyperscalers? Elon Musk: Thanks. Michael Snyder: Demand for Megapack and Powerwall continues to be really strong into next year. We received very strong positive customer feedback on our Mega Block product, which will begin shipping next year out of Houston. We're seeing remarkable growth in the demand for AI and data center applications as hyperscalers and utilities have seen the versatility of the Megapack product. It increases reliability and relieves grid constraints, as Elon was talking about. We've also seen a surge in residential solar demand in the US due to policy changes, which we expect to continue into 2026 as we introduce the new solar lease product. We also began production of our Tesla residential solar panel in our Buffalo factory, and we will be shipping that to customers starting Q1. The panel has industry-leading aesthetics and shape performance and demonstrates our continued commitment to US manufacturing. Travis Axelrod: Great. Thank you, Mike. Unfortunately, the next question is related to future products. This is not the appropriate venue to cover that, so we're going to have to skip it. The question after that is, what are the present challenges in bringing Optimus to market considering app control software engineering hardware, training general mobility models, training task-specific models, training voice models, implementing manufacturing, and establishing supply chains? Elon Musk: Yeah. I mean, bringing Optimus to market is an incredibly difficult task, to be clear. It's not like some walk in the park. At some point, I mean, actually, technically, Optimus can walk in the park right now. We do have Optimus robots that walk around our offices at our engineering headquarters in Palo Alto, California, basically twenty-four hours a day, seven days a week. Any visitors that come by can actually stop one of the Optimus robots and ask it to take them somewhere, and it'll literally take them to that meeting room or that location in the building. I don't want to downplay the difficulty, but it's an incredibly difficult thing, especially to create a hand that is as dexterous and capable as the human hand, which is incredible. The human hand is an incredible thing. The more you study the human hand, the more incredible you realize it is, and why you need four fingers and a thumb, why the fingers have certain degrees of freedom, why the various muscles are of different strengths, and fingers are of different lengths. It turns out that those are all there for a reason. Making the hand and forearm, because most of the actuators, just like the human hand, the muscles that control your hand are actually primarily in your forearm. The Optimus hand and forearm is an incredibly difficult engineering challenge. I'd say it's more difficult than the rest of the robot from an electromechanical standpoint. The forearm and hand are more difficult than the entire rest of the robot. But really, in order to have a useful generalized robot, you do need an incredible hand. Then you need the real-world AI, and you need to be able to scale up that production to have it be relevant because it's not relevant if it's just a few hundred robots. You need to be able to make Optimus robots at volumes comparable to vehicles, not significantly higher. So trying to make a million Optimus robots per year, that manufacturing challenge is immense considering that the supply chain doesn't exist. With cars, you've got an existing supply chain. With computers, you've got an existing supply chain. With a humanoid robot, there is no supply chain. In order to manufacture that, Tesla actually has to be very vertically integrated and manufacture very deep into the supply chain, manufacture the parts internally because there just is no supply chain. This is the kind of thing where I'm like, if I put myself in the position of a startup trying to make a humanoid robot, I'm like, I don't know how to do it without an immense amount of manufacturing technology. That's why I think Tesla is in almost a unique position when you consider manufacturing technology, scaling real-world AI, and a truly dexterous hand. Those are generally the things that are missing when you read about other robots that just don't have those three things. I think we can achieve all those things with an immense amount of work, and that is the game plan. My fundamental concern with regard to how much voting control I have at Tesla is if I go ahead and build this enormous robot army, can I just be ousted at some point in the future? That's my biggest concern. That is really the only thing I'm trying to address with this. It's called compensation, but it's not like I'm going to go spend the money. It's just, if we build this robot army, do I have at least a strong influence over that robot army, not current control, but a strong influence? That's what it comes down to in a nutshell. I don't feel comfortable wielding that robot army if I don't have at least a strong influence. Ashok Elluswamy: Great. Thank you. Travis Axelrod: We've already covered robotaxi expansion. Unfortunately, the question after that is another future product question, so we're going to have to skip that. The next one, though, is can you update us on the $16.5 billion Samsung chip deal in Taylor? The importance of semiconductors to autonomy in Tesla's AI-driven future, what gives you confidence Samsung can fulfill AI six at Tesla's timelines? And achieve relatively better yields and cost versus TSMC. Elon Musk: Okay. I'm going to give quite a long answer to this question because I have to unpack this question and then answer the unpacked version. First of all, I have nothing but great things to say about Samsung. They're an amazing company. Samsung, it's worth noting, does manufacture our AI four computer and does a great job doing that. Now with the AI five, and here's where I need to make a point of clarification relative to some comments I've made publicly before, which is we're actually going to focus both TSMC and Samsung initially on AI five. The AI five chip designed by Tesla is, I think, an amazing design. I've spent almost every weekend for the last few months with the chip design team working on AI five. I don't hand out praise easily, but I have to say that I think the TensorFlow team is really an incredible chip here. By some metrics, the AI five chip will be 40 times better than the AI four chip. Not 40%, 40 times. Because we have a detailed understanding of the entire software and hardware stack, we're designing the hardware to address all of the pain points in software. I don't think there's really anyone that's doing this thing the entire stack all the way through real-world. You know, calibrating against the real world where you've got cars and robots in the real world, we know what the chip needs to do, and we know just as importantly, we know what the chip doesn't need to do. To sort of use some examples here, with the AI five, we deleted the legacy GPU or the traditional GPU, which is in AI four. But AI five does not have, we just deleted the legacy GPU because it basically is a GPU. We also deleted the image signal processor. This looks like a long list of deletions that are very important. As a result of these deletions, we can actually fit AI five in a half reticle and with good margin for traces from the memory to the Tesla accelerators, the ARM CPU cores, and the PCI blocks. This is a beautiful chip. I've poured so much life energy into this chip personally, and I'm confident this is going to be a winner. Next level. It makes sense to have both Samsung and TSMC focus on AI five. Even though technically, Samsung fab has slightly more advanced equipment than the TSMC fab. These will both be made in the US, one TSMC in Arizona, Samsung in Texas. We're going to make starting off just to be confident. Our explicit goal is to have an oversupply of AI five chips. If we have too many AI five chips for the cars and robots, we can always put them in the data center. We already use AI four for training in our data center. We use a combination of AI four and NVIDIA hardware. We're not about to replace NVIDIA, to be clear, but we do use both in combination. AI four and NVIDIA hardware, and the AI five excess production can always be put in our data centers. NVIDIA keeps improving. The challenge that they have is that they've got to satisfy a large range of requirements from a lot of customers. Tesla only has to satisfy requirements from one customer, Tesla. That makes the design job radically easier and means we can delete a lot of complexity from the chip. I can't emphasize how important this is. When you look at the various logic blocks in the chip, you increase the number of logic blocks, you also increase the interconnections between the logic blocks. If you can think of it like there are highways, like how many highways do you need to connect the various parts of the chip? Especially if you're not sure how much data is going to go between each logic block on the chip, then you kind of end up having giant highways going all over the place. It's a very, it becomes almost an impossibly difficult design problem, and NVIDIA has done an amazing job of dealing with almost an impossibly difficult set of requirements. But in our case, we're going for radical simplicity. The net effect is that I think AI five will be the best performance per watt, maybe by a factor of two or three, and best performance per dollar for AI, maybe by a factor of 10. We'll have to, the proof's in the pudding, so obviously, we need to actually get this chip made and made at scale. But that's what it looks like. Travis Axelrod: Great. Thank you, Elon. We've already covered unsupervised FSD. So the next question is, instead of trying to replace hardware three with hardware four, why not give an equal incentive to trade in for a new vehicle? Vaibhav Taneja: Yeah. We've not completely given up on hardware three. However, over the last year, we've offered the customers the option to transfer FSD to their new vehicle. At times, we've been running some promotions. If they've got FSD, they can get better preferential rates. We've been taking care of this. We do want to solve autonomy first. Then we'll come back with a way to take care of these customers. These customers are very important. They were the early adopters. For what it's worth, my daily commuter is a hardware three car, which I use FSD on a daily basis. We will definitely take care of you guys. Ashok Elluswamy: Once the v 14 release series is fully done, we are planning on working on a v 14 Lite version for hardware three. Probably expected in Q2 next year. Travis Axelrod: Awesome. Thanks, Ashok. Alrighty. Our final question from Se is, how long until we see self-driving Tesla Semi trucks? And could you see this technology replacing trains? Elon Musk: Yeah. So I guess I'll start with that in terms of the semi, Lars Moravy: production plan and schedule. The factory is going on schedule. We've completed the building and are installing the equipment now. We've got our fleet of validation trucks driving on the road. We'll have a larger build towards the end of this year and then our first online builds in the first part of next year, ramping into the Q2 timing with real volume coming in the back half of the year. That's going quite well, and that's the first step to obviously getting autonomous trucks on the road. In terms of trains, they're really great for long point-to-point deliveries. They're super efficient, but that last mile, the load-unload can be better served for shorter distances with autonomous semis, and that would be great. We do expect that to probably shift in as we, as Elon said, change the way transportation is considered. We're looking forward to that timeline. Ashok, I know you can take the full self-driving part. Ashok Elluswamy: Currently, the team is super focused on solving for passenger vehicles autonomy. That said, the same technology will apply quite easily to the semi truck once we have a little bit of data from the semi trucks. Travis Axelrod: Great. And now we will move over to analyst questions. The first question comes from Emmanuel, at Wolfe. Emmanuel, please go ahead and unmute yourself. Emmanuel Rosner: Great. Thanks so much. Hi, everybody. So Elon, you talked about expanding production of vehicles as fast as possible now that you have confidence in the unsupervised autonomy. How should we think about that in the context of your existing capacity of 3 million units? Is that where you're hoping to get volume to? What sort of timeline are we talking about? And would this require some level of boosting or incentivizing demand? Like would this basically be prioritizing volume over near-term profitability given the longer-term opportunity? Elon Musk: Well, capacity isn't quite 3 million. But it will be 3 million at some point. Aspirationally, it could be 3 million within, we could probably hit an annualized rate of 3 million within twenty-four months, I think. Maybe less than twenty-four months. Bear in mind, there's an entire supply chain, a vast supply chain that's got to also move in tandem with that. I think we're going to expand production as fast as we can and as fast as our suppliers can keep up with it. Then we're going to think about where we build incremental factories beyond that. The single biggest expansion in production will be the Cyber Cap, which starts production in Q2 next year. That's really a vehicle that's optimized for full autonomy. It, in fact, does not have a steering wheel or pedals and is really an enduring optimization on minimizing cost per mile for fully considered cost per mile of operation. For our other vehicles, they still have a little bit of the horse carriage thing going on where, obviously, if you've got steering wheels and pedals and you're designing a car that people might want to go very direct past acceleration and tight cornering, like high-performance cars, then you're going to design a different car than one that is optimized for a comfortable ride and doesn't expect to go past sort of 85 or 90 miles an hour. It's just aiming for a gentle ride the whole time. That's what Cyber Cap is. Do I think we'll sacrifice margins? I don't think so. I think the demand will be pretty nutty. Here's the killer app, really. What it comes down to is, can you text while you're in the car? If you tell someone, yes, the car is now so good, you can be on your phone and text the entire time while you're in the car, anyone who can buy the car will buy the car. End of story. That's what everybody wants to do. In fact, not everyone wants to. They do do that. That's why, in fact, the reason you've seen an uptick in accidents, pretty much worldwide, is because people are texting and driving. Autopilot actually dramatically improves the safety here. If someone's looking down at their phone, they're not driving very well. That's really the game changer. At this point, I feel essentially 100% confident, I say not essentially, 100% confident that we can solve unsupervised full self-driving at a safety level much greater than human. We've released 14.1, got a technology roadmap that's, I think, pretty amazing. We'll be adding reasoning to the car. Our world simulator for reinforcement learning is pretty incredible. Our Tesla reality simulator, when you see it, the video that's generated by the Tesla reality simulator and the actual video looks exactly the same. That allows us to have a very powerful reinforcement learning loop to further improve the Tesla AI. We're going to be increasing the parameter count by an order of magnitude. That's not in 14.1. There are also a number of other improvements to the AI that are quite radical. This car will feel like it is a living creature. That's how good the AI will get with the AI four computer before AI five. AI five, like I said, is by some metrics forty times better. But just to say safely, it's a 10x improvement. It might almost be too much intelligence for a car. I do wonder, like, how much intelligence should you have in a car? It might get bored. One of the things I thought of, like, well, if we've got all these cars that maybe are bored, well, why they're sort of, if they are bored, we could actually have a giant distributed inference fleet. If they're not actively driving, just have a giant distributed inference fleet. At some point, if you've got tens of millions of cars in the fleet, or maybe at some point 100 million cars in the fleet, and let's say they had, at that point, I don't know, a kilowatt of inference capability of high-performance inference capability, that's 100 gigawatts of inference distributed with power and cooling taken with cooling and power conversion taken care of. That seems like a pretty significant asset. Travis Axelrod: Great. Thanks, Elon. The next question comes from Adam from Morgan Stanley. Adam, please feel free to unmute yourself. Adam, go ahead and ask your question. Seems like we might be having some audio issues with Adam, so we'll come back to you. Next question will then come from Dan, from Barclays. Dan Meir Levy: Hi. Good evening. Thank you for taking the question. Elon, I know that Tesla's really focused on with master plan for bringing AI into the physical world. I think we've seen over the past, you know, this willingness for Tesla to engage and go into new markets, new TAMs. So when you think about the growth prospects, how do we define the areas that are really within Tesla's core competency versus where do you draw the line for markets or AI applications that are outside of Tesla's core competency? Elon Musk: Actually, I'm not sure what you mean by AI applications outside of Tesla's core competency. We kind of didn't have any of these core competencies when we started, you know. We had zero core competencies, total competency of zero, actually. You can think of Tesla as, like, I don't know, a dozen startups in one company. I've initiated every one of those startups. We didn't used to make battery packs, stationary battery packs, but now we do. We make them for the home, make them for utility scale with Powerwall and Megapack. We created the supercharger network globally. No one else has created a global supercharger network. In fact, the North American supercharger network is so good that basically, yeah, every other manufacturer in North America has converted to our standard and uses the Tesla Supercharger network. If it was so easy, why didn't they just do it? The Chef Design team started that from scratch. The Tesla AI software team was started from scratch. I literally just said, hey, we're going to start this thing. I posted it on Twitter, now X. Join us if you'd like to build it. In fact, Ashok was, I believe, the first person I interviewed for the Tesla autopilot team, which we now call Tesla AI software team because it is the AI software team. Core competencies created while you wait. Optimus at scale is the infinite money glitch. It's difficult to express the magnitude of, like, if you've got something that, like, if Optimus, I think, probably achieves five times the productivity of a person per year because it can operate twenty-four seven. It doesn't even need to charge. It can operate tethered. It's plugged in the whole time. That's why I call it, like, if you're true of sustainable abundance, where working will be optional. There's a limit to how much AI can do in enhancing the productivity of humans. There is not really a limit to AI that is embodied. That's why I called the infinite money glitch. Vaibhav Taneja: I mean, one thing which I'll further add is, I mean, forget, like, our first iteration of autopilot was ten years back. Elon had started this way back in the day. We've got the twist to prove it. Exactly. Even on the Optimus side, as much as people think, oh, good, this is a new thing. Still remember, was it four plus years back? We were in a meeting with Elon, and Elon said, hey, our car is a robot on wheels. That's where we started developing. In fact, most of the engineering team working on Optimus has come from the vehicle side. That's why, you know, when we talk about manufacturing progress, we have the wherewithal because the same engineers who worked back in the day on drive units are working on actuators now. If there is any company which can do it at scale, that is going to be us. Elon Musk: We also have actually added a lot of new engineers as well to the team. A lot of the credit for the Optimus engineering is actually also near new engineers, many of them that are just out of college, actually. The Optimus engineering team is a very talented engineering team. I'd say, like, wow, actually. The Optimus reviews at this point are that there's the engineering review and then there's the manufacturing review. Being done simultaneously. With an iterative loop between engineering design and manufacturing. We design something and we say, like, oh, man, that's really difficult to make. We need to change that design to make it easier to manufacture. We've made radical improvements to the design of Optimus while increasing the functionality, but making it actually possible to manufacture. I'd say Optimus two is almost impossible to manufacture, frankly. But my two-point, we've gone from a person in a robot outfit to what people have seen with Optimus 2.5 where it's doing kung fu. Optimus was at the Tron premiere doing kung fu, just up in the open, with Jared Leto. Nobody was controlling it. It was just doing kung fu with Jared Leto at the Tron Premier. You can see the videos online. The funny thing is, a lot of people walked past it thinking it was just a person. Even though with Optimus 2.5, you can see that it has a waist that's three inches wide. It results in not a human. But the movements were so human-like that a lot of people didn't realize they were looking at a robot. What I'm saying is, Optimus three will be a giant improvement on that. Made at scale, like I said, a very difficult thing. The Optimus engineering and manufacturing reviews and there's the Friday night meeting with Optimus, which sometimes goes till midnight. My Saturday meeting is with the AI chip design team. Two things are crucial to the future of the company. Travis Axelrod: Great. And Dan, do you have a follow-up? Dan Meir Levy: Yeah. I think just as a related, maybe you could just talk about to what extent are the AI efforts at Tesla and x AI complementary, or are they just different forms of AI? Maybe you can just distinguish for the audience. Thank you. Elon Musk: Yeah. There are different forms of AI. The XAI, so Grok is like a giant model. You could not possibly squeeze Grok onto a car. That's for sure. It is a giant piece of a model. With Grok, it's trying to solve for artificial general intelligence with a massive amount of AI training compute and inference compute. For example, Grok five will actually only run effectively on a GV 300. That's how much of a beast Grok five is. Whereas Tesla's models are, I don't know, maybe about less than 10% the size, maybe closer to 5% the size of Grok. They're really at the problem from very different angles. XAI and Grok are competing with Google Gemini and OpenAI ChatGPT and that kind of thing. Some of it's complementary. For example, for Grok voice, being able to interact with Grok in the car is cool. Grok for Optimus voice recognition and audio voice generation is Grok, so that's helpful there. But they are coming at it from kind of opposite ends of the spectrum. Travis Axelrod: Alrighty. Adam, let's give it another try. When you're ready, please unmute yourself for the next question. Alrighty. Unfortunately, Adam is having audio issues. So we're going to move on to Walt from LightShed. Walt, please go ahead and unmute yourself. Walt: Can you hear me now? Travis Axelrod: Yes. Perfect. Thank you. Walt: Just getting back to Austin. If you can remove the safety driver at year-end, is the limitation in the Bay Area just regulatory, or is it kind of the market by market learning process? Similarly, in the eight to ten markets that you mentioned to get added, is the decision there to put a safety attendant in the passenger seat or the safety driver in, is that like your step-by-step process to opening up a market, or is it really just the regulation and the individual market? Elon Musk: Well, I think even if the regulators weren't making us do it, we'd still do that as the right sort of cautious approach to a new market. Just to make sure that we're being paranoid about safety, I think it makes sense to have a safety driver or safety occupant in the car when we first go to new markets to confirm that there's not something we're missing. All it takes is one in 10,000 trips to go wrong, and you've got an issue. It just makes sure, like, is there some peculiarity about a city, like a very difficult intersection or something that's an unexpected challenge in a city for that one in 10,000 situation. We probably could just let it loose in these cities, but we just don't want to take a chance. What we're talking about here is maybe three months of safety driver in a new metro to confirm that it's good, and then we take the safety driver off, that kind of thing. Walt: Okay. Then on FSD 14, it has a different feel than 13, and it's also, I think, a little different than what it feels like in Austin. Is it basically different development paths that you're doing in terms of the robotaxi stuff versus what you're dropping to the early adopters? When you push these new builds, is it that you're looking for notable improvements in intervention rates, or is that largely solved and it's more about adding the functionality, like the parking, the drive modes, or just the overall comfort? Elon Musk: The first priority when we release a major new software architecture for Autopilot is safety. It starts off with safety, obviously, safety prioritized, and then solve comfort thereafter. That's why I don't recommend people take the initial version. That's why I say, like, yeah, most people should wait until 14.2 before they actually download version 14. By 14.2, we will have addressed many of the comfort issues. The priority is very much safety first and then thereafter, the comfort issues. That's why most people are like, it'll be safe but jerky. We just need time to smooth the rough edges and solve for comfort in addition to safety with a major new autopilot architecture change. I know what the roadmap is for the Tesla real-world AI in very granular detail. Obviously, Ashok is leading that. I mean, I spend a lot of time with the team going in excruciating detail here on what we're doing to improve the real-world AI. This car is going to feel like it is a living creature. That's with AI four before even AI five. Ashok Elluswamy: Yeah. The roadmap is super exhilarating. We're waiting so much, like, at least all the stuff we are working on. In terms of what we ship to customers versus robotaxi, it's mostly the same. Customers have some more features like, you know, they can choose the car wants to park in a spot or drive you or something like that, which is not super relevant for robotaxi. But there's only a few minor changes like those ones. But the majority of the algorithms and architecture, everything is the same between those two platforms. Elon Musk: Yeah. As I mentioned earlier, we'll be adding reasoning to, I don't know, reasoning in 14.3, maybe 14.4, something like that. Ashok Elluswamy: Yeah. See here. Or by end of this year, for sure. Elon Musk: Yeah. With reasoning, it's literally going to think about which parking spot to pick. It's going to say, this is the entrance, but actually, probably, there's not a parking spot right at the entrance. If it's a full, you know, if the parking lot is fairly full, the probability of an open parking spot right at the entrance is very low. But actually, what it'll simply do is drop you off at the entrance of the store and then go find a parking spot. It's going to get very smart about figuring out a parking spot. It's going to spot empty spots better than a human. It's got 360-degree vision, and it's going to, yeah. Ashok Elluswamy: Yeah. Like I said, it's going to use reasoning to solve things. Elon Musk: Yep. Putting that all inside the computer that has AI four is the actual challenge. That's what the team is working on. Obviously, you can do reasoning on the server that takes forever. But then in the car, you need to make real-time decisions. Putting all the, you know, that's in the car, that's the challenge. Elon Musk: Yeah. That's why I say, like, I have a pretty good understanding of AI, you know, the giant model level with Grok and with Tesla. I'm confident in saying that Tesla has the highest intelligence density. When you look at the intelligence per gigabyte, I think Tesla AI is probably an order of magnitude better than anyone else. It doesn't have any choice because that AI has got to fit in the AI four computer. The discipline of having that level of AI intelligence density will pay great dividends when you go to something that has an order of magnitude more capability like AI five. Now you have that same intelligence density, but you've got 10 times more capability in the computer. Travis Axelrod: Great. The next question will come from Colin at Oppenheimer. Colin, please unmute yourself when you're ready. Colin Langan: Colin, go ahead and unmute yourself, please. Colin Langan: Thanks so much, guys. I appreciate you bringing up the challenges of hand dexterity in humanoids, along with the state of the supply chain and the vertical integration you guys are pursuing. I'm just trying to harmonize the timeline for the start of production next year with the state of the supply chain. What sounds like a fair amount of work remains on the dexterity before you can really freeze the hardware design and start to scale up production. Elon Musk: Well, the hardware design will not actually be frozen even through the start of production. There'll be continued iteration. A bunch of the things that you discover are very difficult to make. You only find that pretty late in the game. We'll be doing rolling changes for the Optimus design even after the start of production. I do think that the new hand is an incredible piece of engineering. We'll actually have a production intent prototype ready to show off in Q1, probably February or March. We're going to be building a million units Optimus production line, hopefully with the production start towards the end of next year. That production ramp will take a while to get to an annualized rate of a million because it's going to move as fast as the slowest, dumbest, least lucky thing out of 10,000 unique items. But it will get to a million units. Ultimately, we'll do Optimus four. That'll be 10 million units. Optimus five, maybe 50 to 100 million units. It's really pretty nutty. Travis Axelrod: Alrighty. That is unfortunately all the time we have for Q&A today. Before we conclude though, Vaibhav has some closing remarks. Vaibhav Taneja: Thanks, Travis. I want to take the time to talk about an extremely important work which is being held on November 6. The meeting will shape the future of Tesla. We are asking you as our shareholders to support Elon's leadership through the two compensation proposals and the reelection of Ira, Kathleen, and Joe to the board. Note that it is a team sport. Here at Tesla, the board is an integral part of the winning team. Shareholders are the center of everything we do at Tesla, and a special committee has laid out a compensation package. Like Elon said, we don't even want to call it a compensation package. Elon Musk: Yeah. It's just like the point is that I just need enough voting control to give a strong influence, but not so much that I can't be fired if I go insane. I think that sort of number is in the mid-twenties approximately. As a company that has already gone public, we've investigated every possible way to achieve voting control without, you know, is there some way to have a supervoting stock, but there really isn't. There is no way to have a supervoting stock after you've gone public. For example, Google, Meta, many other companies have this. But they had it before they went public. It sort of gets, I guess, grandfathered in. Tesla does not have that. Like I said, I just don't feel comfortable building a robot army here and then being ousted because of some asinine recommendations from ISS and Glass Lewis who have no freaking clue. I mean, those guys are corporate terrorists. The problem, yeah. Let me explain, like, the core problem here is that so many of the index funds, passive funds, vote along the lines of whatever Glass Lewis and ISS recommend. They've made many terrible recommendations in the past. If those recommendations had been followed, they would have been extremely destructive to the future of the company. But if you've got passive funds that essentially defer responsibility for the vote to Glass Lewis and ISS, then you can have extremely disastrous consequences for a publicly traded company if too much of the publicly traded company is controlled by index funds. It's de facto controlled by Glass Lewis and ISS. This is a fundamental problem for corporate governance. They're not voting along the lines that are actually good for shareholders. That's the big issue. That's what it comes down to. ISS, Glass Lewis, corporate terrorism. Vaibhav Taneja: Yeah. I would say, you know, the special committee did an amazing job constructing this plan for the benefit of the shareholders. There's nothing which gets passed on till the time shareholders make substantial returns. That's why in the end, I would say, would urge you to not only vote on the plan but also vote on all the three directors because of their exceptional knowledge and experience. Literally, you know, we at Tesla work with these directors day in, day out. There is not even a single day that one of the directors I haven't spoken to or one of my colleagues hasn't spoken to. Even the directors out here are not just reading out of PowerPoint presentations. They're actually working with us day in, day out. Again, I just urge you guys as shareholders to vote along the board's recommendation. Thank you, guys. Travis Axelrod: Great. Thank you, Vaibhav. We appreciate everyone's questions today. We look forward to talking to you next quarter. Thank you very much, and goodbye.
Operator: Good day, and welcome to QuantumScape Corporation's Third Quarter 2025 Earnings Conference Call. Dan Conway, QuantumScape Corporation's Principal Analyst Investor Relations. You may begin your conference. Thank you, operator. Dan Conway: Afternoon, and thank you to everyone for joining QuantumScape Corporation's third quarter 2025 earnings call. To supplement today's discussion, please go to our IR site at ir.quantumscape.com to view our shareholder letter. Before we begin, I want to call your attention to the Safe Harbor provision for forward-looking statements posted on our website as part of our quarterly update. Forward-looking statements generally relate to future events, future technology progress, or future financial or operating performance. Our expectations and beliefs regarding these matters may not materialize. Actual results and financial periods are subject to risks and uncertainties that could cause actual results to differ materially from those projected. There are risk factors that may cause actual results to differ materially from the content of our forward-looking statement for the reasons that we cite in our shareholder letter, Form 10, and other SEC filings, including uncertainties posed by the difficulty in predicting future outcomes. Joining us today will be QuantumScape Corporation's CEO, Dr. Siva Sivaram, and our CFO, Kevin Hettrich. With that, I'd like to turn the call over to Siva. Thank you, Dan. Siva Sivaram: I'd like to begin with one of the highlights of the year. On September 8, at IAA Mobility in Munich, Germany, we unveiled our launch program with the Volkswagen Group. The Ducati V21L race motorcycle, developed as a collaboration among Ducati, Audi, PowerCo, and QuantumScape Corporation. The Ducati V21L is a first-of-its-kind vehicle demonstration planned as a showcase for the exceptional performance of our no-compromise next-generation battery technology. As a launch program, the Ducati V21L is ideal. It is a low-volume but high-visibility demonstration that allows us to put the QSC5 technology into a demanding real-world application. The next step in the Ducati program is field testing. Turning to our annual goals, we are pleased to report that during Q3, we began shipping COBRA-based QSC5 B1 samples, completing another of our key annual goals for 2025. These cells are part of the Ducati launch program and were featured at the IAA Mobility conference. Our remaining operational goal for the year is to install higher volume cell production equipment for our highly automated pilot line in San Jose, named the Eagle Line. Equipment for certain key assembly steps has already been installed on the Eagle Line, and this goal remains on track. Another important goal for 2025 has been to expand our commercial engagement, including deepening relationships with existing customers, engaging new customers, and bringing additional partners into our growing QS technology ecosystem. In Q3, we made substantial progress on all three fronts. With respect to existing customers, the successful launch event with Ducati, Audi, and PowerCo at IAA Mobility was a major milestone in our long collaboration with the Volkswagen Group. Last quarter, we also announced a new joint development agreement with an existing customer, and we are continuing to work closely with them as we progress through the first phase of development and commercialization engagement. We are also in active engagement with a new top 10 global automotive OEM in addition to our existing customers. With regard to QS ecosystem development, we continue to add world-class partners. On September 30, we announced an agreement with Corning to jointly develop ceramic separator manufacturing capabilities based on our COBRA process. Corning is a global leader in advanced materials, and they bring deep expertise in ceramics processing and proven manufacturing excellence to the QS ecosystem. In parallel, we successfully completed the initial phase of our collaboration with Murata Manufacturing, have signed a subsequent contract, and progressed to the next phase of that relationship. Our goal is to make QS technology the clear choice by providing our customers with a turnkey ecosystem to serve the global demand for better batteries. With Murata and Corning, we have two of the most world-renowned technical ceramics manufacturers as ecosystem partners, and we will continue to grow the ecosystem further. With our achievements this quarter, our vision for the commercialization of our next innovation in battery technology is beginning to take shape. We are executing consistently towards our key annual goals, demonstrating our technology, engaging with partners, and building out our capital-light development and licensing business model. Everything starts with execution, and we are proud of our team's performance. This year, we have already accomplished two of our key operational goals, baselining our COBRA process and beginning shipment of the COBRA-based QSC5 cells, continuing our track record of consistent execution against our goals. Q3 also saw our first technology demonstration with the Volkswagen Group, the Ducati V21L. We are expanding our collaboration with existing customers and adding new customers. We have also expanded our global ecosystem of world-class partners. The third quarter also marks another exciting milestone. We are beginning to show returns from our capital-light development and licensing business model, driving over $1 million in customer billings in Q3. Our ambitious targets naturally present many challenges to overcome, and there is much left to do. Our objective is clear: revolutionize energy storage, capitalize on our enormous market opportunity, and create exceptional value for our shareholders. With this aim in mind, we are excited to update shareholders on our continued progress over the months and years to come. With that, let me hand things over to Kevin for a word on our financial outlook. Thank you, Siva. Kevin Hettrich: GAAP operating expenses and GAAP net loss in Q3 were $115 million and $105.8 million, respectively. Kevin Hettrich: Adjusted EBITDA loss was $61.4 million in Q3, in line with expectations. A table reconciling GAAP net loss and adjusted EBITDA is available in the financial statement at the end of our shareholder letter. We continue to drive operational efficiency consistent with our capital-light licensing focus. We revised and improved our full-year guidance for adjusted EBITDA loss to $245 million to $260 million. Capital expenditures in the third quarter were $9.6 million. Q3 CapEx primarily supported facilities and equipment purchases for the Eagle Line. As a result of efficiency gains and process improvements, including from the COBRA process, as well as a change in timing of certain equipment ordering, we revised the range of our full-year guidance for CapEx to $30 million to $40 million. In Q3, we bolstered our balance sheet and completed our at-the-market equity program, raising $263.5 million of net proceeds in advance of the August 10 expiration of our shelf registration. We ended the quarter with $1 billion in liquidity. We now project our cash runway extends through the end of the decade, a twelve-month extension from our previous guidance of into 2029. Going forward, we plan to move away from providing updates on cash runway and will begin providing updates on customer billings. Customer billings represent the total value of all invoices issued by QS to our customers and partners in the period, regardless of accounting treatment. Customer billings is a key operational metric meant to give insight into customer activity and future cash inflows. The metric is not a substitute for revenue under US GAAP. Customer billings in Q3 were $12.8 million. In Q3, we invoiced VW PowerCo under the upgraded deal announced in July. The resulting cash inflows benefit QS shareholders. They will be directly reflected on the balance sheet as cash when we receive payment. During the collaboration phase of this particular deal, because of the related party relationship with VW, in accordance with US GAAP, a liability of equivalent value will also be created. QS has no repayment obligation with respect to these liabilities. Once relieved, rather than impacting the P&L, this value will accrue directly to shareholders' equity. Payments from other customers or partners, we expect, will be accounted for differently due to the lack of equity ownership or significant related party ties. Dan Conway: Thanks, Kevin. We'll begin today's Q&A portion with a few questions we've received from investors or that I believe investors would be interested in. Siva, the world's first live demonstration of QS solid lithium metal batteries in a Ducati V21L motorcycle premiered at IAA Mobility on September 9. Why is this such an important milestone? What are the next steps on your commercialization roadmap? Siva Sivaram: Dan, that announcement and seeing the bike ride across the stage was an emotional moment for all of us at QuantumScape Corporation. And it was obviously a huge milestone for all of our employees, investors, and partners. This is long in the making. Now we'll be demonstrating our battery in the field and gathering as much data as possible from field testing. Stepping back a bit, this was a major step in our strategic blueprint. You can think of this as four tracks that are running in parallel: the Ducati program, our PowerCo relationship, our other customers, and our ecosystem development. With respect to PowerCo more broadly, announced at IAA Mobility, we are working toward automotive-grade standards with the goal of a series production car with QS technology before the end of the decade. With respect to other customers, we are working towards commercialization deals with additional automotive OEMs. And, of course, we are building out our ecosystem with world-class partners like Murata and Corning. That way, we can handle a customer automotive customers at a turnkey supply chain to serve the massive and growing demand for our technology. These are the main areas that we have to execute on. Thanks, Siva. Dan Conway: On that note, QS continues to advance discussions with key high-precision ceramic players, most recently announcing an agreement with Corning and advancing our partnership with Murata. How does this fit into the company's overall strategy of building out the QS global partner ecosystem? What are the key benefits of this business model and some potential ways QS may receive economics from these partnerships? Siva Sivaram: Ben, QS' proprietary ceramic solid-state separator is our core IP. It enables our anode-free architecture and its performance advantage. Our strategy involves partnering with specialized high-precision ceramic manufacturers such as Murata and Corning to scale up separator production. These partners would supply QS separators to cell manufacturers like PowerCo, who would handle final cell assembly. This aggregated model allows QS to leverage the manufacturing expertise and balance sheets of partners with strong reputations in manufacturing as well as IP protection. Ceramic production is a highly specialized skill set, and this allows our cell production partners to focus on their core competency. It accelerates the scale-up of our technology by tapping into their manufacturing capabilities. In short, Corning and Murata are part of a complementary and expanding global ecosystem designed to de-risk scale-up and enable a capital-efficient path to commercialization. We believe each partner contributes unique strengths to help us efficiently scale our separator production into high volumes. As you would expect, we are continuing to build out the entire QS ecosystem with additional partners. Kevin Hettrich: And just to add on to that, in the fullness of time, the ecosystem would represent a third source of cash inflow under our capital-light development and licensing business model. The first is monetizing collaboration and customization work with our OEM partners. The second and largest source of inflows would be licensing as our customers produce cells using our technology. The third one would be value sharing from our ecosystem partners. Dan Conway: Thanks, Kevin. Can you expand further on customer billings as a key operational metric? How do customer billings translate into cash inflows? First, to expand on the significance of customer billings. Kevin Hettrich: Our first-ever invoices totaling $12.8 million in Q3 2025 are by themselves an important commercial milestone in the history of our company. It's nice to have arrived at the chapter where we're billing customers. I'd also highlight to investors that customer billings are evidence of our capital-light business model at work. On the front end, we monetize development activities for our customers to tailor our core technology to meet their specific needs. Subsequently, as the customer ramps production, we realize royalties over the lifetime of the project. Kevin Hettrich: As we continue to develop further generations of our technology, we'll seek to maintain these lines of business to generate consistent and compelling cash flows. Payment for development activities has the benefit of being near-term. The royalty payments represent the majority of the value capture opportunity through a consistent long-term stream of high gross margin revenue. Value sharing from ecosystem partners represents further opportunity for shareholder returns. I'd also ask investors to keep four things in mind when interpreting our customer billings metric. First, the metric is not a substitute for revenue under US GAAP. Second, the accounting for individual customer billings may differ significantly. Third, the amounts billed to customers may vary from quarter to quarter due to fluctuations in activity as we progress through various phases of an agreed scope of work. Lastly, it is important to note that future cash inflows can diverge from customer billings, for example, as a result of timing differences, payment terms, prepaid customer deposits, or any adjustments to final payment amounts. Dan Conway: Okay. Thanks so much, Kevin. Now ready to begin the live portion of today's call. Operator, please open up the line for questions. Operator: Thank you. If you are called upon to ask your question and are listening via speakerphone on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. To be able to take as many questions as possible, we ask that you please limit yourself to one question and one follow-up. Again, our first question comes from the line of Winnie Dong with Deutsche Bank. Your line is open. Winnie Dong: Hi. Thank you guys so much for hosting. First question is, I was hoping you can help me understand a bit more about the joint development of the ceramic separators with Corning, which you recently announced. If you can help me sort of understand maybe some similarities and differences in comparison to Murata. And then on Murata itself, you say you've successfully completed the initial phase of collaboration and then signed a subsequent contract. I was hoping if you can also help me better understand the nature of the agreement, perhaps some details of the economics or the technology know-how in terms of the transfer of it? That's my first question. Thank you. Siva Sivaram: Winnie, thank you. Thanks for the question. As you pointed out, this is an extremely important part of our business model to bring an ecosystem together for QS. Ceramic manufacturing is, as I mentioned earlier, an extremely specialized skill set. We want to bring people with us who can manufacture in high volume, taking our COBRA process and ramping it into the volume and using their balance sheet to put capital in building these factories up. When we started out with Murata about nine months ago, we both entered into a development agreement where they came in to evaluate what we needed to do, what they need to do, etc. They concluded that we entered into the next system where we start to ramp our relationship into a much higher level with commitments of volumes, etc. They understand what the volumes involved are and what our customers' needs are, etc. So we are getting to be in that phase. We can take COBRA and ramp in volume. We have been working with Corning throughout this time as well. Corning had also been under an early development contract with us, and then we came into a more detailed relationship as we announced in early September. The reason we need them is, as you would think, it's pretty obvious, the opportunity is so large that it is good for us to have two suppliers. Initially, they'll be complementary in different aspects of ceramic processing. I expect over the long term to have a much larger portion that each one of them does. Both of them are extraordinarily competent manufacturing partners, and they are excited to be part of this relationship. I spent time with both CEOs at length, and they are very, very eager to get launched into high volume production and work with our big OEM partners. Winnie Dong: That's very helpful. Thank you. And then the second question is the new metric that you just introduced, the customer billing metric. I was wondering if you can give us maybe a rough idea on the conversion time to revenue or to collection of those funds. And then is that sort of the main metric you will be providing over time as opposed to sort of bringing out what revenue could look like in the next maybe one to two years or so? I just wanted to understand that dynamic a little bit better. And then I think last quarter, you mentioned there is some investigation being done in terms of revenue recognition. I was hoping if you can also tie that into your response. Thank you. Kevin Hettrich: Hi, Winnie. So, just to outline back the question parts, there was a going to the definition of customer billings, talk about their importance, and also on the accounting treatment of VW PowerCo. So I'll take them in order. Just to be on the same page, we define customer billings as the total value of all invoices issued by QS to our customers and partners in the period, regardless of accounting treatment. Where we hope it's useful to investors is it's a key operational metric to get insight into customer activity and into future cash inflows. I think you also had a question about how those translate into the timing of cash flow payments. There, I did mention in my remarks that you could see a divergence from billings to future cash inflows for a variety of reasons. Could include things like timing differences in payment from customers, prepaid customer deposits, adjustments to final payment amounts, typical operational considerations there. You asked about the importance. First of all, it is very nice to be in this chapter where we're doing work of value to customers and billing them for it. That's a nice moment for our company. On the VW PowerCo treatment, the way that the accounting works is the cash inflows, of course, at a broader perspective benefit QuantumScape Corporation shareholders. They'll be reflected on the balance sheet as cash when we receive them. During the collaboration phase of the VW PowerCo deal, because of the related party relationship with VW, in accordance with US GAAP, a liability of equivalent value will also be created. A reminder to shareholders, we do not have a repayment obligation with respect to these liabilities. Upon relief of the liability, rather than impacting the P&L, this value will accrue directly to shareholders' equity. This accounting treatment is specific to the collaboration phase of VW PowerCo. Payments from other customers or partners we expect to be accounted for differently due to the lack of equity ownership or significant related party ties. Winnie Dong: Got it. That's very helpful. Thank you. I'll pass it on. Operator: Our next question comes from the line of Jed Dorsheimer with William Blair. Your line is open. Mark Shooter: Hi, everybody. You have Mark Shooter on for Jed Dorsheimer. Congrats on the progress and especially the Ducati demo. It's always a lot of learnings in actually creating the pack and integration. So, congrats on that. During that presentation, VW mentioned cells and EVs by the end of the decade. If we were to take this as 2029, does this track with your development timeline? So if we're assuming that these samples meet all the required cell specs, and a C-sample stage gate is when you're producing those cells at scale. Four to five years seems a bit longer than we expected. What do you think are the remaining technical boxes that need to be checked? Is there any opportunity to pull this forward with VW? Or potentially a little competition with the other two customer engagements you have ongoing? Siva Sivaram: Mark, thanks for the question. By the way, just to be technically correct, the end of the decade is 2029. So just to make sure we don't add an extra year into the calendar. The second thing is, look, actual prioritization belongs to the customer, and they announce plans the way they see it. Our job is to make sure we are going all out. We do everything that we can to make sure they are able to ramp as fast as they can. We are working hand in glove very closely with Volkswagen PowerCo. They know exactly the status of the industrialization because we are working closely with them. We will continue to do that. Now in parallel, when we go work with the new customers that we are talking about, both with an existing customer and the new customer, it's a completely independent path from what we are doing with Volkswagen. We don't try to create competition for our customers, but we work very, very, very closely with each customer, adapting our technical roadmap to their product roadmap. So work goes on in real-time so that we can get to market as quickly as possible. As Kevin points out, in the meantime, they continue to pay us for the development activity that we do together. Mark Shooter: Appreciate the color. Thanks, Siva. 2029 it is. I didn't mean to assume 2030 there. Just it's not bad. I was that would be a separate track here. One engineering group grew to another before the end of the decade. December 30 worst 12/31/2029. Got it. Loud and clear. About the VW relationship as well, in the last iteration of this, there was some space left in for other potential applications where VW could source cells and sell to other markets potentially. Was this written in to give space to the Ducati program? Or should we be looking at even more adjacent markets? Is there any potential there? Siva Sivaram: Yeah. I actually do not want to, again, talk for the customer. But you are absolutely right. We are looking at non-Volkswagen Group applications as well into that contract. The Ducati being part of the Volkswagen Group would be included in the regular production. We do expect to have partnerships across independent of the Volkswagen Group with other new customers and customers working with PowerCo that we both work together. Mark Shooter: Great. Thank you. Operator: Our next question comes from the line of Delaney with Goldman Sachs. Your line is open. Aman Gupta: Hey guys, you have Aman Gupta on for Mark. Thanks. Congrats on the progress. Maybe on the other two customers that you mentioned in your prepared remarks, Siva, could you maybe help us get a sense of where the JDA stands with the customer you announced last quarter and what needs to happen to get that to a more complete commercial agreement? And similarly, on the top 10 global auto OEM, you mentioned you're in active engagement with what it would take to go from the active engagement to a licensing or a JDA agreement? Thanks. Siva Sivaram: Aman, thanks for the question. Of course, we are very excited about these two additional opportunities. We have been alluding to them over the last couple of quarters as to their maturation. We've been already in active engagement with them. As always, we let the OEMs do the announcement, and we follow them. You saw that at the IAA Mobility, we had Volkswagen come out and talk in detail about how they are taking the product into different applications that they have in mind. The same way, we will be doing that with these two as well. As much as I would love to talk about it ahead of time, it would not be appropriate for me to come and tell you how they are doing. But you will see over time as they start to talk about it more and more, you will get a clearer idea of who they are, what they are doing, and how they are doing. I'm very excited about these prospects. Aman Gupta: Thank you for that call, everyone. Maybe secondly, on this partnership approach, recognizing the Corning and Murata relationships for the ceramic separator, I think you mentioned the possibility of expanding the ecosystem to other areas for QS. Can you give us a sense of what areas you might be looking to include for partnerships? And what the kind of structure of these partnerships looks like from maybe a financial standpoint as well? Thank you. Siva Sivaram: Yeah. I'll start with the partnership, and then Kevin will give you the financial impact of those. Look, we are developing a technology ground up that is very, very different in both its potential capabilities and scale-up from regular battery technologies. So wherever possible, we like to include competent and reliable partners from the ecosystem to be with us to invest capital. We talked about these two with respect to the ceramic separators. Have the high-touch transfer. When we develop this no-compromise solution, we want to be able to give them whether it is materials, equipment, processing, software, or metrology. We want to wrap all of this together in a package that they can ramp. In each of these, where we have original IP and unique capabilities, we like partners to come along with us. We want to make it as easy as possible for our OEM customers to ramp production quickly. It would behoove us to bring these partners along. We continue to evaluate additional partners to join the team, and you can see the quality and caliber of the partners that we choose to work with us. Kevin Hettrich: On the finance side, as much as the cell is differentiated, their solid-state lithium metal technology, the energy density, the charge time, and the safety, we think that we're equally proud of the business model as well. We think that's good for shareholders. It's capital-light. It helps us focus on where we think we add value the most, which is in innovation and customer empowerment. It allows each member of our cell manufacturer customer ecosystem player to play to their strengths, which we think is in terms of time and effectiveness and risk-adjusted path to market. Best, and in terms of how our QuantumScape Corporation shareholders see value from that, it really comes from three ways. The differentiation of the self-performance creates value, and our shareholders capture it in three ways. The first would be the monetization of the collaboration work. You saw that in the quarter, $12.8 million of customer billings, longer-term licensing when our customers are producing cells from their factories, we'd get a licensing stream. And then finally, would be value sharing with our ecosystem partners. That together, we think, each of those is important in itself and also gives a robustness to our approach. Aman Gupta: Thank you. Operator: And as a reminder, it is. And with no further questions at this time, I will now turn the conference back over to QuantumScape Corporation management for closing remarks. Siva Sivaram: Thank you, operator. Finally, today, I would like to take this opportunity to congratulate the entire QS team on their outstanding performance this quarter, the execution that they have shown making this IAA announcement so powerful and well-received. And as always, thank you to our shareholders for their continued support. We look forward to updating you on further progress in the months to come. Thank you. Operator: And ladies and gentlemen, this concludes today's call, and we thank you for your participation. You may now disconnect.
Operator: Good day, and welcome to the Q3 2025 SEI Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker 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, 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, Bradley Burke, Head of Investor Relations. Please go ahead. Bradley Burke: Thank you, and welcome, everyone. We appreciate you joining us today for SEI's third quarter 2025 earnings call. On the call, we have Ryan Hicke, SEI's Chief Executive Officer, Sean Denham, Chief Financial Officer and Chief Operating Officer, and members of our executive management team including Jay Cipriano, Paul Klauder, Michael Lane, Phil McCabe, Mike Peterson, Sneha Shah, and Sanjay Sharma. Before we begin, I'd like to point out that our earnings press release and the presentation accompanying today's call can be found under the Investor Relations section of our website at seic.com. This call is being webcast live and a replay will be available on the Events and Webcast page of our website. With that, I'll now turn the call over to Ryan. Ryan? Ryan Hicke: Thank you, Brad, and good afternoon, everyone. We appreciate your time today, especially since we recently spent nearly three hours together during our Investor Day just five weeks ago. First, let me express our gratitude for the overwhelmingly positive feedback we've received since Investor Day. Many of you highlighted the energy, enthusiasm, and clarity of our long-term vision as standout themes. That affirmation reinforces our strategic confidence. We are committed to disciplined execution, transparent communication, and creating long-term value for our clients and shareholders. Turning to the quarter's results, we delivered outstanding performance with EPS reaching 1.3¢. Excluding one-time items, that's an all-time high for SEI. Earnings growth was robust both sequentially and year over year, driven by strong revenue growth and margin expansion. This is the kind of consistent performance we have been messaging over the past few years. Net sales events totaled $31 million with our investment managers business leading the way. IMS posted a record sales quarter reflecting surging demand for outsourcing and client expansions. This is a testament to the strength of our sector, our competitive position in that sector, and our continued investment in future capabilities. As we said at Investor Day, we believe the growth runway here is exceptional. Congratulations to Phil and his team. IMS sales activity was notable for its broad-based nature, with no single client driving the performance. Approximately two-thirds of our sales events were tied to client expansion, increasing our wallet share. Additionally, two-thirds of the events came from alternative managers. This level of diversification and momentum across client types, both new and existing, reinforces our conviction in the durability of our growth strategy. We also continue to engage with large well-known alternative asset managers who are new to exploring outsourcing fund administration. We believe we are well-positioned in these processes given our best-in-class capabilities, track record of execution, and client reference ability. Due to the size and complexity of these opportunities, the contracting process tends to be longer. And we expect to be able to provide more clarity on the nature of these opportunities in our pipeline in early 2026. Switching units, sales activity in our asset management business was highlighted by the single largest mandate win in our institutional segment to date. A multibillion-dollar fixed income assignment for a state government client. We believe this win reflects the early impact of Michael Lane and the entire team's evolved approach, introduced to this audience last month. We are delivering targeted solutions in areas where SEI has deep expertise while complementing our established OCIO offering. The win also reinforces our ability to compete successfully for specialized mandates and demonstrates our capacity to meet the growing demand for tailored investment strategies from large clients. Private banking secured a $13 million win this quarter, partnering with a leading super-regional U.S. bank on a comprehensive transformation initiative across all business lines. This engagement is strategically significant, encompassing technology, outsourced operations, and a substantial professional services component. Our multiyear engagement with this firm to help them define their targeted operating model and build a business case was instrumental in winning the business. This win is an enormous affirmation of the pivot we made a few years ago to be the market leader in the regional bank segment. We anticipate the project will involve extensive work to retire the client's legacy systems, execute complex data conversions, and integrate new platforms. Importantly, SEI is uniquely positioned to support our clients throughout this transition with our professional services offering, representing an incremental opportunity that is not reflected in Q3 sales results. Our strong wins this quarter were offset by a contract loss in private banking, which drove lower net sales for the segment. We've noticed since 2022 that this client was at risk due to a strategic shift away from their bank trust model. And we received formal notice at the very end of September. This is our only notable loss year to date in private banking. The financial impact should be modest as fee conversions typically occur over multiple years. Importantly, we're confident that recent and future wins will more than offset this loss, supported by a healthy diversified pipeline of opportunities nearing the finish line. Net sales would have approached $47 million for the quarter excluding this single client loss. Even with the loss, posting $31 million in net sales events is a strong result, especially as our new wins are well aligned with SEI's long-term strategic direction. Stepping back, SEI's net sales events have surpassed $100 million year to date, a record for SEI through the third quarter. And as we sit here today, we have more confidence in our sales pipelines when compared to Q3 last year. Building on this momentum, our confidence in the Stratos partnership has only grown since the July announcement. Although we have not yet closed, we are already seeing tangible benefits. Awareness of SEI is increasing across both broker-dealer and RIA channels, and we are receiving renewed inbound interest in our capabilities as a result of the announcement. That enthusiasm was on display at the Stratos National Meeting in mid-September, where advisers consistently asked how they could do more with SEI. And earlier this month, Stratos' leadership, including CEO Jeff Concepcion, joined us at our annual SEI Advisor Summit on Marco Island, which saw record client attendance. Our SEI advisers responded very positively to the partnership and the expanded opportunities it creates. We are on track towards the initial closing, which is expected in late 2025 or early 2026. As we said in New York, we are allocating capital to the highest return opportunities and driving margin expansion through cost optimization and targeted investments in technology, automation, and talent. We're in the early innings of AI and tokenization at SEI. Internally, adoption is encouraging, and we're applying AI to real workflows. Externally, we're advancing tokenization pilots with partners. We expect these initiatives to support efficiency and scalability over time. But near term, our focus is on use case validation and a disciplined rollout. In summary, our year-to-date sales events, record EPS, and expanding pipeline reflect SEI's continued momentum, underpinned by disciplined execution and a clear enterprise strategy. Our integrated approach is breaking down silos, enabling us to scale across segments, capture wallet share, and deliver consistent repeatable growth. We are laser-focused on value creation, measured by operating margin, EPS growth, and total shareholder return. Significant opportunity is ahead, and our confidence in SEI's ability to execute and outperform is stronger than ever. And with that, I'll turn it over to Sean. Sean Denham: Thank you, Ryan. Turning to slide four, SEI delivered an excellent quarter. Let me start by calling out the unusual items that impacted our Q3 earnings. We recognize the benefit of approximately $0.03 from insurance proceeds related to a 2023 claim into other income. An additional $0.00 from an earn-out true-up in our advisors business. These gains were offset by $0.02 of M&A expense tied to our planned acquisition of Stratos and $0.02 of severance expense related to cost optimization initiatives. For context, unusual items benefited EPS by $0.58 last quarter and $0.08 in Q3 of last year. Excluding these items, EPS grew meaningfully, up 8% sequentially and 17% year over year. It's worth repeating, Q3 represents an all-time record level of EPS for a quarter excluding unusual items like the significant gain on sale realized last quarter. Let's take a closer look at how each of the business units performed on Slide five. Private banking saw a 4% increase in revenue year over year, thanks in large part to healthy growth on our SWP platform. Our investment manager segment delivered another standout performance, posting double-digit revenue and operating profit growth. We continue to see robust growth in alternatives across both the U.S. and EMEA. Traditional revenue in IMS also grew at a healthy pace, benefiting in part from favorable market appreciation. Turning to advisers, this business posted the highest year-over-year revenue growth among all of our segments. We're seeing growth driven by market appreciation, contribution from our integrated cash program, and improving momentum in the underlying business. Institutional revenue and operating profit were essentially flat for the quarter, reflecting lower equity exposure and less benefit from market appreciation compared to our advisors business. On a sequential basis, both revenue and operating profit increased across all business units, with especially strong margin expansion in investment managers and advisers. As you'll see on Slide six, margins were solid in Q3 with meaningful improvement both year over year and sequentially. The year-over-year decline in private banking margin was due to one-time items that benefited last year's results. If we exclude those, private banking margins would have increased by approximately 60 basis points. Institutional margins declined sequentially mainly due to a handful of choppier items in both the current and prior periods. None of these were individually material, but the impact is more pronounced given the lower revenue base in this segment. For investment managers, margins came in ahead of what we communicated last quarter, supported by revenue growth that exceeded 25% annualized from Q2 to Q3. This growth was fueled by factors that are inherently difficult to forecast, such as market appreciation in the traditional business and the timing of capital deployment in the alternatives business. Advisors margin growth reflected strong revenue growth in $2 million earn-out true-up contributing about 120 basis points to Q3 margin. Margin improvement also benefited from our integrated cash program, which added $10 million to operating profit versus the prior year. Finally, we incurred severance costs of nearly $4 million this quarter, reflecting our commitment to supporting employees through transitions as we continue to evolve our business. The impact was spread across all business units, and most notably corporate overhead. Excluding severance and approximately $3 million of M&A costs related to Stratos, corporate overhead came in at $38.5 million for the quarter. Turning to sales events on Slide seven, Ryan discussed the most notable items in the quarter, including strong wins in investment managers, our large regional bank win in private banking, and a significant institutional win with a new government client. In Asset Management, this quarter's wins offset client departures, most notably in our institutional segment. While losses were previously the only story in this segment, we are now seeing growth elsewhere that offsets these headwinds. A promising sign for the trajectory of our asset management business. Turning to Slide eight, SEI delivered strong asset growth, both sequentially and year over year. Growth in assets under administration was broad-based across CITs, alternatives, and traditional funds. While CITs and traditional funds receive some benefit from market appreciation, the majority of the AUA growth was driven by alternatives. Assets under management also increased, with modestly positive net flows in advisers driven by accelerating growth in ETFs and SMAs, which offset continued pressure on traditional mutual funds. Institutional flows were essentially flat, reflecting offsetting sales events. While overall net flows were modest, this trend marks a clear improvement over prior years and supports our evolving asset management strategy. LSV assets under management each increased over 4% from Q2 driven by strong market performance and outstanding performance relative to benchmarks. Market appreciation was only partially offset by nearly $3 billion of net outflows, similar to the pace realized in the first half of this year. LSV performance against relative benchmarks is supporting continued strength in performance fees, which totaled $8 million or $3 million at SEI's share in Q3. Turning to capital allocation on Slide nine, we ended the quarter with $793 million of cash and no net debt. We are maintaining an excess cash balance in anticipation of funding the first Stratos close with the balance sheet cash. Share repurchases represented a primary use of capital, totaling $142 million in Q3 and $775 million for the trailing twelve months. That represents SEI repurchasing more than 7% of shares outstanding just over the last year. At the same time, we're deploying incremental capital to strategic investments that support long-term growth. This quarter, we made a $50 million anchor investment in LSV's market neutral hedge fund. Our early commitment adds credibility to the new strategy and is expected to support future fundraising from institutional investors. Our investment had a strong start, contributing $1.5 million to Q3 results before tax, which has captured a net gain on variable interest income. In summary, SEI's third quarter results reflect continued progress across our core businesses. We are focused on driving growth, optimizing margins, and deploying capital to maximize shareholder value. With that, operator, please open the call for questions. Operator: Thank you. Please press 11 on your telephone and wait for your name to be announced. To withdraw your question, press 11 again. And our first question will come from the line of Crispin Love with Piper Sandler. Your line is open. Crispin Love: Thank you. Good afternoon. Hope you're all well. Ryan, you mentioned that two-thirds of your sales events were from alternatives. I don't recall you ever making a comment quite like that as it pertains to sales events. First, are those two-thirds similar to recent quarters, give or take? And then second, when you look at those sales events, the recent ones, are the vast majority from the largest alternative players out there, such as the ones that you called out on a slide at Investor Day being clients, or are there smaller nonpublic alts as well that make up a good portion of those wins? Ryan Hicke: Hey, Crispin. Great to hear from you. It's a great question. I'll go kinda high level and then kick to Phil. So, again, I think it's just an opportunity for us to offer continued transparency into sort of where we're seeing growth. And as we touched on in the investor day, when you look at alternatives in that overall space and the surging demand for outsourcing that I mentioned, we're just kinda calling that out and trying to give a little bit more transparency and granularity. But when you go to Phil, if you wanna chime in here, I think the Crispin's question is, is it a lot of the same names that we highlighted that day or new names or a little bit of both? Phil McCabe: Thanks, Crispin. And this is Phil. Actually, it's a mixture of everything, large clients, small clients, but no single event was greater than 10% of the overall number. So it really is a mixture of things anywhere from private credit to insourcers moving to outsourcing, retail, all to, you know, pretty much across the board. We're seeing a lot of alternatives in CITs. It really was a mix. We expect some other announcements, probably early next year to talk a little bit more about some of the larger managers that are moving from insourcing to outsourcing. Crispin Love: Great. Thank you. Appreciate that and, definitely good news there. Second question, can you just give any color on the known contract loss in private banking with a long-time client? Any details on the losses of merger, competitive takeaways? Just any color would be great. Ryan Hicke: Sanjay? Sanjay Sharma: Yep. I can answer that question. First of all, this is I to highlight this is one of loss in last three plus years since I took over to responsibility. And this is something, as Ryan mentioned, knew about it since 2022. This was a major operating model change for this client. And so we should not read this like a trend. This is one-off scenario. We have worked with the client. And as you could see, these kinds of deconversions, they take a long time. The onboarding takes time. The deconversion also takes longer time. But as Ryan has mentioned and Sean has called out that to be on the safer side, we took the hit and announced it in one go. Ryan Hicke: I do. And I think, Crispin, it's really important to note, and we try to call this out specifically in the script. We got the notice literally at the very end of September. And it's a firm that we have known a long time. We have been actively engaged in trying to help them think through their future operating model. But as Sanjay just highlighted there, we got the notice. We took the entire loss. I don't think we have full insight into the entire deconversion schedule. And exactly what will go when. So we're definitely erring on the side of conservative here. And I think it's really important to emphasize Sanjay's point that this is a one-off event. This is absolutely not a trend. And it can't be ignored, the win that we also have in this quarter as well. But you know, certainly not one. We don't like losses. We worked really hard with this firm. We will support the firm actively as a great partner. Through their transition to a new operating model. As you know, I always live in a world of optimism. I think there's always gonna be more opportunity for us when we treat the client right on the way out. They will probably find a way back to SEI in other ways. Crispin Love: Perfect. Thank you. I appreciate taking my questions. Operator: Thank you. One moment for our next question. And that will come from the line of Jeff Schmidt with William Blair. Your line is open. Jeff Schmidt: Hi, thank you. For the integrated cash program, you're earning close to the Fed funds rate on that cash. With a little spread. Is Internet getting a fixed rate? Or are you considering allocating some of that to fixed rates now that the Fed is easing again? Or how should we think about that? Paul Klauder: This is Paul, Jeff. So on that, we're earning about 370 basis points presently and we're giving the investor about 55 basis points yield. Which is pretty attractive versus our competitors. So we'll continue to look at that investor yield as rates come down. Typically, when a rate comes down 25 basis points, we usually impact the investor by 15 and then we would impact ourselves at 10. At some point, we'll get to a floor, but that's kind of the current program and the current state of affairs on the integrated cash. I think one thing to note when it comes to the integrated cash is to also note that we have 20 times the amount integrated cash and fixed income portfolios. And so when you see a decline in rates, you typically are going to see over time an increase in price. And so some of that you look at it in isolation, it'll have an impact. But overall, it'll be muted by the amount of fixed income we have in our portfolio. Jeff Schmidt: Okay. And then in private banks, just looking at the expense growth there, it's running a little bit higher over last quarter '2 than we had seen in the previous really a year or two. Is that mainly investments in talent that you've been calling out recently? Or what's driving that? And then how should we think about the offshoring with the new service center? Would that bring growth down over time? Ryan Hicke: Jeff, I don't think there's anything unusual to call out here with banking if Sanjay wants to provide color. Some of it's just, as Sean mentioned, investments we make to kind of onboard the backlog. Make sure that we're kind of set up to, you know, really successfully create the experience that we want with these clients. But I don't think there's anything you should read into that, Sanjay. Sanjay Sharma: No. And I would act with the same. I think for us, the number one most important thing is backlog delivery. Signing a new client is a great thing. Yes. We all celebrate. Successfully delivering and onboarding those clients is equally important. And that's why we would see sometimes that, yes, and that could be for professional services delivery, or it could be converting new clients. Jeff Schmidt: Okay. Great. Thank you. Operator: Thank you. One moment for our next question. And that will come from the line of Alex Bond with KBW. Your line is open. Alex Bond: Just wanted to start with the IMS business. Obviously, a strong quarter there. And I know you mentioned the growth there was in part driven by market appreciation and the deployment timing. But just trying to size up the 3Q margin level is the right way to think about, the margin for this business on a forward basis considering, the Alt's deployment. And then also, just how the margin here might be impacted sequentially by the ongoing investments you're making and, you know, just trying to see if there will be any impact there you know, from a timing perspective just in terms of a higher expected investment level, in one quarter or the other? Sean Denham: Sure. So, so this is Sean. So as I indicated last quarter, we were actually kinda given some light guidance to the street that the margin improvement we were we're anticipating good margins going forward, but we do know we need to make certain whether it's anticipation of new clients coming on board and us hiring ahead of those clients, Again, as I mentioned in my remarks, the Q3 improvement in margins did take us a little bit by surprise. Some of that, as Phil mentioned, was due to market appreciation. I mentioned that in my comments. That margin or market appreciation obviously is not tied to cost. So when with the market appreciation, you're going to have higher margins than expected. On your the second part of your question on what we expect in the future, we're still expecting strong margins. When I give guide or light guidance, I would I would call it, light guidance on what we may expect or what you can expect from margins going forward, I'm really giving more guidance over a period of time as opposed to quarter over quarter. So we do have, you know, for Q4 going to Q1 into next year, we will continue to be making investments into platform. There's certain things that in Phil's business we need to invest in front of. Whether that's hiring talent in order to support future growth, whether that is certain parts of our technology base, So in in a broad brush, we would expect margins you know, to be relatively flat, if not a downtick especially as we move into 2026. Ryan Hicke: Got it. Understood. That's thing I think it's important to add I think it's important to add to that, though, that I think we try to continue to emphasize this message. When we think about how we run the company, we're not trying to run the company on a unit by unit basis. And get too focused on the individual margins in the unit. So if we saw and and I'm not forecasting or foreshadowing anything. I'm just saying, what we see as Phil talked about in New York, what we see with that pipeline and what we see with that client base right now we are going to maximize that opportunity. And if that required us to take the margins down a little bit in IMS, we would be more focused on SEI's margins and what we would do in other units to make sure SEI's margins continue to grow and expand, as Sean talked about, in New York. But, I mean, Phil, I think, is really consistent as he was in New York and here. We are really, really enthusiastic about what we see right now with our existing client base and pipeline in IMS. And where we're positioned competitively, we will not let that window pass us by. Alex Bond: Got it. Understood. No. That's helpful. And then maybe just one more. Just wondering if you could speak to the sales mix between, US and international this quarter and also maybe how that's tracking year to date relative to last year. I know it's still early days on the on the revamp for that area of the business, but maybe additionally, if you could just walk us through maybe what we should be looking for over the coming months and quarters as it relates to just tracking the progress you're making on the on the international front. Thank you. Sanjay Sharma: Yeah. This is Sanjay here. So on the international front, as I said on the Investor Day, we are in the early phases. Defining our go to market strategy. And as I as I said at that time, we're going to focus on maximizing our presence in the jurisdictions we already have presence. So, for example, UK or Dublin or Luxembourg, those jurisdictions have been we continue to expand our presence there. And we are in in the process of defining our strategy. And and the other part, we're looking at, okay, how we maximize our opportunities to existing clients. The clients, they we already had the assistance in US market. And they have presence in those jurisdictions. So that's what our focus would be. Ryan, Sean, you want to add anything? Sean Denham: Yeah. I I will just this is Sean. I'll just echo what Sanji said. Coming off the heels of Investor Day just a few weeks ago, kind of letting everyone there know that, you know, we are looking at the the the difference between domestic and international. Would echo what Sanjay said. Little bit early days. So I don't think as we sit here today, we're ready to start giving color around revenue mix between international That that'll come more as we realign our segments, as we start disclosing our segments and with anticipation that at that time we'll give more breakdown between international growth versus domestic growth. Alex Bond: Got it. Thank you. Operator: Thank you. One moment for our next question. And that will come from the line of Ryan Kenny with Morgan Stanley. Your line is open. Ryan Kenny: Can you unpack a little bit more how you're thinking about the pace of buybacks you did 1.6 million shares in the quarter. Is that the right pace going forward? Or should we expect to slow down as the Stratos acquisition moves forward? Sean Denham: Yeah. So you know, the way I would answer that is, very similar to the way I I answered at investor day. So we are expecting that free cash flow on a you know, forward looking twelve month run rate would be we would be returning that 90 to 100% through dividends or buyback. So that's the way I'm looking at it. So the cash build, as I is anticipation of drawing that cash down through the Stratos consummation of the Stratos deal And then going forward, I think you can expect whatever our free cash flow that we generate, we're gonna be returning that 90 to 100% back to the shareholders either through dividends but primarily through buybacks. Ryan Kenny: Thanks. That's helpful. And then separately, we've seen some modest credit fears in the market with a few bankruptcies, and you're a big private credit servicer. So are you seeing any impact at all in your private credit servicing pipeline? It sounds like no, all good, but be helpful to clarify. Phil McCabe: Sure, Ryan. This is Phil McCabe. I would start by saying that IMS has been IMS has business is really, really diversified by product, by jurisdiction, by type of client. So, but we have spoken to a lot of our private credit managers. They literally are the best of the best in the industry. And they really know how to manage credit risk. They tell us that they're not concerned at all. They're still launching products aggressively. And, you know, collectively, they they do, say that there could be a new manager that entered the space on the smaller side. And there could be some struggles in the future. But that's in a part of the market that we really don't play in. We're on the higher end of the market. They're doing really well. The one inch fact on top of all that, is that we really get paid for the most part with private credit based on invested capital. So we're not subject to mark to market or NAV. So we don't really you know, as of right now, we see any real risk for the business. Ryan Kenny: Thank you. Operator: Thank you. And our next question will come from the line of Patrick O'Shaughnessy with Raymond James. Your line is open. Patrick O'Shaughnessy: Hey. Good afternoon. So I understand I heard you when you said that we should not read today's chunky client loss that you spoke about in private banks. As a trend going forward, but to what extent are there other high-risk relationships your existing private bank's client portfolio that you're keeping an eye on at this point? Sanjay Sharma: Patrick, that's a great question. As of today, we are not aware of any such large client or any such large risk. I also no. Share one one example. Early this month, we hosted all of our clients here in Oaks Campus. The engagement was best engagement over the last three years. So I don't see that as a trend or a big risk. Ryan Shaw? No. I completely agree with you. I mean, if there's you know, we we are always gotta be you know, vigilant in front of our clients, engaged with our clients. But relative to where we were a few years ago, we feel extremely confident that we are in the right place with our clients in the banking business. Patrick O'Shaughnessy: Got it. Appreciate that. Same time. I will say that was that answer. I think I was I appreciate that answer. Sorry. He said he appreciates the answer. Oh, okay. Great. Sorry to interrupt. So and then for my follow-up question, with the divestiture of the Archway family offices business from the investment in new businesses segment, Can you just remind us what's left in that investment in new businesses segment and the strategic importance of that for SEI? Sean Denham: So included in ventures, there's really two main revenue streams, although albeit they're not large. One is our Sphere business, and other the other pieces are private wealth management business. And those, as I mentioned on Investor Day, if and when we resegment the organization, that segment from a revenue standpoint or even from a segment standpoint will cease to exist. That revenue will then follow the client and the related other segment that it pertains to. Patrick O'Shaughnessy: Got it. Thank you. Operator: Thank you. And we do have a follow-up question. I believe that will come from the line of Ryan Kenny with Morgan Stanley. Ryan Kenny: Hi. Thanks for taking my follow-up. Can you quantify how much margin suppression there's been from accelerated investment? Any numbers or quantification we can think about? Sean Denham: Yeah. Ryan, I this is Sean. I'm I I don't think I could quantify that. That's actually not really the way we think about the business. It's a great question, but I could not sit here and quantify that for you. Ryan Kenny: Alright. Thanks. Operator: Thank you. I'm showing no further questions in the queue at this time. I would now like to turn the call back over to Mr. Ryan Hicke for any closing remarks. Ryan Hicke: Thank you all for your questions and for joining us today. As we close the quarter, I want to emphasize that SEI is on a strategy that positions us for long-term success. But I think it's important as we close the call, we reflect a little bit on the results this quarter. We delivered record earnings per share. The IMS unit had a record sales quarter. We had an important strategic win in the banking business and I know we didn't touch on this so much in the Q and A, but there are some really good leading indicators and lagging indicators when we start to unpack what's going on in the asset management businesses at SEI. And for those reasons, we're confident in our ability to capitalize on opportunities ahead, deliver for our clients, and create value for our shareholders. But thanks again everybody for your time and interest in SEI, and we look forward to updating you next quarter. Operator: This concludes today's program. Thank you all for participating. You may now disconnect.
Operator: Welcome to Winnebago Industries Q4 and Fiscal 2025 Financial Results 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. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Raymond Posadas, Vice President of Investor Relations and Market Intelligence. Please go ahead, sir. Raymond Posadas: Thank you, Towanda. Good morning, everyone, and thank you for joining us to discuss our fiscal 2025 fourth quarter and full year earnings results. This call is being broadcast live on our website at investor.wgo.net. And the replay of the call will be available on our website later today. The news release with our fourth quarter and fiscal 2025 results was issued and posted to our website earlier this morning. Please note that the earnings slide deck that follows along with our prepared remarks is also available on the Investors section of our website under Quarterly Results. Turning to Slide two. Certain statements made during today's conference call regarding Winnebago Industries and its operations may be considered forward-looking statements under securities laws. The company cautions you that forward-looking statements involve a number of risks and are inherently uncertain. A number of factors, many of which are beyond the company's control, could cause the actual results to differ materially from these statements. These factors are identified in our SEC filings, which we encourage you to read. In addition, on today's call, management will refer to GAAP and non-GAAP financial measures. The reconciliation of the non-GAAP measures to the comparable GAAP measures is available in our earnings press release. One additional housekeeping item. Beginning with our Q4 and full year 2025 results, we are transitioning our segment profitability measure from adjusted EBITDA to operating income. To assist with modeling, our investor supplement provides a table detailing segment quarterly operating income along with depreciation and amortization for fiscal 2025 and 2024. It should be noted that operating income at the segment level excludes both interest expense and tax expense, which is held at the corporate level. Please turn to slide three. Joining me on today's call are Michael Happe, president and chief executive officer of Winnebago Industries, and Bryan Hughes, senior vice president and chief financial officer. Mike will begin with an overview of our Q4 performance, Bryan will then discuss the associated drivers of our financial results in addition to sharing our forward view of the market and our fiscal year 2026 guidance. Mike will conclude our prepared remarks, and then management will be happy to take your questions. With that, please turn to Slide four as I hand the call over to Mike. Michael Happe: Thanks, Ray, and good morning, everyone. On our Q3 call in June, I spoke with you about the importance of staying focused on the areas of the business within our control. As I reflect on our fourth quarter performance, the entire Winnebago Industries team has reasons to be proud. We ended a challenging fiscal year with a strong fourth quarter that reflects the resilience of our team and the strength of our diversified portfolio. Our results also demonstrate the progress of the strategic actions we've taken to begin transforming our Winnebago branded RV businesses. Complementing our healthy stable of industry-leading brands, these initiatives and others across the enterprise enabled us to return to positive operating cash flow in the quarter, improve working capital, and meaningfully reduce our net leverage ratio. We generated adjusted diluted earnings per share of $0.71 on net revenues of $777.3 million. Momentum across brands and product lines more than offset operating margin pressure from the ongoing turnaround at our Winnebago branded businesses. Our improved Q4 performance enabled us to achieve the high end of our revised 2025 financial guidance. Driving our growth in Q4 were standout motorized RV products like Newmar's Class A Summit Air and Grand Design's Lineage Series M, which is rapidly gaining momentum in the Class C diesel category. On the towable side, the affordable Grand Design Transcend series is resonating with new consumers to the RV lifestyle. We also continued to see strong performance in our marine segment from multiple Barletta products, including the ARIA, which have become the definition of affordable luxury in the aluminum pontoon segment. Turning to key RV trends on slide five. Following a brief uptick earlier in the summer, RV retail registrations declined in August. On a trailing three-month basis, retail demand remained stable and dealer inventories continue to improve. This environment is contributing to a healthier channel, even as monthly results remain variable. From a wholesale perspective, total RV shipments declined low single digits in August. The industry continues to demonstrate discipline, with manufacturers closely aligning shipments with retail demand. As we move through the remainder of calendar 2025, we expect dealers to remain selective in restocking, supporting channel stability in the off-season. We now expect wholesale RV shipments in the range of 320,000 to 340,000 units for calendar 2025, or a median of 330,000 units. For calendar 2026, we are estimating wholesale RV shipments of 315,000 to 345,000 units. Our production strategy centers on disciplined planning and execution, enabling us to align output with market conditions. Our inventory turn rate of 1.9 times at the end of Q4 reflects seasonal dynamics and dealer demand. While we're targeting higher turns over time to support operational efficiency and steady growth, we recognize that dealer behavior and market conditions ultimately drive those turns. Our strategy remains focused on maintaining a prudent demand-driven approach. On slide six, our continued momentum in our core RV market segments underscores our strategic focus, product innovation, and deep customer engagement. Shown on this slide are some of our current success stories that our team here has every right to be very proud of. Newmar's Dutch Star continues to be the number one brand in the Class A diesel category, a position it has held since 2021. In Class B, three Winnebago brands, Solis, Travato, and Rebel, have led all models in that category for the past five consecutive years. We also continue to win in Class C diesel, The Winnebago Echo is currently the number one selling brand in this class. And while not shown on the slide, the Winnebago View is the second selling brand in that class. Additionally, in just its first full year on the market, the Lineage Series M has become the number three brand in the Class C diesel market for the August trailing three and trailing six-month periods. And a recent ad is the emerging Grand Design Transcend, which advanced three spots versus last year to the number eight position of the highly competitive travel trailer category, joining the Grand Design Imagine in the top 10. And finally, the Grand Design Momentum holds the number one position in both the fifth wheel and travel trailer toy hauler segments. Moving to the marine segment on slide seven, Barletta and Chris Craft have done an exceptional job managing inventory, building dealer relationships, and creating an outstanding boating experience for consumers. This discipline and customer-centric approach has enabled both brands to maintain strong performance, despite significant industry headwinds. For the trailing twelve months ended August 31, Barletta increased its market share 20 basis points to 9%. The brand's dealer network called model year '26 the best top-to-bottom product launch in Barletta's history, including new features, design elements, and technology updates. Now turning to slide eight, in order to deliver a successful fiscal year 2026, we are focused on executional drivers that directly contribute volume, share, and profitability. We expect our Winnebago branded motorhomes business to benefit from new product introductions, like the recently launched Class C Sunflyer, alongside stronger dealer partnerships, and improved operational efficiency. We are positioning the Winnebago branded travel trailer business for growth as well, through innovative products, a revitalized dealer channel, and operational leverage. In addition, we expect to see the Grand Design Motorhomes business continue to capture share as a result of new products, continued dealer momentum, and strong growing brand loyalty. Grand Design Towables will drive share gains and profitability through continued quality enhancements and product innovations like its new foundation, the brand's first destination trailer. Newmar and Barletta will contribute selective share gains and profit stability through sharper price points and competitive new offerings. We are also focused on a multitude of operational initiatives across manufacturing optimization, vertical integration, capacity utilization, sourcing coordination, quality improvement, and working capital management. All of which will further strengthen profitability and cash flow in fiscal year '26. I'll now turn the call over to Bryan Hughes for the financial review. Bryan? Bryan Hughes: Thank you, Mike. Good morning, everyone. Starting on Slide nine, higher consolidated net revenues were primarily driven by favorable product mix and targeted price increases, partially offset by higher discounts and allowances. In aggregate, volumes across our portfolio were roughly flat versus the prior year's fourth quarter. Consolidated gross profit increased on the higher revenues, although gross margin declined primarily due to costs associated with the ongoing transformation of the Winnebago branded businesses, partially offset by targeted price increases. Consolidated adjusted EBITDA increased 33.1% year over year. Consolidated operating income also improved significantly from 2024, which was impacted by an impairment charge we took against the Chris Craft goodwill. Adjusted EPS of $0.71 was up 2.5 times from the prior year fourth quarter. Turning to our Towable RV segment results on Slide 10. Revenue, as anticipated, was down slightly year over year, reflecting a mix shift toward a more value-oriented consumer and driving higher volume in products such as our Grand Design Transcend series. Targeted price increases and improved operating efficiencies within our Winnebago Towables business drove a 210 basis point increase in operating income margin, outweighing higher warranty experience and slight deleverage on the lower sales. As shown on Slide 11, double-digit top-line growth in the Motorhome RV segment was powered by higher unit volume and favorable mix, driven by the continued ramp-up of Grand Design RV's motorized Lineage lineup, as well as a stronger quarter from Newmar. This growth was partially offset by higher discounts and allowances versus last year in the Winnebago branded motorhome business. On the margin side, improved volume leverage and lower warranty expense partly offset costs associated with the ongoing transformation of the Winnebago branded motorhome business and higher discounts and allowances. As part of this ongoing transformation, we took decisive action in Q4 to dramatically reduce production schedules and consolidate the brand's manufacturing footprint by closing two of our four Winnebago Motorhome locations in Northern Iowa. While this had a meaningful negative impact on our operating income and our yield, on the positive side, it drove significant cash conversion in the quarter. As shown on Slide 12, our Marine segment continues to perform well. Net revenues were up double digits from a year earlier on higher unit volume and targeted price increases. Both Chris Craft and Barletta have done an outstanding job managing production in a cautious retail environment. From a profitability standpoint, the year-over-year margin improvement largely reflects the prior year goodwill impairment as well as volume leverage and price increases on model year 26 products. While we are pleased with our performance, unit sales across the marine industry continued to show soft trends. Turning to balance sheet highlights on Slide 13. We sharply reduced accounts receivable and inventories to improve working capital between the end of the third quarter and year-end. This resulted in $181.4 million in cash from operations in Q4. And when combined with the 33% year-over-year improvement in adjusted EBITDA, contributed to a net leverage ratio of 3.1 at the end of the year, a substantial improvement from our 4.8 net leverage ratio at the end of the third quarter. For fiscal 2025, we returned $88.9 million to our shareholders consisting of $50 million in share repurchases and $38.9 million in dividends. Our $0.35 per share cash dividend paid on September 24 marked our forty-fifth consecutive quarterly dividend payment. This underscores our commitment to creating shareholder value and our confidence in the future of the business. Importantly, while not highlighted on this page, we also repaid $159 million of debt during the past year. We remain committed to our targeted range for net leverage and we will continue to prioritize improvements to growth and net leverage in the near term. On slide 14, let me update you on our tariff mitigation initiatives in fiscal 2026. As we enter fiscal 2026, our proactive strategy to address ongoing tariff challenges remains front and center. Over the past year, we've strengthened supplier engagement, tracking policy shifts, reassessing sourcing, and prioritizing high-duty materials. Our sourcing and engineering teams have diversified supply routes, identified alternate vendors, and redesigned bills of materials to enhance supply chain agility. Looking ahead, we're assessing the tariff structure and the rates and their impacts on us going forward. We remain vigilant and adaptable and will continue to provide timely insights as market and trade conditions evolve. Turning to our fiscal 2026 outlook on slide 15, based on the current market environment and our expectations for North American RV wholesale shipments of 315,000 to 345,000 units in calendar year 2026, we expect consolidated net revenues in the range of $2.75 billion to $2.95 billion, reported earnings per diluted share of $1.25 to $1.95, and adjusted earnings per diluted share of $2.20 to $2.70. The midpoint of $2.35 represents an increase of 41% from our fiscal year 2025 results. Our outlook takes into account prevailing trends in the RV sector, including competitive dynamics, shifts in consumer preferences, key macroeconomic factors that may influence overall demand, and current trade policy positions and tariff rates. With the exception being the most recent 100% additional tariffs that were the administration's reaction to rare earth mineral restrictions threatened by China. We have held that risk aside for now pending the upcoming scheduled talks between The US and China. All of these factors remain dynamic and we will continue to provide further updates to our expectations as we progress through the year. Let me share a couple of additional data points to help frame the business trajectory for fiscal 2026. First, as it relates to our sales growth, we are not building in or counting on an improvement to retail units sold in the industry as mentioned earlier. Instead, we expect growth in our portfolio to be driven in part by healthy growth in the Motorhome RV segment due to the success of the Grand Design RV Motorhomes expanded Lineage lineup. Lineage has seen exceptionally strong dealer and end consumer demand to date, which gives us tremendous confidence in the success of this portfolio. We look for flat to modest low single-digit growth in the Towable RV segment. The Marine segment is expected to produce a decline in sales due to continuing soft retail trends in that part of the market. As we continue executing on our margin improvement initiatives, we expect to deliver meaningful annualized cost savings. These savings are driven by targeted operational actions, including footprint optimization, supply chain enhancements, and strategic workforce alignment. That are already underway and will continue to generate meaningful efficiencies. Specifically, we expect operating income margin in the Motorhome RV segment to improve to low single digits for fiscal 2026 from negative 0.6% in fiscal 2025. This expectation reflects both the impact of our enterprise-wide margin improvement initiatives and the focused margin recapture efforts within our Winnebago branded motorhomes business, including a targeted and refreshed product line cost structure optimization, most of which has already been executed during the fourth quarter of our fiscal 2025. The footprint consolidation that has also already been accomplished, focused mix improvements, and other cost efficiencies. From a capital allocation perspective, we are aiming for a net leverage ratio approximating two times by the end of fiscal 2026. This remains a strategic priority in the coming year. Now please turn to Slide 16 as I hand the call back to Mike for his closing comments. Michael Happe: Thanks, Brian. In closing, we ended the year with a strong fourth quarter, delivering solid results across revenue, profitability, and cash flow. A testament to the strength of our diversified portfolio and disciplined execution. We're energized by the momentum building across our enterprise. The strategic actions we're taking to revitalize the Winnebago motorhome and towables lineup, align operations with market demand, and streamline our cost structure are beginning to generate a meaningful improvement to results. We're seeing the early stages of what we believe will become a powerful flywheel effect. Great products attracting top-tier dealers, stronger retail performance reinforcing brand strength, and renewed energy across our distribution network. After all, Winnebago remains the most recognized brand in the entire RV industry. Across our outdoor portfolio, the trends are encouraging. Grand Design Motorized is off to an outstanding start in its first full year, Newmar continues to lead in core motorized Class A segments, and Grand Design Towables is expanding with new offerings that balance quality and affordability. Our marine brands, Chris Craft and Barletta, remain pillars of innovation and premium customer experiences. As we look ahead to fiscal 2026, our optimism is grounded in execution, not assumptions about market recovery. With a strong foundation in place, we expect the cadence of improvement to accelerate through the year as we continue to execute on our strategic initiatives. Now Brian and I are happy to take your questions this morning. Operator, please open the line for the Q and A session. Operator: Thank you. Ladies and gentlemen, wait for your name to be announced. To withdraw your question, please press 11 again. Our first question comes from the line of Scott Stember with Roth. Your line is open. Scott Stember: Good morning, and thanks for taking my questions. Maybe we could dig into tariffs a little. Last quarter, you guys had talked about some unmitigated expense in that 50 to 75¢ worth of EPS range. And it sounds like there's still a lot of variability at least within your guidance. Can you talk about how much or where the unmitigated portion is? Is it at the lower end of your guidance? Or maybe just frame out what that number is. Michael Happe: Scott, good morning. Thanks for the question. As we had indicated at our open house investor event, this morning's guidance does include what we currently anticipate to be the full impact of tariffs on our business performance in the next twelve months. As Brian highlighted in his comments, the tariff subject continues to be very dynamic. And there certainly could be changes in the tariff environment in the future. And as those happen, we will certainly continue to keep the investor community updated as to the relevance and the impact on our business. But we chose for this morning's purpose of providing fiscal 2026 guidance to include the full impact in the guidance. So we won't be calling out this morning a specific number for tariffs in terms of the net impact on the business. But our teams continue to do an outstanding job of finding avenues to mitigate the tariff exposure. And as we also indicated in our Q4 commentary, we have made difficult decisions to do some disciplined pricing actions as well to cover some of those costs where we believe the market can take that. But the tariff environment continues to be very dynamic. And we imagine it will remain that way throughout the year. But we think we've built muscles and processes to mitigate that subject as effectively as most of our competitors are doing. Scott Stember: Got it. And last question on the cadence of guidance. I know you touched on it briefly. A lot of stuff going on, you know, retail, back and forth, and we're coming out of the you know, some of the actions that when the big motorized. But can you just maybe help us for modeling purposes maybe a little bit more granular what we should be looking at near term in quarters ahead versus maybe the first half? Versus the back half of the year? Michael Happe: Chad, I'll comment and then ask Brian to provide certainly more substance. You know, many of our fiscal years tend to be a bit back half loaded in terms of profit generation Q3 and Q4 especially. Fiscal 2026 will be similar in that regard. You know, we do believe that we'll be able to get off to a better start in the first half of the year than we had a year ago. But a majority of the upside will likely happen in the back six months of the year. I do want to reiterate and we stated it on the call, that our assumptions for fiscal 2026 are based on a relatively flattish retail and wholesale shipment environment. And so we believe most of the opportunity to drive stronger results in fiscal 2026 is really a result of actions that we can control. And some of the very difficult decisions we made in fiscal 2025 we believe that we are in a better position in fiscal 2026 to drive the business forward, especially on the bottom line. Brian, what would you add? Bryan Hughes: Not much more than that, Mike. I guess the only other add that I would have is that we do expect each quarter to show improvement year over year at this stage. That's the additional color I would provide. Scott Stember: Got it. That's all I have for now. Thank you. Operator: Thank you. Our next question comes from the line of James Hardiman with Citi. Your line is open. James Hardiman: I wanted to dig into the guidance a little bit. Let's start with the industry numbers. I'm having a tough time getting the sort of full year shipment numbers to foot. I guess what are your assumptions for retail for '25 and '26? I think you said flattish for '26, but where do you expect that to finish in 2025? It seems like based on your wholesale assumption, that we're still gonna be looking at a pretty meaningful inventory reduction at the industry level in '25. Is that right? Michael Happe: James, I think that assumption is right. When we started both fiscal but also calendar year '25, I think there was certainly stronger optimism amongst the industry participants that we had finished most of the destocking from the prior two or three years, 2022 through '24. But that, in fact, was not the case. And, you know, retail in calendar '25 did not show itself to the degree that I think, again, everybody in the industry would have liked. And dealers continued to be disciplined in how they managed, obviously, their inventory both in terms of quality and quantity. For our fiscal 2026 year, you know, and calendar 2026 year as well, we really aren't anticipating a significant increase in dealer inventory. We think in many of our categories that we are near a situation where the industry can shift at a one-to-one level. I would say that there are pockets of the motor home category where that may not be the case, and we are watching the pontoon segment very carefully from the marine side. So I think your characterization of 2025 is correct in that there's potentially a little bit more destocking than we had anticipated. We are not necessarily building in 2026. But as Brian noted, the category we're watching the closest is some weakness in the marine space. As dealers continue to probably have slightly elevated inventory on pontoons that they're managing downward. James Hardiman: That makes sense. But then I guess if putting Marine aside for the second for a second, if I just think about a 2025 in which there was significant destock and then a 2026 where if we assume sort of one-to-one, wholesale to retail, that would seem to suggest material growth in wholesale if retail is in fact flat. And so help me sort of understand, like, RVIA, for example, has a meaningfully higher shipment number at their midpoint. I just wanna make sure I'm not missing something. And maybe one way to talk about it is in the context of your business. I think you finished that 1.9 turns for the fiscal year. Do you expect that number to go higher next year? How should I think about that? Michael Happe: I would tell you that we're striving for two turns in all of our businesses and brands. We've got some of our businesses and product segments were a little further away from that than we'd like. But in a couple other segments, I think we're almost right on top of that number. So there may be places, James, where we undership the market a bit with the ambition of pursuing the turns goal. But there'll be other parts of our business that just have natural momentum in terms of the strategies we're executing. Grand Design Motorized, Winnebago Towables are two that come to mind. Again, I would tell you that I think for calendar year 2026, we anticipate that both for the RV business, that industry retail and industry wholesale can potentially be around that 330,000 unit mark. That's the midpoint of our 315 to 345 forecast. And that being said, over the course of those twelve months, you would not see significant dealer destocking in the RV industry. So, you know, we've got that modeled in a detailed fashion within our business for planning purposes. At the end of the day, we think 330,000 units for calendar year '26 is a reasonable assumption for us to use for planning purposes. If the market's healthier, fantastic. If it's a little softer, we still believe we have the levers within the business to be able to generate profitability in the guidance range that we offered this morning. James Hardiman: Okay. And just sorry. Just to put a finer point on it. If three thirty is the expectation for wholesale and retail next year, what do you have penciled in for retail this year? Because at least based on my numbers, that would suggest a much bigger decline than where we've been year to date. Do you expect the last I don't know, four or five months of the year to be down significantly in terms of retail? Or is my math off here somewhere? Thanks. Michael Happe: Well, we don't know what retail will be, obviously, for sure in the last several months. Obviously, the gross number for August was a little bit higher than the industry had hoped it would be, but we think that net number will settle in a little bit more healthy place. It would not surprise us to see retail in the remaining months of the calendar year be down slightly, in that low to mid-single-digit range. But the variability of the industry is difficult to forecast right now. So, I'm not trying to evade an answer, James, here. It's just really, really hard to forecast either over an extended period of time but also to know what month to month the industry is gonna give us. And so but we are focused on our business, trying to drive our turns to as close to two point o as we can. We believe we have share gain opportunities in multiple spots within our portfolio. Grand Design Motorized, Winnebago Towables, Barletta, pontoons, travel trailers on the Grand Design side, and so regardless of what the market gives us, we believe we can deliver within the numbers for fiscal 2026 that were offered today. James Hardiman: Got it. That's really helpful. Thanks, guys. Operator: Thank you. Please stand by for our next question. Our next question comes from the line Craig Kennison with Baird. Your line is open. Craig Kennison: Hey, good morning. Thanks for taking my question. I had a question around market share. You've had a really good story in the last five years with respect to market share in RVs and in marine. But at least in RVs, it appeared to take a step back in fiscal 2025, and that's probably due to a mix shift favoring some low-end units where you just don't play aggressively. I guess I'm wondering what's your view on market share trends for your brand, especially if this trend towards low-end RV units persists? Michael Happe: Yeah. Good morning, Craig. The most significant areas of pressure in the RV industry for us from a market share perspective have been the Class B category in motorhomes and some fifth-wheel retail share pressure we've also seen on the towable side. And I think those are due to similar but different reasons. The Winnebago brand of vans has long been the industry leader, both in terms of volume but also in terms of innovation. And in our comments this morning, we did mention that we continue to have the top three performing singular product brands in the Class B segment. But the reality is that that segment has gotten incredibly crowded over the last three or four years. Literally, there has been an explosion of brands and floor plans in that space and candidly, dealer distribution points. And almost by the default of math, with us only having one brand in Class B vans, until recently with Grand Design's launch. And us having primarily one distribution network under that one brand. The explosion of competition there really mathematically has pressured our share. But we continue to make the best product in that segment without a doubt. On the fifth-wheel side, that has been a combination of new competition that we've seen over the last three or four years and some very competitive offerings from those competitors, along with some shifts in price point attractiveness from some of our higher volume competitors in the industry. Our fiscal 2026 plans have us stabilizing volume in the RV market and slightly growing it for that particular fiscal year. And the two primary drivers are going to be Grand Design Motorized in the second year of their launch and some of the significant retail momentum continuing that we're seeing. And we intend to make meaningful strides on Winnebago Towables as well in fiscal year 2026. We had the strongest dealer ordering open house for that particular business that we've ever had in September. And we feel well-positioned to grow share in that space. We'll also see some share gains we believe continue in Class A diesel with Newmar and Grand Design Towables as we continue to work on the imagined and Transcend lines within that particular brand. So we're well aware, Craig, certainly, as you stated of some of the dilution in share here recently. But we believe we have plans in place to stabilize that and even in spots to strengthen our share in certain areas. Craig Kennison: Thank you, Mike. And I wondered if you would also just compare the RV consumer versus the marine consumer today and then how those dealer bodies view the market differently? Michael Happe: Well, the RV consumer candidly is probably younger and more diversified in terms of a consumer base, and we think that has been even though obviously every industry has seen a significant volume pullback here in the last couple of years. You know, I think the RV industry as a whole has done a good job attracting consumers from all walks of life and keeping the products as affordable as possible given some of the cost pressures we've seen. To make sure that younger consumers are still participating in the lifestyle. The marine industry has some work to do candidly in that area. As an industry, we need to work within boating to bring the average age of the consumer down and get younger generations not only in the lifestyle but candidly owning more boats. And the diversity has been moving in the right direction. We continue to believe that the marine industry is a little bit further behind the RV industry in terms of the cycle. You know, Craig, I think even your recent report cited that many of the marine dealers feel they still have too much inventory. And we agree with that, and we're working closely with our dealers to try to right-size our particular inventory positions. We think we're in pretty good shape. But by and large, we think the marine consumer is a little bit more hesitant than the RV consumer right now. And the dealers are also probably more focused on destocking in many of those categories even more so than the RV dealers have been lately. But we believe our brands are positioned well. I'm optimistic that our Barletta Pontoon business especially will continue to unveil new strategies in the future to remain very competitive and continue to take share. And again, I think you can tell from us this morning that the theme of fiscal year 2026 for us is control what we can control, and we believe we have a number of actions and strategies in place to, again, deliver the results that we foreshadowed this morning. Craig Kennison: Helpful. Thanks a lot, Mike. Michael Happe: Thank you. Operator: Please stand by for our next question. Our next question comes from the line of Joe Altobello with Raymond James. Joe Altobello: Thanks. Hey, guys. Good morning. Mike, that was actually a good segue into my question. But if we think about the guidance for 26% and I think at the midpoint implies about $0.70 of earnings improvement, call it. Based on my math, the improvement in motor home margins is all of that and then some. So I guess my first question there is how much visibility or line of sight do you have into those cost improvements for this year? Bryan Hughes: Yeah. Sure. You know, I made some of the comments, Joe, in the script as it relates to the Winnebago Motorhome business in particular. A lot of the cost actions have already been taken in Q4 as it relates to some of our cost structure, both in cost of goods and in our SG and A. And then it is, likewise, related to product. As I mentioned. And having a product line and as well as a finished goods position that doesn't require the same level of incentives that were required here in February. So those are the two biggest areas of improvement that we're expecting. Some of which, as I mentioned, have already been executed. So we've got good visibility into it. We'll be tracking it very closely. Most importantly, I think, Joe, we've got the right team in place there, the right leadership. They're highly engaged. We sense a great improvement in culture and motivation of the team. And so we think we got the right team in place to execute. Joe Altobello: Got it. Very helpful. Is there a price involved here too, particularly with tariffs? Bryan Hughes: Pricing is some of the story. But that really is an offset to the increased cost as you referenced as it pertains to tariffs. So I wouldn't call that out as a margin improvement in terms of pricing through tariffs. I think it's more the better-positioned product lineup and the reduction in the incentives that are required. Joe Altobello: Got it. Got it. And maybe one quick one for Mike, if I could. I mean, if we think about sort of a big picture view of the industry, you know, the assumption of mid-cycle I think, on the RV side has always been around, you know, call it 425,000 to 450,000 units. You know, given where we've been the last three or four years, do you still think that's a good mid-cycle estimate? Michael Happe: Joe, we're working on that model as we speak, and it's likely here in the relatively near future that we'll find an opportunity to share an updated mid-cycle model for Winnebago Industries with you. Specific to your question, I think you'll see in our next version of that mid-cycle model that we believe that the RV mid-cycle volume estimates specifically will be lower than what we offered last. It will probably be somewhere in that 400,000 to 425,000 range. We may choose to be even more specific when we release that. And that's just a byproduct, I think, of the reality that this trough in this particular down cycle has lasted longer than most of us have experienced in our careers in this industry. But also, we believe the next peak may be a little lower than what we had been previously modeling. I do want to say this, though. The Winnebago Industries portfolio in its entirety has really not seen a mid-cycle environment yet. The acquisition of Newmar in 2019, the acquisition of Barletta in 2021, and then the acquisition of Lithionics in 2023, plus new strategies and Grand Design Motorized and now, even Winnebago Towables as an example being renovated. We believe we have a portfolio that really hasn't seen its full potential realized in a mid-cycle environment. And we hope that day comes someday. We can't predict the exact year when that will happen, but we're really excited about getting some tailwinds from a market stability standpoint because we believe these five OEM brands and then our Lithionics business from a strategic technology vertical can really start to show some significant performance upside in the future. But stay tuned, Joe. We'll come back to you all shortly with an update on that topic. Joe Altobello: Sounds good. Thank you. Bryan Hughes: Thank you. Operator: Please stand by for our next question. Our next question comes from the line of Bret Jordan with Jefferies. Your line is open. Patrick Buckley: Hey, good morning, guys. This is Patrick Buckley on for Bret. Thanks for taking our questions. Could you talk a bit more about any takeaways from the RV open house? Anything notable as far as recent retail demand or year-over-year sales trends? And I guess how did that general sentiment from the open house factor into the 2026 outlook? Michael Happe: Patrick, good morning. Thanks for being with us. We thought the September open house in Elkhart was a good event as it normally is. Attendance from the dealer community was very strong. I thought the engagement from the OEM and supply side was also fantastic. You know, we have to answer that question in almost brand by brand and given the state of our different businesses. But we were really pleased with dealer engagement on each of our three RV brands. It's not a huge order writing show for our Newmar business. Just the rhythm of how we take orders in that business and work with the dealers, you know, that's a show at Newmar that is more about showing some of the latest products, some of the beds or in the cab on some of the super c's were exciting there, but not a huge order writing show. However, on the Grand Design and Winnebago brands, it is a meaningful order writing show, and we were pleased with the orders that we took on both Grand Design and Winnebago. And as I've already mentioned this morning on the call, Winnebago Towables was a record-setting order-taking event at Open House. And, obviously, Grand Design Motorized being a new business still going into its second full year, you know, we saw good activity and reception there. So Grand Design Towables continues to be a large business for us, our largest single revenue stream. We were pleased with the reception to especially the travel trailer segment there, the work we've done at Imagine and Transcend. The unveiling of the foundation destination trailer, and then as Brian just recently mentioned, our Winnebago Motorhome team really has a lot of cultural momentum right now. We unveiled our Sun Flyer affordable Class C product in Elkhart that month to very strong reviews, took a number of good orders on that. And really just more importantly, validated with the dealers around the Motorhome brand that we're coming, that this business is headed in a stronger direction and that now is the time for many of them to get on board and support that business. So all in all, a really good show. Recent retail trends have been very similar to what you guys have public access to Visa SSI. We're seven or eight weeks into our fiscal year already, so we've got a decent amount of retail underneath us for Q1. Retail trends are similar to what you've seen in the July, August months. Some weeks are good. And some weeks are a little weaker. And collectively, I wouldn't say that there's been a significant change in retail momentum, you know, up or down in the first month and a half of our fiscal 2026 year. So it again, it goes back to the theme of we're assuming the market will be flat, and we believe we have the strategies in place to have a good fiscal 2026 year as we showed today with our guidance. Patrick Buckley: Got it. That's helpful. Thank you. And then just following up on the tariff questions, are you expecting any specific or maybe incremental chassis impact from the most recent tariffs on medium truck? Medium duty trucks? Michael Happe: We are not at this point. The whole tariff subject for us has many puts and takes. And as you all know, there'll be some pretty significant decisions made here in the future, both in terms of any additional tariffs that the administration places on China if they do so. And, also, obviously, the entire subject of tariffs and the justification for tariffs is before the Supreme Court. So that whole topic continues to be very dynamic. You know, every day, there seems to be a new wrinkle or curveball. And our teams continue to do both, both at the centralized sourcing level at the enterprise, but also within the businesses at a procurement level. We continue to be able to mitigate a good majority of those tariff costs before we have to face a decision as to whether to price or not. So you know, again, we're never comfortable with tariffs, but unfortunately, we've gotten better at managing it. And we just have to do that every day now as part of our business model. Patrick Buckley: Got it. That's all for us. Thanks, guys. Operator: Thank you. Please stand by for our next question. Our next question comes from the line of Patrick Scholes with Truist Securities. Your line is open. Patrick Scholes: Hey, good morning, Thank you. Any color on ASP expectations for the upcoming year by segment category that you might be able to provide? Thank you. Bryan Hughes: Yeah. I'll take that one. Mike. Generally speaking, we'll have some favorability in the motor home business just from a perspective of declining incentives that are required to move that product. I mentioned that earlier. For the most part, that's the story in motorized. In towables, I think we'll have a couple of different stories. I think we'll have pricing that will be a natural lift to ASPs in the coming year. That will be offset in many respects by continued mix shift towards affordability-minded consumers. And then on the marine side, we expect again, some negative mix. We've got growth that's occurring at the lower end of Barletta's offering. And then we also have within the Chris Craft business the Sportster, which is showing high receptivity, and that drives an unfavorable mix. Those being offset by some modest pricing activity. So not as much volatility downward, I'd say, as what we've experienced in the past call it, eighteen months. More stability still some negative mix impacts offset by some pricing. Patrick Scholes: You're welcome. Thank you. Operator: Please stand by for our next question. Our next question comes from the line of Noah Zaskin with KeyBanc. Noah Zaskin: I guess most of my questions have been kind of asked and answered, but maybe just one on warranty expense. Any way we should be thinking about warranty expenses in FY '26 relative to '25? And just anything to be aware of there. Michael Happe: Brian, I'll have you comment on maybe the direction that you're willing to share there. Noah, thanks for the question. I want to reiterate that the warranty expense that is shared at times includes both real warranty expense that are often driven by quality issues that we can continue to address and do a better job of. But it also includes significant goodwill and other ways of us taking care of the customer. I'll give you an example. Our Barletta pontoon business, Barletta makes I believe, potentially some of the highest quality pontoons in the entire industry. Yet we continue to run our warranty spending there at a level that incorporates a significant amount of customer goodwill. To provide support coverage to our dealers and our consumers. At a level higher than anybody else in the industry. There's no other pontoon manufacturer that I'm aware of that has a significant holiday consumer hotline on Fourth of July or Memorial Day or Labor Day when consumers are out on the water and something goes wrong. And we're there to support them and cover them. So warranty for us is not just a barometer of the cost of quality. But it's also an investment at times in how we take care of our customers. But Brian, any thoughts on Noah's question in terms of the trend line on that particular item? Bryan Hughes: Yeah. We've cited improved warranty from a year over year in the motor home segment. And then slightly elevated warranty experience in the towable segment and marine segment. We don't see any significant changes or drivers to changing of warranty experience in 2026. I'm expecting, call it, consistent types of rates but no major drivers to OI yield in 2026 as we sit here today. Noah Zaskin: Very helpful. Thank you. Operator: Thank you. Ladies and gentlemen, we have reached the end of the call. I would now like to turn the call back over to Raymond for closing remarks. Raymond Posadas: Thank you, Towanda. This is the end of our fourth quarter earnings call. Thank you to everyone for joining us. We look forward to further updating you on future calls. Enjoy the rest of your day. Operator: Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Ladies and gentlemen, it's Taylor Morrison Home Corporation's 2025 Earnings Webcast and Conference Call will begin shortly with your host Mackenzie Jean Aron. We appreciate your patience as we prepare your session today. During the call, we encourage participants to raise any questions they may have. We will begin shortly. Good morning, and welcome to Taylor Morrison Home Corporation's Third Quarter 2025 Earnings Conference Call. Currently, all participants are in listen-only mode. Later, we will conduct a question and answer session and instructions will be given at that time. As a reminder, this conference call is being recorded. I'd now like to introduce Mackenzie Jean Aron, your host. Vice President of Investor Relations. Please go ahead. Mackenzie Jean Aron: Appreciate you joining us today. Before we begin, let me remind you that this call, including the question and answer session, will include forward-looking statements. These statements are subject to the Safe Harbor statement for forward-looking information that you can review in our earnings release on the Investor Relations portion of our website at taylormorrison.com. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These risks and uncertainties include, but are not limited to, those factors identified in the release and in our filings with the SEC, and we do not undertake any obligation to update our forward-looking statements. In addition, we will refer to certain non-GAAP financial measures on the call, which are reconciled to GAAP figures in the release. Now I will turn the call over to our Chairman and Chief Executive Officer, Sheryl Denise Palmer. You, Mackenzie, and good morning, everyone. Joining me is Curt VanHyfte, our Chief Financial Officer, and Erik Heuser, our Chief Corporate Operations Officer. We are pleased to report strong third quarter results despite the continuation of challenging market conditions. Driven by our diversified portfolio and our team's careful calibration of pricing and pace across our well-located communities, we once again met or exceeded our guidance on all key metrics, including home closings volume, price, and gross margin. The ongoing execution of our balanced operating strategy has allowed us to maintain healthy performance even as we have adjusted pricing and incentives, particularly in entry-level price points. Combined with a thoughtful approach to land lighter financing tools and effective cost management, our business is generating strong bottom-line earnings, cash flow, and returns for our shareholders. With approximately 70% of our portfolio serving move-up and resort lifestyle homebuyers, our financial performance is supported by the strength of our broad consumer set. However, even though these generally well-qualified buyer groups are less sensitive to affordability constraints, all consumer segments have been impacted by macroeconomic and political uncertainty, which has weighed on buyer urgency and shopper sentiment. In addition, consumers are aware of the current competitive dynamics in the marketplace and are carefully weighing available incentives, pricing, and spec offerings in their purchase decisions. Appreciating these dynamics, we are focused on deploying innovative and compelling incentives and pricing offers to support buyer confidence and improve affordability. Leaning into the appeal of our well-designed spec and to-be-built homes to meet consumer preferences and carefully managing new starts as we continue to right-size inventory and prepare for next year's spring selling season. Given our quality land locations, the majority of which are in prime core submarkets, our sales strategies are driven community by community based on their unique selling proposition, competitive analysis, and consumer profile. In all communities, we strive to price to market to remain competitive and offer our homebuyers the greatest value. In some communities, this results in a price-focused approach to drive volume, especially where we serve predominantly first-time buyers and differentiation is more challenging given market competitive pressures. However, in move-up and resort lifestyle communities, we are inclined to be more patient to protect values given our distinct locations and product offerings in hard-to-replace communities. We are able to execute this balanced approach in part because we have a well-structured land bank that provides a flexible and capital-efficient lot supply. As I said last quarter, while the near-term outlook calls for a more patient trajectory, we strongly believe that we have the platform to jump-start outsized growth as market dynamics stabilize. In the meantime, we are doubling down on opportunities for cost management with our suppliers, value engineering with our product offerings, and overhead efficiencies in our back office. These efforts helped drive year-over-year improvement in our direct construction costs and 80 basis points of SG&A leverage. We are also continuing to expand our industry-leading tech-enabled sales tools, which are contributing to growing cost efficiencies as well as an improved customer experience. I'm pleased to share that we recently launched an industry-first AI-powered digital assistant across select on taylormorrison.com. Unlike traditional chatbots seen in our industry that rely on scripted responses forcing home shoppers through a predetermined path, our new digital assistant leverages generative AI to provide dynamic data-driven guidance that better mirrors an in-person sales interaction. Our digital assistant guides consumers through their discovery journey, provides them detailed answers to each shopper's unique questions, and helps convert interest into action, supporting lead generation and customer acquisition. This technology marks a meaningful advance in how we engage prospective buyers online, and it's another step in our ongoing digital innovation strategy as today's consumers increasingly seek intuitive, personalized shopping experiences. As to recent demand trends, we were encouraged to see monthly net absorption paces improve each month during the quarter, with September pacing at the strongest level since May, in contrast to typical seasonal slowing into the end of the summer as the improvement in mortgage interest rates helps spur activity. In total, our monthly absorption pace was 2.4 per community for the quarter and has averaged 2.7 year-to-date, slightly below our long-term target as demand has remained somewhat choppy. However, there are positive signs that potential buyers are cautiously engaged in the market. For one, our latest national home buying webinar, a free educational opportunity, we offer home shoppers to equip them with the knowledge needed for a successful home buying journey attracted over 400 attendees. That's a 155% increase from our last webinar. In addition, total website traffic is up double digits and mortgage prequalification volume is trending similarly to year-ago levels. I continue to believe that for our generally well-qualified diverse customer base, improved confidence in the broader economic and political outlook will be the most important determinant of demand stabilization, especially for discretionary home purchase decisions in our move-up and resort lifestyle communities. Among the many headlines impacting confidence, uncertainty related to H-1B policy and broader immigration-related changes have weighed on nonresident buyer activity, with Dallas, Austin, Atlanta, and the Bay Area feeling the greatest impacts. From a consumer standpoint, the mix of our orders by buyer groups stayed relatively consistent sequentially in the third quarter at 30% entry-level, 51% move-up, and 19% resort lifestyle. On a year-over-year basis, our first and second move-up set held in most strongly, while our entry-level segment pulled back as did our resort lifestyle segment due to performance in our non-Esplanade communities. Going a step further, specific to our Premier Esplanade segment, which accounts for just over 10% of our portfolio orders, were flattish year-over-year benefiting from a handful of new community openings. Given the brand's affluent customer base, this segment of our portfolio is relatively insulated from interest rate concerns and instead more reliant on consumer confidence. Positively, we did see improved shopper engagement in Esplanade during the quarter with many consumers exploring multiple communities across markets with a willingness to travel to find their preferred combination of lifestyle, location, and price. With a healthy pipeline of new Esplanade communities scheduled to open in 2026, we remain encouraged by the strength of this consumer group and the opportunity to capitalize on this brand's unique lifestyle offerings in the years ahead. As we look ahead to 2026, it's still too early to provide guidance, but there are a few strategic priorities I would emphasize as we contemplate next year's opportunities against ongoing uncertainties. To begin, we have well over 100 communities expected to open next year, resulting in mid to high single-digit anticipated outlet growth. Many of these communities are slated to open in time for the spring selling season, which should help support our sales pace and delivery goals next year. We also have realized significant cycle time savings as Kurt will detail, providing improved flexibility to start and close homes within the year, including build-to-order homes. While we hope to begin gradually shifting our deliveries closer to a more balanced mix of to-be-built and spec homes over time from our current mix of roughly 70% spec and 30% to-be-built sales, this normalization will take time and be dependent on customer demand. For now, specs will continue to bridge the gap between current buyer preferences for incentivized quick move-in inventory and an eventual return to more historic preferences for personalizing to-be-built homes, especially in our move-up and resort lifestyle communities, which have long been heavily weighted to to-be-built sales. Recognizing this unique environment, we are fortunate to have experienced teams across our divisions with the expertise to respond to local market conditions effectively to best serve our homebuyers. With that, let me now turn the call over to Erik. Erik Heuser: Thanks, Sheryl, and good morning. At quarter end, we owned or controlled 84,564 homebuilding lots. Of these, just under 12,000 lots were finished. The balance are being and will be value-enhanced by normal course entitlement and development efforts over time. Based on trailing twelve-month closings, this represented 6.4 years of total supply, of which 2.6 years was owned. The majority of our lots are in prime locations and core submarkets where we believe long-term fundamentals are healthiest. This core location strategy has helped to partially insulate us from the elevated level of new and existing home inventory in some markets. We control 60% of our lot supply via options and off-balance sheet structures. This is up from 57% at the 2024 and is considerably higher than the year-end low watermark of 23% in 2019, as we have made significant progress in our asset lighter strategy. Importantly, we have done so by prioritizing seller financing, joint ventures, and other option takedown structures, complemented by land banking at rates not historically seen. By utilizing each of these vehicles, we look to optimize the trade-off between gross margin and expected returns. As we continue to strategically deploy these tools, we believe we are well on our way to achieving our goal of controlling at least 65% of our lots. With respect to the land market, we have seen some development cost relief and favorable in land sellers' expectations regarding land structures and values. This has translated into an increased receptiveness on the part of land sellers to structure deals with terms, our preferred financing route, or in a growing share of deals to also adjust pricing. In the third quarter, our investment committee reviewed land acquisition updates that contemplated favorable transaction enhancements impacting nearly 3,400 lots and more than $500 million of purchase price. These enhancements resulted in an 8% average price reduction, six-month average closing deferral, and other structural improvements. These negotiations related to current deal flow as well as deals that were originally approved as far back as 2023. Partially as a result, we have invested $1 billion in homebuilding land year-to-date as compared to $1.8 billion at this time last year. We regularly review and evaluate our deal pipeline to underwriting assumptions and ensure each new deal and additional phase meet our thresholds prior to closing. With the flexibility to be patient, given our existing lot supply, we now expect to invest approximately $2.3 billion this year, down from our prior expectation of approximately $2.4 billion and our initial projection of $2.6 billion coming into the year. Especially in volatile markets, our investment discipline is critically important to ensuring our portfolio is set up to perform for the long term. Turning to our Build to Rent platform. We previously announced that we had entered into a $3 billion financing facility with Kennedy Lewis to support our Yardley business, which as a reminder provides an attractive and affordable single-family living experience in amenitized rental communities. During the third quarter, we transferred 14 of our 22 non-JV projects from our balance sheet into the vehicle, providing capital relief of approximately $140 million. We expect to complete the transfer of a handful of additional projects by year-end, which would release another approximately $50 million. In total, these transfers address over $1 billion of funded project costs. Even more meaningfully, on a go-forward basis, the structure allows us to jointly underwrite new Yardley opportunities, which can then be acquired, developed, and constructed fully off-balance sheet within the vehicle, providing significant capital efficiency and optionality as we continue to scale this unique business and optimize disposition strategies. Consistent with this optionality, we now expect to sell two projects by year-end as we have taken a more patient approach given recent market conditions. Now I will turn the call to Curt. Curt VanHyfte: Thanks, Erik, and good morning, everyone. Turning to the details of our financial results for the third quarter. We reported net income of $201 million or $2.01 per diluted share. This included inventory impairments, pre-acquisition abandonments, and warranty adjustments. Excluding these items, our adjusted net income was $211 million or $2.11 per diluted share. During the quarter, we delivered 3,324 homes, which slightly exceeded the high end of our guidance range of 3,200 to 3,300 homes due to faster cycle times. The average closing price of these homes was $602,000, also slightly ahead of our guidance of approximately $600,000 due to a favorable mix. In total, this generated home closings revenue of $2 billion. We are closely managing our starts volume based on community-specific inventory levels and incremental sales. During the quarter, we started 1.9 homes per community equating to 1,963 total starts. We ended the quarter with 6,831 homes under construction, including 3,313 specs of which 1,221 were finished. Our total spec count was down approximately 15% from the second quarter. As we look ahead to 2026, we will be strategic in putting new spec starts into production in advance of the spring selling season. Appreciating that our current spec inventory remains elevated and the demand environment is fluid. Positively, the ongoing improvement in cycle time has significantly strengthened our ability to flex production levels. In the third quarter, we realized another roughly ten days of sequential savings, leaving us about thirty days faster than a year ago and ninety days faster than two years ago. Even still, we believe there's further room for improvement as we are continuing to find opportunities for additional efficiencies throughout the construction schedule aided by the slowdown in industry-wide starts. Based on our current inventory position, we expect to deliver between 3,100 to 3,300 homes in the fourth quarter. This implies an updated full-year home delivery target of 12,800 to 13,000 homes. Reflecting our current backlog and recent sales paces, we expect the average closing price of our fourth-quarter deliveries to be approximately $590,000, which would leave our full-year closing price at the low end of our prior range of $595,000. Our reported home closing gross margin was 22.1%. While our adjusted home closing gross margin, which excludes inventory impairment and certain warranty charges, was 22.4%. This was slightly ahead of our guidance of approximately 22%. The upside was due in part to a favorable mix of higher-margin to-be-built home closings, which benefited from faster cycle times. Conversely, for the fourth quarter, we expect a modest mix headwind from a higher penetration of spec home closings. With spec homes accounting for 72% of third-quarter sales, but 61% of closings, we expect our spec closing penetration to increase in the near term. As a result, we expect our home closings gross margin, excluding any charges, to be approximately 21.5% in the fourth quarter. This would imply a full-year home closing gross margin of approximately 22.5% on a reported basis and roughly 23% on an adjusted basis, consistent with our prior expectations. Erik Heuser: Now to sales, Curt VanHyfte: Net orders in the third quarter totaled 2,468 homes, which was down just under 13% year over year. This was driven by moderation in our monthly absorption pace to 2.4 homes per community from 2.8 a year ago, partially offset by a 3% increase in our ending community count to 349 outlets. Cancellations equaled 10.1% of our beginning backlog and 15.4% of gross orders. While cancellation activity has increased due to a change in consumer sentiment, we believe our cancellation rates remain below industry averages driven by our emphasis on pre-qualifications, $45,000 average customer deposits, and the overall financial strength of our buyers. Looking ahead, we now expect our outlet count to be approximately 345 at year-end, slightly below our prior guidance as we have intentionally delayed some openings into the New Year when anticipated selling conditions are stronger. As Sheryl said, we have well over 100 communities expected to open next year, resulting in mid to high single-digit anticipated outlet growth in 2026. We once again realized strong expense leverage as our SG&A ratio improved 80 basis points year over year to 9% of home closings revenue. This improvement was driven primarily by lower payroll-related costs and commission expenses. For the year, we continue to expect our SG&A ratio to be in the mid-nine percent range. Our financial services team maintained a strong capture rate of 88% during the quarter, which drove financial services revenue of $56 million with a gross margin of 52.5%. This was up from $50 million and 45% respectively a year ago. Among buyers using Taylor Morrison Home Funding, credit metrics remained healthy and consistent with recent trends with an average credit score of 750, down payment of 22%, and household income of $179,000. Before turning to our balance sheet, I wanted to highlight that during the quarter, we incurred net interest expense of $13 million, up from $3 million a year ago driven primarily by our land banking vehicles. We expect to incur a similar amount of net interest expense in the fourth quarter. Now on to our balance sheet. We ended the quarter with strong liquidity of approximately $1.3 billion. This included $371 million of unrestricted cash and $955 million of available capacity on our revolving credit facility. At quarter-end, our net homebuilding debt to capitalization ratio was 21.3%, down from 22.5% a year ago. During the quarter, we repurchased 1.3 million shares of our common stock outstanding for $75 million. Year to date, we have repurchased a total of 5.3 million shares for approximately $310 million, representing approximately 5% of our outstanding share count at the beginning of the year. As a result, we are well on track to achieve our full-year repurchase target of at least $350 million as we remain focused on returning excess capital to shareholders and taking advantage of the attractive valuation of our equity. At quarter-end, our remaining repurchase authorization was $600 million. Inclusive of our repurchase target, we expect our diluted shares outstanding to average approximately 101 million for the full year, including approximately 99 million in the fourth quarter. Now I will turn the call back over to Sheryl. Sheryl Denise Palmer: Thank you, Kurt. I'd like to end by acknowledging the recent focus on addressing the country's critical need to help make housing more affordable. At Taylor Morrison Home Corporation, we welcome the opportunity to work collaboratively towards expanding homeownership and improving accessibility. We have long strived to build strong communities and deliver affordable, desirable housing options that serve the needs of our customers with both for sale and for rent offerings. We applaud the administration's commitment to improving the cost and availability of housing and look forward to contributing towards meaningful solutions. I also want to end by thanking our entire team for once again delivering results we are proud to share. Your commitment to our customers, communities, and each other is second to none, and I am confident we will continue to navigate this market successfully. Thank you to everyone who joined us today, and let's now open the call to your questions. Operator, please provide our participants with instructions. Operator: Of course. Thank you very much. We'd now like to open the lines for the Q&A. Our first question comes from Trevor Scott Allinson from Wolfe Research. Trevor, your line is now open. Trevor Scott Allinson: Hi, good morning. Thank you for taking my questions. Want to start with your views on the potential action from the administration to encourage volume. And Sheryl, I appreciate your comments in the prepared remarks. Have you guys had conversations directly with the administration on the topic? And if so, can you talk about specifically what they're looking for from you as a home builder? And do these conversations change your views at all on your approach to volume versus pace in the current environment? Sheryl Denise Palmer: Well, thanks, Trevor. Appreciate the questions. You know, as has been reported, there's a number of meetings that have been held. And, honestly, I believe it's great for the industry that we're having these very productive conversations with the administration. So the discussions are really about how we can overcome the housing shortages in this country and most critically, how do we make housing more affordable. You know, we do have some excess inventory in the system. Everyone knows today that builders are working through, and we need to be very thoughtful about how that happens. But I think we can all agree that we have an affordability issue, and it didn't happen overnight. It's gonna require tremendous collaboration by a number of stakeholders to solve. It's a very complicated issue, you know, but the good news is it's getting tremendous focus by a lot of smart people. We need to tackle rising land costs, local regulations. The list just goes on and on. I would tell you we are in the early days. So more to come. But rest assured that Taylor Morrison Home Corporation and all the big builders want to be part of the solution on providing the right housing for Americans. And I'm quite confident given the meetings we've had that we'll see opportunities and progress. I'd also point you to the LDA statement that went out a couple of weeks ago. I think it did a really nice job representing the position of all the big builders. And as far as your second part of that question, you know, we're gonna continue to do the right thing community by community, asset by asset. As we've talked about for years, Trevor, we don't make that decision globally. We really look at the balance of price and pace in consumer group in every community. And we'll continue to do that. It's not gonna be helpful to flood the market with inventory that can't be absorbed. So we just need to be very conscious of, you know, the dynamics in each submarket. Trevor Scott Allinson: Thanks for that, Sheryl. And makes a lot of sense. I think that's a very logical approach. And then second, on recent demand trends, you talked about demand improving sequentially throughout the quarter, which is very encouraging. Are you seeing a difference by consumer segment just thinking as rates came down, did you see entry-level traffic become more engaged? Or is it more broad across consumer segments? And then any color on if those improved trends continued into October? Thanks. Sheryl Denise Palmer: Yeah. Great question. You know, I would tell you it's been pretty broad-based, Trevor. And I shared just like, you know, prior discussions, that it almost comes down to, once again, community by community. You know, for example, entry-level, absolutely, we've seen traffic pick up. But we know we have, you know, affordability issues we're trying to solve for. When we look at our move-up and our resort lifestyle business, you know, there continues to be increases in traffic, increases in web traffic, foot traffic, and actually, I'm quite encouraged, you know, with the resort lifestyle as we move into the shoulder season. That's gonna continue. That consumer group is, you know, more sophisticated. They know what's going on in the market. So the opportunity is to convert them from traffic to action. And we have a lot of tools if it's anything from everything from our incentives, our mortgage programs to our new AI tool to help consumers get from start to finish. Trevor Scott Allinson: Thank you for all the color, good luck moving forward. Sheryl Denise Palmer: Thank you. Appreciate the questions. Operator: Thank you very much. Our next question comes from Michael Glaser Dahl from RBC. Michael, your line is now open. Michael Glaser Dahl: Hi, great. Thanks for taking my questions. Cheryl, as part of the sequential trends, I was hoping you could elaborate on incentives. You talked in your remarks in the press release about kind of innovative and compelling. I mean, obviously, rate buy-downs have been out there for years now. So you know, what are you doing that's different? Is this kind of lower teaser rate? Is it arms? Like, what do you think you're doing that may be playing a role in helping to drive that customer off the sidelines? Sheryl Denise Palmer: Yeah. I would tell you, honestly, Mike, it's all of the above. As you know, we continue to use, you know, both on the conventional and the FHA loans, we're using buy-downs. We're using adjustable loans. We also have proprietary loans for our inventory that's, you know, just gotten in the ground or specifically our to-be-built. Really trying to stimulate that business. Have recently just introduced a new proprietary nine-month program for our to-be-built. I think most of those are done with Fannie and Freddie through the window. We've got a slightly different program. And it really gives our customers flexibility on a forward lock. But the, you know, security of a longer period of time they, you know, if they believe rates are gonna drop. Obviously, in most of these programs, we also have the ability for a free float down. So you know, I think for us, Mike, it's really about making sure we personalize each customer's experience. Some of them need help with closing costs. Some of them, you know, don't know how, you know, aren't expecting to be in the house a long time and adjustable program seems most helpful. Some need the confidence of a thirty-year lower fixed rate. So it's really making sure we understand the customer needs and we just have a plethora of programs to provide. Michael Glaser Dahl: Okay. Got it. That's helpful. And then, Cheryl, I know it's early to give 2026 commentary. You did highlight a couple of things around community account growth. Specs maybe being a bridge to help you a little bit in the near term. I think some of that probably alludes to the fact that your backlog down nearly 40% in dollar terms year on year and probably the year somewhat similarly. The obvious question we get from investors is if you have a traditional kind of build-to-order builder go into next year with backlog down that much? How can you possibly drive to even flat revenues? Or do you have a significant gap out? So maybe can you just talk to how you're viewing that as you go into the spring? It sounds like maybe you're a little more willing to put some specs in the ground where others are pulling back a little. But just give a little more detail on how we solve thinking about that positioning. Sheryl Denise Palmer: Yeah. I think you have to hit it from a number of angles. Mike, first of all, I think we've been very clear that we're gonna do look at each community and make sure we understand the right need and put the right number specs in the ground. Our specs, as I said, I think both Kurt and I said in our prepared remarks, are a little higher. We pulled back a little bit in the third quarter to see what happened to sales paces. We have the fourth quarter given the reduction in construction cycle. It gives us much more time. I think back to a year ago where we probably had to have houses in the ground by January and February and probably no later than March depending on the community or market. Today, that can go till next July or August. So you've fundamentally picked up at least another quarter of production cycle next year. You combine that with our ability to add new to-be-built, you know, well into next year and the community count growth, then we're gonna really seek to understand the market, and we have the platform to ramp up starts if the market is there for it. But as I've said, we're not gonna force inventory in the ground. In some communities, we find that pricing has been inelastic. And so we really have to make that decision community by community and balance, you know, profitability along with volume. Michael Glaser Dahl: Got it. Okay. Thank you. Operator: Thank you very much. As a reminder, if you'd like to raise a question, our next question comes from Michael Jason Rehaut from JPMorgan. Michael, your line is now open. Michael Jason Rehaut: Great. Thanks very much. Good morning, everyone, and congrats on the results. Sheryl Denise Palmer: Thank you. Operator: Wanted to first drill down on, you know, how you're thinking about, you know, specifically about spec inventory. Sorry. Saying early that it remains elevated, I think it's kind of one of the key reasons why you're looking for a little bit of a dip down sequentially in 4Q gross margins. Trying to get my arms around how you're thinking about this going into the first half of next year, if you would expect this kind of drag or headwind to remain in place or even accelerate. And, you know, if you're kind of working through excess spec inventory, let's say, the current fourth-quarter pace, when might assuming the market trends follow normal seasonality, when might that overhang dissipate? Sheryl Denise Palmer: Yeah. I think similar to what I said to Mike Dahl, I think it's a balancing act, Mike. I mean, obviously, it's our intention to work through the inventory, and then we have a lot of new communities that will be bringing new inventory to the marketplace, and we'll be monitoring it month by month as we look at our fourth-quarter starts. We've always said we're going to align sales pretty close to start. You saw us pull back a little bit on that in the fourth quarter because the inventory was in the third quarter. Going into the fourth quarter, and so we're gonna play that by ear, but we're in a position if it's permits on the shelf, ready to respond to the demand in the marketplace. But like I said, we're not gonna flood the market with inventory, so we're really going to pace it based on sales and opportunity. Michael Jason Rehaut: Okay. Appreciate that. And I guess just looking at your different regions, you talked about September being a little bit better from a within the quarter and perhaps that's continued into October. From a regional standpoint, I'm curious if you've seen the strength more concentrated in any areas and specifically maybe you could kind of go around the world in terms of which markets remain on the margin stronger than average, weaker than average. We heard comments yesterday that maybe Florida showing a little bit of signs of stabilization. So love your thoughts on that as well. Sheryl Denise Palmer: Certainly. I'd be happy to. Yeah. You know, I would with the comments on Florida, Mike. You know, we continue to be very bullish around Florida. I think Florida was the last to really adjust if we think about the last few years, but the good news is given how late it was to the party, we're already seeing green shoots on inventory sales activity. When I look at our sales, half of our Florida markets were up year over year. In fact, Orlando had the highest paces in the country. Closings for the quarter were up almost across the board in all of our Florida markets. And half the market saw improvement in their margin in the quarter year over year. Heading in the shoulder season, like I said, I stay optimistic that we'll have a good season for the resort lifestyle business. We're also seeing a decent reduction in both new and resell inventory. And once again, I'm delighted to see that. If I go to Texas and you see it in the numbers, Mike, you know, it was a tougher quarter from a volume standpoint. Inventories have been elevated in Texas. If I kind of run around the state, you know, Austin, they've been at this for it feels like darn close to three years. It does feel like we're starting to see the bottom, which I would say is encouraging. Months of supply have come down. And it feels like it's holding pretty steady. You know, we'll go a couple more months and see if that's true. But when we look at, like, underproduction QMIs in the market, they've settled. More reasonable levels. Margin recovery, you know, we've seen them up a little bit quarter over quarter. And the land market, I would tell you, continues to be tough. The teams have been very diligent in their assumptions not to get ahead of themselves. Until we really find final pricing in the But the good news is we have a very strong portfolio of quality assets, that will continue to carry the day. You know, Dallas I think it slowed down a bit, a little bit more. The lowest price points in Dallas are hypercompetitive. And most builders, it appears as real have subscribed to, I would say, more of an inventory strategy. Resales have remained generally stable, maybe up a bit. Once again, I tell you our balanced portfolio gives us some great opportunities because it's a high-growth market for us as we look forward. Great land pipeline. Margins are still strong. Probably the thing I'd point to in Dallas I think I said it in my prepared remarks. Say that three times. Prepared remarks, Mike, is the H-1B buyers. You know, we've seen that both in the demand and from a cancellation standpoint. And then if I wrap up with Houston there, you know, the first-time buyers it's competitive, very competitive for them. The good news is there's lots of them. It actually hasn't one of our highest paces in the quarter in the country. Our core communities continue to do well. But you have to put it on a relative basis. Paces are down from the peak levels. Certainly in Texas, more than we've seen across the board. But I think our locations doing well. The ones in the court are doing better. Qualifications qualification seems to be the biggest issue for our first-time buyers there. And we're having to use both rate incentives buy downs, really every tool we have in our toolbox to assist these buyers get to a payment that they can afford. I'd probably describe it as competitive but steady. But like I said, pulled back from our peak levels. Carolina is broadly doing really good. You can really start to see the difference between core and some of the fringe markets, and our core assets are really performing nicely. I move to California, you know, we've been discussing for a while. On the capital front. We've really, you know, tightened up our investment. The communities we have in SoCal are doing well. We have pulled back the investment a little bit. You know, once again, SoCal's above the company average or even pull so it's pulled back from its peak. Their absorptions are above the company average. If I go to the Bay I would say tech has had an impact on both probably Bay and Seattle. And if I go to stack and round out California, you know, I'd say they're holding steady. They're getting more than their fair share in the marketplace. When I look at our resort lifestyle business there, we have one that's approaching closeout, one that's in the new stage. In a new state you know, newer stages of opening without the amenity. So those are kind of balancing each other out. I'd say Sacramento overall stable, consistent community count paces year over year. And then maybe I'll wrap up with Phoenix. I think that market probably provides the most diverse offering across all consumer groups for us. It's a balanced market with our to-be-built and inventory offering. We've seen good improvement on cycle time. We definitely, with our move-up buyers here, have a more discerning buyer. But we have the options to meet their needs. Paces have been constant sequentially. Once again, I'd say this is a market that's kind of punching about their weight, strong margins for us. Modest incentives compared to the rest of the country. You know, in the land market, it's a little bit mixed. We're seeing some wonderful opportunities. We're very deal specific. We've been able to renegotiate terms and price. We've seen, you know, just coming out of an auction, a state that was pretty frothy. So a little bit of everything in the marketplace. You know, I just wrap my with just a macro that I know there's been a lot of discussion on California. I mean, excuse me, Florida and Texas. When you look at migration patterns, they're still leading the country. They continue to be very important markets for the industry. Consumers still have strong equity in their homes. Income networks are growing. So I'd say, you know, the green shoots are starting. But, Erik, I'm sure I missed a lot. Anything you can think of? Erik Heuser: You covered it long term. You know, excited about the population gains. And net move-ins that we've seen in those markets over time. And specifically, as you think about months of supply and price in the retail market, if you're to indicators we've watched carefully. You know, seeing some real stabilization, a few examples, maybe Sarasota and Tampa, by way of example, were months of are actually down and pricing has stabilized, so there's no real movement there. Houston's been interesting in that the months of supply are down about 4%. On a moving average. And stable pricing. And so some real examples of some stabilization. Of course, we'll continue to watch seasonality. And evolution. And on a new inventory side, the cycle is a little different than all others. There is always a little bit of seasonality. But we continue to monitor the core versus noncore benefits that we think we have. Sheryl Denise Palmer: I really see difference in performance. Erik Heuser: Right. Sheryl Denise Palmer: Yeah. Michael Jason Rehaut: Great. Thank you very much. Sheryl Denise Palmer: Thank you. Operator: Thank you very much. Our next question comes from Matthew Adrien Bouley from Barclays. Matthew, your line is now open. Matthew Adrien Bouley: Morning, everyone. Thank you for taking the questions. So I wanted to ask on the I guess, the over 100 new communities to come next year. I'm curious any detail on how that may break out either from a regional or product perspective? And specifically, I'm curious on your Esplanade expansion. I think you said it's still hanging around kind of 10% of sales today. I know you guys had some, you've got some, ambitious goals of expanding that product. So should we expect to see any movement on that mix of Esplanade next year as well with all those openings? Thank you. Sheryl Denise Palmer: You know, we really leaned in, Matt, talking about 26. So we we're not gonna go too far. But I will give you a tidbit. I'll give you an Esplanade we have three new Esplanade opening in the first quarter. Along with amenity centers, nine holes of golf in one of our communities, so very exciting when I look at next year and just across the Esplanade. Portfolio with the amenities that are opening along with new communities. I think we're excited. Very consistent with what we discussed at our investor day. I think before we get into more detail, on community's card, I think you wanna add to that. We really wanna wait till next quarter. Yes. I think we'll wait, Matt, until we kind of wrap up the year. But as you can imagine, I think the outlet growth will be pretty broad-based kind of throughout the country. So I think we'll leave it at that for now. We can handle that more when we wrap up the year. Matthew Adrien Bouley: Okay. Got it. I appreciate that. Secondly, just SG&A. Looked like a lot of leverage there despite sort of flattish homebuilding revenue year over year. Can you speak a little more around what you're doing to control costs here? Was there anything one-time in that 3Q result? Or should we think you've kind of found a new run rate level here in Q3 that we can kind of use to model out the next year on SG&A? Thank you. Curt VanHyfte: Yeah, Matt. Thanks for the question. SG&A, yeah, that's a focus of ours. Ideally, it's part of the culture. The teams are focused on it. We're constantly looking at kind of our throughput kind of results that we get on various metrics. In the quarter specifically, we benefited from some lower kind of payroll-related costs and lower commission costs as well. And as we said in our prepared comments, we're tracking to be in that mid-nine percent range for the year. So all in all, I'm very happy with where we're at from an SG&A perspective. The teams are focused on it. And we're doing a lot of good things from a cost control perspective. And I should also highlight the fact that from a back-office standpoint, we're continually trying to find ways to improve kind of how we're operating whether it's our shared contract kind of program that we have where we're centralizing all of our contracts and we're moving the needle on that as well on some of the other aspects of the business. The other one I'd point to, I think you're Sheryl Denise Palmer: our contracts department that we've had in place for a year now, right, where all the contracts are centralized. I think that's a good one. I think the other one I'd point to, Kurt, is what we're seeing in the reservation system. I mean, even just in September, we saw about an 800 basis point reduction from our overall business to those that came in reservation and co-broke. So if we can keep that up, generally month to month, we've been seeing four, 500 on average. 800 was a September was a peak for us. But, obviously, the more we get through our reservation system with that reduction that will continue to show the leverage in the SG&A. Matthew Adrien Bouley: Got it. Super helpful. Thank you, Sheryl and Kurt. Good luck, guys. Sheryl Denise Palmer: Thank you. Operator: Thank you very much. Excuse me. Our next question comes from Alan S. Ratner from Zelman and Associates. Alan, your line is now open. Alan S. Ratner: Guys. Good morning. Thanks for all the details so and nice quarter. I guess just first on the SG&A just since that was the last topic there. Just trying to back into what the implied guide for 4Q is and to get to mid-9s for the year. I think it does imply that rate does tick up a bit sequentially on a fairly similar revenue base. So is that just some conservatism around that 800 basis point reduction in the broker side that you just mentioned, Cheryl? Or is there some other that I should be aware of on Curt VanHyfte: Yes. Hi, Alan. I think it's a couple of things. A, yeah. We are seeing a potential influx of commission costs for Q4 as what we're seeing from some of the competitors in the marketplace and what everyone's doing to drive maybe their closings for the year. With Sheryl Denise Palmer: brokers, right? With brokers. And then what I would also say is that based on our guide of, you know, the midpoint of our range of 3,200 units, with our average sales price at $590,000, we are losing a little bit of leverage just because of the top line. It's going to be a little bit less than it was in Q3. Alan S. Ratner: Got it. Okay. Understood. Thanks for that Kurt. Second question, and I apologize, I missed some of these numbers, but I thought the detail that Erik gave surrounding some of the successes you've had on land renegotiation was really encouraging to hear. So I was hoping, first, you just repeat that? And second off, on the deals where you were actually able to get lower pricing, can you quantify like what maybe the margin impact is on those particular projects? And just the general timing of when we should expect to see that benefit beginning to flow through? Hi, Alan. Yes, great question. Appreciate it. It was about 3,400 lots in the quarter that rolled through our investment committee that were renegotiated. And that renegotiated a renegotiation took the form of deferrals. So those on average were about six months. But a relatively surprising level were actually on price, and it was basically an 8% decrease in the original purchase price on deals that were rolling back through the investment committee that had been negotiated from fourth quarter twenty-three through relatively current. So, you know, as you think about navigating this particular cycle, it's been interesting to me in participating in it. That this one's been relatively quick in terms of seller receptiveness for the call. But also, you know, our proactiveness in making sure that we're playing offense and communicating clearly. And we've seen success. And so maybe to your question relative to what should we expect, as we review deals that we had in our original expectation in terms of gross margin and return production, we want to make sure that we're holding those. And sometimes that does require an adjustment. And so I wouldn't say that's going to result in significant upside. But we are maintaining our original expectations in most cases. And then in terms of timing, those are gonna roll through. You know, over time. So again, relatively current on deals that we'll be closing on in the next few months. Developing. And so it's gonna take some time for that to roll through the system. The last thing I would say, interestingly, as we're talking about the land environment, this one being a little bit different than past, is we have seen some interesting finished lot pickups. And so about 25% of the land rolling through our system most recently are actually finished lots. Those have been difficult to find, over the last couple of years. And I think that's Alan S. Ratner: likely Erik Heuser: the case of some other builders maybe walking from deals on our ability to renegotiate those in a way that makes sense for us. And as I alluded to, we're also seeing some development cost relief. So those would be a couple of other upsides that we see. Sheryl Denise Palmer: And, Erik, would you just so we don't get over our ski test. I mean, it's been interesting. Right? Because your point, we've had some tremendous renegotiation. We've had other guys that just won't move. And we've been forced into a position to walk away. Erik Heuser: Completely agree. The success cases, as I mentioned, are the deferrals and the purchase price and, in some cases, just some restructuring of the deal. But there are also instances where they just don't work and we're standing our ground and just having to walk from those. And so that was you'll see it all through the system as well. Hey, Erik. Can I squeeze in one more on that topic? Because I think it's really, really interesting. Have you seen any common thread on the deals that you have been able to renegotiate? Are you more are you seeing more success with, say, land bankers or kind of your more institutionalized land sellers and developers or more success perhaps with kind of the one-off mom and pop landowners, farmers, etcetera, curious if there's a common thread on the deals that people are kinda holding their guns or versus the ones that seem to be a bit more willing to negotiate? Yes. It's really all categories. Alan. And so we start with the seller financing, you know, can you just carry this? And we need some more time on it. And so we've seen success there. The land banking appetite continues to be relatively strong so we use that as a in a surgical way where we can optimize our return by using by using land banking. But would say the supply of the availability of land banking is been very high. And then lastly, with regard to just the price changes, as I mentioned of those 3,400 lots, about 75% of the lots actually resulted in some kind of price change. And so it's been really interesting as we think about the solutions, which are many. Alan S. Ratner: Great. Thanks for all the detail, guys. I appreciate Sheryl Denise Palmer: Thank you, Alan. Operator: Thank you very much. Our next question comes from Rafe Jason Jadrosich of Bank of America. Rafe, your line is now open. Rafe Jason Jadrosich: Hi, good morning. It's Rafe. Thanks for taking my question. I wanted to ask in terms of the incentive change, you comment sort of that entry-level was where you're seeing the most pressure, but you're also seeing some hesitancy on the move-up in resort lifestyle. Like, you sort of quantify where the margins are for each of the segments and then maybe how much the incentives have changed for each of them? Like, how different is it across the different segments? Sheryl Denise Palmer: Yeah. I mean, the incentives by consumer group, you know, I always hate averages. Because I think it doesn't tell the whole story. But, certainly, you would expect our most expensive incentives go with those forward commitments. And those are generally our first-time buyers, and we're having to help them get the rate as low as we can. So as to total dollars, the sales price less. So the total dollars are a little less, but the percentage, you know, that's where once again, I think our most expensive set. You go all the way to the resort lifestyle buyer, where that's our, you know, that ASP is probably about $200,000 higher than our average. And those folks generally as concerned about interest rates. And so those incentives work differently. You know, we'll see a lot of support there on helping them with options. You know, if you spend this, we'll give you that. Sometimes it's reduction in lot premiums. They're more sophisticated. They know what's happening in the market. They don't wanna overpay. And if they can't get it in a mortgage incentive, they want it somewhere else. But I'd say, you know, generally, you know, we're using incentives across the board. It's just the how for each customer. But I wouldn't point to significant differences in range except for the call out that our most expensive incentives tend to be with first-timers. Kurt, is that No, think generally speaking, you're in the ballpark. And Rafe, we don't Curt VanHyfte: really provide kind of margins based on kind of the segment. Overall. But I think you could probably imagine what we have said in the past is that our resort lifestyles margins are typically the highest kind of in the portfolio. But to Cheryl's point, it comes down to kind of each buyer's specific situation and we apply and we try to align the to maximize each buyer's situation. Rafe Jason Jadrosich: Okay. That's helpful. And then, you sort of mentioned that cycle times are hard, but they're still coming down. How do we think about how much higher the backlog conversion can go? And then how much opportunity do you have on the cycle times from here? How much more can they come down? Curt VanHyfte: Yes. Rafe, I would say that just from a cycle time perspective, we're essentially at pre-COVID levels for the most part. We have a couple of markets that maybe still have a little bit of opportunity. To kind of run through the tape there. So we do feel like there's continued opportunity there overall for the entire business. Relative to the conversion kind of rate I think we were at about 74%, 75% in Q3. And based on our closing guide and where backlog is today, I think you can expect that that conversion rate will be higher. In Q4 just based on kind of the sheer numbers of the numerator and the denominator there. So you can expect that to be higher probably in Q4 than it was in Q3. Rafe Jason Jadrosich: Is that like a sustainable level going forward? Or is that just because of the mix of spec relative to BTO? Curt VanHyfte: Yes. Rafe, it's more of a function of where specs are today. As you've heard Sheryl talk about, we intend over time to be able to see it in flux or to raise the level of to-be-built over time. So it's a point in time kind of where we're at today. And then as I said we'll see what we can do on the 2B build side of the business in the coming months and quarters. Sheryl Denise Palmer: But the next couple of quarters are going to likely be higher conversion. It's going to be a higher conversion for the next Curt VanHyfte: couple of quarters, yes. Rafe Jason Jadrosich: Okay. That's helpful. Thank you. Thank you. Operator: Thank you very much. Our next question comes from Kenneth Robinson Zener from Seaport Research Partners. Your line is now open. Kenneth Robinson Zener: Good morning, everybody. Sheryl Denise Palmer: Hi, Ken. Good morning. Operator: So Erik Heuser: a couple of things here, just kinda housekeeping. But with incentives, if you were to think about the bucket, I think some of the builders have been Kenneth Robinson Zener: describing it to me, like, you know, half of the incentive is the price reduction. Half and then the other half is kind of split equally between mortgage buy downs and closings. Do you within those three buckets, do you have a comment Sheryl Denise Palmer: Yeah. I would tell you that you know, move a little bit quarter to quarter. And it will be a little different if you're talking growth or net price or you're talking units. But you know, somewhere around 45% of our incentives are specific to financial services. And a subset of that would be what we would call the most expensive. Forward commitments. And then the balance, the other 50%, is gonna be a combination of all the other things we've talked about. You know, it could be options. It could be lot premiums. In some instances, we may have had to reset pricing to market. But it's a combination. Erik Heuser: And just to be clear, when you say financial services, Sheryl, it's Kenneth Robinson Zener: you're recording all that stuff in the homebuilder segment net pricing. Is that correct? Or is there stuff running through financial services, just to be clear? Sheryl Denise Palmer: No. It's running through the margin. Most of the Right. Financial services are running through the margin. I mean, actually, all of them. Are running through ASP, and some are running through cost of goods. Erik Heuser: Right. Okay. Just wanna clarify. And then, Kenneth Robinson Zener: you know, Erik Heuser: obviously with orders, you generally want to follow your starts, we'll generally follow your orders. Kenneth Robinson Zener: I'm just wondering, looking back, so 3Q, starts for below Erik Heuser: orders, both down inventory units make sense. 2Q it was higher Kenneth Robinson Zener: And the idea was there you wanted to build, right? Operator: To have specs. Erik Heuser: Which you know, if let's say spring is Kenneth Robinson Zener: softer, than expected, would you guys still be in the position where you want to keep that volume up relative to the start volume up relative to orders. And I'm thinking you did so much work on it fixed G and A, right? It's like down 20% comparable to your inventory units. I'm just trying to think about how your guys' playbook works there or if you really just have starts follow orders wherever they go, you know, in spring of next year. Curt VanHyfte: Yes, Ken, great question. At this point in time relative to next Kenneth Robinson Zener: year, Curt VanHyfte: probably not going to get into specifics there. But what I can say is we're going to continue to probably we've adjusted our starts in Q3 relative to sales to kind of right-size our inventory position. And generally speaking, we're gonna stay sticky from a start standpoint to sales. But then it's going to come down to a community by community kind of analysis. And how each community is doing, and we'll fluctuate that as necessary. Necessary based on A, the community Entry level is going to be more spec. Townhomes are going to be more spec. And then of course as we move our way up in the consumer segmentation profile we'll look to kind of hopefully pursue more to be built business. But I think the market is going to tell us and lead us to that path down the road. Kenneth Robinson Zener: Okay. No, I appreciate that. I wasn't trying to get next year's guidance as much as kind of your thinking about when to start go above and below orders. Thank you very much for your time. Sheryl Denise Palmer: Thanks, Ken. Bye, Ken. Operator: Thank you very much. Our next question comes from Jay McCanless from Wedbush. Your line is now open. Jay McCanless: Hey, good morning, everyone. Operator: Wanted to ask where is the spread now between spec closings Jay McCanless: and build to order closings? On a closing standpoint, we were sixty-forty, 60% spec or 61% spec and 39% to be built for the quarter. Operator: Okay. Then what's the gross margin spread on that now? Curt VanHyfte: Yes. We continue to run-in that several you know, 100 kind of basis points. As you can imagine Jay, nothing new there. Within our Esplanade communities, with the high premiums and the high option revenue. We can see some of these get up to 1,000 basis points. So but generally speaking, it's at several 100 basis point And then We continue to track to. Sheryl Denise Palmer: Also believe, do you think it's fair, Kurt, even within our Esplanade, non-Esplanade, resort lifestyle? We have a spread. Right? There's our Esplanade tends to deliver the highest. Yep. And our Non-Esplanade still aged targeted restricted a little low. Operator: Okay. Thanks. And then the question I had Jay McCanless: it's encouraging to hear that maybe the land prices are breaking a little bit. But just as we think about how when that can start to help the gross margin Operator: Is it going to be a back half of 2026 event? And also, Jay McCanless: one of your competitors called out, there was a small number, I think it was $1,500 per home tariff impact. Curt VanHyfte: Have you all tried to assess what impact the new tariffs might have on costs for next year? Yes. I'll start with land. Jay. From a timing standpoint, this is current current updates to our underwriting. So you're probably practically not gonna see it really roll through until '27 and beyond for most of that. And in some cases, I would tell you that it's we're just on you know, holding our original underwriting expectations in terms of retrading. And in some limited sort circumstances, we are seeing some opportunistic deals roll through, and those are the ones that you might some future upside on. But kind of a blend of the two, I would just, and then with regard to tariffs, I'll just make a brief comment on the land market, and Kurt can take the balance and vertical But, you know, we are hearing from our teams that, generally speaking, on the land development receipt standpoint, and there's not gonna be a whole lot of specific tariffs impacts, but kind of the magnitude of five to 6% release on cost on the development side. Curt VanHyfte: Yes. And Jay, on the House side, yes, I think we subscribed to the thinking that it will be a modest increase from a tariff standpoint. There's the cabinet stuff that came out the vanities, the steel is out there. But again, I think what I would also add to that is we're doing a lot of things behind the scenes just from an operational kind of execution standpoint. Working with our trade partners, our suppliers on what I'll call cost reduction strategies that the teams are doing a great job working through. I would also add that we've recently hired a new national VP of Purchasing and construction that is helping us lead that charge. And that's one of its focal points as well. So all in all I think we have a pretty good balance approach and dealing with the tariff potential increases. Through some of the other things that we're working on behind the scenes relative to our cost reduction strategy. In light of some of the start activity. That we're seeing. Jay McCanless: Okay. Operator: Thanks, Jay. Thank you very much. We currently have no further questions, so I'd like to hand back to Sheryl Denise Palmer for any further remarks. Sheryl Denise Palmer: Thank you very much for joining us for our third-quarter call, and wish you all a wonderful holiday season, and we'll look forward to talking to you early in the New Year. Operator: As we conclude today's call, we'd like to thank everyone for joining. You may disconnect your lines.
Operator: Good morning, and welcome to the Hilton Worldwide Holdings Inc. Third Quarter 2025 Earnings Conference Call. All participants will be in a listen-only mode. After today's prepared remarks, there will be a question and answer session. Please note this event is being recorded. I would now like to turn the conference over to Charlie Ruer, Vice President Corporate Finance and Investor Relations. You may begin. Charlie Ruer: Thank you, Chuck. Welcome to Hilton Worldwide Holdings Inc.'s third quarter 2025 earnings call. Before we begin, we'd like to remind you that our discussions this morning will include forward-looking statements. Actual results could differ materially from those indicated in the forward-looking statements, and forward-looking statements made today speak only to our expectations as of today. We undertake no obligation to update or revise these statements. For a discussion of some of the factors that could cause actual results to differ, please see the Risk Factors section of our most recently filed Form 10-Ks. In addition, we will refer to certain non-GAAP financial measures on this call. You can find reconciliations of non-GAAP to GAAP financial measures discussed in today's call in our earnings press release and on our website at ir.hilton.com. This morning, Chris Nassetta, our President and Chief Executive Officer, will provide an overview of the current operating environment and the company's outlook. Kevin Jacobs, Executive Vice President and Chief Financial Officer, will then review our third quarter results and discuss our expectations for the year. Following their remarks, we'll be happy to take your questions. With that, I'm pleased to turn the call over to Chris. Christopher Nassetta: Thank you, Charlie, and good morning, everyone. We certainly appreciate you joining us for our call today. Our third quarter results continue to demonstrate the resilience of our business as strong net unit growth, disciplined cost control, and our capital-light business model delivered solid bottom-line performance. Adjusted EBITDA and adjusted EPS both meaningfully exceeded the high end of our expectations despite softer-than-expected industry RevPAR performance. Our strong portfolio of brands, powerful commercial engines, and disciplined execution continue to drive meaningful free cash flow conversion, which we expect to be greater than 50% of adjusted EBITDA for the full year. We remain on track to return $3.3 billion to our shareholders in the form of buybacks and dividends for the full year. Turning to results for the quarter, system-wide RevPAR was down approximately 1% year over year as unfavorable holidays and events, softer international inbound to the U.S., declines in U.S. government-related travel, and portfolio renovations weighed on results. In the quarter, leisure transient RevPAR was roughly flat, driven by strong demand in Europe and the Middle East, offset by unfavorable holiday shifts in the U.S. Business transient RevPAR decreased approximately 1%, driven by continued economic uncertainty. Group RevPAR decreased approximately 4%, driven by tougher comparables as we lap major international events, renovation impacts, and holiday shifts. We did see group demand strengthen, which is reflected in our stronger fourth-quarter group position and our 2026 position, which is up in the mid-single digits. As we look to the fourth quarter, we expect RevPAR to be up approximately 1%, driven by holiday shifts, easier year-over-year comps, and relative group strength. We now expect RevPAR for the full year to be flat to up 1%. As I lift up and think about the opportunity ahead, I remain optimistic about the next few years. We continue to believe that in the U.S., lower interest rates, a more favorable regulatory environment, certainty on tax policy, and a significant investment cycle will result in accelerated economic growth and meaningful increases in travel demand. This, when paired with limited industry supply growth, should drive stronger RevPAR growth over the next several years. Turning to development. During the third quarter, we opened 199 hotels totaling over 24,000 rooms and achieved net unit growth of 6.5%. Openings increased more than 35% year over year on an organic basis. Our luxury and lifestyle brands continue to expand around the world, comprising approximately 20% of total openings in the third quarter. In Asia Pacific, we announced our plans to exceed 250 luxury and lifestyle hotels in the coming years, representing portfolio growth of over 50%. In Europe, we opened the Conrad Hamburg to expand our award-winning luxury brand into one of Europe's most iconic destinations. Conversions remain integral to our growth story. We expect nearly 40% of openings in 2025 to be conversions across 12 of our brands, sourced from a mix of independent hotels and competitor brands. We recently celebrated Hilton Worldwide Holdings Inc.'s 9,000th hotel following the conversion of the Signia by Hilton La Cantera Resort and Spa, a landmark property set atop 550 acres overlooking the rolling hills of Texas Hill Country. We also added the 1,000-room Sunseeker Resort as part of our Curio Collection. After eclipsing 8,000 hotels just a year ago, we opened nearly three hotels per day to reach this latest milestone, further underscoring our incredible growth momentum. In the years to come, we continue to believe the conversion opportunity is immense globally. To help capture this opportunity and leverage our skill set in identifying white space and developing new brands, earlier this month, we launched our newest brand, Outset Collection by Hilton, the company's 25th brand and eighth in our growing lifestyle portfolio. Outset Collection by Hilton is defined by soulful, story-led properties featuring a diverse range of hotels across urban destinations, small towns, adventure outposts, and offbeat hubs. Grounded in deep research, we determined that the upper midscale to upscale collection space represents an enormous opportunity for unbranded or independent hotels that currently comprise more than 50% of the global hotel supply. To date, we have more than 60 hotels in development with a long-term growth potential of more than 500 hotels across North America alone, and will open our first several in the fourth quarter. Hilton Worldwide Holdings Inc. has consistently delivered an industry-leading share of conversions in the United States, and we expect that to strengthen with the addition of the Outset Collection. More broadly, we continue to deploy our brands into new markets around the world, driven by industry-leading premiums they deliver for owners. In the quarter, we marked brand debuts in 12 new countries and territories, including DoubleTree in Pakistan, Hampton in the U.S. Virgin Islands, and Motto in Hong Kong, which also represented the brand's debut in Asia Pacific. Globally, Hilton Worldwide Holdings Inc. operates properties in 141 countries and territories with an average of only four of our 25 brands per country, demonstrating the huge runway of growth ahead. In addition to strong openings, we signed 33,000 rooms in the quarter, up over 25% year over year on an organic basis. We increased our development pipeline to more than 515,000 rooms, growing both year over year and sequentially versus the second quarter, with expansion in key strategic markets and across chain scales. In Japan, we announced several agreements to further bolster our luxury and lifestyle portfolio, including Waldorf Astoria Residences in Tokyo, marking the region's first residences under the iconic Waldorf Astoria brand. We approved LXR, Curio, and Tapestry properties at the foot of Mount Anapore, Japan, offering guests easy access to Niseko's exceptional ski slopes when the hotels open later this year. In Vietnam, we approved nearly 1,800 rooms across five hotels to debut our Conrad, LXR, and DoubleTree brands and to expand the Hilton brand in one of Asia's most dynamic markets. We also signed our first LXR hotel in Phuket, Thailand, our first Canopy in Manila, Philippines, and announced three Curio Hotels in key Italian destinations, including Genova, Milan, and Sorrento. New development construction starts in the U.S. were strong during the quarter, and for the full year, we expect global new development starts to finish up nearly 20% and up over 25% in the U.S. year over year. Even with this year-over-year growth, new development construction starts remain below 2019 levels, implying strong continued runway for growth. Our record-setting pipeline, combined with conversion momentum and acceleration in construction starts, will continue to fuel our growth in the coming years. We expect to achieve net unit growth of between 6.5% and 7% in 2025 and 6% to 7% annually over the next several years. Our development success is incumbent on us being the premier partner for our owner community. Thus, we're always innovating to continue delivering industry-leading RevPAR premiums and profitability for owners while exceeding guest expectations. During the quarter, we communicated a first-of-its-kind program that offers owners system fee reductions, many of which are tied to hotel-specific product and service quality scores. The fee reductions will share the efficiencies we have gained through scale and technology with our owners while reinforcing the need to continue maximizing the customer experience. We think we are well-positioned to continue finding new efficiencies and strengthening our value proposition for guests, owners, team members, and shareholders. Our proprietary tech platform, envisioned a decade ago, was built for agility, with 90% of our enterprise solutions in the cloud today, up from 20% in 2020 when we started deployment. This modern platform has established Hilton Worldwide Holdings Inc. as a pioneer and leader in hospitality technology and is allowing us to rapidly introduce new innovations that elevate guest experiences and drive greater value for our entire network. Because of where we are in our technology platform roadmap, we feel uniquely positioned in the industry to embrace AI and drive greater differentiation for our Hilton network. During the quarter, we continued to drive our award-winning workplace culture, including being named number one best workplace in Australia, New Zealand, and Sri Lanka, marking a total of 18 number one wins in the past year, the most since we began participating in the Great Place to Work survey. We're more confident than ever that our team is poised to deliver for our shareholders in the years ahead. Overall, we're very optimistic about our business and what is on the horizon globally. Our brand-led, network-driven, and platform-enabled strategy will continue to help us achieve our dramatic growth trajectory and meet the evolving needs of our travelers around the world while delivering great returns to owners and shareholders. Now, I'm going to turn the call over to Kevin for a few more details on the quarter and expectations for the full year. Kevin Jacobs: Thanks, Chris, and good morning, everyone. During the quarter, system-wide RevPAR decreased 1.1% versus the prior year on a comparable and currency-neutral basis, driven by modest declines in both occupancy and rate. Adjusted EBITDA was $976 million in the third quarter, up 8% year over year and exceeding the high end of our guidance range. Outperformance was predominantly driven by better-than-expected growth in non-RevPAR-driven fees, disciplined cost control, ownership, and some timing items outweighing RevPAR softness. Management franchise fees grew 5.3% year over year. For the quarter, diluted earnings per share adjusted for special items was $2.11. Turning to our regional performance. Third-quarter comparable U.S. RevPAR decreased 2.3%, largely driven by pressure across business transient and group as holiday shifts, declines in government spend, portfolio renovations, and softer international inbound demand weighed on performance. For full year 2025, we expect U.S. RevPAR to be roughly flat versus 2024. In The Americas outside the U.S., third-quarter RevPAR increased 4.3% year over year, driven by strong demand in both leisure and group segments. For full year 2025, we expect RevPAR growth to be in the mid-single digits. In Europe, RevPAR grew 1% year over year, driven by a rebound in the U.K. and Ireland and offset by a tough year-over-year comparison from major events last year. For full year 2025, we expect low single-digit RevPAR growth. In the Middle East and Africa region, RevPAR increased 9.9% year over year, driven by robust intra-regional travel growth for both business and leisure segments. For full year 2025, we expect RevPAR growth in the high single-digit range. In the Asia Pacific region, third-quarter RevPAR was up 3.8% in APAC excluding China, led by strong group trends in Japan, Korea, and South Asia. RevPAR in China declined 3.1% in the quarter, largely driven by the impact of the government travel policy on business transient group travel, particularly in Tier two and Tier three cities. For full year 2025, we expect RevPAR growth in the Asia Pacific region to be roughly flat, assuming modest RevPAR declines in China. Turning to development. As Chris mentioned, for the quarter, we grew net unit 6.5% and have more than 515,000 rooms in our pipeline, of which nearly half are under construction. We expect to deliver 6.5% to 7% net unit growth for the full year. Moving to guidance. For the fourth quarter, we expect system-wide RevPAR growth to be approximately 1%. We expect adjusted EBITDA of between $906 million and $936 million and diluted EPS for special items to be between $1.94 and $2.03. For the full year, we expect RevPAR growth of 0% to 1%, adjusted EBITDA between $3.685 billion and $3.715 billion, and diluted EPS adjusted for special items of between $7.97 and $8.06. Please note that our guidance ranges do not incorporate future share repurchases. Moving on to capital return. We paid a cash dividend of $0.15 per share during the third quarter, bringing dividends to a total of $108 million for the year to date. Our Board also authorized a quarterly dividend of $0.15 per share in the fourth quarter. For the full year, we expect to return approximately $3.3 billion to shareholders in the form of buybacks and dividends. Further details on our third-quarter results can be found in the earnings release we issued earlier this morning. This completes our prepared remarks. We would now like to open the line for any questions you may have. We would like to speak with as many of you as possible, so we ask that you limit yourself to one question. Chuck, can we have our first question, please? Operator: The first question will come from Shaun Kelley with Bank of America. Please go ahead. Shaun Clisby Kelley: Hi, good morning everyone and thank you for taking my questions. Chris, like usually around this time of year, we start to think about the setup for next year and I know it's hard to put you on the spot without guidance out there, but we'll kind of talk around it anyways a little bit. Could you just give us your thoughts about kind of the timeline for the improvement you're hoping to see on the top line and operating environment? And then just we're getting a lot of feedback this morning about how well you've done on the cost side. Let's play the counterfactual. If the top line and we're talking really RevPAR here, but if that environment doesn't get a little bit better, could you just talk about what you can do in your comfort continuing to execute so well on the bottom line of the side of the business and drive some operating leverage? Across the Hilton Worldwide Holdings Inc. enterprise worldwide? Thanks. Christopher Nassetta: Yes. Thanks, Shaun. Happy to cover both. So obviously, yes, we're not giving we gave you a form of guidance on unit growth. For next year, we're not at this time of year going we're just starting the budget season. And so we don't we're not going to give guidance on RevPAR. But here's what I'd say. I said it at your conference. I said it on the last call, I believe we feel incrementally a lot better about the setup for 2026. I sort of said it briefly in my prepared comments. I mean, think while there's certainly a lot of noise in the world and you saw in Q3 industry numbers were less were lower than everybody expected. I still think if you sort of lift up and you get away from the noise that structurally in the U.S. at the moment, since that's still 75% of our business. There's a lot of really good things going on. I mean, inflation is definitely coming down. Rates are coming down with it. Expectation that rates will continue to come down. You have certainty on tax policy which is unusual and probably lasts for at least three to five years. You have some meaningful benefits in that tax policy like bonus depreciation and things that that stimulate investment. You have regulatory regime that is going to be much more friendly. And you have an investment cycle that is coming and sort of happening, but it takes time to get embedded in the economy. And what is that investment cycle? I mean, I hate being redundant, it's worth noting. I mean, you have the core infrastructure bill that was done approved by Congress signed by President Biden you know, if you add up all the pieces of it, roughly $1.6 trillion, like, less than 20% of that's been spent. You had $800 billion from the CHIPS Act less than 5% of that's been spent because it takes time to get the money in the system. And then on top of that, have the whole AI investment thesis that's going on, not just the tech companies that are obviously investing at into the trillions when you put when you put it all together. But all of the infrastructure that goes behind that. So all the data center development that's going on, all the energy development that has to go because without energy you don't have data centers, without data centers you don't have AI. And so while it takes time to get all of that embedded and I can't like I cannot tell you like I think it's like January 18 that all I think it's like a benefit that we are going to be getting for several years. I do believe you will start to see it. In the first half of next year. I almost think you you you have to. And then another couple of reasons for optimism on next year is one obvious one is comps get a lot easier. Right? I hate to rely on that. I mean, I obviously just gave you a pretty good setup for much better fundamentals. But the comps get easier. You've got some event-driven benefits next year. You have midterm elections, which mean a lot of activity. These are big midterms. People are in every state in the union, people are going to be running around raising money campaigning. That's good for business. You have America's 250 which is going to be a year-round celebration. There's a lot of energy going into that from a lot of different places including the administration. You have World Cup, which isn't like Super Bowl where it's a weekend or whatever. It's a fairly extended sort of experience. And so all of those things are going to be good. And then, of course, on the other side of it, while we're benefiting from what I think is a pretty darn good development story and getting much greater than our fair share, you're still in a in super cycle of underdevelopment. In the industry where you're you're adding capacity at less than 1% against the two point five point five percent thirty year average. So, like again, you can all get caught up in the noise and tariffs and like there's a lot geopolitically. Listen, I'm not don't have my head in the sand, but I like to try and lift up above noise. That's sort of what I do in my personal and professional life. And when I do that, it makes me feel pretty good about the next few years. So I would bet a lot of money that 26% going be better 25% and I'd bet a lot of money 27 is going be better than 26%. The exact slope of that is difficult to determine. We'll obviously try and do a little bit more precise job through the rest of this year. In doing a very granular analysis market by market as we as we go through the budget season. But I feel really good about it. On the cost discipline side, listen, I think I would hope everybody would agree, we've been super disciplined forever on costs. Like since we went public, if you look at us versus core competitors, relative to our size and scale, we've always been pretty efficient. And I believe we will continue to be, as I said, very briefly in my prepared comments, there are a lot of tools available to us to continue to drive efficiencies and we're going to use those. I mean in the world of AI, by redefining a lot of processes there are opportunities to continue do things more efficiently and be able to accomplish more with less. And that by the way holds true for our G and A, but also importantly very importantly, because our job is ultimately deliver profitability for our owner community I think it affords us opportunities to continue to find efficiencies that can translate into higher margins by reducing incrementally system costs more. I noted very quickly and it's reasonably broadly known because we've communicated to our community, but we did a first of its kind reduction in system fees to be clear, not our royalty rates and our not our license fees, but the fees that owners pay us to operate the system, And that's been done because we've just found ways to be more efficient, whether that lots of different use in AI where we're redoing processes and getting efficiency and we think we're doing things better. But more efficiently. And that that's translating to benefit us, but it's also translating because the bulk of the cost structure of this whole enterprise really is running the system. It's benefiting our owners. And we want to do more of that. Like we want to this has been a difficult time for the owner community in this sort of air pocket where I think really good things are coming. But at the moment, you're sort of in The U.S. Seeing modestly negative top line. And while inflations come down, it's still a little bit elevated. That's not good for owner community. And so that's why we put this program in place But it's also why we want to continue as we're in this transition period to a faster growth period of time utilize every weapon in our arsenal and we have a lot to to continue to drive efficiencies. That's a long-winded way of saying I think we've always been frankly on the tip of the spear in driving very efficient cost structures and we will continue to do so. And that's sort of a mentality I have and we have that will never change. And now we just have more ways to do it. Shaun Clisby Kelley: Thank you very much. Operator: The next question will come from Stephen Grambling with Morgan Stanley. Please go ahead. Stephen Grambling: Hey, thanks. Chris, I appreciate the comments you made about the tech stack and also some of the opportunities in AI, but just to dig in a bit on that. On the back of partnerships being formed by some retailers and e-commerce companies with large language models, how do you think about potentially partnering with some of these companies as another source of distribution? Maybe also remind us of some of the internal efforts on AI as we think about both direct and indirect opportunities. Christopher Nassetta: Yes. We can spend the whole call plus we spend the days together talking about this. And we're obviously like most, spending a huge amount of time understanding where AI is, the art of the possible. I mean, have to be exact, think 41 use cases that are being utilized inside the company at this moment. As we test and learn. I'm not going to torture everybody going through it. And competitively, I'm not going to into granular detail for obvious reasons. But I'd say broadly I look at it as AI for us at the moment and I think it'll evolve and change and like you just have to be really agile that with the speed at which this is moving. But I think for the foreseeable future, meaning the next year in AI world, there's probably three buckets. I talked about one, which is reinventing processes to garner efficiencies. And that can be wherever we have a lot of process and historically you have antiquated ways of doing things that require a lot of people. There are different ways to do it and repurpose people to do higher value. Things. And so, again, I think that benefits that can benefit our G and A, which you've you've seen like some of the use cases are are you're seeing a benefit. But again, we're at the tip of the spear. And you've seen a little bit of it vis a vis the system, relative to our owners, but there's more of that. That's one big bucket. The second big bucket is go to market like basic basically how you market distribution, the whole distribution landscape and that's what you started with Stephen, and I agree wholeheartedly. I think I think there are all sorts of risks with AI, like but in the end, here is the thing, we're in the business of fulfillment. We're not yes, we we have a platform and a network But in the end, we have all we have 9,000 and growing hotels that we control rate inventory and availability and the only way you get it is through us. Okay? No other way. You either get it from us or you don't get it. And we are in charge and control of fulfillment, the actual experience for the customer. In the world we're going into, having multiple LLMs and a really what I would argue much more competitive environment for how people get information. I view that, again, I'm not I don't have my head in the sand. There's all sorts of risk. I view that as a very good thing. Right? If we do our job, we have control over inventory, If we do a really good job in delivering product service, loyalty, to our customers and we are viewed which we are as the best of the best at fulfillment then we're going to we have all sorts of new ways to think about how we distribute our products. So you can assume yes, we're talking to all these all these people in their early days. They're in a bit of an arms race trying to figure out who the winners and losers are and it is organized, but it's a little bit like the Wild West at the moment. But I think where it's going is super super good. For us in how we go to market and how we distribute our products if we are intelligent about how we control our and how and making sure we always deliver on the fulfillment side. The third bucket is CX customer experience. We're already not just testing, we're doing like we have because, as I said in my prepared comments, we've evolved our tech stack and we're basically micro open source cloud based We have massive flexibility in how what we do with our tech stack and we are already utilizing that in ways to deliver a much better customer experience, meaning mass customization, understanding your customer, being able to take all this data that we've had, manage the data, get outputs that actually allow people enable people on property to do things to customize the experience to resolve a problem real time in a way that that we've never been able to do because you just you always had massive amounts of information. The question is, did you have the right information? Could you manage the information? Could you translate the information in ways that could spit out a command to get somebody to take an action? And now we have that. And so this isn't like a pipe dream that we like I'm thinking about. This is like inaction, we're doing it, we're testing, we're learning, And we think there's a huge opportunity. I think the winners in fulfillment and back to my fulfillment, comment, are the winners across all industries in a world where everybody wants what they want, right? And they get it now more and more is mass customization. I mean, I've been thinking for twenty years. It just hasn't been quite as possible as it is with how technology has evolved, particularly particularly with AI. And so the most I mean, they're all very exciting to me, but the customer experience side of it as you can probably tell, really excites me. The other two buckets are are super important and I think will ultimately, all of them will allow us to differentiate ourselves in terms of how we serve customers and ultimately drive greater profitability into the network. Stephen Grambling: Love it. Thank you. Operator: The next question will come from Daniel Brian Politzer with JPMorgan. Please go ahead. Daniel Brian Politzer: Hey, good morning everyone and thanks for all the great detail thus far. The net unit growth obviously it's a bit of an acceleration or organically here from that 5% that you've been running at ex LCLH and Graduate. Can you maybe parse that out as we think about going forward between your expectations for conversions next year versus some of the newer brands that you've launched? Maybe if there's any element of that accelerating, albeit off a low base construction starts that you mentioned? Kevin Jacobs: Yes. Thanks Dan. I think look the composition for the acceleration I think is just if you think about it, if you go ex as you said, if you go ex partnerships and look at it, is it just an acceleration still out of COVID, right, because the development cycle picks back up and delivers on a lag. So what you're seeing here, we raised our six point five to from six percent to seven percent to six 0.5 seven percent for this year. That's really broad based. There's really no one area. We said we think nearly 40% of that's going to come from conversion. So we keep winning well more than our fair share conversions. But if you look at new development and Chris mentioned, we think new development starts this year are going be up 20% and then The U.S. Over 25%. That bodes well for the setup for new development going forward. And really is the underpinning of the 6% to 7% for the next couple of years. And then you layer in with conversions. And so look, new brands is going to be part of it just like Spark been an important part of it the last couple of years. The new brands that are oriented towards conversions will be part of the conversion story. But then a good a big part of the story is taking our core brands and exporting them around the world in emerging markets, right? So it really is pretty broad based across the board. And we would expect something on the order of magnitude of in the 30 percentage points 35%, mid-30s, call it, to be from conversions versus new builds for the next couple of years? Daniel Brian Politzer: Got it. Thank you so much. Operator: The next question will come from David Katz with Jefferies. Please go ahead. David Brian Katz: Good morning, everybody. Thanks for taking my for all the details. I wanted to just talk about you frankly asked us a lot about the higher end of the luxury end of the scale. You've in the past how it provides somewhat of an as well as the financial benefit. We certainly hear and see this getting to be a more expensive arena to play in. Talk please about how you sort of balance that tangible and intangible return opportunity and sort of where you're at? Thank you. Christopher Nassetta: Yes. I'm happy to and good question. Luxury is is very important. I mean, we do make money in the luxury space. But if you look at the you looked at our our EBITDA driven by segment, it's not a huge contributor as a slice of the size of the slice of the pie. But it's important because it does help create halo effect that helps the whole system and network effect work. It's aspirational product that our customers want. And so have been very focused on it. You are right that if you looked at where our ultimately where the bulk of our key money goes in any particular year, it is disproportionately at the high end of the business. It's not all luxury, but big convention resort convention and luxury hotels. And so by by so doing those investments, we're saying it's important. And we'll continue to do that. But we're not going to go crazy doing that, meaning right now, you look at where we are in luxury, I would think I think we can prove scientifically. It's really working. We have as many dots on the map as anybody. As a result of the SLH deal, which was 100% capital light deal. We have 600 dots on the map. We have 100 plus more in our core brands coming in terms of pipeline. We have, we think, all the most important covered. I mean, there are always a couple. I'd like to see Waldorf in Paris. And there are a few places that are hard that we're focused on, but if you look at the whole world where we think we're in all the right places and the reality is with all respect to the competition, our loyalty program is the best performing loyalty program in the space. I mean, we're approaching against a target a multiyear target of 75% Honors occupancy, we're approaching 70% at a faster rate than we thought. We're growing the program 15% to 20% a year Active members are increasing or crazy healthy, people are really engaged with the program. The patterns that we've seen in redemption with luxury, including SLH, have proven that what we were trying to do, we've accomplished that And so that's we're going to continue to focus on luxury. You're going to see us do things to to continue I mean SLH will continue to grow not at a really not the way it has grown zero to 500, but it'll grow incrementally because we are helping them and they are they are working on growing that growing that business. So that will continue to grow. But you'll see most of the growth come in our in our core brands. We're going to be sensible about it. We only only even when we're making these investments, we don't make these investments to lose money. I mean, we're always investing against a a market a deal opportunity where we think that whatever we're giving is a lot less than the value of what we're getting. We'll continue to do those. But I don't we do not I do not and we do not feel particularly post SLH that we have to do anything unnatural. And obviously, the luxury business has been performing really well and we like that. My own belief is it will continue to perform well. But what you're going to see over the next two or three years on the basis of what I is going to happen, you can disagree with me, you're going to see broader economic growth in The U.S. Pickup and it's also going to be much broader based you're going to see all of the mid market start to converge with the high end. And almost I mean, eventually it has to, because it always does. And makeup of what's going on, which is really what's really driving it as an investment cycle, that's a middle class game, like the investment cycle of building data centers, bridges, highways, power plants, that's getting everybody in the game. And so again, luxury is great, performing really well. We're focused on it. It's a good halo effect. We think we have what we need. And we'll keep grinding it out with these deals. But I do believe that the relative performance gap will close. In a meaningful way over the next couple of years. David Brian Katz: Thanks. Nice quarter. Operator: The next question will come from Steven Donald Pizzella with Deutsche Bank. Please go ahead. Steven Donald Pizzella: Hey, good morning everyone. Thank you for taking our question. Chris, just wanted to follow-up on the offer to provide owners system wide fee reductions tied to product and quality scores. If I heard you correct, Can you elaborate on what the genesis of that was? How we should think about any impact from a franchise and royalty fee perspective moving forward, if any at all? And does this incentivize more conversions for loaners moving forward? Christopher Nassetta: The answer to the last part is yes, I think it does. But the genesis of this was sort of what what I implied. It started with the fact that, listen, in the end, our job is to deliver not just top line. Got to deliver bottom line to owners or this wonderful virtuous cycle of getting them to reinvest and build us more hotels does not work as well. And so we know that they are they are having a difficult time. They had a great run-in the initial years coming out of COVID, but it's gotten much more challenging. And so we want to help. And we think we should be able to, meaning same comments I won't repeat them about, we can garner efficiency. We can use AI We can think about all of our processes where it's a big system, in ways that in ways that will benefit them. So that was really the genesis. The other thing we're trying to accomplish and it was I said it very quickly, but it's an important note, is that and this isn't unique to Hill. The whole industry industry during COVID had a cycle of underinvestment in assets. That's because everybody the owner community rightfully had to survive. They were having to pay interest and like they didn't have the money that they would normally have to invest. So you went through a unique cycle in my forty years of doing this of under Again, just across the board. Thankfully, we went into it in a very good place. So we feel pretty good about where we are, but we want more investment in the system. And so we have been encouraging and by the way, I sort of mentioned, we have a in The U.S, we have over 20% of the system is in renovation right now. That we've been encouraging it and it's been happening, but we thought if we're going to do this, we want to help provide another incentive to accelerate it to go even faster. And so we did create, I think, pretty unique setup where we have stay scores etcetera. But you think about customer satisfaction scores and it's a complex equation, but one that they understand because it's the way we manage the system the franchise system already where we provided gates essentially that people need to get through by brand with and it's stair step, it's a very complex system. But again, so what sort of the way we've managed the business, they understand it. And so that's the second area. The first was we want to help our owners. The second was we want to help our owners also in the long term, which to make sure that the product quality is where it needs to be. And even without it hitting it doesn't start until January. The relief doesn't start until January. We've seen a pretty meaningful uptick in activity. So I mean people get it. They want to get They want to get through the gate. And a large part of the system will. I think when we did it, it was like 50 I think it's last I looked at maybe approaching 60 without even having rolled out. To be clear, it doesn't I do think it will the more the higher our margins more people want to build us hotels. So I think it's helpful in that regard. And it doesn't have any impact on our royalty management rates and license fees, management fees. It's all in the the other part. The part of the system we manage on behalf of owners for the whole system. So there's no impact on our P and L. Operator: Your next question will come from Robin Margaret Farley with UBS. Please go ahead. Robin Margaret Farley: Great. Thank you. Looking at your fee revenue the year, kind of fee revenue per room, it's growing even with more economy rooms and more rooms in China, but I think a lot of investors might worry would hurt that number. What What's driving the economics there? And I guess is there anything that you'll be comping next year for us to think about anything unusual in those numbers for this year that you'd be comping next year or do you feel good about those economics continuing next year? Kevin Jacobs: You're talking about comps that would drive fee per room year over year? No. Just things like the non RevPAR, yes, sorry. Go ahead, yes. Well, non RevPAR is different, but fees per room, no, there's nothing that would comp year over year. And yes, you are seeing a little bit of our mix shift over time in terms of what we're delivering shift to emerging markets including China, which is normal as we continue to grow outside The U. But I think as we've said before, and I know we all know why you're asking because you get this question a lot from your clients and from investors and we get it a lot. So we get that it's on investors' mind. 've talked about this a lot in the sense that even if you take the mix of what we're delivering, which is slightly different, if you combine that with the existing mix, we're really not shifting the overall mix of of contribution over time from higher fee paying things to lower fee paying things The rooms we're opening largely around the world if you exclude China, are at the same fee per room rates or higher than our existing in place fee per room rates. And then you think about other factors like RevPAR continuing to grow, our take rate continuing to increase as we regrow license fees The bulk of our deliveries being in our strong mid market brands where we charge our highest fees per room If you put all of that in the model, and sorry, I should add that even in the case of emerging markets, we're starting to grow our higher end brands and in China, we're moving more towards our own brands in the MLAs. The MLAs are going to continue to grow, but we're growing our own brands that are 100% off at higher rates. So you put all that in the model and we believe and we know that fees per room will continue to grow over time. Christopher Nassetta: Yes. We I know Kevin's right, it comes up too often. And so right or wrong, it does. We've modeled it. In the most granular way which by definition is more granular than anybody else can model it. And our five and ten year models and it keeps going up. For the reasons Kevin described. A little bit more visibility on the China thing, we did two MLAs. We're not planning to do any more. Those have highly productive. They've helped us build an incredible network effect in China. Our market share in China is incredible. I'm not going to but it's off the charts. It's the highest market share that we have anywhere in the world. So it has worked. We're not doing any more MLAs. We those are productive. We learn from those. And now we're taking our mid market brands like Garden Inn and others and doing it ourselves. So if you look at even in China, with those continuing to grow just based on the velocity of growth that we have the ones we're doing ourselves. The fees per room are going up in China, they're not going down. So you put all that together, and when we do it bit by bit by bit, these per room are going up. Robin Margaret Farley: Great. Thank you. Operator: The next question will come from Brandt Antoine Montour with Barclays. Please go ahead. Brandt Antoine Montour: Great. Good morning. Thanks for taking my question. So apologies for more of a near term question, Chris or Kevin. I just curious in terms of the corporate travel trends into the fourth quarter. I mean, you do have tougher comps on that side of the ledger. But I think more of the question is, guys talk to a lot of companies you see a lot of data. From within your system. Does it tell a bit of a story in terms of which corporates are putting their people on the road large companies or small companies, region by region And when you speak to those companies, are they sort of if they agree with your view, of this sort of future economic tailwinds, what do you think that they're waiting for? Christopher Nassetta: Yes. I mean, listen, it's a lot of yes, we talk to our customers. We do customer events all the time. We did a big one recently where I had tons of our customers and talked to our sales teams. And I'd say broadly people are pretty constructive. Mean it's anecdotal, but I don't really talk to any of our major customers that say like they're not going to be traveling more year. I don't talk to any of our customers that don't understand they're going be paying a little bit more for the product. Next year. I think they like everybody think inflation should come down. So maybe they don't want to see the big increases that they have been seeing. But they understand they're going to have an increase. I think what's been holding them up is the obvious, just noise in the system. I mean, think the big guys the tariff stuff has sort of affected them. They were way behind. So I'd say in a relative sense, maybe they have performed in the very short term a little bit better because they were so far behind But they're rattled. And then the little the SMBs are always more resilient. But they're a little bit relative. So I just think there's been a lot of noise in the system The reason I'm more optimistic about next year, again, I can't prove it. It's just anecdotally. I'm talking to a lot of them. I think you're going to see these if I'm right about when you lift up, you see some of these broader macro macroeconomic trends start to take hold and people feel more confident and you get as you get closer to midterms, some of the tariff stuff sort of goes a little bit more in the back seat, I believe people will settle down and get back to their And again, anecdotally, they're not telling us, they're not telling me when I talk to the folks that run travel departments anything, but think we're going to travel more and we're going have to pay more for it. Next year. Brandt Antoine Montour: Great color. Thank you, Chris. Operator: Your next question will come from Elizabeth Dove with Goldman Sachs. Please go ahead. Elizabeth Dove: Hi, there. Thanks for taking the question. You're clearly seeing amazing traction on the development side and with conversion side of things speaks to the strength of the brand everything else. But maybe it'd helpful just to get like a pulse check on the key money side of things, like what you're seeing in terms of key money per room, the competitive environment, any kind of shift there over the last few months? Kevin Jacobs: I wouldn't say there's been a shift, Lizzie, over the last few months. I think you've had a shift over the last few years in the sense that it is a more competitive environment. I mean with unit growth being an important part of all of our stories in the industry, it's really important. And then some of us sort of take a little bit of a lead in that regard, our competitors are sort of anxious to catch up and get out there and sort of deals get a little bit more expensive. But with that said, I would say, Chris mentioned it, something like 85% or 90% of the key money we deploy is on full service and above. It tends to be on luxury. It tends to be on the big convention center type hotels. It tends to be the bigger projects garner the bigger checks. Every once in a while, you have part of it depends on which brands are available a certain deal, right? If you have a conversion, and it's an independent hotel and all the brands are available and that owner is fortunate enough to be able to create some competition, that can make it a little bit more expensive. But that said, if you look back we're still broadly in terms of what is under construction, we're still under 10% high single single digits of our deals overall are using any form of key money So you're still sort of 90% plus in terms of what's under construction, has no key money associated with at all. And if you look back in the last few years, we've had some years that are a little bit higher. We've had some years that are a little bit lower. But that tends to be more some of the big chunky deals that the timing of when they happen changes that answer. If you had asked us six months ago, a year ago, we would even back to our most recent Investor Day, we would have set a good run rate for key money is $150 million to $200 million a year and we would still say that's a good run rate. So it hasn't really changed dramatically. It is a more competitive world, a slightly more competitive world, but it isn't changing dramatically. And part of that is, and Kevin alluded to it, I mean, we're trading listen, our brands perform better than everybody else's. So like we have trained our development teams to have the dialogue with with our partners, our owner partners to make sure as they're thinking about key money that they're not being penny wise and pound foolish. So they get a little bit more key money or they get some versus none but they get 500 or 1,000 basis points lower RPI or market share, obviously, that's a losing trade. And so we've worked really hard with our development teams. We make it hard on them. I mean, we basically don't don't believe we should have to do it. To Kevin's point, we think it should be consistent with where we've And we've been able to do it because I think we've got a really good story with really good performing brands. And I think our development teams are understand how to make that argument. And it doesn't always win, but it's winning a lot more than it's not. Operator: Next question will come from Michael Joseph Bellisario with Baird. Please go ahead. Michael Joseph Bellisario: Thanks. Good morning, everyone. A question for you. Just a question on pricing sort of broadly maybe help us understand what are you seeing in terms of how and where customers are booking, especially on the leisure side? And then much more are you running promotions and discounts? And is that weighing on ADR at all looking ahead? Thanks. Christopher Nassetta: We are running when it's weaker, we're always going to do honors specials and use a little bit more OTA business and access other distribution channels. And in third quarter, it was weaker. So we did those things. I mean, you look at the numbers, you'll see it was pretty we're not you haven't seen any sort of collapsing in rate integrity. I mean, declines were pretty much balanced between rate and occupancy, which is what you'd see. You definitely add in categories you had a lower in third quarter, lower group base. So that means you have more rooms sell, you got to do more transient, business transient, was a bit weaker for the reasons I just described. Everybody is rattled about everything going on in the world. Leisure was pretty strong, but then leisure isn't the highest rated business. So what does that mean It has impact on rate. What I would say is when you dissect so far, and you know my view now because I've said it three or four times that the world coming our way So far if you dissect it, it's really been a mix shift that has affected rate You're just taking lower rated customers and their sub substituting for higher rated customers, meaning you're taking leisure customers that pay less not necessarily that the leisure rates dumping. It's just it's a lower rate than you're substituting in for business transient, which is a higher rate. So I think when you when you deconstruct it scientifically, I think you feel pretty good that rate integrity has been reasonably good, not that shouldn't be surprising intellectually to any of us in the sense that inflation is alive and well. And while it's come down, it's still somewhat stubbornly high. And so you know, we will be a beneficiary of the, you know, of that of that broader trend. So, technically, it's pretty evenly split but things I can is off, we replace it with lower rate business As a result, rate will will come down a bit. Yes, just the weighted average will bring it down. Operator: The next question will come from Smedes Rose with Citi. Please go ahead. Smedes Rose: Hi. Thank you. I know you've covered a lot of territory here. I just I just wanted to ask you. I I think the full year sort of trimming on RevPAR and slightly more modest outlook doesn't really come as surprise. But as you think about the fourth quarter and kind of the implied guidance, is the government shutdown impacting your forecast at all or is that is everything sort of just going on? It's business as usual? Kevin Jacobs: No. I mean, look, we're sort of almost a month in into twenty two days I guess into the government shutdown with them so a month of that in the forecast. So we have factored for that into the forecast in the fourth quarter. And our full year scenarios, which is a range really encompass if the government even if the government shutdown keeps going, we think we'll be within that range. So it is affecting the numbers. I think that who knows if our forecast would have come down anyway probably given what came in the third quarter, we might have been a little bit lower for the fourth quarter anyway, but we are factoring for it and it is affecting the numbers. Smedes Rose: Thank you. Appreciate it. Operator: Ladies and gentlemen, this concludes our question and answer session. I would like to turn the conference back over to Chris Nassetta for any additional or closing remarks. Please go ahead. Christopher Nassetta: Thanks, Chuck. Thank you everybody. As always, we appreciate the time. As you can see, I remain pretty darn optimistic about what the next several years are going to look like. And even I think if you look at all the numbers and everything we talked about today, even in the midst of what's been a bit of an air pocket as we sort of get through this time to a little bit higher growth time, the resilience of our model business model and our execution I think is been really, really good and we're continuing to deliver and outperform on unit growth, deliver and outperform on the bottom line with taking what the world gives us and and doing everything we can to make it better. So we're feeling good about the business. Feeling good about where we are, feeling good about where the future is going. And we'll look forward on the next call to giving you a fulsome update once again. Thanks again and talk soon. Operator: The conference has now concluded. Thank you for your participation. You may now disconnect.
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