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Operator: Good day. And welcome to the Steel Dynamics Third Quarter 2025 Earnings and Chief Operating Officer. The other members of our senior leadership team are joining us in the call individually. Some of today's statements, speak only as of this date, may be forward-looking and predictive, typically preceded by believe, expect, anticipate, or words of similar meaning. They are intended to be protected by the Private Securities Litigation Reform Act of 1995 should actual results turn out differently. Such statements involve risks and uncertainties related to integrating or starting up new assets in the aluminum industry, the use of estimates and assumptions in connection with anticipated project returns, and our steel, metals recycling, and fabrication businesses as well as to general business and economic conditions. Examples of these are described in the related press release as well as in our annually filed SEC Form 10-Ks under the headings Forward Looking Statements and Risk Factors. Found on the Internet at www.sec.gov and, if applicable, in any later SEC Form 10-Q. You'll also find any reference non-GAAP financial measures reconciled to the most directly comparing GAAP measures in the press release issued yesterday entitled Steel Dynamics Reports Third Quarter 2025 Results. And now I'm pleased to turn the call over to Mark. Mark D. Millett: Thank you, David. Well, good morning, everybody. Thank you for being with us on our third quarter 2025 earnings call. Some may suggest hyperbole but are often said we have the best teams on the planet. They proved it once again in the third quarter. Operationally, they executed incredibly well while keeping each other safe and achieved pivotal successes in furthering our significant growth projects. Financially, even with some interim market headwinds and flat roll, we achieved a number of key operational milestones. We had a record steel shipments of 3,600,000 tons. Revenues were $4.8 billion, adjusted EBITDA was $664 million and we had a healthy cash flow from operations of $723 million. At Sinton, we believe consistent operational execution has been achieved. It was a record quarter for shipments, Downstream coating and prepaint product quality has matured. And the value add product portfolio is expanding nicely. Industry participants are recognizing that this is the mill of the future. Our Lilleham team continues to make strong progress in commissioning and ramping operations. Receiving a number of quality certifications in September and October. In particular, our CAN sheet has been performing extremely well with equivalent results to competitive material. Much more to do, but incredibly exciting performance today. And our Biocarbon team shipped their first product in September, We're extremely excited to have this new tool in our decarbonization journey that will further reduce our carbon footprint. From an already industry-leading low level. I continue to be proud of the entire Steel Dynamics team because they are just the foundation of our company and they continue to amaze me. And so we're laser-focused on providing the very best for their health and safety. It is an everyday conversation at every level. Our world-class safety culture continues to mature and our team's dedication to our Take Control of Safety program is extraordinary and continues to produce strong results. Their commitment is inspiring. They consider themselves family and challenge the status quo each day to keep each other safe. But that said, there will always be more to do as we drive toward a zero incident environment as there is nothing more important for us. So with that, I'll hand it to Theresa and to Barry to give some color to the quarter. Theresa E. Wagler: Excellent. Thank you, Mark. Good morning, everyone. Thank you for joining us and thanks to the teams for an exceptional performance. Our third quarter 2025 earnings per diluted share were $2.74 with adjusted EBITDA of $664 million. Both third quarter 2025 revenue of $4.8 billion and operating income of $508 million higher than the second quarter results, driven by record steel shipments and metal spread expansion as scrap raw material costs declined more than steel prices. As we discussed our business this morning, we continue to focus and execute on our transformational growth initiatives. Our steel operations generated operating income of $498 million in the third quarter. 30% higher sequentially based on record shipments supported by an almost 20% improvement in shipments from Stanton and metal spread expansion. Average scrap cost declined $27 per ton, while average realized pricing only declined $15 per ton. For modeling purposes, this quarter's hot band shipments 1,097,000 tons, Cold rolled shipments were 120,000 tons, And finally, coated shipments were 1,486,000 tons. Additionally, we also highlight that our three flat rolled steel production divisions have planned maintenance outages in the fourth quarter, which could reduce volume by as much as 85,000 tons. For the third quarter, operating income from our mills recycling operations was $32 million significantly above our sequential second quarter results. Driven by near record shipments supported by domestic steel demand and steady nonferrous volume, coupled with metal spread expansion. The largest North American metals recycling processing ferrous scrap and nonferrous aluminum. Copper, and other metals. And we're growing to support our increased steel capacity and aluminum flat rolled operations through new and expanded supplier relationships and through the use of innovative separation technologies. Our metals recycling platform is a significant competitive advantage for all of our Our steel fabrication team achieved operating income of $107 million in the third quarter. 15% higher than second quarter sequential results due to increased volume coupled with relatively flat metal spread. Our joist and deck backlog extends through the 2026 with solid pricing. And federal programs, manufacturing growth and onshoring are expected to support domestic fixed asset investment and, therefore, related steel joist consumption in the coming years. Mark D. Millett: Congratulations. Theresa E. Wagler: To the aluminum teams in Columbus and San Luis Potosi. Hitting so many early quality milestones. The energy and momentum are contagious. Related startup operating loss of $57 million were somewhat higher in the third quarter than previously expected as the team's continued construction and commissioning of various areas, while also accelerating testing for beverage can and automotive products. We currently estimate comparative losses to be in the range of $40 million for the 2025. Based on current expectations, we continue to believe our aluminum operations will achieve monthly EBITDA breakeven or better in the fourth quarter of this year. During the 2024 five, as Mark mentioned, we generated strong cash flow from operations of $723 million Of that, operational working capital was a funding source of $126 million. We ended September with liquidity of over $2.2 billion. For the 2025, we believe capital investments will be in the range $200 million and early estimates for capital expenditures for the full year 2026 are in the range of 500,000,000 to $600 million During 2025, we've repurchased $661 million of our common stock or 3.4% of our outstanding shares. At September 30, $1 billion remained available for share repurchases. Since 02/2017, we've increased our cash dividend per share 223%, and we've repurchased $7.4 billion of our common stock. That's over 40% of our outstanding shares. All while maintaining investment grade ratings and growing. These actions reflect the strength of our capital foundation and consistently strong cash flow generation capability. Our capital allocation strategy prioritizes high return strategic growth with shareholder distributions comprised of a base positive dividend profile that's complemented with a variable share repurchase program. While we remain dedicated to preserving our investment grade credit designation. Our free cash flow profile has fundamentally increased over the last five years to $3 billion excluding our large strategic scented and aluminum investments. We've truly placed ourselves in a position of strength. Have a sustainable capital foundation that provides the opportunity for a meaningful strategic growth and strong shareholder returns. We recently announced that each of our company's steel mills achieved global Steel Climate Council product certification. For our customers, this means greater transparency and confidence when sourcing lower embodied carbon steel products from us. And I'm incredibly proud and excited to announce that our Biocarbon Solution team safely produced and shipped their first Biocarbon material in September. And it was successfully used as a carbon replacement at our Columbus Flat Rolled Steel division. Providing an even lower carbon supply chain for our steel customers in the future. The team plans to continue to refine operations and increase production into the first quarter of next year. This achievement marks a pivotal step in our decarbonization journey and further demonstrates our ability to translate innovative concepts into tangible results. A personal thank you to all 73 Biocarbon team members. Decarbonization is a meaningful part of our long term value creation and we're dedicated to our people, our communities, and our environment. We are committed to operating our business with the highest integrity. We uniquely have an actionable path forward that's intentional and manageable and, we believe, considerably less expensive than may lay ahead for many of our peers. We're squarely positioned for the continuation of sustainable, optimized long term value creation. Thank you. Barry? Thank you, Theresa. Barry T. Schneider: Our steel fabrication operations improved their sequential results as volumes increased 12% sequentially. More than offsetting slight metal spread compression. Order activity remained steady in the quarter and our backlog now extends the 2026. Pricing for steel joists and deck bookings remained relatively stable throughout the quarter. We continue to be optimistic for our steel joists and deck platform based on the continued onshoring of manufacturing, continued announcements of significant privately funded manufacturing projects, and public funding for infrastructure and other fixed asset investment programs. Long term uplift of this backdrop could be considerable for all of our platforms. Our steel fabrication platform provides meaningful volume support for our steel operations, critical and softer demand environments, allowing for higher through cycle steel utilization compared to our peers. It also helps mitigate the impact of lower steel prices. Earnings for our metals recycling operation were much higher in the third quarter as metal spreads improved and shipments were at near record levels. We believe scrap prices have stabilized and are likely to remain relatively steady throughout the of the year aside from typical seasonal fluctuations. Additionally, the team continues to expand its access to recycled aluminum for our aluminum flat rolled operations. North American geographic footprint of our metals recycling platform provides a strategic competitive advantage for our steel, aluminum, and copper operations and for our scrap generating customers. Our metals recycling team partners closely with our metals production and teams to expand scrap separation capabilities to advance process and technology solutions. This collaboration helps mitigate supply risk by making more grades of ferrous and nonferrous scrap usable for operating platforms and generally at a lower cost. Additionally, it positions us to significantly increase the recycled content in our products unlocking enhanced earnings capabilities. The steel team delivered a solid quarter with record shipments of 3,600,000 tons. In the 2025, the domestic steel industry operated at an estimated production utilization rate of 78%. While our steel mills operate at a notably higher rate of 88%. This consistently higher utilization reflects our value added steel product diversification. Differentiated customer supply chain solutions, and strong support from our internal manufacturing businesses. Our elevated through cycle utilization rate is a key competitive advantage underpinning our growing cash generation capability. Overall realized steel pricing slightly declined in the quarter due to lower flat rolled steel pricing tied to lagging contracts. Which more than offset increasing structural and railroad rail pricing. Overall, domestic steel inventories remain lean from a historical basis. However, coated flat rolled steel volume and pricing compressed during the quarter due to an inventory overhang related to imports received earlier in the year. Prior to the positive related trade ruling. We do believe that prices have bottomed out and will improve as we head into 2026. Last month, the ITC unanimously voted affirmatively on the final determination that imports of corrosion resistant steel from 10 countries injured The US steel industry. This uniquely positions us as we are the largest producer of nonautomotive coated flat rolled steel products in North America. Together with the announced section two thirty two steel tariffs, these developments are expected to positively impact demand for lower carbon emission US produced steel products. The underlying steel demand remains steady. However, customers continue to exercise caution in placing orders to ongoing changes in trade policies. That said, we believe steel prices have stabilized in the near term with potential for upward movement in 2026. Our Sinton, Texas flat rolled steel mill achieved higher earnings in the third quarter, driven by record shipments a continued efficiency and quality gains. Congratulations to the team. The team continues to make improvements in yield, cost reduction, and quality. They're also continuing toward additional product development to expand our current flat rolled steel capabilities. Meaningful progress has been made on unique high quality API pipe grades, high strength grade one hundred one ten, pressure vessel quality, and OEM qualification packages for our automotive customers. We are seeing increased shipments from SIN's value added coating lines, are strengthening the facility's product mix and boosting its through cycle earnings capabilities. Regarding the steel market environment, North American automotive production estimates for 2026 were released recently revised modestly upward. Yet currently remain modestly below 2025 forecast. Fortunately, our specific automotive customer base has not only remained stable, but have provided opportunities for growth. We have become a supplier of choice for many US based European and Asian automotive producers due to our superior carbon content capabilities. Additionally, numerous announcements have been made concerning a considerable volume of automotive production moving to The US from foreign locations in the coming years. We continue to grow market share in both flat rolled and SVQ steels within the automotive sector. Nonresidential construction should benefit for bond goering from ongoing onshoring activity. Recently announced domestic manufacturing projects, and continued infrastructure spending that are expected to further support fixed asset investment and construction related demand. In the energy sector, oil and gas activity remains steady, with solar continuing to be very strong as producers attempt to benefit from expiring incentives. Overall, we remain extremely optimistic concerning steel demand and pricing dynamics for the domestic producers in the coming years based on the expected demand from new manufacturing and U. S. Produced steel content requirements. With that, I'll return it to Mark Bellett. Super, mister Shire. I appreciate that. Mark D. Millett: Thank you, Theresa. After many years, I think it's clearly evident that our performance driven team based culture in combination with a proven, diversified, and value add business model drives superior financial metrics. This consistently strong operating and financial performance continues to support our cash generation and growth investment strategies. Allowing a very balanced cash allocation strategy that has delivered the highest shareholder returns only among our metals peers, but the best of domestic manufacturers. Our disciplined investment approach continues to support a strong and growing cash generation profile while maintaining a best in class return on invested capital. Our aluminum investments are now a reality and are extremely compelling. Initial operations and commercial activity are confirming our initial investment premise. We believe we will enjoy a unique commercial position. Unlike our entry into the oversupplied steel market some years ago, a significant domestic supply deficit of over 1,400,000 tonnes for aluminum sheet. And this deficit is forecasted to grow. Even before tariffs. In 2024, that deficit was supplied through high cost imports, which are now at an even higher cost as the tariffs increased from 10% in 2024 to the current 50% level. There's a clear alignment with many of SDI's core competencies. Construction capabilities have been once again proven Both Columbus and SLP are state of the art assets. If you just think about it for a second, shipped our first coil within twenty four months of groundbreaking. And here we stand today twenty seven months from groundbreaking and we're shipping prime product to the can sheet in automotive market. That's an absolutely incredible incredible performance My hats off to the team down there, to Glenn Pushers, and to to Greg Wiggum, everyone. For for making that happen. It's an absolutely beautiful, beautiful facility, work of art. We also lever our deep operational know how have an extensive and successful experience operating melting, casting, rolling type assets. And our performance driven culture will drive higher efficiency and lower cost operations. Just as we did when we entered the steel industry some thirty plus years ago. It's it's demonstrated and the teams will achieve We have an advantage commercial position. Two thirds of our carbon flat rolled steel customers also consume and process aluminum flat rolled sheet. Growth and penetration into the automotive sector will complement our existing steel position and give customers product optionality. The countercyclical beverage can market which in conjunction with the more stable earnings profile experienced through the years within the aluminum space, will further enhance the consistency of our through cycle cash generation. Our raw material platform will facilitate higher recycle content. We are the largest North American metal recycle including aluminum. We we recycle already around about half a billion pounds of aluminum per year. And we've successfully developed new separation technologies allowing us to have both more access to usable aluminum scrap at a lower cost. Operation experience thus far is is confirming our earnings differentiation. We've advertised and do believe that through cycle EBITDA, of 650 to 700,000,000 is absolutely achievable. Plus an additional 40 to $50,000,000 for our omni operations. The key areas of advantage remain labor efficiency, higher recycled content, higher yield and optimized logistics along with our low cost culture. There's no doubt, this strategic investment is a cost effective and high return growth opportunity. Providing SDI with additional countercyclical diversification further stabilizing and growing our cash generation capabilities. And for those that have been there, you understand it. The 650,000 metric ton project is no longer a vision. It's clearly here. As our aluminum growth has become a reality, our reputation permeates the industry, aluminum professionals with vast experience have joined us in this exciting project. They see the vision and are energized by our culture. Where they realize that they will be heard and can have a real impact. They have helped us build a phenomenal team. That combines in-depth knowledge of aluminum flat roll operations, commercial markets, process technology, and custom service. Complementing our SDI professionals that bring our performance driven entrepreneurial culture. We're finding the customer base is excited to have a new market that is known to be innovative, customer focused, and responsive to their needs. For us, as in with steel, business relationships are long term. Founded on trust and the continuous goal of creating mutual value. Not simply financial value, but new supply chain solutions new products, better quality, and better service. We are seen to react with surprising speed. Many customers have just seen that with the recent supply side challenges in the market. The timing of our ramp up has been fortuitous. Allowing us to help the market while accelerating our material qualification. We've received approvals for industrial and can sheet finished products, and for automotive aluminum hot band. Earlier this month. This accelerated certification should allow us to shift our product mix to a higher margin mix in 2026. Reaching optimization sometime in '27. Three of the four male cast houses are fully commissioned at Columbus, and have produced 3,000, 5,000, and 6,000 series ingots. For the industrial, can sheet and automotive sectors, for rolling mill commissioning, product development, and commercial shipment. The hot mill is completing its commissioning, having run three double o three and fifty fifty two industrial, thirty one zero four can sheet, and fifty seven fifty four auto grade material. The code reversing mill is in startup and is successfully producing three double three, 5,052, and 3,104 alloys. Tandem well number one will be starting up in November, and then tandem mill number two the cash line are on schedule to be available. In the 2026. And it is it's it's absolutely incredible if you walk through the plan. Because the team is incredibly excited with the earlier than anticipated product certification. It is a testament to the phenomenal talent we have on the team. And there's great energy, great momentum. We anticipate exit exiting 2026 at a rate of 75% capability. We expect to achieve monthly EBITDA breakeven sometime in the fourth quarter. And increasing thereafter as we continue to ramp and optimize our product mix. Across our business, evolving market dynamics provide an opportunity for us to further enhance our earnings potential. The renewed focus on strategic mercantilist policies to ensure fair and sustainable competition will further improve market strength. The recent coated flat rolled steel positive trade determination will further curb core and pre paint imports, and we're seeing that already. The administration continue to hold a firm position on 32 tariffs on steel and aluminum imports. And the inclusion of tariffs on steel content of derivative products including fabricated structural steel. Has played the domestic industry for years, will be a substantial benefit. One has to consider that in in twenty four, some 30 to 35,000,000 tons of steel came in through actual products. And then last year, obviously, the successful sunset reviews of section two zero one and three zero one trade cases. Will remain in place for some years. Stopping dumped Chinese steel from accessing our market. We will benefit from growing fixed asset investment correlates directly with increased steel demand. Risk mitigation to address numerous supply chains at dislocations is accelerated and reshoring of manufacturing by many OEMs. AI and cloud computing will support the need for more nonresidential construction along with data centers, chip factories, and battery plants. We believe that it obviously will be associated positive stimulus through the inevitable interest rate reductions should happen this year and next. And finally, decarbonization. Will materially steepen the global cost curve providing Steel Dynamics with a meaningful competitive advantage. To gain market share and increase margins. More importantly, we continue to be impassioned by our current and future growth plans. As they will continue to drive the high return growth momentum we have consistently demonstrated over the years. The earnings growth of these new projects is compelling. Capital spending for Sinton, the four value add lines, and Lumodynamics is largely spent for the projected future through cycle EBITDA contribution. Of over $1.4 billion Steel Dynamics has grown to an incredibly resilient cash generating business of scale and diversification. Driven by the best teams, as I already said. In the world. The model has now demonstrated itself year after year delivering financial metrics equivalent to best in class manufacturing com companies. We are fortunate, and at the heart of that good fortune, are our people. They are the foundation of everything we do and I want to personally thank each of them for their passion their commitment, unwavering dedication. And we're committed to them. And I remind those listening today that safety for yourselves, your families, and each other is our highest priority. Always. And I would also be remiss not to express my gratitude to our loyal customers many of whom have been with us since the beginning. These partnerships are built on mutual trust keeping our word and delivering innovative solutions that enhance your value. Our new aluminum partners can expect the same level of commitment and collaboration. And to our suppliers and service providers, thank you. We value continued support the strong relationships we've built together. Our culture and business model continue to differentiate our performance, leading best in class financial performance. And as a circular metals business, we are uniquely positioned to offer lower car supply chain solutions. Enhancing sustainability while helping to mitigate cash flow volatility through all market cycles. This positions us to deliver superior shareholder returns and create lasting value for all. Stakeholders. So we look forward to creating new opportunities for all of us and today and in the years ahead. And with that said, Ali, we would love to open the line for questions. Operator: Thank you. Mark D. Millett: The digit one on your telephone keypad. Operator: If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. If you pressed star one earlier during today's call, please press star one again to ensure our equipment has captured your signal. Also, we ask that you please limit yourselves to one question to facilitate time for everyone. Any additional questions can be addressed upon reentering the queue. Thank you. Our first question is coming from Katja Jancic with BMO. Your line is live. Katja Jancic: Hi. Thank you for taking my question. Maybe starting on the aluminum rolling mill and the quality qualifications for your the products you received so far you talk a bit more what that means for your commercial activities? Specifically, does that open the door for you to start negotiating more longer term contracts? Mark D. Millett: Well, I guess, firstly, the accelerated qualifications that we've been receiving is absolutely incredible, given where we are on our learning curve. As you might recognize. You know, can sheet, has been supplied to most of the principal can makers today. For qualification. Early performance is again, it's just incredible. And when the team sent me a video of the very first coil, going through a can line, with flawlessly. It was something to be someone to behold. Obviously, we are also having some good progress within automotive. I think what it does it accelerates the value or the product portfolio mix into next year. And, you know, we've always said that we hit our target mix in 2027. I think we'll see that earlier in '27 than we were expecting. Theresa E. Wagler: But to answer your other question, Katya, we are negotiating longer term contracts both in the sheet the can sheet, as well as in the automotive. So, yes, that has helped. But we had considerable traction, I think, throughout the third quarter as we were starting up. So more to follow on that. Maybe if I just can quickly squeeze one more. On the twenty sixth, how should we think about the mix between industrial, can, and auto? The most significant difference, Katja, is that earlier on, we wouldn't have expected to have very much volume in automotive. Specifically, and we have full confidence, and we were getting to think, appropriate amount of mix as it relates to can sheet in 2026. As you'll remember, the optimized mix for us is 35% automotive. I think is it 40%, Mark? Can Sorry? 45%. 45% can sheet and the remainder industrial. So we feel pretty confident in that can sheet mix for 2026. But what's changed is we would expect to not reach full optimization in automotive in 2026, but we'll provide more feedback as we get further certified. Because as Mark pointed out, for automotive right now, we're just certified on the hot band. Side. Perfect. Thank you. Operator: Thank you. Our next question is coming from Tristan Gresser with BNP Paribas. Your line is live. Tristan Gresser: Yes. Hi. Thank you for taking my question. Just following up on aluminum. If you could provide maybe an update on the target exit run rate for this year or maybe what you expect in Q1 so we can get a better sense on what you expect in terms of volumes And I think you were initially expecting positive EBITDA in Q4. So what drove the lower number? Any sorts of delay or anything you can share there, that'd be great? Theresa E. Wagler: So, Tristan, I just wanna clarify. So we are still expecting to be positive breakeven to sorry. EBITDA breakeven to positive in the fourth quarter. So that hasn't changed. What has changed is this the certification of the more complicated products is taking place more quickly than we expected. So there are some higher costs associated with that. So that was one of the things that I talked about in my opening comments as it relates to the third quarter impact. That said, we haven't been specific about how we're going to ramp in 2026. But what we have done is provided substantiation that we still are very confident in exiting the year at least at a 75% utilization. Rate. And as it relates to 2025, there's a lot of moving pieces right now. So we don't wanna get into utilization because it depends on the product mix to a large extent. Tristan Gresser: Okay. Alright. That's, that's fair. And maybe just a quick one on the free cash flow. I mean you have a very strong free cash flow outlook If you can talk a little bit about your priority in terms of capital allocation into next year. You mentioned CapEx will be between $500 million $600 million Is growth on the agenda for next year? And if so, what are the options you may consider as upstream steel, aluminum? Are you considering maybe different types of metallic asset that could be on play in the region? So any color there would be great. Thank you. Theresa E. Wagler: Mark can speak to, what things might look like, but just to give you some specificity around the 500 to $600 million, Tristan. As a reminder, our sustaining capital is generally around 200 to $250 million. And then we still will have a tail associated with the aluminum project and a little bit on the bicarbonate project as well. It just depends on the timing as we proceed through the end of this year. So that is a preliminary number. But, Mark, I don't know if you wanna give any context to what other growth opportunities we might be looking towards. Mark D. Millett: Which is generally on the cash allocation broadly, I think, you know, with our strong liquidity position and the through cycle cash generation that will come through next year. And the years after. We can retain our balanced cash allocation profile. So one can expect an increase in the dividend, I would think, you know, a positive profile will continue into next year. We feel that the company is selling at an incredible discount today? Relative to other potential investments one might make. So we'll continue to buy our shares back. Again, we're doing that not because necessary our shareholders just want us to, or where we think it's a flavor of the month It really is buying a company that is discounted, a quality company that we know with a phenomenal team, phenomenal assets. Expanding from that, we still have a team that is innovative and creative They've got a pipeline of organic possibilities. Both in steel and in aluminum. And that will access new products new product lines for us. Now those aren't massive $3 billion greenfield steel mills, but, smaller projects, but very, very high return, high reward. And then, obviously, there's the possibility of M and A activity out there. But you'll But just one on one highlight, I guess. But you will continue to see us adhere to our disciplined investment approach I think we have the highest return on invested capital in our space. For a reason. We're disciplined. And we buy we buy good assets with real return real future return. And you'll see that going forward. Tristan Gresser: Alright. That's clear. Thanks a lot. Operator: Thank you. Our next question is coming from Timna Tanners with Wells Fargo. Timna Tanners: Yeah. Hey. Good morning. I wanted to if I could on the aluminum question. So, you're, you know, you're starting up and getting qualified on hot band just when there's a player in the market that needs hot band. So could you address that ability to supply Novelis if possible? And then if you could just comment on the additional CapEx, I believe comparing the presentations that there's another $200 million that was attributed to the aluminum start up, if you could elaborate on that. Mark D. Millett: Well, Timna, again, thanks for your questions. We will not comment on where our material is going. I think the aluminum space is, is a lot more shielded from a confidentiality standpoint relative to steel. And so most of our relationships are under CA or NDAs. So I can't really speak to that. Other than it's absolutely phenomenal that, the team in such short period of time is accessing those sorts of sorts of markets. Relative to the CapEx, yeah, it did expand. And again, in all honesty, it's kind of the wind down of the project and just clearing up all the construction. Contracts. But I think more importantly, the last three months it has been in particular, it's been incredibly difficult to get electrical talent with all the data centers, etcetera, being built we found our contractors sort of drifting away from us. And there was a substantial increase in the cost to cover that and maintain our schedule. Timna Tanners: Got it. Thanks. If I could squeeze one more in, there was a comment yesterday that there's a view that customers would be switching away from aluminum back to steel because of the availability, not something we'd heard before, and just would be interested to get your thoughts on that as you're now in both markets. Mark D. Millett: Well, I think, obviously, if you're an aluminum consumer and you've seen the sort of supply chain risk that they've just gone through, you've got to ask that question. I think and you've heard us say this before. As we got into the aluminum space, and looking for oil just looking doing our due diligence for the ADI project. Automotive makers would have actually consumed more aluminum over recent years if there was more supply. So are they questioning aluminum? I don't think so. Aluminum is an incredibly important material. For their future plans. We coming on to or coming into the marketplace will allow them optionality and greater redundancies through the supply chain. So I think that issue or that question will sort of mitigate be mitigated going forward. Timna Tanners: Got it. Great. Thanks again. Thank you. Operator: Our next question is coming from Lawson Winder with Bank of America. Your line is live. Lawson Winder: Great. Thank you very much, operator, and good morning, Martrice and Barry. It's nice to hear from you. Thank you for the update, and sincere congratulations on the success at Aluminum Dynamics. What I wanted to do is just follow-up, Mark, on your comments on capital allocation and that you noted that you know, M and A might be a possibility. Can you give us a flavor of where there might be opportunities to improve the business through M and A, whether that be in downstream or upstream or raw materials or otherwise. Mark D. Millett: We would steer away from raw materials. I do believe. I think it's just it would be aligned or parallel our previous commentary in downstream strategic sort of pull through volume type opportunities. Where we can either lever, you know, or exploit our core strengths So downstream in coding you know, the painting, those sorts of value add opportunities for sure. In value add, sort of manufacturing to some degree? As long as the volumes are there and it makes sense. But no. Not upstream Our raw material space, it would with Omnisource, you know, with the largest North American recycler of Ferrocen non ferrous goods today. That's in great shape. You might see a little read from a regional standpoint, a yard here or there. But no major thing. So, yeah, downstream value add as we pursued in the past. Lawson Winder: Okay. Fantastic. Thank you. Operator: Our next question is coming from Phil Gibbs with KeyBanc Capital Markets. Your line is live. Philip Ross Gibbs: Hey. Good morning. Mark D. Millett: Good morning, Phil. Philip Ross Gibbs: Sounds like based on your comments that Rail is pretty strong. Any context just broadly you can give on that market and then maybe give us a feel for how much of the rail mix is a part of your structural shipments right now? Barry T. Schneider: Phil, this is Barry. We committed, many years ago to be in the real market because it's essential that they have a reliable, high quality supplier at all times. So when wide flange is strong, you might see a smaller ratio. But in general, we try to stay exactly where the customers need us to be. It remains, within percentage points of where it always is coming out of Columbia City. And we're resolving our contract relationships for next year right now, but we anticipate growth in that segment. And the team is doing an excellent job with availability of trains to get the product distributed easier, quicker. And quality wise, we're working on, even better products. Coming in the next year or so. Based on some trials they've been doing. It remains a good part of our business, but in a window that we always keep it. So it try not to surge it too much one way or the other. Philip Ross Gibbs: Thank you. And I just have a follow-up on the flat rolled side of the business. And specifically at Centen and just an update maybe on how the downstream lines are running and how much yield improvement you have left there. And then, Theresa, I also missed the comments you made on the flat rolled mix. Thanks very much. Theresa E. Wagler: Sure. No problem. I'll grab that, and then Barry can comment I'll comment on the downstream units. We're very excited about the quality that the team is getting out of the new lines that are added as well as the existing paint galvanizing line Galvalume is a very difficult product to make. The team is really risen to the occasion. There is a learning curve, and we went through that earlier this year. To the point where we are seeing excellent yields, excellent produce prime products, and our distribution system and our customer base is going through approvals. A lot of the product there goes into contract type business with OEMs, and those trials are ongoing and very good. So we believe Centen will have the full breadth of a product mix to offer as the markets return. As I mentioned, there's a little overhang and the galvanized still out there. We think that's diminished. We think it's gonna be behind us here in months. The imports coming in the country, have substantially, tapered off. We believe the playing field is gonna be level and based on good feelings, we think next year is gonna be outstanding for sending the really realize all the hard work they've been putting in. So, Phil, for the shipment, the hot band was a 97,000 cold rolled 120,000, and coated 1,486,000. Philip Ross Gibbs: Thanks, everyone. Theresa E. Wagler: Thanks, Phil. Phil, if I could just add, because the question around structural tended to be rail rail centric. Just looking at the long products market in general, we're finding that to be incredibly strong and robust. And believe that we'll certainly continue, you know, nonresidential is in good great shape And we see on the, you know, on the fabrication side, there's a lot of engineering sort of permitting detailing, work going on And it would be our view that, come the first quarter in twenty six, we're gonna see a nice return of that volume as well. Operator: Thank you. Our next question is coming from Carlos De Alba with Morgan Stanley. Your line is live. Carlos De Alba: Yes. Thank you very much. Hi. Good morning, everyone. So I wanted to check, Mark, you mentioned that you saw some headwinds in the flower business. Has the situation improved as we get into the fourth quarter? If you can give us a little bit more color as to how that part of your steel business is shaping out. Mark D. Millett: Yeah. I think the headwind obviously was principally the inventory overhang. Which as Barry just suggested is eroding and should be depleted by the end of this fourth quarter. And with the almost non existent import profile, first quarter should be in good shape. I think you started to see that hot band pricing soften through the quarter, yet in mid September, it kinda turned up And I think we will see sort of slow but positive move through the end of this year. And as Barry said, we are quite optimistic. Throughout the rest of Or robust for Q1 and Q2. '26. Carlos De Alba: Alright. Fair enough. And then just maybe complementing on the growth. I ahead. Given the early success that you have had on the aluminum business, and your comments on demand being limited perhaps by supply. Would you know that you didn't talk about potentially getting more into the aluminum business. Is this something that you might consider? Is it too early? Yeah. Any color there? Mark D. Millett: Well, we wanna make sure we walk before we run. I gotta say here, the team down there is starting to sprint. Because they're incredibly excited and I'm you know, I wanna see incredibly excited by what those folks are doing. It's an incredible mill. There's absolute opportunity Carlos, in aluminum. There's no doubt about it. We will see how things go over the next six eight months or so. But there is definitely growth opportunity there. Both in downstream we could envision, you know, sort of exploiting or leveraging our pre paint capabilities It's one of our highest margin product lines today. And the team would be incredibly effective to cope the thousands or millions of pounds of aluminum that gets painted every year. And then we do believe there's still clear room for a larger asset. The mill asset. Theresa E. Wagler: Yeah. Just as a reminder, Carlos, and I know some of you would have this top of mind, but for those that may not, you know, even prior to 50% tariffs, the deficit of flat rolled sheet in The US was over a million and a half metric ton. We're only adding 650,000, and then I think there's another project that might may add another incremental amount, but that deficit's growing. And that's without tariffs. So then when you place that 50% tariff into the equation, it just really does we would never invest based on that. But the point is that there's a real need structurally independent of trade action. Carlos De Alba: Thank you very much. Operator: Thank you. Our next question is coming from Andrew Jones with UBS. Your line is live. Andrew Ian Jones: Hi. Couple of questions. Just firstly, on Sindhin, just get an idea as to how much that's having to the to the EBITDA. Can give us any sort of breakout for profitability of that? And I've got second question on tax if you wanna start with first. Theresa E. Wagler: Sure, Andrew. And as soon as you said tax, both Barry and Mark looked away. Yeah. I think I wanna so sentence specifically, Andrew, as a reminder, said that they're through cycle EBITDA capability on an annual basis. But it's through cycle, so we're not making a determination where the market is at this point in time. It's between $475 million and $525 million. And what I wanna do is take a step back because I think there's a bigger picture item that it would be helpful to discuss a little bit. And that's that Mark mentioned, I mean, we've talked about in the past that in the last five years, the fixed asset investments in aluminum, in Sinton, and in the floor flat roll coating lines has been, you know, over $5 billion. Just about $5 billion. Associated with those three projects is about $1.4 billion of through cycle EBITDA capability. And we really haven't been able to utilize that up until this point. And so as we think about 2026, and we think about where the facilities will be from a maturity standpoint, including the ramping of aluminum Of that, you know, incremental additional earnings power, you know, we think that we should have the ability to access on a through cycle basis. So, again, we're not making a determination of what that market will be like. But if it were through cycle, we really think we would have the ability to access somewhere at least no less than 60 to 65%. Of that number. So there's a lot of earnings potential that people may not understand is incremental structure to Steel Dynamics because of the investments we've made over the last five years. Andrew Ian Jones: Yeah. No. No. We work that's that's why I'm asking West, I guess. I'm just wondering, you know, what the annualized contribution was in the third quarter. Therefore, what's the delta of symptom specifically? Going forward? Theresa E. Wagler: So we won't give that specific information Suffice it to say, Sentin was EBITDA positive, but not the magnitude of that through cycle number. And then you said you had a tax Andrew Ian Jones: Yeah. No. It's about the deferred tax movement on the cash flow, which boosted free cash this quarter. Just wondering if you could explain the origin of that and how you're what the moving parts are in the coming quarters with regard to tax. Because I guess you've got a few things. Obviously, you flagged this $2.50 mil impact for the, you know, for the Ali project, and you've also I mean, there's obviously this big, beautiful bill, accelerated depreciation stuff going on. I mean, can you just give us an idea for how we should think about, like, effective tax rates and the actual equivalent of the actual cash tax profile in the coming quarters? Theresa E. Wagler: Yes, certainly. So it was a big boost to the third quarter because that when we were able to adjust for the for the tax bill changes, which included additional research and development benefits as well as most importantly, the acceleration and depreciation as our aluminum assets are getting placed into operations. So that benefit of a $147 million you're referring to, most of that was in the third quarter. You won't see that magnitude of increase in the fourth quarter. The way you should model cash taxes for 2025 is probably at a rate of about eight to 9%. And then for 2026, I would model cash tax closer to 15 to 16%. And the effective rate probably closer to 23%. Andrew Ian Jones: Okay. That's super clear. Alright. Thank you. Mhmm. Operator: Thank you. Our next question is coming from Mike Harris with Goldman Sachs. Michael Dwayne Harris: Yeah. Thanks for squeezing me in. As we look at you consuming more bio carbon material to lower your carbon footprint, How should we think about what that could potentially do to your cost structure? Theresa E. Wagler: Oh, it's a good question, Mike. So from a cost structure perspective, it really probably won't have a material impact for you to be able to observe from the outside in. It is a joint venture, so we are, you know, transacting as we would at a market price. To our steel mills. The joint venture is with Aimmune who has the IP associated with it. But what it does offer is an opportunity for us to offer an even lower carbon product And we do believe we're already seeing some customers that are providing premiums Not something that we're talking about at this point more broadly in specifics, but we think it'll open the door for even more opportunity on market share, specifically in OEMs, specifically more in the flat rolled side of the business. So there's a lot more we'll talk about as it relates to bio carbon in the future. They should be operating continuously here starting in November, so it'll take a minute before we're supplying, you know, as much into the steel mills as we'd like. But you shouldn't see a dramatic impact on the cost side at this point. Michael Dwayne Harris: Okay. That's very helpful. And then just one last one if I could. Of the record shipments you saw in the third quarter, were there any material onetime sales included in that? Theresa E. Wagler: No. Nope. It was just ramping up of Sinton, and then we had some record shipments out a couple of them under of our flat roll facilities as well as really a lot of strength and demand, as Mark pointed out, in the structural arena. Michael Dwayne Harris: Okay. Perfect. Thanks a lot. Theresa E. Wagler: Yep. Thanks, Mike. Operator: Thank you. Our next question is coming from Bill Peterson with JPMorgan. Your line is live. William Chapman Peterson: Yeah. Hi. Good morning, and thanks for taking my questions as well. I wanted to talk about the steel mill shipments in the fourth quarter. You called up the eighty five ks planned maintenance, but guess, is there anything else that we should be taking under consideration For example, you know, things or seasonal trends, or also take into account imports, which seem to be at a very low level or maybe potentially abating further. Get a sense on how to think about shipments relative to maybe the last five years of flat to down 5%. Theresa E. Wagler: So you guys are so You always try to come at it from a different angle. And that's a compliment, Bill. For the fourth quarter, we just wanted to call out the maintenance because, generally, we don't have all the maintenance in the same quarter as we are this time. So we felt like it was impactful enough to call out. But, we do still believe there's going to be seasonality, whether it's the same as it's been the last five years, I can't really comment to that. But you will see seasonality in the volumes in addition to what you're seeing from a maintenance perspective. Barry, Mark, do you have anything to add? Barry T. Schneider: The outages are just our regular attempt to keep our assets performing at the absolute tip top condition. We plan them long in advance and this is strange that we have all the mills taking some time in the fourth quarter. But all are great projects that continue to make our shops the safest in the industry and most efficient possible. William Chapman Peterson: Okay. Thanks for that. And Not sure if this is crafty or not, but how should I think about your overall your overall strategy in auto? I know you're an emerging player in aluminum, but thinking about your steel, is this a market where you're looking to gain share? And if so, how should we think of that? And on unfolding in the coming years? Or is really this business going to kind of grow with your existing partners, assuming they grow their U. S. Footprint in order to avoid tariffs? Barry T. Schneider: We are, real excited about the automotive business that we're doing I think the opportunity for, our customers to purchase a low carbon content product really enhanced our relationship early. And since starting to do business with us, our teams operate very efficiently, very smoothly, and without much bureaucracy. So I believe our teams have a great position relationship They've been working really hard this past year with all the tariff changes. To allow us to continue to do what we do best for the automotive industry. We do see it growing when we built Sinton, that was part of the design to be close to, the automotive base with some high value steel products. The facility was designed with that in mind. So as that ramps up and, we have OEM packages in to all of our customers, from that facility. We anticipate the growth organically happening. We see it as good products, and we're appreciative that the customer base recognizes that. We received an outstanding award from Volkswagen in the second quarter, which was really surprised and we were absolutely thankful to receive that. But it really highlights our position. We have a very low carbon footprint. We have a very engaging position going forward that doesn't change our cost structure. We've engaged on renewable energy and nuclear energy across our flat roll platforms. So we are ideally situated to grow our business there. And we're gonna grow it where it makes sense and listen to our customers and have great discussions with them. William Chapman Peterson: Yeah. Thanks, Barry, and Mark, for all the great color on this call. Thanks again. Operator: Thank you. Our final question today will be coming from John Tumazos with Independent Research. Your line is live. John Charles Tumazos: Thank you. Mark D. Millett: Hi, John. You good afternoon. John Charles Tumazos: Could you explain the $27 drop in scrap cost given that the steel business is strong Calvert, Alabama, starts up a new melt shop right now, etcetera. Is it from lower iron ore and coal prices and China selling lots of slabs and other steel, etcetera. And then second, would a reasonable guess for aluminum be $2.40 to $2.50 a pounds sales realization with the big Midwest premium. And maybe a dollar 40 production cost with 93¢ UBCs. Mark D. Millett: Well? Taking a number one, the scrap dropping off $27 It obviously, John, as you know, scrap is the in my mind, the most transparent fluid commodity out there, and it's just supply demand. The and and and all of the and and 20 whether it's the $27 in the broad scheme of things, is not it's more noise than anything else. Directionally, I think it's important, but it's more noise. You know, in the old days, $10.15, $20 move would be monumental today. It's it it stopped. Not too much. Again, in the dynamics of scrap, with the segregation technologies that are today, the shred one and all these things. There's greater optionality of flow And I think that's just bearing fruit. And we've always said, or always suggested that we don't have a major concern that others have had over the years that, oh my goodness, Yeah. Yeah. Flat roll is gonna continue to grow and scrap is gonna be a problem. In fact, if you look at a lot of the new projects coming online, that they're most of them anyway are having some CRI type version I and associated with them. So even though the production capability of the domestic industry is increasing It's not at the scrap consumption is not at that same rate. We still remain confident that scrap will remain in reasonable at a reasonable level. And that going forward, spreads will remain very high if not increase to be honest, going forward. Relative to your question on aluminum, I will refrain. To be honest, and it's a little bit more complicated as you can appreciate also you know, it depends on which grade, you know, is it automotive, is it can sheet, is it industrial, It is all over the map. Suffice it to say, we do believe that our returns that we've advertised are more than achievable. John Charles Tumazos: I'm glad to be a shareholder. Thank you. Theresa E. Wagler: Thanks, John. John, we appreciate we appreciate you being a shareholder all those years. And challenging us. For sure. And just to finish up would like to thank all shareholders that support us that are on the call. As I have to joke to them, if you're not a shareholder, you should be. Because we will endeavor to perform and use your dollars just as though there are our dollars. Couple are just point I customers that are on the line. Thank you. Thank you for your support. Particularly, would like to welcome any Ali customers that are on the line. It's been a pleasure to engage with you. And just in the last three, four, five weeks of market chaos, in your space, it really has been refreshing for us and hopefully refreshing to you because we do bring a different approach. From a sort of a con customer relationship standpoint. We truly will partner with you going forward And lastly, any SDI, folks on the call, absolutely hats off to you. You do a phenomenal job each and every day. You do make a difference. You are the best deal metals team on the planet. Just make sure you keep safe and keep each other safe. Thank you all. John Charles Tumazos: Thank you. Operator: Once again, ladies and gentlemen, this does conclude today's call. We thank you for your participation, and have a great and safe day.
Operator: Good day, and welcome everyone to the Lockheed Martin Corporation Third Quarter 2025 Earnings Results Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Maria Ricciardone, Vice President, Treasurer and Investor Relations. Please go ahead. Maria Ricciardone: Thank you, Sarah, and good morning. I'd like to welcome everyone to our third quarter 2025 earnings conference call. Joining me today on the call are James Taiclet, our Chairman, President and Chief Executive Officer, and Evan Scott, our Chief Financial Officer. Statements made today that are not historical facts are considered forward-looking statements and are made pursuant to the Safe Harbor provisions of federal securities laws. Actual results may differ materially from those projected in the forward-looking statements. Please see Lockheed Martin Corporation's SEC filings, including our 2024 Annual Report on Form 10-Ks, subsequent quarterly reports on Form 10-Q, for a description of some of the factors that may cause actual results to differ materially from those in the forward-looking statements. We have posted charts on our website today that we plan to address during the call to supplement our comments. These charts also include information regarding non-GAAP measures that may be used in today's call. Please access our website at www.lockheedmartin.com and click on the Investor Relations link to view and follow the charts. With that, I will turn the call over to James Taiclet. James Taiclet: Thanks, Maria. Good morning, everyone, and thank you for joining us on our third quarter 2025 earnings call. Lockheed Martin Corporation delivered strong operational and financial performance across all four of our business areas in the quarter. We secured a number of significant wins across a range of our marquee that drove our backlog to a record high of $179 billion. Our relentless attention to operational execution in every facet of our business resulted in elevated sales growth and substantial cash generation as well. Meanwhile, we are also positioning the company for what we see as even greater demand for the iconic Lockheed Martin Corporation products and systems needed by the U.S. and its allies to ensure deterrence from potential great power armed conflict. As I have said, Lockheed Martin Corporation is in the aerospace and defense industry but in the deterrence business. We are in active discussions with our customers in both the U.S. and abroad on scaling up development and production of the essential elements to deliver on the goal of peace through strength. These systems include air defense radars and missiles, space-based interceptors, state-of-the-art open architecture command and control systems, and the world's most advanced fighter aircraft as just a few examples. In every step of the way, we remain highly focused on enhancing program performance in terms of cost, quality, and schedule while reducing risk to internal production systems modernization and continuous improvement methods. As noted, in the third quarter, we've achieved a record backlog of $109 billion as demand for our reliable advanced solutions remains solid. Multi-year awards on PAC-3, JASSM LARASM, and CH-53K totaled $30 billion in the quarter and provide production rate visibility into the next decade. And shortly after the conclusion of the quarter, we definitized the F-35 Lot 18 and 19 contract with the Department of War's Joint Program Office adding $11 billion of contract value and another 151 aircraft into backlog. Our financial results in the third quarter reflect these trends. Sales increased 9% year over year and a solid 5% normalized for the Lot 18-19 impact in last year's third quarter. We generated strong free cash flow of over $3 billion in the quarter enabling our commitment to further invest in the business while simultaneously driving returns to shareholders through recurring dividends and our disciplined share repurchase program. Earlier in October, our Board approved a 5% increase in our quarterly dividend and increased our share repurchase authorization. This marks the 23rd consecutive year of dividend increase for the company and demonstrates our continued confidence in Lockheed Martin Corporation's stable financial performance. Looking forward, we are updating our outlook for the remainder of 2025 increasing expectations for sales segment operating profit and earnings per share. We remain focused on operational performance and capitalizing on the unprecedented demand cycle to deliver mid-single-digit top-line growth in 2025 while generating $6.6 billion of free cash flow. Evan will provide additional detail on the free cash flow elements and our full-year outlook in his prepared remarks. Circling back to the new business we secured this quarter, at Missiles and Fire Control, our expertise in developing and producing reliable control precision strike weapons and integrated air and missile defense solutions at scale continues to be highly valued by our customers. First on PAC-3, the U.S. Army awarded Lockheed Martin Corporation a $9.8 billion contract for the production of nearly 2,000 PAC-3 MSC interceptors and associated hardware. This marks the largest contract in MSC history and demonstrates the sustained demand for this advanced and proven interceptor from U.S. and international partners, some of which you've read is latest this week in the press. Our teams continue to proactively partner with suppliers and customers to invest in PAC-3 capabilities and production capacity to support the elevated and enduring demand we see this critical mission. Defending against ballistic, cruise, hypersonic, and airborne threats. Next on JASSM and LARASM, we definitized a large lot procurement contract for $9.5 billion with the U.S. Air Force and Navy customers. This multi-year award supports increased production quantities of these proven cruise missile systems and helps build a more resilient industrial base. We look forward to partnering with the U.S. Government to execute and deliver this long-range highly survivable and effective capability to our airmen, sailors, and marines for years to come. Moving to rotary and mission systems, the U.S. Navy awarded Sikorsky a $10.9 billion multi-year contract to build up to 99 CH-53Ks King Stallion helicopters for the US Marine Corps over five years. This is the largest quantity order to date for that aircraft and the largest contract award ever in RMS history. This ensures consistent deliveries of America's most powerful heavy lift into the next decade and enables long-term affordability optimized production efficiency and stability for our supply chain. In our space portfolio, we received additional contract value and funding on the Next Generation Interceptor program in the quarter. Helping to increase backlog for our space business to a new high of $38 billion. With NGI, we continue to advance the program as we progress through development and begin preparing for production. In addition, our space team secured multiple contract research and development awards this quarter. These CRAD awards, as they're known, demonstrate our ability to co-invest with the government partners and accelerate the delivery of revolutionary solutions. With each CRAD initiative strategically targeted to support key missions for the US government. Also of note in the quarter, the Fleet Ballistic Missile, or FBM system, conducted yet another successful flight test demonstrating its continued readiness to provide the world's most potent and survivable nuclear deterrent. This also marks 70 years of Lockheed Martin Corporation support to the US Navy on this critical program. Going forward, both NGI and FBM will benefit from the internal investment we are making in new state-of-the-art facilities to enable rapid, reliable, and cost-effective component production and assembly for these crucial systems. All in, these awards underscore the trust and confidence that our customers place in us. And which in turn underpins our company's long-term solid growth prospects. Shifting gears to F-35, During the third quarter, we delivered 46 aircraft. And now expect between 175 and 190 deliveries in 2025. That's essentially one aircraft delivery every working day of the year. Since program inception, we've delivered over 1,200 F-35 aircraft that have amassed over 1,000,000 flight hours. Providing control of the sky and seamless interoperability between US allied forces. The recent Lot 18 and 19 award reemphasizes the growing demand for the F-35, which is the world's most advanced fighter jet currently in production. Over the years to come, The US and 19 international allies will continue to progress toward a planned global fleet of over 3,500 aircraft. Moreover, we finalized the $15 billion air vehicle sustainment contract with the Joint Program Office. The four-year deal provides for aftermarket activities such as spare parts provisioning, maintenance repair, and other support services through 2028. This long-term agreement will support our key objective to improve the readiness of the aircraft fleet as it continues to expand in number and supports the revenue growth trajectory for our F-35 sustainment business. Finally, we are also heavily committed to support the ongoing modernization and upgrade of the aircraft's capabilities. Particularly the introduction of what's known as Block IV enhancements to a number of aircraft systems. At the same time, Lockheed Martin Corporation has already moved out on engineering analysis at my direction to design and bring even more advanced capabilities from our sixth-generation research and development efforts that we conducted our Skunk Works operation in California. We are aspiring to enhance the relevance and capability of our fifth generation the F-35 and the F-22, to provide the greatest aggregate level of air superiority capability at the most efficient cost and the fastest deployment. This is a total best value approach that we think will be best for the department. To that end, we are working closely with our customers to align our internal investments with their most important mission priorities for the F-35. For example, of these strategic enhancements could include advanced and expanded weapons compatibility, improved data links, autonomous drone wingman integration, superior sensors, and the latest electronic warfare capabilities. Now turning to the budget. We're all watching Congress work through the FY '26 appropriation bills and the government shutdown. We continue to see broad support through all of this for national defense priorities given the unsettled geopolitical situation. The strength of our backlog reflects the importance of Lockheed Martin Corporation Systems in deterring global conflict. We will continue to partner with the administration, Congress, and our customers to provide the absolute best defense technologies as this budget process is finalized. The Homeland Defense Mission, including Golden Dome for America, is one opportunity for which Lockheed Martin Corporation is ready and well-positioned with existing products, expertise, and production capabilities. Although details of the initiative's architecture and acquisition plan continue to take shape, the space domain is expected to play a vital role and Lockheed Martin Corporation continues to make significant progress to advance space-based defense. Earlier this quarter, the first NextGen GEO or NG missile warning system satellite was successfully completed. It's finished environmental testing. It's on track to provide the next level of global surveillance and detection of missile threats from space. We also submitted proposals for space-based interceptors and other emerging technologies And we're actually planning for a real on-orbit space-based interceptor demonstration by 2028. Further, led by RMS Lockheed Martin Corporation has built a prototyping environment at our Center for Innovation in Virginia. To support the collaborative development of a Golden Dome for America command and control capability. Through a series of demonstrations, Lockheed Martin Corporation's open systems architecture is already fusing existing and new C2 capabilities from seabed to space. And importantly, these capabilities are not limited to our own. We have a broad team of industry partners that are participating in the prototype system development, ensuring that the U.S. Government has access to the best available solution for each element of the eventual Golden Dome command and control system. At the same time, we're rapidly increasing production capacity across the missiles, sensors, battle management systems, and satellite integration opportunities that will be directly relevant to achieve the overarching objective of Golden Dome. And that is to strengthen deterrence against an attack against The US homeland and if necessary, defeat it. I'll now turn it over to Evan to share more about our financial results before we open up the call to your questions. Evan Scott: Thanks, Jim, and good morning, everyone. Today, I'll provide an overview of our consolidated financials, and highlight a handful of operational items in the quarter before handing it off to Maria Ricciardone who will cover business area results, and then I'll come back to discuss the updated 2025 outlook. Starting on Chart four, third quarter sales were $18.6 billion up 9% year over year driven by Aeronautics, missiles and fire control, and space. Adjusting for the F-35 Lot 18 award timing impact on revenue in Q3 of last year, the normalized year over year growth was still a solid 5%. Next, segment operating profit of $2 billion was up 9% year over year, resulting in 10.9% segment margins. Similar to sales, adjusting for F-35, normalized growth was 5%. Moving to earnings per share, we generated $6.95 in the third quarter up $0.15 year over year primarily driven by the higher segment earnings and lower share count partially offset by lower total FastCast pension adjustment and a higher tax rate. Taking a closer look at taxes, while the 16.5% effective rate in the quarter was up from the prior year, it was considerably lower than our prior estimate. The primary driver of the lower rate was increased research and development credits related to prior year favorable federal income tax audit resolutions. Overall, these benefits reduced the effective tax rate this quarter, with favorability expected to carry through to the full year. As Jim mentioned, in the third quarter, we saw strong bookings across the business. Totaling over $31 billion in orders, resulting in a 1.7 book to bill ratio. And we're off to a strong start to 4Q, the F-35 Lot 18-19 award additional funding associated with the PAC-3 multi-year award, and a contract modification on the TRIDENT-two D5 fleet ballistic missile life extension. Shifting to cash, we generated $3.3 billion of free cash flow in the third quarter bringing our year to date total to over $4.1 billion. The strength in the quarter was driven by working capital improvement, mainly on the F-35 program as part of the planned payments associated with the Lot 18 and 19 agreement. Lower cash tax payments also helped as we rolled through to the through the OBBA impacts. Finally, looking at cash deployment in the quarter, we continue to fund organic growth and innovation efforts with approximately $900 million going to capital expenditures and internal research and development activities. In addition, we returned approximately $1.8 billion to shareholders through dividends and share repurchases. Bringing the total year to date to $4.6 billion or 110% of free cash flow. We remain committed to our disciplined capital allocation policy and accordingly remain committed to returning capital to shareholders. Turning to some other highlights in the quarter. At Aeronautics, in addition to the F-35 Lot 18-19 award, Jim previously mentioned, international demand for the jet remains strong with Belgium and Denmark both announcing intentions to expand their fleets. Belgium seeking to procure an additional 11 aircraft, and Denmark expressing interest in adding 16 aircraft to their existing program of record. The steady demand from our international allies for the F-35 demonstrates the unmatched capability of the aircraft and gives us confidence in sustained long-term production. As for the classified program at Aeronautics, we will continue to proactively monitor and manage the risks and opportunities there were no additional charges recorded on the program in the quarter. Within MSC, we continue to advance our international strategy. The Global Mobile Artillery Rocket System or GMARS program completed a major milestone launching two Geomotive Surrounds at a live fire event at a White Sands missile range. Validating the launcher's performance ability to integrate the MLRS family munitions or MFOM. This successful test demonstrates Lockheed Martin Corporation's ability to adapt to regional needs in Europe, and partner to create something new, a precision fires launcher that is interoperable with NATO assets. We expect programs like GMARS to support the long-term international growth we anticipate with an MFC, and across the broader portfolio through the end of the decade. Moving to RMS and building upon Jim's comments regarding our work at the Center for Innovation related to Golden Dome, another growth prospect in the integrated and scalable C2 domain is the next generation command and control or NGC2 program. Lockheed Martin Corporation was awarded a prototype agreement to partner with the US Army and serve as a team lead to develop a data-centric NGC2 prototype. RMS will spearhead the collaborative effort, leveraging our c2 systems engineering and project management expertise to empower non-traditional innovators and commercial technology providers to scale their capabilities into our NGC2 offering. Finally, Space performed very well in the quarter, meeting key milestones on FBM, classified national security space, OPIR, and GPS III. On GPS, the ninth vehicle was transported to Cape Canaveral at the September. And more recently, Ocumaran delivered our first of 21 vehicles for space development agencies transport layer tranche one program. Successful program execution events like these, have helped Space once again deliver strong profit in the quarter resulting in segment margins of 9.9%. I'll now turn it over to Maria Ricciardone. Maria Ricciardone: Thanks, Evan. Okay, starting with aeronautics on chart five. Third quarter sales at ARO increased 12% year over year to $7.3 billion. The increase was primarily due to higher volume on F-35 production and sustainment contracts, as well as the absence of the $700 million impact of lot 18-19 contract delays in last year's third quarter. The increase was partially offset by lower volume at classified programs. Adjusting for last year's LOT18-19 award timing impact, sales at ARROW would have increased 1%. Segment operating profit increased 3% year over year in the third quarter to $682 million. The benefit of the profit on the higher volume was partially offset by lower profit booking rate adjustments. Which included an unfavorable adjustment of $40 million on C-130 programs this quarter. The photo to the right showcases Lockheed Martin Corporation Vektis. A Group five Survivable and Lethal Collaborative Combat Aircraft, with a highly capable, customizable, and affordable agile drone framework. Similar to the common multi-mission truck, this is another example of Lockheed Martin Corporation internally funding development of advanced technologies. In this case to create autonomous air dominance force multipliers, help customers outpace threats. Turning to Missiles and Fire Control on chart six. Sales at MFC in the quarter increased 14% from the prior year to $3.6 billion driven by higher volume due to production ramps. Including for multiple tactical and strike missile programs. Such as JASSM LARASM and PRISM. As well as for integrated air and missile defense programs, primarily PAC-3. PAC-3, pictured to the right, continues to ramp production, with the program eclipsing $2 billion in sales year to date. Which is 18% higher than last year. Segment operating profit in Q3 improved by 12% year over year to $510 million driven by the profit associated with the higher volume. Shifting to rotary admission systems on chart seven. Sales at RMS were comparable year over year in the quarter, at $4.4 billion primarily driven by higher volumes on Sikorsky Black Hawk and various C6ISR programs. These increases were mostly offset by lower volume at Integrated Warfare Systems and Sensors and various training, logistics, and simulation programs. Operating profit at RMS increased 5% in the third quarter versus prior year. Primarily due to favorable contract mix at Sikorsky. The photo here is of a Sikorsky CH53K King Stallion which as previously mentioned, received the largest award in RMS history during the third quarter. And on Chart eight, we'll conclude the business area discussion with space. Space sales increased 9% year over year in the third quarter. Due to higher volumes at Strategic and Missile Defense, driven by FBM and NGI programs. As well as at national security space. FBM, pictured to the right, continues to benefit from the life extension two activities. With sales up 14% year to date and driving accretive growth for the Space segment. Space operating profit increased 22% compared to Q3 2024. This increase was driven by favorable net profit booking rate adjustments, primarily on FBM, as well as profit associated with the higher sales volumes. Equity earnings from United Launch Alliance ULA were essentially flat versus prior year. Now I'll turn it back over to Evan. Evan Scott: Thank you, Maria. Turning to Chart nine and our outlook for 2025. As we approach year-end, we've refined our estimates to reflect increased expectations for sales, segment operating profit, and earnings per share. As well as clarifying our attentions on free cash flow and deployment activities. Building off the solid year-to-date growth, we're tightening the sales guidance range to $74.25 billion to $74.75 billion up $250 million at the midpoint and implying 5% organic growth year over year. We now expect segment operating profit to be in the range of $6.675 billion to $6.725 billion maintaining a midpoint margin of 9%. Business area detail can be found on truck 14 and backup appendix two but I'll touch on it briefly now. Three of the four business areas, aero, MSC, and space, are increasing their outlooks for sales by combined $750 million largely based on solid year-to-date performance and improved clarity on cost timing, production ramps, and throughput expectations in Q4. Meanwhile, RMS is lowering its forecast for sales by $500 million due to lower expected cost volume and slower production ramps at Sikorsky. Profit changes are generally in line with sales. Back to the company level, on earnings per share, we are increasing our estimate to a range of $22.15 to $22.35 Incorporating the $50 million of incremental segment mark operating profit as well as lower estimated full-year tax rate. Now estimated to be approximately 16.7%. And as our release stated, the EPS outlook excludes any non-cash impacts from the conversion of pension annuity contracts, that are currently under evaluation and could occur as early as the fourth quarter. Turning to cash, we've shifted to a point estimate our cash flow guidance this quarter. We have line of sight to solid cash generation through the end of the year and we intend to direct any incremental cash generated above the $6.6 billion free cash flow estimate for 2025 towards pre-funding a portion of the required $1 billion pension contribution in 2026. Our goal is to build financial flexibility in 2026 and beyond, to ensure we are best positioned to seize organic growth opportunities and create value for shareholders. In summary on chart 10, as Jim said, we're excited about the prospects for Lockheed Martin Corporation. We remain laser-focused on executing our record backlog to deliver on program commitments and drive favorable outcomes that create value for our customers, and shareholders. With that, Sarah, let's open up the call for Q and A. Operator: Thank you. Tone phone. You will hear an enunciator indicating you have been placed in queue. You may remove yourself from the queue at any time by pressing star then one again. We ask that you please limit yourself to one question. If you're using a speakerphone, please pick up the handset before pressing the numbers. Once again, if you have a question, it is star then one at this time. Your first question comes from Douglas Harned with Bernstein. Your line is open. Douglas Harned: Good morning. Thank you. Jim, when you look at this quarter, this quarter margins were good, essentially a clean quarter. And when you look back over the past year though and certainly, you know, last quarter, you've had some charges, fixed price development program issues and MFC and aeronautics and RMS. You know, how do you look at the when you look forward now, you know, how do we get comfortable that those issues are behind you? What have you done across those businesses so we can get pretty confident that this growth trajectory can be executed with strong margin performance. James Taiclet: Yes, Doug, good morning. Look, we've taken our best approach, our best people and we put them on these highlight programs which have been if you've been reading the Qs and Ks for the last ten years, they've been highlighted all the way through. And we're at a point where now our growth prospects are so strong that we just want to try to put every risk that we can quantify behind us in the company. Now, we can't predict 100% that we've covered every risk that every flight test is going to be successful, etcetera. But we've really wanted to take the lion's share of the risk put it in place, cover it, take the charges, and move on. That's the attitude. Again, can't guarantee perfection going forward. But that's been our attitude. And instead of like lugging these rocks behind us every quarter, the ones we knew about, the helicopter programs both of which could still do better than we're expecting. But we just wanted to take those two legacy risks off the table. And then when it came to MSC, that program needed to get past certain test points, if you will. It's gotten past them. We have a lot more confidence in that. And we took the charges we did because that risk had been carried all those years. And then finally on the ARO classified, we have basically drowned that program in talent and attention. We've got our chief engineer for the entire company now Basically, project engineer on p on the P95A program. Along with a lot of other talent too. So again, we rebaselined every single original assumption in that bid from 2018 And we think we've covered most of the bases that we can understand. But there's still technical risk in this, and what will come out the other side is something really amazing that will have lots more demand we think beyond the fixed price production lots that we are taking the charges for. So I do see a much more robust future for that program now that taken those charges again put that all behind us. But it's not 100% risk free. But I think in the end, all in all, I've been on top of all these programs myself too, at a detailed level, this will be very good for the company and very good for the country over the over the next number of years. Operator: The next question comes from Seth Seifman with JPMorgan. Your line is open. Seth Seifman: Hey, thanks very much and good morning. Evan, in the past on the Q3 call, the company's provided some color on expectations for the following year. Don't if there's anything you can say at this time, but given the backlog growth, would there be any reason not to expect mid-single-digit growth next year And also if you can anything you can say about mix and margin profile along with the cash flow outlook for 2026 that you talked about. On the last quarterly call and whether that's still the way to look at things? Evan Scott: Thanks for the question, Seth. So we are not changing our trending that we previously provided. But since we provided that trending, we are seeing some new opportunity emerge. Particularly around the munitions and Golden Dome and some of the others across the portfolio. Given that these items are fluid, we're going to continue to focus on them this quarter's specifically and we'll be in a much better position to give clear guidance on that in January, both on what upside to revenue that might drive and any investments that are required to unlock that revenue. Operator: The next question comes from Ken Herbert with RBC Capital Markets. Your line is open. Ken Herbert: Yes. Hi, Jim and Evan. Thanks for the question. MFC revenues, you've seen really strong growth now for several quarters. As you think about the outlook for sort of a high single, low double outlook over the next few years, with the very strong demand signals you continue to pull out point out, could you talk about confidence in the supply chain to ramp production over the next few years, whether it be solid rocket motors, seekers, any other focus areas that are constraints today or that you see as potential risks as you look at obviously executing to some of the major contracts you've announced? James Taiclet: Yeah. Hey, Ken, it's Jim. We've worked with our US government partners and our key suppliers on especially some of those items that you just pointed to. And I'm much more confident today than I was a year or so ago about the ability of those industry partners to step up to the kinds of rates of production increase that we're being asked to put into play. There's been I would say top-level interest in both the seeker provider and commitment to the government and to us. To make the kind of investments that will give us confidence that they will get there. On the solid rocket motor side, you know, we've got really three providers now. Aerojet Rocketdyne, has also stepped up with investment. Northrop Grumman made a big commitment again to investment on the SRMs. And we've got a joint venture now with General Dynamics where we will have an ability to have a third supplier to bolster those two in the future. So I'm much more confident about the supply chain than I was before. Having said that, there are a lot of parts and components in these devices. And we have to manage it every day like a wet blanket. We're all on top of our suppliers. And we're getting better and better at looking farther ahead to see where the issues might come and address them early. Evan Scott: Yeah, and I think I'll just add to reach the level of scale that's being contemplated, it really will take everybody operating the same direction. As Jim said, every single part needs to be on time and that is gonna take close coordination with our customer. And I think we're gonna get exactly that to scale across the entire supply chain because the goal is not only to meet current delivery requirements, which we're very focused on, but to potentially scale beyond that to customers demand And then have resiliency within those supply chains that be able to scale further as needed. And that's our big focus as we work on that this quarter. Operator: The next question comes from Gavin Parsons of UBS. Your line is open. Gavin Parsons: Thank you. Morning. Good morning. Morning. Thinking a little bit further about the capacity investment and CapEx spend over the past few years has pretty consistently been around 2.5% of revenue and you've grown kind of mid-single digits. Is there a way to quantify what say, 100 basis points step up in CapEx would convert to in terms of revenue growth? Or how do you guys think about it? Evan Scott: I think it's a little early to make that direct correlation I will say that the numbers you stated historically probably hold for the future based on the revenue projections we had given previously in terms of trending. To the extent that there is a significant ramp up to that demand and top line, there will be potentially more capital investment than we have maybe seen historically to unlock that. Given the potential scale of the minutiae ramps that we're talking about. And that will be able to give a much better clarity on when we report in January. Operator: The next question comes from Scott Deuschle of Deutsche Bank. Your line is open. Scott Deuschle: Hey, good morning. Evan, for the guidance reduction at RMS, is it CH-53Ks volume at Sikorsky that's trending lower than expected? Or is it Blackhawk? And then would you expect any of this year's pressure to get caught up next year such that you ultimately get better growth in RMS next year and land in kind of the same spot? Thank you. Evan Scott: CS53K is the largest driver as we work to scale production We have seen some strength in Blackhawk this particular quarter compared to quarter. So fourth quarter needs to continue to be a scaling quarter for us. And then next year for sure across both programs. So our intention is to get production scaled and in good shape next year and we'll be talking about that of course more specifically in January. But in terms of main drivers this year, I think you are thinking about it right. James Taiclet: Yeah. This is Scott. This is Jim. There's one thing that I'm been pushing for a few years and it's starting to get traction on the customer side now, which is autonomous Blackhawk. For contested logistics and air evacuation missions, those kinds of things. Where we could repurpose Blackhawks over the next couple of decades with about a $5 million per unit autonomy package that can free you up from pilot risk and also from pilot demand on pilots and keep those pilots available for the critical missions that they have to be in the cockpit for. So basically, it's a pilot optional Blackhawk. We've demonstrated these for the last two, three years. And I think there'll be some interest in the armed forces on those because the contested logistics environment is getting way worse instead of any better. Operator: The next question comes from Richard Safran with Seaport Research Partners. Your line is open. Richard Safran: Jim, Evan, Maria, good morning. Evan, if I may, I wanted to follow-up on your opening pension remarks. When we spoke, in August, I brought up pension offsets And while you weren't specific, you did seem to indicate there were some options for offsetting pension headwinds. Now I understand your comments about 25% cash flow by the pension offsets. But could you discuss your plans in a bit more detail and tell us if there's anything else being contemplated that could offset 26 or 27 free cash flow headwinds from pension. Thanks. Evan Scott: Sure thing, Rich. So just a run through of pension. So as stated this year, we're targeting to pre-fund a portion of 2026 required $1 billion cash pension. So anything above 6.6 we would look to put into prepayment of the pension. Just sort of baselining it, in 2025, you look at impact to cash from pension, we benefited from pension recoveries in excess of contributions because of the prior prepayments that we made. 2026 will also benefit from recoveries in excess contributions, but less so than 2025 as we intend to make some contributions next year. So the way to think about it is starting in 2027, we expect pension cash contribution be neutral to free cash flow as pension recoveries and pension contributions should be equal on an annual basis. So while we expect that to be net neutral cash impact in 2027, it could present a headwind year over year compared to 2026. However, our intention is to offset any of that headwind in 2027 with growth in operational cash. Operator: The next question comes from Pete Skibitski with Alembic. Your line is open. Pete Skibitski: Jim and Evan, obviously, F-35 visibility is improved now, I would think. At least through the midterm with the 2018 and 2019 definitization and the air vehicle sustainment contract. Could you kind of tie it up for us in terms of the growth outlook on that program and any margin opportunities? And but also the remaining risk on the Block IV development effort and how that might impact Dynamics? Evan Scott: Sure, I'll start. So we ended the third quarter with a backlog of two sixty five jets, and that's before adding the extra 151 that came in the first week of Q4. So we have seen strong support domestically and internationally. And so given, presuming that the strong advocacy we've seen from lawmakers and the focus on their superiority from the administration, that gives us confidence in maintaining the 156 a year rate. In terms of growth for the program, the largest growth driver will be sustainment. As we stand up new capabilities and deliver more jets. So that will pace overall F-35 growth on a percentage basis. We also see some margin opportunity across F-35 as we really hit a good groove on production. And that will continue to translate into operational results. And our top priorities are delivering out this year with a guidance of more like 1.75 to 1.9 and a big focus on completing Block IV development. James Taiclet: Yeah, and with block four, Pete, can speak to that, it's Jim here. In that we have with the incoming administration the highest level of collaboration and cooperation between government, Lockheed Martin Corporation is the prime contractor on the air vehicle and our supplier partners, many of which you would know by name. So RTX is the W sorry, RTX is the distributed aptra system BAE is the EW system. North of Grumman is our partner with the government on the radars, etcetera. So we have the best collaboration we've ever had and openness with the government, not only to work with us in a teamwork fashion, a all of those companies and the US government and the Joint Program Office, But also to remove barriers and delays on the government side, which heretofore hadn't been addressed that aggressively, I'll say. And so we're in a positive conversation with all the parties that are involved in this block IV modernization program, which is really, really important. To keep everything on time, to keep the production line going, So I'm confident that we will have a successful block four rollout. And one where government, industry, including the supply chain are collaborating in ways that we've never done before. So I'm optimistic about Block IV. It is super challenging, by the way. Some of the technologies that are coming onto the jet and having to be integrated are complex. But I do think that it's just gonna make the aircraft even more dominant than ever before. And any ex-pilot or current pilot can tell you you've got the best EW the best sensor suite, the best weapons, and the best radar, you're gonna win. And that's what we're out for. Operator: The next question comes from Myles Walton of Wolfe Research. Your line is open. Myles Walton: Thanks. Good morning. Curious on the fourth quarter implied margins at Space in the low 8% range Is there anything in particular driving that? And then Jim, you mentioned the space-based on-orbit prototype. Do you anticipate that to be a company-funded exercise And if so, what kind of R and D burden are you prepared to take for something that is, you know, if you build it hopefully the next administration will buy it. Evan Scott: I'll start, Miles, on your question on the space margins. So really, the only notable thing there really is less risk retirements and some dilution based on mix. So the implied margin 4Q, I would not use as necessarily a guide for ongoing into next year. Just happens to be a particularly low quarter from a risk retirement standpoint overall. James Taiclet: And so on SBI, we are changing the way we allocate our independent R and D at this company, Miles, And we've been evolving towards this for the last five years. But I think now we're basically at the mountaintop here, which is the previous way that the company tended to aggregate and fund IR and D was each of the business units would get sort of a slice of the pie, so to speak. And figure out what were the most important projects for their current or prospective pursuits, if you will, And they would internally almost allocate their piece within that. What we've done over the years is we've migrated that approach to one where it does care for the current needs, if you will, in the business areas. But an increasing proportion of the corpus, and the corpus hasn't grown that much larger, but it has increased over these years. But much of that corpus now goes to real highlight corporate level R and D programs. So I give you a couple of them. SBI, the space-based interceptor is one of those. We are building prototypes full of operational prototypes, not things in labs, not stuff on test stands. Things that will go into space or in the air or fly across a missile range. These are real devices that will work and that can be produced at scale. So the space-based interceptor is one we've been we've been pursuing already. And that's all I can say about that. Autonomous Blackhawk, I mentioned earlier, years in the making, ready to go into production. We have a production design that we are gonna be building the prototype for and flying in a year or so. Another is this notion of sixth-generation technology insertion into the F-35 and F-22. How do we take the Skunk Works activities that were designed to go into NGAD and other potential opportunities, some of which are classified and we can't talk about those either. But we develop these sixth-generation capabilities, whether it's stealth, propulsion, inlet designs, coatings, those kinds of things. In in in Palmdale and Skunk Works. Which we can actually backward integrate into F-35 and F-22 and are doing so. So those are a few of the you know, kind of the big bet home run heavy allocation to R and D where we are actually building prototype vehicles to demonstrate to the government perhaps alongside with the new entrants you could look at it that way, where we can show them a working vehicle that we can produce as scale that they can rely on. We're pivoting our company's approach to that. We're gonna keep answering RFPs and RFIs in the traditional way as well. But we are now in the business of self-funding prototypes at the corporate level which we can actually demonstrate real capability, leapfrogs to our customers. Operator: The next question comes from Kristine Liwag of Morgan Stanley. Your line is open. Kristine Liwag: Hey, good morning, everyone. First, on the F-35 lots eighteen and nineteen, Can you talk more about the pricing and expected margin of this? It sounds like the price per jet from previous years was less than the rate of inflation for what you've signed. And with Affirm, price inside the fee structure, how should we think about the margins of this lot versus the previous lots? And, ultimately, what are the key milestones, that would unlock that incentive fee for higher margin later down the road? Evan Scott: Good morning, Kristine. It's important to note that when Lot 19 are transitioning to a true firm fixed price contract relative to the FPAF that we've seen previously. So that's gonna give us the most opportunity to truly drive operational performance particularly with the investments that we've made in the aircraft and overall changes to digitizing our operations. So therefore, we believe we've got some margin opportunity in lot 19 relative to prior lots. Then additionally, as we work through some of the challenges we saw in TR3, that clears the deck in a sense of allowing kind of a more stable baseline for us to drive performance in F-35. So without getting to specifics on the margin expectation, we do see some opportunity on that 35 going forward relative to prior results. Operator: The next question comes from Gautam Khanna with TD Cowen. Your line is open. Gautam Khanna: Yes. Thank you. I was curious if you could talk a little bit about some of the bigger international campaigns you're pursuing right now. Across the segments? Thanks. Evan Scott: Absolutely. From an international perspective, we are looking really across the entire company. Each business area has key international pursuits. Clearly on the ammunition side, there's strong demand for air and missile defense. Products and potentially new customers emerging there as well. From an RMS perspective, international Black Hawk continues to be a focus for us as well as our radar programs. From a space perspective, we are looking at international satellite opportunities with some key competitions coming up in the next year. And from an aeronautics perspective, F-35 continues to be a big focus for us as well as C-130 and F-16. Anything you'd add, John? Operator: The next question comes from Rob Stallard of Vertical Research. Your line is open. Rob Stallard: So much. Good morning. Hey, good morning. Just wanted to follow-up on your answer to Myles' question earlier about R and D and some of the comments you made through the call on CapEx. It does sound like we could be expecting a structural step up in what Lockheed Martin Corporation has to invest as an individual company. In either CapEx or IRAD going forward. So do this mean we need to reconsider what, say, the percentage of revenues that goes into CapEx or the percentage of revenues that goes into company-funded r and d is likely to be going forward? James Taiclet: Rob, we're not intending to step up the percentages of revenue on either case. What we're doing is more material allocations of that corpus. Again, the corpus isn't necessarily changing in a material way. Is not our plan. It is allocating it in a better way to compete and meet what the government's requests are these days. And so there's less traditional contracting going on in the government at the moment. In some areas, not in all. I saw those huge awards we were getting. But we do want to compete in a more effective way And we've been working towards this, again, with the same proportions and percentages roughly of revenue allocated to IR and D and CapEx. And those are the those are the boundary conditions that we intend to stay in. On both of those investment scenarios. Operator: The next question comes from Michael Ciarmoli with Truist Securities. Your line is open. Michael Ciarmoli: Hey, good morning, guys. Thanks for taking the questions. Maybe just on the MS margin, fourth quarter, it looks like we're going to get a nice above 10% sequential step up in growth. The margins look like it could be for the low of the year. Is that related to the classified program? Or what's sort of the dynamic there given the volume growth on some of the core profitable legacy programs? Evan Scott: Yes. MMC margins continue to pace the overall company and be strong. We are scaling multiple munitions as you know. Comes a little bit of dilution on the upfront part of that scaling. Those programs still we expect that the normal margins we would see on prior production programs just with the very accelerated growth that's just creating a little bit of dilution on the front end and we've got long-term confidence in MFC overall performance. Operator: The next question comes from Scott Micas with Melius Research. Your line is open. Scott Micas: Morning, Jim and Evan. Morning. I wanted to get back to Doug's question specifically. Diving into the classified aeronautics program. think the most recent disclosure in the 10 Q that a portion of the charge was related to additional phases And I presume that's some sort of fixed price production options. Do you have those prices for those options locked in with suppliers? If not, I'm just kinda wondering what kind of inflation rate you're assuming for material on the broader supply chain. Evan Scott: We can't speak to exactly what each of those phases represent. But you're right that there's firm fixed price all the way through on this program. And a lot of it is suppliers. So we continue to partner with our suppliers on this to make sure that we have good line of sight to what our cost base is there with greater than 70% negotiated to date and allowance for any growth assumed in those EACs. So this will be a program we'll continue closely monitor and keep updated on But with respect to suppliers, not seeing any elevated risk on that program at this point. Operator: The next question comes from Sheila Kahyaoglu with Jefferies. Your line is open. Sheila Kahyaoglu: Good morning, guys. Maybe I wanted to clarify, I think it was Richard who asked, on the 26-27 free cash flow. Can we talk about just the moving pieces of that bridge inclusive of pension and CapEx? Evan Scott: Absolutely. So with respect to 2025, I want to make clear is that we are not showing any weakness in our free cash flow estimate compared to prior estimates. We're looking to do is give more clarity in how we intend to deploy that cash at the end of the year. And so still staying within the range we gave allow for prepayment of next year's pension which is right now required, are expected to be $1 billion. So no change to 2025. To date. Just more clarity on intentions. With respect to 2026, no change to our prior number that we had given As you noted, we do expect to have additional pension contributions next year. So right now, assuming no incremental, acceleration this year, 've got $1 billion penciled in for that next year. And so think of a portion that being offset by cash earnings which is why we will not be down the full billion dollars compared to this year with more clarity to come. Operator: The next question comes from Peter Arment with Baird. Your line is open. Peter Arment: Yes, thanks. Good morning, Jim and Evan. Jim, have you guys quantified Golden Dome in terms of the there's $27 billion of initial funding. And obviously, there's a number that's been thrown around at 1 and $75 billion. But Lockheed seems like it's really well positioned across so many existing systems. And have you guys quantified what you think that opportunity is? I know General Gulen will be out next month with his architecture, but I think there's a lot of existing systems that are in play here, and you guys have the capacity to support it. Thanks. James Taiclet: Yeah, so Peter, the only way to quantify the potential revenue opportunity is to actually see the mission technology roadmap over time. For homeland air defense, that's not available yet. And what I mean by that is what sites with what radius and what point of time do you want to defend and from what actual threats? Until that's all laid out, we actually won't have any sense of where the budget is being allocated for to actually create the contracts with industry to do that. Now, we think that we've got a very, very significant proportion of what the logical product sets would be. No matter how you lay out that architecture. And what order you put in the geographies, the domains, etcetera. Whether it's, again, it's radars, it's space assets, it's ground-based missiles, etcetera. Were very, very important player in each of those arenas. We'd love to be able to quantify and give you all ranges on this, but until that pattern is laid out, and the budget allocated right along with it, we can't make an estimate of it. Maria Ricciardone: All right. Great. Thanks, everybody. I think we've come to the top of the hour. So I'm just gonna hand off to Jim for some final comments. James Taiclet: Thanks, everyone for joining our call today. In closing, our record backlog, strong sales growth and our solid operational performance give Evan and I great confidence that we're going to finish the year strong. I want to thank our 120,000 Lockheed Martin Corporation employees for continuing to deliver these effective, reliable solutions that we've been talking about this morning. That keep America and our allies safe And I look forward to speaking with you again in January for our fourth quarter and full year earnings call. Operator: This concludes today's conference call. Thank you for joining. You may now disconnect.
Operator: Good morning, and welcome to the Mercantile Bank Corporation 2025 Third Quarter Earnings Results Conference Call. All participants will be in listen-only mode. Please note this event is being recorded. I would now like to turn the conference over to Nichole Kladder, Chief Marketing Officer of Mercantile Bank. Please go ahead. Nichole Kladder: Hello, and thank you for joining us today. Today, we will cover the company's financial results for 2025. The team members joining me this morning include Raymond Reitsma, President and Chief Executive Officer, as well as Charles Christmas, Executive Vice President and Chief Financial Officer. The agenda will begin with prepared remarks by both Raymond and Charles, and will include references to our presentation covering this quarter's results. You can access a copy of the presentation as well as the press release sent earlier today by visiting mercbank.com. After our prepared remarks, we will then open the call to your questions. Before we begin, it is my responsibility to inform you that this call may involve certain forward-looking statements such as projections of revenue, earnings, and capital structure, as well as statements on the plans and objectives of the company's business. The company's actual results could differ materially from any forward-looking statements made today due to factors described in the company's latest Securities and Exchange Commission filings. The company assumes no obligation to update any forward-looking statements made during the call. Let's begin. Raymond? Raymond Reitsma: Thanks, Nichole. Our results for 2025 build on the theme of commercial expertise generating a strong return profile. We continue to demonstrate top quartile ROA performance relative to our peers built upon the following traits. Trait number one, a strong and stable net interest margin. Over the last five quarters, the SOFR ninety-day average rate has dropped 96 basis points while our margin has dropped by a mere two basis points to 3.5%. This illustrates effective execution of our strategic objective to maintain a steady margin via match funding of our assets and liabilities and refutes the notion that we have an asset-sensitive balance sheet despite the relatively large portion of floating rate assets. Trait number two, very strong asset quality. Past due loans remain at the low levels typical of our company at 16 basis points of total loans. Non-performing loans to loans over the last five years plus the year-to-date period averaged 13 basis points. The allowance for credit losses stands at 1.28% of total loans as of 09/30/2025, providing very strong coverage relative to past due and non-performing loan levels. These numbers demonstrate our longstanding commitment to excellence in underwriting loan administration. Trait number three, improved on-balance sheet liquidity and loan-to-deposit ratio. Our loan-to-deposit ratio stands at 96%, compared to 102% on 09/30/2024, and 110% on 12/31/2023. Our deposit mix includes 25% non-interest-bearing deposits and 20% lower-cost deposits which have contributed to the stability of our net interest margin. Our previously announced planned acquisition of Eastern Michigan Financial Corporation will contribute positively to each of these measures. Trait number four, strong deposit and loan compounded annual growth rates. For 2025, annualized deposit growth was 9%. Our recent focus on deposit growth is not new to our bank. In fact, the last six year-end periods demonstrate a deposit compounded annual growth rate of 11.8%. Over the same time period, total loans demonstrate a compounded annual growth rate of 10%. From a third quarter 2025 perspective, loans contracted an annualized 7% as loan paydowns anticipated in the second half of the year concentrated in the third quarter. We believe this contraction is a one-quarter anomaly as the 09/30/2025 commitments to make loans totals $3.7 billion, an all-time high, exceeds the average of the prior four quarters by 32%. We expect that loan growth for 2025 in total will fall within the range of previously defined expectations of mid-single digits. Trait number five, continued strong growth in key fee income categories. Growth in commercial deposit relationships has supported growth in treasury management services, resulting in an 18% increase in service charges on accounts during the first nine months of 2025. Our payroll service offerings continue to report very consistent growth in the current year, with nine-month growth of 15% consistent with prior periods. Our mortgage team continues to build market share and generate a high portion of salable loans contributing to 12% growth in mortgage banking income during the first nine months compared to the respective 2024 period. Trait number six, stability in commercial loan portfolio mix. We have maintained discipline in our approach to commercial loan growth, maintaining a 55/45 split between C&I and owner-occupied CRE loans combined and all other commercial loan segments and prudent concentrations in categories such as office, retail, assisted living, hotel, and automotive exposures. In sum, these traits have allowed us to report a 20% quarter-over-quarter earnings per share growth, a 1.5% return on average assets, and a 14.7% return on average for 2025, and a 13% increase in tangible book value per share over the last four quarters. Additionally, our five-year tangible book value per share compounded annual growth rate of 8.4% and five-year earnings per share compounded annual growth rate of 10.4% each places us in the top two of our proxy peer group. We remain excited about the upcoming combination with Eastern Michigan Financial Corporation, which has financially attractive traits, including double-digit earnings accretion, mid-single-digit tangible book value dilution, and a mid-three-year earn-back period. That concludes my remarks. I'll now turn the call over to Charles. Charles Christmas: Thanks, Raymond. This morning, we announced net income of $23.8 million or $1.46 per diluted share for 2025 compared with net income of $19.6 million or $1.22 per diluted share for 2024. Net income during the first nine months of 2025 totaled $65.9 million or $4.06 per diluted share compared with $60 million or $3.72 per diluted share for the respective prior year period. Growth in net income during both time frames largely reflected increased net interest income and non-interest income, lower provision expense, and reduced federal income tax expense, which more than offset increased overhead costs. Interest income on loans was similar during the third quarter of 2025 compared to the prior year periods reflecting loan growth that was mitigated by a lower yield on loans. Average loans totaled $4.6 billion during 2025 compared to $4.47 billion during 2024, an increase of $210 million which equates to a growth rate of over 4%. Our yield on loans during 2025 was 31 basis points lower than 2024 largely reflecting the aggregate 100 basis point decline in the federal funds rate during the last four months of 2024 and the additional 25 basis point decrease during late third quarter 2025. Interest income on securities increased during the third quarter and first nine months of 2025 compared to the prior year periods, reflecting growth in the securities portfolio and the reinvestment of lower-yielding investments in a higher interest rate environment. Interest income on interest-earning deposits, a vast majority of which is comprised of funds on deposit with the Federal Reserve Bank of Chicago, increased during the third quarter and first nine months of 2025 compared to the respective prior year periods reflecting higher average balances that were partially offset by lower yields. In total, interest income was $2.2 million and $8.9 million higher during the third quarter and first nine months of 2025 compared to the respective prior year periods. Interest expense on deposits decreased during 2025 compared to the prior year period, in large part due to a lower average cost of deposits reflecting the aforementioned decline in the federal funds rate that more than offset growth in average deposits. Average deposits totaled $4.83 billion during 2025, compared to $4.34 billion during 2024, an increase of $489 million which equates to a growth rate of over 11%. The cost of deposits was down 32 basis points during the third quarter of 2025 compared to 2024. Conversely, interest expense on deposits increased during 2025 compared to the prior year period. Although the cost of deposits declined 18 basis points, growth in average deposits between the two periods of $544 million equating to a growth rate of over 13% resulted in a net increase in interest expense on deposits. Interest expense on Federal Home Loan Bank of Indianapolis advances declined during the third quarter and 2025 compared to the prior year period largely reflecting a lower average balance. And interest expense and other borrowed funds declined during the third quarter and 2025 compared to the prior year periods largely reflecting lower rates in our trust preferred securities due to the lower interest rate environment. In total, interest expense was $1.5 million lower during 2025 and $1.6 million higher during 2025 compared to the respective prior year periods. Net interest income increased $3.7 million and $7.3 million during the third quarter and 2025 compared to the respective prior year periods. Impacting our net interest margin over the last past couple of years has been our strategic initiative to lower the loan or deposit ratio, generally entails deposit growth exceeding loan growth and using the additional monies to purchase securities. A large portion of deposit growth has been in the higher costing money market and time deposit products while the purchase securities provide a lower yield than loan products. But despite that strategic initiative and the aforementioned decline in the federal funds rate, our quarterly net interest margin has been relatively steady over the past five quarters ranging from a high of 3.52% to a low of 3.41% averaging 3.48%. And our net interest margin forecast for 2025 reflects similar results. We remain committed to managing our balance sheet in a manner that minimizes the impact of changing interest rate environments on our net interest margin. Basic funds management practices such as match funding, combined with scheduled maturities of lower fixed-rate commercial loans and securities and higher rate time deposits along with scheduled rate adjustments on residential mortgage loans should provide for a relatively stable net interest margin in future periods. Our net interest margin declined two basis points during 2025 compared to 2024. Our yield on earning assets declined 33 basis points during that time period largely reflecting the aggregate 100 basis point decline in the Fed funds rate during the last four months of 2024 and the additional 25 basis point decrease during late third quarter 2025 while our cost of funds declined 31 basis points primarily reflecting lower rates paid on money markets and time deposits, which more than offset an increased mix of higher cost money market and time deposits. While average loans increased $210 million or almost 5%, for 2024 to 2025, average deposits grew $489 million or over 11% during the same time period. Providing a net surplus of funds totaling $288 million. We used that net surplus of funds to grow our average securities portfolio by $163 million and reduce our average Federal Home Loan Bank of Indianapolis advanced portfolio by $64 million. In addition, our average balance at the Federal Reserve Bank of Chicago increased $95 million. We recorded a provision expense of $200,000 and $3.9 million during the third quarter and first nine months of 2025 respectively. Compared to $1.1 million and $5.9 million during the respective 2024 periods. The reserve balance increased $800,000 during 2025 reflecting the $200,000 provision expense and net loan recoveries of $600,000 with the reserve balance increasing $4.7 million during the first nine months of 2025 reflecting the $3.9 million provision expense and net loan recoveries of $800,000. The reserve balance equals 1.28% of total loans as of 09/30/2025, compared to 1.18% at year-end 2024. The third quarter provision expense was primarily comprised of a $2.9 million increase in specific reserve allocations and a $900,000 net increase in qualitative factor allocations which were largely mitigated by a $2.3 million reduction associated with higher residential mortgage and consumer loan prepayments that shorten the average lives of those portfolio segments and a $900,000 decline from a reduction in total loans. Noninterest expenses were $2.4 million and $7.3 million higher during the third quarter and 2025 compared to the respective prior year time periods. The increase largely reflects higher salary and benefit costs including annual merit pay increases and market adjustments. Higher data processing costs also comprise a notable portion of the increased non-interest expense levels primarily reflecting higher transaction volumes and software support costs along with the introduction of new cash management products and services. Despite increased pretax income during the third quarter and the first nine months of 2025, compared to the respective prior year periods, we were able to reduce our federal income tax expense by $1.3 million and $3.6 million respectively. The reductions largely reflect the acquisition of Transferable Energy Tech credits during 2025 providing for reductions in federal income tax expense of $1 million and $2.6 million during the third quarter and 2025, respectively. Our federal income tax expense was further reduced by benefits associated with our low-income housing and historical tax credit activities which totaled $700,000 and $1.2 million during the third quarter and 2025. Respectively. The recording of these tax benefits resulted in third quarter and year-to-date 2025 effective tax rates of 13% and 15%, respectively. We are scheduled to close on another transferable energy tax credit by October, which will reduce our federal income tax expense by about $950,000. Additional acquisitions of transferable energy credits may be made from time to time, subject to our investment policy, tax credit availability, and tax credits derived from our low-income housing and historical tax credit activities. We remain in a strong and well-capitalized regulatory capital position. Our bank's total risk-based capital ratio was 14.3% as of 09/30/2025, about $236 million above the minimum threshold to be categorized as well-capitalized. We did not repurchase shares during the first nine months of 2025. We have $6.8 million available in our current repurchase plan. Our tangible book value per common share continues to grow, up $4.27 or almost 13% during the first nine months of 2025. The improvement primarily reflects retained earnings growth of $48 million and a decline of $21 million in after-tax unrealized losses on securities. On slide 25 of the presentation, we share our latest assumptions on the interest rate environment and key performance metrics for the remainder of 2025 with the caveat that market conditions remain volatile, making forecasting difficult. This forecast is predicated on a 25 basis point reduction to the fed funds rate on October 29. We are projecting loan growth in a range of 5% to 7% annualized during the fourth quarter. Despite the expected federal funds rate reduction, we are forecasting our net interest margin to remain relatively steady and within the range over the past five quarters. And we are projecting a federal income tax rate of 15% for the quarter. Expected quarterly results in noninterest income and noninterest expense are also provided for your reference noting that noninterest expense projections include the assumption that the acquisition of Eastern Michigan will be concluded by the end of this year. In closing, we are very pleased with our operating results and financial condition during the first nine months of 2025, and believe we remain well-positioned to continue to successfully navigate the myriad of challenges and uncertainties faced by all financial institutions. That concludes my prepared remarks. I'll now turn the call back over to Raymond. Raymond Reitsma: Thank you, Charles. That concludes the prepared remarks from management, and we will now move to the question and answer portion of the call. Operator: We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone phone. If you are using a speakerphone, please pick up the handset before pressing the keys. Our first question comes from Brendan Nosal with Hovde Group. Please go ahead. Brendan Nosal: Hey. Good morning, guys. Hope you're doing well. Raymond Reitsma: Morning. Morning. Brendan Nosal: Maybe starting off here on credit quality. I think you had net recoveries in seven of the past eight quarters. I'm just kind of curious, where are you finding recoveries at this point in the cycle? And just given how clean the book has been for a couple of years, like what do you think of as a normalized charge-off ratio given your credit box and portfolio mix at this point? Raymond Reitsma: Well, as it relates to where they come from, we've taken a pretty conservative stance over our company's history on what we charge off, and we're fairly relentless about recovering those once we do charge them off. So some of those go back a ways. And we just, you know, kind of never say die as it relates to a charge-off. As it relates to a normalized level, I'll let Charles answer that. Charles Christmas: Yeah. So I'll make one comment specifically on the third quarter. Part of that recovery was on a loan that we charged off in the fourth quarter of last year. And that credit remains in active recovery status. We typically budget between five and ten basis points of net charge-offs. I think from a historical perspective, Ralph, you know, obviously, excluding the Great Recession, that makes sense to us. Brendan Nosal: Okay. Okay. That's helpful color. Maybe turning to the net interest margin. Just kind of thinking conceptually about the margin a little bit beyond the fourth quarter. I guess, on the one hand, rate cuts are maybe a modest headwind for the margin, but you're going to be putting all that liquidity from Eastern Michigan to work across the next year. So how do those things balance out kind of in the direction the margin takes over the next couple of quarters? Charles Christmas: Yeah. I think you're spot on. Obviously, the acquisition will be beneficial to the net interest margin. That was clearly, you know, something that we saw and look forward to benefiting from. You know, I think part you know, we as I mentioned in my prepared remarks, we do have the lower rate loans and securities that will continue to reprice, you know, quite a bit. Even if the rates do market rates continue to come down, there's still quite a bit of significant opportunity there to gain some interest income. And, you know, we do have time deposits that are at higher rates than current market even today. So those will be you know, though everything we just talked about will be, you know, very strong tailwinds. You know, the one headwind is the reduction of the Fed funds rate. And, you know, part of the answer to your question is just how aggressive the Fed gets. But we believe on an overall basis that regardless of what the Fed does, our net interest margin will remain relatively steady. Because of all those things. Brendan Nosal: Okay. And then just as a follow-up, on that lower rate loan and repricing. Can you just size up that opportunity over the next twelve months? How much back book low rate stuff do you have coming due? And at what rate? Charles Christmas: Yeah. I would say probably well, I'm gonna go by memory here. So we have about $90 million in securities that have an average yield of about 1%. We're getting about three seventy-five to maybe 4% currently on that. We have about $160 million in commercial real estate loans that will mature next year. And those, I think, are at an average rate of about 4.5%. And then we also have some portfolio adjustable rate mortgage loans I don't know off the top of my head, but there's some that are coming up for initial repricing. And there's definitely some solid tailwind in those as well. Brendan Nosal: Okay. Alright. Well, thank you all for taking my questions. I appreciate it. Charles Christmas: You bet. You bet. Operator: And the next question comes from Daniel Tamayo with Raymond James. Please go ahead. Daniel Tamayo: Thank you. Good morning, guys. I guess first on just on the paydowns. You talked a lot about it in the prepared remarks. So did I hear this right that it was basically the paydowns that you're expecting for the back half of the year you recognized in the third quarter? And if that's the case, how should we think about that 5% to 7% loan growth guidance? I mean, it's about where it's basically where you guys have been historically. Is there a chance that's elevated in the fourth quarter and then back to normal next year? Or what's the thinking around that number and how the paydowns play into that? Charles Christmas: Yeah, Dan. This is Charles, and I'll take a first stab at it. And, you know, one of the things about paydowns is you know some of them are coming. You know, generally, we get the paydowns from the sale of the assets, the underlying assets. Or the refinance of the loan to the secondary market, and that's especially true for multi-family. And you kind of get an idea that they're coming, but clearly, we don't have any control over that. So the timing becomes, you know, relatively suspect. But, you know, sitting towards the end of the second quarter, the ones that we got in the third quarter, we knew they were coming. It was just a matter of at what month and in which quarter that was gonna take place. You know, we're always getting some level of paydowns from quarter to quarter because of the activity of our borrowers, and that's not going to change. I think we just kind of, you know, like our commercial loan funding, sometimes quarter to quarter, it gets a little bit bigger. It'll it's a little more lumpy as you go quarter to quarter. And so the same thing happens with fundings. The same thing happens with payoffs as well. As Raymond mentioned, we got a very, very strong pipeline right now. The big question regards to the fourth quarter is when does all of that close? We definitely have some expected closings here in the first half of the quarter. But we also have some fundings that are expected to close, you know, towards year-end. And, you know, whether that happens in December or whether that happens in January, that's just difficult to tell. So that's just relative to our lumpiness, and sometimes we get quarter to quarters that are a little bit more abnormally lumpy, if I can say that. I think in regards to the future, we're looking at continued, you know, mid-single digits loan growth. We tried to peg that. I tried to peg that at 5% to 7% for the fourth quarter knowing what I was just talking about. That there you know, that could be a little bit off. If it's gonna be off, it's probably more likely that the loan growth will be higher than that. With a lot of that coming at right at the quarter end. But, you know, as we start to prepare our budget, we really haven't started doing a lot with that yet. Again, the higher end of maybe five to seven, maybe 6% to 8% is kinda what we're thinking about for next year. Daniel Tamayo: Very helpful. Thank you. And then I guess you know, taking a look at the expenses, they're a little bit higher in the third quarter than I was looking for. And then the guidance takes a step up from that. Just curious if there's anything unexpected or unusual in the expense base or if that's a relatively clean number putting aside the acquisition to look at going into the fourth quarter? I mean 2026, sorry. Charles Christmas: Yeah, Danny. I would say the third quarter, you know, except for the ones that we highlighted, that the, you know, the acquisition costs and the contribution to our foundation, I think, you know, there's definitely you know, I think those are good run rates if you make those two adjustments. But I will say in the guidance that we gave for the fourth quarter, that includes about $1 million in acquisition costs. And that makes the assumption that the acquisition is closed by the end of this quarter. Daniel Tamayo: Okay. So that includes a million of acquisition. Alright. That's helpful. And that brings things back to kinda where we thought they were. Okay. Appreciate it. I was gonna so there's nothing on the tax line that is factoring in with the credits that that flows through expenses now. Right? That doesn't impact that. Charles Christmas: Yeah. The tax things that we talk about are just the impact on the federal income tax line item. They don't impact overhead. Daniel Tamayo: Okay. Great. Okay. I'll step back. Thanks, guys. Raymond Reitsma: Thank you. Operator: And the next question comes from Damon Del Monte with KBW. Please go ahead. Damon Del Monte: Hey, good morning, guys. Hope you're all doing well. Just to follow-up on the expense question there. Can you just remind us, Charles, the kind of the timing or the cadence of when you expect to realize the cost saves? As far as like systems conversion and kind of where you can really see some of that leverage from the cost savings from the Eastern Michigan deal? Charles Christmas: Yeah. So there's obviously two big things going on there. And, you know, there'll be some cost saves next year relative to the Eastern acquisition. Although, quite frankly, most of the cost saves are gonna start taking place in 2027. We're planning on the core merger the core conversion, I should say, will be in February 2027. And until that time, we'll actually be a two-bank holding company with Mercantile and Eastern both running continuing to run as they are today. So from and from a day-to-day operations standpoint, the cost saves are really a 2027 event. Now with the merger itself of the parent companies, there'll definitely be some cost saves, some overhead cost saves there. But as we talked about with the announcement is that cost saves are gonna be a little bit longer. Than typical because of the delay in the merging of the two banks together. Themselves. And then, like I said, the core conversion is set for February 2027. There will be some costs that will expense in 2026 relative to the preparation for that. We'll definitely highlight that in the income statement as it comes through. But once the conversion takes place, there'll be some pretty significant savings as we go forward from that. There's gonna be a little bit of a mistiming there as we prepare for the core conversion, Already started, but definitely through next year. There'll be some upfront costs, but the savings thereafter will be significantly higher. Than those upfront costs. Damon Del Monte: Got it. Great. Appreciate that color. And with regards to the tax rate, you know, how do you think about '26 if, like, you don't have any more purchase transferable tax credits. Or do you expect there to be some in '26 that would impact that number? Charles Christmas: Yeah. So, Damon, as I mentioned, we're just starting to get into the tax rates I think if you said, you know, we're you're not gonna do any energy credits, that's probably gonna be somewhere around an 18. Maybe 17 and a half percent. Somewhere in there. Don't quote me on that. But we are planning on doing some additional energy tax credits And, you know, right now, they're you know, we're closing one, I think, later this week or next week. They're still available. Obviously, there's a lot of due diligence that needs to go through that process. And we do have capacity to do them next year. We are planning on doing that. Next year. We'll even budget for that. If we're able to maximize what we can do from a tax perspective, our tax rate will probably be closer to 16%. Damon Del Monte: Got it. Okay. Great. And then just lastly, obviously, trends are pretty positive here. But as we think about the provision and growth kind of coming back online here in the fourth quarter, do we kind of use the first and second quarter as a good barometer for what we could look for a quarterly provision in the fourth quarter? Charles Christmas: Yeah. I think that's pretty good. You know, obviously, the credit quality remains very strong. And, you know, we're always chasing some credits in good times and bad times, but continue to do that and, you know, establish specific reserves when we think that's appropriate. To do. The prepayment speeds on the mortgage loans, which obviously had an impact in the third quarter, that's an annual event for us. For the most part. We look at it each quarter, but in general, we look at it comprehensively once a year. So not a you know, if rates change dramatically and we see some significant changes in prepayments, you know, from quarter to quarter, we'll definitely address it. But I would say on an overall basis, taking into account our asset quality and our growth expectations, I think your comment is accurate. Damon Del Monte: Great. Okay. That's all that I had. Thank you very much. Charles Christmas: Yep. Operator: And the next question comes from Nathan Race with Piper Sandler. Nathan Race: Hey, guys. Good morning. Thank you for taking the questions. Raymond Reitsma: Sure. Nathan Race: Going back to the margin discussion, curious, you know, how aggressive you guys can be in terms of, you know, reducing deposit rates on the $3.8 billion of funding that you call out on slide eighteen and if you could mention, Charles, maybe what the spot rate of deposits were at the end of the quarter relative to the $2.20 all-in cost in three two. Charles Christmas: Yeah. A lot of numbers there. I think one of the things that we have done in done this as part of bringing in money market accounts, which obviously we've seen a lot of growth in, is, you know, we've told the depositors that, you know, we change rates in that product relative to the change in rates in the Fed funds rate. So there's been no surprises there. As a matter of fact, some of those deposit accounts actually legally are tied to the fed funds rate. But that's how we manage all of the products within the money market account. So we've been you know, we would continue to either increase them basis point for basis point or reduce them basis point for basis point at least into the near future. Based on changes in the Fed funds rate. So that's immediate. So it matches up well. With the any changes, you know, with the changes that would happen on our commercial loans. Relative to any changes that take place with the Fed funds rate. So, you know, some solid matching there. You know, time deposits, a vast majority of our time deposits mature within one year. And I would say based on rates today, that's about 50 basis points. On average of a reduction in time deposits. So that would take into account the expected of next week's cut. And then, you know, most of the rest of the benefit is on the asset side. Nathan Race: Okay. Great. And, obviously, there was a notable M&A transaction involving, you know, two large competitors in your home state there. So just curious, bigger picture, where you may see opportunities either to maybe add production talent or just add you know, some high-quality commercial clients over the next couple of years as that integration unfolds. Raymond Reitsma: Yeah. I mean, historically, combinations of those types have been fertile ground for us in terms of developing business. And attracting more talent. And know, how this one plays out remains to be seen, but that has been the historical pattern. Nathan Race: Okay. Understood. And then one last one. I think you called out, you know, a $3 million specific allocation on the commercial credit that moved to nonperforming. 2Q. Just curious, expectations on potential loss there and timing as well, just given that specific allocation? Raymond Reitsma: Yeah. It's really too early to tell. And it's a process we're working through and it has our full attention. But as we get further into it, we'll make the decisions on those scores that are appropriate. Charles Christmas: I will add that we've been very aggressive in putting specific allocations against that credit. Nathan Race: Yeah. Understood. I appreciate all the color. Thanks, guys. Raymond Reitsma: You bet. You bet. Operator: Again, if you have a question, please press star and then 1. Our next question comes from Brendan Nosal with Hovde Group. Please go ahead. Brendan Nosal: Hey. Just one or two follow-ups here. Hate to beat the dead horse. On the expense number for next quarter. I just want to make sure I get the pieces. Does that number for the fourth quarter that you're providing include a partial quarter of run rate expenses from Eastern? Or is it just the merger charges? Charles Christmas: No. Just the merger charges. We're basically planning for a year-end consummation, so there would be no income statement from Eastern on our numbers. So the only thing would be there is about a million dollars anticipated million dollars or so basically, closing costs. Brendan Nosal: Okay. Perfect. And then just one on fee income just because it hasn't been asked about yet. The debit and credit sorry. The debit and credit card income line was up, like, 30% both linked quarter and year over year. Just kind of curious if there's anything funky going on in that line item this quarter and kind of where you expect that particular number to come in versus this quarter's $3.1 million. Charles Christmas: Yeah. Those numbers sound a little high to us as far as the increases go. I would say just in general, on the card program, it continues to grow quite well. You know, it's designed primarily for our commercial customers. It's a product that's well received and most importantly, well used. That's very much that line item is very much a volume-driven line item. And so the more that we can sell, but also ensuring that our that it's a solid product and one that our customers can and want to use. That's also very important because, again, it is a transaction-driven line that's been doing very well for us. And as we continue to get penetration of those programs into our existing base and of course, with the new growth, on the C&I side, plenty of opportunities to continue to grow that line item. Brendan Nosal: Okay. Alright. Thanks for taking the follow-ups. I appreciate it. Raymond Reitsma: You bet. Operator: This concludes our question and answer session. I would like to turn the conference back over to Raymond Reitsma for any closing remarks. Raymond Reitsma: So we want to thank you for your participation in today's call. For your interest in Mercantile Bank, and that concludes the call. Thank you. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Greetings. Welcome to Valmont Industries, Inc. Third Quarter 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. We ask that you please limit yourself to one question and one brief follow-up question and return to the queue. Please note this conference is being recorded. I will now turn the conference over to your host, Renee Campbell, Senior Vice President, Investor Relations and Treasurer. Ms. Campbell, you may begin. Renee Campbell: Good morning, everyone, and thank you for joining us. With me today are Avner Applbaum, President and Chief Executive Officer, and Tom Liguori, Executive Vice President and Chief Financial Officer. Earlier this morning, we issued a press release announcing our third quarter 2025 results. Both the release and the presentation for today's webcast are available on the Investors page of our website at valmont.com. A replay of the webcast will be available later this morning. To stay updated with Valmont Industries, Inc.'s latest news releases and information, please sign up for email alerts on our investor site. We'll begin today's call with prepared remarks and then open it up for questions. Please note that this call is subject to our disclosure on forward-looking statements which is outlined on Slide two of the presentation and will be read in full after Q&A. With that, I'd now like to turn the call over to Avner. Thank you, Renee. Avner Applbaum: Good morning, everyone, and thank you for joining us. I'd like to start with third quarter highlights and key messages summarized on Slide four. This quarter's results reflect the continued strength of our diversified portfolio and disciplined execution by the global Valmont team. We delivered net sales growth of 2.5%, with double-digit growth in Utility and Telecom. Operating margin improved 120 basis points and diluted earnings per share improved 21%. With these results, and the momentum across the organization, we are raising our full-year earnings guidance which Tom will discuss in more detail shortly. Our strategy continues to guide our decisions and deliver results. We've simplified the business. We're focusing where we lead. And we're directing resources to our best opportunities. United around our shared objectives, and a customer-first vision, our teams are driving innovation, and executing with greater precision. We operate in attractive markets, where our value proposition aligns with customer needs positioning us to capture long-term opportunities. We have the right structure now in place, and we have a strong foundation for sustained value creation. Looking ahead, we remain committed to accelerating growth, enhancing performance, and investing in high-return initiatives that strengthen our leadership and deepen customer impact. Turning to slide five. I'd like to provide a brief update on our 2025 critical objectives. Valmont Industries, Inc. is positioned to lead the North American utility market through an unprecedented investment cycle. We have a multi-pronged approach to growth expanding capacity, and strengthening operating capabilities. Most of our growth CapEx is directed to brownfield utility expansions that increase, upgrade, or repurpose our existing facilities enabling strong returns. We're also increasing throughput by addressing bottlenecks, improving material flow, and implementing new technologies. In agriculture, we're building a more resilient business to improve margins through the cycle. We've aligned resources around key growth areas. Aftermarket parts, technology, and international markets. Aftermarket parts sales grew year over year this quarter, driven in part by our new e-commerce system which all North American dealers now use. To provide industry-leading service and sales. An international rollout is planned in the upcoming quarters. These initiatives strengthen our leadership today and position us for faster growth and higher profitability ahead. Across the company, disciplined resource allocation, a relentless focus on safety, and the dedication of our team remains central to our success. I'm proud of how our employees continue to embrace change, and drive momentum with a continuous improvement mindset. Now turning to slide six, for an infrastructure market update, starting with utility, our largest product line. This business continues to benefit from powerful long-term demand drivers. Data center expansion, manufacturing onshoring, major oil and gas projects, and broader electrification are all contributing to significant load growth expectations. Rising energy consumption, aging infrastructure, and resiliency needs are driving multiyear increases in customer capital plans. Market forecasts call for transmission CapEx to grow at a 9% CAGR through 2029. Our customers continue to turn to Valmont Industries, Inc. to help them execute their multiyear plan across transmission, distribution, and substation as they expand and modernize the grid. We're winning projects because of the value we deliver through our scale, engineering expertise, and proven reliability. For example, Renee Campbell: we were recently awarded a $65 million extra high voltage project from a leading engineering and construction firm Avner Applbaum: in partnership with a large utility. This is one of several major wins that reflect Valmont Industries, Inc.'s trusted ability to execute complex large-scale work with consistency, and quality. Moving to lighting and transportation. The Asia Pacific market remains pressured alongside a softer lighting market in North America. Results were also impacted by operational factors. We know this business can perform better. And we've simplified the structure better aligned operations and commercial teams, and strengthen leadership. The long-term fundamentals of this business remain solid. And these actions are improving focus and accountability setting the stage for steadier performance ahead. The rest of the infrastructure business is performing as expected. We're focused on what sets Valmont Industries, Inc. apart. Our scale, deep engineering expertise, trusted customer partnership, and speed to market. Turning to slide seven for an update on agriculture. In North America, grower sentiment remained soft, As expected, record corn and soybean yields wan prices. The USDA expects 2025 crop receipts to decline about 2.5%, reflecting lower prices for both crops. In Brazil, the environment has turned more cautious. Growers are facing tighter credit, slower release of government financing, and ongoing trade uncertainty, leading many to delay large capital purchases including pivots. These near-term pressures are part of the normal cycle following several strong years, of farm profitability and investment. We know how to manage through cycles like this. That's why we're staying focused supporting growers' immediate needs while continuing to deliver customer-centric innovation, for the future. And we're demonstrating that commitment in the field. At recent farm shows, our Valley team showcased a new technology, including the ICON plus control panel a major addition to the Valley Tech Suite. It brings full Accent 365 functionality to any Pivot brand allowing growers to easily connect older or competitive machines. This expands our addressable market and drives growth in recurring revenue. In Brazil, the long-term opportunity remains exceptional. Farmers can grow two to three crops per year with mechanized irrigation, and the return on investment from Pivot is meaningful. With vast under-irrigated farmland, favorable growing conditions, and strong water availability, Brazil will continue to be a key growth market. In our other international markets, results reflect normal project timing. Several large Middle East projects shipped earlier this year, while last year's activity was more back-end loaded. Year to date, sales in the region are up double digits. Project demand remains strong. Government and corporate-led initiatives are longer-term and less affected by short-term crop prices. We've invested in our presence and dealer capabilities to capture this growth. Overall, the long-term fundamentals in agriculture remain strong. And the business continues to deliver solid returns even in a more challenging period. We remain focused on disciplined execution advancing innovation, and positioning us to lead as market conditions improve. In summary, our strategy is delivering results. Execution has been strong, and decisive actions across the portfolio are improving performance even in markets facing near-term macro pressures. With momentum established, and investment plans underway, our team is energized by the opportunities ahead and confident in the long-term fundamentals of the business. I'll now turn the call over to Tom to discuss our third quarter financial results and updated outlook. Thank you, Avner. Good morning, everyone. And thank you for joining us today. Our results are slightly better than expected. Particularly the 21.2% growth in earnings per share. And I want to thank our team for their execution this quarter. As well as the progress made advancing our value drivers. Operator: Catching the infrastructure wave, positioning agriculture for growth, Avner Applbaum: and disciplined resource allocation. We made progress in all three. Turning to slide nine. Our third quarter income statement. Operator: Net sales of $1.05 billion increased 2.5% year over year. Avner Applbaum: Sales growth in infrastructure, particularly utility, was partially offset by lower agriculture sales. Gross profit margin of 30.4% increased 80 basis points from last year. With improvements seen in both segments. Operator: SG&A expenses of $177 million were flat year over year. Avner Applbaum: Operating income increased to $141 million and operating margins of 13.5% improved 120 basis points driven by improved infrastructure results. Below the line, interest expense decreased due to lower debt. Our tax rate declined to 23.1%, due to a more favorable geographic mix of earnings. Operator: Diluted earnings per share was $4.98 a notable step up compared to historical Avner Applbaum: third quarter performance. Moving to our segment results on Slide 10. Infrastructure sales of $808.3 million grew 6.6% compared to last year. Tom Liguori: Utility sales increased 12.3% driven by pricing, and higher volumes. Sales in lighting and transportation declined 3.4%. Due to continued weakness in the Asia Pacific market softer North America lighting demand, and production challenges that reduced output. Coating sales increased 9.7% supported by healthy infrastructure demand. Telecommunications sales grew 37%. Growth was supported by our quick turn order strategy and the strong alignment of our wireless components business with carrier programs. Solar sales declined due to our decision to exit certain markets. Solar revenues are expected to be approximately 2% of total company revenues going forward. And, therefore, anticipate consolidating Solar into another product line for reporting purposes starting in 2026. Operating income was $143.4 million or 17.8% of net sales. An increase of 150 basis points as a result of our pricing actions growth in high-value offerings, and an improved global cost structure. Turning to slide 11. Third quarter agriculture sales decreased 9% year over year to $241.3 million. The North America market remains challenged. Resulting in lower irrigation equipment volumes. International sales declined mostly due to the timing of Middle East project sales. In Brazil, while third quarter sales were steady, the economic environment weakened late in the quarter, as farmers are facing significantly tighter credit. This also created some added pressure on customer payments. Conducted a review of the business. And determined it was prudent to record additional reserves. Including $11 million of bad debt expense. We continue to pursue collection of these accounts. Both operating income and margins declined, to $23.2 million or 9.7% of sales. Primarily due to the higher bad debt expense. Excluding that expense, operating income was 14.1% of sales. While the agriculture segment had a challenging financial quarter, we continue to invest in aftermarket, and technology projects. As we believe the long-term prospects are favorable based on the need to improve farmer productivity, feed a growing global population, and food security. Moving to slide 12. For cash, liquidity and capital allocation. We had another quarter of healthy operating cash flows. Generating $112.5 million. We ended the quarter with approximately $226 million of cash Renee Campbell: dollars and net debt leverage remains below 1x. Tom Liguori: During the quarter, we invested $42 million in CapEx, primarily for utility capacity expansion. We returned $39 million to shareholders including $13 million through dividends and approximately $26 million through share repurchases. At an average price of $374.33. Moving to slide 13. Last quarter, we provided a financial road map highlighting our key value drivers. Avner Applbaum: We remain sharply focused on execution. Tom Liguori: To catch the infrastructure wave, we continue to invest in capacity and efficiency improvements. And are starting to see the volume growth our revenue. Through the third quarter, we've deployed $78 million of CapEx in our North America infrastructure businesses. Our team made significant progress in capacity expansion in our Brenham, Texas Monterrey, Mexico and other North American facilities. Through these actions, we we've increased our annual revenue capacity in the infrastructure by $95 million. Avner Applbaum: With more coming online Tom Liguori: the fourth quarter. We're very pleased with the progress of our operations team and thank them for their efforts. Our close monitoring of industry capacity and the expansion plans of our peers reinforces our view that demand will exceed supply. And we're planning accordingly. Operator: In agriculture, Tom Liguori: we have comprehensive growth plans in technology adoption, aftermarket parts, and international markets. In the third quarter, aftermarket parts grew 15% year over year, to approximately $52 million reflecting the continued success of our e-commerce platform. Accent's revenues increased 8% year over year. Largely due to the productivity benefits farmers are receiving from our technology tools to manage their irrigation. These initiatives are gaining traction, and we are beginning to see the benefits in our financials. Lastly, our disciplined resource allocation initiatives are progressing. Third quarter corporate expense declined 6.4% to $25.1 million the lowest level in thirteen quarters. We benefited from the work to streamline the organization, and we continue to pare back our outside service provider cost. Renee Campbell: At the same time, Tom Liguori: we're investing in initiatives that will drive longer-term benefits. For example, we recently kicked off a project to simplify our legal entity structure. Which will improve internal efficiency, reduce compliance burden, and strengthen treasury management. On the capital allocation front, our share repurchase program continues. With year to date repurchases, Avner Applbaum: of $125.8 million or approximately Tom Liguori: 127,000 shares. Bringing it all together, we are making progress toward our path to deliver $500 million to $700 million in revenue growth and $25 to $30 in EPS over the next three to four years. Turning to our updated 2025 outlook on Slide 14. Net sales are projected to be approximately $4.1 billion which is the midpoint of the previous range. We're raising our full-year adjusted diluted earnings per share expectation to a range of $18.7 to $19.50 increasing the midpoint to $19.10. Before we close, we wanna thank the entire Valmont Industries, Inc. team for their focus on execution moving our value drivers forward. I also wanna welcome Eric Johnson, as our new chief accounting officer. Eric joined the team yesterday and brings a strong accounting and financial background. In large-scale manufacturing, and project businesses. From his prior roles at ConAgra, KeyWit, and KPMG. Avner Applbaum: We look forward to working with you, Eric. Tom Liguori: Tim Francis, who many of you know, accepted a position in our international infrastructure group. Tim, we wish you good fortune and much success in working with the international team in your new role. With that, I will now turn the call over to Renee. Renee Campbell: Thank you, Tom. At this time, the operator will open up the call for questions. Thank you. Operator: At this time, we'll be conducting a question and answer session. If you would like to ask a question, please press 1 on your telephone keypad. You may press 2 if you would like to remove your question from the queue. Before pressing the star keys. To allow for as many questions as possible, please limit yourself to one question and one follow-up. One moment while we poll for questions. Our first question is from Nathan Jones with Stifel. Please proceed. Avner Applbaum: Good morning. This is Adam Farley on for Nathan. Renee Campbell: I wanted to start on the Adam Farley: infrastructure margins. Very standout performer in the quarter at 17.8%. And I believe that's an all-time record I know you guys have had a number of ongoing margin improvement initiatives within the company over the last couple of years. Could you maybe talk about the most impactful of these initiatives and where the main opportunities remain to continue to expand margins. Tom Liguori: Sure, Adam. Thank you for the question. So if we if we go back the last two to three years, the margin benefits have been a combination of pricing and cost. You know, pricing, we are the market leader did provide value-added engineering. On-time delivery, and and scale, and and customers are are willing customers value that. Cost, you know, when Avner started, he took a number of cost actions. And they have dropped through the bottom line. So that's why you see you know, a good trend in our operating margins going forward. From here onward, it really gets back to the the value drivers. You know, our utility expansions, we're very excited about that. And every incremental revenue dollar contributes over well over 20% of operating margin But we also have good things going on in the agriculture group. You know, we have the aftermarket which is basically spare parts growing, and that's because of the e-commerce and ease of ordering that we've allowed with the farmers. And that's at higher margin product. We also have our Accent 365, which is a recurring revenue type model. And so if you think about it, it's really going forward higher mix, higher higher margin mix of of our revenue. And in general, when you look at the the value drivers, they are gaining traction but it's the early days. You know? I'd say we're in the the second innings of of really reaching the potential of those. So I hope that answers your question, Adam. Adam Farley: Yeah. Thank you for that color. It's very helpful. Yes. Maybe we can talk a little bit about the capacity additions in utility. It looks like the business might be tracking above the $100 million of additional revenue for every $100 million capacity. So maybe could you just talk about if if you're if that's true, and then maybe just if there's any potential upside to the capacity additions and utility. Avner Applbaum: Yeah. Absolutely. Let me let me take that question. And I'd like to unpack that a little bit and just just, there's a lot of questions around capacity, so I'd like to give a a bit of an overview. Well, to answer your question, first of yes, additional opportunity for us to drive continuous growth and overall while we gave the benchmark of $100 million we are on track to exceed that number. And invest over the next several years to drive increased output. But let me just address the capacity for for a moment. When you look at our capacity, I I bring it out to three layers. Right? There's the physical capacity, which is our plants, our equipment, available hours. There's the operational capacity, which is the efficiency of the flow and the supply chain performance. Then, of course, there's the commercial capacity. You talk about our ability to quote, engineer, and deliver quickly. And it's not static. It flexes every day based on product and customer make. And we are operating at a at a high level of utilization levels, Our plants are running efficiently. But we maintain flexibility to manage mix changes, respond quickly to surge in demand. So we never wanna be completely full that you lose your agility, and we continue to add to capacity as the demand grows. Through our brownfield expansions, through automation, process improvement, so we can stay responsive to our customer Tom Liguori: needs Avner Applbaum: while we still maintain efficiency. So with goal to protect our delivery performance, also we have to make sure that we could support our customers if they have storms or emergency or needs. So Tom Liguori: to stay ahead, we're we're continuing to invest. Avner Applbaum: We have plans to invest in 2025. We're really well on our way for our investment to drive growth in 2026, and beyond. To continue to drive We've shown that there's strong demand in that area, up around 9% in transmission, and our goal is to keep investing in that space. So to sum it up, capacity, it's a system. It's capital. It's people. It's technology. They all work together. We're running efficiency efficiently. Scaling intelligently, and we're positioning Valmont Industries, Inc. to capture the infrastructure growth while we maintain the agility that our customers depend on. Adam Farley: That's great color. Thank you for taking my questions. Operator: Our next question is from Chris Moore with CJS Securities. Please proceed with your question. Tom Liguori: Hey, good morning, guys. Thanks for taking a couple. Chris Moore: Yeah. May maybe just start on utility. I've very strong, 12.3% growth. You called out pricing and volume. Were they relatively equal contributors to that 12.3%? Tom Liguori: Yes. Yes. And the, you know, the pricing goes back do you remember the tariff? Actions we took in Q1? Part of the what enabled us to be profit neutral from tariffs is was on pricing. So know, those orders were placed in Q1. They were shipping in Q3. So half of this is pricing and half is volume. Chris Moore: Got it. And Go ahead. I'm sorry. Okay. Got it. Tom Liguori: No. I was just saying that would continue into Q4. Chris Moore: Very helpful. And for for SG&A, was know. It's 16.9%, something like that, of of of Operator: Is that sub 17%, is that a Chris Moore: Revenue in Q3. is that a target moving forward? Is that a is that Renee Campbell: know, Chris Moore: realistic, over the long term? Tom Liguori: That's realistic, and that's where we'd like to be. I mean, there will be ups and downs in any given quarter. But but, yes, Chris, that is realistic. Chris Moore: Perfect. I will leave it there. I appreciate it. Operator: Our next question is from Brent Thielman with D. A. Davidson. Please proceed. Tom Liguori: Hey, great. Thanks. Brent Thielman: Good morning. Great quarter. I guess just a question on the agriculture business. It looks like the backlog is lower, but I know the project business can be sort of episodic. Are you are you seeing sort of industry fundamentals right now Adam Farley: impacting the project Brent Thielman: business pipeline? In other words, are those opportunities sliding? Should we read too much into this backlog? Just trying to get a sense for that. Avner Applbaum: Yeah. It's a it's a good question. And you know, when you look at our project business let me start off with, like, there there there's no change in in the market environment. When the market environment continues to support the need for food security really in that region. And that's the demand driver, which is different than what we've seen in, like, North America and and Brazil, which is more the the crop prices. So the the market continues to be strength. Our pipeline is is strong. And, actually, we have a pretty good and diverse pipeline right now. So it's not just Middle East. It's not North Africa. It's South Africa. It's it's a more broader pipeline. We're really pleased where it is where where it stands right now. We'll support our 2026 goals. What we always need to keep in mind, there's always project timing Last year was more back-end loaded. This year was more front-end loaded. So these things move overall, but you know, we're happy year to date. We're we're up double digits. And we're looking forward to another strong year in the in that in that part of the world. Brent Thielman: Okay. Appreciate that, Avner. And I guess, Chris Moore: know, a lot of good things going on in the infrastructure segment. I guess I'll I'll pick on L and T just a little bit. I mean, when you look at your your backlog within the the overall group and or sort of order trends, lighting transportation? Is there anything Avner, to point to which might suggest some stabilization on the horizon? Or you're sort of expecting, you know, some softness to continue here? Avner Applbaum: Well, that that's a fair question. You know, we we've seen in in the lighting and transportation, continued softness in lighting, particularly in Asia Pac, as well as weaker construction activity. In North America, again, also, lighting's been a little weak, but transportation Brent Thielman: continues to Avner Applbaum: be steady driven by the need for for critical infrastructure. But but the reality is that this business should perform better We did have some operational issues. But we've we've made meaningful progress on reshaping this business. We have new leadership in place. We have a simpler structure. We have a strong alignment between our commercial and operations team. And focusing on our factory performance, delivery, and discipline. All of these areas are improving, and we're seeing early traction. Some of these elements are they they're not gonna be overnight. So some could take a little bit more time to play out. But, really, what matters is the foundation is solid. We have clear plans, and we're confident in the direct direction and the momentum we're building So overall, if I sum it up, I'd say transportation's healthy. Actions we're taking to strengthen the business are are in play. And these and then we will see growth as these challenge as yeah, as these challenges, take place. Tom Liguori: K. Great. Thank you. Our next question is from Brian Drab with William Blair. Please proceed. Brent Thielman: Hi, good morning. Thanks for taking my questions. I did want to go back to utility just Tom Liguori: for a minute. And Brian Drab: you know, the reason is just that the this is, obviously, a topic of of a lot of discussion right now for you given part, the, you know, the history of what what the last know, one of the last booms in demand for utility resulted in too much capacity coming online, and you really did a good job addressing that today. But I was just wondering if we could talk a little bit more about you know, why is the expectation and why why have you achieved, as Tom said, you know, well over 20% incremental margin operating margin on the utility capacity that's coming online. And I I maybe I should clarify too. You are talking about operating margin. And you know, in the past, it's been much lower than that. So, you know, can you can you just talk a little bit about why why is the margin that high? And and what you're seeing in a little more detail across the industry? That gives you confidence that people aren't bringing on too much capacity. Avner Applbaum: Perfect. I'll I'll I'll take I'll take that, and then Tom can share more information around the the margins. And and, actually, I'm glad you brought that up. Since I I spent already a time on the capacity, our internal capacity, but it is really important to understand the dynamics around the industry capacity because we do get that question a lot. So the simple truth is it's a high bar approval driven industry. It's not about building a plan. You know, it's it's about decades of of engineering know-how, certified well procedures, material science, and the ability to design and deliver, you know, the safety critical grid structures. And utilities, they don't add suppliers overnight. Every facility, every product line need to be qualified and approved. Before they can supply one transmission or or substation project. It takes time. You need proven field performance. You need deep customer relationship that build through for us, built through thousands of on-time delivery and problem solving in the field. And it's also an industry there's only a few players that have the financial strength, supply chain depth, technical engineering capabilities, to really meaningfully add capacity. Mhmm. They're long lead, high investment programs. You need capital to build. You need people to execute. And you need the customer trust. And we're one of those few players, and we're actually the leader in this space. And as I just mentioned, right, we have we have our our healthy utilization of capacity at this time. So overall, I'd say the barriers to entry here are real. Engineering, capital, manufacturing, supply train, and trust. And you know, we we manage and we monitor that, the industry capacity very close And we could see its balance today. And even if at some point, you know, the industry adds a little bit too much, demand will catch up quickly. So So overall, we we we feel good of where we are. We we good on where the industry is right now. And we're in a strong position to maintain our leadership in this space. So that's how we kind of we look at the industry capacity and Tom can just share a little bit about the margins. Sure. Brian, on the margins, very healthy margins. Tom Liguori: From capacity expansion. We have good pricing for the reason that Avenue just said. Our engineering capability, our on-time delivery, our scale, But also keep in mind, these expansion projects, they're brownfield. So we're taking our existing plants, and we're adding welding stations, break presses, and other capital equipment. So we're getting more throughput from existing plants. So we get the benefit of you know, basically better fixed cost absorption. So both pricing and for closer brownfield is why we get over 20% operating margin. Brian Drab: Okay. Thank you. And then for my follow-up, can can you just put a little bit of a finer point on what is driving current demand in utility across the different product lines in terms of maybe you know, large transmission structures substations, you know, and other categories and and you know, is is it are you start starting to see demand you know, specifically related to the you know, AI data center boom and tying those, to the grid. Avner Applbaum: Yeah. Thanks. So we're we're seeing strong demand across the board. Right? And and, first of all, in all product lines, transmission, distribution, substations, large projects, smaller projects, All these all these megatrends are real. You know, if you're talking about the electrification, Chris Moore: AI, Avner Applbaum: grid connectivity, resiliency, everything that we've been we've been talking, about, the the load growth that we we haven't seen in a while, And, of course, AI and and data centers are a key driver as well. We know they're they're a large consumer of of energy. So we we don't see slowness in in any area. All of our customers are are showing extremely strong demand where our backlog is well into, 2026. And and the the good thing right now, it's not one single driver. And it's not one single, customer. Right? It's it's very broad. And all indications are that this this will continue to for a while on all the transmission and then you'll add another legs to that when they're ready to focus more on on hardening and reliability and so, overall, to to sum it up, I mean, we are very excited around where the utility space is today with with the strong drivers and our ability to execute based on our relationship with our customers, our engineering, manufacturing, that that makes us a key partner to our customers. So overall, feel very positive. Brian Drab: Great. Thanks thanks very much. Operator: As a reminder, it is star one on your telephone keypad. If you would like to ask a question. Our next question is from Tomohiko Asano with JPMorgan. Please Brian Drab: Good morning, everyone. Avner Applbaum: Good Good morning. Brian Drab: Thank you for taking my questions. My first question is Tomohiko Asano: utility segment pricing. You mentioned recent favorable price in the U2D segment. But could you provide more color on outlook pricing trends, especially you talked about the three types of capacity expansions? And and competitors also expanding capacity going forward. How like, would we think about the stepping up for the pricing trends for 2026 or beyond? Could you could we get more color on this, please? Tom Liguori: Sure. So the pricing I told them, The pricing in this quarter most of it is because in the beginning of the year, with our tariff mitigation plans, it was both supply chain changes, but we passed it on pricing. And there's a delay from when you bid and and when these products ship. We're seeing, part of that. Going forward, you know, that will continue. You know, our head of utility often talks about the bid market. The bid market is very strong. The demand supply remains tight. We are quoting, you know, very healthy margins and winning projects. So know, I think pricing outlook remains strong for for at least the foreseeable future, if not for some time. Tomohiko Asano: Thank you, Tom. And my question's on agriculture margins. So regarding the decline agriculture margin, you mentioned it was due to lower sales and bad debt expense of $11 million Do you expect these levels of bad debt expense to continue in the fourth quarter and beyond? Tom Liguori: Yes. So that's a really good question. I'm glad you asked that. So we worked with the Brazil team this this quarter know, about exposures, and we did we thought it was prudent to to book the 11 million of receivable Chris Moore: reserves. Tom Liguori: But we are still attempting to to make those collections. You know, if we take that out, operating margins for ag are about 14%. So there are a few remaining issues that we're working to bring to resolution. In the fourth quarter, and that is reflected in our guidance. And our whole intent here is to get these exposures behind us financially and put in processes so that, you know, they don't repeat, and we we feel very good about that. So I think when you look at ag operating margins, you know, Q4 could be another challenging quarter. But when we get into Q1, we believe we'll have these issues behind us. And even with the Tomohiko Asano: the the current revenues, we had flat revenues in Q1. You would see a double digit Tom Liguori: operating margin, and that's what we would expect going forward. Thank Tomohiko Asano: That's all I have, and congrats on quarter. Renee Campbell: Thank you, Chamuku. Operator: We have reached the end of our question and session. I will now turn the call over to Renee Campbell for closing remarks. Renee Campbell: Thank you for joining us today. A replay of this call will be available for playback on our website and by phone for the next seven days. We look forward to speaking with you again next quarter. Operator: These slides and the accompanying oral discussion contain Jean Velez: forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on assumptions made by management considering its experience in the industries where Valmont Industries, Inc. operates. Perceptions of historical trends, current conditions, expected future developments, and other relevant factors. It is important to note that these statements are not guarantees of future performance or results They involve risks, uncertainties, some of which are beyond Valmont Industries, Inc.'s control, and assumptions. While management believes these forward-looking statements are based on reasonable assumptions, numerous factors could cause actual results to differ materially from those anticipated. These factors include, among other things, risks described in Valmont Industries, Inc.'s reports to the Securities and Exchange Commission, SEC, company's actual cash flows and net income, future economic and market circumstances, industry conditions, company performance and financial results, operational efficiencies, availability and price of raw materials, availability and market acceptance of new products, product pricing, domestic and international competitive environments, geopolitical risks, and actions and policy changes by domestic and foreign governments. Including tariffs. The company cautions that any forward-looking statements in this release are made as of its publication date and does not undertake to update these statements except as required by law. The company's guidance includes certain non-GAAP financial measures, adjusted diluted earnings per share and adjusted effective tax rate, presented on a forward-looking basis. These measures are typically calculated by excluding the impact of items such as foreign exchange, acquisitions, divestitures, realignment or restructuring expenses, goodwill or intangible asset impairment, changes in tax laws or rates, change in redemption value of redeemable non-controlling interest, and other nonrecurring items. Reconciliations to the most directly comparable GAAP financial measures are not provided. As the company cannot do so without unreasonable effort due to the inherent and difficulty in predicting the timing and financial impact of such items. For the same reasons, the company cannot assess the likely significant of unavailable information, which could be material to future results. Operator: This concludes today's conference. You may disconnect your lines at this time. And thank you for your participation.
Operator: Good day, and welcome to the Community Bank System, Inc. Third Quarter 2025 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch-tone phone. To withdraw your question, please press star then two. Please note that this event is being recorded and discussion may contain forward-looking statements within the provisions of the Private Securities Litigation Reform Act of 1995 that are based on current expectations, estimates, and production projections about the industry, markets, and economic environment in which the company operates. These statements involve risks and uncertainties that could cause actual results to differ materially from the results. Refer to the company's SEC filings, including the Risk Factors section, for more details. Discussion may also include references to certain non-GAAP financial measures. Reconciliations of these non-GAAP measures to the directly comparable GAAP measures can be found in the company's earnings release. I would now like to turn the conference over to Dimitar Karaivanov, President and CEO. Please go ahead. Dimitar Karaivanov: Thank you, Bailey. Good morning, you all, for joining our Q3 2025 earnings call. We had an excellent quarter. Strong and diversified revenue growth remains a core differentiator for our company. Market share gains across all of our businesses continue. We remain focused on expenses even as we are making a $100 million investment in facilities, talent, and technology across all of our businesses. Risk metrics remain excellent. The strength of our capital, liquidity, and credit continues to provide the base for our growth. All in all, record operating earnings per share of 23.9% year over year. I'd like to highlight a few recognitions to give you a better sense of where our businesses stand in terms of capabilities and reputation. Our Employee Benefit Services business, BPIS, was recognized again as one of the top five record keepers nationwide by the National Association of Plan Advisors. Our insurance services business, ONE Group, ranked as the 68th largest property and casualty broker in the country by the Insurance Journal. ONE Group is now the third largest bank-owned broker. In our wealth management services business, Nottingham Advisors was recognized as a five-star Wealth Management team by Investment News. Our banking business, Community Bank, was recognized by S&P Global as one of the top 20 banks in the country in their inaugural deposit rankings. Also importantly, the culture and values of our company and people led to our recognition by the United Way of Central New York with their Community Champion Award. All of these things matter. They make a difference. They make us who we are and lead to the results you see. We have deep national-level talent and capabilities, are now becoming nationally recognized. We have also been fortunate to have excellent capital deployment opportunities year to date. We are on track to deploy approximately $100 million in cash capital in transactions that push forward our strategic priorities. Diversified higher growth subscription-like revenue streams in insurance benefits or wealth, and for the banking business, strong funding and liquidity in attractive high-priority markets. You will note that this quarter, we also provided in the press release the tangible returns for each one of our businesses. I believe those speak for themselves and are largely self-explanatory for our capital allocation strategy. The pretax tangible returns for the quarter were 63% for insurance services, 62% for employee benefit services, 48% for Wealth Management Services, 25% for banking and corporate. We will continue to aggressively pursue similar opportunities to deploy capital at high tangible returns. I am optimistic that we will continue to do so, in particular in our insurance and wealth businesses. In addition, we also have the opportunity after our prior earnings release to buy back approximately 206,000 shares at what we believe was meaningfully below intrinsic value for our company. This largely eliminated any share dilution to our shareholders for the year. I will now pass it on to Mariah Loss for details on the financials. Mariah Loss: Thank you, Dimitar. Good morning. As Dimitar noted, the company's third-quarter performance was robust in all four of our businesses. GAAP earnings per share of $1.04 increased $0.21 or 25.3% from the third quarter of the prior year and increased $0.07 or 7.2% from linked second-quarter results. Operating earnings per share and operating pretax pre-provision net revenue per share were record quarterly results for the company. Operating earnings per share were $1.09 in the third quarter as compared to $0.88 one year prior and $1.04 in the linked second quarter. Third-quarter operating PPNR per share of $1.56 increased $0.27 from one year prior and increased $0.15 on a linked quarter basis. These record operating results were driven by a new quarterly high for total operating revenues of $206.8 million in the third quarter. Operating revenues increased $7.6 million or 3.8% from the linked second quarter and increased $17.7 million or 9.4% from one year prior, driven by record net interest income in our banking business. The company's net interest income was $128.2 million in the third quarter. This represents a $3.4 million or 2.7% increase over the linked second quarter and a $15.4 million or 13.7% improvement over 2024 and marks the sixth consecutive quarter of net interest income expansion. The company's fully tax-equivalent net interest margin increased three basis points from 3.3% in the linked second quarter to 3.33% in the third quarter. Higher loan yields and stable funding costs drove increases in both net interest income and net interest margin in the quarter. During the quarter, the company's cost of funds was 1.33%, an increase of one basis point from the prior quarter driven by a higher average of overnight borrowing balance, while the company's cost of deposits decreased two basis points and remained low relative to the industry at 0.17%. Operating noninterest revenues increased $2.3 million or 3% compared to the prior year's third quarter and increased $4.1 million or 5.6% from the linked second quarter, reflective of revenue growth in all four of our businesses. Operating non-interest revenue represented 38% of total operating revenues during the third quarter, a metric that continuously emphasizes the diversification of our businesses. The company recorded a $5.6 million provision for credit losses during the third quarter. This compares to $7.7 million in the prior year's third quarter and $4.1 million in the linked second quarter. During the third quarter, the company recorded $128.3 million in total non-interest expenses. This represents an increase of $4.1 million or 3.3% from the prior year's third quarter. The increase included approximately $2.3 million of expenses associated with the bank's de novo branch expansion and an increase in data processing and communication expenses included a $1.4 million consulting expense in connection with a contract renegotiation with our core system provider. The impact of a consulting item on total managers' expenses was offset by medical rebates and an incentive true-up, which drove a $1.5 million or 1.9% decrease in salaries and employee benefits. In the fourth quarter, we anticipate approximately $1 million of incremental expense driven by the prepayment of charitable contribution commitments in response to tax changes and incentive compensation adjustments contingent on final scorecard items. The effective tax rate during the quarter of 24.7% increased from 23% in the prior year's third quarter driven by increases in certain state income tax. The effective tax rate for the first nine months of 2025 was 23.3%, only slightly higher than the 22.9% for the first nine months of 2024. Ending loans increased $231.1 million or 2.2% during the third quarter and increased $498.6 million or 4.9% from one year prior, reflective of organic growth in the overall business and consumer lending portfolio. The company continues to invest in its organic loan growth opportunities and expects continued expansion into under-tapped markets within our Northeast footprint. The company's ending total deposits increased $580.7 million or 4.3% from one year prior and increased $355.1 million or 2.6% from the end of the linked second quarter. The increase in total deposits between both periods was driven by growth in non-time deposits across governmental and non-governmental customers. Non-interest-bearing and relatively low-rate checking and savings accounts continue to represent almost two-thirds of the total deposits, reflective of the core of the company's deposit base. The company did not hold any brokered or wholesale deposits on its balance sheet during the quarter. The company's liquidity position remains strong as readily available sources of liquidity total $6.6 billion or 240% of the company's estimated uninsured deposits net of collateralized and intercompany deposits at the end of the third quarter. The company's loan-to-deposit ratio at the end of the third quarter was 76.5%, providing future opportunity to migrate lower-yielding investment securities into higher-yielding loans. All the companies and the bank's regulatory capital ratio continues to substantially exceed well-capitalized standards. The company's Tier one leverage ratio increased four basis points during the third quarter to 9.46%, which is significantly higher than the regulatory well-capitalized standard of 5%. The company's asset quality metrics were generally stable during the third quarter. Non-performing loans totaled $56.1 million or 52 basis points of total loans outstanding at the end of the third quarter. This represents a $2.7 million or one-point increase from the end of the linked second quarter. Comparatively, non-performing loans were $62.8 million or 61 basis points of total loans outstanding one year prior. Those thirty to eighty-nine days delinquent decreased on a linked quarter basis from $53.3 million or 51 basis points of total loans at the end of the second quarter to $51.6 million or 48 basis points of total loans at the end of the third quarter. The company reported net charge-offs of $2.5 million or nine basis points of average loans annualized during the third quarter. This represents decreases of $300,000 from the prior year's third quarter and $2.6 million from the linked second quarter. The company's allowance for credit losses was $84.9 million or 79 basis points of total loans outstanding at the end of the third quarter, an increase of $3.1 million during the quarter and an increase of $8.8 million from one year prior. The increases were primarily attributed to reserve building in the business lending portfolio, reflecting the growth in size and volume of recently originated commercial loans. The allowance for credit losses at the end of the third quarter represented over 6x the company's trailing twelve months net charge-off. We are pleased with the third-quarter results and momentum behind recent initiatives that reinforce our commitment to scale as a diversified financial services company. We anticipate closing on the acquisition of seven Santander branches in the Lehigh Valley Market on November 7, which accelerates our retail strategy in the banking services business. A market we anticipate significant growth. Additionally, we are excited to announce a minority investment in Leap Holdings, Inc, which intentionally complements our insurance services business. Looking forward, we believe the company's diversified revenue profile, strong liquidity, regulatory capital reserves, stable core deposit bank, and historically good asset quality provide a solid foundation for continued earnings growth. That concludes my prepared earnings comments. Dimitar and I will now take questions. Bailey, I will turn it back to you to open the line. Operator: We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. 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 Tyler Cacciatore with Stephens. Please go ahead. Tyler Cacciatore: Good morning. This is Tyler on for Matthew Breese. Morning, Tyler. Dimitar Karaivanov: Morning. Tyler Cacciatore: If I could just start on the minority investment in Leap, and I think you touched on it a bit in the prepared remarks. Should we look at this as a first step to something bigger, maybe a precursor to a larger investment if things work out? And are you able to provide what the impacts to revenues and expenses are, as we move forward? Dimitar Karaivanov: Thanks, Tyler. The way I would think about it is we invested in a business that we believe is highly attractive, growing at very high growth rates. But a tremendous team that fits squarely in our thesis to grow insurance services. So we took a stake in something that we really like and love. And, obviously, we would love to have more of it if we are so lucky sometime down the line. But I think at this point, we are where we are in terms of our investment in Leap. So we will see how well the future evolves for us. As it relates to financial impact, I think the best way to think about it is roughly neutral. You know, kind of some of these ins and outs of the way the accounting works kind of leads to that outcome. And kind of given its relative size, it does not really dramatically change things for us. So I would not really expect much in the way of contribution for 2026. Tyler Cacciatore: Great. Thank you. And then moving to deposit costs. If you could just talk about how deposit costs and how the legacy footprint is doing versus more concerted efforts in areas like Albany, Buffalo, and Rochester. Is there a notable difference in the cost of deposits there? And how should we think about the cost of deposits overall moving forward? Dimitar Karaivanov: Yeah. I do not think that we have seen any dramatic difference in the cost of deposits if you are referring to kind of our legacy footprint versus the de novo expansion. We are pursuing very much the same strategies. I will say we are a little bit more intentional around commercial growth in those de novo markets. So that kind of leads maybe a little bit on the margin of higher cost while the retail side kind of builds up, you know, small checking account at a time. And that will take just a little bit more time. That is kind of the strategy. With all of that said, as we have discussed before, our de novo initiative is not really moving the needle in the way of cost of deposits for the aggregate company because of its relative size. Right? So over ten years, we are hopeful that it is going to be a very meaningful contributor to us. But right now, it is not, and it is not going to be for a little bit. And by the time those ten years have come, we are going to have built the retail checking accounts, as I talked about, kind of one thousand dollars account at a time. So right now, our expectation is that the deposit costs are going to continue to trend down with the rate cuts as expected by the market. And the de novo issue does not really impact that trend for us. Tyler Cacciatore: That is helpful. Thank you. And then if I could just squeeze one more in. I was wondering if you are seeing any spread compression on incremental CRE loans and if so, to what extent? And then if you could provide us what your current CRE loan yields are. Dimitar Karaivanov: Yes. So the way I would think about loan yields is everything is priced roughly spread over three or five years, right? So if you look at the three things that we do, now I will touch on not just commercial, but kind of the overall portfolios. I am sure everybody has got a similar question here. If you look at, let us start with the commercial side. Basically have a fixed and kind of a variable component to those, particularly pricing somewhere to 25, you know, to 30, $2.40 all the, you know, pure five-year part of the curve. So as you can easily see, those parts of the curve have moved down dramatically since the beginning of the year. So if you are looking at $3.50 ish million on those rates in the market and you are putting real spread, now you are looking at that high fives. Now low sixes in terms of commercial originations. This quarter was a little bit higher. But I expect that we will continue to kind of see a downtrend in those rates as just the market is evolving. We do have some aggressive competitors on the CRE side in particular. In our markets, particularly in Upstate New York and to some extent, Vermont. And you are seeing, you know, rates there, promotional rates they are now in the mid-fives. That is not where we are, but that is what some folks are in our markets. If you look at our mortgage portfolio, you are typically pricing that kind of two sixty ish to 70 the ten year. So you can do the math. You are kind of in the mid-sixes right now. That clearly also has a trend towards lower. And I expect that we are going to continue to see that. Again, the back book in that product for us is five thirty ish. So there is still plenty of room for us to reprice mortgage cash flows up. And then in our consumer installment lending business, which is our auto business, we basically have new volume rates that are roughly in line with portfolio rates. So growth there is going to be driven by volume, not by rate. Tyler Cacciatore: Great. Thank you. That will be all for me. I appreciate you taking my questions. Operator: Our next question comes from Steve Moss with Raymond James. Steve Moss: Good morning. Morning, Dimitar. Morning, Mariah. Maybe just, you know, off on the loan growth side here, you know, good to see broad-based growth. Kind of as you were expecting here, Dimitar. Just kind of curious, you know, where does the pipeline stand and, you know, are you still as optimistic on growth just given maybe incrementally more competition? Dimitar Karaivanov: Yeah, Steve, we remain very constructive on the growth side. So if you look at our pipelines today, our commercial pipeline is at its highest level it has ever been. So I expect that that will do well, depending on the pull-through, of course. You know, timing matters. But a lot of that pipeline will come to fruition, you know, over the next couple of quarters. When you look at our mortgage pipeline today, the pipeline is actually higher than it was this time last year, which I think says a lot for the execution of our team on the mortgage side well, given the market we are in. And then on the consumer on the auto side, things are a little bit more unpredictable, but typically, the fourth quarter is a little bit slower, so we will see how that goes. If I was to ballpark it today, I would guess that the fourth quarter is plus or minus $20 million or $30 million in line with the third quarter. That will be kind of my high-level guess, but we will see where things shake out. So I think our kind of guidance for the year of 4% to 5% is very much intact. With an expectation for a strong fourth quarter as well. Most of the growth for us has been is and will continue to be market share gains. And we have talked about this before, but for us, I think if you look at how we are performing versus the majority of folks in our markets, we are outperforming. And that is because we are gaining a lot of market share from some of the larger super regionals that we compete with. And I expect that to continue. Steve Moss: Okay. And I guess on the margin front, still have relatively favorable yields with loans. You have got the Santander deposits coming in. Just kind of curious how you guys are thinking about the blended margin here for the quarter. I am assuming the deal might be a little bit more accretive just given loans are kind of trending the right way here, and you can deploy some of that liquidity potentially. Mariah Loss: Hey, Steve. I will take that one. So you are correct. We are thinking about things the same way. I think for us, we are still in the 3% to 5% range that we guided in Q2. As we continue to look at the balance sheet and bring all the moving parts together, including Santander. We continue to hold funding costs, we mentioned, at an industry level of 1.17%. That is really helpful for us as we go forward. We expect costs to stay at those levels and likely even to go lower. As we address exception pricing in line with Fed funds cuts and as Dimitar just noted, price our loan portfolios effectively. So we have been really successful from that perspective. And we do expect the results to come through in the margin with Santander coming on about halfway through Q4. We will have less overnight borrowings, which will be offset by some fixed assets pricing lower. But again, overall, we are pleased with the expansion year to date, and we do expect to see that in Q4 as well. Steve Moss: Okay. And then on the expense side here, Mariah, I think I heard you a $1 million increase in total expenses quarter over quarter, and I am assuming that is excluding Santander. Mariah Loss: Yes, that is correct. So just wanted to give a little guidance on what we are going to see in Q4, given that we are going to prepay some contribution commitments due to some tax changes, as I am sure you are aware. And then just looking at the compensation adjustments we accrued heavily in the first half of the year. And then as we trued up in Q3, we expect that that might increase again in Q4 as we get our final scorecard in line and everything looking like we are going to close-up. Steve Moss: Okay. And then, you know, on the fee income side here, you know, definitely continue to see good growth with employee benefit services. Just kind of curious, you know, Dimitar, I am assuming it is steady as she goes, but just you know, anything unique with that business that maybe adds a little more upside or I mean, the market has obviously been favorable to help in asset growth. So I am assuming, you know, pretty much regular investments and regular trends. Dimitar Karaivanov: Yes. I think on the Employee Benefit Services, Steve, we have a little bit more seasonality out in Q4. Because a couple of the acquisitions that we did over the past eighteen months that have a lump in revenue in October as they complete the work. That may even out a little bit more next year, but right now, I think Q4 assuming the market values stay where they are, I expect it to be better than Q3. Steve Moss: Okay. Great. So all my questions for now. I will step back in the queue. Operator: Our next question comes from David Conrad with KBW. Please go ahead. David Conrad: Yeah. Hey. Good morning. Just kind of a little bit of follow-up question on NIM. Just want a little bit of color on the investment portfolio. It looks like it went down quarter over quarter in yield and we are kind of down at the low 2% level. So maybe just an outlook there and maybe cash flows or what the duration is and where we can go from yields from here. Dimitar Karaivanov: I think David's on the investment portfolio, some of that noise is due to dividends that we receive from the FHLB or the FRP. So the timing of that kind of impacts some of those yields quarter over quarter. So we have not really made any meaningful purchases in that portfolio nor do we expect to do any meaningful purchases. The vast majority of it is treasuries. So they kind of yield what they yield. So generally, fairly steady. We are going to provide a little bit of refreshed disclosure in our investor deck that we are going to file in terms of the cash flows. But you can think of it as 2026. It is roughly $350 million cash flows. Heavily, heavily weighted towards the fourth quarter. 2027, we have over $600 million. '28, it is another $600 million. Net's another $300 to $400 million in 2029. These are all treasury maturities. So we know we are going to get, when we are going to get, and we know what it yields. So those will be the cash flows that for us ultimately, they are going to have two uses. Highest and best use is for us to redeploy those into loans. Which is Plan A. Plan B is if loan growth or opportunities are not attractive at that time, we are going to be paying down some of our HVLP borrowings. Also, we have turned out to match those cash flows in a meaningful way. So 2027, we have some FHLBs that are kind of in the mid-4s. We have similar in 2028. So if we are not deploying those funds from the treasury securities portfolio, which is kind of roughly one fifty, one sixty ish, you know, in terms of yields. If they are not going into loans, at the very least, we are going to be very additive just by paying down some of the eventual borrowings. And that is going to, if that happens, which is plan B, then you are looking at the balance sheet shrinking and margin going up by default as well. David Conrad: Got it. Okay. Thank you. Operator: Again, if you have a question, please press star then 1. This concludes our question and answer session. I would like to turn the conference back over to Dimitar Karaivanov for any closing remarks. Dimitar Karaivanov: Thank you, Bailey. And thank you all for joining us today. At a conclusion, I would like to note that while both Mariah and I attend a number of investor conferences and events during the year, we consistently find that dedicated one-on-one time with investors and prospective investors is the best way for us to have a well-prepared for and productive meeting. We are very open and available, so please reach out to us if our story is of interest and we will be happy to spend an hour with you. Thank you all, and we will talk to you again in January. Operator: This concludes our conference. Thank you for attending today's presentation. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the Philip Morris International 2025 Third Quarter 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. To ask a question during the session, you will need to press star, one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star, one one again. We do ask that you please limit yourselves to two questions per analyst, and we will take any additional questions if time allows. Please be advised that today's conference is being recorded. I'd now like to hand the conference over to your speaker today, James Bushnell, Vice President of Investor Relations. Please go ahead. James Bushnell: Welcome. Thank you for joining us. Earlier today, we issued a press release containing detailed information on our 2025 third quarter results. The press release is available on our website at pmi.com. A glossary of terms, including the definition for smoke-free products, as well as adjustments, other calculations, and reconciliations to the most directly comparable US GAAP measures for non-GAAP financial measures cited in this presentation are available in Exhibit 99.2 to the Forms 8-Ks dated 10/21/2025 and on our investor relations website. Today's remarks contain forward-looking statements and projections of future results. I direct your attention to the forward-looking and cautionary statements disclosure in today's presentation and press release for a review of the various factors that could cause actual results to differ materially from projections or forward-looking statements. I'm joined today by Emmanuel Babeau, Chief Financial Officer. Over to you, Emmanuel. Emmanuel Babeau: Thank you, James, and welcome, everyone. Following an excellent first half, we delivered very strong results in Q3. We are especially pleased with the performance of our global smoke-free business, with outstanding volume growth for all three of our flagship brands IQOS, ZYN, and VIVE, which together outgrew the global smoke-free industry by a clear margin on year-to-date IMS. Continued double-digit smoke-free top-line momentum and further scale and cost benefits enable us to achieve more than $3 billion in quarterly smoke-free gross profit for the first time. And an adjusted group operating income margin of over 43%, the highest in almost four years. This drove plus 17% growth in adjusted diluted earnings per share to a record 2.24. These impressive results were also delivered in a quarter with elevated commercial spending as we invest in the future growth of our brands. Our growth investments include geographic expansion, and our smoke-free products are now commercialized in 100 markets, including the launch of IQOS in Taiwan this month. We are increasingly deploying our multi-category strategy to enhance growth with all smoke-free brands now commercialized together in 25 markets. IQOS delivered excellent performance, including a very strong growth margin contribution. With Q3 HTU adjusted in-market sales growth, of plus 9% against the high prior year comparison. And plus 15.5% heated tobacco unit shipment growth. This reflects continued strong momentum in Europe, Japan, and global markets. The relaunch of these commercial activities supported a significant Q3 acceleration in U.S. offtake growth to plus 39% as estimated by Nielsen. Enhanced marketing and promotional intensity supported increased trial among legal age nicotine users, with promising level of repurchase intent. Driven by this strong performance in the fast-growing nicotine pouch category U.S. shipments grew by plus 37% to 205 million cans. Ahead of expectation. International can volumes increased by plus 27% or by over plus 100% excluding Nordic countries. In e-vapor, strong VEEV momentum saw total shipment more than doubling on a year-to-date basis. VIVE is now the number one closed spot brand in eight markets, with notably strong performances in Germany, Romania, and Greece. Combustibles delivered a good Q3 with better than expected volumes in both Turkey and Egypt, combining with further strong pricing to deliver a robust top and bottom line performance. Our Q3 performance reflects our position as the global category leader with the ability to drive strong growth and prioritize resources to invest significantly in our leading brands. The increasing overall profitability of our smoke-free business coupled with cost efficiency measures and combustible resilience, places us well on track for another year of double-digit adjusted operating income and earning per share growth in currency neutral terms and even stronger dollar growth at prevailing exchange rates. Turning to the headline financial for Q3. Positive shipment volume, strong smoke-free category mix and pricing resulted in organic top-line growth of plus 5.9% or approximately plus 7.3% excluding the Indonesia technical impact explained earlier this year. Within the high end of our plus 6% to plus 8% mid-term growth algorithm. Adjusted OI grew by plus 7.5% organically and plus 12.4% in dollar term to $4.7 billion with increasing profitability across smoke-free and combustibles, enabling good adjusted OI margin expansion of plus 120 basis points. Adjusted diluted EPS of 2.24 reflect adjusted net income of $3.5 billion and growth of plus 17.3% including a currency tailwind of $0.08 which includes around €0.03 of favorable transactional impact in the quarter. This better than expected delivery reflects the strength of our financial model, with both IQOS and ZYN performing at the high end of our expectation further supported by the resilience of combustible and a more favorable tax rate. Our progress on a year-to-date basis was outstanding with comparable growth above our mid-term targets on all metrics. Organic net revenue growth of plus 7.5% or around plus 9% excluding the Indonesia technical impact was driven by the same factor as the quarter. Adjusted operating income grew by plus 12.5% organically and close to plus 14% in dollar terms to $12.7 billion enabling EPS growth of plus 16%, both including and excluding currency impact. Our year-to-date adjusted effective tax rate was 1% lower than our forecast of around 22% rate for the year, with a higher rate expected in Q4. Turning to shipment volumes, where we again delivered positive growth of plus 0.7% in Q3, or plus 1.8% on a year-to-date basis. Q3 smoke-free volume growth of plus 16.6% was underpinned by the strong fundamentals of IQOS, where HTU shipments grew plus 15.5% to 41 billion units, above our prior expectation even when excluding a shipment timing benefit of around 1 billion unit. A year-to-date basis, HTU shipment grew plus 12%. The excellent volume trajectory of both ZYN and VIVE was again accretive to smoke-free product growth in both Q3 and year-to-date, notably including U.S. ZYN. Cigarette volumes declined by 3.2% in Q3, close to the more favorable end of our 3% to 4% forecast decline for H2, and reflecting better than expected dynamics in Turkey and Egypt. Emmanuel Babeau: Turning to Q3 net revenues in more detail. Growth of plus 7.3% excluding the technical Indonesia impact, reflect the strong smoke-free performance described alongside robust pricing. Total pricing contributed plus 3.1 points with convertible pricing of over plus 8% and a positive IQOS HTU variance offset by the impact of ZYN relaunch promotion in The U.S. The positive mix impact from Smokefree growth drove a further plus 4.7 points. Combustible geographic mix and other factors had an unfavorable impact of 1.2 points, Currency and scope effect had a positive impact of plus 3.5 points. The same dynamic drove strong year-to-date top-line growth, as our three pillars of growth, volumes, pricing, and mix, continue to deliver sustainably. Looking at the Q3 performance by category, both Smokefree and Combustibles delivered strong gross margin expansion. Q3 Smoke Free net revenues grew organically by plus 13.9%, and gross profit by plus 14.8%. Including the short-term impact of Eton U.S. Promotions. Gross margin expanded by plus basis points to 70% in Q3, exceeding combustible by 3.5 points at the current category and geographic mix. This performance was powered by IQOS, with a combination of strong volumes pricing scale and cost efficiency outweighing the dilutive impact of higher device sales in the quarter. While combustible volumes declined by 3%, the business delivered another strong quarter with organic net revenue growth of plus 1% or around plus 3%, excluding the technical impact in Indonesia and gross profit growing strongly by plus 4.8%. This performance epitomizes the continued resilience of our combustible business model with a combination of low single-digit volume decline, robust pricing and efficiency driving top-line and gross profit growth over time. We are well on track to deliver our target of gross margin expansion organically and in dollar terms for the year. The combination of sustained Smoke Free Momentum and combustible resilience drove plus 170 basis points of gross margin expansion overall, to reach 67.9% a record quarterly level since the pandemic recovery of 2021. Our year-to-date performance was outstanding, with the accretive impact of Smokefree growth clearly evident. Smoke-free gross margin expanded by plus three sixty basis points with IQOS again a significant contributor in addition to ZYN's superior U.S. Margin and a growing contribution from Viiv. Combined with a strong combustible performance, we delivered plus two sixty basis points of gross margin expansion for total PMI. Moving down the P and L to OI margin. We delivered a plus 60 basis point of organic expansion in Q3 or plus 120 basis points in dollar term to reach an excellent 43.1%. This reflects the plus 170 basis point gross margin expansion I just covered, partly offset by elevated SG and A cost as flagged last quarter. This includes a substantial planned commercial investment in international markets, beyond the expansion and brand equity of IQOS, ZYN and VIVE. It also includes stepped-up marketing and brand investment behind ZYN in The U.S, following the return to full availability and further investments in our U.S. Capabilities to support the future growth of ZYN and IQOS. We anticipate SG and A cost will increase slightly more than underlying net revenue for the year excluding currency, reflecting this strong reinvestment. Ongoing cost efficiency in both cost of goods sold and SG and A partially offset increased investment. And we remain well on track to deliver our planned $2 billion cost saving objective over twenty twenty four twenty twenty six. Focusing now on our global smoke-free business. Our portfolio is outpacing the industry in the 100 markets where we are present with over plus 12% estimated IMS volume growth year-to-date, compared to less than 10% for the industry. We estimate our volume share of smoke-free product in this market is around 60% And our year-to-date share of category growth is more than 10 points higher than this. With our portfolio of leading premium brands, our share of smoke-free in value term is notably higher. Than this 60%. Our multi-category portfolio is a key strength as we leverage equity and reach of high cost convert more legal edge nicotine user. IQOS generated more than $11 billion in net revenue last year, and its 75% plus share of the growing global heated tobacco category remains stable despite intensifying competition. ZYN, while still small in comparison, is growing notably faster than the category as we benefit from a strong leadership position in The U.S. And rapid progress in international markets supported by a different differentiated and long-term oriented portfolio. The same is true in e-vapor, brand loyalty and repeat purchase for Vive is accelerating growth. IQOS delivered a strong Q3 with plus 9% adjusted IMS growth against a strong prior year comparison, resulting in plus 10% growth year-to-date. As flagged last quarter, we expect double-digit growth in H2, and plus 10% to plus 12% growth in adjusted IMS for the year, including an acceleration in the fourth quarter. This is supported by continuous innovation on devices and including a high focus on brand engagement, an example being the rollout of the limited edition Celletti device in Japan, followed by other market, as part of our CurioSX campaign. Turning to ZYN. Can shipment grew by plus 36% on a global basis, with a presence now in 47 markets. This includes the Q3 launch in Spain, as well as the rollout of small scale pilot in Japan, within BAECO's billing on the strong brand equity and commercial presence of the world's leading smoke-free brand. In The U.S, can shipment grew by plus 37% with a strong acceleration in off take, which I will come back to. Outside The U.S, can shipment grew plus 27%, or over plus 100% excluding the Nordics, with rapid growth from The UK, Pakistan Poland and South Africa. We continue to enrich our ZYN product offering including the progressive rollout of lower strength variant as part of our dry lead portfolio, where we observe a substantial increase in repeat purchase for legal age smokers new to the oral category, versus higher strength product. Moving to e-vapor. This strong momentum continued. With the brand now holding the number one close spot position in eight markets. We delivered excellent Q3 volume growth of plus 91% despite unfavorable regulatory development in Poland. Strong year-to-date volume momentum, including an improved pods to kit ratio driven by repeat purchase, drove increasing operating leverage and scale benefit enhancing profitability. Reviewing now by geography, Europe is the most developed multi-category region with markets such as Italy, Greece, Spain and Romania posting excellent growth within all three smoke-free categories. IQOS continued its strong growth trajectory in Q3, with adjusted IMS up plus 7.3% against a tougher comparison, notably driven by Italy, and supported by innovation on new terrier variants and Livia capsules. PMI HTU shares of the combined cigarette and HTU HTU industry increased by plus 1.2 points to 10.7% with key cities such as Munich, Rome and Madrid all posting very strong growth. We expect a nice acceleration in adjusted AMS growth in Q4. After numerous launches and expansions across the region in the last one to two years, ZYN's excellent early traction continued with share gains across market, including Poland, Switzerland, Greece, and The UK. Within e-vapor, the consumer shift to closed spot continued to underpin growth. These volumes doubled, with the brand now holding the number one post position in seven European markets. In Japan, IQOS continues to grow very robustly, with Q3 adjusted IMS growth of plus 6% again against a strong plus 14% in Q3 last year, and plus 7.6% on a year-to-date basis. This primarily reflects the category growth rate, with twelve month segment share stable at around 70%, notwithstanding a very significant step up in competitive commercial investment and intensity and, as in similar periods in the past, some increased trial of discounted competitor product. As mentioned last quarter, IQOS delivered truly exceptional growth in 2023 and 2024, especially considering the size of the category, is approaching half of total nicotine offtake volume nationally, and more than half in 14 of the top 20 cities. The growth that our business has delivered so far in 2025 is essentially in line with the trend in the years prior. Q3 adjusted IQOS HTU share increased 1.8 points year on year to reach 31.7%, as we continue to innovate on IQOS and plant the first seeds of multi-category deployment with introduction of ZYN in select channels. And location. Turning now to The U.S, which made up around 7% of our global net revenues and 9% of our adjusted operating income year-to-date. Q3 ZYN volume performance was remarkable with an acceleration to plus 39% of the growth according to Nielsen, the fastest growth in the last five quarters. As the fastest growing category in the world's highest value nicotine market, excluding China, we are naturally investing in ZYN, and the category's future growth, where the brand continued to hold over 60% share of volume and two third of value. After posting plus 31% offtake growth across July and August. According to Nielsen. Our Q3 growth was amplified in September to plus 58% by the reacceleration of marketing and promotional support after several quarters of supply constraint. With the growth of ZYN now close to that of the industry, ZYN captured the majority of Q3 category growth in both volume and value terms despite a markedly lower average price for the quarter. Indeed, ZYN was a fast growing brand by dollar retail value across all category in The U.S. convenience channel on both the Q3 and year-to-date basis, as measured by Nielsen, with PMI U.S. Also the same on a manufacturer level as shown here. This emphasizes the strength and power of ZYN franchise with both our retail partners and LegalH Nicotine user, providing an excellent platform from which to drive further growth. As mentioned, we recently implemented a strong step up in overall marketing and brand building activities to support ZYN's presence at point of sale brand visibility, brand equity, and relative price positioning. In Q3, this add a notable skew to promotions. In the supply constrained 2025, only around 20% of these volumes were sold on promotion according to Nielsen, with competitors closer to 50%. With our return to full commercial activity, we expect to maintain a higher level of promotion than H1, as we continue to adapt our marketing mix to provide the appropriate level of support for the brand and the growth of the category. We naturally intend to maintain a clear premium positioning for ZYN, as the leading premium brand. We also look forward to reporting back on future commercial initiative with one example being limited edition variants based on our authorized product range. As part of our re activities, we also decided to launch a special September promotion to mark ZYN's return to full availability. This offered a free ZYN can for legal age consumer purchasing other nicotine product in select location and was designed to target legal age smoker and other nicotine users to increase awareness and trial. This is in line with Zin's mission to grow the nicotine pouch category over the coming years, and we are very happy with the results. The vast majority of those accessing the offer were smokers, or vapers, with improved brand perception and promising level of repurchase intent. This offer accounted for a single digit percentage of our Q3 shipment. Essentially, all the promotional costs of activating the special free can offer including retailer incentives, were booked in net revenues in the quarter. This largely explains the Lower Americas top line, when volumes were growing. With accumulation of relaunch activities this was an exceptional quarter of investment with around $100 million of Q3 specific investment and reduced revenues linked to restarting our commercial engine. The U.S. Nicotine pouch category has been growing at more than 40% over the last eighteen months. And today represents a high single digit percentage of the nicotine market by volume. We believe it has the capacity to become one of the largest category in The U.S. Over the coming years, where we estimate cigarettes are more than 40% of the market, and e vapor in the region of 30%. ZYN is America's number one smoke-free brand by value with a franchise which is second to none. We are investing to support ZYN's momentum both within and outside The U.S. We also hope for a positive outcome from FDA's recently announced plan to streamline the review process for nicotine pouches which should help clarify and level the playing field. As a reminder, the FDA has only authorized 20 nicotine pouch products to date, all of which are under the ZYN brand, and we expect the Tipsak hearing from ZYN MRTP application in the 2026. Altogether, we expect ZYN will continue to be an important growth driver of PMI net revenue and operating income. While the absence of a full commercial program in the first half of this year drove an exceptional level of U.S. Profitability, We expect ZYN to continue delivering best in class margins within PMI. On a more short-term basis, we continue to expect H2 shipment volume growth broadly in line with offtake growth before channel inventory movement. We anticipate a 20 million to 30 million can inventory reduction in the coming months, this impact being effectively delayed from Q3 given strong September promotional activity. We also continue to await the FDA authorization of ICOS ILUMA, which represents by far the most successful product globally in switching cigarette user completely away from smoking. In the meantime, we are continuing with iCO three pilots including the latest location of Jackson, Mississippi, as we also await the renewal of our IQOS three MRTP following the TPSAC meeting earlier this month. Outside of The U.S, Japan and Europe, all three of our Smooth Free category are delivering dynamic growth with Q3 shipments up plus 23% to over 12 billion units. This includes continued strong IQOS performance in South Korea, rapid growth in Pakistan and South Africa and very dynamic multi-category growth in global travel retail and Indonesia. We include further IQOS scarcity of tech shares in the appendix. Moving to combustibles. Our SIGAI portfolio continued to demonstrate its resilience, a strong performance from Marlboro gaining plus 0.4 points to reach a historic high share of 10.9%. International category share declined in the quarter, largely driven by Turkey, following supply chain disruption earlier in the year. However, our share is recovering well sequentially and was essentially stable year to date. Q3 pricing of plus 8.3% came in better than expected with contribution from all regions and notably from Indonesia, Australia, Turkey and Germany. While this was partially offset by unfavorable geographic mix, we now forecast full year pricing a little above plus 7%, with a slowdown in Q3 as expected due to timing factors. Most importantly, and as covered earlier, our combustible business continues to deliver a very robust contribution, with close to plus 5% year-to-date growth profit growth. This is fully in line with our objective of maximizing value over time and supporting the growth of our smoke-free business. This brings me to our outlook for the full year. We are on track for a very strong performance with another year of double-digit growth in adjusted operating income and adjusted diluted earnings per share. This starts with shipments, where we continue to target total PMI growth of around plus 1%. Our fifth consecutive year of volume growth including a cigarette decline of around 2%, smoke-free volume growth of plus 12 to plus 14%. Smoke reshipment growth is more likely to be in the lower half of this range, factoring in the potential inventory adjustments for ZYN I described, and expected IQOS HTU shipments of close to 38 billion units in Q4. This Q4 HTU forecast includes modestly lower channel inventory and a reversal of around 2 billion units, due to timing impact with HTU shipment growth thus broadly in line with our plus 10 to plus 12 adjusted IMS growth forecast for 2025 overall. We continue to forecast organic net revenue growth of plus six to plus 8%, driven by positive volumes smoke remix and pricing. Consistent with smoke-free volumes and given the top-line impact of U.S. Investment, the lower half of this range is also more likely. Excluding the technical impact of Indonesia, our forecast growth would be at or above the high end of our three-year growth algorithm. We expect another year of double-digit organic operating income progression, where we now forecast plus 10 to plus 11.5% growth for the year including the same factor as net revenues. We expect this growth to drive strong adjusted OI margin expansion to land firmly back above 40%. This above algorithm growth in a year of strong investment clearly demonstrates the dynamism of our global growth model. We are raising our adjusted diluted earnings per share forecast to the mid to upper end of our previous currency neutral growth range at plus 12 to plus 13.5%, which translate into plus 13.5% to plus 15.1% in dollar term. This includes an estimated Tencent currency tailwind and we would expect a similar size tailwind for 2026 all at prevailing exchange rates. The 2025 forecast includes an adjusted effective tax rate of around 22% for the year based on the latest assessment of tax dynamic and market. Mix. In Q4, we expect a continued strong performance from our Smokefree business, including an acceleration in 6% currency neutral adjusted diluted EPS growth. In addition, we are upgrading our full year operating cash flow forecast to more than $11.5 billion at prevailing exchange rate subject to year-end working capital requirement. This reflects strong full-year profit delivery and cash conversion and now includes a Q3 dividend payment from our deconsolidated Canadian affiliate. In terms of our balance sheet, we continue to target further deleveraging in 2025 with $0 currency movement, of course, having a potential influence on our ultimate year-end leverage ratio. Given our euro debt position. Importantly, we remain on track for our target ratio of around 2x net debt to EBITDA, by the 2026. Given our strong year-to-date and expected full-year performance, we are well on track to exceed our twenty twenty four twenty twenty six CAGR targets. Which already represent a best-in-class growth profile within Consumer Package Group. With such strong progress already delivered and an exciting growth outlook over the coming years, we look forward with confidence to 2026 and beyond. In summary, our year-to-date performance reflects the strength and momentum of our global smoke-free business, combined with the resilience of combustible. Our smoke-free business is increasingly profitable with IQOS and ZYN leading the way. We remain excited about our future growth potential as we continue to deploy multi-category strategy and invest in our category-leading premium brands. Our financial model is built on strengths across all categories, complemented by proactive measures on pricing and cost efficiencies. This drives our confidence in strong and sustainable adjusted diluted EPS growth in both currency neutral and dollar terms. Our focused capital allocation strategy allows us to not only reinvest at the optimal level to support and elevate our smoke-free portfolio, but also to reward our shareholders. In September, we raised our dividend for the eighteenth consecutive year to $5.88 per share, with growth of plus 8.9% the largest increase since 2013, reflecting our strong year-to-date performance and confidence in our outlook. We look forward to further rewarding our shareholder as our transformation continues. Thank you, and we are now very happy to answer your questions. Operator: And wait for your name to be announced. To two questions per analyst in the interest of time, and we will take any additional questions if time allows. Please standby while we compile the Q and A roster. Our first question comes from Eric Sirona with Morgan Stanley. Your line is open. Eric Serrano: Great. Thanks for the question. I'm hoping to start off with ZYN. I believe previously, you said the goal there was to, in the short term, grow in line with the category. I presume that's in volume terms. Could you clarify that? And, basically, with you know, sort of the extraordinary promos of September having eased a bit in October, We've seen the scanner data at least weaken in October. Not all that surprising, but maybe a little bit surprising in magnitude. So know, I guess, how are things tracking in October? Versus plan. And then, you know, on the IQOS business, you provide some additional color on the mismatch between HTU shipments and IMS. I know there was a pretty tough comp on the IMS side of close to 15%. But any additional color there, would be helpful into what's driving the overshipment. In the quarter. Emmanuel Babeau: Thank you, Harry. Good morning, and thank you for your two questions. So I'm going to start with Zeen and thank you maybe for allowing me to precise or repeat some of what I've been saying. Yes, of course, ZYN is the arch leader of nicotine pouch in The U.S. More than 60% market share in volume, two third in value. It is our role. It is our mission to grow the category, to develop the category, to create the awareness of the category. And of course, as a leader, we will benefit from that. And as I flagged in my remarks, we see a tremendous potential for the category, which over the last quarters have been growing between 30-40%. And the dynamism is still there. So indeed, with our special promotion I'm going come back to this special promotion in a second, we've been further accelerating, I would say, the growth of the category. But the dynamism of the category is absolutely tremendous. And of course, we are very happy as as we said we capture the majority of the growth both in terms of volume and in terms of value. I think what we've seen during this Q3, and that's the way I would summarize things, is on one side, normalization that I'm going to explain, and on the other side, let's be clear. I think we wanted to have a kind of blast effect because we were back with full availability. And, you know, when the leader is back in full force, you just want to let it know. That was his special promotion on on the free can. But first of all, let me comment on back to normal. I think people probably did not fully get it, but during a year of limitation in terms of availability for ZYN, we've been would say, flying at the level of profitability that was abnormal. Because the level of promotion was very low. We flagged the fact that in H1, level promotion was around 20% on price, when the rest of the category and the standard of the category more around 50%. It doesn't mean that we're gonna go to 50%, but it's just to show the difference. But if I look at actually Q3 twenty twenty four, we were with a single digit percentage of promotion, so almost no promotion. And what has been happening in Q3 is just now that we are back to full availability, we want, of course, to capture our fair share of the growth. We are a premium brand. We're still a premium brand. As I think Yatech flagged a few weeks ago, there was a big level of difference because of this low level of promotional activity and the very, I would say, aggressive discount activity from competition. And it was important for us to to go to a more normal level of promotional activity. Certainly not to close the gap, but just to reduce the gap to a more acceptable level in terms of premium. Bazin remain and will remain a premium brand. So this is what I call normalization that happened in Q3. We are going to a normal promotional activity. We is one, not the only, but one of the elements of the mix in order to develop 80% of this free can promotion went to smokers and vapers. And we know that the future growth will come notably from converting these smokers, these vapers to nicotine pouch. And we were happy to do that and we are very, very pleased with the with feedback we are getting from this promotion. Now we acknowledge that this is coming at at a cost, and I've been flagging in my remarks the fact that restarting this promotion, and all this, you know, I would say restart of the machine of pushing Xen at the right level has been costing around 100,000,000 of reduction in sales. And I would say this one, of course, is more exceptional by nature. So I I think really to two elements. One, we are now in a normal situation when in the past quarters we were not in a normal situation in terms of net price positioning. And this kind of one off special, necessarily repeatable promotion that happened in Q3. So that's for explaining what happened in Q3. Now you were asking, okay, what has been happening in terms of consumer offtake? So frankly, first two weeks, I think, have been above 30% or a bit below 30% in terms of consumer offtake. We stay with a very strong growth. And actually, if you look at Q3 without the special free can promotion, we were at 3% sorry, 30% plus growth. So it seems that we are starting the last quarter. On the same strong note as the third quarter in terms of evolution of consumer offtake. Your second question was on September, we are north of 12%. In fact, in terms of HTU shipment growth. So IQOS consumable shipment growth. When we are much closer to 10% in terms of IMS growth. So we expect an acceleration of IMS growth in Q4. But nevertheless, in Q4, we are also expecting to align clearly shipment and IMS. And even I'm not excluding the possibility to have as you know, we manage inventory level here and there. To have shipment a bit below IMS for the year. So that's what is going to happen in Q4. And of course, that is having an impact on the financial performance in Q4. But we are very pleased with the IQOS performance in terms of IMS, which is really the long term driver. And many markets where the brand is is doing superbly well. Thank you. Operator: Thank you. Our next question comes from Matt Smith with Stifel. Your line is open. Matt Smith: Hi, Emmanuel. Thank you for taking my question. Emmanuel Babeau: Good morning, Matt. Matt Smith: Good morning. Wanted to follow-up on your commentary regarding the U.S. ZYN business and better understand the comments in the release about expecting ZYN to maintain best in class or best in group margin structure. Relative to the performance we saw here in the third quarter. You think about the $100,000,000 of investment that took place in the quarter, is that a sustained level of investment or I should say a normalized level of investment that you face a tough comparison against until this time next year? Or are there other considerations we should take into account? Thank you. Emmanuel Babeau: Sure, Matt. Let me clarify again. The €100,000,000 is a one off. Okay? So this is all the cost of this special promotion on one side, relaunching the machine. So this is a one off and nonrepeatable. So that's one element. And then the other element as I said, is the fact that with a new level of promotion activity that's going to be a normal one. Again, I'm not saying we're going go to the rest of the category and the competition that is extremely aggressive, but we will have a significantly higher level of promotional activity versus, as I said, 20% in H1 and single digit in Q3 twenty twenty four. And this is what you should expect in the future. But taking that into account, I'm happy to repeat that we expect ZYN In this new normal or in this normal, I would say, situation to remain very nicely the best in class margin in the group. Matt Smith: Thank you for that clarification. And you talked about the single digit operating profit growth on an underlying basis in the fourth quarter. Can you you provide a little bit more detail behind the drivers behind that? How much of it is related to related timing for IQOS and ZYN versus investment levels remaining high in The U.S. Or other considerations? Thank you. And I'll pass it on. Emmanuel Babeau: Sure, Matt. I mean, the message, if I was to simplify it, is the momentum for the business is going to continue in Q4. So in terms of Smokefree portfolio, expect even IQOS to accelerate. We expect ZYN continue to grow very fast. Of course, we expect a good performance in The U.S, but it goes beyond The U.S. And we also expect this to continue to grow very nicely. So in terms of underlying consumer offtake growth, everything is the same. All the elements in terms of margin are exactly the same. And that there is nothing changed. So this is really what is going to impact the number and the reason why Q4 is going to be lower than the first nine months that, of course, are impressive in terms of growth. I would say, all level in terms of operating income and and adjusted EPS growth is really the move on inventory. Nothing has changed in the momentum. When it comes to combustible, and it's still 50% plus of the group, we expect to be again between 3% to 4% decline in volume, so nothing has changed in our vision of H2. What's going be a bit less favorable is price increase. Because indeed, we expect due to phasing of pricing and so on, a lower Q4. So that's going to impact the quarter. So I'm not saying it's going to be huge because we still have nice price increase expected in Q4, but that would be a bit less favorable than the first nine months. Then below that, expect us to continue to invest at a significant pace behind our portfolio, The growth the potential of growth is outstanding. We want to maximize course, it's coming with investment. And then I also flagged in my remarks that the tax rate will be significantly higher to lend us around 20%, which is our vision today. So that's gonna be significantly higher in Q4 than for the first nine months. To lend us on 22%. And of that is also a negative impact for the Q4. But to be clear, we're not expecting a change of momentum in the business. You have all this technical impact I've just been describing. Bonnie Herzog: Thank you. Operator: Our next question comes from Bonnie Herzog with Goldman Sachs. Your line is open. Bonnie Herzog: Alright. Thank you. Hi, Emmanuel. I am Good morning. I wanted to ask on guidance. You touched on this, but I guess I wanted to clarify a few things. The stepped-up investments in The U.S, is this all Zen related or are you also accelerating spend behind IQOS or the full planned, you know, rollout of Illumina? And is this in any way a pull forward from next year? Should we expect continued stepped-up spend in The U.S. Next year as well? And then as it relates to guidance, I guess I also want to understand the drivers behind your full year dollar EPS growth guidance raise despite the lower operating income growth guidance What are the drivers below the line? And I think I know, but how did those factors change since the beginning of the year? Emmanuel Babeau: Sure, Bonnie. So on the US step up of investment, I mean, is a growth market for us. Thank you for giving me the opportunity to repeat that In The U.S, we are in a unique opportunity. This is a market where we are smoke-free. Basically, we have today the leading brand of the most dynamic category. And hopefully, we are getting close to be able to launch 30,000,000 smokers in this market. So this is a market that is incredibly attractive and where we see a lot of growth in the future. And of course, in line with the potential that we see for this market, we are investing significantly in the country. We are, of course, supporting the ZYN's potential and the ZYN growth. We continue to build the team to be at the right level to promote and develop this very exciting portfolio. That is clearly, you're right, impacting 2025. But that is also certainly something we will continue in the future. So it's not that the investments are stopping in 2025, That will, of course, in all dimension, commercial presence, marketing investment, but of course, also presence in the country when it comes to capacity to work at the state level with the the with the right people. These are investment we are making gradually, and we are indeed continuing to invest behind IQOS to prepare the launch in the future. So all that is absolutely playing in The U.S. And impacting The U.S. On the full year guidance, so yes, obviously, everybody understands, if you take the EUR 100,000,000 and the revision, which is really the new element of this Q3 and the revision of the guidance. Everybody understand where the revision of the guidance is coming. Can I just nevertheless say that there is still the possibility that we finish above 11%, which was the previous guidance? So we'll see how Q4 unfold. And we are raising EPS I mean, let's be clear, we continue nevertheless to expect a very strong growth of OI. And we are also having some as we explained, slightly positive or better views on the tax rate. And I should probably add that interest costs are not evolving in an unfavorable manner, but rather in a favorable manner. So we could be a bit better than what we thought initially. But fundamentally, let's be clear, the EPS growth, the strong double digit, that is coming from the OI growth, okay? That that is a powerful engine that we have, and that is powering very nicely the the company. Well and I think on the cake on on top of that, indeed, you know, tax seems to be evolving in the in the right direction. Bonnie Herzog: Okay. That's helpful. And maybe a quick follow-up question on the free can promo in Zen. Emmanuel, you touched on it. You said it was it a success. Did it actually bring in new consumers to the brand? And if so, I mean, can you give us a sense of what percentage of the free can promo resulted in new consumers to the brand? And then I am curious to hear why you chose to run the promo the way you did versus a BOGO. I guess I'm asking because, you know, did you know, it it result in some of the competitive brands some volume left given your promo, the way it was run. Thank you. Emmanuel Babeau: Look. I'm not going to discuss, you know, how relevant is our commercial policy. And I think we're sharing a lot, frankly, versus that's the remark I was, you know, having the other day. I think that's I was reading what other are saying about what they do. I think we are sharing a lot. So on on the positive, it is, you know, clearly, it will we will need some time to have probably the the full impact. But, clearly, in term of creating the awareness, of the category and of the ZYN brand the understanding, first testing we have some feedback. And remember, you know, we stopped this promotion that many weeks ago, that are extremely positive. And, clearly, we are building new customer for ZYN. I'm not able to, yet at that stage, tell you Oh, but, actually, there are positive impact. On the the Vogo versus what we've been doing, we we could have a a a a discussion, but let's be back to what was here the objective of this free can objective. That was really let's make a big splash. Let's create the blast. We want people to have a first I would say, connection with this category. When you do a buy one, get one free. I mean, you are applying to your consumer, you're not recruiting. You're not creating awareness for new possible customer. I said, but I'm really happy to repeat the potential of the nicotine pouch category is enormous. The category is growing very fast. That is the category that has the potential to be one day as big as vaping, why not as big as combustible? As the leader, it is our role. It is our mission to make it known make it understood, and to contribute to the growth of the category. Are we contributing to other, you know, because they also sell nicotine pouch when we go the nicotine nicotine pouch category. Yes. Probably. But you know what? As the up leader of the category, we are the first beneficial of this promotion. Again, I'm not saying we're gonna repeat it every quarter. You I'm sure you understood that. Was a kind of exceptional moment. But, I think we are very pleased already. Bonnie Herzog: Alright. Thanks so much, Emmanuel. Operator: Thank you. Thank you. As a reminder, and wait for your name to be announced. Again, that is star one one to ask a question. Our next question comes from Faham Pai with UBS. Your line is open. Faham Baig: Hi, Emmanuel. Thank you for taking my hey. Thanks for taking my question questions. The first one from me will will start from heated tobacco. You called out some intensifying competitive activity. I presume you're you're referring to the two product launches in in Japan over the past couple of months. That that are being super supported by heavy promotional activity. I guess the question is, historically, these competitive competitor launches have had a limited impact on on IQOS's performance Do you think it will be similar this time and that IQOS can maintain its high single digit growth in Japan? Emmanuel Babeau: Thank you for the question, Faham. Look, this is not the first time that we see of course, trying things and coming with innovation and more investment. But I think I have to acknowledge that this time, it's probably in some areas. Taking even more intensity, which frankly, and that will be my first comment, we are happy to see because we've been, during a long period of time, the only one in the industry giving the feeling that we thought that it not burn was a fantastic category innovation for smokers with the capacity really to convert smokers and become a big part of the market among smoke-free products and really probably the best solution to convert smokers. So it seems that a growing number of players are getting there. They are improving their product. They work on on innovation. We always thought that, you know, it's a normal development in a category competition would improve and increase their investment. This is happening But at the same time, it's interesting to see that we are in Japan, like in other countries, I mean, we remain extremely stable in terms of overall share of this category. We are north of 75%, and we have been there for the last five, six years. Which is quite incredible because when you have a new segment innovation normally the leader stays the leader for, you know, a long period of time at a high level, but normally losing, you know, a bit of share as there is other offering and and also because lots of this offering is coming at a discounted price. And trying to fish at a low price position positioning, where we're very stable. And actually, Japan is making no exception. You see, and I think we've been showing the data, are very, very stable in terms of share of the category, which obviously is a tribute to the strength of IQOS, to the quality of what we offer, which I believe is a unique experience for the consumer. And therefore, I don't want to be complacent, but we certainly believe that we have the capacity to continue to be a strong leader and maintaining very strong leadership in Japan and in other markets. So there is certainly for us the vision that Japan will continue to be a market where we can grow very nicely. I'm not going to give a guidance now for 2026, but we certainly Japan as a growth market for the future. And I just want to conclude my comment again saying it's really good to see that the industry seems to be putting much more resources behind smoke-free globally. And Eat Notebrand in particular. And again, as a leader of this category, we think it's it's very good news for us. Thank you. Faham Baig: Thanks. Operator: Thank you. And our last question comes from Damian McNeil with Deutsche Numis. Your line is open. Damian McNeil: Just two quick ones from me, please. Just what degree of visibility do you have on the inventory adjustment that you're expecting in Q4 What's the confidence behind that? It's the first question. And then the second question, is what do you see as the sort of a long-term sustainable price premium falls in in The U.S, please? Emmanuel Babeau: Thank you for your question, Damian. First, on inventory adjustment. So again, on I guess your question was both on IQOS and on ZYN. On IQOS, as I said, we are expecting to align our shipment broadly with our end market sales. We expect acceleration in end market sales in in Q4. We are close to 10%, a bit above at the September. So that will drive the level of adjustment. Plus, as I said, the fact that notably in Japan and depending on the situation on logistic and how things evolve, but we we may want we may want to reduce a bit more. The level of inventory. I'm not saying it's going to be very material, but that means that we could have shipment even slightly below adjusted in market sales for the year, we'll see. And in my remark, I said that we expect around EUR 2,000,000,000 stick adjustment for Q4. So that's for IQOS. When it comes to ZYN, we flagged the fact that in this market coming back to normal, there was a higher level than normal of inventory at the level of wholesaler and distributor notably that we expect to adjust in the coming months 20,000,000 to 30,000,000 cans. We were actually expecting that to happen at the September. But given the fact that we were in high promotional activities, it did not happen. So I would tend to believe that this is going to happen in Q4, but what happened in September is pushing me to be a bit more cautious on the certainty that this adjustment that will happen ultimately is going with 100% starting to take place in Q4. But that would be nevertheless my my expectation. On the ZYN premium level I mean, of course, I I mean, that's know, something very sensitive. You don't expect me to to give a a number. But I think today's growth of ZYN and the price positioning of ZYN is certainly confirming that ZYN deserve and justify given the franchise, the strength of the brand, the emotional connection with The U.S. consumer that is unique deserves a very nice premium, and we intend to keep a very nice premium in the future. Of course, I won't elaborate on, what it is precisely. Damian McNeil: Yeah. Very clear. Thank you, Emmanuel. Operator: And we do have a follow-up from Faham Baik with UBS. Your line is open. Faham Baig: Sorry, Emmanuel. I just I did have one more question. I I do appreciate the operator bringing me back in. No problem. So my second question thanks, Emmanuel. The second question was on the potential launch of Xinultra in The U.S. So, as you sort of highlighted in your remarks, the FDA confirmed plans, to more efficiently review nicotine pouch applications. My question would be, when do you expect this, process to potentially conclude? We or could you consider launching the product ahead of an approval It seems like some of your peers are. And I just wanted to confirm that this product that is going to be launched in Ultra corresponds to the 2021 application covering the six milligram and nine milligram strengths and the 10 flavors. Emmanuel Babeau: Well, you know, I'm I'm not going to speculate. I think that FDA has been communicating on the on their program to accelerate and give clarity on on on on on some of application that it could accelerate. So I'm not going to speculate on what's going to happen. But certainly, we are hoping for the FDA to create a level playing field. And ensure that all competitors can come with their product and not, you know, be at a disadvantage because because some would be on the market and other will not be allowed. So that's something that we hope to happen as soon as possible and of course in the coming months. We are monitoring the situation. We see what other competitors are doing. We are considering all options, but as I said, I don't have anything else to to add. Again, for us, expectation of the FDA creating a level playing field is really our ask and our priority. I don't think we ever comment on the characteristic of the ZYN ULTRA PMTA. But certainly, these are products that would come with some differentiation versus Xen drive that today enjoy already a PMTA. Operator: Thank you. Faham Baig: Thank you. Operator: Thank you. This concludes the question and answer session. I would now like to turn it back to management for closing remarks. James Bushnell: Thank you very much. That concludes our call today. Thank you for joining us. And if you have any follow-up questions, please contact the Investor Relations team. Thank you again, and have a great day. Emmanuel Babeau: Thank you. Speak to you soon. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
Gary: Good morning, and welcome to Peoples Bancorp Incorporated conference call. My name is Gary. I will be your conference facilitator. Today's call will cover a discussion of the results of operations for the three and nine months ended September 30, 2025. Please be advised that all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star 1 on your telephone keypad and questions will be taken in the order they are received. If you would like to withdraw your question, press star 2. This call is also being recorded. If you object to the recording, please disconnect at this time. Please be advised that the commentary in this call will contain projections or other forward-looking statements regarding Peoples' future financial performance or future events. These statements are based on management's current expectations. The statements in this call, which are not historical facts, are forward-looking statements and involve a number of risks and uncertainties detailed in People's Securities and Exchange Commission filings. Management believes the forward-looking statements made during this call are based on reasonable assumptions within the bounds of their knowledge of Peoples business and operations. However, it is possible actual results may differ materially from these forward-looking statements. Peoples disclaims any responsibility to update these forward-looking statements after this call, except as may be required by applicable legal requirements. Peoples' third quarter 2025 earnings release and Earnings Conference Call Presentation were issued this morning and are available at peoplesbancorp.com under Investor Relations. A reconciliation of the nine generally accepted accounting principles or GAAP financial measures discussed during this call to the most directly comparable GAAP measures is included at the end of the earnings release. This call will include about fifteen to twenty minutes of prepared commentary, followed by a question and answer period, which I will facilitate. An archived webcast of this call will be available on peoples.com in the Investor Relations section for one year. Participants in today's call will be Tyler Wilcox, President and Chief Executive Officer and Katie Bailey, Chief Financial Officer and Treasurer. And each will be available for questions following opening statements. Mr. Wilcox, you may begin your conference. Tyler Wilcox: Thank you, Gary. Good morning, everyone, and thank you for joining our call today. Earlier this morning, we reported diluted earnings per share of $0.83 for the 2025. An improvement compared to the linked quarter. During the 2025, we sold approximately $75,000,000 of investment securities at a loss of $2,700,000 which negatively impacted our earnings per diluted share by $0.06 for the third quarter. We took this opportunity to sell some of our lower-yielding investment securities in an effort to increase our investment securities yields going forward. When compared to the linked quarter, some of our highlights for the third quarter included annualized loan growth of 8%, our net interest income increased nearly $4,000,000 while our net interest margin expanded by one basis point. Excluding accretion income, net interest margin expanded five basis points which marks our fifth straight quarter of core net interest margin expansion. We continue to produce stable fee-based income. Our quarterly net charge-off rate decreased by two basis points while our provision for credit losses declined by over 50%. Our noninterest expenses declined 1%. Our efficiency ratio improved to 57.1%, compared to 59.3%. Our tangible equity to tangible assets ratio improved 27 basis points and stood at 8.5%. Our book value per share grew 2% while our tangible book value per share improved by 4%. And our diluted earnings per share excluding the losses on investment securities we recorded, exceeded consensus analyst estimates for the quarter. As we mentioned last quarter, we anticipated a reduction in our provision for credit losses. For the third quarter, our provision for credit losses declined over $9,000,000 and our allowance for credit losses stood at 1.11% of total loans. Our provision for credit losses for the quarter was driven by net charge-offs, loan growth, and a slight deterioration in economic forecasts, which was partially offset by reductions in reserves for individually analyzed loans. For more information on our provision for credit losses, please refer to our accompanying slides. Our annualized quarterly net charge-off rate was 41 basis points, an improvement from 43 basis points for the linked quarter. The reduction was due to lower small ticket lease charge-offs as we had anticipated. Nonperforming loans declined nearly $2,000,000 compared to the linked quarter end with improvements in both loans ninety plus days past due and accruing. And non-accrual balances. At September 30, non-performing loans comprised 58 basis points of total loans, compared to 61 basis points at June 30. Criticized loans increased by nearly $24,000,000 compared to linked quarter end, while classified loans grew near nearly $34,000,000. We had a handful of downgrades during the quarter, However, we do anticipate some of these credits will be paid off or upgraded in the fourth quarter. The downgrades were among credits that are unrelated from an industry and geographic standpoint, and viewed as isolated issues. We continue to complete our extensive portfolio reviews while recognizing some softening economic indicators in recent quarters. At quarter end, our criticized loan balances as a percent of total loans was 3.99% compared to 3.7% at June 30. Classified loans as a percent of total loans grew to 2.36% at quarter end compared to 1.89% at the linked quarter end. Please refer to our accompanying slides trends in our historical criticized and classified loans. Our second quarter delinquency rates were stable, with 99% of our loan portfolio considered current at September 30 compared to 99.1 at the linked quarter end. We continue to monitor our loan portfolio for impacts from the recent changes in economic conditions and monetary policy and have not identified any systemic negative trends at this time. Moving on to loan balances. We have loan growth of $127,000,000 or 8% annualized compared to the linked quarter end. The most significant areas of growth were in commercial real estate and commercial and industrial loan balances. At the same time, we had declines in construction loans as those projects completed and moved into our commercial real estate portfolio. We also had decreases in our loan in our lease balances the reduction being mostly due to declines in our small ticket leasing balances. Our loan production this quarter arrived as anticipated. As we indicated last quarter, we expected and continue to expect payoff activity to be weighted to the second half of the year. Those payoffs have shifted to the fourth quarter and possibly into the 2026. Our year-to-date loan growth through the third quarter was 6%, and we expect it to come down during the fourth quarter but to remain in our guided range for the full year. Quarter end, our commercial real estate loans comprised 35% of total loans, 32% of which were owner-occupied. While the remainder were investment real estate. At quarter end, 43% of our total loans were fixed rate with the remaining 57% at a variable rate. I will now turn the call over to Katie for a discussion of our financial performance. Katie Bailey: Thanks, Tyler. Net interest income and net interest margin improved by 4% and one basis point, respectively, compared to the linked quarter. The increase in net interest margin was due to higher investment security yields compared to the second quarter. Our investment securities yield improved to 3.79% compared to 3.52% for the linked quarter as we made moves during the quarter to sell some lower-yielding investment securities at a loss and invest in an effort to be opportunistic with our portfolio yields. For the third quarter, accretion income declined to $1,700,000 and contributed eight basis points to net interest margin. Compared to $2,600,000 and 12 basis points for the linked quarter. Excluding accretion income, our net interest margin expanded by five basis points which is the fifth straight quarterly increase in core net interest margin. For the first nine months of 2025, our net interest income improved 1% while our net interest margin declined nine basis points compared to 2024. Our lower net interest margin was due to a reduction in our accretion income which was $7,800,000 for 2025 contributing 12 basis points to margin compared to $20,300,000 or 33 basis points to margin for 2024. Excluding accretion income, our net interest margin expanded 12 basis points. We continue to be relatively neutral in a relatively neutral interest rate risk position, and we will continue to take further action on our deposit costs as market interest rates decline. Moving on to our fee-based income. We had a 1% decline compared to the linked quarter, which was driven by lower lease income and partially offset by higher electronic banking and deposit account service charges. For the first nine months of 2025, fee-based income grew 7% compared to 2024. The improvement was due to increases in lease income, commercial loan swap fee income, and trust and investment income. As it relates to our noninterest expenses, we experienced a 1% decline from linked quarter and were within our guided range. This was driven by lower professional fees, which was partially offset by increases in marketing and franchise tax expense. For the first nine months of 2025, noninterest expenses grew $7,700,000 or 4% compared to 2024. The increase was due to higher salaries and employee benefit costs, coupled with higher data processing and software expenses. Our reported efficiency ratio improved to 57.1% compared to 59.3% for the linked quarter. This was primarily due to higher net interest income for third quarter compared to the linked quarter. For the first nine months of 2025, our reported efficiency ratio was 59% compared to 57.4% for the same period in 2024. The increased efficiency ratio was largely due to the impact of lower accretion income, coupled with higher non-interest expense compared to the prior year. Looking at our balance sheet at quarter end, we had another quarter of considerable loan growth, which was an annualized rate of 8% compared to the linked quarter end. The loan growth outpaced our deposit growth this quarter, bringing our loan to deposit ratio to 88% from 86% at June 30. Our investment portfolio shrank to 20.5% of total assets compared to 21.2% at June 30. This reduction was primarily due to our sales of around $75,000,000 of lower-yielding investment securities which resulted in a $2,700,000 loss we recognized during the quarter. We reinvested about half of the proceeds into higher-yielding securities and used the remainder to pay down our borrowing. We will continue to look for opportunities to improve the yield on our investment portfolio. Compared to June 30, our deposit balances were relatively flat. Increases in our money market interest-bearing demand and non-interest-bearing accounts did not offset declines in our brokered CDs governmental, and savings accounts. Typically, our governmental deposit balances grow in the third quarter. However, this quarter, the inflows were offset by outflows of tax payments. Demand deposits as a percent of total deposits remained flat at 34%. Compared to the linked quarter end. Our noninterest-bearing deposits to total deposits remained unchanged and stood at 20% at both September 30 and the linked quarter end. Our deposit composition was 77% in retail deposit balances, which included small businesses, and 23% in commercial deposit balances. Our average retail client deposit relationship was $26,000 at quarter end, while our median was around $2,600. Moving on to our capital position, Most of our capital ratios improved compared to the linked quarter end. This was due to earnings net of dividends, more than offsetting the impact of loan growth on risk-weighted assets for the quarter. Our tangible equity to tangible assets ratio improved 27 basis points to 8.5% at quarter end as higher earnings and reductions in our accumulated other comprehensive losses increased the ratio. Our book value per share grew 2% while our tangible book value per share increased 4% compared to the linked quarter end. Finally, I will turn the call over to Tyler for his closing comments. Tyler Wilcox: Thanks, Katie. We continue to develop our business organically as we await the right opportunity to grow through acquisitions. We are managing our net interest income and net interest margin through this interest rate cycle have recorded our fifth straight quarter of growth in net interest margin excluding accretion income. We posted 6% of loan growth through the first nine months of 2025, our provision for credit losses declined to a more normalized rate for the third quarter. We generated positive operating leverage compared to linked quarter. For the remainder of 2025, excluding noncore expenses, we expect to achieve positive operating leverage for 2025 compared to 2024 excluding the impact of the reduction in our accretion income, which declined faster than we had anticipated compared to the prior year. Assuming two twenty-five basis point reductions in rates, from the Federal Reserve in the fourth quarter, we expect our full year net interest margin to be in our guided range of between 4.2%. We continue to be in a relatively neutral position so that declines in interest rates have a minor impact to our net interest margin. We believe our fee-based income growth will be in the mid-single-digit percentages compared to 2024. We expect total non-interest expense to be between $69,000,000 and $71,000,000 for the 2025. We believe our loan growth will be between 4-6% compared to 2024. We expect a provision for credit losses similar to the third quarter excluding any negative impacts to the economic forecast. As it relates to 2026, I would like to give some preliminary high-level guidance, which excludes noncore expenses. We expect to achieve positive operating leverage for 2026 compared to 2025. We anticipate our net interest margin will be between 4.2% for the full year of 2026 which does not include any expected rate cuts. Each 25 basis point rate reduction in rates from the Federal Reserve is expected to result in a three to four basis point decline in our net interest margin for the full year. We believe our quarterly fee-based income will range between 27 percent and $29,000,000. Our first quarter fee-based income is typically elevated it includes annual performance-based insurance commissions. We expect quarterly total non-interest expense to be between 71 and $73,000,000 for the 2026 with the 2026 being higher due to the annual expenses we typically recognize during the first quarter of each year. We believe our loan growth will be between 3-5% compared to 2025. Which is dependent on the timing of pay downs on our portfolio which could fluctuate given changes in interest rates. We anticipate a reduction in our net charge-offs for 2026 compared to 2025 which we expect to positively impact provision for credit losses excluding any changes in the economic forecast. We will update this guidance in January at our next call. This concludes our commentary, and we will open the call for questions. Once again, this is Tyler Wilcox and joining me for the Q and A session is Katie Bailey, our Chief Financial Officer. Will now turn the call back into the hands of our call facilitator. Thank you. Gary: We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. Our first question is from Daniel Tamayo with Raymond James. Please go ahead. Daniel Tamayo: Thank you. Good morning, Tyler. Good morning, Katie. Tyler Wilcox: Morning, Danny. Daniel Tamayo: Maybe one for you, Tyler, on, on credit to to start here. I think you said in the prepared remarks correct me if I'm wrong, on the class an increase in the the crit and the criticized and classified loans in the quarter that you expect to have some of that come back in the fourth quarter or or you know, near near term. Can you just provide some clarification or color on on what you what would cause you to to, think that and and kind of size the amount, you know, that 27% increase in classified loans, how much of that you would expect to to revert? Tyler Wilcox: Sure thing, Danny. Just generally, so we to see it's it's a broad variety of kind of results depending on the specific credits. Obviously, we have a a very granular view down into it. Expect some refinances. We expect some property sales. In in these cases. Just to give you a little bit of color in the criticized book, largely based on three loans. There's a, you know, a a varying varying types and varying sizes. In classified books, it's about four loans that comprises the increase. A couple of those three out of those four actually came from acquired portfolios. And we expect the, you know, kind of an orderly sale or an orderly exit from some of those that's timed in the fourth quarter. And so, you know, something on the order of, you know, based on what we now know now, you know, 35 to $55,000,000 in either upgrades or or payoffs in that in those buckets. Daniel Tamayo: Okay. That's helpful, Tyler. Thanks. And then maybe on the on the loan growth side, so you've got guidance coming down a little bit in 2026 at, you know, the 4% level, from what you've done, recently and what you're expecting here in the fourth quarter. Is that is there a particular driver behind that? Is there, like, a pay down assumption that's increasing or or or something else underlying the the loan growth? Odds for '26. Tyler Wilcox: Yeah, Danny. No. Thanks. We assume we get some good questions about that. I I say a couple. Things. One, you know, we're we're maybe slightly below this year's guidance, we're kind of in line with our historic three to 9% where we've been. As we look out in the coming year, obviously, we've been talking for a couple of quarters now about our the pay down activity accelerating, particularly in a in a falling rate environment. That can tend to accelerate you know, sales of completed projects. Refinance activity, investors moving projects to the permanent market, know, there's there's probably a small component of that in there of multi future expected multifamily projects. Cooling off to a degree. And and maybe it's such a consumer softening on the go forward basis as we see kind of increases in auto prices and and a little bit of weakness in the consumer I think the the consumer, I think, all the data would suggest that the kind of top 20% is driving a lot of the activity there. And tend to bank the 80%, you know, more thoroughly. So that's a little bit of the color on kind of where we see things. Daniel Tamayo: That's helpful. And then maybe last one here, just a small one. But know, as we think about the 10,000,000,000 threshold, getting closer to that now, do you have kind of updated thoughts on when you might cross that organically? Tyler Wilcox: We think that's a 2027 event. You know, Now let me say let me be very clear. Absent any other action, so we also think we before we have to move levers outside of just our normal organic growth, we would expect, you know, 2027 to be when we we would face the crossing issue. And then we would have options to obviously keep ourselves under there. You know, my hope is that we would, you know, potentially do a deal before then, but we retain the flexibility and the patients to know, not feel the need to you know, go forward with the deal just because, you know, 2027 is looming out there. Understood. Daniel Tamayo: Thanks for all the color. I'll step back. Tyler Wilcox: Thank you. Thanks, Danny. Gary: The next question is from Brendan Nosal with Hovde Group. Please go ahead. Brendan Nosal: Hey, good morning, Tyler and Katie. Hope you're doing well. Tyler Wilcox: Doing well, Brendan. Brendan Nosal: Just wanna circle back to to loan growth because this one might seem obvious, but just on the the growth for this year and for fourth quarter in particular, given that you're at 6% growth for this year to date and your your commentary around payoffs in the fourth quarter. Mean, fair to assume that spot balances are flat in the final quarter of the year? Tyler Wilcox: Yes. Yeah. The the payoff activity that we expected to kinda materialize in the third and fourth quarter is really kind of you know, bunched up into the fourth quarter and possibly into the first. And so we still think we have a a really good handle on that. We expect record production on this particular on the commercial side and record payoffs. On the commercial side, particularly in the fourth quarter. Brendan Nosal: Okay. That's helpful. And then maybe just kinda circling to the margin outlooks specifically the commentary around the impact of rate cuts I think you're saying three to four basis points per 25 bps I mean, that's if it happens, like, on January 1. Right? If we're getting a a midyear cut, the impact would be less than that. Is that fair to assume? Katie Bailey: That's exactly correct. Brendan Nosal: Okay. Good. We're gonna sneak one more in here. Just on asset quality as it pertains to North Star. Can you just update us on kind of that plateau commentary that you spoke to last quarter? Around North Star loss content And then if things go according to your plan, how do you envision lost content in that book evolving kind of quarter by quarter as we move through next year? Tyler Wilcox: Sure. And thanks for the question. I I think a couple of thoughts. One, we kind of demonstrated in our charts that the continued work as it relates to the high balance accounts, which as we've discussed, kinda correlated correlated highly with the losses in that portfolio. That high balance account, your portfolio is now down to about $1,516,000,000 dollars and continues fall. And obviously, we're not refilling that bucket. And so, you know, the outlook for the the fourth quarter and for the first quarter of next year are that that plateau will kinda continue you know, in the range of where it's been specific to to the North Star leasing charge offs. With our expectation that the portfolio or the plateau will begin to get a little bit of a slope down to it. In that second and third quarter and get to a normalized you know, rate. Right now, the production in that portfolio is obviously not staying the pace with the amortization and the charge offs. And, you know, that's by design as we make as we exercise some credit discipline and stick to our knitting there. So that's where we think we'll end up. Brendan Nosal: Okay. That that's a super helpful glide path. To to have for that part of the the business. Alright. Thank you for taking my questions. Katie Bailey: Thank you. Thanks, Brendan. Gary: The next question is from Nathan Race with Piper Sandler. Please go ahead. Adam Kroll: Hi. This is Adam Kroll on for Nathan Race. Good morning, and thanks for taking my questions. Tyler Wilcox: Hey. No problem. Adam Kroll: Yeah. So maybe just starting on the margin front, given the guide for 2026 for Katie, I was wondering if you'd be able to expand on what offsets you have to your floating rate portfolio if we were to get a few cuts in '26 and maybe what you have in terms of fixed rate loan repricing and securities cash flow rolling off? Katie Bailey: Yes. So as we've shown over the course of 2025, we have been continuously making taking action on the deposit portfolio and predominantly the retail CD product that's within that portfolio. We also have some floating rate borrowings that we'll look to as to provide us some optionality as rates fall. And then the other piece of your question was on the investment securities portfolio portfolio. It's generally trend $15,000,000 to $20,000,000 a month. Of normal cash flow. And I would just say, as you probably had seen in in the balance sheet, we did have some short-term funding in there too. So that chain that flex obviously. As does the variable rate loans. Adam Kroll: Got it. That's that's super helpful. Maybe just another one on North Star. I was wondering if you could quantify the charge off contribution from the high balance accounts specifically during the quarter? Just trying to get a sense of how large of a driver those accounts are as you've meaningfully reduced your exposure over the last few quarters. Tyler Wilcox: In the third quarter here, they were about 25% of the charge offs. We expect kind of 30% for the full year If you look at the, you know, full year projection of where those charge offs will be coming from. Adam Kroll: Got it. And then last one for me on the securities restructure. Is there any sort of earn back or any sort of metric you evaluate your decision-making process and is there any consideration for a larger one? Katie Bailey: So, yes, there is an earn back considered. I think we're about a year and a half on this one. We try to quantify it also from a loss perspective. We don't wanna flush through a significant loss in any given quarter. We want it to be manageable. As far as a more meaningful in size, loss trade, Surely, we have evaluated them. We don't see the need by which to have to do that transaction at this point, and so we have continued to just be opportunistic and periodically look at the portfolio. I would just note this this trade also was what we would call an odd lot trade. There was a lot of small pieces in our portfolio, and so to make it more manageable in number of securities, that was part of this transaction as well. Tyler Wilcox: We've we've done a few of these over the past couple of years, and we've kept them under two years. So we and, you know, kind of as a as a discipline. Katie Bailey: And on the loss side, generally, 2 to 3,000,000 is kind of our appetite in a in a given quarter? Adam Kroll: Got it. That was that was super helpful, and thanks for taking my questions. Katie Bailey: Thank you. Thank you. Gary: The next question is from Tim Switzer with KBW. Please go ahead. Tim Switzer: Hey, good morning. Thank you for taking my question. Tyler Wilcox: Good morning, Tim. Hey, Tim. Tim Switzer: The first one I have is there there's been some noise around the market around consumer behavior and the health of the consumer, particularly, like, the subprime end of, the market. It's just giving you guys exposure in both the deposit and loan side and your commentary about maybe slower growth for consumer in '26. Just curious if you guys have seen any indications of that at all? Or any changes in behavior. Tyler Wilcox: Well, the good news let me start with the good news. We have our our auto portfolio comprises about $700,000,000 and the subprime component of that is about $1,000,000. So we feel really good about our lack of exposure to subprime. Prime in the consumer side, and our average origination yield on the indirect side in the most recent quarter was close to seven fifty. So we're sticking to our knitting there. I will say Tim, that we have seen some, you know, increased surrender activity I think the affordability of vehicles, particularly as know, tariffs are helping finally drive up some of the pricing. Is challenging for consumers. And you know, from from a deposit standpoint, know, I think I don't I haven't seen any, you know, indications of you know, increased utilization of our you know, deposit protection services and overdraft protection services, but we'll obviously monitor that. That would be an outlet for you know, that kind of activity You know, I think there is a lot of pent up demand though for, you know, refis and if we see a falling rate environment, if mortgage rates do fall, see an increase in in refi activity and and probably an increase in home purchases. So, you know, debt to incomes are are kinda going down a little bit year over year. But, you know, we're we're watching it. It's it's, you know, the on the flip side, our indirect losses, I think, last year, we're running at about 88 basis points. And this year, at quarter to date, they're at 70. So, you know, there's you know, I would say that's a result of the discipline and the underwriting. Tim Switzer: Okay. Great. That was very helpful. I appreciate all the color there. And then on your your previous commentary about the $10,000,000,000 threshold not getting there until 2027, If we take the high end of your loan growth guidance for '26, that kinda gets you right to that $10,000,000,000 mark. You know, what are your plans if you have to kind of manage near that level for a while? Is it the you know, run down deposits in the securities book a little bit? Know, I'm just curious how you kinda going to approach that. Katie Bailey: Yeah. I think the securities books book is our first place to look. I think right now, ninethirty, we're at 20.5%. I think historically, we've guided an 18% to 20% range to assets. Obviously, there's some room there. We have some overnight funding and some funding there that we could help manage the asset side. So that those would be the first places we would look. Tim Switzer: Okay. Gotcha. And then one really quick last one. Can you remind us of the c the dollar amount of the seasonality for non-interest income and expenses, it's about 1 and a half million in insurance income in Q1, but wasn't positive about the expenses. Katie Bailey: Yeah. I think you're right. On the contingent or performance-based income we see in our insurance agency. It's generally 1.5% to $2,000,000 or about So that would be the revenue side. And on the expense side, it varies a bit and it's predominantly around contributions to employee health savings accounts some stock activity that happens in the first quarter, both with granting and vesting. So those I'd say that probably is close to the two, two and a half range. Tim Switzer: Great. Thank you, guys. Katie Bailey: Yep. Thank you. Gary: The next question is from Terry McEvoy with Stephens. Please go ahead. Brendan Root: Good morning. This is Brandon Root on for Terry. Tyler Wilcox: Hi, Brandon. Brendan Root: I first noticed quick on loan growth last quarter. Kind a two parter. For C and I loans, can you can you expand that with if there are any particular industries or regions that contribute to to that growth? And on the premium finance side, it looked like they were down year year over year. So was that more strategic, or is that just a reflection of what the market's offering now? Tyler Wilcox: Yeah. As to your first question, I'm happy to report that it's across a broad swath of industries and our geography. And so no no particular concentrations to to note on the CNI, just good broad-based solid C and I growth. Yeah. As to the premium finance, that's more of a timing issue. I think by the end of the year, you know, we'll see some some some growth in that business. And yes, premiums increase in a hardening market, the demand for their services obviously goes up. So we're not We really like that business. It's it's pristine from a credit standpoint. So there are there's no kind of strategic consideration there. On on a reduction. It's just yeah. I would say it's a timing issue as to where that fell in the quarter. Brendan Root: Okay. Got it. Let me try a second. We're I guess we're we're about a month now past the the last rate cut. Can you just discuss any actions taken since then? And then, client's willingness to to digest additional cuts and how that differs from the first 100 basis points? Katie Bailey: Sure. So we meet regularly as a pricing committee. Have taken action throughout the year even in light of the Fed not having moved earlier in the year. And so we're continually evaluating most notably, our retail CD promotional product, which I think right now is a five-month product. Over you know, they're last few years, it's ranged from a thirteen to a five-month product. So we continue to bring that rate down less significant when there aren't rate cuts, but still making taking action to lower that rate over time. And so we're seeing the re of that portfolio as that five-month term rolls off for various clients in any given month. Brendan Root: Got it. Okay. And then just my my last one, from the the benefit of fixed rate, fixed rate asset, repricing, particularly on the loan side, I think excluding accretion, loan yields rose about six basis points last quarter. Is that mid single digit basis point increase on a sequential basis? Is that kind of a good rate to use going forward? Katie Bailey: You're saying for the fixed rate, I think, specifically, so the 43% of the loan portfolio, is that that's what you're seeing that Right. Yep. I think it's dependent on the mix of the loan growth in a given quarter. You know, this quarter, I'll just that we did not have any meaningful growth in our small ticket leasing business, which has high yield. Our premium finance business also did not have growth. They have nice origination yields too. So I think it's dependent on the mix of loan growth in a quarter and, obviously, the pay downs thereof. But would expect it to continue to go up slightly but I can't say that it's 6% every quarter. It's a mix. Brendan Root: Okay. Got it. I I I appreciate you for taking my questions. Tyler Wilcox: Thanks. Yeah. Thank you. Gary: The next question is from Daniel Cardenas with Janney Montgomery Scott. Please go ahead. Daniel Cardenas: Hey, guys. Tyler Wilcox: Hey, Dan. Daniel Cardenas: So couple of quick questions. Just returning to the auto portfolio, if you could remind us what the average FICO score is on that portfolio? And then historical loss rates on it. Tyler Wilcox: Yeah. Average FICO is seven forty six. Dan, historic loss rates, let me pull the right number for you here. One moment. Sorry. I'm just shuffling papers. Daniel Cardenas: Yeah. No worries. And then and maybe as you're shuffling through the through your papers, if if you could give us, maybe an update on the on the health of your restaurant, exposure. Tyler Wilcox: Yeah. So as it relates to the indirect if you this year, it's I mentioned it's tracking at 71 basis points. Year to date, 24, eighty eighty basis points. Year to date, 23, 50 basis points. Year to date, 22, 30. So I think we've been talking about for, you know, basically a couple years now, kind of a a little bit more of a reality of of decline in that book notwithstanding the kinda continued strength of the you know, FICO scores. Your question was about the restaurant portfolio. The size of it. Size and and just the, you know, relative cost of the portfolio. Yeah. So the the McDonald's portfolio specifically is about $389,000,000 in commitments. The non McDonald's is at about $128,000,000 in commitments. You know, the the McDonald's continues to be a really high from for us from a credit standpoint. And, you know, the the the rest of it includes, you know, a broad variety including some acquired loans. You know, we don't really originate much on the restaurant side in the commercial space. So, you know, McDonald's is really our focus as we think about restaurants. Daniel Cardenas: And they're they're showing no no that's not causing you any concern at the moment? Tyler Wilcox: No. It's been it's been quite solid. I mean, it it always depends on, you know, specific operators and specific geographies and, we have had some cases where some of those moved into other buckets as we monitor and watch them. But know, never lost a dollar on a McDonald's deal thus far. And we have good partnership with corporate and good you know, good outlook and good insight into the operators and understanding how they operate. Daniel Cardenas: Great. Perfect. All my other questions have been asked and answered. Thank you, guys. Tyler Wilcox: Thank you. Gary: Again, if you have a question, please press star then 1. Next question is a follow-up from Brendan Nosal with Hobby Group. Please go ahead. Brendan Nosal: Folks. I just wanted to circle back. On North Star. How much of the current reserve balance is like allocated to North Star? And I ask you this because I'm trying to get a sense of, like, as you kind of work to cure that book, like, how much of a a reduction there could be, whether it's, you know, through know, working through the book or or outright reserve releases to get to, like, a a stable reserve to loan ratio? Tyler Wilcox: It's about $18,000,000, Brandon. Of the 75. Brendan Nosal: Okay. Alright. Fantastic. Thanks for you for taking the call. Tyler Wilcox: Yeah. No problem. Gary: The next question is from Ryan Payne with D. A. Davidson. Please go ahead. Ryan Payne: Hey, good morning. Most of my questions have been asked and answered, but, just just one for me here. On capital, I just wanted to gauge your appetite for buybacks and thoughts on m and a and how conversations have been going as we start to see an uptick in deal activity across the industry. So just any detail on priorities you'd offer as you build capital? Tyler Wilcox: Yes, thanks. I think as we think about capital, buybacks are probably we do have an active buyback program. We have you know, exercised it where where appropriate. Our I would say our priority is building up capital in preparation for m and a. And kinda supporting the the dividend. You know, as we think about, you know, m and a, I agree with you. There's a there's a a lot of conversations going on there. We we have a number of conversations, you know, taking place always at varying degrees of of seriousness. But would say we also look to be opportunistic as there's market disruption. We've had opportunities to hire employees. We've had opportunities to you know, look at market share in certain brand you know, in certain locations. And we've also we'll we will pursue, you know, the opportunity even potentially hire teams that are disrupted by, you know, m and a activity that overlaps with our market. So in addition to just being very interested, obviously, in in the using m and a as the catalyst across $10,000,000,000. But we have we have and will continue to exercise strategic patience. We think doing the right deal is a lot of more important than doing the next quick deal. And that's that's kinda how we think about it. Ryan Payne: Awesome. Thank you. I'll step back. Tyler Wilcox: Thank you. Thanks. Gary: At this time, there are no further questions. Mr. Wilcox, do you have any closing remarks? Tyler Wilcox: Yes. I want to thank everyone for joining our call this morning. Please remember that our earnings release and webcast of this call including our earnings conference call presentation, will be archived at peoplesbancorp.com. Under the Investor Relations section. You for your time, and have a great day. Gary: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Kevin Charles Clothier: Good morning. Joining me on today's call is Timothy J. Donahue, President and Chief Executive Officer. If you do not already have the earnings release, it is available on our website at crowncourt.com. On this call, as in the earnings release, we will be making a number of forward-looking statements. Actual results could vary materially from such statements. Additional information concerning factors that could cause actual results to vary is contained in the press release and in our SEC filings, including our Form 10-Ks from 2024 and subsequent filings. Earnings for the quarter were $1.85 per share compared to a loss of $1.47 per share in the prior year quarter. Adjusted earnings per share were $2.24 compared to $1.99 in the prior year quarter. Net sales in the quarter were up 4.2% compared to the prior year reflecting a 12% increase in shipments across European beverage, the pass-through of higher raw material costs, and the favorable foreign currency translation partially offset by lower volumes across Latin America. Segment income was $490 million in the quarter compared to $472 million in the prior year reflecting increased volumes in Europe, and strong results in our tinplate businesses as well as continued operational improvements across the global manufacturing footprint. For the nine months ended September 30, free cash flow improved to $887 million from $668 million in the prior year reflecting higher income and lower capital spending. The company repurchased $105 million of common stock in the quarter and $314 million year to date. When combined with dividends, we have returned more than $400 million to shareholders this year. The company achieved its long-term net leverage target of 2.5 times in September and remains committed to a healthy balance sheet returning excess cash to shareholders in the future. The company continued to perform well in the quarter, with year-on-year improvements in segment income, adjusted EBITDA, and free cash flow. We have seen limited direct impact from tariffs, and remain attentive to the indirect effects that tariffs have had on the global consumer and industrial demand. Considering our strong performance to date, we are raising our guidance for the full year adjusted EPS to $7.7 to $7.8 and project the fourth quarter adjusted EPS to be in the range of $1.65 to $1.75. Our adjusted earnings guidance for the full year includes modest changes to the following assumptions: We expect net interest expense of approximately $350 million, exchange rates assume the US dollar at an average of $1.13 to the euro. Non-controlling interest expense to be approximately $150 million and dividends and non-controlling interest are expected to be approximately $140 million. Remaining unchanged, we expect full-year tax rate of 25% depreciation of approximately $310 million. We now estimate 2025 full-year adjusted free cash flow to be approximately $1 billion after $400 million of capital spending and net leverage to remain close to our long-term net leverage target of 2.5 times. With that, I will turn the call over to Tim. Timothy J. Donahue: Thank you, Kevin, and good morning to everyone. I will be brief and then we will open the call to questions. As Kevin just summarized and as reflected in last night's earnings release, third-quarter results were better than expected. Consolidated earnings per share advanced 13% as the strength of our balanced portfolio drove higher segment income and cash flow in turn lowering interest costs. Strong demand in European beverage and an improving cost structure across the U.S. Tinplate businesses combined to offset weakness across Latin America. Two items to remind everyone of. First, delivered aluminum reached $2.1 a pound last Friday. That is up $0.74 a pound or 54% in the last ten months. Primarily from the increased United States delivery premium. We contractually pass through aluminum so the increased denominator effect will reduce percentage margins, not absolute margins. And this is primarily a North American issue and it had about a 1.25% impact on Americas beverage margins in the third quarter. Second, as most of you are aware, we operate our Brazilian operations through a joint venture. As Brazil profits go up or down, the minority interest that you see on the face of the income statement will also go up or down. The lower minority interest that you see in the third quarter is the result of the lower Brazilian income which is reported in the Americas Beverage segment income. Following numerous quarters of market growth, including 10% in last year's third quarter, Americas beverage volumes were down 5% in the quarter, the result of a 15% volume decline across Brazil and Mexico. The effects of an uncertain and tariff-weary Mexican consumer combined with the coldest Brazilian winter in twenty years subdued demand. We do expect the fourth quarter in Brazil to return to growth and 2026 in Brazil may be bolstered by government initiatives to lower interest rates and provide subsidies to the lower-income populations. As discussed earlier, the net earnings impact to the company is somewhat muted by the reduction in the Brazilian minority interest. North American volumes were mixed in the quarter down 3% after getting off to a slow start in July and August. However, activity rebounded firmly in September, was up 3% shipments to date in October have also been strong. For reference, North American volumes were up 5% Latin American volumes were up more than 18% in the prior year third quarter. European beverage posted a quarter with income 27% above the prior year on the back 12% volume growth. As has been the case throughout the year, growth was recorded in each region of the segment as the can continues to gain share across Europe while in The Gulf States, the emergence of local brands is driving outsized growth. Margins across Asia remained above 17 in the quarter despite lower Southeast Asian volumes at of 3% as Asian industries and consumers alike feel the pinch of higher tariffs to their economies. Transit packaging income remained level to the prior year as increased shipments and continuing cost efforts offset the impact of lower equipment activity. The industrial markets remain challenging, but the transit team is executing well to control costs and generate cash. North American food can benefited from firm harvest demand and efficiency improvements to recently installed capacity. Combined with a lower cost structure and aerosol cans and increased activity in can making equipment, results in other significantly exceeded the prior year third quarter. In summary, performance across the portfolio resulted in another strong quarter. Segment income up 4% and earnings per share up 13% against a very strong prior year third quarter. European beverage reflects the ongoing benefits from overall market growth and substitution. North American food continues to gain from new capacity brought online over the last two years. The balance sheet is strong and when combined with robust cash flow, the company remains well positioned to responsibly return cash to shareholders. And lastly, before we open the call to questions, we had an exceptional year in 2025. As the entire Crown family continues the mission to serve our brand partners and we sincerely thank them. So with that, Elle, we are now ready to take questions. Operator: Thank you, sir. We will now begin the question and answer session. To ask a question, please press star and then the number one. Please unmute your phone and record your name and company name clearly when prompted. You are required to introduce your question. And to cancel your request, please press star and then the number two. Our first question comes from the line of George Staphos of Bank of America. Your line is now open. George Leon Staphos: Thanks so much. Hi, everyone. Good morning. Thanks for the details. How are you? Congratulations on the progress. I guess the question I had, Europe, you grew 12%, as you stated. Share gains, I think, from a pack mix standpoint and underlying market growth can you give us a bit more color? And in particular, should we worry at all about pre-buying lapping tough comps at some point? How long do you see Europe growing at, you know, maybe not 12%, but, you know, at what's been the historical rate given what's been very, very strong growth through the first nine months, and that had one or two follow-ons. Timothy J. Donahue: Okay. So good question, George. It'll allow me to say something that I do want to get out on the call as well. So the third quarter of last year, I think Europe was up 6%, up 12% this year. And George, you've been around a long time like I have. Maybe I have more gray hair, but you know that 6-12% is not the history of the can business. Right? The can business is a low growth business with pockets of outsized growth requiring discipline cash flow is quite high and it gives you the opportunity to generate a lot of value. So anybody expecting the company to grow 12% quarter after quarter or expecting us to grow earnings per share 20% year after year that's not what the can industry is, right? It's certainly much more stable than that. But having said that, I don't think we would ascribe any volume growth that we this year in Europe to pre-buy. I think as we've said before and I know repeatedly Tom and Kevin have told you before the long-term growth rate in Europe has been on the order of 4-4.5%, 4% to 5%. Got a couple of open years in there perhaps when the Germans outlawed cans and some other things, but for the most part, over the last twenty to twenty-five years, it's been pretty consistent the amount of growth. And I just point out that while the segment was up 12% in the quarter. Continental Europe was up more than The Middle East. So this was a European driven growth phenomenon and I think it's largely to do with growth itself. Underlying growth and substitution as we've discussed before. George Leon Staphos: Appreciate that, Tim. Second question, as we think about the year and certainly what looks to be an up fourth quarter versus where we were and where consensus was, how are you thinking about The Americas EBIT overall? At one point in time, you mentioned $1 billion of EBIT. I think, if I'm correct, as being aspirational can you talk about what the outlook is for the year? If you can talk a little bit about in terms of the third quarter or however you want to frame it, what the profit impact negatively was from what you saw in Mexico and Brazil and how that's woven into the billion dollars. And then lastly, in other, and I'll turn it over, was there any pickup from spread? Or is it purely cost reduction and your volume increase that drove the outperformance? Thank you. Timothy J. Donahue: Alright. So you're going to have to stay on the line, George, because you asked a bunch of questions. The first one was long, so repeat the just get me started on the first one again. George Leon Staphos: Basically, the $1 billion of EBIT being Oh, $1 billion, the case and Brazil, Mexico, kind of what impact did they have And then Yes. Yes. Yes. So $1 billion I was prepared to to again tell you this morning it was aspirational. Kevin reminded me this morning that it looks like we will get there this year. Brazil, Mexico, Mexico, we own 100% of our operations, George. Brazil, is a joint venture If you look at the difference in minority interest, which is what, 12 to $15 million if you wanna want to say the impact of Brazil itself was more than $20 million in the in the quarter. And the impact from Mexico Mexican cans, glass was flattish to slightly up in the quarter Mexican cans was also an impact of about $5 million or $6 million in the quarter. More than the total decline in Americas beverage came from Mexico and Brazil. George Leon Staphos: Got it. And spreads in metal and I'll and steel, and I'll turn it over. Timothy J. Donahue: So I don't believe at this time we're benefiting in the third quarter from any spreads in steel, perhaps there were some spread benefit earlier in the year, but in the third quarter, believe we had any. Thanks, George. Operator: Thank you. Our next question will be from Ghansham Panjabi of Baird. Your line is now open. Ghansham Panjabi: Thank you, operator. Good morning, everybody. Morning, operator. Morning. Morning. I guess, you know, if we switch to North America, yeah, I think you said, Tim, volume's down 3%. You know? Sort of a mixed start to the quarter, ended the quarter much better. What do you what do you think the industry did during the third quarter? And and, you know, is is there is there anything else just going on in terms of you know, movement as it relates to promotional spending that's a little bit more episodic, and and so you're seeing that as as your customers adjust things? Or what do you think is going on in the market? Timothy J. Donahue: Does his best to estimate the market. Not everybody reports data, so we have to make some estimates As we said, we were down three in the quarter and Tom's best estimate is perhaps the market was up 2% in the quarter. So we will have underperformed the market Our underperformance is specific to one customer that we pruned at the start of the year. So I'll leave it at that. It was a complicated customer with short runs, a lot of label changes, Frankly, the pricing didn't warrant the complexity put on the factories the inefficiencies put on the factories. So we we didn't participate no longer participate in that account. What do I think is going on with promotions? You know, I well, I tell you, in the summer, Ghansham, it felt like they were they were much more aggressive promoting. Think through the third quarter, even through Labor Day, it didn't feel like promotions. Now you know, we we've got folks that are in supermarkets up in the Philadelphia area, and we're we're down here in the Florida area. So we're not covering the whole country, but it didn't feel like, you know, when you go to the supermarket and you look because it's one thing to your customers to tell you what they're doing nationally, it's another thing to actually walk into stores and seeing the promotions. Didn't feel like it was very they were heavily promoting. I think I think the strength in the market if the market is indeed up 2%, as Tom says, is more about the resilience of the beverage can is more about the experience that the consumer has with affordable pleasures in challenging environment. I think it's it shows the strength of the can and it shows the strength of our industry. And I'm not trying to be promoted when I say that, Ghansham. I just don't I don't see the promotions from our customers driving the growth. I see the consumer just the consumer demand for the product right now driving the growth. Ghansham Panjabi: Okay, fair enough. And then just related to that you know, so just based on what you said about pruning and, you know, some of the adjustments in the market, etcetera, what what's your base case as it relates to volume specific to North American beverage for 2026? I'm just trying to get a sense as it relates to if there's any spillover from the pruning and so on and so forth. And then for my second question on Europe, just given the strength, which has been phenomenal for multiple years. You know, how do you feel about capacity in the region? And and your specific footprint to align with that growth expectations having changed? Pretty nicely over the years. Yeah. So we like our footprint. We're we're very strong in the perimeter. There's some pockets in the central part of the European continent where we're smaller or not present You know, the only thing I would tell you is the the margin opportunity in those regions have not justified us putting capacity in. I think that and we've talked about this before. Because we're on the perimeter and and we're closer we're we're very strong across Mediterranean we do benefit when tourism is up and tourism was up this summer. So it it can go either way, Ghansham, but but this year, we were the beneficiaries of a strong tourism season. I do think again, I said to George, I don't think that and you've been around a long time as well, Ghansham. I don't think anybody should ever anticipate that 12% is a number that you should expect companies in the can business to print every quarter. We may get a quarter or two like that every so often, but but, you know, the the growth rate in Europe is as you said, it's been very nice. 4% to 5% for twenty plus years, we'll take that for the next twenty years. Capacity there are pockets of open capacity specific to one or two regions But by and large, the market is in pretty good shape and and from time to time, the hope is we're all responsible and we pick our moments as to when we want to add more capacity. Ghansham Panjabi: And Beverage North America 2026? Volumes? Timothy J. Donahue: I think as we've said we expect to be up next year. Ghansham Panjabi: Okay. Fair enough. Thank you. Thank you. Operator: Thank you. Our next question will be from Stefan Diaz of Morgan Stanley. Sir, your line is open. Stefan Diaz: Hi. Good morning, Tim. Good morning, Kevin. Hi. Yeah. Maybe just to begin, can you just give more details on the driver's for the better than expected performance and other? I know in the prepared remarks, you said that food cans are strong. Maybe you saw some, you know, green shoots in the equipment business. But maybe, like, on a go forward basis, you know, how should we think about the earnings power you know, in this business? Well, I it's a last year was not a very good year, right? So let's start with the comp is was low I never wanna say anything is easy, but the comp was low. We knew coming into this year we were going to do much better across food and aerosol. Food with some volume gains early in the year And we brought on three new lines over the last couple of years. Two two-piece lines and then and then we have a a three-piece line two three-piece lines that are co-located at a customer facility. And all are operating much better now than they were earlier. Volume growth let's say pet food in Q1, vegetables in Q2, pretty constant volume in Q3, but really a lot of efficiency gain here in Q3 in food. We did close an aerosol can plant last year, so the aerosol structure cost structure is much lower, so we're benefiting from that. And I almost use the term green shoots in my prepared remarks, but I thought better of it. Although I will tell you that equipment sales equipment and tool sales in can making are up In Q3 profitability is up There is growth globally in beverage can and beverage can equipment. It's in a lot of regions of the world that many Americans are not familiar with. But we do operate a global equipment business out of the headquarters in The UK. And green shoots, don't know, it might be too early to say that, but I think we're we're happy with where the business looks like it's going right now. Stefan Diaz: Okay. Great. That's that's helpful. And then maybe in Signode, me if I'm wrong, but I think you expected, like, a $25 million headwind due to tariffs. In that business. I mean, you were able to grow income there modestly. Is is is this headwind still the right way to think about 2025? And, you know, maybe just sticking with Signode, it it seems like revenue declines have been, you know, getting better over the previous few quarters. Do you think the business is in a position to maybe start growing top line as we look into 4Q and 2020 Thank you. Yeah. So just on the revenue, remember one thing, we also pass through material costs in Signode and by and large, that's steel, not tinplate steel, but steel and plastics. So as the price of those commodities move up or down, our revenues move up or down. But in total, volumes would have been lower. Equipment and tools would have been lower. They're higher value items that get sold and there are higher margin items that get sold offset by plastic strap, which was up nicely in the quarter. You know, I'll I'll I'll wait right now before I say we're at a bottom. I think they're there are some things that still need to be sorted out with tariffs and everything else before we get too confident on where we think cross border shipments of equipment are likely to be as we go forward. Tariffs, Kevin and I looked at this the other day. I would say we said that originally we expected $10 million of direct tariffs. I think we still expect that through three quarters we're in the $7 million $7.5 million range. So we expect the 10 Indirect, we said $15 million which was a function of lower order patterns from customers. Given uncertainty and or increased cost for some of the equipment that we make in Switzerland or Finland that would have to come into The U. S. And we are seeing lower equipment and tool sales that are made abroad that would otherwise come into The U. S. So I think that's still a good number. As I said, the transit team doing a really nice job of managing their cost structure, looking for ways to reduce cost, running more efficiently, running more responsibly, The one thing we have delivered to the Signode franchise since we've owned it now for seven years is we brought them back to understanding they are a manufacturing company. And as we try to do in our can business, we've we've put a number of the former can guys in the Signode who are helping them understand the positive benefits of of efficiency and lower spoilage and lower labor hours to make as many or more units. And I think it's paying off. So cost structure a lot lower The opportunity for us to benefit greatly when the industrial markets return is there. I just know, I I don't it's a little too early to call for that right now. Stefan Diaz: Thank you. I'll turn it over. Operator: Thank you. Our next question will be from Christopher S. Parkinson of Wolfe Research. Sir, your line is open. Christopher S. Parkinson: Great. Thank you so much. Tim, when we think about your global we've seen consistent improvements in operating profitability. Could you just do a quick fly by of how we should be thinking about that? In terms of 2026? And where you think you still could be seeing some opportunities obviously, given that just the asset changes in Asia, obviously be one of my one top of mind. And then also in The U. S, it just seems like some of your newer facilities in the last five years continue to operate. A little bit more efficiently. So if you could give us some color there would be greatly appreciated. Thank you. Timothy J. Donahue: Yeah. Listen, think that I think we're gonna continue to improve operations. I mean, it's not a you know, the manufacturing team has goals every year. And the goal is to get better every year. We've described to you before that we typically characterize our plants in one of three buckets, and if you're in the bottom bucket, you're expected to be in the top bucket prior the next year. So it doesn't always happen, but but that's the goal, continuous improvement. So from that standpoint, we always expect the manufacturing teams to do a better job. That's their job. Having said that, one thing that will happen as the price of quoted aluminum on the London Metal Exchange increases and and more specifically as the delivery premium stays higher, for longer we will have percentage margin impact especially in North America, that will flow through the Americas Beverage segment as we as pass through one for one the denominator gets bigger with the same dollar. You understand the denominator effect And then we'll see how we'll see how Mexico and Brazil do next year in the face of of a tariff environment that has consumers and customers alike a little uncertain to this point. And I should mention that across Asia, the tariff environment perhaps even more impactful than it is in Brazil. So you know, all in all, margins across our business are pretty healthy. Think in every every reportable segment we have, we're well into the double digits and even transit is a business right now where demand is low but they're making above 13% so we describe that as 12% to 15% business and historically, you look across packaging land, 12% to 15% in a low growth, low capital intensive business is is really quite nice because you generate a lot of cash and give the management team a lot of flexibility how to return the money to shareholders. So we're quite happy with the portfolio at this point. Just as a quick follow-up, when we're thinking about your free cash flow conversion, given your updated number for '25, how should we think about that 26 in terms of priorities now that you've hit your 2.5 times leverage in terms of buybacks and anything else you're considering? Thank you. Timothy J. Donahue: Yes. So Kevin does want to tell you that we probably got a little timing on CapEx flipping into next year, but we're still going to have cash flow next year and as we said in the press release, balance sheet is in really good shape. We'll responsibly return cash to shareholders. We might move debt down up or down a little bit, but we're going to be in and around two and a half times. And there's a lot of cash left over to to return. Christopher S. Parkinson: Thank you so much. Thank you. Operator: Thank you. Next question will be from Anthony Pettinari of Citigroup. Sir, your line is open. Anthony James Pettinari: Good morning. Just following up on the last question. So the CapEx that was lowered for this year, I guess, just shows up in next year. And I don't know if you had any kind of further comments about CapEx specifically in 2026. Just given that North America, Europe seems like the system is probably running pretty full, or I I'm not sure how you'd characterize it, but, any color you can give there. Timothy J. Donahue: Well, I'll I'll characterize it this because it's a good question. I would say they're running full enough for everyone to be responsible and have a good margin environment. Now the history of the world people get greedy and they try to take more than they need to But the systems are pretty full, and we we should find a way to operate and and improve. Every everybody should find a way to improve We originally said 450,000 of capital this year. We're going be about 400 So if we thought about $4.50 and $4.50, maybe next year's in the $4.50 to 500 range. Okay. That that's very helpful. And then just switching gears on transit. How did transit demand kind of hold up in 3Q? Kind of relative to the expectations you shared with us over the summer? And as we think about 4Q and finishing the year, I mean, demand improving? Is it deteriorating? Is it kind of in line with 3Q? Just any thoughts you can give there. Timothy J. Donahue: So I I would say that on the commodity side, that is steel and plastic strap, film, all the protective products, actually holding up and specifically in in India, and The United States, up much better than we had initially anticipated at the beginning of the year. And that's probably driving a little bit of the slightly better performance that we had in Q2 and Q3 than we might have otherwise expected. And it's offset by lower equipment and tools, which is much higher margin business. So equipment and tools impacted by the tariffs. And then perhaps in a reverse way tariffs are going to help our our commodity businesses because just becomes that much more expensive to bring commodity products in into the country from overseas. So know, I I all in all, I think holding up as we expected or just a touch better K. That's helpful. I'll turn it over. Kevin Charles Clothier: Thank you. Operator: Thank you. Our next question will be from Philip H. Ng of Jefferies. Sir, your line is open. Philip H. Ng: Strong quarter. Congrats. So, Tim, I guess, you know, when we think about North America this year, the market's up. A little noisy for you guys, but it sounds like you're seeing good momentum in the fourth fourth quarter. When you kind of look out to 2026, it sounds like you expect growth again. How are you positioned now? I know during the summer months, were sold out, inventory was pretty tight. Think you're gonna be in a position to better service that demand next year? And then you made the point that you know, everyone's got decent capacity. You should be able to make good money and profitability. So in that in in the spirit of that, believe there are some contracts that can be up for renewal in North America the next twelve to twenty-four months. Do you view that as a opportunity to sustain profitability at these levels and build off of it? Or are there some risk we should be appreciative? Timothy J. Donahue: Well, you know, the Phil, the the risk factor is that we're in a competitive business, and and not everybody has the same goals and aspirations as everybody else. And you know, we we we operate our business the way we operate our business, and I can't really comment on how other people operate their business, but I think we've done a nice job over the last several years bringing on capacity at reasonable margins and trying to get a return as quick as we can. For the amount of money it costs to build and run it a can plant. I think that you know, we'll see we'll see where the where the market takes us. But as I said earlier, we're not unhappy with our margin profile. Philip H. Ng: Got it. And then your ability to service that North American demand next year, it was a little tighter this year. No. We we we should be okay to service the demand next year. Timothy J. Donahue: Okay. Not an issue. Philip H. Ng: Okay. And then Europe, obviously, really strong growth. And to your point, capacity is pretty tight. Same question, your ability to kind of service that demand and lapping pretty tough comps, know, appreciating mid single digit growth is historically how it's grown. Is that still a good way to think about things when we look out to '26? Timothy J. Donahue: Yeah. We have we bought the German plant sometime early last year, I guess it was, and we're we're still trying to bring them through the crown learning curve as opposed to whatever learning curve they felt they were on before, but it is getting better. And and that yields more cans as you go through that process. And we are modernizing a facility in Greece And essentially, we're operating the old two old can lines currently. But we're building two new can lines on the same property. And then when they're done, they'll be much higher higher speed, obviously, greater output capacity. And we'll take down the old lines when we're done. So we are adding capacity in Europe as we speak. And there are other ways that we're looking at to incrementally add capacity if needed. Philip H. Ng: Got it. Remind me when did those two, new plants come online in Greece? Well, it's two lines, not two plants. I'm sorry. Two lines. Timothy J. Donahue: Yeah. They they should be done sometime early next year. Philip H. Ng: Okay. Appreciate the color. Thank you. Timothy J. Donahue: You're welcome. Operator: Thank you. Our next question will be from Matt Roberts of Raymond James. Sir, your line is open. Matt Roberts: Tim, Kevin, good morning. Let's take another Good morning. Let me take another stab here at twenty twenty-six, lest I berate the point. Based on the demand you're seeing now, do you continue to expect to build inventory in 4Q? And then more broadly, I mean, seems like at max last week, lot of customers seem to be showing off innovation or areas of growth. Are there areas of the portfolio where you'd like to lean into more in 2026? Or on the contrary, pockets of the portfolio that are becoming more competitive going into 2026 that you'd wanna diversify away from to protect price and margin? Timothy J. Donahue: I don't know if there's anything I'd say is becoming more competitive. The business is always been very competitive. And I don't think we really want to lean away from anything. I think you know, and I were talking earlier you know, the we we mentioned earlier to you the price of delivered aluminum right now at $2.10 dollars a pound. Most of that increase being made up by the increased delivery premium This is the highest that we ever remember and it it does remind us of mid to late two thousand and twenty-two. When a massive rise in the aluminum price to the delivered aluminum to the mid 4 thousands a ton did have an inflationary impact across the can business and and, you know, the one thing that our business survives very well is recessionary environments. Many businesses and demand, you do worry about inflation. So let's see before we get too excited about next year let's see what higher aluminum and higher inflation because of of aluminum means to not only our customers, but also to the consumers. But nothing that we're going to lean away from. It's just you're always mindful of inflation. Matt Roberts: That certainly makes sense. Thank you, Tim. And one more on Europe. You did note Continental did better than Middle East. Within Continental Europe, was that across the board for the market or more specific to your I call it, Southern Southern Europe exposure? For us, it was across the board. Okay. And you well, you didn't have tourism. I mean, it seems like some travel companies are saying tourism season is getting extended. Was that evident in October? Or does that impact seasonality in that business at all going forward? Just too minimal, all things considered? Timothy J. Donahue: No. Tourism is very big from, let's say, May to September. It is more seasonal. It's not an October phenomenon. Matt Roberts: Okay. Appreciate that. Maybe I could squeeze one last one in. It looks like you have some maturities due in 2026 just to refinance the euro notes. Plans to address remaining maturities or impact the interest in 2026 from Thanks for taking all the questions. Yeah. So, yeah, Matt, in terms of 2026 notes, if you look at the balance sheet now, we really have cash on the balance sheet to settle those notes and some of them have different call dates. So we'll look at the call dates and and take and address them as they can do. The in terms of interest expense for an year, I would think it's largely in line with this year. Is what I would forecast. Matt Roberts: Tim, Kevin, thank you again. Kevin Charles Clothier: You're welcome, Matt. Operator: Thank you. Our next question will be from Michael Andrew Roxland of Truist Securities. Sir, your line is open. Michael Andrew Roxland: Thank you, Tim, Kevin, Tom for taking my questions and congrats on a strong quarter. Tim, just wanted to get your thoughts around capital allocation for 2026. Given you've had a strong growth this year, increasing free cash flow generation, which you just increased with your updated guide, now you're targeting leverage level. So how should we think about capital return next year, particularly in light of some the expansion projects you've mentioned as well that you're pursuing in Europe? Timothy J. Donahue: Well, Nikki said this year capital is 400. We said next year's $4.50 to 500. That doesn't materially reduce cash flow. But, you know, if you wanna wanna say we got a billion this year and you're only happy with 900,000,000 next year, we'll be happy with $900 next year. We'll see where it comes out. But and as we said, the balance sheet is in pretty good shape and at the end of the third quarter, we're 2.5 times levered, whether we're 2.3 times or 2.7 or 2.5, I'm not sure in the world we're in right now it makes a whole lot of difference. I think it gives us the flexibility depending on the share price to be opportunistic how and when we want to return more cash to shareholders. Michael Andrew Roxland: I mean, I totally get it. I mean, do you think given accelerating free cash flow that you could repurchase $400,000,000 of shares, 500,000,000 worth of shares? Any number that you'd like to just give as a baseline given your strong performance? For 26% of this? Timothy J. Donahue: I could give you a whole lot of numbers. I don't want to give you a number because you're going write it down. But you you can I mean, you can do the math? Clearly, if you want to start with 900,000,000 dollars if we don't buy back a number like you just said, what are we gonna do with the cash? We can either pay down debt or buy back stock. So I I don't I don't mean to not give you an answer. I just I don't I don't wanna say I'm going to buy back a certain amount and if the price doesn't make sense, you know, we'll see what we get to. But there's there's adequate cash to allow us I don't want to say unlimited flexibility, but a lot of flexibility in what we Michael Andrew Roxland: Totally get it. And one quick follow-up just on the CapEx, the $450,000,000 to 500,000,000 is that solely related to the two new lines in Greece and the modernization of the German plant? And is there anything else that we should be mindful of with CapEx? And could that number actually wind up being higher if you decide to pursue other projects? Thank you. We also have a plant a third line that we're putting in a plant in Brazil that we've talked about earlier. So that's included in there and there may or may not be one other opportunity that we've not decided on, certainly not announced yet. Michael Andrew Roxland: Thank you. Thank you. Operator: Thank you. Our next question will be coming from Arun Viswanathan of RBC Capital Markets. Sir, your line is open. Arun Shankar Viswanathan: Great. Thanks for taking my question. Congrats on a very strong quarter there. I guess, first off, just in North America, I understand that think your volumes maybe I think you mentioned minus three. Industry may be a plus two. I think you attributed a a good portion of that to, some customer mix issues. By your own, intentions earlier in the year. So I guess, would you characterize the rest of your portfolio as somewhat in line with industry excluding that event or maybe ahead or behind? You know, I I think you guys are a little bit under indexed to energy versus your peers. Did that result in maybe less than industry performance? Or would you say that you guys were were in line and and seeing pockets of strength elsewhere? Timothy J. Donahue: No. I think you're I think the the customer pruned probably gets us pretty close to flat year over year. Then there is slight underperformance in You may want to attribute that to under indexing energy. The other thing I would tell you is that alcohol was stronger in Q3 than we've seen for some time. And as you know, we're under indexed to beer in North America. So that could have attributed some of it as well. Arun Shankar Viswanathan: Okay. That's helpful. So then if, we can that maybe, you know, you will post some growth, as you noted in Americas next year. Do you expect also continued growth in know, the other segments as well. I mean, European beverage really, you know, stand out performance. You know, but you are gonna be facing pretty tough comps there. And then Signode and and, non reportables or transit non reportables achieved, appear to have achieved a structurally higher earnings power level. Is that correct? Is that a fair characterization? And can you grow from from what you did this year, or is is this year more, transitory? Timothy J. Donahue: So I think we expect the European business to continue to grow volume and income wise. I think the can still has penetration available to it across Southern Europe and it certainly has substrate shift available to it across the entire continent. Transit the cost structure is significantly lower than it was a couple of years ago. That business is only waiting for industrial demand to pick up and there is embedded gains in that business. Now as I've said before, whether that's one, two or three years away, I can't answer it for you. But business from a cost standpoint is in excellent shape. Food business, I would say that as you know food is not a growth business so we expect food to be a very stable business. We do see the move from human food in cans shifting more to pet food in cans and that is ongoing and we have a very large and stable pet food presence. And we're going to continue to benefit from that. I think the growth that we're likely to see in the other segment comes from greater efficiencies on stable volumes in food and aerosol, combined with some recovery in the can making equipment business over time. Arun Shankar Viswanathan: And, I really appreciate Just on the Midwest premium and maybe even aluminum in Europe, I know that the percent margin may start to get impacted, but would that inflation also potentially start to impact demand at some point? Especially in Europe? As you, you know, potentially negotiate those price increases? Or how does that work? Timothy J. Donahue: Yeah. So, I mean, obviously, we did say North America, we are mindful of inflation the impact of inflation on the consumer specific to higher delivered aluminum, which is mostly related to the Midwest premium right now. The delivery premium in Europe is not the Midwest premium and it's not as elevated as the Midwest premium because they're not dealing with a tariff structure for imported aluminum. So we don't have the same inflationary element notwithstanding the London Metal Exchange price for aluminum. So I don't right now have the same concern with European demand that I do with North American demand. Arun Shankar Viswanathan: Great. Thanks. Timothy J. Donahue: Thank you. Operator: Thank you. Our next question will be from Joshua David Spector of UBS. Your line open. Joshua David Spector: First, I just want to ask a quick follow-up on free cash flow and deployment there. I think in response to an earlier question, you talked about paying off some of your debt coming due. Just curious, do you think you need to reduce your gross debt level from here? Or like, just trying to think about why do that versus refi and buybacks into next year and how you're thinking about it? Kevin Charles Clothier: So look, we give you a net net debt leverage ratio. Which is 2.5 times So the cash on the balance sheet right now is really there to pay off debt that's coming due. It's a net leverage, so it doesn't move. As we we think about it going forward, absolute debt levels we're comfortable with the absolute debt level because it's tells us net debt level because we're at the 2.5 times We do have to address the the the bonds that are coming due to to use the cash and refinance your effectively levering up at that point. So we're comfortable at the the net leverage ratio of 2.5 times. Yes. We don't expect any levering up to satisfy twenty twenty-six maturities. Just to summarize it, I think we're in and around the long-term target of 2.5 times If we took all the cash flow we generated next year and paid dividends and bought back stock, we'd still be levered in and around 2.5 times. Joshua David Spector: Okay. Appreciate that. And just to ask on, the Novelis fire that was reported earlier, I mean from this call, doesn't sound like that's impacting your volumes at all, but curious just does it have any impact for you or your view on what the impact there could be on the industry? So the direct impact to Crown from that fire is not as large as it is to others, including some of the customers, That does not mean there's not an indirect impact and Novellus' is looking to subsidize lost automobile production with can sheet production So we are monitoring that. But we're not a We don't have a lot of exposure to Novelis in total but we are mindful of the impact on some of the customers we have do buy directly from them. We don't see a negative impact to the company over the next several months. Joshua David Spector: Okay. Thank you. Timothy J. Donahue: Thank you. Operator: Thank you. Our next question will be from Edlain S. Rodriguez of Mizuho. Sir, your line is open. Edlain S. Rodriguez: Thank you, and good morning, everyone. I mean, Tim, so when you look at share repurchase, I mean, again, since earnings last quarter, you know, in July, there was like a long downspill in the stock. Was there any thinking of trying to be more aggressive with buying back shares? Over the past couple of months or was getting to the targeted leverage or higher priority? Timothy J. Donahue: I don't I don't think there was no priority to get to targeted leverage. I think we got to the targeted leverage a little earlier than we anticipated probably for three reasons. We generated a little bit more cash than we thought we would. Some of that was the result of more earnings than we thought we would have. And then I think currency helped us as well. So we do have a fair amount of debt that's denominated in euros and the euro did devalue a little bit Q3. So all of that helped us get to that leverage target a little sooner than we thought we would Whether we got to 2.5 times by the end of this year or sometime next year, was never really our concern. It was a was target and we had a clear pathway to get there over time. I you know, when we chose to buy back stock was more a function of as we got further through the third quarter and the and the big season, you get a little bit more comfortable where the season is going end up. That that was all it was. Edlain S. Rodriguez: Okay. And and one last one, on on Europe again. Clearly outperformed even your expectation, I believe. So over the past couple of months, as the quarter progresses, like what like where were the big surprises, like versus what you were expecting? Again, 12% volume growth and maybe I think you were expecting maybe could be like half of that a little a little more. Like, what were the big surprising items there for you? Timothy J. Donahue: Well, I think we always knew we were gonna have a real strong campaign in Europe. Know, we were at a conference in early September and All we did at that conference was tell people you know, the analyst at this conference put out a note that said the weather in Brazil was really lousy and demand was lousy. And we tried to remind everybody we have other businesses, namely we have a European business gonna do really well. So we did expect Europe to do really well. But I think it was broad based. Across our portfolio in Europe, which is, as as I said earlier, is perimeter based. And does benefit from tourism, and we just had a very strong season. Edlain S. Rodriguez: Okay. Thank you very much. Thank you. Operator: Thank you. Our last question will be from Jeffrey John Zekauskas of JPMorgan. Sir, your line is open. Jeffrey John Zekauskas: Thanks very much. In your share repurchase, did you buy your shares ratably through the quarter? And sequentially, I think your share count is down maybe 150,000 shares. Did you issue share in the quarter? Or is there an issuance number for this year? Kevin Charles Clothier: There were no shares issued in the quarter. Shares how many shares did you buy, Kevin? Million. We bought so we bought shares later in the quarter, Jeff. Now a little over almost 1,100,000.0 And they would have all been bought over a couple week period? Yeah. Jeffrey John Zekauskas: And then And no share no share ratio with Jeff We No share Mhmm. No. As you look in the fourth quarter, has the European strong volume trend continued? Timothy J. Donahue: We we expect Europe to be very firm in the fourth quarter as well. As I said earlier, should not expect 12% every quarter, but long-term compound annual growth rate for the for the region in the range of 4% to 4.5%, 4% to 5%. That's something reasonable to expect. Jeffrey John Zekauskas: Great. Thanks so much. Thank you. And, Al, I think you said that was the last question. So thank you very much, Al. And thank all of you for joining us, and we'll speak to you again in 2026. Bye now. Operator: Thank you. Thank you. And that concludes today's conference. Thank you, everyone, for joining. You may disconnect now, and have a great day.
Operator: Good morning, and thank you for standing by. At this time, I would like to welcome everyone to the Halliburton Company's third quarter 2025 earnings conference call. All lines have been placed on mute to prevent any background noise. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. To withdraw your questions, simply press star one again. I would now like to turn the conference over to David Goldman, Senior Director of Investor Relations. Please go ahead. David Goldman: Hello, and thank you for joining the Halliburton Third Quarter 2025 Conference Call. We will make the recording of today's webcast available for seven days on Halliburton's website after this call. Joining me today are Jeff Miller, Chairman, President and CEO, and Eric Carre, Executive Vice President and CFO. Some of today's comments may include forward-looking statements that reflect Halliburton's views about future events. These matters involve risks and uncertainties that could cause our actual results to materially differ from our forward-looking statements. These risks are discussed in Halliburton's Form 10-Ks for the year ended 12/31/2024, Form 10-Q for the quarter ended 06/30/2025, recent current reports on Form 8-Ks, and other Securities and Exchange Commission filings. We undertake no obligation to revise or update publicly any forward-looking statements for any reason. Our comments today also include non-GAAP financial measures. Additional details and reconciliation to the most directly comparable GAAP financial measures are included in our third quarter earnings release and in the Quarterly Results and Presentation section of our website. Now, I'll turn the call over to Jeff. Jeffrey Miller: Thank you, David, and good morning, everyone. I'm pleased with Halliburton's third quarter performance. I will begin today's discussion with our highlights from this quarter. We delivered total company revenue of $5.6 billion and an adjusted operating margin of 13%. International revenue was $3.2 billion, a decrease of 2% year over year. North America revenue was $2.4 billion, flat year over year. During the third quarter, we generated $488 million of cash flow from operations, $276 million of free cash flow, and repurchased approximately $250 million of our common stock. And finally, we took cost reduction actions that we expect will save approximately $100 million per quarter going forward. Before we dive into the geographic results, let me talk about the bigger picture for oil and gas. We share the well-accepted view that oil and gas demand will continue to grow over the long term. We also know there is a tremendous amount of investment required to maintain production at current levels, let alone to sustainably grow production. Recent estimates are that 90% of upstream spending simply offsets natural declines, underscoring the requirement for ongoing oil and gas investment. Near term, operators are navigating volatile commodity prices as OPEC plus spare capacity returns and trade concerns persist. The impact is most apparent in North America, where we expect customers to maintain the cautious posture they adopted in the second quarter. In international markets, activity remains broadly steady from here as we look forward to 2026. In this environment, we took steps to address the near-term conditions. First, we improved our cost structure by rightsizing our operations and overhead, which we expect will reduce quarterly labor costs by roughly $100 million beginning in the fourth quarter. Second, we reset our capital expenditures target for next year, and as a result, expect capital spending in 2026 to decline by almost 30% to around $1 billion. Third, we are actively managing our deployed capital, and we will continue to idle, relocate, or retire equipment that does not meet our return thresholds. Finally, and most importantly, we took these steps while maintaining a strong focus on our technology development, our growth engines, and our value proposition. I am super confident in the Halliburton team, our ability to execute, and the strength of our competitive position. Near-term conditions will not change our focus on delivering value for our customers and leading financial performance for our shareholders. Now let's turn to our geographic results. I'll start with the international markets, where Halliburton delivered quarterly revenue of $3.2 billion, roughly flat to the second quarter. For the fourth quarter, we expect international revenue to increase 3% to 4% on roughly flat activity levels with typical seasonal software and completion tool sales. Let me share some progress on our international growth engines, those businesses where we expect growth outperformance by Halliburton relative to the oilfield services market. These growth engines, production services, artificial lift, unconventionals, and drilling are central to our international strategy. We made solid progress this quarter, and here are a few updates. In production services, we won a major five-year contract from ConocoPhillips in the North Sea. To deliver this contract, we will transform a conventional offshore service vessel into an advanced stimulation platform complete with the first deployment of Octave Automation to an offshore environment. This demonstrates our leading technology and execution that maximizes asset value for our customers. In artificial lift, Kuwait Oil Company named Halliburton service partner of the year and awarded Halliburton a multiyear ESP contract, which further strengthens our position in Kuwait. Additionally, in Colombia, Ecopetrol awarded Halliburton ESP contracts in nine of 11 fields. In international unconventionals, we saw further adoption of our leading completions technology and set a new continuous pumping record in the Vaca Muerta. I'm encouraged by our technology penetration in this market as we deliver leading performance and maximize asset value. And finally, in drilling, we introduced iCruise Force in The UAE and Qatar with strong results in both markets. iCruise Force maximizes rate of penetration while utilizing advanced formation evaluation tools, delivering significant value for logging requirements and rig costs are high. Beyond our growth engines, I am pleased with the performance of our international business. Our value proposition to collaborate and engineer solutions to maximize asset value for our customers continues to win work and deliver results. We see this most clearly in deepwater. During the quarter, I met with customers in Latin America and Europe to recognize the performance we've achieved through our collaborative model. Together, we are reducing drilling times, improving well placement, and deepening our collective competitive advantage. The strength of our value proposition and the breadth of our technology offerings underpins my confidence in our offshore position, where we have leading technologies in formation evaluation, drilling automation, drilling fluids, cementing, well completions, and intervention. Offshore is roughly half our revenue outside of North America land today, and I expect that share to grow. To conclude my thoughts on the international market, our value proposition is winning with customers. We are demonstrating differentiated performance, both on and offshore, and our growth engines are delivering. I am confident in the future of our international business. Now let's turn to North America. Our third quarter revenue of $2.4 billion was above our expectations with 5% sequential growth driven by less than anticipated completions white space and strong activity in the Gulf of America. During the quarter, we executed our strategy to maximize value in North America. We stacked uneconomic frac fleets, expanded our leading automation offerings, and executed cost-out initiatives to reduce our operating costs and overhead. Looking to the fourth quarter, we expect greater than typical white space and seasonal activity to result in approximately 12% to 13% lower sequential revenue. Despite softer activity in the near term, technology demand remains strong across both divisions as our customers are focused on maximizing the value of their capital dollars. In completions, Zeus is the recognized leader in technology and performance. Year to date, we have introduced two additional Zeus electric fleets under contract, and today over half of our active North America fleet is Zeus, an important milestone. We also see strong demand for our Zeus IQ closed-loop fracturing offering. We expect meaningful growth of this service in 2025 and 2026, deepening our competitive advantage and reinforcing our leadership in technology, efficiency, and execution. In drilling services, we delivered solid sequential and year-on-year growth driven by iCruise. In the third quarter, we introduced the 778 iCruise CX, a highly sought-after hole size for the Permian Basin, with outstanding results. The system completes curve and lateral sections in a single run, replicating the proven success we've achieved in other hole sizes. This new offering broadens the iCruise product portfolio, and given the system's consistent performance and our advances in telemetry, automation, and rig integration, I am confident we will see rapid adoption by our customers and continued growth in our North America drilling services business. To close, North America is a tough market today. We are taking steps and executing our strategy to maximize value. This means we are prioritizing returns, technology leadership, and working with leading operators. I am confident that our strategy execution will drive further success. Now let me address our investment in VoltaGrid. As disclosed in our Form 8-Ks filed on October 14, Halliburton owns approximately 20% of VoltaGrid on a fully diluted basis. We invested early and increased our ownership over time because distributed power is a critical enabler for electrified oilfield service and a growing opportunity set beyond the oilfield. Last week, VoltaGrid announced an agreement to deploy 2.3 gigawatts of generation capacity to support Oracle's next-generation artificial intelligence data centers. This expands VoltaGrid's contracted backlog, broadens its revenue base, extends a line of sight to multi-year growth, and validates VoltaGrid's position as a leading provider of long-term behind-meter power solutions. I am also pleased to announce that we have signed an agreement with VoltaGrid to be their international partner for delivering distributed power solutions for data centers outside of North America. Through this agreement, we will combine Halliburton's global reach, design, manufacturing, and operating capabilities with VoltaGrid's distributed power expertise to deliver reliable power at scale. I expect this will be an important long-term growth opportunity for both VoltaGrid and Halliburton. Looking ahead, I'm excited by the opportunities for Halliburton and VoltaGrid. Before I turn the call over to Eric, let me close with this. Oil price volatility is likely to impact the near-term macro environment. While I firmly believe a recovery in activity is inevitable, the timing and shape remain uncertain. Near term, we will execute our collaborative strategy and advance our technology, invest in our international growth engines, maintain cost and capital discipline, including idling equipment when returns are not economic, and finally, remain focused on returning cash to shareholders. I'm excited about Halliburton, our strategy, our team, our customer relationships, and our technology. Our portfolio is highly differentiated. We lead in critical product lines both on and offshore. Our value proposition is validated by the work we are doing today and the customer discussions we are having about future work. And finally, our leadership team is focused on executing the strategies that deliver strong financial performance. With that, I'll turn the call over to Eric. Eric Carre: Thank you, Jeff, and good morning. Our Q3 reported net income per diluted share was $0.02. Adjusted net income per diluted share was $0.58. Let me start with some color on the charges taken this quarter. All the details are available in the press release, but a few items are worth highlighting. First, to address near-term market conditions, we took steps to reset our cost structure. As a result, we recorded severance and fixed and other assets write-offs of $284 million. We expect cash operational savings from the actions we took to result in approximately $100 million in quarterly savings. Second, because of the changes to U.S. tax laws, we recorded an additional valuation allowance expense of $125 million. As a result of these changes, we also expect a lower effective tax rate on our U.S. taxable income going forward. Now turning to operations, total company revenue for Q3 2025 was $5.6 billion, an increase of 2% when compared to Q2 2025. Adjusted operating income was $748 million, and adjusted operating margin was 13%. Our Q3 cash flow from operations was $488 million, and free cash flow was $276 million. During Q3, we repurchased approximately $250 million of our common stock. Now turning to the segment results. Beginning with our Completion and Production division, revenue in Q3 was $3.2 billion, an increase of 2% when compared to Q2 2025. Operating income was $514 million, flat when compared to Q2 2025, and operating income margin was 16%. Increased completion tool sales and higher artificial lift activity in North America were partially offset by lower completion tool sales internationally and decreased well intervention services in the Middle East. In our Drilling and Evaluation division, revenue in Q3 was $2.4 billion, an increase of 2% when compared to Q2 2025. Operating income was $348 million, an increase of 12% sequentially, and operating income margin was 15%. These results were primarily driven by higher project management and improved wireline activity in Latin America, increased drilling services in North America and Europe/Africa, and higher software sales in Europe/Africa. Partially offsetting these increases were lower activity across multiple product service lines in the Middle East. Now let's move on to geographic results. Our Q3 international revenue was flat when compared to Q2 2025. Europe/Africa revenue in Q3 was $828 million, flat sequentially. Improved completion tool sales in Norway and increased drilling-related services in Namibia were offset by lower completion tool sales in the Caspian area and lower fluid services across Europe. Middle East/Asia revenue in Q3 was $1.4 billion, a decrease of 3% sequentially, primarily driven by lower activity across multiple product service lines in Saudi Arabia. Latin America revenue in Q3 was $996 million, a 2% increase sequentially. This increase was primarily driven by higher project management activity across the region and increased drilling services in Argentina. In North America, Q3 revenue was $2.4 billion, a 5% increase sequentially. This increase was primarily driven by improved stimulation activity in U.S. Land and Canada, and higher completion tool sales and increased wireline activity in the Gulf of America. Moving on to other items. In Q3, our corporate and other expense was $64 million. We expect our Q4 corporate expenses to increase about $5 million. In Q3, we spent $50 million on SAP S/4 migration, which included milestone payments and is included in our results. For Q4, we expect SAP expenses to be about $40 million. Net interest expense for the quarter was $88 million. For Q4, we expect net interest expense to increase about $5 million. Other net expense in Q3 was $49 million, which included $23 million due to the impairment of an investment in Argentina and a mark-to-market gain on a derivative. We expect Q4 expense to be about $45 million. Our normalized effective tax rate for Q3 was 21.5%. Based on our anticipated geographic earnings mix, we expect our Q4 effective tax rate to be approximately flat. Capital expenditures for Q3 were $261 million. For the full year 2025, we expect capital expenditures to be about 6% of revenue. In Q3, tariffs impacted our business by $31 million. For Q4, we currently expect a gross impact of about $60 million, increasing quarter on quarter due to Section 232 tariffs. These impacts are included in our guidance. Now let me provide you with comments on our Q4 expectations. In our Completion and Production division, we expect greater than typical white space and seasonality in North America, partially offset by strong international results in the fourth quarter. As a result, in our Completion and Production division, we anticipate sequential revenue to decrease 4% to 6% and margins to be down 25 to 75 basis points. In our Drilling and Evaluation division, we expect sequential revenue to be flat to down 2% and margins to increase 50 to 100 basis points. I will now turn the call back to Jeff. Jeffrey Miller: Thanks, Eric. Let me summarize the key takeaways from today's discussion. Halliburton delivered solid Q3 results with $5.6 billion in revenue. We took steps that will deliver estimated savings of $100 million per quarter, reset our 2026 capital budget, and idled equipment that no longer meets our return expectations. Our international growth engines, production services, artificial lift, unconventionals, and drilling are performing well. In North America, Halliburton is executing its strategy to maximize value. Zeus electric fleets now make up over half of our active fleet, and iCruise CX is driving performance in key basins like the Permian, reinforcing our technology differentiation. Also, Halliburton and VoltaGrid agreed to launch an exciting new opportunity for international growth in data centers. And finally, we are committed to returning cash to shareholders, maintaining cost and capital discipline, and investing in differentiated technologies that drive long-term performance. And now let's open it up for questions. Thank you. Operator: Ladies and gentlemen, once again, if you would like to ask a question, if you would like to withdraw your question, press 1 again. We kindly ask everyone to limit themselves to one question and one follow-up. Your first question comes from the line of Arun Jayaram with JPMorgan. Arun Jayaram: Good morning, Jeff and Eric. Gentlemen, you've described how your relationship with VoltaGrid gives you a front seat to the emerging distributed power generation market. Was wondering if you could talk about your views on the evolution of that market over the last three, six, nine months, maybe talk a little bit about the strategic collaboration you announced last night, which I believe allows you to invest in project-level economics internationally. But maybe you could provide a little bit more detail around that. Jeffrey Miller: Yeah. Certainly. Look. The demand for power and for AI is like nothing I've ever seen in terms of demand growth. And that we've watched that. And we also know that not only in the U.S., but around the world, the rest of the world is a really big opportunity set for the same level of growth. And as we look ahead to what we've announced with Volta, this is where Halliburton invests in project economics. So we are sharing the economic value of projects together. And also it's an opportunity to effectively leverage what we each do really well. And you know, from a Halliburton perspective, we've got boots on the ground in 70 countries. We've got excellent execution skills, proven manufacturing, and we also have global scale, industrial global scale. Which I think is critical. And at the same time, VoltaGrid has solved for how to execute these projects, technically and at scale. And we built a strong relationship over five years as that technology has developed. We've worked closely with VoltaGrid and our own business, and that gives us a great deal of confidence in how they've gone about solving the technical requirements for data centers, and we're just super excited to be part of this whole venture going forward. Arun Jayaram: Great. And, Jeff, maybe my follow-up either North American revenue was up 5% sequentially, a lot better than we had expected and maybe you'd guided to and then relatively flat on a year-over-year basis. Can you talk about some of the drivers of the outperformance in North America and thoughts on what this could mean for 2026? Which obviously drove revenues better than what we would have thought. Jeffrey Miller: Well, look. We saw less white space than we expected in Q3. And I think it also gets to the strength of the customers that we work with. The solid programs that they have, and as I look towards 2026, it gives me a lot of confidence in Halliburton's positioning in the market, both how we execute and maybe even more importantly, the technology that we're bringing to market. And as we described, puts a couple of new Zeus fleets to work and, you know, see demand for not only the electric fleet, which is a fantastic piece of equipment, but maybe even more so Zeus IQ in terms of what that means to solving for EURs. Arun Jayaram: Great. Thanks, Jeff. Operator: Thank you. Your next question comes from the line of Neil Mehta with Goldman Sachs. Please go ahead. Neil Mehta: Jeff and team, I want to spend more time talking about the Middle East opportunity as it relates to power and why specifically is that the region you think makes sense to be spending time on? And talk about some of the constraints that might exist in the Middle East in terms of really scaling the AI opportunity set. And how do you intend to debottleneck them? Jeffrey Miller: Look, I think that it's the Middle East and rest of the world. I think our initial focus is the Middle East. We see a lot of opportunity there. Obviously, that's an economy that is developing capabilities every single day and very much focused on looking forward to investment. And so, you know, the other thing is there is certainly a lot of available energy in the Middle East, and there is also a lot of capital in the Middle East. And so those things all conspire to make that very attractive. Neil Mehta: Right. Super. And then Jeff, know it's too early to talk about '26. At this point, we'll get more color on the fourth quarter call. But just as you look at what is still a very uncertain macro for North America in particular, just any early thoughts in helping us think through the picture for '26 and based on early investor for early customer conversations. Jeffrey Miller: Yes. Look, it is really early. Customers haven't produced budgets yet at this point. We clearly are having discussions with customers. I'd step back and say 26% is overall flattish with some bright spots is how I would describe all of '26. North America, we did stack some fleets in the quarter. Those probably don't come back to work. But here's what's more important to think about for '26 in my view. It's gonna be looking at the mileposts as we go through '26 because I think some important things are happening now. Number one, OPEC plus barrels are getting into the market. We know that. North America, in my view, is probably below maintenance level spend. And so and then Mexico stays kind of probably where it is for a little while, but that decline in production there is also meaningful. So if we think about Mexico declining, North America likely rolling over, and all the OPEC plus spare capacity in the market, that creates a real inflection point. Now when precisely that happens is less clear, but oil content demand continues to grow. And that gives me a lot of confidence. And I think that with the OPEC barrels sort of behind us, it creates real tightness that, sort of undisputable tightness in the market that I think the snapback will be super strong for us. Neil Mehta: Right. Alright. Well, stay tuned as you have more investor customer conversations. Thanks, Jeff. Operator: Thank you. Your next question comes from the line of David Anderson with Barclays. Please go ahead. David Anderson: Hey, good morning. So I just have a question about the margins. Which are quite a bit stronger than we were expecting this quarter. You talked about taking $100 million of cost out per quarter. How much of that was in this current quarter? I'm just kind of curious as to how much it impacted the numbers. Eric Carre: Yeah. Let me give you some color, Dave, on the Q3 margin versus guidance. So the first thing we had about half of the beat that came from reductions in labor cost that actually we realized a savings earlier than expected as our operation teams move pretty quickly to get things done. Then in terms of what came out of between C&P and D&E, as Jeff just mentioned, very, very a lot less white space in North America land, strong performance from the Gulf of America team. And then overall, just a strong international performance primarily from Completion Tool and Cementing business. And on the D&E side, the strong result came from our project management business in Latin America. David Anderson: Okay. Thank you. So Jeff, you know I'm asking a pilot question here. So with the partnership here, I'm very a couple things. Obviously, we know VoltaGrid is bringing the power. So I guess maybe if you could just sort of simplify for us what Halliburton's bringing to the table here? And then sort of secondarily, what size projects are we talking about here? VoltaGrid just announced a big 2.3 gigawatt project. Are you talking about that size, or are you talking more like 100, like, 200, 400, that kind of range? And just kind of might as well throw this in there. What kind of timeline are we talking here? Are we talking, like, 2028? Is just kinda wondering about supply chain tightness and how that all lines up. Thanks. Jeffrey Miller: Well, let me start with maybe the last question. From a supply chain standpoint, VoltaGrid is in a fantastic position from a supply chain standpoint and comfortable with where they are. From a size of project, you know, we're aligned with VoltaGrid around projects of the size and scale that they're talking about. And so I think they, you know, I'm not gonna forecast size of projects, but feel comfortable they can be pretty big. And then what does Halliburton bring? And I think Halliburton brings some very important things, particularly, I would say, industrial scale and working internationally. And we've all seen how difficult that can be for companies as they scale internationally. We've seen a lot of them, you know, less than successful, as they scale, and I've, you know, put boots on the ground, managing projects, investing in projects, customer relationships. There's a long list of things that Halliburton brings to the international markets where we are clearly can be additive. And then from a VoltaGrid perspective, clear on what they're doing. David Anderson: Great. Thanks, Jeff. Appreciate it. Operator: Thank you. Your next question comes from the line of Saurabh Pant with Bank of America. Hi. Good morning, Jeff and Eric. Saurabh Pant: Good morning. Oh, Jeff, maybe I'll continue with that line of questioning on the power front, but pivot a little bit on the CapEx side of things because this business is pretty CapEx intensive. Not something that you are not used to, right, Jeff, over the past. But how do you think about that? How do you think you'll fund that? Not just at the VoltaGrid level, but how does the collaboration The U.S. Right? So The Middle East, like, you're targeting right now, how does that look like from a funding, from a CapEx standpoint? Eric Carre: Yes. So to be clear about how we're thinking about it, is so our CapEx budget for next year is $1 billion. Whatever we do around power with VoltaGrid in the international market is not included in that $1 billion. The overall intent is to share total project economics. So we will be funding this on a project-by-project basis over the $1 billion or whatever baseline CapEx we have for our oil and gas business. Saurabh Pant: Okay, okay. I got it. No, helpful, Eric. And then one for the North America market. Right? Like, noted on the call, your performance has been a lot better than a lot of us were thinking. It seems like, Jeff, correct me if I'm wrong, it seems like you are not trying to be everything to everybody. You're targeting the customers, the large sophisticated customers that value what you bring to the table. Right? But just maybe talk to that a little bit. How are you targeting the North American market with the aim of max value like you've been trying to do? Jeffrey Miller: Well, look. Maximizing value means that we are focused on efficiency and technology. And electric fleets bring that, but we continue to invest in technology in North America. I think that's where the point of bifurcation happens. And we've been clearly targeting customers that want to use that technology, both the electric and step forward into the subsurface and the control of sand and a lot of the things that Zeus IQ and the many things that we've built along the way allow customers to do. And we continue to deepen that competitive advantage in terms of how we help customers solve for EUR sand control, measure sand performance, all of those things in the subsurface. And so very deliberate. We don't compete in the spot market. We don't want to be competing in the spot market. You know, you've seen us stack some diesel dual fuel fleets in the quarter. For that very reason. And so, yeah, clearly, we are not gonna be everything to everyone. We're very pleased with the technology performance and pleased with the uptake on the technology. So there's really not a good reason to continue to burn up dual fuel equipment in a market that's not making returns. We have opportunities to send dual fuel equipment overseas, which we may do. Probably will do, or we just idle it and wait for later when things get tighter and we put it back to work then. Saurabh Pant: Makes sense. Makes sense. Okay. Jeff, I'll turn it back. And by the way, as much as I like the $100 million in cost savings, I'm waiting for the day when activity is going up and we are adding labor cost. But until then, thank you. Thanks a lot for that color. Jeffrey Miller: Alright. Thank you. Thank you. Operator: Your next question comes from the line of James West with Melius Research. Please go ahead. James West: Morning, James. Morning, James. So wanna be, guys have been dancing around the VoltaGrid relationship with their questions so far, but I was hoping to just create some clarity here. We obviously know they have a distributed power technology that is gonna be extremely useful. Understand The Middle East is energy-rich, but, really, outside of industrial scale, is it not the relationship that you bring to the table? I mean, nobody walks into the Kingdom of Saudi Arabia and says, hey, guys. Can I do business? Jeffrey Miller: Correct. And that's when I described global industrial scale. I'm including customer relationships, markets, knowledge of markets, history in markets, and history of execution in markets, that is well respected by most of the people in those markets, clearly by the people in those customers and governments and all the rest. James West: Exactly. That's what that's what that's exactly what we see. And then maybe on if we think about '26 and I know North America, can kind of leave that out for now because of the uncertainty. But, you know, it looks to me like Saudi's bottoming and it's gonna recover here in the first half, deepwater coming back in the second half. Is that consistent with what your customers are kind of alluding or telling you at this point? Jeffrey Miller: Yes. I mean, our deepwater business is getting traction now. And continues to strengthen as projects start and as we win projects, so that's sort of the view of that into '26 and beyond. Middle East, Saudi in particular, you know, I expect that picks up as we go into next year. Now I don't think that it springs back to maybe where it was. But not declining is a form of improving. And I think there will be some improvement on top of that as we go into 2026. And so, yeah, look. The international business looks solid. Our technical position internationally looks very solid in terms of growth engines I described, the contract wins we're having. And really, our value proposition is just continues to gain traction with customers all around the world. So very happy with that. James West: Got it. Great. Thanks, Jeff. Jeffrey Miller: No. Thank you. Operator: Your next question comes from the line of Doug Becker with Capital One. Doug Becker: It was a good segue, Jeff. You've been highlighting the growth engines. Earlier this year, you talked about those engines could add two and a half, maybe $3 billion of annual revenue, to five years. How do you think Halliburton is progressing relative to those targets? And assume you feel pretty comfortable that Halliburton should be growing, outgrowing the industry. Internationally given those growth engines. Jeffrey Miller: Yeah. They're on track, I mean, to do what we described. I pointed out a few of the anecdotes around the progress, but the progress is really deep-rooted in our value proposition. And so these are strategic opportunities that continue to gain traction globally, whether intervention you've seen the acquisition of OpTime, which is playing a more and more meaningful role. I know we've I think there was a press release just last night or yesterday around the application of that. And the North Sea with Doctor BP, but that continues to EROX gain traction really in all deepwater markets. I'm very excited about that. Artificial lift continues to gain traction throughout The Middle East, Latin America, so that's very much on track. Drilling technology continues to advance with automation and drilling done some just amazing work in terms of automated drilling controlling or automating not only the rig but the hydraulics. Which is a key technical differentiator for Halliburton. And then in unconventionals, continue to look. We applied the technology of censoring and continuous pumping in Argentina. Those are market firsts there. They have an impact in, you know, a positive impact for customers and for Halliburton. See The Middle East the same way. And we see a lot of opportunity even in Australia where we've done quite a bit of work. And international unconventional. So very much on track and super excited about the differential growth opportunity that Halliburton has in these areas. Doug Becker: Definitely sounds encouraging. Wanted to touch base on Brazil specifically. Halliburton recently received a completion and stimulation contract. Expected to start next year. We've been hearing some of the offshore drilling contractors have been having one-on-one discussions with Petrobras about reducing costs. Just what's your outlook for Brazil? And has Halliburton been approached about helping to reduce cost? Jeffrey Miller: Look. We're super positive about Brazil. We've got a strong position there, both with IOC work and with Petrobras. Again, continue to develop technology specific for that market. We're in all sorts of discussions with Simpest and look, I know. And in terms of the market in Brazil, we see growth in execution and technology uptake given the complexity of that deepwater market. Doug Becker: Got it. Thank you, Jeff. Operator: Your next question comes from the line of Scott Gruber with Citigroup. Please go ahead. Scott Gruber: Yes. Good morning. Jeffrey Miller: Morning, Scott. Morning. Scott Gruber: Morning. You guys have taken a very disciplined approach with respect to idling frac crews, you know, where you will make a reasonable return. I'm just curious, you know, kind of where do you stand in that process? Was it more weighted to go to three q or would idling be more weighted to four q when customers slow down? I'm just trying to think through your market comments around North America being down 12%, 13%, trying to separate the underlying market from the idling trend? Jeffrey Miller: Look, I think that we will we idled some crews probably later in the quarter. May see some of that in Q4. I think the and the white space in some respects go together. However, some of those crews that have been retired or not retired, but idle will stay idle until we see margins snap back on them. But I think what's important is we look at the mileposts that I described is that, you know, the first thing to snap back or recover will be North America. And it's been that way for a decade and a half. And we've seen it through several downturns. And so we fully expect that recovery will come quickly in North America when it comes we're gonna want those fleets available to fill in gaps and actually take on some bigger work. Scott Gruber: I appreciate the color. And then turning to the CapEx budget for next year, I think at $1 billion it's a bit below where expectations were at. But same time, your frac maintenance CapEx should be coming down a lot with the idling and investment in e frac. Can you discuss kind of within the budget your ability to continue to make the strategic investments in the DME toolkit and your growth verticals within CMP. It seems like those investments have borne a lot of fruit here in terms of share gains. Just kind of talk through the moving pieces in the budget next year and you know, your ability to still make those strategic investments. Jeffrey Miller: Look, let me start with the capital budget, the 30% reduction is still in line, I think, largely but it's look. As you described investment cycles, we just view it as we don't well, that's where we need to be. From a strategic perspective, we continue to invest in R&D. We continue to invest in the technology that's differentiating. We have quite a bit of that, but we also have the ability to manage that inside of the budget that we have. And I think that driving some tightness in equipment is a good thing and I expect that, you know, you'll continue to see Halliburton investing in the technology that makes the outsized market returns. Scott Gruber: I guess another way to kind of phrase it is, you think you can still deliver share gains? In DME and P&P with the billion-dollar budgets next year? Jeffrey Miller: Unequivocally, yes. Scott Gruber: Great. I appreciate it. Thank you. Operator: Thank you. Your next question comes from the line of Marc Bianchi with TD Cowen. Please go ahead. Marc Bianchi: Thank you. I wanted to pivot back to some stuff on Volta. Is the arrangement that was announced last night, this international collaboration, is that an exclusive arrangement where Halliburton is sort of exclusively deploying the Volta technology, or can they go work with someone else if they choose to? Jeffrey Miller: Well, look, it's exclusive in parts and I think where we're targeted, it's exclusive with certainty. Over a pretty good period of time. I'm not gonna get into all the mechanics of the agreement, but the relationship is such that I feel confident that we are the partner and, like I said, coinvesting and the work that we've done to get to where we are. Has all been important work. And so quite confident in where that goes. And so what I think the more important takeaway is, is this is a fantastic growth opportunity for Halliburton and for VoltaGrid internationally. Marc Bianchi: Indeed, Jeff. Thank you for that. And if there's some dollar of spend that needs to occur in 2026 on top of the $1 billion CapEx that have related to this? Like is there a certain percentage that Halliburton would be obligated to? Is it 50% obligation or anything like that? You can help us. So if we see a press release from Volta that they're spending $1 billion and we can sort of get a sense of what that might mean for Halliburton's requirement. Jeffrey Miller: Look. I think we'll be investing alongside them. I think the capital we know how to raise capital, and we know how to get capital. I think that these projects are imminently capitalizable. And so I don't see that as any kind of impediment whatsoever. And if you see them announcing capital investment around the world, we're likely more than likely we are part of that. Marc Bianchi: Okay. Thank you so much, Jeff. I'll turn it back. Operator: Thank you. The next question comes from the line of Derek Podhaizer with Piper Sandler. Derek Podhaizer: Hey. Good morning. I just wanted to go back to the theme around idling equipment. If we can a little bit more color, maybe help us understand how many fleets that you've idled. How many you expect to be permanently impaired, how many think might go back to work. Just trying to get a sense of the total market idling equipment. We've heard that from one of your peers last week. And how significant could this accelerated attrition really be for the market and create a better setup from a supply and demand perspective for 2026? Jeffrey Miller: Well, let me we're gonna idle things that aren't economic, and that's really the way we approach it. It's not so much a number of things. The way I think about attrition, and I think this is what we're really seeing in the marketplace. We in fact are idling things and they remain idle. They're not being bled back into the fleet to help shore up underperforming assets elsewhere for customers. And I think that is really the key when we think about attrition. So if we just look at the amount of horsepower on a simul frac, for example, we're fairly disciplined about that quantity. We probably won't have more than 65,000 horsepower on a location like that. If we go look at competitors performing, you know, that number could be 100, 120,000 horsepower. Effectively saying that that's attrition in motion. And I think when the market it doesn't need to recover much, if any, before we'll see real tightness in pricing in North America. Derek Podhaizer: Got it. That's helpful. And this one might be for Eric. I just wanted to ask about the free cash flow here in the quarter. It's a little bit light versus expectations. Working capital headwind. Should that slip to a tailwind in the fourth quarter? And then when we maybe some early indications around 2026 free cash flow expectations just given where CapEx is going down to $1 billion. Eric Carre: Right. So as it relates to 2025, Derek, we're still shooting for about $1.7 billion for the year. Q3 was indeed a bit lower than expected that came from high revenue, slightly lower collection than expected and then the cash part of the charge that we took. We're confident about the yearly numbers. Q4 is always the stronger quarter for collections. So we're not expecting that to change this year. As it relates to cash flow for 2026, it's really early to say. The big focus right now is obviously on ensuring and focusing on the strength of operation returns, etcetera. But I would say this, the cost reductions that we've undertaken everything else being equal will result in $400 million less cost. We have $400 million lower CapEx. So in a way, it's $800 million of additional liquidity as we get into 2026. That being said, as we talked about the macro environments, fairly volatile. So as we think about 2026, we may take a bit more of a conservative approach as to how we utilize the cash flow, particularly as it relates to buybacks. Derek Podhaizer: Got it. Okay, makes sense. Appreciate the color. I'll turn it back. Operator: Your next question comes from the line of Stephen Gengaro with Stifel. Please go ahead. Stephen Gengaro: Thanks. Good morning, everybody. Eric Carre: Morning. Stephen Gengaro: I think two things for me. One is just to kinda get your views as we sort of think about 26 a little bit. We're hearing that frac activity is below levels to sustain U.S. production. And I'm just curious kind of in your conversations and what you've heard how you think the E&Ps react to that as you go through 2026? Jeffrey Miller: Look, I think that E&P is gonna do what they need to do. I'm stepping back and taking a broad view and there are some that are slowing down and some that are maybe are speeding up. But I think that overall, based on our view, North America, and I don't think that I'm the only one that thinks this is the fact that North America is flattish to down a little bit next year just based on activity level and capital spend. And so, you know, I think every customer is going to do what they think they need to do. But I would say conserving capital is one of the things that they're doing. Stephen Gengaro: Thanks. And the other question I had is as pertains to some of the growth areas you've talked about like Lift and chemicals, how do you think the competitive landscape has changed in do you think that aids in your ability to continue to gain share in those areas? Jeffrey Miller: I do. I think that for well, in the lift area, certainly does and I think it's both performance and technology. We've got Intellivate is a key part of the software and AI around pumping. Our pumps artificial lift today are differentiating and we continue to grow that business. And if you recall, we didn't have any international footprint to speak of. We had none when we acquired Summit. And so what we're saying is outsized growth certainly for Halliburton. And I think ESP is broadly becoming more important tool as operators and governments and others seek to produce more oil from existing assets. So I think secular growth is in front of ESP. I think our unique position, both technically and from where we started, Halliburton an outsized opportunity for growth. Stephen Gengaro: Great. Thanks for the color. Thank you. Operator: Your next question comes from the line of Keith MacKay with RBC Capital Markets. Please go ahead. Keith MacKay: Just wanted to start out on the CapEx guide for next year. Appreciate the incremental color on free cash flow. But when it comes to CapEx, you've always messaged that we should think about it as a 5-6% of revenue type target. Is that still the case for next year or have things changed just given the market outlook? Eric Carre: No, I think you should take the $1 billion guidance as a number versus a ratio to revenue. And as Jeff gave some color, we've invested a lot in a couple of really key strategic initiatives around electric frac around the revamping of our technology for directional drilling. We continue to invest in these, but the rollout has progressed significantly. So we don't need to use the same amount of capital dollars in these two strategic initiatives. So you should be viewing this as being disciplined around our capital spend, but making sure that we can still deliver on growth and on all of our strategic initiatives. Keith MacKay: Got it. Appreciate the color. And just stepping back to the market, Jeff, you mentioned North America generally the first place to come back in as the cycle turns upward. Can you just talk to us how you're thinking a little bit more about how the drilling versus completion of that potential upswing might play out? I know some cycles it's been drilling first then completion and or vice versa. How do you see this one playing out? Jeffrey Miller: Look, I think the supply chain in North America is much better wired together than it's ever been. So you know, the idea that it's all drilling and then there are ducts and then there's fracking, I think operators and service companies have solved for how to execute more efficiently. And so I think what you would see is rig count and frac count coming back generally together. But it's so and timing of that, again, less clear. Keith MacKay: Got it. Appreciate the comments. Thank you. Operator: Thank you. And at this time, that is all that we have for questions. I will now turn the call back over to Jeff Miller, chairman, president, and CEO for closing remarks. Jeffrey Miller: Okay. Thank you, John. And before we wrap up today's call, let me leave you with a few thoughts. I'm excited about what's ahead for Halliburton. We have the right strategy, team, customer relationships, technology, and exciting new opportunity. Our value proposition is validated by the work we're doing today and customer discussions we're having about future work. We are focused on executing the strategies that deliver strong financial performance. I look forward to speaking with you next quarter. Operator: This concludes today's conference call. We would like to thank you for your participation. You may now disconnect your lines. Have a pleasant day.
Operator: Welcome to the Pentair third quarter 2025 Earnings Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. To withdraw your questions, you may press star and two. Please also note today's event is being recorded. At this time, I would like to turn the floor over to Shelly Hubbard, Vice President Investor Relations. Please go ahead. Shelly Hubbard: Thank you, operator, and welcome to Pentair's third quarter 2025 Earnings Conference Call. On the call with me are John Stauch, our President and Chief Executive Officer, and Bob Fishman, our Chief Financial Officer. On today's call, we will provide details on our third quarter performance as outlined in the morning's press release. On the Pentair Investor Relations website, you can find our earnings release and slide deck, which is intended to supplement our prepared remarks during today's call and provide a reconciliation of differences between GAAP and non-GAAP financial measures that we will reference. The non-GAAP financial measures provided should not be considered as a substitute for or superior to the measures of financial performance prepared in accordance with GAAP. They are included as additional clarifying items to aid investors in further understanding the company's performance in addition to the impact these items and events have on the financial results. Before we begin, let me remind you that during our presentation today, we will make forward-looking statements which are predictions, projections, or other statements about future events. Listeners are cautioned that these statements are subject to certain risks and uncertainties, many of which are difficult to predict and generally beyond the control of Pentair. These risks and uncertainties can cause actual results to differ materially from our current expectations. We advise listeners to carefully review the risks in our most recent Form 10-Q and Form 10-Ks. Please note that during the presentation today, we will be making references to record financial results. These references reflect the time period post the indent separation in 2018 unless noted otherwise. Following our prepared remarks, we will open the call up for questions. Please limit your questions to two and reenter the queue to allow everyone an opportunity. I will now turn the call over to John. John Stauch: Thank you, Shelly. And good morning, everyone. Thank you for joining us today. Please turn to the executive summary on slide eight. In Q3, we delivered sales growth and a record third quarter across adjusted operating income, return on sales, and adjusted EPS. Sales increased 3% driven by our pool and flow segments. Adjusted operating income increased 10%. ROS expanded 160 basis points to 25.7%, and adjusted EPS rose 14% to $1.24. In September, we acquired HydroStop, a leading specialty valve solutions provider for water infrastructure, for approximately $292 million in cash, or $242 million net of the anticipated $50 million of tax benefits. This acquisition enhances our commercial flow business with a strong financial profile and strategic fit. We are excited to welcome the HydroStop team and their customers to Pentair. Year to date, we delivered record free cash flow and we repurchased $175 million of shares. Lastly, we are increasing our full-year guidance driven by a strong third quarter and continued confidence in our execution. We now expect sales growth of approximately 2% and adjusted EPS of approximately $4.85 to $4.90, up 12 to 13% from 2024. Let's move to the strategic overview on slide nine. Over the last three years, our teams have successfully implemented our transformation initiative while continuing to drive strong execution leading to robust margin expansion. As we enter 2026, we feel confident that we've developed a flywheel that we expect will continue to drive efficiencies, opportunities, and profitability. Our 8020 actions are well underway and show early signs of success in driving top-line growth. Our businesses are in various stages of implementation on this multi-year journey. We plan to share more insights with you on our 8020 actions at an upcoming Investor Day in March. We continue to invest in focused growth initiatives where we see great opportunities to drive near-term and long-term growth. We are also investing in innovation through digital and product technology. In addition to investing for growth, our strong financial discipline and free cash flow have enabled us to make strategic acquisitions that align well with our current businesses and provide a platform for growth. As a dividend aristocrat, we have raised our dividend for forty-nine consecutive years, and we will have continued to repurchase shares. Collectively, we believe this is a smart use of capital deployment to drive future sales and earnings growth. Let's turn to slide 10. We have delivered approximately $56 million in transformation savings year to date and are on track to reach approximately $80 million in 2025. I want to remind you that this performance is net of strategic growth investments and is in addition to the $174 million of net performance we drove in 2023 and 2024 combined. As I mentioned earlier, we believe transformation and 8020 are creating a flywheel for continued sales growth and profitability. Let's turn to slide 11. There are several key themes that I wanted to share. We delivered another quarter of sales growth and double-digit earnings growth due to strong execution. We increased our full-year 2025 guidance driven by a strong Q3 and continued confidence in our strategy. We continue to build a foundation of optimal operational efficiency that we believe can be leveraged when volume returns to normal. We have a balanced water portfolio and a capital-light business model, with 75% of our business going through two-step distribution, and roughly 75% of revenue representing replacement sales. And we have strong free cash flow, a solid balance sheet, and a balanced capital deployment strategy that we expect will accelerate earnings and ROIC. Before I hand the call over to Bob, I want to acknowledge that we announced this morning that Bob will be leaving Pentair effective 03/01/2026. And embarrass him a little by complimenting him on having been an outstanding partner to me and Pentair. Over his nearly six years in what will be 23 quarters of dedicated service, Bob has driven deep financial competency throughout the organization. It shows in our operating performance, the level of commitment to results from the team, our transformation progress, our cash flow and ROIC performance, and of course, the total shareholder return that he has overseen as CFO. What makes Bob an even better teammate is his steady and measured communication style and his no-drama approach to challenges. We have seen tremendous operating performance throughout his tenure, despite us having had to deal with COVID, a period of supply chain instability, rapid inflation, and of course, tariffs. Bob has led us through all of it with a bold leadership style and a sense of humor. Now to nearly sixty quarters of being a public company CFO, he's moving on to his next chapter. Bob has built and developed a great financial team. As you get to know Nick, I'm confident you will see that he has a lot of Bob's skills plus unmatchable energy and drive. Bob will oversee a smooth transition process through 03/01/2026, ensuring that we do not miss a beat on our value creation journey. I will now pass the call over to Bob who will discuss our performance and financial results in more detail. Bob Fishman: Thank you, John, for the very kind words. I have thoroughly enjoyed my time at Pentair, our partnership, and working with all the great people in the company. We have very strong finance and IT teams at Pentair, which is evidenced by Nick's and Heather's promotion. Personally, I will be 63 in May, and I'm looking forward to spending more time with my family and enjoying my hobbies. It is comforting to know that not only is my team in a great place, but the company is expected to exit the year with continued momentum and is poised for significant success going forward. I look forward to continuing to work with Nick and Heather over the next few months to help ensure a smooth transition. Let's move to slide 12. As John mentioned, we delivered a third-quarter record in adjusted operating income, return on sales, and adjusted EPS. In Q3, we drove sales of $1.022 billion, up 3%, adjusted operating income of $263 million, up 10%, ROS of 25.7%, an increase of 160 basis points, and adjusted EPS of $1.24, up 14%. Core sales were up 3% year over year, driven by core growth of 6% in pool, 4% in flow, and water solutions approximately flat. Moving to adjusted operating income, transformation was the primary driver of 160 basis points of margin expansion in Q3. Price offset inflation and we delivered transformation savings of $12 million while continuing to invest in growth initiatives. Please turn to slide 13. Flow sales were up 6% year over year to $394 million. Within flow, residential sales were up 3%, commercial sales increased 5%, marking the thirteenth consecutive quarter of year-over-year sales growth, and industrial sales rose 10%. Segment income grew 15% and return on sales expanded 200 basis points to 24% driven by strong sales growth and transformation. Please turn to Slide 14. In Q3, water solution sales declined 6% to $273 million. Core water solution sales were flat. Commercial sales were down 6%, inclusive of a 9% negative impact from the sale of commercial services in Q2. Residential sales were down 6% year over year primarily due to portfolio exits. Segment income grew 6% to $68 million and return on sales increased 280 basis points to 25% primarily driven by transformation savings. The contribution of price slightly offset inflation. Please turn to slide 15. In Q3, pool sales increased 7% to $354 million driven by price, volume, and the Q4 2024 Gulfstream acquisition. Segment income was $116 million, up 3%. Return on sales decreased 120 basis points to approximately 33%. As a reminder, in Q3 2024, ROS reflected margin expansion of nearly 500 basis points resulting in a challenging compare. In Q3 this year, we continued to invest in growth initiatives, such as new products, sales plays, and digital solutions, to drive higher top-line growth in future periods. We expect pool margins to expand in Q4 and for the full year as we continue to drive a balanced approach of top-line growth and continued ROS expansion in the future. Please turn to Slide 16. We generated record free cash flow of $719 million year to date, up 14% year over year. Our balance sheet remains strong and our return on invested capital increased to 16.7% from 15.2% a year ago. Our net debt leverage ratio is 1.3 times, down from 1.4 times a year ago. This includes our recent acquisition of HydroStop for $292 million with an estimated $50 million of future cash tax benefit. Year to date, we have repurchased $175 million of shares. Our significant free cash flow generation has enabled us to strategically deploy capital through debt paydowns, dividends, share repurchases, and strategic acquisitions. We plan to remain disciplined with our capital and have additional flexibility to strategically allocate additional capital to areas with the highest shareholder return. Let's turn to our outlook on slide 17. For the full year, we are increasing our adjusted EPS guidance to approximately $4.85 to $4.90, which is up roughly 12% to 13% year over year. Also, for the full year, we are increasing our sales guidance to up approximately 2%. We expect flow sales to be up low single digits, water solutions to be down mid-single digits, with core sales down approximately low single digits, and pool sales to be up approximately 7%. We expect adjusted operating income to increase approximately 9% to 10%. We continue to expect to drive approximately $80 million in transformation savings this year, net of investments. For the fourth quarter, we expect sales to be up approximately 3% to 4%. We expect flow sales to be up approximately high single digits, which includes our HydroStop acquisition of approximately $10 million of sales in the quarter at approximately 30% ROS. We anticipate water solution sales to be down approximately mid-single digits with core sales approximately flat reflecting the commercial services sale in Q2. Core commercial water sales are expected to be up approximately low single digits. Pool sales are expected to be up approximately mid-single digits. We expect fourth-quarter adjusted operating income to increase approximately 4% to 8%. We're also introducing adjusted EPS guidance for the fourth quarter of approximately $1.11 to $1.16, up roughly 3% to 7%. Let's turn to slide 18. We continue to execute well and are offsetting the impact of tariffs through increased prices and other mitigation strategies. Our total 2025 tariff impact of approximately $75 million remains consistent with our outlook in Q2, but tariff uncertainty continues. Our 2025 guidance does not include further China and Mexico impacts, which could go into effect later this year. However, these are expected to be immaterial for this year. We expect to take mitigating actions as needed to offset these additional tariffs if they occur. We are very pleased with our performance in Q3 and year to date. Our teams have been hard at work to mitigate the impact of tariffs while continuing to focus on transformation and 8020 and continuing to deliver strong results. We are excited to welcome the HydroStop team to Pentair and look forward to driving continued success. We are in a solid financial position with a strong balance sheet and record free cash flow, which allows us to continue to invest to drive higher sales growth and profitability over the long term. I now would like to turn the call over to the operator for Q&A. After which John will have a few closing remarks. Operator: Operator, please open the line for questions. Bob Fishman: Thank you. Operator: Ladies and gentlemen, at this time, we'll begin the question and answer session. If you are using a speakerphone, we do ask that you please pick up your handset prior to pressing the keys to ensure the best sound quality. To withdraw your questions, you may press star and two. We do ask that you please limit yourselves to two questions. At this time, we will pause momentarily to assemble the roster. And our first question today comes from Steve Tusa from JPMorgan. Please go ahead with your question. Steve Tusa: Hey, guys. Good morning. Bob Fishman: Hey, Steve. How are you? Steve Tusa: Hey. Good morning, Steve. I think you addressed some of, like, the tough comp and pool on the margin, but I think the productivity was definitely weaker than we were expecting there. Could you just talk about what the trend is and then maybe how you're feeling about that number for the full year for the full company? And then secondarily, I guess it's good to see the volume picking up there. Is that kind of like signs of life of a little bit of a bounce in the kind of replacement of the age installed base, and then just talk about how you're measuring, you know, how you're kind of balancing that against price. Bob Fishman: Very good. Let me go ahead and start with that one. So, you know, in terms of transformation as a whole for the company, still driving towards that $80 million commitment we made at the beginning of the year net of investment. So feel good about that. Also, optimistic that Pool will rebound in terms of ROS expansion in the fourth quarter and drive transformation savings. Frankly speaking, when we compare pool performance in Q3 this year, last year, their ROS was sitting at 34%, up roughly 500 basis points. So we always knew that was gonna be a challenging compare. And then frankly speaking, we had the luxury this quarter to invest in pools to drive that top-line growth in the future. We started off the year very strong from a transformation, drove over half of our savings. So we could afford to invest in Q3, especially in pool. Flow had an amazing quarter in the third quarter. And, again, once again, that allowed us to invest in other businesses. So that investment in the quarter for Pool has really helped in terms of sales plays, new products, digital solutions. It's all about making the life of the dealers and the distributors easier by making those investments, creating an effortless pool experience for the end consumer, and then just driving an improved level of customer service. So I think it was money well spent. But again, from a ROS perspective, I expect pool will end the year very strong. They'll be very close to that 34% ROS. And when you think about the journey Pool's been on, six quarters in a row of strong top-line growth, and their ROS was 31% back in 02/2023. So to be approaching 34% this year, really an amazing trajectory for that business. Steve Tusa: Right. And then I guess just a follow-up on the volume and the source of upside there and then just how you're balancing out against price? John Stauch: Yeah. I would just say it felt like it was more predictable in Q3, Steve. And I think some of that is we're not seeing the levels that could find across the new pool build. And we're also not seeing some of the same challenges that we were seeing in the aftermarket side on when the price first went into place. Some of that was consumer shock and looking at substitution. So it feels stable. We're highly encouraged that we're gonna have a volume-based growth plan for pool next year. And prices are holding. I mean, clearly, don't know if we get this next wave of if China were to, you know, 100% tariffs, we're gonna have to go consider those prices again. But right now, the price cost is in line, and we're doing fine, and we feel comfortable with where we are. Bob Fishman: Just to add a few numbers to that, we talked last quarter, our view has not changed that price would read out about 4% for the company and about 5% for pool. So on track for that. And when you think about our guide, Steve, you know, up 7% this year for pool, think about 5% being priced, 1% to 2% being the Gulfstream acquisition, and the market generally flat from a volume perspective. Operator: Our next question comes from Andy Kaplowitz from Citigroup. Go ahead with your question. Andy Kaplowitz: Good morning, everyone. Congrats, Bob. Thanks for all your help. Bob Fishman: Thank you, Andy. Andy Kaplowitz: So you lowered your twenty-five year-over-year cold water solutions growth, I think, just a little bit down low single digits instead of flat. As commercial growth continues to lag a bit for you, I know you, I think, Bob, you said it will go to low single-digit growth in Q4. And then any preliminary thoughts on '26? For the segment? Bob Fishman: Yeah. You're right, Andy. It was the only full-year guide we tweaked down a little bit in terms of core water solution. You'll remember for Q3, we were saying commercial water solutions would be low to mid-single digits. That came in at low single digits. And we guided Q4 for core commercial water to be low single digits. So it's a little bit off where we like that business to be in kind of that low to mid-single-digit range. But to me, it's reflective of the food service industry in general. That's the type of growth we're seeing. We're gonna continue to drive optimization in that business from a bottom-line perspective. But it is a slower market right now. John Stauch: Yeah. And, Andy, I would just add to that. I think North America, we continue to do extremely well against the market backdrop, but we do have international sales. We've seen softness in 2025 for some of the sales into China. And we're still doing well despite that. And that'll level off as we look at next year, and I think we're encouraged by some of the recent value trends that we see in North America. Bob Fishman: Yeah, we did see in Q3 the ICE business hit mid-single-digit growth, which was encouraging for us. And in North America filtration, we also hit our eighteenth consecutive quarter of growth. So that's been a very impressive run for them. Andy Kaplowitz: It's helpful, guys. And then maybe you could give us an update on the 26% target in '26. It seems that you're still comfortable with that. As you know, transformation savings really slowed down now in three years as you said. Is it reasonable to think that at that March Investor Day, you could still talk about a significant transformation in 2020 funnel that lasts well past 2026 and drive margin higher? I know I'm asking for carp before the horse, but you go. Very comfortable with the '26. John Stauch: Start there. And very comfortable that when we come to invest today, we'll demonstrate a bundle that significantly improves from there. I think every time you we have success, we find opportunities that we need to continue to look at. I think we've been reactionary a lot on the tariff mitigation, but now we have an opportunity to study those supply chains more opportunistically of how we can drive further savings. And one of the encouraging data points in Q is we finally got labor and overhead productivity. You need volume generally to get that labor and overhead productivity, so as we start to bring volume back, we're very comfortable that we'll start to expand margins from a volume which we haven't seen for some time here. Andy Kaplowitz: Thanks, guys. Operator: Our next question comes from Deane Dray from RBC Capital Markets. Please go ahead with your question. Deane Dray: Thank you. Good morning, everyone, and I'll also add my congrats to Bob. Bob Fishman: Thank you, Dean. Deane Dray: Hey, can we just want to follow-up on some of Andy's questions on the transformation? Just kind of could you give us some context of where those savings are coming from, kind of what buckets SG and A? And how much more is there to go there? Bob Fishman: Yeah. I'll go ahead and start. And, you know, the transformation journey, you know, two years ago, we drove six seven of savings. Last year, a $107 million. This year, we're tracking 80, you know, on the way to that 26% ROS. So really pleased with the transformation reading out. In the early years, it was primarily in that sourcing space. Where we were working on, you know, wave one, wave two of our overall material spend. What we're seeing now is much better balance across all four pillars of transformation. So we're doing a really nice job with value-based pricing in the pricing excellence workstream. Within sourcing, we're on wave three. Which is looking at really make versus buy. Is there more product we should be making in our plan? Or is there less product we should be making? We're also at the point of revisiting wave one and wave two with more of an 8020 lens. So a lot of opportunity within sourcing. On the productivity side, we're looking at everything from factory automation, four-wall lean, looking at our operational footprint, and driving savings there. To John's point, we've set some pretty aggressive targets for each of our plants. Around labor and overhead, and we're starting to see that labor productivity start to read out. And then finally, on the org excellence piece, again, setting G and A targets, understanding where the spend is, holding the teams accountable for that spend. So I really think about it as balance across the four pillars that's driving the transformation savings. And you'll hear a lot more about that as part of Investor Day in March. Deane Dray: Paul, good to hear. And just second question, back on pool, there was no mention of an early buy. You know, you don't do that every year, but just, you know, is that not needed? And so just to clarify, that's not in your assumption. John Stauch: No. The early buys are always there. Seen every single year in pool. We would say that it was a normal early buy season, and we're experiencing, you know, carries forward here in as you know, that's the level of the factories, but there has been no abnormal efforts related early buy. Bob Fishman: Yeah. We're seeing, again, a very typical early buy for the fourth quarter. Think about a quarter's worth of revenue with roughly 50% shipping in Q4 and percent shipping in Q1. Very normal year is what we expect. Operator: Our next question comes from Damian Karas from UBS. Please go ahead with your question. Damian Karas: Morning. I want to so I wanted to get in the weeds a little bit on the flow segment. So you got three points of price overall. Could you just talk about, you know, was there much variation in that? Across residential and commercial versus industrial? And because that industrial solution's up 10% really stood out. So maybe you could just kind of talk about what you saw there. Bob Fishman: Yeah. Again, we were really pleased with the performance of flow in the quarter. To drive growth across resi, commercial, and industrial was excellent for us. We're seeing price reading out across all three of those businesses. We've told the story around commercial before in terms of expanding who they sell to, and that really paying off for that business. On the industrial side, just really pleased with both our food and beverage and sustainable gas businesses. Frankly speaking, those were easier compares. But as those businesses have improved their operational performance, we've allowed them to go after more top-line growth through standardized offerings. And that's really paying off. And then it's really nice to see the resi business starting to stabilize and even grow. And we had a good quarter in specialty as well. Damian Karas: Okay. That's really helpful. And, John, I think I heard you say pool pricing kind of has been holding up. Could you guys just confirm that you didn't see any sequential decrease in pricing in the full segment? Thank you. John Stauch: Well, I'm not going to address it sequentially because I look at them year over year. You know, we have two really busy seasons and pool quarters in pool and two softer ones. But you know, we would tell you that the price increases that we put in we held and we saw no challenges associated with it. But as a reminder, we didn't put the incremental one in. That would have captured the concerns of the incremental bump in the China tariffs that were mentioned before. So we timed our price increases with what known information we had, and therefore, we're very comfortable with what the way that we approached it and implemented it. Again, feel good about pricing in full. Read out about 5% ish year. In terms of price in Q3 of this year, it is bumping up against a large price increase. So these changes that we show in our waterfalls are year on year, and last year, Q3, was one of the larger price increases, so it had that compare to go up again. Operator: Our next question comes from Mike Halloran from Baird. Please go ahead with your question. Mike Halloran: Hey. Good morning, everyone, and congrats, Good morning. So just hearing carrying through on the pricing there. At this point, what is the carryover pricing in the next year from a percentage basis? So in other words, if you didn't implement any incremental price from here, what does that carryover look like? Bob Fishman: It's encouraging for us to, you know, kind of start the year with some of that momentum, not only in the overall business but also with price carryover at this point, we think it's one to two points. That would help us next year. Mike Halloran: Thank you for that. And then maybe just a thought on the tariffs. Are you seeing any benefits on the competitive side or anything notable on the competitive side? Associated with how those tariffs are rolling through your footprint versus others in the industries you cover or produce in? Any thoughts on the competitive dynamics. John Stauch: No, Mike. I mean, I think we're all, you know, even though we're all different with some of our supply chain sources, we're all chasing the same commodities and looking for the same access points. So I think we're all on a fairly common playing field regarding the competitive challenges. You know, as a reminder, and we haven't in our particular slide, we've whittled down our China purchase to roughly $100 million inclusive of some tariffs that were there from the 2017 timeframe. So I don't think as we continue to evaluate the global landscape, I think all of us are seeking alternatives. But we're also looking for the clarity of where the best alternatives will be. And so I'm reasonably pleased that we've been able to implement what we've done to cover them today. And we're working very, very hard to have alternatives if further challenges arise. Operator: Next question comes from Julian Mitchell from Barclays. Please go ahead with your question. Julian Mitchell: Oh, yes. Hi. Good morning. And thanks, Bob, for all the help. I guess my first question just around when we're thinking about the revenue outlook on organic sales for 2026, just sort of trying to understand the sort of entry rate into the New Year. You talked about I think, the sort of long-term algorithm of mid-single-digit growth on Slide five. It looks like you're exiting this year in Q4 with maybe low single-digit organic sales in the guide. So just wanted sort of any initial impression on that point. Bob Fishman: Without giving 2026 guidance at this early stage, I will make mention of the fact that we do feel like we have some tailwinds coming into 2026. So the businesses are performing well, and we have some top-line momentum in the back half that should carry forward into the new year. We've got the price carryover that we just talked about in the one to 2% range. We've got, you know, market recoveries that we're slowly starting to see from a relatively low starting point in many of our businesses. I'm also really pleased that the 8020 focus on our Quad one customers and over-serving those customers is really beginning to read out. We'll have transformation momentum ending the year with a large funnel. So those are all positive for us as we look at 2026. John Stauch: We also, though, have to be cautious in terms of looking at potential headwinds. Tariffs still create uncertainty for us. Interest rates are remaining high. General sentiment with end consumers, whether it's home sales or eating out with the families. And so for us, we're cautious entering 2026. Our goal has always been to build a plan around lower top-line growth and really lean in on transformation. And then if markets do recover more than what we had planned, we'll capture that upside. That's the way we're thinking about 2026 at this early point. Julian Mitchell: That's great. And then just my follow-up would be around the operating margins. So it looks like sort of guide for the fourth quarter implies less than 100 bps of operating margin expansion year on year. You've clearly done well above that year to date, and you have the pool business growing margins again in the fourth quarter. So just trying to understand, is that just kind of conservatism for the Q4 margin guide or any particular reinvestment effort underway or something like that in Q4 or something on price net of inflation that's a headwind? Thank you. Bob Fishman: I would say from a full-year ROS expansion story, again, it's extremely pleased. And even in the fourth quarter, we're seeing ROS expansion across the businesses. So pleased with what built into the guide, but it is just give us the opportunity to invest in the business as well to drive that balance going forward, the top-line growth, with ROS expansion. Again, pleased with the Q4 guide. Pleased with the ROS expansion story, and we end the year very strong. Operator: Our next question comes from Brian Blair from Oppenheimer. Please go ahead with your question. Brian Blair: Thanks. Good morning, everyone. Congrats. Bye. Bob Fishman: Bye, Brian. Brian Blair: Bob, you had emphasized, I think it was in response to Damian's question, kind of the broadened focus and growth vectors of the Flow business. And your team started to call that out publicly. As I recall, maybe a year ago. So extending reach a bit more into, you know, data center, institutional, municipal applications. Just wondering if you can speak to, you know, the traction to date, offer a little more detail on what that's meant to Flow's 2025 progression, how the funnel of opportunities looks into 2026. And then on the muni side, how HydroStop factors into strategy? Bob Fishman: I'll go ahead and start there. Yeah. Overall, for us with Flow, the significant top-line growth and again, we've guided to Q4 for Flow to grow high single digits. I think about roughly half of that is core growth, the other half benefiting from FX and acquisition of HydroStop. So the growth continues to be there. In commercial flow, really pleased with their ability to sell to different types of customers. Not necessarily, excuse me, doubling down on any one particular set. If a data center opportunity comes up, we'll take advantage of it, but we're not putting all our eggs in one basket. We're more diversifying across that customer base to drive that growth. John Stauch: I'd just add to it. We're looking to sell water supply, fire protection, and disposal. And we look at all commercial building opportunities. And what's been really building the momentum is getting more specified across our key product offerings with our specifiers and the end markets that we serve. And we're building momentum and that's allowing us to get more looks and we've also improved operational efficiencies that have allowed us to outperform some of the competition in those spaces. Feel really good about the progress there. And look forward to further capture of commercial building opportunities. Brian Blair: Understood, that's encouraging. And in terms of HydroStop, Bob, I believe you mentioned $10 million in contribution top line in Q4. I assume that that's seasonally a bit muted. Should we assume $50 million at 30% ROS for 2026 as a baseline? Or factor in, you know, any variance to those numbers? Bob Fishman: That would be a good number for you. Brian Blair: Understood. Thank you. Operator: Our next question comes from Nathan Jones from Stifel. Please go ahead with your question. Nathan Jones: Good morning, everyone. Good morning. Congratulations. Hi, Nathan. Bob. Nick's got big shoes to fill. I guess I'll start with a question on fall. You're obviously into the prebuy season, and that gives you, you know, some visibility into what your customers are expecting in 2026. Maybe I mean, I know the aftermarket side of your business is generally pretty consistent, but maybe you could give any preliminary commentary on what you're thinking about the new and refurbished side of pool in 2026? John Stauch: Yeah. It's a little early, Nathan. I think what we're encouraged by is the way we end up end the year is we're just not seeing the peak declines and decreases that we were seeing in the previous couple of years. I also think that it's an industry that doesn't usually see price decreases. We're getting stabilization and realization that the prices that are in the market today are roughly what they're gonna be in the future. Which allows people to quote pool, deliver the customer pool pads at trying to deliver, and have some continuity around that. So I think it feels more like a break and fix is being serviced appropriately. And as the remodels and the new pool builds come online, you know, we feel like we're well positioned with the dealers just to support them. So that's the way I would describe it. I mean, we'll get a better look as we close out the year here, and get some indications on new housing starts for next year and how pool attachment rates are there and what the potential opportunities are for us. But it's a little early to tell. Nathan Jones: Fair enough. Follow-up questions on 8020 and the comment that you made there about focusing on Quad 1 and growing there is really starting to read out. I find interesting. Typically, I think 8020 is usually associated with margin expansion. And focusing on Quad 4 to begin with. So I'd be very interested to hear a little bit more about the 8020 focus on Quad 1 and what kind of growth initiatives you're putting in there. And then maybe just a comment on how you're addressing Quad 4, as part of 8020 and the margin potential there. Thanks. John Stauch: Yeah. I mean, think really quickly, and we'll give quite a few business cases and share some insights in our March analyst meeting when we roll it out because I think it is time to share details and stories and share with you kind of where we're winning. But when you start a business, you generally start it and become successful with a set of core and you become great partners with them. But then typical public company mentality will be when you stretch to get volume growth and you need to make quarters, you bring on other customers and you give deeper discounts or you offer different ways to serve that new customer base, and you are not taking care of your top customers the way you should. And so by deemphasizing the quad four or the lesser customer day, you have an opportunity to go back to those top customers and say, how do we grow together and really think of our partnership that we had built together. So that's what we're talking about. And it's a leap of faith to say, I'm gonna give away my growth to the lesser performing customers, and I'm gonna get that double-digit growth to my core customers. When you start to see it, you start to build momentum, and then you build more programs with those individuals to be more successful. That's the stage we're at in some of our businesses. And that's building momentum and best case examples that we share across the rest of the portfolio. Operator: Our next question comes from Brian Lee from Goldman Sachs. Please go ahead with your question. Nick Cash: Hi, everyone. This is Nick Cash on for Brian Lee. Just one follow-up question on the HydroStop acquisition. You mentioned doing the company is doing $50 million in revenue in 2025. And I think in the previous answer, you said, you know, it's a decent number to model for fiscal year 2026. Are there any cross-selling opportunities or to accelerate that growth in 2026? And you guys given any color on what the growth was from 2024 to 2025? Thank you. John Stauch: Roughly high single digits on the growth side. That's been performing historically. We don't see a reason why that would slow down if we head into 2026. We do think there's cross-selling opportunities as we look at where they're specified and where they're currently providing value and where we're specified in providing value, and how do we go work with those specifiers to get an extended offering? Similar to what we did with Manitowoc and Evercure, when we put those businesses together. So it's a really nice adjacency. It's a unique product that allows water to run to critical application areas while you're trying to work on the infrastructure opportunities. We think that's gonna open up a great opportunity for us to cross-sell aggressively in 2026-2027. Nick Cash: Awesome. Appreciate it. Thank you. Operator: Our next question comes from Andrew Buscaglia from BNP Paribas. Please go ahead with your question. Andrew Buscaglia: Hey, good morning, everyone. Morning. Just want to follow-up on the data center comment. Just as I understand it, the pump valve market as it plays into that application can be competitive and wondering what you're finding in terms of margins and how you go about capturing volume, but at the right margin in this kind of market. John Stauch: Yeah, I want to be clear. I mean, I think you got to look at data centers as the infrastructure to support the data center. And then the product requirements inside the data center for their particular unique needs, primarily cooling. We're looking at a building, it doesn't matter if it's a hospital, doesn't matter if it's a commercial warehouse structure, doesn't matter if it's a manufacturing, or if it's a data center, and we're working with the engineers in the specifiers, to get water to those sites. Try to be the choice for fire inside of that building and fire protection, which is critical in all applications. And then be the water disposal partner as well as we extract water from that site or reuse the water from that site. And that's how we're looking at the build permit and the specification. Some of them have to be data centers, some of them have to be hospitals, some of them happen to be manufacturing spaces in the United States. And that's how we're trying to win. And you win those by local municipality specifications, you win by the engineers being localized to the builders in those regions. And you have to have an outward sales program to do that. Andrew Buscaglia: Yeah. Okay. Okay. Yeah. Maybe, Bob, first off, congratulations. But I wanted to check-in maybe one of the last few times on your capital allocation into year-end. Been pretty active with repurchases and M&A. And I'm wondering if you know, maybe we're seeing some increased activity on the M&A front with, you know, some optimism around interest rates. Don't know how are you seeing that balance of capital allocation into year-end and just into next year? John Stauch: Yeah. And by the way, Bob's gonna have his signature authority all the way through February. He's gonna have a tight hold on that checkbook. And he's continued to manage cash the way he has. And you know, I think you'll see that Nick, being the treasurer, under that playbook as well. Right now, we couldn't be more pleased with the balanced approach to the capital allocation story. We've got a little bit of M&A contribution here that we think was well spent. We continue to demonstrate buying back our stock, and we're continuing to pay a dividend as we mentioned forty-nine years. Next year is a big round number that we hope to continue. And we like that balanced approach. And I'm an ROIC person, so I think ROIC is the measurement of how you're performing on that capital allocation. And we're very proud of where we sit right now in the high teens. Regarding that, which demonstrates that we're putting cash to work and getting a return. So I don't think anything changes in this area, and I do think we're encouraged that there's more of an M&A pipeline to consider. But we're gonna be extremely disciplined as we look at those opportunities. Operator: Our next question comes from Andrew Crow from Deutsche Bank. Please go ahead with your question. Andrew Crow: Hi. Thanks. Good morning, everyone, and congratulations, Bob. Wanted to ask on the new elevated CIO role with Heather, and I think there's a little bit of a shift on focusing more on digital. Can you just level set us on what percent of sales right now you'd consider digital or digital-enabled? Maybe any views on where this could go over time? Thanks. John Stauch: Yeah. You know, I haven't ever quantified it that way. I do think that it is the time to consider how we're gonna use artificial intelligence, how we're gonna look at our enterprise product technology opportunities, how we're gonna digitize factories, and how we're gonna provide elite customer experiences. And I don't think you could do any of that without software that makes it easier for your to do business with you. And making sure that you have end-to-end usage of simple-to-use technology so that end consumers can work with the dealer partners to optimize those dealer routes. And we can help utilize our product to enable it. Obviously, pool does most of its product offering through an intelligence offering. And we're encouraged with some of the progress that we've had in our industrial solutions business, which is where a lot of the growth is coming from, measured performance, and then ultimately we're doing the same thing in ICE, in the expansion there. Our businesses need to create end-to-end digital strategies, and we're gonna work hard to do that. And then we have to have an accelerated way to implement the IT technology necessary to create those experiences. And so it's a great opportunity to look at it now and I think Heather's a great partner and a great contributor to the organization. Bob's done a great job stewarding and leading IT. But I think we're moving a little bit from the infrastructure and the foundational part and we need to invest in the digital front end of our business. And that's why she's gonna have a seat at the executive table. Bob Fishman: Yeah, I couldn't be more pleased for Heather so often sitting in the executive leadership team meetings. I'm thinking to myself, boy, it would be nice for Heather to hear this firsthand. As we, you know, try to make the lives easier for our distributors and our dealers. So I think this will allow faster decision-making and also better decision-making on that part. And while I am talking about my team, I am extremely proud. You know, earlier this year, we took a very strong corporate controller Jennifer Hensley, and promoted her to chief accounting officer. Heather now moves up to the executive leadership team and Nick is more than ready to take on the CFO role with his strength in the industry overall and its industry knowledge, FP and A, transformation in 8020. So we're just in a really good place from that perspective. Andrew Crow: Okay. Great to hear. And then the follow-up, Oman, could you comment a little on just inventory in the channel? Across your different segments? And just if you're seeing anything that seems a bit out of balance at this point. Thank you. Bob Fishman: No. Not seeing anything unusual and out of balance. We really are at historical levels in almost all of our industries that we serve. So in good shape as we, you know, turn the page into 2026. Operator: Next question comes from Nigel Coe from Wolfe Research. Please go ahead with your question. Nigel Coe: Oh, thanks. Morning, everyone. And I know you've covered a lot of ground here, so I'm just maybe a few more clarifications. John, last quarter, mentioned price fatigue and a bit more repair activity. Amongst the contractors. Are you seeing any change in that? There certainly seems like the price increases for next year seem to indicate that seems like quite a healthy environment. So just wondering if you can maybe just touch on those points. John Stauch: Yeah. I mean, I just want to recognize and acknowledge that if you take a look at cumulative price increase over the last several years, you wouldn't have been here in 2023 instead of price is gonna represent this much more of the cost per product. I do think I'm proud of the fact that we've been able to capture that and expand margins and generally produce profit for shareowners. But I think you gotta start looking at through value propositions, dealer enablement, and consumer lenses, and say you gotta make sure that your product still is the highest quality in the industry, that it has reliability, that matches that new price point. And that you're not having dealers come back with no dollar sales calls. Right? They have to generate revenue from every sales call because of the cost of inflation regarding wages and the cost of their route. So we just have to, as an organization, team, continue to give the best value and make sure that our products are cutting edge from a technology standpoint. Recognizing that things are a lot more expensive today than they used to be three years ago. That's the point I'm making. And, you know, we gotta have NPI lens on this, gotta have innovation. And we've gotta make sure that our dealers are getting the best value from Pentair when they work with us. That's what I meant, Nigel. Nigel Coe: Okay. No, that's fair. Been a lot of price going through. No question about that. And then my follow-on is for Bob. I want to throw in a couple of quick ones, for you before you disappear into retirement. On page 12 on the profit bridge, there's $48 million from price volume, net M&A, and we know there's $37 million from price, which $11 million from other things for x price. I'm just wondering if there's a big mix contribution in that number, just curious what gets us to 48%. Bob Fishman: Yes. We had a good mix count of these. Yeah. I tell you what, you know, when we get sales growth and volume, that tends to drive mix for us. With all of the work that we're doing in quad one. To over-serve those customers and focus on certain product lines. So that's a nice trend for us as we start to drive that top-line growth. Mix has been benefiting. Operator: Our next question comes from Joe Giordano from TD Cowen. Please go ahead with your question. Joe Giordano: Hey, good morning guys. Good morning. We've been here just given kinda building on what Nigel was just talking about. Just given the amount of price that's been put through over the last several years, we're hearing a little bit more about like, dealer or dealers and installers kinda using some more foreign products. And some like, low-cost products maybe from Asia, something like that. I'm just curious of what if you're seeing any of that and any color on the other. John Stauch: Short answer is yes. It's starting to emerge. Long answer is it's not gonna be a huge impact in the short run. But we have to make sure that we're offering better value to our customers. We're innovating. We're building content in all of our channels, and we're making sure that we're offering superior quality and in our brand stand for what we're positioning them to stand for. So it's a longer-term issue and we have to be very cognizant that when markets are more stable from a volume perspective and price starts to be introduced, people are gonna look for lower-cost alternatives. Especially when supply chains are disrupted and there's other opportunities. So nothing unusual but have to acknowledge that these entrants are gonna be here, and we've gotta outperform them. Joe Giordano: It? Targeted to a specific type of application set or product type, or is it kind of pervasive? John Stauch: I would say right now you're looking at more commodity-based products. More lower-end something that's not intelligent, or connected to technology, it's an easier substitution at that level. So, like, for instance, in pool, you might see it on the lower end of the filter. Right? So a filter is not doing the intelligence work. You might have other places that you're doing that water chemistry, and you're seeing it on lower-end applications. In filtration as well across the rest of our businesses. And we just have to be cognizant that our value promises and our efforts around what our brand is promising and our service levels and warranties are worth the difference in price. Operator: Our next question comes from Jeff Hammond from KeyBanc Capital Markets. Please go ahead with your question. Jeff Hammond: Hey, good morning, guys. I just just staying on price. It looks like your 26 pricing for pool is, you know, 6 and a half. Or 6 to 7 versus kinda normal 4. Just wondering what that contemplates for incremental tariffs. And then should we expect something similar from the other businesses where there's maybe an above-normal price increase because some carryover tariff impact? John Stauch: Yeah, so pool goes first, as you know, in the end of the pool season. September. You know, we went out with roughly six-ish price increases, which captured all the things we knew at that point in time. We don't always net that full amount, because we do work with our dealers and have dealer incentives that give them discounts on volumes, or certain levels that they achieve. And I think all the other businesses are looking at the same way. What do we know at the point of January 1 when we put those prices in, and what's fair and how do we feel we're gonna realize and net out price. Jeff? Hopeful that we see anything disruptive now and the end of the year, but if we do, we would have to adjust our prices accordingly. Jeff Hammond: Okay, thanks. Operator: Our next question comes from Scott Graham from Seaport Research. Please go ahead with your questions. Scott Graham: Hey. Good morning. Thanks for taking the question. Bob, congratulations. On really being part of a significant increase in earnings consistency. I think you guys have done a phenomenal job in the face of very little organic. What I wanted to kind of get into was the organic growth investments. It sounds to me like you're doing a lot on the front end, understandable, given your distribution sort of pie chart. So when your end markets improve, does that percentage of front end maybe shift toward a new product orientation? Or would that be incremental growth investment that you deem necessary? In better end markets? John Stauch: So I put it into three major categories. Scott, real quickly. I think we want to drive demand our dealer channel. Right? We've been a little past about last few years in letting the dealers find their own path towards creating the demand, we've gotta pull demand. Right? We've gotta have consumers that are interested in product upgrades, new technologies, and reach out to a set of dealers that we recommend. That helps create the demand in our industry. That'd be one area. Number two is the sales excellence. You know, how do we cover the markets and the regions of The United States and the world more effectively? And how do we incentivize our sales team to sign up dealers and promote our value proposition. Then it's marketing efforts. How do we build the momentum around value propositions, branding, etcetera? All of that has a digital lens to it, and all of that has an increase in talent. Still to it. The fourth component would be technology, right? Making sure that we're investing in both innovative technology for today and innovative technology for the future. Tools across our great businesses, they're prioritized as CWS, is our commercial water business, and basically C and I as the top three businesses. We want to hit the accelerator for organic growth and drive value in those three businesses. That's what we're doing, Scott. Scott Graham: Appreciate it. Thank you. John Stauch: Okay. Thank you for joining the call today. In closing, I want to reiterate some key themes on slide 19. We delivered our fourteenth consecutive quarter of margin expansion. And drove double-digit adjusted earnings growth as a result of solid execution and transformation. We increased our 2025 sales and adjusted EPS outlook and remain confident in our long-term strategy. We expect a long runway of productivity savings driven by transformation and 8020. Our focused water strategy and strong execution continue to build a solid foundation with optimal operational efficiency. Which we believe will drive long-term growth profitability and shareholder value. Lastly, we believe we are well-positioned to address opportunities from favorable secular trends in water with the right long-term strategy. We look forward to seeing you at our 2026 investor day in March. Thank you, everyone. Have a great day.
Operator: Good morning, and welcome to the RLI Corp. Third Quarter Earnings Teleconference. After management's prepared remarks, we will open the conference up for questions and answers. Before we get started, let me remind everyone that through the course of the teleconference, RLI management may make comments that reflect their intentions, beliefs, and expectations for the future. As always, these forward-looking statements are subject to certain factors and uncertainties, which could cause actual results to differ materially. Please refer to the risk factors described in the company's various SEC filings, including in the annual report on Form 10-Ks as supplemented in Forms 10-Q, all of which should be reviewed carefully. The company has filed a Form 8-Ks with the Securities and Exchange Commission that contains the press release announcing fourth quarter results. During the call, RLI management may refer to operating earnings and earnings per share from operations, which are non-GAAP measures for financial results. Moralized operating earnings and earnings per share from operations consist of net earnings after the elimination of after-tax realized gains or losses and after-tax unrealized gains or losses on equity securities. RLI's management believes these measures are useful in gauging core operating performance across reporting periods that may not be comparable to other companies' definitions of operating earnings. The Form 8-Ks contains a reconciliation between operating earnings and net earnings. The Form 8-Ks and press release are available at the company's website at www.rlicorp.com. Will now turn the conference over to RLI's Chief Investment Officer and Treasurer, Mr. Aaron Paul Diefenthaler. Please go ahead. Aaron Paul Diefenthaler: Thank you, Adam. Good morning, and welcome to RLI's third quarter earnings call for 2025. Thanks for joining us as we head into this home stretch of the year. We've got our usual lineup on deck, Craig Kliethermes, President and CEO, Jennifer Leigh Klobnak, Chief Operating Officer, and Todd Wayne Bryant, Chief Financial Officer. Here's the game plan for today's call. Craig will kick things off with big perspectives. Todd will run down our financial results. And Jennifer will follow with commentary on market dynamics and our product portfolio. After our prepared remarks, we'll open the line for questions. And Craig will close with some final thoughts. With that, let's get started. Craig? Craig Kliethermes: Thank you, Aaron. Good morning, everyone. We appreciate all that are participating in the call and look forward to your questions once Todd and Jennifer have had an opportunity to give you an overview of our results. We are pleased with our third quarter results which include an 85 combined ratio with underwriting profitability across all segments. Book value per share has grown 26% year to date inclusive of dividends on an 84 combined ratio and double-digit growth net investment income, resulting in a 20% plus return on equity. The top line continues to be relatively flat largely due to changing conditions in the commercial property catastrophe market over the last several years. And the significant softening that is now occurring. This presents a headwind to current growth, we look at it as a reflection of our willingness to grow when the market is in our favor, and dedication to our hallmark discipline in softening markets. We still have good underlying growth within most of our very diversified niche product portfolio. Despite the reset in the property catastrophe market. A significant amount of that growth is being driven by rate increases in our cash businesses. The industry continues to face a complex environment marked by increased market volatility, political uncertainty, alternative and inexperienced capital providers entering new spaces, and persistent legal system abuse. However, disruption creates opportunities for those with a steady hand and a deep expertise to navigate a rapidly evolving landscape. Vigilance, underwriting discipline, and adaptability are critical to long-term success. At RLI, we value being a stable market to our customers and consistency of financial results overtaking outsized tail risks. We also know you must keep investing in the best information placed at the fingertips of our expert underwriters and claim specialists at the time of decision making to continue to outperform. This is ingrained in our unique ownership culture and it is what we will continue to focus on as we have for the last sixty years. With that, I'll turn it over to Todd who will provide some detail on our financial results. Todd Wayne Bryant: Good morning, everyone. Yesterday, we reported third quarter operating earnings of $0.83 per share supported by solid underwriting performance and a 12% increase in investment income. As a final reminder, per share data reflects a two-for-one stock split that was due to shareholders at the 2024 and distributed in January. Underwriting income benefited from continued growth unearned premium and positive results on the current accident year were complemented by favorable development on prior year's reserves across all three segments. Our total combined ratio was 85.1 down from 89.6% last year. The improvement is largely reflective of the benign hurricane season experienced thus far in 2025. Like last quarter, on an overall basis, our top line was flat compared to the prior year but our casualty segment continued to grow nicely from both rate and exposure in areas our underwriters see profitable opportunities. Property was challenged given increased competition and rate pressure on catastrophe exposed business the returns on this business remain strong. On a GAAP basis, third quarter net earnings totaled $1.35 per share, versus $1.03 per share in Q3 2024. Underwriting and investment income as well as realized and unrealized returns on the equity portfolio all outpaced amounts posted from the same period last year. Turning to segment performance. Property experienced an 11% decline in gross premiums which was influenced by rate and exposure declines in U.S. Property. In other parts of the property segment, marine was flat for the quarter but up 4% for the year and Hawaii homeowners continued to deliver growth up 33% in the quarter and 35% year to date. Jennifer will provide additional detail on sub-segment market conditions shortly. Properties bottom line benefited from an absence of hurricane losses and $5 million in favorable prior year's reserve development primarily on marine. On a comparative basis, Q3 2024 included $37 million of storm and catastrophe losses. These losses were partially offset by $8 million in reduction to prior year's reserves inclusive of catastrophe related amounts. Attritional losses were up modestly in the 2025 but with a 26% loss ratio we are very pleased with this segment's results. All in, Property continued its strong performance posting a 60 combined ratio in the quarter. In casualty, gross premiums advanced eight and we posted a 98 combined ratio for Q3. The segment benefited from $8 million of favorable prior year's reserve development, and improved current accident year loss ratio compared to last year. You may recall that current accident year results for the third quarter last year were impacted by reserve additions to yield based coverages as well as hurricane losses within our package business. Prior use reserve benefits were realized across a number of products with notable contributions from general liability and excess liability. Surety's gross premium was down 3% over last year, driven by modest declines in commercial and contract. For the year, commercial and transactional surety are up 53% respectively. While contracted down 5%. The result for contract was influenced by a slowdown in small to mid market construction activity. The combined ratio for the quarter was 85 and underwriting income benefited from $2.7 million of favorable reserve development. The expense ratio rose reflecting higher acquisition costs and increased investments in technology and people. On the asset side of the balance sheet, our investment portfolio performed nicely as stocks and bonds rallied in the quarter offering a 3% return total return and a solid contribution to comprehensive earnings. Operating cash flow of $179 million and select sales of fixed income assets over the last three months facilitated purchase activity with average yields of 4.8% a 70 basis point advantage to our portfolio's current book yield. Beyond our traditional invested assets, investee earnings totaled $1.5 million in the quarter. Incorporating comprehensive earnings of $1.65 per share, and adjusting for dividends, book value per share increased 26% from year end 2024. All in, we are very pleased with our third quarter and year to date performance And with that, I'll turn the call over to Jennifer. Jennifer? Jennifer Leigh Klobnak: Thank you, Todd. The property segment delivered a strong 60 combined ratio. While premium declined 11% in the quarter. From a profitability standpoint, all products within the segment are performing well. We continue to find opportunities for growth. Hawaii homeowners is a great example, where premium was up 33% in the quarter, including a 16% rate increase. The market has been disrupted since the mine wildfire, we have been taking advantage over the last couple of years. We have an approved rate filing effective this month. That we expect will add 12% rate to the book over the next year. We're working on several initiatives for process improvements and automation help increase retention by making it easier for agents insurers to renew their policy. The attritional loss ratio has been steady and we appreciate the team's contribution to results in the quarter. Marine has made a notable contribution to the bottom line again this quarter. The top line was flat given choppy economic conditions and increased competition in the market. Particularly for cargo exposures where we have intentionally shrunk the book. The division broke their top line growth streak, that kept the more important streak going. They're working on their eighth consecutive year of underwriting profit. 20% for the quarter. To add some perspective on the scale of this business, we've written over $350 million in premium through nine months which alone would represent the third largest production year ever. Other than the last two years. During the last hard market, we leaned into this space in a sustainable way. Meaning we invested in our producer relationships, enhanced our form set for flexibility, and added more claim capabilities to service a larger book of business. Those investments provide a strong foundation to lean into other property market opportunities as they arise. New capacity has been entering the market ever since Hurricane Milton missed its target last year. They are chasing top line growth, as expensive portfolio quality. We remain selective. Our renewal rates for wind are down 11% in the quarter, but remain around 2.5 times higher than they were prior to the hard market in 2019. Our renewal retention is down a couple of points and new business is highly competitive. But the hurricane season is not over yet. Our exposure is down almost 10% for the year. Are comfortable that if and when an event occurs, we'll be able to handle the influx of claims and remain a reliable market to our insureds. Just like we've done in the past. Earthquake remains highly competitive as well. With many insurers choosing to retain this risk. Our submission count is down about 5% accordingly. Rates on renewals are down 9% for the quarter. We are prioritizing maintaining a well priced book sustainable terms and conditions over volume or market share. We have been investing in underwriting talent exploring new producer relationships, and building out product offerings to be ready when the market churns. We expect E and S Properties underwriting profit for 2025 to exceed what we used to write in top line premium. This demonstrates the success leading into the hard market. The surety segment posted an 85 combined ratio with premium down modestly for the quarter. While we're navigating some economic headwinds, our commitment to sound underwriting and long term results positions us well for sustained success. In the construction space, spending is down where we provide surety bonds. Primarily in the small to mid market public construction projects. Mixed messages from the government early in the year and budget constraints more recently have tempered bid activity. Although the average size of the projects we've been able to bond is reduced from last year, Our teams continue to find quality opportunities that align with our underwriting standards. Our commercial surety premium was also challenged by a slowdown in energy renewable projects, the perception that profits are easy to make in the surety business. Has led to a proud and highly competitive landscape. There has been some industry loss activity in both contract and commercial surety, that may bring more balance to the market. Potentially creating opportunities for disciplined players like us. We're confident in our strategy. Our investments in experienced underwriters who can attract new accounts and newer underwriters to perpetuate our expertise. Are helping counteract these headwinds. We've made investments in processes and systems in our transactional surety offering is freeing up underwriters' time for marketing and decision making. These investments will pay off over time, especially when market conditions warrant us leaning more heavily into growth opportunities in this space. Cash and premium grew 8% a 98 combined ratio for the quarter. One of the highlights is the performance of our E and S casualty brokerage group. Is responsible for an improving underlying loss ratio and a large contribution to the reserve release for the quarter. 12%, with a few more opportunities on the excess side versus the primary. Submissions were up around 20% for the group. Some standard markets have pulled back, particularly in the Northeast, which has created some opportunities. Although not all of the business matches our appetite. There is a construction we focus on, for example, office renovation, our growing showing some growth this year. Also staying in front of our producers on a regular basis. Which continues to drive new business solutions. We have a strong pipeline of pooled and project business around the country that we're waiting to buy. Decreasing interest rates will help financing move forward on these projects, as this group focuses on private construction business. An area we continue to monitor closely is our auto exposure. Our transportation division premium was down 1% for the quarter, while we achieved 15% rate increases. Competition remains fierce in this space despite the severity trends experienced in the industry. While a couple of our largest renewals have shopped their policies midterm, and canceled for lower cost alternatives, we remain focused on writing profitable business and leveraging our underwriting discipline to grow where it makes sense. There are still pockets of opportunity. Particularly in the public auto industry. We're hitting on these where our in house loss control identifies accounts with acceptable safety practices, we can get the rate we need. Our transportation staff is collaborating with our package business where we offer auto coverage. Loss control team has expanded services to these other divisions where it makes sense. Auto liability rate increases across the portfolio totaled 16% for the quarter. Up from 14% last quarter. Our actuaries and claims staff provide helpful feedback to our underwriting teams to ensure they understand what is driving loss where loss trends are coming in. We've already seen the benefit of this feedback move among our support teams and between business units. First, umbrella continues to drive our top line growth in the Casualty segment. Premium increased by 24% in the third quarter. This includes a 17% rate increase. New business count has slowed a bit as we implemented higher minimum attachment points in our largest states. We received approval for additional rate increases effective this quarter, that will continue adding rates to the book well into 2026. We believe our approved rate increases are outpacing loss trends, which provides a strong foundation for our growth strategy. Overall, while the top line is flat this quarter, premium is up 2% for the year, In an environment where many business units are experiencing increased competition, and softening terms and conditions. Taking a longer view, we have doubled our premium in the last five years while significant increasing our capabilities. We have invested in systematic ways to gather customer feedback. Translating into meaningful business improvements from simplifying online applications expanding partnerships across business units. And introducing new products. Grow new offerings slowly, ensure we have the coverage as needed at an accurate rate with processes that will support the producers and insurance who select us. Some examples of new coverages include a moving and storage focused transportation division, auto physical damage coverage in marine, and admitted storage tank coverage as part of our environmental liability offering These small products add to the diversity of our portfolio, will provide more opportunities to grow as market conditions change over time. We have also invested heavily in continuously improving the products and services we offer as well as the processes that support them. Sometimes that means simplifying how we work. Other times that means embracing automation. Currently, we are focused on identifying and implementing generative artificial intelligence where it has value. Creative employee owners have already introduced many tools that are reducing the time it takes to serve our business. Have armed our underwriters and claims staff with better information to support their decisions. And we're just getting started. Finally, we've invested in our community of employee owners, producers, and other business partners by increasing training for our staff, and investing in the partnerships we've formed we can be a stable carrier all phases of the market cycle. These investments may not show up in a single quarter's results, but we believe they will translate to long term profitable growth over time. We look forward to continuing to invest in the long term as we strive to achieve our thirtieth consecutive year of underwriting profit. And now I'll turn the call over to the moderator to open the line for questions. Thank you. Operator: And our first question comes from Michael Phillips from Oppenheimer. Michael, please go ahead. Your line is open. Michael Phillips: Thank you. Good morning. You've talked about recently how you've raised your attachment points from the first umbrella book. I think recently in California and then maybe more recently in Florida, clearly two of your biggest states there. Can you talk, I guess, about what that what you've seen that has done to your margins in that personal umbrella book? Also just kind of quick follow-up, where are you in that process in Florida? Jennifer Leigh Klobnak: Yeah. So, we've been at a higher cash report California for over a year now. And we recently, towards the beginning of this year, implemented that in Florida. So moving from traditionally a $250,000 attached point as an example up to a $500,000 attachment point required for new business. We added in September seven additional states where it's just our larger states that we're seeing again a little more frequency as those claims start to breach the five the more often, the $250,000 So moving up to the $500,000 level, think that will help from a frequency standpoint to some extent. Now some of those changes, as you can tell, are fairly new, it's pretty early in the book. But in working with our underlying carriers, we we we are taking advantage already of seeing better talent in the underlying claims staff that are handling those claims as they're have more money in the game. And we are seeing that overall, you know, our loss trends are improving on the book from this change as well as the other things that we've implemented over the last twelve to twenty four months. Michael Phillips: Okay, Jennifer. Thank you. A with Personal Umbrella for a second, I think you said a 17% rate increase there this quarter, hope I heard that right, which seems like a bit of an inflection from the last couple of quarters. Is that just a function of states where you've taken them? Or I think last quarter, you said nine. So it's a pretty big change there. So kind of what's driving that? It is. So Jennifer Leigh Klobnak: that works is, you know, we've got to file in all 50 things. And so in any individual quarter, can be influenced by a state coming online. For example, our Florida rate change was really effective. This quarter. It was substantial. And so that influenced that tick up in the rate change, whereas last quarter, we didn't have too much notable going in, so it's just kind of earning in from previous rate filing. Michael Phillips: Okay. Yeah. Perfect. Thanks. And and then lastly, Jennifer, sticking with your comments, Right before you started talking in the casualty about the auto exposure, you made a comment about some standard markets are pulling back. I think you said particularly the Northeast. It wasn't clear what you were talking about there. Can you clarify that? Jennifer Leigh Klobnak: Sure. There are some of the markets in the Northeast that were covering more artisan contractors. And that's not really a target for us on the primary side, but on the excess side of our, you know, cash group, we do offer that coverage. And so some of those insureds meet our risk appetite, some don't. We do see more submissions coming in and are hitting on some. And and that's a a positive trend in our book. Operator: Okay. Thank you. Thanks for your interest. The next question comes from Mark Hughes at Travist. Mark, please go ahead. Your line is open. Mark Hughes: Yeah. Thank you very much. Good morning. In the surety, in the good morning. The expense ratio, I think you talked about technology and some additional personnel expenses. Where should that head from here? Is this a good level for that surety expense ratio or will it taper off in coming quarters? Todd Wayne Bryant: Mark, Todd. I think we'll see as we continue to invest from that standpoint. And we talked last quarter, Jennifer mentioned kind of the visual side, the customer relationship management. All of those things. I mean, that has continued. And we're continuing to invest there. So I mean, it can ride itself a decent amount There's a little bit of pressure on commissions, I would say. Not a lot, but some. But that overwhelming influence in the quarter and really year to date. Is from those investments in technology. And people. Other thing to kind of take a look at, I think if you look on a relative basis to written premiums, you're going to see it look a little higher on a written basis in the quarter. Than on a year to date basis. But some of that is how the reinsurance sees there. But we're going to continue to invest there. Mark Hughes: Understood. How would you describe the property market now? It's obviously been in the state of flux, so a lot more capacity coming in. As we're getting near the end of the storm season and it looks pretty clear, Is there risk of a kind of another step function in terms of competition or perhaps on the other hand, is it stabilized? How would you characterize it kind of in the the near term here? Jennifer Leigh Klobnak: Yes. This is Jennifer. I would say, during the season, a lot of times, whatever strategy people start with, they kinda stick with. But as the season progresses, we get towards the end where it appears to be quiet, even though there are some there's some talk of some interesting waves out there right now. There are people who are are continuing to soften the market conditions, and we're seeing everything from admitted markets stepping up in the Midwest where you know, the issues from the Verecho several years ago have faded, and so they're coming back into the market a little to, you know, MGAs and other programs that are affecting the coastal states. Where they're, you know, decreasing rates and deductibles and expanding terms and conditions. To in our California market where you got market success, are just adding in if they're writing a fire policy, they might just that'll help them keep the policy. So we've seen that behavior as well. So there's tough market conditions out there, key for us is that even in the hardest market, we stayed open for business for new business from our producers the whole time. We worked with them to try to develop solutions when they couldn't find capacity. And that has really trickled into the current state where those producers appreciate what we've done, and they continue to to help us find new business and to give us a last look on our renewals. And so that is helpful. I think, you know, we will continue to look for getting adequate rate and sufficient terms and conditions that we'll understand what the claim will be if that claim happens. And so that's where we're focused on maintaining terms and conditions that we're comfortable with. So the market could continue to fly, which would pressure our book, but seeing a lot of opportunities around the country on individual accounts that we can take advantage of, and we'll continue to do that. It's a it's a fight out there, but we're up for it. Craig Kliethermes: Mark, this is Craig. I would just add one thing Obviously, a lot of reinsurance renewals are one-one and depending on what happens in the reinsurance market could will happen. Big influence on how competitive the market gets. Mark Hughes: Understood. Thank you very much. Operator: The next question comes from Meyer Shields at KBW. Meyer, your line is open. Please go ahead. Meyer Shields: Great. Thanks so much. Sort of staying on the same topic. Jennifer, you mentioned, I think, 11% win rate decrease in the third quarter. What was that in the second quarter? So you can just like scale where we're trending? Jennifer Leigh Klobnak: I think you said the wind rate decreased. It was 11% this quarter and 13% last quarter. It's 13% year to date. So you can see know, it just depends on what you're buying in a given quarter. On your renewal. Meyer Shields: Okay. Yep. Fair enough. When we look at, the reinsurance costs for Hawaii Hurricane, do they tend to follow pricing trajectories for Florida wind? Jennifer Leigh Klobnak: I would say, Hawaii hurricane isn't an emphasized risk by the reinsurers. I mean, it is absolutely diversifying from Florida. The probabilities that event to happen are lower given the geography of Hawaii, which is where it's at. And so it's not a huge topic of conversation in the reinsurance renewals. It's it's very much lumped in. Florida is really the focus. Meyer Shields: May I add? I'm Justin. Yep. Go ahead. I'm sorry. I was just gonna say hurricane is not a huge expo for us just because way that is sold out there, that's typically in a more cat you know, they buy it, they can buy it separately from the homeowners product. There's a lot of cat only players out there that will write the the hurricane exposure and California. Yes. Hawaii. Sorry. Yeah. A note on that. I mean, only about 20% of our Hawaii book actually buys wind coverage from us. So it's a much smaller exposure for us relative to the entire Hawaii book. Meyer Shields: Got it. That's very helpful. And just maybe a broader question. There seems to be a little bit of turmoil in the whole brokerage market because we've got I guess, Houdon looking to build The U. S. Retail platform. Can you talk about what that means for RLI, like the threats and opportunities in that? Jennifer Leigh Klobnak: Yeah. So, Meyer, our business model, as you know, is, to partner with our producers to try to help help them grow, help us grow. Right? And so we we do invest in our relationships. I'll say at the underwriter's death which means we encourage our underwriters to physically meet with our producers. That's, you know, a line broker, a line underwriter meeting on a semi regular basis in person. They tend to become friends or at least be well acquainted so that the relationship is strong at that level. And then we reinforce that relationship as it goes up the line so that like Craig and myself, you know, hang out with folks from the brokerage as well. You know, anytime there's expansion, there's a lot turmoil. Yeah. There's a wholesalers that are that are more mature here in this market. Be trying to hang on to their people, but a very fluid market with people moving around all the time. And it feels like they're moving around a lot right now. Obviously, housing is driving some of that. So we're happy to do business with you know, any wholesaler that we think has a profitable book of business that we can work together on. We also wanna protect our relationships that we've had. I mean, we're committed to people who have grown with us over the decades, and so it's kind of a a mixed bag there. But that's part of what we do is to just invest in niches that we think will make sense for us. And for them. Meyer Shields: Okay. Perfect. Thank you so much. Thanks, Meyer. Operator: The next question comes from Jamie Inglis from Fido Smith. Jamie, please go ahead. Your line is open. Jamie Inglis: Hi, good morning. Wanted to follow-up on Mark's question about the expense ratio and acquisition costs specifically. It seems as though acquisition costs are rising. Is that Is that a retail phenomenon, wholesale phenomenon? Product line, geography? What do you think is behind that? Todd Wayne Bryant: There's a number of things, really. I mean, I think there if you think of some of the smaller risk that we write, you think in terms of transactional surety, really from a premium standpoint, personal umbrella, there's pressure there certainly. That has been happening and it hasn't changed. Really, if you're trying to look at it on a segment basis, as we grow that umbrella book, which is a a great book for us, it comes at a slightly higher commission rate than the rest of the casualty segment. Now we do push back from that standpoint to our under do. So we're always looking to find that right balance. But the other thing on the acquisition, when pull it all together and think in terms of what we've talked about investments in the technology, investments in the people, our underwriters. Really, that that's all part of of of the total piece of what it takes to put things together. So those those are all moving up moving up a bit. Jamie Inglis: Got it. Got it. And what if you could touch on the surety business generally. And the competitive environment. I mean, you guys have had great results for forever. And And as you pointed out, are others that are that see that as easy and are coming into the market. How does at the end of the day RLI maintain its competitive advantage in the market. Jennifer Leigh Klobnak: Yeah. So our surety book, is made up of a few subsegments say. So if you start with the transactional surety, which is the smallest account, of the most around our business is really our our technology and our servicing of our producers. And, you know, we've spent a lot of time, effort, and dollars in with our producers to understand how to make this the easiest business to do. We we should be the easiest provider. And so we've we're rolling out something in the fourth quarter to, again, up our game in that respect. And so it's a continuous effort to understand how to get that business in as easy as possible. I think from from the account level side, which is both contract and commercial, some of our competitive advantages really are people. We have some very dynamic experienced folks who are focused on servicing the business. So they are extremely available to their producers. Are willing to listen to the story and try to come up with a solution. They meet with principals and brokers all the time. They are they welcome training people, new brokers up just to help you know, perpetuate that next generation, to help that that agency. So there's a number of things that we focus on around service, would say, in the account space. It's really our competitive advantage. We're not the biggest surety. We don't have the biggest capacity. And so we we can't compete necessarily on that. And so we have to find other ways to differentiate ourselves in that market. Craig Kliethermes: Sure. Jamie, I would just add more broadly than just surety. I mean, I mean, I think our people are are problem solvers, the type of people that we hire. As, you know, as owners, you're trying to solve problems. To try to make your business better. Mean, the comment the most common comment I get from producers when I meet with them is is the adjectives they define are underwriters and the people they deal with are authentic and genuine people. That, you know, that they'll tell them if they can they will do everything they can to try to solve the problem. But if they can't, they won't waste their time by saying maybe and then tell them three weeks later no. And and we think when we say relationships, that what we that's what we mean when we we say deep relationships with people. At the end of the day, these producers like doing business with people they like. And they tend to like our people. And that's a huge competitive advantage for us. The one other thing that I probably should have added earlier, but when you think about the discussion and the question gets asked of where is it going? Is that acquisition rate going? That that's a fair question. But but the concept behind a lot of this, whether it's relationships that that Craig and Jennifer mentioned or or the technology investments or or in our people, the idea there is that will all translate into more premium, more business. So we we would leverage leverage all this investment. So that that's where it gets a little challenging to say, where is it headed? Well, it's all designed to to increase top line. Revenue. So that's a big part of everything we're doing there too. Jennifer Leigh Klobnak: I would just say it's for a profitable premium. Todd, but that's that's not it. Fair point. Jamie Inglis: Perfect. Right. Right. Great. No. And I I appreciate it because it's and it's also the trade off with acquisition expenses versus loss ratio, which matters as well. Anyway, thanks a lot. Thank you. Jamie. Operator: As a reminder, that's staff load by one. The next question is from Andrew Anderson from Jefferies. Andrew, please go ahead. Your line is open. Andrew Anderson: Hey, good morning. Looking at the casualty underlying loss ratio in quarter about 65.5%, a little bit better than first half 2025 results. Can you just talk about some of the drivers there? Was that just mix shift? And do view that as kind of a good run rate into the rest of the Todd Wayne Bryant: Yes. It's Todd. As you look and compare to last year, I think I mentioned it in my opener, lot of it's had influence on the current accident year last year. When we added to to real space exposures. You do have a little bit of a benefit this year When we look at the current accident year, the actuaries view that they make any change They're gonna look all the way back to the beginning of the We have a little bit of benefit of some of the property coverage in that package business, but that's pretty small that has a a minor influence on the current accident. Loss ratio. It's really more of a story of of last year and the adverse that we've added on the new base cut, which is Andrew Anderson: Gotcha. And and maybe sticking with the the transportation I think to end 'twenty four, you're growing quite a bit in this line. And then the second quarter, you've started to cut some exposures. And continuing into the third quarter. Kind of where are we in the don't know if it's a re underwriting of this book or maybe just being diligent around rate and exposure units? Jennifer Leigh Klobnak: Yeah. This is Jennifer. I would say it is more about being diligent, but the other factor is that some of those larger accounts that we wrote last year have canceled midterm. Those are those are high six to seven digit accounts where know, budgets are tight for transportation companies. And so they shop their business. And if they found a cheaper quote, sometimes they would move their policy. So we've had some cancellations. That's been a bigger factor us this year. But I'd say, you know, we're constantly looking at risk selection because you can't address the severity entirely with rate, and so we recognize that the real key to our operations, that loss control unit that's evaluating you know, is this a safe account, and are they doing the right things, to do whatever they can to make you know, as few accidents and safe practices as possible. So that feedback loop there is is the most important thing in our book. Andrew Anderson: Thank you. Operator: Further questions at this time, but there's a final call that staff followed by one to ask a question today. Have no further questions, so I'll hand the call back to the team for any closing comments. Craig Kliethermes: Well, thank you all for your interest in our company and your questions today. At RLI, we have a strong balance sheet with very diversified product and investment portfolios. This offers security to our customers, flexibility and opportunity to our product managers, consistent profitability and growth in book value to our shareholders. It isn't easy being different having the fortitude to do the right thing when the discipline escapes others, but we are different at RLI. We are owners we will continue to make the decisions that are in the long term best interest of our customers and our shareholders. That allow us agility to respond in challenging and opportunistic markets. If our unique culture and vision resonates with you, we're a great home for owners who share our values. Being different is what we do best. And being different has delivered again for all of our key stakeholders. In close, I want to thank our employee for their hard work again, delivering the differences that works. See you all next quarter. Operator: Ladies and gentlemen, if you wish to access the replay for this call, you may do so on the RLI home at www.rlicorp.com. This concludes our conference for today. Thank you all for participating, have a nice day. All parties may now disconnect.
Operator: Good day, ladies and gentlemen. And welcome to Northrop Grumman's Third Quarter 2025 Conference Call. Today's call is being recorded. My name is Bella, and I will be your conference operator today. I would now like to turn the call over to your host, Mr. Todd Ernst, Vice President, Investor Relations. Mr. Ernst, please proceed. Todd Ernst: Thanks, Bella, and good morning, everyone, and welcome to Northrop Grumman's third quarter 2025 conference call. Before we start, matters discussed on today's call, including guidance, and outlooks for 2025 and beyond, reflect the company's judgment based on information available at the time of this call. They constitute forward-looking statements pursuant to Safe Harbor provisions of federal securities laws. Forward-looking statements involve risks and uncertainties including those noted in today's press release and our SEC filings. These risks and uncertainties may cause actual company results to differ materially. Today's call will include non-GAAP financial measures, that are reconciled to our GAAP results in our earnings release. In addition, we will refer to a presentation that is posted to our Investor Relations website. On the call today are Kathy Warden, our Chair, CEO, and President, and Ken Crews, our CFO. At this time, I would like to turn the call over to Kathy. Kathy? Kathy Warden: Thanks, Todd. Good morning, everyone and thank you for joining our call. Disciplined execution of our business strategy has continued to position us well as global defense demand grows and our customers transform the way they acquire capability. We continue to prioritize providing technology leadership to our customers through innovation in both the way we do business and the capabilities we deliver. In doing so, we are building a strong backlog of future business. We are also performing well on our current programs building the capacity for sustainable growth and transforming our operations by embracing digital technologies to deliver with speed, quality, and affordability. The Northrop Grumman team delivered another strong quarter of performance amidst a dynamic global environment. We achieved mid-single-digit growth, expanded our segment operating margin, and grew free cash flow year over year. These results are aligned to our long-term financial outlook. The investments we have been making in capacity and capability over the last six years enable us to deliver with urgency against our customers' highest priority. In fact, we achieved an exceptionally strong book to bill of 1.17 in the quarter. Our organic growth rate was 5% year over year and our international growth rate was 32%. It is also worth noting that apart from our space segment, where we continue to have a challenging compare related to the wind down of two large programs, revenue growth was approximately 9%. Despite strong growth in the quarter, we are revising our full-year revenue guidance down due to delayed timing on certain awards and programs. In addition, the team delivered another outstanding quarter of operating performance. Segment operating margin increased to 12.3% in Q3 which drove a 10% year over year increase in earnings per share. We also increased our free cash flow by 72% year over year and are on track to meet our full-year guidance. In the quarter, we made significant strides across multiple programs to position our company for the future. Last month, the second B-21 aircraft entered flight test. Another significant milestone for the program. As we continue to gain momentum. This starts a new phase of the test program, transitioning from general flight performance evaluation to integrating weapons and mission systems. Our testing campaign also involves multiple B-21 aircraft undergoing ground tests prior to flying. Which is validating performance and minimizing risks. With the progress we've made, we remain on track to receive the LRIP Lot three and Lot five Advanced Procurement Awards later this year. We continue discussions with the Air Force on the framework for an agreement to accelerate the B-21 production rate. If an agreement is reached, as previously disclosed, we expect to deploy additional investment to achieve the increased rate with the opportunity to earn improved returns. We've also made important progress on missile defense programs. That can support emerging requirements. In the quarter, we received a multibillion-dollar extension on the ground-based Midcourse Defense Weapon Systems contract. This contract award extends our period of performance through 2030 to provide new GMD capability. GWS is an integrated system designed to protect the U.S. from long-range ballistic missile threats. System enhancements include integrating the next-generation interceptor into the GMD system, updating launch equipment, and advancing the communication capabilities between the GWS and the interceptor fleet. In addition, IBCS continues to be an effective and ready-now solution to meet the global air and missile defense mission. In this quarter, IBCS successfully completed live fire test events for both Poland and the U.S. Army customers. Continuing its record of strong performance in operational tests, with these latest events, IBCS is now 32 for 32 in successful flight tests. We are also advancing the capability to introduce cloud and mobile technology into IBCS. As well as enhanced artificial intelligence. We have demonstrated our ability to rapidly adapt to changing mission requirements adding new operations capabilities through software in a matter of hours to effectively defeat evolving threats. I have previously outlined the investments we've made in solid rocket motor capacity and capabilities over the last several years. Leveraging those investments in the quarter our Gen63 XL rocket boosters played a crucial role in powering a ULA Vulcan rocket that delivered the third batch of Amazon Kuiper satellites to orbit. With additional launches in backlog, the Kuiper program is poised to be a key growth driver for the company going forward. Additionally, we've self-funded investments in tactical solid rocket motor capabilities that have enabled us to pursue and win second source opportunities. Recently, we were selected by the Navy as a second supplier for the SM-6 missile. This is one of several initiatives including the 21 inches motor award that we discussed on our last call that we've undertaken to enhance our SRM competitiveness and broaden our market presence. There are many notable accomplishments from the quarter, but let me now take a step back for a moment. And talk about the transformation that is underway in the Department of War and how they acquire capability and what they seek from an industry partner like Northrop Grumman. I noted earlier that we are innovating. Both in the capabilities we deliver and the ways we work. We are bringing proposals forward to accelerate our program. Embrace new technology, and partner more effectively. We also continue to invest in American factories and workers where we design and build the most advanced systems and technologies in support of our nation's warfighters. Over the past two years, we've allocated over 4% of sales towards capital expenditures, well above industry averages. This investment is essential in providing the capacity to meet demand for next-generation aircraft capabilities, ramping up production in munitions and propulsion, laying the foundation for significant growth in microelectronics, and expanding production facilities to deliver hundreds of satellites and aircraft. We have also invested over $2 billion in the infrastructure and development of our enterprise-wide digital ecosystem. That continues to yield phenomenal results. As we test and prove that digital models have extremely high correlation with the physical products we are delivering. This is game-changing for the way we design, build and produce our products. It opens paths for more affordable solutions for our customers and more predictable and improved returns for our shareholders. And as we look even further over the horizon to five or ten years into the future and beyond, our team of world-class engineers is undertaking research and development and pushing technology boundaries today that will support our competitiveness tomorrow. Over the past two years, we've invested over $2.1 billion in IRAD to maintain our technology leadership and for continuous innovation to disrupt the market and ourselves with the objective of maintaining long-term sustainable advantage for our warfighters and policymakers. As I mentioned earlier, we are exploring creative ways to bring solutions to market faster, and focusing on priority areas such as the development and fielding of multifunction sensors, new and innovative ways to incorporate AI into our solutions, and developing fielding new smarter weapon systems that bring unmatched superiority on the battlefield. To name just a few. The themes we are seeing in the U.S. are also true in the international market. Our allies are committed to modernizing their armed forces and investing in deterrent capabilities. In the current geopolitical environment, has increased the urgency for them to act now. This is being reflected in a significant increase in defense spending that is expected to carry well into the next decade. Allied nations are prioritizing investments in air and missile defense, ground-based airborne ISR, and other advanced weapon systems to enhance their ability to deter, and defend against conflict. This growing demand presents substantial opportunities for our company. And we are well positioned to deliver solutions that meet the evolving needs of our customers worldwide. These factors contributed to our international sales growing 20%, year to date. Before I turn to 2026, let me address the U.S. Government shutdown. It is unclear how long it might persist but we are hopeful it will be resolved in the near term. Assuming it is, we do not anticipate any significant impact on our financial results. In the meantime, we remain focused on executing our programs and delivering on our commitments. Looking longer term, there continues to be strong bipartisan support for national security priorities with robust levels of investment provided through reconciliation, and being considered for FY 2026 appropriations. We believe this continued commitment to funding will result in a long tail of demand as resources are allocated and invested into the industrial base. Our confidence in these underlying trends reaffirms our outlook and positions us well for sustained growth. As we look ahead to the New Year, I'd like to take a moment to provide you with some color on how we're thinking about 2026. We expect mid-single-digit organic sales growth. Supported by growth in all four of our segments. This top-line growth will in turn enable us to also grow segment operating income. We expect a segment OM rate in the low to mid 11% range. Lastly, as we look at cash, we are reaffirming our existing outlook range for '26 free cash flow of $3.1 billion to $3.5 billion. I'd note that these estimates are not inclusive of a potential win on SAXX or an acceleration of the B-21 production rate. And as usual, we plan to provide formal guidance during our Q4 earnings call in January. In summary, I'd like to emphasize our unwavering commitment to our technology-focused business strategy. Which continues to drive our profitable growth. We're experiencing an unprecedented demand environment and our capital deployment strategy is enabling us to meet this demand. And prepare us for opportunities in the future. As we move forward, our primary focus remains disciplined execution of our strategy, and creating lasting value for both our customers and our shareholders. So now let me hand it over to Ken to provide more detail on the quarter's financial results. Ken Crews: Thank you, Kathy, and good morning, everyone. As you just heard from Kathy, we delivered another strong quarter of financial performance. Let's begin on Slide four, which shows our top-line results for the quarter. Third-quarter sales were $10.4 billion, up 4% compared to the prior year. And up 5% on an organic basis. We continue to expect further acceleration in Q4 with all segments returning to growth, both sequentially and on a year-over-year comparison. Aeronautics generated third-quarter sales of $3.1 billion, up 6% compared to the prior year. Higher sales were driven by the ramp on Takimo and higher volume on the F-35 program. Partially offset by lower sales on FA-18 as the program winds down. Sales at DS were exceptionally strong in Q3, accelerating to nearly $2.1 billion. Sales were higher across the DS portfolio, including on ammunition and weapons programs, IBCS, and Sentinel. In total, DS sales grew by 14% compared to Q3 of last year, and by 19% organically. Mission Systems continues to deliver unmatched technological innovation at a rapid rate. This is reflected by further growth on restricted microelectronic programs in Q3 which led the segment to another quarter of double-digit sales growth. Sales were also higher at Marine Systems and on international programs, building on the strong momentum from the first half of the year. And at Space Systems, Q3 sales grew on a sequential basis again this quarter rising to $2.7 billion. On a year-over-year basis, sales were down mid-single digits as expected, and we have now nearly lapped the top-line headwinds we've been experiencing on two programs for the past eighteen months. Looking forward, we believe that space is poised to return to growth given our positioning and opportunities in this arena. Moving to the bottom line on Slide five. Operational performance was outstanding again in quarter three. Segment operating income increased by 11% year over year. And our segment operating margin rate increased 80 basis points to 12.3%. AS operating income dollars were relatively flat compared to a year ago, and operating margin rate was 9.7%. This was driven by strong operating performance on mature production programs, as well as lower net profitability adjustments. As we do every quarter, we review our estimate to complete the LRIP phase of the B-21 program. And made no significant changes to the previously recognized loss. However, we experienced higher than expected costs to produce the EMD flight test aircraft which increased our estimate to manufacture the LRIP units. This increase was largely offset by a reduction in our expected loss on remaining LRIP lots due to a contract restructure that occurred during the quarter. Turning to DS. Quarter three margins improved to 11.4% driven by strong operational performance and higher net favorable EAC adjustments. While the Q2 margin outperformance was driven by Sentinel, this quarter's strength was broad-based with higher margin rates in each of the business areas. Mission Systems operating income increased 32%. And their Q3 segment OM rate increased nearly 300 basis points to 16.7%. This performance was enabled by intentional steps this team has taken to drive efficiencies, mitigate risk, and increase factory utilization. Which drove a $68 million favorable EAC adjustment in the restricted advanced microelectronics portfolio. And Space Systems also had a solid quarter of operational performance generating a margin rate of 11%. The strong bottom-line results drove higher earnings per share as shown on Slide June diluted earnings per share were $7.67 an increase of 10% compared to 2024. In addition to strong segment results, mark-to-market gains on marketable securities increased by $0.35 compared to Q3 of last year. These benefits along with higher net pension income partially offset by higher corporate unallocated expenses and a higher federal tax rate as previously disclosed. As we reflect on our performance to date and expectations for Q4, we have a few updates to our company-level guidance as shown on slide seven. For sales, we are adjusting our outlook to a range of $41.7 billion to $41.9 billion reflecting approximately 8% Q4 growth at the midpoint. We continue to expect a ramp in Q4 sales in all four segments, but at a slightly lower rate compared to our prior expectations. Importantly, we are maintaining our segment operating income dollar guidance range despite the lower sales volume. This results in a segment OM rate that is roughly 10 basis points higher than our prior guidance at the midpoint as a testament to the team's continued focus on disciplined program execution and driving efficiencies throughout the business. Moving to earnings per share. We are increasing our guidance by $0.65 now to a range of $25.65 to $26.05. The increase is driven by several factors. First, we are lowering our expectations for other corporate unallocated expenses to $250 million a reduction of $30 million driven by lower unallowable costs. Secondly, we have slight revisions to our expectations for pension income and the effective tax rate, each providing a modest boost to EPS. And as I mentioned, we experienced a return on marketable securities in the quarter which totaled roughly $80 million. Given market volatility, we have not assumed the entire Q3 gain in our full-year guidance expectations. Rounding out our company-level guidance is cash flow. We are reaffirming our free cash flow expectations of $3.05 billion to $3.35 billion. Third-quarter free cash flow of $1.3 billion was well ahead of the past few years. And we continue to expect the largest quarter of cash generation in the fourth quarter. Consistent with our seasonal pattern. In addition, the unique factors driving year-end cash as outlined during the Q2 call remain intact. Including lower Q4 cash tax payments, higher milestone payments, inventory liquidations at AS. For the year, our guidance represents 22% annual free cash flow growth at the midpoint making a third consecutive year free cash flow growth greater than 20%. Turning to segment level guidance on Slide eight. We are reaffirming our top-line guidance for DS and Space as they performed in line with our expectations in Q3. And we have not changed our view on their sales ramp in Q4. For Aeronautics, we are lowering top-line guidance to the high $12 billion range. As we outlined on our Q2 earnings call, the second half ramp at AS is based on higher B-21 volume, ramp on new program wins including Takimo, and normal production volume that is seasonally weighted towards the end of the year. And while all these factors remain intact, are projecting a modestly lower sales level due to delayed timing on certain programs. In addition, we are increasing our expectations for intercompany sales. Driven by higher activity on restricted programs throughout the portfolio. These are partially offset by an increase to our sales guidance expectations at MS based on the strength of their year-to-date results and expectations for continued growth in Q4. As a result, we now expect MS sales in the mid-twelve billion dollars range. With respect to segment operating margin rates, we have one update this quarter related to DS. As I mentioned, they delivered another strong quarter of operational performance and as a result, we are increasing the OM rate expectation to the high 10% range. Before concluding my prepared remarks, I wanted to build on Kathy's comments regarding our 2026 outlook. First, sales growth next year is expected to be more balanced across each of the segments. With each contributing to growth. Secondly, operating income is expected to grow compared to 2025. And we don't anticipate a repeat of the large EA adjustments we experienced this year on B-21, Sentinel, and microelectronics. Adjusting for these items, our outlook for low to mid 11% margins would represent an increase compared to 2025. I'd also like to share our latest projections for 2026 net pension income based on current market conditions. As we typically do this time of year, we've included a 2026 pension income sensitivity grid on Slide 10. Year to date through September, asset returns were just north of 9%. Slightly better than our initial expectations. And discount rates were down 25 basis points. This combination will result in a modest increase to 2026 net pension income compared to our prior projections. Depending on where we end the year. Importantly, our pension plans remain fully funded and we continue to project minimal cash contributions over the next several years. So in conclusion, we believe we are well positioned for a broad range of new opportunities. We remain focused on growing our business delivering strong operational performance and generating cash flows that allow us to execute our business strategy. With that, let's open the call for Q and A. Operator: We do request for today's session that you please limit to one question and one follow-up. Your first question comes from the line of Kristine Liwag with Morgan Stanley. Your line is now open. Please go ahead. Kristine Liwag: Hi, good morning everyone. Good morning. Kathy, Ken, for the FAXX and the B-21 acceleration, can you provide more color on what that could mean for your 2026 outlook and what's included? Kathy Warden: So Kristine, as I noted in my comments, we at this point have not included either in our 2026 outlook. FXX clearly would come with increased revenue from what we have provided in that outlook. We expect that it would be somewhat dilutive to overall company earnings just because it would be development revenue, which tends to be lower margin than our overall. But it is a cost-plus program. So we expect reasonable returns if we were to win that program. And it would require some investment. So the CapEx we would determine based on our profile to build out and prepare for execution. Over the long run, we expect if we were to win that program that it would be accretive to the company. And very much look forward to the opportunity. On B-21 ramp, similar circumstances, we have not included that in our outlook. It would be upside to revenue. It would increase our amount of sales which in the early phases on production are at the zero margin. And we would expect to need to invest in that ramp through CapEx. But again, over the long term as we've said before, we would expect to have increased returns to the cost of that additional investment. And so we would update our guidance if and when we have clarity on either of those opportunities. Kristine Liwag: Great, super helpful. And for a follow-up, can I ask something about the supply chain? Rare Earths continue to be a watch item for the industry. Can you talk a little bit more about your sorting strategy, how to mitigate supply chain risks and if there are any watch items that could potentially affect your 2026 outlook? Kathy Warden: Yes. Fortunately, our team has the two foundries in The United States where we design, produce and package microelectronics. So our dependency there on rare earths has been mitigated by looking through our supply chain and getting well ahead of our sources of supply to ensure that we can produce those electronics. We are very pleased that the U.S. Government is actively working to set up additional sources of supply including in The U.S. And working partnerships with our allies for them to also invest in these capabilities in their country. This will just create more sources for us to draw upon and make The U.S. more competitive in being able to provide these microelectronics for national security purposes into the future. Kristine Liwag: Thank you very much. Kathy Warden: Thank you. Operator: Your next question comes from the line of Ronald Epstein with Bank of America Merrill Lynch. Please go ahead. Ronald Epstein: Yes. Hey, good morning all. Kathy Warden: Good morning. Ronald Epstein: Kathy, can you maybe pull back the curtain a little bit more on B-21? I mean, how is it going with a potential increase in the build rate on that aircraft and so on and so forth? Because if that were to play out, it is material for you guys. Kathy Warden: Yes. So we are in active discussions with the customer that would enable that acceleration of production rate. And as I noted in our Q2 call that the dollars to support that acceleration are included in the reconciliation bill. So the actual production rates, the timing and ultimately the outcome of those negotiations with the Air Force would define what that financial profile looks like. It's too early for me to speculate on that. We are in the midst of those discussions. They've been held up a bit because of the government shutdown. And the availability of resources to continue those discussions during this time. But we expect those to resume. And we still expect that in the coming months, we would have more clarity on what that acceleration might look like. Ronald Epstein: Got you. Then maybe as a quick follow on, your prepared remarks, talked about some program award delays. What's driving that? The administration has been pushing hard for speed on acquisitions. So just curious where that's coming from? Kathy Warden: I think with any new administration, it takes time to come in and make determinations of where to allocate resources and then to do the appropriate reviews and governance to make those decisions. We are certainly seeing in recent weeks, the government shutdown having some impact on the government's ability to move quickly to make decisions and have the right resources available. So we're all hopeful that the shutdown can come to a quick resolution and that we can resume work on some of these important decisions that would open up spend plans and ultimate awards that will come from the government as they seek to move forward quickly. Ronald Epstein: Got it. All right. Thank you very much. Operator: Your next question comes from the line of Seth Seifman with JPMorgan. Please go ahead. Seth Seifman: Hey, thanks very much and good morning. Kathy Warden: Good morning. Seth Seifman: Kathy, I wonder if you could talk a little bit about the opportunity in Golden Dome and missile defense in space. And you've been doing some work with the FDA. But if you could talk about the sort of the state of maturity and state of technology on missile readiness satellite or missile warning satellites. And if you see the current kind of tracking layer SDA or HPTSS being kind of the nucleus of what's ultimately going to drive missile warning for Golden Dome or is it going to come from elsewhere? Kathy Warden: Well, let me start by saying that we're very pleased to see the urgency the administration is placing on protecting the homeland and the set of opportunities that that creates. It's a very broad-based set of opportunities. The architecture and spend plan for Golden Dome are not public, so I won't comment on those specifically. But we do understand the challenges of creating a missile defense, both warning layer and set of interceptors that would defend the homeland. And we are providing some high fidelity operational analysis that can help the customer understand those requirements as well as ourselves as we define what our offerings might look like. We see this being a number of components to an architecture that range from existing programs where they may have there may be additional opportunity to new programs. And I think you'll see more clarity coming from the department as they share more information on that architecture and spend plan in the coming months. Seth Seifman: Okay, great. Thanks. And then just as a quicker follow-up, maybe I think you mentioned earlier if the government shutdown ends relatively soon, that we shouldn't see much impact, but we're sometimes it seems like we're in unusual times. At what point does the duration of the shutdown become more of a concern in terms of something that where we might see an impact? Kathy Warden: Yes. As I mentioned, the guidance that we updated for 2025 includes what we can foresee including some of the delays that we talked about on program awards and timing. But at the same time, we are assuming that this only goes a few more weeks. Say around mid-November. If it goes beyond that, we may start to see some additional delays in getting funding on contract, or even delays in receiving payment before year-end that could impact our cash flows for the year. We don't anticipate it at this time, but it's certainly something we're monitoring and so we're very hopeful as I said that the government will agree to reopen soon even if under a continuing resolution. Seth Seifman: Thanks very much. Kathy Warden: Thank you. Operator: Your next question comes from the line of Sheila Kahyaoglu with Jefferies. Please go ahead. Sheila Kahyaoglu: Good morning, and thank you. Kathy, maybe if we could talk about the aero outlook for 2025. It seems down slightly but B-21 award timing seems unchanged. So what was the shift there? And what was delayed in terms of certain awards? And we think about that recapture in 2026? And just on B-21, how do we think about the free cash flow impact as it relates to CapEx? In 2026? Ken Crews: Sheila, this is Ken. I'll take that one. In terms of AF, the drivers across the 2025 sales profile, it was really product it was timing of production activity. So don't view it as lost sales, but just timing of sales. The other aspect is on B-21 as we made the adjustment, the top-line implications regarding percentage of completion method that created some additional top-line headwinds for both the quarter and the year. As we think about 2026, we continue to see the strength in B-21 continuing to be a grower a contributor to AS' growth. In terms of the free cash flow with B-21, again, we're holding our overall guidance for 2026. When we think about the future in cash flow is we'll provide more clarity because as Kathy mentioned, we are in the midst of multiple discussions that will ultimately the cash flow of the program and that will be driven by as we come to conclusions and understanding if we do on the ramp and rate discussion. Operator: Great. Your next question comes from the line of Ken Herbert with RBC. Please go ahead. Ken Herbert: Yes. Hi, good morning, Kathy and Ken. I wanted to ask on IBCS. Kathy, you continue to call out success with that program. It sounds like it's ramping in Poland. You've got some installations ramping here. How do you think about that program and the growth into 2026 in particular? But then also we're hearing that that program in particular is very well suited perhaps for some of the Golden Dome applications. Can you just comment on those discussions and how you view IBCS in particular with that opportunity? Kathy Warden: Yes. We are very bullish on IBCS growth opportunities both domestically. As you pointed out, it is a system that is able to integrate disparate sensors and kinetic effectors to enable visibility of the battlefield and then to provide us a fire control system that has application for protecting our homeland, just as it has application for international partners in that same vein. So we've talked previously about having over a dozen countries now that have expressed varying levels of interest in the program. Particularly as we look at the success that we've now demonstrated in Poland, as I spoke about in our comments today, that is a live fire example of how IBCS can be used in a homeland protection scenario. And of course, The U.S. has forward deployed the system and I talked about the operation tests that it is performed for forward deployment in both INDOPACOM and the European theater. Ken Herbert: Can you talk about when we could expect other incremental orders internationally in particular as you talk to those 12 countries? Kathy Warden: Yes. We expect those to phase in over a multiyear period, but starting in 2026 and we do expect IBCS to be a significant double-digit growth driver for us in next year's outlook. Ken Herbert: Great. Thank you, Kathy. Operator: Thank you. Your next question comes from the line of Scott Deuschle with Deutsche Bank. Please go ahead. Scott Deuschle: Hey, good morning. Kathy Warden: Good morning, Scott. Scott Deuschle: Ken, could you give any quantitative detail on the 2B21 financial items in the quarter between the higher EMD flight test costs and the contract restructure. It sounds like it was close to zero on the net amount, but just curious how large the gross numbers were for each of those two items? Ken Crews: Yes, Scott, you're correct. In terms of the cost growth that we baked in from lessons learned on the B-21 LRIP offset by the restructure activity. It is from a materiality perspective very low number. So it essentially washes themselves. Scott Deuschle: Okay. And then Kathy, sorry if I missed this, but can you give us any sense for how international book to bill has trended on a year-to-date basis? Kathy Warden: Yes. International book to bill remains very solid. As I noted, we have 20% sales growth year to date. And our international book to bill coming into the year was 1.4. And this year, ton of Ken Crews: So this year we started off at about 1.45 Scott. And when you look at quarter two and quarter three, it is timing dependent. So overall, roughly slightly lower than one but we built a strong backlog last year that's leading to the growth this year, as Kathy mentioned. Scott Deuschle: We had 20% year over year growth or year to date growth then on top of that, we had about 30% growth within the quarter alone. Scott Deuschle: Okay, great. Thank you very much. Operator: Your next question comes from the line of Richard Safran with Seaport. Please go ahead. Richard Safran: Good morning, everyone. Thank you. So, I think it was last month Secretary of Defense made some comments about requesting industry make significant capacity increases in missile production. I think this is going well beyond just Golden Dome. I was kind of curious what this means for Northrop Grumman you have any plans to undertake further capacity increases that might require incremental CapEx? And is there any timeline associated with planned increases? Kathy Warden: Yes, Rich. Thanks for the question. As I've outlined, a few of our calls over the last six quarters or so, we have already invested in expanding capacity that includes for our tactical missile solid rocket motors where we've more than doubled capacity and we are already breaking ground on another facility that would bring more capacity online in about two years. Right now, we have more capacity than we have orders. And so we are in the process to being qualified on additional missile systems, as I talked about in today's call. We have been awarded a couple and we are in the process of qualification for a handful more and those would utilize that capacity we've already brought online. We foresee continued demand growth, which is why we've broken ground on yet another facility. In addition, we are building out our capacity for larger solid rocket motors. We've talked about that for multiple purposes, U.S. national security applications, but also commercial applications in base launch as I spoke about today with our Gen 63 XL rocket motors that are fueling the ULA launches for the Kuiper satellites. And so we are already through a significant amount of Northrop Grumman funded investment in that capacity. We do have some that you will see committed in our CapEx numbers 2026-2027 as well. Richard Safran: Okay. And then quickly here, I saw you made a bit of an announcement on Lumberjack I'm wondering if you discuss what the opportunity set for this program is? What's the domestic international potential? And when this program might have an impact on the P and L? Kathy Warden: Yes. Lumberjack is an exciting new offering. We are developing that out of our mission system segment and it is a ground-launched opportunity for counter UAS. It has communications sensors. It is targetable and we see this as an advancement of our small microelectronic processing capabilities and communication, put onto an innovative platform that we've worked with partners for to keep the cost very low and keep it competitive for what we see as the attributable market. We have introduced this capability. It's about a TRL six now, and we are working to find our first customers for it, but we also see there has be international opportunity. We clearly need to go through export for the product line, but those are all steps ahead that we look to continue through 2025 into 2026. Richard Safran: Well, thank you very much for that. Operator: Thank you. Your next question comes from the line of Gavin Parsons with UBS. Please go ahead. Gavin Parsons: Thank you. Good morning. Kathy Warden: Good morning. Gavin Parsons: Kathy, you pointed out that you guys spend more on CapEx than most of your peers in the industry. I mean, does that enable more than maybe mid-single-digit growth over the long term? Kathy Warden: We believe that it can. We certainly have invested with the intention of driving significant growth. And that has started to come to fruition in some of our segments you saw. DS in particular with a very solid growth rate last year and it is reflective of that investment. Was just talking about not only in the capacity for munitions and tactical missiles, but also the research and development that we're doing on new and innovative solutions or additions to solutions we already have like IBCS, the investment we're making in modernizing that. So I think it's a good case study of where we have put that investment in and been able to generate those higher levels of growth. And of course, we're working to do that across all of our segments. Operator: Great. Thank you. Your next question comes from the line of Robert Stallard with Vertical Research. Please go ahead. Robert Stallard: Thanks so much. Good morning. Kathy Warden: Good morning. Robert Stallard: Kathy, wanted to follow-up on your initial comments. One of the members of the administration had said recently that they thought that U.S. Defense companies should do a little more research and little fewer stock buybacks. I was wondering if this is essentially a trial balloon or whether there are active discussions with the customer about this? Kathy Warden: We certainly have discussions with the customer where they have shared their desire for industry to see the growth opportunities. That would lead us to invest and that those would be profitable growth opportunities and we share in that sentiment. And as I have shared with you today, I've also shared with the leaders in the Department of War that we have been doing that. That those higher levels of investment above the industry average were because we saw that same vision that if we invested, we would have greater opportunity for growth. And returns. And so I've articulated that we have a number of discussions underway, B-21 acceleration and other new areas that is the core of the conversation that we and I believe my industry peers are having with the department. Robert Stallard: Okay. And then a quick follow-up to that though, I may be wrong, but it would appear fairly new though that they would be perhaps putting some restrictions around returns to shareholders. How would you feel about that? Kathy Warden: We have not had any discussions with members of the administration that would suggest that that is their intent. I think that we all are aligned meaning my company and our customers that the best mechanism is to incentivize that investment through the opportunities for a clear demand signal that reflects in sales growth and increased returns. And that if those conditions exist, it's in our best interest and we will continue to do what we have done. Which is invest in that future. Robert Stallard: Okay, that's great. Thank you very much. Operator: Your next question comes from the line of Scott Mikus with Melius Research. Please go ahead. Scott Mikus: Good morning, Kathy and Ken. Just a quick question on B-21. You kind of referenced that the reconciliation funding, think there's $4.5 billion there. Is for the acceleration of the production rate. So just to be clear, would actually increasing the program of record to 150 or 200 units via completely separate negotiation potentially with additional financial benefits for the firm? Kathy Warden: Yes. That would be a separate discussion. The decision has not yet been made by the department. And if it were to be made, then it would factor into an additional look at what the long-term opportunity is on the program. Scott Mikus: Okay, thanks. I'll stick with one. Kathy Warden: Great. Thank you. Operator: Your next question comes from the line of Myles Walton with Wolfe Research. Please go ahead. Myles Walton: Thanks. Good morning, Stealth. In terms of the fourth quarter implied sequential revenue growth, looks like Aero is carrying most of that load. Are there extra working days in the fourth quarter that maybe help the overall double-digit sequential revenue growth and or within Aeronautics is there something that you think releases here in the fourth quarter that maybe wasn't releasing in the third quarter? Ken Crews: So to answer your question around additional working days, there is one additional working day in Q4. However, that's not the primary driver. As we discussed in my prepared remarks and even last quarter, the real growth that is driving the ramp for AS is driven really by three factors. The first one is with the awards that we discussed in our prepared remarks, there will be inventory liquidations that drive that increased revenue. At the same time, just natural progression of new program wins in production like Takamo. And then the last factor is going to be on their mature production programs just real timing associated with supplier performance and material deliveries. And so yes, while there is an extra working day, it's really driven by the three factors that I mentioned. Myles Walton: Okay. And no impact from the Boeing strike or anything like that? Ken Crews: On F-18? No impacts. Myles Walton: Okay, great. Thank you. Kathy Warden: You're welcome. Operator: Your next question comes from the line of Peter Arment with Baird. Please go ahead. Peter Arment: Yes. Good morning, Kathy, Ken. And Kathy, could you give us an update on just kind of the long-term production ramp plans in Solid Rocket Motors? I know you've kind of looking investing quite a bit there, but there's also a lot of defense sort of tech upstarts or space tech upstarts. Just how those kind of those upstarts are factoring into kind of your plans or whether they're just on different different levels in terms of the solid rocket motor output? Thanks. Kathy Warden: Yes, Peter. I would say that we are focused on qualifying ourselves to be a provider on weapons where we have not historically been a provider. And that capacity investment that I mentioned earlier in the call is enabling us to be ready now as those decisions are made to bring our production online. For many of the other companies that are looking to enter this space, it's going to take them time. To build the capacity to get qualified on these weapons and to enter the space. So our focus has been to continue to be ahead in being able to provide optionality to the Department of War as well as our primes who are looking for additional sources of supply. Peter Arment: Appreciate it. And just a quick follow-up. On B-21, just to be clear, is lots three in your 2026 guidance? We know it's not in 2025, correct? Kathy Warden: So the Lot three award and the Lot five advanced procurement is anticipated to be received in the 2025. The vast majority of the expenditures of sales recognition would not start until 2026. Peter Arment: Thanks, Kathy. Appreciate it. Operator: Your next question comes from the line of Michael Ciarmoli with Truist Securities. Please go ahead. Michael Ciarmoli: Hey, good morning guys. Thanks for taking the questions. Maybe just one question, two items. I guess, Kathy, Beacon, it looks like the testing is ramping up there. You've got six partners now. So just trying to think about how that impacts future financial performance contributions to growth? And then maybe the same vein on the microelectronics, it looks like you're opening up some of your capacity for industry. Does that give a little bit more of a boost to MS margins going forward if you kind of soak up some of that excess overhead? Kathy Warden: Let me start with Beacon. We are very excited about this capability. It is opening up opportunities for us to partner and have demonstrated capability not only leveraging the platform work that we have been doing to demonstrate acceleration of our ability to build autonomous systems, but also the integration of the capabilities inside the platform that give us its mission capability. And that's what Beacon is helping us to do to look at innovation and autonomy, weapons integration, mission systems integration, all of which then support a mission capable platform. And those investments that we are making are in alignment and in conjunction with partners, as you mentioned, and large numbers of partners. We are not at this stage picking winners. We're simply understanding the marketplace and the capabilities that we can bring to bear, because we expect a number of new competitions in this space. Including U.S. Services, the Air Force, the Navy, and now the Army, but international partners that are looking to build upon their combat collaborative aircraft fleet. With regard to your second around microelectronics, we have opened up our foundries to additional customers as more and more U.S. companies are looking to have domestic sources. Our two foundries produce some of the most advanced microelectronics in the world. And we are happy to offer that capacity more broadly. Since we have done that, we've had significant interest and so we are in the process of working through that pipeline. We already do about $1 billion a year for sales to ourselves and existing customers largely in the national security space. So we'd be building on that foundation as we move forward with additional customers, including commercial customers. Michael Ciarmoli: Got it. Helpful. Thank you. Operator: Thank you. Your next question comes from the line of Doug Harned with Bernstein. Please go ahead. Doug Harned: Yes. Thank you. Good morning. Kathy Warden: Good morning, Doug. Doug Harned: So can you give us an update on Sentinel? It's going through this whole restructuring process. You've talked about it before. And basically trying to understand as the timing for IOC has moved back, how does that affect your thinking and when you would be going into production mode? And then also are there any aspects of the restructuring or the issues they've had that tied in any Northrop Grumman performance? And then on the other side, does this open up potentially some opportunities for expanded work scope for you? Kathy Warden: There's a lot to unpack there. Let me start by saying that we are partnering with the Air Force on an execution framework to complete the restructure of the program. In the meantime, we are working on executing the program and there have been a number of key decisions that the Air Force has announced recently, like creating new silos rather than re Minute Maiden three silos. Or the resumption of work on the design of those silos. So all have a positive impact on our ability to move cost and schedule more aggressively. We also in the program restructured are looking to establish a new program baseline, which will define the timing of events including completion of the development program, but when we would start production. And that's subject to future communications because it is in work as part of that restructure. But the important thing is that we continue to make good progress on the program. So we had announced in this last quarter that we completed the full-scale qualification test the Stage two solid rocket motor that's part of the missile. We also just yesterday announced that we completed the critical design review for the Sentinel Launch Support System and that paves the way for all of our system build, test and qualification that underpins Sentinel program. So we're really encouraged with how things are progressing both in alignment with the U.S. Government on how do we accelerate the program from the non-maturity baseline but also executing on the milestones that are right in front of us. Doug Harned: Because also there's some substantial new money coming in, in the '26 budget. And is that funding that you expect would go more to Air Force, I'm probably using the wrong language here, but logistics building out what the silo profile could look like? Or do you expect some of that money to be coming to Northrop Grumman and perhaps add to growth? Kathy Warden: On this program, we see likely both to need funding. The U.S. government contribution spans well beyond the U.S. Air Force in terms of support from the Army Corps of Engineers, for example, and other government entities. And so they likely would need portions of that funding to support their work scope on the program. But we do expect the industry team also to support them in executing those funds that have been provided in reconciliation. Doug Harned: Very good. Thank you. All right. We're going to have to leave it there. I'll turn it over to Kathy here for closing comments. Kathy Warden: Great. Well, thank you all for joining our call today. I'm pleased with the momentum we have rounding out 2025. Our focus will be on having a strong finish to the year. And we really look forward to updating you again in the New Year and providing some clear 2026 guidance in our call in January. So until then, be safe. Operator: Ladies and gentlemen, thank you all for joining and you may now disconnect. Everyone have a great day.
Operator: Ladies and gentlemen, welcome to the Q3 2025 Badger Meter Earnings Conference Call. If you change your mind, please press star followed by 2 on your telephone keypad. As a reminder, today's conference is being recorded. It is now my pleasure to turn the conference over to Barbara Noverini, Head of Investor Relations. Please go ahead. Barbara Noverini: Thank you for joining the Badger Meter third quarter 2025 earnings conference call. I'm here today with Kenneth Bockhorst, our Chairman, President and Chief Executive Officer, and Robert Wrocklage, our Chief Financial Officer. This morning, we made the earnings release and related slide presentation available on our website at investors.badgermeter.com. As a reminder, any forward-looking statements made on this call are subject to various risks and uncertainties, the most important of which are outlined in our news release and SEC filings. On today's call, we will refer to certain non-GAAP financial metrics, including certain base metrics. Use of the term base for these purposes is intended to refer to certain financial metrics excluding the Smart Cover acquisition. Our earnings presentation provides a reconciliation between the most directly comparable GAAP measure and any non-GAAP or base financial measures discussed. With that, I'll turn the call over to Ken. Kenneth Bockhorst: Thanks, Barb. Welcome to our third quarter 2025 earnings call. I'm happy to report another quarter of strong financial performance as 13% year-over-year sales growth drove solid operating profit performance and record free cash flows. As these results demonstrate, demand for our industry-leading cellular AMI solution and BlueEdge suite of modular smart water management solutions remain steady, supported by durable macroeconomic drivers that encourage technology adoption across the water cycle. We also managed persistent tariff and trade-related cost headwinds effectively, as evidenced by gross margins remaining above our historic normalized range of 38% to 40%. Amidst macroeconomic and trade environment uncertainty, our business has once again proven to be resilient thanks to the dedicated Badger Meter employees that serve our customers every day. Bob will review more of the financial details, and then I'll be back to provide color on a few other topics along with our outlook. Go ahead, Bob. Robert Wrocklage: Thanks, Ken, and good morning, everyone. Turning to Slide three. Total sales of $236 million in 2025 represented an increase of 13% year-over-year or 8% base sales growth. As expected, while absolute sales dollars declined sequentially from the second quarter, base sales growth of 8% this quarter did increase sequentially from 5% growth in the second quarter of the year. Total utility water product line sales increased year-over-year by 14%, or 8% excluding SmartCover. The underlying sales increase was driven by higher ultrasonic meter unit volumes and increased BEACON Software as a Service, water quality product sales. Sales for the flow instrumentation product line increased 4% year-over-year, as strength in water-related markets offset lower demand in deemphasized non-water-related applications. Turning to profitability, operating earnings increased 13% year-over-year to $46.1 million, with operating margins up 10 basis points to 19.6% from the prior year's 19.5%. Importantly, when excluding the results of the Smart Cover acquisition, base operating earnings of $46.6 million increased 15% year-over-year, and base operating margins expanded by 120 basis points. Gross margins expanded 50 basis points to 40.7% from 40.2% in the prior year quarter. Gross margin continued to benefit from ongoing structural mix improvement while implemented price increases partially mitigated certain tariff-related cost pressures in the quarter. Even though the trade environment remains very fluid, we are increasing our gross margin range from 38% to 40% historically to a new normalized range of 39% to 42%. Robert Wrocklage: Note that the low end of our new range takes into account our scenario planning related to all currently known trade and tariff conditions. SEA expenses in the third quarter were $49.8 million, with the increase of approximately $6.5 million year-over-year driven primarily by the Smart Cover acquisition. When excluding SmartCover-related SEA expenses, including $1.6 million of intangible asset amortization, base SEA expenses increased $1.2 million or 3% year-over-year. When further accounting for the $1.8 million deferred compensation benefit in the quarter that we referenced in the release, underlying SEA expense increased $3 million or 7% year-over-year. The higher year-over-year base SEA expense was mainly driven by increased bonus and incentive expense based upon business performance and higher personnel costs to support the business. The income tax provision in 2025 was 26.1%, modestly higher than the prior year's 25.3%. Consolidated EPS was $1.19 versus $1.08 in the prior year quarter, representing a 10% year-over-year increase. Primary working capital as a percent of sales at 09/30/2025 was 22%, 20 basis points higher than the prior quarter end and 150 basis points better than a year ago. Record free cash flow of $48.2 million increased by approximately $6 million year-over-year, largely due to lower cash taxes in 2025 resulting from timing aspects associated with tax law changes pertaining to the deductibility of research and development costs. With that, I'll turn the call back over to Ken. Kenneth Bockhorst: Thanks, Bob. Over the past few months, Bob and I have spent a lot of time with customers at WebTech, an annual trade show centered on water quality, and Engage Live, which is an annual gathering of Badger Meter customers presenting customer-curated roundtable and case study discussions. What we've heard over the course of these events strengthens our conviction in the value of BlueEdge both to our customers as they seek to solve complex problems across their operations and to us as a long-term driver of growth for our business in advanced metering infrastructure and beyond the meter solutions. At WebTech, we presented our full suite of smart water solutions spanning the entire water cycle for a variety of water treatment, metering, and network monitoring applications. Five years ago, we had a limited presence at this show. Now we exhibit a full complement of solutions that spans the water cycle. Remarkable to see how far we've come in such a short amount of time. Customers at Engage Live expressed enthusiasm for our ability to grow with them as they prioritize where they'll allocate their budget dollars over the coming years. Despite federal funding noise, our utility customers continue to plan for the long term due largely to current labor challenges but also because they recognize the inevitability of adopting new technologies in their operations for efficiency and resiliency. Our solutions are modular, capable of enabling where and when our customers should begin or continue to adopt BlueEdge components. Rolling out these solutions over time at a pace that works for them and making sure they achieve the outcomes they expect from our advanced technologies. We remain very excited about this growing portion of our long-term strategy. From our vantage point, we continue to see healthy levels of activity across our pipeline, from planning to bidding to awards to deployment and order activity. While we fully expect to experience the unevenness inherent in our industry and business, we remain confident in an average top-line growth rate of high single digits over the coming five-year time horizon. Finally, turning to the outlook. Let me provide our standard fourth-quarter reminder, which should sound familiar to those of you that have followed us for a long time. The fourth quarter usually has 5% fewer operating days due to utility holiday schedules. Nevertheless, our year-to-date trajectory implies a solid close to the year. I remain encouraged that despite ongoing macroeconomic trade and policy uncertainty, our business has proven to be resilient. This is because our products and solutions have an important place within the critical utility water infrastructure. The long-term secular trends driving change in the water industry will continue encouraging our customers to evolve, and we're well-positioned to enable them to do just that. With solid cash flow generation capabilities and the approximately $200 million net cash position, we continue to demonstrate significant financial flexibility allowing us to invest in both organic and value-added inorganic growth. In the third quarter, we also returned cash to shareholders by increasing our dividend for the thirty-third consecutive year. We remain on track to deliver the anticipated cost and sales synergies associated with the Smart Cover acquisition. For example, we've successfully transitioned certain manufacturing operations to our facility in Racine, Wisconsin, and we continue to identify attractive sales leads for Smart Cover as part of our BlueEdge suite of solutions. In summary, we're executing very well and will continue to manage the near term while staying true to a long-term strategy that we expect will compound value for both our customers and our shareholders. With that, operator, please open the line for questions. Operator: Thank you. When preparing to ask your question, please ensure your device is unmuted locally. Our first question comes from Robert Mason from Baird. Your line is now open. Please go ahead. Robert Mason: Hi, good morning, Ken and Bob. First question, I just again, the increase in the expected gross profit margin over time, I think we may perhaps have been anticipating this just given the uplift in structural mix. But Bob, you have been citing kind of the backdrop of tariff cost pressures as some of the reluctance. And so I'm just curious maybe if anything changed in the quarter or if you have repositioned some of your suppliers where you feel better insulated or just maybe the catalyst or to take this up at the point that you did? Robert Wrocklage: Yes. Thanks, Rob, for the question. And you're exactly right. You know, we've said in prior quarters, we're not for some of those evolving tariff situations. We likely would have done the normalized gross margin change sooner. I think that's simply all that the timing now means is that, you know, Q1, we were right on the heels of liberation day. In Q2, we were right on the heels of a rumored tariff on copper, which, of course, didn't prove to be as meaningful to us. So I just think it's the lack of news. And I of course, the environment is changing day by day, but I think it's that lack of new news that I think has us with confidence. And then another quarter of above-target level performance. And I think it's also an enduring, I think, endorsement, if you will, of the structure mix benefit that we all know is resident in our sales volumes. And so I think you combine that entire picture and that's what gives us confidence in that higher range. Realizing that just like the 38% to 40% was in place for a number of years, our expectation is this new range will be, you know, something that's enduring for a number of years, not that's something that we're revising quarter to quarter. Robert Mason: Sure. Just as a follow-up, I think coming into the third quarter, the thought was you were expecting some sequential decline in the core business and some of that just revolved around normal project timing. As projects roll on and roll off. I'm just curious as you go, has anything changed in perhaps maybe closing that gap as we go into the fourth quarter? I know, Ken, you called out that the normal seasonal impact, but anything that you could comment on just on timing and frankly, just as you've gone through the year, how are your customers moving forward on their decision-making? Has it been a noisy year on many fronts? I'm just curious if anything's changed on their decision-making timelines. Kenneth Bockhorst: Yes. Thanks, Rob. Yes. I mean, just to clarify a little bit. So what we didn't signal was a decline in the business. What we were trying to leave the breadcrumbs, well, if you will, that quarter over quarter, it wouldn't be a stack bar growth. And that, you know, inherent in the industry and the business is this common unevenness and sometimes projects are rolling in and sometimes projects are rolling off. So we were just calling out that you shouldn't expect a sequential Q3 being larger than Q2. That wasn't meant to create any concern that perhaps we were expecting declines in the business. And as far as Q4 goes, yeah, it's the typical disclaimer that, you know, we've put out there for the last five or six years. You know, for our customers, you know, days working matters for the work that happens in the field. People need to be working. So anytime that there's fewer workdays, I won't call it seasonality. It's just literally the amount of work that can be done within a quarter is less in Q4 than it was in Q3. Robert Mason: But could you address I think you referenced just federal funding noise. Is that any sense that that's impacted the decision-making process or timelines? Kenneth Bockhorst: Well, I would tend to argue the noise is more external than internal to the industry and the business. You know, the customers that we've talked to, I referenced we were just at West Tech and saw tons of customers literally and at Engage Live and, you know, the excitement and the views that people have about the future haven't changed. And while there is that noise out there, and, again, we've never debated that there could be budget concerns or questions through parts of the water industry. And I think what we confirmed over the last quarter since that noise has come out is that our customers who are in various stages of completed AMI projects in the middle of AMI projects, are contemplating AMI projects, are finding the budget to do that. Robert Mason: Very good. Very good. Thanks for that. I'll hop back in the queue. Operator: Thank you. Our next question comes from Nathan Jones from Stifel. Your line is now open. Nathan Jones: Good morning, everyone. Sorry about the background noise. In the airport. I wanted to ask about Smart Cover. It looks like based on the reported numbers, Smart Cover had something like 25% growth in the quarter. Maybe you could just comment on the growth that you're seeing there and the growth expectations going forward. Kenneth Bockhorst: Yeah. So now that we're another quarter into integrating Smart Cover into the business, we remain extremely excited about the opportunity to continue to grow this at a really outsized level. Again, when we acquired it, it was in the five-year CAGR of 22% ish and being part of the BlueEdge suite of solutions. The feedback we've received from customers, the excitement we have across the Salesforce, we're every bit as excited today as we were the day we acquired it. It is what we thought it was, and all things are progressing as we expected. Nathan Jones: And then maybe secondarily on Smart Cover. I mean, the published numbers show that it's slightly unprofitable on a reported basis. Know some probably some amortization and stuff in there. And, obviously, the focus is on growth. How should we think about maybe the incremental margins on growth there? Just given that at this point in its life cycle, it probably requires plenty of investment to support that growth. Maybe it doesn't, you know, grow profitability as quickly as that otherwise would fix. Robert Wrocklage: Yeah. I would say the commentary is very consistent with what we've said in prior quarters, which is absolutely the opportunity here is growth. Again, I'll remind everyone at least the sewer line, or the man monitoring at the manhole if you will, is an extremely underpenetrated market and one ripe for digital adoption. And that will lead to robust growth. And as we've talked about in prior quarters, while the SEA portion or the core SEA of the business is above line average, even without the amortization and certainly well above line average with the amortization. We believe while still investing in the business to support that growth, that we can lever SEA significantly as a percentage of sales that by default then mathematically leaves to leads to above line average incrementals. And so incrementals that would be more in line with the business that's a durable hardware sales supported by in the case of software, a 100% attachment rate to software. And in the case of post-service support, a high attachment rate to another element of annual recurring revenue. So that's a long way of saying, incrementals on the SmartCover business are well above line average and will add to op and EBITDA margin accretion going forward. We've long said year one EPS accretive both the numbers that you can now see in a separate reconciliation as well as when accounting for the opportunity cost of the $185 million of cash deployed. We've also long said since acquisition that we expect that to become EPS accretive in year two. So that should give you a flavor for a bit of the top-line performance expectations combined with then the incrementals that drive that to be accretive in year two. Operator: Thank you. Our next question comes from Jeffrey Reive from RBC. Geoffrey, your line is now open. Please go ahead. Jeffrey Reive: Thanks. Good morning, everyone. You called out pricing partially mitigating tariff impacts this quarter. Can you size the price increase that you passed through and what was the price capture? And any update on how you're tracking on price cost for the year? Robert Wrocklage: Yeah. So I think, Jeffrey, you know us well enough that we won't size that. I think the way we should think about first off, when we talk about tariff and tariff-related costs, we're absolutely talking about the pure line item of tariff costs we see upon importation to whether it's our US market or whether US manufacturing or whether that's another inbound material flows. But we're also talking about the knock-on effects of bismuth cost increases that remain elevated and very consistent with the story that we told back in the first quarter when those business tariff pressures became available. We have implemented, I would say, not across the board, retargeted product-specific price increases as early as Q2. And that continues on an ongoing basis whether that's on PO to PO business or annual contract renewals. So there's a series of actions consistently occurring that's allowing essentially that price realization effect to catch up to those cost effects that were experienced immediately. And so I would tell you without sizing it, Q3 was still a bit of the lagging effect of price versus cost, but we fully expect that to reach parity as we move forward. Kenneth Bockhorst: Yeah. Jeffrey, I think I would like to add to that that what we are really confident in is that we've got a really strong process for understanding and very short order the impacts that we see from tariffs, our ability to maneuver is, you know, while there is a quarter lag, sometimes we are able to move pretty quickly. And I feel like we have a really strong understanding of our costs and what the value is that we can get from the market for the solutions that we offer. So overall, we've had a really strong process in place around pricing since we did our value-based pricing initiatives in 2020, and that has helped guide us through this. Jeffrey Reive: Got it. Thank you. And then you comment on the water quality performance this quarter? Maybe what was the growth rate? But also from recent customer discussions, are there any testing needs or parameters they're asking for that aren't currently in the portfolio today? Kenneth Bockhorst: Yeah. So typically, since we've integrated this, it is part of the utility business. When we do call something out in the quarter, we're particularly excited though about the recent performance of it. So as we're into this fifth year now of having water quality in the portfolio, really excited about the offering that we have. We're extremely strong traction, really walked away from the Westech show feeling more and more invigorated every year. In terms of parameters, we have a really strong collection of parameters that are required for our customers. So we're not getting into, you know, for sure the pragmatic view that we had on PFAS and not chasing that. So for the areas that we're playing throughout the distribution network or in treatment, we feel really strong about the parameters that we have. Robert Wrocklage: And I would also say, you know, the capability or the comprehensive nature of our solution it extends beyond just the pure mechanical parameters and reaches into the means by which those parameters are gathered, whether that's optical or whether that's electrochemistry. It spans beyond not just the technical capability, but also where deployed. We've got capabilities not only in remote network monitoring type applications, but also inside the fence at water treatment and at commercial and industrial customers. So certainly, you know, one of our and I'm sure the question is going in the direction of what about M&A type activity. Certainly, one of our acquisition lane ways is around augmenting our capabilities around the core of water quality and network monitoring more generally. But I would tell you that we do have a very competitive, not only parameter offering, but technology offering and application offering that positions us to deliver forward growth consistent or relatively similarly to what we just delivered in the third quarter. Jeffrey Reive: Awesome. Thank you. Operator: Our next question comes from Andrew Krill from Deutsche Bank. Your line is now open. Please go ahead. Andrew Krill: Hi. Thanks. Good morning, everyone. I wanted to ask, you know, looking for a little bit more based on your current, you know, customer conversations sound good. You know, your backlogs, any initial views on 2026 and potential for you to deliver on your high single-digit through the cycle growth target. I think this should be your easiest comp on a year-over-year basis since COVID. But, you know, sympathetic. There's still tariff uncertainty, other things that just maybe how are you thinking about next year and the potential to deliver high single-digit growth? Thanks. Robert Wrocklage: Yeah. So, as you know, Andrew, we don't provide guidance, so we'll probably clearly stop short of your expectations and giving you a number. Related to 2026. I would just tell you, you know, the confidence that we have in that high single-digit forward look is over that cycle, that that can be uneven year to year. I think it's interesting. Your comment is it's the easiest quarter or easiest year-over-year comparison since COVID. But unfortunately, that's not how bigger numbers work. Right? It's more challenging to generate growth off of that. That being said, still as you heard in the prepared remarks, regardless of what aspect of the funnel that we talk to customers about, whether that's starting from the planning phase and the engagement of engineering firms to assist with consulting on one end. All the way down to our projects deploying and moving. We remain confident in that outlook. And I would tell you that '26 is no different than any other year. Kenneth Bockhorst: Yeah. And just to add to that a little bit, and it's not trying to be cagey or anything. It's just when you're selling to 50,000 utilities small, medium, large, that all move at different rates and sizes. This is why we talk about this five-year cycle and how we've segmented that down into where people are within the cycle. We feel great through the cycle, but it is difficult at times to predict a particular year or quarter. But overall confidence, it remains solid. Andrew Krill: Enough. And then what on capital allocation, you know, I think your the multiple of the company is the lowest it's been in some time. So maybe has there been any change in thinking on the potential for buybacks, the balance sheet clearly? You know, net cash position. So if there aren't any, like, more deals get across the finish line, like, you know, could that be, you know, an outcome that's more likely than it has been in some time? Kenneth Bockhorst: Yeah. So, our capital allocation priorities that we've lived by since Bob and I have been here have been, you know, around number one, investing in organic growth to remain the R&D leader in the space still feel extremely strong on doing that. Number two has been increasing dividends and we've done that now for a thirty-third consecutive year at, I think, an interesting rate aligned with operating profit growth. And third has been on the M&A front where I think we built out an extremely compelling portfolio that is driving this long-term growth that we've seen. So I am not unhappy with our capital allocation priorities and how the business has performed and grown. The last several years. You know? So I would never rule anything out, but I would tell you that we are on a path that I think has been working really well for the company, our customers, and our shareholders. Andrew Krill: Okay. Great. Thank you. Operator: Thank you. Our next question comes from Bobby Zulper from Raymond James. Your line is now open. Please go ahead. Bobby Zulper: Thank you. To add to the federal stimulus noise, could you provide some context on what your customers say about ARPA specifically? And if you have a sense of how much of that money has gone to metering. Kenneth Bockhorst: Hey, Bobby. So, you know, very little of that money has gone toward metering. I'm sure throughout the 50,000 utilities, you could probably find some examples where it has. For the most part, that has not been a meaningful driver. When we talk about the many, many conversations that we've had over the last quarter or the last year, the macro drivers of available labor adopting technology, nonrevenue water conservation, adopting new technologies. Those all remain the same. And when the utilities are dealing with these problems, they do have the budget to solve the most critical issues that they have within the utility. So I know you're looking for us to size it, but there's really not much there to size. Bobby Zulper: Okay. Fair enough. I think what some investors are concerned about is making the comparison to the 2011 time period. When they read back through the transcripts. From then, when organic sales were down. I guess, could you expand on why that comparison period is not relevant today? Kenneth Bockhorst: Well, I could compare it for several reasons. I think in 2011, the industry was primarily buying mechanical meters that were not battery operated. We've been selling battery-operated meters now in the ultrasonics for fifteen years. We've been selling battery-operated radios. And the idea that in 2025, when metering, which, again, acts as the cash register for the utility, when batteries go end of life and when utilities don't have the available labor, they're not gonna stop doing billing. They're not gonna find people to go out and start reading meters and radios manually. So software in the business, I mean, I could go on and on about how the world has changed from a technology point of view and how our company has changed since then. Those transcripts are history, but I wouldn't say that they predict the future. Bobby Zulper: Okay. Fair enough. And then last one for me. The five-year forward view, excuse me, is that organic, or does that include the contribution of potential M&A? Kenneth Bockhorst: That is organic. Bobby Zulper: Okay. Thank you. Operator: Thank you. Our next question comes from Scott Graham from Seaport Research Partners. Scott, your line is now open. Please go ahead. Scott Graham: Hey, good morning. Nice quarter. I wanted to maybe talk a little bit about mix. And I know in the context of your high single-digit long-term planning horizon growth, I know that volume is still most of that, and I hopefully, you'll tell us if that's changed or anything. But this year has been a very interesting year. Right? A lot of puts and takes. We have the onset of tariffs. We had an increase in your non-metering businesses and I was just wondering if there was anything in 2025 mix wise that has changed that could carry into 2026 either positive or negative? Robert Wrocklage: Well, I think you know, if you're speaking specific to 2025, the first thing I would remind you is that Q1 was an abnormally rich degree of mix, which drove a gross margin of 42.9%, which we all acknowledged at the time was not expected to repeat. And since then, you've essentially the last two quarters reflective of that change. That being said, under the covers, if you will, continues to be this idea of what we call structural mix. When you hear us say that, that's essentially code word for the items or line items or product lines that are growing for us. Are tending to be the items that are average higher average sell price, higher average margin. And that's not new to 2025. It's just we're in a later inning, you wanna use a baseball analogy of that occurring. And so underlying our gross margin profile change over time is the structure mix benefit that can be attributed to the sale of more Orion cellular radios, the sale of more e-series meters, the sale of and faster growth in around the meter or beyond the meter technologies. That is not a trend that stops come the 2025. In fact, it's a large underpinning of our decision in this quarter to raise the gross margin range from 39% to 42%, to 39% to 42% on a normalized basis. And we would expect that to continue as we move forward. So I know I rambled a bit there, but I was trying to isolate a very episodic event in early 2025 that's an outlier. But then signify how ultimately that structural mix benefit and structural mix change is not only here in 2025, but it's enduring and beyond and a big part of why we were able to increase our normalized gross margin range. Scott Graham: That didn't sound like a ramble to me. That sound like good information. Thank you. The other question I wanted to ask was just sort of on software sales. How were they in the quarter? Robert Wrocklage: Yes. So in the script we called that out. As a driver of the core growth or base level growth in the quarter. As you know, Scott, you know, we always say our software model, least for Beacon and frankly for our other connected products is different than I think most software models. It's not one that's license-based and or suite-based. It's a 100% attachment rate to an underlying device sale that then lasts for the longevity or field life of that asset. When we're talking about meters and radios, we're often talking about ten or fifteen-year in the field in the ground cycles. And so essentially, the leading indicator for us is when we talk about growing Orion radio sales, the lagging indicator is a robust growth in SaaS, which if you look at our investor deck, you know, it hasn't been I don't think it's been updated for the midyear here, but, you know, we've seen a 28% CAGR in our software revenue as a result of the success of selling Orion cellular AMI and network as a service. And I would tell you that this quarter was no different on a relative basis. Scott Graham: Thanks very much. Operator: Our next question comes from Michael Fairbanks from JPMorgan. Your line is now open. Please go ahead. Michael Fairbanks: Hey, team. You called out higher ultrasonic meter volumes as a driver of growth for the first time in a few quarters. Can you just talk about ultrasonic and if you're seeing any real changes in demand for that offering? Kenneth Bockhorst: Yeah. It's, you know, it was, you know, as things can be as I'm broken record on it, uneven. It was a particularly strong quarter for Ultrasonic, just given the mix of customers that we had. Each year, we do, and we do expect to sell more ultrasonic meters than we did in the previous year as we continue to see some of that adoption. Our choice matters in our portfolio remains the same. We still expect to sell mechanical, especially on the residential side for many, many, many years to come. But we are excited about the expansion that we do see on the ultrasonic side as it's certainly got its benefits that resonate well with some customers, maybe more so than others. But happy with the growth in the quarter. Michael Fairbanks: Great. Thank you. And then on the flow instrumentation side, we saw that return to growth. Any more color there on drivers? I know you called out water-related end markets but what's the outlook for that segment in general? Kenneth Bockhorst: Yeah. For us, you know, that it's becoming a smaller part of the portfolio, but we remain on the yeah. And GDP-like numbers. So, you know, you might have quarters that are flat, some quarters that are up a little more. But for the most part, it's a business that you should think of growing in line with GDP. Michael Fairbanks: Thank you. Operator: Thank you. We currently have no further questions, so I'll hand back to Barbara for any closing remarks. Barbara Noverini: Thank you, operator. We appreciate you joining our call today. Our fourth quarter and full year 2025 earnings call is tentatively scheduled for 01/28/2026, we look forward to engaging with our analysts and shareholders in the meantime. Thanks for your interest in Badger Meter, and have a great day. Operator: This concludes today's call. Thank you for joining. You may now disconnect your line.
Operator: Good day, and welcome to the Cadence Bank Third Quarter 2025 Earnings Webcast and Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then 1 on a touch-tone phone. To withdraw your question, please press star, then 2. Please note that this event is being recorded. I would now like to turn the conference over to Will Fisackerly, Executive Vice President and Director of Finance. Please go ahead. Will Fisackerly: Good morning, and thank you for joining the Cadence Bank Third Quarter 2025 Earnings Conference Call. We have members from our executive management team here with us this morning: Dan Rollins, Chris Bagley, Valerie Toalson, and Billy Braddock. Our speakers will be referring to prepared slides during the discussion. You can find the slides by going to our Investor Relations page at ir.cadencebank.com, where you'll find them on the link to our webcast, or you can view them at the exhibit to the 8-Ks that we filed yesterday afternoon. These slides are also available in the presentation section of our Investor Relations website. I would remind you that the presentation, along with our earnings release, contains our customary disclosures around forward-looking statements as well as any non-GAAP metrics that may be discussed. Disclosures regarding forward-looking statements contained in those documents apply to our presentation today. Now I'll turn to Dan for his opening comments. Dan Rollins: Good morning. Thank you for joining us this morning to discuss our third-quarter results. It's been another outstanding quarter for our company. I will cover a few highlights, and Valerie will provide some additional detail on our financials. After our prepared comments, our executive management team will be available for questions. We are very pleased to have completed the acquisition of Industry Bank Shares on July 1, as well as the operational integration that just completed last week. Industry and First Chatham are now both fully integrated into our systems and processes, and we are operating as one bank under the Cadence brand. We look forward to the opportunity to grow in Central Texas and Georgia markets that were added through these transactions. Industry was certainly a unique transaction given the size and complexity of their securities portfolio, and it was just a home run on all fronts. Our team did a fantastic job in executing the disposition of 100% of their securities portfolios during the third quarter at a total mark that was less than our estimated mark when we announced the transaction. In fact, virtually all of the purchase accounting marks for Industry came in better than originally estimated. Valerie will cover the purchase accounting items in more detail in a moment. But these improvements are reflected in our quarter-end tangible book value per share declining only $0.12 to $22.82 as the impact of Industry was largely offset by strong operating earnings and improvement in our AOCI. As we look more specifically at our results for the quarter, we had another great quarter from an earnings standpoint. Adjusted net income from continuing operations increased to $152.8 million or $0.81 per share, and adjusted return on assets was 1.13% for the quarter. Our balance sheet growth combined with net interest margin improvement drove a meaningful increase in revenue, and our adjusted efficiency ratio improved to 56.5%. Deposits were up $3.4 billion, with core customer deposits up $3.1 billion due to the influx from Industry. Our teams have done a tremendous job retaining core deposit relationships at all of the acquired banks throughout their transition to our systems. And we look forward to being able to leverage our deposit products and services more fully now that we're past the integration. Loans were up $1.3 billion, with $1 billion coming from the Industry acquisition and over $300 million in organic growth across mortgage and multiple verticals. We did see an uptick in CRE paydowns during the quarter, but our new origination activity continues to be very strong across our footprint. Finally, credit results continue to be in line with expectations, with net charge-offs for the third quarter of 26 basis points annualized and non-performing asset levels and criticized and classified asset levels continuing to reflect stability. And for clarity, loans to NBFIs represent only 2% of our loan portfolio and even less than that if you exclude REITs. We continue to feel confident in that portfolio as well as our overall credit performance. I'll now turn to Valerie. She can provide some highlights. Valerie Toalson: Thank you, Dan. To add to Dan's comments, our adjusted pretax pre-provision net revenue for the third quarter reached a record $224 million, up nearly 9% from the prior quarter, driven by strong organic performance and the closing of our second acquisition this year. As Dan referenced, the Industry transaction added about $2.5 billion of securities on day one, all of which we sold during the quarter. We used those proceeds to invest back into securities, reduce wholesale borrowings, broker deposits, and certain higher-cost public funds, as well as fund loan growth. As part of the sale of those securities, we also unwound related hedges. The financials, the net result is zero impact, with a $4.3 million securities gain offset by a $4.3 million hedge loss included in other miscellaneous non-interest revenue. There were additional gains associated with these sold securities that we offset through a repositioning of $515 million of our existing portfolio securities at improved yields. Net of all this activity, our securities portfolio grew $780 million in the quarter and reflected an improved mix and interest rate profile compared to the prior quarter and day one acquired assets. Total adjusted revenue of $517 million increased $41 million or 9% in the quarter. Net interest revenue was up $46 million or 12% as a result of the larger balance sheet and improved net interest margin. Our net interest margin improved six basis points to 3.46%, driven by improved securities yields and a decline in overall funding costs. Looking forward, assuming the forward curve impact on our balance sheet, repricing, and growth expectations, we anticipate continued modest improvement in net interest margin through the end of the year and into next year. Loan yields were 6.37% in the quarter, up three basis points due to added accretion, while yields excluding accretion remained steady quarter over quarter. Securities yields improved by 32 basis points to 3.65%, again as a result of the restructuring and purchase activity discussed earlier. Our total funding cost improved seven basis points to 2.35% as we brought down wholesale borrowings, broker deposits, and time deposits repriced. Time deposit costs improved six basis points as new and renewed time deposits in the quarter came in over 26 basis points lower than the total portfolio rate. Adjusted non-interest revenue of $93.5 million was down $4.7 million due largely to mortgage banking revenue from seasonal declines in originations, combined with the impact of MSR fair value adjustments. Mortgage banking revenue before MSR was up 13% however, compared to the same quarter last year, reflecting our expanded production capabilities across our footprint. Our other fee businesses showed continued growth and solid performance in the quarter, with trust revenue declines due to the second quarter trust tax revenue. Adjusted non-interest expense increased $22.8 million linked quarter. Slide 15 breaks out the merger-related expenses by category to reduce some of that noise. Of the quarterly increase in adjusted expense, over two-thirds of it is comp-related, basically reflecting the addition of the new banks, our merit impact beginning July 1, and higher incentive accruals related to performance. Increases in occupancy and equipment expense, deposit insurance, assessment expense, and amortization of intangibles are all directly related to the acquired banks. This slide does a good job of highlighting the success we've had managing expenses, excluding the M&A-related growth and improving operating efficiency. The loan provision was $32 million, including the day one provision of just over $5 million associated with the acquired Industry loans. Our ACL coverage also remained stable linked quarter at 1.35%. I'd like to discuss just a few minutes looking at the updated purchase accounting for Industry. As you may recall, Industry had a unique balance sheet and organizational structure. As we refined our purchase accounting and tax evaluation work during the quarter, we were able to reflect improvement in several of the valuation marks relative to our initial estimates. As shown on slide 17, these improved results resulted in an additional $143 million intangible common equity relative to initial estimates. The largest benefit was an additional $80 million in deferred tax assets that was quantified post-close and that was realized during the quarter in conjunction with security sales. In addition, refined marks on loans, securities, and other assets also contributed to the improvement. All in, these adjustments result in the earn-back on this transaction, coming in closer to just two and a half years. Finally, our guidance for the rest of the year is on Slide 18. We continue to be confident in our performance and in the outlook for our markets, with projected growth and financial results through the end of the year all expected to continue to fall within the guidance ranges we shared last quarter. Operator, we would now like to open the call to questions placed. Operator: We will now begin the question and answer session. If you are 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. We ask that you please limit yourself to one question and one follow-up. We will now pause momentarily to assemble our roster. And your first question today will come from Manan Gosalia with Morgan Stanley. Manan Gosalia: Hi. Good morning, all. Dan Rollins: Good morning, Manan. Good to hear from you. My first question is on the guidance slide on Slide 18. Can you talk about the drivers of the slightly lower revenue and loan growth guide? I guess you're pointing to the lower end of the prior range. You know, I know you noted that there's an uptick on CRE paydowns. It feels like organic loan growth might have also been a little bit weaker this quarter relative to last quarter. So I was wondering if that's the reason or if there's anything else that's impacting these numbers. Dan Rollins: Okay. We can take that one. Yeah. I think that the answer is there's only three months left in the year, and so the timeline is much shorter and so we have a better clarity into where we are. I think if you look at the top end of that range, that would show some pretty good growth in the fourth quarter. And we continue to believe that we've got a good growth machine going. Our plans look good. We'll talk about all of that. I think the issue is, it's just a shorter time period. Valerie, you've got some specifics, I think. Valerie Toalson: I think you answered it spot on, Dan. The only other thing that I would add is what we've always talked about is that the expense expectations would fall in line with the revenue expectations. And so as we tighten the revenue, you'll notice we tighten the expense as well. And so again, to drive operating leverage as we go into the end of the year. Manan Gosalia: That's very clear. And maybe on slide 11 with the funding repricing and maturity schedule, I guess the question there is what sort of beta do you expect in the broker and time deposit as rates go down? And also, is there a mix shift you'd expect there as we go through next year? You know, maybe you'd pay down some of the higher-cost deposit with core deposit growth or do you expect that, that funding mix would remain unchanged? Dan Rollins: Yes. I think the Industry Bank Shares plays a big piece of that. Remember, they were very heavily funded on the CD desk. I think our expectation is, over time, we will be able to improve their deposit mix. I think your question was direct on beta on the brokerage side. The brokerage side is going to be market right there. It will move with the market pretty easily. We continue to want to move the broker deposits out. Our loan-to-deposit ratio went down quarter over quarter because of the deposits that came in with Industry. I think we feel pretty good about our funding source, Valerie. Valerie Toalson: Yeah. Thanks, Dan. On the betas, we are expecting, you know, our interest-bearing betas get us to about the 50% level. And the total deposits probably between 30s and 40s. The mix shift that Dan talked to, we do have the expectation that over time those Industry will begin to look a little bit more. So when you look at the balance sheet mix of deposits, looking back kind of prior to the acquisitions this year is something that I would consider a little bit over the normal. Time period for our deposits to migrate back to. Manan Gosalia: Got it. So just to be clear, the 15% sorry. The 50 beta was is is on an organic basis, and in addition to that, there should be some mix shift coming in these higher-cost deposits? Yeah. That's that's fair. Alright. Thank you. Operator: Thank you. And your next question today will come from Jared Shaw with Barclays. Jared Shaw: Good morning. Thanks. Hey, just following up on the deposit discussion, is there anything as we look at the mix shift this quarter with the decline in DDA, what's the expectations for DDA specifically? As we go through the rest of the year apart from maybe the opportunity to pick up mix shift within Industry? Dan Rollins: Yes. I think that you have to look back at a little bit longer time period than just one quarter over one quarter. We had some anomalies in the last couple of quarters that are moving some numbers around. If you look back, we finished year-end 2024 at 21.2% non-interest-bearing deposits. We were at 21.2% non-interest-bearing deposits Q1. Those deposits bounced up in Q2, some of that from First Chatham Bank that had a 30% non-interest-bearing deposit. Some of that from a customer of ours that seems to keep big balances with us at some points in the time period. And so we finished Q2 pretty high. We finished Q3 at 20.6. So from Q1 or year-end last year, 21.2% non-interest-bearing to point 6% is the run rate we've been talking about all along. 21% is kind of where we've been running on. And we've got that one big customer. What impacted this quarter was, remember, Industry's deposits non-interest-bearing deposits were 15% of deposits. So we would have expected to see a rundown from that 21% range a little bit because of their 15% free money on their balance sheets. And then that one customer, Valerie has got some details she can talk about that one customer a little bit. Yeah. Valerie Toalson: Let me just walk you through some details going back a quarter. You go back to the second quarter, of '25, excluding the $150 million NIB that we added from the First Chatham acquisition. Our non-interest-bearing deposits increased about $450 million period to period. And about $550 million of that was a customer that Dan referred to that periodically has influxes and had some dollars that came into our balance sheet in non-interest-bearing the last week of the quarter and stayed over period end. Otherwise, the non-interest-bearing balances excluding the acquisition deposit for that second quarter, would have been flattish. So then you move forward to the third quarter. We added about $50 million in non-interest-bearing deposits from Industry. And backing that out, you see our period-end deposits declined about $750 million. What that represents is the outflow of that $550 million that was in at the June as well as maybe a 2% to 3% reduction in non-interest-bearing as we saw those dollars migrate into interest-bearing products. As an offset in our total core deposits. I think the big difference is the average balances, obviously. And in the third quarter, that difference was driven by those temporary deposits that came into the balance sheet in the quarter and they were gone at the end of the quarter. Specifically, there was about $2 billion that came in at the July. About half of that left mid-August, and the rest the August. So those added those alone added about $850 million in average balances for the quarter. With the rest of that average balance increased due to the Industry acquisition. Jared Shaw: So all in all, when you normalize out that temporary influx and the acquisitions, our non-interest-bearing is very consistent, as Dan said, with our quarterly trends consistent as a percent of total deposits. Going forward, these period-end non-interest-bearing and the ratio of total balances, I'd say, are good levels to consider as a base. Periodically, we may have this customer bring some dollars in and out, but right now those dollars are out. And so it's a foundational base. I would expect that on a go-forward basis. Hopefully, that's helpful to you. Valerie Toalson: Yep. Other thing that I would add is Manan's question. I don't think I answered it on the brokered. We expect that brokered to run off as, you know, we can pay that down with investment cash flow. The bulk of those balances actually in the fourth quarter. Dan Rollins: Yes, we're fortunate to have good customers that trust us with their balances. And this customer has been our customer for decades. And it seems like on an irregular basis, they have a lot of cash that flows in and it sits in our bank for a while while they decide what they want to do with it. So we like good customers like that. Jared Shaw: Okay. Thanks. That's really helpful. I guess as my follow-up with these deals now closed and integrated, and the benefit from the lower purchase accounting marks, the capital is really, really strong here. What should we think of sort of a good capital level or a base capital level that you're trying to manage to? And what are some of the thoughts, I guess, on buyback versus additional deals from here? Dan Rollins: Yeah. I think we want to continue to be good stewards of the capital that we have. So I think we'll continue to execute on our plans. We said last quarter that we needed to build capital after the transaction. We did that already. We made some great changes this quarter that helped us on that front. So I think that puts us back in the buyback game much faster than we thought before. And I think we continue to look for opportunities to use capital and to grow. Number one is core organic growth and number two, be doing something inorganic. Operator: And your next question today will come from Casey Haire with Autonomous. Please go ahead. Casey Haire: Thanks. Good morning, everyone. Wanted to touch on deposits in the quarter. You guys so the deposits were up 3 and a half billion. Industry was a 4 and a half billion dollar franchise. It sounded like the core the legacy deposit franchise was pretty stable. Just wondering what was driving you know, what what happened to a billion of of the Industry deposits? And then any color on Dan, as you mentioned, it's heavily CDs. Any color on your ability to price them down and retention rate? Dan Rollins: Remember, their cost of CDs was actually equal to or lower than ours. So I don't think their pricing structure was wrong. And I think your numbers are off a little bit. Valerie, you want to walk through that? Valerie Toalson: Yeah. I think it might be helpful if you go on to page 20 of the slide deck, if you have that in front of you, Casey. We lay out the alone, addition of the bank shares and the organic change. And you can see in the organic change column, we actually paid down broker deposits $500 million in the quarter. Those public fund dollars that left, those were dollars that we actually that were higher-cost public funds associated with the Industry transaction that we intended on leaving. We talked about that in the second quarter. And they did leave in the third quarter. And then you can see that the core organic was actually flat. When you looked at what Industry brought on versus where we ended the quarter, it was very, very stable. So both Industry and First Chatham did a fantastic job of keeping all those deposits stable throughout the transition. And so there wasn't movement of that magnitude out of Industry. Does that help clarify? The other thing to keep in mind is also that on interest. Casey Haire: I missed that, Scott. I'm sorry. But you said you missed that. Yeah. I did. Sorry. I missed that slide. I see it. It's all laid out there. My bad. And just just following up on the on the NIM, think, Valerie, you said that you expected to be up going forward. Just wondering what does that presume in terms of purchase accounting adjustments going forward? Valerie Toalson: Yes. So the accretion this quarter was $5.5 million. It's projected to steadily decline as we go forward. So for example, next quarter, it's projected at about $4 million. And then for all of '26, about $12 million. And so you can see that's going to steadily decline. So that's not what's driving the NIM improvement. What's driving the NIM improvement is what it has been. It's the fact that we're bringing on new loans at greater than the portfolio rate. It's the repricing of the variable and fixed-rate loans, and it's the bringing down of the deposit cost. All of that is supporting that NIM improvement. Casey Haire: Gotcha. Thank you. Dan Rollins: Thanks, Ben. Thanks, Casey. Operator: Your next question today will come from Ben Gerlinger with Citi. Please go ahead. Ben Gerlinger: Hi. Good morning. It seems like it's a bit of a seller's market right now, the bank M&A. We're seeing some smaller transactions. In or around your footprint that you're the S4, you're seeing multiple bidders. So it kind of know that organic growth is a top priority for capital, and since you've kind of rebuilt with the accounting, to your benefit here, any conversations you might be having or is the bid ask too wide? Get me wrong. Like, doing two deals already this year is quite a bit. So I don't mean to my saying you're not doing a lot, but it seems like M&A is always on the front burner. You guys. Just any conversation you might be having or how sellers are viewing a bid ask spread. Dan Rollins: Yeah. I appreciate that. I think we continue to have opportunities in front of us. So when you look at our footprint today, look at what we've been able to do this year, announcing closing, integrating the two transactions that we've been able to do this year, the team has been very busy as you can imagine. But there will continue to be opportunities. We're in a consolidating industry. We like the position we sit in today. And I think we'll be able to take advantage of the market. Ben Gerlinger: Gotcha. But helpful. Kind of expanding on that a little further, you have a pretty substantial geography in terms of opportunities within MSAs. More you could kinda theoretically go back to the legacy BancorpSouth. We're really, really sticky deposit franchises. Is there one way you'd typically kinda lean if you have the opportunity? Is it more growth? Or is it more deposit focused? Dan Rollins: Yeah. No. I don't I think that we've always looked for opportunities. So when you look at the two transactions we closed this year, Industry transaction is smaller markets, as you call them, stickier deposits, a good core customer base that's been with the bank for a long, long time, I think the team that's been on the ground there, we had 300 and some odd people out for the last two weeks out of their home branches into the markets where Industry's 30 some odd branches are. Really good reception from customers there. Team has done a fantastic job of talking to customers and making that everybody is taken care of. There's really no difference in that to us. Versus the higher growth markets like Savannah from the First Chatham tremendous opportunities to grow further into that market because of the growth opportunities there. They bring different things to us. And so it's really the opportunity that brings themselves the opportunities that bring themselves to us. Ben Gerlinger: Gotcha. That's helpful. Thank you. Operator: And your next question today will come from Catherine Mealor with KBW. Please go ahead. Catherine Mealor: Hey. One on hey. Good morning. One follow-up on the margin. I know you did a lot in the bond book this quarter and we saw a big jump into yield. But curious if there's any insight you can give us into maybe the kind of where that yield was at towards the end of the quarter just so we could kinda fully appreciate maybe what a full quarter's impact would be from all the restructuring you did this quarter. Dan Rollins: That's a good question. Yes. Well, I think. Operator: Can you do you lose Valerie? Am I still on? Pardon me, ladies and gentlemen. It appears we have lost connection to our speaker line. Please standby while we reconnect. Thank you for your patience. Pardon me, ladies and gentlemen, I reconnected to the main speaker line. Please continue. Dan Rollins: Okay, Larry. Answer that question again. Valerie Toalson: You can hear us now. We'll go in again. Yes, Kathryn, that's a great question. We had about $1 billion that we reinvested after selling the securities from the Industry acquisition. And then we had the addition of $550 million that we repositioned of our existing securities book. So all in, about $1 billion of say, new securities, if you will, this quarter. Those came in at about a 5.2% yield. So that'll be helping out that overall securities yield, which actually increased during this quarter as well. The securities that we bought after Industry, those were bought probably by mid-July. The restructuring didn't occur until later in September. So there'll be a little bit additional bump as we go into the next quarter. Catherine Mealor: Okay, great. And then would you expect to continue to grow the bond book as we move through next year? How do we think about I know we can look at what loan growth will do, but how do you think about the bond book with an average earning asset growth? Valerie Toalson: Yeah. So we kind of like where it is as a percent of total assets. That being said, we've also got flexibility there. Where we could add a little bit depending on what the rest of the balance sheet does, but it could also as we show in some of our slides, the cash flow that comes off that portfolio was pretty significant as well. And so it can also serve to be a funding mechanism should we need it. So it's we'll probably stay somewhere between 15-20% of total assets. And really, that's going to depend on the loan growth outlook, etcetera. Dan Rollins: We challenged the team to fund loan growth with core deposit growth. Valerie Toalson: Yeah, exactly. That's the preferred method. And if that was the case, then we would certainly be reinvesting and adding a little bit more into security specs. Catherine Mealor: Okay. Very helpful. Thank you. Dan Rollins: Thank you, Catherine. Operator: And your next question today will come from Michael Rose with Raymond James. Please go ahead. Michael Rose: Hey, good morning. Thanks for taking my questions. Maybe we can just start on expenses. So I think the guide would imply a little bit of build next year, but you still have as we think about 2026, you still have about 75% of the cost saves. From Industry still to kind of be realized. Can you just I'm not asking for explicit guidance, but can you just give us kind of a starting point for expectations as we start to think about 2026 expenses? I mean, obviously, there's gonna be merit increases. There's seasonal impacts, things like that. I know health care costs are going up for a lot of banks, but you do have these cost saves. At the same time, I assume you're still reinvesting in the franchise. So we just love to frame out the puts and takes. Dan Rollins: I appreciate the questions, Michael. I think from a where we stand cost save wise, I don't think you have any cost saves in the numbers that you see yet. I mean, we firstly we ran the quarter. There's a little bit, but also had some old First Chatham expenses still in there. So you've got some pretty good cost saves that we will continue to execute on in 4Q. I think 1Q becomes a run rate quarter that you would want to see on a go-forward basis with the cost saves in. Off of that 1Q, base quarter, then what's the build, I think, is what you're asking? Valerie Toalson: Yeah. And I think what you walked them through, Dan, is exactly right. We really don't have those cost saves for Industry in the fourth quarter at all. We just completed the conversions. And so those will be flowing through most significantly through 2026. As typical, but that's you know, we will preside or present our twenty-sixth guidance when we do our end-of-year earnings. So that's when we'll kind of lay it all out. But I think if you just think about it from a broader spectrum, we do anticipate continuing to build operating leverage as we go into next year. And that's really driven by the strong revenue growth and the good loan opportunities that we see across our footprint as we continue into next year. Michael Rose: Okay. That's helpful. And then maybe if I can just go back to the slide deck from when the deal was announced. On Slide 12, you had pro forma EPS reconciliation for 'twenty-six and 'twenty-seven. I know things have changed, obviously, that was based on consensus. At the time. But maybe, Valerie, if you can just walk us through maybe some of the major changes just to summarize those and maybe how we should think about the build. From the deal? Thanks. Dan Rollins: Yeah. He's on the deal slide deck, Valerie. So you're talking about the changes that we saw. So the biggest one was the deferred tax asset piece. Was the biggest piece. So we thought there was a little bit of a deferred tax asset. We modeled that in. As we worked with our tax folks and our internal team did an absolutely fantastic job. I want to brag on the folks that were involved in that. A lot of work went into understanding all of the pieces that were there. That was an $80 million pickup that came through the deferred tax asset piece. And then the other components, whether it was the loan mark or the credit mark or all the different pieces that came through resulted in about $140 million improvement on the capital side of that. Can turn that into the income, I think is what he's trying to do, is figure out what that does on an income statement side, Valerie. Valerie Toalson: Yes. So and we laid all that out for you, Michael, on slide 17. You can see the changes there. So you can see the piece that was the interest rate on loans. The actual interest rate mark on the loans was very pretty flat. The securities mark, we actually sold all those securities and so there's not anything forward-looking on that piece. And so from an actual income standpoint, there's not a lot of change. But it absolutely helped day one tangible book value. Michael Rose: Okay. That's exactly what I was looking for. Thanks for summarizing that. Appreciate all set back. Dan Rollins: Yeah. The team did a fantastic job on this transaction. Operator: Your next question today will come from Stephen Scouten with Piper Sandler. Please go ahead. Stephen Scouten: Hey, good morning. Thanks. So you guys have had an extremely active busy couple of years with the insurance sale, restructuring, couple deals. How do you think about kind of major strategic initiatives from here? Or is it more just a block and tackling on what's been built out? And if it was additional M&A, would you look for more market extension or more in-market type of deals? We've been very consistent on the answer to that question. Dan Rollins: Steven. I think we like the nine states we're in. We don't see a whole lot of need to stretch outside of that. We want to have more mass, more density within the states that we serve. We like the Southeast. We like Texas. We continue to look for opportunities to expand in that footprint. Again, we're really proud of the fact that we've been able to announce, close and integrate two transactions in this calendar year so far. And continue to believe there's opportunities in front of us. Stephen Scouten: Okay. Great. Appreciate that, Dan. And then you commented earlier on the 2025 guide that it implies a pretty strong growth rate here in the fourth quarter organically. It looks like kind of mid to mid-high single-digit growth implied in that guide. Is that kind of the right way to think about '26? I know you're not giving '26 guidance currently, but is that the kind of expectation that you guys would have as of today for what's a palatable growth rate? And what kind of gives you confidence in that, whether it's pipeline growth, customer demand? Any color you can give there around customer behavior? Dan Rollins: Yes. Great questions. Thank you for asking that. We certainly want to talk about the pipeline today. Chris and Billy can add in on where we stand on some of that. The markets the big server, good. There is strong market activity. 4Q is typically a strong market. We see lots of activity coming in. The tax law changes are driving some business our way. Which one of you guys wants to take the lead on this? Yes, I'll start. Chris Bagley: You're right, Dan. Pipelines are solid. They're diverse. There's what I like about it. It's across all of our C and I segments geographically. It's within all of our groups, verticals, energy as well. The only place where we've seen a little headwind is from paydowns in CRE, which we've been expecting for a number of years. This is on the 21-22 vintage merchant loans that were out there. So we're seeing some of that activity. Most of that's payoffs from private credit. But for longer-term pipeline, I mean, right now, the pipeline is supporting, you know, in excess of what our budget was for the year. So that feels nice. And even Q3 versus Q4, I mean, we had lots in the Q3 pipeline. Some of it fell into Q4 as it always can happen from a first few weeks look pretty good. Yeah. From trying to pinpoint an actual date. So I like the diversity that's there and it's widespread. So I would say it continues to support, you know, our thesis. Dan Rollins: Yeah. And all lines are growing. When you look at what's happening out there, all business lines, the whole geography, everything is running well, Chris? Chris Bagley: Yeah, just to add a little color, I mean, community banks the same way. You're seeing, you know, one of the I think, one of the positives is we just have a lot of leverage to pull. So you've seen growth from market. You've seen growth from the community bank, and you've also proud about the acquisitions. I think there's opportunity there. The transactions that have joined us, I think they've got a new set of products and higher lending limits, and I think you're gonna see them hit the ground running next year as well. Yeah. Our number one product in the community bank was not offered by either one of those banks on the loan desk. Or the deposit desk. Stephen Scouten: Interesting. Okay. Great color. Thanks for all the time and attention. Congrats on the progress. Dan Rollins: Thank you. Appreciate it. Operator: Your next question today will come from Matt Olney with Stephens. Hey, good morning. Thanks for taking the question. Just kind of on that last topic there around loan growth and pipelines, just looking for any kind of color on loan pricing, loan competition in recent weeks and months in the Community Bank and the commercial bank. Thanks. Chris Bagley: I'll start off. I think it's competitive out there, but you see it in our yields that we've booked. So the yields have been holding in there. I think especially on the community bank side, spreads have tightened on some transactions, mostly on the software-based things and in certain verticals. You see some tightening there, but I think all in, we're able to keep our yields up right now. Yeah. The new renewed loans for that third quarter actually came in about 6.85%. So we feel pretty good at that. Matt Olney: Okay. That's all for me. Thanks, guys. Dan Rollins: K. Thanks, Matt. Appreciate it. Operator: Your next question today will come from Brett Rabatin with Hovde Group. Please go ahead. Brett Rabatin: Hey, good morning, everybody. Wanted to ask about Slide 10. And when you look at the one to three years bucket, the yield on that piece is a little lower even though a lot of that portfolio is variable. Can you guys just talk about that bucket? And I know it's not a huge piece, but it could be an incremental driver for yield on the loan portfolio and just is that weighted more towards the one or the three years in terms of the duration? Dan Rollins: Which column are you in again just one more time? The one to three-year column? Yeah. Yeah. One to three. Valerie Toalson: So, yeah, basically, what that includes when you refer to the floating and variable, that'll include also loans that are fixed for a period of time that then switch to floating after a three, five, seven-year period. And so this bucket for the originations includes more of that, and that's for some that were produced at an earlier date. And that's why it has the five forty-six average rate. So yes, you're exactly right. As we look out into next year, there's a decent at least from where our new and renewed coming on at six eighty-five versus that five forty-six, that's a pretty strong delta right now. That may shrink a little bit depending on where rates go over the next few quarters, but it's still a nice delta that we should continue to gain benefit from. Dan Rollins: Allows us to reprice loans up even in a down rate environment. Brett Rabatin: Exactly. And so just following up on that, Valerie, is that weighted more towards the one or the or closer to three years in terms of the maturities there? Valerie Toalson: Yeah. I don't have that information in front of me right now. Brett Rabatin: Okay. No worries. The other question I wanted to ask was around credit, and credit continues to behave well for you guys. People have been talking about cockroaches, but you guys didn't see any. But there was some movement in nonaccruals, down downdraft in C and I and an uptick in income-producing CRE, you know, might have been lumpy, any thoughts on the movement in the nonperformers? Dan Rollins: I think what we're seeing is just a normal migration that we talked about for the last couple of quarters. I don't see anything in there that's too exciting. Chris, I know you want to talk about some of. Chris Bagley: Yeah, I mean, Dan said it's normal course of business as we work through different credits. You're right. Some of it was in the CRE book. This quarter, which we've identified the credits there that have great loan to values. We're not anticipating losses there. Now remember that the nonperforming book they a large number of that's SBA guaranteed loans, so, you know, you need to kind of adjust that when you think about the non-performing. Dan Rollins: I think overall if you wanna add we look at credit today, you know, we're watching the same thing you're seeing. We're seeing some of the talk in the market. We don't have a whole lot that we're getting too excited about here. Brett Rabatin: Okay. That's helpful. Thanks for the color, guys. Operator: And your next question today will come from Jon Arfstrom with RBC Capital Markets. Please go ahead. Jon Arfstrom: Hey. Thanks. Good morning. Dan Rollins: Hey, John. Jon Arfstrom: Hey, Billy, maybe one follow-up for you. You talked a little bit about the paydowns and the vintages. Are you saying you expect the paydown activity to start to slow? Is that the message you wanted to send them that? Chris Bagley: No. You know, what I'm and this is CRE specific. Right? So there's a volume across the industry. I mean, it was a heavy origination period in '21 and 2022. The payoffs have actually delayed longer than we anticipated. They're starting some, but they're not because of sale activity. For the most part. It's because of ridge refinance activity, you know, 50% of the payoffs in CRE, that merchant CRE was from bridge payoffs from private credit. We'll continue to see some of that. We'll provide a little bit of that. As well. So don't see it necessarily slowing. The good news is you know, the twenty-four and twenty-five vintage originations are gonna start funding to offset some of that. So that's where you might see it mute is that is those construction loans start funding. If we could draw perfectly, the lines would cross at the same time. Unfortunately, we can't draw perfectly. Jon Arfstrom: Okay. Okay. Good. And then just bigger picture on the fee income businesses. Is there anything you guys would call out this quarter one way or the other? I understand the wealth management piece and the MSR piece, but you know, just help us with, you know, what's the wealth strategy? What's the more banking strategy, and anything you would call out that was particularly favorable this quarter? Valerie Toalson: You know, I would just say on the mortgage, you know, it's a typical seasonal dip that we see in the third quarter on the standpoint. But if you look back year over year, it's actually up 13%. And so that's indicative of the commitment that we have to that business. And the fact that they've been adding to talent in key markets across our footprint and we expect that to continue. If rates in addition to that, kind of organic flow, if you will, if rates get something with a five handle on them, we would also expect to see a lot of refi activity. And so that would certainly drive up some changes there. On the wealth side, we continue to do very well. I actually just talked to the leader of our Cadence Investment Services earlier today. And he said September was their highest revenue peak. And they looked to be continuing that growth into the fourth quarter. We just continue to do well. That's a strong business for us. We think that for the industry, it's actually a growing area of business. Certainly, there's a lot of wealth transfer that's going to happen in the next several years, and we want to be there to capture it. So, yeah, we're pretty bullish on those fee revenue categories. Was one item this quarter that I wanna make sure is clearly understood. We had the securities gains of $4.3 million.0 and then also we had an offset of a negative $4.3 million.0 in other non-interest revenue that we called out related to unwinding the associated hedges. So the net impact on the P and L was zero. But if you're just looking at some of those fewer numbers, may not see that. So I just wanted to call that out. Dan Rollins: I think on the wealth side, though, I'd just add to that that your team has hired two really good folks to join just this last quarter. In the Houston market and the Atlantic market. And yes. We're investing in wealth and we're excited about what the new folks will be able to help us do. Jon Arfstrom: Okay. Alright. Thank you. Operator: And your next question today is a follow-up from Ben Gerlinger with Citi. Please go ahead. Ben Gerlinger: Hey, Ben. Appreciate the follow-up. Just wanted to follow-up on the one client has a pretty substantial deposit relationship with you guys. Any potential clarity on when they might refill? And then what do you lend against them, or is it just a securities position? Dan Rollins: It's just a this is a customer that we've had for literally decades. And they have cash flows that come sporadically. We don't always know when that money is going to flow in. It's just a great customer that parks deposits with us for a while. Ben Gerlinger: Gotcha. Okay. Appreciate your time, then congrats, Dan, on the chair position of the India. Dan Rollins: Thank you very much. Appreciate it. Operator: This concludes our question and answer session. I would like to turn the conference back over to the management team for any closing remarks. Dan Rollins: Thank you all for joining us this morning. I sure you can sense the excitement in our team shares around the financial results we've delivered combined with the opportunities that lie ahead. Looking back, our year-to-date performance has shown an ongoing cadence of progress, including the announcement closing and integration of two strategic acquisitions, meaningful organic growth, and continued improvement in performance. These accomplishments reflect the strength of our talent, both the front and the back office, and our commitment to serving our customers and communities. Thank you all very much for joining us today. This concludes our call. We look forward to visiting with you all again. Operator: Conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: At this time, I would like to welcome everyone to the Balchem Corporation's Third Quarter 2025 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. Thank you. I would now like to turn the call over to Carl Martin Bengtsson, CFO. Please go ahead. Carl Martin Bengtsson: Thank you. Good morning, everyone. Thank you for joining our conference call this morning to discuss the results of Balchem Corporation for the quarter ending September 30, 2025. My name is Carl Martin Bengtsson, Chief Financial Officer. And hosting this call with me is Theodore Lee Harris, our Chairman, President, and CEO. Following the advice of our counsel, auditors, and the SEC, at this time, I would like to read our forward-looking statement. Statements made in today's call that are not historical facts are considered forward-looking statements. We can give no assurance that the expectations reflected in forward-looking statements will prove correct and various factors could cause actual results to differ materially from our expectations, including risks and factors identified in Balchem's most recent Form 10-Ks, 10-Q, and 8-Ks reports. The company assumes no obligation to update these forward-looking statements. Today's call and commentary also include non-GAAP financial measures. Please refer to the reconciliations in our earnings release for further details. I will now turn the call over to Theodore Lee Harris, our Chairman, President, and CEO. Theodore Lee Harris: Thanks, Martin. Good morning, and welcome to our conference call. We were extremely pleased with the financial results for 2025 and the strong performance of our company, fueled by the ongoing market penetration of our unique portfolio of specialty nutrients and delivery systems, and the favorable "better for you" trends within the food and nutrition markets that are well aligned with our food ingredient formulation systems and capabilities. We delivered record quarterly consolidated sales, adjusted EBITDA, adjusted net earnings, and adjusted EPS, with year-over-year sales and earnings growth in all three of our reporting segments. 2025 was the twenty-fifth consecutive quarter of quarterly year-over-year growth in adjusted EBITDA for Balchem Corporation. We are very proud of this accomplishment, particularly in light of the market environment within which we have been operating over the last twenty-five quarters. I would like to take this opportunity to thank the entire Balchem team for their exceptional performance and contributions toward this significant achievement. Thank you all very much. Before we get into more detail on the quarter, I would like to make a few comments about the overall market environment, including the evolving global trade situation, as well as some of the new science that has recently been published supporting our nutrients and the further expansion of our marketing efforts to help drive awareness and market penetration. We continue to see healthy demand across the vast majority of our end markets. Our Human Nutrition and Health segment continues to perform extremely well, driven by strong demand for both our unique portfolio of minerals, nutrients, and vitamins, and our food ingredients and solutions, which are benefiting from trends toward nutrient-dense, high-protein, high-fiber, and lower-sugar or "Better For You" foods, where our nutrient portfolio and our formulations expertise bring considerable value to our customers. In the Animal Nutrition and Health segment, we delivered another quarter of year-over-year growth on improved demand in both our monogastric and ruminant businesses, as a result of further market penetration of our rumen-protected precision release encapsulates nutrient portfolio and mostly, or modestly, improving market conditions in the European monogastric market. And we remain encouraged by the overall performance of our animal nutrition and health product portfolio. Within our Specialty Products segment, both our Performance Gases business and our Plant Nutrition business are performing well, driven primarily by higher demand as a result of healthier market conditions within Performance Gases and successful geographic expansion growth within plant nutrition. Year to date, on a consolidated basis, we have delivered strong growth both on the top and bottom lines, while continuing to generate strong free cash flow. And our outlook for the remainder of the year remains positive. As discussed on the last few earnings calls, we believe we are relatively well-positioned to effectively manage through the current global trade environment. To date, we have managed to fully offset the impact of tariffs associated with the U.S. Administration's evolving trade policy, either through alternate supply chain options or subsequent pricing actions. And based on what we know today, we expect to similarly be able to offset any impact of future tariffs as the trade situation further evolves. Additionally, I would like to share some progress we have made in our scientific clinical research pipeline, which continues to bolster our human nutrition and health segment. We continue to actively invest in the science behind our brands such as VitaCholine, K2Vital, OptiMSM, and Albion Minerals. These studies are integral to our strategy for entering new markets, expanding our ingredient categories, and building consumer awareness. I would like to highlight one of the studies published recently that is of particular importance. Late in 2017, we informed you that Balchem funded a pilot study. Dr. Steven Sissel, the former director for the University of North Carolina's Nutrition Research Institute, received a $2.6 million grant from a unit of the National Institutes of Health, or NIH, to develop a blood-based test or biomarker to help measure choline status in humans. The NIH-funded choline biomarker study was known to be a lengthy study, only further delayed by the COVID-19 pandemic. That has now been completed, and the results have been published as a preprint. It was an important study from our perspective since it promised to help more easily identify choline deficiency in humans by identifying a choline biomarker in order to ultimately help address deficiencies through supplementation, while also facilitating research on the benefits of choline supplementation in humans. The study was a double-blind, randomized, crossover-controlled feeding study in which all 101 subjects received 100%, 50%, and 25% of the choline recommended daily intake in two-week segments separated by two-week washouts. The results of the study show that plasma choline and betaine, when measured together, are highly predictive of actual dietary choline intake. These findings offer a new opportunity to assess choline dietary adequacy and will likely be included in future clinical and population studies and ultimately be used as a common measurement in health screenings of choline intake versus daily recommended intake levels. On the marketing front, within our animal nutrition and health segment, we continue to expand our reach and impact through marketing. We have strengthened our marketing capabilities, and Balchem's Real Science Exchange platform, now celebrating five years since its launch, has grown into a leading industry information and technology resource with webinars, podcasts, and symposiums that is attracting a strong following across the industry, with high-quality content across leading streaming platforms such as YouTube, Spotify, and Apple Podcasts. This channel to the industry gives Balchem a unique opportunity to reach and interact with an expanded target audience. We will continue to invest in our marketing capabilities, and we recently partnered with Progressive Dairy Magazine to introduce the Real Producer Exchange for practical insights for dairy farmers. And later this month, we are excited to expand into the companion animal sector with new webinars and podcasts, reinforcing our commitment to advancing animal science and industry collaboration. So some exciting progress is being made on our strategic growth initiatives while at the same time, delivering strong financial results. Now regarding the third quarter of 2025's financial performance. This morning, we reported record quarterly consolidated revenue of $268 million, which was 11.5% higher than the prior year quarter. We delivered record quarterly GAAP earnings from operations of $55 million, an increase of 13.7% versus the prior year. Consolidated net income closed the quarter at $40 million, an increase of 19.1%. This quarterly net income translated to diluted net earnings per share of $1.24 on a GAAP basis, up 21¢ or 20.4% compared to the prior year. On an adjusted basis, we delivered record quarterly adjusted EBITDA of $71 million, an increase of 11% compared to the prior year. Our record quarterly adjusted net earnings were $44 million, an increase of 19.1% from the prior year, which translated to $1.35 per diluted share, up 22¢ or 19.5% compared to the prior year. Overall, another excellent quarter for Balchem Corporation, as we continue to deliver strong financial results while making good progress on our strategic growth initiatives. And with that, I'm now going to turn the call back over to Martin to go through the third quarter consolidated financial results for the company in more detail and the results for each of our business segments. Carl Martin Bengtsson: Thank you, Ted. As Ted highlighted, the third quarter was a great quarter for Balchem Corporation with record sales, earnings from operations, adjusted EBITDA, adjusted net earnings, and adjusted earnings per share. Our third quarter net sales of $268 million were 11.5% higher than the prior year, driven by strong performance in all three segments: Human Nutrition and Health, Animal Nutrition and Health, and Specialty Products. Our third quarter gross margin dollars were $95 million, up 11.8% compared to the prior year, and our gross margin percent was 35.7% of sales, up 10 basis points compared to the prior year. Consolidated operating expenses for the third quarter were $41 million as compared to $37 million in the prior year. The increase was primarily due to an increase in professional services and higher compensation-related costs. GAAP earnings from operations for the third quarter were a record $55 million, an increase of 13.7% compared to the prior year. On an adjusted basis, as detailed in our earnings release this morning, record non-GAAP earnings from operations of $60 million were up 12.1% compared to the prior year. Adjusted EBITDA was a record $71 million, an increase of 11% compared to the prior year, with an adjusted EBITDA margin rate of 26.7%. Net interest expense for the third quarter was $3 million, a decrease of $1 million compared to the prior year, driven primarily by lower outstanding borrowings. Our net debt decreased to $89 million, with an overall leverage ratio on a net debt basis of 0.3. The effective tax rates for 2025 and 2024 were 22.6% and 22.9%, respectively. The decrease in the effective tax rate from the prior year was primarily due to certain lower state taxes. Consolidated net income closed the quarter at $40 million, up 19.1% from the prior year. This quarterly net income translated into diluted net earnings per share of $1.24, an increase of $0.21 compared to the prior year. On an adjusted basis, our third quarter adjusted net earnings were a record $44 million, an increase of 19.1% from the prior year, which translated to $1.35 per diluted share. Cash flows from operations were $66 million, with free cash flow of $51 million, and we closed out the quarter with $65 million of cash on the balance sheet. As we look at the third quarter from a segment perspective, our Human Nutrition and Health segment generated record sales of $174 million, an increase of 14.3% from the prior year, driven by higher sales within both the nutrients business and the food ingredients and solutions businesses. Our Human Nutrition and Health segment also delivered record quarterly earnings from operations of $41 million, an increase of 14.8% compared to the prior year. This was primarily driven by the aforementioned higher sales and a favorable mix, partially offset by certain higher manufacturing input costs and higher operating expenses. Third quarter adjusted earnings from operations for this segment were a record $44 million, an increase of 13.2%. We are extremely pleased with the overall performance of our Human Nutrition and Health segment. And as Ted mentioned earlier, we continue to experience strong demand for our unique portfolio of ingredients and solutions. We believe our Human Nutrition and Health businesses are well-positioned to build on the momentum we are seeing across our end markets. And as consumers increasingly favor "better for you" ingredients and solutions, we see significant opportunities ahead to leverage our formulation expertise, nutrient portfolio, and strong market positions to continue to deliver healthy growth in human nutrition and health. Our Animal Nutrition and Health segment generated quarterly sales of $56 million, an increase of 6.6% compared to the prior year. The increase was driven by higher sales in both the ruminant and monogastric businesses. Animal Nutrition and Health delivered earnings from operations of $4 million, an increase of 5.2% from the prior year. The increase was primarily due to the aforementioned higher sales and a favorable mix, partially offset by certain higher manufacturing input costs and higher operating expenses. Third quarter adjusted earnings from operations for this segment were $4 million, an increase of 1.2% compared to the prior year. The end markets for Animal Nutrition and Health remain relatively stable at the moment, and we were pleased to see another quarter of top and bottom line growth. We continue to see market penetration of our rumen-protected encapsulated nutrients for the dairy market, including our ReAssure encapsulated choline and our more recently launched AminoShore XL encapsulated lysine. On the monogastric side, we see a relatively stable U.S. market at the moment, and a modestly improved European market environment following the provisional anti-dumping duties on Chinese choline that were announced last quarter. As we look forward, we expect Animal Nutrition and Health to continue to deliver growth over the long term. Our Specialty Products segment delivered quarterly sales of $36 million, an increase of 7.5% compared to the prior year, driven by higher sales in both the Performance Gases and Plant Nutrition businesses. Specialty Products delivered a record quarterly earnings from operations of $12 million, an increase of 9.7% versus the prior year, primarily driven by the aforementioned higher sales. Third quarter adjusted earnings from operations for this segment were a record $13 million, an increase of 8.8%. We continue to be really pleased with the performance of Specialty Products, delivering another strong quarter of growth both on the top and bottom line. Within Performance Gases, our international reach is creating value for our customers and helping to drive growth rates above historical levels. And similarly, within our plant nutrition business, we are having good success with our geographic expansion efforts, particularly in Latin America and Asia Pacific. Specialty Products is performing well, and going forward, we expect to be able to continue to drive solid growth for the Specialty Products segment. So overall, the third quarter was another excellent quarter for Balchem Corporation, and we believe we are well-positioned for continued growth as we head into the remainder of the year. I'm now going to turn the call back over to Ted for some closing remarks. Thanks, Martin. Once again, we are extremely pleased with the third quarter financial results reported earlier this morning. Theodore Lee Harris: As a company, we continue to show an ability to deliver results in a variety of market conditions. Given our strong market positions and our value-added portfolio of products, the company is performing very well. We have once again effectively managed through the latest macroeconomic and tariff-related trade environment with minimal impact on the company. At the same time, our growth has strengthened as a result of the accelerating "Better For You" trends within the health and nutrition markets, given our unique portfolio of nutrients, coupled with our food ingredients and solutions capabilities. We are extremely proud of delivering 25 consecutive quarters of quarterly year-over-year growth in adjusted EBITDA, with the third quarter results reported earlier this morning. And we remain confident in the long-term growth outlook for Balchem Corporation as a company. I will now hand the call back over to Martin, who will open up the call for questions. Thank you, Ted. Carl Martin Bengtsson: This now concludes the formal portion of the conference. At this point, we will open up the conference call for questions. Operator: And your first question comes from the line of Robert James Labick with CJS Securities. Please go ahead. Robert James Labick: Good morning. Congratulations on another record quarter. Carl Martin Bengtsson: Thanks, Bob. Robert James Labick: Sure. I wanted to start with the food ingredients and solutions. For the last several quarters, it's kind of really picked up after, you know, previously lagging the minerals and nutrients growth rate. You just mentioned the "better for you" trend, but could you drill down a little more and talk about the changes in Food Solutions and the drivers and the outlook for each of the sub-segments in 2025? Theodore Lee Harris: Absolutely, Bob. And first of all, just stepping back a little bit, we really were extremely pleased with the performance of the entire segment, Human Nutrition and Health. Just to kind of peel that onion back a little bit. Sales for H and H were up, you know, 14%. And then if you, you know, talk about the nutrient portfolio, it was up about 30%. But as you highlight, the food ingredient business was up nicely as well. So it was really good to see the food business up almost 7%. And, you know, we don't see that growth rate differential necessarily changing over time. We always see the nutrient portfolio as growing faster than the food portfolio. But as you point out, the food growth was kind of low single digits there for a while and now significantly increased. And the primary driver of that is what we touched on in the prepared remarks, and that really is the benefits we're seeing from the "better for you" trends in the market, whether it's in meat sticks, which is a high-protein snack to replace, you know, other snacks, or whether it's a high-fiber nutritional beverage that is trying to address even some of the negative implications of GLP-1 drugs, for example. We see quite a few of our customers introducing new products targeted to that audience, and we all know that's a pretty sizable consumer base. Or whether it's high-protein bars, for example, with our C Crisps and our ability to add high-protein crisps to certain kinds of bars in the marketplace. So all of those trends are really helping support and strengthen our overall growth in food ingredients. And it's really a combination of our nutrient expertise from the nutrient business, our unique products, you know, encapsulated products, our kind of emulsified fat powder systems, our flavor systems, and our ability to combine all of those in solutions for our customers as they're introducing new products to serve those trends. And we think those trends are likely to continue for the foreseeable future. You know, I think the "better for you" trends have been going on for decades. And of late, we've seen some accelerants to those trends, whether it's the GLP-1 drugs that I touched on that, you know, have side effects and have sort of unique nutrient needs, if you will, for the consumers of those products. That's an opportunity for us. Certainly, the, you know, the RFK Junior focus on, you know, healthier for you products, less processed food products is creating an accelerant, if you will, to this long-term trend. So, you know, we're really pleased that our portfolio of products caters to those trends and is allowing for us to get new wins in the marketplace and grow our food business at a higher rate than we have historically. So we're quite excited about that. Robert James Labick: That's great. Thank you. And then just on the nutrient minerals and nutrients side, the growth was phenomenal as well. Your major markets of choline, K2, MSM, magnesium, etcetera, can you talk about it's been a penetration story for a while, where are you in terms of product penetration? And what is the opportunity? How much longer of a runway is there for penetration and awareness of your products? Theodore Lee Harris: The short answer is we're a long way from that endpoint. You know, again, as I've talked about in the past, you know, to some extent, our challenge is the majority of our portfolio, whether it's choline, or vitamin K2, or even MSM, are not very well known. I would even add the idea of chelated minerals, higher bioavailable minerals are not so well known and, you know, kind of recent studies show that they're, yes, a little bit better known today than they were five years ago, but still not well known. So we think that we have a significant way to go. We think that the market opportunities are still, you know, three, four times multiples of the size of the market today. And in the minerals, you mentioned magnesium. In the mineral space, the overall mineral market is huge. And the position that chelated minerals have within that market remains tiny. So the opportunity there is to both eat away at that bigger minerals market with these higher bioavailable, more effective products, but also kind of drive market penetration to users that aren't supplementing with those minerals as well. So it's really sort of two vectors of growth, but we certainly see, you know, very strong double-digit growth in each of those portfolios, and we expect that to continue for some time. Robert James Labick: Okay. Super. I'll jump back in queue and let others ask questions. But thank you. Theodore Lee Harris: Thanks, Bob. Operator: Your next question comes from the line of Raghuram Selvaraju with H.C. Wainwright. Please go ahead. Raghuram Selvaraju: Thanks very much for taking my questions and congratulations on a very strong quarter. I was just wondering if you could comment on international antidumping practices being enacted at the state, regional, governmental level that could conceivably boost sales, particularly in the H and H segment ex-U.S.? And especially if you could give us maybe just an overview of the status of the European anti-dumping campaigns as these pertain to choline specifically. Where that is currently and what impact you expect it to have over the course of the coming months and indeed into next year? Thank you. Theodore Lee Harris: Yeah. Thanks, Ram, for your comments and your question. You know, there are really, sort of two aspects to antidumping, and maybe I'll start with the current initiative where the European Union has preliminarily put antidumping duties on China-origin choline chloride, and maybe to your specific question, that's both for human choline chloride as well as animal choline chloride. And it's just a clear recognition by the European Union of unfair trade practices by China and trying to create a level playing field. Those duties are still preliminary. There's quite a process that is underway. We initially announced that the duties were, I think it was 195% to 120%. And after further calculations, they reduced those by about five percentage points, so not significantly, which we were pleased to hear. And later this year, certainly by the end of the year, they should have a final vote for the enactment of those duties, and then they will become, you know, approved in their final form and would be in place for five years, which also would be a very good thing. And there is an opportunity for us to work with the European Union to try to address some of the typical reaction from China of moving the product through other countries, and we're working to try to do that. And that would only strengthen the impact of the duties. But certainly, broadly speaking, across the nutrient sector, whether it's in animal or in human, these types of pricing practices are quite prevalent from China as well as others. And I do think that there is an improved environment within which to bring these kinds of cases to the government entities and to get an appropriate response. So we are kind of actively reviewing where that makes sense, where we believe these practices are happening and kind of using that tool. Unfortunately, it is expensive and it is lengthy. And so, you know, you have to go through that. But clearly, in the U.S., and we think in the U.S., there's an improved environment for us, companies like ours, to bring those kinds of cases to the governments, and we'll do that as appropriate going forward. Raghuram Selvaraju: Okay. Great. And then, also just wanted to ask about the Orange County microencapsulation manufacturing facility. Can you just summarize again for us when you expect construction to be completed on that facility now that you have the state approvals in place? And also if you can give us a sense of what the magnitude of impact is likely to be on revenues and earnings quality once that facility comes fully online. Thank you. Theodore Lee Harris: Yes, sure. We're really excited about that. We announced that in our second quarter earnings release, and we felt like, you know, we should update our shareholders on the progress that has been made. And essentially, what we tried to say and the highlight on the press release is that we're moving forward. And we have gotten the most recent approvals to do just that, move forward with the plant. And, you know, we essentially, what we're doing is building a new plant that has twice the capacity of the old plant and will effectively shut down the old plant, which was, you know, one of the first sites that we ever had as a company. In fact, the first site we bought it back in the sixties. And at that point in time, it was an old creamery that we used to make food ingredients and has kind of sort of far outlived its effectiveness. And so it was time for us to upgrade and modernize, and we've done that just down the road so that we can continue to use the employee base from the old site and so forth. And so we're really kind of putting in place in this new plant some new technology around our microencapsulation and more efficient technology. The encapsulation business, for example, just in Q3 grew about 26%. So it's a fast-growing part of our portfolio and has been growing significantly really over the last few years, and we need the capacity. Our current capacity is getting us by, but we're soon going to start to run out of capacity in the coming couple of years. And so the plant will be, from a construction perspective, completed early in 2027, and we expect to be producing new product by 2027. So the way we're looking at it is it's going to allow this important product line to continue to grow at double-digit rates. And our encapsulate business is certainly on the higher end of our gross margin profile of the business within our company. So, you know, we're excited to invest in that product line, and we're excited to be able to allow it to continue to grow beyond our current capacity levels. Raghuram Selvaraju: Okay. And then just two quick questions for Martin, if I may. Firstly, wanted to ask if you expect the pace of debt repayment to be the same in the next couple of quarters as what you just most recently reported? Particularly in light of the significantly lower debt burden and the very low net leverage ratio that Balchem Corporation currently has. Just wanted to see if you're planning to take your foot off the gas on the debt repayment schedule or if you're intending to keep going at the most recently reported pace on a quarterly basis? And also if you could just give us a sense of whether you expect the most recently reported quarterly effective tax rate to be an appropriate assumption to carry forward for the remainder of 2025? Thank you. Carl Martin Bengtsson: Ram, yes. I'll start with the second one as it's a quick answer for the tax rate. I think sort of our best estimate for the year is around 22.5% plus or minus a little bit. So kind of where we're at year to date and where we think we'll finish the year at around 22.5% plus or minus a little bit. On the debt repayment pace, I mean, obviously, we've generated strong free cash flows. And as you know from the past, we deploy that capital, and paying down our debt is part of that. I think it will depend a little bit on the pace and timing of M&A. As you know, we talk a lot about pursuing various opportunities all the time. Unfortunately, you know, we haven't gotten anything over the finish line more recently. That is not to say we're not actively participating, actively discussing, actively pursuing, you know, strategic M&A. So I think that will impact it a little bit on how we see sort of those opportunities develop here as we go forward. Also, you know from the past that we do deploy some of our cash into keeping our sort of share count relatively flat. So we do some share repurchases for anti-dilutive purposes, just to keep sort of our shareholders' ownership relatively stable. So that will impact it as well in terms of at what pace we repurchase shares just to keep our share count flat. Meanwhile, we will continue to reduce debt as there is excess cash. And then I think the big trigger that will change that is sort of when the next M&A transaction occurs, because I think that is more a matter of timing than anything else. Raghuram Selvaraju: Thank you. Theodore Lee Harris: Thanks, Ram. Operator: Your next question comes from the line of Daniel Scott Harriman with Sidoti. Please go ahead. Daniel Scott Harriman: Hey guys, good morning and congrats on another great quarter. Just a couple of quick ones from me today. Within Specialty Products, with that 7.5% year-over-year growth, can you give us a breakdown of how much came from Performance Gases versus Plant Nutrition? Then with the Plant Nutrition growth, could you just update us and provide a little bit more information about the success you're seeing with your geographic expansion within that business? Theodore Lee Harris: Yeah. Sure. Just to give you some growth numbers within Specialty Products. So as you said, overall, we grew about 7.5%. The Performance Gases business grew about 7%, and the Plant Nutrition business grew about 13%. So that combined resulted in the 7.5% growth. So we're seeing nice growth out of both Performance Gases, traditionally reviewed as kind of a lower growth business. But after a number of years of different impacts on growth, whether it was air emission systems upgrades or nursing shortages or COVID impacting elective surgical procedures and so forth, that market seems to have stabilized and is doing well. But we're also seeing nice growth in that business geographically, particularly in Europe. So we're seeing some differential growth there as well. So Plant Nutrition, obviously, is a smaller business for us, but historically has been more focused on the United States and I would say particularly California. We tend to sell into higher-end crops, like grapes and so forth. And so an important strategic initiative for us has been to expand internationally for multiple reasons, for growth reasons, but also to balance out some of the seasonality that we experience in that business. As you know, the first half of the year is much stronger than the second half of the year because of the growing season in the U.S. So we've had a very deliberate effort to try to offset some of that down part of the season with growth in either the Southern Hemisphere or other geographies. And we're having some success in that, and that was worth noting, particularly in Latin America. We're seeing stronger growth as well as in Asia Pacific. You know, some countries that are sort of kind of stand out, you know, Brazil, India, for example, are areas where we're having some good success, and it's been quite a deliberate effort on our part, and we're pleased with that growth. While the U.S. business has been, you know, relatively flat, I would say, the international business has been driving the predominance of the growth in Plant Nutrition. Daniel Scott Harriman: Great. I really appreciate it, guys. Again, congratulations. Theodore Lee Harris: Thanks, Daniel. Appreciate it. Operator: There are no further questions at this time. I will now turn the call back over to Theodore Lee Harris for closing remarks. Theodore Lee Harris: Once again, thank you all very much for joining the call today. We really appreciate your support and your time. And we look forward to reporting our Q4 2025 results in February. That sounds like a long way away, but that's when it will be. In the meantime, we will be participating in Baird's 2025 Global Industrial Conference on November 12, and we certainly hope to see some of you there. So thanks again for joining. Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.
Operator: Good morning and welcome to PACCAR's third quarter 2025 Earnings Conference Call. All lines will be in listen-only mode until the question and answer session. Today's call is being recorded, and if anyone has an objection, they should disconnect at this time. I would like to introduce Mr. Ken Hastings, PACCAR Inc, Director of Investor Relations. Mr. Hastings, please go ahead. Ken Hastings: Good morning. We would like to welcome those listening by phone and those on the webcast. My name is Ken Hastings, PACCAR's Director of Investor Relations. Joining me this morning are Preston Feight, Chief Executive Officer; Kevin Baney, Executive Vice President; and Brice Poplawski, Senior Vice President and CFO. As with prior conference calls, we ask that any members of the media on the line participate in a listen-only mode. Certain information presented today will be forward-looking and involve risks and uncertainties that may affect expected results. For additional information, please see our SEC filings at the Investor Relations page at paccar.com. I would now like to introduce Preston Feight. Preston Feight: Thank you, Ken, and good morning, everyone. Kevin, Brice, Ken, and I will update you on our good third-quarter financial results and business highlights. I'd like to start by thanking our wonderful employees who deliver PACCAR's high-quality trucks and transportation solutions to our customers all around the world. I'm especially appreciative of their efforts in these dynamic market conditions. PACCAR delivered good revenues and net income in the third quarter of 2025. Peterbilt, Kenworth, and DAF trucks contributed to the good results. PACCAR Parts and PACCAR Financial Services continued to deliver excellent performance and strong profits. PACCAR achieved revenues of $6.7 billion and net income of $590 million. PACCAR Parts achieved record quarterly revenues of $1.72 billion and excellent quarterly pre-tax income of $410 million. Parts revenue grew 4% in the quarter compared to the same period last year. Our financial services also had a very good quarter, achieving pre-tax income of $126 million. We estimate this year's US and Canadian Class 8 market to be in a range of 230,000 to 245,000 trucks, and next year to be in a range of 230,000 to 270,000. Customer demand in the less-than-truckload and vocational segments is good. The truckload market continues to have uncertainty. Next year's US and Canadian truck market could be higher than this year, as we realize clarity around tariffs, emissions policy, and potential improvements in the freight market. In Europe, the DAF XF truck was honored as the Fleet Truck of the Year in the UK due to its best-in-class fuel efficiency and driver comfort. We project this year's European above 16-tonne market to be in a range of 275,000 to 295,000 vehicles. The 2026 market is expected to be in the range of 270,000 to 300,000. We estimate this year's South American above 16-tonne truck market to be in the range of 95,000 to 105,000 vehicles and in a similar range next year. PACCAR's premium trucks are performing well for customers in South America, especially in the important Brazilian market. PACCAR delivered 31,900 trucks during the third quarter and anticipates delivering around 32,000 in the fourth quarter. More production days in Europe will be offset by fewer production days due to normal holidays in North America. PACCAR's truck parts and other gross margins were 12.5% in the third quarter. Margins were affected by the August steel and aluminum tariff increases and the tariff costs on trucks that were built in the United States. Looking ahead, fourth-quarter margins could be around 12% as tariffs peak in October. However, the new Section 232 on medium and heavy trucks that will become effective November 1st will be good for PACCAR's customers as it will reduce tariff costs and bring clarity to the market. PACCAR is proud to produce over 90% of its US-sold trucks in Texas, Ohio, and Washington. We look forward to improving market conditions, tariff costs that will begin to reduce as we head towards the end of the year, and PACCAR's continued strong performance. Kevin Baney will now provide an update on PACCAR Parts, PACCAR Financial Services, and other business highlights. Kevin D. Baney: Preston. PACCAR Parts achieved gross margins of 29.5% and record third-quarter revenue of $1.72 billion. Third-quarter part sales grew by a healthy 4% compared to the same period last year, with similar growth expected in the fourth quarter. PACCAR Parts continues to grow by investing in capacity and services. PACCAR Parts is focused on delivering the right part to the right place at the right time to provide industry-leading support for our customers. PACCAR Parts will open a new 180,000-square-foot parts distribution center in Calgary next year to bring faster delivery times to dealers and customers in the region. PACCAR will be opening a new engine remanufacturing center in Columbus, Mississippi, next year to provide our customers with high-quality, rebuilt engines. PACCAR Financial Services' pre-tax income was a robust $126 million, an 18% growth over the $107 million reported a year earlier. This reflects the high-quality portfolio and improving US truck results. PACCAR Financial operates 13 used truck centers around the world to support the sale of premium Kenworth, Peterbilt, and DAF trucks. PACCAR is building another used truck center in Warsaw, Poland, which will open this year. PACCAR used trucks sell at a premium similar to PACCAR Parts. PACCAR Financial provides steady foundational profitability during all phases of the business cycle. This year's capital expenditures are projected to be between $750 and $775 million. Research and development expenses will be $450 to $465 million. Next year, we estimate the company will invest $725 to $775 million in capital projects and $450 to $500 million in research and development expenses. Key technology and innovation investments include next-generation clean diesel and alternative powertrains, advanced driver assistance systems, and integrated connected vehicle services. PACCAR is also investing in its truck and engine factories to support long-term growth, as well as our customers' and dealers' success. PACCAR's industry-leading trucks, expanding parts business, best-in-class financial services, and advanced technology strategy position the company for an excellent future. We are pleased to answer your questions. Operator: Thank you. If you would like to ask a question, please press star followed by one on your telephone keypad. If you would like to withdraw your question, please press star followed by two. When preparing to ask your question, please ensure your device is unmuted locally. The first question comes from Rob Wertheimer with Melius Research. Your line is open. Please go ahead. Rob Wertheimer: Thank you. Good morning. I had a couple of questions around 232. I guess that's no surprise, but I wonder if you're able to give any thoughts on whether it improves your competitive position or not, given production of some of your competitors, but then given, you know, perhaps they have exemptions. And then how does the rebate, how and when does the rebate flow through financials? Thank you. Preston Feight: Hey, Rob, I kind of thought we might hear some questions around 232, and as you are aware, it came out Friday afternoon, late afternoon here. And we've been spending a lot of time with it. We said in the commentary that 232 will be good for our customers, for PACCAR's customers. It'll be good for the fact that we manufacture our trucks in Texas, Ohio, and Washington, and it should improve our competitive position as we look forward into next year. It will take a little bit of time for it to fully implement. So as we shared, tariffs are really peaking for us in the fourth quarter of in October, the fourth quarter, and then as 232 implements November 1st, there's kind of a qualifying period for the components that are involved in it. So it'll become gradually more and more effective throughout the quarter. And probably by the time we get to the first part of the year, we should have great stability around it. So all feels very good and should help our competitive position. Rob Wertheimer: That's helpful. Thanks. And then how do you think about pricing? You know, there's been a lot of uncertainty. I don't think you immediately hit your customers with some of the tariff price increases. Now that there's clarity, do price increases start to offset that in, you know, in the new year or any commentary around that? And I'll stop. Thank you. Preston Feight: So as we think about it, we think about it as a competitive world out there. And we don't operate alone in it. But we feel very good about the trucks that we're producing right now. The best trucks we've ever produced in our history. Best fuel economy, best reliability, great engine performance. So we're happy with how that's going. And I think that our customers appreciate the stability in the market right now with how emissions haven't changed in a while. So the trucks are getting our money for them. And as we kind of think about pricing through the year of next year, I think that there will be some opportunities for us as the year progresses. We said that the LTL market, less than truckload market remains good. The vocational market remains good. And then I think the truckload sector has been in a tough spot for, gosh, 30 months plus. And I think that they are using the equipment. So that bodes well for the fact that they'll get back under replacement cycles as they get back under replacement cycles. It's going to create demand in the market, which is obviously good for pricing. Rob Wertheimer: Thank you. Preston Feight: You bet. Operator: We now turn to David Raso with Evercore ISI. Your line is open. Please go ahead. David, your line is open. David Raso: I apologize. Thank you for the time. I was curious underpinning the North American growth outlook. I was just curious. You mentioned last quarter about some bonus depreciation order, potential. Just curious, what are you hearing from the customer base to underpin that growth? I know you mentioned replacement ban and so forth, but just curious, the conversations that you're having when it comes to any sense of timing and when you think your orders will start to reflect the ability to grow in 26. Preston Feight: Hey, Brice, why don't you offer some comments on how that looks and then I'll come at it from a customer standpoint. Brice J. Poplawski: Sure. So our price we expect to continue to grow. We'll get will benefit from the effects of the tariff. Of course. And our pricing competitiveness. And we believe that the big beautiful bill, as we said in the third quarter, is going to provide incentives. And we have programs around encouraging our customers to take advantage of that 100% bonus depreciation. We think that will help spur some demand here in the fourth quarter. Preston Feight: David, what we're getting from customers is it's very mixed from a customer standpoint, right? If you're if you're operating conditions are positive, like in the vocational market or the LTL market, I think you're looking to take advantage of that. And those are customers that are ordering for the fourth quarter. I think there's obviously in the truckload sector, some people that are still finding challenges there. And so they're less likely to take advantage of it now. But I think there is a growing sense of the momentum has to pick up in terms of truck orders, because 2026 will have, as the law is written right now, a 35 milligram NOx standard. And so I think as trucks age a 35 milligram NOx standard is in front of them, and now they have clarity of tariffs. There's a lot of reasons for people to start to think about allocating their capital to truck purchases. David Raso: I wanted to follow up on the NOx issue. We know where the current situation is, but obviously there's thought that it might be changed. Is there a deadline of some kind that you feel like the EPA has to communicate? What exactly is happening for 27, when it comes to your supply chain and so forth? Just so we have a sense of timing. It was obviously the general assumption out there that they're not going to keep the current, you know, regulation going to .35. Preston Feight: Yeah, I don't know how that assumption has been formed by people from our standpoint, we approach this and saying we are prepared for the 35 milligram NOx standard. We've got our teams working great on it with some new products that are coming out in support of it. We're ready to go with it. That is the law, right? So our best approach is the law is the law. Until the law changes, as time passes, it makes it harder and harder to change the standard back to 200 milligram could happen though, right? I think that we are very comfortable supporting a 200 milligram standard as well, because we have products that are available today that can support the 200 milligram standard. We are all sensitive to the fact that as more time passes, it puts additional burden on the supply base. But I think PACCAR is a great relationship with our suppliers, and we can handle that change. And if that's what's best for the industry, then we will align clearly with that. David Raso: And lastly, the cadence of the clarification on the deliveries for the fourth quarter being roughly flat, any color you can provide geographically, sequentially would be great. Thank you. Preston Feight: Yeah, I think we said in the commentary that fourth quarter, North America has more holidays in it. So you can kind of think of North American holidays being taking away some of the volume. Europe is less holidays. So you kind of see a shift there into European volume for fourth quarter. We're somebody will ask this, but we're roughly 60, 70% full in our in our order book for the fourth quarter. And so that kind of lets us kind of indicate how the quarters filling in. And that's how we got to our similar quantities of deliveries for the fourth quarter. David Raso: Thank you very much. Preston Feight: You bet. David, thanks for your commentaries. Operator: We now turn to Jeff Kauffman with Vertical Research Partners. Your line is open. Please go ahead. Jeffrey Asher Kauffman: Thank you very much. I just want to focus on our follow-up, I guess, on Rob's question on section 232. I know everybody's still figuring this out, but in terms of the rebate amount, how is that going to compare when you're at full speed versus what you're costing out on the tariffs on parts and steel and aluminum? And you mentioned that that's going to ramp up through the fourth quarter. I guess. Is that more a rebate to the customer that lowers the price to the customer? Is that a rebate to the company? How do those economics flow? Preston Feight: Well, I mean, the way we can keep it in simple terms so we don't turn this into a hammer on the 232 because it's really complicated. But I would say that the 232 fact sheet is out there, it's really good. I applaud Commerce and the White House for putting out a clear document that's helpful in articulating what the game plan is and why the game plan is useful to keep it at the highest level. I would say that as parts qualify into 232, that's when we expect we can apply the rebate to them. So if parts coming out of Mexico and it's deemed to be acceptable to be part of 232, you let them know that it becomes acceptable or not acceptable. And that's where you start to realize a reduced tariff cost as you head through the quarter. Obviously, the effective date is November 1st, but it will take time for those parts to be qualified. And so that's why we indicated that it could take until the first of the year to see the full benefit and impact of that. Jeffrey Asher Kauffman: And the first part of that question. When this is fully ramped up, how will that approximately net against the incremental tariff costs you're facing? Preston Feight: Yeah, it's going to bring it down. We haven't netted out a specific number. And obviously, it's going to be something that we started the tariff discussion saying, hey, we're in this together with our customers and our suppliers and our dealers, and that will be the same situation we face as we move forward. It will be hopefully some benefit to everybody in terms of our dealers, our customers, our suppliers. Everybody should have kind of some positive momentum out of this. The quantification of it remains to be seen. Jeffrey Asher Kauffman: All right. Well, congratulations and thank you. Preston Feight: You bet. Thank you, Jeff. Operator: Our next question comes from Michael Feniger with Bank of America. Your line is open. Please go ahead. Michael J. Feniger: Yeah. Thanks. Thanks, gentlemen, for taking my question. Just Preston, I know this has been getting a lot of attention on section 232. Just to be clear. So we have some understanding. Do you believe with the adjustments and the section 232 implementation, we saw, do you believe PACCAR now has a clear cost advantage as a US manufacturer? Or does this just even the playing field on the cost side with your peers? When we saw there was a disadvantage, you know, obviously earlier this year. So this just even it out or do you feel like it gives you a clear cost advantage as a major US manufacturer for the US market? Preston Feight: Michael, that's a great question. I appreciate you highlighting the fact that our team did a really good job for the past several months, dealing with the cost disadvantage and unintended cost disadvantage. So the fact that our market share is 30.3% for Peterbilt and Kenworth right now is just a credit to the teams at those divisions and to the manufacturing teams. And pretty much everybody in PACCAR that operated from that tough position. As we look forward, we of course, don't know what our competitors' cost structure is. So it's really hard to estimate that and probably should avoid doing so. What I would rather do is say that I think it helps PACCAR significantly, and that should be good for our customers. And PACCAR and I think it gives us a competitive leg up from where we've been. Michael J. Feniger: Thank you, Preston. Just my second question to squeeze it in. Just there's been commentary on parts that parts. There's been some deferrals there. I know you hit your. What you guys forecasting at 4%. Just you know what are you seeing underlying on the part side. And can parts margins do you think start to expand in 2026 on a year-over-year basis. What do we need to see in the market for us to kind of see that start to expand on a year-over-year and to get parts moving, because I know it's the underlying market's been a bit challenging. There. Kevin D. Baney: Yeah, Mike, this is Kevin. I'll take that one. So you know similar to truck the parts business was definitely impacted by tariffs. As you know as well as the overall soft truck market price did cover cost. So when we look at the margin impact it was really a mix shift. You know we saw that a shift in proprietary versus all makes. And also a little bit of region impact by fewer days in Europe. And I'll just reinforce, you know there's still tremendous opportunity for growth. Parts team did a great job providing parts and programs to provide excellent customer service. You know during a soft market. So really nice job with the with the revenue growth. And you know we continue to invest in distribution. Our dealers are continuing to invest in locations and service capacity. And so yeah, we see there's there's definitely opportunity for for future growth. Preston Feight: You know and everything Kevin said is just 100% right. And then you have the opportunity. That 232 is also advantageous to components. And so that will help us in a price. Cost. Looking forward. Michael J. Feniger: Perfect. Thank you. Preston Feight: Okay. Operator: We now turn to Andrew Costello with Morgan Stanley. Your line is open. Please go ahead. Andrew Costello: Hi. Good morning. Thanks for taking my question. I was hoping we could just go back to the tariff discussion a little bit more. You had mentioned, I think, in 3Q that was the $75 million headwind with tariff headwinds kind of peaking out here in October. And, you know, the ramp-up in the rebates, can you just quantify for us exactly how much of a tariff headwind you anticipate to be baked into the fourth quarter? And as you as you look at the gross profit margin moving from 12.5 to 12%, is that entirely due to tariff ramp-up, or are there any other factors there that we should consider? Preston Feight: I would think mostly about tariff ramp-up, as we said, and you just articulated, right, October doesn't have any reduction. So it's kind of a peak tariff for us. In that first part of the fourth quarter. And then we're still understanding what the cadence is going to be for how the tariffs feather off for us through the course of November, December. But that's the single biggest impact right now. And I think, you know, as we look at it. So you go from a 75 third quarter, we saw that on slate to increase in the fourth quarter. But with the 232 we see that coming down. And by the time we get to the December time frame, January time frame, we'll start to see improvement marked improvement. We anticipate. Andrew Costello: That's very helpful. And then as we think about next year. Understand that EPA 27, there's still a lot of uncertainty around that. I guess in terms of your outlook for North America or for years and Canada, are you assuming any kind of pre-buy still related to EPA 27 in that? Preston Feight: So we gave a 230 to 270 market, and the reason we gave that significant range is because I think there's some uncertainty in how quick the truckload sector recovers as it is. It, you know, sometime in the first quarter to take a little bit. I think we also are anticipating that the 35 milligram law is what's going to be there. And if it changes, that would obviously take away some pre-buy. And that would put us more towards 230, 240, 250 side of that category versus if the 35 milligram standard stays in place is more like the 250, 260, 270 and maybe even higher. So we kind of see that as being a significant factor in how the market shapes up next year. And we'll look forward to clarity when it happens. But in the meantime, the clarity is 35mg. Andrew Costello: Thank you. Preston Feight: You bet. Operator: We now turn to Tim Thein with Raymond James. Your line is open. Please go ahead. Timothy Thein: Great. Thank you. Good morning. Just following up on the comment earlier with respect to the parts business pricing covered variable costs. I perhaps missed it, but did you give a comment just with respect to pricing that you realized in the truck business in the third quarter and then and maybe your expectations for the fourth? Preston Feight: Sure. For the third quarter compared to last year's third quarter, our pricing was down 1.3%. And the costs were up 4.6% for a -5.9. There. And obviously, tariffs played a big role in that number as well in sequentially, it was 1.6. And I think what we think is favorability should start to be achieved as we move forward. Timothy Thein: Got it. Okay. And then Preston maybe just. You know, as I think about, you know, potential. Early indicators of maybe a bottoming, I think historically we would look at what the behavior and what the, you know, the lease and rental customers are doing and seeing in their business. You have a good lens into that. Just given pack lease. So I'm just curious what you're seeing in that business. Just with respect to utilization and, you know, if you would agree that that could be an important thing to watch as a potential turning point. Thank you. Preston Feight: Tim, it's a good question. I think that utilization is a key factor. And for pack lease, it's healthy right now. So I think that they're starting to see these places of opportunity. And we'll watch that closely along with all the other indicators. Right. Certainly as you well understand, there's many, many things that go into the make of a truck market. That's one of them. And utilization is healthy. Timothy Thein: Thanks for the time. Preston Feight: Yeah. You bet. Have a good day. Operator: Our next question comes from Jamie Cook with Truist. Your line is open. Please go ahead. Jamie Lyn Cook: Hi. Good morning. Two quarters. Sorry. Two questions. One. Preston, can you just can you just speak to, you know, since section 232 has been announced, obviously, I'm sure you've had a lot of conversations with your customers. You know, what are they saying to you in terms of, like, potential incremental market share? And I'm just wondering, as you think about your plans in Denton and Chillicothe, like just, you know, capacity you have or where market share could go until you'd have to think about your investment? I'm assuming you have a lot of runway for market share, but just sort of some thoughts there. And then I guess my second question, I mean, it sounds like you think the 12%, you know, gross margin in the fourth quarter like that should be, you know, the trough for margins for, for PACCAR, even assuming a flat market next year, just with the benefit from section 232. And, you know, tariffs mitigating and potentially the market being flat to up next year. So it sounds like I don't want to put words in your mouth, but you can probably grow earnings next year. But I'll I'll let you chew on that and see if I can get any reaction out of you. Preston Feight: Oh Jamie you're fun. Well, let's do the first question, which is you said, do we think we can gain share and how do we think about capacity in our factories? And one of the things I'm really pleased with our manufacturing team over the last couple of years is we've made these big investments into the factories so that we have capacity to handle what what ends up happening is quarterly swings and build. We talk about full years, but things really happen over a couple of quarters of max build rates. So we're aware of that. We've made the investments in paint facilities and automated vehicles to move parts around inside the truck plants. Great work with our suppliers and their investments in the capacity that they have. So we feel like we can gain share and we feel like we have the capacity to support gaining share in the coming time frame. I mentioned it earlier in the call, right? We invested in products. We have the newest and best performing products in the industry. We've invested in our operations teams, so we have the best manufacturing capacities, highest quality products with plenty of capacity to handle share growth. So I feel really well positioned as we head to next year. And that does lead to your second question. I guess, of saying if 12% is the plus or minus, now, what are you thinking next year is going to be or even the fourth quarter? Phasing? Now, as we said, with tariffs peaking in October, we do think that the cadence through the quarter on a month-by-month basis will be positive. Trending. And then we anticipate that being true through next year. Right. So if the market was at a midpoint, 250, we feel like that bodes well for our earnings growth and our margin growth. Jamie Lyn Cook: Very helpful. Thank you and congratulations. Preston Feight: Thank you. Have a great day. Operator: Our next question comes from Tami Zakaria with J.P. Morgan. Your line is open. Please go ahead. Tami Zakaria: Hi. Good morning. Thank you so much. Apologies. But one more question. On section 232. Seems like the 3.75% value of the truck to offset tariffs extends through 2030, which gives, you know, some time to plan ahead. How are you thinking about your parts and components sourcing with that timeline in mind, do you plan to, you know, expand footprint? Bring stuff on here in the US, any, any thoughts on how you're thinking about that 2030? Timeline? Preston Feight: Well, I think that we feel very good about the supply base and how they positioned right now. And we do think that they'll probably be some reflection in the coming weeks for people to think about where their production setups are and where they're going to position themselves. And I think it's a little bit too early to be commenting on what they're going to actually do in terms of where they might adjust capacity into the different markets, since it's just a few days old. But we are starting those conversations and look forward to working with our suppliers as we figure out where they're going to position component growth. Tami Zakaria: Got it. If I could ask one more, I think you have this huge advantage of, you know, building 90 over 90% of trucks. Here versus some of your peers, you know, they make elsewhere. So this seems like a huge advantage. And so when you think about this offset and the pricing, you've taken, is there any plan to give back any of this pricing as some of these headwinds are offset in order to gain share for the long term? Is that sort of a strategy you might consider? Preston Feight: Well, Tami, you're really smart and you ask great questions and you can understand how we think about margin, price, market share. And it's not an either-or thing. Right. You're always as a company trying to provide great trucks, great transportation solutions for your customer and then be paid fairly for them. And nothing is different than the environment we're in today than that. Right? We want to keep providing these great trucks and transportation solutions. And as we do that, we think our customers are happy to pay us fairly for them as. As cost goes down, that should bring some benefit to them. And that should bring some market share opportunity to us. We hope. Tami Zakaria: I'm just a thank you. Preston Feight: You're welcome. Operator: We now turn to Chad Dillard with Bernstein. Your line is open. Please go ahead. Chad Dillard: Hey, good afternoon guys. So on an industry level, how are you thinking about the supply-demand balance of trucks? Actually in the fleet and how much excess capacity is out there? How long does it take to clear? And is this embedded in your 26 industry outlook? Preston Feight: Does really interesting question. It's really hard to give you anything specific. Chad, if we think about it right now, there's sufficient capacity that's sitting out there in the industry right now at the current build rate, you can understand that clearly. The question really remains, how quickly does the market adjust and where does it adjust from? When do people start to think that 35mg is what's going to happen in a NOx standard? When do our customers in the truckload sector, which represent 40% of the market, start to feel some confidence that they're able to get rates? And I think it's really hard to handicap what that's going to be. The timing for that. But again, it's been a long, tough period for the truckload carriers and at some point those that equipment has to be replaced. And I think they're starting to feel that need. So I think there'll be some lift there. It'll probably start gradually and then it'll accelerate as the year goes on and people define their needs. So the capacity exists for us in our in our factories and with our suppliers are working closely with them to make sure we can build the trucks. Our customers want. We think it could be a pretty good looking 2026. Chad Dillard: Got it. And then all of that same line you're talking about how customers are keeping the trucks a little bit longer any early thoughts on the parts business? As we think about 2026? How should we think about the growth profile for that business? Kevin D. Baney: Chad, this is Kevin. You know, we think about it the same way we have, you know, the truck park has been at elevated levels over the years. And so that that creates tremendous growth opportunity for us. I already mentioned the continued investments we're making. The parts team is doing a great job providing, you know, tailored programs. We're leveraging AI to get smarter about providing, you know, our right, right part to the right place at the right time. And so we see next year as as just a continuation of the great work the team's done. Preston Feight: Yeah. And if I could just add on top of that that the fact that the retail market in the US is still negative is an overhang at some point that will turn. So we're growing in a market that is negative is a really good tribute to our group and to PACCAR Parts. And we think that provides a lot of opportunity for us in the next year. Chad Dillard: Great. Thank you. Preston Feight: Thank you, Chad. Operator: Our next question comes from Kyle Menges with Citigroup. Your line is open. Please go ahead. Kyle David Menges: Thanks for taking the question. I was hoping hoping if you could just talk a little bit about demand you're seeing maybe just into the first half of next year and contextualizing that with your your order book so far for the fourth quarter, 60 to 70% full, I guess. How would that compare to a quote unquote normal fill rate at this point in the year for the fourth quarter, and how that's informing your your views of demand into the first half next year, and then be helpful to hear your comments on inventory and any need for destocking. And I think in particular in the vocational market, at least, the industry data suggests inventories are really high. So would be helpful to hear your thoughts there on any need for destocking in that market. Thank you. Preston Feight: Yeah, I think we feel like from an inventory standpoint, the industry is in a in a position where it's like four months of industry inventory. That's down from 4.2 months. The last time we spoke in July. So it's improving from an industry standpoint and from a Kenworth Peterbilt standpoint. We. Are at 2.8 months, which is a very healthy level for us. We feel quite good about that. It doesn't feel like we obviously have a high vocational share. Market leaders in the vocational segment, so that says we have more inventory getting bodies on it. And so 2.8 months for us. It feels really healthy, which kind of leads back to your first question about order intake and what's the market doing. We don't have an excess amount of inventory. So we're 60 to 70% full. We'll head into what a typical typically in late October and November, we get into capital allocation for the major truckload carriers. We'll get a look at what their buying plans are for the year. Those discussions are. Always ongoing, but they really kind of begin to cement up in the in the fourth quarter. And we look forward to having those conversations with them. And I think that we'll see the first half start to fill in reasonably well. Now that we have clarity around tariffs, as people get their hands around what the law is of 35mg and appreciate that it's really is a good time to buy trucks for them. And probably the right time for them to buy trucks so they can keep their fleet age where they want it. Kyle David Menges: Got it. Thank you. And then just a follow-up on an earlier question. It does sound like with section 232 and the rebates that you'll see, it sounds like you might be passing some of those savings on to the customer. Curious how that might look. Is that simplistically just taking off the existing tariff surcharges, which I think were around three and a half to $4,000 per truck in class A, is it just kind of simplistically taking those surcharges off? Like, how should we be thinking about that? Preston Feight: Well, I mean, what we've said before is the tariffs are still peaked in October and then they're going to come down from there in a, in a process through the fourth quarter. So we are looking at that. I think that our intention is to get away from a tariff discussion with customers. Now that we have stability and we can just integrate into pricing and discuss the price of these great trucks for the customer and get away from the tariff statement. Now that we have stability. So that'll be helpful to everybody inside of our customers base, is to not have to think about what we had to reference. 3,500, $4,000 of tariffs or charges. We can move away from that kind of discussion. Just getting to truck pricing again, since there's clarity and stability. Kyle David Menges: You. Preston Feight: You bet. Operator: There's another reminder if you'd like to ask a question, please press Star One on your telephone keypad. Now, we now turn to Avi Jaroslaw with UBS. Your line is open. Please go ahead. Avi Jaroslaw: Hi. Thank you. I think you said the order books for Q4 are about 60 to 70% full. Is that pretty uniform by region, or are there any that are notably off of that point? Preston Feight: Yeah, that's a great question. It is actually pretty uniform by region right now. So we've seen the European market have strong order intake. And we're seeing that 67% full there as well as in North America. Avi Jaroslaw: Okay. And if I could follow that up, assuming that we don't hear anything new. Day on on the NOx rules. When are customers telling you that they might start Pre-buying. Could that be in the first half or anybody? Is anybody saying that they would expect to do that in the first half, or would that really be more a second half story? Preston Feight: You know, I think they're I think they're buying decisions. These are really smart people. Our customers. And so they're thinking about all the inputs, not just the one. I think it has a it has a heavy influence on them. To contemplate the 35mg. And whether or not they need to think about pulling ahead. But they're also looking at their fundamentals of freight and rates. They're looking at is they're stable and operating environment, which the Commerce Department and the White House did a great job of providing for them now. And so I think all of those are there factors. And I would kind of I kind of think that they will. Start to really have a lot of interest here in the fourth quarter of what their 2026 buying plan is. And probably by the time we're in the first quarter, they're going to be needing to react to it. If it stays at 35. Avi Jaroslaw: Okay. Appreciate it. Thank you. Preston Feight: You bet. Have a good day. Operator: We now turn to Scott Group with Wolfe Research. Your line is open. Please go ahead. Scott H. Group: Hey guys. This is Colin for Scott. Just back to section 232 a little bit I heard earlier in the call, you mentioned that pricing increased 1.6% sequentially in the quarter. And that momentum should kind of continue. But then in the same breath, you're kind of talking to the fact that you want to help out your customer, maybe help like situate us. There are the tariff surcharges effectively going to go away. But core pricing could should continue to move higher. Just any way to help us wrap our heads around that? Preston Feight: I think that, you know, the yeah, it's a great question actually. It's a it's an interesting dynamic. Right now. We surcharges really only exist at moments of inflection where there's some unique factor sitting into there. And hence the reason for the surcharges that we had at that point of inflection is now past and we have stability. So it allows us to probably get rid of the tariff surcharge and go back to normal pricing discussions with our customers. And obviously providing premium trucks and transportation solutions allows us to kind of make sure that we have fair pricing to them, good for them, good for us, and obviously, as we see costs change should be somewhat favorable, we both should benefit from it. So we see that as a great opportunity for PACCAR and our customers to have a strong finish to the year and an even stronger 2026. Scott H. Group: Yep. And last quarter, you mentioned that three Q gross margins would be, I think the math was roughly 14%, excluding tariff costs. Is that a good way to think about one? Q as we hit run rate as rebates, kind of offset some of the tariff costs, or is there any other way to think about how margins should build through? Four Q into one Q? When we hit run rate? Preston Feight: Yeah, I think we actually said around 13%. And then what we've said is tariffs peaking in the fourth quarter, declining throughout the fourth quarter will allow us to see growth as we get into, say, the December time frame. And then continued improvement into the first quarter of 2026. Scott H. Group: Okay. Thanks, guys. I'll turn it back. Preston Feight: Yeah. You bet. Operator: There are no other questions in the queue at this time. Are there any additional remarks from the company? Preston Feight: I'd like to thank everyone for joining the call. Operator: And thank you. Ladies and gentlemen, this concludes PACCAR's earnings call. Thank you for participating.
Operator: Thank you for standing by. My name is Greg, and I will be your conference operator today. At this time, I would like to welcome everyone to today's GATX Corporation 2025 Third Quarter Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. I would now like to turn the call over to Shari Hellerman, Head of Investor Relations. Shari? Shari Hellerman: Good morning. And thank you for joining GATX Corporation's 2025 third quarter earnings call. I'm joined today by Robert C. Lyons, President and Chief Executive Officer; Thomas A. Ellman, Executive Vice President and Chief Financial Officer; and Paul F. Titterton, Executive Vice President and President of Rail North America. As a reminder, some of the information you'll hear during our discussion today will consist of forward-looking statements. Actual results or trends could differ materially from those statements or forecasts. For more information, please refer to the risk factors included in our earnings release and those discussed in GATX Corporation's Form 10-Ks for 2024 and our other filings with the SEC. GATX Corporation assumes no obligation to update or revise any forward-looking statements to reflect subsequent events or circumstances. Earlier today, GATX Corporation reported 2025 third quarter net income of $82.2 million or $2.22 per diluted share. This compares to 2024 third quarter net income of $89 million or $2.43 per diluted share. The 2025 third quarter results include a net positive impact of $5.3 million or $0.15 per diluted share from tax adjustments and other items. The 2024 third quarter results include a net negative impact of $2.5 million or $0.07 per diluted share from tax adjustments and other items. Year-to-date 2025 net income was $236.3 million or $6.46 per diluted share. This compares to $207.7 million or $5.68 per diluted share for the same period in 2024. The 2025 year-to-date results include a net positive impact of $5.3 million or $0.15 per diluted share from tax adjustments and other items. The 2024 year-to-date results include a net negative impact of $9.9 million or $0.27 per diluted share from tax adjustments and other items. These items are detailed in the supplemental information section of our earnings release. I'll briefly address each of our business segments. After that, we'll open the call up for questions. In North America, demand for our existing fleet remains stable. GATX Rail North America's fleet utilization remained high at 98.9%. Our commercial team continues to successfully increase renewal lease rates while extending lease terms. The renewal rate change of GATX Corporation's lease price index was positive 22.8% for the quarter, and the average renewal term was sixty months. While tariff and macro uncertainties have affected customers who use the most economically sensitive car types, demand for the large majority of car types in our fleet is holding up well. An encouraging sign in the North American market is the continued strength of the secondary market. As we offer select packages for sale, we're seeing very strong demand for GATX Corporation assets from a diverse and deep buyer pool. We generated over $60 million in remarketing income during the quarter, bringing the year-to-date total to approximately $81 million, and we expect that we'll finish the year with a strong fourth quarter. Regarding the pending acquisition of Wells Fargo's rail operating lease assets, we continue to expect closing to occur in 2026 or sooner. Turning to Rail International, GATX Rail Europe fleet utilization was 93.7% at the end of the quarter, reflecting ongoing market challenges in Europe. Despite these conditions, we continue to renew leases for many car types at rates higher than those of expiring leases, demonstrating the market's resilience. In September, we announced an agreement to acquire approximately 6,000 railcars from DB Cargo, a major European rail freight operator, through a sale-leaseback transaction. Closing is expected by 2025, subject to customary regulatory approval. In India, rail freight volume remains robust, and demand for railcars is very strong despite trade uncertainty. During the quarter, GATX Rail India took delivery of 600 new cars and placed them with customers. Fleet utilization was maintained at 100% at quarter end. Engine leasing performed very well this quarter, driven by continued high demand for aircraft spare engines. This demand is manifesting itself in high utilization, attractive lease rates, and opportunities to sell engines at compelling valuations. At the same time, we identified attractive opportunities to increase our direct investment in aircraft spare engines, acquiring seven additional engines for $147.1 million during the quarter. The RRPF affiliates also continue to expand their portfolios, with total investment already exceeding $1 billion year-to-date.Finally, as we noted in the earnings release, we continue to expect 2025 full-year earnings guidance to be in the range of $8.50 to $8.90 per diluted share. This guidance excludes any impact from tax adjustments or other items and also excludes any impact from the Wells Fargo transaction. And those are our prepared remarks. I'll hand it back to the operator so we can open it up for Q&A. Operator: All right. It looks like our first question today comes from the line of Ben Moore with Citigroup. Ben, please go ahead. Ben Moore: Yes, hi. Good morning. Thanks for taking our questions. To get to your midpoint of your guide, you would need 4Q EPS at $2.39 versus consensus at $2.25. Can you discuss how you plan to close that gap on both revenue and margin drivers, please? Robert C. Lyons: Sure. Good morning, Ben. Thanks for your question. This is Robert C. Lyons. I'll take that one. So as indicated, the full year, just to kind of take a step back, has largely played out as we anticipated. Certainly some puts and takes on various line items, which is not unusual, but the overall results and the overall environment are very consistent with what we thought coming into the year. And we would expect that to continue into the fourth quarter. As Shari noted in her opening comments, we have a very strong pipeline of assets that we have for sale in the secondary market. We're seeing really strong demand, so we would expect really solid remarketing income in the fourth quarter. And that will be largely the biggest driver in Q4 relative to Q3. Ben Moore: Great. Appreciate that. Maybe just as a follow-up on the remarketing you mentioned. Looking into the next couple of years, longer term, would you still expect sort of elevated remarketing levels at the roughly $100 million to $110 million through 2027, maybe kind of driven by inflation from the U.S. Administration's policies and also more freight car mix from your Brookfield JV versus the roughly $50 million level that we saw back in the pre-COVID levels? Robert C. Lyons: Yes. Well, it's a bit difficult to predict many years out into the future. But based on everything we're seeing today, there is no reason to believe or no reason for us to feel that the secondary market is going to adjust materially downward. Demand is really strong, and we are very encouraged by the sheer number of buyers and their appetite for the assets that GATX Corporation has on lease. So we see a really positive market and environment for remarketing income in the years ahead. I think also supporting that is what we've talked about frequently over the last couple of years, the supply side thesis. That new car supply and capacity manufacturing capacity in North America is more in line with true underlying demand for new cars. So as investors and current competitors in this market look for ways to grow and to build their fleets, the secondary market becomes a very, very good alternative, and we're seeing that. Ben Moore: Great. Really appreciate the time and insights. Thank you. Robert C. Lyons: Thanks, Ben. Operator: And our next question comes from the line of Bascome Majors with Susquehanna. Bascome, please go ahead. Bascome Majors: Thanks for taking our questions here. To the GATX Corporation and Wells Fargo deal, you've talked about that being modestly accretive in the first full year. When we go through the pro forma historic financials, you filed recently, you know, it's indicating some modest dilution on a look-back adjusted for financing and other items. Can you help us square where we get to accretion under your ownership versus this historic look-back and where those just wouldn't add up similarly to what you're seeing on a go-forward basis? Thank you. Thomas A. Ellman: So Bascome, first of all, it's important to note what we issued. So that 8-K is looking at what happened if the transaction for income statement purposes closed on January 1, 2024, and then for balance sheet purposes, closed on June 30, 2025. So obviously, it didn't close on either of those dates. The other thing that it does is it takes the actual results of both companies and then kind of puts them together. So two things it does not do. It doesn't make allowances for the fact that the combined SG&A of the two companies is going to be a bigger number than what the SG&A would be for GATX Corporation on a consolidated basis. The other thing it ignores is any kind of management fee. And there is a variety of other items just because of the nature of how those statements come together that don't find their way in. But those are two big things that would take you from the dilutive numbers that you saw in those reporting versus the modestly accretive numbers that we've talked about several times. Robert C. Lyons: Yeah. And Bascome, I would just add too to Tom's two key points. There is no SG&A synergy in there. That's an easy one you can pick right off of the financial statement that was filed with the 8-K. You can see what the SG&A is for Wells Fargo Rail and then for the combined entity, and there's no benefit given to synergies. There's no management fee. We haven't broken that out yet. When the transaction closes and we provide guidance going forward, we'll give you some more clarity on the management fee, but that's not an immaterial number. And that's not reflected in the financial numbers. And then nor is any other type of synergy that GATX Corporation may generate from the combined entities. So it's really just a financial roll-up, not a snapshot of the go-forward scenario. Bascome Majors: Thank you for that. And to the DB deal in Europe, any thoughts on whether that will be needle-moving next year from a financial standpoint? Or is that really more of a long-term investment in growing the European fleet? Thank you. Robert C. Lyons: Yes. It's Bob again, Bascome. It's more of a long-term play. From an accretion dilution standpoint, it's not material one way or the other in the first year of ownership. It is a longer-term investment, but one that we're very excited about. To be able to do a transaction like this, it starts out as a net lease. Likely, we'll convert over time to full-service leases as those initial leases roll over. Also likely to convert at some level to full-service leases versus the net, as mentioned. So the DB deal, I think, is a very good example of what we're seeing begin to form in Europe. They have a fleet of 70,000 wagons themselves. Like other railroads in Europe, DB is looking for ways to enhance their cash flow. They don't necessarily need to own all of their rolling stock. And so we think there may be opportunities elsewhere across Europe for similar type transactions. And we're certainly out in the marketplace looking for those opportunities as well. Bascome Majors: And lastly, you've already commented on the secondary market in North American rail and really seeing no need or driver for that to change from the favorable situation it's been in for the last couple of years. Can you speak a little bit to the sequential performance in lease rates? Certainly, the LPI is still very positive. You had a slight tick down in utilization in North America. LPI is a little lower than it was in previous quarters. Just, I mean, is there any sequential just gradual weakening going along? And any thoughts on just the market here and now versus six, nine, twelve months ago? Thank you. Paul F. Titterton: Sure, Bascome. This is Paul, and I'll be happy to take that one. So what I would say overall, despite all the macro uncertainty, the North American railcar market is holding up pretty well. And so when we look across the fleet in general, lease rates remain at healthy levels, and that continues to be the case. We've seen sequentially quarter over quarter rates across most car types flat to perhaps down very, very slightly. But in general, Bob alluded to the sort of supply-led market thesis that we've had for quite some time that is really proven itself out. I think that's where this period of macro uncertainty from a lease rate standpoint is really quite different from past periods. If you think about, for example, the lead-up to the Great Recession or the lead-up to the COVID recession, I'm not comparing necessarily this period to those periods, but those are periods where we started to see macro uncertainty and there was a very large negative market response from a lease rate standpoint. We really don't see that here. And again, that's really because the market hasn't been overbuilt. And so fleets remain fairly highly utilized. And so again, a little bit of quarter-to-quarter deterioration, but overall across the fleet, for the most part, rates are holding up well. Robert C. Lyons: And I'll add to that, Bascome, too. I think Paul can elaborate on this. But one of the additional drivers to that we're seeing, scrap rates are holding up really well. And with the market largely in balance, any temporary imbalance in a specific car type appears to be rectifying itself very quickly from a scrapping standpoint. So supply and demand are not getting out of balance for any extended period of time in any car type. Bascome Majors: Thank you all. Operator: Thank you, Bascome. And our next question comes from the line of Andrzej Zenon Tomczyk with Goldman Sachs. Andrzej, please go ahead. Andrzej Zenon Tomczyk: Everybody. Thanks for taking my questions. I just wanted to touch a little bit about the maintenance expense within North America. I know that jumped up a little bit sequentially, and we've been talking about increasing maintenance expenses in North America. I'm just curious on a go-forward basis, is that sort of a good dollar level to sort of be at in terms of North America maintenance? Or should we continue to expect increases from here? Thanks. Paul F. Titterton: So this is Paul speaking. I'll just contextualize it before I get directly to your question. So fundamentally, as you know, over the last really five to seven years, we've made tremendous investments in our owned maintenance capability, and that's because we have a very substantial marginal cost advantage working cars in our own network versus in the contract network. And really, that's been borne out over time. This year, from a mix standpoint, we do a great deal of work to try to forecast the mix of work coming into our facilities. This was a mix that really filled up our shops at a higher clip than we had forecasted. And as a result, we had to put more work into the contract network, which is more expensive. We're not going to guide for 2026 yet because obviously, traditionally with GATX Corporation, we don't do that until the next earnings call. So I can't really comment specifically on '26. But what I can say is over the long run, we are on track with our objective of continuing to put more work into our own shops and control our costs. And we remain of the view that we can achieve that going forward. Andrzej Zenon Tomczyk: Understood. And just maybe a little bit on the combined nature of the Wells Fargo deal as we move forward if that goes through. You mentioned the SG&A synergies, the management fees as well, but should we be thinking of longer-term synergies on other line items like maintenance as well? Thomas A. Ellman: I'll take that one, Andrzej. Thank you for the question. Yes, is the short answer to that question. There will be synergies in other line items as well. Maintenance is one area that we have talked about a little bit more publicly because Wells Fargo, as a bank, is not allowed to own maintenance facilities directly. They do all of their work through third-party shops. As Paul mentioned, we are at full capacity in our shops today. So when this transaction closes, it's not an immediate opportunity to bring work on those cars into the GATX Corporation shop. We'll continue using the third-party network that Wells has effectively established over the years. But longer term, absolutely, we will look for opportunities to bring more of that work in-house at GATX Corporation. Andrzej Zenon Tomczyk: Understood. Appreciate the context. Maybe just shifting a little bit to the spare engine leasing side of the business. It seemed like a good strong quarter there again. Just curious if you could share the breakout between the gains and the core EBIT this quarter and maybe how you expect to trend into year-end? Thomas A. Ellman: Sure. So for the quarter, the operating income was about 85% of the total, and the remarketing was about 15%. So year-to-date, we're at about three-quarters, one-quarter. Much like Paul's commentary about 2026, we usually don't try to get too specific on individual quarters because that's challenging, particularly given the lumpy nature of the way remarketing comes in, whether it's aircraft engines or railcars. But the three-quarters, one-quarter is a little higher on the operating income side than we've historically been. So if history is a guideline, you would see a little bit more on the gain side on the remarketing. But there's no guarantee of that. Andrzej Zenon Tomczyk: Understood. And then lastly for me, I did notice that the renewal success rate in North America jumped up to 87% from 84% last quarter and 82% last year. I'm just curious, like sequentially, if that increase is anything to read into relative to the certainty around tariffs. Is there any increased certainty from your customers? And is that leading to increased renewal success rates? Thanks. Paul F. Titterton: I would say, I wouldn't so much characterize that as driven by increased certainty by our customers, but much more just as we mentioned earlier, the fleet overall remains fairly tight. And obviously, it's in our interest and the customer's interest to renew. It reduces costs for both of us to the extent that demand is still there. So in a relatively tight fleet, as long as lessor and lessee are acting rationally and we price to the market, we should have a very high renewal success rate. But I wouldn't necessarily read into that number anything from a macro standpoint. Shari Hellerman: Appreciate it. Paul F. Titterton: Thanks, Andrzej. Operator: Thank you for your questions. And our next question comes from the line of Brendan Michael McCarthy with Sidoti. Brendan, please go ahead. Brendan Michael McCarthy: Great. Good morning, everyone. Thanks for taking my questions here. I wanted to circle back to a point on the supply side dynamics. I think you mentioned the market remains in balance, really supported by some of the higher scrapping rates. I guess, do you see any room or capacity for new car builds just stemming from any different economic variables that may shift in the future, such as a lower interest rate environment? Paul F. Titterton: Fundamentally, I would say the answer is no. We don't foresee a big uptick in build absent some spike in demand that we can't predict. What I will say is it's not just a question of financing costs. The builders have really rationalized capacity right now. And so if we think back to the crude boom, which is the last big boom in railcar production, the builders were producing at an 80,000 car a year clip. They couldn't ramp up to anything close to that number right now without a Herculean effort. So fundamentally, I think the supply side has right-sized quite a bit. And so, I think a dip in financing cost is unlikely to have a hugely material impact on new car production. Brendan Michael McCarthy: Got it. That's helpful. And really absent any factors driving overbuilding on the car build side, I guess, do you see any reason why lease rates can't continue to remain above the 20% threshold? Paul F. Titterton: Well, eventually, you will work your way through that pool of cars that were priced at much lower rates. So over the longer term, we will get to a point where you're renewing more and more cars that are put on at today's market rates. But we're still a ways off from that. Brendan Michael McCarthy: That makes sense. And do you have any idea of, I guess, how far along in the future that may be, whether it be, you know, two, three years or perhaps longer? Thomas A. Ellman: Yes. So as Paul mentioned earlier, we'll give more guidance next quarter. But order of magnitude, we're probably about halfway through remarketing those. Brendan Michael McCarthy: Okay. I wanted to transition to the engine lease business, really strong quarter there. Are you seeing any hesitancy from customers on the engine leasing side or anything within Rolls Royce affiliates, just resulting from, you know, uncertainty around tariffs or anything like that? Robert C. Lyons: So again, the short answer is no. The recovery post-COVID in aviation has been great. And we continue to see very high demand for the engines and don't expect any changes there. Of course, tariffs or general macroeconomic activity, certainly we'll keep an eye on that for possible signs of what it might do to demand. But to date and in the near term here, we expect that business to continue to be very strong. And we've been encouraged by the investment volume and opportunities that we've seen, particularly within the joint venture itself. Our RRPF, the team there, we came into the year expecting around $800 million roughly in total investment volume. And through the third quarter, we've already gone just north of $1 billion. So they're having an outstanding year in terms of putting capital to work at really attractive returns. Brendan Michael McCarthy: Great. That's helpful. And then on the internal portfolio, GEL looks like I believe I saw seven engines were purchased in the quarter. Is there anything to comment on related to the purchasing pattern there? I know there were no engines purchased in the first half of the year. Was there any outsized read-through there for this quarter? Robert C. Lyons: No, nothing in particular. What I will comment on, I think might be helpful to kind of take a look back. When we first started doing direct investments in engines, it was during the depths of the COVID downturn. And at that point in time, Rolls Royce's financial results were pretty stressed, and the capital markets in general were really in a state of flux, and there was not a lot of capital flowing into aerospace, whether it be aircraft in terms of airframes or engines. So that presented GATX Corporation with a really unique opportunity to step in and buy engines directly, support Rolls Royce in doing so, and invest in some very attractive assets for GATX Corporation for the long term. We now have over $1 billion of direct investment in engines, and they will pay dividends for years to come. We also knew at the same time that Rolls Royce's financial performance would strengthen, their credit profile would strengthen, and more capital would flow back into aerospace investments as it always does. It's the epitome of capital flowing in and out depending on cycles. But it certainly has flowed back in, and Rolls Royce, we knew, would always look at their most effective way to sell engines, whether it be into the JV or GATX Corporation directly. Fact of the matter is they have a lot more options available to them today. We knew that. And so I think our investments going forward will be directly will be much more opportunistic than they are programmatic. Brendan Michael McCarthy: Understood. I appreciate the detail. That's all for me. Robert C. Lyons: Yep. Operator: Alright. Thank you, Brendan. And our next question comes from the line of Justin Laurence Bergner with Gabelli Funds. Justin, please go ahead. Justin Laurence Bergner: Good morning, Bob. Good morning, Tom. Good morning, Shari. Morning. Morning. Few questions here. I just wanted to make sure I heard correctly on the mix of operating and remarketing income within the Rolls Royce JV. It seems like the, you know, JV income stepped up from $30 million in 1Q then dipped to $22 million in 2Q and $53 million in 3Q. But I think you indicated that the share of remarketing income was less than the year-to-date. Thomas A. Ellman: Yeah. That's correct, Justin. And part of the reason for that is one of the items that we called out was the insurance recovery. What that insurance recovery is, is back in 2022, we had an impairment for the JV for engines that were in Russia as the Russia-Ukrainian conflict got going. And we did not anticipate being able to get those engines out. And there was some uncertainty about what would happen from an insurance standpoint. As it turned out, this year we had a recovery of insurance proceeds, and that shows up in the operating income line. So that's part of the reason for that relatively higher number in Q3. Justin Laurence Bergner: Okay. That's helpful. I see an $8.2 million adjustment net of taxes for the affiliate income. Does that correspond to the $53 million, or do they need to gross it up to be pretax? Thomas A. Ellman: So yeah. I'm not totally sure where you're getting the $53 million, but that is a tax number. And that relates directly to the insurance proceeds that Tom just mentioned. So we normalized for that. Justin Laurence Bergner: Oh, sorry. It was $53.4 million, but the $8.2 million is apples to apples on a tax basis with the $53.4 million. I need to gross it up to be pretax. Thomas A. Ellman: Where specifically, Justin, are you picking up the $53.4 million number? I just want to make sure we're looking also apples to apples. Justin Laurence Bergner: If I'm reading correctly, share of affiliates' pre-tax earnings, $53.4 million. Shari Hellerman: Yes, Justin. That's the pretax number for the share of affiliates' earnings from RRPF. So that includes the sorry. That's the third quarter. Thomas A. Ellman: Yes. And that includes the insurance proceeds that Tom was alluding to. So you would need to use the pretax number to adjust for that $53.4 million figure. Justin Laurence Bergner: Okay. I think I do I is there a pretax number given? I think I only see the post-tax number of $8.2 million. Shari Hellerman: It is, yes. It's in the engine leasing section of the earnings release. It is $10.9 million pretax and then $8.2 million after tax. Justin Laurence Bergner: Oh, thank you. Sorry about that confusion. With respect to your guidance for the year then, should I maybe infer that within the unchanged guidance your engine leasing view is somewhat stronger, your gains on dispositions may be slightly stronger? And you know, Rail North America ex-gains and Rail International a touch lower? Thomas A. Ellman: Yes. Justin, when we took up guidance in 2Q, we mentioned that it was primarily because of the outperformance in the engine business. If you look at where both Rail International and Rail North America are relative to the guidance we gave at the beginning of the year, they're kind of both within the range but at the lower end of that range. So that was the case when we took guidance up. And that's the case where we are right now. So really unchanged quarter to quarter. Justin Laurence Bergner: Great. Thank you. One or two more if I may. It looks like the gain per car on asset dispositions in Rail North America was a lot lower this quarter. Is that simply related to the mix of cars you sold? Or should I read anything into it about the strength of pricing in the secondary market? Thomas A. Ellman: It's really the mix of cars, Justin, which changes quarter to quarter. It's not just the cars, but the underlying lease is also a big driver of the value ascribed to any particular car in the secondary market. So if you're selling cars with a Class one railroad with a ten-year lease stream attached to it, the secondary market is going to really value that highly. So given the volume of cars we sell in a given year, it moves all over the map. Justin Laurence Bergner: Gotcha. And then just lastly, to clarify, the increased maintenance expense, was that purely due to kind of volume of maintenance events and the need to outsource? Or was there anything in terms of operational execution in your own facilities that may have also weighed on the margin? Paul F. Titterton: It's really just volume and mix fundamentally. As Bob said, we have filled up our network of work, and that is, of course, on the heels of the substantial investment and increased capacity we've had over the last few years, and whatever is left over that we can't fill has to go into the contract network. Justin Laurence Bergner: Got you. And was there any kind of lumpy nature of tank car requalifications this quarter? Paul F. Titterton: Not noticeably so. No. Justin Laurence Bergner: Okay. Thank you so much for all the questions. Shari Hellerman: Yeah. Thomas A. Ellman: Thank you. Shari Hellerman: Thanks, Justin. Operator: It looks like we have a follow-up question from Bascome Majors at Susquehanna. Bascome, please go ahead. Bascome Majors: Thanks, everyone. Just one more for me. As we get into next year, it sounds like you don't expect a lot of changes in the North American rail cyclical backdrop. But I mean, you are taking on a lot of new cars and customers via the JV and your management of that. Is there anything to tweak on the sales incentives to really drive the outcome you want to maximize value in the next year or two compared to this year? Paul F. Titterton: Yes. That's a really good question, Bascome, because we do adjust our sales incentive plan in North American Rail every year. And there are various toggles we use to kind of drive the performance and the outcomes that we want. So we, of course, will be taking a very hard look at that here. We always do it in the fourth quarter as we set the plan for the year ahead. And assuming we close on the Wells transaction as expected, that will give us a really good new footprint in which to set those goals for the sales team. But yes, there will be some adjustments made. Two times the size fleet essentially means more opportunities, bigger customer opportunities. So we'll drive the sales force accordingly. A really good question. Bascome Majors: Thank you. Paul F. Titterton: All right. Thanks, Bascome. Operator: And it looks like there are no further questions. So I will now turn the call back over to Shari Hellerman for closing remarks. Shari? Shari Hellerman: I'd like to thank everyone for their participation on the call this morning. Please contact me with any follow-up questions. Have a great day. Thank you. Operator: Thanks, Shari. And again, ladies and gentlemen, that concludes today's call. Thank you for joining, and you may now disconnect.
Operator: Welcome to Wintrust Financial Corporation's Third Quarter and Year-to-Date 2025 Earnings Conference Call. A review of the results will be made by Timothy S. Crane, President and Chief Executive Officer, David Alan Dykstra, Vice Chairman and Chief Operating Officer, and Richard B. Murphy, Vice Chairman and Chief Lending Officer. As part of their reviews, the presenters may make reference to both the earnings press release and the earnings release presentation. Following their presentations, there will be a formal question and answer session. During the course of today's call, Wintrust management may make statements that constitute projections, expectations, beliefs, or similar forward-looking statements. Actual results could differ materially from the results anticipated or projected in any such forward-looking statement. The company's forward-looking assumptions that could cause the actual results to differ materially from the information discussed during this call are detailed in our earnings press release and in the company's most recent Form 10-K and any subsequent filings with the SEC. Also, our remarks may reference certain non-GAAP financial measures. Our earnings press release and earnings release presentation include a reconciliation of each non-GAAP financial measure to the nearest comparable GAAP financial measure. As a reminder, this conference call is being recorded. I will now turn the conference over to Mr. Timothy S. Crane. Timothy S. Crane: Good morning. Thank you for joining us for the Wintrust Financial Corporation Third Quarter Earnings Call. In addition to the introductions that Latif just made, I'm joined by our Chief Financial Officer, David L. Stoehr, and our Chief Legal Officer, Kate Bogie. I'll begin this morning with a quick overview of our results. David Alan Dykstra will speak to the financials in more detail, and Richard B. Murphy will speak to the loan activity and credit performance. I'll be back with some final thoughts, and as always, following our remarks, we'll be happy to take your questions. Wintrust reported a third consecutive quarter of record net income driven by our differentiated approach to understanding our clients' needs and delivering the right solutions to help them meet their financial goals. Net income of $216 million was up from just over $195 million last quarter, an increase of almost 11% quarter over quarter. Net interest income was up $20 million from the second quarter to $567 million, driven by another quarter of solid loan and overall balance sheet growth. Loan growth of just over $1 billion was broad-based and continues to reflect the diversified composition of our earning assets. Total loans were $52 billion at quarter-end, up 11% year-to-date on an annualized basis. Deposit growth of just under $900 million kept pace with the loan growth. Total deposits were almost $57 billion at the end of the third quarter, and the rate paid on interest-bearing deposits was essentially flat compared to the prior quarter, up just one basis point. Interest margin was 3.5% for the quarter, down slightly from the prior quarter, but square in the middle of our targeted range. Credit quality remains very good, and we continue to proactively work with a small number of clients who are experiencing challenges. Before I turn it over to David, just a couple of highlights. First, the FDIC's annual deposit market share report was released last month, and we continue to achieve deposit share gains in each of our key markets. In Illinois, Wintrust is now third in deposit market share. Our Wintrust franchises in Wisconsin and West Michigan showed strong growth as well, also with lots of upside potential. Given our advantaged position in these markets, we remain focused on continued core deposit growth as a key tenet of our franchise. Secondly, I'm proud to say Wintrust debuted at number six on American Bankers' nationwide survey of bank reputation. Survey results reflect our commitment to earning the trust of our customers every day. It also speaks to our ability to grow and strengthen the franchise. So once again, a solid and straightforward quarter. And I'll turn it over to David for additional insights. David Alan Dykstra: Great. Thanks, Tim. With respect to the balance sheet growth in the third quarter, we once again had strong loan and deposit growth, which fell within our stated mid to high single digits targeted growth range. Specifically, the deposit growth was $895 million during the quarter, representing a 6% increase over the prior quarter on an annualized basis. The deposit growth helped to fund solid third-quarter loan growth of $1 billion or 8% on an annualized basis. As the other aspects of the balance sheet results, total assets grew $646 million to just under $70 billion in total assets. Turning to the income statement results, it was a very solid operating quarter. As Tim said, we had another record level of quarterly net income. Our net interest income represented another record high quarterly amount also. A $2.4 billion increase in the average earning assets drove the $20.3 million increase in net interest income over the prior quarter. Given the current interest rate environment and even with a few rate changes in either direction, we remain confident that our net interest margin can continue to be relatively stable throughout the remainder of 2025 at roughly 3.5%. I would note that period-end loans are approximately $660 million higher than the average loans for the third quarter, giving us a good start on achieving higher average earning assets for the fourth quarter and combined with that stable net interest margin I referenced should provide for increased net interest income in the fourth quarter as well. The provision for credit losses remained relatively flat with the prior quarter as the overall credit environment and asset quality has remained relatively stable. As to non-interest income and non-interest expense, total non-interest income totaled $130.8 million in the third quarter, which was up approximately $6.7 million when compared with the prior quarter. The increase was supported by slightly higher wealth management and mortgage revenue, higher security gains, and a variety of smaller changes to other non-interest income categories as shown in the table in our earnings release. Overall, a solid and consistent outcome for non-interest income during the third quarter. Non-interest expenses totaled $380 million in the third quarter, which represented a slight decline from the $381.5 million recorded in the prior quarter. Expenses are well controlled with both the quarterly net overhead ratio and efficiency ratio improving from the prior quarter. In summary, we're pleased with the record quarterly results in net income and net interest income. The results were supported by good franchise-building loan and deposit growth, a solid net interest margin, low credit costs, and well-controlled expenses. We also continue to build our tangible book value per share during the first three quarters of this year. And as you can see in our published materials, we have grown tangible book value per common share every year since we've become a public company, and we're on track to do so again in 2025. Also, as we mentioned on our last call in the quarterly call, and to prevent any confusion, I just want to revisit the one-time impact of our preferred stock redemption and the new preferred stock issuance. We included an overview of the impact on Slide 24 of the presentation deck. In short, while there was no impact to operating net income, the portion of these transactions that were of a one-time nature reduced fully diluted net income per common share by $0.28 in the third quarter. Without this impact, fully diluted net income per common share would have been $3.06. If anybody has any questions on the details of that preferred stock issuance or redemption, please contact me and I'm happy to walk you through it. So with that, I'll turn it over to Rich to discuss credit. Richard B. Murphy: Thanks, Dave. As Tim and Dave both noted, credit performance continued to be very solid in the third quarter. As detailed on slide seven, loan growth for the quarter came from a number of different categories. Commercial real estate loans grew by $327 million. The Wintrust Life Finance team had another solid quarter, growing by $252 million. Our leasing and residential mortgage groups also had a very solid quarter. We believe loan growth for the fourth quarter will continue to be strong and within our target range for a few reasons. Our core C&I and CRE pipelines remain very solid, and we continue to benefit from our unique market positioning in our core market of Chicagoland, Wisconsin, West Michigan, and Northwest Indiana. In addition, we continue to have very strong momentum in a number of our lending verticals, including leasing and premium finance. From a credit quality perspective, as detailed on slide 15, we continue to see strong credit performance across the portfolio. This can be seen in a number of metrics. Nonperforming loans decreased from $189 million or 37 basis points to $163 million or 31 basis points. Charge-offs for the quarter were 19 basis points, up from 11 basis points in the prior quarter, but down from 23 basis points in 2024. This quarter's charge-offs were primarily related to the resolution of previously reserved credits that have now been fully resolved. We continue to believe that the level of NPLs and charge-offs in the third quarter reflect a stable credit environment, as evidenced by the chart of historical non-performing asset levels on slide 16, and the consistent level in our special mention on substandard loans on slide 15. This quarter is a perfect example of our commitment to identify problems early and charging them down where appropriate. Our goal, as always, is to stay ahead of any credit challenges. As noted in our last few earnings calls, we continue to be highly focused on our exposure to commercial real estate loans, which comprise roughly one quarter of our total loan portfolio. As detailed on slide 19, we continue to see signs of stabilization during the third quarter as CRE NPLs remained at a very low level, decreasing from 0.25% to 0.21%. And CRE charge-offs continue to remain at historically low levels. On Slide 20, we continue to provide enhanced detail on our CRE office exposure. Currently, this portfolio remains steady, although it represents only 3% of our total loan portfolio. We monitor this portfolio very closely, and we continue to perform our deep dive analysis on a quarterly basis. The most recent deep dive analysis showed very consistent results when compared to prior quarters. Regarding overall economic conditions, particularly in light of tariffs, funding, and government shutdowns, we maintain an active dialogue with our customers to assess business sentiment. Overall, these conversations reflect a sense of measured optimism as we approach year-end. We continue to expect strong portfolio performance consistent with our historical experience supported by strong underwriting, disciplined diversification, and a proactive approach to resolving credit challenges. In summary, we continue to be encouraged by our credit performance in the third quarter. And we believe that our portfolio is well-positioned, very diversified, and appropriately reserved. This concludes my comments on credit. And now I'll turn it back to Tim. Timothy S. Crane: Great. Thanks, Rich. Just a few final thoughts. This past week has been bumpy for many financial institutions. What's important to highlight from my perspective is that Wintrust once again delivered strong predictable growth and solid credit performance. We are very disciplined in our approach to underwriting. As we've said before, there's a lot of liquidity in the system and many providers will take risks that we don't. We pass on deals that do not meet our rigorous standards. We believe our approach to credit underwriting and our diversified portfolio serve us well. And we'll continue to do so as we grow. As we enter the final quarter of the year, we believe we will continue to generate loan and deposit growth in the mid to high single-digit range, while growing net income and maintaining a stable net interest margin. We continue to manage our expenses thoughtfully while we regularly invest in our business. We like where we're positioned in the Midwest, while others may be turning their attention to other geographies. We're focused here where our customers, consumer and commercial, appreciate the relationship-based approach. Our team is focused on putting our customers first and delivering the financial solutions they need to create impact in our communities and to deliver results for our shareholders. We believe there's a lot of growth potential and relatively rational competition in our core Midwestern markets. Our clear focus and differentiated approach drive consistent, meaningful financial results, and we expect to continue to deliver in that manner as we finish the year. At this point, I'll pause and I'll ask Latif to open the floor to your questions. Operator: Thank you. Star one one on your telephone. To remove yourself from the queue, you may press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Jon Arfstrom of RBC Capital Markets. Your line is open, Jon. Jon Arfstrom: Hey. Thanks. Good morning. Timothy S. Crane: Good morning, Jon. Jon Arfstrom: Hey, Tim. Maybe for Tim or Rich, on the loan growth drivers, can you talk a little bit more about the pipelines and what you're seeing? Are they changing at all one way or the other? And then if you could just because it's topical, if you could comment on any NDFI exposure you might have. Richard B. Murphy: Yeah. I'll take the first one. What we're seeing in the pipelines is really, as I talked about in my commentary, we have this unique market positioning in the Chicago market, where there's a lot of much bigger banks and a lot of smaller banks. And for the banks that are significantly larger, they have a huge amount of market share that we have slowly been taking away from them. We just landed a very nice relationship, a long-time customer at one of the predominant banks in Chicago. And, you know, they just didn't even know who to talk to anymore. And those are the opportunities that have just continued to feed that C&I pipeline and CRE pipeline. Really over the last, you know, ten, fifteen years as we've continued to just really press in that area. So it's really when I look down the list, that's what the pipeline largely consists of. It's just more and more opportunities coming from larger banks where they just feel like, you know, they don't know anybody at those institutions. Their credit's getting decisioned at a place where they don't even know who's doing it. And it's just that they really like to bank with somebody where they know their banker, they know who's making the decision. So that's really the pipeline. You know, as it relates to NDFI, anything further on that, Jon? Jon Arfstrom: No. I think you're saying it's market share and the environment both, but maybe market share and the environment. Timothy S. Crane: That's right. And Jon, the only thing I would add to that, I mean, they tend to be relationships where we will also have treasury management opportunities and wealth opportunities over time. So the pipelines are stable and we continue to be encouraged by what we're hearing from our clients in the market. Jon Arfstrom: Right. Okay. NDFI, that's a pretty broad category, which for us totals just over $2 billion. Approximately 70% of that is made up of mortgage warehouse lines and capital call lines, you know, businesses that we've been in for years and we've experienced no losses in. The balance is primarily made up of loans to leasing and premium finance companies. You know, again, businesses that we are very familiar with and customers that we know well. So that, you know, I would say the predominant piece of that puzzle really is mortgage warehouse. Jon Arfstrom: And, I think you know that story well having followed us for so long. Jon Arfstrom: Yeah. And then this comes up on your company as well a little bit just in terms of the margin and the margin range. How do you guys feel about the ability to hold the margin in the current range kind of over the medium term with the Fed starting to cut rates? Is this something that you can, you know, hold through the medium term? Do you feel like you're protected there? David Alan Dykstra: Yeah, Jon. This is David Dykstra. Yeah. We really do. We've said in prior calls that if rates go down, you know, cut three or four times, we still believe that we can hold the margin in the 3.50 range. The balance sheet is relatively variable on the loan side, but we also have some swaps in place to manage that downside risk. But our deposits are also, you know, quite variable with, you know, 80% of them being non-term deposits. And given the rational market here in Chicago, you know, we've been able to cut rates fairly evenly with the Fed cuts going down. So as market rates have gone down, our deposit costs have gone down, and we're fairly balanced on both sides of the equation. So we're pretty comfortable within a fairly tight range around 3.50. Given the three or four rate cuts that a lot of people are talking about over the next year, that will hold that 3.50 margin plus or minus a few basis points. Jon Arfstrom: Okay. Alright. Thanks, Jon. Operator: Thank you. Our next question comes from the line of Terry McEvoy of Stephens Inc. Please go ahead, Terry. Terry McEvoy: Thanks. Good morning, everybody. Maybe a question on the commercial loan growth. Ex the finance receivables, it was $150 million in the third quarter versus $450 million in the prior quarter. I'm just wondering, is that decline market competition, you being more selective, or maybe something within the composition of that commercial portfolio? Richard B. Murphy: Terry, I don't think there's anything that I would read into that. I think it's just more timing than anything else. You know, I would say that, you know, when you look at just overall pipelines, you know, you're seeing pretty consistent, you know, opportunities. It just kind of depends on when they close, you know, you got some utilization issues there. So I would say, you know, it's been a pretty consistent story in terms of overall commercial pipelines and opportunities and balances. Terry McEvoy: Thanks. And maybe a question for Tim. Could you just expand on the strategy to play more offense in your markets when competitors may be focused on Texas or elsewhere? And would you step up hiring and marketing to take advantage of that situation? Timothy S. Crane: Sure, Terry. I mean, there's a lot of conversation about people finding the Southeast or Texas attractive. And we think we've got four, three, four depending on how you look at it, very attractive markets. The Chicagoland community, including Northwest Indiana, is a dense business-rich community with transportation and health care and good education. And although it may not be growing as fast, we've consistently been able to take share from some of our peers. And so we continue to feel very good about that. West Michigan grows a little bit faster. And with the Makatawa integration activities behind us, we're making progress. You see that in terms of the deposit share that we've gained over the last year. And we continue to feel very good about Wisconsin. So we just like our backyard and the markets that we understand better than we like others. And we'll continue to follow clients periodically to Florida or other geographies maybe. But we're very comfortable in the Midwest and our ability to continue to grow on a consistent basis. Terry McEvoy: You bet. Operator: Our next question comes from the line of Christopher Edward McGratty of KBW. Please go ahead, Chris. Christopher Edward McGratty: Hi. Good morning. Thanks for the question. Timothy S. Crane: Yeah. You bet, Chris. Christopher Edward McGratty: Tim, my question is around operating leverage. This year, you're poised to produce, I think, about a couple of hundred basis points. I'm interested if that gets perhaps a little more challenging next year with the rate outlook. But also the, I guess, the offset of deregulation might alleviate some of those pressures. But any thoughts on operating leverage trends? Timothy S. Crane: Well, just that as we kind of approach our end-of-year planning for '26, we expect we'll continue to get operating leverage. And if we can grow the balance sheet mid to high single digits, we can keep expense growth in the kind of mid-single-digit range, we would still expect to see improvement. And that's what our team will be aiming at as we get through the budget process. Christopher Edward McGratty: Okay. Perfect. And then on capital, you're building capital. Is there a scenario where you might consider more acquisitions in a friendlier environment? You guys have a history of doing fairly small, but profitable deals. Timothy S. Crane: Well, you know, our sense is that some of the conversations around acquisitions, particularly around small banks, are picking up. I think we're reasonably good. We're a disciplined acquirer evidenced by Makatawa in our track record. So we'll continue to look at opportunities. But that said, we work for our shareholders. And so if anything else were to arise, our board is well-prepared and well-equipped to deal with that. So we'll keep looking at stuff, and as we've talked about in prior calls, the very, very small transactions are probably tougher for us at this point. They just don't move the needle enough. Christopher Edward McGratty: Okay. And just so I understand, Tim, the comment, I guess, are you implying the optionality of going either way? Is that what your comments were? Timothy S. Crane: Well, I'm just saying we're clear. We work for our shareholders. Our board's equipped to address any opportunity either side of the equation that comes up. Christopher Edward McGratty: Alright. Thank you. Appreciate it. Operator: Thank you. Our next question comes from the line of Nathan James Race of Piper Sandler. Please go ahead, Nathan. Nathan James Race: Hey, guys. Good morning. Appreciate you taking the questions. Just going back to the M&A line of questioning previously, just curious if you're really just focused on organic growth, just given the runway that you've described already on this call. And can you just maybe size up if you were to do an acquisition type of asset size or geographies you would be entertaining? Timothy S. Crane: Yeah. I mean, obviously, track record is sort of bolt-on stuff. Makatawa is the $3 billion range. We think we're good at those types of transactions, but we've also spoken that we're making investments in people and capabilities to be a larger financial institution and serve larger clients. So I think without getting into any specifics, really not a large change to our approach at this point. Again, we'll look at things that make sense strategically and from a cultural standpoint. Nathan James Race: Okay, great. Again, maybe to put the two fences it though, again, the very small transactions are just tougher from an economic standpoint. And we've said on prior calls, MOEs are complex and cultural issues. And I don't think our view on those has changed. Nathan James Race: Understood. That's really helpful. Just going back to fee income. You know, curious if you've seen any change in your lock volumes on the mortgage side of things just given the drop in rates late in the quarter and how you're thinking about that revenue opportunity now that rates have come down in the fourth quarter and perhaps into 2026 as well? David Alan Dykstra: Yeah. Well, you can see, you know, there's just a little bit of a pickup in mortgage banking revenue for the quarter, but still in the low twenty to mid-twenty range. We saw a pickup in applications early in the third quarter when rates came down. So there was a little bit of a flurry of people that wanted to refinance that maybe had rates in the sevens, eight percent range. And then that went away fairly quickly in the middle of September, and applications have stayed fairly low. So I think our thoughts are that the lower rates are better. I probably need another 25 to 50 basis points of mortgage rate cuts to see that number improve significantly. So I think based upon the seasonality of the fourth quarter being low and what we're currently seeing in applications, probably still the mid-twenties on plus or minus on mortgage revenue. We'll see how the quarter ends up here and see whether the ten-year comes down further with any of the Fed actions and whether that influences the ten-year portion of the curve, which in the past is they don't necessarily move in sync as you know. But we're optimistic that it will get better next year with the slightly lower rates and home buying season starting in the early part of next year. But right now, it still seems like applications are sluggish. Nathan James Race: Okay. Gotcha. I could sneak one last one in on margin and kind of the outlook for loan yields. You know, I think you guys have swaps or hedges on, you know, $4 billion or so of your floating rate loans. So, you know, just curious if we get to five rate cuts over the next twelve months or so, Dave, can you maybe help us just in terms of where you could see loan yields drop off based on where you're putting new loan production on these days and relative to some of the swaps you have becoming effective as well? David Alan Dykstra: Well, you know, the swaps are effective all the time. They're just tied to the three-month, you know, the three-month SOFR or the one-month SOFR rate. And so if SOFR goes down a basis point, those help us a basis point. If they go up a basis point, it hurts us a basis point, you know, and vice versa. So I, you know, those are effective for us in hedging those variable rate loans regardless of where SOFR moves to because of the swap nature of it. Loan rates are, you know, well, they're still in the sort of mid-sixes to 7% range depending on our mix. Premium finance PNC is higher than other categories. So it sort of depends on the mix. But we're still thinking right now, without any further rate cuts, that you're probably in the mid to high sixes as far as blended new loan rates. Timothy S. Crane: And, Nate, the flip there is deposits coming on, you know, incrementally in the mid-threes and that kind of matches the 3.5% margin that we believe will hold kind of for the near term. Nathan James Race: I'm sorry, Tim. Were you saying your kind of blended cost of new deposits coming in, or around mid-threes these days? That seems a bit high. Timothy S. Crane: The incremental cost of the deposits. So again, we grew $1 billion on both sides. So at the margin with the promotional activities, sort of mid-threes with loan yields around seven that sort of matches the 3.5% margin that we're talking about. Nathan James Race: Gotcha. I'm with you. I appreciate all the color. Thanks, guys. Timothy S. Crane: You bet. Thank you. Operator: Our next question comes from the line of Casey Haire of Autonomous Research. Your line is open, Casey. Jackson Singleton: Hi. Good morning. This is Jackson Singleton on for Casey Haire. My first question is on NIM. What is the total cumulative interest-bearing deposit beta expectation underlying the stable NIM guide? During the hiking cycle, it looks like the beta was around 65%. Versus 55% at the end of 3Q. So just any color here would be appreciated. David Alan Dykstra: Yeah. We still think mid-60s is probably the right number. Our interest-bearing deposit costs are above 3% higher than some of our peers. So if you were to get more rate cuts, we feel a little bit good in this regard that we have room to move our deposit costs down more than maybe some others do. So again, we feel comfortable, a couple of cuts or a couple of moves either way, the 3.50 is still about the right number. Jackson Singleton: Okay. Great. Thank you. And then for my follow-up, just on premium finance. So PNC growth has been very good this year despite being in a hard market. I think it's up around 15% on a year-to-date basis for end of period. So I guess just what is the outlook for PNC going forward? Richard B. Murphy: Yeah. We continue to be pretty bullish on PNC. I mean, we continue to take market share. We deliver, I think, a very good product for our customers, and you look at over the course of, like, the last five years, you can just see just steady growth. You know, even if you exclude, you know, the market, you see, you know, the number of accounts going up. You know, in addition to which, you know, while there may be some softening in some lines, overall, I would say the market continues to look firm for us. So we continue to be pretty optimistic in that space. Jackson Singleton: Okay. Great. Thank you for taking my questions. Timothy S. Crane: Thank you. Operator: Our next question comes from the line of Jeffrey Allen Rulis of D.A. Davidson. Please go ahead, Jeff. Jeffrey Allen Rulis: Thanks. Good morning. Just wanted to maybe check in on credit. Rich, I think you mentioned your sort of growing comparability on CRE. Just looking at kind of the past dues linked quarter inched up a little bit. I'm curious as to maybe just timing on those. I mean, that's early stage. Could you maybe speak to a little pickup there? Richard B. Murphy: Yeah. Pickup where in the charge-offs or is it in kind of the past due? The not quite nonaccrual, but just early delinquency stuff was a linked quarter increase. Richard B. Murphy: Yeah. You know, I wouldn't say anything that would appear, you know, anything probably more episodic than anything else. You know, we, as we have pointed out and kind of limited our comments during the call on the CRE in the office. But one of the things that we spent a lot of time with our customers on is getting ahead of maturities and making sure that we are working with them to try to find a reasonable solution for things that get maybe a little sideways. And those conversations take some time. So as you're working through those, you know, you really want to be very thoughtful. You want to work with your customer. And occasionally, those may extend out past maturity. But those are that's part of the business. That's something we do, you know, week in, week out as working with our customers, and it's not always linear. So you know, you may have quarter to quarter some changes up or down. But nothing that I would look at as problematic. David Alan Dykstra: Yeah. Jeff, I would just chime in there a little bit. I mean, you look at, like, 30 to 59s, although they're up from the second quarter, you know, they're way down from the prior three quarters ahead of that. So over the last five quarters, still the second lowest. So I think a lot of this is just timing. Nonaccruals are down, sort of the classified, you know, some special mention substandard together categories are down. You know, the problematic areas, I think we're showing improvement on. And the shorter-term delinquencies, I think, are just timing issues. Jeffrey Allen Rulis: Right. Yeah. Didn't mean to I think your overall trends of credit, I guess, kind of the climate that we're at, just lower balances, we're gonna kind of focus on certain things. But maybe on the charge-offs, any particular segment that those tended to come from in terms of the makeup? Richard B. Murphy: No. Really unrelated. And, you know, a handful of credits that had, as we have pointed out, you know, had reserves attached to them previously. And just got the final resolution and, you charged off the reserved amount and moved on. But no commonality. Jeffrey Allen Rulis: Got it. Okay. Appreciate it. And then maybe one last one. Just on the side, particularly within marketing, seasonality, Q2, Q3 tend to be a little heavier. Could we maybe see a step down as we have historically in the fourth quarter and first quarter? Just and then if you have any comment on the overall expense run rate? Thanks. David Alan Dykstra: Yeah. Well, we typically do see a step down in the fourth and first quarters on marketing because we don't have as much of the major league and minor league and baseball sponsorships and some of the summer sponsorships we do in the communities. And none of our Chicago or Milwaukee teams aren't any longer in the playoffs, that expense will stop. But so we would expect that to come back down a little bit. There are some fluctuations in things like employee insurance expense and claims and like that that it's hard to get a beat on sometimes. We had a pretty good quarter this quarter in that regard. Second quarter was a little higher. So there are fluctuations in some other areas, but I think we're sort of sticking with what we said last quarter. Is that the other expenses we would expect to be in sort of the low 380s, $380 to $385 range, you know, depending on fluctuations for certain things. And we obviously were at the very low end of that range this quarter and controlled those expenses well. But, you know, plus or minus of a couple million dollars, you know, I think in that low to mid 380 range is where our focus is right now. Jeffrey Allen Rulis: Great. Thank you. Timothy S. Crane: You bet. Operator: Thank you. Our next question comes from the line of Benjamin Tyson Gerlinger of Citi. Please go ahead. Kylie Wong: Hey. Good morning. This is Kylie Wong on for Ben today. Thank you for taking my questions. I guess you've touched on this a bit, but when you think about, you know, the Chicagoland marketplace, in terms of deposits, it seems like pricing has been rather rational relative to other large cities. And since your bank is more of a price setter when you think about, you know, the next couple of months and the next couple of quarters? How do you guys think about, you know, the ability to both gather deposits while also pricing down rate? Is there a relative level at the Fed where, you know, overall competition might actually become more competitive? Timothy S. Crane: Yeah. Well, number one, we would continue to focus on core deposit growth as part of our target and we would expect to continue to take share from some of our competitors. I think we can do that at, you mentioned, promotional rates that are fairly rational. And so as the Fed cuts rates, I think we'll still be able to get the stabilized margin with deposit growth. So I don't think that there's a trade or a yet in terms of our ability to continue to perform, if that's the question. Kylie Wong: Great. Thanks for the color. Timothy S. Crane: You bet. Operator: Thank you. Our next question comes from the line of David Joseph Long of Raymond James. Your question, please, David. David Joseph Long: Good morning, everyone. Timothy S. Crane: Hi, David. David Joseph Long: I just wanted to follow up on credit. Maybe this is also a lending question. But on the credit front, are there any segments or specific industries you're paying more attention to here? And then any lending verticals or, again, industries where you may be pulling back your appetite to lend in? Richard B. Murphy: No. You know, I wouldn't say we're necessarily pulling away from anything. I think that, you know, we've talked about obviously office and transportation in prior calls. So as I think we've largely got our arms around, you know, now I think and we kind of addressed this in the commentary. Yeah. There's just, you know, a number of things that go on with the government and in terms of, you know, some of the things that we're seeing in terms of higher education and health care and things like that. You know, we're paying very, very close attention to. You know, nothing, you know, that you know, our customers generally are pretty well capitalized. I think they'll be able to weather the storm, but we are working with them very, very closely to make sure that, you know, that if we can help in any way or if we can, you know, give them some guidance. But, you know, that's an area that I we're watching very closely. I'd say if I were to stack rank those, I'd probably put higher right at the top. David Joseph Long: Got it. Thank you, Richard. Appreciate that. And then on the net interest margin, we've talked about being able to keep it stable here for quite some time. What is the biggest risk to being able to keep the NIM stable or within a few basis points of that 3.50 level? Timothy S. Crane: The way I would answer that, David, would be irrational competition. So if something happened in our markets, which by the way, we don't see at the moment, to dramatically alter pricing of either loans or deposit costs, we could get some pressure there. But again, we don't see that right now. We think other banks are focused on their margin and kind of remaining rational. So I wouldn't say there's a high likelihood of that happening, but that would be the risk. David Alan Dykstra: Yeah, I guess the other risk would be, which again, we don't see happening, is if for some reason, the yield curve would go back inverted. But we quite frankly see the slope and the steepness staying in place. So we don't see either of those risks as real prevalent right now. Timothy S. Crane: Yeah. David, I think our team has done a nice job staying very disciplined with pricing, loans, and deposits. That's part of our MO and how we pursue business. I mean, we've talked about on prior calls, we at times could have more business if we were willing to dramatically sacrifice our pricing methodology. We wouldn't sacrifice our credit methodology. But we don't see any need to do that right now. Everything feels relatively rational. David Joseph Long: Got it. Thanks, guys. Appreciate that color. Operator: Thank you. Our next question comes from the line of Janet Leigh of TD Cowen. Please go ahead, Janet. Janet Leigh: Hello. I want to follow up on premium finance. Directionally and strategically, how should we think about the growth trajectory of premium finance loans? I know that there's a seasonality component to it. Should we expect this to become a bigger part of your loan portfolio? And if C&I were to pick up in 2026, how would your appetite to grow premium finance loans versus C&I change relative to the maybe yields that it's generating? How I understand is it's generating yields that are comparable to C&I but with lower credit risk. But not bringing in deposits, how would your appetite change if C&I were to pick up? David Alan Dykstra: Yeah. Well, you know, I think we've always looked at our niche businesses as being about a third of our balance sheet and the biggest one has been premium finance, both life and property and casualty. You know, we like to grow the business in all aspects if it's good business growth. Right? So I don't see us getting the overall premium finance business much more than a third of the balance sheet because it just never has. We've always been able to grow the rest of the balance sheet. In the short run, if C&I grew more or less, I don't think we would take our foot off of the accelerator for premium finance. If it got to be too big, you know that we have offshoot. We've been demonstrating that we can sell off excess production. And so if we get to a point where we didn't like the concentration, if that number started to get, you know, around 40% between all of the premium finance divisions, then you might say, well, we want to sell some of that and take a profit off of that excess production. But I don't think we would take our foot off the accelerator as long as the pricing and the credit metrics of that portfolio held up like they have, you know, for the last few decades that we've been in the business. Janet Leigh: Got it. Thank you. And just on NIM again, in terms of the four basis point decline in loan yields that you saw, was that all driven just by the variable impact from, I mean, the impact from the variable rate loans in the quarter? Or did you see any incremental pressure on loan yields? Some of your peers have talked about some spread compression. Particularly on CRE. So just wanted to get some color. Thank you. Timothy S. Crane: I think your projection is correct. It's mostly the timing around the loan yields. But again, we've seen the market get more competitive for fully funded loans in some cases as people try to get loan growth. We've said we remain selective in terms of acquiring clients and loan opportunities that bring with them other business. And so we continue to feel good where we are in terms of going forward on loan yields and the ability to hold the margin. Operator: Our next question comes from the line of Jared Shaw of Barclays. Please go ahead, Jared. John Rao: Hi. This is John Rao on for Jared. Maybe just expanding a little bit more on the M&A side. Would there be any opportunities for nonbank M&A from you guys, like, in the insurance space or maybe in, like, fee-generating business, what would that look like if anything? Timothy S. Crane: Yeah, John. I mean, there could be. We've certainly acquired either businesses or branches or something other than whole banks at times. So we look at those. Just depends when they surface, if you will. And so it's hard to comment on anything specific, but we certainly would and have in the past looked at those. John Rao: Okay. Great. And then I guess, just maybe on the competitive environment, any change in the overall competitive landscape among, like, the larger banks, smaller banks, like private lenders, as we move throughout the year? Timothy S. Crane: Not materially. I mean, we certainly see private credit popping up some. And they occasionally will win deals that might have considered bank space in prior periods. But we continue to stay very disciplined in terms of how we underwrite credit, in terms of how we pursue business. And so if it gets a little tougher, we'll work a little harder. It's not an environment that we believe is an impediment at this point. John Rao: Okay. Great. Thanks for the rest of my questions have been asked. Operator: Thank you. Our next question comes from the line of Nicholas Joseph Holowko of UBS. Please go ahead, Nicholas. Nicholas Joseph Holowko: Hi. Good morning. Maybe just one for me and coming back to your ability to continue to gain deposit market share in your markets. Does your success there give you any incremental confidence to organically expand other nearby markets? Or is M&A the preferred way to go to new adjacent markets at this point? Timothy S. Crane: It would be situational, but we certainly feel like our track record supports organic growth opportunities. We'll continue to open locations and enter markets that we believe are important if we can't find acquisition opportunities. Rockford is a great example. In the Chicago area, we certainly have examples in Northwest Indiana as well, where we've done very well with newly opened facilities and teams of talented people. So yes, I mean, we think we're good at growing organically where we need to. It doesn't happen as fast, but we certainly wouldn't shy away from it. David Alan Dykstra: We certainly have done that our entire banking careers here at Wintrust as organic growth is the most preferable way to grow. And but Tim says it's not always as fast, but we certainly do it well. So we'll continue to do that. Nicholas Joseph Holowko: Got it. And then maybe just one on the competition from private credit. When you are coming up against private credit lenders and deals and I know it's important that you guys stay disciplined in terms of how you underwrite. Do you tend to see the biggest differentiation? Is it a function of price or structure? Anything in particular that stands out to you there? Thank you. Richard B. Murphy: Yeah. I would say not so much price, but really structure. And when you, you know, things like amortization, things like term, just covenant structure. Those are the things that typically we feel very strongly about and a private lender comes in and, you know, they have a covenant light deal or, you know, a deal that has, you know, nominal amortization. We're just probably going to have more problems with that. So those are the areas where I think we struggle more. Again, it doesn't mean that they're, you know, they're wrong, but, you know, it's just a risk appetite that's different from ours. Nicholas Joseph Holowko: Perfect. Thanks for taking my questions. Operator: I would now like to turn the conference back to Timothy S. Crane for closing remarks. Sir? Timothy S. Crane: Yes. Thank you, Latif. And for those of you on the phone, thank you for spending time with us this morning. We will see many of you before year-end in person, but for those we don't, best wishes for the upcoming holiday season for you and your families. And thank you for your interest in Wintrust. Have a good day. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Good afternoon. My name is Von, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Manhattan Associates Quarter 3 2025 Earnings Conference Call. As a reminder, ladies and gentlemen, this call is being recorded today, October 21, 2025. I would now like to introduce your host, Mr. Michael Bauer, Head of Investor Relations of Manhattan Associates. Mr. Bauer, you may begin your conference. Michael Bauer: ...will review our cautionary language and then turn the call over to our President and Chief Executive Officer, Eric Clark. During this call, including the Q&A session, we may make forward-looking statements regarding future events or Manhattan Associates future financial performance. We caution you that these forward-looking statements involve risks and uncertainties, are not guarantees of future performance, and actual results may differ materially from the projections contained in our forward-looking statements. I refer you to Manhattan Associates SEC reports for important factors that could cause actual results to differ materially from those in our projections, particularly our annual report on Form 10-K for fiscal year 2024 and the risk factor discussion in that report and any risk factor updates we provide in our subsequent Form 10-Qs. Please note that the turbulent global macro environment could impact our performance and cause actual results to differ materially from our projections. We are under no obligation to update these statements. In addition, our comments include certain non-GAAP financial measures to provide additional information to investors. We have reconciled all non-GAAP measures to related GAAP measures in accordance with SEC rules. You'll find reconciliation schedules in the Form 8-K we filed with the SEC earlier today and on our website at manh.com. Now I'll turn the call over to Eric. Eric Clark: Great. Thank you, Mike. Good afternoon, everyone, and thank you for joining us as we review our third quarter results, discuss our Q4 outlook and provide some color on our 2026 cloud revenue growth. Our Q3 results were better than expected as 21% cloud revenue growth drove our top line outperformance and earnings leverage. Also encouraging was our continued services revenue outperformance versus expectations. While the global macro environment remains volatile, our consistent execution throughout 2025 as well as our services backlog and pipeline all set the stage to get back to growth in services in 2026. RPO increased 23% year-over-year to $2.1 billion Win rates remained very strong at 70%, and we experienced strength selling to existing customers, highlighted by a meaningful sequential uptick in conversions and a growing pipeline of future conversion opportunities. However, like the year ago period, Q3 seasonality, coupled with general lumpiness of large deals, pressured net new logos, which were about 17% of our new cloud bookings in Q3, but still represent 50% of new cloud bookings year-to-date. Importantly, our 2025 year-to-date bookings performance is in line with our original projections and supports continued 20% subscription growth. And like the year ago period, Q4 is off to a solid start. In light of these factors, we expect to achieve toward the high end of our full year 2025 RPO outlook. As I stated in the past, Manhattan's business fundamentals are strong, and we are optimistic about our long-term opportunity. Our platform is superior and our product portfolio offers best-in-class functionality across the supply chain commerce ecosystem. This is driving solid pipeline, which provides our sales team with numerous opportunities to drive growth. Those opportunities include adding new customers, cross-selling our unified product portfolio and converting our on-premise customers to the cloud. At the end of the third quarter, new logos continue to represent approximately 35% of our pipeline. From a vertical perspective, our end markets are diverse, and we have a healthy established footprint across numerous subsectors, which include retail, grocery, food distribution, life sciences, industrial, technology, airlines, third-party logistics and more. For example, Q3 bookings included the following notable deals: the global developer, manufacturer and distributor of medical devices became a new logo active warehouse customer; a global top 10 retailer was a conversion from on-prem to active warehouse; a North American food distributor that was an existing active transportation and inventory customer expanded to include active warehouse and active one; a global developer, manufacturer and distributor of pharmaceuticals converted from on-prem to active warehouse; a food and beverage distributor converted from on-prem to active warehouse and at the same time, added our entire active portfolio, including active transportation, active omni and active supply chain planning; a leading telecommunications company became a new logo with active scale as well as a number of others. And while the timing of large deals and the mix of bookings will vary on a quarterly basis, we believe our bookings breadth from both new and existing customers over a broad set of industries and across our full product portfolio exemplifies our multiple opportunities for sustainable long-term growth. To successfully execute on these robust opportunities, we continue to strategically invest in our sales and marketing team and mature our go-to-market partnerships. I want to share several updates since our last call. First, we continue to add key sales talent to the team, including sales specialists in our newer products. Additionally, in Q3, we launched a dedicated renewal team led by a Manhattan veteran. This team brings consistency across all of our renewals to make sure we are maximizing the opportunity for cross-sell and expansion at the time of renewal. We also launched a conversion program. This enables us to take a more proactive and consultative approach to converting our on-prem customers to Manhattan Active. We've been very encouraged by the early results, including some early wins and significant pipeline growth for conversions. And this afternoon, we announced the addition of Greg Betz to the newly created position of Chief Operating Officer. Greg brings more than 2 decades of experience leading complex global organizations. He has a proven track record of operational excellence and strategic execution. Most recently, Greg led Microsoft's global cloud onboarding organization called FastTrack, a flagship program designed to accelerate customer conversions to Microsoft cloud solutions. In his new position here at Manhattan, Greg will play a key role in helping scale the operational frameworks around conversions and renewals as well as drive the next generation of our partner model across global SIs, Manhattan specialists and technology partners like Google and Shopify. I'm delighted to welcome Greg Betz to the team. So now I'll turn to some updates on our products. We are investing in Agentic AI across all of our Manhattan Active solutions, and we are focused on delivering high-impact use cases for key personas across our user community. Earlier this month, we made good on the promise that we made at momentum about being ready to roll out Agentic AI this fall. We're currently working with a number of strategic customers as part of an early access program focused on agent deployments. The applications covered as part of this early access program include warehouse, transportation, store and contact center. Our aim is to gather feedback, create additional capabilities and roll out to multiple groups of early access customers throughout this quarter. We will move to general availability for this initial set of agents in early 2026. So I'd like to share a couple of examples of the value that our initial set of agents are already providing. In Active Warehouse, we have embedded agents into the workflow that monitor operational performance in real time and make high-impact recommendations to key user -- to make key users more productive. This includes areas like wave planning, which drives all of the outbound activity within a DC. Our wave agent empowers DC super users to ensure that orders are being allocated effectively and turned into tasks and that those tasks are being released reliably and completed on the DC floor. In Active Transportation, we have created freight audit and pay agents. By automating the induction and payment of freight bills, our agents increase efficiency, speed and accuracy while reducing or even removing the need for human involvement. And remember, all of this is executed within our unified cloud native API-first platform, embedding AI agents into the workflow to make people more productive; no data lakes, no latency, deployed in minutes, not months and creating value for our customers in real time. Another announcement that we made at momentum was the launch of the new product, Enterprise Promise & Fulfill. EPF Is designed to work seamlessly with leading ERPs like SAP to help our customers add agility and responsiveness to their supply chains. With EPF, we help our customers monetize their inventory more effectively by helping them sell to anyone and fulfill from anywhere. And we improve the end customer experience by providing transparency and flexibility throughout the fulfillment process. We already have a number of customers live with EPF, and we've signed some substantial new deals recently, including one of the large global 3PLs. As our wholesale customers continue to find growth through acquisition and industry consolidation, they're faced with increasingly complex and fragmented fulfillment networks. Their ability to maximize their value of acquisitions is in part on their ability to hide this network complexity and instead to present a simple interface to their sales force, and EPF helps them do just that. EPF also serves another important purpose for us. It provides a natural bridge between our supply chain planning and supply chain execution solutions, particularly outside of retail. The combination of planning and EPF serves as a nexus of network inventory and facilitates the forecasting, procurement, promising and selling of that inventory across the widest possible market. And speaking of supply chain planning, we continue to make progress in this exciting new focus area for us. Our message around unifying planning and execution is absolutely resonating and is helping us find our way into deals that we weren't seeing just a year ago. The cloud native architecture, which underpins the Manhattan Active platform allows us to unlock use cases that vendors focused only on planning simply can't match. We now have our first customer live on supply chain planning, a U.S.-based retailer with over 700 stores. This customer also runs active warehouse and active transportation. A number of the other customers that we have going live in the next few months also run other Manhattan Active products, reflecting the strength of the cross-sell potential. We also continue to hire planning talent aggressively into our engineering teams, allowing us to make rapid progress on building out both core planning capabilities as well as differentiating unification features across planning and execution. So that concludes my product update. And before I hand it off to Dennis, I'd like to share that as we indicated last quarter, our Chairman, Eddie Capel, will be completing his transition away from any remaining executive management responsibilities as of January 1 and will continue in his role as Chairman of the Board. And with that, Dennis will provide you with an update on our financial performance and outlook, and then I'll close our prepared remarks before we open it up to Q&A. So Dennis, over to you. Dennis Story: Thanks, Eric. Our Manhattan global teams continue to execute well in a challenging macro environment. For the quarter, we delivered a better-than-expected financial performance on the top and bottom lines as our reported results returned to the exceeding the Rule of 40, and we continue to generate solid free cash flow. Regarding FX, in Q3, it was a 1 point tailwind to year-over-year total revenue growth but did not have a material impact on year-to-date revenue growth. FX was a $2 million headwind to potential -- or sequential RPO growth and a $7 million tailwind to year-over-year RPO growth. Now turning to our Q3 results. Our growth rates are reported on a year-over-year basis, unless otherwise stated. For the quarter, total revenue was $276 million, up 3% excluding license and maintenance revenue, which removes the compression driven by our cloud transition, our total revenue was up 7%. Cloud revenue increased 21% to $105 million and was slightly better than expected. Services revenue declined 3% to $133 million, driving the better-than-expected performance with solid execution and timing of about $2 million of service revenue shifting to Q3 from Q4. As previously discussed, the year-over-year decline in services revenue reflects customary budgetary constraints that shifted services work to future periods. We ended Q3 with RPO of $2.1 billion, up 23% compared to the prior year and 3% sequentially. As Eric discussed, and like the year-ago period, our bookings were impacted by the lumpiness of large deals and Q3 seasonality. Importantly, Manhattan's demand remains robust, win rates are strong and our year-to-date bookings performance has accelerated compared to the year ago period. Again, in light of these factors, we expect to achieve towards the high end of our 2025 RPO outlook ex FX, despite the ongoing macro uncertainty. Our average contract duration remains at 5.5 to 6 years. And as previously discussed, some customers are electing longer ramp time lines. While our customer contracts are noncancelable, we believe the current macro environment has resulted in some customers taking a more conservative approach to the implementation time line of their contracts. Accordingly, we expect 38% of RPO to be recognized as revenue over the next 24 months. As we've previously stated, our teams are focused on accelerating the adoption of our products, and this will be one of the key areas of focus for our newly appointed CEO, Greg Betz. Also remember, our contracts always allow customers to amend their time line for quicker deployments, but not slower ones. Adjusted operating profit was $103 million with an adjusted operating margin of 37.5%. This is up about 40 basis points year-over-year and nicely ahead of plan. Our performance was driven by strong cloud revenue growth, combined with operating leverage as our cloud business continues to scale. Turning to our earnings per share. We delivered Q3 adjusted earnings per share of $1.36, up 1% and GAAP EPS of $0.96, down 7%. As discussed last quarter, our higher tax rate is due to an increase in tax reserves caused by the acceleration of our domestic R&D cost deductions under the July 4 U.S. tax law change. As such, this change will also lower our cash taxes paid and benefited Q3 operating cash flow by approximately $20 million and will likely benefit Q4 operating cash flow by about $15 million. So moving to cash. Operating cash flow increased 9% to $93 million. Removing the benefit from the U.S. tax law change, operating cash flow increased about 18%. As reported, this resulted in a 32% free cash flow margin and a 38% adjusted EBITDA margin. Year-to-date, our operating cash flow is up 27% to $242 million. Regarding the balance sheet, deferred revenue increased 17% to $297 million. We ended the quarter with $264 million in cash and 0 debt. In the quarter, we leveraged our strong cash position and invested $50 million in share repurchases, resulting in $200 million in buybacks year-to-date. Additionally, our Board has approved the replenishment of our $100 million share repurchase authority. Now on to our updated 2025 guidance. Our long-term and long-standing financial objective is to deliver sustainable double-digit top line growth and top quartile operating margins benchmarked against enterprise software comps. These are drivers to our best-in-class return on invested capital as we maintain a balanced investment approach to growth and profitability. As noted on prior earnings calls, our goal is to update our RPO outlook on an annual basis. Year-to-date, FX has been about a $40 million tailwind to RPO and removing this impact, we expect to achieve towards the high end of our guidance. Additionally, as previously discussed, our bookings performance is impacted by the number and relative value of large deals we close in any quarter, which can potentially cause lumpiness or nonlinear bookings throughout the year. This was evidenced by our Q3 performance and our expectations of a strong conclusion of the year. As discussed earlier on this call, the macro environment remains uncertain, while clarity on external variables remains limited. Given our strong year-to-date performance, we are raising our full year total revenue, operating margin and EPS outlooks. This guidance is also provided in our earnings release. With that, for RPO, we continue to target $2.11 billion to $2.15 billion, excluding FX movements. For total revenue, we expect $1.03 billion to $1.077 billion, with a $1.075 billion midpoint comparing favorably to our prior outlook due to our year-to-date outperformance. For adjusted operating margin, we are increasing the midpoint to 35.6% from our prior midpoint of 35%, while increasing investment in our business. Our full year adjusted earnings per share midpoint is increasing $0.16 to $4.96 and while our GAAP earnings per share midpoint increases $0.17 to $3.44. This implies Q4 total revenue of $264 million, which is $3 million lower than our prior Q4 midpoint as we now anticipate $1 million less of hardware revenue and as previously discussed, the timing of $2 million of services revenue that shifted to Q3 from Q4. This results in our adjusted operating margin target of 33% and earnings per share of $1.11. Now moving to our 2026 preliminary parameters. To be better aligned with our software peers and to provide adequate time for calendar budget cycles to firm up, going forward, we intend to provide our initial annual guidance that will continue to include all the familiar line item transparency on our Q4 call. Otherwise, our philosophy towards guidance remains unchanged and given our visibility, we continue to expect 20% cloud revenue growth in 2026. And as Eric previously highlighted, we also expect services to grow in 2026. Additionally, with initiatives now in place to drive migration of our maintenance paying customers to cloud, we anticipate maintenance attrition will begin to accelerate next year. Removing the impacts of license and maintenance attrition, we expect our adjusted operating margin to expand between 50 to 75 basis points, which is in line with our historical approach to margin expansion while also increasing investment in our business, particularly in sales and marketing. And finally, while the global macroeconomic environment remains volatile, and we are in the very early stages of our 2026 budget cycle, we believe consensus 2026 estimates are generally appropriate. In summary, solid year-to-date execution by the Manhattan team globally, and we are looking forward to ending the year strong. Thank you, and back to Eric with some closing remarks. Eric Clark: Great. Thank you, Dennis. We are pleased with our Q3 and year-to-date financial results. And while we had to navigate some seasonality in Q3, we expect to achieve towards the high end of our RPO goals in 2025 and grow cloud revenue 20% in 2026. We're optimistic about our expanding market opportunity, and we're making strategic investments to accelerate our growth initiative to drive new logos our unified product portfolio and convert our on-premise customers to the cloud. And with that, thank you to everyone for joining the call, and thank you to the Manhattan team for their dedication to our customers. And that concludes our prepared remarks, and we'd be happy to take any questions. Operator: [Operator Instructions] Our first question comes from Terry Tillman from Truist Securities. Terrell Tillman: I had 2 questions. There's a lot of investor focus on RPO, a lot of interest in the story in general, but in particular, I know you're not giving any perspective for next year, but can you just share a little bit more on maybe your level of optimism about RPO levels and just visibility into that potential metric as we move into '26 and beyond because there's a lot of things going on here. You're going to get renewals based next year, potential cross-selling, conversions, et cetera. Just anything at least qualitatively, you could share more around RPO as you think going forward and just optimism there? And then I have a follow-up. Eric Clark: Sure. So when you look at the third quarter RPO, if you normalize the year-ago period for FX, it's actually double-digit growth of RPO in third quarter, and that's also a 23% increase year-over-year. When you look forward to fourth quarter and next year, I think one of the things that gives us a lot of clarity and a lot of optimism in where we expect to be with RPO next year is the renewal cycle. And you mentioned that, and it's something that we've talked about before. If you think about the way we talk about current RPO, keep in mind, current RPO is 24 months. we've got a major renewal cycle coming over the next 18 months, and those are some big warehouse management customers that current RPO is dwindling down to 0 until we renew and then it gets kind of re-upped at a larger scale than it was before. So having visibility to that renewal cycle and visibility to what we've got in the pipeline is what gives us that confidence. Terrell Tillman: That's great. I felt like I always like hearing about the customer examples and the diversity for the new deals. I heard more this quarter felt like on conversions, but I'd just like to unpack a little bit more on some of your conversion strategies and unlocking the on-prem customer base and getting them to move to cloud. So kind of related to that, how are you thinking about the mix of cloud for your WMS customer base maybe ending this year and as we look out over the next couple of years, how do you see it trending? Eric Clark: Yes. So thanks for the question, Terry. We're pretty excited about the early success around conversions. So I stated a quarter ago that we were going to take a more proactive and a more consultative approach to conversions. Our theory historically has been our customers will convert when they're ready. And we've had more focus on going out and taking share from our competitors as opposed to converting our on-prem to the cloud. And as I stated before, we haven't lost any on-prem customers to anybody else's cloud. So we've had success in letting them convert when they're ready to convert. However, as the most recent versions of our on-prem software get older and older, the opportunity that is in front of these customers with the new version of our cloud is getting bigger and bigger. And the gap between those on-prem versions is getting bigger and bigger. And bringing in a genetic AI is going to make that change even faster. So we've taken, as I mentioned, a more consultative approach, gone out to a first cohort of customers, which we identified about 100 customers that were similar. They're all warehouse customers. They're all similar size running a similar number of warehouses. So we had confidence to go out to them and offer them fixed fee, fixed time line conversion to Active Warehouse. And we were very pleased by the pickup rate and the number of customers that were ready to have that conversation quickly once they learned more about it. So that very quickly turned into about 30 new pipeline deals for us. And we saw deal closing in Q3. We've got more expected to close in Q4, and it's given a whole lot of energy around our conversion pipeline which, as you know, creates cloud revenue and creates services revenue. So in Q4, we will take that to additional cohorts from warehouse management. We're also taking it to a cohort around transportation management. And we're even using a similar theory to go after some of our customers that may be behind in their DC rollouts and offer them faster ways and fixed fee ways to get back on track with our DC rollout. So lot of excitement in the building here around what that's driving for us. Terrell Tillman: Good luck in the 4Q. Operator: [Operator Instructions] Our next question will be from Brian Peterson from Raymond James. . Brian Peterson: So Eric, you talked about the fourth quarter was off to a pretty strong start in terms of RPO or bookings. Is there any additional color that you could add to that? And maybe how did that fourth quarter look so far this year versus what you saw in the fourth quarter of last year at this point in the year? Eric Clark: I think in any software business, the linearity typically is towards month 3 in a quarter. But sometimes when you have deals push into the next quarter and slip into the next quarter, that gets you off to a quicker start. Compared to a year ago, we experienced some of that. A year ago, we had a lower bookings Q3, similar to this year. And I think what you saw from us last year is we came back with a very strong Q4, and we expect to do something similar to that this year. Brian Peterson: Understood. And Greg looks like a very impressive hire. I just want to understand from your perspective, Eric, where do you see him coming in and helping you guys as you think about the growth story going forward? Eric Clark: Yes. So I think I mentioned getting him involved in some of our programs around conversions and renewals, strengthening, maturing our partner ecosystem. A lot of things that he's going to be focused on are about building pipeline from both existing customers and new logos faster. And I think, as I've talked about before, we've already got a lot of programs in place there, but I think we've got some low-hanging fruit where he can come in and make a difference pretty quickly. Operator: Our next question comes from Joe Vruwink from Baird. Joseph Vruwink: Great. On the fixed fee and time conversion strategy, can you maybe address the risk factor associated with this approach? I guess are you able to share with customers? Obviously, if you're kind of commonizing the cohort, you probably have a pretty good experience to say that when an implementation remains in scope without change orders. They have been finishing on time and on budget? Is that kind of the approach here? And how do you think about the risk Manhattan takes on in this strategy? Eric Clark: Yes. So it's really about repeatability and similarity. So as you mentioned, this cohort of customers has a lot of things that are very similar. And because they're running our software that we deployed. We know exactly what their extensions are. We know how many warehouses they have. So there's not a whole lot of surprise there for us. So we can be pretty confident in what it takes. The other thing that plays into that is as we build more and more automation and leverage AI in our conversions and deployments, we want to monetize that. So over time, I think you'll see us doing more fixed fee across everything that we're doing, just to make sure that we can monetize what we've built and monetize some of the acceleration that we've created. And that allows us to hold our margins. Joseph Vruwink: Sure. No, that's important. I want to be clear, is the biggest change -- because you're talking when you alluded to how 2026 might look, the 2026 sub growth, the return to growth in services, margin expansion, I mean a lot of that at kind of a higher level, I suppose, is what you have been saying. Is that kind of the key message here is that you're not making kind of the explicit ranges that you normally give in preliminary commentary but generally speaking, things are tracking to what you thought about 2026? Eric Clark: Yes, that's right. And we're comfortable that the contents that's out there is in the right ballpark, and we'll give clear guidance on the next call. Operator: Our next question comes from Chris Quintero from Morgan Stanley. Christopher Quintero: I want to kind of -- similar to Terry's question, but from the services angle. Just curious how would you kind of describe it from a qualitative perspective in terms of the momentum as we head into '26. I know it's still early, but just curious at a high level, any qualitative commentary? Because there's a lot of stuff going on there, right? You're moving to more of a fixed fee. You're spending of some of these implementation time lines, but you also have a huge on-premise space that you're trying to move over. So just kind of curious at a high level, how would you kind of describe that qualitatively? Eric Clark: Yes. So throughout this year, we've seen the services pipeline continue to strengthen. The backlog continue to strengthen. So we are optimistic about how that's building, and we feel like we're in a good place where we are right now in Q4 and feel like we're going to be in a better place as we go into next year. And again, you look at where we are year-to-date growth on RPO, we're still expecting to hit the high end of the guidance on full year exceeding our financial numbers in Q3 and year-to-date. So we're pleased with where we are and the business continues to operate well and perform well. Christopher Quintero: Got it. Super helpful. And then as you were kind of talking through some of the customer examples from the quarter, I was really struck by the food and beverage customer that converted and added the entire active portfolio. So just curious if there are any kind of lessons from that conversion? And how applicable could this be to the rest of the base? Eric Clark: Yes. So the examples I gave this quarter, heavy dose of conversions and a heavy dose of cross-sell, and that one had both. So I think the message there is this unification story is truly resonating. I mentioned that one of the big takeaways from our Momentum conference in May is we had a lot of customers that said, A year ago, it was a great story, but now we've seen that it's real, and we've got to get on board. And once they realize that, it takes a bit of time for it to start happening, but it's happening. And we see it in the pipeline and we saw it in the results in Q3. Operator: Our next question comes from Dylan Becker from William Blair. . Dylan Becker: Appreciate it. And maybe for Eric, starting out here, we talked about kind of structure and maybe some mechanization of a handful of processes around conversions, renewals. We've talked about partners in the past. All of that kind of ties into growing capacity in backlog kind of evidence in the RPO and bookings commentary maybe but how are you thinking about scaling the kind of SI ecosystem to help kind of match the capacity side of the equation relative to what feels like a pretty healthy backlog and growth from a demand perspective as things shape up into 2026? Eric Clark: Yes. So we've started having those conversations with our SI partners. In fact, we had one of them here in the office all day today. And they're pretty excited about where we're headed as well. I think some of the changes that we're making really put us, our partner program more similar to what they're used to with ServiceNow or Salesforce where they've got more clear expectations of how we're going to support them and then grow their business but also more clear expectations about what we expect from them in terms of bringing us opportunities and bringing us deals and then having us help them win those deals together. So I think building that clarity and that trust. The other thing that we did is Greg Betz will be taking over our training education certification team, which will make it more easily available for our partners and will give us a better opportunity to build that ecosystem of certified consultants out in the market. and also measure our partners on how many certified consultants they've got by product to make sure that they're building their teams the way that we need and expect them to. Dylan Becker: Okay. That's very helpful. And then maybe you entered at obviously foundry at the conference and the opportunity for AI and agents, maybe some early use cases, more GA deployments expected here in 2026. But could you talk or expand on some of the kind of the receptivity and use cases you're seeing from customers, maybe to what extent that's serving as an additional carat on this accelerated kind of conversion opportunity? You called out several examples around kind of unification, it feels like, to get full platform value, obviously, adopt more and lean into the Agentic approach, but we're wondering if that's resonating in conversations. Eric Clark: Yes. So thanks for that. And short answer is yes. It's resonating very well. And in fact, as the word has gotten out in the Manhattan community that we have some early access customers out there, I've been in a few conversations with customers where they've told me, "Hey, I thought I was one of your best customers. How come I'm not in the early access program?" so we've had to let some more in, and we've continued to have waves of customers getting into the early access program. And the feedback has been quite positive and very encouraging. In fact, the transportation example that I gave earlier, one of our customers even asked if they could extend that across the part of transportation that isn't on Manhattan yet and use that agent across their entire transportation network. So we're exploring that option with them as well because while it is in their plan to move Manhattan across their entire transportation network. If we can get our agents out there in advance, that gives us an opportunity to help them move even faster across that domain. Operator: Our next question comes from Parker Lane with Stifel. Jeffrey Parker Lane: Eric, you talked about the new dedicated renewal team and the over program, obviously, added Greg Betz here this afternoon. How should we think about the investments you're making in sales and marketing around this. This a lot of people that have been shifted into these new teams or initiatives is there some incremental step-up in investments that you're making? Eric Clark: Yes. So definitely incremental step-up in investment, but it's also a mix of leveraging Manhattan veterans to make sure that we've got some of that knowledge on board as well. So I mentioned that our new dedicated renewal team is led by a Manhattan veteran. Jon Liberman has been with the company 27 years, knows this company inside and out. And we've built a team around him of people that have been in the company as well as people from outside the company that have experience in renewal Greg Betz is another example of bringing in somebody from Microsoft that's been very focused on conversions and getting customers to not only convert but expand within the Microsoft cloud platform. So all of those concepts are things where we want to have a combination of outside knowledge and skills and ideas with all of the deep knowledge that we've got here at Manhattan. One of the things that we take pride in at Manhattan is the longevity of this team, and we want to make sure that we take advantage of that as well. I don't think any of our competitors can put together that mix of longevity with new skills like we can. Jeffrey Parker Lane: Got it. One follow-up on a comment you made earlier about working with customers that are a little bit behind on DC rollout. Is that primarily something that's related to services in budget unlock inside of them? Or are there other commonalities that you find in that cohort that you can work on to get them to go on? Eric Clark: Really, it's a mix. There are some cases where maybe they've gotten -- the customer has gotten focused on something else and haven't been as focused on getting all of their warehouses rolled out. So it's really kind of I would say, similar to -- I mentioned earlier about conversions. We've always taken the approach of, they'll come to us when they're ready. There's been a little bit of that with DCs as well. Maybe we'll -- when we sell the new deal, it includes the first 5 warehouses and we get those done and then we move on to the next customer, and we don't go ask them about 6 through 15. So now we're doing that. And we're taking a more proactive consultative approach to make sure they get everything deployed. Operator: Our next question comes from George Kurosawa from Citi. George Michael Kurosawa: I wanted to ask about the services upside in the quarter. It was nice to see the stabilization there. Maybe you should unpack the drivers of that upside? And maybe that it seemed like the $2 million pulled from Q4 into Q3. Was that a function of maybe resume projects that have been maybe paused or slowed a bit earlier in the year? Or was there some other dynamic at play there? Eric Clark: Yes. Thank you. So I think, first and foremost, the services team continues to execute at a very high level. And some of that, what you saw Q4 being pulled into Q3 as a result of that. They're executing at a high level and they're finding the opportunity to bring things quicker, and we've got happy customers that want to move faster. So we'll continue to look for opportunities. And I mentioned earlier, we've got a building pipeline and a building backlog in services, which gives us a whole lot of optimism going into 2026. George Michael Kurosawa: Okay. Great. Great. And then you referenced some of the hiring you're doing on the go-to-market side. Maybe you could just give some color on how that's going relative to your plan and what the initial productivity ramp looks like for those new is? Eric Clark: Yes. So I mentioned last quarter, we had brought in new leaders for both TMS and POS. We also brought in a strategic selling leader. All of those leaders are building out their teams and continue to bring in talent. I've kind of described it as a little bit of a snowball effect. We start to bring in talent that is well known in the market, and that talent attracts more talent. And you kind of go from recruiting talent to deciding which ones you want to bring in because everybody wants to join. So we're kind of in a luxury right now where we've got kind of a great pipeline of very strong candidates coming in, and we continue to bring them in at what we think is the right pace so that we can continue to get people effective very quickly, not have too many coming in at one time, but we'll continue to have a steady growth of our sales team across the next several quarters. Dennis Story: George, we continue -- we also continue to drive solid margins in terms of the investment that Eric is talking about. So very strong operating margins. . Operator: Our next question comes from Guy Hardwick from Barclays. Guy Hardwick: Eric, I was wondering if you could -- I know you touched on this in the last quarter, but whether you could expand a little bit more on the impact of genic AI both externally and internally, maybe starting internally. I mean the R&D to sales ratio is still rising as you're investing. But at what point will we potentially see some leverage on R&D from agentic AI and then also externally in terms of incremental revenues. And I know the model may have to be different for agentic AI than the SaaS model, but perhaps you could expand a little bit on that? Eric Clark: So internally, we are absolutely seeing leverage from Agentic AI right now and not just in R&D, but across just about every department within the company. I would say, specifically in R&D, and I mentioned this last quarter as well, we've taken the approach, while you've seen some companies in the market talk about big layoffs because of Agentic AI. We've taken a different approach and that is we're doing a whole lot more by leveraging Agentic AI. So we continue to add talent to the company, and we continue to hire. But every quarter as we do our quarterly releases on all of our products, we have more and more features each quarter. So we're making the gap between us and the competition, bigger and bigger every quarter. making it harder and harder for anybody else to be able to compete with us. So that's internal. And then external, as I mentioned, we're really excited about what we've got with Agentic AI. We've got a lot of customers that are excited about it. I think what's truly unique about what we have with Agentic AI in our platform is because our team has stuck to this model of truly cloud-native microservice API first, we don't have to be talking about data lakes. And we don't have to be talking about latency. We don't have to have discussions about increased security because you're moving data somewhere else and then you've got to take an action to move it back into the core system. Everything, all of our agent AI can be done eternity our platform, which allows us to deploy agents in minutes, not months. and allows our customers to take advantage of it right away. All of those things resonate very, very well with our customers. When they're having conversations with lots of software partners about how to take advantage of AI. It's a very different conversation with us that they like. So that's going to create a lot of opportunities for us to truly own and control the domain around supply chain when it comes to Agentic AI. Now from a revenue perspective, we've taken a very conservative approach. We're just getting into this. And we want to work through it with our customers and see what this is going to look like before we start to talk about how much revenue growth it's going to do for us, again, different than some of the other players in the software space. Guy Hardwick: And just a quick follow-up for Dennis. Just to be clear, the RPO guidance of $2.11 billion to $2.15 billion excludes FX? So on a reported basis, it could be a lot higher than that, including FX? Dennis Story: Yes. Absolutely. Operator: Our next question comes from Mark Schappel from Loop Capital Markets. Mark Schappel: Eric, it was good to hear the call out on the supply chain planning win as part of the larger deals. I was wondering if you could just provide some additional color on where the relatively new application stands with respect to, say, reference customers built out to date? And also, too, if you could just maybe touch on where you would like to see that product by the end of next year 2026? Eric Clark: Yes. So as I've said on the past couple of calls, we're ahead of schedule in terms of customers and pipeline. And I think one thing that's been, I guess, expected is that it's a great unification play. Customers that are using warehouse and transportation, it's a natural add-on maybe the thing that was a little less expected, but very positive for us. is we're also seeing customers look at supply chain planning as an entry point to -- as the first product that they bought for Manhattan or the first active products that they've used. So that's very encouraging for us. The pipeline is, again, in good shape and ahead of where we expected it to be. So I don't have a number in mind of where it needs to be at the end of next year. But if you look at all of our products as we've launched them, how they've grown, we're very pleased with where this one is. Mark Schappel: Great. And then shifting over to point-of-sale, not much discussion around point of sale this quarter. I was wondering if you could just maybe spell out some of the challenges that you face in that business right now? Eric Clark: Well, point-of-sale is a pretty exciting place to be. So I did mention in my kind of list of new deals. I talked about Omni, which includes point of sale. So we do have some new point of sale in there. And if you look purely at point-of-sale transactions, which is how we charge for point of sale based on transactions, were up over Q3, up over 80% year-over-year. So that's a combination of our point-of-sale customers continuing to add new stores, store growth, as well as more transactions in the stores and more registers and putting our point-of-sale product into more places. So yes, I think point-of-sale is one of those gifts that keeps on giving. And as we see our retail customers grow, we're growing right along with them. So Q3, up 80% year-over-year. We're pretty excited about the retail season and peak coming up here in Q4. Operator: Our next question comes from Lachlan Brown from Rothschild & Co. Lachlan Brown: Could you talk to the feedback that you've had from the early access program on Agentic AI? And how should we think about the gross margin impact from these solutions? I guess some of your peers have pointed to a level of dilution given the high cost to compute. Should we expect something similar here? Or is the intention to preserve those margins within the cloud solutions? Eric Clark: Absolutely, intention is to preserve our margins. So we are not expecting any dilution there. We haven't shared our pricing. In the early access program, we're still working with customers and finalizing how we're going to price this, and that's another part of the reason that we haven't really talked about revenue impact. But when we in our Q4 call a quarter from now, we'll have more information on how we're going to price and what we expect in that area. But I think you can be very confident that for us, this is about revenue growth and margin expansion. Lachlan Brown: That's clear. And with new... Eric Clark: Sorry, I didn't -- sorry, I didn't answer your full question. You also asked me the feedback we're getting. I think that the key piece of the feedback is A lot of these customers in the early access program because they've talked with other partners, software players about this. They thought the early access program was going to be months of deployment. What does it take? How long does it take? So I think a big surprise to how quickly we can turn these on because we truly have the standard platform, our standard agents can be turned on and use the same day. So a lot of excitement around that. And then also, the second piece that I would say that's pretty consistent is, okay, we can do all of this just by turning on standard agents. What if I can go build one that does this for my unique process and just getting people starting to think about what else they can do, and that's the whole point of the foundry. We can turn on the standard agents right away, but we've also got the ability to build custom agents for you or we've also given you the ability to build your own custom agents or have a partner build your custom agents. Lachlan Brown: I appreciate a good level of color. With logos being 35% of the pipeline, I might have thought that existing customer expansion would have started to become a greater proportion, just given the stronger renewal cycle that's anticipated to come up next year or over the next 18 months. When would you anticipate cohort to come into the pipeline? And could you remind me how long does it typically take for a customer in the pipeline to convert to a booking? Eric Clark: Yes. So first of all, when we talk about 35% we're talking about 35% of our new cloud pipeline. So that does not include renewals. So renewals is a separate pipeline. And when it comes to how long does it take to convert Obviously, renewals and conversions and cross-sell are much quicker than new logo. The new logo pipeline, this is not a 3-month sale for the most part. These are typically multiple quarter sales cycles. And then once we do sell, it varies by product. I would say on 1 in POS, we can roll out very, very quickly. And warehouse, as was mentioned in some of the prepared remarks in the beginning, we do have customers that take conservative approaches to the deployment of warehouses and can do that over quite some period of time. But again, all the focus that we've put around automation and leveraging AI in the deployments and accelerating that makes it faster, easier and more economical for them to move faster because the faster they deploy, the faster they achieve the ROI. Operator: This now concludes our question-and-answer session. I would like to turn the floor back over to Eric Clark for closing comments. Eric Clark: Yes. Thank you all for joining. I appreciate all the questions. I guess I would close by saying we're very pleased with where we are. Strong fundamentals back to exceeding the Rule of 40 and free cash flow margin of 32%. We're making the investments that we feel very confident are going to continue to drive the business in the right way. and again, confidence in hitting towards the high end of our RPO guidance for this year and very optimistic about 2026. So thank you all. Operator: Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. Please disconnect your lines, and have a wonderful day.
Mike Beckman: Welcome to the Texas Instruments Third Quarter 2025 Earnings Conference Call. I'm Mike Beckman, Head of Investor Relations, and I'm joined by our Chief Executive Officer, Haviv Ilan, and our Chief Financial Officer, Rafael R. Lizardi. For any of you who missed the release, you can find it on our website at ti.com/ir. This call is being broadcast live over the web and can be accessed through our website. In addition, today's call is being recorded and will be available via replay on our website. This call will include forward-looking statements that involve risks and uncertainties that could cause Texas Instruments' results to differ materially from management's current expectations. We encourage you to review the notice regarding forward-looking statements contained in the earnings release published today as well as Texas Instruments' most recent SEC filings for a more complete description. You likely saw last week we announced that the board of directors has elected Haviv Ilan as chairman of the board beginning January 2026. Haviv succeeds Rich Templeton, who will retire as chairman after a 45-year career with Texas Instruments. I'm sure you will join me in congratulating them both. Today, we'll provide the following updates. First, Haviv will start with a quick overview of the quarter. Next, he will provide insight into third-quarter revenue results with some details on what we are seeing with respect to our end markets. Lastly, Rafael will cover the financial results, give an update on capital management, as well as share the guidance for the fourth quarter of 2025. With that, let me turn it over to Haviv. Haviv Ilan: Thanks, Mike. I'll start with a quick overview of the third quarter. Revenue came in about as expected at $4.7 billion, an increase of 7% sequentially and an increase of 14% year over year. Analog and embedded both grew year on year and sequentially. Analog revenue grew 16% year over year, and embedded processing grew 9%. Our other segment grew 11% from the year-ago quarter. Let me provide a few comments about the current market environment. The overall semiconductor market recovery is continuing, though at a slower pace than prior upturns, likely related to the broader macroeconomic dynamics and overall uncertainty. That said, customer inventories remain at low levels, and their inventory depletion appears to be behind us. We are well-positioned with capacity and inventory and have flexibility to support a range of scenarios. Now I'll share some additional insights into third-quarter revenue by end market. First, the industrial market increased about 25% year on year and was up low single digits sequentially following a strong result in the second quarter. The automotive market increased upper single digits year on year and around 10% sequentially, with growth across all regions. Personal electronics grew low single digits year on year and grew upper single digits sequentially. Enterprise systems grew about 35% year on year and grew about 20% sequentially. And lastly, communications equipment grew about 45% year on year and was up about 10% sequentially. With that, let me turn it over to Rafael to review profitability and capital management. Rafael R. Lizardi: Thanks, Haviv, and good afternoon, everyone. As Haviv mentioned, third-quarter revenue was $4.7 billion. Gross profit in the quarter was $2.7 billion or 57% of revenue. Sequentially, gross profit margin decreased 50 basis points. Operating expenses in the quarter were $975 million, up 6% from a year ago and about as expected. On a trailing twelve-month basis, operating expenses were $3.9 billion, or 23% of revenue. Operating profit was $1.7 billion in the quarter, or 35% of revenue, and was up 7% from the year-ago quarter. Income in the quarter was $1.4 billion or $1.48 per share. Earnings per share included a $0.10 reduction not in our original guidance. This includes $0.08 of restructuring charges related to efforts to drive operational efficiencies to support our long-term strategy, including the plant closures of our last 250-millimeter fabs. Let me now comment on our capital management results. Starting with our cash generation, cash flow from operations was $2.2 billion in the quarter, and $6.9 billion on a trailing twelve-month basis. Capital expenditures were $1.2 billion in the quarter, and $4.8 billion over the last twelve months. Free cash flow on a trailing twelve-month basis was $2.4 billion. This includes $637 million of CHIPS Act incentives, including a $75 million payment received in the third quarter related to the direct funding agreement. In the quarter, we paid $1.2 billion in dividends and repurchased $190 million of our stock. In September, we announced we would increase our dividend by 4%, marking our twenty-second consecutive year of dividend increases. This reflects our continued commitment to return free cash flow to our owners over time. In total, we returned $6.6 billion to our owners in the past twelve months. Our balance sheet remains strong with $5.2 billion of cash and short-term investments at the end of the third quarter. Total debt outstanding is $14 billion with a weighted average coupon of 4%. Inventory at the end of the quarter was $4.8 billion, up $17 million from the prior quarter, and days were 215, down sixteen days sequentially. We have executed well on building an inventory position, which we believe will allow us to consistently deliver high levels of customer service. Turning to our outlook for the fourth quarter, we expect Texas Instruments' revenue in the range of $4.22 billion to $4.58 billion and earnings per share to be in the range of $1.13 to $1.39. Our fourth-quarter outlook includes changes related to the new U.S. Tax legislation and now assumes an effective tax rate of about 13%. In addition, expect our effective tax rate in 2026 to be about 13 to 14%. In closing, we will stay focused in the areas that add value in the long term. We continue to invest in our competitive advantages, which are manufacturing and technology, a broad product portfolio, reach of our channels, and diverse and long-lived positions. We will continue to strengthen these advantages through disciplined capital allocation and by focusing on the best opportunities, which we believe will enable us to continue to deliver free cash flow per share growth over the long term. With that, let me turn it back to Mike. Mike Beckman: Thanks, Rafael. Operator, you can now open the line for questions. In order to provide as many of you as possible an opportunity to ask your questions, please limit yourself to a single question. Afterward, we'll provide you an opportunity for an additional follow-up. Operator? Operator: Thank you. Mike Beckman: We will now be conducting a question and answer session. Operator: If you would like to ask a question, please press 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press 2 to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. One moment, please, while we poll for questions. Our first question comes from the line of Timothy Arcuri with UBS. Please proceed with your question. Timothy Arcuri: Thanks a lot. Haviv, I'm wondering if you can talk about the linearity of bookings through the quarter. I know, in the June quarter, things had softened throughout the quarter, but this quarter, it seemed like things got a little better as you move through the quarter. So can you talk about that as you sort head into see Q4? Haviv Ilan: Yes. I'll give some high-level comments, and I please add anything with more details. Yeah, this quarter was kind of came in as expected and nothing not similar to what we saw in Q2. It was a little bit hectic with, you know, tensions related to trade and tariffs. We a lot of change through the quarter. This was more of as expected quarter through the quarter in July, August, and September. And Mike, anything to add on that one? We we had talked about, you know, the turns portion of the business had kinda started out strong at the beginning of second and had moderated near the end. We didn't see that same behavior again. And and third, it really you know, that portion kinda followed what you'd expect to see in a kind of a cyclical recovery that we're saw in third. Do you have a follow-up? Timothy Arcuri: I do. Yeah. Ross, I wanted to ask about loadings that are assumed in the fourth quarter. I know you usually come in at the high end, but if we assume the midpoint of the guidance, and I assume that depreciation grows it has the past few quarters, Gross margin, if I exclude the depreciation, so on a cash basis, it's down, like, to sub 67. So hasn't been that low in, like, ten years. And you are already sitting on a lot of inventory. I don't think you wanna build more. So sort of what's the path to get cash margins on a better path here? I mean, it's below where it was seven to eight quarters ago when revenue was 6 to $700 million, you know, lower than where it is today. Thanks. Rafael R. Lizardi: Yeah. Let me try to answer that. There were several questions there, so let me see if I can if I can hit most of them. First, your question is maybe fundamentally on inventory, so let me start there. We're very pleased with our current inventory position. That objective for inventory is to support customers to keep lead time short, and have just great customer delivery, customer satisfaction. So that we are achieving, and we're pleased with where the inventory is. Now given where revenue, the midpoint of our revenue, in order to continue to maintain those levels of inventory and where we want to be an inventory, we're adjusting the loadings down. Into fourth quarter. We did some of that in third quarter, and we're gonna do some more into fourth. So as we do that, and as you pointed out, when you look at fourth quarter, you have lower revenue, you have higher depreciation, you have the hit on the lower loadings. So that's how you get to the EPS range that we have. Timothy Arcuri: Alright. We'll move on to the next caller. Operator: Thank you. Our next question comes from the line of Chris Danely with Citibank. Please proceed with your question. Chris Danely: Thanks, guys, and, thanks for pronouncing my last name correctly, operator. Hey, guys. Could you just talk a little bit more about the restructuring? Maybe what was the catalyst for it? And then any benefits to expenses, either gross margins or OpEx, going forward? Haviv Ilan: Chris, high level, it's related to actually two things. First, I think we announced several years back that we are winding down our six inches fab, the 150-millimeter fab. We have one in Sherman, the old site the old spot in the site and one in Dallas. Both of them have actually started the last wafer this month. And we will see a gradual reduction in cost related to this to two factories. Peru, I think the '26, We are just taking the hit on the restructuring cost in Q3 as we had predictability and the amount was clear to us in terms of the size of it. Regarding the other part of it, this is an ongoing work that we're doing. We always look at the efficiency gains. We had some areas where we felt that our R and D machine is not generating returns that we would expect on the long term, and we decided to consolidate some sites. That is also going to take place in the next couple of quarters for the company. Mike Beckman: Do have a follow-up, Chris? Haviv Ilan: And Rafael, is there anything that just on the OpEx side that you want to mention, Rafael, on? Rafael R. Lizardi: No, I would just say, technically, for fourth quarter, expect OpEx to be about flat to third quarter and that's Saviv alluded to the benefits from the restructuring. They don't all come in immediately, so it just takes a little while for that to happen. And there would be benefits in both COR as well as OpEx. Haviv Ilan: Do have a follow-up, Chris? Chris Danely: Yes. Hey, thanks, Mike. Think you guys said industrial was up low single digits sequentially and auto was up I think it was high singles or something like that sequentially. That sounds like a bit of a bit of a change from what you said last quarter and intra quarter. Is that true? And then, you know, why do you think industrial is slowing down and auto is a little better than expected? Haviv Ilan: Let me take a first, Chris, you remember, we only guide at the company level. We don't guide by market. We did say, I think on the industrial side that we had a very strong Q2. So kind of indicate that we assume Q3 will taper off, right? And actually, to me, that low single digit growth sequentially was good, I'm pleased with the result. Remember, very strong growth in the second quarter. The automotive side, I would say, look, automotive was kind of sequentially up and down and up and down, but all in a very similar level, right? The recovery in automotive, at least for Texas Instruments, was very the trough was shallow, and now, you know, it's kind of back to where it used to be, so I would not read too much into it. It came in more or less as expected I think, Mike, it grew across the regions in automotive. It did. Yeah. I agree. Mike Beckman: Sequentially across all the regions. All the regions. So Ten years. No surprises there, Chris, for market perspective, at least. Haviv Ilan: Yeah. And Andrew has it within industrial, a second to third transition usually actually down. If you just look across the averages over history, it's actually down a little bit. So an up low single digit, is is actually not an an unusual result if you're in a recovery. Alright. I'll move on to the next caller. Thanks, Chris. Operator: Thank you. Our next question comes from the line of Joe Moore with Morgan Stanley. Please proceed with your question. Joe Moore: Great. Thank you. I guess I continue to get a lot of questions about pricing for you guys. Anything unusual happening there? I think you alluded to kind of an ongoing learning curve kind of price declines, but anything happening where any markets are sort of different on the pricing side? Haviv Ilan: Short answer is no. And again, for the year, I think our assumption coming into the year was kind of a low single digit decline like for like on the pricing side and I think that's how we are trending you today. So I expect the year to to end at that low single digit price reduction in 2025. Your follow-up, Kjell? Joe Moore: Yeah. And just your any on lead times? Are you still in the range that you talked about? Any areas where lead times are getting longer? Mike Beckman: I'd say across the portfolio, very consistent with what it was. The quarter prior. So not much of a change in that. And and, you know, our lead times right now are competitive. We worked very hard to make sure that our inventory position allows us to do that. And we're we're happy with the the lead time position we have. Yeah, not a lot of change on a sequential basis. Haviv Ilan: Joe, just a little bit more color on lead times. I think we always talk about inventory part by part, the technology by technology, package type by package type. I think as Rafael mentioned, the third quarter was a very good quarter for us because we reached our milestone of where we need to be. We had a few areas where we were still catching up. So that's now behind us and we are now prepared to any scenario As Mike said, we are serving our customers through a growth issue of mid teens with no issues. So very strong support from Texas Instruments. We are hitting our metrics and exceeding them even And customer service is continuing to be very high for the company. Which explains some of the low visibility we are seeing. In terms of turns business, as Mike mentioned before. Mike Beckman: Right. Thanks, Thank you. Move on to our next caller, please. Operator: Thank you. Our next question comes from the line of Stacy Rasgon with Bernstein Research. Please proceed with your question. Stacy Rasgon: Hi, guys. Thanks for taking my questions. For my first one, I just wanted to dial in on the gross margin expectations explicitly for Q4. So you talked about loadings and and everything else. You talked about the tax rate coming up. Seems that you're guiding it down, I don't know, maybe 250 bps, something in the ballpark of 55%. I just wanna know, is is that the right number to think about And then given that baseline, like, how much cost I be expecting comes out of the model due to the six inch of fab closures in the first half? Rafael R. Lizardi: Yeah. So Stacy, high level in the ballpark. You know, we let the EPS guide speak for itself, but you have lower revenue, you fall that through, you have increases in depreciation, for the year is $1.8 billion to $2 billion. So you know, but it should be an increase second to third similar to third to fourth should be similar to second to third. So so you do that and you have a higher higher levels of depreciation. And then as Saviv said, we're very pleased with our inventory levels, doing what they're supposed to. So now we are moderating those wafer starts, those loadings, and as those come down, we get the the impact on gross margins. Let me just also step back and stress that we run the company with the mindset of a long-term owner and the to grow free cash flow per share over the long term. And that is gaining momentum. On a trailing twelve-month basis, our free cash flow is up 65%. From last year. And it has the potential to accelerate and grow even faster next year as we have outlined in our framework back in the capital management. Mike Beckman: Do you have a follow-up, Stacy? Stacy Rasgon: I do. Thanks. So your Q4 guide is down about 7% sequential off the slightly higher than expected Q3 base. My math suggests that down 7% or so is pretty much seasonal, like, on, like, on on a pre-COVID basis. I know post-COVID seasonality has been over the place, all over the place. But pre-COVID it typically was down, call it, like, high single digits. You seem to be on a seasonal trend now, and and maybe that's consistent with customers no longer draining inventory. What if how do I should I think about normal seasonality, like, pre-COVID levels for Q1? My under my my feeling is it's typically down sequentially. Like, what is I'm not asking you to guide it, but just, what what is normal for Q1, at least on a on a pre-COVID basis? If we're running more of a seasonal pattern from here. Haviv Ilan: Before we talk about Q1, let me just add a little bit more color on Q4. As you said, I look at it as a roughly seasonal guide, as you said. And the reason is, there is a recovery, but it's a very in a moderate pace, right? So that's what guides our call it seasonal view into Q4. I also mentioned and that's what we're seeing. This is part of the way we do business days. More customers are direct, more customers are on consignment. Customer inventories are low, and I think they've gone through this depletion process, okay, that's behind us. So So we are going to be just seeing it real time as it comes and hence our guidance. Now, Q1, Mike, you could comment if Sure. Yeah. Mike Beckman: It's not unusual to see you know, fourth to first just historically. This is not a guide for what we're gonna see, but what historically has done is typically down, just a slightly sequentially. It's not unusual to see. Alright. Stacy, thank you for the questions. Move on to the next caller, please. Operator: Thank you. Our next question comes from the line of Ross Seymore with Deutsche Bank. Please proceed with your question. Ross Seymore: Hi, guys. Thanks for asking. A couple of questions, Haviv. Congratulations on the Chairman role as well. I wanted to go back to the gross margin side. Rafael, you talked about all the reasons it was going to drop and the rough range from the prior question. Just wondered how does that flow through into next year? From the perspective of depreciation? Is there any change to the range you gave before? And if you're flat to slightly down in the first quarter, does that flow through? And the utilization dynamic, does that have to flow through inventory, etcetera, in lead to a headwind as we go into the first half of next year as well? Yes. So a couple of things. First, on depreciation, no change. Rafael R. Lizardi: To our guidance, 1.822 for this year. So you come back into fourth quarter. As I answered to Stacy a second ago. And for next year, we've said $2.3 billion to $2.7 billion but to be on the lower end of that range. So that should give you enough to model that. Beyond that, we'll go we'll forecast one quarter at a time. It's going to depend on revenue and demand. So this by by lowering the loadings now puts us in a good position to have the level of inventory that we think is required. And I think that's to put us in a good position going into 2026. Haviv Ilan: Ross, the only color I'll add and then Rafael touched upon it, we do think that the way we run the place on free cash flow per share We have made an excellent progress on ramp and qualifying our Sherman new site We are winding down to six inch fabs. Our investments in Utah, in Lehi 2 are continuing as planned. So our eyes on free cash flow per share growth and start with free cash flow, right? So when you get to the right level of inventory, when you execute on your expansion plans, I think we are now well prepared for any scenario. And as you remember, we have framed 2026 not on GPM, but on free cash flow And that's where our site is on. Okay? Mike Beckman: Do have a follow-up, Ross? Ross Seymore: Yeah. I do. I just wanted to also talk about margins, but on the OpEx side, clarification first, then the question. The clarification for Rafael, you talked about OpEx being flat in the fourth quarter. I assume that's excluding the charge in the third quarter. And then as you look forward, in the past, you've had years that OpEx was flat year over year. You just some restructuring. You're consolidating R and D sites, you said. How should we think just generally about OpEx, whether it's relative to revenue or absolute levels? Do you plan to grow at low single digits? Is it something higher than that, like this year? Any sort of color about how you're approaching OpEx as you look into next year? Rafael R. Lizardi: Yes. So a couple of things. First, on the first part of your question, when I think about OpEx, I do not include restructuring in that. That is a separate line. So that $85 million of course, it's not going to repeat. So that put that out and the OpEx the the the regular OpEx, I expect it to be above flat third to fourth quarter. Beyond that, on R and D and SG and A, strategy broader more broadly speaking, we have a disciplined process of allocating R and D and SG and A to the best opportunities and the best investments that both primarily on the R and D space, but even in the SG and A strategies such as ti.com to strengthen our competitive advantages. Haviv Ilan: Yes. And on the R and D side, Ross, look, today I'd like to talk about and we are seeing the data center market becoming larger opportunity over the last several years and I think that continues into future. So when I think about industrial, automotive, data center, the amount of opportunity to expand our portfolio is high. We have a lot of good investments to make there and we plan to to grow our portfolio in these three areas. We care about all markets. All five markets, but these three will have really a long-term growth opportunity ahead of them and Texas Instruments can do more to sell these markets. So I expect to see that in 2026 and beyond. Mike Beckman: Thank you, Ross. Move on to our next caller, please. Operator: Thank you. Our next question comes from the line of Jim Snyder with Goldman Sachs. Please proceed with your question. Jim Snyder: Good afternoon. Thanks for taking my question. Was wondering if you could maybe give us a little bit of color in China and what you're seeing there. I think last quarter you called out some pull in activity. I'm curious whether you saw a reversion there in terms of orders or whether orders were ending up ended up better than you expected and sort of what you're seeing on a real-time basis heading into Q4? Haviv Ilan: High level in Q3, China came back to normal, and I expect that to continue into Q4. Mike, anything specific on the China business? Yes. And maybe add, as we probably talked about last quarter, there was potential for pull forward in second. And if you look at industrial and and China, you know, that was one of the only markets that didn't grow sequentially. But if you look on a year on year still up about 40%. But I think you're looking at where it essentially didn't We didn't see that same level of pull forward, at least evidence of it. Can't confirm that. With certainty, but it doesn't appear that same pull forward trend repeated itself in third just based on that. But we'll have to see how it plays through. But that's the only thing I would add. Mike Beckman: Okay. Okay. So nothing special to report there, Jim. Okay? Jim Snyder: Do you have a follow-up? Yes, please. I know when you get to the beginning of next year, you'll give us an update on the Capital Management Day. But I'm just sort of curious as we think sit here today in light of the slower recovery you seem to be talking about right now or you're seeing right now can you maybe give us a sense about whether you expect that your CapEx for next year will be toward the lower end of the range you sort of outlined at the beginning of this year? Haviv Ilan: Yes. We gave you the framework, Jim. And again, we gave you a 20 to 26 framework there. But of course, it can be higher or lower. I think the probability of being lower is probably more probable than higher than $26 billion, right? So at the end of the day, we'll see what it wants to do. This recovery has been so we haven't seen even the market goes back to trend line, not to mention going above trend line and customers building inventory, we just seen it. Could still happen in this cycle, it could not. The good news from a Texas Instruments perspective that we are ready for any scenario. If it wants to grow quickly, we will be able to serve it. But if it wants to continue in that moderate recovery, of course, we will be at the lower end the CapEx and free cash flow will grow. As indicated in framework, the we provided in capital management, And as February comes in, we'll have some more information. We'll have Q behind us and we'll provide more color on that, Jim. Mike Beckman: Thanks, Jim. Thank We'll go to next call, please. Operator: Thank you. Our next question comes from the line of Chris Caso with Wolfe Research. Please proceed with your question. Chris Caso: Yes. Thank you. I guess first question is with regard to, you know, general conditions and the recovery And I think the words you said were that the recovery was continuing at a at a slower pace, Can you talk about, you know, what what what's changed in your mind since the last earnings call? I think earlier in the year, perhaps you were more optimistic that this would follow on to a more typical recovery, which would stronger by now. But, you know, what what what what sort of changed in the part of your customers and such you know, as compared to the last earnings call? Haviv Ilan: Yes, sir. And I think that's related more to the first half of 2Q. I think I might mention that and we acknowledge that in July call that it had a very rapid start. We were thinking that we are sitting on a on a on a sharp slope. I think, time taught us that if you not I would not say it's just a moderate, okay? We are seeing the market getting back towards trend line, but still below trend line. And that's one of the more moderate recovery that we've seen in the history. I think you have to go back many years to see similar behavior. Could still change. And again, I don't have I cannot prove it, but I do see when I talk with customers, on the side, and if you think about investing, building new factories, putting more CapEx, There is a bit of a wait and see mode with our customers. There's just hesitant to have clarity on what exactly are the final rules. Should I put my factory in this country or another one? Even in our domain, think about it, the rules are still not finalized in terms of the rates of tariffs, for example, will they be or not? So do see this hesitancy at the customer base and I see it mainly on the industrial side. On the automotive side, it's the secular growth is continuing So just content growth allows that market to go back to the level it peaked before. And the outlier is data center. Data center, again, not a large part of our revenue, but growing more than 50% for Texas Instruments year to date. That's where we see strong investment. That's the only place where we see strong growth. Where customers are investing and moving fast and Texas Instruments wants to do more there and we are investing investing as well. But again, a smaller part of our revenue. Mike Beckman: You have a follow-up, Chris? Chris Caso: I do. Thank you. And as a follow-up, if you could take us through your thought process with regard to the in in in wafer starts and utilization. I mean, is it a function of what you just said that that, you know, typically, recovery was stronger at this point? And it's not there. So so you need to moderate a bit. You take us through the thought process of that and for how long you would you know, keep the the loadings at a lower level, and what would you need to see to start raising those loadings again? Rafael R. Lizardi: Yeah. So it is you can think of it fairly mechanically. Frankly. Think of revenue was 4.7 and change in quarter. Now the midpoint is 4.4 if you run the factories the same way you were before with lower revenue, you just grow inventory and keep keep on growing inventory. We only grew $17 million in third quarter, so it was essentially flat. But at a lower revenue, same loadings, you would grow inventory. So you need to moderate that in order to keep inventory. Flat or maybe slightly down. As we go into fourth quarter. The second part of your question is gonna depend on revenue. Right? So if the higher the revenue, could be over the next six, nine, twelve months, going into 2026, then the faster we could increase the loadings back up, or we may leave them at a that level if the revenue is more moderate. So it's just it's just gonna depend on how revenue comes in. Haviv Ilan: Yeah. Yeah. Thanks, Chris. Moving on to the next caller, please. Operator: Thank you. Our next question comes from the line of Blayne Curtis with Jefferies. Please proceed with your question. Blayne Curtis: Hey. Thanks, guys. I added two questions. I just wanna follow back up on that loading, comment I mean, said that you would keep it kind of flat in December. I mean, I guess, you're not going to guide to March, but I'm just kind of curious, you've been growing inventory for many, many quarters. Is this now the way to think about it? You'll keep it flat until you see a more robust recovery in the top line? Rafael R. Lizardi: Yeah. And I think you're referring flat inventory levels. And I said flat to down. So we are comfortable with the $4.8 billion that we have that has very of inventory. That has very low obsolescence level. We hardly ever scrap any of our inventory because it lasts a long time, both in finished goods and in terms and in chips. In chip form, in die bank. And in finished goods. So So we feel very comfortable with that level, but it's about sustainability, right? If you just keep on growing, it's not just not a good allocation of of your cash, of your capital for of owners. It's better to moderate the loadings, way you're flat to down. In the current environment and we feel that we can do that and continue to have very high levels of customer service and metrics supporting our customers. You have a follow-up, And then I guess just a follow-up, in terms of the lower loading in the December, is that all reflected in the gross margin guidance? Or does that kind of spill into March? Obviously, like I said, you're not going to guide to March, but just kind of thinking about the moving pieces. Is there any kind of part of the December cut that spills into March in addition to whatever March is? Rafael R. Lizardi: Yeah. So we're not guiding to March as you pointed out, but the the lower loading that I'm talking about, some of that happened in third quarter, There was a step down in third quarter, second to to third, and there's another step down into fourth. That is, of course, embedded in the APS guidance that we just gave. Mike Beckman: Alright. Thanks, Blayne. Move on on to our next caller, please. Operator: Thank you. Our next question comes from the line of Tore Svanberg with Stifel. Please proceed with your question. Yes. Thank you, and congratulations, Pradeep. Tore Svanberg: My first question is on the enterprise data and communications business. I I get the enterprise data that's obviously tied to data center, I'm a little bit surprised to see the communications equipment being that strong. Is is that also tied to data center and perhaps, you know, some of these cluster build outs, or is there anything else going on there? Haviv Ilan: Oh, yes. I think it's a great question, and that's that's the reason. I think we indicated provide more color in Q1. We are planning to break out the data center as a market for the company. Right now, our data center sits mainly in enterprise, in the compute and equipment, but also on the comm side, we have there the wire, the switches and the wired comms in a rack and rack to rack. We also have the optical module business there in comms. So, they are really part of the data center market, if you will. The other part of the data center market for Texas Instruments is SIP today in industrial, think about all these high voltage power delivery, the PSUs and all that. There is also a lot of architectural change there going to high voltage DC and all that. So I think it's time that Texas Instruments calls out a data center at the top, We'll provide more color in Q1, but just for the year and then we are in the midst of collecting all the bits and pieces. But Texas Instruments is running more or less at a $1.2 billion run rate in 2025 that what we're seeing right now. And again, we'll provide more specifics in Q1, but it's also a fastest growing market. It's growing year to date above 50% for the first three quarters. And I see customers continuing to invest, as I alluded before. That's the one market that we see CapEx going into I'm not seeing any slowdown there in the at least in the foreseeable future. Know, related to our visibility at least. Mike Beckman: Okay? Do have a follow-up, Tore? Tore Svanberg: Yes. That was very helpful. Just a quick follow-up. I know you typically don't guide by market in Q4, but any sort of outliers one way or the other by your end markets? Into the December, please? Mike Beckman: I'd just say there's no specific outliers to call out. As you look across our businesses, some of our end markets have higher sensitivity to seasonality than others, personal electronics being probably the most sensitive to it. But overall, there's nothing specific that I call out about fourth quarter's transition. So Tore, thank you for the And I'll hand it back over to Haviv to wrap this up. Haviv Ilan: Thank you, Mike. So let me wrap up with what we've said. At ALCO, we are engineers at the technology is the foundation of our company, but ultimately our objective is to and the best metric to measure progress and generate value to our owners is the long-term growth of free cash flow per share. Thank you and have a good evening.