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Operator: Thank you for attending the OceanFirst Financial Corp. Third Quarter 202 Earnings Call. My name is Brika and I will be your moderator for today. [Operator Instructions] I would now like to pass the conference over to your host, Alfred Goon, Investor Relations. Thank you. You may proceed, Alfred. Thank you all for attending the OceanFirst Financial Corp. Third Quarter 2025 Earnings Call. My name is Brika and I will be your operator for today. [Operator Instructions] [Technical Difficulty] We now have the speaker line reconnected. And I would like to thank you all for attending the OceanFirst Financial Corp. Third Quarter 2025 Earnings Call. My name is Brika and I will be your moderator for today. [Operator Instructions] I would now like to pass the conference over to your host, Alfred Goon, Investor Relations. So thank you. You may proceed, Alfred. Alfred Goon: Thank you, Brika. Good morning and welcome to the OceanFirst Third Quarter 2025 Earnings Call. I am Alfred Goon, SVP of Corporate Development and Investor Relations. Before we kick off the call, we'd like to remind everyone that our quarterly earnings release and related earnings supplement can be found on the company website, oceanfirst.com. Our remarks today may contain forward-looking statements and may refer to non-GAAP financial measures. All participants should refer to our SEC filings, including those found on Forms 8-K, 10-Q and 10-K for a complete discussion of forward-looking statements and any factors that could cause actual results to differ from those statements. Thank you. And now I will turn the call over to Christopher Maher, Chairman and CEO. Christopher Maher: Thank you, Alfred. Good morning and thank you to all who've been able to join our third quarter 2025 earnings conference call. This morning, I'm joined by our President, Joe Lebel; and our Chief Financial Officer, Pat Barrett. We appreciate your interest in our performance and this opportunity to discuss our results with you. This morning, we will provide brief remarks about the financial and operating performance for the quarter and some color regarding the outlook for our business. We may refer to the slides filed in connection with the earnings release throughout the call. After our discussion, we look forward to taking your questions. We reported our financial results for the third quarter, which included earnings per share of $0.30 on a fully diluted GAAP basis and $0.36 on a core basis. In terms of performance indicators, we are pleased to report a fourth consecutive quarter of growth of net interest income, which increased by $3 million as compared to the prior quarter and was fueled by an increase in average net loans of $242 million. Net interest margin of 2.91% remained stable compared to the second quarter. Total loans for the quarter increased to $373 million, representing a 14% annualized growth rate, driven by strong originations of $1 billion. Joe will have more to add regarding our growth strategy in a few minutes. Asset quality remained very strong as total loans classified as special mention and substandard decreased 15% to just $124 million or 1.2% of total loans. This places us among the top decile of our peer group. The quarterly provision was primarily driven by net loan growth and an increase in unfunded loan balances and commitments. Operating expenses for the quarter were $76 million, which includes $4 million of restructuring charges related to our strategic decision to outsource residential loan originations and underwriting functions. This initiative is expected to meaningfully improve operating leverage and earnings in 2026. Pat will provide a detailed update on our financial outlook in a moment. Lastly, capital levels remain robust with an estimated common equity Tier 1 capital ratio of 10.6% and tangible book value per share of $19.52. We did not repurchase any shares this quarter under the existing plan as our capital was deployed for loan growth. This week, our Board also approved the quarterly cash dividend of $0.20 per common share. This is the company's 115th consecutive quarterly cash dividend. At this point, I'll turn the call over to Joe for additional color on these businesses. Joseph Lebel: Thanks, Chris. I'll start with loan originations for the quarter, which totaled $1 billion and resulted in loan growth of $373 million. The value of our continued recruitment of talent, coupled with favorable conditions for many of our borrowers has resulted in momentum in commercial and industrial, which increased 12% for the quarter. Despite the large origination and loan growth for the quarter, the commercial pipeline continues to be strong at over $700 million, only 10% below the high from the linked quarter. Turning to our residential business. During the quarter, we made the decision to outsource this business line. As we wind down the existing pipeline, we expect to see some modest growth in the fourth quarter before the portfolio begins to run off. Total deposits in the third quarter increased $203 million, although organic growth was higher at $321 million before decreases in brokered CDs, which declined by $118 million. Growth was primarily driven by government banking and Premier banking. Premier bankers contributed $128 million of new deposits for the quarter. The Premier banking teams, all of which we onboarded in April, remain on track to achieve our 2025 target of $500 million by the end of the year. Deposit balances as of September 30 totaled $242 million across more than 1,100 accounts, representing nearly 300 new customer relationships to date. Approximately 20% of those balances are in noninterest-bearing DDA and the overall weighted average costs of those deposits was 2.6%. The percentage of DDA is increasing as these accounts become fully operational, which should continue to offset new customer acquisition costs. We remain pleased with their results thus far. Also of note is the Premier Bank's contribution to commercial lending. Premier clients represent $85 million of commercial originations this year and the Premier commercial pipeline totals $50 million. Lastly, noninterest income increased 5% to $12.3 million during the quarter, primarily driven by strong swap demand linked to our commercial growth. With the outsourcing of our residential and title platforms, we anticipate a reduction in fee and service income of approximately $2 million in the fourth quarter and a modest gain on sale of loans in the fourth quarter as we close out the remaining pipeline. With that, I'll turn the call over to Pat to review the remaining areas for the quarter. Patrick Barrett: Thanks, Joe. And we've got a lot of good stuff going on but a little noisy. So apologies in advance for taking a little bit longer with my prepared remarks. So as Chris noted, net interest income grew and margin remained stable this quarter. Furthermore, pretax pre-provision core earnings grew 15% or $4 million linked quarter with the addition of earning assets at the end of the second quarter and through the third quarter, improving earnings power. On the rate side, loan yields increased 8 basis points, while total deposit costs remained flat. While our core NIM remained flat, it was negatively impacted by lower loan fees and a full quarter of higher interest costs on our subordinated debt. Absent these 2 factors, our overall NIM would have improved to 2.95%. Borrowing costs increased 12 basis points, primarily due to the second quarter repricing of our subordinated debt. Average interest-earning assets increased during the quarter, reflecting increases in both the securities and loan portfolios. Chris and Joe have already spoken about the loan growth but I'll add that we took advantage of market conditions to essentially prefund next year's anticipated growth in the securities book with highly liquid, very low credit risk and capital-efficient securities that will be accretive to our ROA, all without meaningfully affecting our neutral interest rate positioning. Looking ahead, we expect positive expansion in net interest income in line with or higher than loan growth but modest short-term compression on margin in the fourth quarter due to seasonality and some residual repricing of a handful of large legacy deposit relationships. Asset quality remained strong with nonperforming loans to total loans at 0.39% and NPAs to total assets at 0.34%. Delinquency levels continued to remain at the low end of historical levels, while criticized and classified loans declined noticeably. Risk ratings across our commercial portfolio were stable, while net charge-offs of $617,000 were benign and represented only 2 basis points of total loans, bringing our year-to-date net charge-off run rate to only 5 basis points. Overall, credit quality continued to perform in line with our company's strong historical experience and remains among one of the best in our peer group. Our provision for credit losses in the quarter was driven by both on and off-balance sheet loan growth, partly offset by overall improvements in asset quality levels. Core noninterest expenses increased from $71.5 million to $72.4 million, driven by increased comp and occupancy expenses. This excludes the impact of noncore restructuring charges totaling $4.1 million in the third quarter. The increase in comp expenses and occupancy expenses were driven by recent commercial banking hires, combined with modest increased variable spend during the quarter. Looking ahead, we expect our fourth quarter core operating expense run rate to move downward slightly to the $70 million to $71 million range. Turning to the noncore charges. We do anticipate a final $8 million in nonrecurring restructuring charges in the fourth quarter related to our outsourcing initiatives. Note that the reduction in headcount associated with the residential outsourcing will not be completed until late in the year, pushing the operating expense benefit from that initiative into the beginning of 2026. To be clear, we expect the pretax improvement in annual operating results to be approximately $10 million. Capital levels remain robust with our CET1 ratio moving down to 10.6%, driven by loan growth during the quarter. While the CET1 ratio remains strong, we continue to evaluate opportunities to further optimize our capital in the near term as we wait for the earnings from newly added earning assets to increase internal capital generation rates. We continue to focus capital priorities on supporting loan growth in the near term and do not expect to prioritize share repurchases. Finally, we've resumed our annual guidance, as you can see in our supplemental earnings materials. At this time, for the full year 2026, we expect 7% to 9% annualized loan growth for the year, predominantly driven by growth in C&I, which will be partly offset by runoff in our residential portfolio. We expect deposits to grow in line with loans as we continue to maintain a loan-to-deposit ratio of approximately 100%. The continued growth in earning assets should drive steady net interest income growth in line with or exceeding high single-digit growth rate, while our modeled 3 rate cuts of 25 basis points each throughout the year could drive a NIM trajectory well above 3% by mid-2026. Other income is expected to be $25 million to $35 million, reflecting reduced gain on sale and title revenues resulting from our outsourcing initiatives. 2026 operating expenses should range between $275 million to $285 million, reflecting the impact of our focus on expense discipline to offset any inflationary pressures. Capital should remain strong with our CET1 ratio at or above 10.5% for the year. These firm-wide targets should result in an annualized return on average assets of 90-plus basis points by the fourth quarter of 2026, with a glide path to achieving a 1% return on assets in early 2027, continuing to improve thereafter. At this point, we'll begin the question-and-answer portion of the call. Operator: [Operator Instructions] The first question we have comes from Daniel Tamayo with Raymond James. Daniel Tamayo: Yes. Maybe we could just start on the net interest income guidance. Just to clarify because there's a few things happening. I think in the slide deck, there was a comment about reaching 3% by the end of -- or maybe it was a terminal 3% rate in 2026. And then, Pat, you just mentioned potentially reaching 3% by mid-2026. The 8%-ish guidance for NII growth in 2026 pretty much implies that, that would be more of an end of the year story. And then that also implies kind of a reduction in the balance sheet from the end of the year. So sorry to pile all that into one question but maybe you can just unpack the NII guidance from a balance sheet compared to a margin story for next year, would be helpful. Patrick Barrett: Sure. So I'll do my best. So hang with me on this. But the 3% terminal rate was referring to our assumption around Fed rate cuts, not our NIM margin. So that's assuming 2 more rate cuts during the rest of this year and 3 next year. So just to kind of take that off the table. We do expect that we will approach or breach a 3% NIM sometime in the first, second quarter of next year, so in the near -- very near term and continue to expand with a pretty modest but steady expansion as we move forward. We expect the balance sheet to continue to grow in the high single-digit levels, almost entirely from loan growth. And that should result -- look, this is all things being equal, so deposit costs, a big question mark, competition, yields and spreads, a big question mark. But our best estimate right now is that, that should result in steady revenue growth, at least commensurate with the loan growth, high single digits. So by revenue, I'm really talking about net interest income. So we see that growing at or better than the pace of loan growth, which is high single digit. Daniel Tamayo: Okay. I appreciate what you said on the terminal rate. First of all, that was obviously a mistake on my side. But -- so that -- I guess if the margin is up at that level, that would imply the balance sheet is going to come down, not down in the fourth quarter but down relative. There were some pretty significant growth on overall balances in assets in the third quarter. It sounds like you prefunded some growth with securities for next year. So there's some dynamic with the average earning assets coming down relative to the size of the overall balance sheet in the fourth quarter. Is that the way to think about it? Christopher Maher: Maybe. It's Chris. Maybe I'll just kind of try and draw a clear path. So to take the noise out of the third quarter, we did buy some securities and we don't anticipate doing that again. It was a pretty unique opportunity to prefund 2026. So the securities portfolio, you should consider being relatively stable as we go into '26 and throughout '26. On the loan side, though, we expect to continue to see growth. So very good quarter this quarter, $373 million. That was a particularly strong quarter. Maybe I would think closer to $250 million, plus or minus. Some quarters better, some quarters worse. But as Joe mentioned, his pipeline is very strong. We've got a lot of momentum. The new bankers are producing. So if you were to just use kind of back of the envelope and assume that over the course of '26, we're growing plus or minus $1 billion on the balance sheet, driven by loan growth, coupled with deposit growth. So that's the part of the balance sheet that would move. And then as we pointed out earlier, NIM crossing over that 3% in the first half of the year and you put those 2 things together and that's how you kind of get the glide path to the 90 basis point or better ROA by Q4. Daniel Tamayo: That's helpful. Okay. But ultimately, the NII numbers that you guys are talking about, just putting the guidance together, is my math correct here, it gets me to kind of the [ 3 80s ] range for 2026 for net interest income. Is that what we should be looking at? Patrick Barrett: Or better, maybe a little bit higher. Daniel Tamayo: Okay. Okay. So that -- the -- this 7% to 9% NII off of 2025 is kind of a floor. Is that the way, that or better? Patrick Barrett: Yes. Look, we haven't had annual guidance in a while, quite frankly, the uncertainty in the environment, the funding environment and the growth environment being a big part of that. So this is our best estimate now and we're trying to probably err on the conservative side. And I know it's frustrating for us to give ranges of things. But we know we'll probably be wrong in our estimates but this is our best estimate today. And so we're trying to be a bit on the conservative side from a growth perspective, given that this is our first quarter of really meaningful growth in 2 to 3 years. Operator: Your next question comes from Tim Switzer with KBW. Timothy Switzer: So the first question I have is around the Premier Bank. And sorry if you guys touched on this on the call but you doubled deposits this quarter. It looks like you got to double it again from a larger base for Q4. What's driving the acceleration there? And I'm sure you already have a good amount in the pipeline kind of embedded for you but just curious what's driving that? And is there any color you can provide on this trajectory as you try to get that $2 billion to $3 billion by the end of [ '27 ]? Joseph Lebel: So Tim, it's Joe. I'll answer the first part of the question relative to what's driving deposit growth. It's the teams we've hired and their acclimation not only to the bank but their customers' acclimation to the bank. I think we referenced the 1,100-plus new accounts that have been opened. A lot of those operational accounts are in the process of being converted to funding. So what we've seen early on is the excess cash come across paying a little bit higher rate for those dollars. And as the actual operational balances start to come, we'll start to see more of that transactional opportunity come across at lower dollar cost. So that's really the value short term. And then, of course, long term, clients come in pieces, right? They don't come altogether and they don't come all at once. So as these teams mature, they'll generate more and more activity from their former book, hence, the value of those deposits over the last couple of years -- over the next couple of years, getting to that $1.5 billion, $2 billion, $2.5 billion, $3 billion number. Timothy Switzer: I'm sorry, I was on mute. It was also great to see the $85 million of loan originations related to Premier Bank. That seems like that's a bit above kind of what you guys are expecting, at least in terms of like an LDR. But it's early -- it certainly can move around but can you maybe provide an update on your expectations there? Joseph Lebel: Yes. Actually, we've been really pleased with the activity of the Premier bankers so far. And Tim, I expect that we'll see more of that. I think it's a little too early to try to forecast what the percentage of loans versus their deposits will be. Obviously, historically, it's been a pretty low number. But we have some seasoned folks that have been around a long period of time and I think we're going to do pretty well in that space. And that sort of goes across some of the CRE space, some of the C&I space. So I think we'll be pleased with the outcomes as we go forward. Timothy Switzer: Okay. Great. And then I want to make sure I heard this correctly. I think you guys said the restructuring of the residential mortgage business will provide about a $10 million pretax benefit. So if that's a $14 million expense savings, that implies about a $4 million headwind to revenue. Are there other headwinds expected in noninterest income that gets you that $25 million to $35 million guide because that's obviously a bit below where you guys are trending for this year. Christopher Maher: Yes. Let me just -- Tim, I'll mention a couple of things on residential and then Pat will get to the noninterest income. Just on residential, this is a business that we were in since 1902. So restructuring it is something we're doing very carefully. We're making sure that we meet and support all of our customers in the transition. We've made sure that we have an ability to produce residential loans for those customers going forward. And then because of the size of the reduction in force, which is about 10% of our headcount, we have modification requirements at the state level. So that all kind of combines for a transition period that's going between [Technical Difficulty]. So you saw some of those onetime expenses for everything from severance to contract terminations and all that. That will all be wrapped up by December. So the benefit will really show beginning in January. We'll get that full benefit. And you're right about the $4 million headwind in residential. So all your numbers are right with that. And Pat, maybe you could talk about the noninterest income. Patrick Barrett: Yes. So the piece that's missing from what Chris just said, which is really focused on our operating residential origination and underwriting platform, the people, the severance associated with it, the costs of paying the people, et cetera, is what generates the $10 million net, $14 million of expense reduction, $4 million of kind of our current run rate of gain on sale per quarter of $1 million, times 4 quarters. So that's your $10 million. The piece that's missing from this that maybe hangs in your models a little bit awkwardly is our majority ownership in the title company that we had acquired about 3 years ago. That hasn't been material from a bottom line perspective. But it did contribute somewhere in the neighborhood of $10 million of consolidated expenses and about $10 million of consolidated title fee revenues annually in our run rates. It just didn't pop up from a discussion standpoint because it was essentially a conduit to facilitate origination business more than it was a profit earner. So that will bring down -- those are headwinds in the revenue side but also positive benefit in the expense side that will come out of it. Operator: Your next question comes from David Bishop with Hovde Group. David Bishop: Chris, Joe, appreciate the color on the NDFI exposure there. Obviously, that's been in the headlines a bit. Any color you can provide there in terms of the nature of that lending, how it sort of bifurcates with the sort of the regulatory guidelines? And then secondly, on the loan side, any update on [ gov con ] exposure with the shutdown, how that portfolio might be holding up on the -- on a credit perspective? Christopher Maher: Sure, Dave. Just on the NDFI, probably the most important distinction I'd make other than it's a very small piece of what we do is that we really aren't engaged in NDFIs that lend to the consumer. So we're -- these are more NDFIs that do commercial lending. So if you think about our Auxilior Capital, for example, which is an equipment finance business that we have an equity ownership in but we also use within the company and we provide some credit facilities to. So stuff that is very closely followed and where we've got our hands on things. So we're not concerned about any of those and those exposures, I think, are all in pretty good shape. Obviously, given the other experience this quarter, we went out and just brushed up and made sure there's nothing there to be concerned about. So does that answer that part of the question? David Bishop: Yes. Unknown Executive: All right. Christopher Maher: I'm sorry, the second -- that was. David Bishop: On the [ gov con ] exposure. Christopher Maher: [ Gov con ], not a big exposure for us today. Today, it's about $100 million worth of exposure and that is squarely focused on mission-critical contractors and decisions we've made over the course of the last year. So we were really thoughtful about entering those kind of relationships with folks that understand government shutdowns. They've been through this before. They've got plenty of liquidity. So we feel pretty comfortable about that. But we stay in close touch with that and Joe, anything you've heard from clients you might pass along? Joseph Lebel: No, I think you summarized it well, Chris. I'd just add the comment that we've been pretty close to it. We didn't have historical exposure and presence there. So a lot of our stuff, as Chris mentioned, has been in the last 12 to 14 months. So that's been a benefit to us because we don't have any legacy risk. David Bishop: Got it. And maybe, Pat, an update in terms of thoughts on the sub debt and that sort of reset. Any thoughts on sort of refi-ing or paying off? Patrick Barrett: Yes. We're not going to really go into the details of that on the call today but those details are available to anybody that's interested elsewhere. Operator: Your next question comes from Tyler Cacciatori with Stephens Inc. Tyler Cacciatori: This is Tyler on for Matt Breese. The cost of deposits were stable again quarter-over-quarter despite strong deposit growth, including demand deposits. And I know you talked about competition a little bit but when do you think we start seeing some of the benefits from the team in terms of lower all-in costs there? Christopher Maher: On the Premier side, you'll see that kind of go down gradually, as Joe said, as those noninterest accounts become activated and balances come in, the mix will shift a little bit but I would think a pretty gradual change there. And then in terms of the rest of the base, deposit betas and the Fed rate cut, there's a lag in the -- or kind of roll-through of deposit rates because we have some contractual agreements with various commercial accounts and things like that. So if you think about what happened last year, rates came down towards the end of the year. We didn't really see the benefit until the first quarter of '25. So sometimes there's about a 90-day lag and that contributes to Pat's guidance that NIM would be flattish, maybe even down a little bit in Q4. And we did have some contractual repricings of accounts that were pretty much at or near 0. So that kind of counterbalanced some of the positive movement elsewhere. So I think flattish, maybe down a little bit in -- for NIM in Q4 but then returning to expansion in Q1 and kind of sequentially thereafter. Patrick Barrett: Yes, that's a little -- this is Pat, Tyler. This is -- that's a little bit of the other side of the double-edged sword of growth, which we're very happy to deal with is that we need to raise deposit funding to fund loan growth. And so we're kind of a little bit bound by whatever the competition in the markets are today. We're seeing the same kind of lag though on deposit cost declines that we saw with increases when we were in the upgrade cycle. It was slow to get going and then it kind of picked up pace as the Fed continued to raise interest rates. We're expecting to see the same kind of behavior, slow, unfortunately, slower to come down initially and then picking up pace as we kind of move into the down rate cycle into next year. Christopher Maher: Also the CD book is pretty short duration. So it's under 6 months. So we'll see a lot of that repricing roll through the CD book in the coming months. Tyler Cacciatori: Great. And then my next question is about the ROA. When do you guys think you can hit a 1% ROA here? Christopher Maher: So I think to kind of knit together our comments earlier, we think we're better than 0.9% by the end of next year, fourth quarter '26, crossing over above 1% in the first quarter of '27 and then for the full year, continuing to grow throughout that year. So it's going to be at or around fourth quarter next year, first quarter '27. And as Pat said, there's a lot of unknowns out there about Fed policy and rates and all that but that's our best guess today. Tyler Cacciatori: Great. And then just my last question here. I think you said it in the prepared remarks, sorry if I missed it, about the deposit composition of the deposits the Premier team is bringing on and if the expectations of that 30% DDA target has changed at all? Unknown Executive: They're about 20% today and the expectations haven't changed. Operator: [Operator Instructions] And we now have a question from Christopher Marinac with Janney Montgomery Scott. Christopher Marinac: Just a quick one on the allowance. If you were to see an increase in criticized loans still not big in the scheme of things, would that drive a change in the reserve? Or does that sort of have tolerance? I mean it's been low on criticized for several quarters. I'm just curious if that were to go back up a little bit, that would be anything material to how you provision? Christopher Maher: Chris, you're right. The model is sensitive to the levels of criticized and classified. So if we saw a material movement in those numbers. We have a little bit of pressure on the ACL. In fact, if we had just taken the mechanics this past quarter, the decrease in criticized and classified would have caused a reserve release. We didn't think that was the right decision given the external environment and our shift over to C&I. So the model may say that on the way down or on the way up but we try and use our qualitative assessment and the exterior -- the indications of the economy that we get from, say, Moody's and others to drive our final decisions. So there's a little bit of sensitivity there but we've been trying to be thoughtful about the provision to reserve using our qualitative factors. Christopher Marinac: Perfect. No, that's great, Chris. And a separate follow-up question just is, if we see more changes among some of the regional bank competitors in your footprint, would that change the hiring? And I'm thinking above and beyond the Premier initiative. Or could -- would you just want to go after more business with the existing team? Christopher Maher: It's always a balance. We -- look, whenever we find great talent, we don't want to pass it up because that's what drives our business. On the other hand, we're very much focused on hitting the return hurdles that we've outlined today. So it's a trade-off. You've got to have -- if you find very good people, you don't want to pass them up. But we're very mindful that we need to get our return on tangible common equity into the double digits. We see doing that next year and we want to stay on course to do that. So we'll be balancing out the quality of opportunities to bring on bank [Technical Difficulty]. We love the bankers we brought on. We will probably always add bankers from time to time but the number of bankers will be determined by us continuing our steady march in improvements to profitability. Operator: [Operator Instructions] I can confirm that does conclude the question-and-answer session here. And I would like to hand it back to Chris Maher for some final closing comments. Christopher Maher: Thank you. We appreciate your time today and your continued support of OceanFirst Financial Corp. We look forward to speaking with you in January. And as we kind of head off into the holiday season, we wish you and your families all the best. Thank you. Operator: Thank you. That does conclude the OceanFirst Financial Corp.'s Third Quarter 2025 Earnings Call. Thank you all for your participation. You may now disconnect and please enjoy the rest of your day.
Operator: Good day, ladies and gentlemen, and welcome to ASUR's Third Quarter 2025 Results Conference Call. My name is Latanya, and I'll be your operator. [Operator Instructions] As a reminder, today's call is being recorded. Now I'd like to turn the call over to Mr. Adolfo Castro, Chief Executive Officer. Please go ahead, sir. Adolfo Castro Rivas: Thank you, Latanya, and good morning, everyone. Before I begin discussing our results, let me remind you that certain statements made during the call today may constitute forward-looking statements, which are based on current management expectations and beliefs and are subject to several risks and uncertainties that could cause actual results to differ materially, including factors that may be beyond our company's control. Additional details about our third quarter 2025 results can be found in our press release, which was issued yesterday after market close and is available on our website in the Investor Relations section. Following my presentation, I will be available for Q&A. As usual, all comparisons discussed on this call may be -- will be year-on-year and figures are expressed in Mexican pesos, unless specified otherwise. Before discussing our results, I would like to begin today's call with an important strategic development. As recently announced, we entered into a definitive agreement to acquire URW Airports for an enterprise value of $295 million. This transaction marks a significant step forward in ASUR's international expansion strategy, building our established presence in the U.S., which began with the operation of San Juan Puerto Rico Airport in 2030. URW airports managed commercial programs are 3 most iconic and high-traffic airports in the United States. URW airports manage commercial programs at 3 of the terminals -- 3 of the airports in the United States, Los Angeles International Airport with 6 terminals, Chicago O'Hare International Airport at Terminal 5. And in the case of John F. Kennedy International Airport covering terminals 8 and the upcoming new terminal 1. Together, these terminals process around 14 million enplanements annually. This acquisition provides ASUR with a strategic foothold in the 3 of the largest U.S. air travel markets and strengthens our position in the high-growth nonregulated commercial segment in the U.S. airport industry. The acquisition will be financed by JPMorgan Chase. As with all our strategic decisions, we are approaching this opportunity with a financial discipline and operational rigor that has long defined ASUR's execution. Closing is expecting during the second half of the 2025. Subject to customary regulatory approvals, we look forward to keeping you updated on our progress in the quarters ahead. Now turning to our third quarter performance. We serve over 17 million passengers across our airports, with traffic remaining practically flat as continued growth in Colombia and Puerto Rico helping to offset persistent headwinds in Mexico. Starting with Colombia, passenger traffic rose 3% to close to 5 million, supported by a solid 11% increase in international traffic and a modest growth just under 1% in domestic volumes. In Puerto Rico, total traffic was up 1%, reaching over 3 million passengers. Growth was driven by international passengers, which increased nearly 12% year-on-year, offsetting the 0.5% decrease in domestic traffic. In Mexico, traffic declined 1% to nearly 10 million passengers for the quarter. The decrease reflects softer demand, domestic traffic, which was down nearly 2% and international which saw a slight contraction of 0.3%. Passenger volumes from the United States, our largest international source market decreased just 0.2%, while South America contracted 7.2%. On the positive note, Canada and Europe increased 9.3% and 1.3%, respectively. Looking ahead, we anticipate a more balanced operating environment across our portfolio. In Mexico, we expect traffic to gradually stabilize over the next year as aircraft ability improves. In Puerto Rico and Colombia, we expect continuous positive momentum supported by the healthy international demand and improving productivity. Now turning to review our financial results. As a reminder, all figures exclude construction revenues and costs, unless otherwise noted. Comparisons are all year-on-year unless otherwise noted. Total revenues increased in the mid-single digits, reaching over MXN 7 billion, driven by growth in Puerto Rico and Colombia. Mexico at 70% of total revenues posted a slight low single-digit decline with aeronautical revenues practically flat and non-aeronautical revenues down in the mid-single digits. Revenue growth was limited by softer passenger volumes and the stronger peso, which continues to weigh on the U.S. linked revenue streams. Puerto Rico at nearly 18% of total revenues reported revenue growth in the high single digit driven by increases in 5% in aeronautical revenues and 10% in non-aeronautical revenues. This performance reflects positive passenger traffic trends and sustained demand across commercial activities. Colombia, which accounted for a total of [ 30% ] of the total revenues, delivered revenue growth in the high single digits, reflecting a mid-single digit increase in aeronautical revenues while non-aeronautical revenues were up in the high teens. This good performance was supported by passenger traffic growth and solid -- partially offset by the strong Mexican peso. Continue our ongoing focus on commercial development. We added 45 new commercial spaces across our airports over the last 12 months, including 31 in Colombia, 8 in Puerto Rico and 6 in Mexico. This supported a low single-digit increase in commercial revenues as solid growth in Puerto Rico and Colombia was partially offset by a weaker performance in Mexico. On a per passenger basis, commercial revenue rose 1% to MXN 126. By region, Colombia led a 14% increase followed by Puerto Rico, up 10%, while Mexico posted a 4% decline, reaching MXN 144 per passenger. Turning to costs. Total expenses were up nearly 17% year-on-year. By region, Mexico posted a 4% increase, largely due to higher maximum -- minimum wages and service costs. Puerto Rico reported expense increase of nearly 8%, reflecting inflationary pressures and higher operating activity. While Colombia cost increased 76%, mainly driven by an adjustment in amortization method of the concession. Without this increase would have been 5.4%. Lastly, in Puerto Rico and Colombia cost benefited from depreciation of Mexican peso against the U.S. dollar. On the profitability front, consolidated EBITDA declined just over 1% year-on-year to MXN 4.6 billion in the quarter. Puerto Rico and Colombia delivered EBITDA growth of nearly 5% and 10%, respectively, while EBITDA in Mexico declined close to 4%, mainly reflecting lower traffic and higher operating costs. The adjusted EBITDA margin, which excludes construction related revenues and costs under IFRIC 12 declined by 157 basis points to 66.7%. This reflects lower margin contribution from the Mexican and Puerto Rico operations, where the margin contracted 152 and 151 basis points, respectively. In contrast, Colombia reported an 81 basis points margin expansion. On our bottom line, this quarter was negatively impacted by depreciation of the Mexican peso against the U.S. dollar, which resulted in a foreign exchange loss of nearly MXN 1 billion compared to the reverse effect during the third quarter of last year. Profitability was also affected by the MXN 333 million adjustment in the concession amortization method in Colombia that I just explained. Now moving to our balance sheet. We closed the quarter with a solid cash position of MXN 16 billion, down 19% from December 31, 2024, primarily reflecting dividend payments made during the period. Our net debt-to-EBITDA ratio remained at healthy 0.2x. In terms of capital deployment, in September, we paid an extraordinary dividend of MXN 15 per share funded from retained earnings. Note that in November, we will be paying an additional dividend of MXN15 per share. Lastly, we invested close to MXN 1.9 billion during the quarter, primarily directed to projects our Mexican airports, including the reconstruction and expansion of Terminal 1 at Cancun Airport, and the terminal expansion in [indiscernible]. In Puerto Rico, we are progressing on the new pedestrian bridge for Terminal A, while in Colombia, we invested in maintenance CapEx. In closing, our third quarter results reflect the resilience of multi-country platform and the value of our disciplined execution amid a more tempered demand environment. While traffic in Mexico continued to face near-term headwinds, we are encouraged by the ongoing momentum in Puerto Rico and Colombia. We remain focused on advancing on our commercial strategy, investing in infrastructure and maintaining a strong financial profile. These conclude my prepared remarks. Latanya, please open the floor for questions. Operator: [Operator Instructions]. The first question comes from Rodolfo Ramos with Bradesco BBI. Rodolfo Ramos: I have a couple, if I may. The first one is in regards to the URW acquisition. Can you shed a bit of light on the economics, revenue per pax, how much EBITDA contribution you're expecting from these assets on an annualized basis? And the second is on Colombia. Can you elaborate on this adjustment to the concession amortization method that we saw during the quarter, was this a one-off? Or should it be a new level going forward? I don't know if it has to do something with the economics of your concession title there? Adolfo Castro Rivas: Thank you for your questions. In the case of URW, I cannot yet share numbers with you until [indiscernible]. In the case of Colombia, basically, what we have done is to change amortization method because in accordance with our estimates, during 2027, we will not receive regulated revenues anymore, and the concession should be over by 2032. So we are aligning amortization in accordance with revenue generation there. And it's going to be not one-off. It's going to be from now the same level. Operator: The next question comes from Emst Mortenkotter with GBM. Ernst Mortenkotter: I wanted to follow up a little bit on URW. I understand you cannot discuss the financials. But leaving that aside, it seems like a great way to gain some strategic insight into the consumer that goes from your airports to the U.S. I just was wondering if you could discuss a little bit what kind of synergies do you see? Or what is the strategic rationale behind this acquisition? Adolfo Castro Rivas: Thank you, Anton. Well, basically, the most important for us is to get -- to put a foot in the U.S. market. The U.S. market represents 22% of the aviation market of the world. And these terminals are extremely important for the U.S. market. So pulling our name there is extremely important, and this should be the platform for future growth in the United States, probably in the same kind of contracts that we are entering right now. That is the most important thing. Operator: Our next question comes from Andressa Varotto with UBS. Andressa Varotto: I have 2 here on my side. The first one is about Motiva Airports that are for sale. We've been seeing the news source that ASUR is [indiscernible] interested in this airport. So just wondering if you could provide some more information, if you're looking, for example, at all of the airports are just a subside of them. And how would the company finance this? And my next question is regarding the traffic trends that you've been seeing for Mexico. We've been seen recently on news as well that Tulum airport has been facing some cancellations. And if you think that this could help Cancun airport in the near future. These are my 2 questions. Adolfo Castro Rivas: In the case of Motiva, I cannot comment. In the case of the traffic trends, what I see today, it's a slow recuperation in the domestic market because of Pratt & Whitney engines, something that should improve in my opinion during the next year. For the moment, the traffic is really weak and the demand is weak in the case of the region. If we see Cancun and Tulum together for the first 8 months of the year, and I'm saying that months because that is the latest public figure or the case of the airport of Tulum. The traffic for the region is a decrease of 3.1%. If we go to the latest month that has been published for the case of the airport of Tulum which is the month of August this year. August versus August last year, the traffic of the region was a decrease of 5.1%. So the traffic is soft. Nevertheless, what you are saying in terms of the recent cancellations to the airport of Tulum. Operator: [Operator Instructions] Our next question comes from... Adolfo Castro Rivas: Sorry, could you repeat? Operator: Our next question comes from Pablo Ricalde. The next question comes from Pablo Ricalde with Itau. Pablo Ricalde Martinez: My question is related to the [indiscernible] Cancun? Is it still expected to be open around Q3 2026 or there are delays on that construction of that one? Adolfo Castro Rivas: What we are expecting is to open this new facility during the third quarter 2025 -- 2026, sorry. Pablo Ricalde Martinez: Okay. So as expected. Operator: The next question comes from Gabriel [indiscernible] with Deutsche Bank. Unknown Analyst: [indiscernible] Just 2 questions. First, is there any way or some how that capacity allocation from carriers has been shifting from Cancun? And the second one is the decrease in traffic could somehow make the pace of writing the tariffs towards the maximum tariff faster for either this year or next year? Adolfo Castro Rivas: Well, in terms of capacity, we are not -- we're not seeing a shift in capacity. What we are seeing basically is a weak demand, as I said, from the domestic resulted from Pratt & Whitney and some other elements. And in the case of the U.S., the numbers for the quarter is 0.2% decrease, which is small, but it's the largest market we have. Let's see how the winter comes. And I hope that the winter will be very strong in the north part of the Americas, and then they come. Positive side is the case of Canada, which is up for the quarter, and I thought that it will be up during the fourth quarter as well. Unknown Analyst: And in the case of the traffic that has somehow decreased, that could accelerate the pace on which tariffs are increased up to the maximum tariff? Adolfo Castro Rivas: No. I don't see that. Our maximum tax compliance this year should be similar of what it was last year, so more than 99%. Operator: [Operator Instructions] At this time, we'll turn the call back over to Mr. Adolfo Castro for closing comments. Adolfo Castro Rivas: Thank you, Latanya, and thank you all of you again for joining us on our conference call for the third quarter 2025. We wish you a good day, and goodbye. Operator: Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.
Operator: Good morning. Welcome to Hasbro's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time. At this time, I would like to turn the call over to Fred Wightman, Vice President, Investor Relations. Please go ahead. Frederick Wightman: Thank you, and good morning, everyone. Joining me today are Chris Cocks, Hasbro's Chief Executive Officer; and Gina Goetter, Hasbro's Chief Financial Officer and Chief Operating Officer. Today, we will begin with Chris and Gina providing commentary on the company's performance, and then we'll take your questions. Our earnings release and presentation slides for today's call are posted on our investor website. The press release and presentation include information regarding non-GAAP adjustments and non-GAAP financial measures. Our call today will discuss certain adjusted measures, which exclude these non-GAAP adjustments. A reconciliation of GAAP to non-GAAP measures is included in the press release and presentation. Please note that whenever we discuss earnings per share or EPS, we are referring to earnings per diluted share. Before we begin, I would like to remind you that during this call and the question-and-answer session that follows, members of Hasbro management may make forward-looking statements concerning management's expectations, goals, objectives and similar matters. There are many factors that could cause actual results or events to differ materially from the anticipated results or other expectations expressed in these forward-looking statements. These factors include those set forth in our annual report on Form 10-K, our most recent 10-Q, in today's press release and in our other public disclosures. We undertake no obligation to update any forward-looking statements made today to reflect events or circumstances occurring after the date of this call. I'd now like to introduce Chris Cocks. Chris? Chris Cocks: Thanks, Fred, and good morning. Hasbro delivered another strong quarter in Q3, extending our growth trajectory in 2025. Net revenue and operating profit both showed robust year-over-year gains, underscoring the power of our Playing to Win strategy, which positions Hasbro as a diversified digitally forward play company uniquely resilient in today's tariff-sensitive market. Key drivers were MAGIC, Marvel, MONOPOLY, PEPPA PIG, Beyblade and G.I. JOE. Brands exemplifying durable, diversified growth that differentiate Hasbro from traditional competitors. Year-to-date, revenue is up 7% and adjusted operating profit has increased 14%. We anticipate full year revenue growth in the high single digits and adjusted operating profit growth exceeding 20%. MAGIC continues to outperform expectations, posting 40% growth year-to-date. This success is fueled by unprecedented new player acquisition and standout collaborations with brands like Spider-Man and Final Fantasy. Our Universes Beyond strategy, leveraging MAGIC's depth with beloved IPs is generating extraordinary engagement. Looking ahead, we'll build on this momentum in 2026 with original MAGIC IP sets and blockbuster collaborations, including Teenage Mutant Ninja Turtles, The Hobbit, Star Trek and Marvel Superheroes. Interest indicators like event attendance, search metrics, MagicCon participation, sales in new channels like mass and convenience and player growth are all at record levels. We expect momentum to continue into the fourth quarter, fueled by upcoming MAGIC releases, including The Last Airbender and Final Fantasy's holiday set, alongside sustained momentum in Secret Lair and backlist offerings. Wizards of the Coast is more than MAGIC. The refreshed 2024 additions of D&D's Monster Manual, Players Handbook and DM Guide are off to the strongest ever start for D&D books. D&D Beyond's new accessible virtual tabletop has driven weekly traffic up nearly 50% since the September launch. Meanwhile, our digital licensing business, highlighted by Monopoly Go! and our recent launch of SORRY! WORLD with Gameberry Labs continues to outperform with both games topping mobile player charts. In Digital Gaming, the game awards this December will showcase some new announcements from Hasbro, including updates on our upcoming sci-fi RPG EXODUS, further cementing our commitment to innovative digital play experiences. Consumer Products met our Q3 expectations, although retailer shifts pushed some revenue into Q4. We anticipate a solid bounce back in the fourth quarter, driven by innovation, entertainment tie-ins and strategic partnerships. Key highlights include momentum from PEPPA PIG and Marvel's blockbuster content lineup, steady growth from Beyblade, G.I. JOE's rebound post supplier transition and solid traction for new products like Nano-mals, DJ Furby, baby Evie, Star Wars Kyber Forge Lightsabers (sic) [ Star Wars Lightsaber Forge Kyber ], Priorities and PLAY-DOH Barbie. Retail shelf resets since late August have led to a mid-single-digit POS increase entering the holiday season and share gains for Hasbro across our focus categories. We expect Consumer Products to finish the year down mid-single digits, primarily impacted by tariffs. However, because of our proactive supply chain diversification initiatives, we expect that by year-end 2026, no single country outside the U.S. will represent more than 1/3 of Hasbro's supply chain. Additionally, new vendor and manufacturing partnerships will unlock attractive pricing opportunities globally from Bodegas in Santiago to Dollar stores in Peoria, expanding our retail footprint and total addressable market significantly. After a long turnaround effort, we expect Q4 to be the start of a long-term growth period for our toys business, driven by innovation, a killer entertainment slate and new partnerships. Just this week, we announced an exciting collaboration tied to Netflix hit film, KPop Demon Hunters. Product is expected to hit shelves in 2026, but for fans who can't wait, preorders are already live for our MONOPOLY deal card game inspired by the film. In summary, Q3 reinforces that Hasbro's Playing to Win strategy is delivering results. We're confident in our ability to sustain long-term growth through diversified digital initiatives, strategic partnerships and resilience against external pressures. Before I close, I want to thank our incredible employees and partners around the world. Hasbro's return to growth is a direct result of your creativity, focus and belief in inspiring a lifetime of play. Now over to Gina. Gina Goetter: Thanks, Chris, and good morning, everyone. We delivered another solid quarter, outperforming expectations on revenue and profit while operating with discipline in a dynamic macro environment. Our results reflect the strength of Wizards, ongoing cost transformation and continued progress toward our 2027 profitability goals. Net revenue in the third quarter was $1.4 billion, up 8% versus last year, driven by double-digit growth in Wizards and steady execution across Consumer Products. Adjusted operating profit increased 8% to $356 million with an adjusted operating margin of 25.6%, holding steady versus last year despite increased cost pressure. Adjusted earnings per diluted share were $1.68, down 3%, driven by a higher tax rate and FX impacts. Year-to-date, total Hasbro revenue is up 7% and adjusted operating profit has increased 14%, underscoring the strength of our diversified portfolio and the impact of our transformation efforts. The growth in MAGIC, coupled with sequential improvement in Consumer Products is fueling our overall financial performance. Turning to our segments. Wizards once again led our performance in the quarter. Revenue grew 42% to $572 million with broad-based gains across both tabletop and digital. MAGIC revenue increased 55% to $459 million, driven by engagement with our Universes Beyond sets, our core IP Edge of Eternities as well as continued momentum across Secret Lair and backlist products. Operating profit rose 39% to $252 million, delivering an exceptional 44% operating margin, reflecting the positive benefit of scale and mix within the MAGIC portfolio. Consumer Products navigated a complex quarter, and the team demonstrated agility as we adjusted to delayed on-shelf days from retailers and lapped a difficult comparison last year in licensing. Revenue of $797 million was down 7% versus last year, with growth in Europe offsetting softer performance in North America. Adjusted operating profit was $89 million with an 11.2% margin compared to 15.1% last year. The margin change was driven primarily by tariff expense and unfavorable mix, offset in part by productivity improvements across our supply chain and expense management. The Entertainment segment delivered revenue of $19 million, up 8% and an adjusted operating margin of 61%, which is consistent with the asset-light model we're building in this segment. Year-to-date adjusted EBITDA stands at $989 million, up 11% versus last year, demonstrating the combined impact of top line growth, operational excellence and disciplined investment. Year-to-date, we generated $490 million in operating cash flow, returned $294 million to shareholders via the dividend and spent $120 million on debt reduction through the combination of bond repurchases and prefunding our 2026 maturity via treasuries, a proactive step that provides flexibility while keeping us ahead of our long-term leverage targets. We continue to see tangible benefits from our cost transformation efforts. Through the first 9 months, we've delivered approximately $150 million in realized gross savings, keeping us on track to achieve our full year target. Operational efficiencies, expense management and productivity gains across sourcing and logistics are driving strong margin performance even as we absorb higher royalty costs at Wizards and trade-related headwinds in Consumer Products. These savings are translating directly into margin resilience and giving us the flexibility to reinvest behind our highest return growth engines. We're executing our tariff remediation playbook decisively, mitigating risk and protecting profitability. Maintaining our assumption that the China tariff rate stays at 30% and Vietnam at 20%, we continue to expect $60 million of impact in our 2025 P&L. Owned inventory levels remain healthy and firmly aligned with our year-end targets. We believe we have appropriate inventory in our warehouses to fulfill the anticipated holiday build and replenishment orders. With a robust entertainment lineup scheduled for 2026, we remain laser-focused on exiting the year with clean company-owned and retail inventories. We are continuing with our diversification efforts to build resiliency across the supply chain and coupling those with the incredible growth in MAGIC. By 2026, we expect approximately 30% of our total Hasbro toy and game revenue will be sourced from China and 30% of our revenue will be based in the U.S. as we opportunistically lean into our U.S. manufacturing capacity. As we enter the final quarter, our momentum remains strong, and we are raising our full year guidance. We now expect Hasbro revenue to grow high single digits with an adjusted operating margin between 22% to 23%. This results in our adjusted EBITDA increasing to approximately $1.25 billion at the midpoint. For Wizards, we expect full year revenue growth between 36% to 38% with an operating margin of approximately 44%. This improved guidance reflects the MAGIC over delivery in Q3 and sustained engagement and high demand through year-end releases. In Consumer Products, we are holding our latest guidance and continue to expect revenue to decline 5% to 8% year-over-year with margins between 4% to 6% as productivity works to mitigate cost pressures. Our capital allocation priorities are unchanged. And with our updated outlook, we will likely achieve our 2.5x leverage target at the end of this year. The Board has declared a quarterly dividend of $0.70 per share, consistent with our capital allocation priorities to return cash to shareholders. We remain focused on execution and operational efficiency in our core toy business. At the same time, we're thoughtfully investing for the future with a disciplined returns-driven approach, particularly in Digital Gaming and with strategic partners who help bring our brands to new audiences and categories. We are on track to close the year from a position of strength, delivering profitable growth, deepening engagement in our most valuable brands and advancing toward our long-term financial and strategic goals. And with that, I'll turn it back to the operator for questions. Operator: [Operator Instructions] Our first question is from Megan Clapp with Morgan Stanley. Megan Christine Alexander: Maybe Gina, I wanted to start with just ending with your comments there just on the implied 4Q outlook, at least on the EBITDA line, it does seem to be above what The Street was expecting. And from a profitability standpoint, implies that your growth accelerates versus the third quarter. It does seem like versus the third quarter, both segments are contributing. So can you just walk through some of the puts and takes by segment as we think about 3Q versus 4Q profitability? And related to that on the top line for CP, I think the guide implies flattish sort of top line growth for the fourth quarter. I think you talked about, Chris, POS accelerating. So how should we think about kind of the timing of retailer ordering shifts into the fourth quarter and POS being positive in the context of what I think is a flat guide for the top line? Chris Cocks: Megan, I'll start, and then I'll turn it over to Gina. I think for CP, we do expect modest revenue growth. I think toy and games will have a little bit more robust, and it will be offset by some licensing comp headwinds we have last year related to MY LITTLE PONY, which had just an amazing quarter based on MY LITTLE PONY trading cards, which has since settled into more of a run rate. We also expect Wizards is going to have a heck of a quarter as well. The early reads on Avatar: The Last Airbender look terrific. And then we have another bite at the Final Fantasy [ Apple ] with our holiday set. So overall, we're expecting pretty good top line growth and some nice operating profit growth as well. I'll turn it over to Gina to kind of dig into point B C, D and E of your first question. Gina Goetter: Megan, all right. Let's start. So you're correct. Like we're raising guidance. A lot of it is driven by the strength that we're seeing play through and continue to play through really all year on MAGIC in Q3 and really firming up our outlook for consumer products as we move into Q4. When you peel apart Wizards, the increase or the raise there is all based on revenue. So we've continued to see momentum. And as we look out at the set releases that we've got planned in Q4, coupled with -- remember, we have a holiday release this year that drives nice revenue. It also drives leverage throughout the P&L. The one thing that we've talked about a lot as we came into the year on Wizards is the royalty expense. So just from a modeling standpoint, what we saw in royalty expense in Q3 will largely be the same as what we see in Q4. So the raise in Wizards is really all due to the revenue momentum that we're seeing and just the trickle on the positive benefit that, that has down the line in the P&L. On our CP business, to your point, a relatively flat outlook. I mean, depending on which range you go, you could see us getting to some growth within the quarter. We have seen our POS momentum accelerate as we came out of Q3. We've continued to see that as we've moved here into Q4. And with the whole retail order shipments, we -- many in the industry were talking about these later shelf resets that absolutely impacted Q2. We started seeing their shipments pick up in Q3. And again, we've seen that continue into Q4. So our expectations for CP as we move through kind of the holiday period is that we're going to have shipments outpacing what our POS is. So that benefit will help, again, create some leverage within the P&L as well from a margin standpoint. Did I hit all of your points? Megan Christine Alexander: Yes. A quick follow-up just on the balance sheet and capital allocation. So you said leverage target by the end of this year. Free cash flow growth has been quite strong, and I think that should continue into '26. So how are you thinking about capital allocation priorities as we head into '26 with the balance sheet now at your leverage target? Gina Goetter: Yes. Where we sit today without getting too much into '26 guidance, unchanged priorities. We continue to, first and foremost, want to invest back into the business and invest into our growth drivers. So you'll continue to see us do that. Obviously, we have the dividend, and we're committed to the dividend. And then lastly, we will continue to pay down debt. So we feel great that we're going to be at a point from a leverage ratio standpoint that we'll be at 2.5x. We still think there's opportunities for us to bring that down even further to just create more optionality and flexibility for us as a business. So as we turn the corner into '26, we'll come back and see if any of those are changed. But for now, we're sticking with those. Operator: Our next question is from Arpine Kocharyan with UBS. Arpine Kocharyan: What do you think is driving this acceleration in retail POS for you and for the industry? And what are some of the indicators that you look at to decide whether this holds up in the next 40 days if you compare it to sort of prior holiday seasons or what do you know about the consumer? And then I have a quick follow-up. Chris Cocks: Sure, Arpine. I think a couple of things. Each product is a little different. For instance, with G.I. JOE, we just didn't have supply because we were going through a supplier transition for the first half of the year. And so we're in catch-up mode. On others, I think it has to do with just great innovation, Nano-mals, DJ Furby, some of our new board games are hitting the mark and hitting what we think players want. And then still others, I think, just are kind of buoyed by fantastic brands and really strong content. Marvel, in particular, is one that's really doing well this year, and we expect that to continue moving forward. Transformers has been benefiting from that throughout the year. Even though we don't have new content this year, last year's Transformers One has had a nice long tail for us. So we've been pleased with it. We've been seeing acceleration in POS for probably the last 7 to 8 weeks. And usually, what we see in September and October is a pretty good harbinger for what's going to happen throughout the holidays. Arpine Kocharyan: Very helpful. And then -- sorry, go ahead. Gina Goetter: My one add that I would have is on, just as you think about the overall category and pricing as a dynamic, we really haven't seen overall huge increases in ASPs. We've seen some mix shift, but not big increases in ASPs. And as you look at where the consumer could be heading and how our portfolio shapes, roughly, call it, 40% to 50% of our portfolio is priced under that $20 kind of MAGIC price point. So as we're innovating, as we're executing with our retailers, our prices are staying in that nice zone for consumers heading into the holidays. Arpine Kocharyan: That's very helpful. So just a quick follow-up. You have had incredible growth in MAGIC this year and will likely finish the year on a strong note. There is a bit of concern how you lap that next year. And arguably, Marvel's strength in the second half of this year has probably legs well into the first half of next year, I would imagine. But this business is very much driven by the timing of set releases. Anything you could tell us to help think through how you left these very strong numbers from this year into 2026? And Gina, just a quick question for you. The licensing expense under MAGIC for the back half, you had raised that from $40 million range to closer to $60 million plus. Is the updated number now $70 million plus, just given the outperformance in that segment? Gina Goetter: Is that -- are you talking about the Digital, MAGIC Digital? Arpine Kocharyan: Correct. I'm talking about the royalty expense within Wizards tied to third-party IP. Gina Goetter: The royalty expense, I see. Yes, the -- just the back half of the year was always going to be back weighted in terms of expense just given the timing of the universes beyond set releases. So we had Avatar and the Spider-Man are falling in the back half of the year, whereas it was just Final Fantasy in the front half of the year. So that's why you see that weighting. It will be roughly, call it, $50 million, $60 million of royalty expense in the back half of the year. And then, of course, will be accrued in the front half. I think total royalty expense change is $80 million year-over-year, I believe. So it's a pretty sizable step-up in expense. Chris Cocks: Yes, Arpine, in terms of your question about the underlying durability of MAGIC's growth, I think there's a couple of things going on. At the easiest level, this year, we had, call it, 6.5 sets because one of our sets was a little bit of crossover in terms of sell-in between Q4 and Q1. Next year, we're going to have about the equivalent of 7 sets. So just you're naturally going to have more content to sell, which generally is correlated with higher sales. Then when you look at kind of like the momentum that we have on backlist, I think we continue to see that as being kind of like a nice kind of floor for the business that will -- is continuing to raise. I mean our backlist business, I think, is 70% ahead of what it was last year already for the full year basis. And last year was a record. And then I think like the last one is Universes Beyond is just working. The whole theory of the business was it's going to increase our distribution. It's going to increase our number of active players. It's going to bring in new fans that were adjacent to MAGIC, and that has just worked. Like basically, every set we've done in Universes Beyond has set records in terms of new player engagement, in terms of search queries, in terms of number of people who are going into stores, in terms of sales in nontraditional outlets like mass and convenience for us. And we don't see that slowing down. If anything, I think there's potential to accelerate it just with the quality of partners we have next year and the early reads we're getting on those partners. Teenage Mutant Ninja Turtles, Marvel Superheroes, The Hobbit, Star Trek, which for a big nerd like myself, is near and dear to my heart. I think all of those have had excellent initial reactions and bode well for continued robust sales. Operator: Our next question is from Stephen Laszczyk with Goldman Sachs. Stephen Laszczyk: Maybe first on Consumer Products for Chris and Gina. Just be curious to get your latest thoughts on higher prices and just generally how they're being digested by retailers and consumers. Curious what you're seeing so far, the types of conversations you're having with retailers this fall. And if that's influencing your strategy as you look at promotional activity into the back part of the year and then maybe opportunities to take pricing if needed in 2026? Chris Cocks: Yes. I would say pricing so far has been relatively muted in the category. We started seeing evidence of it like in July, August. I think you'll see more of it in September and October. We've been pretty surgical in where we've chosen to price. We've chosen to put it usually against brands that have some pretty robust content and latent demand associated with it and trying to hit price points where we think the consumer tends to be a little less price sensitive, particularly under that kind of $15 threshold, maybe the $20 threshold. And we haven't seen a tremendous amount of elasticity so far based on the early reads. In terms of ongoing pricing, I think we just kind of have to see how the holiday goes and how the consumer holds up. Right now, I think it's really kind of a tale of 2 consumers. The top 20% -- particularly in the U.S., the top 20% of households continue to spend pretty robustly. We've got a nice fan business with them. We've got a nice trading card and gaming business with them. The balance of households are watching their wallets a bit more, a little bit more promotional and price sensitive. And as Gina mentioned, about 50% of our items that we're selling are under that $20 price range. And we think that's going to expand as we go into 2026 with some of the new suppliers we're working with and some of the new product we're working with. So net-net, so far, so good. Stephen Laszczyk: That's great. And then maybe one on 2026 around EXODUS. Gina, it sounds like we're about a year from EXODUS being released. I was just curious if there's any way you can maybe help investors size the cost impact expected from the game next year, perhaps over the course of '26 and '27. I appreciate we'll probably learn more in December, but anything or any frameworks you could provide at the moment to help set the frame of mind looking into next year? Gina Goetter: Got it. Yes. Good question. And you're right, we'll provide more specifics when we get to December. So I'll give you a some tidbits on the framing and how to think about it from an accounting standpoint without getting too deep into unit expectations. But when you look at our balance sheet, you'll see that line that says capitalized software, and there's roughly $350 million that's sitting on our balance sheet. This includes development costs for EXODUS as well as all of the other games that are within our portfolio. So it is not just an EXODUS charge. It's the entire pipeline of games that we're working on. And how that will come off of the balance sheet through the P&L. So as EXODUS ships and we launch the units, that cost will depreciate alongside with units. It will flow through our cost of goods. So that's where you'll see it. It will impact our gross margins. That's what you'll see it flow through. And then the other important thing to call out is because it is a product development cost, it's an input cost, it will not be an add-back into EBITDA. So it will show up as a depreciation charge within cost of goods, but it's not going to be added back on an EBITDA basis. In terms of EXODUS and how to think about the dollar impact, when we're modeling it out, roughly kind of rule of thumb, 65% of that development cost is going to hit in the quarter that we launch the game. And in the 4 quarters in that first year, roughly 85% of that development cost will have been worked through the P&L. That's right now how we're modeling it out. Obviously, as we get sharper on the absolute units and the absolute time line for when we're going to launch, that will impact it, but that's the good rule of thumb. In terms of how we're thinking about the overall expense standpoint, you've heard us talk about how AAA video games, some of them can be very, very expensive. We are not playing in that range. You've heard us talk in the previous calls that our development budgets are anywhere from, call it, $100 million if we're working with partners up to, call it, $200 million, $250 million. So that's the range of outcome in terms of absolute expense and absolute [ depreci ] that you'll see come through the P&L. Now obviously, that's the P&L impact. As we launch the game, as we have the units, have the revenue, there's going to be a pretty material uplift in our cash flow. So we kind of have to look at it through what's going to happen in the balance sheet, that capitalized asset comes down, P&L, the depreciation hit goes in, but then we have a nice uptick in our operating cash. Does that help, Stephen? Operator: Our next question is from Christopher Horvers with JPMorgan Chase. Christopher Horvers: So maybe talk a little bit about what the gross net headwinds from tariffs were in the third quarter. As you turn through more sales, does that dollar headwind actually worsen as you get into the fourth quarter? And then stepping back, thinking longer term about the potential profitability of the CP business, is the expectation ultimately that you can get the tariff rate pressure back over time through pricing? Or does the long-term outlook for CP profitability change? Gina Goetter: Got it. So the tariff pressure in Q3 was roughly, call it, $20-ish million of cost. As we look into Q4, there's a bit more. So it's a bit of a heavier quarter. Still the net impact is going to be $60 million-ish within 2025. As we look into 2026, we are fully running our tariff playbook. And so as we calculate the various scenarios of where that absolute rate will play out, we're really putting all of our levers to work from how we think about pricing, how we're thinking about our product mix, how we're thinking about our supply chain and how we're managing all of our operating expenses to mitigate and offset the impact. Christopher Horvers: Got it. But I'm guessing just is the net headwind next year smaller than the $60 million? Or do we have to lap through something similar? I would think just based on the seasonality of the business that it would be less? Gina Goetter: It will be less next -- overall, for the year, the tariff cost itself will be bigger just because we'll have a full year. But the impact, we're still working through what the net kind of impact is as we put all of the levers to work. But the actual tariff cost itself, obviously, with 4 quarters' worth, we really didn't start seeing that impact to the P&L until third quarter. Chris Cocks: Yes, Chris, I think as you think about the midterm in terms of CP and total company, I think at a total company, we're very confident in our operating profit guidance. Our games business is performing very well, well ahead of plan. Our licensing business continues to perform very well and frankly, at or ahead of plan. Toys, we're, I think, in the early innings of getting to the growth portion of the turnaround, which is great. And so from a top line perspective, I think we feel good about the guidance we gave in February. I think from a margin perspective for the CP business, if tariffs persist at a 20% and 30% range, it probably carves off a couple of points of margin from the expectations for that business. So low double digits probably becomes high single digits. If nothing changes on the tariff front and nothing changes on the nature of the business. I think it's a little too early for us to call that ball for CP. We feel pretty good about the partnerships we're inking, KPop Demon Hunters just being the first -- that's probably one of the hottest new entertainment properties of the year. We love what's going on with Star Wars and Marvel in terms of their content and how those brands are coming roaring back. So I think we'll have a more fulsome update come February when we talk about 2026 and an update to midterm. Christopher Horvers: Got it. And then my follow-up is a follow-up to a prior question about MAGIC next year. Can you talk about how big is Final Fantasy this year? Obviously, it's played out exceptionally well and you have this holiday set. And as you think about the content that you have for next year, is the strategy a little bit of like all of those UB sets combined are sort of like in aggregate, become bigger? Or do you think maybe the Star Trek set, for example, could be actually bigger than Final Fantasy? Chris Cocks: Final Fantasy is a record-breaking set. It's already the biggest set in MAGIC's history. I won't tell you which one next year we think could rival or beat Final Fantasy, but we definitely see at least one that we think can do that. I think I'll stick it there. And then we haven't shared with you guys the content lineup that we have for 2027 and beyond, but we also feel pretty darn good about the partners we have lined up. I mean this is a great deal for MAGIC in terms of, hey, we get access to some of the premier IP in the world. It's a great opportunity for the partners because really, there's never been an opportunity for them to access the trading card business, certainly at the scale MAGIC: THE GATHERING is delivering for them. And so we pretty much have had our pick of partners. And so I think if you can conceive of a collaboration that we could do with MAGIC, we probably have inked the deal or in conversations on a deal on that. So I think, again, we're still at the relatively early innings of what Universes Beyond can do. I think there's upside in terms of what the sets can do in the future. And then I think that's also just going to be buoyed by a very long and lucrative backlist as well, which we've been seeing play out in 2024 and definitely in 2025. Gina Goetter: We should probably say that our owned MAGIC IP is also performing quite well. Chris Cocks: Yes. I mean that's a great point. People aren't just coming in and buying Final Fantasy. People are coming in and buying Edge of Eternities. They're buying other sets. And so we've also been setting records with what we've been doing with our own sets as well. So there's a nice halo here. Operator: Our next question is from James Hardiman with Citi. James Hardiman: So to that last question, Chris, I'm not going to ask you which sets you think can be Final Fantasy. It sounds like -- but I am curious, this KPop Demon Hunters' press release did mention Wizards of the Coast. would curious what the thoughts are there, how those 2 could integrate. And then just on the margin side of Wizards, we came into the year thinking that margins would be down pretty materially. And obviously, that's not going to be the case. Any thoughts on how to think about Wizards margins into next year? And any color on the royalty piece would also be helpful. Chris Cocks: Yes. We're pretty excited about KPop. I remember the weekend it came out, I watched it and sent a text over to Tim, who runs our toy business. And I'm like, why haven't we talked to these guys because this thing is awesome. If you look at my Spotify playlist, it looks like a 12-year-old kids. I got Soda Pop, that Golden on there along with some other stuff. So I'm pretty jazzed for KPop. We're working with Netflix. Mattel is doing basically dolls and figurines. We're basically doing just about everything else, plush, games, trading cards, as you mentioned, for something like MAGIC as well as electronics and role play. So I think that's going to be a pretty lucrative license that's been -- had incredible staying power. And frankly, it's just the first new partnership inside of our toys business that we're going to be really excited to share more details about over the coming couple of quarters. I think there's a lot of reasons to believe that our toy business is in the early stages of a long-term growth from entertainment to toy partnerships, to new licenses. So I think that's good. And on your question about MAGIC, I think MAGIC has proven that it can fit a large number of IPs. One of the best-selling Secret Lair products of all time was SpongeBob SquarePants. And if we can figure out how to get people jazzed up about SpongeBob SquarePants collectible cards, I'm pretty sure we can do it with one of the biggest movies of all time. Gina Goetter: And if you look at our -- the margins, we're not going to get into 2026 guide today. But we've always said that our Wizards segment is going to be in that high 30s, low 40s. If you look back over our recent history, you'll see that we're dancing around those levels over multiple years. And this is where we're going to expect to run that business, and that's what we're asking our teams to deliver, even knowing that, that is our growth engine. So we're going to continue to make sure that we're making the appropriate investments back into the business. But I would say, without giving guidance, we've always talked about a high 30s, low 40s Wizards segment. And that's what you should expect from us over time. James Hardiman: Got it. That's helpful. And then just real quick on the inventory front, there's a lot of discussion, obviously, about shifting orders between 3Q and 4Q. Where are retailers with respect to your product versus last year? I'm assuming there's a deficit versus a year ago and that we'll ultimately sort of bridge that deficit as we make our way through the fourth quarter. So maybe speak to that a little bit. Chris Cocks: Yes. Our retail inventories were down kind of mid- to high teens in the U.S. coming into fourth quarter. Our order book has accelerated versus what we've seen in previous fourth quarters. Domestic is actually doing pretty well. DI is maybe a little bit behind. But everything kind of augurs towards continued robust kind of replenishment from our retailers. And I think we would expect that, let's use the mid-teens as kind of like the anchor point. We think retail inventories will be down by the end of the year. But if current trends persist, it's -- we probably cut that ratio in half. And that's kind of what underscores our belief that fourth quarter will be a pretty good quarter for CP. Gina Goetter: I think this is our first quarter that we've talked about actual restocking happening as we've moved into the fourth quarter. So we're definitely seeing that. We can see that play through in our early October shipment data. Operator: Our next question is from Alex Perry with Bank of America. Alexander Perry: I guess as a follow-up to the last line of questioning, but more consumer products focused. Could you help us think about the building blocks for next year for the EBIT margin on the CP segment with the cost saves versus tariff impact versus potential volume leverage? And then I guess on the content side for Consumer Products, what are you most excited about next year thinking about that? Gina Goetter: Thanks for the question, Alex. We're not going to get too much into the building blocks for 2026 quite yet. We do think we've got some nice tailwinds as we're exiting the year that set us up nicely from a top line perspective. Obviously, we've talked about how not having top line creates a delever impact on the P&L. So as that flips to positive next year, that becomes a benefit for us. We're actively working all of our levers to offset the margin impact, and we continue to stay on our -- the margin impact from tariffs. And we continue to stay on our trajectory to deliver that $1 billion of cost savings in 2027. So as we get -- obviously, the next time you talk with us in February, we'll give a lot more detail on where the CP kind of outlook will be for '26. Chris Cocks: I mean I think a couple of bread crumbs that are public. Certainly, we are bullish on the potential of KPop. We've got a lot of really cool ideas. It's been fun working with Netflix on it in a fairly quick order. We already have a product that's got for sale with the MONOPOLY deal. And hopefully, we'll have a couple of preorders up for some cool items for fans before the end of the year. And then the content lineup that we have, particularly from the Walt Disney Company is amazing. You have Toy Story 5, which always helps to drive Mr. Potato Head sales in a big way. You have a new Star Wars movie with Grogu and the Mandalorian. you have a new Spider-Man movie and you have the Avengers returning to form with Robert Downey Jr. in the role of Doctor Doom. I couldn't imagine a much more stacked content lineup than what we have kind of forming a tailwind for us next year. Alexander Perry: That's very exciting. And I guess my follow-up question is on MAGIC. And specifically, could you talk through the MAGIC growth that you're seeing in the mass channel, especially how the Universes Beyond strategy sort of plays into it? And I think based on some of the disclosure, the retail distribution network for Wizards continues to grow nicely. I think store count sort of up 7% sequentially versus the last quarter. Can you talk about sort of where that is coming from and where you're seeing the growth there? Chris Cocks: Yes. So hobby store growth continues at pace. I don't think it's so much that there's more hobby stores. I think it's just more that are qualifying to become part of the Wizards Play Network and leaning into MAGIC. And what we tend to find is when a hobby store really adopts MAGIC, it becomes a big section of their mix, and they help to propel player growth and player engagement in a positive way. And then mass, it's just a very easy sell with mass when you go in and say, "Hey, here's a video game that you've sold tens of millions of copies of like Final Fantasy, there's obvious demand for it. Let's expand distribution inside of MAGIC" or "Hey, here's a superhero that is beloved and everyone from 2 years old through adulthood wants to collect and play with like we have with Spider-Man." So that's just caused us to be able to have both incremental placements within the store, new promotion within the store as well as opening up new doors for us, especially in underserved markets for MAGIC like a lot of Europe, where we haven't had as robust of a mass offering, and we've been able to do things with the Tescos of the world and the Carrefours of the world with some pretty meaningful and enduring results. Operator: Our next question is from Kylie Cohu with Jefferies. Kylie Cohu: You kind of already touched on this, but I was curious what you're seeing specifically in terms of promotional cadence. One of your peers might have said that it's intensifying heading into the holidays. Just kind of curious what you guys are seeing. Chris Cocks: Yes. Yes. So we've been pretty choiceful with our pricing through this year. And so that's benefiting us in terms of incremental promotion opportunities with basically every major U.S. vendor, Amazon, Walmart and Target in particular. And so that kind of underscores some of the order growth that we think we can see and the sustainability of our point of sale for this holiday as well. And then last year, we had some replenishment outages for things like board games that we won't be lapping this year that, again, we think will kind of help to underscore it. So as we've leaned in on trying to provide value to consumers, especially in hot categories where we're the category leader in like board games, like action figures, like compounds, the retailers have responded in kind, leaning back with us and giving us extra opportunities to share that value with consumers. Gina Goetter: Yes. And I think it's a bit early to say the quality and kind of when your word intensifying because of the shelf reset and that moving back, we're really just starting to see the impact of promotions start playing through. So obviously, everyone -- from a retail standpoint, they were really concentrating on all that sitting within Q4. Kylie Cohu: Got you. And then I know this is kind of small potatoes, but I was curious a little bit if you could expand on your expectations for the Entertainment segment, both in Q4 and then beyond in like steady state as well. Gina Goetter: Yes. Good question. Overall, you should expect more of the same on Entertainment. It's going to be roughly that same revenue base at roughly that, call it, 50% to 60% margin as we're moving forward. And really think about that, that is all the -- either the content that we're creating for brands like PEPPA or it is rights that we are giving to other studios to develop our IP. The delivery of the revenue gets a little bit lumpy just because it's based on when deals are inked. But overall, that's how you should think about the mix of how it's going to play out through this year and the balance of next year. Chris Cocks: Yes. I think we think of Entertainment as a long-term brand development pipeline. There's some revenue associated with it. It kind of -- it's advertising that pays for itself with fantastic content partners. And I think at last count, we have something like 45, maybe 50 shows and movies and reality TV offerings in development across a range of partners. And we work with the best of the best. We're working with Paramount, Warner Bros., Netflix, Universal, Disney, you name it, Lionsgate. So we'll have more to share on that as those kind of deals matriculate. We tend to not announce like a development deal. We tend to wait until it's actually in production. So those are starting to kind of go through and probably in 2026, there will be a lot more to share. Gina Goetter: But we're going to continue with the asset-light model. That's why you're going to see just a high margin within that segment moving forward. Operator: Our next question is from Jaime Katz with Morningstar Research. Jaime Katz: I was hoping to touch on product development spend. It has stepped up a little bit in 2025. But I think given everything that you guys have said about content and innovation coming on, can we think about this staying sort of structurally higher than it maybe has been in the past? Gina Goetter: Yes. I mean you hit on it. The increase or the step-up that you're seeing is largely driven by Wizards and Digital. There's some this year within toy just as we've kind of revamped our innovation pipeline as we started going out. You heard us talk about KPop and securing some of these new licenses, but the bulk of the uptick has been within Wizards. As we look into next year and kind of we're probably at that right watermark level. Like we've been slowly increasing that cost over time. And we're probably in that zone as we think about next year. Jaime Katz: Okay. And then D&D hasn't really been discussed, but there's obviously a little bit more emphasis on the brand as you guys expand into more space. Can you just maybe help us think about what the long-term growth prognosis is for D&D relative to MAGIC or maybe what incrementally it might add to Wizards of the Coast over time? Chris Cocks: Yes. So I think the big thing for D&D is going to be digital games. We have several games in development. We're working with some fantastic creators in that space. And again, like I said, for Entertainment, we tend to be a little gun-shy talking about projects too early. But very likely over the next, call it, couple of quarters, you're going to start to see more of our digital ambitions come to life with D&D and understand some of the things we have in development. And I think they're going to be pretty exciting. Baldur's Gate III was a seminal project. I think it really showed that if we build something that's great, consumers will come. And so there's probably 5 projects in development for Dungeons & Dragons across our portfolio, ranging from more casual and kid-oriented to very high-end action adventure and role-playing games. And that's in addition to a continued focus on building out kind of the core business, the core TRPG with a special emphasis on D&D Beyond as kind of like the best place to play at TRPG. Operator: With no further questions, ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. Please disconnect your lines, and have a wonderful day.
Operator: Good morning, ladies and gentlemen, and welcome to Essential Properties Realty Trust Third Quarter 2025 Earnings Conference Call. [Operator Instructions] This conference call is being recorded, and a replay of the call will be available 3 hours after the completion of the call for the next two weeks. The dial-in details for the replay can be found in yesterday's press release. Additionally, there will be an audio webcast available on Essential Properties' website at www.essentialproperties.com, an archive of which will be available for 90 days. On the call this morning are Peter Mavoides, President and Chief Executive Officer; Mark Patten, Chief Financial Officer; Max Jenkins, Chief Operating Officer; A.J. Peil, Chief Investment Officer; and Rob Salisbury, Head of Corporate Finance and Strategy. It is now my pleasure to turn the call over to Rob Salisbury. Robert Salisbury: Thank you, operator. Good morning, everyone, and thank you for joining us today for Essential Properties' Third Quarter 2025 Earnings Conference Call. During this conference call, we will make certain statements that may be considered forward-looking statements under federal securities law. The company's actual future results may differ significantly from the matters discussed in these forward-looking statements, and we may not release revisions to those forward-looking statements to reflect changes after the statements were made. Factors and risks that could cause actual results to differ materially from expectations are disclosed from time to time in greater detail in the company's filings with the SEC and in yesterday's earnings press release. With that, I'll turn the call over to Pete. Peter Mavoides: Thanks, Rob, and thank you to everyone joining us today for your interest in Essential Properties. In the third quarter, we continued to execute on our focused investment strategy as our team sourced attractive opportunities to deploy capital accretively into middle market sale-leasebacks with growing operators. During the quarter, we added new operators in our portfolio while continuing to support our existing relationships, which contributed 70% of our $370 million of investments, highlighting a healthy balance within our investment sourcing. Pricing was very favorable again this quarter with a weighted average initial cash yield of 8% and a strong average GAAP yield of 10%, which represents the highest level for us and an approximately 450 basis point spread to our estimated weighted average cost of capital. Our portfolio performance was another highlight this quarter with same-store rent growth of 1.6%, an increase in overall rent coverage to 3.6x, a 120 basis point decline in the percentage of ABR under 1x rent coverage and a decline in the tenant credit watch list, all of which is better than our budgeted expectations. Our capital position remains healthy with pro forma leverage of 3.8x and $1.4 billion of liquidity, which was supported by our unsecured bond issuance during the quarter. This positions us well to continue to invest, support our relationships and grow our portfolio, all to generate sustainable earnings growth for our shareholders. With operating and financial trends coming in ahead of budgeted expectations, we are again increasing our 2025 AFFO per share guidance to a range of $1.87 to $1.89, and our investment volume guidance to a range of $1.2 billion to $1.4 billion. Additionally, we are establishing our initial 2026 AFFO per share guidance range of $1.98 to $2.04, which implies a growth rate of 6% to 8%. Our guidance for 2026 reflects continued strong portfolio performance and a pace of investments generally consistent with our trailing 8-quarter average. Cap rates are expected to compress modestly over the coming quarters, reflecting a lower and stable interest rate environment. Specifically, we expect to invest between $1 billion and $1.4 billion in 2026. Additionally, we expect cash G&A expense to be between $31 million and $35 million, resulting in continued efficiency gains. Turning to the portfolio. We ended the quarter with investments in 2,266 properties that were leased to over 400 tenants. Our weighted average lease terms continued to be approximately 14 years for the 18th consecutive quarter, with just 4.5% of our annual base rent expiring over the next 5 years. With that, I'll turn the call over to A.J. Peil, our Chief Investment Officer, who will provide an update on our portfolio and asset management activities. A. Peil: Thanks, Pete. As Pete mentioned, at a high level, our portfolio credit trends remain very healthy, with same-store rent growth in the third quarter of 1.6%, up from 1.4% last quarter and occupancy of 99.8% with only 5 vacant properties. Overall portfolio rent coverage increased to 3.6x from 3.4x last quarter, and the percentage of ABR under 1x rent coverage declined by 120 basis points. There were no noteworthy credit events during the third quarter, and overall tenant credit trends have performed better than our budgeted expectations and our historical credit loss levels of 30 basis points. From a portfolio diversification perspective, our top tenant concentration continues to decline with our largest tenant equipment share representing just 3.5% of ABR at quarter end, our top 10 tenants overall accounting for just 16.9% of ABR and our top 20 accounting for only 27.6% of ABR. Tenant diversity is an important risk mitigation tool, and it is a direct benefit of our focus on middle market operators. On the disposition front, during the third quarter, we sold 7 properties for $11.5 million in net proceeds. This represents an average of $1.6 million per property, highlighting the importance of owning fungible liquid properties, allowing us to proactively manage portfolio risk. The dispositions this quarter were executed at a 6.6% weighted average cash yield. Over the near term, we expect our disposition activity to be consistent with our trailing 8-quarter average, driven by opportunistic asset sales and ongoing portfolio management activity. With that, I'll turn the call over to Max Jenkins, our Chief Operating Officer, who will provide an update on our investment activities and the current market dynamics. Max Jenkins: Thanks, A.J. On the investment side, during the third quarter, we invested $370 million at a weighted average cash yield of 8%. Our capital deployment was broad-based across most of our top industries with no notable departures from our investment strategy. During the third quarter, our investments had a weighted average initial lease term of 18.6 years and a weighted average annual rent escalation of 2.3%, generating a strong average GAAP yield of 10%. During the quarter, we closed 35 transactions comprising 87 properties, of which 97% were sale-leasebacks. Investment per property was $3.8 million this quarter as our deal activity was characterized by granular freestanding properties, which is one of our core elements of our investment strategy. Looking ahead, our investment pipeline remains strong. Pricing in our pipeline has cap rates in the mid- to high 7% range, which represents a healthy spread to our cost of capital with elevated contractual escalations supporting our long-term growth trajectory. Combined with our investments of $1 billion year-to-date, we have again increased our full year investment guidance to a new range of $1.2 billion to $1.4 billion. With that, I'd like to turn the call over to Mark Patten, our Chief Financial Officer, who will take you through the financials for the third quarter. Mark Patten: Thanks, Max. Overall, we were very pleased with our third quarter results, highlighted by the record level of investments and our AFFO per share, which totaled $0.48, representing an increase of 12% versus Q3 of 2024. On a nominal basis, our AFFO totaled $96.2 million for the quarter, which is up 24% from the same period in 2024. This AFFO performance was consistent with our expectations as reflected in our guidance range. Total G&A in Q3 2025 was $10.2 million versus $8.6 million for the same period in 2024, which is consistent with our budgeted expectations. The majority of the year-over-year increase is related to increased compensation expense, including stock compensation as we continue to invest in our team in support of driving our growth ambitions. Our cash G&A was approximately $6.7 million this quarter, which is consistent with our guidance range of $28 million to $31 million for the full year and represents just 4.6% of total revenue, down from 5.1% from the same period a year ago. We declared a cash dividend of $0.30 in the quarter, which represents an AFFO payout ratio of 63%. Our retained free cash flow after dividends continues to build, reaching $36.4 million in the third quarter, equating to over $140 million per annum on a run rate basis or approximately 10% of the top end of our 2026 investment guidance. Turning to our balance sheet. With the net investment activity in Q3 2025, our income-producing gross assets reached nearly $7 billion at quarter end. The increasing scale and diversity of our income-producing portfolio continues to build, improving our credit profile. On the capital markets front, we successfully executed a $400 million 10-year unsecured bond offering in August with a 5.4% coupon. This achieved an important advancement in a strategic objective of our capital markets program as we continue to build a more liquid bond complex and work to more closely align the weighted average duration on our liabilities with our long-dated assets. Our weighted average debt maturity improved by approximately 18% to 4.5 years, owing in large part to this issuance. With the liquidity from the bond offering, we were able to be more selective on the equity side this quarter, raising approximately $14 million through our ATM Program. We did not settle any forward equity during the quarter, leaving us with a balance of unsettled forward equity totaling $521 million at quarter end. We expect to utilize these funds in the near term to support our investment activities and preserve our balance sheet flexibility by repaying our revolving credit facility balance. Similar to last quarter, our share price remained above the weighted average price of our unsettled forwards of $30.71 at quarter end. As a result, under the treasury stock method, the potential dilution from these forward shares is included in our diluted share count. For the third quarter, our diluted share count of 199.9 million shares included an adjustment for 0.2 million shares from our unsettled forward equity related to this treasury stock calculation. This represented a modest headwind to our AFFO per share for the quarter, which was consistent with our budgeted expectations. Based on our current share price, we expect a very modest headwind from the impact of the treasury stock method in the fourth quarter. Our pro forma net debt to annualized adjusted EBITDAre as adjusted for unsettled forward equity remained low at 3.8x as of quarter end. We remain committed to maintaining a well-capitalized and conservative balance sheet with low leverage and significant liquidity to continue to fuel our external growth and allow us to service our tenant relationships in this dynamic environment. Lastly, as we noted in the earnings press release, we have increased our 2025 AFFO per share guidance to a new range of $1.87 to $1.89. Importantly, this guidance range requires no incremental equity issuance to achieve, and we anticipate ending the year at pro forma leverage of approximately 4x, leaving us ample runway to fund our growth ambition in 2026. Turning to 2026. As Pete noted, we have established an initial AFFO per share guidance range for 2026 of $1.98 to $2.04, reflecting a growth rate of approximately 6% to 8%. With that, I'll turn the call back over to Pete. Peter Mavoides: Thanks, Mark. We are happy with our third quarter results. The portfolio is performing well. The investment market is exceptional and the capital markets are supportive. Operator, please open the call for questions. Operator: [Operator Instructions] We'll take our first question from Haendel St. Juste with Mizuho. Haendel St. Juste: So I guess, first, congrats on another strong quarter. I wanted to ask, I was intrigued, Pete, by your comments about expecting lower cap rates going forward. I understand a lot of that is from lower cost of debt here, but I'm also curious if any of that is from the increased competition we're hearing about. And if you expect any of this new competition to impact your ability to source sale-leasebacks going forward? Peter Mavoides: Sure. Thanks, Haendel, and thanks for the compliment on the quarter. It was a great quarter, and we feel pretty good about it. Listen, the 10-year is down materially and the interest rate environment is more stable than it has been, which all contributes to a lower cap rate environment. We continue to source a strong pipeline of sale-leaseback opportunities as evidenced by the fourth quarter, as evidenced by our increase in investment guidance for the fourth quarter. And we can compete with any competition in the market. And so there's always competition. I think the cap rates are going to be driven down more by the stability in the interest rate environment, and we have an ample opportunity set. Haendel St. Juste: Appreciate that. One more, I wanted to ask about the new industrial assets you acquired. I know you have a little exposure there already, but there were really high rent coverage and I'm curious if there's an expectation perhaps to do more of that asset type going forward? Peter Mavoides: Yes, sure. We've been investing in industrial outdoor storage sites with service-based companies for quite some time now. Our investment in the industrial space really focuses on granular, fungible assets. And so one of the important considerations when we're doing those deals is making sure that we're having a very fungible piece of real estate. And we like it. We like the sale-leaseback where we can structure master leases on our lease, and that's been a part of our business and will continue to be a part of our business going forward. I wouldn't expect it to be disproportional. I would expect it to grow ratably. Operator: Our next question comes from Michael Goldsmith with UBS. Michael Goldsmith: Maybe to follow up on Haendel's first question on the expectation for cap rates to come down. When you marry that with your initial 2026 outlook, are you contemplating compressing spreads in that? I'm just trying to understand the flow-through -- just trying to understand the flow-through of cap rates going down? Peter Mavoides: Yes. I mean I've been saying this consistently for the past 2 years that we expect cap rates to come down. Certainly, as we look at the business, we did in the third quarter, initial cap rate of 8% with a 10% GAAP yield. As I've said in past calls, that's pretty much as good as it gets. As I said earlier, a 10-year going from 4.5% to 4 certainly contributes to downward pressure on cap rates. And if you think about the lag in the business, there's generally going to be a 60- to 90-day lag between movements in underlying interest rates and movements in cap rates. So similar to last year, as we look out here very early, 15 months in advance, we anticipate some downward pressure on cap rates. And overall, and as we think about the forward yield curve, I think it really results in a static spread, if anything. Maybe some compression in spread. I certainly feel like there's some room for that with our historically wide spreads. But there's certainly, as there always is a certain amount of conservatism baked into our forward assumptions because it is pretty early. Michael Goldsmith: And as a follow-up, the percentage of ABR was less than 1% -- or 1x rent coverage came down. It looks like you sold some stuff there. So can you provide a little bit of color about what you sold there, what you still have left in the portfolio in that less than 1x coverage and if you have plans for further disposals of that type of product? Peter Mavoides: Yes. Selling 7 assets at $11 million really isn't going to drive a material movement in that. It's at the margin. As we generally say, we take a very close look at those assets. And if they're permanently impaired, we come up with a strategy, whether disposal, restructuring or whatever to fix that. Many of the assets in those buckets are assets that are transitional, and we expect to come out of that bucket over time. And so we take an asset-by-asset look. And if we see permanently impaired assets, we'll move them out of the portfolio. I think what you see in the quarter is decrease in that bucket is just general improvement in some of the underlying operating conditions. Operator: Our next question comes from John Kilichowski with Wells Fargo. William John Kilichowski: Maybe, Pete, just to kind of go back into the guide here and talk about the drivers. I think it would be really helpful to talk about your assumptions this year versus last year. I understand for the past 2 years, you've been assuming some cap rate compression. I don't know if on the low and the high end, if you could talk to maybe the sizing of that and how that looked on this guide versus the last guide? And then maybe also on credit loss, maybe if there's more conservatism there and if that's just general conservatism given weakness in some of the private credit markets or if there's specific tenants that are on your watch list today that weren't last year, that would be really helpful. Peter Mavoides: Yes. I would say -- I would start by saying we build up our guide really targeting an AFFO per share range and looking at what we need to do to achieve that. As we said on the call, 6% to 8% is implied in our guide and the investment volumes are there to support it. As we think about cap rates, ironically, the cap rates assumptions are pretty similar to what we were looking at this time last year, which assumes a modest downtick in cap rates. As we saw when interest rates were rising and cap rates were rising, cap rates were sticky on the way up. We anticipate cap rates to be a little sticky on the way down. And just to frame that, I wouldn't expect something in the, I don't know, mid- to low 7s maybe at the end of the year. And obviously, there's a range of assumptions built into guidance. As it pertains to credit loss assumptions, we take a very deep dive into our portfolio, look at specific assets and specific tenants and try to create scenarios around where we might potentially take losses. And then we build in on top of that an unknown credit loss assumption to make sure we're covered for the unknown events. I think as we look at the credit loss scenarios built into this year's guidance, Ascent, again, it's very similar to what we were looking at and thinking about this time last year. And we would be hopeful that as the year progresses, the credit loss experience turns out to be favorable to our underlying assumption. I don't know -- Rob, you; Mark, you add anything to that? Max Jenkins: Yes. John, it's Rob. As you think about the low end and the high end of the range, one of the biggest drivers is actually just the timing of when we close investments and close on capital markets activities. Cap rates and credit losses, of course, will move it a little bit, but it's really when you're going to close deals throughout. So that's the main flux in the bottom versus the high end. William John Kilichowski: Okay. That's very helpful. And then maybe just on the credit side, given the issues we've seen with BDCs and private credit this year, can you talk about how you've been able to outperform on the credit side as it relates to the migration out of that sub 1x coverage bucket and just your overall coverage? Peter Mavoides: Yes. And I would really look at the outperformance in our same-store rent growth, right, which at 1.6% reflects a pretty strong pass-through of our contractual rent escalations. And I think our outperformance is really due to our focused and disciplined investment strategy by focusing on service and experience-based industries that are a little less volatile than general retailing, focusing on owning assets at a conservative basis and owning granular fungible assets that give us the ability to manage risk and ultimately, being the most secured creditor as a landlord in these businesses puts us first in line for the cash flows. So I think it's really a tribute to the team and the discipline in the underwriting and a tribute to the assets that we own. Operator: Our next question comes from Smedes Rose with Citi. Bennett Rose: I just wanted to ask a little bit about maybe if you could just repeat what you're seeing kind of in the fourth quarter in terms of activity. It looks like historically, the fourth quarter has picked up seasonally, I guess, people kind of rushing into year-end. Are you seeing that? And can you maybe provide what you've closed on so far and what the -- maybe the LOI pipeline looks like? Peter Mavoides: Sure, Smedes. And listen, I think with our revised guidance, we provide a pretty good landing zone of where -- what the fourth quarter might look like. And it's early in the fourth quarter and the year-end rush has yet to start. We didn't disclose subsequent activities because they just weren't material. But generally, I would expect the fourth quarter to look pretty similar to our 8-quarter trailing average in that kind of $300 million range. And there's -- events that could be a lot bigger, it could be a little smaller, but that's kind of where we're guiding at this point. Bennett Rose: And then I just wanted to -- did you say you would expect to settle the forward equity? And I just -- is that reflected in your 2026 guidance in terms of just the share count we should be thinking about? Mark Patten: Yes. Actually, thanks, Smedes. So that actually is reflected still in our 2025 guide as well. So that would be reflective there, and it would also be reflective of how we see the capital markets activity playing out for 2026 and the way we've utilized the [Technical Difficulty] and then utilize forward [Technical Difficulty] to wipe that off the balance sheet. Operator: Our next question comes from Jana Galan with Bank of America. Jana Galan: Sorry, one more on cap rate expectations. In the prepared remarks, there was a comment of kind of the mid- to high 7% range. I'm just curious if that's the current pipeline or if that's kind of the range embedded in the '26 guide? Peter Mavoides: Yes. I think it's really both, right? We have visibility on part of our fourth quarter pipeline, and that's in the mid- to high 7s. And as we look out, as I said, we don't anticipate cap rates falling off a cliff. We anticipate them to be sticky, but it's really going to be driven by the capital markets. And -- but overall, we would expect to maintain our spread. So yes, as I always say, we really don't have visibility past kind of 90 days, but that's kind of what our expectations would be. Jana Galan: And then back to kind of the -- I think that Mark had mentioned the historical credit loss has been 30 basis points. If you can just kind of help kind of frame the scenarios you've considered for 2026? Peter Mavoides: Yes. Rob, Mark? Mark Patten: Yes. I mean, look, Jana, as you might have suspected, range in our guidance, and I'll let Rob dig into it. But the range of our guidance incorporates a wide range of assumptions around credit. Certainly, we orient the first aspect of it to be our historical experience at that 30 basis points. But as Pete said, we do a deep dive on the portfolio and just look at both just kind of a general assumption. And [Technical Difficulty] some risk mitigation or otherwise kind of orientation around [Technical Difficulty] be appropriate. And that tends to be for us as we move through the year, as Pete, I think [Technical Difficulty] if our experience is better than we expected so far this year, that would be a scenario like that, that gives us an opportunity to tighten the range on our [Technical Difficulty]. Jana Galan: I'm sorry. I don't know if the line was cut off. Peter Mavoides: No, we're here. A. Peil: We're here. Peter Mavoides: Yes. So we don't guide specific credit loss assumptions, and there's a wide range in there, Jana. Mark Patten: And Jana, as we mentioned earlier on the call, our credit loss experience has come in much better than we had anticipated, which has been part of the driver for our guidance increases over [Technical Difficulty] Operator: Our next question comes from Caitlin Burrows with Goldman Sachs. Caitlin Burrows: Pete, in the press release, you mentioned the expanding platform that EPRT has. You also mentioned G&A efficiencies in the prepared remarks. So I was wondering if you could talk more about the potential of the platform and maybe why the '26 midpoint volume guidance isn't necessarily a continuation of growth from '25. Peter Mavoides: Yes. I think as I said a little earlier, Caitlin, it's -- we targeted an AFFO per share growth and try to present a business plan that is derisked from an execution perspective. And so while we continue to scale the platform, we continue to source more opportunities and have the ability to close more opportunities. We're fighting the desire to just do more and get bigger. So we're more trying to execute a business plan that gives us outsized sustainable growth for a long period of time. So the platform is growing. Our relationship base is growing. Our ability to close transactions is improving, but we certainly feel 6% to 8% guide to our AFFO per share growth is ample and adequate and derisked from an execution perspective. Caitlin Burrows: That makes sense. And then as you guys think about funding, obviously, you did use debt during the quarter, a small amount of dispositions. Could you go through like to what extent did share price moves in the quarter impact your equity issuance activity and maybe even bigger picture, not just 3Q, but how you think of it over time? Mark Patten: Yes. I guess what I'd say is I'd sort of flip that around. We were -- I'd say in any given year, if you think about our equity and debt issuance capital raising, it might be anywhere from 50 and 40 because as I mentioned in my remarks, we're over 10% of our capital needs in any given year is now available through free cash flows [Technical Difficulty] an important source for us. But if we were looking at where to access the bond market because I think we've [Audio Gap] our ambition is to be in that bond market, build the bond complex and really align our debt ladder, our maturity ladder with our long-dated leases. So we were looking at the bond market. And so what I'd say instead is being able to do that bond execution really put us in a position to be selective on the equity front. And we already had over $500 million of unsettled forward equity. So we didn't really need to lean in too hard in the quarter. And with the bond deal that made it even more so. And then I guess what I'd say in 2026, as you think about it, we remain very low levered. And so I think depending on the pricing of both our debt and our equity, that's where we would orient kind of our decisions around equity -- access to equity and then otherwise utilizing the bond market on the debt side. Operator: Our next question will come from Jay Kornreich with Cantor Fitzgerald. Jay Kornreich: Just curious, you added a new top 10 tenant this quarter with Primrose Schools. And as the majority of the deal flow comes from repeat business, I guess I'm just curious, how do you think about prioritizing obtaining new tenants that can really set the stage for continued business going forward? And can we expect more additions to that top 10 quadrant as the next 12 months come on? Peter Mavoides: Yes. Max, why don't you tackle that for us? Max Jenkins: Sure. Thanks, Pete. Primrose is a premium childcare concepts with over 500 locations across the country, and we've been partnering with their largest franchisee over the last couple of years and so a subsequent transaction put them in the top 10. But on the sourcing front, we're constantly adding new tenants and relationships to the portfolio. And frankly, it's been pretty consistent over the years of every quarter, we're adding anywhere between 5 and 10 new tenants and -- but then we're obviously focused on repeat business and growing ratably with those operators throughout our industries. And so it's always going to be a two-pronged approach. Jay Kornreich: And then just as a follow-up, in addition to sticky cap rates lately, you also ticked up the lease escalations to 2.3%. And so I'm curious what's driving that lease negotiation leverage and is that something on the lease escalations that you feel like you can continue to increase even in an environment where lowering interest rates could lower cap rates? Peter Mavoides: Yes. Listen, I think that's a key economic term of the sale-leasebacks we're negotiating. And ultimately, in any deal, we're negotiating the best terms we can. And whether or not we win a deal is really a factor of competition and having an ample opportunity set to focus on the deals with the least amount of competition. I would not anticipate that going higher. And as I said in our prepared remarks, a 10% average cap rate over the life of these leases is as high as we've seen and pretty darn compelling. If you look back to 2020, 2021, where interest rates were low and competition was very high level, our escalators were down around 1.4%, 1.5%. And so over a longer period of time, I would expect downward pressure on that key economic term. Operator: Our next question comes from Rich Hightower with Barclays. Richard Hightower: I guess just to maybe follow up on the same theme. I mean, obviously, one of the big, I guess, headlines in net lease this year has been that added private market competition. And so we probably asked this question last quarter as well. But just tell us about what you're seeing in the marketplace and how the different features of deal negotiation are impacted as more capital flows into the space? And does that affect the way you underwrite, you think about guidance, et cetera? Peter Mavoides: Yes. I mean it's always a competitive market. There's always competitive forces, competitive sources of capital, competitive alternatives for our tenants. And ultimately, we compete on our reliability and our ability to execute and deliver capital into capital needs. And I think when you have a lot of new entrants, there's a lot of footfalls and a lot of misstarts. And I think the priority on reliability and certainty and relationships and the ability to service and those relationships reliably gets rewarded. And that's been our operating thesis since starting this company and will continue to be the way we go to market. And so I'm confident that we'll be able to offer more compelling and certain capital to our counterparties than new market participants. Richard Hightower: I appreciate it, Pete. Maybe just to follow up or put a finer point on it. If you are losing out on a transaction, where are you typically losing and on what terms and that sort of thing? Peter Mavoides: Yes. We're going to lose on price. We're going to lose on -- I think the initial cap rate is ultimately the highest point of sensitivity. And if -- I view it as if we lose a deal, it's because we're choosing not to do it, and we're choosing not to chase the price and we see a different risk-adjusted return dynamic and opt to deploy our capital somewhere else. So it's not necessarily losing a deal. It's just deciding to invest somewhere else. Operator: Our next question comes from Eric Borden with BMO Capital Markets. Eric Borden: Just a quick question on the bad debt watch list. I understand that it's coming in above your underwriting. Just curious if you could provide an update on the watch list and where it sits today. I believe last quarter, you said it was approximately 160 basis points. Peter Mavoides: A.J., it's you, Buddy. A. Peil: Yes. So our watch list, and again, just to refresh, is the intersection of B- and less than 1.5x coverage. Today, that sits at 1.2x. And there's a variety of tenants on the list that we keep a close eye on, but it is down 40 basis points quarter-over-quarter. Operator: Our next question comes from Dan Guglielmo with Capital One Securities. Daniel Guglielmo: There were some changes to the ABR by state, but nothing that jumps off the page. When looking at the existing pipeline, are there states or regions where you see better investment opportunities over the next year or so? Peter Mavoides: Yes. As we think about it, geography is always an output, not an input, and we go where our tenant relationships bring us in the United States. And so there's certainly good opportunities across all states, and we just prioritize the best opportunities with the best operators. And so I wouldn't expect any material deviation in our geographies as we think about 2026. Daniel Guglielmo: I appreciate that. And then as a follow-up to the question on the elevated lease escalation number, are there any additional risks you think through for the higher annual rent bumps on some of the newer tenant leases? Anything kind of incremental? Peter Mavoides: Yes, listen, it's -- rent escalations are a key economic term. One of the benefits of lower escalations is a more compelling rent basis for the counterparty, right? The inverse of that is the higher the rent escalations, the more inherent credit risk as you get in the out years to your assets. Certainly, we feel comfortable at the level we're at, kind of roughly CPI-ish. But to the extent that your lease rates are growing faster than CPI, the tenant's underlying ability to generate profit may not keep up with rent. And so that's an important consideration as we structure these leases is really making sure there's a healthy rent payment and healthy coverage as we think about the out years in 10 through 20. So it's a balance. And certainly, more is better, but making sure you're getting the right level and having tenants that can service those obligations throughout the life of the lease. Operator: Our next question comes from James Kammert with Evercore. James Kammert: You've covered a lot. Just to go back on the credit loss assumptions for '26. Would you just say as a platform, you're adopting a more conservative expectation for credit loss for '26 given the economy or the portfolio? Or I'm reading too much into this? Or it's very similar to what you kind of started the 2025 outlook for when you [Technical Difficulty] in late '24? Peter Mavoides: Yes. I would say we're looking at it through the same lens. We have the same guys doing the same work, taking the same assumptions with the same base of experience and our assumptions are based on the most current data that we have in the shop. Ultimately, the result of that process is very consistent to what we're looking at last year at this time. But the risks in the portfolio tend to be very idiosyncratic and not really driven by macro trends. It's more just specific operators who are not operating the way we would expect. So it's a consistent process. The result just happens to be very consistent to last year as we sit today, but nothing out of norm. Operator: [Operator Instructions] We will take our next question from Omotayo Okusanya with Deutsche Bank. Omotayo Okusanya: The group of tenants where the rent coverage is less than 1x, could you just kind of a high level, tell us like who that is, whether -- if you can't mention the specific client or tenant, kind of what sector or what industry it is? Peter Mavoides: Yes. It's a group of assets. First and foremost, let's focus on the real estate properties that we own. And there's really not a consistent theme. It's very much specific idiosyncratic risk to those assets and the lease obligations that the tenants have at those assets. It's going to be across all our industries. It's going to be across all our geographies and it's just specific sites that aren't working. It could be very idiosyncratic as a childcare center lost an operator or a manager or it could be a restaurant where there's a road widening and the access is off-line or it can be a car wash that's just opened and really ramping into its membership base. So very idiosyncratic stuff, not terribly material. Certainly, we're happy that it's come down, but nothing thematic that I would point out. Operator: Our next question comes from Greg McGinniss with Scotiabank. Greg McGinniss: It's never particularly low, but acquisitions through existing relationships hit 70% this quarter, which maybe one could argue is relatively lower than usual. I'm curious if this is an indicator for the growth of EPRT's name as a source of capital? Or how do those nonrelationship deals come about? Is it market deals, the seller approaching you? I'm just trying to understand if you start having even more investment opportunities as you grow. Peter Mavoides: Yes. I think you see that we're having more investment opportunities. Our underwritten pipeline has grown consistently over the years. I think the opportunity set that we've written offers on this year is approaching $7 billion versus $5 billion last year. And we're doing the hard work in attending conferences, sending out mailers, dialing the phone to find new relationships in our industries and find new partners. And I think our execution and our reliability has given us a good reputation as a capital provider, and that continues to drive incremental opportunities. So having that number at 70% is great. I wouldn't concern me if that was 50% because certainly, relationships outgrow us from a concentration perspective, and it's important that we're finding new people to bring deals in the coming years. Greg McGinniss: And then I just wanted to kind of confirm whether or not you start seeing any indications of increased competition today or if this is kind of similar to last year at this time when you expected greater competition to materialize given historically wide spreads and the success that you've been having? Peter Mavoides: Yes. There's other buyers out there. We're seeing them bid on deals. We continue to be successful where we choose and where we see appropriate risk-adjusted returns. So there's platforms out there. There's people investing and there's competition, but we're continuing to execute well and have a good reputation and are able to pick and choose the deals that we do. Operator: Our next question comes from Ryan Caviola with Green Street. Ryan Caviola: Is there any color you could share on the differences in yields between your traditional retail portfolio versus the industrial properties that you mentioned earlier in this call? And is that expectation of cap rate compression, does that apply to these industrial properties as well? Or is that mostly in the retail space? Peter Mavoides: Yes. I would say it's -- there's really no differentiation. The biggest driver of differences in cap rates is going to be the counterparty, the credit and the real estate pricing, not necessarily whether it's retail service or industrial. So there's really not a differentiation, and we would expect cap rate compression across our entire opportunity set driven by the -- as I said on the call, lower interest rates and more stable capital markets. Ryan Caviola: And then I know you've mentioned a few times that credit losses have been better than expected throughout this year. The only notable story across retail that comes to mind for this quarter is some distress in autos. Has any of that flowed into the portfolio? Or how are you viewing that space for the rest of the year and going into '26? Peter Mavoides: Yes. We haven't seen it. Our auto exposure is largely focused on automotive service. And so the noise around automotive retailing and dealerships isn't in our portfolio. The noise around auto parts suppliers isn't in our portfolio. So we still think automotive service is a good industry for us, and we like the real estate in that industry, which is granular, bite-sized, well-located boxes. And so we'll most likely continue to invest ratably across that industry as we think about 2026. Operator: Our next question comes from John Massocca with B. Riley. John Massocca: Sticking with the industrial assets, and sorry if I missed this earlier in the call, do those properties house consumer-facing businesses? Or are they part of a tenant's internal supply chain? And if it's the later, how are you calculating rent coverage? Peter Mavoides: Yes, they're not -- I mean, they're industrial properties, industrial outdoor storage yards where service-based operators are running their business. And the coverage is based upon the revenue generated out of that site and the profitability from that site. I would acknowledge that, that revenue and that profitability is less tethered to that piece of real estate than a traditional retail box like a restaurant, but those sites are still essential to that operator's business and switching costs are very high, such that we would expect durable tenancy in those assets. John Massocca: [indiscernible] are they selling goods made there like directly to other businesses? Or is it kind of an internal thing within a tenant that you're kind of just getting whatever their estimate is of the kind of revenue contribution from that particular manufacturing facility or storage facility or whatever it may be? Peter Mavoides: It's a wide range of businesses and operations. So I would say there's probably a little of both of that. John Massocca: And then as you do your credit underwriting for potential investments with private equity-backed tenants, does the size of the private equity sponsor matter to you at all? I mean, especially in the current environment where private equity capital raising, liquidity events are a little bit more uncertain versus in years past? Peter Mavoides: Yes. We start underwriting real estate and underwriting the unit level profitability and the economics of the site and then take a look at the corporate credit. And I tend to be agnostic to the equity source. It could be private. It could be large private equity and [credits] credit. And we ultimately hang our hat on owning a good piece of real estate at the appropriate basis with a good lease structure supported with rents supported by the operating business. John Massocca: Is there any difference versus maybe a smaller regional private equity operator versus a bigger brand name one? Or would there be a trend do you think in the current kind of credit environment to move one way or another between the two in terms of how you're thinking about valuing potential transactions with those tenants and their sponsors? Peter Mavoides: No. There's good big operators and bad big operators, and there's good small operators and bad small operators. And we really focus on our history and our relationships. And the bigger the operator, we find the more use of leverage and so we certainly take that into consideration, but it's underwriting credit. Operator: And it appears we have no further questions at this time. I'll turn the program back to the speakers for any additional or closing remarks. Peter Mavoides: Super. Well, thank you all for your questions today, and thank you for your time, and we look forward to seeing everyone in the conferences in the upcoming months. Have a great day. Operator: This concludes today's program. Thank you for your participation, and you may disconnect at any time.
Operator: Good day, and welcome to the POOLCORP Third Quarter 2025 Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Melanie Hart, Senior Vice President and Chief Financial Officer. Please go ahead. Melanie M. Hart: Welcome, everyone, to our third quarter 2025 earnings conference call. During today's call, our discussion, comments and responses to questions may include forward-looking statements including management's outlook for 2025 and future periods. Actual results may differ materially from those discussed today. Information regarding the factors and variables that could cause actual results to differ from projected results are discussed in our 10-K. In addition, we may make references to non-GAAP financial measures in our comments. A description and reconciliation of any non-GAAP financial measures included in our press release will be posted to our corporate website in the Investor Relations section. Additionally, we have provided a presentation summarizing key points from our press release and today's call, which can also be found on our Investor Relations website. We will begin today's call with comments from Peter Arvan, our President and CEO. Peter Arvan: Thank you, Melanie, and good morning, everyone. I am excited to share that our teams have maintained the momentum we established in the second quarter, delivering another solid performance in Q3. Thanks to their hard work and dedication. We continue to drive growth with top line sales up 1% and gross margin expansion of 50 basis points. This was fueled by consistent maintenance activity and encouraging signs of stabilization in both new pool construction and remodel. I'm also pleased to see that we achieved year-over-year growth in building materials for the first time since Q3 of 2022 driven by improvements in remodel activity and share gain. As you know, we have continued innovating and investing in our POOL360 applications. And I'm pleased to say that our adoption rate of these industry-leading tools continues to grow as our customers realize their full potential. Building on these successes, we recently shared our strategic road map for the next year and beyond with the entire management team at our international sales conference, and their excitement was palpable. The innovative products and ambitious growth plans we unveiled are already gathering a buzz and our teams are ready to hit the ground running as new initiatives start rolling out immediately. We're focused on key areas of our business where we know we can win. This forward-looking approach not only positions us to close 2025 with momentum, but also lays a strong foundation for an even more dynamic 2026. Looking at the macroeconomic environment, uncertainty around tariffs and elevated borrowing rates continue to weigh on consumer sentiment and limit discretionary demand, particularly for pool projects that require financing. While we observed overall permit data down mid-single digits year-over-year through August with considerable variability across the country, recent easing of interest rate policy offers a promising path forward towards relief. For clarity here, we believe it will take further reductions to bring borrowing rates to a level that will motivate potential entry-level pool owners to build. Despite these challenges, however, our new pool construction sales have outperformed industry permit data indicating continuous share expansion. On the remodel side, consumers remain focused on essential repairs and targeted improvements rather than large-scale upgrades. In response, our teams are leveraging our robust product portfolio, our strong private label offerings and enhanced technology while partnering with vendors to deliver innovative solutions and drive future growth. Overall, I am more than confident in our team's ability to adapt, execute and position us for long-term success. Now I will walk through our third quarter results. We reported $1.5 billion in net sales, up 1%, building on the growth we generated during peak season. Maintenance product sales performed well, particularly parts and private label chemical volumes. As mentioned, we saw growth in building materials used in new construction and remodel projects. mid-season price increases created a slight lift on top line, but were diluted some by chemical deflation. Related to our geographic markets, Florida produced 1% growth with Texas flat and California and Arizona each down 3%. Florida remained steady across our product categories and leads the country with new pools being built in 2025. While flat, Texas showed sequential improvement compared to recent quarters. New pool builds in Texas remain pressured, but continued to improve throughout the year and maintenance-related product sales showed resilience. In California, we see continued pressure on new pool builds, particularly in areas affected by recent wildfires. Arizona showed some deceleration in permits compared to earlier this year, but we believe this may be related to timing versus reversion, while maintenance held up for both California and Arizona during the quarter. In Europe, net sales decreased 1% for the quarter in local currency and increased 6% in U.S. dollar. Similar to last quarter, we saw growth in the southern countries while impacts from political strain and related consumer uncertainty pressured sales in France. For Horizon, net sales increased 3% in the quarter, supported by solid maintenance growth and improvement in sales for outdoor living products like landscape lighting, hardscapes and synthetic turf. Shifting to product categories. Total chemical sales declined 4% this quarter, reflecting some additional deflation. Overall, I consider the demand for chemicals and our performance to be stable. Our private label offerings generated volume growth during the quarter, showing that our teams are being successful in showing the power of our brands and the innovative products and systems that we offer. With our new product showroom displays and marketing support, our customers continue to see strength of our value proposition, and this bodes well for the upcoming selling season. Building Materials sales increased 4%, again driven by our expansive private label offering and elevated customer experience. We recently rebranded NPT, formerly National Pool Tile to National Pool Trends to align our brand name and marketing efforts to highlight our many offerings. The new name brings greater clarity to our value proposition, showing NPT as our customers' partner for complete backyard transformations using our tile pool finish decking to name a few. Our premier product offering, product sales specialists and consumer showrooms offer a one-of-a-kind customer experience, and it is shown in our results. Equipment sales, which excludes cleaners increased 4% during the quarter, mostly reflecting benefit from price and steady replacement volume for critical components. Turning to end markets. Our commercial sales increased 2% in the third quarter, showing steady momentum from a strategic focus area. We continue to make investments in our team during the quarter and created greater connections to key designers and builders to better support commercial aquatic projects. Sales to our independent retail customers declined 3%. Chemical deflation created mild headwinds here, while DIY consumers continue to be hesitant with discretionary purchases like cleaners and above-ground pools, spas and some equipment. For our Pinch A Penny franchise group, represented -- sales represented our franchisee sales to their end customers declined 1% during the quarter. Also of note, we have not seen any meaningful shift between do-it-for-me and do-it-yourself customers. Before covering progress on our initiatives, I want to briefly highlight gross margin ahead of Melanie's prepared remarks. I'm extremely pleased with the team's effort to expand gross margin by 50 basis points this quarter. Although the operating environment remains challenging, our teams continue to deliver by making strategic and efficient supply chain choices refining our network and applying disciplined buying and sales strategies, all while providing an unparalleled customer experience. A key investment area and differentiator for POOLCORP is our technology suite. POOL360 is the largest and most comprehensive set of customer-facing tools in the industry and our adoption rate continues to grow. For the quarter, sales through the tool represented an all-time high of 17% of our total sales for the third quarter, which demonstrates the customers' desire for technology that creates value. While still in the early stages, this growth shows the output of our technology investments over the past few years. Our targeted spend in our digital ecosystem is driving technology adoption and fueling not only growth in private label chemicals but also service and traditional B2B offerings. Our deliberate investments in innovation and enhancements of our tools have been key drivers of POOL360's impressive sales results. These advancements empower us to support higher sales efficiently while creating capacity for future growth. Increased POOL360 transaction adoption delivers significant benefits, not only strengthening our margins, but also elevating the customer experience, accelerating private label and exclusive product growth and enhancing our long-term competitive advantage. We completed 1 acquisition during the quarter, adding 2 locations in key markets. Additionally, we opened 1 greenfield bringing our year-to-date opening to 6 sales centers and we remain on track for additional openings in the fourth quarter to reach 8 to 10 new sales centers for the full year. Our Pinch A Penny franchise network added 1 new store in the quarter, adding to our Arizona presence and bringing the Pinch A Penney locations to 303 franchise stores. Touching on guidance. As we exit the pool season and enter the fourth quarter, we expect full year sales performance to be relatively flat to up slightly. We are confirming our diluted EPS guidance for the year to a range of $10.81 to $11.31 updated to reflect the $0.11 in realized ASU benefits year-to-date. At POOLCORP, our relentless pursuit of continuous improvement is driving us to lead the way on innovation across products and processes. Recognizing the industry's need for fresh ideas and solutions, we are making a new and intentional push to discover, shape and bring new innovation to market for our customers and as the strongest channel to market for our supplier partners by identifying emerging opportunities and thoughtfully guiding them from concept to market, we are helping to expand the total addressable market while delivering value unique to POOLCORP. Our team's product expertise is unmatched, backed by superior inventory availability, robust operating system and customer relationships that span decades in nearly every market we serve. Even as the macroeconomic environment presents challenges, the underlying strength of our industry and POOLCORP's distinctive capabilities remain clear. Our long-term growth trajectory is secure. Pools continue to be highly desirable and no company is better positioned than POOLCORP to help build and maintain the growing installed base. We have a strong competitive advantage, and we are continually strengthening it through strategic investments in our people, facilities, acquisitions, digital platforms, innovative private label and exclusive products, retail support systems, advanced chemical repackaging capabilities and consumer-facing marketing tools. Our commitment is focused and our path forward is clear. We mark our 30th anniversary as a public company. I want to thank our entire team for their exceptional dedication, which has driven our long-term success and positions us for the future. Over the past 3 decades, our growth and sustained success have been driven by the talent and commitment of our field leadership and support teams. All united by a focus on delivering the best customer experience and cultivating a go-to-market relationship with our valued suppliers. Looking ahead, I am confident that this foundation and our continued investment will equip us to enhance the differentiated value we provide to the pool and outdoor living industry while growing sales, expanding margin and generating strong cash flows and delivering exceptional returns for our shareholders. I will now turn the call over to Melanie Hart, our Senior Vice President and Chief Financial Officer, for her detailed commentary. Melanie? Melanie M. Hart: Thank you, Pete. For the third quarter, we saw year-over-year improvement in sales. driven by increased maintenance on the installed base, favorable pricing and market share gains, while noting that the impact from lower discretionary spend levels was less of a drag on a comparable basis compared to the third quarter of prior year. During the quarter, we realized a 3% benefit from pricing, reflecting the full quarter impact of price realization on the mid-season vendor price increases implemented in April and May. Trichlor selling prices continue to be impacted by the lower level of spend in the industry and somewhat offset our positive price realization in the quarter. Throughout the quarter, in certain markets, we saw some positive months where there were permit increases year-over-year from the prior period. However, in total, year-to-date permits remained below last year's level. Our estimate of new pool construction remains flat to slightly down, consistent with our expectations included in last quarter. Overall, the lower level of discretionary spend had a 2% impact on our sales for the quarter, similar to the impact we saw in the second quarter, with both Horizon and Europe having positive sales growth in the quarter. As Pete mentioned, we added 2 new sales centers through acquisition during the quarter, as well as one newly acquired location in October. These additions did not have a significant impact on our base business results, so we have not reported base business performance separately for the quarter. Our gross margin in third quarter was 29.6%, representing a 50 basis point improvement over prior year. This improvement was driven by favorable pricing, successful supply chain initiatives and an increase in sales of our expanded private label offering. All areas that we continue to focus on and excel in despite the persistent impact of the macro environment and lower levels of consumer discretionary spend. The sequential change from the second quarter margin is consistent with our typical seasonal trends. Operating expenses increased 5%, slightly ahead of the quarter-over-quarter changes we reported during the first half of the year. This increase includes the impact for our cumulative new greenfield locations that were not open in both periods. Also, as Steve described, the positive results we have seen with our expanded POOL360 initiatives we accelerated some incremental technology costs during the quarter because we believe that this further differentiates us from our competition and will yield better sales and operating leverage in the future. Operating income improved $2 million over prior year and was $178 million for the quarter. Interest expense of $12 million continues to compare favorably to prior year. Our effective tax rate was 23.5% for the quarter compared to 23.4% in prior year. ASU benefits contributed $0.01 in both periods presented. We generated diluted earnings per share of $3.40, up 4% from the $3.27 we realized in the third quarter of last year. Next, I'll discuss our balance sheet, cash flows and capital allocation. We finished September with inventory balances of $1.2 billion, up 4%, our lowest level of inventory we expect during the year as we exit the season. The increase includes product inflation and also includes stocking for our 9 new locations, including both our greenfields and the acquisition completed during the quarter. Total debt of $1.1 billion resulted in a leverage of 1.58x remaining at the low end of our stated target range of 1.5 to 2x. We generated $286 million in cash flow from operations year-to-date, compared to $487 million in the prior year. The decrease was primarily due to higher tax payments and investments in working capital. We expect to achieve our current year target of converting 90% to 100% of net income into cash flow from operations, which includes a deferred tax payment from prior year. We continue to execute on our share repurchases opportunistically under the authorization provided by the Board. We have completed $164 million of share repurchases through the third quarter with an additional $20 million through our earnings call ahead of $159 million through third quarter of last year. We have $493 million remaining under our share repurchase authorization. Looking at the year, we continue to expect full year sales to be relatively flat compared to the prior year, with 1 less selling day. This outlook reflects a modest decline in discretionary spending compared to last year, offset by positive impact from maintenance growth and pricing realization. In the prior year we baked 1% in the fourth quarter from weather-related hurricane activity, which at this time is not expected to reoccur in the fourth quarter. Our full year gross margin rate is forecasted to be similar to the prior year, which, on an ongoing basis reflects improvement as the prior year rate included a nonrecurring import tax benefit recorded in first quarter of prior year. This would include some improvement on a year-over-year basis in gross margins in the fourth quarter. While customer mix remains less favorable, these impacts are being offset by growth in private label sales ongoing supply chain improvements and pricing benefits. Our estimate for full year operating expenses remain in line with last quarter, with an expected annual increase over prior year of approximately 3%. This reflects productivity improvements, offsetting inflationary cost pressures with increases attributable to our investments in greenfield locations and our focus on technology initiatives. Forecast for interest expense estimated tax rate and share count for the full year are included in our quarterly earnings presentation posted on our website. There have been no significant changes to these estimates since last quarter, with interest expense updated to include share repurchase activity. As we typically see, our third quarter tax rate is lower than the annual rate due to discrete timing differences, and we expect our fourth quarter rate to be in line with the first and second quarter rate. We are confirming our diluted EPS range of $10.81 to $11.31 including $0.11 in ASU tax benefits realized year-to-date, of which we reported an additional $0.01 in third quarter that is now included in the range. I am pleased with our team's ability to perform and remain focused on our internal strategic initiatives, which have delivered tangible results year-to-date. This highlights the strength of our team and the significant value that industry-specific talent contributes across the outdoor living value chain. While we continue to manage the business effectively, we are also investing in our key strategic growth areas to create long-term value for our shareholders. I will now turn the call over to the operator to begin our Q&A session. Operator: [Operator Instructions] The first question comes from Susan Maklari with Goldman Sachs. Susan Maklari: My first question is diving in a bit on the comments you made around seeing some early signs of stabilization which is encouraging, given what we've seen in housing in the consumer as we think about this summer and into the fall. Can you talk a bit more about what is driving that and how you're thinking about the trends that you're seeing on the ground as we exit this year and maybe even into early 2026? Peter Arvan: Yes. As I mentioned, the permit data, when you look at that, which again only represents a portion of the market, is very sporadic. And so there isn't a consistent theme. But when you look at them from geography to geography, but I guess when we look at them in totality and then combine that with our comments that we're getting from our builder customers and remodel customers, I would tell you that the activity level is -- seems to have firmed up, and we are encouraged as evidenced by our growth in building material sales in the quarter, which it's been a long time since we've seen that. So I would say that overall, the comments tend to be more positive now I think it's going to take further interest rate cuts to really drive the entry-level pool buyer to jump in. But I think that overall, the consumer sentiment on new construction and large renovation projects seems to be fairly consistent and more optimistic than it was. Susan Maklari: Okay. That's good to hear. And then my second question is on innovation side, you mentioned that you accelerated some spend in the summer. It sounds like you've got some really good initiatives that are coming through the business. Can you talk about how you're thinking of the investments and the trends that we should expect into the fall and year-end? And then what that can mean for your ability to outgrow the market, even if things do stay relatively more challenging for next year or the next several years? Peter Arvan: Sure. So I'm going to break this down into a couple of areas. I'll talk about technology as it relates to POOLCORP's technology, and then I'll talk about technology related to the market. All of our investments in technology from a POOLCORP perspective are really designed to enhance the customer experience, to give them greater access, greater convenience and allow them to be more productive. I look at our suite of tools, whether it's the POOL360 service, which allows our service customers to essentially operate their business, invoice, market, schedule, do everything with the tool which allows them to be more productive. It allows them access to their catalog of products in POOL360, allows them to schedule pickups for products, have them delivered and frankly, have access to the entire network or whether you're talking about our industry-leading water test technology that we provide for our independent retailers that are selling our proprietary pool chemicals. Again, great product very good reviews for the homeowners and we've also extended that into an at-home app. So you can either bring the water test or bring your water to the store for testing or you can buy our proprietary Regal and E-Z Clor test strips take them home and then use again our proprietary app, test the water and get the same recipe, if you will, for correcting any water chemistry imbalances. So we look at our standard B2B tool, which is the -- where the preponderance of our traffic is and said, what can we do in order to enhance the customer experience to make that tool easier to use and the team has been relentless on that, which again provides more convenience, more information, more access for our dealers. And then the last thing that we have recently started launching is the -- an app that our counter people can use in our branches outside in the yard so that our customers don't even have to come inside. So if they're just getting product that is outside, they'll be met outside with a tablet and they can tap to pay. If they don't have an account, they can tap to pay or swipe a credit card out in the yard, which again gets them back to work. So I feel really, really good about the technology suite that we're rolling out for our customers. And I think that allows us to provide more convenience to our customers, a better experience and allows them to grow their business faster. And those all feed into our marketing tools too, which our consumer-facing marketing tools are designed to help our customers grow. So just a plethora of tools available and the adoption rate continues to grow. So very, very pleased with that. The other side of the technology that I mentioned has to do with product technology for the industry. I think our industry needs innovation and new product technology in order to grow I think customers are craving technology, convenience and value as it relates to those new products, which will give them reasons to invest in their backyard, in their swimming pool to make the ownership of a pool, whether you're talking about managing the water chemistry or managing your equipment pad, easier, more convenient and at a price point that is available for everybody. So we're very excited about the -- how technology will continue to impact this business and POOLCORP's role in driving that. Operator: The next question comes from David MacGregor with Longbow Research. David S. MacGregor: I just wanted to start by going back to the graphic in your deck where you referenced customer risk or customer mix, I guess. And just -- I presume we're talking about larger consolidated contractors and the kind of growing presence in the remodel work. But just thinking about longer-term margin implications here, and what are the levers that you have available to offset against that impact? Peter Arvan: I think what we -- what it means is that we continue to see consolidation at the customer level. And when you have consolidation at the customer level, they're looking for more tools and more convenience in order to help them be more effective. So for us, I actually think it's a big opportunity because nobody has the technology suite that we have today in order to integrate with them. So our systems are very flexible. It allows us to integrate with them. It allows -- some of the customers are choosing to use our software to operate their businesses and some of them are just choosing to integrate with us. So I actually think that it creates a competitive advantage for us, on one hand, it actually it makes them easier to deal with because we get more advanced notice, which allows us to be more productive when we're handling their orders, and it also gives them access to information on a self-service basis versus having to call and make inquiries, which again is -- just drives our cost to serve. So very comfortable with our ability to leverage our technology suite in order to help the larger companies be more efficient and grow their business. David S. MacGregor: That makes sense. And just as a follow-up, I want to go back to the 4% growth on equipment and how much of that would have been just kind of parts going into maintenance and repair versus equipment sales in the remodel segment? Peter Arvan: I think most of it right now is -- I mean, of course, every new pool gets a set of equipment a portion of the renovation and remodel will get new equipment. But the vast majority of the products that we sell are related to one of the critical components on the pool failed and had to be replaced, whether it was a pump or whether it was a heater or filter like the vast majority of our equipment sales, and it's -- frankly, it's always been this way, are for the replacement business for failed components. Operator: The next question comes from David Manthey with Baird. David Manthey: First question on chemicals. I was surprised that the weakness there, I think it's been recently flat to moderate growth. And could you talk about inflation, deflation broken down by chemicals, building materials, equipment. And I'm just wondering, is that chemicals? Is that something that happened recently? It seems like a slight change in trend versus what we've been seeing lately. Peter Arvan: Yes. I'll take that. Dave, I think the way -- here's the way I think about chemicals. I don't know that there's been any trend. I think we've mentioned on the last couple of calls that there's been some deflation on trichlor. Now remember, we break chemicals down into 3 buckets, right? There's the sanitizer, then there's balancers and then their specialty. So the most deflation that we have seen, and again, I wouldn't put it in the category of significant, I would just say that there has been some deflation is really in the santiser category. I don't think it should be -- I don't look at that in alarm. In fact, in my comments, I looked at our overall chemical business, and I said, you know what, our sales out the door on chemicals I would consider a fairly normal because you have to remember that it's -- our sales of chemicals goes into our service professionals and into our retail stores. So when you're within a few percent of the total I don't really look at that as an alarming trend one way or the other because that could be absorbed in just inventory on people's trucks when they actually bought an inventory in the stores. So overall, I would say there's been slight pressure in sanitizers, right, and sanitizers and shock. But I would say that the rest of the business, balancers and the rest of the specialty products are actually holding up holding up just fine. So nothing really alarming or noteworthy there. the rest of the inflation that you mentioned, building materials, I would say, not a tremendous amount of inflation there. I would call that slight and then on the equipment side, the equipment guys are all out with their pricing for the upcoming season. And I would say that, that's fairly consistent to what we have seen over the last couple of years. David Manthey: Okay. That's helpful. Looking out to next year, I'm not asking for guidance. I'm just thinking about how the model works here. And I think typically, you talk about if you're growing normal kind of 6% to 9% in that growth algorithm, you often have talked about keeping SG&A growth to 60% to 80% of the top line growth rate and I know there's also some costs that creep back in when you start reinstating bonuses, incentive comp and that sort of thing. So I just want to know how the model works mathematically, when we think about year 1 of mid-single-digit growth, let's say, do we see that kind of normal 60% to 80% growth rate in SG&A leverage? Or is it slightly higher than that in year 1 and then we start to hit that leverage as we go forward. Melanie M. Hart: Yes. So the model stays intact. We will see some upfront kind of recovery of expenses. So incentive compensation, as you mentioned, would be the one area. But of course, that would only track as far as our growth track. And then outside of that, what we've talked about from an expense-based standpoint, is we've managed variable expenses. And so when you think about kind of volume increases coming back, we will have some add backs as it relates to drivers and warehouse personnel, but that will be kind of limited from that standpoint because we've maintained all of our professional staffing, our sales center managers and our BDRs so initially, there will be those volume-related expenses as well as the incentive compensation that would come back in with the sales growth. Peter Arvan: So Dave, this is Pete. Really nothing new to report in that area. It's the same as we always have done. I guess what is noteworthy though is we continue to invest in the business for the long term. So we continue to increase the number of sales centers that we have in the markets that we believe are either at capacity now or poised for additional growth and opportunity. And we also continue to invest in technology because we are convinced that it's something that customers really want and value, it is an area that allows us to differentiate POOLCORP and an area that customers have been very happy with the investments that we've made. Now again, those investments are -- none of those are short term. Those are all long-term investments that we believe we make. They become foundational and become part of our operating system, become part of the customer's operating system. And the leverage on those will continue to climb in the out years. Operator: The next question comes from Ryan Merkel with William Blair. Ryan Merkel: I want to start with the commodity pricing down 1% in the chart. How much is trichlor down year-over-year? And then are you also seeing deflation in PVC? Just what else is in there? Melanie M. Hart: Yes. So we still are not seeing PVC stabilize. So it's getting better when you look at the quarter-over-quarter rates on the PVC, but it is still within the quarter a decline. And then when you look at trichlor, the overall impact of the pricing is, one, but the chemical pricing is down more than that since it's just a portion of about 12% of the sales overall. So it varies. Right now, it's somewhere kind of in the mid- to high single digits down from a pricing standpoint of where it was last quarter. Ryan Merkel: Yes. It's pretty interesting to see this persistent chemical deflation. I mean, usually, that commodity is kind of up 1 to 2 points pretty consistently every year just because more of a maintenance item. Like what is different today about trichlor? Why do we continue to see this persistent deflation? Peter Arvan: Yes. I think, Ryan, that trichlor, as you know, went up dramatically during COVID. It went from for -- when I look at the price of trichlor today compared to what it was pre-COVID it is significantly higher than it was. It was a crazy high number, it has come down from what I thought was an unsustainable number at the time but it is still up significantly over what it was during the COVID era. So again, what's changed? Really, nothing has changed from a demand perspective. I think in any given year, you're going to see ebbs and flows in demand that's tied to overall demand, which is whether when the pool is open, how hot the weather is, how wet the weather is but honestly, when I look at it, it's not a number that I think is moving. What would concern me is if it was moving sharply one way or the other. I think the movement is muted and I don't know that it is affecting anybody's long-term trend. I think that import regulation can have an impact on that depending on what the administration decides on that because some of the chemical is domestically produced. Some of it is sourced from imports. But overall, I don't get too excited about that number because, again, it's not moving sharply. During COVID,when it's skyrocketed and like a lot of things that was moving sharply, that was much more of a concern. But I look at the movement today and say, yes, it's down slightly. But in 6 months, it could be back where it was, too. And I don't know that I could explain why it would be up 4% or down 4% one way or the other. Overall, though, it's a portion of our chemical mix. And I think trichlor just happens to be the product that everybody pays very close attention to. But when we look at it in total, it's a much smaller part of the total. Operator: The next question comes from Trey Grooms with Stephens. Trey Grooms: So just from one comment earlier, I want to make sure I have this right. So sales still expected to be kind of flat. And I think Pete, you said flat to slightly down for the year. But we're still thinking 4Q overall should be up year-over-year. Is that still the right way to think about it? And then I guess, with the EPS range, you reiterated clearly. But given where we are this kind of late stage in the -- with the pull season pretty well behind this. I guess what would maybe get us to the higher end versus the lower end of the guide range here, given the expectation for sales? And then I think you mentioned gross margin to be roughly flat year-over-year for the year. So any color on that would be great. Melanie M. Hart: Sure. So for sales, fourth quarter, we would expect that to be kind of flat to slightly up. And what we're seeing there is we'll see incremental benefit from a pricing standpoint in fourth quarter, that's really offsetting the weather-related hurricane benefits that we got in the fourth quarter of last year. And then from a margin standpoint for fourth quarter, we are also expecting margin there to be up. So we would expect to continue to see all of the benefits of the things that we've been working on all year long. And we'll see that it should be kind of up slightly from where we are in third quarter with some benefits from product mix. Peter Arvan: The other thing I would to mention, which is always the case, our fourth quarter a portion of what happens in the fourth quarter is construction and remodel. And again, that is going to be dictated largely by weather in the seasonal markets is what I'm referring to. So right now, weather up North is still pretty good, pretty warm. And the folks that have contracts to build are still building, which is encouraging. So the longer the weather stays warm, that bodes well for the fourth quarter for us. Melanie M. Hart: And then in order to get to the higher end of the range, that would really be weather dependent. So at this point, basically, we don't have any -- we don't have a near-term hurricane or weather impact -- significant weather impacts that we're seeing. But that would -- that benefit from last year would -- if we saw that similar benefit, that would be where it would fall in the range. Operator: The next question comes from Scott Schneeberger with Oppenheimer. Scott Schneeberger: I guess, Melanie, I'll start with you, but Pete, if you have anything to add, I'd love to hear it. In the third quarter gross margin improvement, it looks like pricing and supply chain were about equal. It's a two-part question. In pricing, could you just delve into a little bit now that we have the full impact of the tariff increase in the third quarter level or to deeper, Melanie on what you're seeing, how have competitors reacted, how we should think about that going forward? There's some uncertainty, obviously, on November 1 as well. But just how we should think about the sustainability of that trickling forward? And then the second half of the question is on the supply chain piece, could you just take us into what -- how structural is that, how permanent are the fixes, maybe some anecdotes of the improvements you're conducting there? Melanie M. Hart: Okay. Yes. So sure. On the pricing front, we are seeing that the -- we did have a full quarter of the price increases that went into effect kind of mid-season. And those are at this point I would say, fully flushed through the cycle. And so when we're looking at the acceptance of that pricing overall within the market, we -- that is through the pricing channel, and we're not seeing any impact on what we're doing versus our competitors doing as it relates to pricing. Peter Arvan: And I'll take the second part of the question as it relates to supply chain activity. We have become more and more sophisticated with supply chain over the last couple of years. Very happy with the team's effort in that regard. I think we have better technology. They have embraced the AI tools that we have available to us. So I look at the actions that the supply chain team, which has to do with what we buy, when we buy, whom we buy, how we buy and making sure that we are partnering with our vendors to maximize our opportunities and benefits and say that we are as good in that area, if not better than we've ever been. So I would look for the gains that we see in that area to be sustaining. Operator: The next question comes from Garik Shmois with Loop Capital. Garik Shmois: You spoke to equipment price increases that have been announced for the next season. I'm just curious if you can speak to the early buy programs and if your approach for the coming season is taking any different shape than usual. Peter Arvan: Yes. Really, nothing new to report there. The vendors have -- there was only, I think, 1 year during the peak of COVID when the vendors modified their traditional early buy program. So the early buy programs are very, very similar to what they've always been. And we are certainly participating in those in a very strategic way as we always have. So there's really not much new to report on there. . Garik Shmois: Okay. And then just a follow-up question, just on SG&A and the guide for the year, a little bit of a nitpicky question, but I think, Melanie, you mentioned in your remarks and outlook for 3% SG&A growth this year. I think last quarter, it was maybe 2% to 3%. I just want to confirm that. Is that different? And if so, is it just related to the expenses that you saw primarily in the third quarter. Melanie M. Hart: Yes. We had the 5% increase for the third quarter. So that increased slightly because we did accelerate some of these technology investments. When we look forward to fourth quarter, we'll expect to see that rate higher than what we saw earlier in the year. I would say in the range of a 3% to 4% increase for the fourth quarter. Operator: The next question comes from Jeff Hammond with KeyBanc Capital Markets. Jeffrey Hammond: Just on pricing in the next year, I guess, we've gotten the price list or from some of the equipment guys ahead of the early buy seems like they're putting kind of normal plus 2 to 3 points with tariffs. And I'm just wondering, one, what are you hearing from kind of the rest of like your other categories around pricing into next year? And just kind of the level of fatigue as we -- it looks like we're seeing kind of another year of above-average price increases? Peter Arvan: Yes. I think as it relates to the rest of the suppliers, I would say fairly normal cadence. I think the equipment guys are above where most of the rest of our suppliers are. Your comment on that level of fatigue from our customers that is certainly something that we hear. Quite frankly, all of that is solved with innovation, right? So new products, new innovation, make those price increases far more palatable for the customers because it gives them something new to go sell and grow their business and to help address the concerns of the homeowners and pool owners. Jeffrey Hammond: Okay. Great. And then just on POOL360, continue to see good adoption there. I'm just wondering if you have a target or the way to think about what you think that percentage of adoption is a couple of years out. And what the pushback or feedback is on people that are may be more reticent to adopt? Peter Arvan: That's actually a really good question. I would tell you that when I look at the range, it gives me good comfort on this number as well as many others as I look across the expanse of our quantitative metrics at POOLCORP is the range. So whenever I see a very tight range on something, I look at it and say, okay, if the range is very tight, it tells me that, okay, this is really kind of what process capability is for the particular thing that we're talking about. In the case of POOL360, I can tell you that our range is pretty broad, which, again, I have people that are well above. I mentioned that we were at 17% for the quarter which is an all-time high for us. We have people that are nearly doubled that. In fact, there's a few that are actually above that. So I look at that and say that there is still significant room to improve the adoption of the tool. What we hear consistently from customers, it's an education thing, right? So first of all, we have to have something that is worth using. And I think we have that. I think the teams work very, very hard to make sure that we have a relevant set of tools that is best-in-class that exists primarily for the benefit of the customer. So this is not, hey, how can I operate POOLCORP cheaper. It's about how can we help our customers be more productive and improve the overall customer experience. And I think the teams have worked very hard to do that. So I look at the adoption rate in some areas, it is significantly higher than what it is for the total. So what's my target I guess my target is still significantly higher than where we are. Do I think we could be as a company, 25%, 30%, yes, I think we absolutely could do that. Could it be higher? And the answer to that is probably yes. but we don't have quite enough experience with it, and we need to spend more time with our customers to say, okay, what would it take in order to have this be your go-to every time? Operator: The next question comes from Steven Forbes with Guggenheim. Steven Forbes: Maybe to the follow-up on Jeff's there around POOL360. Is there a way to help frame to us sort of how a customer spend or wallet share evolves sort of 6 months, 12 months after initial adoption as we sort of build support right around that achievement of target that you just laid out? . Peter Arvan: Yes. I think the way I think about it is this, customers that have a very strong digital connection with their supplier tend to be -- we tend to grow faster with those companies. In particular, when you look at our digital tools related to water test, obviously, the water test was developed to support our private label chemicals, whether that's our Regal or E-Z Chlor brand. So every dealer that uses the software, every homeowner that buys the test strips and test their water using either the test strips or the in-store experience, they're going to get a recipe, if you will, or a prescription of chemicals to add to their water, which are all private label products. So the more -- the faster we drive adoption in that area, the faster we'll be able to grow our chemical business. And it becomes less about, well, I could buy this bottle of algaecide for $1 cheaper from someplace else that becomes, well, wait a minute, this is part of the recipe and the program that I'm using to manage my pool water that produces these great results and crystal clear. So whether it's that or whether it's the service tech that is using POOL360 service because every time that person needs something, he's drawing the quote from his/her POOL360 account rather than shopping around. So we see much greater stickiness for customers that use that. And frankly, every time we integrate with our customer software, again, that drives stickiness. So we love the potential of growing the business through closer technological connections with our customers. And as those businesses or as those connections grow, we believe our sales will grow faster than the average, if you will. Steven Forbes: Helpful. And then as we think about sort of future innovation and technological advances. When you talk to the builder community today, what's sort of in the pipeline as you think about opportunities to sort of continue to create a digital advantage and sort of drive further share capture? Like is there -- are there certain specific things that the builder community is asking you to innovate beyond or behind? Peter Arvan: Yes. I don't know that I'd focus specifically on the builders, right? Because the builder in our mind is the -- certainly, it's foundational because that's how the installed base grows. But the percentage of our business that is driven from builders as compared to the installed base of pools, which is maintenance from repair, the latter is far larger. So that's initially where we are focused. Now a lot of those tools can be used for the builders too. So we're investing for the builders with our -- a lot of the builders, in particular, the smaller builders, if you will, are very much in tune with and use our design centers and our digital catalogs for our building materials. But our focus right now is more with the maintenance and repair operations. Certainly, builders can use the same tools to get -- to prepare their quotes and order materials and order equipment sets for construction projects. That is something and then don't forget about our retailers, too, because the retailers, many of them are using their systems integrated with ours to do essentially replenishment to the stores to manage their inventory. So it is -- I wouldn't focus just on builders, I would just say we are looking to improve our customer experience on all facets of the business. Operator: The next question comes from Sam Reid with Wells Fargo. Richard Reid: Awesome. I wanted to touch on the relationship you've historically seen between home equity line of credit rates or HELOC and the demand for remodel and new pool, anecdotally, kind of what's the lag typically between lower HELOC rates and spend for some of those more discretionary categories? Peter Arvan: Yes. I don't know that I could quantify a strong link that says, okay, at this HELOC number, the project is a go at 50 basis points higher, it's a no go. I mean, I would just tell you, instinctually that homeowners today have a higher level of home equity than they've ever had before. And I think pools and new pools and renovation remodel certainly are still highly desirable. It stands to reason that as those rates come down, HELOC is one of the sources of financing that homeowners use to finance those projects. There's also other ways that they are doing it. But we just look for kind of overall more liquidity and lower rates is going to bode well for large renovation projects and allowing more customers that are -- have been waiting on the sidelines to get a pool to go ahead and pull the trigger and start construction. Richard Reid: That helps, Pete. And second question here. I know it's early, but I think you're going to be hosting an Analyst Day next year. You're going to follow your consistent kind of biannual schedule. So just along those lines, any high-level thoughts at this point around things that you think you might share or not share, just looking to get a sense for, are we going to potentially get an update to your algorithm or something along those lines? Peter Arvan: I can't give you all of my secrets now. It's way too early. It's not even Christmas, I would tell you, we put a lot of time and effort into our Analyst Day to make them -- Investor Days in order to make them worthwhile and show the best parts of the company and our focus areas and what gives us confidence in the future and what differentiates our value proposition. So at this point, that's all I'm going to give you is that I believe you're going to -- hopefully, you attend, and I believe that you'll leave there convinced more than ever that nobody is better positioned than POOLCORP to capitalize on this industry. Operator: Since we run out of our time, our last question comes from Collin Verron with Deutsche Bank. Collin Verron: The technology sounds really exciting, and sounds like you've already done quite a bit of investment behind it already. So I was hoping you can just help us think about the magnitude of the spend that you're doing there and how much more SG&A investment is there left to drive these initiatives? Or are those pretty much behind you and your start to reap the benefits as we move out to '26 and '27. Peter Arvan: Yes. I think when you start with technology, I look at the spend that we have on -- I don't -- it's not an alarming number. It's not a huge amount for a company of our size at all. And when I compare it against the benefits that we are seeing and will potentially and should see going forward. I think that in order to have anything relevant in the technology world, it's nothing. It's not like, hey, I spent a little bit of money and it's done. Technology changes at a very, very rapid pace. And we have to make sure that we change with it. AI is certainly going to have an impact on our business, the way we develop technology and the way we deploy technology and I think it's going to be helpful on both ends. But I don't look at the spend and say, wow, okay, we are spending hundreds of millions of dollars on an ERP system, we're not. We're spending as part of our normal course of business to make sure that we have the best, most relevant set of technologically up-to-date tools that create value for our customers, which again drives them to adopt the tools which makes for a stickier transaction because of the value that it creates for the customer. So I guess that's a long way of saying that I don't think we're spending a lot of money today but we're certainly not done spending. But like everything we do at POOLCORP, we try and squeeze the nickel just as hard as we can. And I think AI is helping us in that regard. Collin Verron: Great. That's really helpful color. And then maybe a more near-term question here. Melanie, you mentioned a few times the weather benefit that you guys saw last quarter. Any way you can help quantify just the magnitude of what you don't expect to repeat this year? Melanie M. Hart: It was a 1% benefit in fourth quarter of last year. That was the top line sales number. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Peter Arvan, President and CEO, for any closing remarks. Peter Arvan: I just want to thank you all for joining us today. We look forward to hosting our year-end call on February 19, when we will release our fourth quarter 2025 results and full year results. Thank you for your interest and support in POOLCORP, and I hope you all have a happy and safe holiday season and New Year. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Hello, everyone, and a warm welcome to the Heritage Financial 2025 Q3 Earnings Call. My name is Emily, and I'll be moderating your call today. [Operator Instructions]. I would now like to turn the call over to Bryan McDonald, President and Chief Executive Officer, to begin. Please go ahead. Bryan McDonald: Thank you, Emily. Welcome and good morning to everyone who called in and those who may listen later. This is Bryan McDonald, CEO of Heritage Financial. Attending with me are Don Hinson, Chief Financial Officer; and Tony Chalfant, Chief Credit Officer. Our third quarter earnings release went out this morning premarket, and hopefully, you have had the opportunity to review it prior to the call. In addition to the earnings release, we have also posted an updated third quarter investor presentation on the Investor Relations portion of our corporate website, which includes more detail on our deposits, loan portfolio, liquidity and credit quality. We will reference this presentation during the call. As a reminder, during this call, we may make forward-looking statements, which are subject to economic and other factors. Important factors that could cause our actual results to differ materially from those indicated in the forward-looking statements are disclosed within the earnings release and the investor presentation. Improving net interest margin and tight controls on noninterest expense growth continue to incrementally drive earnings higher in the third quarter. On an adjusted basis, earnings per share was up 5.7% versus last quarter and up 24.4% versus the third quarter of 2024. And on the same adjusted basis, our ROAA improved to 1.11% versus 0.87% in the third quarter of 2024. We are excited about the pending merger with Olympic Bancorp. Their addition to the Heritage franchise will add to the profitability of our operations and better position our company for growth in the Puget Sound market. We'll now move to Don, who will take a few minutes to cover our financial results. Donald Hinson: Thank you, Bryan. I will be reviewing some of the main drivers of our performance for Q3. As I walk through our financial results, unless otherwise noted, all of the prior period comparisons will be with the second quarter of 2025. Starting with the balance sheet. Total loan balances were relatively flat in Q3, decreasing by $5.7 million. Although loan originations increased from Q2 levels, payoffs and prepayments also increased in Q3, while utilization rates decreased. Yields in our loan portfolio were 5.53%, which was 3 basis points higher than Q2. This was due primarily to new loans being originated at higher rates and adjustable rate loans repricing higher. Bryan McDonald will have an update on loan production and yields in a few minutes. Total deposits increased $73 million in Q3 and noninterest-bearing deposits increased $33.7 million. The increase in total deposits was net of a $31.4 million decrease in certificates of deposit accounts, most of which was the result of a decrease of $25 million in brokered CDs. The cost of interest-bearing deposits decreased to 1.89% from 1.94% in the prior quarter. As a result of the rate cut in September, we expect to see continued decreases in the cost of deposits. Investment balances decreased $33 million due primarily to expected principal cash flows on the portfolio. Due to the desire to preserve capital for the pending acquisition, we halted loss trade activity in Q3. We also did not purchase any securities in Q3. Moving on to the income statement. Net interest income increased $2.4 million or 4.3% from the prior quarter due primarily to a higher net interest margin. The net interest margin increased to 3.64% from 3.51% in the prior quarter and from 3.30% in the third quarter of 2024. We recognized the provision for credit losses in the amount of $1.8 million, up from $956,000 in the prior quarter due primarily to an increase in the weighted average life of the loan -- construction loan portfolio. New construction loans increased the average life of the portfolio as well as reduced portfolio utilization rates. Net charge-offs remain at very low levels. Tony will have additional information on credit quality metrics in a few moments. Noninterest expense increased $530,000 from the prior quarter due mostly to increased comp and benefits expense as well as professional services. We recognized 535 -- sorry, $635,000 of merger-related expenses in Q3, most of which was included in the professional services category. Comp and benefits expense was higher, primarily due to increased incentive compensation accrual. And finally, moving on to capital. All of our regulatory capital ratios remain comfortably above well-capitalized thresholds and our TCE ratio was 9.8%, up from 9.4% in the prior quarter. Similar to our inactivity and loss trades on investments, we were also inactive in stock buybacks in Q3 and are unlikely to resume stock buybacks this calendar year. I will now pass the call to Tony, who will have an update on our credit quality. Tony Chalfant: Thank you, Don. Through the first 3 quarters of the year, I'm pleased to report that credit quality remains strong and stable. Nonaccrual loans totaled $17.6 million at quarter end, and we do not hold any OREO. This represents 0.37% of total loans and compares to 0.21% at the end of the second quarter. The largest addition during the quarter came from 2 loans totaling $6.7 million that are primarily secured by a townhome construction project. That project is nearly complete and the unit should be listed for sale before year-end. There is currently no loss expected on these loans and the nonaccrual decision was primarily tied to the delinquency status. Also within our nonaccrual loan portfolio, we have just over $2.8 million in government guarantees. Nonperforming loans increased modestly from 0.39% of total loans at the end of the second quarter to the current level of 0.44%. This increase was primarily tied to the previously mentioned increase to nonaccrual loans. Criticized loans moved lower during the quarter. These loans rated special mention or substandard totaled just under $194.5 million at quarter end, declining by just over $19 million during the quarter. Substandard and special mention loans were down by 5% and 12%, respectively, during the quarter from a combination of payoffs and upgrades. At 2% of total loans, substandard loans remain at a manageable level and in line with our longer-term historical performance. Page 19 in our investor presentation provides more detail on the composition of our criticized loans and reflects the stability we've seen in this portfolio over the past 2 years. During the quarter, we experienced total charge-offs of $374,000 that were split evenly between consumer and commercial loans. The losses were partially offset by $256,000 in recoveries leading to net charge-offs of $118,000 for the quarter. For the first 9 months of the year, net charge-offs remained low at $911,000. This represents 0.03% of total loans on an annualized basis and compares favorably to the 0.06% we reported for the full year 2024. Page 20 of the investor presentation shows our history of low credit losses and how we compare favorably to our peer group. We are pleased with the strength and stability of our credit metrics for both the quarter and through the first 9 months of the year. While we are closely watching the increase in our nonperforming loans, it is important to note they remain at a low level when compared to our historical trends. While there has been some economic volatility this year, we have yet to see any material impact on our credit quality. We remain confident that our consistent and disciplined approach to credit underwriting will serve us well should the economy show any material deterioration in the coming quarters. I'll now turn the call over to Bryan for an update on our production. Bryan McDonald: Thanks, Tony. I'm going to provide detail on our third quarter production results, starting with our commercial lending group. For the quarter, our commercial teams closed $317 million in new loan commitments, up from $248 million last quarter and up from $253 million closed in the third quarter of 2024. Please refer to Page 13 in the investor presentation for additional detail on new originated loans over the past 5 quarters. The commercial loan pipeline ended the third quarter at $511 million up from $473 million last quarter and up modestly from $491 million at the end of the third quarter of 2024. As we look ahead to the fourth quarter, we are estimating new commercial team loan commitments of $320 million, which is very similar to Q3 levels. As anticipated, loan balances were fairly flat quarter-over-quarter with a $6 million decline in the quarter. Although total loan production was up $81 million or 30% versus last quarter, we continue to see elevated payoffs and prepaids. And similar to last quarter, the mix of loans closed during the quarter resulted in lower outstanding balances. Looking year-over-year, prepayments and payoffs are $124 million higher than last year, and net advances on loans have swung from a positive $142 million last year, to a negative $75 million year-to-date in 2025. Please see Slides 14 and 16 of the investor presentation for further detail on the change in loans during the quarter. Looking ahead to the fourth quarter, we expect loan balances to remain near Q3 levels then resume growth to more normal levels in 2026 as loan payoffs moderate, and the net advances moved back to a positive position. Deposits increased $73 million during the quarter and are up $173 million year-to-date. The deposit pipeline ended the quarter at $149 million compared to $132 million in the second quarter. And average balances on new accounts opened during the quarter are estimated at $40 million compared to $72 million in the second quarter. Moving to interest rates. Our average third quarter interest rate for new commercial loans was 6.67%, which is up 12 basis points from the 6.55% average for last quarter. In addition, the third quarter rate for all new loans was 6.71%, up 13 basis points from 6.58% last quarter. In closing, as mentioned earlier, we are pleased with our solid performance in the third quarter. Deposit growth has allowed us to pay down borrowings and broker deposits while our loans have continued to reprice upward. These factors drove our net interest income up $2.4 million versus last quarter and $4.4 million versus the third quarter of 2024. The combination with Olympic Bancorp and its subsidiary, Kitsap Bank, will add to this positive momentum in a significant way. We look forward to having the exceptional bankers of Kitsap join the Heritage Bank family and are excited about what we can accomplish together. Overall, we believe we are well positioned to navigate what is ahead and to take advantage of various opportunities to continue to grow the bank. With that said, Emily, we can now open the line for questions from call attendees. Operator: [Operator Instructions] Our first question today comes from Matthew Clark with Piper Sandler. Adam Kroll: This is Adam Kroll on for Matthew Clark. Yes. So maybe just starting off on the margin. I was wondering if you had the spot cost of deposits at September 30 and maybe the NIM for the month of September? Donald Hinson: Sure, Adam. Yes, spot rate on cost deposits was -- the interest-bearing was 1.87%. And that, of course, compared to 1.89% for the quarter and for total cost deposits of 1.35%. The NIM for September was 3.66% compared to 3.64% for the quarter. Adam Kroll: Got it. That's super helpful. And then just on deposit costs. I guess how much opportunity do you still see to reduce rates on the nonmaturity side? Tony Chalfant: Well, we have close to -- I think where it comes into play is mostly close -- is approximately $1 billion we have in exception price as it's -- that are costing us currently close to 3%. And so we will continue to, as rates are cut to work those down over time. It's a process, and it doesn't happen all at once. But we have been working them down some. I will say also, a lot of the new -- if we bring on new accounts, so they tend to be at the higher than the overall portfolio rate. So that mitigates some of the help of the rate cuts, but I do expect that we will continue to be able to work that down over time. Adam Kroll: Got it. I appreciate the color there. And then maybe just one last one for me is I was wondering if you could just expand on how you're thinking about organic loan growth in '26? And do you have any visibility into payoffs and when they might normalize lower? Bryan McDonald: Sure, Adam. We're expecting to move back to more of our traditional range, mid- to high single digits next year. On the second quarter call, I had mentioned, anticipated growth hitting in the fourth quarter, and we have several additional larger payoffs we're now expecting here in the fourth quarter. So we're expecting to be flat again. So there's kind of 2 things going on. One is the cycling of some construction loans we've booked over the last few years that are reaching perm and paying off. And you can see that on Page 14 in the investor presentation just with the utilization rates on the construction loans as those go to perm and pay off. And then we've -- a lot of the new bookings over the last couple of quarters have been in that construction bucket, and so our fundings have been lower. If you look at the detail on the change in loans during the quarter, you can see our net advances on construction loans or actually on all of our lines is down this year versus up last year. So we expect, as we get into 2026, work our way through the rest of these payoffs that we'll have positive net advances on those loans, so a bit of a tailwind versus the headwind that we had this year. And then the productions continue to be strong at over $300 million this last quarter and expecting, again, $300 million in Q4, over $300 million in Q4. It's a little harder for me to see out into 2026 because our pipeline is really accurate out 90 days. It's hard to anticipate loan demand in 2026, although I would say things have been strengthening since the summer. And so based on that, I'm not seeing anything at this point that would cause those -- cause loan demand to dip and the pipeline to shrink beyond all the obvious things that could drive that. We're just -- we're seeing the trend move in the other direction right now. Operator: Our next question comes from Jeff Rulis with D.A. Davidson. Jeff Rulis: Maybe staying on the payoff front, just a follow-up. Any of that kind of managed by you or encouraged balance reductions for credit-related reasons? Bryan McDonald: Yes, Jeff, I would say the kind of the change in the fourth quarter is some several larger payoffs that are for adversely classified credits, not necessarily a circumstance where we're working them out of the bank, but ones where the customers have decided to sell the assets and pay it off. So that's the difference versus last quarter. We've got a few in that bucket and then one additional construction loan that's going to pay off in Q4. We're expecting Q4 versus previously we thought it push into '26. So that's the change for Q3. Not a huge number of loans, but a couple of chunky ones in there. Jeff Rulis: Sure. No, that's helpful. Just to kind of get the whole picture that on the edges, maybe some of that activity is positive. I wanted to talk about the deposit success in the quarter, a pretty good core deposit growth. Is that a bit of seasonal factors in play? Or is this just execution with the team, a bit of both? Just trying to see -- unpack that a little bit. Bryan McDonald: Yes, it is a bit of both. Third quarter, traditionally our strongest deposit growth quarter during the year, and that was the case last year, and we saw it this year, the years previously was hard to see it, of course, because of all the rate changes and the outflow of excess deposits. But yes, seasonal increase. And then we've had good additions from the new account activity side. And so those are driving the balances as well as some accumulation in customer accounts, again, more related to that seasonality. Jeff Rulis: Got you. And then connected maybe, Don, on the margin, I guess, it sounds as if that -- those deposit costs or spot rate and margin trending well. Is there a bit of a carryover or a declining benefit from the loss trades. I guess anything you give puts and takes on margin, particularly in light of cuts as well, rate cuts? Where would you sort of position the margin ahead? Donald Hinson: Yes. I don't think we're going to get the margin growth based off the rate cut we had in mid-September, which we didn't feel the full effect of or experience full effect of and kind of expecting one next week. I think we're going to continue to get, again, help on the deposit side. But I think the loan yields are going to be fairly flattish this quarter. We're going to continue to be able to reprice adjustable rate loans higher and new loans going on will be higher. But those rate cuts when we have, I think, it's 22%, 23% fully floating that also impacts it. So having a flattish loan yields for the quarter and maybe some help on the deposit side, I think we might continue to see some NIM improvement, but it will be muted compared to last quarter. Operator: Our next question comes from Liam Coohill with Raymond James. Liam Coohill: Liam On for David. So we've talked a lot about the deposit success in the quarter and I was curious, how has competition been trending in your markets, especially with a lot of banks targeting high levels of loan growth. Where are you seeing the most opportunity for gathering those deposits even in a seasonally stronger quarter? Bryan McDonald: Yes, Liam, really, it's same strategy we've deployed in the past going after the operating relationships, accounts that look for strong servicing. Don mentioned in his deposit comments that some of the new relationships we're bringing on have a little higher average cost than the bank's average. And that's because for those excess deposits to the extent that customers are shopping between a few banks, we're having to pay up on those excess deposits, maybe a little bit more so than we are within the portfolio on average. But then, of course, we're getting strong demand balances along the way. So we still see competition in our market, strong pricing competition on deposits. It's kind of varied from local -- one local geography to another in terms of who the players are that are being particularly aggressive with deposits. So that continues to be a factor. But if you're going after the operating relationships, it's a different driver than price on that piece. So that's the key. Liam Coohill: I appreciate that. And on the acquisition of Olympic, how has progress in the pending deal been trending? And what are the most pressing priorities from your view post deal approval and integration? Bryan McDonald: Yes, Liam, everything is progressing right as planned. We have a project plan and time line and everything is going smoothly. Not seeing anything at this point that, that would change kind of our estimated closing date beginning of Q1, we're on track for that. And then, of course, coordinating closely with the Olympic team to make sure everything goes smoothly and that's also been going very well. So nothing at this point of concern, just going just as we had anticipated. Liam Coohill: Great. And then last one for me. I mean asset quality remains pretty strong broadly, and it's great to hear that, that credit migration is likely going to be resolved without loss in 4Q. With classified down quarter-over-quarter. Is there anything you're watching more closely moving forward? Or is all seemingly quiet? Bryan McDonald: Tony, I'll let you pick that one up. Tony Chalfant: Yes, Liam, it's a good question. I think what we're seeing is that the impact from some of the economic volatility has been sort of spotty through the portfolio, nothing really systemic. So we'll have -- we have a few loans that were relationships that we're looking at that have been impacted somewhat by that. But generally speaking, it's just kind of the normal, ins and outs of -- into the classified criticized buckets that we typically see. So no real particular trends we're watching. And as Bryan mentioned, we do have some positive momentum in the substandard category that may play out in the fourth quarter or should play out in the fourth quarter. And that -- the loans that are in our nonperforming bucket right now, we're just not seeing a lot of material loss potential there as of right now. Operator: Our next question comes from Jackson Laurent with Stephens. Jackson Laurent: This is Jackson on for Andrew Terrell. If I could just hit on expenses first, and I apologize if I missed it. Adjusting for like the merger costs in the quarter, expenses were right at the bottom end of like the previously guided $41 million to $42 million expense guide. Just wondering if that's a good run rate that we should be looking for going forward? Donald Hinson: Sure, I'll take that, Bryan. The one impact to this quarter that we haven't had is the state raised their revenue tax rate and that's going to impact us by about $300,000 per quarter. So other than that, I expect it to be pretty similar. It fluctuates some, right? But still I would say in the low 41s core, and then we also have this $300,000 that we'll be dealing with. So it may pump up more into the mid-41s as a result. But that I think it still is a pretty good run rate overall. And we'll still have some acquisition-related costs, which I'm not sure exactly when they're all going to hit. We're going to have some again this quarter, but there will also be some next quarter and of course, over the conversion post acquisition. Jackson Laurent: Got it. That's helpful. And then just last one for me. I know the primary focus has been on closing the current pending deal, integrating the franchise, but it seems like the M&A space has been heating up a little bit. Just wondering how you guys are thinking about M&A post deal close? And just honestly, how conversations have been trending recently? Bryan McDonald: Yes. Obviously, our first priority is to work through the transaction with Olympic and get that closed. We're anticipating early Q1 for the closure. We're continuing our discussions just like we always have. And if there was an opportunity that came up, we would consider it. So again, focuses on the Olympic deal and getting it closed. But looking ahead to next year, if the right opportunity came along, we'd certainly be open to taking a look. Operator: Our next question comes from Kelly Motta with KBW. Unknown Analyst: This is Charlie on for Kelly Motta. I guess just kind of piggyback on that last question. Just wondering how you're thinking about capital from here. You mentioned you're likely to pause the buybacks for the remainder of the year. once the Kitsap deal is closed and integrated successfully, do you expect capital priorities to change in any meaningful way going forward as a combined bank? Bryan McDonald: Don, do you want to comment on that one? Donald Hinson: Sure. It's kind of hard to comment on this until we get through it and see exactly what -- where we're coming out, obviously, we modeled certain things but we'll probably hold -- we'll probably be preserving some capital as we're experiencing the transaction costs associated with it in addition to the upfront dilution. So we do expect to be earning quite a bit of capital back over time. But it's kind of hard to comment if we're going to be involved in any sort of buybacks at this point. I really have a hard time commenting on that. We're just kind of wait and see. I wouldn't plan on anything in your model at this point. Unknown Analyst: Understood. And then in terms of how you're thinking about the loan-to-deposit ratio, it came down a bit this quarter. And I know you expect some liquidity from the Olympic deal. Just wondering high level, how you're thinking about managing that ratio moving forward? Bryan McDonald: Yes. High level, we like to get it back up to 85% and we'd be comfortable a bit above that as well. So we're continuing to look for loan opportunities to deploy more of our assets into loans. So certainly, our goal is to move it up to 85% and certainly be comfortable a bit higher than that. Operator: [Operator Instructions] With that, we have not received any further questions. And so I will turn the call back over to Bryan McDonald for any closing comments. Bryan McDonald: Thanks, Emily. If there are no more questions, then we'll wrap up this quarter's earnings call. We thank you for your time, your support and your interest in our ongoing performance. We look forward to talking to many of you in the coming weeks. Goodbye. Operator: Thank you, everyone, for joining us today. This concludes our call, and you may now disconnect your lines.
Operator: Hello, and thank you for joining the Stewart Information Services Third Quarter 2025 Earnings Call. [Operator Instructions] Please note today's call is being recorded. It is now my pleasure to turn the conference over to Kat Bass, Director of Investor Relations. Please go ahead, ma'am. Kathryn Bass: Good morning. Thank you for joining us today for Stewart's Third Quarter 2025 Earnings Conference Call. We will be discussing results that were released yesterday after the close. Joining me today are CEO, Fred Eppinger; and CFO, David Hisey. To listen online, please go to the stewart.com website to access the link for this conference call. This conference call may contain forward-looking statements that involve a number of risks and uncertainties. Please refer to the company's press release and other filings with the SEC for a discussion of the risks and uncertainties that could cause our actual results to differ materially. During our call, we will discuss some non-GAAP measures. For a reconciliation of these non-GAAP measures, please refer to the appendix in today's earnings release, which is available on our website at stewart.com. Let me now turn the call over to Fred. Frederick Eppinger: Thank you for joining us today for the third quarter earnings conference call. Yesterday, we released the financial results for the quarter, which David will review with you shortly. I'd like to start today's call with a discussion of our perspective on current housing market conditions, followed by a review of our third quarter results and strategic progress by business. I am proud of our third quarter results. Our 19% revenue growth and 40% earnings growth reflect the efforts we have made to continue to grow the company even while facing prolonged headwinds from the historically low housing market we continue to be in. There continues to be both a blend of positive and negative economic headlines related to housing. In the third quarter, we experienced some rate relief, exiting September with mortgage rates around 6.35%. While there is some softening of rates in the third quarter, we did not see rates quite as low as the quick dip we experienced in September of last year, where rates hovered momentarily right around 6% and caused a flurry in purchase and refinance activity to close out 2024. I am more confident in the market's ability to improve over the next 12 months this year than I was last year at this time. The housing market continues to become a bit friendlier for buyers as inventory has been growing. Builders continue to offer incentives and an increasing portion of homes are being sold below list price, indicating the cooling of house price appreciation. We have also seen price improvement in more of the MSAs. That said, home prices still remain a hardship for many buyers as the median sales price of existing for homes sold is still increasing year-over-year, though at a lesser rate than we have experienced for most of '24. So far this year, existing home sales are hovering right around 4 million annual units as many buyers continue to sit on the sidelines awaiting less volatility in the macro market conditions and in anticipation of future rate cuts into the next year. September existing home sales data will be published later this morning. However, we expect around 1% to 2% increase in existing home sales relative to the third quarter of '24 this quarter. Looking ahead, we believe the housing market will continually to gradually improve over the coming year, and '26 will be the beginning of a transition back towards a more normal existing home sales environment, which we characterize as 5 million existing homes sold. From a commercial market perspective, we have benefited from and capitalized on recovery seen in the commercial real estate markets across various asset classes. We expect this recovery to continue into '26 and beyond. Given these market headwinds and volatility, we are proud of the results that we have delivered in the third quarter as they reflect our momentum. In the third quarter, as I said, we grew total revenues by 19% and adjusted earnings per share by 40% when compared to the same period last year. Our direct operations unit grew 8% in the third quarter relative to the same period last year. We see this as solid progress given that this business unit most immediately feels the effects of challenged residential housing market. Our direct operations leadership remains focused on the charge and growth share in target MSAs and micro markets, both organically and inorganically. They are also focused on picking up share in small commercial transactions that run through this business unit, and we are seeing real progress on that initiative with commercial growing 18% in direct this quarter. We continue to expect a significant portion of our future growth in this business to come from targeted acquisitions, and we maintain a warm pipeline of targets that will develop as the market signals a return to more normal market levels. Our National Commercial Services business delivered another solid quarter of growth. Success for this group is largely due to our increased penetration in the number of geographic markets and asset classes. We have brought on best-in-class talent, and we'll continue to invest in talent in this space to grow our share. Thoughtful investment in our talent will allow us to expand our network and deepen our capabilities in more geographies and asset classes in order to leverage the distinctive underwriting capability we currently have. We grew domestic commercial revenues by 17% in the quarter. And through the third quarter, we have grown domestic commercial revenues by 33%. I'm proud of our performance here as it really represents the momentum we have built for ourselves on the commercial front. The energy asset class continues to be a point of strength. data centers, hospitality and self-storage were also areas of growth for us in the quarter. We are focused on growing all asset classes and target geographies to expand our overall footprint. Our Agency Services business had another strong quarter with revenues up 28% year-over-year in the third quarter. This amount of growth is exciting for us when considering the overall housing market is near flat for the year. We are on a mission to grow this business through share gains in attractive states, onboarding new agents and wallet share expansion with existing agents. While we see growth across all states, there are 15 states that we are targeting for share shift and growth. We are seeing sustained growth year-to-date in agency in several of our target states, most notably Florida, Texas and New York. Our commercial initiatives with agents has also been a big part of our success, and we continue to build out momentum that we have made in recent years to our target agents to differentiate our services and better our offerings for agent partners. Our agent -- our Real Estate Solutions business delivered another strong quarter of results as well, generating revenue of 21% higher than the third quarter of '24. The increase was led by our credit information business. Our margins again improved sequentially and are now in the low teens range, which we would consider our normal range. We are focused on growing this business line by gaining share with top lenders and cross-selling our products as we leverage our improved portfolio of services. We expect continued progress in this business line as the market improves. Moving to our international operations. We are focused here on broadening our geographic presence within Canada and increasing our commercial penetration. In the third quarter of '25, we grew revenue by 21% versus '24 due to noncommercial growth of 12% and outsized commercial growth due to a handful of larger transactions. We believe we can build on our strong position in these markets and continue to grow share. Overall, we remain dedicated to strengthening our company through thoughtful geographic, customer and channel expansion in each business to set the company up for continued long-term success. I am pleased to share that in September, we announced an increase in our annual dividend from $2 per share to $2.10 per share. This is the fifth year in a row we have increased our dividend to shareholders. We continue to invest in ourselves and our shareholders as we pursue smart growth for each of our business lines. Thank you to our customers and agent partners for your continued trust. We are committed to doing our best to serve you with excellence. And I'd like to close by saying thank you to our employees for their dedication, loyalty and drive. It has been a privilege this year to visit so many of our office this year and see and experience the energy that you have all shared with me. It is contagious. We have never had a better talent as we do today. I'm so proud of how far we have come on our journey to become a destination for industry-leading talent. Earlier this year, we were recognized as a top workplace by USA Today. And in the third quarter, we were named by Forbes list of America's Best Employers for company culture. We also ranked in the business services category by Forbes of America as the Best Employer for Women in 2025. I want to thank you all for what you're doing to build upon the company's legacy and set up the company for enduring success. David, I will now turn it over to you to provide an update on our results. David Hisey: Good morning, everyone, and thank you, Fred. I would also like to thank our employees and customers for their continued support as we navigate the residential real estate market, which remains around 15-year lows. Yesterday, Stewart reported strong third quarter results with growth in both revenue and profitability. Third quarter net income was $44 million or $1.55 per diluted share based on revenues of $797 million. Appendix A of our press release shows adjustments primarily related to net realized and unrealized gains and acquired intangible amortization that we use to measure operating performance. On an adjusted basis, third quarter net income improved 41% to $47 million or $1.64 per diluted share compared to $33 million or $1.17 per diluted share in the third quarter of 2024. In the Title segment, operating revenues grew $107 million or 19%, driven by our improved direct and agency title operations. As a result, title pretax income increased $17 million or 38%. After adjustments for net realized and unrealized gains and losses on purchased intangible amortization, adjusted title pretax income was $61 million, which was $17 million or 40% higher than the prior year quarter. Adjusted pretax margin improved to 9% compared to 7.7% last year. On our direct title business, total third quarter open and closed orders related to commercial and residential transactions improved. Domestic commercial revenues improved $12 million or 17% across various asset classes, including data centers. Domestic commercial average fee per file was $17,700, which was similar to last year. Domestic residential average fee per file increased 6% to $3,200 compared to $3,000 last year as a result of higher purchase orders. Total international revenues increased $9 million due to increased volumes and large commercial deals. On agency operations delivered strong performance with gross revenues of $360 million, increasing 28%, primarily driven by improved volumes in key states, as Fred noted, and commercial. Similarly, net agency revenues increased $12 million or 25% compared to the prior year quarter. On title losses, total title loss expense decreased slightly due to our continued overall favorable claims experience. The title loss ratio for the third quarter was 3% compared to 3.8% last year. We expect our title losses to average 3.5% to 4% over the coming period. On the Real Estate Solutions segment, total revenues improved $20 million or 21%, primarily driven by our credit information and valuation services operations. The segment's adjusted pretax income was slightly higher than the prior year quarter. We continue to manage the higher credit information costs and are expanding and strengthening customer relationships. Adjusted pretax margin for the third quarter was 11.3%, which is better than the prior 3 sequential quarters. We expect our margins to be in the low teens as these relationships mature. On our consolidated operating expenses, our employee cost ratio improved to 27% compared to 30% last year, primarily due to higher revenues, while our other operating expense ratio was comparable to last year. Our financial position remains solid to support our customers and employees in the real estate market. Our totally cash and investments were approximately $390 million in excess of our statutory premium reserve requirements. We recently renewed and upsized by $100 million to $300 million, our line of credit facility, which is fully available. Total Stewart stockholders' equity at June -- at September 30, 2025, was approximately $1.5 billion with a book value of $52.58 per share. Net cash provided by operations improved by $17 million or 22% compared to last year. Again, thank you to our customers and employees, and we remain confident in our service of the real estate markets. I'll now turn the call over to the operator for questions. Operator: [Operator Instructions] Our first question will come from Bose George with KBW. Bose George: So first wanted to ask about the strength in agent premiums. Can you -- it looks like you're continuing to grow there. Are you taking share? And if so, is that like coming from the larger players? Or just color on what's going on there? Frederick Eppinger: Sure. Great. So there's really 2 components of it. So in the res side, what we're seeing, particularly within the 15 states we're focused on, we're seeing pretty good share shift. And I think this quarter, we saw about a 16.5%, and again, primarily in those targeted states and both -- it's pretty interesting, also deepening of penetration with existing. Part of it is because our -- we now can service all the states, and there's a bunch of things about our technology that's a little bit better than it had been historically. The second thing is this quarter, we had a little bit of really good traction on commercial. We probably grew commercial 40% in the agency channel. And again, that's been -- if you've heard me talk about -- historically, we were very good in, say, the New York area for commercial agents. But outside of New York, we weren't as good. Our service wasn't as good or capable. And now it's been a big push for us over the last couple of years, and it's really taken off. So again, I feel like both the commercial strength, and that will do with both a lot of the bigger agents that have more commercial, although we're doing commercial with smaller agents, too. But that -- those 2 pieces, kind of the geography piece and then the focus on commercial-oriented agents and providing better service outside of New York is really the 2 things. I'd like the traction on both right now. It's good. Bose George: Okay. Great. And then just sticking to the commercial, can you talk about the pipeline into year-end? How is that looking? And how much is office starting to contribute as well? Frederick Eppinger: Yes. I feel good about it. So you see our order stuff, I feel good about the commercial. The pipe is good. Again, we've had a heck of a year. It's been -- I think we're up whatever it was 35%. And for large accounts, we're probably up 39%, the larger centralized commercial. And the growth has been pretty broad by class. Office has not been one that's been -- had significant growth for us. And I don't see that necessarily changing. But pretty much -- it's interesting. Most every other class is pretty good. So I feel good about the breadth of it, as a percentage has gone down, which is good. Probably 5, 6 quarters ago, I mentioned how we really -- the energy was a growing portion, and it's now evened out as we grow in other categories. But I feel pretty good about the back half. Now the comparisons for us, I have to sit down and think about the comparisons. We took -- we started taking off about 5 quarters ago and the fourth quarter of last year was very strong for us. So we'll see how that plays out. But if you look at, as I said, our orders and our -- I look at what's in the pipe, I feel very good about the fourth quarter. Bose George: Okay. Great. That's helpful. And then just one more quick one. The investment income line was a little bit lower than last quarter. Anything to call out there? Because I assume the rate cut was late in the quarter. David Hisey: Nothing significant. I mean, we will have some variability with short-term rate cuts because that's where all the escrows and everything are invested. So I think you may be seeing a little bit of that, but we haven't seen a whole lot of impact so far. And so far, the balances have been able to offset the rate cuts, but we'll just have to monitor that going forward. Operator: Our next question will come from Jeffrey Dunn with Dowling & Partners. Geoffrey Dunn: I wanted to follow up on the expectation for a low teens margin in RES once relationships mature. Is there a critical revenue level that goes with that expectation? Frederick Eppinger: No. I mean, again, what -- in the RES services, that's low teens, and again, what I said for the last couple of calls is we had that hiccup in the beginning of the year because of the rate increase -- the large rate increases that came kind of late from the data players, and we were kind of migrating those rate increases into our contracts as well as kind of we changed the way we did some of the pricing to more value-added approach with them. And so we had to catch up a little bit. And what I've said is once that kind of works its way into the system, we'll go back to what we've been doing in the last couple of years, which is that low teens margin. Where it gets a lot better, again, I think that's kind of the normal rate. Where it gets a lot better is when the market comes back, right? Because a lot of our services businesses are tied to volume. And there's leverage from the normal -- more of a normal flow of business, and so I think in a $5 million purchase market kind of experience, that will get to mid-teens. We'll get into the 14%, 15% instead of the 12% area. And so it's kind of a direct line of improvement from here to there above the 12% is what I would say. But again, they're all -- it's like a lot of businesses, right? It's got a fixed variable portion and you've got to -- the growth helps a lot with the margins in those businesses. David Hisey: And Jeff, the other thing is that if you just look at the sequential, so we sort of bottomed at like 7% something in fourth quarter of last year, and then we've been slowly getting back up to the low teens. And so that's what we're talking about, right? It's having worked through all that and now being at the level that we would expect. Frederick Eppinger: And it was really about the data contract opportunity. It wasn't really the volume or anything. It was really just a onetime event, which we -- as I said, we were going to recapture it. We just had to get it built into our contracts. Geoffrey Dunn: Okay. And then just following up on the NII question. Can you just remind us how you think about the sensitivity to that NII line 2 Fed rate cuts? David Hisey: Yes. Jeff, we don't have the same FA where they do the 25 basis point because our rates are negotiated. And so we've been able to -- we haven't had a direct drop with our rates because we were never at like money market. And so really going forward, it's going to be the offset of, do the rates get cut because rates are going down. And then how does that compare to balances, right? So as volume comes back, balances grow. And so I think it's probably better to think about interest income being maybe more consistent over the next year, slightly down. But then it's really going to depend on those 2 dynamics. And once we see the effect of rate cuts for the rest of the year, we'll probably have a better perspective on that. Operator: It appears we have no further questions at this time. I'd now like to turn the conference back over to our presenters for any additional or closing remarks. Frederick Eppinger: Yes. Thanks for joining today. I want just to summarize where I think we are right now. So I believe that while the market is kind of still bouncing on the bottom, we're more confident looking forward over the next 12 months that we're going to start to see improvement. I think we're at the beginning of the improvement. There's enough indication that that's true. And the other thing I would say is, as a company, I feel very confident in our capabilities, and we're well poised to take advantage of that improvement. And one of the things that I think is kind of showing up nicely for us is we talked about at the beginning of the year, if the market didn't grow, what did we expect? We said, well, if the market doesn't grow, we believe we can generate about 10% revenue growth and about 20% earnings growth because of the improvements we've made in our operating model. And I think what we've done year-to-date is we've grown roughly 17% and about 45% earnings growth. And so it shows that we have some momentum in being able to grow in this market, and we're operating in a way that we get leverage from the growth. And I feel pretty good about that. And as the market improves, I think we are positioned to continue on that. Will it be as good as it's been in the first quarter? I don't know, right? The last 3 quarters are very good. It might even out a little bit, but I can tell you that we continue to have momentum in our ability to grow share and our ability to improve earnings. So I feel like even though the market I feel is relatively difficult, I think we're well positioned. So I appreciate people's interest and attention to the company. And again, I thank our employees for their commitment to what we're doing because I know how hard it is. So thank you, everybody, for your time and attention. Operator: Thank you, ladies and gentlemen. This concludes today's event. You may now disconnect.
Operator: Good day, and welcome to the Western Union Third Quarter 2025 Results Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Tom Hadley, Vice President of Investor Relations. Tom, please go ahead. Tom Hadley: Thank you. On today's call, we will discuss the company's Third Quarter 2025 results, 2025 outlook, and then we will take your questions. The slides that accompany this call and webcast can be found at westernunion.com under the Investor Relations tab and will remain available after the call. Additional operational statistics have been provided in supplemental tables with our press release. Joining me on the call today is our CEO, Devin McGranahan; and our CFO, Matt Cagwin. Today's call is being recorded, and our comments include forward-looking statements. Please refer to the cautionary language in the earnings release and in Western Union's filings with the Securities and Exchange Commission. Including the 2024 Form 10-K for additional information concerning factors that could cause actual results to differ materially from the forward-looking statements. During the call, we will discuss some items that do not conform to generally accepted accounting principles. We have reconciled those items to the most comparable GAAP measures in our earnings release attached to our Form 8-K as well as on our website, westernunion.com, under the Investor Relations section. I will now turn the call over to our Chief Executive Officer, Devin McGranahan. Devin McGranahan: Good afternoon, and welcome to Western Union's Third Quarter 2025 Financial Results Conference Call. Today, we reported a solid quarter against a difficult macro backdrop, demonstrating the benefits of our large-scale global and now multiproduct business model. We saw strong performance in many corridors and product categories, offset by continued weakness in North America across several specific large corridors, most notably U.S. to Mexico. While we are on our way to becoming a much more customer-centric company, we have invested significantly in becoming market competitive and have increased our executional and operational rigor. We are now delivering an improved omnichannel customer experience across our products and channels. As a result, in this quarter, we saw reasonable to strong performance in Europe, South America and Asia, driven by our retail business in Europe, our digital business in Asia and our consumer services business in Europe and LACA. Our opportunity is to continue to drive our strategy across all geographies and channels and see the benefits as market conditions improve. An important element of the strategy has been to accelerate the development of our retail model in the U.S. Our goal is to have a strong base of strategic accounts, a large and competitive mix composed of exclusive and nonexclusive agents -- independent agents in the middle and a small selection of high-performing company-owned stores at the top. Upon completion, our recently announced acquisition of Intermex will help accelerate our progress towards this goal. With the passing of the HSR review period 2 weeks ago, we are now excited to begin the appropriate integration planning with [ earnestness ]. We remain optimistic about the longer-term outlook for our business as we expect migration patterns to stabilize and our investment in becoming market competitive over the past 2 years has provided a foundation for ongoing revenue and share gains. We also see many opportunities to continue to expand our consumer services business, which contributed significantly to the company's results in the quarter. Over the past 3 years, we have delivered above-average industry margins and returned substantial capital to our shareholders via dividend and share buyback. We have and will continue to fund the necessary investments in our transformation through cost discipline and good operational performance management. For the third quarter, we reported revenue at $1.033 billion (sic)[ $1.03 billion ] on an adjusted basis and excluding the impacts from Iraq, this was a decline of 1% year-over-year. Consumer money transfer transaction growth was down 2.5% in the quarter, excluding Iraq, and cross-border principal growth was up mid-single digits on a constant currency basis, speaking to the resilience of our customer base and their perseverance in the current macro environment. While our retail business in the Americas continues to face headwinds associated with the current geopolitical environment, we are encouraged by some improving trends in recent months. And while it is too early to say that we have reached the bottom, we are potentially seeing some stabilization. Our strategy continues to perform well with our retail business in Europe with mid-single-digit transaction and revenue growth. Our branded digital business increased transactions by 12% and adjusted revenue by 6% in the quarter. Consumer Services adjusted revenue was up 49% in the quarter, driven by our acquisition of Euro Change and a strong European travel quarter, which is the driver of our travel money business. I was in London last week with our new team discussing our plans for 2026, and we remain excited about the potential for expanding that business across both retail and digital channels. We expect Consumer Services to have another strong quarter to the end of the year, and our travel money business is likely to approach $150 million in revenue in 2026, up from nearly nothing just a few years ago. Adjusted earnings per share came in at $0.47 compared to $0.46 this quarter a year ago. Our discipline in managing operating costs continues to come through. Matt will discuss our third quarter results and 2025 outlook in more detail later in the call. Switching now briefly to the macro environment. Economic conditions globally remain reasonable with inflation rates declining in key markets around the world and GDP outlooks remaining relatively strong despite elevated interest rates. These economic conditions are providing a stable backdrop for our business and should improve further as we have begun an interest rate cutting cycle, both here in the United States and in Europe. Globally, migration continues to evolve in complex and dynamic ways. Our business remains fundamentally linked to human mobility. When people move, they rely on Western Union to send money home. This connection makes our business sensitive to shifts in migration patterns, policies and enforcement practices. The good news is that our business is globally diversified across countries and channels, mitigating much of any one region's specific risk. When we see trends towards more restrictive migration policies like we are seeing in the United States now, it does influence our business. Recent policy changes have led to a substantial decline in border crossings and an increase in enforcement actions, including workplace inspections and deportations, which have created uncertainty and hesitation within migrant communities. These developments continue to impact customer behavior with some customers reducing transaction frequency or shifting to other channels. That said, the U.S. is not monolithic. And in the quarter, we saw transaction growth that was positive to places like Brazil, India, Haiti, Panama and Vietnam, flat to slightly negative in important corridors like the Philippines, Jamaica, Guatemala and Colombia, offset by significant declines to Mexico, El Salvador, Peru and Ecuador. The U.S. to Mexico corridor is the most important to monitor going forward to which we have begun to see some recent improvements from the lows in June. The Bank of Mexico data would also indicate some improvements with the most recent month down 8%, improving materially from the June lows. In other instances, we see beneficial new patterns emerging from the macro changes, such as strong growth in outbound remittances in Argentina and growth in corridors like Canada to India and Singapore to Indonesia. Despite these short-term headwinds, we believe the long-term trajectory remains clear. Global migration is not disappearing. It is adapting. People will continue to move in search of opportunity, education and family. And Western Union will continue to stand with them, providing trusted, compliant and accessible financial services. Looking ahead, our role is clear. We will support the evolving needs of senders and receivers with a broad base of solutions that are fast, secure and built on trust. Our 100 million-plus customers around the world are a resilient force and so are we. Over the last several years, we have frequently spoken about our desire to make Western Union a more digital company and to expand our product set to meet the needs of our customers as they evolve. We also see our strong brand recognition and the large base of existing customers as key building blocks to cost effectively build our digital business without having to invest hundreds of millions of dollars in nonscalable marketing. In advance of our Investor Day in a couple of weeks, I want to take a moment to highlight the significant progress we've made in becoming a more digital-centric company. Our transformation is not just about technology. It's about reimagining how we serve our customers, deepening relationship and unlocking new areas of growth. Over the past several quarters, we've accelerated the shift towards digital channels. Our branded digital business has now delivered 8 consecutive quarters of mid-single-digit or better revenue growth with strong transaction momentum in key regions like the Middle East and APAC. Our digital business now accounts for over 40% of the principal we move around the world. We are also seeing a continued expansion in our payout-to-account capabilities, which now represent over half the principal we send through our digital business. Our expansion of card acceptance and digital funding options across both our retail and digital channels is another example of how we're becoming a more digital company. Today, over 55% of all of our money transactions are digital. Our global digital payment network is a fundamental asset that we will continue to lever and grow as a foundation for future expansion and growth. We have been making progress on our digital wallet strategy. We are now live in 7 countries, having launched Brazil in the first quarter and the U.S. in the second. We have onboarded over 0.5 million customers and now have a growing number of active and loyal monthly users. We see real benefits in capturing payouts in our wallets with Argentina now approaching 15% of all inflows and Brazil after less than a year of -- post launch, nearing 5%, saving us on commissions and enabling a better and more digital receive customer experience. We anticipate change of control regulatory approval in Mexico before the end of the year and have received a license for a digital wallet offering in Australia with an anticipated Q1 launch of 2026. We envision our future as a broad-based 2-sided payment network with digital wallet options on both sides in all of our major markets. We also anticipate being able to facilitate both traditional and digital asset transfers for our customers and potentially others as well. But digital is more than a channel. It is a platform for innovation. This includes our new point-of-sale system, which is now nearly ubiquitous around the world and allows our retail network to connect digitally to all of our account and wallet payout points quickly. Executing the rollout of a new point-of-sale system in under 12 months is something that we would not have been able to do just a few years ago and is a true testament to the progress we are making on the technology front. With this new platform fully implemented in the U.S., we are continuing to make progress in meeting the needs of our customers with digital payment options, when the new U.S. 1% remittance tax on cash transfers goes into effect in January, we will be well positioned. Looking ahead, our strategy is clear. We will continue to modernize the movement of money, expand our product suite and deliver trusted, compliant financial services to our global customer base. We are building a platform that is resilient, scalable and ready for the future. And we look forward to discussing this with you more in detail at our Investor Day in just a couple of weeks. To capitalize on our strong brand, trusted customer relationships and omnichannel platform, we have been enhancing our product suite with new or revamped products that our customers want and value. We have made significant progress in this effort within what is now our Consumer Services segment. Over the last 2 years, we have invested in our existing product offering to improve functionality and value and added new products like travel money, prepaid cards, digital wallets and our out-of-home advertising business. Today, Consumer Services now accounts for roughly 15% of total company revenues, which is up 70% or over $200 million in just the last 2 years. That incremental $200 million is about 5 percentage points of additional revenue growth for the company. Travel Money, which has been a big driver and which we believe will account for roughly $150 million of revenue in 2026 is up from almost nothing in 2023. We believe there is a much longer runway to finding unique and interesting ways to monetize our highly differentiated asset base, including our 100 million-plus customers, our growing portfolio of well-recognized and trusted brands, our global reach and scale and our digital payments network. More recently, we have seen an opportunity to accelerate our development and use of digital assets. The work we have been doing to modernize our technology stack, invest in digital payments network and roll out digital wallets around the world are all foundational enablers that will help us accelerate a digital asset strategy. Historically, Western Union has taken a cautious stance towards crypto, driven by concerns around volatility, regulatory uncertainty and customer protection. However, with the passage of the GENIUS Act, we are now seeing potentially interesting opportunities to integrate digital assets into our business in ways that enhance efficiency, reduce friction and improve customer experience. We are actively testing stablecoin-enabled solutions in our treasury operations. These pilots are focused on leveraging on-change settlement rails to reduce dependency on legacy correspondent banking systems, shorten settlement windows and improve capital efficiency. We see significant opportunities for us to be able to move money faster with greater transparency and at lower cost without compromising compliance or customer trust. Beyond treasury, we are exploring how our global payments network can serve as an on-ramp and an off-ramp between fiat and digital currencies. We are seeing strong interest from potential parter -- potential digital native partners using our infrastructure to bridge these worlds, particularly in regions where access to traditional banking is limited, but crypto adoption is growing. Finally, we are expanding our partnerships and capabilities to allow customers to move and hold stablecoin digital assets. This is not about speculation. It is about giving our customers more choice and control in how they manage and move their money. In many parts of the world, being able to hold a U.S. dollar-denominated asset has real value as inflation and currency devaluation can rapidly erode an individual's purchasing power. These innovations align closely with our broader strategy to modernize the movement of money. They complement our investments in digital channels, payout-to-account capabilities and next-generation platforms like our digital wallets. Together, they position Western Union to lead in a future where digital assets could play a growing role in global finance. We look forward to sharing more with you at our Investor Day in a couple of weeks. In closing, I want to reiterate our confidence in the path we are on. Western Union is transforming. We are becoming more digital, more agile and more aligned with the evolving needs of our global customer base. We are expanding our product suite, modernizing our platforms and unlocking new opportunities for growth across all of our channels. This transformation is not just about technology. It's about building a resilient, scalable business that delivers trusted financial services in a rapidly changing world, whether it's through faster account-directed payments, expanded digital wallet capabilities or innovative digital asset-enabled solutions, we are positioning Western Union to lead in the future of cross-border money movement. We remain focused, disciplined and optimistic. Our strategy is working, our execution is accelerating, and our platform is stronger than ever. I look forward to sharing more with you at our upcoming Investor Day and continuing this journey with all of you. Thank you. I would now like to turn the call over to Matt Cagwin, our Chief Financial Officer. Matthew Cagwin: Thank you, Devin, and good afternoon, everyone. I'm delighted to be here today to walk you through our third quarter results as well as our 2025 financial outlook. In the third quarter, GAAP revenue was $1.033 billion and consistent with our expectations, our adjusted revenue, excluding Iraq, was down 1%, driven by growth in Consumer Services and branded digital offset by our retail business. Our industry-leading adjusted operating margins was 20% in the quarter, up from 19% in the prior year period. Our adjusted operating margins primarily benefited from the continued cost discipline that we've now -- as we've now completed our cost redeployment program 2 years ahead of schedule. Adjusted EPS was better than our expectations at $0.47 in the current period compared to $0.46 in the prior year. Adjusted EPS benefited from our cost management discipline as well as fewer shares outstanding, primarily offset by higher interest expense and higher adjusted tax rate. Our adjusted effective tax rate was 12% in the quarter, up from 8% in the prior year period. The adjusted effective tax rate was higher due to discrete benefits in the prior year period. Consumer Services adjusted revenue was up 49% in the third quarter, driven by our Travel Money business, and strength in our bill pay business. The Consumer Services segment has accelerated since the first quarter due to the acquisition of Euro change. Our Travel Money business drove about half of our growth this quarter. Organically, consumer services continue to grow double digit. And as expected, consumer service margins have improved 1,300 basis points to 22% in the third quarter as our new product sets began to scale. As Devin mentioned, we've made meaningful progress expanding the products and services we offer, and we believe there's meaningful runway ahead. Travel Money is a great example. It is now $100 million of revenue and on its way to $150 million next year from close to nothing just a few years ago. We believe there are many other potential opportunities to serve our 100 million-plus customers and look forward to sharing those as ideas developed and get launched. Now turning to our consumer money transfer or CMT business. Transactions declined 3% in the quarter or 2% excluding Iraq, U.S. immigration policies continue to disrupt our business, although the third quarter was not meaningfully different than what we saw in the second quarter. Customers continue to send fewer transactions but higher average principal per transaction. Our PPT increased roughly 6% in the third quarter compared to the prior year on a constant currency basis. Our branded digital business grew adjusted revenue 6% and transactions by 12%. This marks the eighth straight quarter of solid revenue growth. It also marks a return of double-digit transaction growth driven by the Middle East, where we saw a meaningful acceleration of our business from partnerships that we announced in the second quarter this year. These partnerships are primarily focused on account-to-account transactions. Which has put pressure on the gap between revenue and transactions. However, we're super excited about these relationships because they expand our reach in the fast-growing Middle East. We also continue to see strong growth in our digitally initiated paid out to account business. In the quarter, principal grew over 40% and now accounts for over 50% of all principal sent from our branded digital business. We continue to expand our payout capabilities worldwide to meet the evolving needs of every customer segment. The rising demand of account directed payouts reflects our customers' desire for speed, flexibility and convenience. This shift provides a unique opportunity to deliver higher-quality service while building a long-lasting relationship with our customers. Turning to our retail business. Overall, the performance has remained relatively consistent with the second quarter, with softness in North America, driven by the effects of immigration policies in mid-single-digit revenue growth in Europe. Now turning to cash -- now turning to our cash flow and balance sheet. We have generated over $400 million in operating cash flow year-to-date compared to $272 million in the prior year period. Included in this number is over $200 million in cash taxes paid this year related to the transition tax. We're excited about these obligations being behind us and look forward to the additional flexibility that we'll have to invest our free cash flow in support of our business or return to our owners. Year-to-date, our CapEx was $101 million, up 10% year-over-year. I'd like to highlight that our CapEx will be up slightly this year versus prior trends. As this has been a large strategic agent renewal year as well as we've had an infrastructure refresh. We continue to maintain our strong balance sheet with cash and cash equivalents of roughly $1 billion and debt of $2.6 billion. Our leverage ratios remained at 2.6x and 1.7x on a gross and net basis, which we believe provides us ample flexibility to return capital or potential M&A while maintaining our investment-grade credit rating. In the third quarter, we returned over $120 million to our owners, via dividends and share repurchases and over $400 million during the first 9 months of this year. This represents a cash return to our owners of over 15% based on our current market cap. Through the first 9 months this year. Now moving on to our 2025 outlook, which assumes no material changes in macroeconomic conditions. We are reaffirming our guidance today, which includes adjusted revenue to be in the range of $4.035 billion to $4.135 billion. However, based on our current trends, we anticipate adjusted revenue to be at the lower end of this range. This range reflects the continued benefit of our branded digital business. Double-digit growth in Consumer Services and a slight improvement in retail. I would also like to remind everyone that our consumer services -- consumer service business has different seasonality in our CMT business. Travel Money is seasonally higher in the second than third quarter. And I'd also like to remind everyone that we had a very strong media network business in the fourth quarter of last year due to higher media demands related to the U.S. presidential election. These comments are not meant to foreshadow consumer service growth being below our double-digit goal but rather to highlight it will probably not be at 49% next quarter. We continue to expect adjusted operating margins to be in the range of 19% to 21%. And finally, we expect adjusted EPS to be in the range of $1.65 to $1.75. Based on our current trends, we expect adjusted EPS to be at the upper end of this range. In conclusion, I want to emphasize the momentum that we're building across our business. Western Union is executing with discipline, clarity and delivering results while transforming for the future. Our strategic focus is on becoming a more digital-first company is yielding tangible outcomes. This is the eighth consecutive quarter of mid-single-digit branded digital revenue growth or better to also the rapid expansion of our payout to account capabilities. We're not just adapting to change. We're also leaning into it. Our Consumer Services segment is unlocking new revenue streams. Our operational efficiency program has exceeded expectations and our financial foundation remains strong, which gives us the flexibility to invest and innovation as well as returning capital to shareholders. I look forward to seeing many of you at our Investor Day on November 6, and thank you for joining today's call. Operator, we're ready to take questions. Operator: [Operator Instructions] Our first question comes to us from Tien-Tsin Huang from JPMorgan. Tien-Tsin Huang: Good to catch up with all of you. Yes, no surprises. It sounds like -- and it sounded like you were encouraged by some of the recent trends in recent months in the retail and Americas segment that in your prepared remarks. Can you maybe elaborate on that? Was that just some of the Mexico statements you made in the recent months? Just wanted to get a little bit more detail on that. Devin McGranahan: Yes. Tien-Tsin, thanks. We are seeing the lows from the mid-summer have come back a bit, particularly in Mexico. But more or less across some of the important corridors. As highlighted in the prepared comments, we still see corridors that are growing and some important ones that are now approaching what I'll call stable or flat. So we remain positive that in the back half of the year, those trends will continue and the outlook will improve, but I would say things are still lumpy. Tien-Tsin Huang: Okay. Good. I'll ask on Consumer Services quickly. Just Travel Money. You mentioned a few times that will probably grow 50% next year. Just curious on the visibility there and the incremental margins on that business, just to highlight it because it is a bigger contributor now. Matthew Cagwin: So our expansion next year is we'll have one more quarter of the grow over from Eurochange. We're pushing into other new markets based on now, we've got a good scale. We've got a management team that's very competent. As Devin talked about, we were in Europe last week, and we actually spent most of the week with the management team there and came away very impressed by their quality of the stores, the strength of the management team and their vision for how we can continue to expand both same-store sales as well as across new footprints. And the last little fun fact for you. When we did the acquisition, we had talked probably 2 quarters ago that we bought it for a little under 5x. Now having owned it for a couple of quarters, they're meaningfully above our models that we had done and on track to have a great return for us. Operator: Our next question comes to us from Darrin Peller from Wolfe Research. . Darrin Peller: See the profitability. We see [indiscernible]but I wouldn't or were use penetration [indiscernible] Matthew Cagwin: Darrin? Darrin Peller: Yes, can you hear me? Matthew Cagwin: Your mic is really, really hard. Unknown Executive: I think you might be better now. Try it again. Darrin Peller: Just the same reason of penetration. Matthew Cagwin: DarrIn, you got a bad connection, maybe try coming back in, and we'll put you back in the queue. Operator: Our next question comes to us from Will Nance from Goldman Sachs. Please ask your question. William Nance: I hope my audio is not also bad. But because I'm hearing it on a couple of people's calls now -- so I guess, I just wanted to hit on some of the trends that you saw on LACA. It looked like the trends there actually got a little bit better this quarter. So maybe just echoing the earlier question on the North American trends -- anything to kind of call out and just the linearity of results? Are we starting to hit easier comps and maybe some of the -- starting to lap some of the changes in migration patterns? And just any color on how you're thinking about that over the next -- in the near term? Devin McGranahan: Yes. And so a couple of things. One, we've seen some overall market stability, which we commented in the public comments. And as you know, it was in this quarter last year where we highlighted the impacts and the effects of the then recent elections across certain parts of South America, Northern South America and Latin America. We are now starting to see the lapping effects of some of those declines when the Darién Gap was closed and when we had presidential elections in Venezuela and a few other places. Including Mexico. And so I think you're starting to see both the effects of some market stability as well as now we're a year into what was a relatively significant change in outlook and trajectory for the region following a series of elections. Operator: Our next question comes to us from Bryan Keane from Citi. Unknown Analyst: Guys, thanks for having me on the call. Just wanted to ask on digital, in particular, it improved from 9% to 12% in transaction growth from the second and third quarter. But the revenue growth stayed about the same at 6%. Just trying to figure out the delta change there, why we didn't see a lift in the revenue as well? Matthew Cagwin: Bryan, thanks for joining the call. Really, the vast majority of the acceleration we saw from our partnerships in the Middle East, which are account-to-account payout, which, as you know, come generally with a lower RPT. So it's really a combination of that. So we've seen a little bit of -- we would have had a hair of slowdown in revenue and trans about [indiscernible] but that didn't help provide a little uplift on both sides. . Devin McGranahan: I think the Bryan, the other thing that we've historically talked about given the current market dynamics where new customer pricing and we've actually seen some more aggressiveness in the marketplace on some of those offers, not just offering 1 time fee-free but in some cases, by some folks, 2 and 3 transactions free for new customers. The new customer growth causes a degradation in the revenue line. And so anytime we see an acceleration in transactions, we're likely to see, a, as you saw this time, stability or maybe even if we could accelerate it enough, some degradation in the revenue line relative to the transaction line. And historically, we are and will continue to be in looks of ways to cost-effectively accelerate and knowing that revenue will catch up over time. Unknown Analyst: Got it. And then just one follow-up on the guidance in fourth quarter. You're talking about an improved -- a slight improvement in retail going into the fourth. Is that all macro driven? Or is that something specific you guys are doing for the improvement in retail into the fourth quarter? Matthew Cagwin: Really, it's driven by a few things. One is the comment was made a minute ago about LACA. We're starting to lap easier comps as we hit the latter part of the year. We've also seen some good momentum and some customer wins that will help or agent wins. Devin McGranahan: The other thing I would add, Bryan, we talked about this, I think in the second quarter, we've asked one of our leaders who leads our European region to spend some material time with us here in the U.S., implementing much of the model that's been successful in terms of our go-to-market, particularly around independent agents the strategic pricing model that we employed there and a bit more rigor around managing that independent agent network. We're starting to see some of the fruits of that as well, and we are excited about the ability to integrate -- Intermex and accelerate that retail program at a much faster rate than we have been able to over the last year, 1.5 years. Operator: We're going to take the call from -- or the next question from Darrin Peller from Wolf Research. Darrin Peller: Yes. Is that better now, guys? Devin McGranahan: Much better. Darrin Peller: Just where do you see overall digital penetration going long term I mean the company is basically near global penetration of 38% of transactions this quarter. Does that continue to move higher? And just talk a little bit more about how that impacts the take rate. And then a quick follow-up would just be just -- just when I look at the principal per transaction up 6%, is that a trend around people that are setting more now, but less often, just maybe associated with migration policies in the U.S. or something more structural? Devin McGranahan: Yes. It's a great question, Darrin. And so I think there are 2 or 3 things I think we would highlight what we believe and aspire to a reasonably stable retail business around the world, which will be somewhere between minus [ 2% ] and plus [ 1% ] over time as we get our operating model in place as we believe the retail value proposition does have merit, and there are many migrants, particularly new to country see value in that. We do expect digital to continue to grow at double-digit rates into the certainly intermediate if not indefinite future, which we will see over time, the ability of that digital become a larger and larger piece of our business with the stability in retail. We also know, at least for Western Union, there are a lot of places in the world. U.S. to India is one of them. U.S. to Guatemala is another one, where our digital penetration still has plenty of opportunity to grow relative to both the size of the market and our current market share. So we could even see some acceleration in that low double-digit growth that we've been seeing for the last 8, 10 quarters as we focus on specific corridors going forward. Darrin Peller: All right. Thanks, Devin. Matt, just a very quick follow-up with just the understanding where Eurochange -- is Eurochange entirely in consumer services? I'm just trying to get a sense of organic growth segments. Matthew Cagwin: So, no, it's not. So we actually use the business for both CMT but also CS. They were an agent of ours before we acquired them. So if we're doing any remittance transactions would go to our CMT line and the rest CS. But to take away is, we're using that footprint for money -- travel money, we're using for prepaid cards. We're using it for remittances, and we split it up based on the type of product. Operator: Our next question comes to us from James Faucette from Morgan Stanley. James Faucette: I wanted to ask quickly about dynamic pricing in Spain. It seems like you've seen some good results there. And just curious how quickly you may be able to roll out to other markets and maybe start to garner some of the same benefits? Devin McGranahan: Thanks, James. Great question. We have rolled out dynamic pricing or strategic pricing, as we call it, probably in about half to 2/3 of our European market. We asked the leader of our European market to come here to the U.S. to help us. And we are in 3 metro markets at some scale now in the U.S. with the anticipation that over the course of '26 and the integration with Intermex who has a very similar model that will be able to be kind of across the U.S. by the end of 2026. It has less applicability in other parts of the world like the Middle East, which, we have a lot of large master agents where they have a lot more control over pricing or frankly, in Asia, which has gone significantly more digital than either the U.S. or Europe is. James Faucette: Got it. That's really helpful. And then I think, Matt, you touched on this a little bit, but I may have missed it, is that you guys have done a really good job in terms of your cost efficiencies, programs, et cetera. How should we think about like future programs or where there may be incremental opportunities on that side? Matthew Cagwin: Yes. Thanks for the question. I'll actually spend about 5 minutes of that in 2 weeks from the day talking about our next step, but I'll leave a teaser. We still think there's meaningful opportunity ahead and look forward to sharing that with you on the 6. James Faucette: Stay tuned to like it. Devin McGranahan: And James, one of the things, the first part of our program really was what I'll call the blocking and tackling and Matt and the team, the broader management team did a great job of creating the normal operational efficiencies in terms of managing our real estate footprint. Reducing customer service calls, managing vendors, we're now starting to really see the benefits as we implement new technology. We have some adoption of AI into both our development functions, our customer service functions. Where we could start to see some shifting of the business model, which will, again, as Matt said, yield results for a reasonably long period of time relative to the first chapter of this, which was really just blocking and tackling. Matthew Cagwin: Now I got to remove that page in my presentation. So, I got more work on Investor Day. Operator: Our next question comes to us from Tim Chiodo from UBS. Timothy Chiodo: Great. On the Intermex, 10,000 locations, they were always viewed to be as very strategically well placed, but one of the advantages was the speed, the UI, the UX, and it was generally talked about as being better for the agent, and that was something that was attractive to them. Is that an advantage that somehow gets ported over to Western Union? Or does that system get retired in the sunset and those locations move on to the Western Union platform. How will that all play out? Devin McGranahan: It is our intention to maintain both the Intermex brand, the Intermex locations and the Intermex go-to-market model. We also are now as we begin integration planning, looking at ways in which we can take that into Intermex model and bring it into our Vigo independent agents and our Western Union branded independent agents here in the U.S. So we have aspirations of belief that we think we can learn a lot from what they do, and we will preserve everything that they do, the way they do it today. Operator: Our next question comes to us from Rayna Kumar from Oppenheimer. Rayna Kumar: I think there's an echo here. So [indiscernible] to hear me. Just on North America, it looks like trends have gotten a little bit worse versus the second quarter. You expected to improve from here? Like have we reached the bottom in North America? Devin McGranahan: Yes. So the quarter was, as I described in the call, what I would say is lumpy. We had a little bit better July than August was pretty tough. And then we started to see some trends in the back half of September and a little bit early here in October. But the linear improvement is certainly not there, but the directional improvement would seem to indicate that we may be hitting some stability relative to what we saw in either June or August. Operator: Our next question comes to us from Nate Svensson from Deutsche Bank. Christopher Svensson: Thanks for the question. I wanted to ask on payout to account -- so I think last quarter in the Q&A, you mentioned a slowdown in growth there, but it sounds like in 3Q principal was up 40%, and it now represents 50% of the digital business. So maybe it's the Middle East partnerships, but I was hoping you could unpack some of the drivers and the improvement there and maybe how sustainable you think the trajectory impact to account could be? Matthew Cagwin: I don't remember making that comment last quarter. We've seen very consistent 30%-plus growth rates for going on 2, 3 years now for account payout. So we see it everywhere. We're seeing strong growth in our retail business to be digitally funded. We've seen growth there with our rolling out more digital acceptance or card acceptance in Europe and North America. We've seen growth in account payout from retail. We've seen great account payout from our digital business as well as the new partnerships in the Middle East. So don't remember the comment from last quarter, but there was not a dip last quarter. There has been a modest acceleration this quarter, but I would argue it's modest, and the new partnerships have driven that because they're a largely account payout or digitally funded relationship. Devin McGranahan: Nate, I think we believe that this is a secular change in customer behavior. And again, whether it's originated in a retail transaction or a digital transaction, the received customers are rapidly entering the banking or digital wallet infrastructure in their countries. And we've seen that, whether that's in the Philippines or Malaysia, now even to a certain extent in Mexico, where the receiver preference is to receive the money in a more digital form. We think that has implications over time for us in terms of our payout network and our ability to create efficiency and streamlining some of our retail payout network. And the shift also in payout costs will become margin beneficial to us as payout to account has a different economic profile than pay out to cash in many regions around the world. Operator: Our next question comes to us from Cris Kennedy from William Blair. Cristopher Kennedy: Can you just talk a little bit more about the 500,000 digital wallet users. What kind of engagement are you seeing or retention trends? Or anything you could talk about that? Devin McGranahan: Cris, we are on a journey, right? And so -- we launched our first digital wallet in the third quarter of 2022. And over the course of the last 3 years, we've iterated both the platform the value proposition and to a certain extent, the nature of the customers that we're acquiring. The customers that we're currently acquiring tend to be much more in the receive markets. And as I highlighted in the prepared comments in Argentina, Brazil, also in Romania and to a certain extent, even here in the U.S., people putting money into their wallets from inbound remittances and then using that either for everyday living expenses through our cards or through like in Brazil, the [ PICK ] system, is a growing trend for us. And so what I would say is our most engaged customers are those that are in our received markets and are using the product as an alternative to having received cash in one of our retail locations. Operator: Our next question comes to us from Jamie Friedman from Susquehanna. James Friedman: I wanted to ask about the ability to transfer some of the best practices you've had in Europe, the European orders really doing well for you. I think you alluded, Devin, to some similarities or differences between there and here, like you talked about the independent agent network. But to what extent are those -- are there like synergies between those markets? And how can you transfer the success that you're having there here? Devin McGranahan: Jamie, great question. Thank you. We'll actually spend a bunch of time at our Investor Day talking about this. But recall, our European go-to-market model really has 3 components to it. One is the nature and shape of the distribution. Two is our go-to-market strategy in terms of how we structure our sales teams and our support model for the agents. And then third, which we talked about on this call already, really is the strategic pricing capability where we manage and monitor on a daily basis, market prices in specific locations in order to present the best possible option while maintaining our discipline on margins. And so those 3 components in certain ways differ in the U.S. So part of the rationale for the Intermex acquisition was historically, in the U.S., we had a much larger base of the large strategic accounts, the Kroger's, the Publix, the Walmart and as Matt mentioned in the commentary, we've gone through a big renewal cycle with those. We think they're important, but you have less ability to influence what happens in those than you do in the independent agent channel. So adding Intermex into that mix significantly broadens the middle of that pyramid of distribution with a very strong independent agent, nonexclusive independent agent channel. The other part of the pyramid in Europe that we have is -- Matt will know this, but I think we're up to 300 or 400 company-owned stores across the European footprint. And the company-owned stores are 6 to 8x more productive than your average agent, and therefore, they play an important but small role in the strategy. Here in the U.S., we had 3 when we get done with the Intermex acquisition and some other work we're doing, we'll end up close to a couple of hundred. So that change is kind of in process to get the distribution right. The strategic pricing, we're in the process of putting in place. I said we're now kind of in 3 metro markets with an aspiration to roll that out over the course of the next 12 months. And then on our go-to-market model, as we do the integration with Intermex, we will restructure our sales force and our agent support model to align much more closely with our European approach and the historic Intermex approach here in the U.S. So again, I see that as in the second half of '26 getting fully implemented. Operator: Our next question comes to us from Kartik Mehta from Northcoast. Kartik Mehta: Devin, just to understand North America a little bit better, I think you said August was a lot worse than maybe July or the second half of September. Was that a result of icing competition or just the market was really slow? Devin McGranahan: From our view, it was a market view. We didn't see any different, what I would call, competitor behavior, but we certainly did see different consumer behavior and so again, we don't have complete transparency, but the Bank of Mexico data would also support some of that as well where June was probably the worst. July improved moderately significantly and then August reverted back to a double-digit decline. So I can't explain it. I can just tell you what we observed. Matthew Cagwin: And just to build on Devin's point there, just give you some external data. Bank of Mexico had a low point for the year of down 18%. July got down 13% down 17%, then down 12% and the improved from there. So it's bounced around as time has passed on a transaction basis. Operator: Our next question comes to us from Zachary Gunn from FT Partners. Zachary Gunn: I wanted to ask on consumer services and apologies if this is -- if I missed this, but what was the contribution from euro changes over I know you stated consumer services still grew double digit organically. And just with that in mind, I appreciate the comments on 4Q and some of the headwinds in consumer services. But how do we think about the sustainability of that growth kind of going forward? Matthew Cagwin: Zach, pleasure to meet you. I said in the prepared remarks that the Eurochange acquisition contributed roughly nearly half of the overall CS growth this quarter. So that's the simple answer to your first part of your question. And then to your second part about how sustainable is consumer services in the long run. We've now had 3, 4 years of 10% plus growth in that business, how we've gotten there has varied from year-to-year, but we've got lots of new products that we've launched that are starting to scale. . We've got some that are doing very well already, and there's new ideas we're working on. So we think there's a long runway to continue to grow consumer service for the foreseeable future, and we'll do a really good long deep dive on that in 2 weeks. Operator: Our final question will come to us from Gus Gala from Monness, Crespi, Hardt & Co. Please ask your question. Unknown Analyst: I wanted to ask about the [indiscernible]strategy to the U.S. from Europe. As we think about that, I mean, is your fleet in Europe a little bit more focused on smaller retail format versus a large retail format in U.S., and then just by thinking about how cities are set up in Europe versus the U.S. what are kind of some of the differences as changes that you're having in terms of trying to approach in retail? Devin McGranahan: Yes Gus. great question. So the European model is slightly different than the U.S. model, but there are analogies. So the European model does have a relatively significant independent agent network, of which Western Union has a pretty strong presence in, which is different in the U.S. where we've historically participated in the independent agent channel with our Vigo brand and less so with our Western Union brand. But there is a large and significant independent channel in the U.S. We've just had less presence in it than say a Ria or an Intermex, which was part of the opportunity with Intermex. The U.S. does have a large base of what I will call the strategic accounts for us, the Walgreens, the Kroger's, the Walmart's, that is not true in Europe. The analogy in Europe, though, is a fair number of relatively significant postal systems. And so like in the U.K., we have the U.K. post or in Spain, we have the Spanish post. We work with La Banque Postale in France. And so that big base of what I'll call relatively lower productivity, but omnipresent distribution is done with postal systems in Europe versus grocery or convenience retailers here in the U.S. So we see the biggest opportunity really to bring and import some more of that independent agent model and do it on a -- as I said, we're doing it on a city-by-city basis, just like in Europe, so we're now implementing it in 3 major metropolitan areas in the U.S. But the reason it's going to take some time is you got to do it across 50 or 60 when in any European country, you do it across 3 or 4, and you've covered the majority of it. So we see upside. We see potential. We like the Intermex acquisition. As an ability to accelerate it, but we think the model is right, whether it is in Europe or here in the U.S. Thanks, everybody. Operator: Thank you for joining the Western Union Third Quarter 2025 Results Conference Call. We hope you have a great day.
Operator: Ladies and gentlemen, welcome to the Lonza Q3 2025 Qualitative Update Conference Call and Live Webcast. I am Sandra, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Philippe Deecke, CFO. Please go ahead, sir. Philippe Deecke: Good morning, good afternoon, and a very warm welcome to our Q3 qualitative update. Before we go into more details, please let me remind you that we intend to provide you with a general business overview with our qualitative update, but we will not be sharing figures related to our financial performance. We will do so on the 28th of January with our full year update. Let me start with an overview of our group performance before we move to the performance of our business platforms and [ THI ]. Afterwards, I will provide you with an update on our business contracting and our growth projects, followed by the current macroeconomic situation before I close for the Q&A session. Today, we report a strong Q3 performance across our CDMO businesses aligned with our expected full year trajectory. Supported by this strong performance, we are confirming our 2025 outlook for the CDMO business, which we upgraded at half year, with sales growth of 20% to 21% at constant exchange rates compared to the prior year and a core EBITDA margin in the range of 30% to 31%. Excluding Vacaville, which is now expected to contribute at the upper end of the range of around CHF 0.5 billion in sales and a better-than-expected core EBITDA margin in 2025, we expect low teens percentage organic CER growth and a margin improvement in our CDMO business, in line with our CDMO organic growth model. As anticipated at our half year release in July, we confirm our expectation of higher sales in H2 2025 than in H1. We see a healthy progression of our core EBITDA margin in line with the 2025 outlook. Progressing well on its expected recovery path, we also confirm our full year 2025 outlook for the Capsules and Health Ingredients for CHI business at the low to mid-single-digit percentage CER growth and an improved core EBITDA margin in the mid-20s. Based on FX rates at the beginning of October, we can reiterate an anticipated year-over-year headwind of around 2.5% to 3.5% of sales and core EBITDA for full year 2025. However, our margin is well protected due to a strong natural hedge and our hedging program in place. Moving to the performance of our business platforms. Let's start with Integrated Biologics. Integrated Biologics continue to see strong momentum with robust demand for its large-scale mammalian assets. This is further supported by Vacaville, as I just commented on. In our small-scale mammalian assets, we see a high level of utilization, and we have a good level of visibility for the remainder of this year. But let me come back to the early-stage business later to provide further context and outlook. Overall, we are pleased to report a continued good operational execution alongside maturing growth projects and growth and margin drivers in our Integrated Biologics business. Turning to our Advanced Synthesis platform. We continue to see strong commercial demand for our small molecules and bioconjugates capacities as underlined by the deal mentioned in our Q3 release, signing a large multiyear supply agreement in small molecules. Growth is supported by new capacities in small molecules with our new highly potent API plant and bioconjugates. The business platform further benefits from a robust operating execution and the demand for complex products supporting margins as witnessed already with our half year results. Our Specialized Modalities platform improved in Q3 as expected. Also, we expect the full year performance to remain moderate in the context of the softer first half. Deliveries are weighted into Q4 and depending on the progress of key customer projects and decisions, sales may also fall into 2026. Life Science had a good Q3 with robust growth, and we are pleased to report that microbial returned to growth in Q3 after a softer H1 performance. In Cell & Gene, ongoing pipeline variability and complex manufacturing continues to weigh on asset utilization. While we anticipate a gradual recovery in operational performance, it will remain below the strong execution seen in 2024. Cell & Gene is a business with strategic relevance to Lonza and is our aim to increase resilience of the business over time, commercially and operationally. But in the meantime, some business variability may persist. Our CHI business returned to positive CER growth in Q3, in line with the expected full year trajectory for 2025. We are pleased to report that also the pharma capsules business is seeing improved demand trends and returned to positive volume growth in Q3. We can, therefore, confirm that both our nutraceuticals and pharmaceutical capsules business has moved beyond the post-pandemic destocking phase. In the current geopolitical environment, our manufacturing footprint in Greenwood, South Carolina and Puebla, Mexico is continuing to support CHI's customers to navigate the evolving geopolitical environment. In the U.S., recent preliminary affirmative countervailing and antidumping decisions continue to be in place, allowing more balanced competition for pharmaceutical and nutraceutical capsules in the U.S. In Q3, we progressed with the necessary internal carve-out measures to prepare our exit from the CHI business. The good business momentum highlights the attractiveness of the CHI business as a leader in its markets, and we are confident in the business ability to return to historical CER sales growth in the low to mid-single-digit percentage and a core EBITDA margin above 30%. We are, therefore, confident to exit the business in the best interest of our customers, employees and shareholders, and we will do so at the appropriate time. Before turning to our growth projects, let me say a few words on contracting. For 2025, we expect again a healthy level of contract signings across technologies and sites. Recently, we were able to sign several significant contracts, including a further strategic long-term contract for integrated drug substance and drug product supply of bioconjugates. In our small molecules technology platform, we signed a large multiyear commercial supply agreement. And in Integrated Biologics, we were able to secure a fourth significant long-term supply agreement for our Vacaville site. In Vacaville, we expect further contract signings in the coming months, and we continue to see strong customer interest for large-scale U.S. capacity. Let me say a few more words about Vacaville. One year after closing the acquisition, we are very pleased with the site's integration into Lonza's network, which is progressing in line with plan. The site continues to demonstrate robust execution in support of Roche and maintaining excellent quality track record, which is also reflected in our expectations for Vacaville continuing at the high end of our initial estimate for 2025. The site is also preparing new product introductions for 2026 and the first phase of CapEx is progressing as planned to the [indiscernible] system and [indiscernible]. [indiscernible] our new highly potent API facility is progressing well, and we commenced full commercial operation in July 2025. Our large-scale mammalian facility also showed good progress in ramp-up activity in Q3. GMP operations are underway and commercial production is expected to ramp up gradually from 2026 onwards. Ramp-up activities for both facilities are those progressing in line with plan. Before closing my remarks and opening for the Q&A session, let me reiterate our expectations of no material financial impact on Lonza from the currently announced official U.S. trade policies. The so far announced U.S. tariffs do not include tariffs on API, intermediates and raw materials as described in the Annex 2 of the Executive Order. We further remain confident that our well-diversified global manufacturing footprint with large capacities in the U.S., Europe and Singapore will enable us to support our customers' global manufacturing requirements today and in the future. We, of course, remain vigilant to the continued evolution of the situation and potential impact on our businesses. We also continue to closely monitor biotech funding trends and recent fluctuations in funding levels are expected to have only a minimal impact on Lonza's growth momentum in 2025 and beyond, with early-stage activities representing only approximately 10% of the CDMO business and only a portion of that business originating from companies requiring funding. To close, let me provide some final remarks. Lonza is on track to deliver on its full year 2025 outlook. We see strong contracting demand with customers seeking Lonza's services for their strategic projects. Our growth projects are on track and are contributing to our growth this year and will continue to do so also in the years to come. In the current geopolitical environment, our large commercial business provides stability and our global asset positions us well to support our customers in the complex manufacturing needs. With that, I would like to thank you for your time and hand over to Sandra. Operator: [Operator Instructions] Our first question comes from Ebrahim Zain from JPMorgan. Zain Ebrahim: Hopefully, you can hear me okay. This is Zain Ebrahim from JPMorgan. I'll stick to one question, which is on Vacaville. So just on the significant contracts you announced this morning, how should we think about the timing of tech transfer for the contract? And when can it start contributing to revenues? And related to that, just based on this contract, where are you with respect to your target for being able to maintain Vacaville sales stable over the midterm? Philippe Deecke: Thank you very much for the question. So I think as we've stated in the past, I think large commercial contracts are usually not for immediate use of batches. It takes time to tech transfers, as you say. But I think all the contracts we are announcing for Vacaville are part of the plan to offset the reduced need for batches from the initial Roche contract. And so this new contract is part of that plan and reconfirms that our stated trajectory for Vacaville of more or less flat sales in the next few years is exactly on track. So this contract will start working the [indiscernible] site next year [indiscernible] to revenue over the next 2 to 3 years. Operator: The next question comes from Charles Pitman-King from Barclays. Charles Pitman: Charles over here from Barclays. Hopefully, you can hear me okay. Just a question, please, on guidance. Just wondering, given you kind of raised the backfill outlook to the upper end of your around CHF 0.5 billion range this year, but you ran the top line guide. I was just wanting to confirm if there's one portion of your business that you think is kind of deteriorated such that you are just kind of reiterating that top line guide? And just maybe whilst we're on guidance, I was wondering if you were -- if you could provide commentary on your thoughts on FY '26 guidance next year, which is currently looking for low double-digit growth. I know you don't typically comment, but worth asking. Philippe Deecke: Yes. Thank you, Charles. Thank you for offering the answer to your second question. [indiscernible] more seriously. Look, I think on guidance for this year, I think we gave you a range. There's always things that move up and down. So certainly, I think we're pleased with the Vacaville progress this year and continue to be pleased with it. So that's helping us. On the other hand, there are, as we mentioned, some uncertainty on SPM. So I think within that range, this is what the puts and takes are. So that's for 2025. We're 3 months away. So we kind of have good visibility on what's going to happen for the rest of the year. On 2026, as you know, we usually guide in January when we report full year numbers. So we will stick with that. For 2026, I think we talked about early stage, which is not going to have a material impact on our numbers no matter what the funding level is. And I think we're very pleased with the contracting, as we said, for 2025, which will also help in '26. So, I think everything is in line for '26, so far [indiscernible]. Operator: The next question comes from Charles Weston from RBC Europe. Charles Weston: I wanted to stick on 2026, please. So not asking for a number. But since the large mammalian Visp asset will be ramping in '26, which could presumably be a bit dilutive to margin with a relatively high base in Advanced Synthesis in Vacaville, there might be some headwinds to margin improvement year-on-year in 2026, perhaps a bit offset by the Advanced Synthesis improvements. But are there any other moving parts that I haven't mentioned that could drive an improvement next year? Philippe Deecke: Yes, Charles, so again, you summarized very well, which is great to hear. I think, again, yes, we have large growth assets that start dilutive as it is very normal. Vacaville, I think, is probably more of a top line headwind because this is going to be more or less flat for next year. So that's a big block of sales, if you want, that does not contribute to growth next year. Nevertheless, I think our organic growth model is looking at low teens growth and improved margin year-over-year. And that's, I think, for now the new best assumption for next year. Operator: The next question comes from [ Theodora Rowe Beadle ] from Goldman Sachs. Unknown Analyst: So just on the separation of the CHI business, is the process of carving out this business now complete? And are you able to share with us anything in terms of the timing of separation or when you'll be able to communicate the decision? Philippe Deecke: Yes. Thank you for the question on CHI. So I think the progress on the internal separation, which contains of legal entity work, [indiscernible] as I said in my speech before, is progressing well. I think we're nearing completion of that. And I think the rest of the process is really an internal process that is going to be between us and the other parties and we will inform when things are decided. Operator: The next question comes from James Vane-Tempest from Jefferies. James Vane-Tempest: On back of [indiscernible], I mean you've announced you won a new contract and there's potentially some in the coming months. So just to clarify, should we understand that there could be some by year-end, but we're not going to find that out until full year in January if you don't plan to disclose more in real time like your peers? I guess I'm asking this because some of them have been more visible to the market in terms of the number of contracts they've signed, which suggests a much more competitive environment. So perhaps I can also ask what you're seeing on that front? Philippe Deecke: Yes. Thank you, James. So again, we usually do not communicate all the contracts we're signing. This would be issuing a lot of release. I think if you remember, our signing in 2023 was about CHF 12 billion. Last year, it was about CHF 9 billion, if I recollect right. So I think these are a lot of contracts being signed. We do not have a history and we do not mention every single contracts we're signing. I think we decided to do so on Vacaville to provide you, I think, more visibility into our confidence to fill the assets over time. So this is the reason why we're kind of providing you the Vacaville contracts on a more regular basis. And usually, our customers also have no interest for us to publicly announce their contracts. So we don't do so. I think indeed, I think if we were to sign further contracts this year, you'll probably hear about it at the end of January when we report our full year numbers. And I think as stated as well, I think we should get off the rhythm of announcing contracts for a single site. And probably we won't do so in 2026. But let's see, I think the contracting situation is very strong. We're also very pleased with the interest in Vacaville. So we have a lot of concurrent negotiations ongoing. Some will finalize over the next few months. Others may take longer. These are very large contracts. These are usually also complex multiyear contracts that need time to be negotiated. In terms of the competitiveness and what our peers are doing, you would have to ask them. I think for now, we are very pleased to have a very strong footprint in the U.S. with attractive capacities available in the U.S., but also our sites in Europe and Asia see good demand. And you saw that some of the contracts that I mentioned today also include some of our non-U.S. assets. So I think on the contracting side, we're very pleased with the progress and with the interest of companies, large and small to contract with Lonza. Operator: The next question comes from Patrick Rafaisz from UBS. Patrick Rafaisz: Just a follow-up on the large contract wins. For Vacaville, is there any chance you could add a bit of color on size and types of capacities, the amount of capacity required. And the same for the large bioconjugate contracts, for which site was that specifically? And can you add some color on what types of services from your end did this include? Philippe Deecke: Yes. Patrick, happy to take your question. So I think on the Vacaville contract, I'm not going to directly answer your question, but maybe give some more color about the contracts that we have signed so far. I think all of these contracts, including the latest one, are multiyear contracts that are significant for the site as well and which are very important for us to offset the declining revenue coming from Roche. So I think these are very helpful projects because they start contributing very soon, helping us to maintain flat sales for Vacaville. Important also to note that we see great interest for both assets within Vacaville. I think, as you know, we have a 12,000-liter asset and a 25,000-liter asset. And I think also coming from the market, I think there were certainly question marks around the market still requiring such large reactors like the 25,000 liters we have. And we're very pleased to say that, yes, indeed, there is big demand for such large reactors. So we see contracting for both our 12,000-meter reactor and our 25,000-meter reactor. So again, Vacaville for us following a very -- tracking very well along the plan that we had. And this confirms our outlook for kind of flattish sales to 2028 and then increasing sales further on as we ramp up utilization of the site. For the integrated offer contracts that we also mentioned today, I think here, we are offering several services, including producing the protein, the conjugation and the drug product. So again, I think the reason why we mentioned this contract to you is because, again, this shows the interest from pharma companies, large and small, to ask us for integrated business, which cover more than one modality. So more and more we get asked to do not just the protein or not just the conjugation or not just the drug product, but the combination of several modalities across our platforms. And I think we believe that this is, again, something where Lonza can clearly differentiate, of course, in the areas of ADC, but not only. Operator: The next question comes from Thibault Boutherin from Morgan Stanley. Thibault Boutherin: My question is just on tariff and the CapEx announcements in the U.S. by large pharma players. Clearly, there is a push from the U.S. administration to bring more manufacturing to the U.S. So did you have discussion with the administration and confirmation that investing through CDMOs such as Lonza meets the administration goals for locating manufacturing in the U.S.? So it makes sense that it does, but just wondering if you had an explicit confirmation that it would fit what you're looking for? Philippe Deecke: Yes. Thanks, Thibault. So I think there are multiple discussions happening. I think with the U.S. government, certainly, pharma companies are talking directly. The Swiss government is talking directly. We also have contacts that we use. I wouldn't go into more details of what's happening in these discussions until there's a result. I think this would be premature. So I think we'll wait until something is official and is being communicated. But overall, I think I reiterate that also we at Lonza are investing significantly in the U.S. So of course, if you compare this with the numbers of big pharma, this is a different magnitude. But I think as an industry leader, we are investing significantly in the U.S. in multiple sites -- of our investments in Portsmouth, of course, our investment -- of our large investment in California and Vacaville, and there are other sites that are seeing further investments. So I think we feel very confident to also here be very much in line with the intention of the government, but more importantly, the intention of our customers to have capacity and strong capacity in the U.S. So we will continue to offer increased capacity in the U.S. And if our pharma customers can leverage this, then even better. But in any case, having a footprint in the U.S. is helpful to our customers. Operator: The next question comes from Manesiotis Odysseas from BNP Paribas. Odysseas Manesiotis: First one, Philippe, I wanted to follow up on the detail you provided on the contracting between Vacaville bioreactors. Is it fair to interpret your -- the details you provided there as that you've landed in these 4 contracts, at least one of them has to do with the 25,000 liter? And on top of that, within these 4 contracts, you also have contracts for more than one bioreactor? So that's the first one. And secondly, could you remind us the pace of the new Visp mammalian capacity ramp? Is this still expected to run at full utilization by '28, '29? And has there been any plans change given the recent push to reshore capacity in the U.S.? Philippe Deecke: Yes. So let me give you -- maybe reconfirm what I want to say just before on the Vacaville contract. So indeed, I think we have been able to contract for both assets for the 25,000 and the 12,000. So I think there's a different mix in the contracts. I'm not sure I understand what you meant with the contract for more than one reactor. But I think I can confirm that the new contracts that we have signed are involving both 25,000 and 12,000 assets. I think on the Visp, on our large-scale mammalian facility, I think we mentioned a while back how the profile of such large-scale facilities look like. And indeed, it usually takes 2 to 3 years also to ramp. So since we started late this year, you can do the math as to when we would expect utilization to be high and contributing favorably to our bottom line and to our margins. So I think this asset is a typical large-scale asset that will follow this path. Yes. So everything is in line. We started GMP processing this quarter. So progress is in line with our plans. Operator: The next question comes from Max Smock from William Blair. Max Smock: Maybe just a quick one here on Vacaville. I appreciate the fact that revenue is going to be flat next year in 2026. But in the past, you've talked about margins at that facility ramping up as you replace some of that Roche revenue with additional third-party customers. Can you just talk about how you expect Vacaville margins specifically to trend next year? Philippe Deecke: Yes, Max. So I think on Vacaville, again, we said 2 things. One, I think revenue will be more or less flattish through '28 and margins will progress over time to basically be neutral to group by 2028. So I think this continues to hold true. I think margins this year were a bit better or better than we expected, as we mentioned in our first half call. Now of course, this was also an easier year. 2025 was an easier year for Vacaville since they were basically continuing to produce the products that they knew from before for Roche with not a lot of new tech transfers to do, et cetera. So 2026 will be more challenging, if you want, for Vacaville because they have not only the implementation or the execution of the CapEx investments to do, but they also need to start to onboard and tech transfer new programs while still delivering the batches for Roche. So it's a more complex year. Nevertheless, I think we believe that our goal for 2028 is confirmed, and we'll have to see closer to next year how the margin exactly behave versus what they do this year. I think we had before the question from Charles around the dilutive effect in terms of growth for the company. So in terms of growth, yes, this is a dilution. In terms of margin, we'll have to see if we can replicate this year's margin or not. But the progression -- the progression over the next 3 years is confirmed. Operator: The next question comes from Falko Friedrichs from Deutsche Bank. Falko Friedrichs: My question is on your Cell & Gene business. And now that we are in the middle of your fourth quarter, can you speak a little bit more about your level of visibility into this year-end pickup and what exactly is driving that? Philippe Deecke: Yes. So I think if you talk only about the Cell & Gene business, I think there, we met in H1 that we had also operational issues. I think remember this is a much more manual and very complex manufacturing process. So there, I think we see improvement in the second half and that business has certainly improved versus the first half. But I think we're still managing the complexities. And overall, for the year, we don't expect this to be as good of a year as we had in 2024. Now if you talk about SPM as a platform, I think there also, we saw better performance in the third quarter. We remain with several customer decisions and customer projects that are late -- happening late this year in Q4. And so these are the one that could still move between '25 and '26 and this we will only know probably late this year. Microbial, which is the second large business in this platform, is performing well and it's usually a very stable and strong business. We explained the first half in our July call with mainly a very high base and some contract -- some construction in our assets in microbial. But otherwise, this is kind of a stable and nice business. So overall, we see SPM better in the second half, but for the full year, certainly will be difficult to offset what happened in the first half. Operator: The next question comes from Sebastian Bray from Berenberg. Sebastian Bray: It's on the early-stage fraction of the portfolio. It was mentioned earlier in the call that it looks relatively robust, at least on a few months' view. How far does the visibility extend in this area? And if conventional biotech funding measures, which suggest that this business faces a funding squeeze in '26, are no longer a reliable guide, where is the money for these end customers coming from? When they go and sign the contract and if research funding is not there anymore, where is it coming from instead? Philippe Deecke: Sebastian, so let me first reconfirm what you said very quickly. I think the early-stage business is strategic for us because it allows us to look very early into the pipeline of pharma companies as to what services and technologies will be needed in the future and also contributes clearly to our future commercial utilization. So I think this is an important business for us. But again, this is not a very large business for us given the sizable commercial contracts and commercial assets that we have. So this early-stage work is about 10% of our CDMO revenues. And also for us, the funding in biotech is only a portion of what drives this early-stage work for us because many of our customers don't require external funding. This can be large pharma, large biotechs, midsized companies that have their own revenue and own funding. So only a portion of the 10% is actually really relying on external funding being from [indiscernible], follow-ons, venture capital, et cetera, et cetera. So I think what we wanted to make clear is that the funding levels that we're seeing today, and I'll come to this in a second, will not play a major role in the Lonza performance. And we have visibility of roughly 6 to 9 months in that business. That's usually the delta that you see between any movement of funding and then again, these smaller company relying on funding being able to deploy the capital they received or having to reduce their spending because of the lack of funding. So this is usually the visibility that we have. So for now, we would see roughly into the first half of 2026. And for there, I think we see good level of utilization certainly for '25 and early '26. I think the inquiries that we're seeing have reduced slightly throughout 2025, but not dramatically. And on the funding side, actually is good news. Q3 was actually better than Q3 last year. So I think this is not only bad news there. I think we saw a great increase in pipe funding, which is one of the other mechanisms for these companies to get money. [indiscernible], I think, was holding well at similar level as previous quarter. So I think this is still something that's volatile, but the decline that we've seen since early '25, at least has been put on hold for Q3. That's at least what we see, but that's probably the same data that you are all looking at. So I would say we're happy with the progress certainly in '25. We are confident that we can manage '26 and that we will continue to see interest for early-stage work to then be retained within the Lonza network over the years to come. Operator: Ladies and gentlemen, this concludes today's question-and-answer session. I would now like to turn the conference back over to Philippe Deecke for any closing remarks. Philippe Deecke: Yes. Thank you, everybody, for the question and the interest in Lonza. Again, a strong Q3 and confirming our outlook for this year. So I think good news from our end, and I wish you a great end of your day and talk to you in January. Operator: Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.
Operator: Good afternoon, and welcome to the Digital Realty Third Quarter 2025 Earnings Call. Please note, this event is being recorded. [Operator Instructions] I would now like to turn the call over to Jordan Sadler, Digital Realty's Senior Vice President of Public and Private Investor Relations. Jordan, please go ahead. Jordan Sadler: Thank you, operator, and welcome, everyone, to Digital Realty's Third Quarter 2025 Earnings Conference Call. Joining me on today's call are President and CEO, Andy Power; and CFO, Matt Mercier. Chief Investment Officer, Greg Wright; Chief Technology Officer, Chris Sharp; and Chief Revenue Officer, Colin McLean, are also on the call and will be available for Q&A. Management will be making forward-looking statements, including guidance and underlying assumptions on today's call. Forward-looking statements are based on expectations that involve risks and uncertainties that could cause actual results to differ materially. For a further discussion of risks related to our business, see our 10-K and subsequent filings with the SEC. This call will contain certain non-GAAP financial information. Reconciliations to the most directly comparable GAAP measure are included in the supplemental package furnished to the SEC and available on our website. Before I turn the call over to Andy, let me offer a few key takeaways from our third quarter results. First, we posted $1.89 in core FFO per share, a quarterly record and 13% higher than the third quarter of last year. Constant currency core FFO per share was $1.85, 11% higher than last year. Other profitability metrics surged as well with AFFO per share and adjusted EBITDA up 16% and 14% year-over-year, respectively. These strong earnings results were comfortably ahead of expectations, resulting in our third quarterly guidance increased so far this year. Second, we have strong visibility to continued growth given our near-record backlog and crisp execution. Our backlog grew to $852 million, with the lion's share slated to commence through the end of next year, while organic growth continues to accelerate as demonstrated by 8% same capital cash NOI growth year-over-year. Third, we continue to execute across the full product spectrum and our footprint, with over $200 million of bookings at 100% share, near record 0-1 megawatt plus interconnection bookings in the quarter with a leading power bank of 5 gigawatts of IT load to support our customers and Digital Realty's future growth. With that, I'd like to turn the call over to our President and CEO, Andy Power. Andrew Power: Thanks, Jordan, and thanks to everyone for joining our call. As digital transformation, cloud and AI continue to grow, our ability to deliver scalable connected infrastructure across key metros worldwide is more critical than ever. PlatformDIGITAL's global reach and full spectrum product offering are key differentiators, enabling us to support the evolving needs of cloud providers, enterprises and service partners around the world. Over the past 2 years, the data center industry has experienced unprecedented demand fueled by the digitization of enterprise business processes, the expansion of cloud and the ongoing proliferation of AI, resulting in complex hybrid IT architectures. Demand for scalable connected infrastructure remains robust across a wide range of customer segments from global cloud platforms to regional service providers and multinational enterprises. Meeting this demand within our markets, however, is becoming increasingly challenging. Power availability, permitting challenges and infrastructure constraints are making it harder to bring new supply online at the pace our customers require. Digital Realty's established presence in the world's leading metros, deep relationships with utilities and local governments and proven development track record give us a distinct advantage in navigating these challenges and delivering capacity efficiently and reliably where and when our customers need it. In an attempt to help frame how we see the abundance of data center infrastructure announcements we are all seeing in the market, I want to make a few comments. It is clear that the world is engaged in a full-scale technology race with a handful of key players aiming to build the most advanced AI models or perhaps even AGI. Three years post launch, ChatGPT holds the title of the fastest-growing app and is already among the most highly used applications in the world with more than 800 million weekly users. Several others, including Meta, Google, Baidu and xAI have also developed AI with meaningful scale. With each passing week, we continue to see massive investment announcements and partnerships aimed at scaling the infrastructure necessary to support the world's most powerful AI training models. Given the scale of these announcements, the ongoing development and proliferation of AI offerings, the opportunity still appears to be in the very early innings. The preponderance of gigawatt campus announcements to date have generally fallen outside of the major metro markets in Digital Realty's strategic footprint as model builders and their providers have urgently sought locations that offer readily available and abundant power, as power is the limiting factor for scaling AI. The anticipated pace and scale of these developments are largely unprecedented. Given our experience and track record in the space, we are intrigued as several new market entrants have launched the development of massive and complex remote campuses, often to support a single use case, workload or customer. These facilities hold the promise of developing life-changing technologies, and we are optimistic about their prospects. Training workloads geared toward developing the AI models can be described as latency tolerant as the development of the AI takes precedent over the utilization of the technology, at least for now. Based on conversations that we are having with our customers and industry participants, Al as well as what we are seeing in our broad portfolio, we are increasingly confident that connectivity will become increasingly important over time as model success drives implementation and usage requiring lower latency, inference-oriented deployments. Digital Realty has landed a meaningful share of AI-oriented deployments over the last 2 years. Since mid-2023, AI has averaged more than 50% of our quarterly bookings, and we continue to expect that the 5 gigawatts of IT load that we have in our power bank will be significantly weighted toward AI workloads over the next several years. Critically, our data center capacity is situated in and around the world's most highly connected cloud zonal markets with the highest concentration of population and GDP, and we currently maintain 5 gigawatts of large contiguous capacity blocks situated across 40 of our strategic metros across the globe. It is harder to build in these locations for a growing list of reasons, and we expect this capacity will continue to be highly sought after as new applications and use cases continue to evolve. Our conviction in our portfolio and in our markets continue to be evidenced through our daily engagement with our 5,000-plus customers. Digital Realty continues to see a robust pipeline of demand from AI-oriented use cases. And even without a record hyperscale lease like the one we signed in March of 2025, 50% of our bookings were related to AI use cases in the third quarter. In Q3, we again delivered strong operational and financial performance, underscored by record interconnection bookings, near-record new logos and the second highest level of bookings ever in our 0-1 megawatt plus interconnection product set. Core FFO per share set a record $1.89, a robust 13% above last year's third quarter. These strong earnings were driven by 10% operating revenue growth and continued expansion of our high-margin fee income, together with disciplined expense management, resulting in the third consecutive guidance increase this year. Bookings in the third quarter were $201 million at 100% share or $162 million at Digital Realty share. Like last quarter, our 0-1 megawatt plus interconnection category was a strong contributor to our leasing strength with $85 million in new leases, along with a healthy $76 million of greater than a megawatt leasing. Leasing was globally diversified, broadly consistent with our existing rent roll with notable activity in Americas, in EMEA and in APAC. We also added a near-record 156 new logos. Interconnection leasing of $20 million marked a second consecutive record quarter, which was 13% higher than the last quarter's record, underscoring the growing recognition of our connectivity-driven value proposition. Interconnection leasing was buoyed by strength in our AI-oriented fiber offering, reflecting the increased demand for high-volume movement of data amongst customers as well as momentum in our ServiceFabric product. Matt will provide more details on our results in a few moments. While there's been significant market focus on large-scale AI deployments, Digital Realty's pool of highly sought-after larger contiguous capacity blocks are slated to come online in late 2026, 2027 and beyond. We remain actively engaged with hyperscale customers on our largest future leasing opportunities, and we continue to see strong momentum in our colocation and connectivity product offering. Enterprise demand for data center infrastructure continues to grow as organizations transition away from traditional on-prem IT environments toward more flexible cloud-connected architectures available within Digital Realty data centers. This shift is driven by the need to improve scalability, reduce costs and enable faster innovation. Enterprises are increasingly deploying workloads in colocation and hybrid environments to gain proximity to cloud platforms, partners and end users, while maintaining control over mission-critical applications and data. Digital Realty's full spectrum product offering, combined with our global footprint, allows us to support this transition, providing the infrastructure and connectivity enterprises need to modernize their IT strategies, accelerate digital transformation and AI implementation. We're seeing these trends play out across our customer base as enterprises increasingly turn to Digital Realty to support their evolving infrastructure needs. Whether it's enabling real-time data exchange across global operations, integrating with multiple cloud platforms or deploying AI workloads at the edge, our customers are leveraging PlatformDIGITAL to solve complex challenges and accelerate their digital transformation. Let me share a few examples that illustrate how our platform is helping enterprises unlock new capabilities and drive meaningful business outcomes. In September, I was honored to join the CEO and CTO of Oxford Quantum Circuits for an important milestone during their recent deployment of New York's first Quantum AI computer in our JFK10 data center. Oxford Quantum Circuits is taking advantage of PlatformDIGITAL's colocation and connectivity capabilities to expand their AI capabilities at scale, solving for efficiency and resource constraints. A leading global technology company chose PlatformDIGITAL to deploy their global presence, taking advantage of liquid cooling capabilities required for their HPC/AI environments. A leading health care analytics and technology solutions company is expanding its geographic presence on PlatformDIGITAL to solve data localization and sovereignty challenges. A leading higher education research institute is taking advantage of PlatformDIGITAL's liquid cooling capabilities required for their HPC and AI deployment. A leading European technology and network provider is expanding on PlatformDIGITAL, deploying a sovereign cloud solution in the U.S. to support their customers' compliance needs. A global payments provider and new logo for Digital Realty chose PlatformDIGITAL to deploy infrastructure in multiple markets to utilize network and cloud ecosystems while solving for scalability and compliance requirements. And a multinational financial services company is expanding on PlatformDIGITAL, taking advantage of Digital Realty's leading financial and network ecosystems. Before I turn it over to Matt, I'd like to briefly highlight our progress on global sustainability. In the third quarter, we received the EcoVadis Gold rating, a prestigious international recognition for business sustainability. This recognition places us in the 97th percentile of all companies assessed, highlighting our position among the top sustainability performers worldwide. We expanded our renewable energy commitment in Illinois by signing additional contracts that support high-impact, local community solar projects being developed by Soltage. These locally sourced solar energy projects will help support local power grids and benefit residents in the communities in and around our data centers. Additionally, in the third quarter, we announced long-term renewable energy agreements with Current Hydro to procure 500 gigawatt hours of clean baseload hydro power from 3 projects along the Ohio River. These agreements highlight our commitment to sourcing new firm 24/7 carbon-free energy in the regions where we operate, enabling us to support our customers' needs. And with that, I'll now turn the call over to our CFO, Matt Mercier. Matt Mercier: Thank you, Andy. For the second consecutive quarter, Digital Realty posted double-digit growth in revenue, adjusted EBITDA and core FFO per share, reflecting the momentum in our business, driven by commencements from our substantial backlog, strong releasing spreads, modest churn and growing fee income. We achieved these record results while reducing our leverage and maintaining significant liquidity to invest in data center projects across our 5 gigawatt runway of buildable IT capacity. In the third quarter, core FFO per share grew by an attractive 13% year-over-year to a new quarterly record, while leasing results were highlighted by their geographic and product breadth as well as continued strength in the 0-1 megawatt plus interconnection category. Looking ahead to the fourth quarter, we increased guidance for the full year once again and expect to begin 2026 with significant momentum in the sizable backlog which extends our runway for long-term growth. As Andy touched on, we signed leases representing $201 million of annualized rent in the third quarter, bringing year-to-date leasing to $776 million at 100% share. At Digital Realty share, we signed $162 million of new leases in the third quarter, which is well distributed across our 3 reasons. Our 0-1 megawatt plus interconnection product set continued to demonstrate the strong momentum we have been highlighting, posting $85 million of new bookings in the quarter, led by record bookings in the Americas and strength in EMEA. We also posted record AI bookings in this segment this past quarter, demonstrating the continued emergence of AI-oriented demand among our enterprise customers. Interconnection bookings also marked a new record, besting last quarter's record by 13%. Pricing in the 0-1 megawatt plus interconnection category was strong, led by leasing in one of our most highly connected facilities in the U.S. Over the past 4 quarters, we've leased a robust $319 million in this product set. We signed $76 million within the greater than a megawatt category at our share, while leasing spread across our regions but notable strength in EMEA. Pricing in the greater than a megawatt product was strong, averaging over $200 per kilowatt in the quarter and reflected activity in our top 3 performing markets: Silicon Valley, Amsterdam and Singapore. Building on our leasing momentum, our backlog at Digital Realty share increased to $852 million at quarter end, with $137 million of commencements more than offset by our new bookings. Looking ahead to the fourth quarter, we expect another $165 million of leases to commence with another $555 million scheduled to commence throughout 2026. Our large backlog provides us with strong visibility and predictability for the next several quarters. During the third quarter, we signed $192 million of renewal leases at a blended 8% increase on a cash basis. Renewals in the third quarter were again heavily weighted toward our 0-1 megawatt category with $138 million of renewals at a 4.2% uplift. Greater than a megawatt renewals of $49 million saw an exceptional 20% cash re-leasing spread, driven by deals in Singapore, Chicago, Northern Virginia and New Jersey. Year-to-date, cash renewals averaged 7%. For the quarter, total churn remained low at 1.6%. As for earnings, we reported record core FFO of $1.89 per share, up 13% year-over-year, reflecting strong upside from commencements and positive re-leasing spreads, continued growth in fee income and an FX benefit versus last year. On a constant currency basis, we reported core FFO per share of $1.85 in the third quarter or 11% growth year-over-year. Data center revenue was up 9% year-over-year, but adjusted EBITDA was even greater at 14% year-over-year, driven by the growth in data center revenue and higher fee income. During the quarter, operating expenses continued to increase, reflecting both the growing scale of our business, rising employment costs and seasonal effects. As we head toward the end of the year, we expect to see the typical seasonal increase in repairs and maintenance expenses along with the seasonal decline in utility expenses and related reimbursements. Same-capital cash NOI growth was strong in the third quarter, increasing by 8% year-over-year, driven by 7.8% growth in data center revenue. On a constant currency basis, same-capital cash NOI rose 5.2% in the quarter. For the 9 months, same-capital cash NOI grew by 4.5% on a constant-currency basis, which prompted us to notch our full year guidance range up to 4.25% to 4.75%. Moving on to our investment activity. During the third quarter, we spent over $900 million on development CapEx when including our partner share and approximately $700 million on a net basis to Digital Realty. During the quarter, we delivered about 50 megawatts of new capacity, 85% of which was pre-leased. While we started about 50 megawatts of net new data center projects leaving 730 megawatts under construction. At quarter end, our gross data center development pipeline stood at $9.7 billion at an 11.6% expected stabilized yield. Our runway for future growth including land, shell and ongoing development stands at roughly 5 gigawatts of sellable IT load. For clarification, IT load difference from the gross utility feed figures being touted by newer entrants to the data center development world as utility feed must also be used to cool a data center and to provide redundancy. During the third quarter, we pruned a few small non-core facilities in Atlanta, Boston and Miami for a total of $90 million. And earlier in October, sold a non-core facility in Dallas for $33 million. We redeployed $67 million of that capital into land in Chicago and Los Angeles to bolster our development capacity. Turning to the balance sheet, leverage fell to 4.9x, well below our long-term target of 5.5x, while balance sheet liquidity remained robust at nearly $7 billion, which excludes the $15 billion of private capital we have arranged to support hyperscale development and investment through our joint ventures and new U.S. hyperscale data center fund. Our next debt maturity is EUR 1.1 billion notes at 2.5% in January 2026. Beyond that, we have a smaller CHF 275 million note at 0.2% that matures in the second half of next year. Looking further out, our maturities remain well laddered through 2035. Let me conclude with our guidance. We are increasing our core FFO guidance range for the full year 2025 by roughly 2% at the midpoint to a new range of $7.32 to $7.38 per share to reflect better-than-expected operating performance and updated FX assumptions for the full year. We are also increasing the midpoint of our constant currency core FFO guidance range by 2% to $7.25 to $7.30 per share. Despite our enthusiasm and outperformance in the quarter, we expect fourth quarter core FFO per share to be tempered by seasonally higher repairs and maintenance expenses, headwinds from a non-core asset sale and lower interest income associated with lower rates and cash balances. The midpoint of our increased core FFO per share guidance represents approximately 10% year-over-year growth, reflecting the momentum in our underlying business and the benefit of the weaker U.S. dollar year-to-date. On a constant currency basis, core FFO per share growth is expected to be over 8% at the midpoint, reflecting a 200-plus basis point improvement from the growth that we forecasted at the beginning of this year. Supporting the bottom line improvements in guidance, we are increasing the midpoint of our revenue and adjusted EBITDA guidance ranges for 2025 by $75 million a piece. We are raising the midpoint of our cash and GAAP re-leasing spread guidance ranges to 6% and 8%, respectively, to reflect the continued strength in market fundamentals. We are also increasing our constant currency same-capital cash NOI growth assumption by 50 basis points at the midpoint to 4.5%. Lastly, we are increasing the midpoint of our G&A assumption by $7.5 million for full year 2025. In summary, we are very proud of our third quarter performance and the continued momentum across our platform. The strength of our 0-1 megawatt plus interconnection product set, combined with disciplined execution across our 5 gigawatt power bank and a growing backlog positions us well to deliver durable growth through the rest of 2025 and 2026. We remain focused on executing our strategy to deliver the capacity that our customers require and to maintain the financial discipline to drive long-term value for our stakeholders. This concludes our prepared remarks. And now we would be pleased to take your questions. Operator, would you please begin the Q&A session? Operator: [Operator Instructions] And your first question today will come from Aryeh Klein with BMO Capital Markets. Aryeh Klein: I guess maybe just with the guidance increase on the core FFO growth of 9.5% this year, I realize you're not providing 2026 guidance and there is some FX benefit. But can you just talk to the puts and takes for next year and the ability to stay or even accelerate from current growth levels while balancing development investment requirements? Andrew Power: Thanks, Aryeh. I'll have Matt hit on that. Matt Mercier: Yes, Aryeh. So look, I think I'd start off with -- obviously, we're proud of the results this year and the beat and raise that we put them now for a few quarters, which is resulting in where we are today on a constant currency basis, which is around 8.5% for the year. And look, looking ahead into 2026, we're on the path to start on a strong footing, looking at continuing to target 10% top line growth. That's supported by our healthy backlog that we've got of over $550 million and the robust fundamentals that continue to support our business. I'd say some of the things to note that are -- you could say are some of the headwinds that we'll see in the first -- very early in 2026, we do have about $1.3 billion of debt maturing in January. That's at roughly 2.5%. We're also planning to contribute the remaining 40% of the $1.5 billion of stabilized assets to our relatively new North America hyperscale fund. And given the expectation for rate cuts into 2026, which you would usually say is going to be a benefit. But for us, we have relatively considerable cash holdings, that's going to result in likely some lower interest income. All that said, we feel like we have been on a great path here in derisking our 2026 plan and feel good about continuing our growth going forward. Operator: And your next question today will come from Jon Petersen with Jefferies. Jonathan Petersen: I was hoping you could talk a little bit more about what you're seeing from hyperscalers in terms of demand in the major metro markets. I think in your prepared remarks, Andy, you mentioned their focus on gigawatt campuses. But are you starting to see examples of any latency-sensitive hyperscaler AI applications coming to DLR markets that you can speak of? Andrew Power: Thanks, Jon. I'll kick this off and then ask Colin to speak to what we're seeing on the customer dialogue with the hyperscalers. So obviously, we're off to a strong start to the year or 3 or 4 quarters. This quarter, on a total share, we're at the fourth largest quarter, north of $200 million of signings. I think what's been unique or great about it is in the major markets where we're supporting their growth, be it cloud computing and AI, we've seen tremendous diversity of demand. So I think the last 7 quarters, our top signing -- single signing was with a different customer. So tremendous diversity of demand. In fact, our 2 largest signings this quarter were 2 customers that hadn't signed big deals with us in a while. We're continuing to ready significant capacity blocks that are coming in the most prized locations and more strategic to our customers' locations. And I'll let Colin speak to some of the dialogue he's having on those capacity blocks. Colin McLean: Thanks, Andy. Yes, Jon, I appreciate the question. Q3 bookings, obviously, diverse in nature across our 3 regions. And in terms of conversations with our hyperscalers, I'd say it's robust dialogue that's leading to the largest pipeline on record for us. So our large contiguous footprint continues to have real value. So they're seeing interest and dialogue for us across our 5 gigawatts that we have across our markets that we identified previously. So our customers are now starting to look really hard into our '26 and '27 deliveries, which are coming online in the near term. And so that's really producing, I think, some real interest to continue discussions really across AI, but also cloud continues to be a consistent dialogue that we're having with our clients. Operator: And your next question today will come from Mike Funk with Bank of America. Michael Funk: Yes. So Andy, can you address the 2026 expirations and how you're thinking about the capacity to increase the re-leasing spreads on those? Andrew Power: Sure. Thanks, Mike. So I think we're continuing to see more of the same what we've seen for now several consecutive quarters. If you kind of cut it into the 2 main categories we, call, discussed the business in, we're continuing to see strong pricing power in the less than a megawatt category. I think our cash mark-to-markets were 4.2% or 4.3% in the quarter or LTM. We think that pricing is going to hold and stay in that territory. And then the bigger stuff, you can see we start to see continued step down, not just 2026, but for a few years, a step down, I think, until about 2029 in our expiring rates. I think they get as low as like 124-ish. And you can see from our new signings in the bigger deal category, we're obviously signing at healthier market rates than that. And listen, I think we're working the way through that and moving customers to market and the value of the capacity blocks we're offering. And that's a product of our portfolio, our value add, but some of that's just a product of the supply-demand dynamics in these markets that are extremely tight. And the backdrop around it is the tightness of these markets feels like it's going to be continuing for some time. Operator: And your next question today will come from Eric Luebchow with Wells Fargo. Eric Luebchow: Andy, just curious on the kind of the large capacity blocks, if you could talk about kind of the diversity of hyperscalers you're talking to. There's a lot of kind of newer entrants, whether it's neo clouds, the model developers, the chip companies or are you kind of focusing on the big 4 or 5 that you have historically? And then maybe if you could also just touch on CapEx. I mean, to the extent you start to win some of these larger requirements, how should we think about funding it between the managed funds between cash on the balance sheet? Could that kind of raise the CapEx expectations above the $3 billion to $3.5 billion level? Andrew Power: Thanks, Eric. So I'll hand the funding piece to Matt, and he can talk to the numerous levers we've now assembled here through our successful hyperscale fund, our joint venture partnerships, the balance sheet liquidity that if you add it all up, it seems to a significant amount of liquidity and dry powder to fund the growth of our platform. But on the customer front, by and large, the bigger the capacity block, the higher the credit quality, the larger the size of the counterparty and the more established the business. We are certainly supporting some of the neo clouds, but I would say our work with them, and it's been not in the big, big deal arena. We support them in, call it, megawatt, 2 megawatt type edge type locations and smaller capacity blocks. So when you think about those, call it, the big and nearest term, the 25s, the 50s, the 100s or even larger, I think the dialogue we're having is with a diverse array of, call it, more traditional hyperscale customers that are called the household names in our top customer roster. Matt Mercier: Yes. And Eric, on the funding, so as you noted, we're -- we guided this year $3 billion to $3.5 billion. We're trending on target with that. And while we haven't given specific guidance for next year, what I can tell you is that I expect our -- in particular, at our growth level, we're going to be spending more in 2026. Now I'd say a broader portion of that is going to be within our private capital groups. But I still expect that when you come down to even our share level that you'll see a slight increase or an increase to what we're spending this year as we start to really hit kind of a sweet spot in terms of projects that we have underway to be able to deliver incremental capacity, especially in the back half of '26 into '27. Operator: And your next question today will come from Michael Rollins with Citi. Michael Rollins: Just off the topic of how much you're putting into the JVs and off-balance sheet partnerships relative to what you're doing on your own, how are you thinking about the mix going forward? And are there opportunities to revisit what the right target leverage should be for digital to take more projects on balance sheet and create that -- more of that accretion for shareholders? Andrew Power: Thanks, Michael. So Matt will speak to target leverage, but I don't think we've changed our stripes on that. And one great thing about, call it, tapping in these sources of private capital, including our oversubscribed $3-plus billion hyperscale fund in the U.S. is we can deploy different leverage quantities at different project levels alongside that private capital to generate the returns suitable for the project. This is -- a reminder, this is, call it, an evolution of our funding model here, right? And we started down the road of joint ventures, one-off stabilized assets and then moved on to development. And then our first inaugural fund is a combination of both. And it's really the beginning of the scaling of our strategic private capital initiatives. And that's in the backdrop of we see a demand landscape that is just quite tremendous, right? You look at the numbers of the gigawatts that are stated to be needed to, call it, continue the growth of digital transformation to continue the rollout of cloud computing and to really even get the off-the-ground AI and built and commercialized. And yet we being an $80-plus billion company, still believe that having that, call it, private capital business, especially dedicated around hyperscaler allows us to fuel our growth for our customers and balance that in terms of generating an accelerating bottom line per share growth for our shareholders at Digital. So I think it's kind of a best of both worlds, allowing us to do more with our platform and fund effectively. Matt Mercier: Yes. Maybe, Michael, I'll just add briefly. Look, I think our target leverage 5.5 is a good place to be in terms of balancing our overall cost of capital and where we are today and where we seek to fund in the future. Maybe I'd also add, look, we're at 4.9 today, and so that gives us some ability to go up and potentially go down when necessary based on the capital market environment so that we can continue to fund what is larger builds going forward and a pretty good demand profile that we have. Operator: And your next question today will come from David Guarino with Green Street. David Guarino: Andy, I just wanted to clarify on the comments you made given these multi-hundred megawatt deals in tertiary markets. Is that something where you'd reconsider chasing that sort of demand, whether it's on balance sheet or through the funds? Or is the playbook to continue sticking the primary markets for Digital Realty? Andrew Power: Thanks, David. So I think the comment was trying to get a few themes that are hopefully apparent, but I want to provide our thoughts on. One, it's certainly showing an incredible conviction for the infrastructure needed to launch this technology. And as you go through these list of announcements, we're still seeing numerous mega announcements that are just talking about training, right, not even really evolving to inference or certainly commercialization and the use of AI use cases. You're also seeing a diversity of players in that arena, which I think is healthy. It's not necessarily single threaded to just only one major player building that infrastructure. When it comes to digital, I think we've had a great success being across the full product spectrum, call it, from supporting our growing enterprise business all the way to our hyperscale customers. We focus on markets where we see not just diversity and robustness of demand, but locational and latency sensitivity to the workload. So the answer to your question is we're certainly keeping our eyes on. I can tell you our team is across a tremendous amount of these opportunities. I think our intersection of that would be much more akin to our strategy. Like I said earlier, these cloud availability zone markets, the Northern Virginias, the Santa Claras, the Frankfurts and around the world, they are tight markets, and they may be tight for a long time. And I think the adjacencies to those markets make the most sense because we want to be investing in infrastructure that we believe in for the really, really long term. And so that's how we're thinking about it today. Operator: And your next question today will come from John Hodulik with UBS. John Hodulik: Andy, a quick question on the power side. Given the constraints you're seeing in terms of accessing the grid, any thought to moving to behind-the-meter power solutions in some of your new projects? Andrew Power: Thanks, John. So it was not that long ago, we made a bigger announcement in -- actually in South Africa, where we're building solar in a market, which is akin to that same concept. And that's obviously a market that is an incredibly fragile grid. So we're able to really extend our moat in that market with our platform in a supplemental power that is essentially behind the meter. I can tell you, we're looking at this in numerous markets and the context is much more in a bridge fashion. We don't -- we're uncertain how long that bridge may be, but we hear from our customers the preference in the long run for utility given the diversity of the power sources, the redundancy of that, but we're happy to help our utility partners with bridge solutions. And you can think about that in some markets that have been challenged with shortages, delays in power sources. Operator: And your next question today will come from Michael Elias with TD Securities. Michael Elias: Just building on that point, I'm curious, when I think of your portfolio, you obviously have very valuable capacity in Northern Virginia at Dulles. Is it feasible for you to bring gas to that site to expedite the delivery of additional buildings? And then maybe as part of that, just on the M&A side, there are a lot of companies out there that may have some facilities leased, but they have some land banks. How are you thinking about the M&A opportunity in this landscape? Andrew Power: So thanks, Michael. So just touching brief, I mean we're thinking about all the markets where there's shortages or delays or frustration around the power infrastructure. So it's not just one site, not just one submarket or market, we're thinking about that trying to make the solution work. And we're trying to do it in a thoughtful manner, right? We want to -- we are long-term committed, have been in these markets for many years. We'll continue to be in these markets. We want to be good stewards to the community, to our customers. But it's not just one in any given market. It's numerous markets where this could be a tool in our toolkit to accelerate infrastructure deployments. I'll turn it over to Greg to kind of give his thoughts on the M&A market. Gregory Wright: Yes. Thanks, Andy. Thanks, Michael. Michael, I'd say our strategy today is consistent with what it has been. And we continue to see what opportunities in the market that's going to provide us with the best risk-adjusted returns. So today, we're looking at buying land and developing. We're looking at buying buildings if strategically significant. And we look at buying companies if they're strategically significant or there's industrial logic to it. So I would say we haven't changed anything in terms of our strategy. And I would say in today's market, we have opportunities across all 3 of those growth prongs, if you will, and we continue to assess them. Operator: And your next question today will come from Irvin Liu with Evercore ISI. Jyhhaw Liu: Andy, I wanted to ask about the 5 gigawatts of future developable capacity. Can you help us understand the timetable or the time line needed for this developable capacity to become available for lease? How much of this is available for lease, if any? And any sort of customer conversations you had related to this capacity? Andrew Power: Sure. Thanks, Irvin. So I'll touch on the most, call it, front of the queue capacity box and then I'll let Colin touch on the customer dialogue. But they do go a little bit kind of together. What we've seen is there is a continuous focus on the here and now. And we saw this as we've navigated our way through 2024 and put up $1 billion plus of new signings, includes some large capacity blocks. And as we got closer and closer to deliveries of power and obviously, our infrastructure and data centers, the interest continued to ratchet up. And we were able to intersect that with a great diversity of customers at attractive rates and ultimately, returns. Given how valuable these locations are, these are strategically important to our customers. These are often the locations where our customers are landing major customers inside of their facilities, be it cloud or other services that are highly profitable to them, and they're unique in that nature. And just like what transpired a year ago, I think the seasonal nature of this as we approach the "late '26 vintage" or the 2027 vintage or 2028 shortly thereafter, the attractiveness becomes more and more attractive to those customers and that ensues in the dialogue Colin will touch on. That is playing out, in Northern Virginia, be it Manassas, Digital Dulles or call it, adjacent to our existing Loudoun campus. That's playing out in Charlotte, in Atlanta, in Dallas and Santa Clara. That's playing out outside the U.S. in the major, call it, flat markets in Europe or in the major Tokyo soccer markets in Asia, and I'm just rattling off a few. So there's numerous markets that have those, call it, the near-term larger contiguous capacity and vintage that the customers are seeking. But go ahead, Colin. Colin McLean: Yes. Thanks, Andy. I think we're very much in that window of prioritization that Andy talked about. This leasing activity for 2026, 2027, 2028 is very much the here and now. I highlighted before the largest pipeline that we've had on record. By the way, that also suggests a lot of momentum on the 0-1 as well, which we saw in our bookings number. But the conversations across this large capacity blocks that Greg secured for us across North American into the flat markets is really becoming a consistent conversation in the core markets, which as Andy talked about, these cloud zonal areas are resilient to having consistent demand pop up. So we're pleased with the conversations and the pipeline that we've generated. Operator: And your next question today will come from David Choe with JPMorgan. Richard Choe: It's Richard. Just wanted to follow up on that. Given that the long lead times in the industry for capacity, both building and demand for it, as we look since most of your 2026 capacity is sold out, as you kind of look for the development deal in 2027, how big can that be relative to '26, given that you've been kind of planning this for a while and seeing the demand pipeline? Andrew Power: These are big capacity blocks. And the concept is the customers really just almost want to get going with the build, right? They don't need to be powered on with the entire 100 megawatts or 200 megawatts and a date certain in 2026 or date 2027. It's just they want the ramping to start commencing, which is a product of power delivery at the site and obviously, our delivery alongside it, which we're trying to time out. So I don't -- this is a sizable amount of that 5 gigawatts when you add it all up. I mean just those markets, I just rattled off across North America and a handful outside the U.S. are call it hundreds and hundreds of megawatts by themselves. And I didn't even really touch on our capabilities in, call it, the Latin America or in South Africa when you add to those numbers. Operator: And your next question today will come from Jim Schneider with Goldman Sachs. James Schneider: Relative to some of the larger capacity hyperscale AI deployments you talked about as prospects for commencements in '26 and '27. Can you maybe talk about some of the technical requirements underpinning those? I think we know that Rubin and generations beyond from NVIDIA are going to require 800-volt architectures plus liquid cooling, and that's I'm assuming is something that's not present in most of your existing capacity today. So how are you thinking about planning both these new facilities for that? And are you thinking about potential for retrofitting any of your prior -- your existing facilities to accommodate those new requirements? Andrew Power: Thanks, Jim. So Chris and I'll tag team that. But Chris, why don't you start off in terms of what we've done so far being, call it, AI ready, liquid cooling ready. And then I mean, if you don't touch I can about just recent anecdotes of we've had churn and customers, we're doing air cooled, [ switch to liquid ] with the next generation just to answer Jim's question. Chris Sharp: Yes. No, I appreciate the question. And I love the way you're thinking about it with like new and old because that's exactly the way that we have different tool sets and different capabilities that we're looking to deploy. But we've been a partner of NVIDIA's for many, many years with their DGX precertified program. We're one of the leading partners there. We continue to work with them on even -- you said it, right, like not the chipset today, but what's going to be out there 2 and 3 years out. And so we're always looking at that. And the power distribution piece for the rest of the people on the call on 800-volt, we've been across that for some time now on different types of electrical distribution capabilities that are going to be required, and that's a lot for the new build. And we're always looking at evolving our modular designs, right? And that modular design is not only in our new footprint, but it's been deployed for many, many years in our existing footprint. So we're always looking at how we bring liquid. And quite frankly, our architecture for these new builds allows us to align to the densification of that chipset in a very granular fashion. And so for a part of the retrofit, we've been talking about for a while called HD colo. And so that HD colo capability is something that we've really been working on, and it's available across 30 metros, 170 facilities, and you can deploy it in roughly 14 weeks. What that allows us to do with our customers is to densify up to 150 kilowatts, and that will support the Rubin. It will support a lot of the Grace Blackwell. So we have a lot of runway in our existing facilities to align when our customers need us to. And so we're always watching exactly how that's going to be coming to market. I think you might have seen some of the press releases and some of the customer announcements around our Digital Realty Innovation lab. Why that was built is to allow us to bring all of our partners together inside of an environment where the data center, unfortunately, today is the point of integration. And so we're trying to pre-engineer and set a bunch of standards so that our customers are able to get outcomes out of this infrastructure as they bring it to market. So as you understand, we've really been ahead of the curve with a lot of these partners and making sure that we can build a repeatable kind of outcome for our customers on a global basis. Operator: And your next question today will come from Frank Louthan with Raymond James. Frank Louthan: Great. Can you walk us through what is your average size deployment that you're seeing for enterprises now? And do you think that you're gaining share in that? And then can you give us an idea of what percentage of your new bookings are for AI inferencing workloads? Andrew Power: Thanks, Frank. So I'll try to tackle this in a few parts. So we -- overall, of our total signings we have, about 50% was AI related. This quarter, in particular, in just the 0-1 megawatt, so predominantly enterprise-oriented. We did see a new high watermark of north of 18% of those signings being, call it, AI-related, so high-performance compute. So -- and that number in that category by itself has probably hovered closer to single digits or high single digits for some time. So we are seeing a pickup in that. You're seeing certain sectors, financial services, manufacturing, certain customer types, I would say, moving closer to proof of concept and evolving. I still believe this word inference is beyond nascency, quite honestly, based on the fact that the adoption of this in a commercialized, call it, corporate private data center data site setting is -- we're not even scratching the surface of what we can do with this technology, right? I believe the B2C applications are way out running what's going to happen on enterprise. So I don't think -- I think our data centers in our markets that are supporting the cloud and enterprise will ultimately be the home for that applications. But I think we still got a good runway towards to get there, especially when people are just putting out press releases that are talking about training today because if it's a press release now, it's not a data center for a good while. On average size, we did see, I'd say, size of deals are catching up or getting a little bit bigger than the enterprise size. They're definitely getting a little more power dense, which is playing into our wheelhouse. And we've been supporting for enterprises, liquid cooling well before we were talking about ChatGPT or GPUs. So we have a lot of experience with that. And then lastly, when it comes to taking market share, the answer is yes, in my opinion. Operator: And your next question today will come from Joe Osha with Guggenheim Partners. Joseph Osha: My question is pretty simple. If I look at the spreads on the 1 megawatt plus side, it's 2 back-to-back quarters now of double digit and the most recent one is almost 20%. And are we just seeing maybe a temporary artifact there? Or is this kind of the new normal with those spreads being at that level going forward? Matt Mercier: Yes. Thanks, Joe. Look, I think you're seeing -- starting to see like what we're expecting as we start to look forward and we see the rates that start to drop down over the next several years, as Andy mentioned earlier. I mean this -- I would say this year was a relative -- or year-to-date, it's been a relatively light year in terms of renewals within the greater than a megawatt. We'll start to see that pick up in '26 and '27 as you look at our expiration schedule. But we've also had this year, even this quarter, in particular, you'll see that the average rate, if you look at this quarter was, I think, north of 180, which reflects the markets that we are in. And despite that, we were still able to get higher rates and robust re-leasing spreads. So I think we're -- again, we're in a robust supply-constrained market. And we think looking forward, our mark-to-market opportunity is in a good position. Operator: And your next question today will come from Cameron McVeigh with Morgan Stanley. Cameron McVeigh: Just wanted to ask about future CapEx spend. And do you envision CapEx spend going forward? Do you expect it to be geared more towards retrofitting existing data centers for denser deployments or maybe expanding new capacity? And then secondly, do you see this incremental CapEx geared to capture more growth in the 0-1 segment or the 1 plus segment going forward? Andrew Power: Thanks, Cameron. So I think Matt touched on this a little bit. I mean, I think just to paraphrase, we believe, given the opportunity and the conversion of our, call it, shells or delivery of our suites under construction, shells in the data centers and colos and land in the shells and ultimately data centers, CapEx is likely to inflect higher on both the total and our share basis. So that's just -- that's based on really success driven. And when it comes to where the money is going, by and large, the dollars are going towards new capacity. The new capacity is well outpacing. We're still doing a great job maintaining, retrofitting where necessary our existing fleet, but the dollars for building a new data center are dwarfing the dollars needed that we need for our portfolio. And when it comes to the types of CapEx, yes, the dollars amounts are certainly bigger when you call it slant towards bigger deals, 50-, 100-, 200-megawatt deals. But we've made this strategically the priority at this company to make sure that we don't go dark for our enterprise colo customers in 50-plus in growing metros around the world. And those enterprises are landing with us with private IT for their digital transformation, hybrid cloud, and they're then connecting to our top cloud customers. So that virtuous cycle, we're building for all the customers that land and expand with digital is part of our value prop. Operator: And your next question today will come from Maher Yaghi with Scotiabank. Maher Yaghi: Great. I wanted to ask you, I mean, since February, you've increased guidance and signed many new contracts. Certainly, we've seen the number of projects in construction in the U.S. overall increased significantly. But when I look at your development CapEx guidance, it has not changed. I'm not suggesting you should spend more, but do you think the drive to build bigger and bigger campuses is moving projects to private developers and reducing your share of what you typically might get? And the second question is, could you qualify maybe the credit quality of the new mega projects that are being built, do you see the returns being commensurate with taking on much bigger projects with a lower customer count that might not have the same cash flow level that your traditional Fortune 500 companies might have currently? Andrew Power: Sure. So a lot to unpack in there for, I think, what's our last question. I'll try to be -- try to hit it. So our development, we're posting about $10 billion in total on the development life cycle. So maybe the dollars going out the door will only, call it, pushing towards the high end of our guidance, which is a decent range in the guidance. But we're definitely leaning towards bigger, and it's not a static thing for us, right? Projects are delivering. We had, I think, record commencements last quarter. We have sizable commencements this quarter, meaning projects are moving off that schedule and new products are getting added to that schedule. We've been intersecting as addressed in a prior question, this primarily in the major markets where we saw diversity of demand from enterprise to hyperscale, where it was also locationally latency-sensitive workloads. We've not necessarily to date chased that out to the one-off locations, but we're very much cognizant of those opportunities and seeing a world where the markets where we're having a distinguished position in are expanding and stretching. And I think that's where you likely see us next to support those types of customers' growth. For us -- I can't speak of others, but for us, when you talk like these large-scale locations, be it in our major markets or otherwise, we're aligned with making sure the counterparty risk that fits the project. So certainly leaning towards the larger, call it, $1 trillion type companies that are investment grade. And that doesn't mean we don't do business with, I would say, the neo clouds, but we've not been involved with major one-off projects to those names to date. Operator: That concludes The Q&A portion of today's call. I would now like to turn the call back over to President and CEO, Andy Power, for his closing remarks. Andy, please go ahead. Andrew Power: Thank you, Nick. Digital Realty delivered another strong quarter, building on our momentum throughout this year. We saw continued strength in our 0-1 megawatt plus IX business with record interconnection bookings, underscoring the strength of our global full spectrum platform. Our backlog grew and now sits at 20% of data center revenue. Our pipeline is at a record level and we are well positioned for better long-term sustainable growth. This is special time in our industry. Demand has never been stronger. We've positioned the company to meet the challenges of this moment with a strong and growing value proposition, enhanced innovation and an evolved funding strategy that enables us to better meet the needs of our customers while improving our overall returns. I'm incredibly proud of our talented and dedicated colleagues who continue to execute at an exceptionally high level, and I thank you all for your hard work. I'm excited by the opportunity that lies ahead and remain focused on delivering for our customers, partners and shareholders. Thank you all for joining us today. Operator: The conference has now concluded. Thank you for joining today's presentation. You may now disconnect.
Operator: Good afternoon, ladies and gentlemen, and welcome to the South Plains Financial, Inc. Third Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the call over to Steve Crockett, Chief Financial Officer and Treasurer of South Plains Financial. Please go ahead. Steven Crockett: Thank you, operator, and good afternoon, everyone. We appreciate you joining our earnings conference call. With me here today are Curtis Griffith, our Chairman and CEO; Cory Newsom, our President; and Brent Bates, the bank's Chief Credit Officer. The related earnings press release and earnings presentation are available on the News and Events section of our website, spfi.bank. Before we begin, I'd like to remind everyone that any forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from those anticipated future results. Please see our safe harbor statements in our earnings press release and in our earnings presentation. All comments expressed or implied made during today's call are qualified by those safe harbor statements. Any forward-looking statements made during this call are made only as of today's date, and we do not undertake any duty to update such forward-looking statements, except as required by law. Additionally, during today's call, we may discuss certain non-GAAP financial measures, which we believe are useful in evaluating our performance. A reconciliation of these non-GAAP financial measures to the most comparable GAAP financial measures can also be found in our earnings release and in the earnings presentation. Curtis, let me hand it over to you. Curtis Griffith: Thank you, Steve, and good afternoon. As outlined on Slide 4 of our presentation, we delivered strong third quarter results, highlighted by solid earnings growth as we continue to experience net interest income expansion, supported by our low-cost community-based deposit franchise. The credit quality of our loan portfolio also continued to improve, and our return on assets markedly expanded. Our results demonstrate the strong foundation that we have purposefully built. We've added exceptional talent across the bank while also making the necessary investments in our technology platform that positions South Plains to efficiently scale our operations as we grow. We have also built strong liquidity and capital while continuing to improve the asset quality of our loan portfolio. As a result, I believe the bank is firmly positioned to accelerate our asset growth through both organic growth and accretive M&A opportunities. As Cory will expand upon, we continue to benefit from our competitors' acquisitions by attracting experienced lenders to the bank. We expect they will bring high-quality, long-term customer relationships they have built in their successful careers to South Plains. While we have been experiencing higher-than-normal loan paydowns, which has proved a headwind to loan growth, we expect an acceleration in growth next year through increasing our lending team by up to 20%. The investments that we've made in the bank, combined with the experience that we gained through the acquisition of West Texas State Bank also positions us to explore further acquisitions. Of note, we continue to engage in discussions with potential target banks in our core markets that we believe have the potential to fit our conservative nature and overall culture and meet our strict criteria for a deal. As I have said on many of these calls, we are only interested in acquiring a bank that possesses these qualities and makes sense for us and our shareholders. Importantly, M&A is not the only option that we have to grow. Our organic growth initiative is just in the early innings, and we are optimistic that we will see a sharp acceleration in loan growth in the year ahead. As a result, we will only do a deal that makes sense for the bank and our shareholders, of which my family and I are the largest. We believe that we are in a strong position to capitalize on opportunities to drive growth as the bank and the company each significantly exceed the minimum regulatory capital levels necessary to be deemed well capitalized. At September 30, 2025, our consolidated common equity Tier 1 risk-based capital ratio was 14.41%, and our Tier 1 leverage ratio was 12.37%. Given our capital position, we remain focused on both growing the bank while also returning a steady stream of income to our shareholders through our quarterly dividend and keeping a share buyback program in place. Last week, our Board of Directors authorized a $0.16 per share quarterly dividend, which will be our 26th consecutive dividend. Now let me turn the call over to Cory. Cory Newsom: Thank you, Curtis, and hello, everyone. Starting on Slide 5. Our loans held for investment decreased by $45.5 million to $3.05 billion in the third quarter as compared to the linked quarter. The decline was primarily due to a decrease of $46.5 million in multifamily property loans, mainly due to the payoff of 2 loans totaling $39.6 million. As Curtis mentioned and we have discussed on previous calls, we've been experiencing a heightened level of loan payoffs and paydowns through the year, which have been a headwind to loan growth. Looking forward, we expect level of paydowns and payoffs to moderate as we look to 2026. Our yield on loans was 6.92% in the third quarter as compared to 6.99% in the linked quarter. Our loan yield was boosted by 8 basis points in the third quarter due to $640,000 in interest and fees related to the resolution of credit workouts. As a reminder, our loan yield was also boosted by 23 basis points in the second quarter due to $1.7 million interest recovery from the full repayment of a loan that had been on nonaccrual. Excluding these onetime gains, our yield on loans was 6.84% in the third quarter and 6.76% in the second quarter, representing an increase of 8 basis points. Looking ahead, the impact to our loan yields from the FOMC's 25 basis point reduction in their benchmark interest rate in September was not material, though we do expect our loan yields to moderate. That said, we remain optimistic that we can continue to reprice our deposits and manage our margin as market rates decline. Importantly, our new loan production pipeline continues to remain solid and economic activity continues to be healthy. As we discussed on our second quarter call, we have a strong position in each of the communities and metro markets where we do business and have capacity within our existing infrastructure to expand our lending platform. We're actively recruiting lenders who fit our culture to grow our lending capabilities as we work to accelerate our loan growth, which is a priority for our management team. We continue to be very pleased with the quality of bankers that we are speaking with who have an interest in joining South Plains. We are also seeing dislocation from recent acquisitions in Texas, which is creating more opportunity to expand our platform. As Curtis touched on, our goal is to grow our lending platform by up to 20%, and we are more than halfway there, having added lenders in Houston and Midland since our last call. This builds on our success from the second quarter where we recruited several experienced lenders in our Dallas MSA. While loans in our major metropolitan markets of Dallas, Houston and El Paso held steady in the third quarter at $1.01 billion, as can be seen on Slide 7, we remain optimistic that loan growth will reaccelerate as we continue to add lenders across our metropolitan markets. At quarter end, our major metro loan portfolio represented 33.2% of our total loan portfolio. Skipping to Slide 10. Our indirect auto loan portfolio totaled $239 million at the end of the third quarter, which is relatively unchanged as compared to $241 million at the end of the linked quarter. We've been carefully managing this portfolio with a focus on maintaining its credit quality over the last 2 years, which has resulted in a decline in loan balances of $57 million since the third quarter of 2023 when the portfolio was $296 million. Over this time period, we have seen competitors become more aggressive at the higher end of the credit spectrum while volumes have declined. More recently, we have tightened our loan-to-value requirements to further ensure that we are proactively managing this portfolio in the current environment as well as any potential challenges to come. It is also important to highlight that we are primarily a lender through auto dealers to borrowers who are in our markets, 86% with super prime or prime credit ratings at origination. Our borrowers' strong credit profiles can further be seen in the credit metrics of this portfolio as our 30-plus days past due loans, which totaled approximately $575,000, improved 8 basis points to 24 basis points in the third quarter as compared to 32 basis points in the second quarter. At year-end 2024, our 30-plus days past due loans stood at 47 basis points. We believe our 30-plus past due loans are the best early indicator to any potential signs of credit stress in this portfolio and believe our tightened credit standards will further protect the bank and the credit profile of our indirect auto portfolio as we look forward. Additionally, our net charge-offs for all consumer autos were approximately $160,000 for the quarter as compared to $350,000 in the linked quarter. Given the stable profile of our indirect portfolio, combined with the success that we are having adding lenders to the bank, we expect loan growth to gradually accelerate to a mid- to high single-digit rate through 2026. We expect our new hires to begin contributing to a loan growth in '26, while the level of payoffs begin to diminish. We also remain cautiously optimistic that economic growth across our Texas markets can remain resilient and provide a tailwind to growth. Turning to Slide 11. We generated $11.2 million of noninterest income in the third quarter as compared to $12.2 million in the linked quarter. This was primarily due to a decrease of $1 million in mortgage banking revenues as can be seen on Slide 12. The decrease was mainly from a $769,000 quarter-over-quarter decline in the fair value adjustment of the mortgage servicing rights asset. Overall, our mortgage banking revenues have been relatively flat over the last 4 quarters given persistently high mortgage rates combined with low housing supply. We are pleased with how the business is performing in this low transaction environment and the recent easing of market interest rates and believe we are well positioned for the eventual upturn in volumes as rates look set to decline further. For the third quarter, noninterest income was 21% of bank revenues, essentially flat with the linked quarter and the year ago 2024 third quarter. Continue to grow our noninterest income remains a focus of our team. I would now like to turn the call over to Steve. Steven Crockett: Thanks, Cory. For the third quarter, diluted earnings per share were $0.96 compared to $0.86 from the linked quarter. This increase is primarily a result of the reduction in provision for credit losses and increase in net interest income, which I'll cover, partially offset by the decrease in MSR fair value adjustment Cory mentioned. Starting on Slide 14. Net interest income was $43 million for the third quarter compared to $42.5 million in the linked quarter. Our net interest margin calculated on a tax equivalent basis was 4.05% in the third quarter as compared to 4.07% in the linked quarter. As Cory touched on, we had loan interest and fee items related to specific credit workouts that positively impacted our NIM in both the third quarter and the second quarter. The third quarter impact was 6 basis points or $640,000, while the second quarter impact was 17 basis points or $1.7 million. Excluding these onetime items in both periods, our third quarter NIM increased by 9 basis points to 3.99% from the linked quarter. As outlined on Slide 15, deposits increased by $142.2 million to $3.88 billion at the end of the third quarter due to organic growth in both retail and commercial deposits. The increase was predominantly noted in the loan market and follows the overall $53.6 million decline during the second quarter. Noninterest-bearing deposits increased $50.7 million in the third quarter. Additionally, our noninterest-bearing deposit to total deposit ratio increased to 27% in the third quarter from 26.7% in the linked quarter. The mix shift change in deposits along with the continued drop in CD rates contributed to the 4 basis point decline in our cost of deposits to 210 basis points in the third quarter, down from 214 basis points in the linked quarter. Turning to Slide 17. Our classified loans decreased $21.1 million during the quarter. This includes the full collection of a $32 million multifamily property loan that had been talked about on prior calls. This is the second consecutive quarter with a positive resolution to a large previously classified and/or nonperforming loan that included full repayment of all amounts owed and shows our commitment to asset quality. Our ratio of allowance for credit losses to total loans held for investment was 1.45% at September 30, 2025, unchanged from the end of the prior quarter. We recorded a $500,000 provision for credit losses in the third quarter compared to $2.5 million in the linked quarter. The decrease in provision expense was largely attributable to a decrease in specific reserves, decreased loan balances and overall improved credit quality. I would note that we believe we continue to be well positioned for varying economic conditions. Skipping ahead to Slide 19. Our noninterest expense was $33 million in the third quarter as compared to $33.5 million in the linked quarter. $519,000 decrease from the linked quarter was largely the result of a decrease of $581,000 in professional service expenses related primarily to consulting on technology projects and initiatives. On September 30, 2025, we redeemed $50 million in subordinated debt. The redemption was done in conjunction with the end of the initial 5-year fixed rate period as the debt was to begin floating quarterly at a higher interest rate. We made the decision to repay the debt given the higher rates, combined with our view that we can readily access the fixed income market if and when a need arises. Moving to Slide 21. We remain well capitalized with tangible common equity to tangible assets of 10.25% at the end of the third quarter, an increase of 27 basis points from the end of the second quarter. Tangible book value per share increased to $28.14 as of September 30, 2025, compared to $26.70 as of June 30, 2025. The increase was primarily driven by $13.7 million of net income after dividends paid and by an increase in accumulated other comprehensive income of $9.1 million. This concludes our prepared remarks. I will now turn the call back to our operator to open the line for any questions. Operator? Operator: [Operator Instructions] Our first question is from Joe Yanchunis with Raymond James. Joseph Yanchunis: So you discussed your plan to increase your lending team by up to 20% next year. And that follows a relatively rapid pace of hires over the past couple of years. I guess how much of that growth is coming from true lenders versus support staff? And for context, can you tell us how many lenders we should use as a base to go off this growth? Cory Newsom: Yes. Nothing -- I think from the base is probably about 40. And as far as -- none of that includes support staff. That's all production. And I would say -- and based on the 20% that we're talking about, we've probably already achieved north of 10% so far this year. Curtis Griffith: We're partway to that. Joseph Yanchunis: And are there any particular markets that you can highlight where that growth has either come from or where you're expecting that growth to come from? Cory Newsom: Yes. Permian, Houston and definitely in the Dallas area. Joseph Yanchunis: Okay. So shifting gears here, and I apologize, I only heard most of your comments on your indirect auto portfolio. And I certainly understand your great past due ratios and low charge-off activity. However, I noticed in your deck, your concentration of subprime and deep prime indirect loans increased pretty materially. Can you talk about that? Cory Newsom: Repeat part of that. I didn't hear part of what you said. Joseph Yanchunis: Yes. It looks like there was an increase in subprime and deep subprime kind of concentration in that portfolio. Cory Newsom: I mean I don't see that. We haven't had much of it. Steven Crockett: Yes. Joe, this is Steve. I'll start with that. And I'll have to say the -- this is showing -- while it says on the deck, it's showing the category at origination. The numbers that actually got put in are updated information, so it's not as of origination date, which it normally is. I think we did not grab the consistent data we've been providing. This is really more updated and shows some changes in what's going on with borrower credit scores. And that is -- so that's why it does look different than what you've seen before. Joseph Yanchunis: Got it. Okay. That's helpful. And then lastly for me, just kind of a modeling question. Based on that $50 million of sub debt you guys redeemed, what was the incremental cost associated with that? If you happen to have that. Steven Crockett: Well, I mean, the $50 million, we were paying $4.5 million, and it would have been going up to $8 million. Joseph Yanchunis: No, I was wondering about any expenses that you incurred in the P&L from redeeming that. Yes, just to kind of try to understand the true run rate. Steven Crockett: Yes. And I may not be understanding. I mean, there was no expense to redeem it. It was at the end of the call period. Cory Newsom: If that's what you're wondering. We didn't go outside of the call period. We had the opportunity. The window opened and we took it. Operator: Our next question is from Woody Lay with KBW. Wood Lay: I wanted to follow up on the hiring initiative. You did a similar initiative back in 2021, and I believe it was pretty successful. So could you talk about your kind of previous experience being aggressive on the hiring front and how you're translating those past experiences to what you're doing now in the market? Cory Newsom: Yes. So if you go back to that time frame, we were fairly aggressive in hiring those. But if you also remember, we had a fair number of retirees that were coming around in the near term after that. And so we were as equally focused on making sure we were prepared to replace those as we were trying to increase our team at the same time. That's not the case today. We're just -- I mean, we feel like that we're in a position to continue to take advantage of some really good opportunities and for us to be able to expand in those markets. And the way we look at those, whenever we model one, we model to a breakeven in 6 months or less. And that's what we stay pretty well focused on to make sure that's how we do it. But if you still go back to the hiring process, it's pretty rigorous trying to make sure that we find a credit culture fit and a culture fit that fits into who we are. So it's quite an undertaking, but one that we're quite proud of and have had great success. Wood Lay: Yes. And then I believe you all said you are about 50% the way through there, but it doesn't feel like we've seen a huge expense impact from that. Is it fair to -- I guess, just how should we think about the expense growth rate from here given the additional hires you expect? Cory Newsom: Steve, you're usually on cleanup on me for stuff like that. But I mean, these guys are covering the way as we go on this. So the expense run hasn't been that bad. I mean it's from a net perspective. But Steve, what would you? Steven Crockett: Yes. I mean it will increase. It's increased a little bit as we've gone. I mean it hadn't all -- everybody hadn't all hit at one time has been spread out. And so that's -- again, I would expect overall noninterest expense to modestly increase. Cory Newsom: We've kind of taken the approach that this is the kind of money we're quite proud to be spending and having the increases on. Curtis Griffith: And remember that a significant part of the compensation will be in their ICP packages, and that won't get paid out until well into next year, even for the ones that are bringing the business on. Wood Lay: Yes. And maybe just last for me on M&A. You all sound a little bit more optimistic on the M&A front than maybe previous quarters. I know you are very stringent on who you look at and who would make a good target for you all. So could you just remind us sort of go down the checklist and what makes a good target for South Plains? Cory Newsom: I'm going to lead it off. It's number one, got to be a culture fit. And we've got to make sure that this is somebody that we think that we could go achieve success with long term. And the numbers have got to line up. There's no question. And I'll let Curtis talk a little bit further about this, but we're as focused on culture as anything that you can find because that's where we've seen more of the train breaks that really come from. Curtis Griffith: Yes. If we can't integrate the acquired banks successfully, then this is not good for anybody, not good for their customers, not good for our shareholders. So as Cory says, that's really what we focus on. But we also want to focus on successful banks, ones that are doing a good job with what they're doing, that have built some customer loyalty that they have -- again, and this is all part of the culture, but have that mindset among their employees that they're not there short timers for things. They're there for the long haul, and we want to just transition them over to be working for us. And that's the kind of group that we look for. And it's got to -- the numbers have to work. And right now, I think we're seeing out there in the marketplace, lots of activity. And it's interesting that it's coming at a time when bank stocks really aren't doing all that well. We're certainly not leading the market by any means. So a lot of the acquirers, including us, don't have a big multiple to play with. So you've also really got to look at someone that is looking at joining us up, joining with us as an investor to be there for the long pool, and they ultimately benefit, their shareholders ultimately benefit through the long-term growth in our stock. So it's a combination. And it's -- I think we are going to see some activity. I really do. We're looking at some very promising situations right now. Cory Newsom: Woody, both of your questions are kind of funny because they're kind of tied together. Typically, unless there's disruption involved, we're not hiring lenders or employees that are looking for a job. We look for contentment. I think the same thing goes as we look for an acquisition. There's a difference between somebody who may want to sell and somebody who has to sell, and we're much more focused on somebody who might want to sell. Wood Lay: Yes. That makes total sense. Operator: Our next question is from Stephen Scouten with Piper Sandler. Stephen Scouten: I'll see if you've gotten tired of asking -- answering questions about these new hires yet. When you bring these guys on, I know, Cory, you said think about like a 6-month breakeven. Are you guys targeting any specific kind of segment of lender like C&I versus CRE currently? And then ultimately, how big of a book of business do you anticipate each one of these people bringing over? Is it kind of -- is it a $50 kind of million book over time? Or what's the right way to frame up the potential of each kind of hire as you see it at a high level? Cory Newsom: So Woody -- I mean, to me, Stephen. We're mean I would say a good portion of these are -- I mean, there's still going to be CRE or real estate. I mean, portfolios as a general rule, I mean, we like the C&I when we can get it, but I mean we've never hit from the fact that we're a real estate bank and a lot of that stuff ties together. But if you -- I will just tell you this, I can't -- we've never gone out and hired somebody to see what portion of their book they could bring. We want to know what their abilities have been and how they generate business. And we really -- typically, we will hire them under the impression they not bring anything. But the people that we're hiring are carrying portfolios that might run anywhere from $75 million to $300 million to $400 million. And I mean, these guys have very good -- we're looking at people that have the capacity to go out and produce and have been very successful for long periods of time before they've ever joined our organization. So I would just tell you that I'm probably pretty conservative when I give you those numbers right there. Stephen Scouten: Okay. That's helpful. And just the ones -- I mean, if I'm doing the math kind of roughly right, it sounds like maybe you got 4 or 5 more lenders to add to get to this 20%. And the 4 or 5 maybe that you've already added that comprises the 10% already, what have they done so far? What kind of build have you seen in those people over -- I don't know what length of time that's been when you've added them, but over the duration of time that you've added them? Cory Newsom: I think you have to factor in that you're probably on the longest of 2 quarters in place as opposed to some that have been a little bit shorter than that. So I mean, I'm not prepared really to, I guess, rattle off any numbers because I didn't kind of expect that one. Are we seeing nice good-sized transactions coming across the table? Absolutely. Absolutely. I would venture to say I can't think of one that's not already breakeven. Stephen Scouten: So most of them have been there under -- it's all under 6 months. It sounds like maybe a lot of 3 months. So it's all been relatively recent. Got it. And then maybe going back on -- sorry. Cory Newsom: So typically, a lot of these people that you'll bring on, they may have a nonsolicit for a period of time on the front end. So it's getting where they are and the new business that they're chasing that doesn't conflict with anything they might have already had in agreements in place. So we're pretty careful about all of that stuff. So that's -- I mean, what we see is their overall ability and what we see probably in the first 6 months are probably a little bit different. Stephen Scouten: Got it. Helpful. And then maybe this one will be for Steve. I'm kind of curious on where you think like a good starting point is for the NIM next quarter. Obviously, there's a lot of puts and takes there with the recovery. I guess maybe starting from that 3.99% net of the recovery, but then I assume it looks like you're paying the sub debt off with existing liquidity. So I assume there'll be some NIM benefit there and then rate cuts. So if there's maybe a starting point you think about for fourth quarter as a jumping off point? Steven Crockett: Yes. No, that's a good question. I mean we -- as you said, there are lots of puts and takes. I mean that's -- we did show for, if you will, a 9 basis point increase, but the Fed movement just only occurred right at the end of the quarter and with a couple more scheduled. That's I'm going to say I don't necessarily foresee us increasing NIM. I mean, we could a basis point or 2 or it could decline a couple of basis points. In the short term, again, we've got some -- I think we've talked about before, some of our public funds that they are tied to an index, but they do -- they may lag until the following month or something like that where they will catch up. But it's -- we've done good. I think in the immediate term, it may -- you may see a slight decline in NIM until everything kind of works through the system. We're able to reprice deposits the way we need to. And you still have some loans coming off of low rates as they hit a 3- or 5-year mark. So again, like I said, lots of puts and takes, but that range is not a bad spot. Stephen Scouten: Okay. That's helpful. And maybe one last one for me. Just kind of going back to the indirect auto, and I hear what you're saying, Cory, losses obviously haven't really been material this quarter or in the past. But that data of credit scores and the migration, even though I know it's not apples-to-apples in the quarter-over-quarter presentation of it, but it does obviously show a migration of credit scores downwards. I mean, does that concern you at all? Or is that kind of part of why you guys have been pulling back a little bit in indirect auto? Or maybe any more color you can give about that credit score migration and what that maybe means for the consumer part of your book? Brent Bates: Yes. This is Brent. We have done kind of a study on -- typically once a year where we pull scores on the whole portfolio, soft scores on the whole portfolio. And what we're seeing is both this year and in last year, we saw some migration in the bottom half of those credit scores migrating downward. All through those 24 months, we really haven't seen delinquencies rise or other credit issues that would cause some concern. But it is something we actively monitor just like all other areas of credit risk where we're diligently looking for potential issues. Cory Newsom: And average duration on these loans ends up being, what, a little over 2 years. So it's... Curtis Griffith: Pretty. Cory Newsom: We just stayed so focused on the upper portion of that growing the higher-end stuff on the portfolio that we want to be very, very careful with it. Curtis Griffith: Stephen, it is very true all across the country, the folks kind of on the lower end, life is getting harder. It's getting tight out there, and you're seeing it in all kinds of areas. And I worry about that some just from the overall economy. The good news for us is, yes, we do have some of those, but we have very few of those. So we're not immune to some of our people having some credit problems. But so far, it just hasn't impacted us on any meaningful losses. And we don't think it will because so much of that portfolio is much higher credit scores. Cory Newsom: Yes. And go back and keep in mind one thing. I mean, if you put the dollar amount to it, you're still looking at less than $20 million that is in subprime or deep subprime in the whole portfolio, less than 2% of that is in non-autos, which would be in any type of an RV or something like that. We just don't get out into some of that stuff that's a little bit questionable. We're very, very careful about what we're going to put on our books. Stephen Scouten: Yes. Yes. No, that makes sense. And I guess at the end of the day, if the past dues are still good, maybe they're not paying their credit card, but they're continuing to pay their auto payment to make sure they got some way to get to work and the like. Cory Newsom: And that's what we've seen [indiscernible] years. I mean they'll pay for the car when [indiscernible] sometimes they may miss on something else. Operator: [Operator Instructions] Our next question is from Brett Rabatin with the Hovde Group. Brett Rabatin: I wanted to go back to payoffs. And I know that's been a topic for some quarters now, and you guys are optimistic. Obviously, all this hiring is going to help drive origination activity. To what extent does the commercial real estate book look vulnerable to the curve here to the permanent market, just given a dip here recently in rates. Does that concern you guys at all about continued payoffs maybe in the CRE book, just given where rates are? Brent Bates: Yes. This is Brent. I'll address that. I do think we're -- we still have some that are scheduled. We expect to have scheduled payoffs of some projects that are complete and stabilized into the first quarter, maybe second. So it's kind of a normal course a little bit. I mean I think what you've seen a little bit of in the past 6 months or so has been just partly efforts of identifying potential credit issues and resolving those and that put a little pressure on loan balances. But we will have some additional payments coming at us, we think, in the first and second quarter of next year, maybe a little earlier. Cory Newsom: And we were just looking over looking at our multifamily, it's down about $100 million over the last 3 quarters. If you take that $100 million and you try to reconcile it just a little bit, over half of that was the 2 credits that we told the whole world, we were exited. It did not matter. we exited without any loss or anything else, but we didn't feel like it was what we wanted on our balance sheet. But you take another 25% of that and it went into a nontraditional bank lender that let them take a P&I loan back to interest only. We're not doing that stuff. And so there's a little bit of that stuff that we're not lowering our credit standards to keep something on our books. We'll go out there and find new business to continue to replace it with, but we will not lower credit standards just because we're afraid of something is going to pay off. Here's the bigger one in all of that. I think in nearly every aspect of even what we've talked about, all those loans were at below market rates. We were okay they left. And so not all headwinds that come with some paydowns are necessarily a bad thing, especially if you were in a situation that you had some stuff that was back in the 4% or 5% rates that you don't really -- I mean, it's not something you really want to have on the books. Operator: There are no further questions at this time. I'd like to hand the floor back over to Curtis Griffith for any closing comments. Curtis Griffith: Thank you, operator. Thank you to all of those that participated on today's call. To conclude, we do believe our third quarter results demonstrate a strong financial position as well as growing earnings power and capital of the bank. While delivering our strong earnings growth, we've been making necessary investments to expand our capabilities, position South Plains to be a much larger company. Our growth will come from our strategic initiative focused on reaccelerating organic loan growth while seeking to expand South Plains through accretive M&A opportunities. We've continued to add experienced lenders all across our markets to expand our lending platform and increase our loan growth through 2026. We also continue to engage in discussions with potential acquisition candidates and are pleased with the opportunities we're evaluating. Fortunately, the organic loan growth initiative is also just in the early innings. We're optimistic we'll see that growth in the year ahead. As a result, we're only going to do a deal that makes sense for the bank and our shareholders. Taken together, we believe we're in a good position to deliver on our initiatives and drive value for our shareholders as we work to accelerate the growth of South Plains Financial. Thank you again for your time today. Operator: This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.
Operator: Good day, everyone. Welcome to VeriSign's Third Quarter 2025 Earnings Call. Today's conference is being recorded. Recording of this call is not permitted unless preauthorized. At this time, I'd like to turn the conference over to Mr. David Atchley, Vice President of Investor Relations and Corporate Treasurer. Please go ahead, sir. David Atchley: Thank you, operator. Welcome to VeriSign's Third Quarter 2025 Earnings Call. Joining me are Jim Bidzos, Executive Chairman, President and CEO; and John Calys, Executive Vice President and CFO. This call and presentation are being webcast from the Investor Relations website, which is available under about VeriSign on verisign.com. There, you will also find our earnings release. At the end of this call, the presentation will be available on that site, and within a few hours, the replay of the call will be posted. Financial results in our earnings release are unaudited, and our remarks include forward-looking statements that are subject to the risks and uncertainties that we discuss in detail in our documents filed with the SEC, specifically the most recent reports on Form 10-K and 10-Q. VeriSign does not update financial performance or guidance during the quarter unless it is done through a public disclosure. The financial results in today's call and the matters we will be discussing today include GAAP results and 2 non-GAAP measures used by VeriSign, adjusted EBITDA and free cash flow. GAAP to non-GAAP reconciliation information is appended to the slide presentation, which can be found on the Investor Relations section of our website available after this call. Jim and John will now provide prepared remarks. And afterward, we will open the call for your questions. With that, I would like to turn the call over to Jim. D. Bidzos: Thank you, David. Good afternoon to everyone, and thank you for joining us. VeriSign delivered both growth in a domain name base and solid financial performance during the third quarter. We also continued our consistent return of value to shareholders through dividends and share repurchases. At the end of September, the domain name base for .com and .net totaled 171.9 million domain names, up 1.4% year-over-year. We had strengthened the quarter with 10.6 million new registrations. Revenue was up 7.3% year-over-year and EPS is up 9.7% year-over-year. During the quarter, we returned $72 million through dividends and $215 million through share repurchases for a total return to shareholders of $287 million. The positive domain name base trends we saw during the first half of the year continued during the third quarter. Net registrations added during the third quarter were 1.5 million names. This was made possible by the strong volume of new registrations already mentioned and improvement in the year-over-year preliminary renewal rate. The renewal rate for the third quarter of 2025 is expected to be 75.3% compared to 72.2% a year ago. The domain name base grew sequentially in our 3 main regions with the U.S. and EMEA being the strongest. We're seeing solid underlying demand for our domain names and continued registrar engagement with our programs which together have enhanced the pace of growth in new registrations. Given these continued positive domain name base trends, we now expect the growth in the domain name base to be between 2.2% and 2.5% for 2025. Our financial and liquidity position remained stable with $618 million in cash, cash equivalents and marketable securities at the end of the quarter. At the end of the quarter, $1.33 billion remained available under the current share repurchase program, which has no expiration. As announced in today's earnings release, VeriSign's Board of Directors declared a cash dividend of $0.77 per share of VeriSign's outstanding common stock to stockholders of record as of the close of business on November 18, 2025, payable on November 25, 2025. VeriSign intends to continue to pay a cash dividend on a quarterly basis, subject to market conditions and approval by VeriSign's Board of Directors. And now I'd like to turn the call over to John. I'll return when John has completed his financial report with some closing remarks. John Calys: Thank you, Jim, and good afternoon, everyone. For the quarter ended September 30, 2025, the company generated revenue of $419 million, up 7.3% from the same quarter a year ago. Operating expense in Q3 2025 totaled $135 million, which compares to $129 million last quarter and $121 million for the third quarter last year. The areas we saw increases include incentive compensation and legal costs. Net income in the third quarter totaled $213 million compared to $207 million last quarter and $201 million in the third quarter last year. Third quarter diluted earnings per share was $2.27 compared to $2.21 last quarter and $2.07 for the same quarter of 2024. Operating cash flow for the third quarter 2025 was $308 million and free cash flow was $303 million, compared with $253 million and $248 million, respectively, in the quarter a year ago. I will now discuss our updated full year 2025 guidance. Revenue is expected to be between $1.652 billion and $1.657 billion. Operating income is now expected to be between $1.119 billion and $1.124 billion. Interest expense and nonoperating income net, which includes interest income estimates, is still expected to be an expense between $50 million and $60 million. Capital expenditures are still expected to be between $25 million and $35 million and the GAAP effective tax rate is still expected to be between 21% and 24%. In summary, VeriSign continued to demonstrate sound financial discipline during the quarter. Now I will turn the call back to Jim for his closing remarks. D. Bidzos: Thank you, John. The improved domain name base trends that emerged at the end of 2024 continued through the first 3 quarters of 2025. We're seeing strength in demand for our domain names, which we believe are the results of the plans and expectations we laid out last year. Our adjustments to our channel programs, along with anticipated favorable cyclical shifts from ARPU to customer acquisition. Of note is that these improved trends are seen across our main 3 regions with strength in the U.S. picking up during the third quarter. Our 2025 programs have deepened our engagement with our channel and we use their feedback to improve our 2026 programs, which we have rolled out to our registrars. We look forward to finishing out 2025 from a position of strength with these positive domain name base trends. I would note that we also see increases in registration and resolution activity for which we believe increasing use of AI is the -- is a primary driver. Thanks for your attention today. This concludes our prepared remarks, and now we'll open the call for your questions. Operator, we're ready for the first question. Operator: [Operator Instructions] And the first question comes from Rob Oliver with Baird. Robert Oliver: A couple of questions from me. Jim, I guess, first, I appreciate all the color on the domain base trends that you're seeing. I guess, going back to Q1 of last year, when you guys called out the changes you need to make in your marketing programs. We've seen a nice improvement in those domain-based trends from sort of beginning of this year through now. You cited a few reasons, but I was wondering if you can give us a little bit more color perhaps on how much of it is macro, how much of it is stuff that you guys are controlling with your marketing programs? Any other color you can provide in particular geos would be helpful. And then I had a couple of quick follow-ups. D. Bidzos: Okay. Well, I think really, the story is pretty much the one that I talked about in my remarks. It's just basically blocking and tackling in a sense. We improved our programs and made them more adaptable for our channel. We got great engagement from our channel. We've been talking about a cyclical shift that we were hoping for and anticipating and that came around. So that added to the growth. The registrar engagement with our marketing programs is also helping us sharpen our 2026 programs. I guess some more details we can share. John, do you want to? John Calys: Sure. Thanks, Jim. As Jim mentioned, we saw good strength across all of our 3 main regions. EMEA has been the most consistent region over the past few quarters. But what we saw in third quarter was the U.S. improved very nicely and was strong during the quarter. The domain base in Asia Pac, which includes China, did grow again, but it wasn't as strong as the growth we saw during the first half of 2025. Our programs seem to be contributing to the improving trend of domain -- of demand for our domain names. We saw a success with our marketing efforts during 2025. We've already rolled out our programs to registrars for 2026. As Jim mentioned, we continue to incorporate feedback from our registrars and have further refined our approach for 2026. As you would expect, we'll continue to invest in programs that have been working well, and the initial response from our registrars to the 2026 programs has been positive. Just as a reminder, the cost of our marketing programs is included in our updated guidance we provide today, and all of these programs are accretive. In addition to the strong volume in new registrations, the renewal rate has continued to improve as evidenced by the preliminary renewal rate in third quarter of 75.3%, that's up from 72.2% a year ago, both the first time and previously renewed rates have improved year-over-year. And as a reminder, the overall renewal rate is impacted by the mix of first-time renewing names this year versus last. And more specifically, last year, we had fewer new registrations which means fewer first-time renewals this year, which tends to improve the overall renewal rates. The midpoint of our improved DNB guidance for 2025 reflects a continuation of the trends seen in the first 3 quarters of the year, and we plan to provide you with 2026 guidance during our February call after we have a chance to see how domain-based trends finish out '25 and start out 2026. To sum it up, we're pleased with the improvements in both growth and renewal rates and that these better trends are seen across our main regions. Robert Oliver: That's really helpful. Okay, thanks John, appreciate it. Jim, I want to ask specifically about changes that Google has made this year to their AdSense program and what, if any, impact you might be seeing or expect to see within your current domain base from those changes? D. Bidzos: Okay. Well, this -- so Google's AdSense has been around for a long time and the changes that they made are part of a long process that's not new. Through the almost 15 years, they started in 2011, 15 years, Google has been making changes to their algorithm, and they've steadily eroded domain names that exist solely for ad monetization with AdSense. So changes this year to AdSense have continued a multiyear predictable strategy from Google to reduce their reliance of both advertisers and domain name registrants on that particular service. So this isn't a new trend. And after a decade of these changes, we view our exposure as minimal. Don't confuse these domain names with names that have been purchased for resale. Some of these are parked because it doesn't cost anything to do so, but the intent of these domains and the value of these domain names is for resale are not impacted by changes to AdSense. Robert Oliver: Yes. Yes, that helps. Okay. If I have time for one more, I'll just -- I'll ask one more. Just wondering if I can hear from you, Jim, just a broader sense of your view on how you see AI potentially impacting your business, how you see it impacting your business at all today and how you think it might impact your business going forward? I know you guys have said that any technology that makes it easier to create and use domains is good for you guys. I think that's generally true, and we're seeing a lot of activity in that regard. But would love to hear your view on -- from a high-level perspective on AI. D. Bidzos: Thanks -- yes. Thanks for that question. AI is on everybody's mind these days, and it's no surprise, we get a lot of questions about it. So let me answer that in 2 parts. One, what impact we're seeing in our business and separately how we're using ourselves to manage our business. So on the first part, it's early, but with the data we have this year, it's clear to us that AI is having a positive impact on registrations as well as on the utilization of our DNS resolution services. I might mention today, our infrastructure on average, processes over 450 billion DNS transactions per day and growing. Just 2 years ago, that number was $200 billion per day. So AI companies need data, and they're continuously scouring the Internet to get it. Data is not static. And so AIs like search engines are constantly fetching fresh data from websites to augment their existing data. This is enabled by the DNS. There's no doubt in our minds that this trend will continue growing importance and will be additive to the existing drivers of DNS Reliance. So we think this applies even more to the agentic web. Agentic AI can do more for you, you set an objective, and the AI can plan steps and execute required tasks. So for example, the launch of Agentic browsers is making interaction with websites more user-friendly, even more powerful. It lets users summarize information across multiple open tabs, from any websites, applications and Internet services. Again, this is enabled by the DNS. Also, AI can be powerful for domain name suggestions, website provisioning and content generation. So we've used and continue to use AI in our domain name suggestion platforms. For example, AI is enabling more sophisticated multi keyword name suggestions based upon natural language across many languages. And of course, like most businesses, we look for ways AI can provide efficiencies and better protect our services. And one last thing. Looking ahead, we believe domain names will remain critical in providing many important services. They can serve as digital trust anchors, providing trust and authenticity of a destination, critical for Agentic AI. Domain names provide globally unique, stable, human-readable identifiers for verifying digital content and can be especially valuable in combating misinformation and deepfakes hypercritical for AI. As it relates to infrastructure for new protocols because AI agents autonomously crawl the Internet to complete complex tasks, we believe demand for persistent, resolvable identities and endpoints will continue. But the traditional use of domain names isn't going away. Businesses require branding, discoverability and credibility. So domain names and recognized and trusted high assurance TLDs like .com and net hold strong value. Registrars in the DNS ecosystem are well positioned to layer new value-added services on this infrastructure, again, all enabled by the DNS. So from what we see today, the trends are very positive. Operator: And we'll take our last question from Ygal Arounian with Citi. Ygal Arounian: I guess I want to follow up on some of Rob's questions. Maybe first, just on the marketing programs. And there's been a lot of questions on this lately from investors. And maybe if you could help just kind of parse through marketing programs, what's worked in particular. And if there's been a lot of discounting within that? Or is that just the cadence and pace of discounting has changed at all? And just note in your -- in the SG&A line, there was a sort of a notable step up there. I think you called out some legal expenses. But if you strip those out, that sort of more normalized, you step up a little bit in that spending? Maybe just kind of help us think through that a little bit more. John Calys: Yes, Ygal. This is John. We do think our marketing programs have contributed to the growth we've seen in 2025. I would point out that from a cost standpoint, those programs are accounted for as a reduction in revenue. So in the SG&A, there really isn't a significant change in marketing dollars in that line item. So it really is the incentive comp and the legal costs that I mentioned during my prepared remarks. That said, we've seen -- we've tried to shift our programs towards ones that yield higher quality and higher renewing names. And we think those are working at least to date. We've made some adjustments to those programs for 2026. The initial response that we've gotten from registrars as we begin to roll out those new offerings to them has been very positive. And so we're pleased with that. We continuously review our programs, monitor their performance and listen to feedback for registrars, and we will continue to invest in programs that we see are successful. The last thing I would say is don't think of our programs of something that's finite for 2025 or finite for 2026. Think of these programs as an evolution of what we've run for several years. And the main thing we've changed recently as we give more choices to be responsive to the changing market. So you can expect us to continue to learn, adapt and where appropriate, implement changes to our programs going forward. Ygal Arounian: Okay. And so another follow-up on the Google AdSense issue. Just -- I think there's a lot of opaqueness in this industry and maybe things that investors don't understand. Jim, you mentioned a lot of park domains are deferred kind of resale, a lot of the park domains are there for defensive purposes. Like is there any way to sort of break out what you think the split is on advertising monetized or aftermarket monetized defensive? And I think there were a number of players in the -- or a couple of players, key players, public players in the market that saw some impact from this in particular, which might be where some of this fear has been spreading from. So it does feel like it's impacting somewhere. If you could just comment on that and your thoughts on that. D. Bidzos: Sure. When you say it's impacting somewhere, meaning not in our zone, you're not talking about that. I want to make sure I understand the question. Ygal Arounian: I'm talking about like some public players that have seen an impact to add revenue from this change on advertising on park domains. D. Bidzos: Well, if that's your revenue model to make -- to earn revenue from monetizing traffic in parked domains through AdSense, yes, you've been on a downhill slide for 15 years. It was a 2011, I think many of those listening may remember this, Google introduced a change to their search algorithm called Panda, and then they did some more. There was Penguin and I think some others that started with P. And I remember during earnings calls, we'd go through each one and what impact it would have. And that's what I meant when I said that, that particular business has been eroding for 15 years. What I meant about the other side of the business or the other side of those domains is that the domains that are purchased for resale can be easily parked. In fact, I actually found that a registrar had parked a domain that I owned that I wasn't doing anything with, because I guess I didn't check the box that said don't park my domain. So they can pick up a small amount of revenue or at least they could. This happened about 9 years ago. So I think those domains are purchased for resale. They are -- those are -- you can see those for sale. And on registrars, almost every major registrar now has an aftermarket available for premium com domains. Those are different, but you may -- some of those could be part is the point I was making. So I don't have a segment breakout in detail. We do some analysis, but we don't disclose that. John Calys: Okay. And then finally, just shifting to different. Just an update on -- if there is any on .web time line or expectations and maybe in particular, like if sort of loophole on this process continuing open over again, might change? And then maybe with -- at the same time, just if you could talk about any update on how you think about the new -- I guess it's not really an auction model anymore, but with new TLDs and how that might play out later next year and into 2027? D. Bidzos: Okay. So first of all .web, there's nothing substantive that's new since we talked last quarter. The -- but what is true is that what I reported then, which is that the final hearing is still scheduled for mid-November 2025. So I think there's anybody new on the call, just to reiterate, we intend to become the registry operator for .web. We hope to bring it as soon as we can to our customers. We believe Altanovo, who in this legal proceedings believe their use of ICANNs processes to keep that from happening as an abusive process and is being pursued in bad faith to keep web off the market. So we only have weeks now until at least that process begins, and we'll certainly keep you informed when we can about anything that comes out of that. I'm sorry, you had kind of a second part of that? Ygal Arounian: Yes, just on the upcoming domain auctions and -- on that process yes, for later next year and into, I think, 2027? D. Bidzos: ICANN 2026 round of new gTLDs you're referring to. Yes. Yes, that's -- I believe that's on target to open the round in the second quarter, I believe, is ICANNs goal to do that. Unlike the 2013 round, there will not be auctions. There will be a different process that they use, but they haven't started rolling all that out yet. I think like a lot of companies, we are looking at any opportunities there. If there's something that we're interested in, we have our teams studying that, nothing to report yet. But yes, that round, if everything runs on schedule, I'm not sure exactly what the timing for the process is after the opening of the round and the submission of applications and there's a lot of process that goes with these. So I can't tell you exactly when. But yes, I think, 2027, you'll probably -- is probably the earliest that they'll actually be deployed because of the process. But it starts Q2 2026 according to ICANN. Operator: And that does conclude the question-and-answer session. I'll now turn the conference back over to Mr. David Atchley. David Atchley: Thank you, operator. Please call the Investor Relations department with any follow-up questions from this call. Thank you for your participation. This concludes our call. Have a good evening. Operator: Thank you. That does conclude today's conference. We do thank you for your participation. Have an excellent day.
Operator: Good day, and welcome to Selective Insurance Group Third Quarter 2025 Earnings Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to turn the conference over to Brad Wilson, Senior Vice President, Investor Relations and Treasurer. Please go ahead. Brad Wilson: Good morning. Thank you for joining Selective's Third Quarter 2025 Earnings Conference Call. Yesterday, we posted our earnings press release, financial supplement and investor presentation on selective.com's Investors section. A replay of the webcast will be available there shortly after this call. John Marchioni, our Chairman of the Board, President and Chief Executive Officer; and Patrick Brennan, Executive Vice President and Chief Financial Officer, will discuss third quarter results and take your questions. We will reference non-GAAP measures that insurance and investment professionals use to evaluate operational and financial performance. These non-GAAP measures include operating income, operating return on common equity and adjusted book value per common share. The financial supplements on our website include GAAP reconciliations to any referenced non-GAAP financial measures. We will also make statements and projections about our future performance. These are forward-looking statements under the Private Securities Litigation Reform Act of 1995, not guarantees of future performance. These statements are subject to risks and uncertainties that we disclose in our annual, quarterly and current reports filed with the SEC. We undertake no obligation to update or revise any forward-looking statements. Now I'll turn the call over to John. John J. Marchioni: Thanks, Brad, and good morning. This quarter, we delivered an operating return on equity of 13.2%, driven by strong investment income, which increased 18% year-over-year. We are on track to deliver full year operating ROE in the 14% range. However, our combined ratio guidance of 97% to 98% exceeds our 95% long-term target. To address this, we are prioritizing profit improvement and moderating premium growth. Risk selection, granular and accurate risk pricing and prompt fair claims adjudication are foundational capabilities we have built over many decades. We have a solid foundation but are continuing to strengthen these core competencies to compete effectively in this dynamic environment. Across the company, we are sharpening our focus on a set of key priorities. First, relentlessly improving on the fundamentals across risk selection, individual policy pricing and claim outcomes; second, diversifying revenue and income within and across our 3 insurance segments; and third, further leveraging our use of data, analytics and technology, including artificial intelligence to drive operational efficiency and improved underwriting and claim outcomes. Turning to results. We recorded unfavorable prior year casualty reserve development of $40 million or 3.3 points in the quarter. $35 million relates to commercial auto and $5 million to personal auto. Unfavorable prior year development in both lines is attributed to the 2024 accident year and is primarily driven by the state of New Jersey. With recent prior accident year reserve strengthening in each of the last 2 quarters, we refined our view of the current accident year for commercial auto. This adjustment added just under 5 points to the current year casualty loss cost for the lines year-to-date combined ratio. For the quarter, the pressure in casualty lines was offset by light property catastrophe activity and favorable non-catastrophe property results. In total, our combined ratio for the quarter was 98.6%. As you know, we book our best estimate each quarter, incorporating new and emerging information as it becomes available. Consistent with our long-standing practice, we continue to engage an independent party to conduct semiannual reserve reviews and sign our actuarial statement of opinions. Over the past 15 months, we have supplemented these external reviews by engaging other independent third parties to evaluate our reserving, planning and claims processes. Through their reviews, the outside firms have provided us with additional industry perspective on current loss trends and best practices. Their reviews confirm that our actuarial processes are reasonable and consistent with best practices for methodology, data and approach. Most recently, we had an independent review of our overall casualty reserve adequacy completed. It indicated that our booked reserves were in a reasonable range and importantly, above the third-party central estimate. The third-party review confirmed that our approach was somewhat more responsive to recent elevated trends they are seeing industry-wide. Consequently, we have greater confidence in our overall reserves, and we maintained our actuarial approach and management processes to determine our best estimate for the quarter. The claims reviews include evaluations of samples from both open and closed claim files. The findings on open claims indicate that our claims management and reserving practices are consistent with internal guidelines, aligned with industry best practices and that valuations have been reasonable. The review of closed claims is ongoing. We will continue to incorporate enhancement recommendations from these reviews, augmenting our other ongoing claims handling and litigation management process and system improvements. Last quarter, we took reserving action in commercial auto liability responding to increasing paid severities. This quarter, these trends escalated in specific jurisdictions, most notably New Jersey. Otherwise, auto liability loss ratios have been in line with our expectations with improving accident year loss ratios driven by consistent rate increases. While rate increases continue to be an important lever, rate alone will not be sufficient to drive and maintain long-term profitability in this line, particularly in certain jurisdictions. The legislative, regulatory and judicial environments in these jurisdictions present specific challenges, and we intend to take significant targeted underwriting actions. Specifically for commercial auto, several actions are underway. In early September, we deployed an updated rating plan and predictive modeling to provide more granular pricing segmentation for the auto line, incorporating several enhanced variables, including additional vehicle and driver-specific criteria. We've implemented tighter underwriting guidelines on fleet exposures, supported by state-level tactics and analytics to better identify and target risks. We are targeting certain segments and states for higher penetration of Compass, our telematics solution. And in further support of our risk management specialist engagement on fleet safety with our insurers, we are actively promoting increased use of commercial auto self-assessments in our risk management center, which provides customers online risk management guidance and expertise. We continue to invest in processes and tools to further elevate our underwriting, pricing and claims sophistication. While this is not a new initiative, there are opportunities to sharpen fundamental disciplines, including risk selection, individual risk pricing and claims adjudication. Maintaining our focus and sense of urgency is critical to improving underwriting margins and supporting long-term profitable growth. We continue to diversify our portfolio by expanding our Standard Commercial Lines footprint. Since 2017, we have strategically added 14 states with 2 more planned in 2026. Geographic expansion has significantly increased our addressable market, and we have advanced our stated goal of operating our Standard Commercial Lines business with a near national footprint. Going forward, we will continue to pursue opportunities to further diversify our business within and across our 3 insurance segments. Before I turn the call over to Patrick, I want to reinforce 3 foundational points shaping our performance and long-term strategy. First, we firmly believe that insurance requires a long-term perspective, particularly with long-tail casualty lines. To that end, we will trade short-term impacts for long-term sustainable success. By reacting quickly to current claim trends, we are better positioned to ensure our pricing indications are appropriately positioned to achieve our long-term underwriting margin targets. Second, we believe that prudent decisions made now with the best information available are the surest way to deliver value over time. Analyzing new information requires us to constantly refine our views of the market and take appropriate and sometimes difficult actions. This ongoing process reinforces the importance of maintaining a long-term perspective. Third, we continue to invest to deliver long-term profitable growth even as the market is increasingly competitive. Growth levers include achieving greater market share and segment diversification in Standard Commercial Lines, potential geographic expansion in Personal Lines and increasing our product and distribution capabilities in E&S and other specialty lines. We also prioritize returning approximately 20% to 25% of earnings through our shareholder dividend. In addition, guided by our capital strength and the valuation of our stock, we will opportunistically repurchase shares as we did this quarter. The $36 million of repurchases in the quarter, the new $200 million purchase -- repurchase authorization and a 13% dividend increase reflect our confidence in the path forward and the value we perceive in our stock. Our full year guidance implies an underlying combined ratio of 91% to 92%, up 1 point from our expectation at the beginning of the year, driven by our actions to strengthen the current accident year. We remain committed to taking a longer-term perspective, making tough decisions when necessary and investing in profitable growth to deliver long-term value to shareholders. Now I will turn it over to Patrick, who will provide more details about our financial results. Patrick Brennan: Thanks, John, and good morning, everyone. For the quarter, fully diluted EPS was $1.85, up 26% from a year ago. Non-GAAP operating EPS was $1.75, up 25%. Our return on equity was 14% and our operating return on equity was 13.2%, with continued strong performance from the investment portfolio. The GAAP combined ratio was 98.6%, elevated primarily due to 3.3 points of unfavorable prior year casualty reserve development and 6.2 points of higher current year casualty loss costs. Catastrophe losses were 2.1 points, significantly better than anticipated and 11.3 points better than the prior year period. Our full year guidance now includes a 4-point catastrophe load, reflecting lower-than-expected catastrophe losses through the first 9 months. The overall underlying combined ratio for the quarter was 93.2%, up from 86.1% in the third quarter of 2024, reflecting higher current year casualty loss costs. Non-catastrophe property losses, although better than expected, were 0.9 points higher than last year. Year-to-date, the underlying combined ratio was 91.6%, 2.6 points higher than the first 9 months of 2024. Non-catastrophe property losses were 14.7 points year-to-date. This was an 80 basis point improvement year-over-year and reflected the continued benefits from property lines earned rate and the tightening of terms and conditions over the past few years. Year-to-date, these benefits were eclipsed by a 3.1 point increase in current year casualty loss costs. The expense ratio increased by 40 basis points, primarily driven by higher expected employee compensation compared to last year's lower profit-based payouts. We remain disciplined in managing expenses but continue to invest across our business to support scale, enhance decision-making and improve operational efficiency. In Standard Commercial Lines, we reported a 101.1% combined ratio this quarter, which included 3.7 points of unfavorable prior year casualty development and 6.6 points of higher current year casualty loss costs. As John described, the current environment demands strong underwriting and pricing discipline. Consequently, premium growth in the quarter slowed to 4% .Renewal pure price increased 8.9% or 10%, excluding workers' compensation. The biggest increases were in general liability at 11.4% and commercial auto at 10%. Renewal premium change for property was 15.5%, including 5.1 points of exposure increase. Retention for the quarter was 82%, down 4 points from a year ago and 1 point from last quarter. The decrease reflects our pricing and underwriting actions as well as an increasingly competitive environment. Excess and surplus lines grew 14% in the quarter, driven by average renewal pure price increases of 8.3%. The combined ratio was 76.2%. We see continued growth opportunities in this segment despite an increasingly competitive market. Our deliberate E&S strategies include introducing new products, expanding our brokerage business and investing in operational efficiency and piloting expanded distribution by giving retail agents access to our E&S offerings. We are excited about this segment's forward growth prospects. The Personal Lines combined ratio was 110.1% this quarter, 12 points better than a year ago. However, our New Jersey personal auto reserving actions added 4.9 points of unfavorable prior year casualty development from the 2024 accident year. It also drove the 7.2 point increase in current year casualty loss cost this quarter. Personal Lines net premiums written declined 6%. However, target business grew 12% in the quarter, with nearly all new business being in our target mass affluent market. Renewal pure price for the quarter was 16.9%. Third quarter after-tax net investment income was $110 million, up 18% from a year ago. This income generated 13.6 points of return on equity, up 50 basis points from the third quarter of 2024. Our investment portfolio continues to be positioned conservatively, and we have not significantly changed our investment strategy with an average credit quality of A+ and duration of 4.1 years. We delivered strong operating cash flow in the quarter, supporting continued portfolio growth. The average new purchase yield was an attractive 5.8% pretax, exceeding the quarter end average pretax book yield of 5.1%. We expect this embedded book yield to provide a durable source of future investment income even if interest rates decline. Turning to capital management. As John mentioned, we continue to prioritize profitable growth within our insurance business and aim to return 20% to 25% of our earnings through dividends. We also opportunistically repurchased shares. These actions reflect our commitment to delivering long-term value to shareholders. We are pleased to announce a 13% increase in our quarterly dividend, our 12th consecutive annual increase. We also repurchased $36 million of common stock during the quarter with year-to-date repurchases through September totaling $56 million. Given the increased level of share repurchases in 2025, our Board of Directors authorized a new $200 million share repurchase program. This replaces the previous authorization, and we expect to deploy it opportunistically. We ended the quarter with $3.5 billion of GAAP equity and $3.4 billion of statutory surplus. Book value per share increased 13% in the first 9 months of the year, driven by our profitability to the $2.77 per share reduction in after-tax net unrealized losses. Debt to total capital declined modestly to 20.5%, below our internal threshold of 25%. In light of results through the first 9 months of the year, we have revised our 2025 guidance as follows. First, we expect our 2025 GAAP combined ratio to be between 97% and 98%, in line with our prior guidance. Our guidance now includes 4 points of catastrophe losses, lower than our previous 6-point estimate, reflecting favorable results through the first 9 months of the year. Guidance also includes the impact of prior year casualty reserve development reported through the third quarter, which equals approximately 2 points on the full year combined ratio. It also assumes no additional prior year casualty reserve development and no further change in loss cost estimates. We do not make assumptions about future reserve development as we book our best estimate each quarter. Second, we also expect after-tax net investment income of $420 million, up from prior guidance of $415 million. We also expect an overall effective tax rate of 21.5% and an estimated 61.1 million fully diluted weighted average shares, reflecting repurchases in the first 9 months of the year, and we assume no additional repurchases under our share repurchase authorization. With that, I'll now turn it over to Q&A. Operator, please start our question-and-answer session. Operator: [Operator Instructions] The first question comes from Michael Phillips with Oppenheimer. Michael Phillips: John, I appreciate the comments in the opening about the commercial auto, and it seems like this quarter was isolated to one accident year in one state, predominantly New Jersey. But I guess if we go back to last year when you were taking some GL charges, I -- just correct me if I'm wrong here on my perception of kind of the comments, GL charges last year, you got some questions about could this spill over into commercial auto? And it seemed pretty confident that it wouldn't. The last 2 quarters, granted $60 million total in 2 quarters isn't a big number, but it's continued 2 quarters in a row. So is my perception right? And if so, kind of what's changed? Maybe just New Jersey, but sort of it seems like commercial auto now is the problem child. And if so, if that wasn't the case before, sort of what's different? John J. Marchioni: Yes, Mike, thanks for the question. So first thing, just going back to the prior comments relative to commercial auto, and you've heard me reference it as probably the earlier evidence of higher severity trends and the evidence of social inflation. I think that comment continues to hold weight. And what I mean by that is if you look back to our public disclosures, we have been carrying a higher assumed loss trend in commercial auto than GL dating back to 2021. And in fact, we increased our GL -- I'm sorry, our commercial auto liability trend assumption to 8.5% in '22 and carried it there. I think what we've seen in the last 2 quarters is a reacceleration of severity trend, particularly in the state of New Jersey. And remember, New Jersey is a bigger state for us in the commercial auto line. It represents about 15% of our countrywide commercial auto premium, and we've seen higher severity emerge there. And I'm happy to talk through some of what we think might be driving that. New Jersey has always been a higher severity state across all casualty lines of business, but we've seen that really impact the last couple of quarters. We didn't point it out last quarter, but it was also the primary driver of our commercial auto emergence that we saw last quarter as well. So I would say that's the change that we've seen and recognized. I think the positive is from non-New Jersey perspective in commercial auto liability, not that there hasn't been some pressure there, but our actual emergence in those other states has held up reasonably well relative to our expectations. Michael Phillips: Okay. Yes, maybe we can get into the details of New Jersey and another venue or here if I think anybody else wants to I appreciate that. I guess second then for me would be, you talked about the added third parties that kind of looked at reserves for you guys, the external reserves reviews. And I'm not sure I heard you correctly. It sounded like -- I mean, one of my takeaways was it sounded like as they look at your reserves and compared to what they see as industry trends, I sort of heard maybe a warning sign that industry looks like there could be some deficiencies and you guys are staying ahead of it. But it sounded like some warning signs for some pockets of deficiency for the industry that just hasn't been recognized yet. And did I hear that right? Is that what you're seeing? John J. Marchioni: Yes. I guess I'll stop short of suggesting what you're saying there with regard to whether or not there's going to be industry challenges going forward. What I will say and reinforce though is the validation from more than one external actuarial expert that has a broader view of the industry that the elevated trends that we're responding to in the more recent accident years are evident across the industry. And that is clearly a statement that we've gotten from them. It's something that we've heard repeatedly from our reinsurance partners, the majority of whom we just met with earlier this month out of the CIAB meeting. And I think that's -- while it doesn't change the results that we're delivering, I think it does suggest that, in fact, this is something that's more widespread. And again, I would encourage you to look over a longer time horizon at both commercial auto liability and general liability and just look over the last 10 years up to and including the -- our current view of the more recent years. And what you see is our performance over the long term continues to hold up really well for commercial auto liability and general liability against the industry. It doesn't change the fact that these lines are under pressure and they're under continued pressure from elevated social inflationary trends, but we're reacting and we're reacting in a way that we think is timely and appropriate. And I'm highly confident that when we look back at these more recent accident years post pandemic as they age for us and everybody else, that our track record and our reputation of being a strong underwriting company history will show that that's continued to be the case. I understand it might not feel that way right now, but that's how we manage our business, and that's how we'll continue to manage our business. Operator: And our next question will come from Michael Zaremski with BMO Capital Markets. Michael Zaremski: Maybe you could explain more of the thought process behind continuing to buy back shares if this reserve review has been leading to the loss ratio profit margin pressure. And you said there's still an ongoing review of closed claims that will or could impact ongoing claims and ultimately reserves. So I guess why not wait until the coast is clear? John J. Marchioni: Well, just to clarify a point, the open -- the open and closed claim reviews were designed to evaluate whether or not there was something happening in the claims organization that might be driving some of this. There's no evidence of that. And based on the early indications we've had because the closed claim review is actually 2/3 complete, there's nothing there that would suggest any issues. With regard to reserving, we book our best estimates, and we continue to book our best estimates, and we have high conviction in those estimates, and that conviction has only been reinforced by the external reviews. I think the challenge right now is our results on an absolute basis are not the issue. It's our results on a relative to industry basis that is causing the pressure. And with a 6% top line growth rate and as we said, an expectation for the full year of a 14% ROE, we are building book value per share. We're building capital and surplus. And as a result of that, that is the Board's way of expressing confidence in our forward earnings... Michael Zaremski: Got it. Okay. As a follow-up, on commercial auto, you took up the pick, I think, 5-ish points. How much of that was influenced by the study that you commissioned versus just things you're seeing? Or is it all commingled? John J. Marchioni: Yes. That's a result of our internal analysis. Again, the point we made about the outcome of the third-party review of adequacy was that we are above their central estimate in total. And the reaction as continues to be the case is based on our internal evaluation. And again, with regard to commercial auto, that continues to be predominantly driven by the state of New Jersey. And based on what we see because we have good insight into other company filings and other companies' indications, frequency and severity trends in New Jersey over the last couple of years have accelerated. And that's what we're reacting to, and we're seeing that in actual claim emergence on the paid and incurred side in the state of New Jersey. Michael Zaremski: Got it. And my last follow-up, thought I believe you said 8.5% is your trend assumption of commercial auto. Is that correct? John J. Marchioni: Yes. So it's been sitting in that range dating back to 2022. And again, those were our assumed loss trends that we incorporated into our expected loss ratios. Michael Zaremski: Yes. And so if we look at the 8.5%, is it a correct statement for me to say that if we look at your historical loss ratio development for commercial auto specifically in vintages that are more seasoned, so let's say, '18, '19, I'm going to exclude '20 because of the pandemic year in '21. So if I look at those vintages that are more seasoned and see how the loss ratio has trended, is it correct to say that loss inflation on those vintages has been higher than 8.5%? John J. Marchioni: No, no, we're talking about the post-pandemic accident years. I mean, for commercial auto liability, those pre-pandemic years are quite mature at this point. And the pressure we've seen of late has not been driven at all by those pre-pandemic accident years. So I would actually say those are -- there's no change with regard to those. It's more of these recent accident years we're responding to. And again, I think it's important to note that our average commercial auto BI rate over the last 4 to 5 years is a little over 10%. So while trends have been elevated, the earned rate level has been largely offsetting that impact when you look at loss ratios and on level and trend them and look at the pre-pandemic block of years to where the current years are, and that's how you want to think about that... Operator: And the next question will come from Meyer Shields with KBW. Unknown Analyst: This is [ Dan ] on for Meyer. My first question is on the general liability reserves. I know you reported no reserve development. Just curious, is there any shift among individual accident years? John J. Marchioni: No, there's nothing notable with regard to any accident year movement within GL. Those are stable overall. Unknown Analyst: Got it. My second question is on your expansion to the new state. You mentioned entering -- enters this quarter, entering Montana, [ Wyoming ] next year. Just curious what you're seeing in these markets, what the initial agent receptivity on that? And what feedback do you have? John J. Marchioni: Yes. I would say -- and this -- our expansion has been ongoing since 2017 and results and agency reaction has been favorable. Performance has been in line with our expectations, and I think that continues to be the case. And again, as I pointed out in my prepared remarks, one of our organizational priorities is to continue to diversify our business. And part of that diversification is geographic, part of it is line of business and product and part of it is across the 3 primary business segments of commercial, personal and E&S. And that geo expansion is a big part of that diversification in standard commercial lines and part of it is we're talking a lot about New Jersey so far this morning. It's a state that we have performed well across all lines over the long term, but there is a concentration that we were trying to manage. And over the last decade, our New Jersey share has gone from north of 20% to about 16%. And we think that will continue to happen going forward with our expansion. And I think that's just part of how we think about the business longer term is to drive greater diversification in both revenue and income. Unknown Analyst: Got it. Just a follow-up on that. Are there any lines or customer segments you're seeing especially strong interest fund distribution component? John J. Marchioni: I would say our performance in our expansion states over the last 8 years, the mix of business is generally reflective of the mix we see in our existing footprint on a line and a segment basis. Operator: And the next question will come from Paul Newsome with Piper Sandler. Jon Paul Newsome: So I guess the first question would be any thoughts you could give us on how we should think about premium growth? I mean I think we could figure out the size of your commercial auto business in New Jersey. But I guess the follow-on question would be if that business tends to shrink as you become more conservative, does that affect the package business? I think of you folks as being a package provider more than anything else. Any thoughts that kind of might give -- push us in the right direction would be great. John J. Marchioni: Yes, sure. So I mean I'll give you some sort of higher-level thoughts around this. First and foremost, and I'll say this has always been the case. We think about growth as more of an outcome as opposed to a target. And for us, it's always about striving to achieve your target margins and then growth will be determined in part by market dynamics and whether the market is reacting in a similar fashion and has a similar view of indicated rate or adequate rate levels on a state and line of business basis. And there's no question, and you hear the commentary and you see the industry pricing surveys that would suggest that our pricing -- our actual pricing being achieved in GL and commercial auto liability are above where industry surveys are currently showing market pricing mix. That has and will continue, we expect to put some pressure on conversion rates. And as we've said on multiple occasions, that's a trade-off that we're willing to make. And I think what you saw in the quarter is reflective of that. New Jersey, as I mentioned earlier, is about 15% of our auto premium across the country in commercial auto premium. And if you look at New Jersey in total, it's a similar percentage of our footprint. So we are going to -- when we have underperforming pockets of business like we're talking about with regard to New Jersey commercial auto, we will take aggressive action to address that. And that will impact growth without question, and that's a trade-off we're willing to make. Jon Paul Newsome: That sounds good. Another question would be any additional help on thinking about the level of the forward accident year, maybe excluding catastrophe losses. Obviously, you bumped up in this quarter because of the commercial auto issues in New Jersey and other places. But I don't know if that's a good run rate for the future or if we should think about maybe the run rate on your day results is a better run rate. Any thoughts you have there in terms of what might be a higher accident year loss ratio prospectively? And I realize some of this has to do with pricing and perhaps even the lag between getting the pricing and actually bringing in over time. John J. Marchioni: Yes. So I guess, Paul, the best place to really focus, if you look at the 9 months and then look at the full year guidance. The full year guidance of a 97% to 98% with our 4-point assumption relative to cats gets you to an underlying combined ratio on an accident year basis of 91% to 92%. And because you've got 2 points of PYD -- roughly 2 points of PYD in the current year, and you've got the adjustments to the current year casualty loss cost that are adding about 2 points. And then you've got non-cat and expense favorable. So you put all those pieces together. And I think as you're thinking about the run rate, I would focus more on that 91% to 92% that underlies our guidance for the full year of 97% to 98%. And I'm happy to go through those pieces, yes, I know there's moving pieces there, but you have to incorporate the current year loss cost changes that we've been making but you've got to also adjust for the PYD impact. Operator: And the next question will come from Bob Huang with Morgan Stanley. Jian Huang: Yes. So first question is on the 2025 developments. I think last quarter, you talked about 2025 was still favorable to expectations. Can you remind us -- so can you remind us if that is still the case comparing the 2025 picks to the 2024 and the prior picks? John J. Marchioni: Yes. Just I'll clarify one point. So what we've said and we'll continue to say is that claim frequencies in the current year have been running in line with or better than expected, and we pointed particularly to workers' comp as the line that was driving the better-than-expected claim counts. In casualty lines, you never want to react that quickly to favorable claim counts, but those claim counts have continued to come in better than expected. That's what we said last quarter, and that's what I'll repeat again. And that's different from the decision that we made in the quarter to book additional loss ratio impact in the commercial auto line of business specifically and specifically driven or largely driven by the state of New Jersey. Jian Huang: Okay. No, that's helpful. Second question, and apologies, this is a little hypothetical. Does it make sense to kind of find or somehow explore ways to have a bigger -- much, much bigger balance sheet either through like a variety of other ways of thinking about the business going forward? Like wouldn't that kind of reduce the reserve volatility? And would that also maybe better absorb reserve volatility? Is there a way to think about -- does it make sense for Selective to find a way to somehow explore opportunities to have a much bigger balance sheet one way or another? John J. Marchioni: In our view, this business is still about getting the fundamentals right and achieving your target loss ratios. I think -- and again, I realize there's recency bias, and there's been some challenges in an uncertain loss trend environment. And we are a little bit overweight to commercial auto liability and general liability, which has created some near-term challenges. But I think when you look at it over the long term and the way we've optimized the balance sheet and maximize shareholder returns and delivers consistent strong performance from an underwriting perspective. We like the strategy. We like the operating model, and that's going to continue to be our focus. Operator: And the next question comes from Michael Zaremski with BMO Capital Markets. Michael Zaremski: I appreciate you letting me in after follow-ups. One thing that caught my attention was you talked about RPC for property that sounds like accelerating into the [ 15s ]. I think we've been seeing the decel industry wide. What's causing that? John J. Marchioni: I would say that we've seen a little bit of deceleration in property. But in our mind, property is a line that while the results have improved and continue to improve and rate remains strong, it's a line that on a risk-adjusted basis, you have to think about the longer-term variability and volatility in both non-cat and cat property. So our risk-adjusted combined ratio of target for that line is lower. So we're going to continue to try to improve margins there. So -- and the exposure change has been fairly consistent in that renewal premium change that you're referencing and the rate is just under 10%. So that's held in strong, but it's drifted down a little bit. And we would expect based on market dynamics for property -- commercial property pricing to drift down a little bit further, but remain strong against a relatively low exposure trend in that line of business -- or loss trends, sorry, in that line of business. Michael Zaremski: Got it. And lastly, just stepping back, thinking about kind of these corrective actions you're taking to improve profitability. I think when we think of Selective, you all target to have well into the double-digit share of -- I guess, I think you call it share of wallet with your agency partners. And so does that -- and you also talked about the market becoming a bit more competitive overall. So is there -- does it -- in your view, these corrective actions, do they need to be kind of dealt over many, many quarters in order to not let retentions continue falling maybe into the 70s? Is that kind of -- are you walking that line? John J. Marchioni: Yes. It's a great question. First thing I'll say is I think the benefit of depth of relationship that we have and size of relationship we have agency by agency is beneficial because the renewal negotiation ensures that we have good communication back and forth. What I will say is, and I mentioned this, and this was sort of underlies our discussion about improving the fundamentals. It's important that in an environment like this, you execute your pricing and underwriting strategies in as granular a fashion as possible by account, by class, by state, by line of business. And our ability to continue to do that and do that effectively should mitigate some of the downward impact on retention overall. Now again, we are willing to make that trade that push comes to show. But the granularity of our execution will ultimately determine how agents respond to that and how the overall retention rate responds to that. And I'll put that in the category, one of the areas that we'll continue to focus on from a continuous improvement perspective is the granularity of execution. I think we have the tools to do that. We want to make sure we're effectively executing with those tools. Operator: And the next question will come from Michael Phillips with Oppenheimer. Michael Phillips: I have 2 follow-ups also. John, I think you said Jersey frequency severity kind of rising over the last couple of years. If I heard that correctly, does that mean that we should be worried in the future about accident year '23? John J. Marchioni: No, I would suggest that we continue to book our best estimate across all accident years. So our response this quarter -- what we saw this quarter was driven by the '24 accident year, but the actions last quarter were the '22 through '24 accident year. So I would say that we're talking about the commercial auto reserve position across the recent accident years and are acting accordingly across all of those... Michael Phillips: Given the third parties have kind of confirmed and give you some confidence in what you're booking, have you ruled out or have you considered maybe an LPT for your reserves on the casualty side to help give some confidence in what you're booking? John J. Marchioni: Yes. I would say that reinsurance opportunities, including some sort of a cover like that are things that we routinely evaluate but at the same time, these are very recent accident years. We're confident in how we're booking those accident years and the economics on that would not be favorable from our perspective because that -- these are immature years. And anybody who's going to come in on the reinsurance side is going to command a lot of the economics, and that's just not something we think is all that attractive, but we'll continue to evaluate it. We just don't think it makes sense for us at this point. Operator: I am showing no further questions at this time in the queue. I would now like to turn the call back over to John for closing remarks. John J. Marchioni: Well, thank you for joining us. We appreciate the questions and the interest. And as always, please feel free to follow up with Brad with any additional questions you might have. Thank you. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Good afternoon, everyone, and welcome to Associated Banc-Corp's Third Quarter 2025 Earnings Conference Call. My name is Diego, and I will be your operator today. [Operator Instructions] Copies of the slides that will be referenced during today's call are available on the company's website at investor.associatedbank.com. As a reminder, this conference call is being recorded. As outlined on Slide 1, during the course of the discussion today, management may make statements that constitute projections, expectations, beliefs or similar forward-looking statements. Associated's actual results could differ materially from the results anticipated or projected in any such forward-looking statements. Additional detailed information concerning the important factors that could cause Associated's actual results to differ materially from the information discussed today is readily available on the SEC website in the Risk Factors section of Associated's most recent Form 10-K and subsequent SEC filings. These factors are incorporated herein by reference. For a reconciliation of the non-GAAP financial measures to the GAAP financial measures mentioned in this conference call, please refer to Pages 24 through 26 of the slide presentation and to Pages 10 and 11 of the press release financial tables. Following today's presentation, instructions will be given for the question-and-answer session. At this time, I would like to turn the conference over to Andy Harmening, President and CEO, for opening remarks. Please go ahead, sir. Andrew Harmening: Well, good afternoon, everyone, and thank you for joining us for our third quarter earnings call. This is Andy Harmening. I am joined once again by our Chief Financial Officer, Derek Meyer; and our Chief Credit Officer, Pat Ahern. I'll start some highlights of the quarter. Derek will cover the income statement and capital trends, and Pat will provide an update on credit quality. Over the course of 2025, we've been squarely focused on execution and delivering on the strategic growth investments we've made across our company. 9 months into the year, we continue to see several trends that are both leading to strong current results and positioning us for future performance. We're proving that we can grow and deepen our customer base organically. We've posted net household growth each quarter so far in '25 and are on pace to deliver our strongest year for organic checking household growth since we began tracking a decade ago. We're also proving that we can grow and remix our balance sheet simultaneously. On the asset side, we've added nearly $1 billion in high-quality C&I loans year-to-date while working down our mix of low-yielding low-relationship value resi mortgages. On the liability side, we added over $600 million in core deposits in the third quarter, enabling us to work down our wholesale funding mix. As this mix shift continues, it enables us to drive stronger profitability after delivering quarterly net interest income of $300 million in the second quarter, a record for our company. We posted another record of $305 million in Q3. And with this enhanced profitability comes enhanced capital generation. We added another 13 basis points of CET1 capital in Q3 and have now added 30 basis points year-to-date. This capital generation enables us to support our growth while continuing to execute on our organic strategy. Now I'll remind you, just because we're growing assets doesn't mean we're stretching. Credit discipline remains foundational to our strategy, and our growth is focused on high-quality commercial relationships and prime/super prime consumer borrowers, which is consistent with our conservative credit culture built over the last 1.5 decades. We continue to manage our existing portfolios proactively and meet with our customers regularly to stay on top of emerging risks. As we look at the remainder of 2025 and '26, Associated Bank has strong momentum that continues to build. While we continue to monitor risks tied to the macro uncertainty, our growth strategy puts us in a position to grow and deepen our customer base, take market share, remix our balance sheet and improve our return profile without having to rely strictly on a hot economy or a perfect rate environment. With that, I'd like to walk through some additional financial highlights on Slide 2. In Q3, we reported earnings of $0.73 per share. Total loans grew by another 1% versus the prior quarter and 3% versus Q3 of '24. Adjusting for the loan sale we completed in January, we've grown loans by 5.5% over that same time period. C&I lending has continued to lead the way as we deepen relationships across our markets and see noncompete agreements from our new RMs expire, we grew nearly $300 million of C&I loans and we've now grown C&I loans by nearly $1 billion year-to-date. Shifting to the other side of the balance sheet, seasonal deposit positive inflows came back as expected during the quarter, with our core customer deposits up 2% or $628 million from Q2. With that said, we're seeing more than just seasonal strength core customer deposits were also up over 4% or $1.2 billion relative to the same period a year ago. Moving to the income statement. Our Q3 net interest income of $305 million set a new record as the strongest quarterly NII we've seen in our company's history. Our NII was up 16% relative to Q3 of 2024. We also saw strong quarterly noninterest income of $81 million in Q3, a 21% increase from the prior quarter. The increase was driven primarily by capital markets revenue, wealth fees and a onetime asset gain of approximately $4 million tied to deferred compensation plans. Total noninterest expense was $216 million in Q3, up $7 million from the prior quarter. The quarterly increase was primarily driven by performance-based incentive programs, delivering positive operating leverage continues to help us post strong quarterly operating results and is a primary objective as we execute our plan. Managing credit risk is also a top priority, and we remain pleased with asset quality trends. In Q3, delinquencies were flat and nonaccruals were just 34 basis points of total loans. Net charge-offs were also flat at 17 basis points and our ACLL decreased 1 basis point to 1.34%. And finally, we posted a return on average tangible common equity of over 14% in Q3, a 250 basis point improvement from Q3 of last year. On Slide 3, we provide a reminder of how our strategic investments are transforming our return profile and setting us up for additional momentum over the remainder of this year and into 2022. First, we're positioned to take market share in commercial lending and deposit acquisition, thanks to a strategy predicated on hiring talented RMs in metro markets where we're underpenetrated. In fact, we've already seen results from our efforts. Through the first 9 months of the year, we've already added nearly $1 billion in C&I loans to our balance sheet with pipelines remaining strong and several more noncompete set to roll up between now and the first quarter of next year, we expect our momentum to carry through '26. And as those relationship C&I balances come onto the books, they're replacing lower-yielding nonrelationship resi mortgage balances that are rolling off, positioning us to diversify our asset base more profitably without changing our conservative approach to credit. This mix shift is driving enhanced profitability. Over the past 2 quarters, we saw our margin climb above 3% and posted back-to-back quarters of record NII. As we continue to grow and remix our asset base and support it with low cost core deposits, we see additional opportunity ahead. On Slide 4, we highlight our loan trends through Q3. On both an average and period-end basis, quarterly loans grew by 1% versus Q2. And that growth was once again led by the C&I category. On a spot basis, C&I loans grew by 3% or nearly $300 million versus the prior quarter. After adding nearly $1 billion in C&I balances to our balance sheet year-to-date, we feel very well positioned to meet or exceed the $1.2 billion growth target we originally set for ourselves in 2025, thanks to the strength of our pipelines and the additional lift from newly hired RMs as our noncompetes expire. Auto balances also grew by $72 million in the third quarter as we've continued to be, to selectively add prime and super prime balances to our book. Total CRE balances grew slightly for the quarter, but decreased by $160 million on a quarterly average basis. We expect elevated CRE payoff activity in the coming quarters as rates continue to fall. Overall, we continue to expect total bank loan growth of 5% to 6% for the year. Shifting to Slide 5. Total deposits and core customer deposits both bounced back as expected in Q3 following Q2 seasonality. Core customer deposits increased by over $600 million point-to-point with gross spread across most key categories. Relative to the same period a year ago, core customer deposits were up 4% or $1.2 billion. And growth in our core deposit book has enabled us to work down our wholesale funding balances. Here in Q3, overall wholesale funding sources decreased by 2% versus Q2. Based on our latest forecast, we now expect core customer deposit growth to come in towards the lower end of our 4% to 5% growth range for the year, but we remain confident in our ability to grow granular low-cost core customer deposits over time for 2 key reasons. First, our consumer value proposition stacks up well against any bank or fintech in the industry, and we have additional product upgrades planned for late Q4 of '25 and into 2026. This gives us an engine to attract deep and retain checking households over time, and it's already driving results. After posting the strongest organic primary checking household growth numbers we've seen since we began tracking a decade ago back in Q2, we followed that up with another quarter of solid growth in Q3. Second, we've refined our focus on commercial deposits by moving to a balanced scorecard, hiring relationship-focused RMs, launching a new deposit vertical and most recently, hiring Eric Lien as our new Director of Treasury Management. With pipelines growing and several noncompetes set to expire in the coming months, we feel very well positioned for growth in 2026. We continue to expect that our efforts to drive growth in lower-cost core customer deposit categories, will enable us to further decrease our reliance on wholesale funding sources over time. And with that, I'll pass it to Derek to discuss the income statement and capital trends. Derek Meyer: Thanks, Andy. I'll start on Slide 6 with our yield trends. In the third quarter, total earning asset yields remained flat at a 5.5% and interest-bearing deposit costs also held flat at 2.78%, while total interest-bearing liabilities ticked up 1 basis point to 3.03%. Within our major asset categories, slight decreases in commercial, CRE and auto yields were offset by slight increases in mortgage and investment yields. While total interest-bearing deposit costs were flat compared to Q2, they were down 55 basis points from Q3 of 2024. Moving to Slide 7. Third quarter net interest income of $305 million was up $5 million versus the prior quarter and $42 million versus Q3 of 2024. Q3, net interest margin held firmly above 3% at 3.04%, which was flat compared to Q2 but 26 basis points higher relative to Q3 of 2024. Based on our latest expectations for balance sheet growth and mix, deposit betas and Fed action, we continue to expect to drive net interest income growth of between 14% and 15% in 2025. This forecast assumes 2 additional Fed rate cuts in 2025. Given the potential for additional rates, we've provided a reminder of the steps we've taken to dampen our asset sensitivity on Slide 8. Over time, we put ourselves in a more neutral position to minimize interest rate risk. We've maintained repricing flexibility by keeping our funding obligations short we've protected our variable rate loan portfolio by maintaining received fixed swap balances of approximately $2.45 billion, and we built a $3 billion fixed rate auto book with low prepayment risk. While we're still modestly asset sensitive, a down 100 ramp scenario now represents just a 0.5% impact to our NII as of Q3. We expect to maintain this relatively neutral position going forward. Moving to Slide 9. Total securities increased to $9.1 billion in Q3 as we've continued to modestly build our AFS book. Our securities plus cash to total assets ratio climbed to 23.4% for the quarter. We continue to target a range of 22% to 24% for this ratio. On Slide 10, we highlight our noninterest income trends for the quarter. In Q3, total noninterest income of $81 million was up 21% relative to both the prior quarter and the same period last year. The increase in Q3 was primarily driven by strength in capital markets and wealth fees with an additional boost from nonrecurring asset gains. In the capital market space, in particular, the increase was due to an elevated level of activity in our syndications and swaps businesses. The asset gain booked during the quarter was approximately $4 billion for deferred compensation valuation adjustment. Given the strong quarter, we now expect a total of -- we now expect total 2025 noninterest income to grow by 5% to 6% relative to 2024, after excluding the nonrecurring items that impacted our fourth quarter 2024 and first quarter 2025 results from the balance sheet repositioning we announced last December. Moving to Slide 11. Third quarter expenses of $216 million were up $7 million versus Q2, with much of the increase attributed to performance. The increase came in personnel where we booked $4 million of additional expense for the same deferred comp valuation adjustment that was recognized as a gain in our noninterest income. Another large component was a $4 million increase in variable compensation expense the result of strong execution against our strategic plan. During Q3, the personnel bucket was also impacted by approximately $1 million of incremental health care costs relative to Q2. Outside of personnel expense, we also saw quarterly increases in technology, business and development and advertising expenses, offset by decreases in legal and professional fees, loan and foreclosure costs and other noninterest expense. As we've stated previously, we continue to invest to support growth, but driving positive operating leverage remains a top priority. Here in Q3, our efficiency ratio decreased for the third consecutive quarter coming in below 55%. Based on our latest forecast, we now expect total noninterest expense growth of between 5% and 6% in 2025 off our adjusted 2024 base. On Slide 12, capital ratios increased across the board once again in Q3. Our TCE ratio of 8.18% in Q3 was up 12 basis points versus the prior quarter and 68 basis points versus Q3 of 2024. Our CET1 ratio increased to 10.33%, a 13 basis point increase relative to the prior quarter and a 61 basis point increase versus the same period a year ago. Based on our expectations for growth in 2025 and current market conditions, we continue to expect to manage CET1 within a range of 10% to 10.5% for the year. I'll now hand it over to our Chief Credit Officer, Pat Ahern, to provide additional updates on credit quality. Patrick Ahern: Thanks, Derek. I'll start with an allowance update on Slide 13. Our CECL forward-looking assumptions utilized the Moody's August 2025 baseline forecast. This forecast remains consistent with a resilient economy despite the higher interest rate environment. It contains no additional rate hikes slower but positive GDP growth rates, a cooling labor market, continued elevated levels of inflation and continued monitoring of ongoing market developments and tariff negotiations. In Q3, our ACLL increased by $3 million to $415 million. This increase was primarily driven by an increase in commercial and business lending, which largely stemmed from a combination of loan growth, plus normal movement within risk rating categories. Our ACL ratio decreased to 1.34%, down 1 basis point from the prior quarter. On Slide 14, we continue to review our portfolios closely given ongoing uncertainty in the macro picture, but we maintain a high degree of confidence in our loan portfolios and continue to see solid performance in Q3. Total delinquencies were flat at $52 million in Q3. These delinquency trends are largely in line with the benign trends we've seen for the past several quarters. Total criticized loans ticked higher in Q3 with an increase in substandard accruing partially offset by decreases in the special mention and nonaccrual categories. [Audio Gap] With the current industry guidance. As a reminder, we do not feel that recent trends in this category are an indication of a material shift in the credit profile of the portfolio nor has there been a corresponding risk of loss. In fact, we continue to see resolution with some of our more stressed credits and liquidity remains present in the market in terms of both payoffs and loan re margin. Nonaccrual balances decreased to $106 million in Q3, and down $7 million versus Q2 and down $22 million from Q3 of 2024. Finally, we booked $13 million in net charge-offs during the quarter and $16 million in provision. Our net charge-off ratio held flat at 0.17%. All 3 of these numbers remain squarely in line with the figures we've seen over the past several quarters. In response specifically to tariffs and ongoing trade policy negotiations, we remain in contact with clients as the trade policy discussion continues. I would note that clients have been planning for tariff changes for some time, and we feel comfortable with the positioning of their strategies and the ability to execute when more clarity exists. Going forward, we remain diligent on monitoring other credit stresses in the macro economy to ensure current underwriting reflects the impact of ongoing inflation pressures and shifting labor markets to name just a few economic concerns. In addition, we continue to maintain specific attention to the effects of elevated interest rates on the portfolio, including ongoing interest rate sensitivity analysis bank-wide. We expect any future provision adjustments will continue to reflect changes to risk rates, economic conditions, loan volumes and other indications of credit quality. And finally, given the recent industry news surrounding nondepository financial institutions or NBFIs, I'd like to provide a brief update on where we stand. NBFI balances represent a minimal part of the bank's total loans largely comprised of REITs, mortgage warehouse lines and insurance company lending. These facilities have historically performed very well with relationships that average over 10 years with the bank. With that, I will now pass it back to Andy for closing remarks. Andrew Harmening: Thanks, Pat. In summary, we're really pleased with the results, both in the third quarter and year-to-date over the first 9 months. We feel very well positioned based on the actions we've taken. And believe that the enhanced strength and profitability profile, solid capital position and disciplined approach to growth will serve us well going forward. With that, we'll open it up for questions. Operator: [Operator Instructions] And our first question comes from Timur Braziler with Wells Fargo. Timur Braziler: C&I growth has been and remains pretty impressive here. I guess I'm just wondering what happens when the remaining RMs come off of their noncompete? To what extent should we expect that growth rate to accelerate? Is the expectation of that -- that growth rate accelerates from the area as they come online? Andrew Harmening: Yes. Well, good question. Look, we still have quite a bit of lag, we think, left in this. There are a couple of things that I look at, specific to this initiative I look at what is our production this year? Well, that production is up 12%. What does our pipeline look like? Our pipeline is up 31%. That's on the loan side. So as we head into the end of the year and you start to see some of the nonsolicitations and about half of them are already off. So we're getting up to that point where production, we would expect it to go up just a little bit next year. You may have a little more amortization because your portfolio has grown. What we believe though is we're set for a strong C&I growth above the market in 2026, probably as exciting and something we don't talk about. We thought there would be a lag effect to deposit production on commercial, and it's panning out the way that we thought we're adding some very good new names on the deposit side. But when we pull up our deposit production right now, our deposit production is up 23%. Now that's not seasoned, and we'll roll that into our seasonality and be able to forecast very clearly. But it's a very good omen because the pipeline itself is also up 46%. And I've been asking continually each quarter to our Head of Commercial Banking. When will we see that production start to catch up with the pipeline? And the answer is right now. Timur Braziler: That's good color. And then looking at fees this quarter, obviously very impressive. The guide does imply a pretty large step down in 4Q. Can you just maybe talk through some of the success you saw in 3Q and what the expectation is for decline in the coming quarter? Andrew Harmening: Yes. I mean, the fee income in some categories can be a little lumpy. We did have a onetime benefit through a portfolio asset gain. So that's not likely as repeatable at that level. However, when I look towards 2026 versus the fourth quarter, so it was a little bit higher in the fourth quarter but some of the underlying benefit that we're getting in capital markets, commercial production is up. Rates are trending down and likely to continue. That makes fixed rate conversion more attractive. Pipelines are up. And with fixed rate likely up and more popular in 20 -- or fixed rates likely more popular in 2026 and production trending up. We think that bodes pretty well for the forward view. The linked quarter-over-quarter is not likely to be quite as high for the reasons that I mentioned in Q4. Timur Braziler: Okay. And then just last for me. ROTCE, 14% this quarter continues to grind higher, 15% seems to be in striking distance. I guess how are you thinking about further improvement here in these next couple of quarters with rate cuts? Is there an ability here to continue grinding that higher? Or does that trend maybe take a step back a little bit as you digest these hikes or these cuts? Andrew Harmening: Derek, do you want to take that? Derek Meyer: Yes. Thanks, Tim. Yes. I think the opportunity is there. I think, again, I was just going to come back to the market's response to rates vis-a-vis deposits because obviously, the big, we had a nice uptick in fees we expect the hiring to help that continue, but it will still be choppy. So I see the opportunity on the margin side in the long run still being the bigger the bigger lever. And based on what we saw the first couple of weeks after the rate cut in September and the response to how we rolled out our deposit back book rate cuts and what we're seeing in the market response, the outlook is pretty good. So I think we have the ability to continue to grind that higher. I think it's going to bounce around quarter-to-quarter while we do that. But it feels like everything is on track. Operator: Your next question comes from Daniel Tamayo with Raymond James. Daniel Tamayo: Maybe just to follow up on the deposit side. You talked about the momentum you have there, certainly evident in the numbers. We did see deposit costs overall up a bit in the third quarter. Is there a read-through there on an increase in competition? Or something unusual. I'm just curious what you saw in the third quarter that drove those costs modestly higher? Derek Meyer: Yes. I don't think there's a lot to read you there. Part of our benefit, I know you remember the first part of the year and then the last year, we have seasonality that's in addition to account acquisition that affects the rates. And what happens this quarter is some of that seasonality is in accounts that are at the higher end of pricing. So as those things came back in, they came in at the higher rates relative to the back book and put a little bit of pressure on the overall yields. But I don't think we're uncomfortable with what we netted out altogether. Again, why my early canary in the coal mine read on deposit pricing is what happened when we went and looked at the $11 billion, $12 billion of managed rates we had to reprice right when the Fed cut and where are we able to execute on it and what was the response from the customers, and that went very well. Daniel Tamayo: Great. That's helpful color. Appreciate it. And then maybe for you, Andy, on the hires. You talked a lot about the solicitation agreements that those folks will be coming off. They are coming off and more coming. Just curious in terms of additional incremental hires that the pace around that timing if there's the time of the year, beginning of the year when that tends to happen. Andrew Harmening: Yes, I feel like we're open for quality relationship managers year-round. We've shared with our Head of the Commercial Bank that if there is a team that is well known in a market, that has a following that is interested in joining us, we'll consider that any quarter of the year. We don't have a stated plan to increase off of what we have because we know that what we have will lead to pretty solid growth next year. But we'll be opportunistic in a market where we see disruption in dislocation. When you see the M&A activity in the world, that usually leads to opportunity for those banks that have a good reputation in the space. I'll say, as you start to track talent as you start to do deals, you get a reputation that's positive. And so what I would say to that, Daniel, is we will be opportunistic, we won't have a stated number of new RMs, but should that opportunity arise. And I suspect it will during the year, we'll take advantage of that. Operator: Your next question comes from Scott Siefers with Piper Sandler. Robert Siefers: Let's see. So Andy, I just wanted to follow up a little on the loan growth discussion. I mean like the C&I really it speaks for itself. Maybe just a thought or 2 on where we stand with some of those areas that have been more of headwinds on total growth, like resi real estate rundown the CRE payoffs. I know you mentioned those in particular, will likely stay elevated in coming periods. But any reason that either of those or are there any recent headwinds would either accelerate or decelerate in coming periods? Just trying to get a sense for kind of likely interplay between the momentum in C&I and the things that have held back even stronger net growth. Andrew Harmening: Yes. No, that's a great question. You characterized resi as headwind. It's a headwind in terms of balances. It's a benefit in terms of having that run off and what that leads to, and it's purposeful, as you know. Certainly, if rates go down, they'd have to go down pretty significantly, say, 1% to 2% because of the position that those are in today to have a meaningful adjustment. But we plan for the decrease that we're seeing. So that's within the plan. The part that is maybe -- I'm not sure what adjective, a little bit less predictable but expected is CRE. So on the CRE front, as rates go down, there'll be a little bit of pent-up demand for pay downs, not just with us but across the industry. We're expecting that. So does that happen in 90 days? Does it happen in 120 days? Does it happen over 180 days? It's hard to say. So it could have a short-term impact. However, we've already gone back out to market. And the production on the commercial real estate side has increased versus the prior year. So we're up, for instance, about $100 million above the prior year in construction lending. And those are loans that will help offset some of that in 2026. So you could see a short-term impact if a couple of rate drops and there's an opportunity for some of our customers to refinance in the permanent market. So that would be a short-term thing. It doesn't worry me through 2026 because I think we've positioned ourselves with additional lending to make up for that. But probably on the CRE side, that's one where you might see it a little more quickly if rates become advantageous. Robert Siefers: Got you. Okay. Perfect. And then separately, just sort of following up on that last question about like sort of team and RM lists and stuff like that. I think during the third quarter, you made some comments about perhaps entering some new markets, I think, in particular, you sort of talked out like Oklahoma, Kansas City and Denver. I know you already -- or I believe you already did the team lift in Kansas City. But when you think about adding to the footprint, are you thinking still the bias is strongly organic? Or would M&A become a possibility at some point? Andrew Harmening: Well, I mean, the bias is strongly organic. We feel like we have a proved it out year, and we're 3 quarters into proving it out. We feel like we're stacking up quarters. So we're really pleased with that. but we want to do that through the fourth quarter. So that remains number one. And Scott, what I would say is I've been here 4.5 years. So I'm in year 5. And the focus has been the same. It's been execution and opportunity. And so when we see things -- and it has to be within our wheelhouse. It has to fit what we understand and what we know and what we can execute on. So that won't change. Does that mean it's organic or inorganic? I would leave it with we continue to evaluate opportunities in a way that's very similar to everything we've done over the last 5 years. Operator: Your next question comes from Jon Arfstrom with RBC Capital Markets. Jon Arfstrom: Andy, a question for you on the pipelines. When you talk about the lending pipeline increases, is that from new hires and market share gains? Or is it borrowers expanding and becoming more optimistic. Can you just kind of separate the two? Andrew Harmening: Yes. I don't think it's from the latter. I think you have an economy that's been -- news has been bouncing around and forecast of kind of perhaps a little bit slower GDP. What we've said is whether GDP is 1.5%, 2%, 2.5%, we believe we can grow. And so this is, I think, largely from the approach from the folks that we have brought into the team, these are A players. They are folks that could get a job anywhere in the country at any bank. And so being able to bring that kind of talent in. And then we've surrounded it with tools that we continue to establish to make it easier for them to do business. But I think the lion's share of this is on the pipeline, and I'm really pleased to see the production pulling through now. I mean that to me is what we've been waiting to see. We've seen it a little bit more each quarter. But I would say it's, by and large, it's mostly people. Jon Arfstrom: Okay. Good. Derek, one for you, just a follow-up on the margin. I appreciate Slide 8, but what is the message on the kind of the near-term margin outlook from here if we get a couple more cuts? You're talking about reducing asset sensitivity, but I'm wondering, are you signaling a little bit of a dip in the margin? Or do you think the mix shift is enough to keep the margin stable and moving higher? Derek Meyer: I think we believe that we've been very focused on stability. So generally speaking, our remixing generates a basis point or 2 of margin improvement. That's been true for many forecasts now. You could have a blip in any given quarter based on strange behavior in the market with deposit pricing or movements in the portfolio related to payoffs or nonaccrual reversals or pay downs. But I think over a quarter or 2, it's still mostly stability. And I know you're asking that because frequently, if there's a long lag in repricing deposits, you can get compression. But that's why I keep harkening back to what were the first steps that we were able to take and how did I see customers respond and do we see anything strange in the market that would take us off course and make everyone hesitant. And that hasn't -- I haven't seen a lot of that. It's still early, but it gives us confidence in committing to a pretty stable outlook. Andrew Harmening: Jon, I just -- I agree with everything Derek said, but I'd also add on to that is every time we go from a negative 2% to negative 1% to a 0% household growth, 2.5% to 1% to 1.5%. We intend to continue that trend as we head into next year. It's small incremental movements, but those are operating accounts that we're bringing in. That is the cream of the crop when it comes to how you think about managing your margin and your funding sources. And then we go into next year with, really, frankly, again, more tools than we've had before, whether it's a focus on wealth, the product mix that we're going to launch before year-end or it's the expansion of the vertical and HOA and title, that is significant and those are things we just haven't had. There are more quivers that fit into that. So the household growth as in addition to additional capabilities, that is what allows us to believe that we're able to remain either flat or slightly up as we go through the course of the next several quarters regardless of the multiple interest rate changes. Operator: And your next question comes from Jared Shaw with Barclays. Jared David Shaw: Tying into the margin, I guess it was this time last year that we got a little bit of an update on thoughts around beta on the deposits through the cycle. If we get the 2 cuts or if we get 2 more cuts this quarter, where do you see with the changes in the deposit base, where do you see that sort of cumulative beta moving from there? Derek Meyer: Yes. I think the range I'm thinking about now is about 55% to 58%, I think that's a little bit better potential. I think last time, it was more like 55%, 56% to the cycle. So again, things look good. And I also think we get more confidence as we get closer to the additional verticals rolling out because it gives us more options on how to manage levers and handle the higher-priced accounts. Jared David Shaw: Okay. And then on the expense, especially on -- specifically on the personnel expense, you called out a couple of things. As we look at fourth quarter, should we assume that the incentive comp stays in the numbers going forward? Or is that more of a onetime catch-up? How should we think of that? Derek Meyer: Yes. So the deferred comp is largely tied to market value. So if -- so that -- it should stay where it is, unless the market goes up a lot from here were down from here. So set that aside. We tie that largely to our forecast. So as long as if we are consistent with our guidance, we would expect that to stay at similar levels, not step up from here. but we're not going to complain if we blow through our guidance, and we have to share some of the comp for it. Andrew Harmening: And just to piggyback on that, too, Jared, you didn't ask necessarily about what we're expecting next year, but that usually is the next question. And we're planning for '26 expense increase to be -- the increase to be less than 25%. We've been opportunistic this year when we see opportunities to drive revenue and drive return and improve operating leverage, we've taken it. But those are manageable and we've already planned for going into if we don't have the exact same scenario. Jared David Shaw: Okay. All right. And then, Andy, I think in your comments, you mentioned something about a new deposit system or a system upgrade that can help drive maybe some incremental growth. Any details around that? And is that fully baked into the expense structure? Andrew Harmening: It is baked into the expense structure. The capability, really, it's a product enhancement first, on the wealth side that we expect to launch by the end of November that is substantial in the value proposition that we've had, which we've largely not built out before. So we focused on the consumer, growing that, mass affluent, growing that, commercial growing that, and it kind of meets at wealth management. So we believe that's one of the opportunities. The HOA title is a business where we have a very good team that's ready to go. And they have helped us with what capabilities their customers require in detail. And so that will be an ongoing road map. We expect to launch something either by the end of the year, if not the first part of January but then we think we'll have additional pieces in second quarter and third quarter. That will be a priority for us. It won't raise the cost. We'll do that at the expense of something else that is not such a large opportunity for the bank. Operator: And ladies and gentlemen, there are no further questions at this time. So I'll hand the floor back to Andy Harmening for closing remarks. Andrew Harmening: Well, look, we leave here pleased with the third quarter. We expect to land the plane in the fourth quarter and are optimistic about the fundamentals going into 2026. And as always, we appreciate your interest in Associated Bank. Operator: Thank you. And with that, we conclude today's call. All parties may disconnect. Have a good day.
Operator: Hello, and welcome to the Globe Life Inc. Third Quarter Earnings Release Call. My name is Jeannie, and I will be your coordinator for today's event. Please note, this call is being recorded. [Operator Instructions] I will now hand you over to your host, Stephen Mota, Senior Director of Investor Relations, to begin today's conference. Thank you. Stephen Mota: Thank you. Good morning, everyone. Joining the call today are Frank Svoboda and Matt Darden, our co-Chief Executive Officers; Tom Kalmbach, our Chief Financial Officer; Mike Majors, our Chief Strategy Officer; and Brian Mitchell, our General Counsel. Some of our comments or answers to your questions may contain forward-looking statements that are provided for general guidance purposes only. Accordingly, please refer to our earnings release 2024 10-K and any subsequent Forms 10-Q on file with the SEC. Some of our comments may also contain non-GAAP measures. Please see our earnings release and website for discussion of these terms and reconciliations to GAAP measures. I will now turn the call over to Frank. Frank Svoboda: Thank you, Stephen, and good morning, everyone. In the third quarter, net income was $388 million or $4.73 per share, compared to $303 million or $3.44 per share a year ago. Net operating income for the quarter was $394 million or $4.81 per share, an increase of 38% over the $3.49 per share from a year ago. On a GAAP reported basis, return on equity through September 30 is 21.9% and book value per share of $69.52. Excluding Accumulated Other Comprehensive Income, or AOCI, return on equity at 16.6% and book value per share as of September 30 is $93.63, up 12% from a year ago. Before I discuss the third quarter insurance operations, I would like to revisit the nature of the market we serve. As most of you know, we serve the lower middle to middle income market. This market is vastly underserved and has significant growth potential, providing us with a distinct competitive advantage. This advantage is protected due not only to our ability to efficiently reach this market through both exclusive and direct-to-consumer distribution channels, but also due to the tremendous amount of data and experience we possess as we have been in the same market for over 60 years with essentially the same products. The basic protection life and health insurance products we offer are specifically designed to help provide financial security to consumers in this market. We continue to be proud to serve this market and are grateful for the opportunity to help working families protect their financial future. In our insurance operations, total premium revenue in the third quarter grew 5% over the year ago quarter. For the full year 2025, we expect total premium revenue to grow approximately 5% as well, which is slightly higher than in 2024 and consistent with our 10-year average growth rate. Life premium revenue for the third quarter increased 3% from the year ago quarter to $844 million. Life underwriting margin was $482 million, up 24% from a year ago, driven by premium growth plus remeasurement gains due to good mortality experience, including the updating of both mortality and lapse assumptions. For the full year, we expect life premium revenue to grow between 3% and 3.5%. As a percentage of premium, we anticipate life underwriting margin to be between 44% and 46%. In health insurance, premium revenue grew 9% in the quarter to $387 million and health underwriting margin was up 25% to $108 million due primarily to premium growth and remeasurement gains. For the year, we expect health premium revenue to grow in the range of 8% to 9% and anticipate health underwriting margin as a percent of premium to be between 25% and 27%. Administrative expenses were $90 million for the quarter, an increase of 1% over the third quarter of 2024. As a percent of premium, administrative expenses were 7.3%. For the year, we expect administrative expenses to be approximately 7.3% of premium, the same as in 2024. I will now turn the call over to Matt for his comments on the third quarter marketing operations. James Darden: Thank you, Frank. I'd like to start with a few comments about our exclusive agency force. We currently have over 17,500 exclusive agents that sell only for us. These agents are the strength to grow Globe Life. While we frequently see short-term agent count fluctuations in a stair-step pattern, this agency force has consistently generated significant long-term growth. In fact, the average agent count has nearly doubled over the past 10 years. The ability to maintain and grow an exclusive agency force is a core competency of our company. As a reminder, we typically recruit individuals who haven't previously sold insurance and are looking for a better opportunity. This provides us with an enormous pool of potential recruits that provides a tremendous growth opportunity going forward. As we have mentioned in the past, there is a very close correlation between sales growth and agent count growth over the long term. And we are confident that our agent force will continue to grow, and our goal is to surpass 28,000 exclusive agents and $1.4 billion in annual sales by 2030. Now I'll discuss each distribution channel. First, let's start with our exclusive agencies, American Income, Liberty National and Family Heritage. At American Income, the life premiums were up 5% over the year ago quarter to $451 million. And the life underwriting margin was up 18% to $261 million. In the third quarter of 2025, net life sales were $97 million, flat compared to a year ago. But as a reminder, we had a difficult comparable this quarter as American Income had a 19% increase in life sales in the year ago quarter. The average producing agent count for the third quarter was 12,230 up 2% from a year ago. We are currently focused on initiatives to enhance our recruiting as growth in agent count will lead to future sales growth. At Liberty National, the life premiums were up 5% over the year ago quarter to $98 million, and the life underwriting margin was up 57% to $70 million. Net life sales were $24 million, flat from the year ago quarter, and net health sales were $8 million, up 4% from the year ago quarter. Average producing agent count for the third quarter was 3,847, up 1% from a year ago. We have a few initiatives underway that we expect to have a near-term positive impact. We have developed a new worksite enrollment platform designed to improve agent productivity and training. In addition, we are in the process of rolling out a new recruiting CRM, which will further enable the use of data and analytics to enhance the recruiting process. I continue to be optimistic about the future growth of this agency. At Family Heritage, the health premiums increased 10% over the year ago quarter to $119 million, and the health underwriting margin increased 49% to $51 million. Net health sales were up 13% to $33 million, and this is due to an increase in agent count and productivity. The average producing agent count for the third quarter was 1,553, up 9% from a year ago. And this is 5 consecutive quarters of strong agent count growth for family heritage. The continued focus of the past few years on recruiting and growing agency middle management has produced significant momentum and results. Now let's move on to our direct-to-consumer channel. In our DTC division of Globe Life, the life premiums were down 1% over the year ago quarter to $245 million while the life underwriting margin increased 29% to $114 million. While the life premiums were down slightly this quarter, net life sales were $27 million, up 13% from the year ago quarter. I'm very pleased to see this continued sales turnaround from the declining trend of recent years. As we mentioned on our last call, we have implemented new technology to enhance our underwriting process. This technology is helping improve the conversion of customer inquiries into sales. Now as a reminder, the value of our direct-to-consumer business is not only those sales directly attributable to this channel, but the significant support that is provided to our agency business through brand impressions and sales leads. We expect this division to generate approximately 1 million leads during 2025, which will be provided to our 3 exclusive agencies. Improved conversion of our direct-to-consumer leads across the enterprise allows us to increase our marketing spend and increase direct-to-consumer lead volume and marketing campaigns, which leads to sales growth in both our DTC and agency channels. United American is our General Agency division, and here, the health premiums increased 14% over the year ago quarter to $170 million, driven by the sales growth and Medicare supplement rate increases we have discussed previously. Health underwriting margin was $16 million, up $2 million from the year ago quarter. Strong activity across the entire agency resulted in net health sales of $25 million, an increase of approximately $9 million over the year ago quarter. Now I'd like to discuss projections. And based on the trends we are seeing, we expect the average producing agent count trends for the full year 2025 to be as follows: at American Income, an increase of around 2%, at Liberty National, an increase of around 4% and Family Heritage, an increase of around 8%. Net life sales for the full year 2025 are expected to be as follows: American Income, an increase of around 3%, Liberty National, an increase of around 1% and direct-to-consumer, an increase of around 4%. Net health sales for the full year 2025 are expected to be as follows: Liberty National, flat; Family Heritage, an increase of around 13%, United American, an increase of around 50%. Now let's move on to projections for 2026. And at the midpoint of our guidance, we expect sales growth for the full year to be as follows. For net life sales, we expect American Income to have mid-single-digit growth, Liberty National high single-digit growth; direct-to-consumer, low single-digit growth. For net health sales, we expect Liberty National to have high single-digit growth; Family Heritage, low double-digit growth; and United American mid-single-digit growth. I'll now turn the call back to Frank. Frank Svoboda: Thanks, Matt. We will now turn to investment operations. Excess investment income, which we define as net investment income less only required interest was $37 million, down approximately $3 million from the year ago quarter. Net investment income was $286 million in the quarter, slightly above last year's third quarter. The low growth of net investment income is consistent with the low growth in average invested assets. Required interest is up approximately 1% over the year ago quarter, relatively consistent with the growth in average policy liabilities. As a reminder, the growth in average invested assets and average policy liabilities is lower than normal, primarily due to the impact of the annuity reinsurance transaction in the fourth quarter of last year, which involved approximately $460 million of annuity reserves being transferred to a third party along with supporting invested assets. Net investment income was also negatively impacted in the current quarter by lower average earned yield as compared to a year ago. For the full year 2025, we expect net investment income to be flat and required interest to grow around 2%, resulting in a decline in excess investment income of around 10% to 15% for the year. The growth in average invested assets for the full year is lower than normal due to the impact of the previously mentioned annuity reinsurance transaction as well as higher dividend distributions from the insurance companies to the parent. Now regarding our investment yield. In the third quarter, we invested $279 million in fixed maturities, primarily in the municipal and industrial sectors. These investments were at an average yield of 6.33%, an average rating of A+ and an average life of 29 years. We also invested approximately $86 million in commercial mortgage loans and limited partnerships with debt-like characteristics and an average expected cash return of approximately 9%. None of our direct investments in commercial mortgage loans involve office properties. These non-fixed maturity investments are expected to produce additional cash yield over our fixed maturity investments while still being in line with our conservative investment philosophy. For the entire fixed maturity portfolio, the third quarter yield was 5.26%, up 1 basis point from the third quarter of 2024. As of September 30, the fixed maturity portfolio yield was 5.28%. Including the investment income from our commercial mortgage loans, limited partnerships and corporate owned life insurance investments, the third quarter earned yield was 5.46%. While we do own some floating rate investments, they are well matched with floating rate liabilities on the balance sheet. Now regarding the investment portfolio. Invested assets are $21.5 billion, including $18.9 billion of fixed maturities and amortized cost. Of the fixed maturities, $18.5 billion are investment grade with an average rating of A-. Overall, the total fixed maturity portfolio is rated A-, same as a year ago. Our fixed maturity investment portfolio has a net unrealized loss position of $1.1 billion due to the current market rates being higher than the book yield on our holdings. As we have historically noted, we are not concerned by the unrealized loss position and it is mostly interest rate driven internally relates entirely to bonds with maturities that extend beyond 10 years. We have the intent and, more importantly, the ability to hold our investments to maturity. Bonds rated BBB comprised 43% of the fixed maturity portfolio compared to 46% from the year ago quarter. This percentage is at its lowest level since 2003. As we have discussed on prior calls, we believe the BBB securities we acquire generally provide the best risk-adjusted, capital-adjusted returns due in part to our ability to hold securities to maturity regardless of fluctuations in interest rates or equity markets. While the percent of our invested assets comprised of BBB bonds might be a little higher than some of our peers, remember that we have little or no exposure to other high-risk assets such as derivatives, equities, residential mortgages, CLOs and other asset-backed securities. Below investment-grade bonds remain at historical lows at $455 million compared to $556 million a year ago. The percentage of below investment grade bonds to total fixed maturities is just 2.4%, are below investment-grade bonds as a percent of equity, excluding AOCI, are at their lowest level in over 30 years. While there is uncertainty as to where the U.S. economy is headed, we are well positioned to withstand a significant economic downturn due to holding historically low percentages of invested assets in BBB and below investment-grade bonds. In addition, due to the long duration of our fixed policy liabilities, we invest in long-dated assets. As such, a critical and foundational part of our investment philosophy is to invest in entities that can survive through multiple economic cycles. In addition, we have very strong underwriting profits and long-dated liabilities so we will not be forced to sell bonds in order to pay claims. With respect to our anticipated investment acquisitions for the full year 2025, at the midpoint of our full year guidance, we assume investment of approximately $800 million to $850 million in fixed maturities at an average yield of around 6.4%. And approximately $300 million to $400 million in commercial mortgage loans and limited partnership investments with debt-like characteristics and an average expected cash return of 7% to 9%. Also at the midpoint of our guidance, we expect the average yield earned on the fixed maturity portfolio to be around 5.27% for the full year 2025 and approximately 5.29% for the full year 2026. With respect to our commercial loans, limited partnerships and corporate-owned life insurance, we anticipate the yield impacting net investment income to be in the range of 7% to 8% for 2025 and 2026. In total, including these additional investments, we anticipate the blended earned yield to be approximately 5.45% in 2025 and in the range of 5.4% to 5.5% in 2026. Now I'll turn the call over to Tom for his comments on capital and liquidity. Thomas Gallagher: Thanks, Frank. First, I'll spend a few minutes discussing our available liquidity, share repurchase program and capital position. The parent began and ended the quarter with liquid assets of approximately $105 million. We anticipate concluding the year with liquid assets in the range of $50 million to $60 million. In the third quarter, the company repurchased approximately 840,000 shares of Globe Life Inc. common stock for a total cost of approximately $113 million at an average share price of $134.17. Including shareholder dividend payments of $22 million for the quarter, the company returned approximately $135 million to shareholders during the third quarter and approximately $580 million year-to-date. We expect share repurchases will be approximately $170 million and anticipate distributing approximately $20 million to our shareholders in the form of dividend payments in the fourth quarter. For the fourth quarter, share repurchases are higher than previously anticipated as we recently received approval for an extraordinary dividend from one of our subsidiaries, which will be -- which we anticipate will be available to support additional share repurchases by the parent. At the midpoint of our guidance, we anticipate share repurchases will total $685 million in 2025. In addition, we intend to distribute approximately $85 million to our shareholders in the form of dividends. We will continue to use our cash as efficiently as possible. We still believe that share repurchases provide the best return of yield to our shareholders over other available alternatives. Thus, we anticipate share repurchases will continue to be the primary use of the parent's excess cash flow after payment of shareholder dividends. The parent company's excess cash flow, as we define it, results primarily from the dividends received by the parent from its subsidiaries, less the interest paid on debt and is available to return to its shareholders in the form of dividends and through share repurchases. We continue to invest in our growth through investments in sales, technology, and the insurance operations. It should be noted that the cash received by the parent company from our insurance operations is after our subsidiaries have made substantial investments during the year to issue new insurance policies, implement new technologies, enhance operational capabilities, and modernize existing information technology as well as to acquire new long-duration assets to fund their future cash needs. Financial strength is paramount to our company's success, and we believe the $500 million contingent capital funding arrangement established early in this quarter, will add to our already strong capital generation capabilities that exist within our insurance companies. Now with regard to capital levels at our insurance subsidiaries. Our goal is to maintain capital within our insurance operations at levels necessary to support our current ratings. To do that, Globe Life targets a consolidated company action level RBC ratio in the range of 300% to 320%. Although the target range is lower than many of our peers, it is appropriate given the stable premium revenue from the large number of in-force policies, the nature of our protection products with benefits that are not sensitive to interest rates or equity markets. Our conservative investment portfolio and strong consistent underwriting margins, which result in consistent statutory earnings at our insurance companies. As we do every quarter, we performed stress tests on our investment portfolio under multiple economic scenarios, anticipating various levels of downgrades and defaults. If all estimated losses under our stress tests were to occur before year-end, which we believe is highly unlikely, we have concluded that we have sufficient capital resources exist within our subsidiaries and the parent to maintain our target RBC range and our share repurchases as planned. For 2025, we intend to maintain our consolidated RBC within the target range of 300% to 320%. As previously discussed, we continue to progress towards establishing a Bermuda reinsurance affiliate for the purpose of reinsuring a portion of new business and in-force life insurance policies issued by Globe Life affiliates. We currently estimate parent excess cash flow will increase from incremental earnings from our U.S. and Bermuda subsidiaries over time as the reinsurance block grows. This additional excess cash flow will enhance the financial strength of the company and provide additional flexibility, allowing the company to meet various capital and liquidity needs of the parent. We continue to make progress on the required regulatory filings and subject to approvals, we anticipate executing the first reinsurance transaction by the end of 2025, and we will provide an additional update on our next call. Now with respect to policy obligations for the current quarter. Each year, GAAP accounting requires us to review and generally update actuarial assumptions for mortality, morbidity and lapses. We have chosen to review and update as necessary both our life and health reserve assumptions in the third quarter each year. The remeasurement exhibit included in our supplemental financial information available on our website includes the impact of these assumption changes as well as experience related remeasurement gains and losses by distribution channel. When assumption changes are made, GAAP accounting standards require a cumulative catch-up adjustment going back to January 1, 2021, the transition date for LDTI. This cumulative catch-up is the assumption related remeasurement gain or loss. An assumption remeasurement gain lowers the reserve balances and indicates an improved outlook as less premium is needed to fund reserves to meet future policy obligations. The opposite is true if there is an assumption to remeasurement loss. For the quarter, the overall impact of both life and health assumption changes reduced policy obligations by $134 million, with life obligations reduced by $131 million and health obligations reduced by approximately $3 million, indicating an anticipation of an improved outlook for future policy obligations. To put this into perspective, total GAAP life and health reserves on our balance sheet are approximately $19 billion, so the adjustment to reserves is less than 1%. To better understand the performance of the business, we think it is beneficial to look at normalized underwriting margins, which exclude the impact of assumption changes and provide an improved basis for comparison of quarterly results. For the third quarter, normalized life underwriting margin as a percent of premium was 41.5% compared with 40.4% for the year ago quarter, which is a notable improvement and reflects recent favorable mortality experience. Normalized health margin as a percent of premium was 27.2% compared with 27.5% for the year ago quarter. For the Health segment, as expected, health margins as a percent of premium continued to increase from the first half of the year. This is largely driven by margin increases from the Medicare supplement business as 2025 premium rate changes became fully effective. So now with respect to guidance for 2025. For the full year 2025, we estimate net operating earnings per diluted share will be in the range of $14.40 to $14.60, representing 17% growth at the midpoint of our range and 11% growth when excluding the impact from assumption updates in both '24 and '25. The midpoint is higher than our previous guidance due to the anticipation of continued favorable mortality experience. Finally, with respect to 2026 guidance. For the full year 2026, we estimate net operating earnings per diluted share will be in the range of $14.60 to $15.30 representing 3% growth at the midpoint of the range. The growth rate is lower than historical averages given the significant impact of the assumption updates in 2025. At the midpoint of our guidance, we anticipate total premium revenue growth of 6% to 7%, with life premium revenue growth growing 4% to 5% and health premium revenue growing 9% to 11%. We anticipate underwriting margins as a percent of premium to be in the range of 40% to 43% for life and 24% to 27% for health. We anticipate net investment income growth will be approximately 3%. Although 2025 statutory results are not final for the year, we anticipate parent excess cash flows available to return to shareholders through both dividends and share repurchases in 2026 will be approximately $600 million to $700 million. This is greater than the amount available in 2025, excluding the impact of extraordinary dividends. On the next call, I'll provide an update as we get updated statutory results for 2025 and after we finalized the initial reinsurance transactions for the new Bermuda subsidiary. Those are my comments, and now I'll turn it back to Matt. James Darden: Thank you, Tom. Those are our comments, and we will now open the call up for questions. Operator: [Operator Instructions] We will take our first call from Jack Matten of BMO Capital Markets. Francis Matten: First question was just on the life sales growth of the exclusive agencies. I'm just wondering, is there anything you're seeing or hearing from customers that's driving more muted sales growth in recent quarters? Or is the challenge really around agent productivity given that you currently have a higher mix of newer agents? And I guess looking forward, what gives you confidence that life sales growth can reaccelerate in the coming quarters? James Darden: Yes. Thanks, Jack, for the question. It's not anything we're hearing from a consumer perspective as we talk with our agency owners. We're actually seeing an improvement in the premium on a per sale basis. And so we're not seeing any demand weakening from a consumer perspective. It really does get back to that agent count growth. And what I'd point to is usually followed years that follow significant growth years, we do temper the growth a little bit as we get those new agents onboarded. Start producing, and then they start moving into the middle management ranks. And then the middle managers out there in the field are responsible for a lot of the recruiting, training and onboarding. And so as I've mentioned before, one of the things we look at is just our whole recruiting pipeline. What we're talking about on the call on our agent count is those agents that are actually up and producing for us. But we look at what the agents are in the pipeline coming in as they get onboarded and licensed and trained, et cetera. And so our hires for AIL are actually up this quarter by 17%. And so this is individuals that have started into the process. They're in the process of taking exams, getting their licenses and then they move forward into training and selling their first policy. And so it's a good leading indicator for us. And so some of those trends are what we're seeing that gives us the confidence that 2026 will have a higher agent count growth, which bodes well for sales growth for 2026 as well as we've looked at some of our incentive programs and just getting our middle management focused on growing the agent count by recruiting activities and onboarding also plays into our consideration for our sales growth guide. Francis Matten: And my follow-up on excess cash flow. I think you said that the guidance for next year is $600 million to $700 million. I mean, does that include any assumption or any incorporation of a benefit from the Bermuda entity? And I guess [indiscernible] you called out, I think, an extraordinary dividend this quarter. Any other updates you can or color you can provide on that? I think it looks like you sort of the buyback guide for the full year by $50 million or $60 million. So just make sure I have the numbers right there. Thomas Gallagher: Yes. Thanks, Jack. The $600 million to $700 million does not include any benefit from the Bermuda affiliate. We -- it takes at least 2 accounting periods. The rules require 2 accounting periods for reciprocal jurisdictions. So we think the earliest time at this point would be 2027. And as I mentioned on prior calls, we'll try -- we'll work with and try to get reciprocal jurisdiction earlier, but it's just really not up to us. It's really up to the regulators to accept reciprocal jurisdiction status. Operator: Our next question comes from the line of Andrew Kligerman of TD Cowen. Andrew Kligerman: First question, just kind of following up on Jack's about the sales growth outlook and the recruiting outlook. You mentioned, Matt, on the -- in the comments earlier that you've got a newer worksite enrollment platform, a new recruiting CRM with different kinds of data and analytics, Those 2 things, they sound very interesting. Could you elaborate a little bit more on that and how they work and why they're different and why they'll have an impact? James Darden: Sure. So Liberty, as you may recall, about 75% of our business is marketed at work sites for those smaller employers. And we've rolled out -- or we're in the process of rolling out technology that's a new enrollment platform, and it really takes some of the lessons that we've learned in our processes on our individual sales and it really where an agent sits down with the client and really goes through and you've heard us talk about a needs-based analysis. And so on the worksite side, put some more tools in the hands of our agents where they sit down with the customer, go through their needs and help customize a package appropriate for them of the various different coverages and types of policies. And as I said, we're early on and rolling that out, but on the first few agencies that we've rolled that out, we've seen significant increase in premium production on a per worksite basis as well as just a per sale basis. And it exceeds 20-plus percent on the increase there. And so we anticipate as that gets rolled out across the entire agency, which will take into the beginning of next year, that's really going to be a tailwind for our worksite sales growth there. And then the recruiting CRM system, right now, a lot of our agencies are tracking that manually with spreadsheets and those type of things. And so just like a sales CRM system, the recruiting CRM system is going to have all of that data in one place to be able to for our agency owners and those middle managers to be able to have the data and the analytics they need to really understand their recruiting pipeline, much more on a real-time basis so they can see what's happening during the week as people start listening to our opportunity, come back for the different interviews, get through the various phases of taking the test, getting licensed and ultimately producing. And so what we've seen with some of our agencies that utilize more of a system that they've developed on their own, it's definitely an improvement for them to be able to manage all of that activity. And so we're designing a system that will be enterprise-wide, roll that out to the organization. And it will just give us a more real-time view into the recruiting pipeline and being able to manage the various conversion points that happen throughout the life cycle of a new person coming into the organization and getting up and producing. Andrew Kligerman: Sounds very impactful. And then my follow-up is still on the sales area, direct-to-consumer. And I think the stats you mentioned on the call were that while sales in direct-to-consumer were up 13%, premiums were down 1%. I'm kind of curious maybe a mesh of a question here. I'm kind of curious as to the policy retention ratio in direct-to-consumer? And then secondly, you mentioned low single-digit sales in direct-to-consumer next year. Is that just because you're going to -- you're having a really good second half of 2025 that you don't want to get too aggressive? James Darden: Yes. Let me address your first part of that question. Related to -- if you think about it, we've got a big in-force block. And so we've been discussing sales declines for quite some time over the last couple of years. And so those sales declines are hitting that our premium growth rate. And so we've only had 2 quarters now of positive sales growth, and it's been very strong and we anticipate that continuing. So the premium earnings are going to turn around as we continue to have positive sales growth. But that's just kind of the dynamic you're looking at from this quarter's perspective. And so we're very pleased. As we mentioned, this is technology and processes we've been working on for quite some time. They're coming to market here in Q2 and Q3, we're seeing the results. And so we're -- we've got very strong results here. And so we're just kind of cautiously optimistic is we're, at this point, before we see what fourth quarter looks like as we think about next year. And so I'd just say that's a good estimate right now based on what we're seeing early days. We'll certainly modify that as we have Q4 experience. But obviously, we've got a pretty good lift here in the last half of this year. And so we just want to be a little bit cautious about what we think at this early stage for 2026. Frank Svoboda: Andrew, one thing I'd just like to tack on to that is really the decline in the premium growth rate here that we're seeing in 2025 really has more to do with those -- the declining sales that we've been seeing here in the recent periods. Really, if you look at the lapse rates for DTC overall, they're pretty consistent with our long-term averages. We've actually seen very good lapse rates, favorable lapse rates, if you will, in our renewal. Once the policies have been on the books here for several years, really seeing with our renewal premium, seeing a little bit higher in some of the first year here the last few quarters. But again, it's really stabilized when you look at it overall, it's pretty consistent with our long-term rates. And then I think with -- as we're getting a little bit of that ability, as Matt was talking about, reinvesting some of those dollars and improving those sales, we really do anticipate some growth in premium -- overall premium income in 2026. And then assuming that, that continues on with growth in that low to mid-single digits on the sales side, then that will help to bring up the premium growth then as well. Operator: Our next call comes from Jimmy Bhullar of JPMorgan. Jamminder Bhullar: I had a couple of questions. Maybe first just on your 2025 guidance. If we look at what that's implying for EPS in 4Q, it seems like it's $3.25 to $3.45. So that's a lower number than you've had in the most recent quarter even at the high end, if you take out the remeasurement gain. So wondering if you're seeing anything in the business that suggests you to be conservative? Or just any color on sort of the guidance -- the implied guidance for 4Q? Thomas Kalmbach: Thanks, Jimmy, for the question. Yes, the $0.05 raise reflects the favorable third quarter results and anticipated fourth quarter results. One thing I'd say is third quarter, we benefited a little bit from timing on a couple of items. So for instance, we had a research and development tax credit that came through in the third quarter that we had planned for the full year, but just the timing was favorable to us. The other thing is that really mortality experience was really very favorable in the third quarter. And you kind of can see that from -- we expected remeasurement gains, but the remeasurement gain for life, excluding assumption updates was $18 million. So that's indicative of a pretty favorable quarter. And we -- to us, it's a fluctuation at this point. We'd like to see that -- we'd love to see that emerge in 2024, but it's not really -- sorry, in the fourth quarter, but it's not really in our guidance for the fourth quarter. And that would -- if it does come through, that would put us, I think, at the higher end of our guidance range. The other thing is health experience was very favorable as well in the third quarter that we really wouldn't expect that to continue in the fourth quarter either for both life and health. Fourth quarter claims tend to tick up a little bit just from a seasonal perspective, where we're starting to get in the flu season for life and then at the end of the year, people start visiting the doctor a little bit more and try to get some of those medical visits in. So we do see a little bit of an uptick oftentimes in the fourth quarter. So those are some of the things impacting kind of our fourth quarter EPS expectations, but I'm glad to see that we also raised the guidance by $0.05 in the midpoint. Jamminder Bhullar: Okay. And then secondly, could you comment on what you're expecting in terms of claims trends and sales in the health business. There's obviously been a lot of concern about margin compression at some of the major medical companies in various products. Your margins had gone down too, but they seem to be recovering. Should we assume that, that continues into 2026 as you implement price hikes? Or -- and then similarly, with a lot of companies indicating that they're going to raise prices on Med Advantage plans do you -- are you seeing that happen? And how is that affecting demand for your Med products? Thomas Kalmbach: I'll start first, Jimmy, on the health trends, we're really pleased with the third quarter with Medicare Supplement and the group retiree health trends. They are favorable to our expectations, which is great. And we've really seen the medical trend -- the claim cost trends really flattened, which is actually a nice sign for us. So we actually have built in the experience that we saw late in the fourth quarter of -- third and fourth quarter of 2024 as well as the experience we've seen in the first half of 2025 into our rate increase requests to regulators, and we really believe that those rate increases will bring us back to target profitability. Again, those get implemented throughout 2026. So in the first quarter, I think it's going to look a little bit more like 2025, but in the second, third and fourth quarter of '26, I think we'd see an increase in margins just because of the rate increases becoming effective then. James Darden: And then, Tom, it's fair to say that recent experiences, we're just kind of seeing trend moderate a little bit. We had some acceleration of that in Q3 and Q4 of last year. Thomas Gallagher: Exactly. Certainly, third quarter trend moderated. James Darden: And then, Jimmy, to answer your second part of your question, yes, we're seeing that related to the Med Advantage, which we don't write. As you know, the market that is providing a tailwind as price increases happen or carriers pull out of the market. It's definitely been a tailwind for us. It's hard to say now what 2026 will look like. That's when we kind of have a moderate growth, considering the significant sales growth that we've had for 2025. And so really, we need to see what happens here over the next quarter or 2. But right now, I do believe it will be a tailwind for us to continue to grow those sales in a profitable way, as Tom mentioned, related to our price actions. But there's a lot of dynamics, as you know, going on in that market. And so things change quite a bit. But currently, I think we're getting some benefit from a lot of that disruption that's going on in the Medicare Advantage space. Operator: Our next call comes from John Barnidge of Piper Sandler. John Barnidge: So my question is around health. The performance and production in the third quarter wasn't really that far off from the level you produced in the fourth quarter of a year ago. And I know there's some seasonality that would typically occur on the fourth quarter, and I understand you updated your sales assumptions. But this is more of a broader question. What are you seeing in the distribution environment, and we all have parents and the baby boomer generation is aging? Is there a portion of this cohort that more and more is in need of your products that will be secular in nature and more extended beyond just what we've seen in recent years? James Darden: Well, like I said, I just kind of go back to the conversation around where to the extent that there is -- Medicare Advantage has been growing for quite some time with just the appeal from a -- I think from a pricing perspective, some of those were offered at very low premiums or if not virtually free. And so I think now with some of what's happening on the profitability side, you see carriers increasing the rates. And so we kind of have a different customer in the Medicare supplement space where people are willing to pay for choice and willing to pay to keep their providers or be able to have the freedom of choice to go to who they want to. And so I think that will always be there for a segment. There's, of course, a segment of the market that was kind of on the bubble that may move back and forth depending on when they sign up of what's appealing at that point. But I think there will always be a place for Medicare Advantage from our product portfolio perspective. Frank Svoboda: Medicare Supplement... James Darden: Medicare Supplement, excuse me. I think there will always be that opportunity for us. It just -- as we've seen over a long period of time, we've been in this business forever. It ebbs and flows just a little bit with what's going on in the overall broader market. So we feel good from a long-term perspective, but just recognize there's going to be short-term disruption as we have pricing and competitive pressures in that marketplace. Thomas Gallagher: I do think there's some demographic characteristics of growing retirement a number of people that are in retirement and those that are retiring over the next few years is also a favorable dynamic that will support continued product sales. John Barnidge: My follow-up question. Shortly after the last call, the DOJ and SEC investigations have concluded. Is the EEOC investigation still ongoing? And what's your visibility into that -- taking care of itself? James Darden: As a reminder, the EEOC findings are not binding. The litigation has to actually be initiated, and there is no pending litigation. So don't really have anything to update from that perspective. It's just -- it's kind of status quo. Frank Svoboda: Yes. And John, I would just remind you that the courts have -- with respect to just the whole independent contractor or employee issue, the courts have addressed this issue in the past several times with regard to AIL sales agents and have always found that they have been appropriately classified. So if there are any lawsuits, we would vigorously defend those. Operator: Our next call comes from Joel Hurwitz of Dowling & Partners. Joel Hurwitz: Tom, on excess cash flow generation, the $600 million to $700 million is above the $500 million to $600 million run rate you mentioned a few quarters ago. I guess, what's the driver of the increase there? And is that level sustainable going forward before factoring in Bermuda benefits? Thomas Kalmbach: Yes. Thanks. I really do believe that it is sustainable. I think it's indicative of the improving trends that we've seen in mortality. To the extent that health margins continue to improve, that will be a tailwind for future years. And I also I think the investment income environment or the investment yield environment on '25 was more favorable than 2024. So as long as that stays consistent, I think we'll also benefit from higher yields going forward. Frank Svoboda: Yes. Then I would just remind you that the $500 million to $600 million range that I think Tom has talked about on prior calls was the amounts available for shareholder repurchase or share repurchases after dividends. And when Tom is talking about the $600 million to $700 million, that is the total excess cash flow. And so if you assume around $80 million, $85 million of dividends, shareholder dividends being paid out of that, that brings you back into the mid-$500 million consistent with what Tom had talked about before. Joel Hurwitz: And then just a follow-up. In terms of the '26 guidance and the margin guidance for life, does that factor in any expectation for remeasurement gains? Frank Svoboda: Yes, thanks. The -- with mortality, we just updated assumptions. As I mentioned, third quarter remeasurement gains, excluding the assumption update impact were very favorable as well, right? So we do expect that the -- our assumptions that our mortality is performing. We're getting mortality results, which are better than our assumptions, and we anticipate that mortality experience to continue into 2026, which we would then expect continued remeasurement gains relative to the assumptions that we just set. And so I think the important thing, I think, to pay attention to is what are the obligation ratios that are emerging. And are those obligation ratios staying similar to what we've seen in the third quarter. And I think that those -- that really is kind of the more -- the thing that I pay attention to more. I think as we see remeasurement gains, if we see continued positive remeasurement gains I think that's a leading indicator that we might have an assumption change. And so I think that's kind of what I would take from looking at remeasurement gains themselves. But the absolute number that I'd pay attention to would be policy obligations and I'd normalize those policy obligations for assumption updates. Operator: Our next call comes from Wes Carmichael of Autonomous Research. Wesley Carmichael: Just wanted to circle back to Bermuda real quick. Just curious, has there been any progress with the BMA or other regulators? And should we expect any change to your expectations on uplift to free cash flow or the timing there? I think you had previously mentioned $200 million and maybe that's in 2027, but I just wanted to see if that still stands? Thomas Kalmbach: Yes. Previous comments were $200 million trending over time. So over time, to $200 million of benefit. We have -- Bermuda has approved our business plan. We have started -- we've established the company. We're going through the licensing process, and we're going through U.S. regulatory approvals for the reinsurance transactions and the transfer of assets to the new entity. So we're in the middle of the approval process. And once we get that, then we can actually execute on that first reinsurance transaction. Frank Svoboda: And John, I would think that we haven't seen anything at this point in time that would really change what we said with respect to amount of timing at this point. I think as we kind of get the final approvals, I think we should be pretty close to being able to really give a little bit more guidance early next year on what that kind of looks like and maybe a little bit more sense of what that timing might be, too. Wesley Carmichael: And second question, I just wanted to come back to your comments on floating rate exposure. I think you mentioned that assets and liabilities are well matched. But how should we think about sensitivity of your NII, if we get additional Fed cuts from here? Frank Svoboda: Yes. I think it's around $1 million that -- for a 1% change in the short-term rates. Thomas Kalmbach: But I also think that there's a -- the geography of the change is -- happens in a few places, which is required interest would also go down a little bit if short-term rates went down. And then we have a floating rate debt as well, which would also go down as well. So we'd see a little bit reduction in financing costs, which is part of one of the offsets. So Frank, your $1 million is really a combination of the 2. Operator: Our next call comes from Ryan Krueger of KBW. Ryan Krueger: I just had a couple of quick ones. Can you give us a couple more details on your 2026 guidance in terms of admin expenses and excess NII growth? Frank Svoboda: Yes, Ryan. I think admin expenses, we still expect to be around 7.3% of premium, so very stable with 2025. So we're pleased with respect to that. And then with respect to net investment income, we probably see being up around 3% and required interest probably being a little bit higher than that, closer to maybe a little bit closer to 4%. Ryan Krueger: And then for the -- I guess, what did you assume for buybacks? I assume it's just the $600 million to $700 million of free cash flow minus the $85 million dividend, but I just wanted to confirm? Thomas Kalmbach: Yes, I think that's a reasonable way of looking at it. Yes. Frank Svoboda: I think that's right. And then it's really, again, fairly well spread out over the course of the year at this point in time with respect to the buybacks. One thing else I would know, Ryan, is as you think about -- bring the conversation around some of the floating rates, we do anticipate that interest or financing costs will be down a little bit next year as compared to 2025. Just given some of the floating rate exposure we have there on the CD balances and our term loan. We do -- we just follow the economist forecast with respect to what the expectations are around those changes in the short-term rates. Operator: Our next call comes from Elyse Greenspan of Wells Fargo. Elyse Greenspan: I guess my first question, given, I guess, your comments around share repurchase as well as, I guess, the plan outlined for next year. It feels like, I guess, M&A is still less likely, but I was just hoping to get some updated thoughts there. Frank Svoboda: Yes. I would say M&A is always in our minds, it's not foremost, if you will, and that we're feel compelled that we have to do on M&A transactions. So we're very comfortable with our ability to grow organically. And so with our baseline as we think about guidance, we anticipate that the excess cash flows would, in fact, be used for share repurchases. Now if an opportunity came along, that provided us a better return and a better answer to our shareholders than using that money for share repurchases then we would clearly divert some of that money and make a good positive acquisition. I think as -- we think about M&A, it's still really being very focused on opportunities that really improve the core of who we are around being able to provide protection-oriented products in the middle and lower middle income markets. And we really like distribution that comes along with that ability. So it's something that we feel that we can come in and help to grow much like the acquisition Family Heritage been over 10 years ago now, but an organization that is really hitting its stride as far as continuing to grow. So we'll also look for opportunities if there are for -- to help us within our operations and to make those operations more efficient, but that becomes from the value proposition there that we'd be looking for. Elyse Greenspan: And then I guess my second question, just given the focus right on agent recruitment, would you expect, I guess, the sales guidance in life to be more back-end weighted? Or I guess, maybe there's some easier comps to start the year. Just if you could kind of help us think about the cadence there? James Darden: Sure. As we've talked about before, it's definitely a momentum game with the agent count being a leading indicator for the sales growth. So early Q4 is good for us. And then as you might imagine, around the holidays and things like that, there's a little bit of slowdown and it picks up back again mid-January and moving forward. So the first quarter of the year definitely has an impact of determining what the entire year looks like. We're seeing some good, as I mentioned, positive momentum from our hires, which is a leading indicator for new agents. And so we've got hires up at 15% at Liberty and 17% up at AIL as compared to a year ago. And so I think that bodes well for where we're at for Q4 and leading into Q1 of next year. But there is typically a quarter or 2 lag, I'll say, between good increase in agent count growth then the sales growth comes as some of those agents get onboarded, producing and get a little bit more experienced. But I do agree with you. You also have to kind of go back and look at -- we're talking about quarter-over-quarter. You got to look at comps from the prior year quarters to kind of really think through that. But right now, as we had indicated, I think Liberty is set up well to have high single-digit growth next year and AIL in that mid-single-digit growth range. Operator: Our next call comes from Suneet Kamath with Jefferies. Suneet Kamath: First question, just in your prepared remarks, you talked about an extraordinary dividend. I was just curious if you could size that. And was that a 2025 event? Or is that something that's going to show up in 2026? Thomas Kalmbach: Yes, it was a 2025 event and it was $80 million. Suneet Kamath: And then I guess on this whole remeasurement mortality thing. I guess the way I think about it, and maybe I'm wrong, is every third quarter, you true-up your assumptions to your best estimates. But if you expect that mortality will still continue to improve or remain favorable, why would that not be in your best estimates at this point? Thomas Kalmbach: I think we just really want to see it emerge quarter-to-quarter before we actually put it into our valuation assumptions. There's been some discussion about do we have a pull forward of deaths from the pandemic. And so we're just patient in making those changes into our overall long-term assumptions. So again, they're long-term assumptions. And so we do see short-term trends that actually influence us in our judgments, but we want to really focus on kind of where we believe the long term is. James Darden: Yes. To me, that's the key. It's very much a long term over the life of the business assumption and we can have differences in the short run that are different from that. And I think Tom, is this a fair assessment is that we're fairly close to kind of pre-pandemic levels from a long-term assumption perspective. But some of our recent experience is actually more favorable than that. So we're reluctant to move it back to a short-term very favorable position at this point. Operator: Our next call comes from Tom Gallagher of Evercore ISI. Thomas Gallagher: First question is the long-term assumption changes that were made in 3Q, how much of a go-forward earnings boost is that -- will that result in, in terms of prospective earnings? Thomas Kalmbach: Yes. I actually -- I reflected those in my comments around normalized underwriting margins that we saw for the quarter. I think that's a good way to kind of think about the go-forward normalized and also just the range that I gave you for underwriting margins in general for each of the life and health. I think that's a reasonable range for where we see life underwriting income coming in or life underwriting margins and health underwriting margins. Frank Svoboda: Yes. So Tom, if you kind of look at it back in for 2024, your normalized margins were closer to a little under 40%. And now we're a little bit closer to 41%. I think Tom noted that maybe 41.5% for Q3 and maybe for the full year, we're closer to 41%. So you see a little bit of that uptick. And that really comes from having the lower policy obligations as a result of that assumption change. Thomas Kalmbach: It's exactly right. I mean in 2023, we're 38%. In 2024, we're 39.7%. In 2025, we're right around 41%. So it's really demonstrating the significant improvement in mortality we've seen over time. Frank Svoboda: And so something that as you think about those remeasurement gains, the normal fluctuations, if you will, each quarter as we continue to see positive experience below those long-term assumptions, then you still end up with some positive remeasurement gains, but that's really just showing that the book of business is still performing really better than the long-term assumptions and over time just by the nature of the long-term assumptions we wouldn't. We currently anticipate that eventually, they'll kind of revert back to those long-term assumptions. And -- but what we're seeing right now, as Tom was talking about. We do anticipate the trends that we're seeing right now, saying that we anticipate those continuing on into '26. As we get more experience as that emerges over time, then we'll either -- do you change those long-term assumptions? Or do you ultimately have fewer remeasurement gains. Thomas Gallagher: And just relatedly, just to clarify, are there any long-term assumption change benefits embedded in your '26 guidance? Or is it only some assumption of sort of current period remeasurement gains that you're assuming? Thomas Kalmbach: Yes. The way we're thinking about that is the range that we've provided. The top end of the range would be indicative of a number of things, but one of those possibilities could be an assumption update that comes through. And so we've tried to factor in, in the scenarios that we look at in determining the range, an assumption update of what that might do to the results overall. Thomas Gallagher: So high end would have something in it for that? Thomas Kalmbach: Correct. Thomas Gallagher: And then just, I guess, final question, if I could, in terms of thinking about -- I think you mentioned the actuarial assumption update was under 1% of reserves. Just to sort of compare how favorable the remeasurement gains are in quantifying it. I assume they're running well better than 1% of your long-term assumption in terms of current experience. And that's the reason you pointed out that the reserve release was under 1%. Can you quantify how -- like right now, if you just isolate to 3Q, how much more favorable is that running? Is it 3%? Is it 5%? Is it 10%? Can you give some sort of indication of comparing 1 versus the other? Thomas Kalmbach: That's a hard question to answer directly. What I'd say -- What I'd point to is, again, kind of looking at normalized underwriting margins and normalized policy obligations because I think that really -- the normalized policy obligations is really the underlying metric that reflects the actual experience that's coming through. And so I think that's kind of where I put a little bit of focus as far as looking at those trends, I think. James Darden: And I think the point of the 1% comment was just recognizing that a small change in an assumption can have a decent-sized impact in the current quarter and -- on a dollar-wise, on a dollar, yes, but not on 100% of reserve. And it's a cumulative catch-up from the day of transition. And so just slight tweaks and long-term assumptions can have a decent impact. So it's just really reflective of the reserve balances are moving significantly 1%. Thomas Kalmbach: I think what's also important there is what it's telling us, right, is when we have an adjustment from the assumptions that brings down reserve levels. That says that we have -- and I mentioned in my comments that we have a more favorable outlook of future profits from that business or future that we need less premium to fund the benefits that we have promised to our policyholders. So that's a really, I think, good indication of just kind of how the business is performing and how we think it's going to perform. Operator: Our next call comes from Maxwell Fritscher of Truist. Maxwell Fritscher: I'm calling in for Mark Hughes. Just further digging into DTC, how does this conversion rate lead to sales compared historically in the same channel? And then is that elevated compared to recent experience in DTC? Or are conversions high historically? James Darden: Yes. So the technology improvements that we've put in and just process improvements is that keep in mind, direct-to-consumer sale is fairly passive. The customer fills out an application. Well, in some of those instances, based on how they fill out the application, we have follow-up questions or we have information from data perspective related to some medical questions that we need to follow up on. And so there was times when we could not get a hold of a customer. And therefore, that policy just never got issued, it pinned out. And so now with more advanced data and analytics, we knew there was some good risk in there that we want to go ahead and issue, but trying to get past some of this friction. And so we're issuing those policies now without really changing our risk profile. So the conversion ratio has gone up just in the last couple of quarters as that's been implemented. And again, that's kind of a onetime adjustment upward for a new conversion ratio that we would expect on a go-forward basis and an improvement. The other thing that's going on in the direct-to-consumer channel, though is that as we have a better conversion of those advertising spend across the entire organization. Then you've heard me talk about in the previous quarters, how we scaled back advertising from unprofitable different campaigns. Well, we're able to go back into those campaigns and other campaigns because the profitability metrics have changed because now I'm issuing more policies with the same advertising spend. And so that's why I said in my comments that the that program and the conversion of looking at it enterprise-wide, meaning agency and direct-to-consumer allows us to spend more money on advertising, and that's growing sales, both in our direct-to-consumer channel as well as giving more leads and growing sales in our agency channel. And so that's what we're very pleased about is all of those channels working together from a growth perspective. Operator: There are no further questions in queue. I will now hand it back to Stephen Mota for closing remarks. Stephen Mota: All right. Thank you for joining us this morning. Those are our comments, and we will talk to you again next quarter. Operator: This does conclude today's call. You may now disconnect.
Operator: Thank you for standing by. My name is Eric, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q3 2025 Knowles Corporation Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Sarah Cook. Please go ahead. Sarah Cook: Thank you, and welcome to our third quarter 2025 earnings call. I'm Sarah Cook, Vice President of Investor Relations. And presenting with me today are Jeffrey Niew, our President and CEO; and John Anderson, our Senior Vice President and CFO. Our call today will include remarks about future expectations, plans and prospects for Knowles, which constitute forward-looking statements for purposes of the safe harbor provisions under applicable federal securities laws. Forward-looking statements in this call will include comments about demand for company products, anticipated trends in company sales, expenses and profits and involve a number of risks and uncertainties that could cause actual results to differ materially from current expectations. The company urges investors to review the risks and uncertainties in the company's SEC filings included, but not limited to, the annual report on Form 10-K for the fiscal year ended December 31, 2024, periodic reports filed from time to time with the SEC and the risks and uncertainties identified in today's earnings release. All forward-looking statements are made as of the date of this call, and Knowles disclaims any duty to update such statements, except as required by law. In addition, pursuant to Reg G, any non-GAAP financial measures referenced during today's conference call can be found in our press release posted on our website at knowles.com and in our current report on Form 8-K filed today with the SEC. This will include a reconciliation to the most directly comparable GAAP measure. All financial references on this call will be on a non-GAAP continuing operations basis with the exception of cash from operations or unless otherwise indicated. We've made selected financial information available in webcast slides, which can be found in the Investor Relations section of our website. With that, let me turn the call over to Jeff, who will provide details on our results. Jeff? Jeffrey Niew: Thanks, Sarah, and thanks to all of you for joining us today. As we continue to execute our strategy of leveraging our unique technologies to design custom engineered solutions and then deliver them at scale for customers and markets that value our solutions, we achieved strong results in the third quarter of 2025. Revenue was $153 million, up 7% year-over-year. EPS of $0.33, up 22% year-over-year, and cash from operations was $29 million, all of which were above the midpoint of our guided range. I believe our results continue to demonstrate that our focus on the markets and products where we have significant competitive advantage is paying dividends and positions us well for future growth. Now turning to the segment results. In Q3, Medtech & Specialty Audio revenue was $65 million, up 2% year-over-year. Our continued operational excellence, sustained success of new product adoption and cutting-edge technology is evidenced with our strong gross margins. I expect that Medtech & Specialty Audio will have revenue growth within the range of 2% to 4% over the year in 2025, and we are optimistic about our future growth opportunities we detailed at our Investor Day. In the Precision Devices segment, Q3 revenue was $88 million, up 12% year-over-year. We saw revenue growth across all our end markets: medtech, defense, industrial, and EV and energy. Our strong intimacy with our customers' applications has led to accelerating design wins. Coupled with robust secular trends in our end markets, I am confident in our ability to continue to grow revenue in the fourth quarter and beyond. While we are seeing growth across all our end markets, I would like to highlight the defense market as it was particularly strong with design wins and bookings outpacing other end markets. Our capacitors and RF microwave solutions serve a wide variety of military applications. We have a compelling product offering of RF filters being used in next generation of defense systems serving a broad base of applications from radar, detection and jamming to ground communications, ensuring reliable and secure military communications. Our capacitors provide the electrical energy source needed for extremely harsh applications like munitions and detonation devices. Defense spending is increasing and shifting towards spending on electronic warfare where our products are in high demand. In Q3, bookings in the PD segment remained strong, particularly in defense and with our distribution partners. We continue to believe that channel inventories are now at normalized levels as they are now matching orders to end market demand. We continue to collaborate with our customers leading to a robust pipeline of new design wins as our customers continue to choose our innovative and differentiated solutions across all the markets we serve. We are positioned well for organic growth, and I expect the Precision Devices segment will grow at the high end of our stated growth range of 6% to 8% in 2025. I would like to reiterate the strategy we are executing across both of our business units. We are leveraging our unique technologies, creating custom products through our customer application intimacy and then scaling into production with our world-class operational capabilities for end markets with strong secular growth trends. It is proving to be a winning combination, leading to year-to-date revenue growth of 5% and EPS growth of 15% on a year-over-year basis. John will go through our Q4 guidance shortly, but as we stated on previous calls, we are expecting to finish the year strong with revenue and EPS growth accelerating in the second half of 2025. As we look to next year, with new design wins ramping and a very healthy backlog of existing orders, we expect to see organic growth rates at the high end of our stated range of 4% to 6% for the total company. This is an increase from historical levels, supported by strong secular growth trends in our end markets and new initiatives such as the expansion of our specialty film production coming online. Cash generation from operations continued to be robust in the third quarter, allowing Knowles to purchase $20 million in shares and reduce outstanding bank borrowings by $15 million. We have a very strong balance sheet that will continue to support our growth as we pursue synergistic acquisitions and buy back shares while continuing to keep our debt at very manageable levels. In summary, as I said last quarter, I'm excited by the momentum and strength the business demonstrated and the growth opportunities that we have in front of us, both in the near and longer term. Our design wins continue to be strong across our product portfolio. This is driving increased demand for our products, which gives me confidence that we have entered a period of accelerated organic growth from historical levels. We are laser-focused on what we do best, designing custom engineered products and delivering them at scale for customers and markets that value our solution, positioning us well for growth in 2025 and beyond. Now let me turn the call over to John to detail our quarterly results and provide guidance for Q4. John Anderson: Thanks, Jeff. We reported third quarter revenues of $153 million, up 7% from the year ago period and at the high end of our guidance range. EPS was $0.33 in the quarter, up $0.06 or 22% from the year ago period and also at the high end of our guidance range. Cash generated by operating activities was $29 million at the high end of our guidance range, driven by lower-than-expected net working capital. In the Medtech & Specialty Audio segment, Q3 revenue was $65 million, up 2% compared with the year ago period, driven by increased demand in the specialty audio market. Q3 gross margins were 53%, flat versus the year ago period. As expected, segment gross margins in the third quarter improved more than 200 basis points sequentially, and we expect gross margins to be above 50% for the full year 2025. The Precision Devices segment delivered third quarter revenues of $88 million, up 12% from the year ago period. Segment gross margins were 41.5%, up 150 basis points from the third quarter of 2024 as higher end market demand and production volumes in our ceramic capacitors and RF microwave product lines resulted in increased factory capacity utilization. These improvements were partially offset by higher production costs and lower-than-expected yields associated with the ramp-up of the specialty film product line. It's worth noting that specialty film output trends within the quarter were positive. And as we exited Q3, we are well positioned for both sequential growth and gross margin improvement in the fourth quarter. On a total company basis, R&D expense in the quarter was $9 million, flat with Q3 2024 levels. SG&A expenses were $26 million, up $2 million from prior year levels, driven primarily by annual merit increases and higher incentive compensation costs. Interest expense was $2 million in the quarter and down $2 million from the year ago period as we continue to reduce our debt levels. Now I'll turn to our cash flow and balance sheet. In the third quarter, we generated $29 million in cash from operating activities. Capital spending was $8 million in the quarter. We continue to expect to generate operating cash flow of 16% to 20% of revenues for full year 2025. During the third quarter, we purchased 940,000 shares at a total cost of $20 million. We exited the quarter with cash of $93 million and $176 million of debt, which includes borrowings under our revolving credit facility and an interest-free seller note issued in connection with the Cornell acquisition. The remaining balance of the seller note matures next month, and we expect to fund this payment with a combination of cash on hand and revolver borrowings. Lastly, our net leverage ratio based on trailing 12 months adjusted EBITDA was 0.6x, and we have liquidity of more than $350 million as measured by cash plus unused capacity under our revolver. Before turning to the fourth quarter guidance, I want to give a brief update on the tariff situation as it relates to Knowles. While the situation remains fluid, we continue to believe our exposure to tariffs is less than 5% of revenue and 3% of cost of goods sold. We've had success in passing these additional costs on to our customers, and our expectation is to continue to do so without loss of business. Moving to our guidance. For the fourth quarter of 2025, revenues are expected to be between $151 million and $161 million, up 9% at the midpoint year-over-year. R&D expenses are expected to be between $8 million and $10 million. Selling and administrative expenses are expected to be within the range of $26 million to $28 million. We're projecting adjusted EBIT (sic) [ EBITDA ] margin for the quarter to be within the range of 22% to 24%. Interest expense in Q4 is estimated at $2 million and includes noncash imputed interest. We expect an effective tax rate of 7% to 11%. As we move forward, I expect the tax rate to increase in 2026 to the range of 15% to 19%. We're projecting EPS to be within a range of $0.33 to $0.37 per share. This assumes weighted average shares outstanding during the quarter of 87.2 million on a fully diluted basis. We're projecting cash generated by operating activities to be within the range of $30 million to $40 million. Capital spending is expected to be $12 million, and we expect full year capital spending to be approximately 5% of revenues as we've increased investments associated with capacity expansion related to our specialty film line. In conclusion, our year-over-year revenue and earnings growth were strong in the third quarter. And with the backlog and increased order activity, we expect to continue to deliver both sequential and year-over-year revenue and earnings growth in the fourth quarter of 2025. I'll now turn the call back over to the operator for the questions-and-answers portion of our call. Operator? Operator: [Operator Instructions] Your first question comes from the line of Christopher Rolland with Susquehanna. Christopher Rolland: Congrats. So I guess my first is going to be on specialty film. If you guys could just remind us on current capacity, your plans or even update us on your plans for capacity additions and how from a demand standpoint, you guys see revenue now into next year and whether you have high confidence on high-volume additional customer opportunities for this product in particular? Jeffrey Niew: Yes. Chris, let me separate that into 2 pieces of specialty film. Let me answer the first, which is a little bit easier, which is back to that energy order we received in Q1. So first, I think we're on track that starting really in the second quarter, but really fully ramping up at the end of the second quarter, that energy order will start to be delivered in the back half in full -- but starting in Q2, around $25 million or so. That's what we expect in that business. I think in the other portion of the specialty film business, right now, we have a backlog that's not counting again the energy order that's in excess of $25 million, close to $30 million backlog that to deliver on. And we see more orders coming. So we feel pretty comfortable as we look into next year that the specialty film line, probably is going to be in the $25 million to $30 million range this year. If you add the $25 million, it should be at least $55 million or $60 million next year. And we're expanding the capacity to fulfill those orders. Christopher Rolland: Excellent. And then perhaps we can talk about -- I think in the press release, you talked about design activity. I was wondering what you were alluding to and what underpins your high end of your target growth range? And just as we kind of think about Medtech or Precision Devices or any subsegment, what you would expect to be above and? Jeffrey Niew: Yes. So if you divide it that way, I think if I were to sit there right now, I would probably look at the Medtech & Specialty Audio business in '26 being in that 2% to 4% range for growth next year. I would sit there and say the Precision Device, which is now a business which is now obviously larger than the med tech is at the high end to maybe even slightly above the high end of the 6% to 8% that we provide for organic growth at the Investor Day. The underpinning of this, I wish I could point to and say beyond that energy order, which we highlight that it's like one customer or one application, we are just having a tremendous amount of success. And I would sit there and say, I really commend the teams within Knowles, Chris, in terms of execution. It's taking our unique technologies and then customizing them for specific applications across med, industrial, defense, and then delivering them at scale with a world-class operation. And we're just having a tremendous amount of design win activity across the board. And that's why I think we feel comfortable right now when you look at the growth rates, coupled with that energy order we'll start to deliver that all our markets are up. I was even looking -- I think like even this year, we're kind of having quite a bit of success this year in EV. That's in '25, which obviously a lot of people aren't. And that's all about very specialized design wins in EV where we're having obviously very unique and differentiated products. Operator: Your next question comes from the line of Bob Labick with CJS Securities. Bob Labick: Congratulations. Also my congratulations as well on the strong performance. Jeffrey Niew: Thanks, Bob. Bob Labick: Yes. So I just want to follow up on the kind of the specialty film. There's obviously lots of excitement going on in the capacitors. You talked about the energy order coming on next year and then the other specialty, I guess, I think you said medical and defense. And any way you can elaborate on some of the products that these are going into or the ability for follow-on orders in the non-big energy one and how that could progress over time? Jeffrey Niew: Yes. I think I talked about a couple of them that we've talked about before, but they're growing pretty rapidly and doing well for us. But it all -- the specialty film really focuses around pulse power applications. It's applications where the capacitor is not being used in a traditional sense as a building block of an electronic circuit. It's actually being used to store a significant amount of energy that needs to be released in a very rapid pace in order to power something. And we've talked about before about defibs. We talked about in the railgun application. We talked about more recently, radiotherapy is a great application for us. So there's a lot of applications that are emerging that are coming. I wouldn't -- beyond the energy ore, which is very unique in terms of the size, we have a lot of unique applications that are coming to market, and we continue to be called up on a weekly and daily basis. We seem to be in a very unique position, Bob, relative to the technology and the capability to deliver the solutions. And of course, it doesn't help to be U.S.-based in manufacturing in the U.S. as well. Bob Labick: Got it. Yes. It sounds like these are new applications solving problems may be better than before in kind of existing markets, but taking share from older technologies. Is that post... Jeffrey Niew: I wouldn't say taking share. I would say this is like new applications that didn't exist before that are requiring like a significant amount of power to be delivered in a very rapid period of time in order to power the device. I think one of the ones that we alluded to, which is coming is downhole. And that's another application that, quite frankly, we're taking prototype orders for right now, but we could see down the road with all the work that we've been doing that these downhole applications where our capacitors would be in high heat environments, have to be taken downhole in order to be involved in fracking and cleaning of drill bits. There's a whole bunch of different applications here that we've been working on for like a year or 2. And we're in the prototype phase right now, but everything indicates like that one is another application that would require pulse power. Bob Labick: Got it. Very exciting. And shifting gears, obviously, the balance sheet is in good shape. You're buying back stock. You've had M&A in the past. Can you just give us an update on the M&A environment? I don't know if it's like with tariffs, it slowed down. Has it like reopened up a little bit? Or what's the opportunity... Jeffrey Niew: Yes, we're definitely focused on this. I just think where we are today as a company is we have a great organic plan. And I think we want to make sure that if we do an acquisition, it becomes -- it's very obvious to our analysts, our shareholders why we did it. And so we're laser-focused on -- still on acquisitions. But I think we're in a position now where we're trying to be picky and making sure we're going to do something that makes sense, and that's really 1 plus 1 equals 3. I'm still hopeful we'll get something done over the next year or 2, but we want to make sure it's the right thing. I don't know, John, if you have any comments. John Anderson: I think that the environment has improved from a quarter ago. There's more assets out there. Interest rates expectations are coming down. So again, we've got a good pipeline, but it's difficult to say when we're going to be able to complete. And as Jeff said, we're being disciplined. Operator: Your next question comes from the line of Anthony Stoss with Craig-Hallum. Anthony Stoss: John, probably the first question for you. I'm curious if you can share the book-to-bill now and where it was maybe a quarter ago. And then palladium prices are up about 30% in the last 30 days. I know this impacted you guys early in 2022. I'm curious at what price of palladium do you think would have a negative effect on your gross margins? Jeffrey Niew: So I'm going to let John take the palladium question first, and then I want to just cover the book-to-bill. John Anderson: Yes, Tony, you're right. The palladium costs have increased. I will say we're pretty good in terms of -- we've got prebuys. We have a pretty good position at least through the first half of next year, where we're kind of locked in at prices below today's market price. If they continue to elevate, I know looking back 12, 18 months ago, they got over $2,000 a troy ounce -- as you mentioned, they're $1,500. Again, we're monitoring this closely. If there are opportunities to prebuy even beyond the second half of next quarter -- sorry, of 2026, we'll do that. But I don't see this impacting our gross margins in a negative way at this point. Jeffrey Niew: I mean we've had a kind of a -- when we went through this once before, obviously, we were able to raise prices. But I think one of the things that we've done is we've kind of fixed the price, as John said, through the middle of next year. So we're not subject to like big swings in volatility over a short period of time. And I would also add that if we get to the back half of next year and prices remain the same, I think we'll probably be having discussions with our customers about it. I mean, I don't think it's a big deal at this point. On the book-to-bill, our book-to-bill within PD was 1 for the quarter. And I just -- it's worth a little color here. It was the second largest order quarter in the last 4 quarters. I think what you're starting to see is, quite frankly, that one is the revenue is up significantly. And so it's getting a little bit more difficult to produce those crazy book-to-bills that we had in the first half, but we're starting to deliver on those. But I will say this, it was -- we had a very strong, again, bookings quarter. When I said it's the second largest bookings quarter we've had in the last 12 months. I would also just say that the backlog is quite high as well. And that's why we put so many orders in the last 3 quarters, again, not even counting the energy order. And so I think we feel very comfortable about how bookings are. I did look just yesterday at where the bookings were month-to-date, and it appears we're having another strong bookings month in October. So I think that the trends continue. It was -- as I said in the prepared remarks, it was particularly strong, the bookings in defense and then in -- with our distribution partners. We had well above 100 distribution partners in the defense market. Anthony Stoss: If I could sneak in one more for John. You said it's good to hear that the thin film you're making improvements in Q4 on the gross margin side. How much or how many more quarters do you think that will last? And what kind of impact is it at now? John Anderson: Tony, I mean, in terms of -- you're talking about the specialty film line specifically? Anthony Stoss: Yes. John Anderson: I mean margins, all I'll say in Q3 were -- we had a great quarter overall, but that was an area for opportunity improvement. Margins were well below the total company and the PD average. As I said, it's really a question of we're adding costs, both fixed overhead. We're incurring higher than normal scrap costs. We're seeing within the quarter -- within Q3, we saw some positive trends. So August was better than July. September was much better than August. So coming out of that, we're kind of trajectory is right. Jeffrey Niew: I think the question -- just -- I think you're not going to really see the full benefit of what we think the gross margin we can get to until probably late Q2 when the energy order starts to fully ramp. Because just remember, what's going on is we're hiring people, equipment is starting to run. We're putting overhead in place to deliver this energy order, but we're not actually delivering a lot of units yet or producing a lot of units. So it is impacting gross margin, and that's really not going to go away fully until mid- to late Q2. John Anderson: But I do, again, see sequential improvement from Q3 to Q4 in gross margins due to improved output and capacity utilization. Operator: Your next question comes from the line of Tristan Gerra with Baird. Tristan Gerra: Could you give us a sense of the gross margin leverage on incremental utilization rates and where utilization rates are currently? And also as a follow-up to the prior question, what is the gross margin impact from the ramp in specialty film in Q3? And assuming that impact, as you said, disappears by mid next year, is it kind of a linear decline? Or is it more of a decline that happens mostly when you start ramping in Q2 of next year? John Anderson: Yes. A lot of questions to unpack there, Tristan. I would say the first thing with respect to the gross margin utilization and capacity, you really have to look at it on a product line-by-product line basis. We have some product lines that are running close to full capacity within the ceramic capacitor business and others that we've got some capacity. So it's really difficult to kind of go and give you a blanket on what our capacity utilization is. Jeffrey Niew: But generally speaking, like our drop-through on incremental revenue. John Anderson: I would say that question is easier to answer on average, again, it depends on product line. But overall, you can think of 35% to 40% dropping to the bottom line on every dollar of sales. Our variable -- you can see our gross margin is, call it, 45%. Our variable contribution margin is higher than that, obviously. And we don't have a lot of incremental operating expenses. So if I was modeling this yes, every dollar of sales, kind of think of it as that 35% to 40%. Obviously, if it's MSA, it's going to be a little higher than that and certain areas within PD can be a little lower. But overall, kind of use that 35% to 40%. Jeffrey Niew: Maybe, John, if you agree, but I think what you're going to see is some linear improvement in Q4, Q1 and into Q2. And when you're going to see probably a bigger jump up in Q3 once we're fully running the production. So it's going to kind of be linear and then a jump up. John Anderson: Yes. The only thing I would say is sometimes Q1 has a little seasonality where in some... Jeffrey Niew: I'm talking about specialty film specifically. You will see linear sequential improvement Q3, Q4, Q4 to Q1, Q1 to Q2 and then a big jump up as we get into Q3. John Anderson: But in some of our other business, like MSA, typically, Q4 is a really good -- Q3, Q4 are good quarters, and then we see a little dip down in Q1. Jeffrey Niew: I think the overall theme, Tristan, is this. I still think that a number of our businesses, specifically the specialty film product category still has upside gross margin that should be -- help the overall company continue to start -- continue to raise EBITDA margins over time. John Anderson: Yes. I would -- just last point on this. If we're going to finish somewhere 44% to 45% in 2025, there is opportunity to go higher in 2026, really driven by the -- in the back half of '26, driven by that ramp-up in the specialty film line. Tristan Gerra: Okay. That's very useful. And then for my second one, your exposure to distribution and industrial within PD, is that still around 40%? And you've mentioned that inventory levels are back to normal. Is that the case for industrial and distribution as well? And you've mentioned a very nice ramp in industrial. So should we assume that even in that segment, inventory levels have normalized? And if not, when do you think that happens? Jeffrey Niew: I would say, generally speaking, a big portion of what we categorize in our distribution business is industrial, and that business is up. Now here's what I'd just say is it's a little opaque yet to answer the question on industrial growth year-over-year, because you're taking into account inventory burn down. But I can definitely say that if you look at the growth in distribution, we're going to have some pretty nice growth in our distribution business. And when we see their POS reports, they're seeing nice growth as well. And a big portion of that's industrial. Now again, it's hard to actually say how much industrial is growing. But I can tell you is the inventory is for sure out. We're definitely seeing ordering trends that are saying that orders are lining up with demand as opposed to if we're burning out inventory, we don't really need that much to order that much from you. Operator: There are no further questions at this time. Ladies and gentlemen, this concludes today's call. Thank you all for joining, and you may now disconnect.
Operator: Thank you for standing by, and welcome to the Sonoco Third Quarter 2025 Earnings Conference Call. [Operator Instructions] I'd now like to turn the call over to Roger Schrum, Head of Investor Relations and Communications. You may begin. Roger Schrum: Thank you, Jeannie, and good morning, everyone. Yesterday evening, we issued a news release and posted an investor presentation that reviews Sonoco's third quarter 2025 financial results. Both are posted on the Investor Relations section of our website at sonoco.com. A replay of today's conference call will be available on our website, and we'll post a transcript later this week. If you would turn to Slide 2, I will remind you that during today's call, we will discuss a number of forward-looking statements based on current expectations, estimates and projections. These statements are not guarantees of future performance and are subject to certain risks and uncertainties. Therefore, actual results may differ materially. Additionally, today's presentation includes the use of non-GAAP financial measures which management believes provides useful information to investors about the company's financial condition and results of operations. Further information about the company's use of non-GAAP financial measures, including definitions as well as reconciliations to GAAP measures is available under the Investor Relations section of our website. Joining me this morning are Howard Coker, President and CEO; Rodger Fuller, Chief Operating Officer and Interim CEO of Sonoco Metal Packaging EMEA; and Paul Joachimczyk, our Chief Financial Officer. For today's call, we'll have a prepared remarks followed by your questions. If you'll turn to Slide 4 in our presentation, I will now turn it over to Howard. Robert Coker: Thank you, Roger, and good morning, everyone. Let me start by saying I am incredibly proud of our team's strong operating performance in the third quarter as we achieved record top line and bottom line performance, along with margin expansion despite challenging market conditions, which affected both consumer and industrial demand, particularly in the EMEA region. As Slide 5 shows, net sales grew 57% and adjusted EBITDA was 37% up, while adjusted EBITDA margin achieved a record 18.1% due primarily to improving margins from our Industrial Paper Packaging business. Total adjusted earnings grew 29% in spite of higher-than-expected interest expense. Our Consumer Packaging sales and operating profit grew 117% and adjusted EBITDA increased 112%. Most of the improvements came from the addition of Metal Packaging EMEA and strong results from our Metal Packaging U.S. business, where we saw food can volumes up 5%. Our Industrial Packaging segment also had an exceptional quarter with operating profits up by 28% and adjusted EBITDA up by 21%. Both operating profit and adjusted EBITDA margins grew significantly during the quarter and registered an eighth consecutive quarter of margin improvement in the Industrial segment. Our industrial team continues to successfully drive our value-based pricing model while achieving solid productivity savings. Paul will go through all the numbers and business drivers for the quarter in a few minutes. As shown on Slide 6, we successfully entered into an agreement on September 7 to sell our ThermoSafe temperature-assured packaging business to Arsenal Capital Partners for a total purchase price of up to $725 million. We expect the transaction to close during the quarter, subject to regulatory review. The purchase price includes $650 million in cash at closing, and additional earn-out opportunity of up to $75 million based on the business' 2025 overall performance. The completion of the sale of ThermoSafe will substantially complete Sonoco's portfolio transformation from a large portfolio of diversified businesses into a stronger, more simplified structure with 2 core global business segments. Consumer Packaging, which consists of our global Metal and Paper Can businesses and industrial packaging, where we have global leadership in uncoated recycled paperboard and converted products. Pro forma for the transaction, the expected net proceeds from the divestiture, excluding any additional considerations are projected to reduce our net leverage ratio to approximately 3.4x. I'm now going to turn the call over to Rodger Fuller to give us an update on activities and where we are at S&P EMEA. Rodger Fuller: Yes. Thank you, Howard. Good morning, everyone. If you turn to Slide 8, I'll provide a brief review of Metal Packaging EMEA's third quarter performance and outlook for the rest of the year and actions we're taking to improve performance in 2026 and beyond. Third quarter results modestly improved over the same quarter last year with adjusted EBITDA up approximately 9% and EBITDA margins improving to approximately 18%. Food can units increased 3.5% year-over-year, but unfortunately, business activity was below our expectations due to macroeconomic headwinds and weaker-than-anticipated seafood availability. With the vegetable harvest season substantially behind us, we believe the fourth quarter will likely be weaker than we had anticipated based on our customers' projected demand throughout the EMEA region. In response to these challenges, we're taking actions now to improve our competitive position and drive cost savings to accelerate our performance in 2026. As I mentioned on our last call, our team is making tremendous progress in achieving our targeted $100 million in annual run rate synergies by the end of 2026, with savings benefiting our entire consumer metal and paper can portfolio. Our team expects to further drive procurement synergies in 2026 after they were delayed in 2025 due to the late closing of the acquisition. In addition, we are rightsizing our manufacturing footprint to match our customers' demand profile and better leverage our operating costs. We're also building out our commercial team and have active growth projects that are focused on increasing our exposure to more nonseasonal products. As an example, we're making capital investments to gain new pet food and seafood business in Eastern Europe, which will improve our mix with our large vegetable can customers. In closing, while I'm not satisfied with our recent performance. I'm encouraged by the receptiveness Sonoco has received from our customers and our team's focus on taking the necessary actions to drive improved performance going into 2026. So I'll now turn it over to Paul for the quarterly financial review. Paul Joachimczyk: Thank you, Rodger. I am pleased to present the third quarter financial results, starting on Slide 10 of the presentation. Please note that all results are on an adjusted basis and all growth metrics are on a year-over-year basis, unless otherwise stated. The GAAP to non-GAAP EPS reconciliation is in the appendix of this presentation as well as in the press release. Adjusted EPS was $1.92, representing a 29% year-over-year increase. This improvement was primarily driven by favorable price/cost performance of $43.5 million, the EMEA Metal Packaging acquisition and continued strong productivity of $11 million, primarily from our converting businesses. These benefits were partially offset by unfavorable volume mix, an increase in the effective tax rate by approximately 180 basis points and slightly higher legacy interest expense. Third quarter net sales for continued operations increased 57% to $2.1 billion. This change was driven by the acquisition of Metal Packaging EMEA, strong pricing disciplines across all segments and the favorable impact of FX. Adjusted EBITDA of $386 million was up by an outstanding 37% and adjusted EBITDA margin improved by 130 basis points to 18.1%. This was driven by strong price cost discipline, continued productivity and the net impact of acquisitions and divestitures. These benefits were partially offset by volume softness in the Consumer and Industrial segments and an unfavorable sales mix in our all other businesses. Slide 11 presents information on our operating cash flows, which was a source of cash of $292 million during the quarter, up more than 80% over the prior year. Gross capital investments for the quarter were $65 million, and our annual capital spending is tracking below our $360 million target for the year. As we enter our fourth quarter, we expect similar operating cash flow performance as last year as the seasonal build of net working capital reverses. Slide 12 has our Consumer segment results on a continuing operations basis. Consumer sales were up 117% due to the Metal Packaging EMEA acquisition, price increases implemented to offset the effects of inflation and tariffs and the favorable impact of foreign currencies. This was offset by unfavorable volume mix. Our domestic Metal Packaging business presented higher sales versus the prior year due to higher food can units and price, which was offset by unfavorable mix. Sales for our Global Rigid Paper Can business was relatively flat as favorable price was offset by mix and lower volumes. Adjusted EBITDA from continuing operations grew an extraordinarily 112% year-over-year due to the acquisition, favorable price disciplines, continued productivity gains and the favorable impact of foreign currency exchange rates. This was offset by weaker volume year-over-year. Now let's turn to our Industrial segment slide on Slide 13. Sales were flat year-over-year at $585 million, with the recovery of price offset by volume softness and the exit from our Chinese paper operations. Adjusted EBITDA margins expanded 360 basis points year-over-year in the third quarter and increased by $21 million to $123 million, representing a 21% increase. Adjusted EBITDA was positively impacted by price, improved productivity and fixed cost savings resulting from footprint rationalizations in North America and headcount reductions in Europe and Asia. Slide 14 has the results for the all other businesses. All other sales were $108 million and adjusted EBITDA was $21 million. Sales were higher versus prior year due to higher volumes in ThermoSafe. Adjusted EBITDA improved 2% to $21 million as favorable productivity and fixed cost savings more than offset the negative impact of unfavorable mix and price cost. Transitioning to our outlook for the remainder of the year, as shown on Slide 15. We are tightening our guidance with net sales in the range of $7.8 billion to $7.9 billion. The European market continues to soften, and we are seeing pressures in the North American market with slightly lower demand. From an adjusted EBITDA perspective, we are narrowing our range to $1.3 billion to $1.35 billion, with strength in the performance of our North American businesses, offset by the softness in the European and Asian markets. We are reducing our adjusted EPS range of $5.65 to $5.75. This adjustment is primarily driven by subdued market conditions outside of the United States and the deleveraging process occurring across those facilities as sales volumes declined. Reflecting on the third quarter, July commenced successfully surpassing our expectations. However, August and September experienced declines, mirroring the market's weakening trend. This downward trajectory is continuing into our fourth quarter, which serves as the primary rationale for the lowered outlook. An additional item of note is our guidance assumes a full quarter of ThermoSafe performance. Given the projected pressures in our sales and operating profit, we are adjusting our operating cash flows range to $700 million to $750 million. Over the next 90 days, we'll be closing out 2025 and getting ready for our Investor Day, which is scheduled in New York on February 17, 2026. We are very excited about the strength, stability and simplification of the new Sonoco and the competitive advantage it creates in the marketplace. We intend to lay out a road map over the next 3 years to show how we're going to grow our businesses, strengthen our balance sheet, and continue to drive margin expansion. I will now turn the call back over to Howard for closing comments. Robert Coker: Great. Thanks, Paul. As we look ahead at the remainder of the year, our top priorities are to continue building momentum for growth and improving our competitive position by further reducing our cost structure. As the graphic shows on Slide 16, we believe our consumer and industrial businesses have solid funnels in place with several new products and market launches planned in 2026 and beyond. We believe we can continue to gain additional wins with both aerosol and food can customers in North America as we have successfully done through this year with can units up approximately 9%. As Rodger mentioned, Metal Packaging EMEA continues to achieve market wins, which will provide growth in '26 and beyond. Also, we believe our Rigid Paper Containers business is on the cusp of reigniting growth in global stacked chips, and we continue to launch new all paper cans and paper bottom cans for customers looking to substitute with less sustainable substrates. Finally, our Industrial Packaging segment is purposely driving share gains while focusing on new product categories such as wire and cable reels, where we experienced double-digit growth in the third quarter as well as new markets and applications for URB paper. If you turn to Slide 17, I'll make some final comments with the planned sale of ThermoSafe, we will be entering the next stage of our transformation journey, which is focused on optimizing our operating footprint and reducing future support function costs to align them with the needs of our now simpler portfolio. Our restructurings are never easy. They are necessary if we are to realize the full value of these portfolio changes. As an example, we recently closed a 25,000 ton per year URB machine in Mexico City, which eliminates an older higher cost machine and allows us to better balance our North American mill network. As Rodger mentioned, we expect to continue to drive actions to meet our synergy targets and expect to further optimize our EMEA footprint to better serve our customers and to react to changing market conditions. With a simplified operating model also comes additional opportunities to optimize support functions. We've actioned approximately $25 million in annual savings from stranded costs left from divested businesses, and we're implementing additional actions that will enable our businesses to fully leverage our market capabilities and generate strong cash flow. We've added a save-the-date reminder of our Investor Day in New York on Slide 18 of our presentation. I look forward to sharing our growth plans and the significant savings and value capture we expect to unlock with our simplified focused operating vision. So with that, operator, we will now take any questions. Operator: [Operator Instructions] And your first question comes from the line of Gabe Hajde with Wells Fargo. Gabe Hajde: Howard, Rodger and Paul, thanks for all the detail. I wanted to dig into, I guess, the European Food Can business. It feels like there's a couple of mixed signals here. And I'm thinking about you guys talking to win some share, I guess, in seafood. I appreciate you talked about some powdered formula wins. But just maybe more near term, you're talking about Q4 maybe getting a little bit sequentially weaker. I'm curious if that's associated with a shortened vegetable pack or if there's something unique going on there? And then I thought kind of in the second quarter, you talked about Northern Africa, some disappointing seafood trends. I'm just curious, your increasing exposure there. And then last part on the footprint rationalization or consolidation, what's going on there? It felt like that business was pretty well optimized when you acquired it? If you could just elaborate there. Rodger Fuller: It's Rodger. I'll hit all 3 of those. First one on volume. First of all, when you look at the third quarter volumes, we had guided to mid-single-digit can units up quarter-over-quarter. We came in at 3.5%. The seasonal business, fruits and vegetables for the third quarter came in almost exactly as expected. The shortfall was in Africa, and it was, again, the starting issue in Morocco, plus we have a plant in Ghana, which supplies tuna and other products that primarily supplies one customer and that customer's projections were too high, and that was down. So if you strip out Africa for the third quarter, we would have been in that -- well into that mid-single-digit range. So as we look at the fourth quarter, what we're seeing and what we're hearing from our customers -- and the seasonal business is ramping down. So we'll have some of the seasonal business continue in October, but it is ramping down. What we're hearing from our customers and why we take the guide down for the fourth quarter for the EMEA volume is they're going to be very sensitive to any inventory build in the fourth quarter due to what they see as macroeconomic conditions. Technically, this could help us in the first quarter. But again, they're watching their inventories very closely, and we're watching the Africa business very closely to see how that sardine business improves. We've not seen it this year. We're not expecting it and we're not guiding that for the fourth quarter. When you talk about the footprint issues, the #1 issue is for me right now is Africa because if you look across the board and sardines, again, farming Morocco, other fish products in Ghana and others, we do have to address our footprint there and our cost base there, and we're actively doing that. We've also started some negotiations in France to do some continued footprint optimization around our metal in supply across our platform, which was expected, and we intended to do that as we came into the acquisition. So that was as expected. So yes, it's been a little confusing. The starting business down hundreds of millions of units over a few year period is a fact. It's not really an excuse. It's just a fact. And it's something that we're dealing with, and we've got to really get after the Africa footprint. So I hope that covers some of the confusion, I think, Howard, do you want to follow up? Robert Coker: Yes, sure. Gabe, thanks for your question. What I would say is, first off, we are really, really pleased with this acquisition, the people, the technology, the market position all the things that you point out, optimization. As Rodger just said, we see more opportunity there. And yes, we are indeed disappointed in how we're going to finish up the year and what the fourth quarter is rolling to. And again, Rodger talked to the main points there. But we did this to create a global platform. Consumer for the first quarter ever is one product, basically, it's cans. It's cans made from steel, aluminum and paper. That's it. And so we have clear line of sight as we've talked about in terms of the synergies associated with the acquisition. But what really excites us is what we can do from one consumer perspective. We are very early in the process, but some of the structural, commercial and other opportunities that are materializing across our 3 formats, metal, our legacy rigid paper and steel aluminum are creating some really, really exciting opportunities that we're working now. And so as we talked about February when we go into February, we'll be able to talk more, but different ways to manage, run, go-to-market than we ever even thought about as we started on this journey that are incremental that, again, we'll talk about in more detail in February. Gabe Hajde: Thank you for that Howard. Unfortunately, we tend to be greedy over here, I guess. If we think about big moving parts into 2026, just to make sure we're calibrated properly, and we pick the midpoint $1,325 million. Just to remind us, that does include $50 million TSP contribution in the first quarter. And then assuming that the ThermoSafe transaction closes, that would be another $50 million to $55 million adjustment, again, starting with that $1,325 million. You've talked about actioning about $25 million of stranded cost savings, SG&A, et cetera. I'm not assuming all of that hits in '26, but a decent portion of it. And then we'll make our own assumptions about volume, FX and price cost. Is there anything else that we should be thinking about? I mean, are you -- would you say in the fourth quarter, you talked about Rodger throttling maybe production in the food can business to keep inventories in check. Do we have an estimate of order of magnitude what that might be hitting Q4 earnings? Paul Joachimczyk: Yes. Gabe, this is Paul. And to answer your question there, too, you're thinking about the stranded costs, you're thinking about TFP and ThermoSafe, exactly correct. I'd say the one element that you probably have to factor into your model for next year is the reduced interest expense that we're going to be using the proceeds from the ThermoSafe sale and transaction that Howard talked about earlier in the call. All of those proceeds will go directly to debt reduction. So I'd say that would be the largest element to change on there, too. And if you think about our Q4 performance that's out there, you can see our operating cash flow guide did come down. That does create a little bit of a strain on the ability to pay down our debt. So that's why we are experiencing a little bit of higher interest rate expense that's out there, too. So as you're modeling in your Q4 projections that are out there, and this wasn't a direct question, but interest expense should be in the range of around $50 million for the quarter. And all the other performance will be a little bit muted just due to the overall consumer demand that we're seeing really in the EMEA regions that are out there today. Operator: Your next question comes from the line of George Staphos with Bank of America. George Staphos: Congratulations on the progress. I guess my first question, I know we'll get more of this in February, but is it possible at this juncture to quantify some of the cost or revenue synergies you expect to get from having a Metal and Paper Can business together? And can you give us a couple of, for instances, in terms of what you already think you might be able to pick up commercially? Robert Coker: Yes. George, you want to do your follow-ups now? George Staphos: No, let's -- we'll start first with that question if it possible. Robert Coker: Yes. I know, and I hate it that you started out correctly. It's too early for us. I truly mean it. It's been in the last, I don't know, a month or so that we or 2 that we've really got into this and things have started to settle down from an integration perspective when we start stepping back and we're saying, wow, we've got plants on top of plants around the world. How are we managing geographically, how are we managing substrates that are very, very similar. So it's -- we got a number in mind, but we got to work that a little more. But we're actioning now to be in a position to start generating the savings side of this thing as early as the first of next year. But... George Staphos: What do you think the long-term EBIT growth is for the consumer business as it's currently constructed? And look, the reason behind the question, we recognize all the M&A, heavy lifting that's been going on at the company in the last 1.5 years, 2 years. Having said that, this quarter, you're very happy with the platform. You love the structure, et cetera, but sardines don't swim, the pack is late and the volumes wind up being really not particularly good and nor is the earnings, and you spend a lot of capital to build out this platform. And so that's kind of the reason behind the question. So if you had a view on what you think the long-term EBIT growth is for the combined consumer business, that's what's driving the question. If you had a view at this juncture, if not, we can move to the next question. Robert Coker: Yes. We have a positive view. I can't sit here and give you a percentage point at this time, but we did this for that very reason to grow the profitability of the company. And you can talk about individual fair enough in terms of -- I'm a hell of a fisherman, but I can't guarantee you that I'm going to catch fish every time I go. But that's the thing. You worry about your controllables, you're not your noncontrollables. And that's what Rodger talked about getting rightsized structuring. And when I talk about -- and you asked about commercial opportunities across substrate, it's amazing once we started putting pen to paper to say how many people are buying one or the other from us that we could materially take advantage of. So all our conversations right now, all of our actions that we're taking right now are to do exactly what you're saying, the expectation should be that we should be growing our profitability on into the long term. And we have some very chunky growth opportunities in front of us as we sit here today. And that's without consideration of what if we go to market in a different way. What if we structure our plants in a different way that gives us the positive viewpoint that we have. And I'm really sorry that I can say, hey, this is -- it's going to be 8.75% going forward. We'll talk about this in February. George Staphos: Okay. Understand, Howard. I guess next question I had on cans again in the U.S. I want to say little on the 2Q sort of commentary kind of into the third quarter, the commentary was that maybe it'd be a late pack, but you'd see an uptick in the fourth quarter. What in particular is driving the weaker volume? And then as regards to third quarter, food cans being up 5%, but I think overall, the performance in metal for the third quarter in the U.S. was down low single. That's just mix, right? That's pet food versus other end markets or something else behind that? Robert Coker: Yes. That's just mix. And what I'd say is it was a good pack season. It has carried over into -- in North America into October. So we're actually looking at a pretty reasonable fourth quarter on the food can side of North America. I'd be extremely remiss if I didn't talk about the paper can side of things globally. We've got an issue going on that I can -- what's the appropriate word, I would say, temporary situation with a very major customer that actually is highly material to us, particularly on an international perspective, but certainly touches North America as well. And that's been an extremely disappointing, but exciting at the same time, disappointing in terms of the performance as this particular transaction nears closure, but exciting in terms of where this business can go into the future. So we're seeing inventory drawdown, what we're seeing in the fourth quarter. So that's part of this forecast that we've got in front of you. And again, I look at that as a temporary problem. George Staphos: Last one quick one. OCC prices are really low right now. That's probably helping you a bit on margin. Hopefully, OCC heads up in 2026 for macro reasons and the like. Any way you will try to avoid any margin pressure ahead of time? Or is it -- will it be really the same sort of mechanisms you've had in the past in terms of pricing and the like, your pass-through mechanisms and just you'll manage it on the way up just like you always have. Robert Coker: Yes. Thanks, George. We're going to do what we've always done, but I did just highlight one example in my prepared remarks about preemptively making the right moves in terms of the balance of supply in North America. So if you listen, we've taken 25,000 tons out, and it's a really smart thing to do just in and of itself, replacing coming off of a 25,000-ton machine. And here, we're sitting in South Carolina with a 180,000-ton machine with a different cost profile. So we'll do what we have to do, what we've done traditionally as it relates to price cost management, but we're going to control those things that we can control as well and make decisions like I just announced. Operator: Your next question comes from the line of John Dunigan with Jefferies. John Dunigan: I really appreciate all the details here. If I could start with the URB mill in Mexico City that you just touched upon. What does that do to your operating rates for the business? And what I'm thinking about is, is cost going to end up going up because you have to still supply those same customers. So freight may be more of a headwind next year? And then if you could touch upon a much larger price/cost spread in both Industrial Packaging, which obviously you had the price increases go through for URB. OCC continues to slide a bit. But overall, still quite a bit ahead of where we're expecting. Same with the Consumer Packaging business. I know there was pricing to help cover some of the tariffs, but price/cost spread again seemed outside to our expectations. So maybe you can touch upon price/cost for both those segments going into 4Q and 2026 and how we should be thinking about that? Robert Coker: Sure, John. Let me start with your opening around the mill network. First off, we're running in the low 90s. And we've been proactive and aggressive all along the way in terms of making sure we were -- we had a pretty balanced portfolio here. As it relates to Mexico, that's a math decision as well as the capacity say, control, but a capacity-oriented decision that it just makes better sense. I mean, the math says that 25,000 tons coming off of the mill across the border versus what we can do from a leverage perspective with much larger facilities here. So strictly a math equation. Price/cost going forward, we'll see what happens. Very similar question to what George asked. I wouldn't surprise us to see OCC, hopefully, as noted that markets are going to continue, and that's what happens. OCC starts going up, markets tighten up. That's a sign of market start tightening up and that price/cost -- there's 2 forms of that. One is contractual related to the indices and others are just good management of our cost side of the business as well. So are we going to -- no. I mean we've got -- it's a big quarter for us in industrial and we expect that it's probably going to slip through the course of next year, but be at levels that very consistent with the last 3 or 4 years, which is remarkably higher than the old Sonoco. Rodger Fuller: Yes. John, add one real question on the URB mill closure there, too. This is really to get us to be maintaining an operation efficiencies in the 90s. So this is balancing the overall portfolio. As we started to see, we had redundant capacity across the network and structure, and we wanted to make sure we maintain that because at that efficiency rate, we had to balance out logistics costs and everything else like that to make sure that the net transaction actually was a benefit for the overall company. But our goal is to maintain all of those facilities in the 90s, and we started to see the trend of starting to be a little bit overcapacity in the market space. So just to give you a little bit more context on that. And the total cost of the transaction after is down, just to be clear on that. John Dunigan: Okay. That's helpful. And then just a couple of more questions on the bridge in 2026 that Gabe had touched upon earlier. I'm sure we'll get more insights in February. But just thoughts around with the moving pieces in S&P EMEA, what are you kind of expecting out of that $100 million or so synergy run rate by the end of next year? How should that be flowing through? And in terms of -- apologies, I'll leave it there. Paul Joachimczyk: Yes. And John, Rodger mentioned too, we're on track to getting the $100 million of synergies, and I want to stress by the end of 2026, that would be the full run rate. Year-to-date, we're kind of expecting to have a run rate of $40 million by the end of '25. And the goal would be is to achieve that full run rate of $100 million. Now you could say that's a $60 million more run rate you have to go get. And then timing of this, as you can imagine, in Europe, it does take longer to take those costs out and those stranded costs and other synergies that are out there. So you can split the difference and say roughly $30 million will be actually realized in 2026 with the remainder coming into '27 and beyond. Operator: Your next question comes from the line of Anthony Pettinari with Citi. Anthony Pettinari: You talked about potential reacceleration in RPC, which I guess was down low single digits in 3Q and is expected to be down that much in 4Q. In terms of the reacceleration, is that just a large customer getting to kind of a deal completion? Or are there new projects that are in the pipeline? Or are you seeing anything in terms of inventory? So I'm just wondering if you could give any more detail in terms of what drives that inflection? And is that something maybe we see in the first quarter, the first half of '26? Or any further detail there? Robert Coker: Yes. Anthony, the easy answer to that is all of the above. What I would tell you is that the receleration -- if that's a word, receleration of our Snack business is -- that's a foot on the gas pedal type thing that really is impactful immediately if and when it happens, expectation it will happen, and that's a global phenomenon for us. We're continuing to win as it relates to our paper solutions in Europe. We're adding those capabilities to the U.S. Those are more incremental. They build as big as the business is. You win 50 million units, doesn't really -- it's rounding there, but over time, and what we're seeing is a trajectory in that direction that will continue to build movement throughout. So I suggest to you that we're really bullish about the paper can side of the business and then you start adding that to the synergies that are associated with the metal side. We're looking forward to next year and on into the next coming years with what these businesses can do. Anthony Pettinari: Okay. That's helpful. And then just switching gears to capital allocation. You talked about getting leverage down to 3.4x by year-end, debt pay down next year. I'm wondering if you could talk a little bit more about the capacity for share repurchases in terms of when you'd be able to really buy back at scale in terms of timing or leverage threshold? Or is there an opportunity to maybe pull that forward given the valuation of the stock? And then I guess, related question, the $100 million run rate synergies that you're going to get in '26, is there a cash cost associated with that, that we should think about when we think about that '26 cash bridge? Paul Joachimczyk: Yes, Anthony, I'll start with the, I'll call it the capital allocation. And that strategy, we were really laid out in our February meeting, but I want to reiterate to you is we are committed to as an organization to getting our debt structure down. We talked about our last call getting our debt leverage ratio to 3x to 3.3x by the end of '26. You can see we'll be at 3.4x by the end of this year. So very strong performance. Once we are at that level, it does offer us the optionality to go do things like share repurchase and other activities. But debt in the near term is going to be our primary capital allocation strategy that's out there. And I'm not kind of delaying the question, but I really want to wait for that road map in February to give you the full capital allocation story that's out there. Now the $100 million of synergies and cost outs, we have put in a significant amount of money in restructuring charges already to date. We will have to allocate some capital to that in '26. That amount has not been released, and we haven't disclosed that. But I will say there will be capital definitely allocated towards that as a priority to hit those synergies and run rate. Operator: Your next question comes from the line of Mike Roxland with Truist Securities. Michael Roxland: Congrats on all the progress. I just wanted to follow up on Europe again. And can you give us some more color on EMEA, S&P EMEA and the cost savings that you're looking to achieve? It seems like the business is facing headwinds that you think are structural given the cost actions you're pursuing and the end market realignment. So any additional color you can provide on the cost you too to take out dollar-wise and whether you think there's a structural shift in EMEA relative to your initial expectations? Rodger Fuller: Yes, Mike, thanks. This is Rodger. Yes, I think if you look at what we've actioned. First of all, you've got the synergies that Paul just talked about, so I won't repeat that. Then you've got the incremental cost outs that we're actioning now as a result of learnings that we've had in the marketplace. Typically, and we'll share the more numbers in February, but typically, we're getting 1-year returns on these cost outs. So whether it's footprint consolidation, whether it's actually going in and taking out cost to match the volumes that we see in places like Africa, we look -- we're getting a full 1-year return. And it's not -- if you look at the base business in Europe, the Europe-based business, we're really just advancing plans that the business had in place, again, going around the metal ends and consolidating our metal end production in low-cost facilities. And we're actually adding some capability in Eastern Europe where we see the growth in products like fish and pet food. So it really is a balance. What we found is, again, back to Africa, if you look at our small plant in Thailand, if you look at what we have in Turkey with inflation concerns, those outlying areas where we're really targeting getting some pretty significant cost out to match the volumes that we have today and make sure they have the profitability that we see in our base business in Europe. So there's nothing I would say that's extraordinary, different than what we went into the plan with. The rationale -- strategic rationale around the acquisition is still solid, service quality leader in the organization, strong operational team. Frankly, as we look at next year, where we're focusing, and I mentioned in my opening comments, is around our commercial capability and commercial excellence. We're building out our talent in our regional sales team. We've added talent in France and Italy and Germany. And towards the end of the year, we're going to have a new commercial leader coming into the organization. So I'm really excited about that. So as you get into all areas of commercial excellence, price cost, real disciplined approach to share gain in the marketplace, so on and so on. That's where we're focusing our time, and I think that's really what will drive our improvement that we're targeting in 2026. Michael Roxland: How much -- from you being involved in the business as closely as you are, how much of the weakness that you're seeing in EMEA relates to end markets versus commercial capabilities and maybe not having the talent in the right seats at present? Rodger Fuller: No, I think it's -- no, I don't see that. I think when I get into those type of comments. Longer term, I think certainly it's going to help us. We've got some exciting growth projects that are going to hit in 2026. For me, it's about recovering all forms of inflation. Again, back to that disciplined process to go to market to win share. So what we've seen this year, the surprises we've seen this year, I hate to repeat myself, is around things like sardines in Africa as some of the business that we've seen in Turkey go -- be reduced as a result of really high inflation levels. So no, I don't think this -- volume-wise, I think the year played out exactly how it's going to play out. It has nothing to do with commercial capability because we've got wins coming. For me, it's more around that value add, getting paid to be the service quality, technical service leader in the market and make sure we're getting paid for the value we're taking into the marketplace. The volume -- unexpected volume drops, really, we talked about the reasons for those. And now they're included in our fourth quarter guidance, and we'll talk about more of that in February, how we see it for 2026. Michael Roxland: Got it. And then just one quick follow-up. Can you just help us frame the procurement benefits you expect to receive next year from integrating both U.S. and EMEA steel procurement teams into a single globally focused organization. I think you -- the company originally mentioned $20 million from reducing support functions. Is that still what you're looking to achieve? Is there any upside to that? Any color would be helpful. Rodger Fuller: Yes. From the procurement, we said from the very beginning that procurement savings of the $100 million synergies would be about 60%. We said $20 million will come from synergies around support functions. That's still a really good number. What Howard has been talking about and Paul has mentioned before as far as future restructuring, that would be on top of that. But you're right, the numbers you called out are exactly right. Procurement is about $60 million of the full $100 million run rate and other support cost is about $20 million. And then final $20 million is supplying ends to our Paper Can business that we have not supplied before and other one-off moves that we're making. Again, we're fully confident we can get that $100 million run rate by the end of 2026. Robert Coker: I think, Mike, your comment related to mine about the $20 million that we've expanded costs that we've taken out through the course of this year. That's going to be rolling into next year. And then what I alluded to was that we're on the cusp of looking at even more opportunities corporately. I think, well, it's corporate as well as operationally that we'll be talking about as we go into next year. Operator: Your next question comes from the line of Ghansham Panjabi with Baird. Ghansham Panjabi: Just given that there are so many moving parts with your portfolio, et cetera. Howard, if you just zoom out a bit and kind of think about the end markets, how are you thinking about the operating environment for both consumer and industrial as you look ahead to both 4Q and the early part of 2026? And I'm just asking as it relates to the trend line from what we've seen in consumer and the industrial markets over the last few quarters. Is it -- there any inflection? Or is it just more of the same at this point? Robert Coker: Yes. First, Ghansham, I appreciate the comments about all the moving pieces. I get it. We've been busy for the last 5 years setting the portfolio in place that we have today. I just want to kind of put a stake in the ground and say that's done. So this is the first quarter being the third quarter where you're actually able to look at the go-forward consumer business, which is nothing but cans. Industrial is what it is. On the consumer, what's happening at this point in time and into 2026, I'd say, I don't see a real stimulus across the globe at this point in time. We've spent most of this call talking about EMEA. And I talked about the consumer side as it related to -- certainly Rodger as it related to the metal, but paper can volumes are actually okay right now, flattish last year, but that's with the impact of one discrete customer that I think we all understand. So I'm not looking -- we're not looking for. We're not planning on to see some great resurgence in terms of consumer volumes going forward. Typically, if macroeconomics -- and I say typically, it's actually factual. We went back and looked at slowdowns in the macro, we win on the consumer side, the consumer is spending more in the supermarkets than they are in the restaurants. So we'll see how that plays out. Industrial, just in North America, just kind of flattish quarter-over-quarter, and I don't think you'll see us expecting that to materially improve either as we go into next year based on what we see at this point in time. Europe, as we talked about EMEA and we look at fourth quarter and the forecast, yes, we came out of the August holiday season there. And typically, in our industrial business, we see a pretty good lift as we get into September selling off as we get to the latter part of the fourth. We didn't see that lift, so there is -- in September. So there is definitely signs that things aren't great. And again, additionally, that's been a good thing on the consumer side of the business because people are shopping in the markets more, but too soon to call at this point in time. Ghansham Panjabi: Okay. Howard. And then in terms of the industrial margin expansion of 380 basis points year-over-year for the third quarter. Was there anything unique that boosted the quarter? I mean it seems like margins were quite a bit higher than the trend line over the previous quarters, just given the price cost clip that has benefited. Just more color on that would be great. Robert Coker: Yes. Price cost is certainly a part of it. And I want to take it back in time. Our margins in our industrial business, if you go back to -- way back to Project Horizon to where we are today with our refocus of saying we are the world's #1 in URB and converted URB products, let's behave that way. So the capitals that we started putting in 4 and 5 years ago have continued to drive improved margins, obviously, exceptional for this quarter and price cost is part of that. But I'd be remiss if I didn't say, as an example, our North American team has completely restructured how they manage the business, how they look at how they view the business. And what I'm saying is we no longer here have a paper division and a converting division. They're all one. And it's created a powerful new viewpoint in terms of how we are optimizing our supply chain between the paper mills and the converting operations. It's driven cost out. So there's some stickiness to the improved margins, but certainly, price cost is going to be a part that ebbs and flows. But I'm very, very proud of this team and be able to say that 5 years ago, if I told you guys, we were operating in the 16%, 17%, 18% type margin range. You would ask the same question, when is it going to drop down to 13%. Operator: Your next question comes from the line of Mark Weintraub with Seaport Research Partners. Mark Weintraub: Two quick follow-ups. One, on the synergies or really actually the purchasing synergies. I remember last year, the deal closed a bit late. And so you didn't end up getting them in 2025. I would have thought you would have gotten most of that $60 million in 2026. But the way you talked about maybe like $30 million in total for synergies, it seems like that might not be correct. Can you explain why the purchasing synergies, how much have already come and why more of it wouldn't come quickly in 2026? Paul Joachimczyk: Yes, Mark, it's a great question. And if you think about the cycle of the sales, as they come through throughout the whole year. The procurement is 60% of the overall savings. We did realize a portion of procurement in 2025. So it won't be a full $60 million of savings and additional incremental in '26. So that's why I'm kind of -- I gave you a midpoint of it to be conservative, and we'll give you that real strong clarity in that February '26 of the outlook of the full synergies and the road map that's out there. But the $30 million is a conservative approach. Rodger Fuller: Yes. Mark, remember, we're not just people immediately go to tinplate, but we're talking about all purchasing, so compounds, coatings, indirect, freight and the like. So many of those, we were able to start realizing some synergies this year. Mark Weintraub: Okay. And second, congratulations. I think you say it's an all-time record quarter. Your stock doesn't seem to be reflecting the really strong financial performance. I guess I was a little surprised that I didn't sense a more clear-cut communication on the share repurchase opportunity. I mean, I think buying back stock, just the cash benefit of not paying out the dividend is probably after tax even higher than your after-tax interest expense. And I was just wondering, is that a function of like debt maturities that you have to be conscious of? Or why not kind of a more -- this is a terrific opportunity to take advantage of what's a mispriced stock given the financial performance that you're putting up and I think you're going to continue to achieve. Robert Coker: Mark, what I'd say is certainly, stock buybacks are in the mix, but we're also looking at -- we talk about options, one of which is obviously stock buybacks, more aggressively pay back down debt and the third being capital reinvestments into the business and restructuring. And so we're balancing -- that's our decision tree, if you will, and which one is going to offer the longest term payback to our shareholders, to our owners. So again, we've talked about the restructuring that -- things that are really coming to light today. I talked about very chunky business wins and opportunities that we're looking at that are going to require, in some cases, fairly significant capital. So we're taking the approach that at this point in time, let's stay on the path, let's continue to pay our debt down, let's buying these opportunities. And at the right point in time, we look and say, we've got this capital project. We can buy back shares. We can do this restructuring and still maintain the debt type levels that we think our shareholders expect of us and make that right decision at that time. Operator: Your next question comes from the line of Matt Roberts with Raymond James. Matthew Roberts: Following to Anthony's question earlier on RPC. Any indications on when new international capacity, specifically Thailand will begin to ramp? How many points of incremental volume is expected from that? Or is customer merger time line still a drag into 2026 and potentially delaying any benefit there? Robert Coker: Yes. So we're ramping up. We are starting up as we speak. So first line is up and running, going through qualifications with the customers. So things are moving forward. What I'll tell you is it was when first presented to us and we've mentioned it to you guys, the intent is this will be the world's largest paper can facility in the market. So we've got to see this transaction close. The expectation would be that, that would remain the objective. But at this point in time, we're just kind of starting up and on hold. So we've got a new facility that's ramping up pretty aggressively in Mexico, and we've got capacity additions that are fully ramping up right now in Brazil. So Matt, I wish I knew. It's all quiet right now until things clearer through their process. Matthew Roberts: Howard. Second, you mentioned investments in pet and seafood in Europe. What is the timing of when those come online? Any CapEx considerations next year? And relatedly, what is the mix of these categories expected to be versus what it is now? And how do the margins compare to the system average for Metal Packaging EMEA? Rodger Fuller: Yes, Matt, Yes, capital would be in process as we speak, and that will run into the first quarter of next year. So you're looking at growth coming really probably starting the second quarter of next year. If you look at fish and -- seafood and pet, they're both today about 15% to 17% share of our overall market. Pet is a really mover. We see it going to 20% and the same for seafood. So pretty nice gains in both those markets, again, with the whole idea being our seasonal business is very good business, but it's very seasonal. So it's really spread out and better leverage our operations. As far as EBITDA margin in that business, pretty much average. We approached 18% in the quarter. So I'd say it's maybe slightly better than some of our average margins, but with the incremental investments that will be ramping up starting, let's call it, beginning of second quarter next year. Operator: That concludes our question-and-answer session. I will now turn the call back over to Roger Schrum for closing remarks. Roger Schrum: Again, I want to thank everybody for joining us today. And do please save the date for our February 17 New York Investor Day, and we'll be providing you more information on that in the future. Thank you again for your attention. Operator: This concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Good morning, ladies and gentlemen, and welcome to Tractor Supply Company's conference call to discuss third quarter 2025 results. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session and instructions will follow. At that time, we ask that all participants limit themselves to one question and return to the queue for additional questions. Please note that the queue for our question and answer session did not open until the start of this call. Please be advised that reproduction of this call in whole or in part, is not permitted without written authorization of Tractor Supply Company. And as a reminder, this call is being recorded. I would now like to introduce your host for today's call, Mary Winn Pilkington, Senior Vice President of Investor and Public Relations for Tractor Supply Company. Mary Winn, please go ahead. Mary Winn Pilkington: Thank you, Alyssa. Good morning, everyone. We appreciate your time and participation in today's call. On the call today, participating in our prepared remarks are Hal Lawton, our Chief Executive Officer, and Kurt Barton, our CFO. We will also have Seth Estep, Rob Mills, John Ordus, and Colin Yankee join the call for the question and answer portion. Following our prepared remarks, we will open the floor for questions. Please note that a supplemental slide presentation has been made available on our website to accompany today's earnings release. Now, let me reference the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. This call may contain certain forward-looking statements that are subject to significant risks and uncertainties, including the future operating and financial performance of the company. In many cases, these risks and uncertainties are beyond our control. Although the company believes the expectations reflected in its forward-looking statements are reasonable, it can give no assurance that such expectations or any of its forward-looking statements will prove to be correct and actual results may differ materially from expectations. Important risk factors that could cause actual results to differ materially from those reflected in the forward-looking statements are included at the end of the press release issued today and in the company's filings with the Securities and Exchange Commission. The information contained in this call is accurate only as of the date discussed. Investors should not assume that statements will remain operative at a later time. Tractor Supply undertakes no obligation to update any information discussed in this call. As we move into the Q&A session, please limit yourself to one question to ensure everyone has the opportunity to participate. If you have additional questions, please feel free to rejoin the queue. We appreciate your understanding and cooperation. We will also be available after the call for any further discussions. Thank you for your time and attention this morning, and now it's my pleasure to turn the call over to Hal Lawton. Hal Lawton: Thank you, Mary Winn, and good morning, everyone, and thank you for joining us today. Before getting into our results, I want to thank our more than 52,000 Tractor Supply team members. Their commitment, hard work, and passion for life out here continue to set us apart by delivering legendary service. They build the trust and loyalty that define our brand, and their dedication to our lifestyle remains the foundation of our leadership in rural retail. The Tractor Supply Team delivered a strong third quarter in line with our expectations, driven by ongoing share gains in our consumable, usable, and edible businesses. Agile execution through an extended summer season and healthy transaction growth that was supported by our consistent focus on value and service. Our view is that our third quarter results largely mirrored the broader US consumer environment, augmented by some share gain. We saw a strong start to the quarter with spending trends moderating into September. This pattern aligned with what we observed across the retail landscape and, in our case, was amplified by two key dynamics. First, the tailwind of an extended spring and July. And second, the headwinds of unseasonably warm weather in September and the absence of emergency response. So let's start with a few top-line sales highlights from the quarter. First off, we grew net sales 7.2% to a third-quarter record of $3.72 billion. Comparable store sales increased 3.9%, driven by a balance of transaction growth of 2.7% and average ticket growth of 1.2%. And importantly, we had positive comps in all three months. Positive comps in 11 weeks, a flat comp in one, and negative comps in only one week. We are particularly pleased to extend our track record of comp transaction growth, a hallmark of Tractor Supply and a strong signal of the health and engagement of our customer base. Our customers remain loyal and connected to their lifestyle, continuing to shop with us across categories and channels. And so let's turn to some customer engagement metrics, which remain a clear strength in the quarter. First, customer satisfaction remains strong, with scores continuing their positive trajectory, marking a record 17 quarters of consecutive improvement. Additionally, we achieved record Q3 highs across some key customer metrics, including total customer count, Neighbors Club membership, reactivated customers, and retention rates. Neighbors Club continues to be a powerful differentiator and represents over 80% of our sales. We saw gains in member retention and spend per member, and our Hometown Heroes program continues to attract new customers. We're also making progress on how we serve customers using data. With the implementation of our new customer data platform last year, our team is now able to better personalize offers and messaging, helping us deliver more relevant and engaging experiences across channels. Now let's shift to category performance in the third quarter. In line with recent quarters, the consumer remained discerning in their spending with categories that offer newness, strong value, and needs-based continuing to outperform. Our comp sales growth was driven by strong seasonal performance in spring and summer products, along with continued momentum in our core year-round Q categories. As we move from the second quarter into the third, seasonal categories strengthened meaningfully after a more modest first half. We benefited from the bathtub effect of the extended summer season. We believe this was about a 50 to 60 basis point contribution to the third quarter that would have historically been in the first half. As it relates to seasonal, the team did a great job capitalizing on the elongated summer season. Whether through strategically positioned inventory, enhanced financing offers, or targeted labor investments across the company. Our merchants to our store teams, to our supply chain, the organization leaned in to capture every single sales opportunity at a great example of that execution was in our tractors and riders category, which delivered another strong quarter. Our industry-leading lineup of zero-turn mowers, combined with disciplined inventory management and effective merchandising, continue to resonate with customers and drove share gains in this category. In the quarter, additionally, other categories in seasonal that saw standout results were lawn and garden sprayers and chemicals and power equipment, parts, and accessories. In our hallmark area of Q, we saw stronger than average growth in livestock, equine, poultry, feed and supplies, and wildlife supplies. In wildlife supplies, we continue to expand our position as a destination for outdoor enthusiasts across gun safes, deer, corn feeders, hunting blinds, attractants, trail cameras, and more. Our customers are responding to the depth of the inventory and the newness that we're bringing into the category, including the launch of the Field and Stream brand. We now have nearly 50 SKUs in this brand available in-store and online, with a robust pipeline in development. This launch strengthens our position as the destination for the out-here lifestyle. In discretionary and weather-dependent categories, particularly those in the fall season, such as recreational vehicles, grilling safes, and generators, sales continue to lag, reflecting both the cautious big-ticket consumer and the absence of storm-related activity this year. As it relates to big-ticket, overall, the strength in tractors and riders offset the softness I just mentioned in discretionary and emergency response categories, resulting in essentially a flat comp performance for the quarter. Finally, in companion animal trends remained stable, but below company averages. The consumables business remains flattish, with seasonal strength in animal health, and we have seen some sequential improvement in pet supplies and equipment as well. We also continue to execute well across our strategic initiatives and operational priorities. Digital sales grew at a low double-digit rate, representing a notable sequential improvement from the second quarter. Nearly 80% of online orders were fulfilled by our stores, highlighting the strength of our local network and store base. Same-day delivery and delivery from store outperformed, reinforcing the convenience and reliability of our model and the value of the final mile capabilities that we're building out. Peasants by Tractor Supply marked its 20th anniversary, and congratulations to that team. It highlights the differentiated pet specialty model out in rural America. Our distribution centers delivered another strong quarter of productivity gains, supported by disciplined execution and efficient inventory flow across the network. This execution helped ensure we remained in stock on the product. Our customers count on, particularly with the extended seasonal demand. Turning to pet pharmacy, we continue to see steady growth in orders and customer adoption. Each week we're seeing an increase in Neighbors Club subscriptions of prescription and over-the-counter products, leveraging our Alivet acquisition, our customers continue to engage with our suite of pet services, which also includes pet washes and vet clinics. On the real estate front, we remain disciplined and confident in our growth strategy. We opened 29 new Tractor Supply stores in the quarter, bringing our year-to-date total to 68. New store productivity continues to perform very well. Our pipeline of 2026 and into 2027 remains robust, with a significant runway for low-risk value, creating organic growth ahead. We also continue to invest in our existing store fleet. We now have 55% of our chain in the Project Fusion layout, and nearly 700 garden centers. These are capital investments that provide a multi-year runway for growth and extend the terminal value of our stores. They help us be more relevant to both our core customers and our new customers, allowing us to garner a greater share of their spending and be the dependable supplier for their lifestyle. Finally, we're making solid progress on advancing our life out here. Strategic initiatives with a focus on direct sales and final mile. These initiatives strengthen our foundation for long-term growth and relevancy to our customers. To summarize, the third quarter demonstrated the strength and consistency of our model. Healthy customer engagement, strong execution, and continued progress on our life out here. Strategy. As we look ahead, we believe it is appropriate and timely to narrow our fiscal 2025 guidance. This guidance reflects our year-to-date performance and outlook for the remainder of the year. We remain excited about our strategy and our ability to deliver long-term value for our shareholders. And with that, I'll turn the call over to Kurt to provide more detail on our performance and outlook. Kurt Barton: Thank you, Hal, and good morning to everyone on the call. As Hal highlighted, our third-quarter top-line performance aligned with our expectation each period of the quarter delivered positive results supported by consistent transaction growth throughout sustained growth in transactions remains a hallmark of Tractor Supply and a key indicator of the health of our business model. In addition, all geographic regions across the chain delivered positive, comparable sales for the quarter. These results underscore the broad-based nature of our performance and the consistency we're seeing in the business. This was especially evident in the performance of our Q categories, which outperformed the chain average and had mid-single-digit comparable sales growth every month of the quarter. While the early part of the quarter benefited from the extended spring selling season, the later portion was pressured by lingering summer heat and dry conditions. With no meaningful shift to fall weather. As far as emergency response sales, while we did not receive a significant year-over-year sales lift from emergency response last year, we did have a hurricane event in 2024 that provided some benefit to sales. This year, we had no emergency weather-related activity, which represented a modest headwind to our third-quarter comparisons. Let me add a few additional comments on our comp sales to complement Hal's remarks. The transition from price deflation to modest inflation year over year was consistent with our expectations for the quarter. Average ticket increased 1.2% driven principally by higher average unit retail. This was primarily the result of a higher but stable commodity cost environment and to a lesser extent, selective price adjustments as higher product costs flowed through our supply chain. Moving down our income statement. Our gross margin increased 15 basis points to 37.4%, in line with our expectations. This performance reflects the continued discipline of our merchant team in managing product costs and consistent execution of our everyday low price strategy. These benefits more than offset the anticipated pressure from tariff costs and higher transportation costs as we lapped last year's benefit from the opening of a new distribution center along with the modest cost increase to support our strategic investment and final mile delivery. We remain very pleased with our ability to expand gross margin in this environment which speaks to the strength of our cost management initiatives. Selling, general and administrative expenses, including depreciation and amortization, were $1,050,000,000 up 8.4% from last year. As a percent of net sales, SG and A deleveraged 29 basis points to 28.1%. This outcome was in line with our expectations and reflects a few puts and takes. There were primarily three drivers of the deleverage: First, the planned strategic investments in our business to launch initiatives such as direct sales. Second, higher incentive compensation from stronger performance primarily at the store level and the lap from last year's lower accruals. And then third, a lower benefit year over year from our sale leaseback strategy. These factors were partially offset by ongoing productivity initiatives and leverage in fixed costs from the stronger sales performance. Importantly, within gross margin and SG and A, we view our investment spending as critical to supporting our strategic priorities and long-term growth. While continuing to balance expense discipline with the opportunities ahead. Our effective tax rate decreased to 21% from 22.3% in the third quarter last year. Largely due to the timing of planned tax strategies for the purchase of federal tax credits, which we expect to normalize over the full year. On a year-to-date basis, our effective tax rate is 22.3%, just 10 basis points higher than last year's rate. Diluted earnings per share was $0.49 up from $0.45 in the prior year. Our inventory position remains in excellent shape. Our average store inventory is up a modest 3.4%, reflecting healthy sell-through and strong inventory management by the team. Year to date, we've returned more than $600,000,000 of capital to our shareholders through dividends, and share repurchases. As we look ahead, we're focused on finishing the year with the same discipline and agility that have guided our results year to date. The fourth quarter carries typical seasonal variability but we're confident in our ability to respond quickly to changing conditions and deliver within our outlook range. For the fourth quarter, we anticipate comparable store sales growth in the range of 1% to 5%, reflecting a wider set of possible outcomes given the current consumer environment. And keep in mind, winter weather is often the primary driver of our fourth-quarter business. More so than the holidays and the related gift buying. As a result of this outlook, we are narrowing our fiscal twenty twenty five guidance range. We now expect net sales growth of 4.6% to 5.6%. Comparable store sales growth of 1.4% to 2.4% operating margin between 9.59.7% and diluted EPS in the range of $2.06 to $2.13 Shifting further out, While we are not giving formal guidance for 2026 and with a caveat that we are still in the planning process and the macro environment can change rapidly, I thought it would be helpful to make a few comments about how we are thinking about next year. As we look to 2026, we expect to open 100 new stores compared to 90 this year, This increase reflects our continued confidence in the strength of our new store economics and the long-term growth potential of our model. We anticipate a consistent pace of openings throughout the year. For 2026, we are optimistic about maintaining the step up in comps that we are forecasting for the second half of this year. We expect transactions to remain a strength. With average ticket staying positive and the early benefits of our strategic investments contributing to that momentum. This level of comp sales growth should also support progress in our operating margin rate. To that end, we would anticipate fiscal twenty twenty six to be a more normalized year as it relates to our investment levels and the corresponding pressure on operating margin. This normalization provides the foundation for improved profitability. Based on our model, we see an inflection point in operating margin expected around the low 2% comp sales range. With margin rate expanding proportionally as comp sales growth increases beyond that level. Stepping back, with our peak capital investment cycle, as a percent of sales, now behind us, we believe 2026 will reflect continued P and L normalization. This progress positions us to deliver solid sales growth with margin improvement opportunity in line with our comp sales performance. We look forward to sharing our official guidance for 2026 during our Q4 call in January. In closing, we remain focused on disciplined execution and the factors within our control. Our Life Out Pier strategy continued to position Tractor Supply well to navigate the current environment maintain our industry leadership position and deliver sustainable value over time. Now I'll turn the call over to Hal to wrap up. Hal Lawton: Thanks, Kurt. As we look at the remainder of the year, and into 2026, we're focused on finishing strong. And building momentum on our investments in the next phase of our Life Out Here strategy. For the balance of the year, our priority remains on being a dependable supplier delivering compelling value and providing more meaningful in-store and online experiences. Let me share some of the key in-store and merchandising activities that we have planned. We remain excited about the continued momentum of our Hometown Heroes program, which is part of our Neighbor's Club benefits for military service members veterans and first responders. This year, in the weeks leading up to Veterans Day, we'll be executing our Hometown Heroes Days. A highlight of the event is our self-proclaimed National Hometown Heroes Day on Saturday, November 1. This day comes to life in our stores as a unique opportunity to connect with our communities in very special ways from touch a truck events to Americana themed crafts for kids, to thank you notes to our hometown heroes, and an honor wall. These types of events create a lot of energy and excitement in our stores. And if you get a chance, it's a great day to be in them. The winter and holiday season always creates a sense of fun and excitement across our as our teams showcase the best of Tractor Supply for our customers and communities. Customers truly rely on us for their winter essentials like wood pellets, propane heaters, fireplaces, insulated jackets, gloves, boots, more. In the fourth quarter, we're leaning into that responsibility with depth of inventory, the right price and fresh and trusted brands that reinforce our relevance. While holiday gets the spotlight, it's winter readiness that drives the heart of our business and where we consistently show up for our customers when they need us most. And once again, our now famous six-foot holiday rooster is capturing customer tension and social buzz a great example of the fun and discovery and retail theater that define the Tractor Supply experience in the holiday season. Additionally, in recreational products, exclusive mini bikes and gun safes position us as a destination for unique gifts at a great price. And this year's Tool Shop event brings outstanding value to our customers with leading brands and exclusive TSC offerings in power tools, accessories, and storage. This event highlights us as a gifting destination for the homesteader lifestyle. Our holiday sets always bring energy and excitement to our stores, But as I said, what truly drives our business in the fourth quarter is the weather. And when winter weather arrives, our customers know they can depend on Tractor Supply. In addition to strong merchandising and store execution in the fourth quarter, our teams remain focused on setting up the Life Out Here 2,030 initiatives for success as we head into 2026. From localization and direct sales to Pet and Animal Rx, to Final Mile exclusive and private brands and retail media the team is fully engaged. Executing detailed roadmaps that will drive growth, and long-term value creation. To close, we operate in a large attractive market that rewards consistency, connection and authenticity to a lifestyle. Our investments in our new store base in our existing stores, in our technology, in our supply chain, and in our talent are strengthening our competitive advantage, and enabling us to consistently gain share. Combined with strong new store returns, ongoing rural migration, and disciplined expense management, we believe we are well positioned to deliver long-term value for our shareholders. With that, let's open up the call for questions. Thank you. Operator: We will now begin the question and answer session. The first question is from the line of Steven Forbes with Guggenheim. Please go ahead. Steven Forbes: Good morning, everyone. Hal, curious if you can give us an update specifically around the direct sales rep build-out and maybe how many you plan to have in place by year-end. What will the final mileage coverage be? Percentage of the store base and then lastly, just like how should we be thinking about the benefit of the incremental sales potentially offsetting the initial startup costs, right, associated with the initiative next year. It sort of sounds like you're implying that there's a potential sort of net benefit to margin next year as this program ramps and you start getting the benefit of sales flow through. Hal Lawton: Good morning, Steven. And thanks for joining us on the call and thanks for the question about direct sales. I will give a couple of high-level comments and then turn it over to John to provide further detail. But at the highest level, what I'd say is we remain incredibly bullish and confident in our direct sales initiative. It's off to an excellent start. Right on top of the expectations that we set at the beginning of the year in terms of rollout. Sales rep ramping, the sales attributed to that ramping, etcetera. As we've been clear, this year, there was some expense investment that we've made in that business, to get it launched and ramped, that's embedded in the guidance, that we've been giving throughout the year. As it relates to next year, we are looking for the initiative to self-fund itself. So there would be no further incremental investment, into the initiative as it's ramping now and starting to self-fund. I'll turn it over to John to give some of the highlights on the number of reps we've hired recently and over the last nine months and, how they're doing on sales and what our outlook for next year is. John Ordus: Yeah. Thanks. Hey, Steven. Good morning. Our direct sales business continues to scale rapidly with reps covering we're over 300 stores now. I think it's 312 as of today. Our big barn customers are comping at nearly 50% our direct sales specialists working directly with them, and we're selling over $2,000 a week now in sales. So it could and continue to ramp pretty fast. We're taking that legendary service that our stores do a great job in, and we're taking it out to the Big Barn customer. I'll give you just a quick example of a recent customer. So a customer in the Florida market was buying feed somewhere else after three visits, and it normally takes about three to four visits for us to complete that sale. That customer decided to move to us. They're buying eighty bags of feed, now two skids of feed. Buying them every other week, and we're able to create that relationship and an ongoing relationship. And then we'll continue to build on that basket as we go. Our team builds these relationships with our customers, and our specialists have over ten years, on average ten years of experience in this industry, and a 100% of them live the lifestyle. So we're very pleased with the people we've hired. We're very pleased with where we're at. We've done four cohorts now, four training classes. The first, obviously, class April, and that's starting to ramp up faster. And we're seeing that ramp as each week as that class ramps up. To answer your question on specials, we're at 48 specialists right now. Continue to look at markets this for the remainder of this year where we'll have modest growth with another eight to 10 reps. And as we get to next year, we'll continue to follow the final mile team. As they grow out there, we'll let them get established and then we'll come in a little bit behind them, and then we'll start doing direct sales in those same markets. Average ticket continues to be strong, about seven times the company average, and we're very pleased with what we're seeing in the departments that are doing that are driving the sales are the departments that we thought they would. Feed, fencing, and equine feed being the big one. Steven Forbes: Thank you. Thank you. Operator: The next question is from the line of Michael Lasser with UBS. Please go ahead. Michael Lasser: Good morning. Thank you so much for taking my question. The question is on any changes you're seeing around the consumer behavior lives in the life out here environment. Especially because the perception is that trends have slowed quarter to date and folks are wondering, is that due to just the weather or is there something more that's going on? And then as part of it, you were helpful in giving some color on the contribution from your initiatives $200,000 in incremental sales per week, If you could build on that and give us a sense for how you think about that contribution as you move into next year across all of the initiatives that you have in place? Thank you very much. Hal Lawton: Hey, Michael, and thanks for joining the call today, and good morning to you. I'll start out first just on the state of our consumer. Our consumer remains strong, resilient. You know, we had exceptional customer metrics in Q3. Whether it relates to engagement and their shopping patterns or whether it relates to overall customer satisfaction. changed dramatically as we've moved into Q4, very much steady as she goes. I'll highlight a couple things on that. As we all know, the core component of that is our Q business. Our Q business trends, and that's the fundamental underpinning some foundation of our business. Certainly would acknowledge that the first couple of weeks here, three weeks or so of October have had unfavorable weather for us, but it's, the last few days started to get cool across the country, and we feel very good about the outlook for, for the balance of the quarter. That's reflected in our guidance of 1% to 5% comp. And as we talked about in our, prepared remarks as well, the biggest driver of variation in our sales in a Q4 is, is a winter storm. And if you go back over the last decade or so, it's about fifty fifty in those last two weeks, if you get a, polar vortex or a really, really significant cold snap. You know, you look at, like, 02/2018, I think, a great example for this quarter where started out warm in October, very similarly, our first couple weeks were tougher comps. There was a government shutdown going on, and and holiday sales that year were some of the weakest holiday sales, in the last decade, and we still put up a 5.7% comp for that year I mean, for that quarter. Because the last two weeks, we had incredibly strong winter business. And, you know, we think our guidance reflects if you go back over the last, decade plus, you know, we're right in that Our the guidance range we've given that midpoint of 3% comp is even if you exclude, like, 2021 where we had really high comps those two years, you exclude those, our center point's still right at about a 3% for comp for, for Q4. So, yeah, we feel really good about the guidance we've given in Q4. It is all about the cold weather and winter that starts to happen in December. We're really optimistic about our holiday. We've got a lot of things locked and loaded for that. Our hometown heroes event should give us the opportunity to get in the market very early in a very unique way for Tractor Supply. So just can't say enough, positive things about how we're thinking about the balance of Q4, and we feel as bullish on Q4 as we did three months ago, on our most previous earnings call. As it relates to to the comments John made on direct sales, Michael, I'd say a few things. First off, John mentioned we've got a little over 40 sales reps right now, 48 sales reps in place. I'd say, you know, 20 to 25 of them are really doing the bulk of the sales driving right now out of that first cohort, second cohort of classes. And driving that to $250,000 a week we're seeing right now. And we're ramping sequentially every single week. So we feel really good about, the continued benefit that that's gonna drive for us into next year, and we've always talked about 2026 would be when you'd start to see, the impact of the initiatives in our results. At our next earnings call, we certainly will be providing guidance for '26 and and more detail on how the initiatives layer into that guidance. But no doubt, direct sales, you know, will be a complement and a driver of our growth year. Thanks so much for the question, Michael. Michael Lasser: Thank you very much. Operator: The next question is from the line of Kate McShane with Goldman Sachs. Please go ahead. Please ensure your line is unmuted. Kate McShane: Sorry about that. We wanted to ask a few more questions around pricing and tariffs. The color you gave around ticket was helpful. How should we be thinking about ticket in Q4, especially when it comes to like for like price increases. And just when it comes to the change that we saw the narrowing in the top line of guidance today, how much of that is because of the change in terms of what you're expecting to flow through in terms of price? Seth Estep: Hey, Kate. This is Seth. Thanks for the question. For tariffs and kind of pricing and as we look ahead, would just take a step back first and just say, first and foremost, that you know, I've just really highlight to the team that we have the tools and the team in place and have done a really nice job up to this point. To navigate. And at this point, we're about halfway through the initial incremental tariff impact kinda year over year as it's kind of flown through to the p and l. We have taken some price where we have needed to here and there. Where we have, we have not seen a lot of elasticities yet. It has driven a little bit of AUR, but not a lot of elasticities. You know, we think about a look ahead, I would just say our top priority really is to continue to be that advocate of value for our customers. You know, our guidance implies that, we're gonna continue to navigate the costs that flow through to the P and L in Q4 as a result of these tariffs. Where we do take price, we're gonna continue to be surgical. We do have a portfolio approach. As you know, Q is such a big part of our business. 40% to 45%. You know, and you think about that and mostly domestic based on that. You know, it continues to be operating within kind of a a lot in line with, where we are kinda today and foresee that kinda going forward. So as we think about price, as we look ahead, again, we're gonna continue to navigate You know, our focus, again, is on value perception. It's on managing margins. And at the end of day, we're gonna continue to make sure that we are priced right to make sure that we continue to take market share. Operator: Thank you. The next question is from Scott Ciccarelli with Truist. Please go ahead. Scott Ciccarelli: Good morning, guys. So Kurt provides some comments on '26 So when you guys look at next year and the OI margin expansion you referenced, is the potential on the 2% plus comp coming from SG and A leverage? Is it coming from growth? Is there a mix Can you just provide any more color or clarity around the thought process around that? Thank you. Kurt Barton: Yes, Scott. What you heard from me in my remarks, I'd summarize by saying we expect and see momentum in our gross margin expansion. In 2026. The pressures on SG and A that you saw this year, we we had said we were going to make a very purposeful investment to launch final mile and direct sales and that was gonna put 15 to 20 basis points of pressure on operating margin in 2025. As you heard Hal mentioned just a second ago, the next cohorts in the 2026 launch we anticipate paying for itself, and there's no incremental pressure on SG and A. So between that and some of the transitory type items that were pressured this year, SG and A has less pressure in 2026 as we see it today and allowing us to be able to leverage at a lower, more normalized comp rate as I mentioned in that low 2% range. And just as an example for Q3 and even our expectation for Q4 of this year, with twenty basis points of pressure on initiatives, on year over year pressure from incentive comp just compares, and even some timing on the benefit or the pressure on sale leaseback you you look at the core of the business, and SG and A is in a really good shape. And it's really another great example of of how at this point, we can leverage on SG and A at a lower comp rate and be able to grow operating margin if we achieve that low to mid 2% range. And it's really about being able to move past the investments, and, and and I hope that helps in regards to seeing the potential for next year. Scott Ciccarelli: Thank you. Operator: The next question is from the line of Steven Zaccone with Citigroup. Please go ahead. Steven Zaccone: Hey, good morning. Thanks very much for taking my question. I wanted to ask on the same store sales growth. So to follow-up on Michael's question earlier, The fourth quarter, why does the low end of the guide include a one comp? You know, quarter was back to algo. So just help us understand why there's a wider range for the fourth quarter what gets you to the low end versus the high end? And then as we think about '26, thanks for the preliminary views, is there anything to be mindful of first half versus second half? Just since inflation was a factor in first half versus second half of this year? Hal Lawton: Good morning, Steven. As it relates to Q4, it's really just reflective of the range of outcomes that we see in the fourth quarter as we've mentioned previously, kind of dominantly based on weather. I think if you go back and look at our kind of ten year trend on the fourth quarter, that's it's kind of the range to that we've seen historically in the in this quarter. And and, anyway, so I'd just say that that's kind of reflective of of what we're seeing. The second thing I'd say as it, relates to next year there's really not a lot ins and outs on the sales side for next year. You know, a little bit of maybe of Q3 benefit that I referenced in my earning scripts that might flow into Q2. But other than that, I think the sales should be pretty straightforward probably got a little more AUR benefit in the first half of the year than the second half of the year. At least what we know now. Kurt mentioned, we've got a DC opening, next year. That's got a little bit of a start up cost that'll impact operating margin in the first half, but we get the the cost of goods benefit on that on the second half, from the new store from a new discount we get with our vendors for opening up a new DC. That should pretty much, wash itself out for next year just between the two halves a little bit. So, you know, I'd say nothing nothing too out of the ordinary next year. I think that's that's one of the big things to Kurt's prepared remarks we're trying to get across was it's a we expect it to be a very much more of a normalized year than we've had in the last five or six years. Whether that's across our p and l, whether that's across commodity deflation, inflation, etcetera. Steven Zaccone: Thank you. Operator: The next question is from the line of Zach Fadem with Wells Fargo. Please go ahead. Zach Fadem: Hey, good morning. Kurt, on your 26 comments, maybe we could talk a bit more about the comp building blocks. Maybe we talked a little bit about direct sales. Maybe we could touch on Alivet. And curious how you think about other things like commodity inflation and tax refund stimulus? And adding this all up, is it fair to anticipate a return to comp algo in 2026? Kurt Barton: The information that I've shared thus far is about the the the length of what, at this point, I think it's appropriate to share on thoughts for 2026. It's really been intended to say, the p and l is more normalizing And at a run rate relatively consistent with what you're seeing in the second half of this year, there's an opportunity for margin inflection. Certainly will be able to share some of the details on how we build up to our guidance range for comp sales in the back half of the year. Things that we've said thus far that I'll just reiterate that it's important to understand, we see AURs continuing to be in a positive scenario. The back half of this year, and going into 2026. Transactions continue to be a core foundation for comp sales growth, and we anticipate that for 2026. So in general, the consumer continues to engage in the lifestyle. We have a solid demand for our core business. We anticipate transactions and ticket to both contribute. Strategic initiatives which just launched this year including Ally Vet, We ant we're excited about the momentum. We anticipate that each of them will give some contribution. But I would just say at at this point early in each of those stages, those contributions are important to be able to show the acceleration, the momentum of the business, but won't be the the key drivers of the comp sales growth. And we'll give you more information on what our range is and what the key contributors are in our January call. Zach Fadem: Thank you. Operator: The next question is from the line of Chuck Grom with Gordon Haskett Research Advisors. Please go ahead. Chuck Grom: Hey, good morning guys. Thanks very much. Maybe a question for Seth or John or maybe Given the increasing tariff drop, curious if you're making any changes to your seasonal assortment for the holidays, some other retailers have talked about swapping out certain products. And I guess if so, how that supplementing of assortments could impact sales or gross margins here in the fourth quarter? And then just one quick one follow-up for Kurt. I think historically, your leverage gets you about 15 bps above or below. Is that would that still be the case based on that low 2% potential comp next year? Thank you. Seth Estep: Hey, Chuck. This is Seth. I'll start, and then I'll kick it over to Kurt for your second question. Hey. Hey. For holiday, I would just say, you know, going back to post the April announcements of the tariffs, the team did a really great job. Analyzing all the programs that were set aside for the back half, looking at where we thought, you know, there could be elasticities or tariffs could come in. And went went right away to kind of adjusting potential buys and things of that nature. I would tell you that, like, there's not a significant meaningful amount of updates and shifts that occurred other than maybe going from direct importing some products to finding domestic supply and demand, looking for products that had other countries and origins of supply, I would just say that the team did a really nice job pivoting to those other countries of origins as well taking advantage of opportunistic buys so that we can make sure that we have a really compelling offer as it comes and we look ahead to holiday. So, you know, we're we're really confident when we look ahead and be able to manage not only tariffs, but also being able to offer, that kind of assortment that our customers expect for us around this time of year. I'll kick it over to Kurt and let him go to the second question. Kurt Barton: Yeah. Chuck, the you're going back to my comments about the over moving beyond the peak investment cycle gives us the ability at lower comp rates more historical tractor supply norms to be able to have some level of inflection in operating margin. When we gave our long term guidance, we said, you know, we we generally look in this guidance range to be able to grow our operating margin five, 10, 15 basis points annually. And as we are able to achieve comp sales above that inflection point, I believe that scenario is very much in play for 2026. Operator: Thank you. The next question is from the line of David Bellinger with Mizuho. Please go ahead. David Bellinger: Hey, good morning everyone. Thanks for the question. I want to ask you about the hunting supplies expansion. We've noticed rollout of ammo dens in the ammunition category as part of our checks. Can you help us size the revenue opportunity in the the potential comp uplift there? How many stores can this reach? And any early reads from your core customer? Thank you. Seth Estep: Hey, David. This is Seth. Hey. Thanks for the question. Hey. I would I would start with just saying that, you know, wildlife and recreation supplies have been a core kind of category growth strategy for us. If we go back even over the last five years, and we continue to be really, really pleased with the growth of the categories and those items as we're looking at those in the store. So when it goes directly to ammo, I would say ammo for us was just kind of a natural extension, to that kind of outdoor wildlife and recreation category. You know, we are the market leader in safes. We are growing significantly in, call it, feed and attractants. When you look at those categories, ammo is kinda like that next, iteration of q when you think about that wildlife category for us. Today, I would tell you we're in roughly about half of the chain we've ramped that recently where we started with a small pilot, and we're pleased with the initial results. We also have it online. And I'd say for a little bit for the foreseeable future, would be in about that kind of store count as we kinda go into 2026 and we continue to manage that out. So, again, ammo is kind that natural extension to it. I would just say more broadly, you're gonna continue to see us go deeper and deeper in the wildlife and outdoor recreation categories. Because not only has it been a key growth driver for us in the business for the last five years, but as we look ahead. And that's part of the things that you're seeing with us with the Field and Stream partnership that we're launching. We're having those new exclusives. Kinda coming out. And for us, we're looking at that as, like, what's that kind of next category of growth similar to what we've seen over poultry kind of over the course of over the last five years, ten years, etcetera. So thanks for the question. Thank you. Operator: The next question is from the line of Chris Horvers with JPMorgan. Please go ahead. Chris Horvers: Thanks. Good morning and thanks for taking my question. So a couple of follow-up on the top line You talked about 50 bps to bps of Spring seasonal demand, springsummer shifting into the third quarter. Also talked about some fall headwinds. So was that 50,000,000 to 60 sort of a smaller tailwind as you think about how it played out in September? And then as you think about the ticket component of comp following up on an earlier question, into the Seth, you mentioned you're about halfway through rolling out pricing. But also into the fourth quarter, your mix goes more highly towards imported goods. So would you think that ticket could perhaps be up 2.5% in the fourth quarter or maybe a little bit more given the mix shifts? Thanks so much. Kurt Barton: Hey, Chris. It's Kurt. In regards to the the ticket question, we anticipate that our ticket will have a similar, maybe slightly higher impact on the fourth quarter. For some of the things that you mentioned. The the ticket had minimal impact this quarter on mix in well, including big ticket. So, ticket is is benefiting from the stable commodity market with some slight increase in the input cost, including tariffs. That may moderate up a bit in the fourth quarter. We've always said that in this quarter, there's volatility in regards to elasticity as well. So some of that in, includes for ticket, how much impact may be in the basket, etcetera. So we look at both transactions and ticket being a key contributor to the fourth quarter and maybe maybe more outsized on ticket in the fourth quarter than it was the third quarter. And transactions will move in regards to demand for the business And particularly, as Hal mentioned earlier, the demand related to cold winter weather, impact. So look at it look at it that way in regards to the the benefit. And then, remind me the first part of your question, Chris. Chris Horvers: Was, yeah, Kurt. The, was whether you think that 50, 60 basis point lift from the shift from 2Q to 3Q on the seasonal business, do you think it was less of a tailwind considering what happened in September? Or is that sort of your view of the net impact of weather in this in the third quarter? Kurt Barton: Yeah. You let me I'll just step back on the on the third quarter in general And we often say is is the quarter favorable or unfavorable weather related? And third quarter overall was favorable from a weather perspective. And there's been some puts and takes in there, but if it's, you know, relatively a a point of comp benefit from a good solid weather condition in the third quarter, that's a pretty good range to look at it. Within there, Hal mentioned that areas on a delayed start to the second quarter and then the bathtub effect, some of that is what fell into July that may often be know, part of the second quarter. But overall, particularly July and August, we're set up as a a favorable, solid third quarter. And then on the tail end of it, you had a, you know, a headwind on there. But we do overall look at the third quarter as a a solid, good, favorable weather con you know, condition type quarter. Thank you. Operator: The next question is from the line of Robert Ohmes with Bank of America. Please go ahead. Robert, please ensure your line is unmuted. Robert Ohmes: Sorry about that. Sorry, just two quick questions. Maybe how can we get an update on retail media for Tractor Supply? And then another question for the team would just be, I think you guys on the the the release you put out mentioned softness in the select discretionary categories. A little color on that. Was it apparel? Sounds like it wasn't big ticket overall, but would love to get any color on that. Thank you. Hal Lawton: Hey, Robert. Thanks so much for the question today. I'll take the second one, and then I'll toss it to Rob to share some details on direct sales. I'm sorry, on retail media. As it relates to the, softness in discretionary, really, not much difference in what we saw in Q3 than what we saw in Q1 and Q2. The seasonal big ticket certainly continues to resonate with customers when there's a need. They're purchasing We saw that in July and August with riding lawnmowers, as we called out. But on the flip side is if there's not a big driver of demand right now, we still see customers being a little bit cautious in their purchase as a big ticket. And and for us, those are things like, say, dog kennels and crates, It could be it's things like, that we've called out also, like trailers, and gun safes. Some of those, everyday bigger ticket businesses that we sell just a little bit of kind of, cautiousness from the consumer on that. It's been that way all year, and I think what we were trying to call out in Q3 is that the strength in riders offset the weakness there. Also, the weakness we mentioned in the last couple weeks of emergent response, you can imagine, we sold a lot of generators in weeks '3 as it relates to the trends we saw in the first half. Rob Mills: Alright. And good morning, Robert. This is Rob. Hope all is well. Hey. So first, from a retail media perspective, we're continuing to make really strong progress. You know, we entered this year with retail media with two primary objectives. One, to expand our partnerships and ultimately drive revenue. And we're on track for this year to deliver a triple retail media revenue growth year over year. So we're very pleased about that. We're doing that by expanding the partnership count over 80%. Our average partner revenue is up by nearly 50%, and we're introducing new products and capabilities to our partners such as know, branded pages, off-site products, and expanding our in-store, display meet retail media offerings. You know, we're really early still into retail media. I would call it kinda say the first inning, but we're really pleased with the progress the team's made. Have extreme focus. We have strong, we, have strong value proposition back to our partners. Really focusing on the footsteps in the rural market area, And in '26, where we're gonna double down, expanding our vision to more of the self-service capabilities, the model, related to more product placement, related to ads, as well as products in general. So with these expansion, the momentum that we're seeing in our partnership as well as just continuing to put the focus on our value proposition, we feel we're well positioned going into '26. We're we're very pleased to team's done a great job. Operator: Thank you. The next question is from the line of Peter Benedict with Baird. Please go ahead. Peter Benedict: Hi, good morning guys. Thanks taking the question. I guess I'll ask on on AI, just maybe an update on what you guys are doing in that area. And what your kind of outlook is for how you're gonna layer it into Tractor Supply? Thank you. Hal Lawton: Yeah. Hey, Peter. Thanks so much for the question on AI. We've got a lot of exciting things going on on that front, and I'm gonna break it into into three buckets. Enterprise level software. The second is custom built what now we call, off the shelf enterprise software. Second, call custom built enterprise software. And then the third, would talk about is around agents and automation. First off, on on the enterprise kind of purchased software, all of our vendors that we work closely with are now rolling in AI modules AI analysis, AI capabilities, you know, whether that's in ERP ERP systems, whether that's in replenishment systems, marketing, etcetera. So we are, fast adopters there where appropriate. Obviously, with, clarity of understanding of functionality and security. On the second one, as, in terms of custom build, we talked about that several times in the past. Those, software systems applications that we built out we continue to scale. We continue to refine. And they continue to and they become more and more key parts of just how we operate every single day. So whether that's Heygura, which is increasing in its use whether that's tractor vision, in terms of our customers, you know, calling out when customers need help in areas that our team members might have visibility to them, or whether that's in CorSo, which drives day to day operational So those are just three examples of custom built applications that are scaled out now and continue to ramp in their impact and use by our team members. On the third one around, kind of automation and agent build out. Over the last six months, we've done a, enterprise integration with OpenAI. We now have over 1,200, I think, 1,500 users that now have, OpenAI enterprise account. That's integrated with our Snowflake data lake. And what that allows us to do now is to start, really across the organization building agents to automate and make things, simpler and faster. An example of that, would be in, say, our fast team, where in the past, when a, FAST team member would finish a planogram reset, they would take a picture. They would send it to their district manager, district FAST supervisor. They would review it and provide manual feedback. We've now built up the capability where when that picture's taken, AI assesses the picture and gives immediate feedback to the team member, and our district FAST supervisor only has to get involved with escalation And so, you know, just makes everybody's job more efficient and allows us to execute faster and kudos to the team across, you know, really all dimensions of our organization for embracing it and driving that that productivity enhancements that it can provide. Mary Winn Pilkington: Alyssa, we'll got time for maybe just one more quick question. So let's see if we can slip one more in. Operator: Great. Thank you. Our final question will come from the line of Spencer Hanis with Wolfe Research. Please go ahead. Spencer Hanis: Good morning. Thanks for the question. I just wanted to ask on store growth. Stepping up for next year. Where do you see most of that growth being centered? Is it new or infill markets? Then how are you thinking about the cannibalization from that growth and then the returns on those? Those stores as well? John Ordus: Yes, thanks for the question. Appreciate it. So on new store growth, first, I'd just say as we look backwards, last eighteen, twenty four months, there were some questions around our new store productivity being lower and we talked about was a lot of noise in there. And as we said then, ex the noise, we've been running pretty consistent. And we continue to be pretty consistent. The new store productivity numbers of late continue to show that our new store productivity is running strong and consistent. New stores are performing above pro forma. We are site selection and model is the best we've ever had. Our pipeline is strong. The real estate construction team are doing an excellent job continuing to build out these stores in the right locations. We know that cannibalization we can build out markets. We can grow the overall market and we're seeing cannibalization numbers come in even lower than what we predict them to be. So we we know that the growth's out there. We see growth across the entire United States. But a lot of our growth will continue to be in the West as we're opening a new DC out there. Idaho, we'll continue to grow stores up there as well. Well, Mary Winn Pilkington: Alyssa, I know we've hit the top of the hour, so that will wrap our call. I'm around anytime anybody needs anything at all. So thank you all for joining our call today. Operator: Thank you. This will conclude today's conference call. Thank you all for your participation. You may now disconnect your lines.
Operator: Good afternoon and thank you for standing by. Welcome to the Deckers Brands Second Quarter Fiscal 2026 Earnings Conference Call. [Operator Instructions] I would like to remind everyone that this conference call is being recorded. I'll now turn the conference call over to Ms. Erinn Kohler, VP, Investor Relations and Corporate Planning. Please go ahead, ma'am. Erinn Kohler: Hello, and thank you, everyone, for joining us today. On the call is Stefano Caroti, President and Chief Executive Officer; and Steve Fasching, Chief Financial Officer. Before we begin, I would like to remind everyone of the company's safe harbor policy. Please note that certain statements made on this call are forward-looking statements within the meaning of the federal securities laws, which are subject to considerable risks and uncertainties. These forward-looking statements are intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. All statements made on this call today, other than statements of historical fact, are forward-looking statements and include statements regarding our ability to respond to the dynamic macroeconomic environment and the impacts on our business and operating results, including as a result of changes to global trade policy, tariffs, pricing actions and mitigation strategies and fluctuations in foreign currency exchange rates. Our current and long-term strategic objectives, including continued international expansion, the performance of our brands and demand for our products; anticipated impacts from our brand, product, marketing, marketplace and distribution strategies, product development plans and the timing of product launches; changes in consumer behavior, including in response to price increases, our ability to acquire new consumers and gain share in a dynamic consumer environment; our ability to achieve our financial outlook, including anticipated revenues, product mix, margin, expenses, inventory levels, promotional activity, anticipated rate of full price selling and earnings per share and our capital allocation strategy, including the potential repurchase of shares. Forward-looking statements made on this call represent management's current expectations and are based on information available at the time such statements are made. Forward-looking statements involve numerous known and unknown risks, uncertainties and other factors that may cause our actual results to differ materially from any results predicted, assumed or implied by the forward-looking statements. The company has explained some of these risks and uncertainties in its SEC filings, including in the Risk Factors section of its annual report on Form 10-K and quarterly reports on Form 10-Q. Except as required by law or the listing rules of the New York Stock Exchange, the company expressly disclaims any intent or obligation to update any forward-looking statements. On this call, management may refer to financial measures that were not prepared in accordance with generally accepted accounting principles in the United States, including constant currency. For example, the company reports comparable direct-to-consumer sales on a constant currency basis for operations that were open through the current and prior reporting periods. The company believes that these non-GAAP financial measures are important indicators of its operating performance because they exclude items that are unrelated to and may not be indicative of its core operating results. Please review our earnings release published today for additional information regarding our non-GAAP financial measures. With that, I'll now turn it over to Stefano. Stefano Caroti: Thank you, Erinn. Good afternoon, everyone, and thank you for joining today's call. Deckers delivered outstanding second-quarter results ahead of our expectations on both the top and the bottom line. Specifically, in the second quarter as compared to last year, we drove revenue growth of 9% and a 14% increase in diluted earnings per share. These results closed out a solid first half for Deckers' fiscal year 2026 with highlights that include total company revenue growing by 12%, HOKA revenue increasing by 15%, UGG revenue rising 12% and diluted earnings per share growing by 17%. In the first half, our international regions remain the driving force behind UGG and HOKA revenue growth, increasing 38% versus last year. Year-over-year gains were led by the wholesale channel, in part from earlier shipment timing, while DTC also delivered strong growth for the first half. We continue to see progress from our brand-building marketing investments in these regions, helping grow HOKA awareness and expand UGG mind share with consumers around the world. I could not be more pleased with how our teams are executing our strategy and connecting with consumers who are increasingly looking to HOKA and UGG for innovation and newness. In the U.S., consumer sentiment is still under pressure, but we're encouraged by the signs of progress we have seen in our business and have maintained our focus to ensure HOKA and UGG remain positioned for long-term success. The U.S. marketplace remains dynamic, with recent consumer trends indicating a heightened preference for multi-brand shopping experiences. We believe UGG and HOKA are prepared to acquire new consumers and gain share in this environment with consumers wherever they wish to interact with our brands as with strong brand partnerships with premium wholesalers, which help elevate our brands, UGG resonates with consumers with high-quality distinctive products that provide a unique tactile experience, HOKA sees the highest consumer adoption when people can try its unique blend of technologies, geometries and materials firsthand on their feet. We view this as a strategic opportunity to continue expanding our consumer base across both brands while maintaining this relationship through our direct-to-consumer business. This approach supports our long-term objective of achieving a balance of 50% between direct-to-consumer and wholesale channels. As we enter our historically largest fiscal quarter, our brand and global marketplace teams are focused on delivering profitable growth and building UGG and HOKA for sustainable value creation. I'm confident that our solid foundation, sound financial discipline and nimble operations will serve us well to continue executing against our long-term strategic objectives. Steve will provide additional details on our second quarter financial results and an update on our latest fiscal year 2026 projections later in the call. Prior to that, I will share further details on first half brand performance as well as the forward direction we see for HOKA and UGG. Starting with HOKA. Global HOKA revenue in the first half increased by 15% versus last year. Performance was driven by consumer-led updates to the brand's 3 largest road running franchises, the Clifton, Bondi and Arahi as well as exciting updates in the trail category with the expansion and evolution of the Mafate franchise. Bondi, Clifton and Arahi have continued to deliver strong growth and impressive sell-through rates for the brand as consumers embrace the significant enhancements implemented by our product team. The success of these top franchises helped HOKA gain market share. According to Circana, HOKA gained 2 points of market share in the overall U.S. Road running category for the past rolling 12 months ended September 25 and also outpaced the competition in Europe as one of the fastest-growing road running brands across Italy, France and Germany for the first half of 2025. Beyond the success of top franchises, the HOKA team is making great progress developing product families deeply rooted in the brand's origins. We're leveraging a multilayered approach to build recognizable icons that resonate across multiple categories and use cases, including dimensions of peak performance, everyday performance use and versatile active lifestyle. The Mafate, HOKA's original shoe is the latest example of how we are aligning our products within these key dimensions. Mafate X was created to deliver peak performance through maximum cushioning and carbon plate propulsion for agile long-haul efforts on the trail. Mafate 5 was upgraded to adapt to all types of trail terrain with premium performance cushioning and traction. And the Mafate Speed 2 has been reintroduced on the archive with an updated aesthetic to achieve a contemporary active lifestyle look. This product family has already contributed meaningful growth during the first half of the year and now accounts for a larger share of total brand revenue, supported by targeted marketing initiatives that have strengthened consumer awareness, visibility and alignment with HOKA's brand heritage. We have previously discussed the importance of the UTMB World Series finals in Chamonix, France, where HOKA is a title sponsor. The event includes 7 races attracting top trail runners from around the globe and nearly 100,000 spectators. HOKA reinforces leadership in UTMB, and it was the top brand in overall shoe share as well as among top 5 finishers, including first place finishes for HOKA athletes Jim Walmsley, Francesco Puppi and Martyna Mlynarczyk. Our marketing initiatives for the HOKA brand are designed to establish coherent product narratives that foster consumer engagement and encourage adoption across our portfolio. We're seeing traction with our approach to building product families that are supported by marketing investments. This approach will, over time, allow us to further segment and differentiate the marketplace. You will soon see this product strategy evolution come to life through the Mach franchise, where we recently introduced the X 3 peak performer in the lineup. And in spring '26, we'll be launching the Mach 7 and Mach Remastered for everyday road running and active lifestyle, respectively. From a regional standpoint, HOKA's performance in the first half was driven by the strength of our international business, where the brand continues to grow awareness and gain market share. We tailor our strategy for each region, taking into account the unique stages of brand distribution and awareness while staying attuned to evolving consumer preferences. What remains consistent is our focus to maintain high levels of full price selling as we continue to expand our presence within the premium and elevated marketplace. And we're very pleased with the HOKA brand's results across the board. HOKA has seen consistently strong gains across all international regions throughout the first half, with notable incremental revenue contributions from EMEA and China. In the EMEA region, HOKA is driving impressive results across all countries and segments of distribution, including market share gains and robust reorders with our specialty partners as we continue to drive double-digit growth. Best-in-class sell-through with our key sporting goods partners, significant percentage gains with athletic and lifestyle specialty accounts, where we are just beginning to build our business and broad-based strength in our DTC channel across Germany, France, Italy and the U.K. with our first German store opening in Berlin and a pop-up retail experience in Chamonix for UTMB. In China, the HOKA brand's premium positioning and product innovation continue to drive resilient consumer demand. Highlights include new store openings in key cities that are attracting strong consumer interest, substantial growth in loyalty membership with particularly strong gains with females and younger consumers, industry-leading full price selling and sell-through rates for wholesale exceeding the goals set for mono-brand partner locations. As we navigate a dynamic U.S. marketplace, HOKA continues to gain market share in the athletic footwear category, and we remain dedicated to controlling distribution and driving a pull model demand. There are a number of positive signals for the HOKA brand U.S. business that give us great confidence in the vast opportunities ahead for this brand with wholesale sell-through increasing double digits in the first half. DTC is delivering a sequential improvement from Q1 to Q2, maintaining a high-quality full-price business, a strong Spring/Summer '26 season order book, and positive feedback from retailers on our fall '26 product line. HOKA is a disruptive and transformational brand with the ability to further capture billions of incremental global market share dollars. Across both domestic and international markets, we'll continue to uphold our disciplined approach to marketplace management by building our DTC business and carefully exploring potential expansion into attractive wholesale channels and partnerships. We are committed to building sustainable growth for HOKA and are confident in the strategy we're executing to achieve this goal. As we enter the second half of fiscal '26, our priorities are driving healthy sell-through and gaining market share, leveraging our enhanced DTC loyalty program to drive consumer engagement, preparing the marketplace for spring '26 updates to Gaviota, Mach and Speedgoat franchises, and investing in marketing to build global HOKA awareness. Moving on to the UGG brand. Global UGG revenue in the first half increased by 12% versus last year. The UGG brand's first-half performance stayed consistent, fueled by our key brand initiatives. Top-performing styles remained in line with our 365 focus. Men's footwear achieved growth at twice the rate of the overall brand. International regions accounted for the lion's share of our growth. We are especially encouraged by the consumer response to newer products and expanded franchises aligned to our men's and 365 initiatives. Including the Mel franchise, which across sneaker, chukka and Chelsea silhouettes has more than doubled versus last year in the first half. The Classic Micro, our most versatile derivative to the original Classic boot, debuting as a top 5 style across DTC and wholesale and also the Zora Ballet Flat, an unmistakable UGG version of the timeless silhouette that is significantly outperforming our expectations in its first month since launch. While these products have driven positive sell-throughs, I would note that wholesale sell-in was the driver for total UGG brand performance in the first half, which includes benefits from earlier shipments that were carefully curated in alignment with our marketplace management strategy. These shipments have provided greater opportunities for consumers to discover UGG at wholesale points of distribution, which we believe in combination with the shifts to consumer shopping habits has put pressure on our DTC business near term. From a regional perspective, as anticipated, international markets are leading our growth, but we have seen a very strong order book conversion across all regions. The consumer response to our fall '25 collection has been very consistent globally, with consumers gravitating towards fresh seasonal colors and transitional newness such as the Classic Micro, Astromel, PeakMod and Zora Ballet Flat. This quarter, these styles saw gains as consumers preferred versatile buy-now, wear-now items. As we prepare to ignite UGG season, our teams have created cohesive brand stories with our iconic style and iconic design global marketing campaigns, aiming to generate excitement and drive consumer engagement. In August, UGG's Iconic From the First Step campaign featuring Stefon Diggs, Sarah Jessica Parker and Founder Brian Smith to celebrate the brand's legacy. In September, UGG served as the official starting partner for Highsnobiety's New York Fashion Week opening ceremony party aimed at building fashion credibility with influential males. At the beginning of this month, to celebrate Paris Fashion Week, UGG took over the atrium of Galerie Lafayette to create a curated icons pop-up store. And tomorrow, UGG will launch an aspirational product collaboration with the renowned Japanese fashion label, Sacai. These brand activations help the UGG brand generate momentum with consumers, while at the same time, maintaining cultural relevance. And our team will continue to build upon the compelling content we've created to elevate the brand and amplify key seasonal product stories. I'm confident that the global marketplace is well-positioned for UGG season. Thanks, everyone. I'll now pass it off to Steve to discuss our second-quarter financial results and provide an update on fiscal year 2026. Steve Fasching: Thanks, Stefano, and good afternoon, everyone. We are extremely proud of the results achieved in the second quarter and first half of our fiscal year 2026. For the second quarter, HOKA delivered more balanced growth across wholesale and DTC led by the strength of international and included sequential improvement in U.S. DTC compared to the prior quarter as we continue expanding the brand's presence to gain global awareness and market share. The UGG brand drove robust wholesale growth also led by the strength of international as we prepare the global marketplace for the brand's peak season. Our disciplined approach, flexible operating model and strong balance sheet continue to position us favorably in a dynamic marketplace as we head into the second half of our fiscal year 2026. We remain energized by the opportunities ahead for HOKA and UGG and look forward to further progress towards our long-term vision for these consumer-loved brands. Now let's get into the details of our second quarter results. Second quarter fiscal year 2026 revenue came in at $1.43 billion, representing an increase of 9% versus the prior year. Performance in the quarter was driven by HOKA and UGG, which increased 11% and 10% versus last year, respectively, with small offset primarily from winding down stand-alone operations of smaller brands. For HOKA, wholesale remained the primary driver of growth, increasing 13% in the quarter as the brand continues to experience strong sell-in and healthy sell-through with innovative and compelling products that are resonating with consumers. HOKA DTC grew 8% versus last year as international momentum carried through from the previous quarter, and we saw improvements in the U.S. business as anticipated. For UGG, growth was driven by wholesale, increasing 17% in the quarter, which was partially offset by a 10% decline in DTC. Wholesale strength was driven by strong demand from our retail partners, including earlier demand as well as European shipments that were pulled forward related to our upcoming third-party warehouse transition. UGG DTC was softer than anticipated, as we have continued to experience pressures from better in-stock positions with our wholesale partners due to increased allocations delivered earlier in the year in an effort to match the demand that has continued to build in recent years. A more challenging macroeconomic environment for the U.S. consumers with shifts in consumer preference toward multi-brand in-store shopping experiences. Additionally, we believe these factors will continue to have an impact on UGG growth in the second half. Gross margin for the second quarter was 56.2%, up 30 basis points from last year's 55.9%. Second quarter gross margins compared to last year benefited from price increases, favorable product mix, favorable foreign currency exchange rates and factory cost sharing with partial offsets from incremental tariffs on U.S. goods and channel mix headwinds. As a result of our price increases being implemented at the beginning of July, in combination with actions to bring additional inventory in ahead of increased tariff rates being implemented, we saw a slight delay in the net headwind of tariffs and did not experience a meaningful negative impact in the second quarter compared to the prior year result. However, this is unique to the second quarter, and our expectation of net tariff headwinds in the back half of fiscal year remain largely unchanged. SG&A dollar spend in the second quarter was in line with expectations at $477 million, up 11% versus last year's $428 million as we continue investing in key areas of the business. As a percentage of revenue, SG&A was 33.4% versus last year's 32.7%. Our tax rate was 21.7%, which compares to 24% for the prior year as a result of onetime benefits recorded in the quarter. These results culminated in diluted earnings per share of $1.82 for the quarter, which is $0.23 above last year's $1.59 diluted earnings per share, representing EPS growth of 14%. In terms of our second-quarter performance relative to the guidance we provided in July, gross margin was the primary driver of EPS favorability. Again, the better-than-expected gross margin result was largely driven by favorable timing of tariff-related variables unique to the second quarter, with benefits of our pricing actions flowing through in advance of the full burden from increased tariffs. Turning to our balance sheet. At September 30, 2025, we ended September with $1.4 billion of cash and equivalents. Inventory was $836 million, up 7% versus the same point in time last year. And during the period, we had no outstanding borrowings. During the second quarter, we repurchased approximately $282 million worth of shares at an average price of $109.31. As of September 30, 2025, the company had approximately $2.2 billion remaining authorized for share repurchases. Now moving into our forward-looking update. We are now providing an outlook for our full year fiscal 2026 and expect total company revenue of approximately $5.35 billion, with HOKA increasing by a low teens percentage versus last year and UGG growing in the range of a low to mid-single-digit percentage. Gross margin of approximately 56% as we anticipate headwinds from the impact of tariffs as this becomes material in the back half of this fiscal year with partial offsets from our mitigation strategies and normalized levels of promotion in a more pressured macroeconomic environment. SG&A to be approximately 34.5% of revenue, reflecting our commitment to investing in the long-term opportunities of our powerful brands. This results in an expected operating margin of approximately 21.5%, which remains at a top-tier level of profitability relative to our peers. We are projecting an effective tax rate of approximately 23%. And finally, we expect earnings per share in the range of $6.30 to $6.39. This guidance assumes a blended growth rate of approximately 9% from our 2 largest brands as we have streamlined our brand portfolio to focus on our most profitable long-term opportunities and expect to yet again deliver record years for UGG and HOKA, each with annual revenues north of $2.5 billion and significantly contributing to our best-in-class profitability profile. Within this revenue guidance, we continue to expect international to outpace U.S. growth and global wholesale to outpace DTC for this fiscal year. Over the longer term, our focus remains to create a balanced business across regions and channels as we continue building our consumer base, bolstering connections with consumers through direct relationships and capturing incremental market share for years to come. Regarding tariffs, with timing-related favorability seen in the second quarter results and our expectation of tariff impact in the second fiscal half largely unchanged, we now expect the unmitigated tariff impact on fiscal year 2026 to be approximately $150 million. Further, we now estimate that our mitigation efforts for this fiscal year will offset approximately $75 million to $95 million of this pressure, including benefits from select strategic and staggered pricing increases as well as partial cost sharing with factory partners. Please note, this guidance excludes any unforeseen charges that may be considered nonrecurring to our ongoing business or impact from any future share repurchases. Additionally, our guidance assumes no meaningful deterioration of current risks and uncertainties, which include, but are not limited to, further updates to imposed tariffs or other global trade policy, changes in consumer confidence and recessionary pressures, inflationary pressures, fluctuation in foreign currency exchange rates, supply chain disruptions and geopolitical tensions. Overall, our second quarter and first half fiscal year 2026 results illustrate the strong demand for our brands and strength of our disciplined model, giving us conviction to provide and achieve a compelling outlook for fiscal year 2026. We remain confident in the growth trajectory of our consumer-loved brands as our top-tier levels of profitability provide opportunities for targeted investments supported by our fortified balance sheet, all of which position us effectively to drive sustainable growth over the long term. Thanks, everyone. I'll now hand the call back to Stefano for his final remarks. Stefano Caroti: Thank you, Steve. Before we take your questions, I would like to highlight that our brands have continued to perform very well through the first half of this fiscal year. More importantly, we remain committed to supporting and strategically managing our brands to ensure sustained long-term growth. We believe that both HOKA and UGG are well-positioned across the global marketplace as we enter the holiday quarter, and our teams are energized and hyper-focused to deliver our full-year guidance. HOKA has established itself as a prominent global performance brand, extending far beyond its disruptive origins. HOKA is just beginning to realize its full potential and capability to innovate, and we are excited to continue building this transformational brand. And UGG brand continues to inspire generations of consumers with its iconic products and its global appeal. This powerful brand has established a unique position in the marketplace with a strong, loyal customer base and an ability to capture new audiences through compelling product evolution. These 2 premium brands maintain a strong commitment to the original values, consistently creating purposeful products while adapting to the evolving demands of their respective global customer base. We are very excited about the opportunities ahead and remain focused and disciplined on our approach to delivering long-term sustainable growth and value creation. I'd like to sincerely thank all of our valued employees across the Global Deckers team for their continued commitment to our collective success. Thank you all for joining us today and thank you to our shareholders for your continued support. With that, I'll turn the call over to the operator for Q&A. Operator: [Operator Instructions] Our first question comes from Laurent Vasilescu, BNP Paribas. Laurent Vasilescu: Stefano and Steve, very glad to hear that you are reinstating guidance here. And I wanted to ask about that. Originally, Steve, the framework, I think, on the fourth quarter call was calling for HOKA to grow mid-teens for this year, UGG to grow around mid-single digits. I think last quarter, I think there was greater confidence in that framework. With today's guide, lower expectations on those 2 metrics, can you maybe just unpack that a little bit more? Is there just a degree of conservatism? And I didn't hear anything about weather with regards to UGG of the low single to mid-single, but do you think that's a factor playing into your guidance? Stefano Caroti: Laurent, this is Stefano. We have 2 of the healthiest brands in the global marketplace with a very strong and loyal consumer base and a growing global demand. Our first half demonstrates the strength of these brands. For the back half, we are anticipating a more cautious consumer as the full impact of tariffs and price increases will be felt here in the U.S. Having said that, our brands are well-positioned when the consumer shows up for the holidays. And as always said, we don't manage our business month-to-month and quarter-to-quarter. We build brands for long-term profitable, sustainable growth. Steve Fasching: Yes, Laurent, this is Steve. I think just to talk a little bit about the guidance and kind of reorient everyone in terms of what we said at the beginning of the year, and you're right, we didn't give full year guidance and the fact and appreciate your recognition of that, giving guidance now, I think, is a demonstration of our confidence of how well our brands are performing in the marketplace and the continued path that we see on that. Part of the framework that we gave at the beginning of the year really said, if tariffs did not have an impact on consumers, how we saw kind of certain growth. And we still believe that, right? But we do know and we are more currently seeing some impacts on the U.S. consumer. So as U.S. consumers are beginning to see some price increases, it is impacting their purchase behavior within the consumer discretionary space. And so as we now look out at the next 6 months to give the full year guidance, our HOKA back half still is a low teen guide. So in many respects, we're not off of what we originally thought, maybe a little bit of a reduction, but we are now anticipating the impact of tariffs. So I think that's a demonstration, again, that the brand continues to do better than what we thought in a tariff-imposed environment. So we feel good about that. To Stefano's point, we're going to manage these brands for the long run. We're not going to try to chase growth in a current period that could be detrimental to the brand. And again, that is what our guidance reflects is we are going to maintain these brands. We're going to manage them in the marketplace that allows us to grow these -- grow these meaningful over a sustainable longer period of time. And I think that is a bit of what you're seeing in our guidance. And yes, we do know that the revenue is below where the consensus was. We're taking into account a consumer who's a little bit more cautious. I think is there opportunity that we could do better? Sure. And we'll see how the consumer shows up. And that's how we're looking at it. From an inventory position, we have inventory that if the consumer shows up, we will be able to capture some upside to this. But we're confident, again, in how our brands are performing in the marketplace internationally and domestically. We know domestically that the U.S. consumer is a little bit more pressured. So we're reflecting that in our outlook for the next 6 months. But again, our positioning of the brands remains with long-term sustainable growth in mind. And then just the other bit on the guidance. I think, again, we're showing a demonstration of how we can manage our business from an overall perspective. So even with a more conservative approach on some of the revenue guidance, we're still delivering profitability on a consensus bracket for the full year. So again, I think we will continue to manage these brands in a healthy way and drive long-term sustainable growth. Laurent Vasilescu: Very helpful. And then, Steve, just to understand a little bit more on the back half guide for HOKA, low double digits. I know you don't guide anymore by quarter out, but any nuances we should consider just because there are some compares that we can look at between 3Q and 4Q. I thought it was also interesting that you mentioned there's some positive reception regarding spring/summer order books. Maybe can you unpack that a little bit more? Steve Fasching: Yes, sure. I think in terms of how we're looking at the back half, more pressure in Q3 with more growth in Q4. So -- and again, I think that's where we're going to see how the consumer shows up kind of Thanksgiving through the holiday season. That's one thing that we're going to keep a very close eye on. We believe our brands are positioned better than most, right? If the consumer shows up, our brands are positioned to capture that demand. And so really, this is more about how does the consumer show up. So we're being a little bit more cautious with our third quarter growth with a little bit more aggressive growth in the fourth quarter. And then to your point on the order book, and I'll let Stefano jump in here, very confident with how things are shaping up and the consumer response to our products. Stefano Caroti: Yes. So, I'm very happy with what the teams have done specifically in the U.S. market for HOKA. We are growing awareness. We're gaining share really across every country. But specific to the U.S., the marketplace is clean. Sell-throughs are stronger than sell-in. Our full-price business is very, very strong. Our key franchises, Clifton, Bondi and Arahi are performing well in the marketplace. And our most recent product launches have also performed well and referring to Challenger, the Mafate family, Mafate X, Mafate 5, Rocket X 3, Rocket X Trail. Our order books are healthy. We're gaining share in Performance Run. We're back to #1 in specialty. And we're well set up with the transition to these new models I just mentioned. So our marketing also has been resonating, and we're seeing improvements also in our DTC business. So all is good on the HOKA side of the U.S. Operator: The next question is from John Kernan, TD Cowen. John Kernan: Steve, can you talk to the split between DTC and wholesale in Q3 and Q4 a bit more? The DTC compare gets a lot easier as you enter the fourth quarter. You did provide some color to Laurent's question. Just curious, the channel split between wholesale and DTC and what you're doing specifically to reaccelerate DTC same-store sales or omnichannel comps, particularly in America -- in the U.S. Steve Fasching: Yes. I think from a total company DTC perspective, we expect to continue to see improvements in Q3 and then further improvements in Q4. I think also important just to -- as you look at our growth and understand kind of what we said about this year is, again, remember, as we're expanding wholesale this year, we said much of that was going to come in the first half of the year, right? And that's what we've delivered and more so. And I think that's a demonstration of the strong demand that's out there for both brands is that our wholesale partners to get their hands on product earlier, they wanted to be able to showcase product earlier. And so we were selling in into that environment. That has put some pressure on our first half DTC. So with expanded distribution, right? It's more a demonstration of the growth of our demand for our brands and really a timing effect. And so it's not an indication of things kind of slowing down for brand and from a demand perspective, they are still increasing. And on a full-year basis, it still has increased. But as we've shipped more of that in the first half of the year, you're just seeing kind of a timing flow of that. And so in respect to that, right, that's where we'll see a little bit or expect a little bit more DTC growth on a percentage basis in the back half, a little bit more in Q3, a little bit more in Q4. And then with selling more in the first half in wholesale, you're going to see kind of lower numbers as a result of having more products move into the wholesale channel earlier in the year. John Kernan: That's helpful. And you obviously called out the company's top-tier profitability. I think you have the highest operating margin structure of anybody in the athletic footwear and apparel space. I was just curious, as we look into next year, obviously, tariff pressure is going to be pretty significant in the first half of the year. How do we put guardrails on the long-term margin structure of the business? We're finishing this year around 21.5%. Is north of 20% plus operating margins, how you look at the business long term? Steve Fasching: Yes, it's a good question, John, and we appreciate it. Clearly, right, what you're seeing. So last year, we delivered exceptional levels. Again, this year, I think in comparison to what others are saying, it's going to be another exceptional year with half of the year being impacted by tariffs. Next year, you're going to have kind of another half of year. So that will be a headwind to further margins. But again -- and I think you can see, as demonstrated by Q2, how we manage our business. So we are continuing to organically grow our business. The demand for our brands continues to increase. And at the same time, we're doing, I think, a very good job of managing an uncertain, volatile environment. And you can see how we've mitigated some of those tariff impacts in Q2, where we earlier thought that we would see some headwinds, we were able to take some actions and mitigate some of that and flow that improvement through. And that's what you're seeing on that gross margin. We will continue to operate in that disciplined approach. But yes, to your point, we're going to continue to see tariff headwinds as we look into FY '27. We're not in a position yet to kind of give guidance on that. But yes, you will assume further pressure. Stefano Caroti: And our strong financial profile will also allow us to invest in capabilities we're building, whether it's innovation or apparel, or technology digital. John Kernan: Got it. And then the gross margin pressure you're guiding to in the back half of this year, it's safe to assume at least that magnitude carries into the first half of next year, I would assume. Steve Fasching: Yes, correct. If the tariffs stay in effect the way they currently are, yes, equivalent. Operator: Up next, we'll hear from Adrienne Yih from Barclays. Adrienne Yih-Tennant: This is probably for both of you, both Stefano and Steve. Can you talk about kind of the price actions that you have taken at both brands earlier in July? Earlier in back-to-school, it seemed like those price actions didn't have a lot of impact on the demand, but obviously, that was kind of in the back-to-school time period. Is there something that you've seen either sell-through in the channel at your own DTC or maybe on the products that actually had those price increases that has given you a little bit more concern about the consumer? And then, Steve, my follow-on is, how are you seeing -- it's a really good point on more points of wholesale distribution, right, because there's more places to buy the product. But how are you thinking about when we kind of see a more normalization in the DTC versus wholesale balancing? Stefano Caroti: Adrienne, on the pricing question, we have premium brands and premium brands have more elasticity than other brands. And we've been very selective and strategic in our price increases. And we have not seen any issues. Sell-through on key styles continues to be strong for both UGG and HOKA. No issues so far. Steve Fasching: And then on the wholesale question, it's a good one, and we appreciate you asking it. I think if you go back 1.5 years or 2 years ago, we talked about how we are in the marketplace significantly underpenetrated in wholesale in comparison to many of our peers. So many of our peers are selling in a lot more points of distribution, wholesale distribution, than we are. And we've talked about marketplace management for years now about how we do this. And this is how we lean into wholesale. And I know there's questions out there about, oh, their growth is coming through wholesale. Yes, we're putting more shoes on feet, right? And -- but we're doing it in a strategic long-term way, right? We're not chasing growth in a quarter or in a year, trying to blow out wholesale distribution just to show sales increases. This is how we're expanding our brand globally and sustaining longer-term growth over a longer period of time. Does it mean that we deliver slightly lower levels of growth rate in the current period as we continue to expand, but are able to sustain longer-term growth rates? Yes, that's what we're doing. And so last year was a big year of wholesale expansion. We are anniversarying some of that this year as well as some additional wholesale expansion this year, but that will begin to slow. It doesn't change our outlook on that balance that we talked about of getting to 50-50 wholesale to DTC. So we're still on that. You will begin to see wholesale growth slow a little bit and DTC again begin to pick up. But again, this is about taking opportunities, increasing demand in the marketplace, giving consumers more points to purchase product and overall leading to more shoes on feet. And that's what we're building. Stefano Caroti: Yes. And we operate an omnichannel model, and we have the ability to flex and react to consumer demand as needed. Operator: The next question is Samuel Poser from Williams Trading. Samuel Poser: I got a handful. Number one, you talked about the healthy order book in for spring. I assume that's for both UGG and HOKA. Can you define what that means, please? Stefano Caroti: Sam, we provide those details, but we are very happy with the order book that we have for spring/summer '26 and the early reaction to fall '26. Steve Fasching: Yes. And I think, Sam, it's fair to say that it's up, right? And that's why we're happy that we're seeing increases in order book. Samuel Poser: And can you talk a little bit -- I'm going to get into a little bit of weeds here. Can you talk a little bit about like how -- especially with the UGG brand, sort of in and out of back-to-school, how you saw both in your own DTC and within your wholesale partners, because you get sales reports, how you saw that business like peak in valley? And are you seeing any big differences between the peak like peaks and valleys versus last year? And I mean, because I'm really wondering what -- sorry, go ahead. Stefano Caroti: It's a good question, Sam. What we're experiencing, and this is probably due to the consumer uncertainty in the U.S., is deeper valleys and higher peaks. Back-to-school is strong, and we anticipate to have a strong holiday season. But September, October are typically not the strongest months in our space. Samuel Poser: And so that leads to -- are you -- is your guidance for the back half and I guess, particularly holiday, is it more about what you saw during back-to-school? Or is it more about sort of what's going on right now? Because given those peaks and valleys and given the fact that in your own DTC business, you'll do every day between Thanksgiving and Christmas, you'll do more business in a day than you basically do in a week, July through probably the beginning of October. I'm wondering how much of this is just real caution or my favorite saying. So I won't say that in front of everybody, guys, but you do live near the beach out there. And I'm just wondering how much of the -- because I mean, consumer seems to want your product. It seems to be -- and so the concern about the consumer it seems like whatever they're buying your stuff at full price. You're not getting margin pressure, you're not getting those things. So the fact is they're not buying Jo's Frye boot brand. They generally want UGG, and they're not buying Champion sneakers because they want HOKA. And so either they want your brand or they don't. And you talked about the elasticity you had in price, which tells me that you actually believe that the consumer is buying your stuff regardless. So why so much caution around this macro consumer like, oh my God, the consumer in the U.S. might be hurting, but they still seem to go to your brands, not to us. Steve Fasching: Yes. I think, Sam, on that, clearly, our guidance for the year, which is reflective of the next 6 months, is taking into consideration what we're currently seeing kind of right now. And so I think that's where the question is, right? It's not about question about how we think our brands are placed in the marketplace. We think we're, again, positioned better than most and in many cases, very well positioned. But we'll have to see how the consumer begins to show up. I think some of the economic signals are consumers are beginning to see higher prices. Inflation is starting to affect them more in the U.S. And so there is some caution on our part as we take that into consideration. And again, we don't want to just chase sales because we want to achieve a higher number. We're about building brands for the long term. And so we don't want to do something in the quarter that could be detrimental to us in the longer term. So to your point, yes, we're taking a little bit of caution in there. We don't know how the consumer is going to show up, but we do know if the consumer does show up, we're better positioned than most. Samuel Poser: And then lastly, Stefano, with HOKA, are you -- are there any lower profile max cushioning? Or are we going to see any evolution to lower-profile shoes out of HOKA? Stefano Caroti: Yes. You will see more lower-profile solutions going forward. Ready for spring, we have the new Solimar that's been very well received. The new transport on our lower profile tooling. We have the Speedgoat 2 in lifestyle that is resonating and it's a lower profile than what we had in the past. So you'll see a more vast array of products going forward. Operator: The next question is from Jonathan Komp from Baird. Jonathan Komp: I want to follow up on HOKA. Hoping that maybe you can be a little bit more specific when you think about changes to the product launch plans into 2026, just any more details on what we should expect broadly and then maybe for some of the key styles going forward, the big 3 in terms of cadence and plans? And then just bigger picture on HOKA, as you talk about having potential to add billions of revenue yet. Can you give somewhat of a buildup or some of the big buckets or growth opportunities that you see when you make that comment? Stefano Caroti: Yes. Let me start with the latter. So we're focusing on a handful of categories for HOKA. It's performance run a trail, it's hike, it's fitness, it's a lifestyle. And over time, you also see apparel. So those are the 5 key areas of growth for us. And we compete in a $0.5 trillion market, and there's plenty of upside for HOKA, both in the U.S. and internationally. As we continue to grow awareness and consideration, we should continue to grow our brand in a healthy way. As regarding product transitions, we have tightened inventory of key outgoing style as we prepare for the upcoming launches of Gaviota, Mach, Transport and Speedgoat. So you should see -- experience less noise in the marketplace as we have bought less and tight inventories. And in regards to cadence, you will see an update to our biggest franchise, the Clifton in fall '26. So Clifton and Bondi will no longer overlap. Jonathan Komp: Okay. That's helpful. Steve, one follow-up then on margin. It looks like the back half margin for operating margin pointed in the low 20% range. Historically, when the back half was in the low 20s, the full year margin was more in the high teens, below 20% on an annual basis. Is that the run rate for the business currently, as we think about annualizing some of the second-half pressures? Or how should we think about the back-half margin guide in relation to the current annual run rate that you're performing at? Steve Fasching: Yes. I think, John, just on that, as we look at the back half kind of this year in comparison to kind of last year, the declines that we're reflecting are really being driven by the tariffs, right? So in terms of how we're running the business, how we think about margins and the margin profile of the business, really, the change that you're seeing in the back half is tariff-driven. So that's what we expect, again, based on the tariffs as they're imposed today. Jonathan Komp: And just a follow-up, given the discussion about maintaining premium positioning, should we view that pressure and the unmitigated portion that you guided to for tariffs, is that more temporary? Or is that a permanent step down in the margin that you're willing to give up potentially? Steve Fasching: Yes. So the margin change that you're seeing between last year and this year is going to be driven by the tariffs. And then we'll see kind of if promotion changes, we do have an element of promotion assumed for the back half. So we'll see that. Again, the biggest driver being tariffs, that's the overall driver, but there is a level of promotion given the environment today. That will, again, to the earlier question. I think that John asked is that, that will also trickle into FY '27. Again, we haven't given any update on '27, but the first half will be pressured by that margin. But -- so there will be an overall headwind. We have done, I think, a very good job of mitigating that in Q2, and that's what you saw us deliver. We don't have the same levers necessarily going into the back half nor will we have those levers kind of going into. We were able to take advantage of inventory movements that now that the tariffs are fully into effect, you won't necessarily get -- you'll get that benefit into future periods. So -- but we'll continue to look. As we talked about some of our mitigation strategies, we'll again continue to review pricing. To an earlier question, we didn't really see much pushback on some of our price increases. So we'll always -- with a strong brand that's well positioned in the marketplace, we'll continue to evaluate levers that we have. But the way we're kind of currently looking at it, we still have headwinds in the back half that will continue into FY '27. Operator: And our final question today comes from Jay Sole from UBS. Jay Sole: Maybe, Stefano, first question for you. As you just think about calendar '25 for HOKA brand, do you see this year as a little bit of a transition year where you had sort of the accelerated life cycles of Bondi 8 and Clifton 9 and then you have this tariff situation where next year maybe is sort of not a transition year where you have a lot of newness and clean inventories in the marketplace and good brand momentum where you might see a different kind of momentum financially. And then I guess, Steve, the question for you is that I know this was asked on an earlier question, but the guidance before was, say, mid-teens for HOKA, assuming no tariffs. Now you're saying low teens for HOKA with tariffs. So if we had gone back to the beginning of the year and you would have given guidance for HOKA with tariffs, what would it have been? Or without giving you the exact would have been, would the guidance that you gave today have been in line with that? Would it have been better than that? Would it worse than that? Maybe if you could just frame that clearly for us, that would be super helpful. Steve Fasching: Yes. Sure, Jay. I'll start kind of with that question, then Stefano can kind of talk about a bit of the transition year of 2025. So to your point, if we look back, I think one way to answer your question is that how we've seen HOKA perform, especially with the product transitions, we're very encouraged by the year. So to the point where in a pre-tariff environment, we saw mid-teens and the fact now with a tariff imposed world in the back half, we're low teens. I'm very encouraged by that, right? Because what it shows is even in a tariff-imposed world, consumers are still showing up for our brand, probably a little bit better than what we may have thought at the beginning of the year. So I think that speaks to how well some of our updates are resonating with consumers in the U.S. and globally, too, and you're seeing that in the global numbers. So where the tariff is impacting a U.S. consumer, I think we've seen a good response. And then we've seen a very good response from an international perspective, which gives us a view into that non-tariff-imposed world of a consumer response. So having seen that be very positive is actually very positive on the brand because I do think tariffs are having an impact on the U.S. consumer. Stefano Caroti: Yes. And regarding the question on transition. Yes, it's -- '25 is a bit of a transition year. We probably have masked a few too many big product launches in the first half of the year, and we didn't space them out enough. There are a few learnings from us in the transition to the model. So I think it was a learning year for us. And hopefully, this will help going forward. Operator: Thank you, everyone. That does conclude our question-and-answer session. This does conclude our conference for today. We would like to thank you all for your participation. You may now disconnect.
Operator: Good day and welcome to the TransUnion's 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. Please note this event is being recorded. I would now like to turn the conference over to Gregory R. Bardi, Vice President of Investor Relations. Please go ahead. Gregory R. Bardi: Good morning and thank you for attending today. Joining me on the call are Christopher A. Cartwright, President and Chief Executive Officer, and Todd M. Cello, Executive Vice President and Chief Financial Officer. We posted our earnings release and slides to accompany this call on the TransUnion Investor Relations website this morning. It can also be found in the current report on Form 8-Ks that we filed this morning. Our earnings release and the accompanying slides include various schedules, which contain more detailed information about revenue, operating expenses, and other items, as well as certain non-GAAP disclosures and financial measures along with the corresponding reconciliation of these non-GAAP financial measures to their most directly comparable GAAP measures. Today's call will be recorded and a replay will be available on our website. We will also be making statements during the call that are forward-looking. These statements are based on current expectations and assumptions and are subject to risks and uncertainties. Actual results could differ materially from those described in the forward-looking statements because of factors discussed in today's earnings release, the comments made during this conference call, and in our most recent Form 10-Q and other reports and filings with the SEC. We do not undertake any duty to update any forward-looking statement. With that, let me turn it over to Chris. Christopher A. Cartwright: Thanks, Greg. During the third quarter, TransUnion again exceeded all key guidance metrics and achieved its seventh consecutive quarter of high single-digit organic revenue growth. These results demonstrate the growing momentum of our innovation-led strategy. I want to outline four key highlights from the quarter. First, we delivered market-leading and diversified growth, with revenue increasing by 11% on an organic constant currency basis, excluding the significant breach remediation win from last year, which represents our strongest underlying performance since 2021. Second, we are raising our 2025 guidance across all metrics, reflecting our strong third-quarter performance, stable lending trends in the U.S., and new business wins. U.S. lending conditions continue to be solid, characterized by modest GDP growth, still strong employment, stable delinquencies, lower interest rates, and manageable inflation. This is despite emerging concerns regarding a slowing labor market and stress for lower-income consumers. Third, we advanced our technology modernization with the successful migration of our first U.S. credit customers. One True is accelerating our pace of innovation in credit and non-credit products. We remain on track to achieve our remaining structural cost savings in 2026 as anticipated. Fourth, we accelerated our share repurchases to take advantage of highly attractive valuation levels. During the third quarter and October, we repurchased $160 million in shares, bringing the year-to-date total to $200 million. Additionally, we increased our share repurchase authorization to $1 billion, underscoring our commitment to delivering value to shareholders. Further details on each of these highlights are discussed below. Our third-quarter results demonstrate effective execution against our growth playbook, with strength evident across our solutions, our verticals, and our geographies. U.S. Markets delivered 13% organic constant currency revenue growth, excluding last year's breach win. Financial services grew 19%, or 12% excluding mortgage, reflecting continued broad-based outperformance in a stable and modestly growing market. Emerging verticals accelerated to 7.5%, their strongest growth since 2022. Our non-credit solutions, which account for over half of U.S. Markets revenue, grew 8%. These results reflect the emerging commercial benefits across our vertical markets from our accelerating innovation in credit, marketing, fraud, and communications. International revenue grew by 6% on an organic constant currency basis. Canada, the UK, and Africa all exceeded expectations and achieved double-digit growth despite muted economic conditions in each market. India grew 5%, slightly below our outlook as new tariffs impacted U.S. export-dependent small and medium-sized businesses, which tempered the pace of lending recovery. We now expect high single-digit revenue growth in India in the fourth quarter. On a positive note, we experienced some volume improvement in the first days of the festival season in late September and early October, supported by further pro-growth actions from the RBI and the Indian government. Todd will provide a comprehensive review of our results in just a minute. Looking ahead, we're raising our 2025 outlook based on our strong third-quarter results, stable U.S. lending trends, and our continued commercial momentum. Our guidance raise maintains a prudently conservative approach, which offers likely upside if current lending conditions continue. At the high end of guidance, we now expect 8% organic constant currency revenue growth, or 9% excluding last year's large breach win, 9% adjusted EBITDA growth, and 9% adjusted diluted earnings per share growth. Excluding the 400 basis point impact of a higher tax rate in 2025, our results show another year of double-digit EPS growth, supported by our consistent execution and the strength of our diversified and resilient portfolio. We continue to advance our technology modernization to drive cost savings, accelerate innovation, and enable sustainable growth. In the third quarter, we completed the migration of our first U.S. credit customers, a key milestone. We're enabling these clients with faster processing speeds and seamless access to our newest innovations, including TrueIQ analytics. Additionally, we expanded our dual-run program for key customers. We're partnering closely with our customers to ensure smooth transitions ahead of a full migration. By year-end, we expect One True to power a critical mass of our run-rate U.S. credit volume and revenue. We plan to complete all U.S. migrations by mid-2026. Over the year, we identified incremental third-party spend and other internal savings to deliver our targeted savings for 2026 and allow additional time to complete U.S. credit migrations. In 2026, we expect to deliver $35 million of operating expense savings and reduce capital expenditures to 6% of revenue. We will leverage these savings to drive margin expansion in 2026 and fund growth investments. We anticipate no technology-related one-time expense add-back in 2026. Next year, our technology modernization will shift to our international markets. We've launched the TrueIQ analytic platform in Canada, the UK, and India in 2025. Next year, we plan to export other OneTru-enabled solutions to these markets and start modernizing the core credit capabilities across Canada, the UK, and the Philippines. One True is our destination platform, and we expect to fund these migrations through normal operations, driving additional savings in 2027 and beyond while diffusing our innovative solutions globally. Our technology modernization is enabling commercial success across our solutions. We see new products rapidly gaining market traction, and we've built a robust innovation pipeline to fuel our next phase of growth. Factor Trust has delivered exceptional results, secured multiple new wins in the quarter, and continues to expand the pipeline. Factory Trust has been a key driver of outperformance in our consumer lending business throughout the year. We anticipate roughly 20% growth from Factor Trust in 2025. TrueIQ data enrichment launched on Snowflake with the first few live customers. The Snowflake partnership expands the market opportunity for data enrichment and underscores our commitment to meet customers wherever their data lives. Data enrichment has quickly become one of our most successful recent product launches. In fraud, we experienced strong demand for our newest synthetic fraud models and credit washing solutions. These new tools are built on One True and leverage our augmented identity graph, which now includes integrated public records and delivers better fraud signals. With One True, we're beginning to penetrate the large and fast-growing global market for advanced fraud analytics. We're accelerating growth in our marketing suite as well, driven by strong demand for our enhanced cloud-based identity resolution and audience activation capabilities. Over the last few years, we've streamlined our marketing suite down from 87 products across six separate platforms into a single integrated marketing platform on One True. This integrated solution improves performance and simplifies our product portfolio for sellers and customers. Trusted Call Solutions continues to scale with new customer wins and ongoing capability enhancements. We expect to deliver over $150 million in revenue in 2025, a 30% plus increase year over year. We also continue to pursue global expansion opportunities for TCS. In Consumer Solutions, our freemium model is increasing in users and offers available. We're also migrating our indirect customers globally onto a new platform that combines our credit education, identity protection, and financial offers behind a single set of APIs. One True brings together our unique data within a single workflow platform, making it easier to deploy AI solutions across use cases and at scale. TransUnion is well-positioned for AI-led growth. Our credit solutions are based on proprietary data contributed by thousands of individual furnishers. This data is not publicly available and can only be gathered and utilized within demanding regulatory frameworks. Our non-credit solutions are also developed from data gathered from tens of thousands of sources, many unique to TransUnion, and then combined with proprietary data exhaust from our fraud and marketing solutions. This vast array of data fuels our credit, fraud, and marketing predictive models, which already use advanced machine learning and AI to boost accuracy and facilitate actions based on their better predictions. Increasingly, TransUnion will capture value with AI agents by performing work currently done by internal client teams or automation upstream from our data and analytics. Our most AI-enabled customers already consume more of our data than our traditional customers, and they adopt our newer solutions more rapidly. We are actively leveraging AI across the enterprise to drive faster product development, enhance customer experience, and improve operational efficiency. Internally, One True Assist and One True AI Studio are driving productivity gains for our software developers and data scientists, but also for non-technical teams. Within the One True Tech platform, agentic.ai is enhancing core processes such as data onboarding, ID resolution, analytics, and delivery. At the product level, we're embedding AI into our solutions, including role-based agents for TrueIQ analytics, our next-generation fraud detection models, and advanced consumer behavioral analytics in our marketing suite. In summary, the tech modernization is driving rapid innovation and operational efficiency, but it's also positioning us to lead in the next phase of AI-driven growth. Our strong earnings and solid balance sheet have enabled us to boost capital returns for our shareholders. In the third quarter and October, we ramped up share repurchases to $160 million, increasing our total for the year to $200 million. This reflects our ongoing commitment to shareholder value. The Board recently raised our share repurchase authorization to $1 billion, and we believe buying back shares is especially attractive given our current market valuation. With that, I'll hand it over to Todd. Todd M. Cello: Thanks, Chris. Let me add my welcome to everyone. As Chris mentioned, we exceeded guidance across all key financial metrics in the third quarter, driven by U.S. Financial Services and Emerging Verticals. Consolidated revenue increased 8% on a reported and 7% on an organic constant currency basis. The Monevo acquisition added 0.5% to growth. The foreign currency impact was immaterial. Excluding the comparison to last year's large breach remediation win, organic constant currency growth was 11%. Mortgage contributed three points to growth. Adjusted EBITDA increased 8% with margin at 36.3%, above our 35.6% to 36.2% guidance due to revenue flow-through. Adjusted diluted earnings per share was $1.10, ahead of the high end of our guidance and an increase of 6%. In the third quarter, we incurred $34 million of one-time charges related to our transformation program: $12 million for operating model optimization and $22 million for technology transformation. Cumulative one-time transformation expenses total $349 million, and we remain on track and within budget for our $355 to $375 million in one-time expenses by 2025. Looking at segment financial performance for the third quarter, U.S. Markets revenue was up 7% on an organic constant currency basis versus the prior year, or 13% excluding the impact of last year's large breach win. Adjusted EBITDA margin was 38.4%, up 70 basis points due to revenue flow-through and lower product cost compared to the prior year. Financial Services revenue grew 19%, or 12% excluding mortgage. In the U.S., consumers remain resilient with still low unemployment and positive wage growth, and lenders well-positioned with adequate capital and healthy credit performance. Our growth reflects strong performance against the favorable and stable market backdrop. We continued to outperform the market by driving new business wins across our solution suites. Credit card and banking rose 5% against modestly improving online volumes. We continue to see good sales momentum with Trusted Call Solutions and alternative data. Consumer lending grew 17%, driven by healthy marketing and origination activity from FinTech and point-of-sale lenders. Factory Trust also delivered another strong quarter. Auto grew 16%, driven by pricing as well as growth in communications and marketing solutions. We saw an uptick in activity in the quarter, including increased electric vehicle sales in September ahead of the expiration of the federal EV tax credit. We anticipate volumes to normalize in the fourth quarter. Mortgage revenue grew 35% on flat inquiry volumes, benefiting from third-party scores, pricing, and non-tri-bureau revenue. Mortgage now represents 12% of trailing twelve-month revenue. Emerging Verticals grew 7.5%, led by double-digit growth in insurance. Other verticals accelerated as well, driven by strength in Trusted Call Solutions, marketing, and specialized risk. Tech, retail, e-commerce, and collections posted double-digit growth. Media and Communications grew mid-single digits, and Tenant and Employment grew low single digits. Public sector declined due to revenue timing. In insurance, we delivered another strong quarter. Consumer shopping remains elevated. Credit-based marketing activity continues to normalize as insurers benefit from improved rate adequacy, complemented by new wins and our modern marketing solutions. Commercial momentum continued in core credit and driving history products as well as Trusted Call Solutions. Turning to Consumer Interactive, revenue declined 8% on an organic constant currency basis due to last year's breach remediation win. Excluding this impact, Consumer Interactive grew mid-single digits with growth in both the direct and indirect channels. For my comments about international, all revenue growth comparisons will be in organic constant currency terms. For the total segment, revenue grew 6%. Canada and the UK delivered double-digit growth, demonstrating our ability to outgrow market volumes in our most mature markets. Africa and the Philippines also grew double digits. Other markets, including India, Latin America, and Hong Kong, experienced below-trend market volumes and growth rates. Adjusted EBITDA margin for our International segment was 43.2%. Looking at the specifics for each region, India grew 5%, slightly below our expectations as recent trade actions tempered the pace of volume recovery. We now anticipate high single-digit revenue growth in India in the fourth quarter. In late 2023 and throughout 2024, the Reserve Bank of India took actions to slow lending by tightening regulations and targeting lower loan-to-deposit ratios industry-wide. These actions included temporary bans of several non-banking finance companies. Volumes troughed in 2024 with gradual improvement throughout 2025. Conditions overall are favorable with manageable delinquencies and modest inflation. The RBI lowered rates by 100 basis points throughout 2025 and lifted lending bans on the impacted non-banking finance companies. The recovery has been measured. Loan-to-deposit ratios are still modestly elevated, and non-bank finance companies have conservatively returned to the market. Lenders are prioritizing existing customers and lower volume, higher notional loans over new-to-credit opportunities. These dynamics have underpinned our guidance throughout the year. Recent U.S. tariffs of 50% on Indian imports, however, introduced uncertainty and have dampened commercial lending, particularly to small and medium-sized businesses in export-oriented sectors. This has resulted in new pressures on CapEx, employment, and credit demand. On a positive note, the Indian government recently enacted tax reforms, and the RBI proposed further regulatory easing to support lenders and stimulate growth. Volumes in the early festive season in late September and early October, while still dampened from tariff effects, showed some improvement. We will monitor ongoing trends. From a TransUnion perspective, we continue to deliver double-digit growth in business wins and new product introductions, outperforming the broader market and our competitors. We remain highly confident in India's robust long-term growth potential. Our UK business grew 11%, our strongest performance since 2022, driven by healthy volumes from our largest banking customers and new business wins across verticals. We also continue to expand our consumer indirect offering to new partners, now serving over 27 million UK consumers. Canada also grew 11%. We drove innovation-led share gains across financial services, telco, insurance, and auto, as well as new and expanded wins in FinTech and consumer indirect. Latin America revenue was flat amid softer economic and lending conditions. Colombia delivered modest growth despite political uncertainty that weighed on government revenues and lending activity. Brazil declined as we lapped one-time project revenue. Our other Latin America countries grew modestly, impacted by consumer uncertainty linked to recent trade and immigration policies. Strategic campaigns and innovation-led wins offset some of the near-term volume pressures in the region. Asia Pacific declined 8%. The Philippines remained strong, but Hong Kong faced a soft economic backdrop. We also lapped one-time consulting revenue from the prior year. Finally, Africa increased 12% with broad-based growth across financial services, retail, and insurance. Turning to the balance sheet, we ended the quarter with $5.1 billion of debt and $750 million of cash on the balance sheet. Our leverage ratio at quarter-end declined to 2.7 times as we continue to push toward our long-term target of under 2.5 times. Our strengthening free cash flow and ongoing natural delevering positions us to accelerate capital returns to shareholders. We repurchased $160 million in shares in the third quarter and October, bringing the year-to-date total to $200 million. We remain on track to complete the Mexico acquisition in late 2025 or early 2026, which will be funded with cash on hand and debt. We look forward to adding Mexico to our leading global portfolio and bringing our state-of-the-art technology, innovative solutions, and industry expertise to Mexican consumers and businesses. Turning to guidance, as Chris mentioned, we are raising our full-year outlook, reflecting strong third-quarter results, stable U.S. lending conditions, and new business wins. Our guidance remains prudently conservative. If current conditions continue, we expect to deliver results at or above the high end of our guidance range. That brings us to our outlook for the fourth quarter. FX impact is expected to be minimal to both revenue and adjusted EBITDA. We expect our Monevo acquisition to contribute roughly 1% to revenue. We expect revenue to be between $1.119 billion and $1.139 billion, up 7% to 9% on an organic constant currency basis. Our revenue guidance includes two points of tailwind from mortgage. In the fourth quarter, mortgage inquiries are expected to increase modestly. We expect adjusted EBITDA to be between $393 million and $407 million, up 4% to 8%. We expect adjusted EBITDA margin of 35.1% to 35.8%, down 70 to 130 basis points. We expect our adjusted EBITDA margin in the second half of the year to be roughly 36%, consistent with the first half of the year and full-year expectations. We expect our adjusted diluted earnings per share to be between $0.97 and $1.02, down 1% to up 5%. Turning to the full year, we anticipate FX to be immaterial to revenue and adjusted EBITDA, and the Monevo acquisition to contribute 0.5% to revenue. We expect revenue of between $4.524 billion and $4.544 billion. We expect organic constant currency revenue growth of 8%, an increase from our prior guidance of 6% to 7%. Excluding mortgage, we expect organic constant currency growth of 5% to 6%. These growth rates include a 1% headwind from last year's breach win comparison. Specific to our segment organic constant currency assumptions, we expect U.S. Markets to be up high single digits or mid-single digits excluding mortgage. We now anticipate financial services to be up mid-teens or roughly 10% excluding mortgage. We expect mortgage revenue to increase by nearly 30% against modest declines in mortgage inquiries. We expect emerging verticals to be up mid-single digits. We anticipate Consumer Interactive decreasing low single digits but increasing low single digits when excluding the impact of last year's large breach win. We now anticipate international growing mid-single digits. Turning back to the total company outlook, we expect adjusted EBITDA to be between $1.622 billion and $1.637 billion, up 8% to 9%, an increase from our prior guidance of 5% to 7%. That would result in an adjusted EBITDA margin of 35.9% to 36%, down 10 basis points to flat. We anticipate adjusted diluted earnings per share to be $4.19 to $4.25, up 7% to 9%, also an increase from prior guidance of 3% to 6% growth. Our expected adjusted diluted earnings per share growth reflects strong double-digit underlying performance, excluding a 400 basis point headwind from a higher tax rate in 2025. We expect depreciation and amortization to be approximately $570 million. We expect the portion excluding step-up amortization from our 2012 change in control and subsequent acquisitions to be about $285 million as technology modernization initiatives go into production and start to depreciate. We anticipate net interest expense will be about $200 million for the full year, and we expect our adjusted tax rate to be approximately 26.5%. Capital expenditures are expected to be about 8% of revenue. We continue to expect to incur $100 million to $120 million in one-time charges in 2025 related to the last year of our transformation program. Given those investments, we expect our free cash flow conversion as a percentage of adjusted net income to be 70% in 2025 before improving to 90% plus in 2026. I will now turn the call back to Chris for closing remarks. Christopher A. Cartwright: Thank you, Todd. I'd like to provide some perspective on the recent changes in the mortgage market, both in terms of score competition and also distribution. We believe that these changes are a net positive for TransUnion, enabling us to fully leverage our leading trended and alternative data to the benefit of homebuyers. Additionally, we believe that the introduction of score competition will redistribute the economic value in the mortgage credit market towards data providers and away from scores. This is what we experience in all markets where score competition exists. It's our extensive contributed data from thousands of lenders that forms the foundation of value in mortgage credit decisions, not the score. We expect the proportion of value associated with data to increase over time now that competition is possible. As a pioneer in trended data and an innovator in the alternative data space, TransUnion will empower mortgage lenders to reward consumers for responsible credit behaviors while preserving the safety and soundness of the mortgage market. TransUnion is the only bureau with thirty months of trended credit data, creating the most complete picture of consumers. We continue to enhance our mortgage credit report with alternative data, including rental and utility trade lines and short-term lending attributes. VantageScore 4.0 uses trended and alternative data to boost predictive accuracy and to expand financial access, scoring 33 million consumers that were previously credit invisible. The scores are already used by the largest banks and 3,700 institutions in total, including increasingly in securitization. Additionally, VantageScore is the leading credit score for credit education, serving 220 million consumers. We believe that the combination of TransUnion's leading trended and alternative data alongside VantageScore 4.0 will shape a new era of more inclusive mortgage access, benefiting homebuyers, lenders, and investors. We provided further details on the importance of TransUnion in the lending ecosystem and the value proposition of the VantageScore in our appendix of this earnings presentation. Starting in '26, we're expanding our mortgage credit offerings to accelerate VantageScore adoption. First, we'll offer VantageScore 4.0 at $4, significantly below FICO's announced price hike to $10. For customers that adopt Vantage 4.0, the cost for a credit report plus a score in '26 will be similar to the cost of a credit report plus the FICO score in '25. To enable lender choice, we'll also provide a free VantageScore 4.0 for mortgage customers that purchase a FICO score from TransUnion through 2026. We'll also offer multi-year pricing for credit reports and Vantage 4.0 to promote certainty after multiple years of rapid FICO price increases. We'll launch a free VantageScore credit score simulator to empower prospective homebuyers to improve their credit scores and qualify for the best possible mortgage terms. These offerings provide clear cost savings and predictable pricing for clients, emphasizing that the main value in lending is in the data. Our actions will preserve the profitability of our mortgage vertical regardless of changes in third-party score delivery models. For TransUnion, VantageScore adoption represents an incremental profit and margin opportunity over time. Looking at the industry broadly, even a modest recovery in mortgage activity would boost already attractive financial results. Mortgage originations in 2025 are roughly 40% below 2019 levels, at their lowest levels since the middle of the 1990s. Despite this volume decline, we have built a strong profit base in mortgage. This year, we expect to deliver $580 million in mortgage revenues, or $395 million when excluding the $185 million of no-margin FICO royalties. We expect an eventual normalization in mortgage activity, with the pace largely determined by interest rates. Lower rates would drive substantial refinancing activity and start to unlock home purchase demand. Currently, over 9 million mortgages have rates above 6%, compared to 5 million total mortgage originations in 2024. If the average rates fall below 6%, we expect a significant increase in market activity. This normalization would significantly boost our earnings. Every 10% increase in mortgage volumes would add $40 million of adjusted EBITDA and $0.15 to our earnings. A full recovery to 2019 levels equates to a $240 million adjusted EBITDA increase, or $0.90 in our earnings, representing a 20% increase to 2025's adjusted diluted earnings per share. Any volume normalization would be in addition to the typical growth drivers in mortgage of pricing, innovation-led new business wins, and the upside from VantageScore adoption. Lower interest rates would drive incremental volume demands across all lending categories, which also remain below the long-term trends. Taking this together, we remain confident in navigating this evolving mortgage landscape to maintain our attractive financial profile with upside from VantageScore adoption, as well as an eventual recovery in lending volumes. In closing, TransUnion's strong third-quarter and year-to-date results highlight the benefits of our multiyear strategic transformation. We view the high single-digit revenue growth and the double-digit underlying EPS growth in each of the last two years as indicative of the long-term earnings power of our business in stable conditions. Going forward, we're poised to accelerate growth and efficiency, powered by our modern technology platform and the most innovative products in our history. We're just beginning to tap the potential in large and growing markets such as credit analytics, fraud, marketing, and trusted call solutions. We've also reinvigorated our consumer business. We see growth upside in each of these businesses because of recent product innovation and our expanded go-to-market efforts. This is in addition to any benefit from normalization in U.S. mortgage as well as India returning to its typical growth algorithm. Our industry-leading growth and enhanced free cash flow generation will enable us to accelerate capital returns to shareholders while continuing to invest thoughtfully in innovation and expansion. We plan to share more about our technology transformation, product innovations, and accelerating commercial momentum, as well as updating our medium-term financial framework at an Investor Day that we will host in early 2026. With that, let me turn it back to Greg. Gregory R. Bardi: That concludes our prepared remarks. For the Q&A, we ask that each ask only one question so that we can include more participants. Operator, we can begin the Q&A. Operator: Thank you. We will now begin the question and answer session. If you are using a speakerphone, please pick up your handset before pressing the keys. The first question comes from Andrew Steinerman with JPMorgan. Please go ahead. Andrew Steinerman: Good morning. I appreciate the left side of Slide four. This is the slide that breaks down the growth drivers by bars and colored bars in U.S. Market. I particularly wanted to ask how much of the U.S. Market growth here on Slide four is coming from FICO pricing pass-through. I'm just assuming that is on the green bar of pricing. Correct me if I'm wrong. While you're looking at the green bars, if you could just comment on the other green bars, the volume growth, that's credit volume growth and the non-credit growth green bars. Do you think is growing with market or gaining share relative to end market activity? Todd M. Cello: Good morning, this is Todd. I'll take that question. As it pertains to pricing when we look at that 5%, I would say a good portion of that relates to the mortgage pricing. But there still is pricing that TransUnion does take and we do have a pretty robust process to have price increases on an annual basis, but I'd say the majority of that is primarily related to mortgage. If we look at the other green bars, the volumes in particular do speak to the growth that we have been experiencing within credit. We articulated that, talked specifically about within financial services excluding mortgage, saw some really good growth in consumer lending. Credit card and banking also was up a little bit and auto is kind of held its own. Other than that, we are seeing good volume growth outside within the emerging verticals as well. If you look at non-credit growth, think of that as our Trusted Call Solution capabilities. Think of that as marketing as well as fraud. In particular, in the third quarter, we saw very strong growth continue in Trusted Call Solutions and encouragingly marketing posted a very good solid quarter and you can see that when you look through to the emerging vertical overall growth rate at 7.5%. Andrew Steinerman: Great. Thanks, Todd. Then if I could just add on to that too, one last is that I just talked about the volumes in that first bar, but the bar clearly has wins in there as well too. So I'd be remiss to not recognize the terrific work that our sales team has done and continuing to build our pipeline, convert that to bookings, and then ultimately enjoy the revenue recognition that you're seeing here. Christopher A. Cartwright: Look, if I can add my 2¢ Andrew. Obviously, to compare our results to the market, you got to do some slicing and dicing for non-comparable lines of businesses and such between the different players. When we isolate it down to financial services performance, we think we're materially outgrowing the market. A lot of it is due to our new innovation. The Factor Trust score has really reinvigorated our growth across consumer lending. We think we are gaining share. When you adjust for mortgage, which is a bit of a constant between the several bureaus, our growth rate is more than double that of what we see elsewhere in the market. Andrew Steinerman: Great. Thanks, Chris. The next question is from Jeffrey P. Meuler of Third. Please go ahead. Jeffrey P. Meuler: Yes. Thank you. Good morning. So really nice quarter. They've been good for a while now. I want to ask about the pace of investment. There was a nice EBITDA beat to go along with really good revenue growth, but the flow-through on the revenue upside was lower than it sometimes is on big revenue beats, especially when you're at 11% underlying growth. So my question, are you incrementally, I guess, reinvesting into strength? If it's incremental investment, what is it in? Like is it some of the AI initiatives ahead of productivity and revenue benefit or what is it? Any framework updated framework you can give on how to think about margins beyond 2025? Thank you. Christopher A. Cartwright: Yes. Well, listen for sure Andrew, I think you characterized it Oh, sorry, Jeff. Apologies. I think you characterized it right that we are accelerating investments given the financial strength that we're delivering in 2025. I mean, pulling back the frame a little bit, we're very happy with how we're performing not just in the quarter, but how we're set up to perform in 2025 and really over the past couple of years. We're talking very high single-digit organic compounding growth. We've got margin expansion. We've got low double-digit EPS growth when you make sensible adjustments to the numbers. We're highly confident that we're going to deliver on all of these metrics including our 36% margin guide. I would also point out that our guide for the remainder of the year, the fourth quarter, and the full year maintains our prudent conservatism, which I think you guys know means if conditions persist as we have experienced them in the quarter, and for most of the year, we would expect to outperform the high end of this guidance. So in terms of the fall-through, look, the strong outperformance has given us a chance to continue our product innovation, to invest in AI areas like I highlighted. We had a slide on that in the deck and I talked about how AI is really permeating much of our product and some of our new feature functionality for using our new analytics platform. But additionally, we're growing our go-to-market effort across all of our new product lines because we want to make sure that we can continue to compound the top line at this level going forward. So hopefully that gives you what you need. Todd M. Cello: Question, I think I heard you talk about '26, Andrew. So let me kind of sorry, Jeff, I call you Andrew now too. So, 2026 as far as how we're thinking about margins, I think our expectations are for what we would characterize to be solid expansion in 2026. So, if conditions stay the way that they are, revenue growth plus the remaining savings from our transformation program will allow us to achieve that solid margin expansion while also allowing us to invest back in the business. So just like what Chris just talked through, so that's an important point. Also, we're committed just to reiterate a point we made in our prepared remarks to stop the transformation program adjustments. That will end at the 2025. I think it's important to call out here that when we announced that program in November 2023, we called for that spend to be between $355 million and $375 million. We've managed to that budget and we've hit our deliverables. So that's been a big focus for us internally. So really proud of what the team has been able to accomplish there. The other part when we think about 2026, let's not forget that we're also planning to reduce our capital expenditures down from about 8% to 6% of revenues. So the margin expansion plus the CapEx coming down to 6% nets us to a 90% plus free cash flow conversion, which we've had our eyes on since the beginning of this transformation program two years ago. Christopher A. Cartwright: Yes, good point. Thank you. Operator: The next question is from Faiza Alwy of Deutsche Bank. Please go ahead. Faiza Alwy: Yes. Hi. Good morning. I wanted to ask about the really strong growth you had in emerging verticals. I'm curious how do you think about the sustainability of that growth? I know you're still guiding to mid-single digits for the year. But was there anything sort of one-time related? Maybe if you can remind us around how much of the business is subscription-related and what you're seeing from a new business perspective here? Christopher A. Cartwright: Yes, thanks for the question. Look, there's nothing anomalous in the third-quarter results for emerging verticals. There's nothing that is one-time or that you need to make an adjustment for. Obviously, it's been a little bit bumpy in the past couple of years as we've been raising our growth rate and emerging from low single to now high single digits. We've got a stable foundation of revenue performance across almost all the vertical components of emerging. We had to get through some volatility in the tenant and employment because of CFPB changes and the like. The only component I think that is not performing right now is public sector, which is relatively small for us. But we used to be able to count on it for low double-digit growth. Doge kind of interrupted that. Shutdown is probably not going to help. But there's no reason in the intermediate future with stability that our solutions don't start growing at low double digits again. Now with that said, what's driving the improvements in the growth are first insurance. Insurance has been a solid double-digit organic grower for the past couple of years. We're doing exceptionally well there. We've got terrific products, particularly our drivers' risk solutions. We estimate now with current policy levels that we touch 50% of all policies that are being underwritten in the U.S. So it's a fantastic and growthful position that will continue. We've also really grown well in our Trusted Call, our communication solutions. That's again a double-digit grower. There's a lot of addressable market ahead of us. There's a lot of opportunity to expand those solutions internationally. Marketing has been reinvigorated. Marketing has been a target for tremendous reinvestment over these past couple of years. We launched our TruAudience marketing solution. It's now we've gone from just dozens and dozens of point solutions into an integrated end-to-end workflow solution for marketers and our audience data, our onboarding revenues, and most importantly, our core identity resolution, which really leads the market, are performing exceptionally well. Fraud is contributing, investigative solutions, all of them are showing improved revenue performance. Our goal is to get this number up and to really take advantage of some very large and fast-growing markets. Faiza Alwy: Great. Thank you, Chris. The next question is from Toni Michele Kaplan of Morgan Stanley. Please go ahead. Toni Michele Kaplan: Thanks so much. Chris, thanks for going through your AI solutions in the prepared remarks. I was hoping you could talk a little bit more about your proprietary data and particularly how you're positioned in the marketing business, but also across other parts of the business? I think you did a great job, but just wanted to hear more specifics on that. Thanks. Christopher A. Cartwright: Okay. Yes. Well, thanks for the question. Obviously, AI concerns have permeated the info services space over the past couple of months. There's been a lot of thought about who's positioned to win and who might be vulnerable. As I articulated in the main deck, I feel like TransUnion and the bureaus overall are really positioned to be beneficiaries of AI because of the breadth and the proprietary nature of the data, the broad contributory network, and all of the levels of regulation around this information. You simply can't go out and crawl the web, get all of this credit information, and then credential all of the customers who consume it and then ensure that those customers are only using it in the regulatorily approved ways. That can't happen, right? We've got this proprietary defensible foundation of information. If you look at the marketing space, we are gathering information in marketing and fraud from literally tens of thousands of different touchpoints. Many of them are not publicly accessible, and that information, while it's not regulated by the Fair Credit Reporting Act, it is regulated by the Drivers Privacy Protection Act, by GLB regulations overall. Again, there are regulatory hurdles or moats protections around this data. Our solutions not only take that foundation of data, but they combine all of the exhaust we get from providing marketing, in particular audience activation and measurement services to the space, and they incorporate that back into the data foundation. So there's a bit of a network effect that enriches our marketing data and our fraud data that makes it hugely defensible. Now as we build AI on top of that foundation, as we move from advanced machine learning to more AI and generative techniques, it gives us an incremental growth opportunity because look, the analytics and the insights that consumers drive from our data that leads them to take actions. A lot of those actions are embedded in software applications upstream. Decisioning and other workflow applications. Increasingly, the AI agents that we're going to build are going to erode the value of the upstream software applications. So over time, our business and as you look across our industry, we are going to evolve into integrated workflow platforms driven by proprietary data and analytics. We strongly believe that AI represents a massive growth unlock for the business. It's just going to take some time for the market to understand this and then recognize it. Toni Michele Kaplan: Thank you. Operator: The next question is from Manav Shiv Patnaik of Barclays. Please go ahead. Manav Shiv Patnaik: Thank you. Chris, I just want to on that last statement you made. I think, yes, the market will take some time to appreciate it, but is it also because it's going to take you guys some time to actually show that benefit in the revenue line item? Then maybe to Todd just on the cost side, does that help? When can we start seeing that help your margin flow through? Christopher A. Cartwright: Yes. Look, fair question, Manav. We've raised our guidance for the fourth quarter, but we didn't do it based on anticipated new AI revenues. Right? So if your perspective is the next quarter, it's going to take a little bit of time. In the intermediate term, you're going to start to see increases in wins and retentions and pricing power increases and absolute new categories of revenue developed quarter by quarter as we begin to utilize AI across the product suite. The other thing I would say is look internally, we're using AI to automate a lot of our customer service and our dispute resolution operations. We have thousands and thousands of people that service consumers around the world who have questions or concerns about their credit or the scores being calculated based on it. We can do a better job servicing those consumers with AI-enriched processes, and we're investing a lot to make that happen. I think that's going to allow us to continually improve service at much greater productivity over time that will be a net positive to our margins going forward. Manav Shiv Patnaik: Thank you. Operator: The next question is from Ashish Sabadra of RBC Capital Markets. Please go ahead. Ashish Sabadra: Thanks for taking my question and congrats on such solid results. I just wanted to ask a few questions on mortgage, questions that we are getting a lot from investors. First one was just around mortgage. Is there an opportunity for you to continue to raise prices on your data file even in a FICO direct license model? Second is just some concerns around 3b2-2b. Have you heard anything on that front? Third would be just on the trigger marketing regulation. Could that have any impact on your revenues going forward? Thanks again. Christopher A. Cartwright: Hey, Ashish, I didn't hear the second component of your question. The first is the change competition and the changes in the distribution model and go-forward pricing power. The third is about triggers. What was the second? Ashish Sabadra: Just the three bureau to two bureau. Is there any potential risk there? Thank you. Christopher A. Cartwright: Okay. Well, we've got our mortgage team at the Mortgage Bankers Association meeting has been going on since Sunday. We've had a ton of client interactions. All three bureaus have had their representatives on stage talking about their new integrated mortgage offerings to counter this latest and very aggressive price increase by FICO. I think you have to just stop for a second and realize that four years ago, the FICO score cost I think it was $0.62. Today, we're talking $10. Resellers and lenders are really frustrated by the aggressive price increases that have been put through and put through on the eve of competition for the first time in thirty years in score pricing. Now what we have put forward 30 million plus consumers that were previously because we were using a score that was point-in-time data and not trended data. Trended data has been the standard for a decade in the mortgage industry. Right? So there's been a real lack of innovation in that regard. The power of our trended data and alternative data, we estimate 5 million to 6 million more Americans will qualify for GSE-sponsored mortgages going forward. There is value there that I think TransUnion and the other bureaus will be able to capture while still saving the industry an enormous amount of cost. Right. So the industry is looking for this opportunity. Now look, for thirty years, the industry has not had choice. So much of it is calibrated to the FICO classic score. But the industry is hungering for change. They want greater financial inclusion because that means more customers for them to make loans to. The GSEs care about financial inclusion and they also care about safety and soundness. For ten years, they've insisted upon trended data from the bureaus because they know it works better. Right? So now the stars are aligning to really support what I think will be a material share shift over time. Yes, it's going to take some time to warm up the engine. But look, we have already helped a number of clients move off of the FICO score. Synchrony moved to VantageScore for underwriting their card portfolios some years ago. They wrote a white paper on how to do it. They've had teach-ins on how to do it. They securitize those mortgages. Community financial institutions have been under the vice of FICO price increases. They hold a lot of their mortgages on their books. We have been converting many of them over to the VantageScore and trended data for years. Okay. So it's not like this can't happen. I think the industry is awakening to the opportunity. I think the entirety of the industry is going to start experimenting with this. I think over time you're going to see material share shift to Vantage because it works better and it unlocks trended data and the industry is fed up with price increases. So that's the first point. Now triggers, we've essentially been out of the triggers business for years, right? So we're not impacted by the changes in regulation or legislation. Look in terms of the TriMerge, the tri-merge is an important part of the safety and the security of the mortgage lending system in the U.S. We've proven it out empirically. Neutral third parties like S&P have analyzed this. What they've observed is that in recent years the three bureau files have started to diverge in terms of their data content. This era of accelerating alternative data on the credit files is just going to lead to further divergence. If you don't pull three files, the chances are you're not going to qualify somebody who could be qualified. It's a misrevenue opportunity. You're also not going to assess the risk as well as you will if you pull three files. You may end up charging people more on a very large and long-duration credit. That higher rate is going to come down to a massive increase in the interest that a consumer pays. So for a very small cost in the context of this larger transaction, you get greater financial inclusion, greater profitability, greater safety and soundness. For all of those reasons, which the FHFA understands very well and there's an enormous amount of support on Capitol Hill for the TriMerge, I don't see any changes coming on that horizon. Ashish Sabadra: Very helpful, Chris. Thank you very much. Operator: The next question is from Scott Darren Wurtzel of Wolfe Research. Please go ahead. Scott Darren Wurtzel: Hey, good morning guys and thank you for taking my question. Just wanted to go back to maybe some of the trends you're seeing on the FinTech lender side. It sounds like during the quarter itself, trends were pretty stable. But just given some of the noise that we've heard around subprime credit or anything, just wondering if you can maybe talk about some of the trends you've seen since kind of the end of September, early October on that side of the business? Thank you. Christopher A. Cartwright: Well, look, let me pull back the lens and just talk about the overall market conditions that we're seeing and the health of the market. The broader context is coming out of COVID and coming out of this era of really cheap money in the U.S., in 2022 and 2023, we had to deal with declining volumes. In '24 and '25, we've largely had stable but muted lending levels. All lending categories are below the long-term trend. Mortgage lending is dramatically below the long-term trends. It's back to mid-90s levels. Now I think we're in a period of stable to improving loan volumes. I mean if you look at our results, 11% organic growth with 13% in U.S. Markets alone reflects really good volumes. Now we're not back to the long-term trend lines, but when I look at my daily volume reports across all categories, I see material volume increases. Part of that is because of the soundness of the market. So it's macro-driven, but a lot of it is based on our commercial success. Right? The wins that we're racking up in the market and the dramatic performance improvements in our subprime-oriented credit scores. Right, the Factor Trust scores. So we're doing really well there. We see a market that's got decent GDP growth, lowering interest rates, a lot of stability in delinquencies. We've looked really hard here at the nominal debt levels of consumers of all risk tiers. Looking at their current levels back to 2019. You see in the media a lot of concern about the nominal increases in consumer leverage. But when you adjust that for inflation and you adjust it for the substantial wage gains particularly that lower-income Americans have enjoyed over this period, their net indebtedness in 2025 looks pretty much the same as 2019. I think the banks confirm this. I mean we just had a round of bank reporting. All the results for the industry are quite solid. Lending volumes are increasing and practically no one took any increase in their bad debt reserves. Right? So the industry feels good about the condition of the market. The industry feels good about the condition and lendability of the consumer. Now at the lower end in subprime, I mean, look go back over the last eight quarters, ask AI to do a media search for you. In every quarter somebody is talking about instability and subprime rising delinquencies etcetera, etcetera. Despite those concerns, some of which are legitimate, we have managed to post market-leading growth in every quarter. Right? So clearly our foundation for growth is very broad-based across all risk tiers in the U.S. The portfolio is really representative of the broader lending ecosystem. It's not skewed toward subprime. If it were, we wouldn't have been able to outgrow the market for the past eight quarters. So those are my thoughts on that topic. Thank you. Operator: The next question comes from Craig Huber with Huber Research Partners. Please go ahead. Craig Huber: Yes, hi, good morning. Thank you. My understanding is out there that VantageScore has about 5% market share in autos, credit cards, personal loans, etcetera. Obviously, on the non-conforming part of mortgages, I believe it's basically negligible in the non-conforming piece. When we think about the pricing you guys have come out with for VantageScore for mortgages of $4 you just announced recently, Equifax obviously came out at $4.05 $0 price. Then you talk about it versus $10 for FICO score. That is a huge cost savings. I could see your argument there. But obviously, FICO has a second model out there, right, a brand new one at $5 but then it's a $33 fee on the back end if the mortgage closes. All this stuff, of course, gets paid by the consumer. If I'm the lender, if I'm the lender here, I'm going to be much more likely to go with the $5 option for FICO. Then the $33 on the back end that the consumer pays for all of that, correct? On the lender. So in my mind, I'm comparing your $4 number to $5. Am I wrong on that? Also, can you comment on the 5% market share? Christopher A. Cartwright: Yes. Well, look, the market share is low in these other areas, but I think that's derived in large part to the monopoly positioning in mortgage. Of course for FICO, the profitability of the business is driven disproportionately out of mortgage where the pricing is high. I think now that all of these resellers are being forced to do the analytics behind the Vantage score in conversion, it just creates a very ripe opportunity for share shift. I think that's how it's going to play out over time. Now in terms of the success-based model or the booked fee model, and in terms of shifting the calculation of the FICO score via the direct approach, I think that the resellers and the lenders, but particularly the resellers, are just starting to understand the complication with administering the model. It comes with a blizzard of complexity. Right? The first is just the accuracy of the calculations themselves. As we've seen in the industry, sometimes there are errors. When there are errors, the question will be who's responsible? For that error? Secondly, today none of the resellers are agents of the bureau. That's a status that's very difficult to attain. You have to have considerable cybersecurity investments and scrutiny and they've simply been consumers of the data and the output of the score calculation that we provide and then they pass the three of them on to the GSEs or to their lending customers. Right? Well, now they're going to have to increase their cybersecurity investments. They're going to have to increase their personnel investments to support potentially consumer dispute inquiries and the legal and the regulatory liability that they're going to have to assume is considerable. Now, I don't think that any of that was really understood at the initial press release. Based on the feedback that we're getting from the MBA, the resellers are now understanding that and they really have they don't really know how to handle that. Because it is really quite complicated and it is fraught with a number of challenges that can have significant financial consequences. Craig Huber: From your perspective in 2026, are you viewing that the changes that FICO have done for their pricing in the marketplace from your perspective, given the change with your own pricing, etcetera, that you will be it will be neutral to you? In essence, you're raising the price on your credit file for mortgages, basically to make up the loss FICO revenue and profit? Am I thinking about that correctly? Christopher A. Cartwright: Yes. Look, the measures that we have taken around our mortgage offerings in total actually hold the cost of the credit in the services that we provide related to credit constant between the years. Right? So we expect that we're going to protect our revenue and our profits regardless of who's calculating the FICO score and regardless of which model they choose. Right? Then from there, I think we will have revenue growth and margin enhancement as we start to take share from FICO Classic. Craig Huber: So again, I'm sorry, in '20 you don't think of an EBITDA basis that the changes that FICO put in place here are going to change your outlook for next year? Is that correct? Todd M. Cello: Is correct. Craig Huber: Thank you very much. Operator: The last question will be Andrew Nicholas from William Blair. Please go ahead. Tom Rausch: Hi, good morning. This is Tom Rausch on for Andrew Nicholas. Thanks for taking my call. I wanted to touch on the trajectory of India growth. I think fourth quarter you were expecting to exit the year in high teens growth. Was curious when you're what you're thinking about like getting back to that rate, could you see it happening next year? Then relatedly, it sounds like the tariff impact was on the commercial lending part of the business. So I was wondering how consumer lending within India tracked relative to your expectations in the quarter? Thank you. Christopher A. Cartwright: Well, yes, well look the India situation is very fluid. Because we're in the middle geopolitically of intense negotiations around tariff and trade terms. We were very much pivoting back toward high teens growth in India in the fourth quarter. When things went a little bit sour, the U.S. imposed a 50% tariff on all imports coming from India. Now the challenge there is that a good portion of the economy about 30% is driven by micro, small, and medium businesses, very entrepreneurially driven that are also export-dependent. So with this additional cloud hanging over, the banks have slowed lending to that segment, which has flowed through the form of lower volumes to our leading bureau there, Sibyl. Right. Now again, things change pretty quickly in these trade negotiations. Could be here a month from now with stability restored and lending volumes increasing. But what we do know is that India continues to be an awesome market. They've got 7% GDP growth, they've got inflation down to 3%. They have a central bank, the RBI, that is growth-oriented that has been enabling fintechs that support unsecured retail lenders to resume their operations, which was driving more volume. They've been cutting rates. So all the macro factors are aligning for a resumption of terrific growth coming out of one of the largest and most attractive markets on the planet. But we have hit a speed bump here with the 50% tariff and we're just going to have to wait until that gets resolved. I'm confident it will resolve. I think the U.S. and India are natural partners and there's a tremendous amount of trade that we'll do. But things do get heated in the course of negotiations and so that has delayed the full recovery of that market a bit. Say the other bright spot in India is that mean, have 40% exposure to consumer credit. We're growing in all of our other categories. We recently launched our analytics platform TrueIQ Analytics in India. We know with a lot of interest from major bank clients, and I think it's a whole new vector of growth that will both help us defend the massive market share that we have and then generate new revenues additionally. Todd M. Cello: Tom, I'm going to add on to that. Hopefully, you're hearing from Chris is just the conviction that we have in the India business and the runway that's ahead for us. You got to think about this longer term. But when we take a step back and we think about just the overall portfolio of TransUnion and the businesses that we have and how diverse they are, just want to call out while India is very important to us, it does represent only about 7% of our total revenues. What's important to talk about that balance of the portfolio is if you go back to 2022 and 2023, when the more developed markets of the U.S., the UK, and Canada in a slowdown because of high inflation and rising interest rates, India business was growing in the 30% range. So right now there's some things going on in their market that Chris just articulated. So that revenue is down to 5%. But if you look across the portfolio now, markets like Canada and the UK are leading the international growth. 11% in the third quarter. Despite all of this noise, with India, we continue to deliver high single-digit revenue growth with India clearly below trend and our long-term aspirations. Christopher A. Cartwright: Yes. In addition to that, I mean, I outlined in my concluding remarks, there's a number of places in the portfolio where we think we will boost our growth rate based on all the product innovation and based on expanded go-to-market investments. I would put marketing, fraud, communications, analytics across credit, marketing, and fraud. I think investigative solutions have got a lot of juice. Of course, India is upside. Of course, mortgage is upside. Let's not forget the consumer business. We've made massive investments to remediate the consumer business. They're starting to bear fruit. Our intermediate goal is to get that back to a mid-single-digit compounder. I feel like we're on the way there. So I mean if you like 11% in market-leading growth, understand that it's on a stable consumer lending foundation today and there's upside from that given all of the product innovations in all of those different market areas that I just outlined. I think again it's important to emphasize that this is a global portfolio. At any point in time, we're going to have strength and weaknesses across it. If you look at the consistency of our results over the past five years, the worst we've ever done is grow in line with the market, but for the most part, we outperformed the growth rates in the market. So I think this portfolio is much less risky and far more durable than is currently understood. Gregory R. Bardi: All right. Thanks, Chris, Todd. I think that's a good place to end. Thanks for all your questions today and have a great rest of your day. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.