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Operator: Ladies and gentlemen, thank you for joining us. And welcome to the LendingClub Corporation Q3 2025 Earnings Conference Call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please raise your hand. If you have dialed in to today's call, please press 9 to raise your hand, 6 to unmute. I will now hand the conference over to Artem Nalivayko, Head of Investor Relations. Please go ahead. Artem Nalivayko: Thank you, and good afternoon. Welcome to LendingClub Corporation's third quarter 2025 earnings conference call. Joining me today to talk about our results are Scott C. Sanborn, CEO, and Drew LaBenne, CFO. You can find the presentation accompanying our earnings release on the Investor Relations section of our website. On the call, in addition to questions from analysts, we will also be answering some of the questions that were submitted for consideration via email. Our remarks today will include forward-looking statements, including with respect to our competitive advantages, demand for our loans and marketplace products, and future business and financial performance. Our actual results may differ materially from those indicated by these forward-looking statements. Factors that could cause these results to differ materially are described in today's press release and earnings presentation. Any forward-looking statements that we make on this call are based on current expectations and assumptions, and we undertake no obligation to update these statements as a result of new information or future events. Our remarks also include non-GAAP measures related to our performance, including tangible book value per common share, pre-provision net revenue, and return on tangible common equity. You can find more information on our use of non-GAAP measures and a reconciliation to the most directly comparable GAAP measures in today's earnings release and presentation. Finally, please note all financial comparisons in today's prepared remarks are to the prior year-end period unless otherwise noted. And now, I'd like to turn the call over to Scott. Scott C. Sanborn: Thank you, Artem. Welcome, everybody. We delivered another outstanding quarter with 37% growth in originations, 32% growth in revenue, and a near tripling of diluted earnings per share. Innovative products and experiences, compelling value propositions, a 5 million strong member base, consistent outperformance on credit, and a resilient balance sheet are all coming together to deliver sustainable, profitable growth. I'm excited to share more on our vision and our many competitive advantages at our upcoming Investor Day in two weeks, so I'll keep it brief today. Quarterly originations of $2.62 billion came in above the top end of our guidance, reflecting strong demand from both consumers and loan investors, our increased marketing efforts, and the power of our winning value proposition and customer experiences. With competitive loan rates enabled by our sophisticated credit models and a fast, frictionless process, we continue to be very successful at attracting our target customers. In fact, when our loan offers are made side by side on a leading loan comparison site, we close 50% more customers on average than the competition. We continue to be disciplined in our underwriting. Our asset yield remains strong, and our borrower base continues to perform well. In fact, we're delivering our originations growth while also demonstrating roughly 40% outperformance on credit versus our competitor set. Consistent strong credit performance on a high-yielding asset class has allowed us to confidently build our balance sheet, which now stands at over $11 billion, delivering a durable, resilient revenue stream that nonbanks can't replicate. In fact, this quarter we generated our highest ever net interest income of $158 million, enabled by a growing balance sheet and expanding net interest margin. Our loan marketplace is also thriving, with our reputation for strong credit performance and innovative solutions attracting marketplace investors at improving loan sales prices. We grew marketplace revenue by 75% to our highest level in three years and had our best quarter ever for structured certificate sales totaling over $1 billion. We also secured earlier in the quarter a memorandum of understanding by which funds and accounts managed by BlackRock would purchase up to $1 billion through LendingClub Corporation's marketplace programs through 2026. What's more, our new rated product, specifically designed to attract insurance capital, is capturing strong interest, which should help us to continue to improve loan sales prices and further boost marketplace revenue. As excited as I am about our financial performance, I'm equally excited about what we're seeing in member engagement and behavior. Our mobile app, combined with high engagement products and experiences like LevelUp checking and DebtIQ, are successfully encouraging members to visit us more often and are driving new product adoption. We launched LevelUp checking in June as the first of its kind banking product designed specifically for our borrowers. Members are responding positively, with a 7x increase in account openings over our prior checking product. In a recent survey, 84% of respondents said they were more likely to consider a LendingClub Corporation loan given the offer of 2% cash back for on-time payments through LevelUp checking. And what's really encouraging is that nearly 60% of new accounts being opened are being opened by borrowers. Our efforts are driving a nearly 50% increase in monthly app logins from our borrowers, and with that engagement, an increasing portion of our repeat loan issuance is now coming through the app. That's proof that these investments are enabling lower-cost acquisition from repeat members, keeping pace with our new member growth as we continue to ramp our marketing efforts. We'll share more examples at Investor Day of how our intentional product design, coupled with an engaging mobile experience, is creating a flywheel to increase lifetime value. Before I turn it over to Drew, I want to thank all LendingClubbers for their incredible execution and dedication to improving banking for our more than 5 million members. Their efforts are paying off, and I look forward to building on our momentum. With that, I'll turn it over to you, Drew. Drew LaBenne: Thanks, Scott, and good afternoon, everyone. We delivered another outstanding quarter, extending the momentum we built throughout the first half of the year. For the third quarter, we generated improved results across all key measures, including originations, revenue, profitability, and returns. Total originations grew 37% year over year to over $2.6 billion, reflecting the impact of our growth initiatives, scaling of our paid marketing channels, and continued expansion of loan investors on our marketplace platform. Revenue grew 32% to $266 million, driven by higher marketplace volume, improved loan sales prices, and expanding net interest income. Pre-provision net revenue, or revenue less expenses, grew 58% to $104 million, reflecting the scalability of our model. The net impact of all these items is that we nearly tripled both diluted earnings per share and return on tangible common equity to $0.37 per share and 13.2%, respectively. The business is firing on all cylinders, demonstrating the earnings power of our digital marketplace bank model. Now, let's turn to Page 12 of our earnings presentation. We will go further into originations growth. We delivered our highest level of originations in three years. Borrower demand remained strong, as the value we are providing in the core use case of refinancing credit card debt continues to be compelling. Loan investor demand also remains strong, with marketplace buyers looking to increase orders and prices steadily improving. Demand for our structured certificate program continues to grow as we added the rated product attracting new insurance capital. In addition to $1.4 billion of new issuance sold, we also sold $250 million of seasoned loans out of the extended seasoning portfolio, which included a rated transaction supported by Insurance Capital. Our consistently strong credit performance sets us apart from the competition and is one of the reasons we have been able to sell all of these loans without any need to provide credit enhancements. Leveraging one of the benefits of being a bank, we grew our held-for-sale extended seasoning portfolio to over $1.2 billion, consistent with our strategy to grow our balance sheet while maintaining an inventory of seasoned loans for our marketplace buyers. Finally, we retained nearly $600 million on our balance sheet in Q3 in our held-for-investment portfolio. Now let's turn to the two components of revenue on Page 13. Non-interest income grew 75% to $108 million, benefiting from higher marketplace sales volumes, improved loan sales prices, continued strong credit performance, and lower benchmark rates. Fair value adjustment of our held-for-sale portfolio benefited by approximately $5 million in the quarter from lower benchmark rates. Net interest income increased to $158 million, another all-time high, supported by a larger portfolio of interest-earning assets and continued funding cost optimization. The growth in this important recurring revenue stream is expected to continue into the future as we leverage our available capital and liquidity to further grow the balance sheet. If you turn to Page 14, you will see our net interest margin improved to 6.2%. We continue to see healthy deposit trends, and total deposits ended the quarter at $9.4 billion, a slight decrease from last year. The change was primarily attributable to a $100 million decrease in brokered deposits, which was mostly offset by an increase in relationship deposits. LevelUp savings remains a powerful franchise driver, approaching $3 billion in balances and representing the majority of our deposit growth this year. We are maintaining a disciplined approach to deposit pricing while providing meaningful value for our customers. Turning to expenses on Page 15, non-interest expense was $163 million, up 19% year over year. As we signaled last quarter, the majority of the sequential increase was driven by marketing spend as we continue to scale, test, and optimize our origination channels to support continued growth in 2026. We continue to generate strong operating leverage on our growing revenue, and our efficiency ratio approached an all-time best in the quarter. Let's move on to credit, where performance remains excellent. We continue to outperform the industry with delinquency and charge-off metrics in line with or better than our expectations. Provision for credit losses was $46 million, reflecting disciplined underwriting, stable consumer credit performance, and portfolio mix. Our net charge-off ratio improved modestly again this quarter to 2.9%, and we continue to see strong performance across our vintages. I would highlight that the net charge-off ratio also continues to benefit from the more recent vintages we've added to the balance sheet. We expect the charge-off ratio to revert upwards to more normalized levels as these vintages mature. These anticipated dynamics are already factored into our provision. On Page 16, you will see that our expectation for lifetime losses is also stable to improving across all vintages. Turning to the balance sheet, total assets grew to $11.1 billion, up 3% compared to the prior quarter. Our balance sheet remains a competitive strength, allowing us to generate recurring revenue through retained loans while maintaining the flexibility to scale marketplace volume as loan investor demand grows. We ended the quarter well-capitalized with strong liquidity and positioned to fund future growth without raising additional capital. Moving to Page 17, you can see that pretax income of $57 million more than tripled compared to a year ago, hitting a record high for the company. Taxes for the quarter were $13 million, reflecting an effective tax rate of 22.6%. We continue to expect a normalized effective tax rate of 25.5%, but we may have some variability in this line due to the timing of stock grants and other factors. Putting it all together, net income came in at $44 million, and diluted earnings per share were $0.37, which nearly tripled compared to a year ago. Importantly, return on tangible common equity of 13.2% showed continued improvement and came in above the high end of our guidance range, and our tangible book value per share now sits at $11.95. As we look ahead, the business enters the fourth quarter with significant momentum. Loan investor demand remains strong, loan sales pricing continues to trend higher, and our product and marketing initiatives are driving high-quality volume growth. As a reminder, in Q4, we typically see negative seasonality on originations due to the holiday season. With that in mind, we expect to deliver originations of $2.5 to $2.6 billion, up 35% to 41% year over year, respectively. Our outlook for pre-provision net revenue is $90 million to $100 million, up 21% to 35%, respectively. Our outlook assumes two interest rate cuts in Q4 and includes increased investment in marketing to test channel expansion, which will support originations growth in future quarters. We expect to deliver an ROTCE in the range of 10% to 11.5%, more than triple year over year. We will provide additional details on our strategic and financial framework at our Investor Day on November 5, where we hope you will join us. With that, we'll open it up for Q&A. Operator: We will now begin the question and answer session. A reminder that if you would like to ask a question, please raise your hand now. And star six to unmute. Your first question comes from the line of Bill Ryan with Seaport Research Partners. Your line is open. Please go ahead. Bill Ryan: Hello. I think you're on mute. Drew LaBenne: Got it. Operator: Thanks. So first question, I just want to ask about the disposition plans. Looking into the future between your various channels, structured certificate, whole loans, and extended seasoning, and what your plans are to continue to grow the held-for-investment portfolio on the balance sheet. Looks like there's a little bit of mix shift last couple of quarters dialing back on the whole loan sales focusing on the other two. And if you could also kind of maybe talk about the economics of what you're seeing between the various disposition channels. Drew LaBenne: Yeah. Great. Hey, Bill. Thanks for the question. So, you know, for HFI for Q4, it's kind of steady as she goes in terms of what we plan each quarter. So we're targeting, you know, roughly $500 million in HFI, and that sort of just depends on how the quarter evolves. Sometimes that's a little higher, a little lower. I'd say, generally, it's been a little higher the past couple of quarters. The other programs are roughly in line with where we've been for the past couple of quarters. We see demand for structured certificates being strong. We're seeing good pickup in the rated product as well, and as I mentioned, we sold one of those out of extended seasoning this quarter, a rated deal that is. So demand is strong and still there, and with issuance being targeted to be roughly the same, kind of the mix and disposition should also be roughly the same. I guess, Bill, to make sure you're tracking, you probably are. Not all of these sales are equal. Historically, whole loan sales to banks would come at a different price than, say, whole loan sales to an asset manager. As the insurance-rated transactions have been coming in, those prices, as we mentioned in the script, are really approaching bank prices now. And in those cases, we're generally not retaining the A note. So effectively, it is a whole loan sale, and it's coming at a higher price. So it's really the mix is based on where we're getting the best execution, and, you know, we are looking to certain channels. So that's a channel we're developing, and it's going in the direction we like, which is building demand and higher prices there. Bill Ryan: Okay. Thanks, Scott. And just one big picture follow-up. If you can maybe kind of touch on the competitive state of the market. I mean, origination volumes have increased quite a bit across the board. You've heard about some companies maybe have opened their credit boxes a little bit. Some with product structure, if you will. Fixed income investors' allocation more capital to the sector. I mean, if you could kind of give us an overview of have you seen any pressure on your underwriting standards at all? Scott C. Sanborn: No. We haven't. I'd say, you know, as we say every quarter, this has always been a competitive space. In our case, our growth is coming off of a low, and it's coming off of a low that's been informed not just by tighter credit underwriting, which, you know, we're maintaining the discipline there, but also because we just pulled back on marketing. So our ability to grow is if you still look at, you know, where you can see volume levels, you'll see we're still running below historical levels of spend and volume. In a TAM that's larger than it ever was. So we're not seeing the space as competitive. It's no more competitive than it was last quarter or the quarter before. As usual, we see a mix in who we're competing with in different environments. So when the interest rate environment shifted, we were competing more with banks and less with fintechs. I'd say now we're competing a bit more with fintechs and a little bit less with some of the banks, but that doesn't it's not changing certainly not affecting our underwriting standards. You know, we are absolutely in this for the long game. And as you know, we're bringing our own cooking here. So we are looking to make sure we are delivering the returns for ourselves as well as for our loan buyers, and we don't view the way we get rewarded long term is by posting a temporary jump in growth through short-term making on credit. Bill Ryan: Okay. Thanks for taking my questions. Operator: Next question comes from the line of Tim Switzer with KBW. Tim, your line is open. Please go ahead. Tim Switzer: Hey, good afternoon. Thanks for taking my questions. My first one is, can you explain what drove the higher loss in the net fair value adjustment? And, you know, I think you mentioned earlier on the call that pricing seems to be holding up on loan sales. So just curious what drove that adjustment line. Drew LaBenne: Yeah. So keep in mind, we had a positive fair value adjustment in Q2 that I believe was about $9 million in the quarter, and we had $5 million this quarter. So positive adjustments in both quarters, but it was larger in Q2 than it was in Q3. And so that's a big part of the delta right there. You know, as we said, prices moved up a little bit, so it's not price that's driving that. The other piece is as we have a larger extended seasoning portfolio, there is natural roll down that happens, and that comes through that net fair value adjustment line. So that's also a little bit of the change that we're seeing quarter over quarter. It's just a larger portfolio. Tim Switzer: Got you. Is there a good way for us to be able to model the impact of the extended seasoning portfolio? Drew LaBenne: There is. It's probably a little complicated to get into the details on this call, but we can follow up with you afterwards. Tim Switzer: Appreciate that. We can do it offline. Scott C. Sanborn: Yeah. Tim Switzer: And then can you also walk us through the loan reserve dynamic a bit this quarter because it went up quite a bit, but if we look at your slide 16 that indicates lower loss expectations for those legacy vintages, I guess, and you obviously didn't grow the HFI book a whole lot. So I'm just curious on, you know, what was that reserve going up for, I guess? Drew LaBenne: Yep. So two factors. Again, last quarter, there was a one-timer that we called out in the provision line because we had a re-estimation of the lifetime losses, and that caused a positive benefit in the provision line. And so I think there's about $11 million. Right, Artem? Yeah. $11 million last quarter that you know, credit was great again this quarter, but we didn't do a change in the reserve on the previous vintages. So that's one factor. The other is just as we're growing some of our businesses, like, for example, our purchase finance business into HFI, the duration's a little longer, so it has a little higher upfront CECL charge, but also fantastic economics on balance sheet. And so those are the two main drivers. Tim Switzer: Gotcha. Thank you. And, one last one real quick. Can you explain what drove the increase in diluted shares? And the period went up a little bit, but not nearly as much as diluted share count. Sorry if you said this earlier on the call. Drew LaBenne: Yeah. No. I think share price is probably the biggest factor. Right? If you just do the treasury, if you just think of treasury stock method on the diluted shares, the higher the share price, the more dilution you effectively get on the outstanding, you know, grants that have been issued. So there wasn't there was no step change in terms of kind of the, you know, the vehicles that cause diluted share count. Tim Switzer: Got you. Alright. Thank you. Drew LaBenne: Thank you. Operator: Next question comes from the line of Giuliano Bologna. Your line is open. Please go ahead. Giuliano, your line is open. Please go ahead. Joanna, I think you're on mute too. Okay. We can come back to Giuliano. We'll move on to Vincent Caintic of BTIG. Line is open. Please go ahead. Vincent Caintic: Hi. Great. Can you hear me? Scott C. Sanborn: Yes. Vincent Caintic: Yes. Having some tech issues. I have a feeling maybe others are as well. But yeah, so thank you for taking my questions. First question, kind of a follow-up on that funding side. And I want to ask it, kind of the demand for, you know, your marketplace loans, the structured certificates, and the seasoned portfolio. It's great to see that there's so much demand. And, you know, I think a lot of there's been a lot of investor questions over the past months where, you know, we've seen some other companies have some issues, some bankruptcies, and so forth. And so there's been some concerns broadly about institutional investor appetite for fintech originated loans. So it looks like your demand is great. And I was wondering if you can maybe talk about kind of the broad industry and if you're seeing any differentiation. And if maybe that's a competitive advantage of your funding vehicles and mechanisms versus the rest of the industry. Thank you. Drew LaBenne: Yes. So thanks for the question, Vincent. A lot there. So I'd say, first of all, the comments I'm gonna make are really just focused on our asset class in our industry, so not, you know, auto securitizations or any of the other things that are going on. But, you know, we just actually our team was just at a conference yesterday talking to, you know, loan current investors and potential investors, and I'd say the appetite is still very strong. I don't think there's any fade on the appetite at all for, you know, the various vehicles that are out there, whether it's a structured product, the rated product, or, you know, whole loans out of extended seasoning. So demand is definitely there. I think track record matters. So the demand is there for us. I think it's certainly there for other issuers as well. But I'd say on the margin that issuers are also being maybe slightly more cautious on who they're partnering with, and we're hearing that in we've been the partner of choice for years and I think continue to be. So I think that plays to our advantage. Obviously, we're always watching the ABS markets to see if there's any, you know, major disruption there. And haven't seen much. Certainly, there's been a little noise as you indicated over the past couple of weeks, but summary demand remains good. Prices are strong, so we're feeling good going into the fourth quarter. Vincent Caintic: Okay. Great. Thank you. That's very helpful. And I guess also, real quick. Scott C. Sanborn: Think just a little added color. We're certainly hearing that some capital providers are further narrowing their selection of who they're working with. But, you know, hard for us to kind of but, you know, we remain in the wallet and remain a really primary important partner there, but certainly hearing some chatter of that. Vincent Caintic: Okay. Great. That's super helpful. Thank you. And, actually, kind of related to, you know, the volatility we've been hearing over the past month just in broader consumer credit. Just wondering if you could talk about, you know, your credit performance and what you're seeing. So it was great to see charge-offs at 2.9% this quarter. That's great. Just wondering if you're noticing maybe not in the loans that you're that are on your balance sheet already. But as you get applications, maybe has the quality of that changed? Are you noticing maybe any themes in terms of delinquency evolution like, maybe with lower credit tiers or any comments you might say be seeing with that relative to press trend? Scott C. Sanborn: Yeah. No. I mean, I'd say for us, you know, reminder, we remain very, very restrictive compared to, you know, pre-COVID. And that is even more so the case in sort of the lower credit area. So I acknowledge there's definitely been a decent amount of press about a bifurcated economy and, you know, where certain subsets of consumers could be struggling. But, you know, in our portfolio, given how we're underwriting today, I mean, just for an example, there's talk about, you know, consumers earning less than $50k a year. I think that represents 5% of our originations right now. So very, very small. Same thing with student loans. As you know, we've restricted underwriting to that group. So the percent of that are, you know, delinquent on a student loan and current on us is, you know, now measured in basis points and is shrinking. So we on our book, aren't seeing anything more than the normal kind of, you know, variability that you adapt and continue to manage to, which our platform is set up and our team is set up to do that quite well. So no not, you know, no kind of broad themes. Despite, again, we're reading the same thing you are, but we're not seeing it in our book. And I think that's based on how we're underwriting. Vincent Caintic: Great. Thanks. And maybe I'll sneak one more in, and this might end up having to be for the investor meeting. We want to leave some meat on there. But your CET1 of 18% is very healthy. I'm just wondering how much is too much. Thank you. Drew LaBenne: We'll see you in November. Vincent Caintic: Sounds good. Alright. Thanks, guys. I appreciate it. See you then. Drew LaBenne: In all seriousness, I think, what you know, a little bit on that is, we do have what we would say is some excess capital, and our plan is to use that for growing the balance sheet as we ramp up originations. And, you know, if we have enough capital to satisfy that primary goal and more than enough after that, then I think we'll consider other options. Vincent Caintic: Okay. Great. And, see you November 5. Thanks very much. Operator: Okay. Thank you. Our next question comes from Giuliano Bologna from Compass Point. Your line is now open. Giuliano Bologna: Sounds good. Hopefully, you guys can hear me now. I have the unmute notification this time. Congratulations on a great quarter. You know, it's great to see that, you know, continued, you know, great results. When I look forward, I mean, there's obviously a tremendous amount of demand, you know, through the marketplace, whether structured certificates or whole loan sales. I'm curious in a sense how much more do you think you'd want to grow that versus grow the kind overall HFI pie? Because, you know, the outlook is called 45% between HFI and extended seasoning. Which is a pretty, you know, healthy amount, and it looks like that could, you know, keep growing balances. But just trying to think about, you know, how you think about the balance going forward because you have a lot of dry powder, a lot of liquidity, a lot of capital to kind of keep pushing. So I'm curious how you think about how much you do want to, you know, push both sides there? Drew LaBenne: Yeah. Yeah. And we'll get into this more at investor day. So but to give you an answer now for, you know, for Q4, the or even longer term. I mean, the end goal is to grow originations enough that we can feed all of our desires to grow the balance sheet and we can feed all the investors in the marketplace that are paying the appropriate price for the loans we're originating. So our goal is to be able to do both. And then, you know, if we're not quite there on total originations, then it's a bit of a balancing act. Right? We still want to see healthy growth on the balance sheet, but we originate loans that are better off in the marketplace on the sheet, and we're going to sell those. And we have long-term investors that we want to keep our relationship with, so we're going to make sure we're able to allocate to them as well. So, you know, always a bit of a balancing act while we're still ramping originations. The end goal is we have enough originations to feed both sides. Giuliano Bologna: That's very helpful. One thing I'm curious about, when I look at your marketing spend, as a percentage of volume, it, you know, came up a little bit, but it's still, you know, much lower than I would've expected, you given that pushing some new marketing channels. I mean, I'm calculating it, you know, 1.55%, 1.553%. You know, you obviously, you know, highlighted that you're gonna push a little bit more harder on the marketing side. In April, you know, in anticipation of, you know, growth in '26. Scott C. Sanborn: Know, Giuliano Bologna: looks like, you know, I mean, HFI was down, so there should be, you know, a little bit less of a benefit from more, you know, capitalization or amortization of that through, you know, on HFI. But seems like that's, you know, continued to be very efficient, you know, from a, you know, percentage of volume perspective. I'm just curious, you know, how I should think about that, you know, going over going forward over the next few quarters. Scott C. Sanborn: Yeah. So as I mentioned, I think we, you know, excitedly, I'd say we still see a lot of opportunity there. Right? We are coming from a place of reasonably low activity into a market that I think is pretty attractive in terms of the value proposition to the consumer, the experience we've got. We, you know, it's our efforts are working well. We are still, I mean, we're only two quarters into restarting direct mail as an example. We're on the third version of our response model. We will be on our fourth as we exit the year, you know, building the creative optimization library, optimizing the experience, and, you know, then take that across some of the other channels like digital and all the rest. So we still have a lot of opportunity in front of us. I think what you're also seeing in Q3 is not just the performance of those channels being, you know, positive. But also some of our other efforts. I touched on it in my prepared remarks. Our other we are growing we, you know, we delivered 37% growth year on year. That was both in new and in repeat marketing over indexes to driving new. But repeat is coming at a, you know, much lower much lower cost. So our ability to scale that at an equivalent pace, we're still at fifty fifty to jump in year on year marketing spend. We're still, you know, drive roughly fifty fifty with new versus repeat. So both of those efforts are working in the external marketing efforts. And then the efforts to drive repeat and lifetime value from our customers. Giuliano Bologna: That's very, very helpful. I appreciate it. And, yeah, congrats on team performance. I'm looking forward to seeing you guys, you know, in a couple of weeks. Scott C. Sanborn: Great. Thanks, Giuliano. Operator: Thank you. And your next question comes from Reggie Smith of JPMorgan. Your line is open. Please go ahead. Reggie, your line is open. Vincent Caintic: You're on mute, Reggie. Reggie Smith: There we go. Operator: Can you hear me now? Scott C. Sanborn: Yes. Operator: I'm sorry. I wanted to follow-up on the, on the last question. So Reggie Smith: kind of thinking about marketing, you know, obviously, it costs less to reengage a previous customer. I guess thinking about that expense ratio, you know, the 1.5 that we see on the income statement, my sense is that it's not evenly distributed and that, you know, maybe your incremental or your marginal loan is a little bit more. Help me understand, I guess, how inefficient that is, or where where is the marginal cost to underwrite a loan? And then maybe frame that against you could sell one for. Like, it's my my sense and my gut is that despite the fact that that your marketing channels are not optimized, that it's still, there's still room there to kind of kind of go, almost as though you're leaving money on the table possibly. Not in a bad way, but just just thinking about the opportunity there. So maybe talk a little bit about what the marginal cost to acquire a new loan is and then maybe frame that against, you know, what you can sell these loans for. Looks like origination, your marketplace ratio is about 5%. So there seems to be a lot of room there. But anything you could share there would be great. Thank you. Scott C. Sanborn: Yeah. So you're certainly thinking about it the right way. We're underwriting marginal cost of acquisition that reflects the lifetime value of the customer. And, you know, the part of this process, you know, book. And what we are very, very focused on is profitable sustainable growth. Right? We're not looking to just post inefficient volume that we can't rinse and repeat and drive further. So as we push into these new channels, we're where we'll find that efficient frontier and then we work to basically bring it in, right, by improving our targeting models, improving our creative and response rates, improving our pull-through on the experience and the conversion rate on the experience so that we can then go deeper and push harder in those channels. So I think you're right that we have more room to go, but it is it is very mathematically and or scientifically backed. Right? It's we've got a very good handle on what we can expect to get from our customers. Now that that number is going up. Right? As we and we'll share a little bit more info on this. But as we get better and better, you know, these repeat customers are not only lower cost to acquire, they're also lower credit loss. And, oh, by the way, if we get you back once, it's likely we're gonna get you back three or four times. So you know, there really is a real long-term benefit here. That will drive up the lifetime value, which will drive up our ability to pay up at acquisition, but we're building towards it. And we're building towards it incrementally every quarter. Reggie Smith: That makes sense. And if I could sneak one more in, I'd love to hear more about the BlackRock program and the insurance sales channel. Vincent Caintic: If I'm thinking about Reggie Smith: that right, I guess, this is a way for civilians to get exposure to these types of notes? Like, as liquidity the liquidity there for the consumer, they able to sell that stuff back? Like, how does that kind of work? And then on the insurance side, like, do you think we'll get to a point where you're announcing, you know, a committed number from the insurance channel. Like you do for, you know, kind of private credit, today. Vincent Caintic: Thank you. Drew LaBenne: Yeah. So a couple of things there. One, this is not this is not direct to consumer sales that's happening. This is really, you know, in the BlackRock example, I think they have many different ways that they may, you know, represent other clients where they're managing money to purchase this program. So I wouldn't want to box it into just one use case for them, but it's not a, you know, direct or indirect to consumer investors that's happening in any way. I think the insurance pool is extremely deep. And so the, you know, these are insurance companies who are taking premiums for various insurance policies. And investing that money. So, you know, it's a massive pool. It is, as Scott was saying, it usually, the price is not quite as good as banks, but generally, it's still a very low cost of capital. And so we think we can make progress in terms of growing that channel and helping our overall price that we're selling loans at as well. Reggie Smith: And I guess on the direct to consumer point, is that possible? I could maybe not with BlackRock, but is that, like, a channel that one day be a thing, or are there things that prevent that, regulatory wise that would prevent that or make that difficult? Scott C. Sanborn: So there is capital in our loan book today that is provided by it's usually coming through funds that are managed by RIAs. At some of the wealth managers and, you know, hedge funds and all the rest. So there is private individual investor capital coming in to purchase the asset. So that's one. Going direct to consumer retail would be, you know, going back to our original model. And if you recall, you know, it is doable. Then the loans become securities, which comes with a lot of overhead and disclosure requirements, and we have been able to operate a much better business without that because we're what I mean by that is you we are required to announce when we make pricing changes. We're required to announce when we make credit changes. We had all of our competition downloading our publicly available data and using it to compete against us because we had to tell them what we were doing. So it's not something I would gladly go back in that old structure. But, certainly, high net worth individual through funds is a source of capital today. I was thinking about how I would love to, to pick up some yield, versus what I get in my savings account now. Reggie Smith: So I think there's something there. I don't know. Scott C. Sanborn: We could open it up. Operator: Thanks a lot. Listen. Great quarter, guys. Reggie Smith: We'll talk soon. Thanks. Drew LaBenne: Thanks. Operator: Thank you. And a reminder that if you'd like to ask a question, please raise your hand. Our next question comes from Kyle Joseph of Stephens. Line is open. Please go ahead. Kyle Joseph: Hey. Good afternoon. For taking my questions. You guys have touched on this a bit, but just looking at looking at Slide 10 and kind of delinquency trends amongst FICO bands. Obviously, at least amongst the competitor set, you saw a pretty big increase on the lower band there. Just give us a sense for how that impacts your originations, and investor demand and, you know, where you're seeing kind of the best bang for your buck in term across the FICO band score? Scott C. Sanborn: Yeah. So that doesn't directly affect us as I touched on before. You know, we're certainly hearing some chatter about, maybe people consolidating with a smaller handful of originators that have shown themselves to have more stable and predictable performance. What you know, always looking at is what does the application profile look like coming at us? Is it shifting? Is it shifting in a way we like, we don't like? So, you know, when you see an uptick like that, it's generally gonna result in somebody else pulling back. It's we don't know. Is that one platform too? Three? Like, hard for us to say, but we'll be monitoring and adapting to is making sure we continue to get a consistent through the door population. And that that we want. And because it may provide some opportunity. It might provide some risk, and that's part of, you know, what our day job is. Kyle Joseph: Got it. Helpful. And then, just one follow-up for me. Talked a lot about marketing expenses today, but just, you know, and imagine you'll cover this at the investor day as well. But just, you know, a sense for the operating leverage you have on the remaining expense items. Drew LaBenne: Yeah. We think it's pretty significant. We will get into it more at investor day. I think you can already see it happening right now in terms of, you know, the revenue growth we've produced year over year compared to expenses. And that's certainly not to say that other expenses won't go up as we grow the company. But I think marketing is where you'll see the most variable cost as we scale up. Kyle Joseph: Got it. That's it for me. Thanks very much for taking my questions. Scott C. Sanborn: Great. Operator: Thank you for your questions. I will now turn the call to Artem for some questions via email. Artem Nalivayko: Alright. Thanks, Kevin. So Scott and Drew, we've got a couple of questions here that were submitted by our retail investors. First question is, we noticed a difference in origination growth rate across issuers and originators. To what do you attribute differences in growth? Scott C. Sanborn: Yeah. So first, thanks to all the retail investors for submitting. I understand from Artem that we got quite a few this quarter, so that's great. Yeah. As we talked about on the call, not all originations are created equal. Our focus is on profitable sustainable originations growth, and, you know, I think 37% growth in originations to a level that's, you know, really getting close to our highest over the last several years. Is also coming with record high pretax net income and also coming with outperformance on credit by 40%. So it's we're not just looking at one number, which is dollars originated year on year. We're looking at a combined balance of what we think makes for a sustainable, profitable business. Artem Nalivayko: Perfect. Alright. Second question. You talked a little bit about potential rebrand coming up. Any updates on the status? Scott C. Sanborn: Yep. I'm only talking about it because you all keep asking. But I would say we're yes. We have done quite a bit of work this year, and we're in the final stages of the let's call it, the research and development phase and landing on, you know, where we want to take it. Very excited about it. We're now entering the planning and execution phase. Which we're gonna be pretty deliberate about as it won't surprise anyone on this call. We built up equity in this brand after almost twenty years. We think a new brand will give us a broader permission set with our customer base and kind of create new opportunities for us, but we gotta make sure we don't lose the, you know, tens of thousands of positive reviews and awards and our conversion rate that we finally honed across all these channels and so lots of work to do. So when will it be, you know, out in the ether will be probably of next year. Don't hold me to that date exactly, but we're doing the planning phase to make sure we know exactly what we're gonna get and can support it with the, you know, marketing oomph that it's gonna need to be successful. Artem Nalivayko: Alright. Perfect. And last question. Just any updates on the product road map or launching any new products? Scott C. Sanborn: Yeah. So, obviously, this year, as we've been getting back to growth, we've also been, you know, expanding our ambitions on the product mix. We talked about LevelUp checking on the call today. Of savings has been a big driver, which I think Drew talked about that IQ this year. So there is absolutely more to come. That's part of the reason we're gonna be investing in a new brand. What I'd say is, you know, stay tuned for investor day where we'll talk a little bit more about some opportunities we're gonna be pursuing in the years to come. Artem Nalivayko: Alright. Perfect. Thanks, Scott. Alright. So thank you, everyone. With that, we'll wrap up our third quarter earnings conference call. Thanks again for joining us today. And if you have any questions, please email us at ir@lendingclub.com.
Operator: Good afternoon, and welcome to the Alcoa Corporation Third Quarter 2025 Earnings Presentation and Conference Call. Participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note that this event is being recorded. I would now like to turn the conference over to Louis Langlois, Senior Vice President of Treasury and Capital Markets. Please go ahead, sir. Louis Langlois: Thank you, and good day, everyone. I'm joined today by William Oplinger, Alcoa Corporation President and Chief Executive Officer, and Molly Beerman, Executive Vice President and Chief Financial Officer. We will take your questions after comments by Bill and Molly. As a reminder, today's discussion will contain forward-looking statements relating to future events and expectations and are subject to various assumptions and caveats. Factors that may cause the company's actual results to differ materially from these statements are included in today's presentation and in our SEC filings. In addition, we have included some non-GAAP financial measures in this presentation. For historical non-GAAP financial measures, reconciliation to the most directly comparable GAAP financial measures can be found in the appendix to today's presentation. We have not presented quantitative reconciliation of certain forward-looking non-GAAP financial measures for reasons noted on this slide. Any reference in our discussion today to EBITDA means adjusted EBITDA. Finally, as previously announced, the earnings press release and slide presentation are available on our website. Now, I'd like to turn over the call to Bill. William Oplinger: Thank you, Louis, and welcome to our third quarter 2025 earnings conference call. Let me begin with safety. In late July, we experienced a tragic loss with the passing of a colleague due to a fatal incident at the carbon plant of our Alumar smelter, our first workplace fatality since 2020. This event has deeply affected the entire Alcoa family; our thoughts remain with his loved ones, friends, and colleagues. Following the incident, safety leaders from across Alcoa, supported by independent external experts, conducted a comprehensive investigation. We held a town hall with employees to share findings, address concerns, and reinforce our safety protocols. Already, the implementation of the associated actions is well advanced at Alumar, and a series of global measures have been introduced to prevent such incidents in the future. This loss is a solemn reminder of the critical importance of safety in everything we do. We remain steadfast in our commitment to provide a safe working environment. In the third quarter, we delivered strong operational performance and stability, achieving year-to-date aluminum production records at five of our smelters. These additional tons are particularly valuable as they carry higher margins and contribute meaningfully to our bottom line. With increases in the Midwest premium this quarter, related revenue on our U.S.-produced tons more than offset the net unfavorable tariff impacts on imports of aluminum to the U.S. from our Canadian smelters. We had three one-time items impacting the quarter, which Molly will cover: the permanent closure of the Kwinana refinery, the closing of the sale of our 25.1% interest in the Ma'aden joint venture, and a sizable increase in asset retirement obligations, primarily related to our Brazil operations. Looking ahead to the fourth quarter, we anticipate higher shipments and a sequential release of working capital. The recent rise in the Midwest premium is now sufficient to cover the full cost of logistics for importing aluminum into the U.S., including the 50% Section 232 tariff. While we continue to evaluate the most profitable placement of our spot volumes and direct those shipments accordingly, the Midwest premium now covers costs on the shipments to our U.S. customers on contracts supplied by our Canadian smelters. Earlier this week, we announced that the United States and Australian governments will provide funding to develop a gallium plant, which will be co-located at our Wagerup alumina refinery in Australia. This follows the support by the Japanese government, which we announced in August. The partners will receive a gallium offtake in proportion to their interest. This project has strategic benefits for Alcoa and the governments supporting it. The support from all three governments underscores Alcoa's role in the development of the critical mineral supply chain and enables us to provide maximum value from the bauxite resources we already extract in Australia. The continuity and competitiveness of Alcoa's Australian mining and refining operations not only support the aluminum industry but also support manufacturing, technology, and defense industries. Additionally, earlier today, we announced a new long-term energy contract for our Massena operations, as well as a $60 million investment in the anode bake furnace. Securing long-term, competitively priced energy is essential to supporting investments like the rebuild and modernization of the furnace, an initiative that will enhance operational efficiency. This energy contract and major investment commitment are a big deal. Alcoa is taking steps to further strengthen the United States' primary aluminum production capabilities. I made a commitment to the Massena employees to secure power and to invest in their operation. Now I will ask them to respond with their commitment to continuously improve the operation's profitability. We look forward to celebrating this step and certainly welcome President Trump, Governor Hochul, Senator Schumer, and the entire New York congressional delegation, as well as members of the New York Power Authority and Empire State Development, to visit our Massena operation to see what great U.S. manufacturing looks like and to thank them for their support. The Australia mine approvals process is moving forward with the completion of the public comment period in August. We are preparing our responses and expect to submit to the Western Australia EPA by year-end. The Western Australia EPA has indicated that it will publish its assessment and recommendations by the end of 2026, and we anticipate ministerial approvals by year-end 2026. In summary, this quarter brought both sorrow and progress. The tragic event at the Alumar Smelter underscores the importance of our unwavering commitment to safety. Despite challenges, we achieved record aluminum production and took strategic steps to strengthen our future. Looking ahead, we're focused on increasing profitability through higher shipments, improved operations, and key investments such as the Massena Energy contract and anode bake furnace. Now I'll turn it over to Molly to take us through the financial results. Molly Beerman: Thank you, Bill. Revenue decreased 1% sequentially to $3 billion. In the Alumina segment, third-party revenue decreased 9% on lower volumes and price of bauxite offtake and supply agreements. In the Aluminum segment, third-party revenue increased 4% on an increase in average realized third-party price, partially offset by lower shipments and unfavorable currency impacts. However, this was lower than our revenue expectation for the segment, primarily due to certain aluminum shipments from Canada to U.S. customers being in transit at quarter-end. This also explains why our tariff costs sequentially were lower than expected. Third-quarter net income attributable to Alcoa was $232 million versus the prior quarter of $164 million, with earnings per common share increasing to $0.88 per share. The results reflect a $786 million gain on the sale of our interest in the Ma'aden joint venture and a subsequent favorable mark-to-market change of $267 million on the Ma'aden shares, partially offset by restructuring and related charges of $895 million for the permanent closure of the Kwinana refinery in Australia. On an adjusted basis, net loss attributable to Alcoa was $6 million, or $0.02 per share. Adjusted EBITDA was $270 million. Let's look at the key drivers of EBITDA. The sequential decrease in adjusted EBITDA of $43 million is primarily due to increased U.S. Section 232 tariff costs on aluminum imported into the U.S. from our Canadian smelters, adjustments to asset retirement obligations, unfavorable currency impacts, and lower alumina prices, partially offset by higher aluminum prices. The Alumina segment adjusted EBITDA decreased $72 million, primarily due to adjustments to asset retirement obligations, primarily in Brazil. Also, lower volumes and price of bauxite offtake and supply agreements and lower alumina prices were only partially offset by lower production costs related to the timing of maintenance activities. The Aluminum segment adjusted EBITDA increased $210 million. Higher metal prices and lower alumina costs were partially offset by tariff costs, which reflect a full quarter at the 50% tariff rate after its increase from 25% on June 4. In addition, production costs improved due to the timing of maintenance activities. Outside the segments, other corporate costs increased, while intersegment eliminations changed unfavorably, primarily due to the absence of a benefit in the prior quarter resulting from a lower average alumina price requiring less inventory profit elimination. Moving on to cash flow activities for the third quarter. We ended the third quarter with cash of $1.5 billion. Cash used for operations was $85 million, including a slight working capital use of $25 million. We also received a tax refund of $69 million from the Australian Tax Office for the deposit held during the five-year transfer price dispute that was resolved in our favor in April. Cash from investing included $150 million from the sale of the Ma'aden joint venture, shown here net of transaction costs. Cash used for financing activities included a $74 million full repayment on a term loan, which was the last borrowing associated with the AWAC joint venture structure. Let's look at other key financial metrics. The year-to-date return on equity was 14.5%. Days working capital increased sequentially by three days due to an increase in accounts receivable days, primarily due to higher aluminum pricing. Our third-quarter dividend added $26 million to stockholder capital returns. We closed the quarter with $1.635 billion in adjusted net debt, making progress toward the top end of our target of $1 billion to $1.5 billion. Cash flow for the quarter includes an increase in capital expenditures to $151 million. Turning to the outlook. We have a few adjustments to our full-year outlook. First, we are decreasing our annual outlook for interest expense to $175 million. Second, we have adjusted our total CapEx for 2025 to $625 million, down from $675 million, primarily due to less spending on mine moves in Australia. Third, we have adjusted our payment of prior year income taxes for 2025 to zero, previously $50 million, to reflect the tax refund from the ATO matter mentioned earlier. And last, the outlook for total ARO and environmental spend in 2025 is expected to increase by $20 million to approximately $260 million, consistent with the guidance update we provided in the Kwinana closure press release. For 2025, in the Alumina segment, we expect performance to improve by approximately $80 million due to the absence of charges recorded in the third quarter to increase asset retirement obligations, as well as higher shipments and lower maintenance costs. In the Aluminum segment, we expect a sequential unfavorable impact of approximately $20 million due to restart inefficiencies at the San Ciprian smelter and lower third-party energy sales, partially offset by higher shipments. While current Midwest premium pricing and higher shipments of our Canadian metal into the U.S. are expected to have a favorable impact on the fourth quarter, we expect tariff costs to increase by approximately $50 million due to increased shipments. Further tariff impacts from changes in LME pricing during the quarter can be calculated from our tariff sensitivity. Alumina costs in the Aluminum segment are expected to be favorable by $45 million. Below EBITDA, other expenses in the third quarter included favorable foreign currency gains of approximately $10 million, which may not recur. Based on last week's pricing, we expect fourth-quarter operational tax expense of $40 million to $50 million. Now I'll turn it back to Bill. William Oplinger: Thanks, Molly. Let's discuss our markets, starting with alumina. Alumina prices have declined significantly over the past month, with recent prices around $315 per metric ton as the market remains under pressure due to ample spot availability and refinery expansions in Indonesia and China. Outside China, the timing mismatch between new refining capacity coming online in Indonesia in 2025 and additional smelting capacity expected only in late 2025 or into 2026 is creating a short-term imbalance. In China, most previously curtailed capacity has been restarted since May, adding further supply pressure. Many Chinese refineries operate at the top of the cost curve. Continued downward pressure on domestic prices may prompt further supply-side response, resulting in curtailments. Looking ahead, alumina demand will be supported by new smelting capacity in Indonesia and anticipated to come online in 2026. However, uncertainty around the Mozal smelter could weigh on demand and pricing. Meanwhile, bauxite prices remained firm, supported by seasonal supply disruptions in Guinea and the market working through stockpiles accumulated earlier in 2025. Alcoa continues to deliver on strong fundamentals, consistent quality in our smelter-grade alumina products, and preferred supplier status due to our reliability. We remain on track for a record year in third-party bauxite sales volumes. Let's now move on to aluminum. LME prices rose approximately 7% sequentially and have continued to increase, recently reaching $2,775 per metric ton, reflecting a combination of factors: a weaker US dollar, expectations of monetary easing, and persistent supply tightness amid resilient global demand. In the U.S., the Midwest premium continued to increase during the third quarter and recently reached import parity. This reflects declining inventories and reduced aluminum imports following the Section 232 tariff increase earlier this year. European premiums also rebounded from earlier lows, signaling improving market fundamentals. Demand remains steady across Europe and North America. Packaging and electrical sectors continued to show healthy demand growth in both regions, while construction and transportation remained soft. The automotive sector is weak based on tariff uncertainty. On the supply side, growth remains constrained. Outside China, restarts and ramp-ups have been moderate, while China is approaching its smelter capacity ceiling. Additionally, potential disruptions at the Mozal smelter could further tighten the market. Looking ahead to 2026, the impact of increasing supply from Indonesia is expected to be limited, given constrained growth elsewhere, including in China, and the expectation of continued demand resilience. Importantly, our core markets in Europe and North America are expected to remain in regional deficit. Specific to Alcoa, we had an overall stable order book of value-add products in the third quarter, with the exception of foundry. In North America, demand for slab and wire rod remained strong, while billet demand is steady but spot activity is subdued. In Europe, wire rod demand is robust, slab performance is mixed, with strength in packaging but weakness in automotive, and billet demand remains cautious with customers maintaining short order visibility. I'm very excited to host you on October 30 for our Investor Day 2025. It's been almost four years since Alcoa has had its last Investor Day. It's a great opportunity to discuss why Alcoa is the investment choice in aluminum. We will discuss our strategic vision and market position, operational excellence and innovation, talent, the long-term market, and our financial outlook. We will also provide additional details on our Spanish operations and our Australia mine approval process. Please visit our website for additional details. To conclude, in the third quarter, Alcoa maintained strong operational stability, took strategic actions to strengthen the company, and continued our engagement with trade policymakers. Looking ahead, we will focus on safety, stability, and operational excellence, deliver fourth-quarter financial improvement, and progress our Australia mine approvals. I look forward to welcoming you to our Investor Day event on October 30. With that, let's open the floor for questions. Operator, please begin the Q&A session. Thank you. Operator: We will now begin the question and answer session. Chris LaFemina: And our first question will come from Chris LaFemina with Jefferies. Please go ahead. Chris LaFemina: Hey guys, thanks for taking my question. Hi Bill. Just wanted to ask about, I guess, capital allocation. I mean, you're approaching your net debt target range. You could be in a position where you're able to start returning capital a bit more aggressively in 2026. You're obviously focused on further operational upside. I know you're going to give us a lot more detail around this at the upcoming Investor Day, but just wondering about how you think about potential M&A opportunities in the market? And to the extent that you think about that at all, is it any particular spot in the supply chain that you'd be focused on? Would you be interested in bauxite and alumina? Is it more in the downstream? Or is that really not even on your mind right now because of all the stuff you have going on internally? Thank you. William Oplinger: So Chris, let me let Molly address the capital allocation and then we'll come to the M&A question. Molly Beerman: Hi, Chris. We are $135 million away from the top of our adjusted net debt target of $1.6 billion, and the top target is $1.5 billion. We do have a priority to continue to pay down debt. We have notes, the 2027 notes, with $141 million remaining, and on the 2028 notes, $219 million remaining. That will be our first priority. But as we stay within the net debt target, we will certainly be evaluating additional returns to stockholders in parallel with pursuing some growth options. William Oplinger: And Chris, to address the M&A question, we did the Alumina Limited transaction last year, and that showed that we have the ability to successfully do M&A work. That transaction, if you look back upon it, allowed us to do the Ma'aden transaction where we're swapping out the Ma'aden equity interest for shares. As I look forward, we will look at opportunities for M&A across the spectrum of the product line. I would not say at this point that we have any particular part of the product line that we need to add to. But we will look at opportunities as they come up, and we'll do the evaluation. And what we'll do is, where we have opportunities to create significant synergies that aren't available to our shareholders otherwise, we would look at those opportunities from the acquisition perspective. Chris LaFemina: That's very helpful. Thanks, Bill. See you next week in New York. William Oplinger: Yes. Thanks. Operator: Your next question today will come from Lawson Winder with Bank of America. Please go ahead. Lawson Winder: Great. Thank you very much, operator. Good evening, Bill and Molly. Nice to hear from you both. Could I ask about the U.S.-Australia Alcoa partnership? Would you be able to provide some background on how this came together? Was that an initiative driven by Alcoa? William Oplinger: It was an initiative that really began between Alcoa and the Japanese. The Japanese were looking for the potential offtake of gallium. We got that joint development agreement put together a little while back. And we've been talking to both the U.S. and the Australian governments for a number of months now. The real strategic advantage of this deal is that it provides a supply chain outside of China for gallium that is around 10% of the world's gallium market. It will be at our Wagerup facility in Western Australia. That solidifies the importance of that facility in Australia. And it really strengthens the relationship between, and you saw this in the press conference yesterday and in the joint signing ceremony between President Trump and Prime Minister Albanese, strengthens the relationship between the U.S., Australia, Japan, and really shows the importance of Alcoa in Australia. Lawson Winder: Thank you for that. And then as a follow-up, can you give us an idea of what sort of approvals or permits might be needed and the timeline to first production on that facility? William Oplinger: So that's one of the reasons why Wagerup was chosen. The approvals, we have line of sight to get the approvals done fairly quickly. We are pushing to have first metal by 2026. We think we will be first to market outside of China on an aggressive schedule. The next step is that we need to get final documents signed, but we're pushing to be able to create, to extract gallium by 2026. Lawson Winder: Okay. Thank you, Bill. William Oplinger: Thanks. Operator: And your next question today will come from Timna Tanners with Wells Fargo. Please go ahead. Timna Tanners: Yes. Hey, good evening. I'm looking forward to hearing more about Australia and Spain as you teased for next week's Investor Day. But I didn't hear mention of Canada or the U.S. I thought I would probe those topics. Didn't hear mention, in particular, on the negotiations with Canada regarding any carve-out of aluminum. So I'd like to hear about that export opportunity, the latest there. And then given that the U.S. now has arguably the lowest aluminum smelter production costs in the world, just if there's any rethinking of expanding capacity domestically, like at Warrick with that idle hotline? Thanks. William Oplinger: Wow, there are a lot of questions there, Timna. So as far as the Canadian-U.S. negotiations that are going on, we are providing information to both sets of governments so that they have the right information, the right data to make the right decisions. And we're working with both administrations to ensure that they understand the trade flows because we're probably the world's expert on the trade flows between Canada and the U.S. when it comes to aluminum. I'm a little bit surprised by your comment around the lowest cost in the world for aluminum. We have not yet seen, with the exception, and I'll cover the Massena Project, we have not yet seen significantly competitive energy prices available for the long term in the United States. You know that globally, we would be shooting for energy prices between $30 and $40 a megawatt hour. We've not seen those available yet for long-term packages in the U.S. In fact, the opposite of that is occurring because some of the data centers and the AI centers are able to pay $100 a megawatt hour, whereas we're looking for $30 to $40. And then lastly, around your question around Warrick, the Warrick restart is a complex restart for that fourth line. It will cost us probably about $100 million, and it'll take anywhere between one to two years to get that fourth line up. We'll continue to evaluate it, but we won't make an investment decision simply on a tariff. Tariffs can and do change over time, so we won't be plowing $100 million into the ground at this point based on a tariff cost. Did I answer all of that? Timna Tanners: That's helpful. I think you did, and I should clarify that that comment on the lowest production cost is adjusted for tariff and actually came from CRU, but that's helpful detail. I appreciate it. William Oplinger: Oh, and I should have highlighted Massena. And let me just take a second to highlight Massena. Really big deal. And I said this in my prepared remarks, but maybe it didn't come out as exciting as I wanted it to. Really big deal in Massena. We have a ten-year contract that has two potential extensions of five years each. That allows us now to make long-term decisions associated with Massena, and we've decided to invest in the bake furnace in Massena. So really excited for the people of Massena. And as I said in my prepared remarks, I committed to them. We're going to get them a globally competitive long-term power contract. They've committed to me that they're going to work on the profitability of that plant, the safety of that plant, and the production of that plant. And I'm looking forward to getting up to Upstate New York and celebrating here soon. Timna Tanners: Okay. Thanks again. William Oplinger: Thanks. Operator: And your next question today will come from Carlos De Alba with Morgan Stanley. Please go ahead. Carlos De Alba: A question on gallium. Do you have any color that you can share on the economics of that project? And if it is too early, maybe when do you expect a technical report or feasibility study that you can share, given that it could come up rather quickly? And maybe related to that, does this project change in any way the ongoing mining permitting process you have going on in Western Australia? William Oplinger: I missed the second half of that. Does it impact our approvals at all? Carlos De Alba: Like, if it changes the ongoing mining permit process that you have in Western Australia? William Oplinger: Right. So let me go there fairly quickly. The approvals process that we're going through currently is related to Huntley and Pinjarra. Huntley, the mine, Pinjarra, the refinery. So this would have no impact on that approvals process. In Wagerup, we will be going through an approvals process there at a later date. And this should have no impact on that approval process either. When it comes to the economics, Carlos, this is not a large plant. It is not a large plant. It is going to be financed via a couple of the Japanese entities, the U.S. government, and the Australian government. Alcoa will have a small part of the financing. The really critically important thing here is to have a supply chain of gallium outside of China. And this is what the governments want, and they will be taking an offtake of that gallium. So Japan, Australia, and the U.S. will all have an offtake of the gallium. Molly Beerman: I'll just add that the structure for that offtake is a cost-plus margin, which is still in the process of negotiation. Carlos De Alba: Great. Thank you for that. And then one more, if I may. Maybe related to the last question, didn't ask. Any intention to maybe look at getting back into the rolling business and unfortunate situations from some of the current producers there maybe highlighted the need for having a more robust supply chain? William Oplinger: Hey, my attorneys always tell me not to make unequivocal statements. But I will make an unequivocal statement. No. There's no interest in getting back in the rolling business. Carlos De Alba: Fair enough. Thank you very much. See you next week. William Oplinger: See you. Operator: And your next question today will come from Daniel Major with UBS. Please go ahead. Daniel Major: Hi, Bill, Molly. Thanks for the questions. I think most have been answered, but discussed most of the strategic elements. Next week. But just one follow-up, just on the comment you made on gallium. Would you you said that the pricing would be an offtake agreement at a cost-plus or a fixed margin. Is that for all of would that be for all of the volumes associated with the project? Is that the right way to think about it? William Oplinger: All of the volume. Alcoa and we still have to get through definitive agreements. So we're making these comments based on the MOU that was signed. Alcoa will have a very small offtake, very small offtake, the rest will be cost-plus. Daniel Major: Okay. And just one follow-up on the gallium dynamic. Can you give any insight on the ownership structure of the JV and your equity participation in the 100 tons? William Oplinger: So the ownership structure is two entities will own the plant. The Japanese will own 50%. The combination of the U.S., Australia, and Alcoa will own the other 50%. We have not publicly said the ownership of that second 50%. And the offtake will be similar in line with the ownership percentages. Daniel Major: Right. So I'll go yeah. Comfortably less than 50% of the economics of the joint venture. William Oplinger: Yes. To put it in perspective, we would anticipate taking again, this is all in negotiation. Something like five tons of the 100-ton capacity. Daniel Major: Okay. Thank you. And then your second question, again, trying to front-run next week. Can you still confirm the target for San Ciprian smelter running at steady state is mid-2026? Is that still correct? Molly Beerman: Yes. That is our target that we will have full run rate mid-2026, trying to get to the level of profitability at the smelter in the back half of '26. Daniel Major: Okay. And then yes, last we've seen a bit of an uptick recently in both Midwest and European premiums. Can you give any color on what's trying to drive that? Are you seeing any green shoots in end demand? Or is this some tightening in the supply chain? What would you attribute that uptick to? William Oplinger: So in the Midwest, the Midwest has finally risen to a level where it covers the full tariff cost. In Europe, we're seeing some uncertainty around Mozal, the potential Mozal shutdown. And then the Century shut that's occurred within the last day or two, that could put further pressure on the European premium. Molly Beerman: Both markets are still in deficit, and the supply is very tight. So I think you're seeing the price react to that. William Oplinger: Yeah. In the U.S., I think our days' consumption has gone down to something like thirty-five days, which typically triggers it's below a level where it typically triggers higher pricing. Daniel Major: Very clear. Thank you. Operator: And your next question today will come from Alexander Nicholas Hacking with Citi. Please go ahead. Alexander Nicholas Hacking: Yes, evening Bill and Molly. Look forward to seeing you next week. Congratulations on the agreement at Massena. Just one question for me. Your geographic mix of shipments from your Canadian smelters, I know at one point you were rerouting some of that material away from the U.S. With the MWP back where it is, are those kind of flows back to normal again? Thanks. William Oplinger: So we had redirected about 135,000 tons during the course of the year so far. But at this point, with the Midwest premium as high as it is, it would be back to normal shipments in the United States. Alexander Nicholas Hacking: Thank you. Operator: And your next question today will come from Nick Giles with B. Riley Securities. Please go ahead. Nick Giles: Thank you, operator. Bill, coincidentally, net income attributable to Alcoa was $232 million this quarter. My question is, what do you think the administration needs to see from here to ultimately come to this agreement with Canada and reach a resolution on the tariffs? William Oplinger: You know, Nick, I'm not going to speculate on what the U.S. needs to see. The position that we're in, and I was in Washington over the last two days, and I was meeting with key decision-makers on both sides of the table. The position that we're in is we're explaining to them the market flows. And just so everybody knows, and I'm sure you've heard these numbers, the U.S. is short roughly 4 million metric tons on an annual basis. Canada provides around 3 million metric tons out of that 4 million metric tons. I know there's been some discussions, and you've probably heard some of the rumors around lower tariffs or potentially a tariff wall around North America, potentially tariff rate quotas. We are a resource to both to help them understand the impacts of those, and that's the function that we've been fulfilling. Nick Giles: Appreciate that, Bill. My second question was, you've noted some production records at several of your assets year-to-date and assume that's the result of all the productivity and competitiveness work over the past twelve months. But what assets would you still consider to be underperforming today? And any other commentary about how much more you could improve at some of those other assets? William Oplinger: So I am very pleased with the operations globally. It starts with stability, and that gets reflected in generally higher production levels and lower costs. When I look around the world, if I just take you on a tour around the world, our Western Australian refineries have dealt with really, really poor bauxite quality. This is bauxite that we would have typically thrown away in the past, and they've been able to offset a massive amount of that deterioration with better operating procedures and technology. If I then go to, and I should have stopped in Spain just for a second. The startup in Spain is going really, really well. You know, we've never questioned the ability of our workers in Spain to run that facility extremely well, and the startup is going well. We've hit production records in Quebec. We've hit some production records in Norway. And the U.S. is running well from a smelting perspective. It all starts with stability, a focus on the relaunched Alcoa business system, really focusing around maintenance and getting maintenance done right. And I should highlight down in Brazil, we hit a production record in our refinery, our Alumar refinery, in September. Fantastic performance there. And the smelter is up to around 93%, 94% starting. Start at capacity. And every day, they just add a pot or two. So are there areas? Yeah. There are definitely areas across the patch. As I look at opportunities for improvement, Brazil now has to get the stability and take the cost out. We still have opportunities to serve our customers better out of the cast house in Massena, New York, for one, and in Mosjøen in Norway. So as I look across the system, there's still a lot of opportunity for improvement. Nick Giles: Bill, that was a great tour. I appreciate all the color and continuing best of luck. William Oplinger: Thanks. Operator: Your next question today will come from John Tumazos with John Tumazos Very Independent Research. Please go ahead. John Tumazos: Could you give us some color on the continued ten-year agreement in Massena? Is it a region where the demand for electricity has risen? Are there data centers or other new uses, new buyers? And is there new electricity capacity such as wind or natural gas or solar? And then secondly, does any of the infrastructure from the old prior Massena West plant still exist? Is this a candidate, or are there any candidates among your properties where old capacity could be brought back? William Oplinger: Oh, wow. You ended that in a different way than I thought you were going. So let me address each one of those, and Molly, feel free to jump in on any of this. The agreement that we have with the New York Power Authority extends the power contract for Massena out ten years, plus two opportunities to extend it another five and five. So Massena can have very competitive, low-cost green energy for the next twenty years. That allows us line of sight to be able to make the bake furnace investments. So we're going to invest $60 million in the bake furnace. So as I talk to people, for instance, in the U.S. administration, this is what aluminum needs in the United States. It's competitive, globally competitive electricity, preferably green, because at some point, we will get a green premium that's significant in the U.S. But this is exactly what's needed for investment in the United States, and that's why we've announced it and why we've done it. Your second part of that question is, is there competition for the electricity in Upstate New York? There absolutely is. I think New York Power Authority and the state of New York, and you remember New York Power Authority is part of the state of New York, understands the commitment to jobs in the North Country. Unlike a data center, we actually employ people. And we have approximately 550, 600 direct employees up in Massena, and this solidifies the future for them. They have to now deliver on a lot of things that I'm going to ask them to deliver upon. You then went to Massena, you said West, it's actually Massena East that's the curtailed capacity there. Massena East, there is no potline left, so we are not going to be restarting aluminum production. What we do have opportunities in Massena East is around data centers and AI, and there is electrical infrastructure still in place, and we're looking at opportunities there along with everywhere else in North America, but we're really looking at opportunities at Massena East. The electrical infrastructure is there. John Tumazos: Thanks, Bill. Congratulations. William Oplinger: Thanks, John. Good to hear from you. Operator: And your next question today will come from Glyn Lawcock with Baron Joey. Please go ahead. Glyn Lawcock: Good morning from Australia, Bill. William Oplinger: Hey, Glyn. Glyn Lawcock: Bill, on the call, you said the public review period has closed. Have you been privy to what was in the public review period? And has there been anything that you've seen, you know, been outside what your expectations, etcetera, in the review period that you have to respond to? William Oplinger: For the question, Glyn. Yes, the public review period is closed. We have received the comments from the EPA. Rough numbers, 60,000 comments, which is a very large number of comments to come in through a public review period. We had originally thought out of those 60,000, about 5,500 were individual comments. We've subsequently had the time to go through each of the comments and use a set of tools that can help us go through those comments. There's probably around 2,000 individual comments that have been submitted. We have a very large team in Western Australia that is completely focused on replying to those comments and addressing those comments. As you can imagine, there's probably two or three areas that those comments are focused on. One is proximity to water. And just so that everybody knows, we've been mining in Western Australia for sixty years. We've never impacted the water supply at Perth. But I understand the concern around proximity to water. That's why we've agreed to step back some of the mining farther away from the water sources. The second is really around mining in the jarrah and that's rehabilitation and any potential impact on black cockatoos. I think, Glyn, you were probably out on our tour that we took you through. You've seen it for yourself. I would invite anybody else that wants to take a tour of Western Australia. We have public tours to show you the rehabilitation in Western Australia. It is world-class. And that's one of the two areas that people are focused on. Glyn Lawcock: Alright. Thanks, Bill. If I could squeeze in a second and staying in Australia, you announced the Kwinana permanent closure the other day. You talked about the potential for a significant offset from the land sale. Just two questions. $1.6 billion seemed a lot of money for the closure. Was there anything that's specific to the closure versus other refineries? And then secondly, when you say significant for the land sale, is it commercially zoned? And could it be rezoned to make it more valuable? Or do you not think there's a zoning opportunity change as well? Thanks. Molly Beerman: So, Glyn, I'll take this one. So the significance of the closure costs for Kwinana, we have a large water management with the RSAs there, and this is the largest that we've seen in any of our prior refinery closures. So that's the accelerated up. Higher cost that you are seeing and our accelerated attempts to remediate that as quickly as possible. As far as the zoning, it's in an industrial park, so it is already a part of a large complex. We do believe the land will be quite valuable. It has port access, rail access. And because in Kwinana, we have the residue areas physically separated from the refinery site, we will focus on remediating the refinery site and preparing that for redevelopment and resale there to try to get a full recovery of those closure costs and possibly exceed it. Glyn Lawcock: Alright. Thanks very much for the response. Operator: And your next question today will come from William Chapman Peterson with JPMorgan. Please go ahead. William Chapman Peterson: Yes. Hi. Good afternoon, and I look forward to the update next week on the longer-term areas. Maybe as a snapshot and picking up on an earlier response on hyperscalers and maybe interest in idled assets or some of the interconnections. Have you seen hyperscaler interest pick up in recent months? You mentioned specifically Massena. So I'm just wondering how the dialogue is proceeding and is a snapshot relative to earlier this year when you first started up? William Oplinger: So the interest in data centers and AI centers hasn't really mitigated at all, hasn't come off at all over the last six months. We have spent a significant amount of time within the company trying to completely dimension what the opportunities are for our sites and how we aggressively market those sites to the right customers, the right developers for that land. So more to come on that in the future, but a lot of work going into what are the opportunities that we have, what electrical infrastructure we have, what interconnect that we can provide, and who the best developer or buyer of the site would be. And these are the closed and commissioned sites, not so much the active sites. William Chapman Peterson: Yes, understood. Earlier in your prepared remarks, you talked about the demand profile. And I guess specific to the U.S., you spoke of strength in packaging and electrical weakness in construction and transportation. Is this a sign of demand destruction? Or potentially substitution given tariffs and high Midwest premium? Is this kind of more of a cyclical statement? Trying to get a sense of how the higher Midwest premium could be contributing to some of this demand weakness, if at all? William Oplinger: We don't think it's demand destruction at this point. When and I think you ran through the end markets pretty well. When I look at the end markets, packaging and electrical conductor are very strong. Building construction hasn't gotten worse. We were expecting, as probably most people were expecting, lower interest rates in the second half of this year. Those have not materialized. That will spur residential construction. The real weakness that we're seeing both in Europe and in North America is the automotive. And is that demand destruction, or is that in the case of Europe, really substitution by electric vehicles coming out of China? It's really hard to say. But, at this point, we're not seeing significant demand disruption. William Chapman Peterson: Okay. Thanks for that. And, again, look forward to next week. William Oplinger: Thanks. Operator: And your next question today will come from Nick Giles with a follow-up of B. Riley. Thanks. Nick Giles: Please go ahead. Thanks for taking my follow-up. Obviously, we've gotten some updated measures in the EU on safeguards for steel. So I was curious if there are any updates you could share on what we could see on the aluminum side or how those discussions have progressed? William Oplinger: No. I can't give you any update on that in Europe. The next big set of regulations will be coming into Europe is CBAM. And our company's position is that we think CBAM will go into effect as of 2026. There are still some pretty big loopholes in CBAM, and anybody that wants to discuss that next week with me, we can. But the two big loopholes are scrap and end-user and product production. We think that CBAM will raise the Midwest not the Midwest, the European premium probably $40 or $50 a ton in 2026. That will be a slight positive for us. Ultimately, costs will go up too as carbon costs creep into the overall cost structure. So CBAM, we think, will be coming in, in 2026 and at least in the near term have a positive impact for Alcoa. Nick Giles: Thanks a lot, Bill. Appreciate it. Operator: This will conclude our question and answer session. I would like to turn the conference back over to Mr. Oplinger for any closing remarks. William Oplinger: Thanks, operator, and thanks to everybody for joining our call. We hope that you will join us for Investor Day next Thursday. I really look forward to seeing many of you there in New York. And that concludes the call, so thank you. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Welcome and thank you for standing by. At this time, all participants are in a listen-only mode. Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now I will turn the meeting over to Olympia McNerney, IBM's Global Head of Investor Relations. Olympia may begin. Olympia McNerney: Thank you. I'd like to welcome you to International Business Machines Corporation's third quarter 2025 earnings presentation. I'm Olympia McNerney, and I'm here today with Arvind Krishna, IBM's chairman, president, and chief executive officer, and Jim Kavanaugh, IBM's Senior Vice President and Chief Financial Officer. We'll post today's prepared remarks on the IBM investor website within a couple of hours, and a replay will be available by this time tomorrow. To provide additional information to our investors, our presentation includes certain non-GAAP measures. For example, all of our references to revenue and signings growth are at constant currency. We provided reconciliation charts for these and other non-GAAP financial measures at the end of the presentation, which is posted to our investor website. Finally, some comments made in this presentation may be considered forward-looking under the Private Securities Litigation Reform Act of 1995. These statements involve factors that could cause our actual results to differ materially. Additional information about these factors is included in the company's filings. So with that, I'll turn the call over to Arvind. Arvind Krishna: Thank you for joining us today. In the third quarter, International Business Machines Corporation delivered strong results across revenue, profit, and free cash flow, exceeding our expectations. Revenue growth accelerated to 7%, our highest growth in several years, with all our segments accelerating sequentially. These results underscore the strength of our business model and portfolio, and the innovation we are delivering to clients. Clients continue to turn to IBM as a trusted partner to help them modernize, embed AI, and build resilient infrastructure. Let me touch on the economy before I turn to our execution. Last quarter, I said we had moved from being cautiously optimistic to optimistic. Technology remains a key driver of growth and competitive advantage. AI adoption is accelerating, and hybrid cloud remains the foundation of enterprise IT. Clients are leaning on enterprise technologies to scale, innovate, and drive productivity. There are always macro uncertainties, but overall, we continue to see broad-based demand from clients and remain optimistic. Now turning to our execution this quarter. Our strategy remains focused on hybrid cloud and artificial intelligence. Our products and services fuel growth and productivity for our clients. You can see this in our results for the quarter. Software growth accelerated to 9%, led by strength in automation. Automation was up 22%, highlighting our end-to-end portfolio of leading solutions that optimize operations, automate infrastructure and workflows, build resiliency, and drive cost efficiency for clients. Many of our automation products are infused with AI, enhancing their capabilities. HashiCorp also continues to accelerate within IBM, benefiting from our go-to-market distribution and joint product innovation, highlighting our synergy potential. Consulting accelerated, reflecting growing demand for AI services as clients need help designing, deploying, and governing AI at scale. And infrastructure delivered robust performance, growing 15%, driven by continued strength in z17, our strongest February launch in history. The Spire Accelerator, which will be available in Q4, will bring advanced generative AI and real-time inferencing capabilities inside IBM Z, redefining how enterprises capture AI value within their most mission-critical environments. In addition to being a demand driver, AI is also a powerful productivity driver for IBM, contributing to our strong financial performance. In 2023, we set out on a goal to achieve $2 billion of productivity savings, and today, we are well ahead of that with an expectation of $4.5 billion of annual run rate savings exiting this year. I believe we have significant opportunity ahead of us to continue to become even leaner and more nimble. Our client zero approach sets us apart as we have internally identified and addressed pain points on data readiness, siloed and vertical workflows, application and IT sprawl, using our own technology and domain expertise. Clients see these results and look to us to help them on their own transformations, driving over 1,000 client zero engagements this year. The breadth of our AI offerings is a key differentiator, combining an innovative technology stack with consulting at scale and our client zero journey. Our Gen AI book of business continues to show momentum, at over $9.5 billion inception to date. In consulting, we are embracing disruption and leading the way with our digital asset and services and software strategy. While we are early in this journey, we have over 200 consulting projects using digital workers at scale. In software, demand for Watson X and Red Hat AI remains strong, with early momentum in our agentic platform WatsonX Orchestrate. WatsonX Orchestrate helps enterprises deploy AI by connecting agents, models, and workflows with governance and security. Orchestration will be critical as enterprises run a variety of models to optimize cost and performance. Our hybrid approach to models enables clients to use the best option for each use case. IBM's Granite models, third-party models, or open models from Hugging Face, Meta, and Mistral. We recently launched Granite 4.0, our next-generation family of open small language models. Granite 4.0 delivers high performance and cost efficiency using 70% less memory and offering twice the inferencing speed of conventional models. We also partnered with Anthropic to infuse Chloride into IBM products to unlock new Gen AI features and capabilities. This week, we announced a partnership to run Watson X on Grok, giving clients access to their inferencing technology, which provides ultra-high-speed, low-latency AI capabilities at lower costs. All this leads to real tangible value for clients. Companies like Deutsche Telekom and S&P Global are embedding Watson X into core workflows. In infrastructure, clients such as Nationwide, State Street, and Credit Agricole are turning to AI to manage increased workloads and use z17 for its advanced AI inferencing capabilities and enhanced resiliency. Accelerating innovation remains a core focus for IBM. At our recent IBM Tech Exchange Developer and Builder Conference, we showcased how we are helping clients and partners with innovation that blends enterprise strength and AI speed. We had almost twice the number of participants as last year, with speakers including United Airlines, T-Mobile, Prudential, UPS, Morgan Stanley, Verizon, and Cigna. We announced Project Bob, facilitating AI-powered software development, helping teams ship higher quality code faster. We have more than 8,000 developers within IBM that are using Project Bob, reporting productivity gains averaging 45%. Another powerful client zero use case. We also announced new automation capabilities, including a real-time infrastructure graph connecting applications, services, and ownership through HashiCorp Terraform. As outlined at our Investor Day, we are on a path to demonstrate the first error-corrected quantum computer by 2028 and continue to deliver key milestones in our quantum roadmap. As we collaborate with our ecosystem of over 280 partners, we are making tangible progress on near-term use cases. For example, HSBC achieved a notable improvement in bond trading predictions using IBM's Heron quantum processor. Vanguard announced a breakthrough in optimizing portfolios using IBM's quantum computing as a service. We recently announced a partnership with AMD to build quantum-centric supercomputing architectures leveraging IBM's quantum expertise and AMD CPUs, GPUs, and other accelerator technologies. Just last week, IBM and the BaaS government unveiled Europe's first IBM Quantum System Two. This marks the second installation outside The United States and underscores our commitment to global leadership in quantum computing. In closing, we are executing on our strategy of accelerating revenue growth and delivering higher profitability. Given these results and the momentum in our portfolio, we are raising expectations for revenue growth to more than 5% and free cash flow to about $14 billion for the year. With that, let me hand it over to Jim to go through the financials. Jim Kavanaugh: Thanks, Arvind. In the third quarter, our revenue growth accelerated to 7%, our highest growth in several years, with all of our segments accelerating sequentially. Revenue scale, mix, and productivity drove 290 basis points of adjusted EBITDA margin expansion, 22% adjusted EBITDA growth, and 15% operating earnings per share growth, highlighting the significant operating leverage in our business model. And through the first nine months, we generated $7.2 billion of free cash flow, our highest nine-month free cash flow margin in reported history. We exceeded our expectations on revenue, profitability, adjusted EBITDA, earnings per share, and free cash flow, reflecting the strength of our portfolio and the disciplined execution across our business. Software revenue grew 9%, fueled by accelerating organic growth, up a few points since last quarter, and continued contribution from our high-value annual recurring revenue base, which grew to $23.2 billion, up 9% since last year. Growth in automation accelerated to 22%, driven by strength in the organic portfolio and early synergies with HashiCorp, which maintained momentum and delivered its highest bookings quarter in history. Red Hat bookings growth accelerated to about 20%, and revenue grew 12%. This performance was driven by a softening in consumption-based services and Rell trending back towards single-digit growth as we wrap on last year's exceptional double-digit performance. Demand for our hybrid cloud products remains strong, and all three of our major subscription offerings gained market share again this quarter, with growth accelerating for both OpenShift and Ansible. OpenShift ARR is now $1.8 billion, growing over 30%. Data was up 7%, driven by continued strength in our AI portfolio. And transaction processing revenue declined by 3%, reflecting another quarter of z17 outperformance as clients continue to prioritize hardware spend on our latest IBM Z system. While this dynamic impacts near-term revenue, we're encouraged by a healthy pipeline that positions us well for future demand. Infrastructure delivered another strong quarter, growing 15%. Hybrid infrastructure grew 26%, and infrastructure support was flat. Within hybrid infrastructure, IBM Z delivered its highest third-quarter revenue in nearly two decades, up 59% year to year, fueled by the early success of our z17 platform, purpose-built for AI and hybrid cloud, with breakthrough capabilities in real-time inferencing, quantum-safe security, and AI-driven operational efficiency. Clients are investing in z17 not only for its reliability and scalability but because it enables secure high-performance computing at the core of their digital transformation strategies. Distributed infrastructure, up 8%, reflects broad-based growth across our storage portfolio as clients scale capacity to meet rising data and AI demands. Consulting returned to growth in the third quarter with revenue up 2%, improving sequentially and marking a positive inflection point in performance. Intelligent operations was up 4%, while strategy and technology revenue stabilized, with both lines of business showing quarter-over-quarter momentum. This growth reflects solid demand for our strategic offerings: business application transformation, application modernization and migration, and application operations as clients focus investments on solutions that accelerate AI transformation and maximize return. As Arvind mentioned, we are embracing AI disruption and leading with the software-driven services delivery model. We are transforming into a hybrid model of people plus software that delivers efficiency and scale. This approach is already driving internal productivity, reflected in the 220 basis points of segment profit margin expansion year to date, and resonating with clients seeking to operationalize AI strategies. By combining domain expertise with scalable technology platforms, we reinforce our role as a strategic provider of choice in this evolving landscape. Our consulting generative AI book of business accelerated to over $1.5 billion in the quarter, with the number of projects more than doubling year to year, underscoring our momentum. While total signings declined this quarter, the quality of signings continued to strengthen, with more strategic wins from new clients and expanded engagements within existing ones. Turning to profitability, we have delivered nine consecutive quarters of operating pretax margin expansion, highlighting the evolution of our portfolio mix and our laser focus on productivity, which again played out this quarter. Revenue scale, mix, and productivity drove expansion of operating gross profit margin by 120 basis points, adjusted EBITDA margin by 290 basis points, and operating pretax margin by 200 basis points, ahead of our expectations and well above our model. Segment profit margins expanded by 420 basis points in infrastructure, 270 basis points in software, and 200 basis points in consulting, with consulting margins at the highest level in three years. Revenue scale and mix contribution from IBM Z is a significant source of profitability and free cash flow, and combined with the three to four times stack multiplier, helps fuel our investment in innovation and drive growth. Productivity is also a key driver of profit margin expansion, as we deploy AI at scale across IBM in areas including finance, supply chain, sales, HR, service delivery, and customer support to improve efficiency and reduce costs. While we have made progress on this journey and expect $4.5 billion of run rate savings exiting this year, there is still significant opportunity ahead for us to drive even more efficiency and cost savings. Through the third quarter, we generated $7.2 billion of free cash flow, up about $600 million year over year, resulting in our highest year-to-date free cash flow margin in reported history. The largest driver of this growth is adjusted EBITDA, up $1.8 billion year over year, partially offset by proceeds from the Palo Alto Q Radar transaction, which resulted in a reduction in CapEx in the third quarter of last year, and working capital dynamics. Our strong liquidity position, solid investment-grade balance sheet, and disciplined capital allocation policy remain a focus for us. We ended the quarter with cash of $14.9 billion. Our debt balance ending the quarter was $63.1 billion, including $11.3 billion of debt for our financing business, with the receivables portfolio that is over 75% investment grade. In addition, year to date, we returned $4.7 billion to shareholders in the form of dividends. Now let me talk about what we see going forward. Through the first nine months of the year, we delivered 5% revenue growth, 17% adjusted EBITDA growth, 10% operating earnings per share growth, and 9% free cash flow growth. The strength and diversity of our portfolio, disciplined capital allocation, and relentless focus on productivity continue to drive the durability of our revenue and free cash flow performance. Given the strength of this performance, we are raising our expectations for revenue, adjusted EBITDA, and free cash flow. We now expect to deliver revenue growth of more than 5%, adjusted EBITDA growth of mid-teens, and free cash flow of about $14 billion for 2025. Let me focus on full-year growth for the segments. We continue to expect software revenue growth of approaching double digits for the full year. Through the first nine months, we delivered growth above our model of 17% in automation and inline model growth of 7% in data. And these trends should continue. And we continue to expect mid-teens growth for Red Hat, albeit at the low end. This is underpinned by strong bookings growth in the third quarter of about 20% and our revenue under contract, which is growing in the mid-teens. As we wrap an elevated growth in consumption-based services last year, we expect double-digit revenue growth in the fourth quarter, with an accelerated growth profile heading into 2026. While transaction processing was down 1% year to date, as clients prioritize spend on our high-value innovation z17, the strength of the new cycle provides future monetization value across the z stack. We are seeing this strength in our pipeline as we enter the fourth quarter, which we expect will return to growth. With continued strength in z17, we now expect infrastructure to contribute over 1.5 points to IBM's revenue growth this year. In consulting, we are encouraged by our return to growth this quarter and continued progress in our Gen AI book of business. And now we see an inflection in growth going forward, with fourth-quarter revenue performance similar to our third-quarter growth. Now turning to profitability. We started this year expecting over 50 basis points of operating pretax margin expansion, and through the first nine months of this year, we delivered 130 basis points of expansion, well ahead of our expectations. This performance is driven by our revenue scale, portfolio mix, and progress with productivity initiatives, enabling operating leverage while providing investment flexibility. We are raising IBM's full-year operating pretax margin expansion to over a point, and our operating tax rate expectation for the year remains in the mid-teens. For the fourth quarter, we are comfortable with consensus estimates for constant currency revenue growth and profitability. Let me conclude by saying we are pleased with our continued disciplined execution and look forward to capturing growth opportunities ahead of us. Arvind and I are now happy to take your questions. Olympia, let's get started. Olympia McNerney: Thank you, Jim. Before we begin Q&A, I'd like to mention a couple of items. First, supplemental information is provided at the end of the presentation. And then second, as always, I'd ask you to refrain from multi-part questions. Operator, let's please open it up for questions. Operator: Thank you. At this time, we'll begin the question and answer session of the conference. And our first question comes from Amit Daryanani with Evercore ISI. Please state your question. Amit Daryanani: Yes. Thanks a lot. Good afternoon, everyone. I guess maybe just want to focus on free cash flow. So I really appreciate the guidance of free cash flow at $14 billion for the year. And if I get my math right, this sort of implies free cash flow is up double digits in '25 and your conversion rates are around 125% give or take. Can you just touch on if there's any one-off dynamics that we should be aware of that are helping in free cash flow in 2025? I'm really just trying to think that as we get into 2026 and if your growth is in line with your longer-term models, is there anything that could preclude free cash flow from growing a few points higher than sales growth, sort of the way you have talked about it? I'd love to just kind of spend a little bit of time on free cash flow. And if anything alters on the capital allocation as well. Thank you. Jim Kavanaugh: Thanks, Amit. I appreciate the question. It's right at the heart of how Arvind is repositioning this company around the two key measures. One, accelerating revenue growth, and two is driving that free cash flow engine that's going to fuel the investments for us to continue to make to drive long-term sustainable competitive advantage. But if you take a step back first, as we said in prepared remarks, we're very pleased with our free cash flow engine starting out the next evolution of our journey coming off the midterm model. Year to date, $7.2 billion, up $600 million year over year, highest free cash flow margin reported history through three quarters for our company. And I'll just state that underneath it, we overcame in the third quarter a $500 million headwind from last year as a result of the Palo Alto QRadar transaction that was recorded as an asset sale and reduction in CapEx. So we got through 2025's headwind around that. What's driving that free cash flow? Probably the most important thing is the underlying fundamentals of our business. An accelerating top-line revenue growth profile and an operating leverage engine that is driving productivities like we haven't seen in a long period of time. I think we're nine quarters in a row of driving operating leverage and significant margin productivity. So I would tell you high quality, high sustainable free cash flow. And that's what gave us the confidence for the second quarter in a row to take up our free cash flow estimate for the year. Now about $14 billion. Why do we do that? We took up revenue, we took up operating margin, we took up adjusted EBITDA, we took up our profitability, and all that leads to free cash flow. When you take a look at what's driving that $14 billion, $2.5 billion give or take year-to-year growth in adjusted EBITDA. Mid-teens growth, well above our model. And underneath that, you take a look at some of the dynamics we've been talking about since back in January. Yes, higher profitable-based engine will pay higher cash tax. Yes, we're investing long-term for this business, we are going to have higher CapEx outside of the QRadar transaction. And, yes, we made a significant strategic acquisition. We've got acquisition-related charges and foregone interest. All of that is embedded in 2025's guidance. Now you take a step back to the heart of your question of 2026. 2026, I would tell you, what is our free cash flow generation engine flywheel? It's accelerated revenue growth, the 5 plus percent in this company, is driving operating leverage and it's leveraging an efficient balance sheet. We see all that continuing to play out in 2026. And those underlying fundamentals, yeah, they deliver a sustainable realization number by the way, in the mid to high one twenties. Kinda to your question. By the way, we've been there for four years in a row already. So we can handle that. So you bring that all together, I think it talks to the statement and the confidence of our focused portfolio. Our disciplined capital allocation, the diversity of our business model, and the relentless focus of us driving productivity and operating leverage that gives us the investment flexibility to continue driving long-term sustainable competitive advantage. So thank you very much for the question. Olympia McNerney: Great. Operator, let's take our next question. Operator: Thank you. And your next question comes from Wamsi Mohan with Bank of America. Please state your question. Wamsi Mohan: Yes. Thank you so much. Arvind, you said AI adoption is accelerating right at the top of the call. And I'm wondering if you can maybe help us think through the financial impact in maybe revenue terms for IBM, how we should think about the progression for that. Are we hitting some kind of inflection that we should see meaningful upside into 2026 on the AI front? And maybe quickly, your quick thoughts on maybe the impact of the federal government shutdown if there is any materiality to that to IBM here in the fourth quarter? And if I could, Jim, if you could just clarify the organic growth in software in the third quarter and expectations for transaction processing going into the end of the year? Thank you so much. Arvind Krishna: Wamsi, thanks for those questions. Let me try and unpack it. Let me go with the easiest one first. The easiest one is on the current government shutdown. I would tell you that we see a de minimis impact to IBM. It's always hard to say zero because something could happen. We still got two months to go in the quarter. But so far, we have not seen any impact from the shutdown. And the reason for that is the makeup of our business. Our technology business is largely comprised of hardware as well as software, software mostly on a subscription basis. These are running critical systems. Payments for social security, benefits for the VA. All of these are considered essential, so I don't really see that at risk. A little bit over half the business is consulting projects. But the consulting we do is of a similar nature. ERP, benefits, helping people reduce paper, reduce errors. Back to payments. These are all considered essential. And that is the reason that we may be in the minority of not seeing any direct impact so far. Now just leave it at that because so far we have not. Nobody has come to us about any of these projects. And so that's the first question that is straightforward. Next, you asked about AI. Look, our book of business, we talked about it being over $9.5 billion. Adjusted consulting piece was $1.5 billion in the quarter itself. These are very real numbers. So as those consulting projects start to get executed, as that backlog builds up, certainly the contribution to consulting is going to be very real. We talked about another number tied there, which is not a different number, is the 200 projects in consulting which are already using digital workers which effectively are the AI agents that we have built that get deployed by our consultants on behalf of our clients. About not quite, but close to 20% of our overall book of business is technology and software. And there, that is mostly subscription revenue, as well as products that people are purchasing from us. So those numbers certainly begin to add up. And I will tell you that a big fuel behind both our OpenShift growth as well as our automation growth is due to the AI capabilities that are infused inside those products. So if I sort of put the first two pieces together, de minimis on the government shutdown, and definitely the AI piece is a strong contributor to the software growth and I believe it's a big piece of why consulting is beginning to return to growth. Because we called the play to move towards AI almost two years ago. So as that book of business has built up, it is overcoming the headwinds from staff augmentation projects going away and people getting rid of discretionary spending and consulting. Jim, I'll let you take the third piece. Jim Kavanaugh: Yes. Just to amplify the last piece and then I'll get into your question about software organic and TP. To Arvind's point, you know, year to date from a software perspective, we're growing 8.5% overall. Approaching 9% right now. About two points of that growth is coming out from our GenAI book of business. So we're getting very good realization and penetration. Arvind's point on consulting, north of a $7.5 billion book of business I'd put that up against any consulting company right now. We called that play to Arvind's point a few years ago. We do think we have a differentiated competitive value proposition of a company with an integrated tech stack plus strategic partnership AI plus a consulting business at scale with an integral part of IBM client zero that drives distinctive use cases and references. We've already had over a thousand client engagements year to date around GenAI from an enterprise software and consulting perspective overall. In consulting, it's already north of 22% of our $31 billion backlog. And in this quarter, we eclipsed double-digit composition of our revenue, 12% of our revenue growing very nicely at still a two to three-point competitive advantage in terms of margin overall. And by the way, you see that play out in our consulting margins. You know, year to date up 220 basis points, the highest margins we've had in a long time. Now to your point about software. Software you know, we're very pleased, 9% in the quarter. We accelerated about three points organically quarter to quarter. This wasn't an inorganic contribution. In fact, our inorganic contribution came down as we wrapped on some of these. It's being driven by the strong contribution of our high-value recurring revenue, now a book of business, $23 billion, up 9%. And when you look underneath it, you know, TP right now given the strength of the mainframe cycle, driving cycle dynamics. We're very encouraged, around the future monetization value opportunity. And as you heard in prepared remarks, calling a return to growth in TP in the fourth quarter with the strong pipeline we got. By the way, if you map it back to the z16 cycle, what happened in '22? Our TP revenue was flat. In '23, we grew high single digit. In '24, we grew double digit. Look at '25 right now, we're calling back to growth probably a quarter early compared to a historical cycle. We feel very good about that growth profile. And given the strong z17 where we've shipped over 100% more MIPS than the z16 cycle, actually feeling pretty good about that valuation opportunity moving forward. Olympia McNerney: Great. Operator, let's take our next question. Operator: Your next question comes from Ben Reitzes with Melius Research. Please state your question. Ben Reitzes: Hey guys, thanks a lot. Appreciate the question. Arvind, I appreciate that fourth-quarter reported software growth is set to accelerate in your guidance, sounds like above 10%. I was just wondering about next year. You do wrap the Hashi acquisition in the spring, I think March. Are there signs that it can accelerate from here? Obviously with Red Hat decelerating a little, I just think folks would like to know broadly if you can keep double-digit next year or even accelerate based on the portfolio realizing that you're wrapping the acquisitions that timeframe? Thanks so much guys. Arvind Krishna: Yes, Ben, great question. So let me decompose it into the four parts of software that we talk about. And then we'll touch on acquisitions and their contribution. And then I'll ask Jim to try to put it all together back into the financial model for you. So let's take Red Hat. We talked about 20% signings growth this quarter. We had similar numbers in the previous quarter. As that becomes the bulk of the Red Hat book of business entering 2026, we do expect to see Red Hat returning to mid-teens or close to mid-teens growth. So that would be an acceleration from where we are this quarter. Then next, we talked about and in the last question, Jim touched on transaction processing, or mainframe software. We have seen this happen multiple times. In the first couple of quarters of a new cycle, TP tends to come down because people are very much focused on getting their hardware capacity. As that hardware capacity gets deployed, then the TP revenue begins to come up, along with some of the ELA cycle dynamics that are there. And we begin to see that. So I expect to see TP grow. Not quite in double digits to be clear, but let's call it low single digits for sure into next year. Automation has been growing in this last quarter at 22%. Yes, the HashiCorp acquired revenue was a piece of it. And as you point out, that'll go away in the second quarter. However, the acquired properties we have tend to provide continued growth for quite a while. Because of the Hashi bookings, which are significantly ahead of where we had planned them to be, I expect we'll continue to see growth out of Hashi through 2026 as well. Now not quite as much as an acquired growth, but I do expect that we'll continue to see automation in the double digits for sure. If but maybe not north of '20. And we've continued to see the data and AI portfolio grow in the mid to high single digits. Now that does put aside what other acquisitions we will do. Part of our model for software is we'll get a couple of points of growth from acquired revenue and we see a good market for targets, yes, that is yet to play out. But in the current regulatory environment, combined with what we can see out there, expect that we should be able to do that as well. So that was sort of giving you color on the portfolio and the different pieces I'll ask Jim to get into them closing it back up in terms of sort of what is the organic and inorganic and overall software numbers. Jim Kavanaugh: Yeah. Thanks, Ben, for the question overall. I mean, obviously, we are a software-centric platform company overall. So it's at the heart of both our top-line growth factor profile and also more importantly, from a free cash flow, generation engine overall. It delivers about three-quarters of our profit. And you take a look at '25, I think we positioned extremely well with regards to accelerating revenue growth through our throughout the year. Off of tougher comps at the '24. We gotta remember that. And I think that's a reflection of the strength that our portfolio, the diversity, of our portfolio across the board, and to the disciplined execution. Now when you look at '26, early indicators, I'll put them in some big buckets. Arvind went into some of the detail. First, I think we shouldn't forget, and Arvind called this out ninety days ago, which I think surprised many of you. We're operating in an attractive TAM and a positive backdrop from a technology perspective. Overall, we feel very good about technology being a source of competitive advantage, and you're seeing that play out in areas around hybrid cloud modernization, around AI, around automation. In many areas, we see that continue. So the market backdrop, we couldn't be more optimistic around twenty-six. Two, the strength and diversity of our portfolio not only has it been repositioned over the last three or four years to accelerate growth, what is happening? More and more of our composition is software is now aligned to higher growth end markets. Which gives us a better vector of growth even as we go into '26. Three, our annuity portfolio. And I don't think we get a lot of value for this, and we keep bringing it up. Over a $23 billion ARR book of business, feel we're gonna exit the fourth quarter at double digits. That's a great indicator for 2026 because that is 80% of our software portfolio overall. Four, new innovation, GenAI. I already talked about GenAI, the book of business and the acceleration we got, and all of the capital investment going into the infrastructure providers, I think, is just gonna accelerate the innovation curve for enterprise AI overall. And we are a leader in enterprise AI just given our tech stack, portfolio, and consulting, and that should deliver a few points. Five, Red Hat. You know, our bookings are three-month, are six-month, are nine-month, are twelve-month RPO shows accelerating growth coming off a 20% bookings overall. By the way, we actually had more opportunity to do even better than that 20%, and that fuel an inflected growth. Next, M&A. Now point I would bring up on M&A, Arvind already talked about, it's embedded in our model. We've said that all along. But, I think we've gotta continue selling the investor narrative because that M&A drives a much higher organic growth engine because those synergies play to those acquisitions. That's how we pay for control premiums. That's how we get an accelerated top-line growth. That's how we get an accelerated bottom-line growth. And we get accretive value in free cash flow in two years. So our organic engine continues to grow. And then finally, TP monetization. Arvind wrapped up on it. Let's just remind all the investors. TP gets monetized based on hardware installed MIP usage. I already said two quarters in, albeit early, we're a 130% program the program on z17. Off of a z16 was that was the most successful program in the history of IBM. We're at a 130%. So I do my math and calculation. Higher capacity opportunity creates higher monetization opportunity creates higher price opportunity, creates higher value creation opportunity. So I think when you look at it, we feel pretty good about delivering our model and software. Olympia McNerney: Operator, let's take the next question. Operator: Your next question comes from Eric Woodring with Morgan Stanley. Please state your question. Eric Woodring: Guys, thank you very much for taking my question. Just one quick clarification question there, Arvind. The growth rates you just provided in the response to that question for 2026 or into 2026, I just wanted to confirm those were all organic growth rates or whether they included M&A embedded in them. And then my question, just taking a step back Arvind is, we've seen cloud providers experience exceptional growth recently, particularly in infrastructure services and large-scale AI workloads. How does IBM view that trend? And do you see a similar opportunity for IBM Cloud to capture long-term infrastructure-driven demand? Thanks. Arvind Krishna: The growth rates that we talked about we tend not to do much M&A or any in both our mainframe or TPS. Well as in some of the other areas. The growth rates I mentioned, would call it are largely organic without having any significant M&A. But tuck-ins, small M&A are probably all included in there, but if we do anything substantial, it would help accelerate those growth rates. That's just put it that way. I'll also let Jim comment on it after I talk about the cloud opportunity. We actually partner deeply with all the hyperscalers. A thing that we haven't talked about, but it's certainly no secret, for example, we are one of CoreWeave's large clients. We also tend to use a lot of infrastructure at AWS, at Azure, as well as at GCP. So as opposed to that it's an opportunity for us, Eric, is the flip. We got a huge opportunity to do both consulting projects as well as deploy our software on those infrastructures for our clients. As an example, if I take one of our very large health insurance clients, as they think through where they're going to deploy their AI models, they do not like deploying in a public instance. But they are perfectly fine getting a private instance in a cloud and deploying models there, deploying our software stacks there, and getting growth. So we tend to do that. We also tend to, in some cases, for example, with Grok, we are deploying Grok in people's own data centers. So that's a big opportunity that comes there. That'll show up in revenue for us both in consulting as well as in software because on top of the Grok infrastructure, we tend to put our software stacks. In some instances. So it's less about us getting an opportunity in our cloud only but much more that that's a growth vector that we are able to ride and that helps increase overall growth rate in both software as well as in consulting. And lastly, let's not forget our biggest beneficiary of AI infrastructure is our mainframe, and our storage portfolio at this time. The latest generation mainframe we will surprise you with some of the numbers. This quarter, fully populated single system is capable of doing 450 billion inferences per day. As clients purchase that capability, that will be both a further accelerant to mainframe infrastructure growth but it also comes with a software stack that helps them do all of that inferencing. If I look at our storage portfolio, as many people have realized, you need a lot of storage to be able to do AI training. And we are gonna be beneficiaries of that. Inside our storage portfolio as people deploy that. So I would much more say, we are actually the direct beneficiary of the hyperscaler growth of AI capability and capacity as enterprises use this capability. And two, we will be a beneficiary in our mainframe and storage stack in a direct way. I think that that would I hope Eric addressed that part of the question. Jim Kavanaugh: Eric, and just to the numbers piece. I mean, overall, we are all focused here to execute a very important fourth quarter. To finish a very successful 2025 for IBM. But we both Arvind and I are given some color about '26, about the confidence we have in our portfolio. But let me just take a step back and remind you on software. Our software model shared at Investor Day approaching double digits, that is all in. That has two to three points give or take at each year, maybe a point more and maybe a point less depending on our disciplined capital allocation around M&A. Of inorganic contribution and six to seven to eight points of organic. When you look at 2025, you go do the math, work probably gonna be approaching six plus percent organic growth overall. We're gonna have somewhere three to four points this year because we took advantage of a very strategic opportunity with HashiCorp this year. But when you take a look at 2026, the TP growth monetization value that I talked about, the Red Hat accelerated growth profile that's on our revenue under the annuity growth profile, that is, you know, approaching or now gonna be double digits at the exiting the year. Each of those are gonna fuel that organic growth engine overall. So I think, you know, big picture, the model, is pretty much what we kinda look at right now for 2026. Olympia McNerney: Great. Operator, let's take the next question. Operator: Your next question comes from Jim Schneider with Goldman Sachs. Please state your question. Jim Schneider: Good evening. Thanks for taking my question. Arvind, I was wondering if you could maybe elaborate a little bit on how you're thinking about M&A from a target perspective. You've previously stated that you're looking to accelerate growth and you're looking for things that fit strategically with the portfolio. But on the margin, anything in any way you're thinking about differently about either the portfolio or the product piece of it or the potential size of transaction you might like to undertake? And specifically, would you consider undertaking a somewhat larger, transformative transaction not quite as big as you did with Red Hat, but of sort of similar scale relative to your overall portfolio? Thank you. Arvind Krishna: Yes. Jim, thanks for the question. Look, M&A is an extremely important part of our strategy. So I want to just perhaps reiterate because this has come up on prior calls as well. We look at it always in a multiyear window. So we gotta look at what is our excess cash flow over a few years. And once we have that window, that means we can sort of buy ahead, which means we can sort of lean in. Or if we don't find a good target like we didn't, for example, I think in 2023, then we actually spent much less than we could have. So that's just a backdrop to the amount of financial flexibility that we have which if I remember at our Investor Day earlier this year, we laid out that we have somewhere in the mid-twenties perhaps a bit more flexibility over a three-year window. That's kind of a way to start to look at it. Next. We are very focused on the areas that we have already explained as our strategy. Very top level, we say hybrid cloud and artificial intelligence. That translates into our hybrid portfolio, our automation portfolio, and our data and AI portfolio. And you've seen us do acquisitions in there. For example, we bought an AI company that does VLLM, but it fit into our hybrid portfolio. Because it's a direct part of the Red Hat and OpenShift portfolios. We did HashiCorp, which fits directly into automation. We did data stacks fits into data. When I look at the target lists, there is, I think, a pretty rich list of opportunities that are out there in the private markets, in the PE world, and public markets across those opportunities that we think will some of them will be actionable. It's hard to predict upfront. Which are and which are not. I think that if I put it that way, and just to be clear, anything that is of size has to fit three criteria. It has to fit with the strategy we just laid out, there has to be synergy aka the growth rate inside IBM will be above what it was as a standalone entity. Some of that comes from our geography spread. We have a sales team in most countries in the world. Some of it comes by the ability to bundle more attractive offerings together and it comes from faster deployment for example, leveraging our consulting team or the rest of our sales team. All three will be able to add to more to a faster growth rate. Third, if it is of size, then we are very disciplined also that we like it to become accretive to cash by the end of the second year. So those are the criteria. But as you've seen, we have found plenty in the last few years that do fit that whole criteria. So I hope that that gives you a sense. Now your question on larger, I'll just use that word larger, we will never rule anything out but it has to meet all the criteria that we just laid out. It is not for size alone. Red Hat allowed us to enter a new space helped accelerate IBM's overall growth rate by the way, both in software and in consulting. So that was the sort of the synergy piece that was there. And you many people forget Red Hat also had a very attractive free cash flow profile that we have been able to leverage since the acquisition. Olympia McNerney: Great. Operator, let's take one final question. Operator: Thank you. And that question comes from Brian Essex with JPMorgan. Please state your question. Brian Essex: Hi, good afternoon and thank you for taking the question. Arvind, maybe as a follow-up as to part of Eric's question, and I appreciate your hybrid exposure here. But could you generalize what you're seeing with regard to mix as enterprises focus on AI readiness? Are cloud-native ISP ISV-based agentic applications maybe targeted at task and point solution automation? Are those low-hanging fruit prove ROI before pursuing self-hosted projects? And then maybe within the IT budgets, where is the spending coming from? What's at risk of getting trimmed as companies focus on adopting AI-based technology? Arvind Krishna: So Brian, let me address the first part of your question with a bit of depth. I actually think that these are an and. Are people going to leverage ISV? Otherwise, I'll call it SaaS applications for getting exposure to AI and agents either as part of those entities or as added value onto them. And there are hundreds, if not thousands of little boutique companies that provide some of those agents that are out there. I think they would absolutely do that. They'll kick the tires on it. They'll get some value. But at the end of the day, to get real value from AI, people have to be able to integrate their existing applications. How do they tie what is happening in their payroll system and HR system to perhaps something that is happening in the CRM system, perhaps something that is happening in their ERP system? People begin to want to build much more profound agents, that that is where a lot of the action that we see is happening. As people try to build those agents out, then they get deeply concerned about what is that data, where is that data going. And they are going to deploy those either in their own data centers or in a private instance. Note, a private instance of the cloud is quite protected. People do deploy a lot of critical applications that are there. But if I think about our clients, in the regulated industries, banking and insurance, still is very much data center as well as a cloud picture. If I look at healthcare, healthcare data tends not to go out very much from their own data centers. If I look at telecom, most people build their own backbones. And their data and applications reside there. But certain other things like marketing may well reside in the public cloud. So as we begin to look upon all that, I believe that we are at the very beginning. I would actually characterize this, Brian, that if I was to use the baseball analogy, we in the first innings of enterprise AI rollout. And I expect that we'll be seeing and we will see more SaaS AI usage. We will see more public cloud AI usage. And will begin to see a lot more private AI usage as people begin to get into more critical applications and agents. On the IT budgets, look, IT budgets have been growing ahead of GDP. That's simply observation. I think this began four or five years ago. But IT budgets are growing typically two to three points ahead of GDP growth. You combine that then with inflation because GDP after all is real, not nominal. I see IT budgets staying healthy. So a lot of the growth comes from the fact that the IT budgets are growing as opposed to the cost of something else. That said, think people are getting very, very effective at trying to run and maintain with lower costs and putting more money towards newer projects. Five, ten years ago, that ratio used to be seventy thirty. 70 are running what is, 30 are new. I think that is shifting more towards the sixty forty spread. And where it'll go, is where we'll get the benefit. That is why our automation portfolio and our hybrid portfolio get a lot more growth because people are using that. So it's sort of substituting for labor and, in some cases, for services by letting those capabilities move into software. Olympia McNerney: Great. Operator, I think we have time for one last question. Operator: Thank you. And the next question comes from Mark Newman with Bernstein. Please state your question. Mark Newman: Hi, thanks for taking my question. Very good to see the growing AI book of business and thanks for those comments just now. Arvind, I don't think you've given any specific breakdown yet on the breakdown between software and consulting of the AI book of business. Is there any clarity on that? I think it used to be eighty-twenty, want to clarify, there's any clarity you've given on that today. And then a follow-up on consulting. I think there's two quarters in a row now where we are seeing the book to bill ratio a touch below one. I know you point in the earnings to a book to bill ratio greater than one if you're looking at the trailing twelve months. But I would just like to understand more on a shorter-term basis, last six months, it seems like the book to bill ratio is below one. And if you could explain kind of why maybe why that's the case, why we shouldn't be worried especially considering, I think, around 30% of signings you mentioned are AI which I believe are longer duration. So just a little bit of clarity around consulting and how AI plays into the book bill ratio and that recent number being below one would be appreciated. Thanks very much. Jim Kavanaugh: Okay. Mark, this is Jim. I'll take both of those. Well, let's start with the second one first, and then I'll come back to your clarify question on Gen AI. And in particular, around the software portfolio overall. I want to dive a little bit deeper in that. But, you know, when we take a look at consulting, let's dial back ninety days ago. I think we surprised many just compared to what many other consulting companies have been talking about publicly. We talked about green shoots. That we saw entering second half. But I think at that time, we were prudently cautious about how we were gonna monitor client buying behaviors and we didn't expect growth in the second half, although we saw many green shoots overall. Now we posted I think, a marked inflection point of consulting back to growth, up 2% and it's been driven by what we're seeing as continued opportunity for growth as clients accelerate investment in AI-driven transformation, what we've been talking about on many of these questions here. Why? Companies are looking to unlock efficiency, business model innovation, and growth, growth, growth. And AI is accelerating overall. When we take a look at right now fourth quarter, and more importantly, early parts of '26, we again see momentum around those key metrics, our backlog position, our Gen AI book, strategic partnerships, and around productivity. You know, backlog, $31 billion. Healthy growing 4% right now. Our best ever erosion in, I think, multiple years. What does that say? Clients' commitment to IBM Consulting, the quality of our delivery, and the value of our different offerings are doing extremely well. Now to your point about signings, signings were down 5%. By the way, signings been down five in the last six quarters, something like that. But as I've said many times before, why do I always start with backlog? That to me is the most critical component that's closest to the outcome measure. The outcome measure is revenue. Revenue growth, revenue growth. As Arvind always likes to say in this room with our operating team. Indicators are backlog. Indicators are signings. But signings are not all equal. And those signings numbers have been driven down think we posted down 5% based on lower large deal renewal. Volume. By the way, I would argue that's at best no revenue realization. And probably worst, dilutive revenue because renewals typically drive more price and more productivity. But underneath that, what are we seeing? We're seeing a tremendous improvement in the quality of our signings. Our net new business penetration, again, another quarter in a row, up double digits year to year on a penetration. Over 300 new clients year to date fueling our backlog. Our backlog realization is up over four points year over year. And when we take a look at our backlog run out, it's pretty healthy growing at market level growth rates here over the next three, six, nine, twelve months. Lot of work still to go. To sell and bill within quarter, but a lot of good indicators. And that GenAI to your point, over 22% of our backlog, 30% of our signings, 12% of our revenue, that's what's inflecting the growth overall. So we feel pretty good, and that's why we called the mark inflection, and we said we're gonna grow consulting here in the fourth quarter. And we feel pretty good about getting back to market growth levels in 2026. Now, GenAI, the over $9.5 billion book of business, Arvind already talked about over $7.5 billion in consulting. Well over $1.5 billion, almost approaching $2 billion in software. You know, we're, what, seven, eight quarters in here. That number might vary quarter by quarter as far as the composition. But we're still pretty damn close to that twenty-eighty overall. But the underpinnings behind that of the software book in the generation, you know, you see that play out and how it's accelerating automation growth. But also Red Hat. I know there's been a lot of questions around Red Hat. Let me just spend a minute just to close the call on Red Hat. Red Hat, we delivered 12% growth. We were down a couple points quarter to quarter. And year to date, we're at 13% low teens. Right? Let me break down some of the performance. One from a physician strength, and Arvind talked about a few points. OpenShift up nearly 40% bookings. Our ARR $1.8 billion up mid-thirties year over year, accelerating profile. Virtualization, now we've closed total contract value of bookings over $400 million. We got a $700 million pipeline over the next five plus quarters. And Ansible, 20% bookings in the quarter, accelerating the high teens. So what happened on the sequential decline? One, as we knew we were facing tougher comparison on the consumption-based services. That impacted us by about a point. And Rell, about 50% of our portfolio. We've been talking about we've been growing web rel abnormally in the mid-teens. We reverted back to our model growing 6% and had about a point. Now taking a step back Red Hat models mid-teens. When you look at it, our 80% subs business we gotta grow low end of that high teens. The consumption base, we gotta grow high single digit. When you look at our year to date, Arvind talked about our bookings year to date, we're well positioned on that subscription-based business growing high teens already on bookings. And when you look at that six, nine, twelve-month revenue under contract, we're accelerating that growth as we go into '26. That gives us confidence in that acceleration comment that Arvind talked about and I talked about as qualitative statements about confidence in '26. And when you look at fourth quarter, let's put this in perspective. We're gonna accelerate Red Hat growth in '25. It's gonna be a nice acceleration on the subs and we got about a two-point headwind on consumption-based services. We knew about that. Because last year, we grew consumption-based services high teens. And when you look at fourth quarter, we're gonna wrap on that. We've known about that all year long. So when we look at fourth quarter, double-digit solid double-digit growth in Red Hat. Low teen growth for the year, nice composition of where that acceleration is. But the most important thing, we're well positioned 2026. So with that, I'll turn it back over to Arvind to close out the call. Thanks, Jim. Arvind Krishna: Look. To close out, we are pleased with our performance this quarter. All of our segments accelerated sequentially, our portfolio strength business model and relentless focus on productivity reinforce our confidence in the trajectory. I look forward to sharing our progress as we close out the year. Olympia McNerney: Thank you, Arvind. Operator, let me turn it back to you to close out the call. Operator: Thank you for participating on today's call. The conference has now ended. You may disconnect at this time.
Kimberly Esterkin: Greetings, and welcome to the ASGN Incorporated Third Quarter 2025 Earnings Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance, please press 0 on your telephone keypad. It is now my pleasure to introduce your host, Kimberly Esterkin of Investor Relations. Thank you. You may begin. Good afternoon. Thank you for joining us today for ASGN's third quarter 2025 conference call. With me are Theodore S. Hanson, Chief Executive Officer, Sadasivam Iyer, President, and Marie L. Perry, Chief Financial Officer. Before we get started, I would like to remind everyone that our commentary contains forward-looking statements. Although we believe these statements are reasonable, they are subject to risks and uncertainties. As such, our actual results could differ materially from those statements. Certain of these risks and uncertainties are described in today's press release and in our SEC filings. We do not assume any obligation to update statements made on this call. For your convenience, our prepared remarks and supplemental materials can be found in the Investor Relations section of our website at investors.micron.com. Please also note that on this call, we will be referencing certain non-GAAP measures such as adjusted EBITDA, adjusted net income, and free cash flow. These non-GAAP measures are intended to supplement the comparable GAAP measures. Reconciliations between GAAP and non-GAAP measures are included in today's press release. I will now turn the call over to Theodore S. Hanson, Chief Executive Officer. Theodore S. Hanson: Thank you, Kim, and thank you for joining ASGN's third quarter 2025 earnings call. ASGN delivered solid performance in the third quarter, with revenues reaching $1.01 billion and an adjusted EBITDA margin of 11.1%, both at the high end of our guidance ranges. Our IT consulting business continues to be a key growth driver, representing approximately 63% of total revenues in the third quarter, up from 58% in the same period last year. Commercial consulting bookings totaled $324 million, translating to a book-to-bill of 1.2 times on a trailing twelve-month basis. While bookings remain weighted towards renewals, we are seeing the volume of new lands grow as we take on more complex multi-capability engagements and assessment projects. In our federal segment, new contract awards totaled $461 million for the third quarter, or a book-to-bill of one times on a trailing twelve-month basis, and 1.5 times for the quarter. As anticipated, bookings increased in the third quarter, coinciding with the end of the government fiscal year. Federal contract backlog was approximately $3.1 billion at quarter-end, or a coverage ratio of 2.6 times the segment trailing twelve-month revenues. Although IT spending levels remain steady quarter to quarter, our commercial and government clients continue to acknowledge the importance of executing their key initiatives despite macroeconomic conditions. Strong quarterly bookings reflect the demand across our client base, and ongoing investment in AI highlights a significant commitment to digital advancement. Reflecting upon this ongoing trend, ISG highlighted on their third quarter 2025 index call that AI spending is not merely a passing fad but a fundamental replatforming of enterprise technology. We are witnessing this firsthand. We deploy a growing number of AI use cases on behalf of our client base and are witnessing an increasing volume of data and cloud initiatives flowing through our pipeline as clients prepare for their next phases of digital and AI growth. That said, even with this continued drive towards AI, the path to enterprise-wide AI adoption is not without its challenges. Organizational readiness and operational governance remain hurdles as companies work to streamline and integrate these new technologies into their stacks. In addition, many commercial enterprises and government agencies lack the skills and engineering talent needed to successfully deploy AI. This reality is driving greater reliance on IT service partners like ASGN that can offer the breadth and depth of capabilities needed. On the topic of specialized skill sets, we are actively tracking the potential changes to the H-1B visa application process and believe that any changes to the process will be an incremental positive to ASGN. To further illustrate the demand for our expertise, I would like to turn the call over to our president, Sadasivam Iyer. Sadasivam Iyer: Thanks, Ted. It's great to speak with everyone this afternoon. Let me begin with an overview of our commercial segment industries. Our consumer and industrial accounts saw the greatest improvement in the third quarter, posting mid-teens growth year over year. This strong performance was driven by gains across our material utilities, industrial, consumer discretionary, and consumer staples clients. Healthcare was our second-best performing industry, up high single digits as compared to the year ago, to double-digit growth amongst our healthcare provider, pharmaceutical, and biotech clients. Financial services, TMT, and business services all experienced year-over-year declines. Looking sequentially, we saw growth in three of our five commercial industries. The healthcare industry saw the largest sequential growth and was led by our provider clients. Consumer and industrial accounts also posted modest sequential gains driven by our work with utility, materials, and consumer staples customers. In TMT, growth was supported by our e-commerce group, as well as incremental gains in telecom hardware and equipment accounts. Beyond these three industries, we continue to watch financial services closely as these customers are some of the largest spenders on IT. While our financial services revenues declined from the second quarter, new wins for the industry outpaced renewals in Q3, with much of this work in our federal segment slated to begin in Q4. We track our revenues across four customer types: defense and intelligence, national security, civilian, and other clients. In the third quarter, defense, intelligence, and national security accounts comprised approximately 70% of our total government revenues. Notably, national security revenues improved 12% year over year, driven by our work with the Department of Homeland Security. Looking ahead, we are encouraged by the future of our federal segment, particularly due to the increased defense budget under the one big beautiful bill, as well as the strong quarterly bookings that Ted highlighted earlier. Also of note, given the mission-critical nature of the work we perform, the government shutdown to date has had an immaterial impact on our operations. That said, we continue to stay very close to our clients and monitor what is a very dynamic situation. Let's now turn to our solutions capabilities. For the quarter, we saw an increase in projects focused on data and AI, application development and engineering, customer experience, and cybersecurity. I'd like to share a few examples of each. Beginning with our data and AI work. For a Fortune 500 managed care organization, we partnered to develop a centralized data supply chain platform leveraging Databricks, AWS, Snowflake, and MongoDB. Through this engagement, not only did we modernize our client's core data capabilities, but we also laid the groundwork for advanced AI and machine learning workflows that will enable our client to offer smarter, faster, and more efficient healthcare delivery. Our deep expertise in platforms like Databricks and Snowflake, along with our ability to tailor these solutions to each client's unique environment, truly sets ASGN apart in the marketplace. Additionally, our suite of AI-embedded developer productivity tools created for specific industry use cases provides a competitive edge. For example, when a global privately held hospitality company sought to modernize its loyalty application, our AI accelerators shortened the discovery phase by 25% and captured 40% more of the project's detailed requirements than traditional manual methods. This approach reduced project risk and laid a solid foundation for faster modernization of the new loyalty application. We're also building accelerators and custom AI solutions for our government clients. In the third quarter, we secured an extension with DHS to continue supporting the agency's enterprise data warehouse. Our team provides a range of data engineering, data science, and data analytics capabilities to DHS and is leveraging both commercial and our own custom-built AI solutions to advance DHS's mission-critical initiatives. Our data and AI work is closely aligned with the work we are conducting in our application development and engineering space. As an example, under the FBI's information technology supplies and support services contract, a recompete won during the third quarter, we're delivering enterprise-scale software development and application modernization services to help the FBI accelerate DNA analytics delivery across federal, state, and international partners. On the commercial side, with a leading US crop insurance provider, we secured our largest application engineering services contract to date. Our selection was based on our deep industry experience, proven accelerators for legacy modernization, and cost optimization through a blend of onshore, nearshore, and offshore delivery. This three-year contract will modernize policy administration, claims, and customer engagement platforms, enabling real-time data access and insights that enhance underwriting accuracy, claims efficiency, and customer experience. Using AI to reinvent customer experience represents a growing area within our creative digital solutions portfolio. For a Fortune 250 pharmaceutical company, we're leading a full-scale transformation of their in-house agency, reimagining how customer experience is delivered globally. Using our in-house agency excellence framework, we embedded Adobe-powered personalized and AI-driven operations into their workflows, combining translation, reasoning, and execution with human strategy and creativity. This project is one of our many customer experience projects that demonstrate in the AI era, human creativity isn't replaced; it's amplified with AI. Just as we help our clients elevate their own customer experiences, we strive to provide the highest level of service to our clients. This approach often helps us outpace the competition during the proposal process. For example, our cloud and infrastructure team recently replaced a long-standing incumbent as the new level three network support for a Fortune 500 athletic footwear and apparel company. Our deep understanding of this client's business needs was a key differentiator during the selection process. Now, as this retailer's highest level network support, our team of network engineers is responsible for everything from network triage, strategic decisions, and network optimization across the company's distribution centers, stores, and headquarters. Similarly, broader network protection or cyber remains in demand across our client base, particularly among our federal government customers. In the third quarter, we won a recompete contract with the US House of Representatives to support their 24 by 7 security operations team. As the House's first line of defense, our teams provide real-time network security monitoring, endpoint detection and analysis, and cyber incident response and reporting for more than 20,000 geographically dispersed endpoints. These are just a few of the many projects our commercial and government teams secured over the past three months. The breadth of this work underscores our deep industry expertise and engineering capabilities. It also highlights the growing strength of our ecosystem and alliance partnerships, all of which position our business for continued growth. With that, I'll turn the call over to our CFO, Marie Perry, to discuss ASGN's third-quarter segment performance and fourth-quarter guidance. Marie L. Perry: Thanks, Shiv. For the third quarter, revenues totaled $1.01 billion, a decrease of 1.9% year over year but at the top end of our guidance expectations. Revenues from our commercial segment were $711.3 million, a decrease of 1% compared to the prior year. Assignment revenues totaled $376.4 million, a decrease of 13.2% year over year, reflecting continued softness in portions of our commercial segment that are more sensitive to changes in macroeconomic cycles. Revenue from our commercial consulting, the largest of our high-margin revenue streams, totaled $334.9 million, an increase of 17.5% year over year. Excluding Toplot, which we acquired in March 2025, consulting revenues improved mid-single digits year over year. Revenues from our federal government segment were $300.1 million, a decrease of 3.9% year over year. Turning to margins, gross margin for 2025 was 29.4%, an increase of 30 basis points from the third quarter of last year. Gross margins for our commercial segment were 33.2%, up 40 basis points year over year, reflecting a higher mix of consulting revenues. Gross margin from our federal government segment was 20.3%, a decline of 40 basis points year over year due to the loss of higher-margin work related to Doge and the completion of certain projects. SG&A for the quarter was $212.2 million, compared to $207.5 million in 2024. SG&A expenses included $4.2 million in acquisition, integration, and strategic planning expenses. These items were not included in our previously announced guidance estimates. For the third quarter, net income was $38.1 million. Adjusted EBITDA was $112.6 million, and adjusted EBITDA margin was 11.1%. Also, at quarter-end, cash and cash equivalents were $126.5 million, and we had approximately $460 million available on our $500 million senior secured revolver. Our net leverage ratio was 2.4 times at the end of the quarter. Our strong free cash flow provides a strategic advantage that enables ASGN to fund growth initiatives, invest in strategic M&A, and opportunistically repurchase shares, all while maintaining a healthy balance sheet. Free cash flow was $72 million for the third quarter, a conversion rate of approximately 64% of adjusted EBITDA, well within our target of 60 to 65% conversion. We deployed roughly $46 million of free cash flow to repurchase 0.9 million shares at an average share price of $51.46. At quarter-end, we had approximately $423 million remaining under our $750 million share repurchase authorization. Turning to guidance, our financial estimates for 2025 are set forth in our earnings release and supplemental materials. These estimates are based on current market conditions and assume no further deterioration in the markets we serve. In addition, estimates do not include any acquisition, integration, and strategic planning expenses. Guidance also assumes sixty-one billable days in the fourth quarter, which is the same number of billable days as the year-ago period and two and a half days fewer than the third quarter. We typically see a larger sequential decline in billable days between the third and the fourth quarter due to holidays. The fourth quarter had the lowest number of quarterly billable days. In terms of our business segment, on a same billable day basis, our estimates assume a slight sequential improvement in our commercial segment from the third to the fourth quarter. For 2025, we are estimating revenues of $960 million to $980 million, net income of $32.1 million to $35.7 million, adjusted EBITDA of $102 million to $107 million, and adjusted EBITDA margin of 10.6% to 10.9%. Thank you. I'll now turn the call back over to Ted. Theodore S. Hanson: Thanks, Marie. As we progress through 2025, I'm genuinely excited about the path ahead and eager to share more about our vision for sustainable growth and long-term value creation. On November 20, we'll be hosting an investor day in New York City, where we'll offer an in-depth look at our strategy and unveil new three-year financial targets. I encourage you to listen to the webcast and hear directly from our expanded leadership team about the next phase of our growth journey. A link to register for the webcast is available on our Investor Relations website. This concludes our prepared remarks. I want to express my deep gratitude to every one of our employees for your steadfast dedication throughout this past quarter. Your hard work has been instrumental in strengthening our client partnerships and driving our continued move into high-value technology and engineering solutions. With that, we'll open the call to questions. Operator: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press 2 to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. One moment, please, while we poll for questions. Jeffrey Marc Silber: Our first question comes from the line of Jeffrey Marc Silber with BMO Capital Markets. Please proceed with your question. Theodore S. Hanson: Hey. Thank you so much. This is Ryan on for Jeff. Just wanted to dig a little bit more into the H-1B situation. Particularly, what gives you the confidence that you're a beneficiary there, and how do you see the situation evolving in the coming months based on just your conversations with clientele? Thank you. Theodore S. Hanson: Brian, thank you for the question. I think, you know, from our standpoint, almost all of our delivery is onshore, nearshore. We have very little presence, you know, most of the H-1Bs are coming from India. At the end of the day, anything that tightens the program, whether it's, you know, enforcing all the regulations the right way, maybe making the program a little smaller and tougher to get in, increasing the fee, which ultimately would, you know, tighten the program. All those put a focus back on onshore and nearshore technical, you know, skill capabilities, and that's really where we sit. We're at the intersection there. And I think it just makes our services that much more important to the client. Without diminishing anything, if you will, on the other side. And the other side of this, you know, at the end of the day is, you know, better enforcement of those regulations. It's gonna create also pricing improvements because a lot of the things that are going on there in terms of the way the program is used to skirt, you know, certain situations where the client would wanna pay a prevailing bill rate. Again, it just highlights our services and our core capabilities. Jeffrey Marc Silber: Great. Thank you very much. And just one more follow-up. On the federal government. Heard the comments that there's a little bit of caution factored into the fourth quarter guidance. Was wondering if any of that is just any lingering DOGE stuff or it's mostly just on the government shutdown and the longevity of that. Thank you. Theodore S. Hanson: Yep. Nothing on the DOGE side. I think it's just around the shutdown. You know, the government shutdown does two things. One is, you know, certain nonessential activities get furloughed, and, you know, as we mentioned in the script, as Marie said, it's really immaterial to us right now at this point. But the other thing it does is slow down the cycle of new awards and the ability to ramp up on awards you've either just won or may win. And so I think all those things put together, you know, while we think it's, you know, not a mid or long-term blip, but could cause some caution here in the near term. So Jeffrey Marc Silber: Thank you. Thank you. Operator: Our next question comes from the line of Tobey O'Brien Sommer with Truist Securities. Please proceed with your question. Tobey O'Brien Sommer: Thank you. Let me start off by following up on that government shutdown question. Do you assume that the shutdown extends through the fourth quarter and, you know, maybe more specifically, how long do you assume it lasts? Theodore S. Hanson: Well, we didn't really make an assumption on the length of it, Toby. But it did keep us from stretching in the forecast, if you will. So I don't think we, because it's an immaterial impact at this point, we didn't cut numbers, if you will, but we did say this is not a quarter to stretch. So I think that's probably a better context for it. Tobey O'Brien Sommer: Sure. But immaterial at this point, it's the "at this point" part that we're interested in. Okay. Yeah. Right. Within commercial consulting, which software implementation softwares are you implementing that are experiencing the best demand right now? And where, when you look at your portfolio of services and how you map out against your customers and, frankly, the available software market in terms of implementations, where might you want to add capability to be able to participate in those other areas? Sadasivam Iyer: Oh, it's a great question. So the areas that, as we called out in the, we're seeing continued demand are in, you know, data and AI. Clearly in things like Snowflake and Databricks, where we're actually actively partnering. We continue to see active demand on some of our enterprise platforms. So you look at Workday with Toplot or even with GlideFast and ServiceNow, we're seeing an uptick in demand in both of those areas. We see continued demand on the cloud side, both from a migration perspective as well as from a custom app development perspective. We continue to ramp up on our Salesforce capabilities because we do see Salesforce as an active player in both the agentic world and also in the experience world. So, Tobey, really, that's where we're seeing continued demand. So I think the partnerships that we've lined up ourselves against are very much in line with where we see our clients continuing to invest in. Tobey O'Brien Sommer: And then, just to anticipate your investor day but not steal all the thunder, would a feature of the next several years, do you expect commercial IT consulting to continue to be a larger percentage of total company sales and therefore a driver of margin expansion over time? Theodore S. Hanson: Absolutely. Even if you look at this quarter, I mean, despite, you know, maybe a little contribution, you know, more in federal towards the full quarter than we expected, slightly. We, and still the same state of affairs with high-margin services like perm placement and creative, you saw our sequential margin here increase about 70 basis points, and that's really due to the strength in commercial consulting. And so I think that's been the driver of margin, will continue to be the driver of margin. It's going to be where we're allocating capital. Obviously, we'll talk more about that in the Investor Day. So it's definitely an underlying pillar here of the strategic plan. Tobey O'Brien Sommer: Thank you. Sadasivam Iyer: Thank you. Tobey O'Brien Sommer: Thank you. Operator: Our next question comes from the line of Jason Daniel Haas with Wells Fargo. Please proceed with your question. Jason Daniel Haas: Hey. Good afternoon. Thanks for taking my questions. There's been some headlines recently about companies not seeing a great ROI on many of the AI projects that they've undertaken. So I was curious if you could weigh in on that, if that's something you're hearing from your customers. And, you know, where can you help on, if that's the case, where can you help, you know, where's the roadblock? What can you guys do to help companies, you know, see a better ROI on these projects? Thank you. Sadasivam Iyer: Look. I think there are multiple reasons why the ROI isn't materializing. Right? So I think, let me start by saying that we are hearing that, and clients are doing a lot of proofs of concepts and, you know, pilots around this. You know, almost 70% of what they're trying requires a deeper level of integration into their architectures. That's sort of one. Second, many of them have challenges with the data and the way their data is lining up. Right? The third is it requires integration of these, whatever they're doing, with the workflows that they have, and the logic of these workflows typically sits within enterprise platforms. So our view on this is the fastest path to ROI at the moment, where with agentic AI and agents, is really around harnessing the core capability of those platforms around which those workflows are built. Right? Because, you know, despite all the marketing hype that you hear about, you know, end-to-end process automation and multi-platform AI orchestration, we're simply not seeing the returns on those things. So, really, the challenges are all around, and, of course, that's a big part of it also is technical talent. So the challenge is for technical talent, the complexity of integrating these things into their architectures, data, and then the fourth thing is just the ability to make these work with complex workflows. The logic for which is embedded within the enterprise platform. So that's the fastest path to ROI in our opinion. Jason Daniel Haas: Hey. Thank you. That's great color. Sounds like a great opportunity. And then as a follow-up, I wanted to switch over to the federal government segment. Sounds like there's some moving pieces there with the shutdown, maybe, you know, potentially turning into a headwind at some point. But I'm curious about the one big beautiful bill. And, you know, to what extent has that started to help the bookings that you're seeing, and over what time frame could you see more benefits, or at what point do those turn into revenue? If you could just give some more color on the timing of how that could help that segment, that'd be really helpful. Thank you. Theodore S. Hanson: Yeah. Look. I think that in the areas where we play, we're about 75% of our business in defense and intel and national security. Those are the areas that are gonna get the biggest increase from what was passed in the big beautiful bill. Gonna have to get past this shutdown and, you know, subsequent continuing resolution to a final budget, which we hope will happen sooner than later. But once we get to that point, let me, let's just say it's sometime in the early first quarter, end of this year, then those agencies will be funded at these higher levels. So I think really in the first half of next year, you know, subsequent to that, you're gonna see those things begin to get competed, awarded, and out on the street and really contribute to revenues probably the midpoint or second half of next year. Jason Daniel Haas: That's great. Very helpful. Thank you. Sadasivam Iyer: Thank you. Operator: Our next question comes from the line of Surinder Singh Thind with Jefferies. Please proceed with your question. Surinder Singh Thind: Thank you. A question about the staffing business versus the consulting business. Obviously, we're seeing some good growth on the consulting side on an organic basis. But it seems like there's still some challenges on the staffing side. How would you characterize that in the context of the current environment? Is this a situation where maybe complexity is requiring more outside expertise and maybe less willingness to augment internal staff, or how should we think about that? And is that something that with, you know, increased complexity in the tech stack, that trend just kinda continues from here? Sadasivam Iyer: Look, Surinder, there are a few things. Right? Let me start by saying that, you know, the staffing business for us as we look at our numbers has been stable. Year on year, obviously, we're declining. But from a sequential basis, you know, our leading indicators are relatively stable. But I think there are multiple dynamics at play here. Right? The first is clients, our customers, are looking to partners to drive to outcomes. And really start to think about how do we drive outcomes, how do we drive deliverables. So the trend is the con that we see a continued shift in buyer behaviors where partners are looked at more to as partners who drive value and outcomes versus simply augmentation. And, you know, from our vantage point, that's a trend that is a benefit for us on the consulting side, and we're obviously, as you can see, benefiting from it. But it creates headwinds on the staffing side. And, you know, Ted can opine on this, but I don't see that buying behavior shifting tremendously. Theodore S. Hanson: I think especially, Surinder, in today's macroeconomic environment, if the client's really gonna invest in something, they want a short time to value. Meaning they want an outcome. They want it in as soon as they possibly can. They're really focused on total cost of ownership. And, you know, getting to a certain outcome if they're gonna green light something. So I think we see just a higher level of rigor around that from clients than we've ever seen before. And part of that is because of the increasing cost within their IT environments. And part of that is because they're wary around the macroeconomic backdrop here. And concern about where their business may go in the future. Surinder Singh Thind: That's helpful. On the general side, can you maybe talk about the cost reimbursable contracts? The percentage there continues to trend higher. Back in your peak levels. Can you talk about what's driving the change? And its impact on margins? Because it's interesting when I look at the federal margins, the gross margins, those were up pretty materially quarter over quarter. Theodore S. Hanson: Yes. So we're really not seeing an impact on margins from that. I think that's just the natural ebb and flow of certain contracts ending and certain contracts being won during the quarter and subsequent quarters. I think overall, the government is gonna be more focused on fixed-price outcome-based work, but, you know, just naturally here, we've seen a slight tick up in the cost plus, and I think that's mostly because of either the prior DOGE activities, which, you know, some of the work that was started was fixed-price work, and also, you know, just the natural ebb and flow of what's won and what's completed. Marie L. Perry: And Surinder, remember, last quarter we had a surge in license revenue on the federal side. And so we talked about that. And so when you kinda look at Q3 federal margins, they're really back to their kind of more normal state. Surinder Singh Thind: Got it. Thank you. Sadasivam Iyer: Thank you. Operator: Our next question comes from the line of Alexander J. Sinatra with Baird. Please proceed with your question. Alexander J. Sinatra: Hi. I'm on for Mark Marcon. I was just wondering, you know, you went through a couple of big projects. I was wondering if you could describe who you're competing against to get those big projects and how the competitive dynamics have maybe changed. Things on pricing. And then also on the Toplot and GlideFast side, who do you run into and, you know, is pricing working there as well? Sadasivam Iyer: Look. I think, you know, it varies by client, but, you know, a lot of these are with our larger clients. And you would find that the people we run into typically are the competitors that you would expect. A combination of Accenture or the Big Four, in some cases, the India-based pure plays. Certain platforms, also smaller competitors we run into. So it's the traditional set that you would expect from these clients. Right? On these clients. And we're seeing pricing both from a GlideFast side and a Toplot side really hold up. We're not seeing pricing pressures on the work that we're doing. Partly because of just the quality of what we're doing. And sort of our approach to how we do these things, which is very much around assets and accelerators that we bring, sort of are truly different from what you would see. So most of the competitors are the standard competitors that you would expect in any of these large clients. Alexander J. Sinatra: Gotcha. Thank you. And then I was also wondering, on the Mexican facility side, has that been impacted at all by the political climate and just kind of what you're looking at there going into the future? Sadasivam Iyer: No. Not at all. Not at all. It has no impact. Alexander J. Sinatra: Alright. Thank you. Marie L. Perry: Thank you. Operator: Our next question comes from the line of Maggie Nolan with William Blair. Please proceed with your question. Maggie Nolan: Thank you. Maybe a slightly different angle on the pricing question. As it pertains to accelerators. As you're incorporating more and more of these into the development process, are there active discussions about changes in pricing related to this? Or if not, do you expect that maybe to be a discussion point in the future? Sadasivam Iyer: Great question, Maggie. We are exploring those opportunities, but we're not seeing a big uptick today. Right now, these assets and accelerators are really allowing us to deliver work more rapidly, more effectively, as I mentioned in, you know, one of the examples I gave about sort of this whole code legacy code modernization where we're able to do things 25% faster and gives us better quality assurance. Now, as these assets and accelerators evolve and mature, we have the opportunity to position some of these on a more stand-alone basis. I mean, we have some good examples. We have something called Pathfinder, which is an AI-driven cybersecurity product, which we've invested in. Which we are actively engaged in conversations about pricing differently. More, you know, maybe on a product basis. But those are still early days. Maggie Nolan: Thank you. And then it seems like some momentum is building on the commercial consulting side. Could you maybe comment on whether you think that's sustainable? What are the drivers there? You know, is this more of a point in time or a potential trend on a multi-quarter basis? Thank you. Sadasivam Iyer: No. We actually see it sustaining and continuing, but I don't wanna make that a broad-based statement. We see that sustaining and continuing in specific areas where we see client investment being directed. So whether it's data and AI, whether it's custom engineering, whether it's some of the platforms that I alluded to. Right? So and we've been very, very thoughtful and focused on those areas where we see the growth and the market opportunity happening. Right? So I think that's how I would characterize it, Maggie. We do see continued momentum in that space. Because, you know, all the work that's happening and AI is a big, big tailwind, which is driving a lot of work for us, whether it be data, whether it be cloud, whether it be cybersecurity, whether it be, you know, integration associated with putting them and getting it to work in the environments that our clients have. Theodore S. Hanson: I would add to that just to even think about a platform like Workday, which is gonna be a leader in agentic AI. I think customers more and more are thinking, hey, you know, I've sat on my legacy systems here for many years, but I'm not gonna get to take advantage of agentic AI if I don't have modern enterprise, you know, platforms in my environment, like a Workday or ServiceNow or Salesforce. Or right on down the list. Maggie Nolan: That's helpful. Thank you. Thank you. Sadasivam Iyer: Thank you. Operator: And, ladies and gentlemen, we have reached the end of the question and answer session. I would like to turn the floor back to CEO, Theodore S. Hanson, for closing remarks. Theodore S. Hanson: Well, thank you for being here this evening to talk about our third-quarter results, and we look forward to speaking with you in the first quarter on our fourth-quarter results. And I will remind you as well that we have our Investor Day on November 20. And so we look forward to being with you if you can be present with us in New York City. Have a great evening. Operator: Thank you. And this concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.
Operator: Good day, and welcome to the Lam Research Corporation September Quarter 2025 Earnings Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. To withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Ram Ganesh of Investor Relations. Please go ahead. Ram Ganesh: Thank you, and good afternoon, everyone. Welcome to the Lam Research quarterly earnings conference call. With me today are Tim Archer, President and CEO, and Doug Bettinger, Executive Vice President and Chief Financial Officer. During today's call, we will share our overview on the business environment, and we'll review our financial results for the September quarter and our outlook for the December quarter. The press release detailing our financial results was distributed a little after 1 PM Pacific Time. The release can also be found on the Investor Relations section of the company's website along with the presentation slides that accompany today's call. Today's presentation and Q&A include forward-looking statements that are subject to risks and uncertainties reflected in the risk factors disclosed in our SEC public filings. Please see accompanying slides in the presentation for additional information. Today's discussion of our financial results will be presented on a non-GAAP financial basis unless otherwise specified. A detailed reconciliation between GAAP and non-GAAP results can be found in the accompanying slides in the presentation. This call is scheduled to last until 3 PM Pacific Time. A replay of this call will be made available later this afternoon on our website. And with that, I'll hand the call over to Tim. Tim Archer: Thanks, Ram, and good afternoon to everyone on the call. Lam delivered a solid September quarter, highlighted by record revenues of $5.3 billion, a gross margin of 50.6%, and a record operating margin of 35%. We also achieved record combined spares and services revenue, and growth in total CSBG revenue outpaced the increase in installed base units. Inclusive of our guidance for the December quarter, we expect to close calendar 2025 with three consecutive quarters of greater than $5 billion in revenue. Our performance reflects strong company-wide execution and the critical role that our products and services portfolio plays in enabling the industry's technology roadmap and in addressing the rapid increase in semiconductor manufacturing complexity. Our December guidance does contemplate roughly a $200 million revenue impact from the recently announced 50% affiliate rule restricting shipments to certain domestic China customers. Currently, we expect this rule to impact our calendar year 2026 revenues by approximately $600 million. This impact, together with the strong growth anticipated in worldwide fabrication equipment, or WFE, spending, leads us to expect the China region to represent less than 30% of our overall revenues in calendar year 2026. Turning to WFE, spending in calendar year 2025 is shaping up to be slightly better than our prior view of $105 billion, predominantly due to better-than-expected high bandwidth memory or HBM-related investments. As we look ahead, we see a robust setup for equipment spending in calendar year 2026. AI-related demand should support sustained strength in leading-edge foundry logic and DRAM as well as continued NAND upgrade spending. The strong leading-edge growth we see across all three device segments is forecasted to be partially offset by a decline in domestic China-related investments. We plan to provide our detailed 2026 WFE spending outlook and subsegment color on our January call, per our usual practice. AI and its impact on the semiconductor industry continues to be a major topic of interest. The data center CapEx investments already announced are expected to drive significant expansion of manufacturing capacity over a multiyear period. In recent months, we have seen an acceleration of activity. AI data centers require the most advanced CPU and accelerator capabilities, low latency, high bandwidth memory, and high-speed ESSD storage, all integrated through 2.5D and 3D advanced packaging. We estimate these needs translate to roughly $8 billion of WFE spending for every $100 billion in incremental data center investment. Most importantly, deposition and etch, the area of Lam's core product differentiation, play an increasingly critical role in enabling the higher performance, more scalable semiconductor devices required for AI. We see the surge in AI data center demand creating billions of dollars of served available market expansion and share gain opportunity for Lam in the coming years. I will share a few areas of strength we are seeing. In NAND, customers are continuing to upgrade existing fabs to meet the need for higher layer count, higher performance devices. We have estimated that these conversions will require $40 billion of WFE spending over the next several years. And as we have previously said, Lam should capture a high percentage of this conversion spend due to our large installed base position. Our upgrades business is projected to remain strong into 2026, as NAND bit demand looks to be trending higher than prior expectations. Device makers have already announced enterprise-grade SSDs with 256 terabytes of storage capacity to satisfy growing data center demand for high-capacity storage. Availability of clean room space will likely act as a limiter to the pace of NAND supply growth, but we believe that capacity additions to meet rising bit demand may be needed sooner than previously thought. Lam is in a great position for both upgrade activity in the near term and new capacity builds in the future. We have the industry's largest installed base of NAND systems, and our comprehensive NAND product portfolio features several industry-first advances. Notably, Lam recently earned the 2025 SEMI Award for our pioneering Lam Cryo 3.0 dielectric etch technology, a process that has quickly become the industry standard for advanced NAND devices. We're also seeing solid demand for our atomic layer deposition, or ALD products, including a recent key win at a major NAND manufacturer for a critical high aspect ratio dielectric deposition application. Lam's differentiated conformal fill capability using a higher temperature process was fundamental in securing this win. On the metal side, Lam's ALD tool has been selected as the tool of record for three consecutive nodes at a leading customer, including for devices with more than 500 layers. This further reinforces our leadership in the 3D NAND word line application, a step that is fundamental to building the higher performance devices required for ESSDs. The performance demands of AI devices are also spurring investment in foundry logic and DRAM manufacturing inflections. Over the last several years, we have focused on expanding our product portfolio to target these opportunities and believe we will benefit as the technology transitions unfold. For example, Lam's Ether Dry Resist EUV patterning solution has demonstrated the ability to resolve features of less than 15 nanometers at the highest density and pattern fidelity. Ether also enables a more than 10% reduction in EUV exposure dose, boosting scanner productivity and reducing the cost of patterning per wafer. Lam's Ether technology is already ramping in the HBM high volume production line of a major memory manufacturer, and we see more opportunities ahead as we look further out on the roadmap. For instance, we believe high NA EUV in combination with Ether for single patterning of sub-ten nanometer features will be critical to addressing the complexity and cost challenges associated with the transition from gate all around transistors to CFET in foundry logic, as well as the anticipated migration from 6F squared to 4F squared in DRAM. In September, we announced a key partnership with JSR Corporation, an innovative semiconductor materials company, to collaborate on the integration of our Ether technology with novel EUV patterning materials and metal oxide resists. In addition, Lam and JSR are partnering to explore new precursor materials for advanced ALD applications, which we believe can further enhance our capabilities and differentiation for future technology inflections. In the case of low K ALD films, Lam's high productivity single wafer solutions are enabling our customers to move past traditional furnace-based approaches. As logic transistor sizes scale down to achieve greater compute power, higher capacitive coupling in the gate module degrades overall performance. Similarly, as DRAM devices shrink, there's a detrimental increase in capacitance between the bit line and capacitor contact. To resolve these issues, deposited low K films must be very thin, five nanometers or less, and conformal in high aspect ratio structures. Furnace-based films at these thicknesses are often fragile and unable to withstand the harsh chemistries used in subsequent process steps. Lam's low K ALD solution employs a unique single wafer remote plasma reactor and a novel precursor to deposit thin, defect-free films with the desired silicon-carbon bonding structure. As a result, Lam's ALD films have demonstrated superior durability throughout the remainder of the chip-making process, and we recently secured critical wins at foundry logic and DRAM customers for low K applications using this process. Beyond traditional device inflections, Lam is also benefiting from healthy growth in advanced packaging. Our SABER 3D plating and Cindian etch systems are industry leaders and should continue to see strong demand in 2026 as AI-related spending grows. Looking further ahead, we are investing in new advanced packaging opportunities. Today's packaging production lines primarily use 300-millimeter diameter wafers, but as AI and high-performance computing demand larger chips to integrate more accelerators, memory, and interconnects, panel-level packaging is emerging as a scalable solution. By processing multiple units on larger format panels, it significantly improves manufacturing efficiency and supports the integration of increasingly complex and larger semiconductor devices. Lam's SABER 3D Callisto and 20 customers worldwide. Our growing installed base of panel packaging tools is rapidly building experience and maturity that should prove valuable as this technology becomes mainstream in the future. So to wrap up, Lam is poised to close out a record calendar year 2025, and our setup is strong heading into 2026, where we expect solid WFE growth. The technology requirements of AI play extremely well to Lam's product strengths, and we are excited by the breadth of opportunities we see ahead for the company. Now here's Doug. Doug Bettinger: Thank you, Tim. Good afternoon, everyone, and thank you for joining our call today during what I know is a busy earnings season. We executed well in the September quarter, delivering gross margin performance of 50.6%, which is a record in the post-Novellus period. Financial results for the quarter came in above the midpoint of all of our guidance ranges. We also delivered many financial records throughout the P&L. The company truly performed well in the quarter. Let's turn to the details of our September results. Revenue for the September quarter came in at an all-time record of $5.3 billion, which is up 3% from the June quarter. The deferred revenue balance at quarter-end was $2.77 billion, up slightly from the June quarter due to increases in services and system-related transactions where revenue recognition was not yet complete. This was partially offset by approximately $100 million of reduction in customer advanced down payments. We do expect to see these down payments continue to decline in the December quarter. From a market segment perspective, foundry accounted for 60% of our systems revenue in the September quarter, up from 52% in the June quarter. This marks our third consecutive record quarter, underscoring the strength of our strategic focus and execution in foundry. Foundry strength came from investments at the leading edge in addition to mature node spending in China. Memory was 34% of systems revenue, which was down from 41% in the prior quarter due to the timing of customer investment plans. Within memory, nonvolatile memory contributed 18% of our system revenue, which was down from 27% in the June quarter. The trajectory of the NAND spending this year is broadly consistent with our expectations coming into the year. And as the industry transitions to devices above 200 layers, we continue to estimate over $40 billion in upgrade spending will be required over the next several years. DRAM increased from the June quarter, accounting for 16% of systems revenue compared to 14%. Investments in high bandwidth memory continue to remain strong, driven by AI-related customer demand. We're also seeing traditional node migrations to the 1B and 1C nodes, enabling the transition to DDR5. The 6% of systems revenue in the September quarter, roughly in line with the 7% we reported in the June quarter. Let's turn to the regional breakdown of our total revenue. China came in at 43%, an increase from the prior quarter level of 35%. While the multinationals in China remained steady, the domestic Chinese customers grew, and the majority of our China revenue continued to come from them. The next largest geographic concentrations were Taiwan at 19%, which was flat sequentially, and Korea at 15%, down sequentially from 22%, again due to the timing of customer investment plans. The customer support business group generated approximately $1.8 billion in revenue for the September quarter, slightly higher sequentially and year over year. This is being driven by continued strength in spares and upgrades. CSPG remains a key part of our growth strategy, given the expanding installed base and our innovation in advanced services. We expect CSBG to deliver year-over-year growth in 2025. And I just mentioned that in the thirteen years since we brought Lam and Novellus together, CSBG has grown every year except for one. Let's look at profitability. Gross margin in the September quarter was 50.6%, at the higher end of our guided range and improving from the June quarter level of 50.3%. The increase is primarily driven by favorable customer mix, partially offset by the impact of tariffs. I expect the impact from tariffs to continue to increase somewhat in the December quarter. Operating expenses for September were $832 million, which was up from the prior quarter level of $822 million. The increase is primarily due to increased headcount and incentive compensation, which is tied to the company's improved profitability. R&D accounted for 68% of the total operating expenses. We're investing in innovations like Vantex, Aqara, Halo, and Dextro to continue our leadership in providing a differentiated product portfolio for our customers. The September operating margin was 35%, at the high end of our guidance. This operating profit represents a record level for Lam in both dollars as well as percentage terms. The non-GAAP tax rate for the quarter came in at 14.2%, generally in line with our expectations. We continue to see the tax rate in the low to mid-teens for the near term. We do expect, however, with the increase in the GILTI rate in the United States, as well as the advent of the global minimum tax regime outside of the United States, you will see a slight increase in our effective tax rate as we get into calendar year 2026. Other income expects for the September quarter was approximately $8 million in income compared with $4 million in income in the June quarter. The slight increase in OI&E was primarily the result of increased interest income tied to a higher cash balance. As we've talked about in the past, you should expect to see variability in OI&E quarter to quarter. Let's look at capital return. In the September quarter, we allocated approximately $990 million to share buybacks through open market share repurchases. Our average buyback price in the quarter was approximately $106 per share. Year to date, we've repurchased nearly 30 million shares at an average price of a little more than $88 per share. We also paid $292 million in dividends in the quarter. I'll remind you that we increased the dividend from $0.23 to $0.26 per share earlier this month. Moving forward, we remain committed to returning at least 85% of free cash flow to our shareholders over time. The September diluted earnings per share were $1.26, above the midpoint of our range. Diluted share count was 1.27 billion shares, which was a reduction from the June quarter and consistent with our guidance. We have $6.5 billion remaining on our Board-authorized share repurchase plan. Let me pivot to the balance sheet. Cash and cash equivalents totaled $6.7 billion at the end of the September quarter, an increase from $6.4 billion at the end of the June quarter. The main reason for the cash increase was cash generated from operating activities, which was partially offset by cash allocated to capital return as well as capital expenditures. Day sales outstanding was sixty-two days in the September quarter, which was up slightly from fifty-nine days in the June quarter. September inventory turns improved to 2.6 times compared with 2.4x in the prior quarter, and up from the levels two years ago of 1.5 times. We've remained focused on driving asset utilization during this time frame, and I was pleased to see us deliver this outcome. Our non-cash expenses for the September quarter included approximately $97 million for equity compensation, $89 million for depreciation, and $13 million for amortization. Capital expenditures in the September quarter were $185 million, which was up $13 million from the June quarter. Spending was primarily focused on lab investments in the United States, along with expansion of manufacturing sites in Asia. This remains consistent with our global strategy to be close to our customers' development and manufacturing locations. We ended the September quarter with approximately 19,400 regular full-time employees, which was an increase of approximately 400 people from the prior quarter. Headcount increases were in R&D to support our long-term product roadmap. Additionally, we had increases within the field organization to support customer growth and a higher volume of tool installations. Let's turn to our non-GAAP guidance for the December 2025 quarter. We are expecting revenue of $5.2 billion, plus or minus $300 million. We expect a decline in China revenue offset by stronger spending from the global multinationals. We're expecting a gross margin of 48.5%, plus or minus one percentage point. I expect customer mix and tariffs will be contributing to the sequential decline in gross margin. We're expecting operating margins of 33%, plus or minus one percentage point. And finally, earnings per share of $1.15, plus or minus $0.10, based on a share count of approximately 1.26 billion shares. I want to give you a few things to think about as you build your 2026 models. While we are not yet quantifying the level of growth in WFE, I will tell you that calendar '26 looks somewhat second-half weighted as we sit here today. The newly restricted China entities would have been weighted to the first half of next year. Customer mix will be a headwind to gross margin a bit year as the China mix normalizes. And the tax rate will likely tick up very slightly, as I previously mentioned. We'll give you better color on all this during the December call. So let me wrap up. Lam delivered another strong quarter, highlighted by record levels of revenue, record gross, and operating profit. Inclusive of our December guidance, we're on track to deliver calendar year 2025 at an all-time high watermark in financial performance, closing with three consecutive quarters of revenue above $5 billion. We remain focused on strategic investments that extend our technology leadership, operational efficiencies, and long-term value creation. Operator, that concludes our prepared remarks. Tim and I would now like to open up the call for questions. Operator: Thank you, sir. Ladies and gentlemen, if you would like to ask a question, please press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the star keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. And the first question comes from the line of C.J. Muse with Cantor Fitzgerald. Please proceed. C.J. Muse: Yes, good afternoon. Thank you for taking the question. I guess, first question, very helpful guidepost for thinking through incremental WFE tied to AI infrastructure spending. But I guess over the last six, eight weeks, would love to hear how your conversations with customers have progressed. Are you seeing expedited meetings? Are you seeing actual orders? Would love to see how the announcements around infrastructure spending are translating into visibility on your business. Tim Archer: Sure, C.J. Let me take that. I mean, obviously, when we talk about announcements that are made recently, there's not physical space. There's not near-term demand for those. Those are things that give you a guidepost as to where demand is going further in the future. I think to look at the conversations that we're having today about near-term needs for equipment, it's a lot of the things I talked about, which is enterprise SSDs and the impact on NAND. You've heard some of our customers, I believe, speak to bit demand that might be a little bit higher than expectations. I just said that our view of NAND upgrades is well on track for a good 2025 and a strong 2026. So it's really down. When we talk about our equipment demands, it's near-term needs with those longer-term announcements being an opportunity in the future. But they're along the same technology transitions. Those data center investments are going to require faster GPUs, aided smaller nodes for foundry logic. They're going to be made with higher capability HBM. And that's where all of our products come into play. How we participate in gate all around, our ALD tools, high aspect ratio conductor etch, on the DRAM side, work we're doing in HBM to enable higher stacking of HBM devices. And so again, we're seeing very robust demand, as we mentioned, going into 2026, but it's for things that are real and here today. C.J. Muse: Very helpful. And then maybe thinking through your relative outperformance to WFE, based on your guide, it looks like you're tracking on a tool shipment basis up 40%. And I think many investors think we're growing 10% overall. So tremendous outperformance. I guess, are you thinking about 2026? And as part of that, what would be the critical drivers to drive relative outperformance? Thanks so much. Tim Archer: Yeah, sure. I'll let Doug add in here as well. But I guess I would just say that you have to remember that as fabs get built and equipment is brought in, there often are timing issues. And so it's a little bit hard to speak to any near-term like outperformance, underperformance, but certainly because it depends on what other suppliers are going to be doing and when they're shipping and what their lead times are. But what we can say with quite a bit of confidence, and I think we laid it out at our Investor Day earlier this year, is that over the longer term, Lam's markets, etch and deposition will outgrow WFE because of nearly every trend that's taking place technology-wise in semiconductor manufacturing, whether that's 3D devices, in foundry logic, in NAND, stacking using advanced packaging in DRAM, whether it's advanced packaging itself. They're all deposition and etch intensive products, and, therefore, I think over the longer term, confidence to outperform WFE is very high. Doug Bettinger: Nothing to add, Tim. You nailed it. Thanks, C.J. Operator: The next question comes from the line of Tim Arcuri with UBS. Please proceed. Tim Arcuri: A lot. Doug, when we talked three months ago, you were thinking that December would be, like, 04/07. You were saying it'd be sort of back to where March was. Now it's coming in at, you know, five two. So the incremental 4 to 500,000,000, where did that come from? It sounds like maybe a little bit of it pulled in from the first half of next year. Can you just sort of give us a sense, like, what's actually better than what you thought three or some months ago? Doug Bettinger: Yeah. Listen. I think, Tim pointed that WFE is a little bit stronger. We think high bandwidth memory in DRAM is a little bit stronger. And maybe everything else was just a little bit stronger, Tim. It's not any one thing that I would point to. I would tell you though, honestly, it would have been even higher if not for the restricted entities in China. So things did strengthen for sure. As we look into next year, clearly, next year is a growth year. And whether we pulled anything in from the first half, I honestly think so, Tim. Because as we sit here today, I think the first half of next year is flat to maybe slightly up from the second half of this year. So it's going to continue to be pretty good. Tim Arcuri: Got it. Great. Thanks, Doug. And then on the 2026 WFE in China, I know you and everyone else has the same message that it's, you know, gonna be down. But to be honest, that's what everybody said at this time last year too, and you're growing, like, 20% this year. I know that there's some others that are more close to flat, but, I mean, you know, you're up a ton in virtually everyone else is up a ton too. So it seems like we keep saying that China will digest and that it'll be down, but they keep finding ways around these bans. So like, why would China be down next year? I guess I'm just trying to figure out, is there something different next year that you're seeing that maybe gives you the confidence that finally China is gonna be down because it hasn't happened yet? Thanks. Doug Bettinger: I guess what I'd say, Tim, it's twofold. First, the global multinationals outside of China are going to be pretty strong next year. So that's part of it, right? Everything else is going to be stronger in 2026, I think, than it was in 2025. And honestly, as we sit here right now and look at the stack up of everybody's plans in China, it's going to be less. That's the best I can tell you. And yep, you're absolutely right. A year ago when we were sitting here, we would have seen the same thing and then to strengthen through the year. I just right now don't see where that's gonna come from next year, Tim. Tim Arcuri: Okay, Doug. You. Doug Bettinger: Thanks, Tim. Operator: The next question comes from the line of Vivek Arya with Bank of America Securities. Please proceed. Vivek Arya: Thanks for taking my questions. The first one, Tim, you gave this interesting statistic $8 billion of WFE for, I think, every $100 billion in data center. How much of that $100 billion of data center spend is in semiconductors? Basically, what is the WFE intensity in an AI data center versus kind of the mid-teens, you know, WFE intensity? All semiconductors. And then off that $8 billion, what is Lam's opportunity? Tim Archer: Okay. Well, maybe I'll go ahead. Doug, you can add here, but I guess just to clarify, the $8 billion was WFE for a $100 billion of data center investment. So that would represent the equipment portion that we could target. And again, given that data centers and especially those focused on AI applications require leading edge across all three device segments. Again, that's an area where Lam's SAM as percent of WFE continues to increase at every technology node. And so all the things I'm talking about, whether it's high aspect ratio etches, it's ether, dry UV resist, it's ALD, all of those are growing our opportunity in that $8 billion. And so that's where a lot of our focus is these days, is the products that are required to do well through that spend. Doug Bettinger: Vivek, was that your question? Did that answer your question? I'm not sure we got it. Vivek Arya: My question is different. You know, because if you look at WSE overall as a percentage of semiconductors, it's about mid-teens percent. And when we talk about a $100 billion in data spend, there's a lot of non-semiconductor spend as part of that. My question is, of that $100 billion, how much is semiconductor spend? And what does that imply for WFE intensity in an AI environment? And of that $8 billion, how much is Lam's opportunity? Doug Bettinger: Yeah. Listen, Vivek, if I'm honest, I don't know the precise answer to your first question, how much is semiconductor content as part of that $100 billion. It's a decent amount, right? It's GPUs, it's HPM, it's enterprise SSDs. I don't know the precise number, but I know it's a decent amount. And then relative to our intensity in all these things, it's very similar to what you've seen from us across the rest of semis, which is you've got the move to gate all around. You've got high bandwidth memory. You've got a growing stack in NAND. It's part of the contribution of our share of WFE going from the low 30s to the high 30s. This would be representative of it to the best of my ability to answer your question. Tim Archer: Yes. I think that would be the best way to think about it is at the Investor Day, we said that as you move to these leading-edge nodes, Lam's SAM as percent of WFE, our opportunity would grow from the low thirties to the high thirties through those transitions. So assuming these are at the leading edge, then you're starting to create an opportunity that's at that high thirties level. Vivek Arya: Okay. For my follow-up, I think in the past, you have mentioned the $40 billion TAM for NAND upgrade. Much of that will be completed by the end of the year, like, will a third be completed? You know, will half be completed? Just any rough sense of where we are in the journey of that conversion. And as you look at next year, I know you have you're not giving a specific WFE view. But what would you know, cause NAND growth to be different, you know, higher or lower than what you saw in what we have seen so far in '25? Thank you. Tim Archer: Well, here's what we said. So we were at the Investor Day back in February. We said that $40 billion would be spent. And obviously, we didn't exactly put a date on it, but we said over several years to satisfy the upgrade of the installed base to 200 plus layer level. What I said in my remarks today is that this demand being a little bit higher than prior expectations, we've likely seen a little bit of an acceleration of that upgrade. I also said that in 2026, our upgrade business in NAND would remain strong. So we're not going to tell you exactly how far we are through that several-year period. But compared to February, it's accelerated. And as I also mentioned, I think that if this demand for high-capacity storage continues and the $40 billion when we gave that in February, targeted kind of a mid-high teens bit demand. And I think that what you're hearing publicly right now is maybe demand that's a little bit higher than that. So that would suggest it's being accelerated. And all we can speak to is our demand would suggest the same thing. Vivek Arya: Thank you. Doug Bettinger: Thanks, Vivek. Operator: The next question comes from the line of Harlan Sur with JPMorgan. Please proceed. Harlan Sur: Good afternoon. Thanks for taking my question. Maybe as a follow-up to CJ's question, given all of these data center infrastructure announcements, you know, I think for example, Sam Altman's recent trip to Asia, he had a view that, you know, DRAM and advanced foundries supply requirements over the next several years would be x amount, right, which positively surprised all of us. And it actually does imply significantly more capacity requirements across advanced foundry, memory, and advanced packaging. You would think that your customers would wanna start to put this in place as quickly as possible, maybe starting next year. But Tim, I think you did bring up a good point, right, which is on NAND, for example, that growth might be limited by tight clean room space. So do you think that overall, growth in calendar '26 WFE might be limited by availability of clean room space not only in NAND but across DRAM, advanced foundry, and advanced packaging? Tim Archer: Well, I would say that look. I can't speak for the customers. This would be a much better thing to ask them they can do amazing things. But I would say that, generally, you know, there's a time that it takes to put in physical infrastructure. We suffer from the same thing, whether we're expanding labs or expanding manufacturing. So depending on what the demand is, it could be limited. I think what we're trying to respond to is the point of how much could you accelerate. And that's a function of probably more physical space than it is ability for like, the equipment supply chain to respond. And that's simply because our lead times are generally within the lead time of building a facility. That was kind of my general comment. Maybe we're not going to be the bottleneck. But, yeah, clearly, we've seen some accelerated demand as a result of, you know, the current demand, but also in anticipation of those future opportunities. I would imagine this year, you'll see some of those plans come to fruition. I would suggest you talk to the customers and find out what their physical plan, investment plans are. Harlan Sur: Yeah. That's a fair point. And then maybe for Doug, you know, good to see the CSPG dynamics still on track to drive growth this year. I think first nine months of this year, CSBG was up 7% year over year, but includes Reliant. I assume that core spare services and upgrades are growing at a faster rate anyway. Maybe quantify how much faster it's growing. Then maybe if you could just true us up, I believe CSBG has been neutral to Accretive to your overall operating margins, but you've had similar cost benefits as you've moved CSBG support. Closer to your customers, especially with the Malaysia build out. Given all of this, on a relative basis, where do CSBG op margins currently sit relative to corporate average? Doug Bettinger: Yes, Harlan. Let me unpack that a little bit. Just to remind everybody on the call, and Harlan, I know you know this, but for others, there's four components to CSPG, spare service upgrades and then Reliant. Three of the components of CSPG are clearly growing. One is not, which is Reliant, largely because of maybe mature node spending across the whole world. Tim mentioned in his scripted remarks record spares and service combination. I said in my scripted remarks, hey, upgrades are pretty strong given what you got going on in NAND. So that's the way to think through all of the kind of ups and downs and if DG is gonna grow this year. You're right. CSBG is a creative operating margin. I've never quantified that for anybody, but that continues to be the case. Harlan Sur: Appreciate the color. Thanks, Tim. Thanks, Doug. Doug Bettinger: Yes. Thanks, Harlan. Operator: The next question comes from the line of Jim Schneider with Goldman Sachs. Please proceed. Jim Schneider: Good evening. Thanks for taking my question. I was wondering if you could maybe just give a little bit of color on the NAND market and what you're seeing. I think clearly given all the announcements that are out there in the market, there's an expectation that NAND orders could accelerate at some point and sort of wondering your view on whether you're seeing that yet or whether you're any kind of initial signals from customers in terms of longer-term forecasts. And when we might start to see that show up in the numbers? And maybe as a follow-on to that, maybe comment on whether you expect 26 growth in NAND to be led by upgrades or whether you see any potential for new tools starting to lead that? Thank you. Tim Archer: Yes. Thanks for the question. I think that I addressed some of that in my comments about NAND, but just to kind of go back and say that of the $40 billion of conversion spend that we had anticipated, I think the demand signal right now is a little bit accelerated to what we originally saw. That's based on the fact that bit demand is, people are speaking about bit demand that's a little bit higher than probably prior expectations. I think our business is going to continue to be predominantly upgrade focused, you know, not only in 2025, but through 2026. And that's primarily because there was a very large install base that had not been upgraded for a number of years. So there are quite a few tools that can still be upgraded to provide those higher layer count devices. Now as you do those upgrades, you tend to lose wafer out capacity. And so at some point, if demand remains as high as maybe people anticipate with these data center announcements, then I would think you'd transition to capacity additions. But my comment about floor space, physical infrastructure, again, a better question for our customers, but I would anticipate that everyone will remain focused on upgrades since it's the lowest cost and likely easiest way to achieve higher performance growth in bits through 2026. And then beyond that, you know, it's again, better question for all the NAND providers to speak to their plans. Jim Schneider: Great. Thank you very much. Doug Bettinger: Thanks, Jim. Operator: The next question comes from the line of Krish Sankar with TD Cowen. Please proceed. Krish Sankar: Yes. Hi. Thanks for taking my question. Tim, I just want to on the NAND thing. I understand clean room space is limited, maybe Kyosha is only on there as a new fab. But it also seems like the NAND utilization rate for most of your customers is heading towards 100%. So I'm kind of curious, in that scenario, should we assume that there might be a quarter or two where your NAND orders or shipments drop off? Or do you think it's going to be not, like, an lock lock and separate? It's gonna be pretty smooth transition. Doug Bettinger: Maybe I'll jump in and then Tim, you can add. Krish, nothing goes up into the right every single period. In fact, if you looked at the most recently reported quarter, NAND was actually down a little bit. It's going to continue to kind of trend towards that $40 billion, maybe a little bit more. But every quarter we'll have some level of variability depending on who's investing and what. All these guys or most of these guys also have DRAM investments. So they're going to modulate what happens in what quarter. But things have strengthened somewhat relative to what we were describing a quarter ago. And Tim, I don't know if you want to add anything. Tim Archer: Yeah. No, I think that's fair. I mean, I think the important thing to remember is that as we move above 200 layers, the drivers for our business aren't just the increased bit demand. Basically is that to produce each of those bits, the intensity of Lam's equipment actually rises. Well. And so, again, above 200 layers, we've talked about the fact that we start introducing several new types of products to deal with wafer stress, to deal with the higher gap fill requirements from the higher layer count devices, I talked a little bit about Moly in my prepared remarks. And so for us, as we see more interest and perhaps a bit of acceleration in those upgrades, we think that it's a combination for us of upgrades to existing installed base and the addition of some new tools. So you'll see it within our business both in systems and in upgrades. Krish Sankar: Got it. Got it. Thanks for that. And then a follow-up for Doug. Maybe it's a hypothetical question for you. You said next year, WFE is going to grow kind of makes sense. Seems like most folks assume mid to high single digits growth in calendar 2026. I'm assuming that's set up understand Lam's revenues are going to grow year over year. With less China being a gross margin headwind and higher tax rate, can Lam's EPS also grow year over year in that situation or outgrow revenue? Doug Bettinger: You're funny, Krish. I'm not going to answer that question. Listen, but you have it right. And I don't wanna over position the tax rate. Tax rate's gonna go up just a little bit. Okay? Don't go too far with it. And of low mid-teens, maybe it's approaching mid-teens or maybe a little bit towards the higher end of the low mid-teens. Don't go too far with that. The reduction of customer mix will be a headwind for gross margin. Right? We just took you down to 48 and a half percent. Depending on how each quarter progresses, we're probably in that range for a while. As things grow, that's going to be beneficial. From a fixed cost standpoint. We don't have huge fixed costs. There's going to be a customer mix headwind. And then probably in the next year, tariffs are a little bit a headwind, too. So I don't know, anchor yourself plus or minus where we just guided you in December, I think, and that'll be a good spot for you to start your models. Krish Sankar: Got it. Thanks a lot, Doug. Appreciate it. Doug Bettinger: Thanks, Krish. Operator: The next question comes from the line of Stacy Rasgon with Bernstein Research. Please proceed. Stacy Rasgon: Hi, guys. Thanks for taking my questions. Doug, my first one, I wanted to zero into something you said about next year. So you said second half loaded year. But then you said the first half would be sort of flat to maybe up a bit. Versus the second half of 25. But then if it's the second half of the year, it feels to me like the second half ought to be up you know, more materially than that. Am I sort of characterizing that trajectory correctly? Doug Bettinger: Oh, I haven't given you any numbers for the second half, Stacy. I just said it's a second half weighted year, and I said the first said second half weighted, Stacy. Yeah. And that the first half was flat to slightly up from the second half of this year. Stacy Rasgon: The second half weighted to me means at least the second half of next year should be higher than the first half of next year. Correct? Doug Bettinger: That's what that means. Yep. Stacy Rasgon: Okay. Got it. So then I want to dig into the implications of that with regard to China. You said China drops below 30% next year. It's probably gonna be what? I don't know. 36 or something. Like, this year. So that drop would have dropped to, like, 29. It'd be something like a billion and a half dollar headwind. Maybe more. It's probably a high single digit headwind to revenue growth. But from what we just heard, like, revenue overall should be growing. And, I mean, it should should be it feels like it should be growing okay. Given the trajectory you just laid out at least qualitatively. Again, I just wanted to know, do I do I have that dynamic correct? And, like, can you give us maybe a little more color on the non-China offsets that are enabling you to overcome a headwind from China, but, like I said, it has to be at least a billion and a half, probably something in that range. Doug Bettinger: Yeah. Stacy, what you just described is largely consistent with what I believe is gonna happen next year. So, yeah, China's gonna be down. Your numbers probably aren't too far off. The global multinationals, though, are going to offset that. Right? More than offset that is ours, you know, as we sit here today. Right? And just think about what's going on. We've been talking about NAND a ton on the call. We've been talking about high bandwidth memory. We've been talking about accelerators and all that kind of stuff going to more advanced nodes. So that's what's gonna be offsetting it, Stacy. Stacy Rasgon: I was actually just hoping to get a little more color on the granularity there, but maybe you're saving that for the next next quarter. Doug Bettinger: Yes. Let us leave a little bit in our pocket for next quarter. Stacy Rasgon: Alright. Alright. Sounds good. Thank you, Doug. I appreciate it. Doug Bettinger: You bet, Stacy. Thanks for trying. Operator: The next question comes from the line of Blayne Curtis with Jefferies. Please proceed. Blayne Curtis: Hey, thanks for letting me ask questions. I want to ask on China. Maybe I had it wrong. I was you didn't really answer last quarter, but I thought the strength that you highlighted for September was going to be multinational spending in China. That's clearly not the case. So maybe you could just walk through why such a big bump to China revenue in September now that it's done. Doug Bettinger: Yeah. No, Blayne. If it came across that we were suggesting it was a multinationals in China, that wasn't what we intended to communicate. If we did, apologies for misrepresenting it. Listen, the multinationals in China stayed relatively steady. So call it flattish. The growth in China was largely driven by the domestic Chinese customer base. Blayne Curtis: Got you. And then just the driver of the second half weighted, is that across all your segments? Or is that more of a foundry logic comment? Doug Bettinger: It's listen. We'll give you more granularity. I know everybody wants it but we'll give you more granularity on the December call. It's just a description of what we see totality of the spending in the industry. WFE in total. Blayne Curtis: Okay. Thanks. Doug Bettinger: Yep. Thanks, Blayne. Operator: Next question comes from the line of Melissa Weathers with Deutsche Bank. Please proceed. Melissa Weathers: Hi there. Thanks for letting me ask a question. I wanted to check-in on some of the new products that you introduced at the start of the year at your Analyst Day. Now that it seems like we're getting a little bit more momentum on the WFE side, have you seen any acceleration in engagements on those new products, the Acara and the Altus Halo products? Tim Archer: Yeah. It's a great question. And we have. I mean, Acara and Halo these are both products that are very focused on inflections that are taking place in foundry logic, DRAM, and NAND. Aqara for conductor etch, high aspect ratio, very well suited as we scale Git all around and also heavily used in DRAM. We've talked about a couple of wins since February. In some key DRAM conductor etch applications. Again, remember, we introduced some of these products specifically to improve our performance and revenue growth in foundry, logic, and DRAM because of the drivers there. Halo, I talked about on this call. Again, continuing to make progress in securing 3D NAND word line applications, which is an important step for the ESSD performance. And so I would say where, you know, where I sit right now, there's a long way to go to deliver on the Investor Day full model. But I think from a product perspective and how we see the trend playing out, we're feeling pretty good about the progress we've made since February. Melissa Weathers: Thank you. And then maybe one more on the backside power side of things. It looks like backside power nodes are gonna start to ramp in volume next year, maybe the year after. So has anything changed on either the timing or the magnitude of what you're expecting for backside power contributions? In the next couple quarters or years? Tim Archer: No, no, not really. I think in terms of change, I think, again, as you move forward and you hear all about the requirements for and challenges of power in these very compute-intensive devices. Just gives us further confidence that need solutions like backside power. I mean, it directly addresses some of the issues that customers have in scaling performance of high compute devices. So it's an edge depth intensive inflection, and therefore, it's important for us, and we're focused on it. And I think we'll do well those nodes ramp. Melissa Weathers: Thank you. Doug Bettinger: Thanks, Melissa. Operator: The next question comes from the line of Mehdi Hosseini with SIG. Please proceed. Mehdi Hosseini: Yes. Thanks for taking my question. All the good questions have been asked I have a quick follow-up. Going back to your slide number I know. I know. Going back to your slide number six. Interesting observation. I understand the lead times are in a one to two year, and that's almost in a ballpark as, a leading edge fab. I would also argue that there is increased concentration within that $8 billion of WFE for every $100 billion of incremental AI. And that increased concentration would, in my opinion, give your customers some leeway. They don't have to rush to secure capacity or to release all their POs. And I'm just wondering if you have any additional thoughts to it. Is that a factor? Doug Bettinger: Mehdi, that's a good question. Not exactly sure how to answer it. I think Tim has been meeting with a lot of customers over the last couple of weeks and having conversations about, okay, what do you think next year looks like? What where where are you going and so forth? I don't know that lead times have been all that different, so to speak, at least not yet. I'm not sure I'm answering your question. I'm just kind of rambling here a little bit. Mehdi Hosseini: I was at the your customers don't have to worry about running out of capacity among their suppliers. Tim Archer: Well, I think that look. In whether it's whether it's us and how we work with our customers or I'm sure our customers, how they work with theirs, everybody wants to make sure they have what they need. So we spend a lot of time with our supply chain, making sure they have the capacity their ramp, they understand the plans. Can anticipate that our customers do the same thing with us. To ensure that when they take an order, they can deliver it. I think we're in a period right now, as we talked about, of some acceleration. I think, you know, I don't believe most people anticipated the number of announcements that have come in recent months for, you know, AI infrastructure. It will take time for those. But I can guarantee when people hear those announcements, it ripples through the supply chain to make sure that capacity is going to exist. And I think everybody goes to work. And if there's one thing that Lam has been good at, it's executing to the needs of our customers, and that continues to be our focus. Mehdi Hosseini: Got it. Thank you. Doug Bettinger: Thanks, Mehdi. Operator: The next question comes from the line of Vijay Rakesh with Mizuho. Please proceed. Vijay Rakesh: Yeah. Hey, Doug and Tim. Just a quick question on 2026. As you look at the strength that you mentioned into next year, is that being driven by memory or foundry, logic, logic foundry as well? Because it looks like DRAM and pricing have been especially strong. So just wondering what you're seeing on the memory side as well. Doug Bettinger: I think it's probably gonna come from both. And, again, we'll give you more color on the December call. Vijay Rakesh: Got it. And then as you look at '26, obviously, there's a US it looks like a US ITC that kicks in December 31 for a higher investment tax credit, like 35%, and looks like some chipset money is starting to flow again. Are you seeing that as a tailwind for WFE into next year? Or Doug Bettinger: Maybe only on the margin, Vijay. No, what's driving WFE next year is end demand. At the end of the day. Yes, I'm sure the investment tax credit is going to maybe influence a little bit of the geographic distribution of that, maybe a little bit. But end demand is what matters right now. Vijay Rakesh: Got it. Thanks. Tim Archer: Thanks, Vijay. Doug Bettinger: Operator, we will take one more call. Or one more set of questions. Sorry. Operator: And the final question will come from the line of Brian Chin with Stifel. Please proceed. Brian Chin: Hi. Thanks for taking our questions. Appreciate it. Maybe first one, going back to that popular slide in the slide deck. Of the $8 billion in WFE spending, on a kind of rough cut, could you partition that across on a percentage basis, advanced logic, DRAM and NAND? Doug Bettinger: Brian, more than half of it is coming from memory. More than half? SSD. Enterprise SSD is in high bandwidth memory. And clearly, the great big GPU accelerators, the ASICs and whatnot, are part of it, but more than half is memory. Brian Chin: Okay. That's helpful. And you know, going back to the $40 billion mass in terms of upgrades over several years, do you view that as having to the industry having to sort of exhaust that and then capacity of spending capacity spending occurs? Or can they be somewhat concurrent maybe towards the back end of that? Maybe kind of more customer by customer basis. Of customer Tim Archer: Yeah. Just as you said there, it's going to be a customer by customer situation. And already today, we're seeing some capacity additions. And that has nothing to do with end to end. That was the customer's plan all along. And so I think you find different customers at different points of where they are with their installed base. Where they are with the needs of their customers and end markets. And the great thing for Lam is that we can work with customers in a very agnostic way as to whether it's whether they're gaining the bits and performance they need through upgrades or through capacity ads. We participate in both and in a meaningful way. And so I think you'll see both. However, what I said was upgrades to install base tend to be the fastest, and lowest cost means of achieving it's at the higher performance. And so I think that most customers will prioritize that first they get to capacity, but there will be some concurrence and maybe instead towards the back end of that upgrade rollout. Brian Chin: Great. Thank you. Doug Bettinger: Yes. Thank you, Brian. Operator, with that, we're going to conclude the call. Thank you everyone for joining today. I know Tim and I will be talking to a lot of you during the remainder of the quarter before we get into the quiet period. But thanks for your interest in Lam Research. Operator: Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Tim Archer: Yes. Thank you.
Operator: Welcome to the third quarter of 2025 Earnings Conference call for Amphenol Corporation. Following today's presentation, there will be a formal question and answer session. Until then, all lines will remain in a listen-only mode. At the request of the company, today's conference is being recorded. If anyone has any objections, you may disconnect at this time. I would now like to introduce today's conference host, Mr. Craig Lampo. Sir, you may begin. Craig Lampo: Thank you very much. Good afternoon, everyone. This is Craig Lampo, CFO, and I am here together with Adam Norwitt, our CEO. We would like to welcome you to our third quarter 2025 conference call. Our third quarter 2025 results were released this morning. I will provide some financial commentary, then Adam will give an overview of the business and current market trends. Then, of course, we will take your questions. As a reminder, during the call, we may refer to certain non-GAAP financial measures and make certain forward-looking statements. So please refer to the relevant disclosures in our press release for further information. The company closed the third quarter of 2025 with record sales of $6.194 billion, a record GAAP and adjusted diluted EPS of $0.97 and $0.93, respectively. Third quarter sales were up 53% in US dollars, 52% in local currencies, and 41% organically compared to the third quarter of 2020. Sequentially, sales were up 10% in US dollars and local currencies and up 9% organically. Adam will comment further on trends by market in a few minutes. Orders in the quarter were a record $6.111 billion, up a strong 38% compared to the third quarter of 2024 and up 11% sequentially, resulting in a book-to-bill ratio of 0.99 to 1. GAAP and adjusted operating income were both $1.702 billion in the quarter, and operating margin was a record 27.5%. On an adjusted basis, operating margin increased by a strong 560 basis points from the prior year quarter, and 190 basis points sequentially. The year-over-year increase in adjusted operating margin was primarily driven by strong operating leverage on significantly higher sales volumes, which was only modestly offset by the dilutive impact of acquisitions. On a sequential basis, the increase in adjusted operating margin reflected strong conversion on the higher sales levels, as well as further progress on profitability improvement on acquired businesses. I am extremely proud of the company's record operating margin performance in the third quarter, which reflects continued strong execution by our team. Breaking down third quarter results by segment compared to the third quarter of 2024, sales in the Communication Solutions segment were $3.309 billion and increased by 96% in US dollars and 75% organically. Segment operating margin was 32.7%. Sales in the Harsh Environment Solutions segment were $1.516 billion and increased by 27% in US dollars and 19% organically, and segment operating margin was 27.1%. Sales in the Interconnect and Sensor Systems segment were $1.369 billion, increased by 18% in US dollars and 15% organically, and segment operating margin was 20%.The company's GAAP effective tax rate for the third quarter was 23.5%, and the adjusted effective tax rate was 27%, which compared to 21.4% and 24% in the third quarter of 2024, respectively. The increase in our adjusted effective tax rate this quarter is due to some shift in income mix to higher tax jurisdictions during 2025. The third quarter includes an adjustment to bring the year-to-date taxes to a 25.5% adjusted effective tax rate, which resulted in a three-cent impact to our third quarter EPS. Our fourth quarter and full-year guidance assumes this higher 25.5% tax rate, and we expect this higher tax rate to continue into 2026. EPS was a record $0.97 in the third quarter, up 102% compared to the prior year period. And on an adjusted basis, EPS increased 86% to a record $0.93 compared to $0.50 in the third quarter of 2024. This was an outstanding result. Operating cash flow in the third quarter was $1.471 billion, or 117% of net income, and free cash flow was $1.215 billion, or 97% of net income. Also, an excellent result. From a capital standpoint, inventory days, days sales outstanding, and payable days were all within a normal range.During the quarter, the company repurchased 1.4 million shares of common stock at an average price of approximately $109, and when combined with our normal quarterly dividend, total capital return to shareholders in the third quarter of 2025 was $354 million. As noted in the earnings release, the company has increased its quarterly dividend by 52% to $0.25 per share, effective for payments beginning in January of 2026. Total debt on September 30th was $8.1 billion, and net debt was $4.2 billion. Total liquidity at the end of the quarter was $10.9 billion, and this included cash and short-term investments on hand of $3.9 billion plus availability under our existing credit facilities, including the $4 billion term loan facility recently put in place in anticipation of the acquisition. Third quarter 2025 EBITDA was $2 billion, and our net leverage ratio was 0.7 times at the end of the quarter. As of September 30th, the company had no outstanding borrowings under its revolving credit facility or its commercial paper programs. I will now turn the call over to Adam, who will provide some commentary on current market trends. Adam Norwitt: Well, thank you very much, Craig. And thank you to everybody for taking the time to join our call today. And I hope that all of you are having an enjoyable fall. I can tell you it's a beautiful day here in Connecticut. I'm going to highlight our achievements in the third quarter. I'll discuss our trends and progress across our served markets, and then comment on our outlook for the fourth quarter and the full year. And then, of course, we'll have time for questions thereafter. There's no doubt that our results in the third quarter were much stronger than expected, exceeding the high end of our guidance in sales and adjusted diluted earnings per share. Sales grew from prior year by a very strong 53% in US dollars and 52% in local currencies, reaching a new record $6.194 billion, or nearly $6.2 billion. On an organic basis, sales increased by a very strong 41%, the same level that we actually achieved in the second quarter. And this was driven by double-digit organic growth in all but one of our end markets. We're very pleased that the company booked a record $6.111 billion in orders in the third quarter, and that represented a book-to-bill of 0.99 to 1. Orders grew by a very strong 38% from prior year, and were also up 11% sequentially. I have to say that we're particularly pleased to have delivered record operating margins of 27.5% in the quarter, an increase of 560 basis points from our prior year adjusted operating margin and 190 basis points sequentially. This strong profitability is a direct result of the outstanding execution of the team around the world, all of whom continued to manage extremely well in a very dynamic environment. As Craig mentioned, our adjusted diluted EPS also grew very strong, 86% from prior year, reaching a new record of $0.93, and the company converted those earnings into record operating and free cash flow in the quarter of $1.471 billion and $1.215 billion, respectively. Both clear demonstrations of the quality of the company's earnings. Finally, I'm very pleased that our board has approved a 52% increase in the company's quarterly dividend to $0.25 per share. I just can't express enough my pride in the team. I would just say that our results this quarter, once again reaffirmed the value of the passion, discipline, and agility of our entrepreneurial organization as we continue to drive superior performance. Now, as we announced in mid-August, we're very excited that we signed a definitive agreement to acquire Trexan for approximately $1 billion in cash. Trexan is a leading provider of high-reliability interconnect and cable assemblies, primarily for the defense market, and expects to generate 2025 sales in EBITDA of approximately $290 million and 26%, respectively. We're very excited about the incremental potential that Trexan capabilities will bring to Amphenol, and we look forward to welcoming the entire Trexan team to the Amphenol family. We continue to expect this acquisition to close by the end of the fourth quarter. We're pleased as well to announce that we closed on the acquisition of Rochester Sensors earlier in the third quarter. Based in the Dallas, Texas area and with annual sales of approximately $100 million, Rochester is a leading manufacturer of highly engineered, application-specific, liquid level sensors for the industrial market, with a particular focus on propane, heavy vehicle, and refrigeration. The company has a strong and long-respected brand in the sensor industry, and no doubt will be a great complement to our already broad sensor offering. In addition, we remain excited about the pending acquisition of the business from Commscope. Given our good progress on the path towards closing, we now expect to close CCX by the end of the first quarter of 2026. About a quarter sooner than originally anticipated. We remain confident that our acquisition program will continue to create great value for Amphenol. In fact, as our ability to identify and execute upon acquisitions and then to successfully bring these new companies into the Amphenol family, that remains a core competitive advantage for the company. Now, turning to our trends across our served end markets, I would just note that we continue to be very pleased that the company's end market exposure remains diversified, balanced, and broad. This diversification continues to create great value for the company, enabling us to participate across all areas of the global electronics industry while not being disproportionately exposed to the volatility of any given market or application. The defense market represented 9% of our sales in the quarter, and sales grew from prior year by a strong 29% in US dollars and 23% organically. And this is really driven by robust growth across virtually all segments of the defense market, with the contributions in particular related to space, naval communications, and ground vehicle applications. Sequentially, our sales grew by 8%, which was higher than our expectations coming into the quarter. And looking into the fourth quarter, we expect a mid-single-digit increase in sales from these already lofty third quarter levels. And for the full year 2025, we expect sales to increase by more than 25%. I would just note that this outlook does not include any impact from the Trexan acquisition. We remain encouraged by the company's leading position in the Defense Interconnect market, where we offer the industry's widest range of high-technology products. Amidst the current dynamic geopolitical environment, countries around the world continue to expand their investments into both current and next-generation defense technologies. With our existing offerings as well as the complementary capabilities that Trexan will bring, we're positioned better than ever to capitalize on this long-term demand trend. The commercial aerospace market represented 5% of our sales in the quarter. Sales increased by 17% from prior year and 16% organically, as we benefited from increasing production levels of our customers together with our continued progress in expanding our content on next-generation commercial aircraft. Sequentially, our sales grew by 7% from the second quarter, which was better than our expectations coming into the quarter. Now, looking into the fourth quarter, we expect a mid-single-digit sales increase from these third quarter levels. And for the full year 2025, we expect sales to increase in the high 30% range from last year, helped by the acquisition of Sit back in 2024. I'm truly proud of our team working in the commercial air market. With the ongoing growth and demand for jetliners, our efforts to expand our product offering, both organically and through our acquisition program, continue to pay real dividends. In particular, I just want to mention that we're very pleased with the progress of the Sit team, who's now completed more than a full year as part of the Amphenol family. We look forward to further capitalizing on our expanded range of product solutions for the commercial air market long into the future. The industrial market represented 18% of our sales in the quarter, and sales in this market grew by 21% in US dollars and 11% organically. And that was really driven by organic growth in all three geographies. In particular, our organic growth was driven by strong performance in factory automation, medical instrumentation, industrial electric vehicles, and our heavy equipment segments. On a sequential basis, sales grew by 5% from the second quarter, which was better than our expectations coming into the quarter. As we look into the fourth quarter, we expect sales to moderate slightly from these third quarter levels. And for the full year 2025, we expect our sales to grow by approximately 20%, reflecting both strong organic growth as well as the benefit of acquisitions. We remain encouraged by the company's strength across the many diversified segments of this important market. As demand continues to recover, I'm confident in our long-term strategy to expand our high-technology, interconnect, antenna, and sensor offering, both organically as well as through complementary acquisitions. Indeed, with the acquisition of Rochester Sensors, we have further broadened our sensor offering for the industrial market, and that strategy has really enabled Amphenol to capitalize on the many electronic revolutions that are taking place across the diversified industrial market, thereby creating continued opportunities for our outstanding team working in this important area. The automotive market represented 14% of our sales in the quarter, and sales in the third quarter grew by 13% in US dollars and 12% organically, as we once again drove growth in all regions. Sequentially, our sales grew by 8% from the second quarter, which was actually much better than our expectations coming into the quarter. And that really reflected the ability of our team to quickly execute on a wide range of opportunities around the world. For the fourth quarter, we expect a moderate sales decline from these third quarter levels. And for the full year 2025, we expect sales to increase in the mid to high single-digit range from 2024. I remain very proud of our team working in this important market. And you know well, there are no doubt many areas of uncertainty in the global automotive market. Our team continues to be focused on driving new design wins with customers who are implementing a wide array of new technologies into their vehicles. We look forward to benefiting from our strengthened position in the automotive market for many years to come. The communications networks market represented 11% of our sales in the quarter. Sales grew from prior year by 165% in US dollars and a strong 25% organically, as we benefited from the Andrew acquisition that we completed earlier this year, as well as from increased spending by both communications network operators and equipment manufacturers. Sequentially, our sales grew by 8% from the second quarter, which was better than our expectation for sales to remain flat. As we look into the fourth quarter, we do expect sales to decline in the low teens range on normal seasonality, and for the full year 2025, we expect more than 130% growth, driven by the acquisition of Andrew, together with robust organic growth. With our expanded range of technology offerings following the acquisition of Andrew earlier this year, we were well positioned with both service provider and OEM customers across the global communications networks market. Our deep and broad range of products, coupled with an expansive manufacturing footprint, have positioned us to better support customers around the world. And as those customers continue to drive their systems to higher levels of performance, we look forward to enabling these important networks for many years to come. The mobile device market represented 6% of our sales in the quarter, and sales moderated by 3% in US dollars and organically, as growth in wearables, as well as basically flat sales, enhanced year over year, was more than offset by moderations in sales related to laptops and tablets. Sequentially, our sales did grow by 18% from the second quarter, which was much better than our expectations coming into the third quarter. As we look into the fourth quarter, we expect sales to increase modestly from these levels, and for the full year 2025, we expect sales to grow in the low single-digit range compared to 2024. I remain very proud of our team working in the always dynamic mobile devices market, as their agility and reactivity have once again enabled us to capture incremental sales in the quarter. I'm confident that with our leading array of antennas, interconnect product, and mechanisms designed in across a broad range of next-generation mobile devices, we're well positioned for the long term. And finally, the IT Datacom market represented 37% of our sales in the quarter. Sales in the quarter grew by a very strong 128% in US dollars and organically, and that was driven by the continued acceleration in demand for our products used in artificial intelligence applications, together with continued robust growth in our base IT Datacom business. I'm really proud of our team's outstanding execution here in the third quarter, as we were once again able to significantly outperform our expectations in this very exciting market. On a sequential basis, sales increased by 13% from the second quarter, and that was substantially better than our expectation for mid to high single-digit decline. This outperformance is actually driven both by sales of AI-related products, as well as by growth in our base IT Datacom business. As we look towards the fourth quarter, we expect sales to increase slightly from these very strong third quarter levels. And for the full year of 2025, we expect our IT Datacom sales to more than double compared to the prior year. We are more than ever encouraged by the company's position in the global IT Datacom market. There's no doubt that our team has done an outstanding job securing future business on next-generation systems with a broad array of customers. The revolution in AI continues to create a unique opportunity for Amphenol. Given our leading high-speed and power interconnect products, whether high-speed, power, or fiber optic interconnects, our products are critical components in these next-generation systems, and that creates a continued long-term growth opportunity for the company. Turning to our outlook, and obviously assuming the continuation of current market conditions as well as constant exchange rates for the fourth quarter, we now expect sales in the range of $6 billion to $6.1 billion, and adjusted diluted EPS in the range of $0.89 to $0.91. This would represent a sales increase of 39 to 41%, and an adjusted diluted EPS increase of 62 to 65%, compared to the prior year fourth quarter. Our fourth quarter guidance also represents an expectation for full-year sales of $22.660 billion to $22.760 billion, and full-year adjusted diluted EPS of $3.26 to $3.28. This outlook represents full-year sales and adjusted EPS increases of 49 to 50% and 72 to 74%, respectively. There's no doubt that 2025 has been a very strong year for Amphenol thus far. I remain confident in the ability of our outstanding management team to adapt to the many opportunities and challenges in the current environment and to thereby continue to grow our market position, all while driving sustainable and strong profitability through this year and into the long term. Finally, I'd like to take this opportunity once again to thank our entire global team for what were truly incredible efforts here in the third quarter. They worked unbelievably hard to deliver this level of growth and performance, and I'm truly grateful to each and every one of them. And with that, operator, we'd be very happy to take any questions that there may be. Operator: Thank you, Mr. Norwitt. The question and answer period will now begin. Please limit to one question per caller. To ask a question, please press star followed by one on your telephone keypad now. If you change your mind, please press star followed by two. When preparing to ask your question, please ensure your device is unmuted locally. We have a question from Steven Fox from Fox Advisors. Please go ahead. Steven Fox: Hi. Hi. Good afternoon. Thanks for taking my question. As you guys mentioned, your margins are quite impressive. Another record. I was wondering if you could zero in on the incrementals a little bit from two aspects. One is the harsh environment and communications incrementals were 40%. Obviously, volumes are helping, but what else is helping produce that? And then secondly, it seems like you mentioned, Adam, there's a lot of product complexity. We just saw, you know, a lot of your products at OCP last week. How does that either help or make it harder to deliver like these types of incrementals as you get into next-generation data centers, aerospace, things like that? Thank you. Adam Norwitt: Thanks, Steve. Yeah, no, listen, we're super proud, obviously, of our results this quarter and specifically the profitability we were able to achieve here in the third quarter after coming off of a really strong quarter, actually in the second quarter, you know, at 25.6. So, you know, the 27.5% profitability for the company is something that certainly will take a lot of work. And I think really is driven by, you know, certainly a few factors. Number one, you know, obviously we're growing quickly. We had a really great quarter from a growth perspective. And we're continuing to execute in order to leverage that into strong profitability. And I think that's what you saw in the quarter. You know, and, you know, and the other part of it is our acquisitions also are doing really well. I mean, you mentioned the segment. I mean, that's kind of where the CET business sits. And I would tell you that business is performing very well. And certainly as contributing to the margins and the conversion margin that you just mentioned in your question. So, you know, I think the overall profitability of the company is kind of hitting on all cylinders. You know, it's the execution, you know, related to the growth of the company in addition to acquisitions that we're starting to see real progress on from a profitability perspective. So, you know, these are things that, you know, certainly proud of. I think that, you know, certainly the value we're adding to our customers, the technology that we're bringing to the table here is being reflected in these margins. And that's, you know, that's kind of the results you're seeing here. And these really great results. Yeah. Well, thank you, Craig and Steve, thank you for the question. And thanks for stopping by the booth at OCP. We really appreciate that. Look, you saw a slice of our products there, which certainly reflect an increasing complexity primarily related to the IT Datacom market. And there's no doubt that as interconnect products have become more fundamental to the performance of the systems, the networks into which they are incorporated, there is more being demanded of those products. They become more complex. Whether those are higher speed products, whether those are high power products. And to make those products, to design those products, to innovate around those products, to develop the manufacturing processes, to make these and to ramp those products up at scale and at the speed that our customers and the market would like to have. This is not a trivial task whatsoever. And I'm just so proud of our team for really working over many, many years to build the fundamental building blocks that have ultimately allowed us to be so successful. But I would also say this, it's not confined to that market. We see interconnect products across all of our end markets, becoming increasingly high technology, having increasing complexity around them, whether you're talking about in the defense market, in commercial air, where we can now offer a broader suite of value-add interconnect products to our customers, in part because of the Sit acquisition and what that brought. If you look at the Trexan acquisition that we announced this quarter, which brings us into even more advanced complex interconnect assemblies for customers in the defense market. We see that across the industrial market as well, the automotive market, and certainly in the communications networks, with the complexity of the products, the antenna products, the interconnect products that came along with the Andrew acquisition, I would tell you that today, more than ever before, customers recognize the importance they rely upon the technology value of interconnect products, and they represent a bigger hurdle for many of our customers, one that we can solve. You know, you asked, interestingly, that question around margin at this out of the same breath as that question around product complexity. And I don't think the two are unrelated. Yes, it's hard to do that. But if you are creating more value for your customers through the technology of your product, by creating that value, then maybe those customers will be willing to share some small part of that value also with you that's embedded in that complex technology of the products. And I think that's something that Amphenol, that we certainly, as a company, are seeing more of today than ever before. Operator: Thank you. Our next question goes to the line of Amit Daryanani with Evercore. Please proceed. Amit Daryanani: Yep. Good afternoon, everyone. Thanks for taking my question. Yeah. Adam, last quarter, I think, you know, we talked about about $150 million of AI performance in the June quarter was driven by out execution. And that resulted in, I think, initially guiding it. Datacom revenues down mid-single digits or so. As you think of the better performance you just had in that segment, I think you folks, it's up 13%. How much of that do you think was driven by the traditional IT Datacom markets doing well versus AI? If there's a way to parse that out, it would be really helpful. And then how do you feel about the broader inventory levels in the AI ecosystem as you wrap this year? Get into calendar 26. Thank you. Adam Norwitt: Well, thank you very much, I appreciate the question. And look, I think if you think about our performance in the third quarter, I'd say it's pretty balanced. I mean, I can't get super granular about this. You never know on the exactly the margins of what product does it exactly go into. But I would say our impression is that it's pretty balanced. Our upside in the quarter between AI related and then more traditional Datacom. And look, relative to inventory. What we don't see any signs of anything abnormal. And there's no doubt, you know, in the third quarter we obviously beat our expectations. And there's there was clearly more demand from our customers. And we were able to satisfy that demand. And so even though we came out of the second quarter with, as you talked about it, maybe shipping a little bit ahead to what our customer demand was anticipated, the demand got better here in the third quarter. And our team was able to flex to really react to that. Both on the AI as well as the more traditional IT Datacom side. Operator: Thank you. Our next question goes to the line of Guy Hardwick from Barclays Capital. You may proceed. Guy Hardwick: Hi. Good afternoon, Adam and team. Obviously with so much of the incremental growth coming from AR, it Datacom, it's natural for investors to kind of fret on about major architectures in AI. Can you kind of allay any concerns about Amphenol content on, say, the the Khyber architecture due to coming 2027 versus the Oberon architecture? Adam Norwitt: Yeah. Thanks very much, Guy. Look, I'm not going to talk about specific customers and specific architectures. There's a lot of different design activity going on. And what I can tell you is this, you know why we have been so successful in establishing ourselves as a leader in this unique and high-value architecture of interconnect products in accelerated compute AI, machine learning, whatever you want to term it is a very long-term, multi-decade build-up of our capabilities on high-speed and also power products, and then also commensurate with that building up the capabilities to make these advanced products and to ramp those products up when our customers need them. And those capabilities have enabled us to continue to win with customers up and down the stack of the AI ecosystem. And, you know, people want to talk about one or another platform, but you know that there are lots of things going on in AI. We treasure our relationships with each of those customers, and we work directly with customers up and down the stack from the folks who are really the service providers, all the way down through the equipment manufacturers, the data center builders, and down through to the folks who are designing and specifying the chip-based architecture. And I can tell you that we have a strong position today, and we have a strong position in future platforms really up and down that stack. Operator: Thank you. Our next question comes from the line of Luke Junk from Baird. You may proceed. Luke Junk: Good afternoon. Thanks for taking the question. Maybe a simple question, but more complex answer. I'm just wondering how you think about book to Bill at this level of growth. I mean, it just seems like at these levels, maybe that becomes a less meaningful metric to look at. And also, I think some of your sales are shorter term in nature, especially in IT. Datacom. Just how that's impacting the book to bill measure as well. Thank you. Adam Norwitt: Well, thanks, Luke. Actually, it's a very good question. And I think you're kind of spot on like with these growth levels, the fact that our bookings grew also in the quarter on a year-over-year basis by 38%, and that we had so much upside in the quarter in terms of our revenues to what our expectation. And yet we still manage to have a book to bill that was really just under one. I think it rounds to 0.99. But I mean, more than $6.1 billion in orders in the quarter. I would say that when we were in the earlier part of the ramp-up of, in particular, this ramp-up related to IT Datacom and specifically related to AI. There's no doubt that our book to bill was a very strong book to Bill in particular because we were making a lot of significant investments, and it was very much on the. Com and our customers, you know, wanted to give us the confidence that we would make those various investments. Now, look, I can't tell you what the cadence of bookings will be. You know, here in the fourth quarter. We don't give guidance for bookings for that reason, it's very hard to tell. Maybe, maybe it'll be above one or below one. And we shall see. You know, is it a shorter cycle? What I would say about this, IT Datacom specifically is there's no question that as we've gone through this cycle of the build-out and the ramp-up, our lead times have certainly come down relative to what they were early on as we were building out the capacity. And as your lead times come down, that naturally has an impact on your book to bill. And it's a slightly shorter cycle. And so I think that's not also totally far off base either, Luke. Operator: Thank you. Our next question comes from the line of Samik Chatterjee from JP Morgan. You may proceed. Samik Chatterjee: Oh, great. Hi, thanks for taking my question. Maybe just putting IT Datacom aside, the recovery and the strong organic growth that you had in the other end markets as well, like industrial communication networks, like really strong growth in all of them. Maybe one, how are you sort of overall looking at the landscape right into 90 days ago? Have things in those underlying markets improved and then what is the visibility? I get that maybe book to bill is in the best metric to look at for IT Datacom. But what is the visibility of the book to bill in those end markets, giving you in relation to future demand? Is the visibility improving with the book to bill numbers as well? Thank you. Adam Norwitt: Yeah. No, thank you very much. I mean, look, it's hard to say that we don't have a more positive view today than we would have had 90 days ago. Really broadly across the company with the performance that we had here in the quarter. I mean, growing sequentially as we did by 10%, is really, you know, an outstanding performance. Especially compared to what our expectations were coming into the quarter. And if you look at our performance across really all of our end markets with the small exception of mobile devices, which was slightly down year over year, all of our end markets were up in double digits organically. And honestly, if you even took IT Datacom totally out of our performance in the quarter, we would have organic growth in the mid-teens levels, which to me sounds like pretty good performance. And so there's no doubt that we feel, you know, incrementally positive on the overall landscape in terms of books to book to. Bill's in the other markets. I mean, I would say that, you know, we had some favorable book to bills in particular. I would say, like defense. We have pretty strong book to bill in that market. I'd say others are, you know, plus or minus, but certainly not negative. And so I think we feel incrementally encouraged and that, you know, ultimately goes into our expectations where we look next quarter, for example, in the defense market, commercial air market, those two in particular to be up kind of, you know, in the mid-single digits on a sequential basis, which is a very strong finish for each of those areas. Operator: Thank you. Our next question comes from the line of Mark Delaney from Goldman Sachs. You may proceed. Mark Delaney: Yes. Good afternoon, and thank you very much for taking my question. Adam, you mentioned the company saw better than expected strength in the auto market in the third quarter, and you spoke to some of that being a function of Amphenol executing well against opportunities that came up in the quarter. Could you speak a bit more on what some of those opportunities were? And what was supporting that strength that the company saw in 3Q and then maybe just give a bit more color on what you're seeing in the auto market for the fourth quarter, please. Thanks. Adam Norwitt: Well, thanks very much, Mark. I mean, look, I think our team did well on a global basis in automotive in the third quarter. I mean, growing really sequentially in all regions, growing pretty strongly in all regions on a year-over-year basis, including, by the way, we saw double-digit organic growth in Europe. Which is maybe not what one reads in the papers every day. And so we feel really good about the performance. And I'm really pleased with our team there. And, you know, look, there's a lot of moving pieces in automotive right now. You hear about lots of different things, you know, different government policies impacting certain automotive demand. You hear about different supply chain things going on plus or minus. In that area. And you know, so as we look into the fourth quarter, taking all of that into account, you know, we expect it, you know, sort of modest sequential reduction here in the fourth quarter, which is not totally abnormal. You know, sometimes we'll see that in a fourth quarter for automotive. But our position is really strong. And in addition, I would tell you that we're really pleased to see, you know, a kind of growth in that market in new kind of platforms. You know, EVs where we've had strong performance in our automotive last quarter. But also in traditional and hybrid vehicles around the world. And so I think it's a pretty broad-based, positive view that we had, which I think does contrast with maybe some of the more cloudy things you read about every day in the paper. But I tried not to read all these cloudy things too often. Operator: Thank you. Our next question goes to the line of Andrew Buscaglia with BNP Paribas. Andrew, your line is open. Andrew Buscaglia: Hey, good morning, everyone. Adam Norwitt: Morning, Andrew or good afternoon, I should. Andrew Buscaglia: Say. Yeah. Good afternoon. Yeah, I want to check on your margins have been great. And you're talking about this kind of higher incremental margin shift. But yet your guidance to get to the midpoint of your guidance, it does imply margins would step down. If you look historically, usually they're flat or up, you know, from Q3. And I'm just wondering are there some dynamics in there that are causing that or anything you want to call out? You know, ahead of that. Craig Lampo: Yeah. Thanks a lot, Andrew. Yeah. No, listen, you know, our fourth quarter kind of guidance here certainly I think is actually very strong both from a top line and the bottom line perspective. I mean, we're guiding down slightly our margins in the fourth quarter kind of implied are slightly down. But also revenue is slightly down. And we're talking about, you know, not a significant I think a 2% I think on the high end sequential decline. So I guess I wouldn't call out anything too specific. I mean, the reality is that these at these revenue levels, that these growth levels, I mean, there will be some variability in margins. And we're going to, you know, I think we talked about our 30% kind of conversion, you know, or approaching 30 on the growth. And I would think on, on the, you know, when we have some declines, you're going to see a little bit higher conversion on the decline. And you would typically see at these margin levels that we're at. But so I wouldn't call anything out too specifically. I mean, we are, as I've mentioned before, adding some level of cost, you know, kind of given the significant growth we've seen in the inability to necessarily add some cost as quick as you can when you're growing kind of 40% organically or 41% in this quarter. So I would say maybe that's having a slight impact, but maybe I would say modest, but I mean, this implied margins, I think still would be close to 27%. So I mean, this is not a significant drop in margin. And I think this is still a very good overall profitability for the company. And certainly we believe sustainable. And, you know, as we continue to grow and but there will be some level of variability for sure. Operator: Thank you. Our next question comes from the line of Wamsi Mohan from Bank of America. You may proceed. Wamsi Mohan: Yes. Thank you so much. Adam, can you talk a little bit about the opportunity that you see on the power side as these AI data centers and standing up racks that are consuming maybe 2 to 3x of 100 kilowatt rack, which itself used to be a lot lower just a year ago. And maybe you can just address some of the products that are driving that opportunity for you. And if I could, Craig, could you just talk about the CapEx trajectory? It was slightly down quarter on quarter. I think you'd expected it to be flat. How should we think about the trajectory from here? Thank you so much. Craig Lampo: We spent I would say we spent in the range of what we expected to spend in the quarter. I mean, there's no precision around exactly what you're going to spend in the quarter. We expected kind of in the ballpark of what we had in the second quarter. And we were, you know, slightly under that. But I think still kind of roughly where we expect it to be. I think we hadn't really I haven't mentioned the fourth quarter. I mean, I guess I would expect kind of to be in a similar range, maybe slightly higher than we were in the third quarter and the fourth. But, I mean, these are given the level of growth we've had, given the revenue that we've had, we're kind of growing into our capital spending right now. Which we would expect to do. And that's certainly, you know, so we're closer to kind of again, the higher upper end of that kind of 4% kind of target that we would typically have. And that's what we did here in the third quarter. And I kind of would expect it, you know, roughly in that range, kind of as we move forward, certainly into the fourth quarter here. Adam Norwitt: Yeah. And look, relative to power, I mean, look, power is a big story here. I'm not saying anything. None of any of you don't know. But there's no doubt that power in these next-generation architectures is a really fundamental part of the operating of the systems. And we've been involved in power connectors essentially since the birth of the company. If you think about our legacy back into military and industrial high power, high voltage, I mean, we've been making interconnect products related to really high power consumption systems for most of the modern history of Amphenol, which means that we have dialed in the knowledge of what it means to be handling so much power. The safety, the efficiency, the throughput of the power. You know, this concept of millivolt drop and all of that that goes along with it. And so, you know, we're involved in a very complex way across a lot of different interconnect products, complex interconnect assemblies, Busbars board level interconnect, bringing power, you know, as soon as the power gets to the side of a building, you know, we're helping it get all the way around there all the way until it gets to the board of the chips. I mean, as you mentioned, AI is only going to increase in the needs of power. And I have to say, you know, I use these tools probably more than most. I am just dived in head and shoulders into using AI. And I will admit that once in a while when I'm doing something pretty complex and it's waiting a little bit, I get a little pang of guilt that I might be using a little more power. I mean, I was making, you know, immunology models for my daughter who's studying for a test last night. And, you know, I see the little thing thinking and know that, you know, that's probably burning a few light bulbs of power while doing that. And I think our job at Amphenol, our job at Amphenol to do this is to make sure that as little as possible of that energy that comes in the building is lost through the interconnect products that ultimately our products are the most efficient and the safest. So that the maximum amount of electrons can make their way to where they need to go, which is to the GPUs and to the associated things that go on these systems. And if we can do a good job at doing that, we're pretty good at doing that. We've been developing that skill for many decades. You know, our customers are going to keep relying on us to support them. And I'm really proud of what our team has done here. And, you know, I look forward to more opportunities related to power in the future. Operator: Thank you. Our next question comes from the line of Asiya Merchant from Citigroup. You may proceed. Asiya Merchant: Great. Thank you very much. Great results here. If I may, Adam, I know you talked a lot about, you know, how the interconnects are now creating more value. And I think it's pretty well understood on the AI side. But I do get questions from investors on, you know, the other end markets, you know, where is that extra value that is being created that can sustain the incremental margins that you're talking about and sort of related to that? You know, how do you think about the competitive dynamics now? You know, what, whether it's within the IT Datacom or outside within the other end markets, that you participate in? Thank you. Adam Norwitt: Well, thank you very much, Asiya. And I hopefully I pronounce your name correctly. There. Sorry about that. Look, there's no doubt that as I mentioned earlier, we see interconnect becoming increasingly embedded with more technology. Increasingly complex and thereby increasingly creating value for our customers across the entire gamut of this wonderful array of markets that we serve. And, you know, how is that happening and why is that happening? It gets to just the intensity of electronics that our customers are embedding in their products to create more functionality, more value for the end customers. Everything from a combine that is cutting down soybeans or corn in the Midwest. Now operating as an autonomous vehicle where one driver can drive five of these massive farming machines, as opposed to having to have five drivers to do that. Mining equipment. The same, you know, with autonomy, with hybridization of the drive trains across the defense industry. I mean, we just see so much more complex adoption of electronics that thereby then requires a more complex interconnect system. The density, the number of different nodes, the sensors that and the processes that are being associated therewith. All of this adds up together to create a complexity and a need, and ultimately an opportunity for us to create value for our customers. Now, look, we have a lot of competition. To your second question, and everywhere that we operate, and it's up to us to create a sustainable advantage for our company through our technology. Number one, through our capability and capacity to build that technology. Number two, and then ultimately through our agility, reactivity, and speed. And that last piece of it, that last piece of it comes from that unique culture that I talked till I'm blue in the face about because it ultimately is the nucleus of what makes this company successful. And so we will always have competition, and we respect those competitors. And there's some wonderful companies, large, medium, and small around the world with whom we have really wonderful competition. But at the end of the day, if we can develop a better product, if we can build that product at scale and if we can do that in an agile, fast, and flexible fashion, I believe that we'll continue to be able to win more than our fair share and thereby be able to outperform the market. We've done that for more than a quarter century, and I have a lot of confidence that we will be able to do that for many years to come. Operator: Thank you. Our next question comes from the line of Joe Spak from UBS. You may proceed. Joe Spak: Thanks. Good afternoon. I just want to go back to some of the incremental margin commentary from before, particularly by segments, because I understand growth's really the largest driver here, but is there anything structural between the segments that we think can impact incremental margins, like, you know, if you look at com services and harsh environments, you know, similar incrementals quarter, but you know, Com services grew three times as fast as harsh. So is there some more investment that's needed there. And then, you know, if we think about the interconnect and sensor. Segment, is there anything that ultimately preventing that segment from also hitting, you know, 30% plus incrementals if they achieve. Faster growth? Thanks. Craig Lampo: Yeah, thanks for the question. I mean, I think the short answer is I don't think there's anything structural in any of the segments that's limiting them from or enhancing their, their profitability. I mean, there's no doubt that the segment has had a significant amount of growth. And when we talk about kind of adding cost to support, kind of 40% plus organic growth, we're talking about also adding costs of support. I think the 74% organic growth or whatever they had in the quarter. So certainly there's some of that kind of in that segment that maybe is more than some other segments in terms of adding some of those costs that will catch up a little bit over time. But these are modest amounts. These aren't things that are going to have a super meaningful impact on overall, the overall profitability of segment or on the company. I mean, I think, you know, all of the segments have the ability to, you know, grow, continue to grow their margins and continue to expand over time. I mean, I'm actually I say I would say I'm particularly proud of this quarter, you know, achieving 20%, you know, profitability, operating margins in the quarter. I mean, just outstanding, you know, performance by that, by that segment. And actually they did achieve, I believe sequentially about 30% conversion margin. You know, in that segment. So they absolutely have the capability and the opportunity to continue to do that. I think, you know, in the future. So I would say all three of our segments have the opportunity to continue to expand margins. And, you know, certainly the level of growth that, you know, each of those have will have some impact on the margin expansion. But overall, I think this 30% kind of, you know, targeted long-term target we have here as we kind of come down to normal levels of growth over time, I think we're doing much better than that right now. Is something that, you know, all of them will contribute to. Operator: Thank you. Our next question comes from the line of William Stein from Truist Securities. You may proceed. William Stein: Great. Thanks for taking my question and congrats on the great quarter and outlook. Adam, in the last couple of meetings, we had you discussed incremental automation that you're doing in the IT Datacom business. I think you noted that it helps you meet high product performance requirements, high quality standards. I think you talked also about time to market and time to volume. Maybe that even helps your print position with customers overall. But I'd love to hear any further clarification on that effort. Especially if there's anything afoot to extend what you're doing there beyond the IT Datacom end market, which is where it came up. Thank you. Adam Norwitt: Well, thanks very much, Will. And thanks for your kind comments. Yeah, we did talk about this and I think I mentioned this in the past in our quarterly calls that when I think about the building blocks of our success, I mentioned, you know, it's about having a great product and building the fundamental engineering elements, the technology elements that go into those products. But then it's about how do you make those products at volume, at quality and ramp those in a time that's expeditious and especially in this kind of, you know, hyper speed, speed of light kind of world that we are in right now. And over the last, you know, I don't know, ten, 15 years plus, you know, we've been kind of around in our sort of typical Amphenol, decentralized way, developing an enormous amount of in-house capabilities related to automation. And I wouldn't even say that those capabilities started out necessarily related to IT Datacom. I mean, we were doing a lot of automation in our mobile business and others. But no question that as we design these next-generation products as the product life cycle shortened, it became imperative that we have our own capabilities to automate so that we could do that automation in lockstep with the product design and validation, as opposed to design and validate a product, then go outside and ask someone to make an automation machine for you, which could take another year plus. And then at the end of the day, it comes back and it's not what you wanted. And so working hand in hand between our design engineers, our automation engineers has allowed us to really shorten that cycle. And it has allowed us to make sure that when you have these products that are operating at the highest levels of performance, high speed, for example, you know that those products are so sensitive. There's such a delicacy and a precision to those products that really they need to be automated in order to ensure that the good performance of the product. Now, in terms of going beyond it, I mean, we've been doing this for a long time as well. I mean, as entrepreneurial and decentralized as we are, we also talk about the company as being collaborative entrepreneurship. And there's been an enormous amount of collaboration, unstructured, not incented in any funny way. It's not like some matrix structure of an automation corporate team or anything like that, but there's a really organic kind of efforts around the company to work with each other to see where automation really makes sense. And I would tell you that in every one of our end markets as products get more complex as, as sort of the, the sort of cost environment changes as, as the trade environment changes, whatever. I mean, we are adopting automation in places where it really makes sense now, are we just saying, you know, from above, thou shalt automate everything? Absolutely not. I mean, this is a decision left to our general managers who know their products, who know what their customers need, who know where they make the products, who know the life cycles and who ultimately own the financial, the financial assets that they're creating when they make these automation. And having that push down to 140, general managers. But enabling that through the collaboration across the company has been a really good recipe. And so we see a lot of automation around the company, but it's reasonable automation. It's homegrown automation, it's lower cost automation. And thereby allows us kind of to have our cake and eat it too. In terms of the flexibility and the low cost of the company. Operator: Thank you. Our next question comes from the line of Joseph Giordano from TD Cowen. You may proceed. Michael: Good afternoon. Thanks for taking my question. This is Michael on for Joe. Adam Norwitt: Hi, Michael. Michael: You mentioned earlier. Thank you. You mentioned earlier strong year-over-year and sequential performance on the commercial aero side. And I mentioned some potential for like content or share gains in that area. Do you mind just diving through the different parts of Aero or the applications that are related to some of those content gains or share gains? Thank you. Adam Norwitt: Well, thank you very much. Look, we're really pleased with our commercial air business and in particular, you know, the, the, the really quantum increase in the breadth of our products that came from the Sit acquisition a year ago. And so, you know, as we, as we have conversations with customers around the global commercial air market, you can imagine we're having conversations at every part of the plane where there's electronics. And today, you know, there's very few parts of a big airplane that don't have some degree of electronics from, from the engines to the avionics to the entertainment systems, cabin management systems, safety systems, you know, the all the way to something as mundane as, like a coffee maker or a laboratory. These things all have now electronics on them. And with Sit joining Amphenol, together with our interconnect, our, our, our wonderful value add business that we already had the connector products, the cable and wire products that Sit brings and very complex interconnect assemblies as well that we can now do together with them. You know, we really have the broadest product offering of interconnect products for the commercial air market at a time when you know that technology and the push of electronics into planes continues to grow. And so I think that just puts us in a very strong position. And in addition, I would tell you that our global footprint has been also a great asset because customers are very sensitive to making sure that you can support them around the world. And so now having even a broader footprint, again, with Sit and other steps that we've taken internally, you know, we have not only the right product, not only the right breadth of product, but also the right capability to make those products for our customers need them to be made. Operator: Thank you. Our last question will go to a line of Scott Graham from Seaport Research. Your line is open. Scott Graham: Hey. Good afternoon. Great quarter. Thanks for taking my question. Squeezing me in. So really, you've answered a lot of the questions I had around, you know, incremental margins. And their movement. I was just if you can just maybe flip the script a little bit and talk about acquisitions, you guys have obviously been very active the last couple of years. To the extent, that you're able to comment on perhaps what you're missing, you know, your wish list and does that wish list, perhaps include some of the end markets that you have? Kind of imported with new acquisitions, sort of either new or end markets that we've talked about with the deal flow or markets where you're already in, but you've really increased your critical mass in them with the deals. So could acquisitions be more tuned toward some of these newer verticals going forward? Adam Norwitt: Yeah. Well, thanks very much, Scott. Look, M&A is something near and dear to our heart. And there's no doubt that over the last three years, the company has made more acquisitions and also more fundamentally large acquisitions. And you know, I don't want to use the word transformative because none of these are at that level that you would say that's a merger of equals or anything like that. But we've clearly accelerated the expansion of our offering for our customers across our end markets. At the same time, even with the growth that we have had and the great array of wonderful new companies that we have brought into the Amphenol family, or we will soon bring into the Amphenol family in terms of those that haven't closed yet, like Intrexon, you know, there's a lot of opportunity in this industry. This is a highly fragmented industry. The interconnect industry is just such a wonderful place. When you think about the fact that interconnect products go into every place where you have electronics. I mean, we estimate it's a market of more than a quarter trillion dollars in size. And even with, you know, our relative growth this year, we still see a lot of room to grow, both organically as well as through our M&A program. And, you know, do I have a wish list of companies? You know, I'm certainly not going to articulate names of companies here. But I can tell you this. You know, we look at great companies across all of our end markets. We never put all our eggs in one basket. We don't chase a thing of the moment in M&A. We take a very, very long-term view of our acquisition program. We look for companies, we develop relationships with them. For many, many years. I mean, I have been developing certain relationships with companies since I was an intern in the company. 27 years ago. And, and we'll continue to do that. And my team will continue to do that. And we take a very, very long view on M&A, because at the end of the day, when we make an acquisition, it's for life. And we're not a trader. We're not buying and selling things all the time. You know, if it doesn't work out, we develop long-term relationships and then we're not chasing what's the right thing in the market at that moment. And I think that's been a great recipe for us for a long time. It's been a great return on the wonderful cash that we have generated. And it's one where we continue to see great potential for many years to come. Operator: Thank you. We currently have no further questions, so I'll hand back to Mr. Norwitt for closing remarks. Adam Norwitt: Great. Well, thank you very much. And thanks to all of you for spending a small part of your beautiful fall day with us. And we appreciate your interest in the company, and we look forward to getting back together with you. Amazing to say it in 2026. In just 90 days from now. Thanks, everybody. And we'll talk to you soon. Operator: Thank you. Bye bye. This concludes today's call. Thank you for joining. You may now disconnect your lines.
Operator: Good day, and welcome to the Crown Castle Quarter III 2025 Earnings Conference Call. All participants will be in listen-only mode. To withdraw your question, please press star then 2. Please note this event is being recorded. I would now like to turn the conference over to Kris Hinson, Vice President of Corporate Finance and Treasurer. Please go ahead. Kris Hinson: Thank you, Chloe, and good afternoon, everyone. Thank you for joining us today as we discuss our third quarter 2025 results. With me on the call this afternoon are Chris Hillebrandt, Crown Castle's President and Chief Executive Officer, and Sunit Patel, Crown Castle's Chief Financial Officer. To aid the discussion, we have posted supplemental materials in the section of our website at crowncastle.com that will be referenced throughout the call. This conference call will contain forward-looking statements, which are subject to certain risks, uncertainties, and assumptions, and actual results may vary materially from those expected. Information about potential factors which could affect our results is available in the press release and the Risk Factors sections of the company's SEC filings. Our statements are made as of today, 10/22/2025, and we assume no obligation to update any forward-looking statements. In addition, today's call includes discussions of certain non-GAAP financial measures. Tables reconciling these non-GAAP financial measures are available in the supplemental information in the Investors section of the company's website at crowncastle.com. I would like to remind everyone that having an agreement to sell our fiber segment means that the fiber segment results are required to be reported within Crown Castle's financial statements as discontinued operations. Consistent with last quarter, the company's full-year 2025 outlook and third-quarter results do not include contributions from what we previously reported under the Fiber segment, except as otherwise noted. To aid in the review of our third-quarter results, our earnings materials include year 2024 results on a comparable basis. As we indicated last quarter, within the 2025 outlook, and in our quarterly results, all financing expenses are included in continuing operations and do not reflect the impact of any expected use of proceeds from the sale of our fiber business. Additionally, SG&A has been allocated between continuing and discontinued operations to develop our outlook. However, these allocations may not represent the run rate SG&A for Crown Castle as a standalone tower company. As a result, adjusted EBITDA, AFFO, and AFFO per share in our 2025 outlook and quarterly results may not be representative of the company's anticipated performance following the close of the sale. With that, let me turn the call over to Chris. Chris Hillebrandt: Thank you, Kris, and good afternoon, everyone. It's an honor to address you for the first time as CEO of Crown Castle. As you've seen from my background, I've been in the telecommunications industry for many years, and I have long admired Crown Castle and its high-quality portfolio of approximately 40,000 towers, both as a customer and as a previous competitor. In my first forty days, I've traveled across the country to host town halls and hear from many of Crown Castle's employees and customers, and I've gained several key insights. First, I am really pleased by the high level of engagement of our employees and their excitement about our goal to become a best-in-class US tower company. We believe that the fiber-owned small cell transaction remains on track to close in 2026. Second, I believe that the US wireless communications infrastructure industry is entering a period of significant opportunity, supported by solid fundamentals, continued growth, and customer demand. Third, Crown Castle is uniquely positioned to drive attractive risk-adjusted returns during this period, as the only large publicly traded tower operator with an exclusive focus on the US. In September, CTIA, a leading wireless industry association, reported that mobile data demand in 2024 had increased by more than 30% for the third consecutive year. We believe mobile data demand is the best indicator of long-term demand for our assets, as incremental network investment by our customers is required to enable higher levels of mobile data traffic. As data demand continues to grow, it will require operators to expand network capacity by both deploying new sites and adding new spectrum bands to existing sites. We're seeing this dynamic unfold in real-time. Over the past year, each major mobile network operator has acquired additional spectrum despite having collectively secured approximately 700 megahertz of spectrum less than five years ago, the same amount of spectrum acquired in the prior forty years combined. Looking ahead, the FCC has said it plans to auction at least 800 megahertz of additional spectrum beginning in 2027. As we saw during the early stages of the 5G deployment cycle, spectrum acquisitions by well-capitalized carriers tend to create significant opportunities for tower operators. With this in mind, I am excited by Crown Castle's long-term value creation opportunity. As the only large publicly traded tower operator with an exclusive focus on the US market, I believe we have an opportunity to generate attractive long-term risk-adjusted shareholder returns by focusing on becoming the best operator of US towers with the following strategic priorities: First, to empower the Crown Castle team to make the best and timely business decisions by investing in our systems to improve the quality and accessibility of asset information. Second, strengthen our ability to meet the business' needs by streamlining and automating processes to enhance operational flexibility. And third, as the team has already started doing, drive efficiencies across the business. We will advance our data management and process engineering capabilities to deliver on these strategic priorities, and over the long term, we expect to maximize cash flow by unlocking additional organic growth while driving continuous improvement in profitability. This strategy is supported by our previously announced standalone tower capital allocation framework, which balances the predictable return of capital to shareholders with the financial flexibility to invest in our core business. Following the close of our sale transaction, we intend to grow our dividend in line with AFFO, excluding amortization of prepaid rent, by maintaining a payout ratio of 75% to 80%. Additionally, we continue to expect to spend between $150 million to $250 million of annual net capital expenditures to add and modify our towers, purchase land under our towers, and invest in technology to enhance and automate our systems and processes. We believe these enhancements, which are already underway, are fundamental to our strategic priorities to improve the quality and accessibility of asset information, enhance operational flexibility, and drive further efficiencies. Lastly, after paying our quarterly dividend and pursuing organic investment opportunities, we intend to utilize the cash flow we generate to repurchase shares while maintaining our investment-grade credit rating. So in conclusion, I am excited by the opportunity ahead for both the US wireless infrastructure industry and Crown Castle specifically. As the only large publicly traded tower operator with an exclusive focus on the US, we are well-positioned to deliver attractive risk-adjusted returns over the long term, with our strategy designed to maximize organic growth while enhancing profitability and our capital allocation framework which balances the predictable return of capital to shareholders with financial flexibility. With that, I'll turn it over to Sunit to walk us through the details of the quarter. Sunit Patel: Thanks, Chris, and good afternoon, everyone. We delivered solid third-quarter results and are increasing our full-year 2025 outlook as demand for our assets remains strong, and we continue to identify opportunities to operate more efficiently. Starting on page four, the tower business performed well in the third quarter, highlighted by 5.2% organic growth or $52 million, which excludes the impact of Sprint cancellations, and benefits from a $5 million timing-related uplift to core leasing activity in the quarter. However, this was more than offset at the site rental revenues, adjusted EBITDA, and AFFO lines largely due to an unfavorable $51 million impact from Sprint cancellations, a $39 million reduction in non-cash straight-line revenues, and a $17 million decrease in non-cash amortization of prepaid rent. Moving to page five, our updated full-year 2025 outlook includes increases at the midpoint of $10 million to site rental revenues, $30 million to adjusted EBITDA, and $40 million to AFFO. The higher site rental revenues are driven by continued strong demand for our assets, which we expect will result in a $10 million increase to full-year straight-line revenues and fourth-quarter leasing activity and non-renewals in line with the first half of 2025 results. We also expect a $40 million increase at AFFO consisting of a $5 million increase in services gross margin, driven by higher services activity, a $15 million decrease in expenses, and a $5 million decrease in sustaining capital expenditures as we continue to identify opportunities for greater operational efficiency in the tower business. And finally, a $15 million decrease in interest expense largely due to lower than expected floating rates and a push out in the assumed term out of our floating debt. Included in our updated full-year 2025 outlook is a $30 million reduction in discretionary capital expenditures from spend that has been pushed into next year. The updated outlook for 2025 discretionary CapEx is $155 million or $115 million net of $40 million of prepaid rent received. In conclusion, we are pleased with our third-quarter results and believe we are well-positioned to meet our increased outlook for full-year 2025, and our range for estimated annual AFFO following the fiber business sale closing that we reiterated last quarter of $2.265 to $2.415 billion. Longer term, we're excited by the opportunity for Crown Castle as the only large publicly traded tower operator with an exclusive focus on the US to deliver attractive risk-adjusted returns with our balanced capital allocation framework, investment-grade balance sheet, and focus on operational execution. With that, operator, I'd like to open the line for questions. Operator: We will now begin the question and answer session. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. The first question comes from Michael Rollins with Citi. Please go ahead. Michael Rollins: Chris, congratulations on becoming CEO of Crown Castle. Chris Hillebrandt: Thank you. Michael Rollins: So a couple of questions. First, Chris, it'd be great to get your perspective. You shared some of the course already in terms of some of your priorities and your initial takes. But as you look at the growth opportunities for Crown, can you frame maybe in more detail what are the opportunities to grow further with your existing customers and how that opportunity rates relative to the efficiency gains by divesting the fiber operations and just looking for more opportunities to be more efficient and effective? And then just a second topic, if I could. Just curious for an update on the relationship with EchoStar. Have you received any feedback in terms of what their approach to the network may be and how you look at collecting the rest of the contractual commitments that you have with that customer? Chris Hillebrandt: Yeah, great. Thanks, Michael. So I think four questions in one, if I counted them up correctly. Let's start with the growth one that you mentioned. I think, look, one of the reasons why we're so excited about becoming a large public US tower operator is that we believe that we can really unlock the value on both revenue and the profitability side. Fundamentally, we will be focusing in on almost the back to basics to just maximize the revenue opportunities that we have with the existing portfolio overall. And I think we feel good, as recognized by the results that you just heard today. In terms of efficiency, look, this is one of the things that we have a huge focus on. Not only in terms of what we promised to deliver as part of this, and so we need to get through first the actual fiber sale itself. This is our number one priority as a management team to get this over the finish line here by the end of the first half of next year. But then we're already starting to focus on those efficiency areas. And again, you saw that in the results that we're reporting this quarter. We started to accelerate those activities where we can. And we as a company will spend a great deal of focus on looking for the opportunities to drive efficiency across our platforms, both through process changes and new tools, but also just execution and delivering against customer expectations in what will be a best-in-class tower co. And then finally, the EchoStar question that you asked, look, we have a good agreement in place. It runs through 02/1936. And the bottom line is we expect to be paid for the terms of the agreement. Operator: Thanks very much. Thank you. The next question comes from Benjamin Swinburne with Morgan Stanley. Please go ahead. Benjamin Swinburne: And welcome to the earnings calls, Chris. Nice to hear your voice. Wanted to ask you guys a couple of questions. AT&T this morning talked about deploying 3.45 from EchoStar kind of prior to close. In fact, we talked about getting that to two-thirds of their pops by mid-November. I'm curious. I know you can't talk about specific carriers, but as we see the EchoStar spectrum get deployed, particularly where it's simply a software upgrade, is there any opportunity for Crown Castle from a revenue point of view? How do you think about this migration of spectrum from Boost to the majors? I was just wondering if Sunit could talk a little bit about the one-timer in the quarter. I think you said it was $5 million. Any color on sort of what drove that would be interesting. Thank you. Sunit Patel: Yeah, I'll take both. Yeah, I saw those remarks. Look, I think in general, what I would say, because it's tough for us to comment on AT&T's specific plans over the next years. But in general, I would say, the massive investment in Spectrum, which is usually followed by depends generally. And, you know, it depends on whether they would do a software upgrade to existing coverage areas or they want to go into more coverage areas, again, I wouldn't know. But what I would say over the long term is most spectrum bands get occupied and as mobile data demand continues to grow, in general, that's favorable for the tower sector, and we hope we'll do a good job of serving AT&T for whatever its plans are. So I think that's the main point there. On the one-time benefits, yeah, it's a combination of different things happening in the third quarter with several of our carrier customers. So we had a one-time benefit. As we said, we expect to revert back to the sort of activity levels we saw in the first half of the year in the fourth quarter. So these things are never linear. Sometimes, you can have lumpiness, and that's what you saw in the third quarter. Benjamin Swinburne: Got it. Great. Chris Hillebrandt: Well, thank you very much. Operator: The next question comes from Michael Funk with Bank of America. Please go ahead. Michael Funk: Yeah. Hi. Good evening. Thank you again for the question. And Chris, congratulations on your new role. Chris Hillebrandt: Thank you, Mike. Appreciate it. Michael Funk: Yeah. So a couple if I could. Sort of, you know, following on the last one, you know, we've heard carriers talk about less densification due to spectrum that they're acquiring. And just wondering if that's filtered through to your conversations with them, either maybe pulling back on plans that they had or discussions that they were having, or if it's too early and you wouldn't necessarily already have those, the conversations around densification. Chris Hillebrandt: I don't think we've seen anything. As you can see, leasing is continued strong for us. We're seeing solid demand for our assets and no material changes at this time. Michael Funk: Great. And then, Sunit, a lot of discussion about efficiency efforts. Where would you say we are in that process today? If you had to put it in innings? Sunit Patel: Yeah. I mean, I think we are you can see with our progress every quarter, we are basically taking down the execution risk on the guidance that we've provided for next year's AFFO for the period, July 1, next year to June 30 of the following year. So think where we are is we keep looking for opportunities to drive efficiencies, various automation systems implementations in a phased approach. But clearly, big benefit comes as we simplify from, you know, running three businesses to one business. So I think that you'll start seeing benefiting us as we get to the close of the transaction and beyond that. But meanwhile, there's plenty to do within our entire business, our corporate segments, and that's where we are focused on. Michael Funk: Great. Thank you, Chris and Sunit. Operator: The next question comes from Ric Prentiss with Raymond James. Please go ahead. Ric Prentiss: Thanks. Good afternoon, everyone. And, Chris, yeah, always nice to start on a beat and raise quarter, so good talking to you again. Chris Hillebrandt: Timing is everything. It is. Ric Prentiss: Wanna follow Mike's question earlier. On the DISH MLA, clearly, you've got a contract. It's written well. You expect to get paid. Sunit Patel: Putting the spectrum on the towers was really critical to make sure they kept the spectrum rights and be able to sell it. My question was to go at it we look at your 24 actuals and your 25 guidance, I know you've said in the past, your boost this boost contract had some step-ups in it. How should we think about how much was in the 24 actual and the 25 guidance that was kinda related to DISH activity that we should be thinking about that's continuing to grow while the contract's in place in 2627? Any kind framework can give us even rough basis points what it might have been. Sunit Patel: Yeah, Ric. So mean, as we as we've said before, you know, DISH represents about 5% of our revenues on the tower side. And so I think as we look forward, you know, we'll see what happens with DISH EchoStar. We feel really good about our contract. And beyond that, it's tough to get into too many specifics given the confidentiality with our clients. Ric Prentiss: Sure. Okay. So I'd try. When you think about dealing with Charlie Ergen and Hamid and the EchoStar Boost folks, are you willing and open to saying, well, let's look at maybe an NPV basis Let's look at what you owe me. Can we have some kind of discussion? And I guess the extra piece of the question would be help us understand what decommissioning cost ballpark might be because I think the contract also includes that they're supposed to return the towers remove the equipment. Sunit Patel: Yeah. So what I would say, you know, tough to tell what direction when, what discussion would go, and tough for me to comment on any discussions with them generally and then, you know, and similarly to comment on specific contract provisions on some of the things you're talking about just, you know, all of these things are confidential, but we are we feel very good about the contract we have with DISH. Chris Hillebrandt: Rick, maybe the other way to put it is, you know, look, our goal here as management is to maximize shareholder value and we're always open to working with our customers to accomplish that. Right? So right. Yeah. Maybe leave it open-ended like that. Ric Prentiss: Okay. Last one for me. Touched on it briefly to Feng's question. That famous slide seven from the fourth quarter deck, where you laid out kind of that pro forma second half twenty-six, first half twenty-seven. There's that one stack bar in there that talks about SG&A stand-alone. You'd mentioned, I think, previously that you'll update that slide. Are we still waiting for the deal to close, or how should we think about when do we get more granularity on that I'll call it, my famous slide seven from your four q deck? Sunit Patel: Good question. I think that when we report next quarter, obviously, we'll provide guidance for 2026, and I think you can expect a little more detail then. Ric Prentiss: That'd be great. Okay. Thanks, guys. And, again, welcome, Chris. Sunit Patel: Thanks, Rick. Operator: The next question comes from Jim Schneider with Goldman Sachs. Please go ahead. Jim Schneider: Chris, I was just wondering if you could maybe give us a sense of given your prior experiences, how would do those inform your role at Crown Castle And you've been very clear about the strategic goals of the company, but on the margin, are there any areas where you might look to sort of slightly shift those goals, whether they be at the operational level, at the capital allocation level or otherwise relative to what's already been laid out there? Chris Hillebrandt: The short answer is no. We are focused on becoming the best-in-class US tower operator, you know, full stop. You know, I think once we close the transaction, we achieve all our operational objectives, even then the bar for say, like, and a will remain high. And really limited to The US for the foreseeable future. Right? So the fact that I have that experience is great, but, you know, the clear strategy that we've embarked on is clearly the right strategy and the winning strategy for Crown. Jim Schneider: Great. And then just a quick follow-up. Can you maybe just comment on the impact of the T-Mobile's acquisition of U.S. Cellular on the business over the next several quarters and years? Thank you. Chris Hillebrandt: Yes. I'll just start, maybe Sunit can bring it home. But, you know, this is fairly de minimis for us from our perspective. It should be very little impact from what we see, at this time. Sunit Patel: Yep. That's correct. Chris Hillebrandt: Thank you. Operator: The next question comes from Nicholas Del Deo with MoffettNathanson. Please go ahead. Nicholas Del Deo: Hi, thanks for taking my questions and I wanna echo others and congratulate Chris, on your appointment. I guess, Chris, you know, you described improving Crown Castle's and information availability as your number one priority, in your prepared remarks. I guess how would you describe the state of the company's systems today relative to those of some of the other firms that you've led what you think best-in-class systems can offer? Chris Hillebrandt: Yeah. It's a great question because having just literally gone through a multiyear journey at Vantage Towers where we were focused on the exact same types of issues. The good news is that many of the same platforms that we're in the process of utilizing over there Crown has already started in that journey to deploy those systems here. So overall and I feel like we're on the right track. This will take some period of time. There's a lot of work to be done. Defining what best-in-class looks like in terms of the cycle times on how we deliver to our customers and the efficiency in how we spend our capital and OpEx dollars, so that they're the most efficient use of that money. This is really our challenge over the next year. Us really to lay out, what great looks like. And then bringing the team along on that transformation. The good news is I've just seen how this works because I just lived through it the last few years. And hope to be able to bring that same level of discipline and leadership to the team here. In executing those plans. Nicholas Del Deo: Okay. That's very, very encouraging. Can I ask one more kinda high-level philosophical question maybe? You know, most of your business today is contracted under holistic master lease agreements. Some of those may roll off over the coming years. Just wondering how you think about MLAs and the puts and takes or what you find important Just so we understand how you might think through that as deals potentially roll off over time. Chris Hillebrandt: I think in the end, we will always look to do good business for Crown. And so for any future MLA renegotiations or extensions, we're always gonna look for win-win with our customers on finding both long-term value creation. What we won't do is just go run after an MLA for the sake of an MLA. We'll only do it where we see value creation for the company. And ultimately, driving that customer experience, the winning combination is ultimately to have a strategic partnership with your customers. And, again, maybe something I have some fairly unique viewpoints on having been both in the operator space in the OEM space, and now here in the tower space. But in the conversations I've had with customers so far, it's been very warm and welcoming and looking for ways to partner into the future in ways that both companies can profit. So I'm encouraged by the direction we're headed in. I mean, you know, stay tuned to the space. Nicholas Del Deo: Okay. Great. Thank you, Chris. Operator: Thank you. The next question comes from Richard Choe with JPMorgan. Please go ahead. Richard Choe: Hi. I wanted to see if we can get a little more color on application volumes, kind of what are you seeing. And then also just wanted to clarify, do you expect ex the $5 million that the second half of the year is gonna be the same as the first half of year in new core leasing, or what should it be higher? Sunit Patel: Yeah. So the answer to the second question is, as I said, we expect the fourth quarter to be consistent with what we saw in the first half. If you look at the first two quarters of the first half, they were about the same. So I think that's what we meant that the third quarter was lumpy or higher, but that the fourth quarter will be consistent with what you saw in the first two quarters. And then on the application levels, I think you've heard us say previously, application levels do not necessarily correlate to our leasing activity per se. But, yeah, we've seen healthy levels of activity as we pointed out in the last couple of quarters. You can see the benefit of that in our service business. So and, you know, it was a good quarter also. In the third quarter. Richard Choe: Got it. Thank you. Operator: The next question comes from Batya Levi with UBS. Please go ahead. Batya Levi: Great. Thank you. Can you provide a little bit more color on how should think about the 5% organic growth ex Sprint churn tracking into next year, maybe kind of the pieces in terms of the amendments and leasing mix? And then how do you think about your scale in the Tier two, three markets where incremental activity seems to be going right now? Like how would you approach maybe adding to your footprints either organically or through M&A? And finally, one clarification question. The new leasing activity of about $115 million this year does that include any take or pay contribution from EchoStar? Sunit Patel: Yeah. I'll let me take through that. So, you know, as far as organic growth in the next year, we'll come back to that when we report fourth quarter and provide guidance for 2026. So not much to comment there, but we'll have more to talk about that then. On the scale, tier two, tier three, you know, all of us have different footprints, but our general goal is to make sure that we can support our customers where we do have coverage or towers in tier two, tier three markets and we suddenly have very active conversations with our clients of that. And two, we are open to, as Chris mentioned, his comments, to add towers where it makes sense. So we continue to engage with clients to look at that. And then I think your third question was on sorry. Oh, the leasing activity. Yeah. I mean, I think, as we said, we didn't change guidance for that. So I think we will continue to see good leasing activity line with the guidance and the expectations we've laid out. Hence, the guidance that we provided for the year. Batya Levi: Yeah. Just to follow-up on that, I think there is a bit of a good confusion if EchoStar's contribution is in the base, or is it also in the growth? In the core leasing piece, 115? Is there some part of the contract that's embedded in there from EchoStar? Sunit Patel: Yeah. So, I mean, generally, we don't comment on specific client contracts, but all our leasing activity includes activity from all our clients. So I'm sorry. That's tough to get into detail on specific. Right? Each of our clients and the contracts. Batya Levi: Thank you. Operator: The next question comes from Brendan Lynch with Barclays. Please go ahead. Brendan Lynch: Great. Thank you for taking my question and congrats Chris. I look forward to working with you. In terms of laid out kind of the bull scenario where, CPI data is supportive of growth, spectrum auctions are in acquisitions of spectrum. Continue to be supportive. Maybe you could just help us frame some of the risks that exist in the industry related to additional spectrum swaps or efficiency gains via technology or spectral efficiency? It seems there's a lot of negative sentiment in the industry and maybe you can kind of tackle some of these risks head on in think and inform us how we should think about them? Chris Hillebrandt: I mean, overall, the biggest risk is we don't have the detailed knowledge of what any of these new spectrum purchase owners are planning to do. And the correlation that we're drawing here is the fact that spectrum that wasn't being put into use is now being put into use. Something that will generate incremental leasing for infill sites or capacity growth and or lease up amendment revenue. Is something that is, again, based on what we've seen this year, seems to be in a very steady state. What could happen where the technology will go and allow for? Again, the customers have very defined space on the towers. And as they continue to deploy additional capacity, it represents a growth opportunity for us as a business. Brendan Lynch: Great. Thanks. That's helpful. Maybe another question. You sound very committed to the pure play U.S. Tower business as being your core. Can you talk about any ancillary services that would fall within the realm of tower exposure that you would be willing to or interested in scaling more? Now that Crown Castle has scaled back on services, maybe there's an opportunity to expand that in the future or build to suits or anything that would kind of be within that realm. Chris Hillebrandt: Yeah. Let's start with the fact of, like, we are our goal is to really maximize the revenue opportunity of our existing base of assets. And we think that there's room to go there, and that's what we'll be focusing on developing. Much of what I'm focusing on doing now over the next couple of months is meeting with our customers and to engage to understand where their unmet needs. And you're right, there are things that are services related. There could be things like, you know, shared power systems. There's a whole slew of potential opportunities that are out there. We need to do, I think, in a very disciplined way, is to make an inventory of what those opportunities are working with our customers and prioritizing them. And then making sure that there's good business to be done. Because I'm confident that there is business to be had, but I think it's, you know, specifics are probably a little bit early, at least in my tenure, to be able to share with you what those But know that this is a high priority for us. You know, we wanna really maximize the opportunity on our sites. And again, based on the earlier question that somebody had on my experiences, I've seen what the art of possible is. Of really providing great partnership with your customers. To be able to generate those incremental revenues. Brendan Lynch: Great. Thank you. That's helpful. Operator: The next question comes from Eric Klubchow with Wells Fargo. Please go ahead. Eric Klubchow: I appreciate it. And Chris, great to connect over the phone. So I just wanted to check again on the cost efficiency program. I know it's in your pro forma AFFO guide you put for less next into next year, but you could talk about opportunities beyond what you've guided to. As we look at your margins relative to your two tower peers in the public market, is there any reason why can't get SG&A efficiency or gross margins to kind of similar levels? I know there's some structure and structural differences some of the sale leasebacks you have. But just wanted to get your perspective on how much runway you have on the cost side the next few years. Sunit Patel: Yeah. So I think first as it pertains to the guidance we provided, you know, when that was provided at the announcement of the transaction, there were efficiencies factored in going from running three businesses to one business. I think we're just executing a little earlier on that. But if you look out over the next couple of years, two or three years, there are several things. There's the implementations of systems, process automation, all of that, I think, will yield benefit over the next several years. There's the opportunity for us to buy out ground leases as we talked about. I think that can help us. So, you know, we so we comparison to our peers. So I think we bought quite a few things over the next couple of years, but certainly the guidance that we provided for next year incorporated the sort of efficiencies you'd expect. Moving from running three businesses to one business. Eric Klubchow: Gotcha. And I guess I know it's a little early for 2026 guide, but, you know, just wondering, you know, if you see anything kind of takes you off the expectation that you've talked about where you can grow kinda four to 5% organically pretty consistently even if we assume the EchoStar contribution continues to wane. Just based on everything they've announced, do you think that's still a reasonable assumption based on all the activity you have in your pipeline? And I guess related to that, is there any kind of mix shifting you're seeing between new colos and amendments as you look out into Q4 and into next year? Thank you. Sunit Patel: Yeah. So on the last question, we're not seeing any big changes in the mix. Between those two items. And then again, we haven't really provided guidance for next year. So we'll come back and talk about it. There's obviously terrible things happening that we're excited about with our clients, but yeah, we'll when we get to reporting fourth quarter, we'll have a much better sense of where we are and cover that then. Operator: The next question comes from Brandon Nispel with KeyBanc Capital Markets. Please go ahead. Brandon Nispel: I think the efficiency one has been asked. Answered multiple times, so I'll refrain from that. I wanted to just maybe ask on the discretionary CapEx guide decrease this year. You know, why was that? And, really, why is the right number? I think Chris, you said a 150 to 250 million. So I guess, yeah, why decrease this year, and then why so much going forward? Thanks. Sunit Patel: Yeah. I think some of that is timing when you look at those capital expenditures there. There are several buckets. There's, you know, whether you're buying out ground leases, whether they are tower modifications, different things. But again, as we said, that's just more timing and it's pushed out to next year. Nothing fundamental happening per se. But it's just a push out to next year. Brandon Nispel: Timing? Sunit Patel: Got it. Thank you. Operator: This concludes our question and session as well as our conference. Thank you for attending today's presentation. You may now disconnect.
Operator: Good morning, and welcome to the Bridgewater Bancshares, Inc. 2025 Third Quarter Earnings Results Call. My name is Megan, and I will be your conference operator today. After Bridgewater's opening remarks, there will be a question and answer session. Please note that today's call is being recorded. At this time, I would like to introduce Justin Horstman, Vice President of Investor Relations, to begin the conference call. Please go ahead. Justin Horstman: Thank you, Megan, and good morning, everyone. Joining me on today's call are Jerry Baack, Chairman and Chief Executive Officer; Joseph M. Chybowski, President and Chief Financial Officer; Nicholas L. Place, Chief Banking Officer; Katie Morell, Chief Credit Officer; and Jeffrey D. Shellberg, Deputy Chief Credit Officer. In just a few moments, we will provide an overview of our 2025 third quarter financial results. We will be referencing a slide presentation that is available on the Investor Relations section of Bridgewater Bancshares, Inc.'s website investors.bridgewaterbankmn.com. Following our opening remarks, we will open the call for questions. During today's presentation, we may make projections or other forward-looking statements regarding future events or the future financial performance of the company. We caution that such statements are predictions and that actual results may differ materially. Please see the forward-looking statement disclosure in the slide presentation and our 2025 third quarter earnings release for more information about risks and uncertainties which may affect us. The information we will provide today is as of and for the quarter ended September 30, 2025, and we undertake no duty to update the information. We may also disclose non-GAAP financial measures during this call. We believe certain non-GAAP financial measures, in addition to the related GAAP measures, provide meaningful information to investors to help them understand the company's operating performance and trends, and to facilitate comparisons with the performance of our peers. We caution that these disclosures should not be viewed as a substitute for operating results determined in accordance with GAAP. Please see our slide presentation and 2025 third quarter earnings release for reconciliations of non-GAAP disclosures to the comparable GAAP measures. I would now like to turn the call over to Bridgewater's Chairman and CEO, Jerry Baack. Jerry Baack: Thank you, Justin, and thank you, everyone, for joining us this morning. In the third quarter, our team continued to demonstrate our ability to take market share by growing deposits and generating loans, which resulted in steady net interest income growth. We saw strong core deposit growth with balances up 11.5% annualized. This continues to be a testament to our talented banking teams and the relationship model we prioritize. The relatively steady pace of core deposit growth we have seen over the past year has positioned us to be more aggressive on the loan front as our loan-to-deposit ratio remains near the lower end of our target range. We generated strong loan growth of 6.6% annualized during the third quarter as we continue to see growth across multiple asset classes, including the affordable housing space. This helped drive a $1.6 million increase in net interest income during the quarter. We also saw one basis point of net interest margin expansion to 2.63%. Joe will talk more about the margin in a minute, but we are optimistic about our ability to see more meaningful expansion in the coming quarters. Asset quality continues to be a strength as non-performing assets remained at consistently low levels and net charge-offs were just 0.03% of loans. We continue to see some modest risk rating migration within the portfolio, which our Chief Credit Officer, Katie Morell, will touch on shortly, but we continue to feel good about the portfolio overall. Lastly, we've developed a reputation for consistently building tangible book value, which you can see on Slide four. As tangible book value per share increased 20% annualized in the third quarter, and is up 14% annualized year to date. This continues to be how we drive shareholder value. Before I turn it over to Joe, I want to share an update regarding the successful completion of two significant initiatives in the third quarter: the launch of our new retail and small business online banking platform in July, and the systems conversion of our acquisition of First Minnetonka City Bank in September. The new online banking platform gives our clients an updated, robust platform to enhance the way they manage their finances at Bridgewater. In addition, it provides our smaller entrepreneurial clients with a platform designed specifically for them. The team worked tirelessly to ensure smooth migrations initially for Bridgewater clients and then convert to our newly acquired clients a few months later. The success of both conversions reinforced my confidence that we have the right team to take advantage of future M&A opportunities as they become available. In August, we also announced some transitions to our strategic leadership team. Most notably, Mary Jane Crocker, our Chief Strategy Officer, and Jeffrey D. Shellberg, our Chief Credit Officer, will both be retiring in 2026. Mary Jane will join our Board of Directors next year while Jeff will continue to work alongside Katie in a Deputy Chief Credit role until his retirement, ensuring Bridgewater's credit culture remains consistent. Jeff and Mary Jane have been with me at Bridgewater since founding the bank in 2005. I'm so appreciative of their contributions and quite simply, Bridgewater would not be what it is without them. By executing the succession plan we have been working on for a few years, I am confident in the leadership of the bank going forward. We elevated Katie Morell to Chief Credit Officer, Jessica Stetskull to the new role of Chief Experience Officer, and Laura Aspisov to her role of Chief Administrative Officer. All three are talented individuals with strong work ethics bringing a diverse set of skills. I am thrilled that we have the internal talent to continue to drive our unconventional culture and continue our growth trajectory. Overall, I believe Bridgewater is well-positioned as we head into the fourth quarter and in 2026. Our outlook for loan and deposit growth remains very strong as we continue to see opportunities from M&A disruption in the Twin Cities. Our goal is to grow to become a $10 billion bank by 2030, and we believe we are on track to get there. Our balance sheet is well-positioned for meaningful net interest margin expansion in this rate-down environment. With the systems conversions behind us, we look for expense growth to return to more normalized levels in line with asset growth. And the Twin Cities market trends remain favorable, which will hopefully support continued strong asset quality. With that, I will turn it over to Joe. Joseph M. Chybowski: Thank you, Jerry. Slide five highlights another quarter of strong net interest income growth, driven by annualized average earning asset growth of 16%, and one basis point of net interest margin expansion to 2.63%. As we mentioned last quarter, we were not expecting much margin expansion in the third quarter as we anticipated the higher asset yield repricing to be mostly offset by a couple of specific headwinds, which is what we saw. The most notable headwind was the $80 million of subordinated debt at 7.625% we issued in June, which we used to redeem $50 million of outstanding subordinated debt at 5.25%. This created a six basis point net drag on margin in the third quarter. We also continued to see the ongoing benefit of the purchase accounting accretion diminish as it contributed just four basis points to margin during the quarter. In addition, we had higher than expected average cash balances in the third quarter due to our strong deposit growth. While this put added pressure on the margin, we view it as a good thing as it created more net interest income dollars and gives us more funding to deploy into future loan growth. Looking ahead, we are well-positioned for more meaningful net interest margin expansion in the fourth quarter and into 2026, especially given the full quarter impact of the September rate cut and the potential for additional cuts. In fact, we believe we have a path to get to a 3% margin by early 2027. Combining our margin expansion with the loan growth outlook that Nick will talk about in a few minutes, we are in a great position to continue driving net interest income growth from here. Turning to slide six, our loan yields continue to reprice higher even in the current environment. Loan yields increased five basis points during the third quarter, which was a slower pace than the second quarter as we saw less new originations and payoffs, resulting in less overall churn of the portfolio. With $68 million of fixed rate loans scheduled to mature over the next twelve months, at a weighted average yield of 5.69%, and another $140 million of adjustable rate loans repricing or maturing at 3.85%, we still have more loan repricing upside ahead of us as new originations in the third quarter were in the mid-6s. We would expect this repricing to be a tailwind to margin going forward, especially as the portfolio continues to turn over. Overall, total earning asset yields increased seven basis points to 5.63% as we also saw an increase in securities yields during the quarter. The cost of total deposits was 3.19%, continuing the stabilization trend we have seen throughout 2025. However, we should see deposit costs decline in the fourth quarter as we have $1.7 billion of funding tied to short-term rates, including $1.4 billion of immediately adjustable deposits, that we repriced lower immediately following the recent rate cut in mid-September. Turning to Slide seven, we continue to see strong revenue growth trends, driven by the momentum in net interest income. Fee income has also been a contributing component to revenue growth in recent quarters due to increased swap fee income and investment advisory fees. We did see fee income decline in the third quarter, however, due to the lack of swap fee income. We mentioned last quarter that swap fees would continue to be part of the revenue mix going forward, and we expect that to continue to be the case. However, this just highlights the lumpiness of these fees. Over the past five quarters, swap fees have averaged about $300,000 per quarter, but have ranged from $0 to nearly $1 million. I can say that we expect a rebound in swap fees in the fourth quarter as we have already booked some in October. On slide eight, as expected, the higher than usual increase in noninterest expenses we have seen year to date continued in the third quarter as we have had some redundant expenses this year leading up to the core conversion. We added 17 full-time equivalent employees during the quarter, which drove an increase in salary expense. Marketing expenses were also elevated during the quarter due to advertising directly related to our focus on bringing talent and clients from the Old National and Bremer disruption, which have been bearing fruit. We feel much of the higher expenses in the third quarter were really opportunistic in nature as we continue to position the bank for ongoing growth. Now that the systems conversion is behind us, we would expect expenses to return to growing more in line with asset growth over time. With that, I'll turn it over to Nick. Nicholas L. Place: Thanks, Joe. Slide nine highlights the strong core deposit momentum we have seen over the past year, which continued in the third quarter as core deposits grew 11.5% annualized and are now up 7.4% annualized year to date. Core deposits are the lifeblood of what we do here. This more consistent growth we have seen recently provides us the ability to grow the bank in a more profitable way. You can see it from a deposit mix shift standpoint. During the third quarter, non-interest-bearing deposits increased approximately $35 million while brokered deposits declined by about the same amount. Overall, we continue to feel good about the core deposit pipeline, especially given opportunities out there related to the local M&A disruption. Turning to Slide 10, as we mentioned last quarter, we expected loan growth to be in the mid to high single digits in the second half of the year, after outperforming these expectations in the first half. And this is what we saw in the third quarter as loan balances increased 6.6% annualized and are now up 12% annualized year to date. Generating loan growth has never been a problem for Bridgewater. With more consistent core deposit growth, loan pipelines that remain at three-year highs, opportunities from M&A disruption, and a 98% loan-to-deposit ratio that is in the lower half of our target range, we are in a good position to continue being aggressive on the loan front. We also had several deals we expected to close in the third quarter that were pushed out a quarter. As a result, we should have a bit of a head start here in the fourth quarter. Overall, we continue to expect near-term loan growth to be in the mid to high single-digit range. This will, of course, be dependent on the ongoing pace of core deposit growth, as well as loan payoffs, which can be difficult to predict. Turning to slide 11, you can see our loan origination activity, which was down a bit in the third quarter, primarily due to some deal closings sliding from the third quarter to the fourth quarter, as I mentioned earlier. We would expect this to pick back up in the fourth quarter as our pipeline remains at a three-year high. Payoffs have also trended a bit lower recently. While payoffs are a drag on loan growth, these recycled dollars will allow us to continue to fund new loan originations at attractive yields. Turning to Slide 12, the loan growth we saw in the third quarter was spread across several key asset classes, including construction, multifamily, non-owner-occupied CRE, and even one to four family. As mentioned last quarter, construction was an area where we would be seeing more balance sheet growth following an increase in new construction projects in 2024. These projects are now starting to fund, driving an increase in balances in the third quarter. We would expect this to continue being a catalyst for loan growth throughout 2026. While it isn't called out in its own section of the portfolio, we continue to have success in our national affordable housing vertical as this drove much of the multifamily growth during the quarter. With that, I'll turn it over to Katie. Katie Morell: Thanks, Nick. Slide 13 provides a closer look at our multifamily and office exposure. We continue to see positive multifamily trends in the Twin Cities. This includes lower vacancy rates, which recently dropped below 6%, strong absorption, and reduced use of concessions, all of which suggest a favorable outlook for higher levels of net operating income. We continue to expand our affordable business both locally and on a national basis. The portfolio now totals $611 million, with $467 million in multifamily, while the rest is in land, construction, or non-real estate. The total portfolio has grown at a 27% annualized pace year to date. We feel good about this portfolio from a credit standpoint, as we continue to work with experienced developers across the country and because of the shortage of affordable housing nationwide. Our non-owner-occupied CRE office exposure remains limited at just 5% of total loans. We continue to work through the one Central Business District office loan that is rated substandard and on non-accrual, but overall, we feel good about our office portfolio. Turning to Slide 14, our overall credit profile remains strong. Our reserve level of 1.34% is conservative compared to peers, and our nonperforming assets held steady at just 0.19% of total assets, well below peer levels. Net charge-offs also remained very low at 0.03% of average loans. The minimal amount of charge-offs we had during the quarter were related to the legacy First Minnetonka City Bank portfolio. Turning to slide 15, our classified loans remain at relatively low levels. We did have one multifamily loan that migrated from special mention to substandard during the quarter. This was the loan that we moved to special mention last quarter while it was under a purchase agreement. Unfortunately, that purchase agreement was canceled, and we decided to move the loan to substandard. We actively monitor new sales prospects for the property. The borrower remains engaged with the bank and is committed to moving the asset quickly. Importantly, we do not see any systemic credit issues as our overall portfolio is performing well and the multifamily sector continues to show favorable trends. I'll now turn it back over to Joe. Joseph M. Chybowski: Thanks, Katie. Slide 16 highlights our capital ratios, which remained relatively stable in the third quarter, with our CET1 ratio increasing slightly from 9.03% to 9.08%. We did not repurchase any shares during the quarter given our strong organic growth pipeline and where the stock was trading. As of quarter end, we still have $13.1 million remaining under our current share repurchase authorization. In the near term, we expect capital levels to hold relatively stable given retained earnings and our stronger growth outlook. Turning to slide 17, I'll recap our near-term expectations. Given our strong loan pipelines and opportunities we continue to see in the market, we believe we can continue to generate mid to high single-digit loan growth in the near term. Core deposit growth will continue to be a governor here, but we feel we are in a good spot to be offensive-minded, as our target loan-to-deposit ratio remains 95% to 105%. While net interest margin increased just one basis point in the third quarter, we feel bullish about more meaningful margin expansion over the next several quarters. We believe we have a path to get back to a 3% margin by early 2027, driven both by loan yields repricing higher and deposit costs declining, with additional Fed rate cuts. At the end of the day, our focus is on driving net interest income growth, which will come from both the margin expansion and our stronger loan growth outlook. Non-interest expense growth has been higher than what we have typically seen due to the later systems conversion, but now that that is behind us, we expect to return to growing expenses relatively in line with asset growth over time. We also feel we are well-reserved at current levels and would expect provision to remain dependent on the pace of loan growth and the overall asset quality of the portfolio. I'll now turn it back to Jerry. Jerry Baack: Thanks, Joe. Finishing on Slide 18, I want to provide a quick update on our 2025 strategic priorities. As we suggested earlier, we have clearly returned to a more normalized level of profitable growth in 2025, with 12% annualized loan growth and 7% annualized core deposit growth year to date. With a strong marketing campaign and talented team of bankers, we continue to take market share in the Twin Cities, both on the loan and deposit fronts. Our brand is stronger than ever. We continue to build strong relationships and we are taking advantage of the ongoing M&A disruption. Our technology and operations team successfully rolled out our new retail and small business online banking platform, while also completing the systems conversion of our First Minnetonka City Bank acquisition. As we look forward, we do plan to close one of the two branches we acquired from First Minnetonka City Bank. This will provide some additional efficiencies as we have branch coverage in the area. While this brings us to eight branches, we will be bumping back up to nine when we open a De Novo branch, expanding our footprint into the East Metro of the Twin Cities in early 2026. With that, we'll open it up for questions. Operator: The first question comes from the line of Jeffrey Allen Rulis with D.A. Davidson. Jeffrey Allen Rulis: Jeff, are you there? We can't hear you. Jeffrey Allen Rulis: Hi. Can you hear me now? Joseph M. Chybowski: There you go. Hello? Jeffrey Allen Rulis: Yep. We can hear you. Okay. Sorry about that. On to the margin path that you outlined towards 3%. Wanted to see if appreciate the visibility there, but I guess over the course of a year plus, you expect that improvement to be fairly measured? Or is ramp later? Any sense, I know there's a lot of inputs there with rates and such, but any idea how that kind of that path towards there transitions? Joseph M. Chybowski: Hey, Jeff. This is Joe. Yeah, I think generally it's fairly steady. I mean, it's two basis to three basis points a month. I will say we are assuming those cuts happen just two of them happened in October and in December. So the deposit piece might be more front-loaded, but the asset side as we lay out our portfolio, roughly $750 million of fixed and adjustable rolling off kind of in the mid-5s. So I think that'll happen pretty steady throughout 2026. But, yeah, we think it's very much achievable with just two cuts assumed early on. Jeffrey Allen Rulis: Got it. Thanks. And then maybe rate related and turning towards the credit side and maybe for Katie or Jeff, just on kind of a clumsy question, but I would assume rate cuts would offer some relief to your borrowers. Have you run any analysis of the percent of borrowers sort of a tangible benefit of 50 basis points of cuts or more? I don't know if there's a or come in the form of upgrades with cash flow relief. Anything you could quantify on the expected rate cuts and what that might mean for the health of the loan portfolio? Katie Morell: You know, I don't think we have anything quantified to share, but, I mean, we are proactively getting ahead of any loans with repricing risk. We feel like that's getting materially better since the last eighteen to twenty-four months. So certainly any further reduction in rates will only benefit those loans that are repricing and currently at a fixed rate over the next year. And a lot of those also with the repricing risk we potentially had action plans already in place with borrowers due to covenant failures or the pending reprice. So we feel really good about having gotten ahead of any from a credit risk standpoint that have repricing risk. Jeffrey Allen Rulis: Appreciate it. Yes, probably a little early, but that's helpful. And maybe just one last one, just sort of a housekeeping. Trying to map the merger costs, was that truly in other? I know you kind of broke out in Slide eight that the cost. I was just trying to mesh that with the press release. Anything in professional and consulting? Or was it truly absent out of comp, out of professional consulting? Truly other? Joseph M. Chybowski: Yes. The slide in that we lay out noninterest expense pulls it out and just highlights it. So those costs that were specifically related to the merger itself. So I think when we talk about this quarter, kind of the increase in expenses was more salaries related ordinary course marketing given our offensive-minded efforts around ONB and Bremer. Advertising specifically and then just general consulting fees. I don't know if that's answering your question. Jeffrey Allen Rulis: Yes. I guess to go forward, messaging is that obviously we think the merger costs kind of go away and you're talking about the core costs even coming down or normalizing with the pace of growth. Joseph M. Chybowski: That's essentially the message. Yes, definitely. I think this was kind of the last quarter where we had that redundancy in expenses. But I think as we look forward into 4Q and then into 2026, we view expenses growing similar to how they did pre-deal where it's assets and expenses growing in line. You can see that in the core kind of NIE to average assets. It's been steady at one and forty-three the last couple of quarters. We envision we grow at a mid to high single-digit pace next year that expenses would grow in line. Jeffrey Allen Rulis: Great. Thank you. Operator: The next question comes from the line of Brendan Nosal with Hovde Group. Please go ahead. Brendan Nosal: Hey, good morning, folks. Thanks for taking the question. Hope you're doing well. Just to circle back to kind of the margin outlook. We really appreciate you guys putting a stake in the ground a little further out than you typically do. Just kind of on the moving pieces of that 3% margin, get the rate cut commentary out of the Fed that's underpinning that. Can you just speak to kind of assumptions for what the belly of the yield curve does and how that impacts back book lowering pricing? And then if we look at that roughly 40 basis points of margin improvement that you're kind of calling for, can you just bifurcate that between relief on the funding side and yield pickup on the loan side? Joseph M. Chybowski: Yes, Brendan, this is Joe. You know, I think we envision kind of the belly of the curve really staying where it is. Maybe some slight decline. But I think there I think slope as we've always said is our friend certainly. So if we kind of have a terminal fed funds rate in the mid-3s and the five ten-year part of the curve where it's at. I mean, that's what our assumption is. Now granted you get more cuts or you get some flattening or steepening, I think obviously those have impacts too. But nonetheless, I think slope is certainly our friend. On the other side in terms of bifurcating loans and deposits, I just think the comment is similar to earlier where there's continued repricing throughout 2026 on the asset side. Both fixed and adjustable rate loans. Also think just given the pickup in origination activity, the churn of the portfolio certainly buoys or increases earning asset yields specifically in the loan book. And then the deposit portfolio, I think is most sensitive that $1 billion that we highlight will obviously benefit with those first two cuts that we're assuming here in October and December. And then the rest of the portfolio we continue to rationalize lower in a different rate environment. So I think it's both sides coordinated effort, I think very achievable as we think about it. Throughout 'twenty six. Like I said, it's two to three basis points a month. Considering the dynamics of composition of the balance sheet, for putting on loans low to mid-6s. And kind of incremental additional new funding in the low threes. We think that spread in itself is very much accretive to the existing margin. So all of that coupled together is how we can feel confident about that path to early twenty twenty seven. Brendan Nosal: Yes. Okay. Okay. Thanks for the color there. That makes sense. Maybe just kind of switching gears to the affordable housing piece. Just kind of curious what the comfort level is and kind of growing the national piece of that book. I think the national piece is only like 4% of loans today maybe that are kind of out of market at this point. Just kind of curious how high you're comfortable taking this over time? Nicholas L. Place: Brendan, this is Nick. Yeah. This has been maybe somewhat recent that we've been sharing our activity level. Within this space, but it's certainly not a new business line for us. It's something that we've been involved with going back to probably 2007. So we have a deep history in working knowledge within the space. So I think that is sort of a foundational piece that gives us a lot of comfort in understanding not only the transactions that we get involved with, but vetting through the borrowers that we're meeting with that are new to us as we've expanded our reach beyond, you know, the Minneapolis St. Paul market. So the quality of borrower that we've been focusing on, is really top tier and we feel really good about the pieces of that we're getting involved with on those transactions. Relatively short term in nature, refinancing stabilized properties as they're coming out of their compliance period. Or providing sort of ancillary pieces of debt that are short term that turn pretty quick. So overall, we feel really good about how we're positioned in that space. We feel like it's an underserved market that we're well-positioned to be able to provide our banking services to and grow on both sides of the balance sheet. Certainly, the loan side is maybe what we shared within the prepared remarks, but that has been a really good source of growing core deposits as well. As those client relationships are eager for a relationship bank that understands their business and are open to moving their deposit balances to us even if they are based outside of the Twin Cities. So it certainly is a relationship game for us. And we're not looking for transactional business there. So for a lot of those reasons, we feel good about where we're positioned in that space and how we see it providing a growth path for us in the future. Brendan Nosal: Okay. Well, thank you for your thoughts, Nick, I appreciate you guys taking the questions. Operator: Next question comes from the line of Nathan Race with Piper Sandler. Nathan Race: Good morning, everyone. I appreciate taking the questions. Just going back to the loan growth outlook, I appreciate your term expectations haven't really changed, but it seems like you're guys are being pretty offensive in terms of some of the hires that you completed in the quarter and you're maybe there's more to come on that point. So just curious if we can expect any step change function in terms of kind of the growth trajectory into next year. Is it possible we can get back to kind of a stronger pace of growth that we saw both in terms of loans and deposits prior to the rate hiking cycle starting in 2022? Nicholas L. Place: Yes. Hey, Nate. This is Nick. I mean, feel really good about where we're at. From a loan growth outlook perspective. I think one thing that we're mindful of is and I think we made a lot of progress in the last eighteen months about aligning our loan growth to be more consistent with our deposit growth, specifically on the core deposit front. So I think that that's a strategy that trying to employ as we think about our future loan growth. That does provide us with a more profitable path on a go-forward basis. So I think it's certainly that engine is there and the potential is there to grow faster than that. We're just trying to be both selective on sort of the client relationship front and the profitability front as we think about our loan growth to ensure that we're not putting ourselves in a loan or deposit position that forces us to really pull back hard on growth in a quarter or two just as we if we outperformed our expectations. So we feel good about a lot of the verticals that we're in, the disruption that we talked about, within the Twin Cities, is real and you know, we've been able to have great conversations with both clients that are impacted and production staff. And I think those conversations will continue here over the next year as clients are transitioned over and as personnel find their new normal at the new organization. And, we're expecting to be beneficiaries on both of those fronts. So that certainly something that could impact the amount of our loan growth as we bring on production staff hopefully over the next year or so. Nathan Race: Got it. That's really helpful. And Nick, maybe just touch on where you expect to see these hires impact? I mean, are these more C and I related? Or color in terms of potential growth impacts that we can see across the balance sheet? Nicholas L. Place: Yes. I mean, that's certainly something that we've had as a strategic priority to improve our expertise and depth of knowledge in that space. So yeah, there's conversations within that front. But we've always been opportunistic in our hiring and that's really across the bank. Whether that's production staff or operations folks compliance and BSA, I mean, there's a lot of really talented banking personnel here in the Twin Cities and we're open to having conversations with all of them. Specific to the production front though, I think, you know, we've tried to differentiate ourselves by thinking about sort of niche business lines and to the extent that we can expand into a new vertical through the acquisition of a person or a team, we're definitely open to that as well. And we're having conversations sort of across all of those fronts now and hopeful that some of those will pay off here in 2026. Nathan Race: Okay, great. Then a couple of questions for Joe. There's some differences in the end of period average cash balances. I've mentioned the sub-debt impact has some relevancy there. Curious if you can touch on kind of where you'd like to run in terms of cash levels going forward? And then also, it looks like securities yields ticked up nicely in the quarter. Just any thoughts on the securities yield trajectory from here in light of the rate outlook? Joseph M. Chybowski: Yes. I think on the cash side, I think we were generally just really pleased with the core deposit growth that translated during the quarter. I think a lot of that we'd message with some seasonal outflows in the second quarter would come back in the third. So we did certainly have higher average cash balances throughout the quarter. I think we're always ultimately loan growth being top priority and given pipelines where they're at, I think we when we think about cash and securities, we always want to have liquidity such to fund that growth. From the security standpoint yields going forward, there were opportunities I think given where rates were at kind of more mid-quarter where we saw some opportunities to put on some longer duration paper. So part of that contributed to the higher boost in securities yields during the quarter. And then I think where we're at today, we're definitely active just kind of redeploying as there's pay downs, payoffs, maturities. Some of that's also just recycling FMCB's portfolio which we had always kind of planned once we closed the deal last year. So I think we're opportunistic in the security space as well, but I think ultimately we want to support the loan growth outlook. And think where the pipeline is at, I think that's certainly bullish on continued growth there. Into 2026. Nathan Race: Okay, great. And then maybe a couple for Katie. On the loan that we've talked about a couple quarters now, I believe you guys have a specific allocation there. Just curious if you're still expecting some charge-offs there at some point in the future and if there's any specific reserves on the credit that moved to substandard in 3Q? Katie Morell: So yeah, starting with the office loan, our specific reserve hasn't changed on that one. It's just under $3 million. And we continue to see leasing prospects and some interest. There's been more return to the office in Downtown St. Paul. So we're not planning a charge-off at this time on that loan. And then in regards to the multifamily loan that we moved this quarter, that one does not have a specific reserve. And like we shared in the prepared remarks, the borrower is sort of moving quickly to reengage a new buyer and hopefully sell that asset quickly. Nathan Race: Okay. I appreciate all the color. Thanks, everyone. Operator: This concludes our question and answer session. I will now turn the call back over to Jerry Baack for any closing remarks. Jerry Baack: I want to thank everybody for joining the call today. Really excited about our ability to take market share in the Twin Cities market and believe the fourth quarter in 2026 will certainly be a good year for us. Do want to call out and thank some of the team members that we have here, our deposit operations, technology, and operations team have really busted their butts these last few months to get the conversions done successfully. And also just want to do another shout-out for Mary Jane Crocker and Jeffrey D. Shellberg and how incredible they've been as partners for me. Considering twenty years ago we started this bank in our basement. It's great to still both be on the board supporting us going forward, but a great shout-out to them. Thanks for everybody taking the call today. Thanks. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Kimberly Esterkin: Greetings, and welcome to the ASGN Incorporated Third Quarter 2025 Earnings Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance, please press 0 on your telephone keypad. It is now my pleasure to introduce your host, Kimberly Esterkin of Investor Relations. Thank you. You may begin. Good afternoon. Thank you for joining us today for ASGN's third quarter 2025 conference call. With me are Theodore S. Hanson, Chief Executive Officer, Sadasivam Iyer, President, and Marie L. Perry, Chief Financial Officer. Before we get started, I would like to remind everyone that our commentary contains forward-looking statements. Although we believe these statements are reasonable, they are subject to risks and uncertainties. As such, our actual results could differ materially from those statements. Certain of these risks and uncertainties are described in today's press release and in our SEC filings. We do not assume any obligation to update statements made on this call. For your convenience, our prepared remarks and supplemental materials can be found in the Investor Relations section of our website at investors.micron.com. Please also note that on this call, we will be referencing certain non-GAAP measures such as adjusted EBITDA, adjusted net income, and free cash flow. These non-GAAP measures are intended to supplement the comparable GAAP measures. Reconciliations between GAAP and non-GAAP measures are included in today's press release. I will now turn the call over to Theodore S. Hanson, Chief Executive Officer. Theodore S. Hanson: Thank you, Kim, and thank you for joining ASGN's third quarter 2025 earnings call. ASGN delivered solid performance in the third quarter, with revenues reaching $1.01 billion and an adjusted EBITDA margin of 11.1%, both at the high end of our guidance ranges. Our IT consulting business continues to be a key growth driver, representing approximately 63% of total revenues in the third quarter, up from 58% in the same period last year. Commercial consulting bookings totaled $324 million, translating to a book-to-bill of 1.2 times on a trailing twelve-month basis. While bookings remain weighted towards renewals, we are seeing the volume of new lands grow as we take on more complex multi-capability engagements and assessment projects. In our federal segment, new contract awards totaled $461 million for the third quarter, or a book-to-bill of one times on a trailing twelve-month basis, and 1.5 times for the quarter. As anticipated, bookings increased in the third quarter, coinciding with the end of the government fiscal year. Federal contract backlog was approximately $3.1 billion at quarter-end, or a coverage ratio of 2.6 times the segment trailing twelve-month revenues. Although IT spending levels remain steady quarter to quarter, our commercial and government clients continue to acknowledge the importance of executing their key initiatives despite macroeconomic conditions. Strong quarterly bookings reflect the demand across our client base, and ongoing investment in AI highlights a significant commitment to digital advancement. Reflecting upon this ongoing trend, ISG highlighted on their third quarter 2025 index call that AI spending is not merely a passing fad but a fundamental replatforming of enterprise technology. We are witnessing this firsthand. We deploy a growing number of AI use cases on behalf of our client base and are witnessing an increasing volume of data and cloud initiatives flowing through our pipeline as clients prepare for their next phases of digital and AI growth. That said, even with this continued drive towards AI, the path to enterprise-wide AI adoption is not without its challenges. Organizational readiness and operational governance remain hurdles as companies work to streamline and integrate these new technologies into their stacks. In addition, many commercial enterprises and government agencies lack the skills and engineering talent needed to successfully deploy AI. This reality is driving greater reliance on IT service partners like ASGN that can offer the breadth and depth of capabilities needed. On the topic of specialized skill sets, we are actively tracking the potential changes to the H-1B visa application process and believe that any changes to the process will be an incremental positive to ASGN. To further illustrate the demand for our expertise, I would like to turn the call over to our president, Sadasivam Iyer. Sadasivam Iyer: Thanks, Ted. It's great to speak with everyone this afternoon. Let me begin with an overview of our commercial segment industries. Our consumer and industrial accounts saw the greatest improvement in the third quarter, posting mid-teens growth year over year. This strong performance was driven by gains across our material utilities, industrial, consumer discretionary, and consumer staples clients. Healthcare was our second-best performing industry, up high single digits as compared to the year ago, to double-digit growth amongst our healthcare provider, pharmaceutical, and biotech clients. Financial services, TMT, and business services all experienced year-over-year declines. Looking sequentially, we saw growth in three of our five commercial industries. The healthcare industry saw the largest sequential growth and was led by our provider clients. Consumer and industrial accounts also posted modest sequential gains driven by our work with utility, materials, and consumer staples customers. In TMT, growth was supported by our e-commerce group, as well as incremental gains in telecom hardware and equipment accounts. Beyond these three industries, we continue to watch financial services closely as these customers are some of the largest spenders on IT. While our financial services revenues declined from the second quarter, new wins for the industry outpaced renewals in Q3, with much of this work in our federal segment slated to begin in Q4. We track our revenues across four customer types: defense and intelligence, national security, civilian, and other clients. In the third quarter, defense, intelligence, and national security accounts comprised approximately 70% of our total government revenues. Notably, national security revenues improved 12% year over year, driven by our work with the Department of Homeland Security. Looking ahead, we are encouraged by the future of our federal segment, particularly due to the increased defense budget under the one big beautiful bill, as well as the strong quarterly bookings that Ted highlighted earlier. Also of note, given the mission-critical nature of the work we perform, the government shutdown to date has had an immaterial impact on our operations. That said, we continue to stay very close to our clients and monitor what is a very dynamic situation. Let's now turn to our solutions capabilities. For the quarter, we saw an increase in projects focused on data and AI, application development and engineering, customer experience, and cybersecurity. I'd like to share a few examples of each. Beginning with our data and AI work. For a Fortune 500 managed care organization, we partnered to develop a centralized data supply chain platform leveraging Databricks, AWS, Snowflake, and MongoDB. Through this engagement, not only did we modernize our client's core data capabilities, but we also laid the groundwork for advanced AI and machine learning workflows that will enable our client to offer smarter, faster, and more efficient healthcare delivery. Our deep expertise in platforms like Databricks and Snowflake, along with our ability to tailor these solutions to each client's unique environment, truly sets ASGN apart in the marketplace. Additionally, our suite of AI-embedded developer productivity tools created for specific industry use cases provides a competitive edge. For example, when a global privately held hospitality company sought to modernize its loyalty application, our AI accelerators shortened the discovery phase by 25% and captured 40% more of the project's detailed requirements than traditional manual methods. This approach reduced project risk and laid a solid foundation for faster modernization of the new loyalty application. We're also building accelerators and custom AI solutions for our government clients. In the third quarter, we secured an extension with DHS to continue supporting the agency's enterprise data warehouse. Our team provides a range of data engineering, data science, and data analytics capabilities to DHS and is leveraging both commercial and our own custom-built AI solutions to advance DHS's mission-critical initiatives. Our data and AI work is closely aligned with the work we are conducting in our application development and engineering space. As an example, under the FBI's information technology supplies and support services contract, a recompete won during the third quarter, we're delivering enterprise-scale software development and application modernization services to help the FBI accelerate DNA analytics delivery across federal, state, and international partners. On the commercial side, with a leading US crop insurance provider, we secured our largest application engineering services contract to date. Our selection was based on our deep industry experience, proven accelerators for legacy modernization, and cost optimization through a blend of onshore, nearshore, and offshore delivery. This three-year contract will modernize policy administration, claims, and customer engagement platforms, enabling real-time data access and insights that enhance underwriting accuracy, claims efficiency, and customer experience. Using AI to reinvent customer experience represents a growing area within our creative digital solutions portfolio. For a Fortune 250 pharmaceutical company, we're leading a full-scale transformation of their in-house agency, reimagining how customer experience is delivered globally. Using our in-house agency excellence framework, we embedded Adobe-powered personalized and AI-driven operations into their workflows, combining translation, reasoning, and execution with human strategy and creativity. This project is one of our many customer experience projects that demonstrate in the AI era, human creativity isn't replaced; it's amplified with AI. Just as we help our clients elevate their own customer experiences, we strive to provide the highest level of service to our clients. This approach often helps us outpace the competition during the proposal process. For example, our cloud and infrastructure team recently replaced a long-standing incumbent as the new level three network support for a Fortune 500 athletic footwear and apparel company. Our deep understanding of this client's business needs was a key differentiator during the selection process. Now, as this retailer's highest level network support, our team of network engineers is responsible for everything from network triage, strategic decisions, and network optimization across the company's distribution centers, stores, and headquarters. Similarly, broader network protection or cyber remains in demand across our client base, particularly among our federal government customers. In the third quarter, we won a recompete contract with the US House of Representatives to support their 24 by 7 security operations team. As the House's first line of defense, our teams provide real-time network security monitoring, endpoint detection and analysis, and cyber incident response and reporting for more than 20,000 geographically dispersed endpoints. These are just a few of the many projects our commercial and government teams secured over the past three months. The breadth of this work underscores our deep industry expertise and engineering capabilities. It also highlights the growing strength of our ecosystem and alliance partnerships, all of which position our business for continued growth. With that, I'll turn the call over to our CFO, Marie Perry, to discuss ASGN's third-quarter segment performance and fourth-quarter guidance. Marie L. Perry: Thanks, Shiv. For the third quarter, revenues totaled $1.01 billion, a decrease of 1.9% year over year but at the top end of our guidance expectations. Revenues from our commercial segment were $711.3 million, a decrease of 1% compared to the prior year. Assignment revenues totaled $376.4 million, a decrease of 13.2% year over year, reflecting continued softness in portions of our commercial segment that are more sensitive to changes in macroeconomic cycles. Revenue from our commercial consulting, the largest of our high-margin revenue streams, totaled $334.9 million, an increase of 17.5% year over year. Excluding Toplot, which we acquired in March 2025, consulting revenues improved mid-single digits year over year. Revenues from our federal government segment were $300.1 million, a decrease of 3.9% year over year. Turning to margins, gross margin for 2025 was 29.4%, an increase of 30 basis points from the third quarter of last year. Gross margins for our commercial segment were 33.2%, up 40 basis points year over year, reflecting a higher mix of consulting revenues. Gross margin from our federal government segment was 20.3%, a decline of 40 basis points year over year due to the loss of higher-margin work related to Doge and the completion of certain projects. SG&A for the quarter was $212.2 million, compared to $207.5 million in 2024. SG&A expenses included $4.2 million in acquisition, integration, and strategic planning expenses. These items were not included in our previously announced guidance estimates. For the third quarter, net income was $38.1 million. Adjusted EBITDA was $112.6 million, and adjusted EBITDA margin was 11.1%. Also, at quarter-end, cash and cash equivalents were $126.5 million, and we had approximately $460 million available on our $500 million senior secured revolver. Our net leverage ratio was 2.4 times at the end of the quarter. Our strong free cash flow provides a strategic advantage that enables ASGN to fund growth initiatives, invest in strategic M&A, and opportunistically repurchase shares, all while maintaining a healthy balance sheet. Free cash flow was $72 million for the third quarter, a conversion rate of approximately 64% of adjusted EBITDA, well within our target of 60 to 65% conversion. We deployed roughly $46 million of free cash flow to repurchase 0.9 million shares at an average share price of $51.46. At quarter-end, we had approximately $423 million remaining under our $750 million share repurchase authorization. Turning to guidance, our financial estimates for 2025 are set forth in our earnings release and supplemental materials. These estimates are based on current market conditions and assume no further deterioration in the markets we serve. In addition, estimates do not include any acquisition, integration, and strategic planning expenses. Guidance also assumes sixty-one billable days in the fourth quarter, which is the same number of billable days as the year-ago period and two and a half days fewer than the third quarter. We typically see a larger sequential decline in billable days between the third and the fourth quarter due to holidays. The fourth quarter had the lowest number of quarterly billable days. In terms of our business segment, on a same billable day basis, our estimates assume a slight sequential improvement in our commercial segment from the third to the fourth quarter. For 2025, we are estimating revenues of $960 million to $980 million, net income of $32.1 million to $35.7 million, adjusted EBITDA of $102 million to $107 million, and adjusted EBITDA margin of 10.6% to 10.9%. Thank you. I'll now turn the call back over to Ted. Theodore S. Hanson: Thanks, Marie. As we progress through 2025, I'm genuinely excited about the path ahead and eager to share more about our vision for sustainable growth and long-term value creation. On November 20, we'll be hosting an investor day in New York City, where we'll offer an in-depth look at our strategy and unveil new three-year financial targets. I encourage you to listen to the webcast and hear directly from our expanded leadership team about the next phase of our growth journey. A link to register for the webcast is available on our Investor Relations website. This concludes our prepared remarks. I want to express my deep gratitude to every one of our employees for your steadfast dedication throughout this past quarter. Your hard work has been instrumental in strengthening our client partnerships and driving our continued move into high-value technology and engineering solutions. With that, we'll open the call to questions. Operator: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press 2 to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. One moment, please, while we poll for questions. Jeffrey Marc Silber: Our first question comes from the line of Jeffrey Marc Silber with BMO Capital Markets. Please proceed with your question. Theodore S. Hanson: Hey. Thank you so much. This is Ryan on for Jeff. Just wanted to dig a little bit more into the H-1B situation. Particularly, what gives you the confidence that you're a beneficiary there, and how do you see the situation evolving in the coming months based on just your conversations with clientele? Thank you. Theodore S. Hanson: Brian, thank you for the question. I think, you know, from our standpoint, almost all of our delivery is onshore, nearshore. We have very little presence, you know, most of the H-1Bs are coming from India. At the end of the day, anything that tightens the program, whether it's, you know, enforcing all the regulations the right way, maybe making the program a little smaller and tougher to get in, increasing the fee, which ultimately would, you know, tighten the program. All those put a focus back on onshore and nearshore technical, you know, skill capabilities, and that's really where we sit. We're at the intersection there. And I think it just makes our services that much more important to the client. Without diminishing anything, if you will, on the other side. And the other side of this, you know, at the end of the day is, you know, better enforcement of those regulations. It's gonna create also pricing improvements because a lot of the things that are going on there in terms of the way the program is used to skirt, you know, certain situations where the client would wanna pay a prevailing bill rate. Again, it just highlights our services and our core capabilities. Jeffrey Marc Silber: Great. Thank you very much. And just one more follow-up. On the federal government. Heard the comments that there's a little bit of caution factored into the fourth quarter guidance. Was wondering if any of that is just any lingering DOGE stuff or it's mostly just on the government shutdown and the longevity of that. Thank you. Theodore S. Hanson: Yep. Nothing on the DOGE side. I think it's just around the shutdown. You know, the government shutdown does two things. One is, you know, certain nonessential activities get furloughed, and, you know, as we mentioned in the script, as Marie said, it's really immaterial to us right now at this point. But the other thing it does is slow down the cycle of new awards and the ability to ramp up on awards you've either just won or may win. And so I think all those things put together, you know, while we think it's, you know, not a mid or long-term blip, but could cause some caution here in the near term. So Jeffrey Marc Silber: Thank you. Thank you. Operator: Our next question comes from the line of Tobey O'Brien Sommer with Truist Securities. Please proceed with your question. Tobey O'Brien Sommer: Thank you. Let me start off by following up on that government shutdown question. Do you assume that the shutdown extends through the fourth quarter and, you know, maybe more specifically, how long do you assume it lasts? Theodore S. Hanson: Well, we didn't really make an assumption on the length of it, Toby. But it did keep us from stretching in the forecast, if you will. So I don't think we, because it's an immaterial impact at this point, we didn't cut numbers, if you will, but we did say this is not a quarter to stretch. So I think that's probably a better context for it. Tobey O'Brien Sommer: Sure. But immaterial at this point, it's the "at this point" part that we're interested in. Okay. Yeah. Right. Within commercial consulting, which software implementation softwares are you implementing that are experiencing the best demand right now? And where, when you look at your portfolio of services and how you map out against your customers and, frankly, the available software market in terms of implementations, where might you want to add capability to be able to participate in those other areas? Sadasivam Iyer: Oh, it's a great question. So the areas that, as we called out in the, we're seeing continued demand are in, you know, data and AI. Clearly in things like Snowflake and Databricks, where we're actually actively partnering. We continue to see active demand on some of our enterprise platforms. So you look at Workday with Toplot or even with GlideFast and ServiceNow, we're seeing an uptick in demand in both of those areas. We see continued demand on the cloud side, both from a migration perspective as well as from a custom app development perspective. We continue to ramp up on our Salesforce capabilities because we do see Salesforce as an active player in both the agentic world and also in the experience world. So, Tobey, really, that's where we're seeing continued demand. So I think the partnerships that we've lined up ourselves against are very much in line with where we see our clients continuing to invest in. Tobey O'Brien Sommer: And then, just to anticipate your investor day but not steal all the thunder, would a feature of the next several years, do you expect commercial IT consulting to continue to be a larger percentage of total company sales and therefore a driver of margin expansion over time? Theodore S. Hanson: Absolutely. Even if you look at this quarter, I mean, despite, you know, maybe a little contribution, you know, more in federal towards the full quarter than we expected, slightly. We, and still the same state of affairs with high-margin services like perm placement and creative, you saw our sequential margin here increase about 70 basis points, and that's really due to the strength in commercial consulting. And so I think that's been the driver of margin, will continue to be the driver of margin. It's going to be where we're allocating capital. Obviously, we'll talk more about that in the Investor Day. So it's definitely an underlying pillar here of the strategic plan. Tobey O'Brien Sommer: Thank you. Sadasivam Iyer: Thank you. Tobey O'Brien Sommer: Thank you. Operator: Our next question comes from the line of Jason Daniel Haas with Wells Fargo. Please proceed with your question. Jason Daniel Haas: Hey. Good afternoon. Thanks for taking my questions. There's been some headlines recently about companies not seeing a great ROI on many of the AI projects that they've undertaken. So I was curious if you could weigh in on that, if that's something you're hearing from your customers. And, you know, where can you help on, if that's the case, where can you help, you know, where's the roadblock? What can you guys do to help companies, you know, see a better ROI on these projects? Thank you. Sadasivam Iyer: Look. I think there are multiple reasons why the ROI isn't materializing. Right? So I think, let me start by saying that we are hearing that, and clients are doing a lot of proofs of concepts and, you know, pilots around this. You know, almost 70% of what they're trying requires a deeper level of integration into their architectures. That's sort of one. Second, many of them have challenges with the data and the way their data is lining up. Right? The third is it requires integration of these, whatever they're doing, with the workflows that they have, and the logic of these workflows typically sits within enterprise platforms. So our view on this is the fastest path to ROI at the moment, where with agentic AI and agents, is really around harnessing the core capability of those platforms around which those workflows are built. Right? Because, you know, despite all the marketing hype that you hear about, you know, end-to-end process automation and multi-platform AI orchestration, we're simply not seeing the returns on those things. So, really, the challenges are all around, and, of course, that's a big part of it also is technical talent. So the challenge is for technical talent, the complexity of integrating these things into their architectures, data, and then the fourth thing is just the ability to make these work with complex workflows. The logic for which is embedded within the enterprise platform. So that's the fastest path to ROI in our opinion. Jason Daniel Haas: Hey. Thank you. That's great color. Sounds like a great opportunity. And then as a follow-up, I wanted to switch over to the federal government segment. Sounds like there's some moving pieces there with the shutdown, maybe, you know, potentially turning into a headwind at some point. But I'm curious about the one big beautiful bill. And, you know, to what extent has that started to help the bookings that you're seeing, and over what time frame could you see more benefits, or at what point do those turn into revenue? If you could just give some more color on the timing of how that could help that segment, that'd be really helpful. Thank you. Theodore S. Hanson: Yeah. Look. I think that in the areas where we play, we're about 75% of our business in defense and intel and national security. Those are the areas that are gonna get the biggest increase from what was passed in the big beautiful bill. Gonna have to get past this shutdown and, you know, subsequent continuing resolution to a final budget, which we hope will happen sooner than later. But once we get to that point, let me, let's just say it's sometime in the early first quarter, end of this year, then those agencies will be funded at these higher levels. So I think really in the first half of next year, you know, subsequent to that, you're gonna see those things begin to get competed, awarded, and out on the street and really contribute to revenues probably the midpoint or second half of next year. Jason Daniel Haas: That's great. Very helpful. Thank you. Sadasivam Iyer: Thank you. Operator: Our next question comes from the line of Surinder Singh Thind with Jefferies. Please proceed with your question. Surinder Singh Thind: Thank you. A question about the staffing business versus the consulting business. Obviously, we're seeing some good growth on the consulting side on an organic basis. But it seems like there's still some challenges on the staffing side. How would you characterize that in the context of the current environment? Is this a situation where maybe complexity is requiring more outside expertise and maybe less willingness to augment internal staff, or how should we think about that? And is that something that with, you know, increased complexity in the tech stack, that trend just kinda continues from here? Sadasivam Iyer: Look, Surinder, there are a few things. Right? Let me start by saying that, you know, the staffing business for us as we look at our numbers has been stable. Year on year, obviously, we're declining. But from a sequential basis, you know, our leading indicators are relatively stable. But I think there are multiple dynamics at play here. Right? The first is clients, our customers, are looking to partners to drive to outcomes. And really start to think about how do we drive outcomes, how do we drive deliverables. So the trend is the con that we see a continued shift in buyer behaviors where partners are looked at more to as partners who drive value and outcomes versus simply augmentation. And, you know, from our vantage point, that's a trend that is a benefit for us on the consulting side, and we're obviously, as you can see, benefiting from it. But it creates headwinds on the staffing side. And, you know, Ted can opine on this, but I don't see that buying behavior shifting tremendously. Theodore S. Hanson: I think especially, Surinder, in today's macroeconomic environment, if the client's really gonna invest in something, they want a short time to value. Meaning they want an outcome. They want it in as soon as they possibly can. They're really focused on total cost of ownership. And, you know, getting to a certain outcome if they're gonna green light something. So I think we see just a higher level of rigor around that from clients than we've ever seen before. And part of that is because of the increasing cost within their IT environments. And part of that is because they're wary around the macroeconomic backdrop here. And concern about where their business may go in the future. Surinder Singh Thind: That's helpful. On the general side, can you maybe talk about the cost reimbursable contracts? The percentage there continues to trend higher. Back in your peak levels. Can you talk about what's driving the change? And its impact on margins? Because it's interesting when I look at the federal margins, the gross margins, those were up pretty materially quarter over quarter. Theodore S. Hanson: Yes. So we're really not seeing an impact on margins from that. I think that's just the natural ebb and flow of certain contracts ending and certain contracts being won during the quarter and subsequent quarters. I think overall, the government is gonna be more focused on fixed-price outcome-based work, but, you know, just naturally here, we've seen a slight tick up in the cost plus, and I think that's mostly because of either the prior DOGE activities, which, you know, some of the work that was started was fixed-price work, and also, you know, just the natural ebb and flow of what's won and what's completed. Marie L. Perry: And Surinder, remember, last quarter we had a surge in license revenue on the federal side. And so we talked about that. And so when you kinda look at Q3 federal margins, they're really back to their kind of more normal state. Surinder Singh Thind: Got it. Thank you. Sadasivam Iyer: Thank you. Operator: Our next question comes from the line of Alexander J. Sinatra with Baird. Please proceed with your question. Alexander J. Sinatra: Hi. I'm on for Mark Marcon. I was just wondering, you know, you went through a couple of big projects. I was wondering if you could describe who you're competing against to get those big projects and how the competitive dynamics have maybe changed. Things on pricing. And then also on the Toplot and GlideFast side, who do you run into and, you know, is pricing working there as well? Sadasivam Iyer: Look. I think, you know, it varies by client, but, you know, a lot of these are with our larger clients. And you would find that the people we run into typically are the competitors that you would expect. A combination of Accenture or the Big Four, in some cases, the India-based pure plays. Certain platforms, also smaller competitors we run into. So it's the traditional set that you would expect from these clients. Right? On these clients. And we're seeing pricing both from a GlideFast side and a Toplot side really hold up. We're not seeing pricing pressures on the work that we're doing. Partly because of just the quality of what we're doing. And sort of our approach to how we do these things, which is very much around assets and accelerators that we bring, sort of are truly different from what you would see. So most of the competitors are the standard competitors that you would expect in any of these large clients. Alexander J. Sinatra: Gotcha. Thank you. And then I was also wondering, on the Mexican facility side, has that been impacted at all by the political climate and just kind of what you're looking at there going into the future? Sadasivam Iyer: No. Not at all. Not at all. It has no impact. Alexander J. Sinatra: Alright. Thank you. Marie L. Perry: Thank you. Operator: Our next question comes from the line of Maggie Nolan with William Blair. Please proceed with your question. Maggie Nolan: Thank you. Maybe a slightly different angle on the pricing question. As it pertains to accelerators. As you're incorporating more and more of these into the development process, are there active discussions about changes in pricing related to this? Or if not, do you expect that maybe to be a discussion point in the future? Sadasivam Iyer: Great question, Maggie. We are exploring those opportunities, but we're not seeing a big uptick today. Right now, these assets and accelerators are really allowing us to deliver work more rapidly, more effectively, as I mentioned in, you know, one of the examples I gave about sort of this whole code legacy code modernization where we're able to do things 25% faster and gives us better quality assurance. Now, as these assets and accelerators evolve and mature, we have the opportunity to position some of these on a more stand-alone basis. I mean, we have some good examples. We have something called Pathfinder, which is an AI-driven cybersecurity product, which we've invested in. Which we are actively engaged in conversations about pricing differently. More, you know, maybe on a product basis. But those are still early days. Maggie Nolan: Thank you. And then it seems like some momentum is building on the commercial consulting side. Could you maybe comment on whether you think that's sustainable? What are the drivers there? You know, is this more of a point in time or a potential trend on a multi-quarter basis? Thank you. Sadasivam Iyer: No. We actually see it sustaining and continuing, but I don't wanna make that a broad-based statement. We see that sustaining and continuing in specific areas where we see client investment being directed. So whether it's data and AI, whether it's custom engineering, whether it's some of the platforms that I alluded to. Right? So and we've been very, very thoughtful and focused on those areas where we see the growth and the market opportunity happening. Right? So I think that's how I would characterize it, Maggie. We do see continued momentum in that space. Because, you know, all the work that's happening and AI is a big, big tailwind, which is driving a lot of work for us, whether it be data, whether it be cloud, whether it be cybersecurity, whether it be, you know, integration associated with putting them and getting it to work in the environments that our clients have. Theodore S. Hanson: I would add to that just to even think about a platform like Workday, which is gonna be a leader in agentic AI. I think customers more and more are thinking, hey, you know, I've sat on my legacy systems here for many years, but I'm not gonna get to take advantage of agentic AI if I don't have modern enterprise, you know, platforms in my environment, like a Workday or ServiceNow or Salesforce. Or right on down the list. Maggie Nolan: That's helpful. Thank you. Thank you. Sadasivam Iyer: Thank you. Operator: And, ladies and gentlemen, we have reached the end of the question and answer session. I would like to turn the floor back to CEO, Theodore S. Hanson, for closing remarks. Theodore S. Hanson: Well, thank you for being here this evening to talk about our third-quarter results, and we look forward to speaking with you in the first quarter on our fourth-quarter results. And I will remind you as well that we have our Investor Day on November 20. And so we look forward to being with you if you can be present with us in New York City. Have a great evening. Operator: Thank you. And this concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.
Operator: Good morning, and welcome to the EQT Third Quarter 2025 Quarterly Results Conference Call. All participants are in a listen-only mode. After the speakers' remarks, we will conduct a question and answer session. As a reminder, the conference call is being recorded. I would now like to turn the call over to Cameron Horwitz, Managing Director, Investor Relations and Strategy. Please go ahead. Cameron Horwitz: Good morning, and thank you for joining our third quarter 2025 earnings results conference call. With me today are Toby Rice, President and Chief Executive Officer, and Jeremy Knop, Chief Financial Officer. In a moment, Toby and Jeremy will present their prepared remarks with a question and answer session to follow. An updated investor presentation has been posted to the Investor Relations portion of our site, and we will reference certain slides during today's discussion. A replay of today's call will be available on our website beginning this evening. I'd like to remind you that today's call may contain forward-looking statements. Actual results and future events could materially differ from these forward-looking statements because of factors described in yesterday's earnings release, our investor presentation, the Risk Factors section of our most recent Form 10-Ks and Form 10-Q, and subsequent filings we made with the SEC. We do not undertake any duty to update forward-looking statements. Today's call also contains certain non-GAAP financial measures. Please refer to our most recent earnings release and investor presentation for important disclosures regarding such measures, including reconciliations to the most comparable GAAP financial measures. With that, I'll turn the call over to Toby. Toby Rice: Thanks, Cam, and good morning, everyone. Third quarter results built upon EQT's strong track record of operational and financial outperformance. Our performance this quarter resulted in $484 million of free cash flow attributable to EQT, which is net of $21 million of one-time costs associated with the Olympus transaction. We have now generated cumulative free cash flow attributable to EQT of more than $2.3 billion over the past four quarters with natural gas prices averaging just $3.25 per million BTU, highlighting the differentiated cash flow generation capabilities of EQT's low-cost, integrated business model. Production was near the high end of guidance despite price-related curtailments as we continue to benefit from robust well productivity and compression project outperformance. Our tactical approach to volume curtailments in response to volatile local pricing resulted in another quarter of significant price realization outperformance, with our corporate differential coming in $0.12 tighter than the midpoint of guidance despite local basis widening after we provided Q3 guidance. Operating costs were also lower than expected across the board, driving record low total cash cost per unit and underscoring ongoing benefits from water infrastructure investments and midstream cost optimization. Capital spending came in roughly $70 million below the midpoint of guidance, supported by further upstream efficiency gains and midstream optimization. Our team set multiple EQT and basin-wide records during the quarter, including our highest pumping hours ever in a month, our fastest quarterly completion pace on record, and the most lateral footage drilled and completed in a 24-hour period. Simply put, our execution machine is firing on all cylinders. Turning to our acquisition of Olympus Energy, we closed the transaction on July 1 and completed the full integration of all upstream and midstream operations in just 34 days. This marks the fastest operational transition in EQT's acquisition history. Our teams have already achieved significant operational improvements since taking control of the assets. An example of this is in the Deep Utica, where we drilled two wells during the third quarter at a pace that was nearly 30% faster than Olympus' historic performance, driving an estimated $2 million of per well cost savings. Deep Utica inventory represents significant long-term upside optionality on the Olympus assets, which we ascribed zero value to in the purchase price. Olympus' production also provides a significant supply source to feed the Homer City data center project that we announced last quarter, underscoring how assets can become more valuable once they are part of EQT's platform and our ability to unlock sustainable growth. Shifting to our growth project pipeline, we have made significant progress with the various in-basin power projects that we announced last quarter and are seeing additional opportunities to provide natural gas supply and infrastructure to service new load growth in Appalachia. We have also completed an exceptionally strong and oversubscribed open season on our MVP boost expansion project. Demand far exceeded our initial expectations, and as a result, we collaborated with our vendors and partners to upsize the project by 20%, increasing capacity to over 600,000 dekatherms per day. Even with the additional capacity, the region's appetite for Appalachian natural gas remains greater than what we can currently provide, a clear signal of continued market strength and long-term demand growth. The MVP boost project is 100% underpinned by 20-year capacity reservation fee contracts with the leading Southeastern utilities, highlighting the depth and durability of these customer commitments. We estimate a three times adjusted EBITDA build multiple for the expansion project, highlighting how strong the economics are for low-risk infrastructure investments in our midstream business. Once expanded by the Boost project, MVP will have a total capacity of 2.6 Bcf per day of gas, which is more than one Bcf per day greater than current flow rates on the MVP mainline due to downstream bottlenecks, which will be solved when the Transco southbound and northbound expansion projects are completed in 2027 and 2028. This additional takeaway should come online at the same time that in-basin power demand is inflecting higher, which we expect will drive improvement in Appalachian pricing over the coming years. In fact, the futures market is already starting to take note, with M2 basis futures in 2029 and 2030 tightening by more than $0.20 over the past few months. In summary, our third quarter performance once again demonstrates the power of EQT's integrated model and our relentless drive for continuous improvement. From record-setting operational efficiency to seamless acquisition integration and advancement of strategic growth projects, all aspects of our business are performing at a high level. The strength and consistency of our results, even in a moderate gas price environment, reflects the quality of our company, the durability of our low-cost structure, and the depth of our opportunity set. The foundation we've built at EQT is strong. Our strategy is working, and our future has never been brighter. I'll now turn the call over to Jeremy. Jeremy Knop: Thanks, Toby. Our strong financial results and free cash flow outperformance left our balance sheet in a stronger than expected position during the third quarter. Despite approximately $600 million of cash outflows from closing the Olympus transaction, the previously disclosed legal settlement, and working capital impacts, our net debt balance ended the quarter just under $8 billion. We continue to target a maximum of $5 billion of total debt, which is three times unlevered free cash flow before strategic growth CapEx at a $2.75 natural gas price. With $19 billion of forecasted cumulative free cash flow attributable to EQT over the next five years at recent strip pricing, we have plenty of capacity to execute on our capital allocation priorities, which include investing in high-return strategic growth projects, further deleveraging, steadily growing our base dividend, and building cash to opportunistically buy back shares. Last week, we increased our base dividend by 5%, to $0.66 per share on an annualized basis, as we begin returning permanent cost structure improvements and synergy capture to shareholders. Our credit ratings are stabilized, and we are on a glide path of further balance sheet strengthening. We have now grown our base dividend at an approximate 8% compound annual growth rate since 2022. This is a testament to our confidence in the sustainability of our business and a corporate free cash flow breakeven price that is among the lowest in North America. We will continue to look for ways to recycle structural cost savings into future growth, ensuring that our base dividend is bulletproof through commodity cycles. Turning to LNG, we signed offtake agreements with Sempra's Port Arthur, Next Decade's Rio Grande, and Commonwealth LNG beginning in the 2030 and 2031 time frame. These SPAs represent patient execution of the LNG strategy that we began formulating in 2022, as we waited for the right time to gain exposure to high-quality facilities with geographic diversification, competitive pricing, and favorable credit terms. We intentionally positioned our exposure to begin after the 2027 to 2029 window, which we have flagged for several years as a potential period of global oversupply. This oversupply should result in a trough period of new LNG FID activity, and lower prices should stimulate new international demand, setting the stage for tightening fundamentals concurrent with the commencement of our contracts. While we remain bullish on domestic demand growth, we believe that international growth will increase even faster, and it is important to have the right exposure in our portfolio to these markets. Our strategy of signing SPAs on tolling arrangements provides direct connectivity to the international markets, with less downside risk and greater upside optionality than netback deal structures. Our structures give us complete end-market flexibility, allowing us to provide tailor-made solutions to end-market customers globally, with varying contract tenors and price benchmarks over the 20-year lives of these contracts. We are taking the same direct-to-customer approach to LNG we have deployed domestically with utilities and data centers. We expect to enter into sales agreements and regasification capacity covering a large portion of our LNG exposure in the coming years, leaving us with a geographically diversified portfolio of customers and pricing exposure. Our recent discussions with international buyers give us confidence in the long-term LNG demand outlook and suggest a desire to contract with an integrated US-based natural gas producer that can offer greater flexibility than legacy LNG suppliers due to their short exposure at Henry Hub. It's worth noting that EQT is the second-largest marketer of natural gas in the U.S., ahead of all upstream and midstream peers as well as the super majors. LNG marketing is a natural bolt-on to our existing capabilities, and we've been building our expertise over the past several years. While the U.S. market has significant demand tailwinds over the near and medium term, global growth in natural gas demand should far outpace the domestic market over the long term. We expect natural gas demand outside the U.S. to rise by 200 Bcf per day between now and 2050, highlighting the tremendous opportunity for U.S. producers that can directly access international markets. However, that access will only be available to producers that have the combination of low-cost structure, multiple decades of quality inventory, an investment-grade balance sheet, and strong environmental attributes, all of which are hallmarks of the differentiated platform we have built at EQT. Turning to the natural gas macro, we see a supportive setup emerging as we head into year-end, with a tightening balance driven by factors including surging LNG demand and slowing associated gas supply growth as crude oil prices weaken. On the demand side, the U.S. is on track to exit 2025 with over 4 Bcf per day of incremental LNG demand compared to year-end 2024, the largest annual increase since the U.S. began exporting LNG almost ten years ago. The startup of Golden Pass and continued ramp-up of the Corpus Christi Stage 3 expansion are expected to add another 2.5 Bcf to 3 Bcf per day of demand by year-end 2026, providing a further tailwind for U.S. natural gas prices. Looking ahead to winter weather, several major forecasters are calling for one of the coldest winters in over a decade, as early indications suggest a transition from El Nino to a moderate La Nina phase. This transition tends to produce below-normal temperatures across key U.S. consuming regions, including the Midwest and Northeast. A return to sustained cold could drive a meaningful rebound in residential and commercial heating demand, tightening inventories and accelerating the drawdown pace by late Q1. Finally, on the supply side, we anticipate flat associated gas volumes through 2026. The rig reductions and capital discipline we've seen across major oil basins this year are beginning to translate into lower associated gas growth, particularly from the Permian. Should Brent and WTI prices remain in the 50s as OPEC increases production and geopolitical tensions in the Middle East ease, oil prices could approach breakeven economics for many producers and further discourage incremental oil activity. Together, these trends point to a tighter supply picture emerging into 2026 and 2027, supporting a more durable recovery in U.S. gas prices. In sum, the U.S. gas market is entering a critical inflection point. Rapidly growing LNG demand and slowing associated gas production point to a constructive setup in 2026, which could be bolstered further should a cold winter manifest. That said, we remain vigilant over the medium term due to the wave of new Permian pipelines scheduled to be completed by 2026 and an increasing risk of LNG oversupply later this decade, which we believe could temporarily back up gas supply into U.S. storage and set up another short down cycle. Wrapping up, I want to point out a couple of items on our updated guidance and provide a few thoughts as we think ahead to 2026. Our fourth quarter production and operating expense guidance includes the impact of 15 to 20 Bcfe of strategic curtailments during October, as our teams continue to optimize around in-basin pricing volatility. Additionally, recent IRS guidance suggests that we will not be subject to AMT in 2025, and thus, we now expect to pay minimal cash taxes this year, which will save nearly $100 million relative to our prior forecast. Looking ahead to 2026, we expect to maintain production volumes at a level consistent with our 2025 exit rate. We expect maintenance CapEx in line with 2025 plus the full-year impact of the Olympus acquisition. As our compression projects are completed and base declines shallow, we expect maintenance CapEx to decline towards $2 billion later this decade. As we highlighted last quarter, we have an expanding backlog of high-return infrastructure growth projects which will unlock sustainable growth for our upstream business. We are excited to allocate the first dollars of our free cash flow after maintenance CapEx to these opportunities, which we believe will create more long-term shareholder value than any other reinvestment opportunity available to us today. Our total capital spend in the years ahead will be based on the quality of the investment opportunity set in a given year, and we hope to continue sourcing opportunities and unlock differentiated value across our integrated platform. Our pipeline of projects provides a low-risk, high-return reinvestment opportunity that is unique to EQT, allowing us to drive sustainable cash flow per share growth and compound capital for shareholders for years to come. With that, I'd like to open the call to questions. Operator: Thank you. Our first question will come from Arun Jayaram from JPMorgan. Please go ahead. Your line is open. Arun Jayaram: Jeremy, Toby, I was wondering if you could start with the open season and talk about some of the key demand takeaways that you saw from the utilities during that process? Toby Rice: Yes. Arun, I think it's really interesting just to look at what took place with MVP compared to what took place with this MVP boost. I think the most significant signal is the fact that to get the MVP project going, it required a producer, EQT, to sign up for over 60% of the capacity to make sure that volumes were spoken for to get that pipeline built. In contrast with MVP boost, 100% of the shipping capacity is taken by the utilities. It just represents the fact that we're in a pull environment and should not be surprising just given the tremendous amount of demand that we're all seeing. We're seeing that show up in our projects with utilities. Arun Jayaram: Great. And then maybe just a follow-up. Jeremy, you provided some soft 2026 outlook commentary. I guess one question is how are you thinking about strategic midstream capital in '26 and over the next, you know, maybe through '28? Do you have any visibility on that spending in the midstream bucket? Jeremy Knop: Yeah. Arun, we're still working through that. We're not going to give any specific guidance today. But I would say it's going to be something at our discretion based on the quality of projects. We certainly don't need to spend any of it if we don't want to. But I think when we look at the full cycle returns, both on those projects but also the demand it unlocks for our products from our upstream business, the holistic return is so attractive and allows us to grow in a really differentiated way. We're going to be pretty disciplined about how we invest in those, but we also recognize it's a key differentiator for EQT to be able to bring those online. So we're going to keep it in balance. But we're continuing to see that opportunity set grow, which is pretty exciting. Arun Jayaram: Great. Thanks a lot. Operator: Our next question comes from Devin McDermott from Morgan Stanley. Please go ahead. Your line is open. Devin McDermott: Good morning. Thanks for taking my questions. I wanted to start on the commercial side. It's already been a big year for you guys on the commercial front, solidifying some of the power opportunities. I think, Toby, you mentioned in your prepared remarks that you're seeing additional opportunities still here. And I feel like you just the headline since the last call, I think there was another large data center site through a project in Greene County, Pennsylvania that actually did call out a new supply contract with EQT. So not sure if you can comment on that, but maybe broadly, the kind of trends you're seeing on incremental opportunities, any updated thoughts on price structure and how this all fits into your views on in-basin demand growth through decade end? Toby Rice: Hey, Devin. How are you doing? Good morning. Yes, so we have a robust opportunity pipeline. I mean, what we've announced to date has been pretty large. Our midstream growth teams are working multiple opportunities. I expect us to have more announcements in the future, can't say when. But I'll tell you this, I mean, the focus still is on scale and speed. That has been the factor. So as these projects are still trying to get as large as they can, figuring out exactly what they need once schedules get put in that baseline gets put in place, then people will be working on moving things to the left. As far as structuring on gas prices here, I think on that Robina site specifically, you talked about some structure on gas prices we talked about. We think that entering into conversations about structure on pricing, like specifically getting into more fixed nature, is an opportunity down the road. But the focus right now is on the scale and the speed. But I do anticipate once the dust settles, that will be a great optimization opportunity for these hyperscalers to solidify that a part of their cost structure. We'd be open to having those conversations. All of this would be a tool for us to continue to bring more durability to the cash flows at EQT. So it's a good strategic fit for us. Devin McDermott: Okay. Got it. Makes a lot of sense. And then sticking with the commercial side, but shifting over to LNG is an active quarter for LNG deals for you all. I mean, Jeremy, maybe could you comment on what you've done so far kind of solidifies your strategic goal of diversifying price exposure and giving some direct access to international markets? And then a little bit more clarity on how you think about terming this out and the evolution of your direct-to-customer sales strategy as you place these volumes over time. Jeremy Knop: Yes, absolutely. So look, we've been talking about LNG as a company for several years now. And we've been laying the groundwork in terms of team and expertise in negotiating with a lot of projects for that duration of time. You know, we've been very intentional about the time of these projects coming online. If you look back at our prior commentary over the last couple of years, we've been pretty eyes wide open about what we think will be a relatively well-supplied LNG market between, call it, 2027, 2029. So we've intentionally tried to partner with and take capacity out on projects that come online after that window. That's one of the reasons we've been so patient. But it's not only that, it's getting the right credit terms, making sure the right EPC is building these contracts. You have the right financial sponsor behind the facility itself. We think we got that with all of these facilities. We think they're really some of the best along the Gulf Coast. I think with what we signed up for today, our bucket is full now. We moved really swiftly once we saw that opportunity come up. I wouldn't anticipate we sign anything else near term. And our focus really going forward is getting our team fully built out, finishing the build-out of our systems, which we've been working on for really about a year now on the LNG side, and been working on those long-term sale agreements with customers around the world. And we're having a lot of really productive conversations there, seeing a lot of good traction in those discussions, and it's going to give us a lot of flexibility to diversify that exposure around different markets in the world, while giving us that direct-to-customer model that we've been talking about and developing domestically. So it's going according to plan, and we're really excited about the momentum. Devin McDermott: Okay, great. Thanks so much. Operator: Our next question comes from Doug Leggate from Wolfe Research. Please go ahead. Your line is open. Doug Leggate: Good morning. Thanks for having me on. I guess, Toby or Jeremy, whoever wants to take this, my first question is on marketing because obviously you guys had a phenomenal quarter in terms of marketing optimization. I'm trying to understand is this kind of a new normal for you guys and I wonder if I could bolt on to that. When you pivot into LNG, I mean, guys like Shell are your competition on this, confident on how that gives us some color, know it's some way off, but give us some color as to how your domestic gas marketing translates to a successful international marketing business? That's my first one. And my follow-up very quickly, Jeremy, you mentioned buybacks again, know where I'm going with this. We're heading into a much more volatile gas price environment one suspects. I think you've acknowledged that yourself. Where is the priority on the net debt balance sheet sit versus the priority for getting back to buybacks? And I'll leave it there. Thanks. Toby Rice: I'm going to count that as three questions, Doug. Yeah. Let me just state, I think one of the things coming into this year, we were most excited about this company is seeing Jeremy really spend a lot more time and attention on the commercial front. And I think you're seeing the results of that. So we'll save comments on marketing for him. But as it relates to just our positioning on the LNG marketplace, we think that we're going to be very competitive in this space. We've got the scale to be able to be meaningful here. I mean, just to give you some perspective, some of these customers with us being able to deliver up to over 800 million cubic feet of gas a day in LNG form, we are relevant. We've been networking in the LNG space for years now. You all remember the unleash US LNG campaign. We've been part of the global conversation about energy. We've made a ton of contacts and had a lot of meetings with energy leaders around the world. And now as we've solidified our offtake agreements, those conversations are now advancing, and we're excited about keeping people up to speed with how that portfolio shapes up over time. Jeremy Knop: Yes. Doug, I'll hop in on the other part of your question too on marketing. Look, I think we're in the early innings of the potential of the team here. We have the right leadership in place. We're redeveloping some systems internally. It's giving a lot of visibility to the team. I mean, our total trading team size today is about 45 people. So they're getting really dialed in, taking advantage of a lot of great opportunities. I mean, even stuff we've done in the past week, and the amount of volume, the amount of money we're making doing that's really exciting to watch. I would correlate the performance of that team with volatility. So for example, winter volatility and, like, winter's remain, fall shoulder season volatility, I think you'll see the most benefit in realizations relative to where you would just assume basis shakes out first a month. As the team optimizes around what we're seeing in the daily markets and capturing those spreads. And again, as you and I have talked about, the more volatility we see develop in the markets over the coming years, the more profitable that business will become. I expect it to be pretty consistent. It's not trading so much in a speculative sense. It's really just optimization. Very proactively in the markets. So I hope it becomes something that is more and more consistent. But again, I think we're in the early innings of the potential that that team has. And then your final question as it relates to balance sheet, capital allocation, look, as we said in the prepared remarks, we see $5 billion as our maximum total debt level going forward. Don't really have a view that when you look at valuation in the industry today, the companies get any benefit from having much debt on the balance sheet. In fact, I would argue there's really a ding in valuation that comes from that. So we're very focused on converting that liability into equity value and reducing that equity volatility. And at the same time, what that does is it opens up the optionality for us to take aggressive and decisive action when you see pullbacks in our stock price. Just look at what our stock has done over the course of this year. I mean, we've traded between the DeepSeek pullback, Liberation Day, what's happened over the summer between a range of, like, 45 and sixty dollars a share, is a lot of really great opportunities for us to step in and buy the stock once we have the capacity to do so. So that's what we intend to do as we go about executing that buyback once we have the capacity to do it. But I think, you know, a core tenet of our strategy is having low leverage and being able to act with conviction during down cycles and pullbacks like that. We think over the long term, that creates the most value for shareholders. Doug Leggate: Great answers. Thanks for taking my two and a half questions. Thank you. Cheers. Operator: Thanks. Our next question comes from Betty Jiang from Barclays. Please go ahead. Your line is open. Betty Jiang: Good morning, team. Want to ask about the growth capital and how you guys are thinking about allocation capital there. Jeremy, you mentioned earlier that you're looking at full cycle returns and not just the midstream, but the demand unlock for the upstream business. So can you just expand on how you assess the value of these? And is the flow through to upstream benefits coming from pricing uplift or volume growth? And is that like and are you looking at opportunities above and beyond the billion-dollar investment identified last year? Sorry, last quarter? Jeremy Knop: Yes, great question. So whether it's LNG or whether it's power, our teams have done a lot of work over the last couple of years to understand where along that value chain a lot of the value is accruing to. And, you know, I think the one thing that really jumps out to us is that the most value really comes back to being able to grow sustainably our base volumes and ideally into premium markets or premium contracts. And so what we're trying to do is use our midstream business to connect our upstream production to those markets and opportunities. Whether you have a really good low-risk return, which is a foundation for then allowing us to steadily and methodically increase our base upstream business by increasing volumes into that over time when the market needs it. So that's in essence what we're trying to do, just create this virtuous cycle, sort of a flywheel effect there. But I would argue the majority of that long-term value uplift comes from unlocking our multiple decades of upstream high-quality inventory and being able to pull that forward. But again, doing it in a sustainable way. So that is really what we're trying to unlock through these opportunities. And yes, I would say that growth pipeline, specifically on the midstream side, which is what then unlocks the upstream side, that continues to grow. We're working on a number of really high-quality opportunities right now. We're not ready to talk about them yet. But we're trying to increase the number of shots on goal to see what shakes loose and continue to increase that optionality and the amount of value we can create by growing the business in the years ahead. Betty Jiang: Got it. That's helpful. And then my follow-up is actually on the MVP boost. Just talking about that flywheel effect, you got the utilities signing up for the PIPE FTE, but do you see opportunity to sign separate sales agreements on the upstream side? For you guys to lock in premium pricing similar to what you have done in the past? Jeremy Knop: Yeah. We'll look. We'll see where those negotiations go. But if you think about where it connects to, it's really fed by our pipeline systems in Appalachia upstream. So I think there's opportunity both on further pipeline expansions upstream as well as sales deals, so I think this has set the stage for that next stage of negotiations for our business holistically. Betty Jiang: Got it. Thank you. Operator: Our next question comes from Josh Silverstein from UBS. Please go ahead. Your line is open. Josh Silverstein: Just on the LNG side, you had highlighted the four to $4.50 cash flow breakeven on pricing there. I was curious, can you not get the spread with the tolling agreement versus an offtake agreement? And maybe the suggestion is, you know, tolling agreements are more like a 5 to $7 range, and so the cash flow breakeven there would be much higher. I was curious about that. Thanks. Jeremy Knop: Yeah. Good question. Just to give us a chance to clarify this. So economically, they're, I mean, virtually the exact same. I would argue that the spread is the same needed to breakeven on the contracts. The difference in tolling is that we are responsible for delivering the physical molecules to the facility. In that case, we need to take out additional Feet and probably take out storage capacity nearby just to help with balancing. With an offtake agreement, we don't have to worry about any of that. So it just makes it a bit more of a pure expression on the international spread and diversifying into that pricing market. But that's why, look, we're open to both. I think something like tolling, we're more open-minded about on the Texas Coast market just because you have so much long-term Permian supply. I think as you move towards Louisiana, our appetite for offtake increases because we do have concerns about long-term just gas supply in the region because you have so much demand pull relative to a Haynesville play, which is pretty short inventory at this point. So we're trying to sort of match contract structure with where we see the risks long-term. Make sure we have the best exposure for EQT. But I would say in both situations, whether it's the tolling agreement we have at Texas LNG, which again is on the Texas Coast side, versus something more like Commonwealth on the Louisiana side, the spreads we need to breakeven are virtually the same. Josh Silverstein: Got it. Thanks for that. And then you had highlighted tighter Appalachia pricing a few years out from now. Given that you see this and that you have the ability to further ramp supply into that market, how do you think about your consolidation strategy in the basin as part of this? You've obviously had a lot of integration success with recent transactions, and that could provide a further uplift to you guys beyond tightening diff. So I was just curious how you're thinking about that going forward. Thanks. Jeremy Knop: Yeah. I'll make a comment or show on basis and let Toby talk about, you know, future strategic moves. I would encourage you to look at what has happened to M2 basis. If you look at, like, cal twenty-nine, twenty-thirty, that is tightened by, call it, cents. I mean, you're trading in the sixties now. Over the past six months, it's been a material move in response to these demand projects getting built. Discussion of new pipeline capacity out of basin. So I think you're already seeing the impact of that. Effectively around the time frame and beyond after these projects come into service. That is accruing entirely to the value of our asset base. A way that's not been factored in historically and is not really factored into our forecast today. So that tailwind is already in full effect and we hope continues. Toby Rice: Yes. And as it relates to acquisitions and strategically expanding, what is a pretty remarkable story that we have right here. I think you get to start with the story that we've created. You know, strategically, when we look at what we're doing, I mean, it's very simple, getting access to the best markets and supplying the best energy. With our asset base we have right now, we've got a lot of runway across all of those fronts that we can do organically. So it's easy for us to stay disciplined here, but there are, I think we're seeing the opportunities of scale. You're seeing that with our capture of these data center demand opportunities within our footprint. You're seeing scale coming from our more robust trading platform that we're leveraging. You're seeing the benefits of scale with our operations teams, the number of reps that they're getting. They're exceeding execution capabilities on the operational front. So, I mean, there's wins across the board from this company. Firing all cylinders. So, you can look and see the opportunity for us to replicate that in other assets. But we'll continue to make sure we make the best decisions and stay disciplined to value creation with what we have now. Operator: Our next question comes from Neil Mehta from Goldman Sachs. Please go ahead. Your line is open. Neil Mehta: Yes. Good morning, Toby, team. I just want to talk a little bit more about the 4Q outlook here. And you elected to take some curtailment in the quarter. And so I just talk about what the mechanism or what would be triggered to lower that near-term production is and what you're looking to bring some of that supply back on? And then any comments around CapEx as well where it did come in a little bit hotter than we expect in the quarter, but I think some of just probably reflected timing. Jeremy Knop: Yes, great questions. So first of all, on curtailment, so we went into the quarter assuming we base load a Bcf a day of curtailments. When you look at where pricing was a week ago, sub a 1.5, we were effectively fully curtailed. Where we sit today with pricing in basin, call it two fifty, we're fully online. So we have been very tactful about shifting production on and off in response to this. That is also what drives, you know, in many ways, our improved realizations that you've you saw in Q3 and hopefully in Q4 as well. So we're very responsive to market conditions and making sure a reliable supplier. As it relates to CapEx in, I mean, there's just some lumpiness in there to some degree. But you're also approaching the end of the year where typically when there are dollars that have been allocated, we and we have, call it, two to three months left in the year. We typically don't trim those back. We leave the option open for teams to spend that and finish up projects for the year. Some of that might not get spent or might get pushed, but we've left it in the budget for now. Look, there is a chance for being conservative, but we feel good about the guidance we've given. And hope to consistently beat that. Neil Mehta: Thank you. Apologies for the background noise, but the follow-up is just around 2027 and I know, Jeremy, you've been very consistent in your view that LNG markets could flip the U.S. gas market into oversupply potentially as well if there is any backup as well. So I know you're leaving '26 more open and that's been a really good call as the curve has strengthened up. But does this make you want to be more aggressive around hedging '27 now that the '27 curve rally as well? Jeremy Knop: Look, we're going to all options are open. Again, our approach to hedging is to be opportunistic and tactical. Right now, we don't have a specific plan in place, but we're watching the markets as always. And we continue to be patient. And look, I think what we're doing with price realizations and optimizing how every physical molecule is sold right now, also should continue to provide a big uplift there. And again, the more volatility that we see, the more we can optimize. So we'll see and if we decide to add some hedges, you'll see it in our quarterly results. But right now, we remain pretty bullish over the near term. Neil Mehta: Makes sense. Operator: Our next question comes from Kalei Akamine from Bank of America. Please go ahead. Your line is open. Kalei Akamine: Hey, good morning, guys. I want to come back to 2026. There have obviously been some portfolio changes over the last twelve months with Northeast non-op coming out, Olympus coming in, strategic curtailments here in 4Q. So that's quite a few moving parts. And I appreciate the call out for maintenance CapEx, but for fair can we also get your view on maintenance production? Jeremy Knop: Yeah, Kalei. Good question. We expect next year to be approximately flat to where we are 2025, so you could extrapolate forward our Q4 guidance adjusted for the curtailments. Kalei Akamine: Got it. I appreciate that. Next, I want to ask on data centers. So Homer City and Shippingport were obviously big wins, there's more in development. There's some attention on Ohio. Some would say that you don't have the same presence in Ohio as you do in Southwest PA. And, therefore, those projects might be out of reach. But you guys do have Feet and the ability to build lateral pipelines. I'm wondering if that expands your range for those kinds of sales agreements. Toby Rice: Yeah. I think you're exactly right. You know, we look at these opportunities that come to EQT sort of across three different tiers. Our option footprint, across our midstream footprint, the 3,000 miles of pipeline network that we have, and then also looking at opportunities across our commercial footprint, factors into all the pipelines that we have selling gas anywhere East Of Mississippi, which includes Ohio opportunity. So we're engaged in conversations on that now. I think the biggest focus has been around our midstream footprint, but we are having conversations around the commercial footprint as well. Kalei Akamine: Toby, a while back, you guys called out several smaller projects on the XCL midstream system. Parenting connector, Oakgate, and the purpose was to get more gas over to Rex in West Virginia. Just what's the latest on those projects? Toby Rice: So on Clarrington, that's a project that we're planning on putting in place in the next in 2026 budget. So, hopefully, we'll have we'll do a little bit of spend here in '25 and then that'll be bigger in 2026, so that will get completed. Our midstream team is going to continue to look inside the operational footprint we have to look for ways to continue to debottleneck the system. I mean, you look at where we're optimizing the energy systems, what started with the sites has now evolved to the gas systems and now obviously with Feet and debottlenecking some of those points like this Clarrington connector, we'll continue to look for more of those opportunities because those will be really great high rate of return low capital type projects. Kalei Akamine: Got it. Thanks, Stephanie. I appreciate it. Operator: Next question comes from Phillip Jungwirth from BMO Capital Markets. Please go ahead. Your line is open. Phillip Jungwirth: Thanks. Good morning. With the very successful open season for MVP Boost, wondering if you could give us an update on MVP Southgate here. And whether the changes in the marketplace, greater pull on gas demand, more favorable permit regime, provide any reason to maybe revisit the project scope? Toby Rice: Yes. So Southgate, I think the results of MVP Boost specifically, the fact that we're seeing a strong pull environment gives us more excitement over the future potential of Southgate. And the opportunity to potentially expand that pipeline system in the future. But when you look at this region here, I mean, there's some big things that are happening. Obviously, the customers are demanding more gas supply into this area. You see what happened in this region this last winter with MVP flowing above max rate. So the demand is there. MVP boost oversubscribed. And then on a federal level, you're seeing the drive for more reliable lower-cost energy systems. So I mean, I think all the factors are there. We're going to be looking at ways to optimize. Just like we did in taking advantage of upsizing the MVP boost project by increasing that by over 20%. So we're studying that right now. We'll report back. Jeremy Knop: Yeah. I would just say for the lack of clarity though, I mean, you know, we're moving ahead on Southgate. I mean, that's a project that we are counting on happening. And I think as Toby said, Boost open season I think just further underscores how important that is. And there is I would expect there to be overlap in customers there as well. So it just further highlights how much that gas is needed in that region. Phillip Jungwirth: Okay, great. And then you guys have talked about an LNG strategy a couple of years now really, only recently had announced some numerous agreements. Wondering if you could talk about how offtake terms have evolved maybe before and after the LNG export pause? And are you generally seeing a lot more favorable deals and structures than you would have a couple of years ago you'd signed up some of these arrangements. Jeremy Knop: Yeah. Look, I think the one thing that held us in a major way were some of the credit conditions that we were going to have to sign for with some of these projects in the past. And it was very much a seller's market where if you wanted to be an off-taker or have tolling capacity, it was very difficult to get it on terms that we were comfortable with. As you saw that LNG pause get released and a lot of these projects move rapidly towards FID, in our mind, it shifted to be more of a buyer's market. Shifting in the favor of the likes of EQT. And so that's why we tried to move pretty quickly in response to this. Also have a view that contracts of this quality at this cost LNG build-out it kind of happens in waves. And so once you get beyond this wave, if you do see a period of oversupply, that will probably put a chill on new FIDs for a couple of years. That next wave that comes up, I would expect the pricing on those projects to probably increase another level as well. So what we're trying to do is get in at the tail end of this wave, capacity comes online, post any sort of risk of LNG glut, we have the right credit terms, the right EPCs, and the right partners on the LNG facilities. And then I think we will be structurally advantaged long term as the cost of building equipment and facilities like this inevitably just goes up over time. So that I mean there's a culmination of factors leading to why we made the decisions we did at the time we did. But again, we feel really good about just the totality of the terms we've got. Phillip Jungwirth: Makes sense. Thanks, guys. Operator: Our next question comes from Bob Brackett from Bernstein Research. Please go ahead. Your line is open. Bob Brackett: Good morning. You guys highlight that you're the number two gas marketer in the U.S. If you look at your peers, they use that scale and that market insight to extend into gas trading, gas storage, even power marketing. There's a lot of adjacencies. What's your appetite to explore some of those adjacencies, and maybe what time frame? Jeremy Knop: Yeah. Look. We're not looking to get into speculative trading and things away from our base business. We're looking at optimizing the value of our production. So, again, we're sticking to our knitting and where we really have an edge. That's why we're able to produce the results we did and realize pricing this quarter as an example. You know, as it relates to LNG too, because there's been a lot of questions around the overlap between that business and LNG where you have a lot of big players like Shell internationally. In our view, you need to have a minimum of about four MTPA of LNG capacity on the water to where you can really start to optimize and be a real player and be competitive. That's part of what also held us back signing in the past is we didn't think that the cost structure and the balance sheet and everything else was lined up within EQT with enough scale to be able to do that. We thought we might be overextending ourselves by doing it. We were very patient until we could get to the point we could sign up for at least four. But we do think there's a lot of synergies between the two, and I think the discussions we've been having with international buyers of gas are proving that out. Toby Rice: Yeah. And I would just say, when we think about just strategically what we're trying to do with the best energy, you know, making it cheaper, making it more reliable, making it cleaner, we've spent a lot of time focusing on making our energy more affordable, lowering the cost structure of this business. That's been a huge focus. We focused a lot on making the energy cleaner. All the work we've done to become the first company of scale to achieve net-zero scope one and two emissions. And I think now you're seeing a little bit more focus for us on the reliability of the energy that we produce. And that simply put is just making sure the market has the energy when it needs it, and trading will be a big function there. And it's a part of the story here that we're spending a little bit more time improving the reliability of the energy systems we develop and work in. Bob Brackett: That's great. Appreciate the color. Operator: Our next question comes from Sam Margolin from Wells Fargo. Please go ahead. Sam Margolin: Good morning. Thanks for taking the question. Hey, Stan. There's a question on commercial. And it kind of relates back to an earlier comment Toby made. You know, one of the things that turbine manufacturers are talking about is a shift in customer mix. And, you know, data center customers, hyperscalers directly ordering turbines. And I wonder if that's the catalyst to change pricing structure around gas supply deals. Utilities are comfortable with variable pricing maybe the hyperscalers directly would prefer something a little more bracketed or stable. I just maybe if you could elaborate on that comment you made earlier, that'd be great. Toby Rice: Yes. What we're seeing on the turbine side of things is we're actually seeing some opportunities for turbines that have been put on order lock up that are actually looking for homes. You know, hyperscalers, I think, are going to be looking to relieve whatever constraints that they're facing. You know, for them getting into actually developing the power themselves, would be an interesting move for them. I wouldn't put a pass just given the cost, but that is outside their area of expertise. I mean, perspective is that if hyperscalers had it their way, they would be able to sign up and just pay a rate for every kilowatt that they use and keep it very simple because they've got so many other bigger things to focus on. But in the spirit of simplifying the story for them, yeah, I think that could create opportunities for EQT in creating more structure on pricing, increasing the durability of our cash flow. So we're certainly willing to entertain those conversations. Jeremy Knop: Yeah. I think from what I've heard in the market, whether it's I know Amazon has done a little bit of this, Meta might have. Some of these big facilities specifically down along the Louisiana, Mississippi corridor, you have to order a lot of this equipment multiple years ahead of time and it's very costly. Utilities are not in the business of speculating like that. And so whether it's done through like a PPA offtake or whether it's one of the hyperscalers stepping in and making the order, basically guaranteeing the cost, I think that kind of has to happen for these mega projects. So I wouldn't say that means the hyperscaler is building or owning the power themselves. I think it's more so inherently providing the credit support one way or the other for what are very large capital expenditures. Again, it really just speaks to the demand for power, and the necessity for all this stuff to get built as quickly as possible. So it's all positive either way. Sam Margolin: Got it. Thank you. And then, just on the marketing side, you know, you pointed out that on the curves, diffs are tightening. And I guess, in the past, that might have compelled you to hedge basis. If not, if not the flat price? And I guess the question is like with the evolution of this marketing team and the success it had, you know, should we expect basis hedging to really be reduced and deemphasized just given what your capabilities are now? Jeremy Knop: Yeah. In the past, I mean, we never provide a lot of clear disclosure on what we do in basis. Just because we don't want to influence the markets in any indirect way. But we, in the background, had usually hedged up to about 90% of our in-basin sales just to provide that stability. We are not doing that anymore. We will hedge basis and we do have some basis hedged. But it will be likely far less than that in 2026 and beyond. Just due to those dynamics. And if you think about it, we can also effectively hedge basis by just shutting gas in. And that is kind of a new paradigm shift in the ability to coordinate between our traders, our production control center, midstream control center, and make sure we're not just selling gas at a price that doesn't make sense when you can shut in for a month and sell it into winter. I mean, provide that reliability during the winter months when you can surge above your baseline of production capacity. So it is an evolution for us, but the need to hedge basis to protect that downside is just not there in the same way. And instead, we're turning it from, like, a defensive strategy to more of an opportunistic proactive strategy through what we're doing with curtailments. Sam Margolin: Thank you so much. Operator: Next question comes from Scott Hanold from RBC. Please go ahead. Your line is open. Scott Hanold: Yeah. On MVP boost and potentially Southgate, can you talk about do you expect that EQT will be the supplier for those pull volumes? If so, how do you think about where you source that? Is it pulling it from in Basin Appalachia or would you grow into that and just give us a sense of if it's a grow option kind of the timeframe at which it starts? Jeremy Knop: Yeah. Great question. So MVP again pulls off systems and comes out of the Mobley plant. So I would expect it to be at least majority EQT volumes, if not all of it. And that provides us the opportunity to grow. We're not committing to growing to fill that yet. We have to ultimately see how the markets balance out. But whether it's the data center projects or whether it's more egress out of basin, what that is doing is teeing up the opportunity for us to grow with confidence. And do so in a sustainable way. Scott Hanold: Yeah. To quantify that, from where MVP is flowing today, through the end of boost coming online, that we see over a Bcf a day of greater takeaway from the MVP complex and you pair that up with another $1.5 a day of data center demand, it's a pretty, pretty attractive demand setup. Jeremy Knop: Yes, that's right. Scott Hanold: Okay. And then real quickly, you talked that you feel you're good with the LNG offtakes right now, which I think is circa 10% of your production. And you've obviously done some of these power deals. Can you talk a little bit about like industrial types of deals? Have you seen any interest in there? How much are you willing to allocate toward those initiatives? Jeremy Knop: Yes. I mean, look, we're seeing opportunities across the board. I think our sort of reinvigorated commodities team and our gas origination efforts are turning up a ton of opportunities. Whether that ultimately manifests in a midstream deal or a supply deal, you know, we're open-minded about both. We're trying to be a sort of one-stop-shop solution for gas supply. Look, we're pretty flexible and open-minded about it. Scott Hanold: Thank you. Operator: Our next question comes from Jacob Roberts from Tudor Pickering Holt and Company. Please go ahead. Your line is open. Jacob Roberts: Good morning. Good morning. On LNG, you've laid out some thoughts on demand through 2050. And Jeremy, touched on this a few questions ago, but we were curious if you could comment on global supply over that timeframe? And maybe more specifically your assumptions on the cyclicality of the global LNG market over the contract life with respect to the outcomes on Slide 12? Jeremy Knop: Yeah. Great question. So, you know, what's interesting when a lot of people are focused on the risk of LNG oversupply right now, and I think rightly so. It is a short window where I think that is at risk. But just say haircut our assumptions in half if you want to. Right? The amount of new LNG that has to get built to serve that market means that that spread needs to be in excess of four fifty at a minimum. To justify new projects getting built. And as the cost of those projects goes up in time with inflation, that just means that spread has to widen out. So that spread has to structurally stay wide as long as you do have additional demand growth. Otherwise, the demand growth cannot be served. So that's why, like, structurally, we're really bullish on that setup long term. Ultimately, it just comes down to what that export ARB incentive is for new projects to get built though. And ultimately, a question of where does the gas come from. We think the U.S. is advantaged in many ways whether it's gas from Appalachia or gas from the Permian. That really will be the biggest source of demand over the next two decades. We are certainly bullish on the domestic opportunity, but when you think about the, call it, 20Bs of growth, we could see from domestic demand not including LNG over that time period. We think that global market is going to dwarf even what a really bullish domestic outlook will be. And that's why we're so excited about getting into that LNG market even in a small way because even a small increase in that export ARB can have meaningful impacts on our profitability and realize pricing. So it's a really good way for us to extend our exposure and further improve the profitability of EQT over the long term. Jacob Roberts: Great. Thank you. And then a quick follow-up on the Olympus results, the two Deep Utica wells, you point to in the presentation, you classify those as having met the EQT standard in terms of efficiencies and cost? And then how are those results shaping thoughts about development going forward? Toby Rice: Yeah. I would classify that as early innings for us. I mean, have not got a ton of reps on Deep Utica. So it's really encouraging to see the teams come out the gate and cut drilling times by over 30% in shape dollars 2,000,000 per well. In that area, we've got a pretty hefty amount of acreage, hundreds of potential sticks. So that's a starting point is the way we'd look at it. Where we're going to get to is going to be where we're at with Marcellus relative to peers. And that's going to be peer-leading setting operational records both on the CapEx side and peer-leading LOE. I think the table is set. We just need to get some more reps and it's something that we'll sprinkle and give the teams the opportunity to lightly touch improve themselves over time. But in the meantime, the core story is going to be continuing on the success that we've had with our core Marcellus in Pennsylvania and West Virginia. Jacob Roberts: Great. Appreciate the time guys. Operator: Next question comes from Bert Donnes from William Blair. Please go ahead. Your line is open. Bert Donnes: Hey, morning, guys. I'll keep it pretty short. I just want to follow-up on the potential for the data center fixed gas price agreements. It sounds like your view is that the structure might ultimately fit better for both parties involved. But is there also a discussion to potentially take some equity in a power project? Or is that not even on the table? Toby Rice: Yes. Right now, I mean, strategy is the same when it comes to vertical integration, whether it's LNG or power plants. We're taking a very capital-light approach towards creating value in these arenas. Infrastructure continues to get funded by others. Returns do not compete with our core business. And we're able to access the value potential of these arenas without taking the equity stake. So that's the situation right now. We'll continue to be capital light, but those are the factors that we're watching that drives our decision. Bert Donnes: Perfect. That makes sense. And then on the same topic, at a time, there was an idea that maybe a consortium of smaller E and Ps could potentially piece together a power deal. Is that no longer the case? You really need the midstream side of things in order to sign these deals? Or is there room for maybe smaller projects to work that way? Toby Rice: I mean, every project that we look at, the projects are only getting bigger. I mean, if we were in a situation where 50 megawatt data centers make sense, I guess, could say that would be an opportunity. We're talking about gigawatts, multiple gigawatts at a time. You're going to need large scale. I mean, 1.5 Bcf a day is a tremendous amount of natural gas. EQT is unique in the sense that we could say we've already got that gas flowing above ground at local markets, we could just allocate that to you when you're ready. The credit requirements here, again, investment-grade balance sheets matter. That's something that's not available to smaller peers. I look at this as sort of a big player opportunity, and it's a big response for EQT to make sure that we get our tech customers all the energy they can. Jeremy Knop: Yeah. I would also just add that I think one of the biggest obstacles to getting all these data centers specifically built out is you have too many parties already involved when you think about the needs for an $80,100,000,000,000 dollar project. Adding more chefs in the kitchen doesn't improve efficiency. I think one of our edges at EQT is really simplifying this and being a one-stop shop. So I think a strategy like that would actually be moving the wrong direction and make it even more challenging to get something done. And it doesn't solve the credit quality either. So I don't think that really holds water. Operator: Our last question today will come from David Deckelbaum from TD Cowen. Please go ahead. Your line is open. David Deckelbaum: Thanks for squeezing me in, guys. I did want to just ask on the margin. You guys have seen some outsized performance on the well productivity side, but we've seen an increase in liquids recovery. Is that happening from benefits on the midstream side? Or is that something that's more geologically driven? Perhaps if you could speak to that going into next year? Toby Rice: Yes, I think that would be more driven from just where we've been developing. If I'm being honest with you. And on that front, we have been reassessing some of our parts of our asset base and looking at opportunities we see from the Equinor trade, we just got done looking at that. Probably not a lot of running room from the Ohio Utica there, but have identified the prospect of the Ohio Marcellus be very perspective over 80,000 acres. This would be big upside. It would give us even more exposure to liquids. So, I mean, it's something that we're looking at and how we're shaping it. But just given the size of our base, we're going to be a dry gas story. David Deckelbaum: I appreciate that, Toby. Then maybe Jeremy just a high level, I think there's been a lot of questions around firm sales and LNG and data centers and I guess as you see all the market forces progressing here, do you see a long-term target? Obviously, you guys give guidance all the way up to 2050 on demand. As you enter into like the next decade, do you have an expectation for or a target for what percent of total EQT gas volumes will be on firm sales agreement in the direct-to-customer model? Jeremy Knop: Yeah. I mean, if I'm honest with you, we're seeing more opportunities pop up like, literally every single week. I consider it to be a bit of a, you know, what we call internally, like, an all-you-can-eat opportunity. We can grow volumes if there's really that much demand that comes up. We can market it, whether it's third-party gas, I wouldn't say there really is a limit. Our job as it relates to just what's best for EQT and shareholders is just to capture as much of that growth opportunity as possible. And I would say that continues to ramp up, and I think the teams are doing an amazing job just increasing the frequency of conversations and getting in front of every potential customer and making sure we capture. David Deckelbaum: Thanks, guys. Operator: We are out of time for questions today. I would like to turn the call back over to Toby Rice for any closing remarks. Toby Rice: Thanks for your time, everybody. This quarter stepping back just thinking about it, it's probably one of my favorite quarters just because of the fact that every is a really great example of the total team effort that's taking place here at EQT. We're seeing wins across the board from every department, CapEx, OpEx, volumes, the back office team is getting in the mix with lightning-fast strategic integrations of Olympus. Our commodities team, grinding wins on the trading front. It's a really great example of the culture we built of teamwork and trust in delivering for our stakeholders. So we look forward to continuing the success going forward. Thank you, guys. Operator: This concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Good morning, ladies and gentlemen, and welcome to the Thermo Fisher Scientific 2025 Third Quarter Conference Call. My name is Claire, and I will be coordinating your call today. During the presentation, you can register a question by pressing star followed by one on your telephone keypad. If you change your mind, please press star followed by two on your telephone keypad. I would like to introduce our moderator for the call, Mr. Rafael Tejada, Vice President, Investor Relations. Mr. Tejada, you may begin the call. Rafael Tejada: Thank you for joining us. On the call with me today is Marc Casper, our Chairman, President and Chief Executive Officer, and Stephen Williamson, Senior Vice President Chief Financial Officer. Please note this call is being webcast live and will be archived on the Investors section of our website thermofisher.com, under the heading News, Events and Presentations, until February 1, 2026. A copy of the press release of our third quarter earnings is available in the Investors section of our website under the heading Financials. So before we begin, let me briefly cover our Safe Harbor statement. Various remarks that we may make about the company's future expectations, plans, and prospects constitute forward-looking statements within the meaning of applicable securities laws. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in the company's most recent reports on Form 10 and Form 10-Q under the heading Risk Factors. These forward-looking statements are based on our current expectations and speak only as of the date they are made. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even in the event of new information, future developments, or otherwise. Also, during this call, we will be referring to certain financial measures not prepared in accordance with generally accepted accounting principles or GAAP. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures is available in the press release of our third quarter 2025 earnings and also in the Investors section of our website under the heading Financials. So with that, I'll now turn the call over to Marc. Marc Casper: Thank you, Raf. Good morning, everyone, and thanks for joining us today for our third quarter call. As you saw in our press release, we delivered an outstanding quarter that included excellent operational performance reflecting our active management of the company. Strong execution from our team was ongoing focus meaningfully advanced a number of our customer relationships. And we made significant progress advancing our proven growth strategy, which continues to strengthen our foundation and build an even brighter future for our company. So first, let me recap the financials. Our revenue grew 5% in the quarter to $11.12 billion. Our adjusted operating income grew 9% to $2.59 billion. Adjusted operating margin expanded by 100 basis points to 23.3% and we grew adjusted EPS by 10% to $5.79 per share. Our performance in the third quarter enables us to raise our full year guidance. Now turning to our end markets. In pharma and biotech, we delivered another quarter of mid-single-digit growth. Performance in the quarter was led by our bioproduction and analytical instruments businesses, as well as our research and safety market channel. Turning to academic and government, revenue declined in the low single digits, representing a modest improvement versus last quarter. To provide some additional context, conditions in the U.S. in this end market were similar to Q2. In Industrial and Applied, revenue grew in the mid-single digits store in the quarter, representing a nice sequential step up. Performance in the quarter was led by our electron microscopy business, as well as our research and safety market channel. Finally, in Diagnostics and Healthcare, revenue growth improved over Q2, though it remained down low single digits for the quarter, largely due to conditions in China. Highlights in this quarter included strong growth in our transplant diagnostics and immunodiagnostics businesses. Wrapping up my comments on end markets, our team executed very well to capture the opportunities during the quarter. Let me turn to our growth strategy, which consists of three pillars: high-impact innovation, our trusted partner status with customers, and our unparalleled commercial engine. Starting with innovation, it was another excellent quarter for our company. Our new offerings demonstrate our continued leadership and further enable our customers to unlock scientific breakthroughs, advance precision medicine, and enhance productivity in their labs. In clinical next-gen sequencing, we continue to expand our offerings, strengthening our ability to help clinicians and researchers advance targeted care for patients. The OncoMindDx Express test on our iNTRON GenexisDx integrated sequencer received FDA approval as a companion diagnostic for a targeted therapy used to treat non-small cell lung cancer and for broader tumor profiling applications. We also introduced the Oncomine Comprehensive Assay Plus on the GeneXus system, providing clinical research labs with an all-in-one comprehensive genomic profiling solution that delivers next-day results. This capability provides clinical researchers with faster, more actionable insights to advance precision medicine. For proteomics, we launched the OLINK target 48 neurodegeneration panel to advance research into conditions such as Alzheimer's, Parkinson's, and multiple sclerosis. The new panel helps address the need for reliable detection and measurement of biomarkers that can unlock insights into these and other complex neurological diseases, while also enabling researchers to monitor disease progression and therapeutic responses. In analytical instruments, we unveiled two new electron microscopes at the recent Microscopy and Microanalysis Conference. These include the Thermo Scientific CALOS-twelve transmission electron microscope. This powerful new platform built on our popular Talos line and delivers exceptional image quality and ease of use for structural cellular analysis and biological research, pathology, drug development. We also introduced the Thermo Scientific SkyOS three, focused ion beam scanning electron microscope. Engineered with advanced automation precision and ease of use, this instrument accelerates material science research supports the development of new materials used across clean energy, aerospace, and digital devices. In chromatography and mass spectrometry, we launched 7.4, the first enterprise-ready compliance-focused software platform that unifies chromatography and mass spectrometry workflows. This system offers centralized secure data management and remote access across labs, empowering regulated bio clinical and environmental labs to streamline workflows, improve their productivity, and accelerate scientific decision-making. This launch is a great enabler for both our mass spec and chromatography instruments. Let me give you a quick update on our trusted partner status and our unparalleled commercial engine. We have a unique relationship with our customers, one that has been earned over many years through a relentless focus on anticipating, understanding, and meeting their needs. Our trusted partner status provides us with unique insights to guide our strategy and continually strengthen our capabilities. At the same time, our entry-leading commercial engine enables us to deliver those capabilities at scale. I'll share a few highlights of the actions we've taken recently to deliver even greater value to our customers and position our company for the future. One example is our strategic collaboration with OpenAI. The collaboration is focused on two broad areas. The first opportunity is to embed these capabilities into our products and services to make an even bigger impact for our customers. And the second opportunity is to make Thermo Fisher even more productive. As part of this collaboration, we are embedding OpenAI in advanced technology into critical areas of our business, including product development, service delivery, customer engagement, and operations. Our initial focus is on clinical research, to help improve the speed and success of drug development, ultimately enabling customers to get medicines to patients faster and more cost-effectively. We are deploying these capabilities to improve the cycle time of clinical trials. We'll also look to leverage OpenAI's capabilities to unlock value in our deep repository of data and experience to enable customers to focus on the most promising opportunities in their drug development pipelines. To enable the second focus area, we've launched ChatGPT Enterprise internally across the company to drive productivity, innovation, and ultimately, smarter customer engagement. I'm really excited about the ways Thermo Fisher and OpenAI, two innovation leaders, will work together to make a real difference in advancing science and bringing new medicines to patients. Another good example of our trusted partner status this quarter was the recently announced strategic partnership with AstraZeneca BioVenture Hub in Gothenburg, Sweden. This partnership will leverage the combined expertise of Thermo Fisher and AstraZeneca to drive innovation and strengthen the life sciences ecosystem. A dedicated team from Thermo Fisher will co-locate with AstraZeneca scientists to work on collaborative R&D projects with an initial focus on chromatography, molecular genomics, and proteomics. And it was also great to celebrate the grand opening of our Manufacturing Center of Excellence in Nevin, North Carolina this quarter. A high-volume, low-cost facility, this site was developed with support from the U.S. Government and is capable of producing at least 40 million laboratory pipette tips per week to support life science research and diagnostic laboratories and adds to the U.S. National supply chain resilience. So wrapping up our growth strategy, this was an excellent quarter where our actions strengthened our industry leadership today and positions our company for an even brighter future. Moving on now to capital deployment. We also had a very active quarter successfully executing our proven capital deployment strategy, which, as you know, is a combination of strategic M&A and returning capital to our shareholders. In September, we completed our acquisition of our filtration and separation business from Solventum, which is now part of our Life Sciences Solutions segment. As you know, this business expands our bioprocessing offering for pharma and biotech, as well as industrial filtration capabilities. The integration is progressing smoothly, and the early feedback from our customers has been incredibly positive. We also closed our acquisition of the Ridgefield, New Jersey sterile finish site from Sanofi, expanding our U.S. Drug product manufacturing. This is an excellent addition to our industry-leading sterile fill-finish network within our pharma services business. At this site, we'll continue to manufacture a portfolio of Sanofi's therapies and we'll invest in additional production lines to meet the growing demand for U.S. Manufacturing from our pharma and biotech customers as they reassure more activity to the U.S. Also in the quarter, we repurchased $1 billion of our shares. This brings our total repurchases to $3 billion for the year. So overall, a very active quarter of capital deployment. We have a company culture based on continuous improvement through our PPI business system, which once again was a key enabler of outstanding execution. We made great progress in the quarter leveraging PPI to manage our cost base and deliver very strong earnings growth. The PPI business system continues to drive great impact. And with the OpenAI collaboration, it will have even more impact going forward. The practical application of AI will enhance our colleagues' ability to find a better way, increasing our productivity and improving the customer experience. As I reflect on the quarter, I'm proud of what our teams accomplished and grateful for their contributions to our success. Let me now turn to our guidance. Given our strong performance in the quarter, we are raising both our revenue and earnings guidance for 2025. Steven will take you through the details in his remarks. I'll cover the highlights. We're raising our revenue guidance to a new range of $44.1 billion to $44.5 billion and raising our adjusted EPS guidance to a range of $22.6 to $22.86 per share. So to summarize our key takeaways from Q3, this was a terrific quarter. We delivered excellent operational execution reflecting consistent and active management of the company and the power of the PPI business system, which resulted in outstanding earnings growth. We continue to advance our growth and capital deployment strategies. And we're raising our full-year guidance and remain confident in our midterm and long-term outlook and the proven strength of our strategy to create meaningful value for our shareholders and continued success for our company. With that, I'll now hand the call over to our CFO, Stephen Williamson. Stephen Williamson: Thanks, Marc, and good morning, everyone. I'll take you through an overview of our third quarter results for the total company, then provide color on our four business segments, and I'll conclude by providing our updated 2025 guidance. Before I get into the details of our financial performance, let me provide you with a high-level view of how the third quarter played out versus our expectations at the time of our last earnings call. In Q3, our team executed really well and delivered results significantly ahead of what we'd assumed at the midpoint of our prior guidance on both the top and bottom line. Q3 reported revenue was approximately $300 million ahead of what we'd included in the midpoints of the prior guide, driven by stronger FX tailwind, a benefit from our recent acquisitions, and a slight beat on organic revenue. The beat on the bottom line was even more significant. We delivered $0.30 of adjusted EPS ahead of what was included in the midpoint of our prior guide for Q3. $0.11 of that beat was from a lower impact of tariffs and related FX than had been assumed in the prior guide. $0.20 of the beat was from very strong operational performance, and this was partially offset by $0.01 of dilution from the recent acquisitions. So to summarize, in Q3, once again delivered excellent operational performance. Let me now provide you with some additional details on Q3. Starting with earnings per share. In the quarter, adjusted EPS grew 10% to $5.79. GAAP EPS in the quarter was $4.27, in line with the prior year quarter. On the top line, Q3 reported revenue grew 5% year over year. That included 3% organic revenue growth, a 1% contribution from acquisitions, and a 1% tailwind from foreign exchange. Turning to our organic revenue performance by geography, in Q3, North America grew low single digits, Europe and Asia Pacific both grew mid-single digits with China declining mid-single digits. With respect to our operational performance, we delivered $2.59 billion of adjusted operating income in the quarter, an increase of 9% year over year. Adjusted operating margin was 23.3%, 100 basis points higher than Q3 last year. The very strong earnings results reflect our active management of the business and the power of our PPI business system. Total company adjusted gross margin in the quarter was 41.9%, 10 basis points higher than Q3 last year. We delivered very strong productivity, which enabled us to fund strategic investments further advance our industry leadership, and offset the impact of tariffs and related FX and unfavorable mix. Moving on to the details of the P&L. Adjusted SG&A in the quarter was 15.5% of revenue, R&D expense was $346 million in Q3. Reflecting our ongoing investments in high-impact innovation, R&D as a percent of our manufacturing revenue was 6.9% in the quarter. Looking at results below the line, our Q3 net interest expense was $113 million. As expected, the adjusted tax rate in Q3 was 11%, and average diluted shares were 378 million, approximately 5 million lower year over year driven by share repurchases net of option dilution. Turning to free cash flow on the balance sheet. Year-to-date cash flow from operations was $4.4 billion and free cash flow was $3.3 billion after investing $1 billion of net capital expenditures. Q3 was a very active quarter of capital deployment, we deployed approximately $4 billion of capital through the acquisition of our filtration and separation business from Silventum and the sterile fill-finish site from Sanofi. In addition, we repurchased $1 billion of shares during the quarter and returned $160 million of capital through dividends. Ended the quarter with $3.5 billion in cash and short-term investments, $35.7 billion of total debt. Our leverage ratio at the end of the quarter was 3.2x gross debt to adjusted EBITDA and 2.9 times on a net debt basis. Completing my comments on our total company performance, adjusted ROIC was 11.3%, reflecting the strong returns on investment that we're generating across the company. I'll provide some color on our performance of our four business segments. In Life Sciences Solutions, Q3 reported revenue in this segment increased 8% versus the prior year quarter, and organic revenue growth was 5%. Growth in this segment was led by our bioproduction business, which had another quarter of excellent growth. Q3 adjusted operating income for Life Science Solutions increased 15%, and adjusted operating margin was 37.4%, up 200 basis points versus the prior year quarter. During Q3, we delivered very strong productivity and volume leverage, which is partially offset by unfavorable mix strategic investments and the impact of the acquisition of our filtration and separation business. Which is included within this segment. In the analytical instruments segment, reported revenue increased 5% and organic revenue growth was 4%. Growth in the quarter was led by electron microscopy, and chromatography and mass spectrometry businesses. In this segment, Q3 adjusted operating income decreased 5% adjusted operating margin was 22.6%. Down 230 basis points versus the year-ago quarter. But this is a sequential improvement from Q2 2025. The majority of the year-over-year margin change was driven by the impact of tariffs and related FX. Outside of that impact, strong productivity was partially offset by strategic investments. And unfavorable mix. Seniors and Specialty Diagnostics in Q3 reported revenue grew 4% year over year, and organic revenue growth was 2%. In Q3, growth in this segment was led by our transplant diagnostics, and immunodiagnostics businesses. Q3 adjusted operating income for Specialty Diagnostics increased 10% and adjusted operating margin was 27.4%, 150 basis points higher than Q3 2024. During the quarter, we delivered strong productivity and volume leverage. Finally, in the Laboratory Products and Biopharma Services segment, reported revenue increased 4% and organic revenue growth was 3%. Growth in this segment was led by a research and safety market channel. The runoff of pandemic-related revenue had a 1% impact on the revenue growth in the segment in the quarter. Q3 adjusted operating income in this segment increased 12% adjusted operating margin was 14.5%. 100 basis points higher than Q3 2024. In the quarter, we delivered very strong productivity, which is partially offset by unfavorable mix, strategic investments. Turning to guidance. As Marc outlined, we're raising our 2025 full-year guide on both the top and bottom line, reflecting our continued active management of the company. Let me provide you with the details. We're raising our revenue guidance to an expected range of $44.1 to $44.5 billion. Organic revenue growth at the midpoint of the guide continues to be 2% for the full year, and as a reminder, that includes a one point of headwind from the run-up of pandemic-related revenue. Increasing our outlook for adjusted operating margin in 2025 to a new range of 22.7% to 22.8%. And we're raising our adjusted EPS guidance to a new range of $22.6 to $22.86. The increase of the midpoint of the guidance range reflects $420 million higher revenue than the prior guide. Driven by the benefit of our recent acquisitions, and an increase in the tailwind from FX. From an earnings standpoint, the increase in the midpoint of the guide reflects 20 basis points of improved adjusted operating margin expansion and $0.20 of higher adjusted EPS. This change includes $0.05 of dilution from the recent acquisitions. Continue to actively manage the company drive excellent operational performance once again enabling us to increase our guidance for the year. I'll now move on to an update of some of the modeling elements for the full year. Our guidance now includes the impact of the recently closed acquisitions, these deals added $260 million to revenue to our prior full-year guide, $20 million of adjusted operating income, and as I mentioned earlier, $0.05 for adjusted EPS dilution. In terms of tariffs, our guidance reflects the tariffs that are currently in place as of today. This includes the increase in tariff rates between the U.S. and Europe that occurred since the time of our last guidance. The changes in tariffs and trade policy once again caused intra-quarter volatility in FX rates in Q3, as a result, FX in Q3 was $220 million revenue tailwind to our prior guide, and a $0.10 adjusted EPS headwind. So for the full year, we now expect FX to be a year-over-year tailwind to revenue of $230 million and a headwind to adjusted operating income and adjusted EPS of $110 million and $0.37 respectively. Below the line, we now expect net interest expense to be $440 million in 2025, and we continue to expect an adjusted tax rate of 10.5% for the full year. We expect between $1.4 billion and $1.7 billion of net capital expenditures and around $7 billion of free cash flow for the year. Then in terms of capital deployment, our guidance now assumes that we deploy $7.6 billion of capital in 2025. $4 billion on the recently closed acquisitions, $3 billion on already completed share buybacks, and $600 million of capital return to shareholders through dividends. Finally, we estimate that full-year average diluted share count will be approximately 378 million shares. So to conclude, we delivered an excellent Q3, we're in a great position to deliver on our 2025 objectives. With that, I'll turn the call back over to Raf. Rafael Tejada: So with that, let's get started for the Q&A portion of the call. Operator: Thank you. When preparing to ask your question, please ensure your device is unmuted locally. The Thermo Fisher management team, please limit your time on the call to one question and only one follow-up. If you have any additional questions, please return to the queue. Our first question comes from Michael Ryskin from Bank of America. Your line is now open, Michael. Please go ahead. Michael Ryskin: Great. Thanks for the question and congrats on another strong print guys. I'll start just on market conditions and what you're hearing and what your customers' mark. I mean a lot has changed since we last spoke on the 2Q call. Especially on pharma, there's been a lot of progress in, I would say, de-escalation on some of the MFN and tariff concerns with pharma. Just wondering if anything has changed in your conversations with your major customers. Over the last couple of weeks and months. Talk of reshoring longer term. Could you just talk about how Thermo would benefit from that? Both from a facility build-out perspective, but also from Patheon and some of the other pharma services, some of your fill-finished capacity in the U.S. Just sort of how that come up in conversations? Marc Casper: Mike, thanks for the question. Very topical. So in terms of our dialogue with our pharma and biotech customers, as you know, we're very engaged, right, with this customer set, the senior executives, and if I say, what are they focused on? Probably is the first thing. Right? A lot of, you know, excitement around scientific breakthroughs. A lot of confidence actually in their pipelines. And they're partnering with us to help them drive their success. As we talk about the actual environment, right, which is a part of how they think about the world and the decisions they make, you know, there's a quiet confidence, actually, that they're going to be able to navigate the government policies effectively. And you're seeing that in some of the announcements that have been made on pricing as well as on reshoring more activity in the U.S. in terms of not being exposed to potential tariffs. On that dynamic, what I would say is we're very engaged in helping those customers think about, you know, new sites, how to best equip them, and support our customers. In that effort. And, you know, that will benefit our channel business, it will benefit our bioproduction business, analytical instruments businesses, will all benefit from those new construction. And that's really largely 27%, 28% by the time ground is broken on new things. For expansions, within existing facilities, it could be a little bit faster than that. So that is something we're actively engaged in, but it takes some time to gestate. More rapidly than that and in a way more cost-effectively for our customers, is leveraging our pharma services network to be able to move more of their volume to the U.S. You know that we are the industry leader in drug products sterile fill finish. We have very strong capabilities here. We've had very strong demand for those capabilities and our arrangement with Sanofi where we acquired one of their sites gives us another production node in the U.S. That is well trained, great workforce, and the ability to expand that facility as well. So we're excited to be able to enable our customers and pharma biotech has been a good environment for us. So thanks, Mike. Michael Ryskin: Okay. Thanks. That's all really helpful. And then maybe on the academic and government front, I mean, think you called out a low single-digit decline in the quarter. It seems like slight improvement from last quarter. But a lot of updates there as well. It looks like we're on track for hopefully flat budget next year, which is encouraging. But on the other hand, you've got the government shutdown over the last couple weeks now. So just give us an update on what you're hearing there. Is there any risk from government shutdown starting to hurt some of that? Potential recovery in A and G? Just sort of how you think about that playing out? Thanks. Marc Casper: Yeah. So, when I think about academic and government, in the quarter, the improvement was really slightly better in Europe. U.S. was very similar. China was very similar. To what we experienced in Q2 in both of those markets have headwinds, obviously different drivers of those headwinds. And when I think about so that government shutdown is kind of post-quarter. So I'll talk about that in a moment. But I say what's going on in the environment, in Q3, in the US, customers actually feel better about the idea of a more stable funding environment. Obviously, we'll have to get a budget in place and all of those things. But I think there's more consensus around relatively a flattish budget. And I think that will remove a headwind over time as the market stabilizes, once we get that funding in place. So I actually say from that perspective, while the conditions were, muted, I would say actually the noise or the it's less noise in a way. It feels a little bit better. On government shutdown, the way I would say is, obviously post-quarter, we're in the middle of it. Right now. I think it adds a little bit to customer hesitancy, right? It does add some uncertainty. And it obviously will delay some expenditures by the US government as well. On the things that they actually purchase. We put into our implied guidance range for the fourth quarter a reasonable set of action outcomes based on the government shutdown and based on our own experience. And how we think it's playing out and feel well positioned to navigate that. So that's how we thought about it. At this point in time. Michael Ryskin: Thank you, Mike. Thank you so much. Thanks. Operator: Thank you. Our next question comes from Tycho Peterson from Jefferies. Tycho, your line is now open. Please go ahead. Tycho Peterson: Hey. Thanks. Mark, I wanna maybe unpack some of the analytical instrument strengths. We're certainly better we've been modeling. Appreciate your comments on academic and pharma. But maybe just a little bit more color. Is this mostly mass spec? Is it cryo EM? Any particular segments that are emerging? And I guess, importantly, how do you think about kind of momentum on analytical instruments in the year-end? Any thoughts on budget flush and '26 at this point? Obviously, little bit too early to see a real pickup from onshoring, sounds good. Marc Casper: Yes. So Tycho, thank you for the question. So the team has been doing a good job in our analytical insurance business I'm proud of the efforts. The innovation that we've been talking about is really being incredibly well adopted. Say what is one of the drivers? Great launches in both mass spec and cryo electron microscopy. You know, it makes a real difference. And many of you have heard me say over the years, irrespective of funding environments, because they ebb and flow over time, you have relevant innovation and you think about what our customers are actually doing, they're doing their life's work. With this innovation. And if they don't have the best tools, effectively, they're really wasting their time. And because of that, you see an incredibly resilient and entrepreneurial set of customers getting funding. So the team's done a good job on that respect, and I'm proud of the mid-single-digit growth that we delivered in the quarter. When I think about what drove it really electron microscopy and chromatography and mass spectrometry. Were the drivers. We still have headwinds in our chemical analysis business. It was a little better. Than the previous quarter, but still pressure in some of the industrial and environmental segments. So largely, the two big businesses drove the strong performance. I think about the momentum going into the fourth quarter, really the only thing that's different, we have a much stronger comparison in the fourth quarter. We had very strong high single-digit growth last year. So comparison is difficult. Different. So that really is the will be the factor. But the underlying health of the business is quite good. Tycho Peterson: Great. And then a follow-up on Diagnostics You did flag China. Obviously, this has been a pressure point for some of your peers in China Diagnostics. Maybe Just Give Us A Sense Of What's Going On, You Know, On The Ground There. What If What Would Especially Specialty Diagnostics Have Done Ex That China drag? And then overall, I guess, just what are your assumptions around China for remainder of the year and early twenty six? Marc Casper: Yeah. So when I think about our specialty diagnostics, business, we provide high value medically relevant, critical testing. Right? And you think about that it's transplant diagnostics, it's immunodiagnostics, It's our protein diagnostics, which is our multiple myeloma business, which is part of our clinical diagnostics business. Our biomarkers for sepsis. These are just critical capabilities. And businesses that are, you know, a healthy long-term set of prospects. When I think about the environment in China, we have a much smaller presence than the market average for the diagnostic businesses in China in terms of what we do. So we saw very weak conditions based on the pricing and reimbursement environment. It's not different than what we expected. And those pressures flow through, but it's relatively modest portion of our business. And saw a little bit of improvement relative to the prior quarter in terms of what the growth rate was in the business. So think we're well positioned there over time. And you know, not much beyond that, I would say. Tycho Peterson: Okay. Thank you. Operator: Thank you. Our next question comes from Jack Meehan from Nephron Research. Your line is now open. Please go ahead. Jack Meehan: Thank you, and good morning. First question Good morning, Jay. Mark, just wanted just wanted to test your pulse You know, last quarter, you gave some initial framing thoughts around 2026 and kind of progression around the 3% to 6% organic growth. I guess just based on everything you've seen and the dialogue that you've had with customers, just great to get your latest thoughts on how you felt like you were tracking relative to that. Marc Casper: Yeah. So you know, when I think about the progression and the midterm outlook in the long-term outlook, we feel very good about that. Right? So nothing has changed about our confidence in the next couple of years. 3% to 6% organic is the right level of assumptions and strong operating margin and operating income growth coming out of that. So that's consistent. When I think about the first few agreements, on MFNs between the pharmaceutical companies, and the industry and the government in the US, that's what we expected to happen. Right? So that's a good thing, right, which is we expected that companies or the vast majority of companies would navigate the environment successfully. You're seeing the early ones do that. And that gives us confidence that the market conditions will continue to progress. I think it's worth remembering that today, we're basically at 2% organic and is about full point headwind from the COVID runoff, which doesn't which won't repeat next year. So we're kind of running at the 3% range. And over time, over this next couple of year period, the absence of negatives, meaning that academic and government won't decline as much, China at some point will stabilize, that in and of itself, without even improving the market conditions, ultimately gets higher in the range and then ultimately continued share gain in market conditions will get us further and further in the range over time. I feel very good about the position. I think for Stephen, it's worth commenting a couple of things that have changed. Stephen Williamson: Yes. So Jack, a couple of things to think about when you're doing the modeling for 2026. So based on current FX rates, there'll be a tailwind to revenue of a couple of million dollars. Obviously, I'd obviously monitor how rates change between now and the end of the year. We'll give more detail in terms of the current view in early 2026. Then in terms of the recent M&A, maybe it's worth actually taking a step back and giving a little bit more detail on kind of the implications for the current guide '25 and some thoughts in terms of modeling for you going forward. Starting with the filtration and separation business, revenue for this business for the full year 2025, not just the period we own but as I think about the full calendar year, expected to be just under $750 million in scale, so good sized business. When I think about going forward, the revenue growth there will be likely around or above the average for the company going forward. A good growing business. For the first twelve months of ownership, we continue to expect the transaction to be $0.06 dilutive, just under half of that is occurring in 2025. And then we're bringing this company this business into the company as a low double-digit margin business, and that quickly gets up to mid-teens and above. Once the integration stand-up costs are behind us. At that point, strong top-line growth, including strong synergies, will be nicely accretive to both margins and earnings for the business. Then moving to the Sanofi site acquisition. This comes with, as Mark mentioned, an existing book of business from Sanofi, approximately $75 million. And over the next couple of years, we're investing in additional lines that we're drive much stronger utilization of that site going forward. And as we go through the investment phase over twelve months of ownership, we expect the transaction to be dilutive by about $0.05. To get into 2027, the revenue profitability builds nicely as the new lines start to generate revenue there. So hopefully, that's some good color that will help you with modeling here. Jack Meehan: Yeah. That was all great. Wanted to follow-up and talk about the clinical research business. Mark, just any additional color you can share on trends and new authorizations, how you feel like pharma customers are feeling about getting back to work on trials, and any any just color around traction there would be great. Marc Casper: Thanks. Jack, thanks for the questions. They never stop working. It's really the business has progressed really well, very very proud of how the team is executing. The year has played out strongly. When I think about Q3, revenue growth stepped up. So we're growing in the quarter. Remember, we were just slightly positive in Q2. We're back to low single-digit growth. Authorization is incredibly strong. So ahead of that. So that positions that step up that we're expecting over time is playing out nicely. Are also innovating in what we do in clinical research. Right? And if you think about why that's relevant is because it is the lifeblood of the pharmaceutical and biotech industry is to be able to improve the speed and efficiency of the drug development process because that creates opportunities to improve the ROI on drug development. Which creates a virtuous cycle of more investments by our customers. A couple examples in the clinical research business where one is actively being, you know, implemented. We talked about accelerated drug development about a year ago. We're winning significant business. It's resonating incredibly well. Because what it's allowing us to do is shave time and cost out for our customers and leveraging our capabilities of not only our CRO business, but also our pharma services business to help our customers bring exciting medicines to market. The OpenAI collaboration is what we're creating together and what's new. Right, which is where, you know, deploying artificial intelligence in a way to help improve the cycle time of our clinical trials. We're co-creating new capabilities, right, in terms of effectively leveraging the large repository of data that we have to be able to add new value to our customers. So it's a super exciting time. Clinical research business, and the business is progressing nicely. During the course of this year. Jack Meehan: Yeah. It seems interesting. Talk to you. Marc Casper: Thank you. Operator: Thank you. Next question comes from Daniel Anthony Arias from Stifel. Your line is now open. Please go ahead. Daniel Anthony Arias: Hey, good morning guys. Thank you. Mark, maybe just following up on your biopharma comments. I'm just curious whether demand from small and emerging biotech is getting any better from where you sit. I mean, obviously, the BTK index is doing better, but I'm wondering if spending is loosening up at all. Marc Casper: Yeah. So, Dan, in terms of biotech, I'm sure it's a strong quarter. Right? When I look at what was going on sort of in the more detail, we really saw very nice momentum in our clinical research business. Of the early activities in pharma services. Obviously, in pharma services, it's going be smaller dollars as you get going. But there was a really nice progression there, which I feel good about. So I think that is encouraging. Actually think some of the M&A transactions that were done by large pharma acquiring biotech also helps sort of the ecosystem more broadly. So if I say not only do the equities perform better, but I think also you're seeing deal activity. And that deal activity ultimately will help drive a reinvestment cycle or cycling in of new capital. The market over time. So I think Q3 was a nice progression from that perspective. Daniel Anthony Arias: Yeah. Okay. That's great. Then maybe just taking the other side of Tycho's China question as it relates to pricing and just the initiatives that they have going on over there to control price. You know, the diagnostics markets are evolving, obviously, but what are you seeing on the research and industrial side? Is that fluid in a way that you think introduces some additional risk, or do you have your hands around the pricing dynamic? Such that you can think about it being stable into year-end or into the beginning of '26? Thanks a bunch. Marc Casper: Yeah. Dan, thanks for the question. So maybe if I step back on China. Right? Because we've been able to deliver stronger growth, around the world now for some period of time, China has become a smaller percentage of the company's total. Still an important market, but smaller. When I look at what's going on in China, know, academic and government, does benefit from some of the stimulus programs, but relatively pressured. As the government has tried to manage its own economic challenges, which are meaningful. But what was encouraging was that pharma biotech grew in the quarter modestly, but it was nice to see that happen. When I think about the quarter we declined in the mid-single digits. That was an improvement versus Q2. Really, the difference over those trends was we had that month of succession of trade activities back in the April timeframe. That absence really allowed us to have a bit more moderate declines. I would expect China for this year full year, to be down between mid and high single digits. The pricing dynamics, less government affected in the industrial sector, in pharma and biotech. They're more private enterprises or state-backed enterprises, but they don't have the same reimbursement dynamics. That you would see in the diagnostics and health care market. So that's a bit more manageable. Thanks for the questions. Operator: Thank you. Our next question comes from Daniel Gregory Brennan from T. D. Cohen. Line is now open. Please go ahead. Daniel Gregory Brennan: Great. Thank you. Thanks for the questions. Congrats, Mark and Stephen. Maybe, Mark, just going back to the onshoring announcement since it's been tremendous focus in the investor community. How to think about that? You gave a lot of color already in to some questions. I was hoping you can elaborate a little bit on two parts. First is, you know, we all ultimately think, like, kind of CapEx and, you know, capacity following drug volumes. So if drug volumes aren't necessarily changing, just trying to understand how to think about like what will be incremental in the U.S. Versus kind of that wasn't there before. So any way to help us think about that at this point? I know you talked about for the greenfield that would come with time, maybe like '27 and beyond. Just trying to think about that. And then I know you did talk about maybe more near term, maybe some of the brownfield there could be some equipment uptake. 'twenty six. Anyway, just help frame sizing magnitude or just any way to kind of contemplate what this can mean for Thermo Fisher? Marc Casper: Yeah. So, Dan, thanks for the question. So when I think about what is the aggregate dynamic, let's say, what the dollars are for us, but just what's going on. It is true incremental onetime demand. Right? And what I mean by that is there's gonna be new equipment new initial stocking inventory, new labs, all these things. I mean, none of these things are material in itself, but, you know, you just go through that process of getting a facility online. You do qualification runs. You just there's just a bunch of activity. That will generate demand over the next few years. But the volume in the industry hasn't changed. You do they're just real incremental in terms of that start up. But effectively, it doesn't mean that your ongoing consumables business grows more quickly because you're producing the exact same amount of medicines around the world, you're just producing in different sites. So from that perspective, it's kind of an unexpected positive over the next few years. We have a strong presence there. And interestingly enough, have a much stronger presence today than when those facilities were built many years ago in Europe. Right? Just if you think about how strong our bioproduction business is how strong the capabilities we're bringing in from solventum and filtration, the product launches around Dynaspin, which is our bioreactor technology. These are great things that position us actually have a higher share in the new facilities than the existing installed base. So I feel very good about the prospects. And we do it site by site in terms of what the opportunity is. So I don't have a good number to say how big is it in total, but should be a tailwind a bit in bioproduction. What I would say is our bioproduction is doing incredibly well, right? So when I able to look at a few of the companies that I've reported, very strong growth in Thermo Fisher. Clearly faster than what the others have reported. Broad-based strength geographically across our different businesses there. Really, the team did an excellent job. Bookings outpacing the strong, you know, teens growth in revenue is really the Teams are just doing great work. So it's an exciting business for us, and one with great momentum in the market. Daniel Gregory Brennan: Terrific. And then just a follow-up maybe to Steven. Just on the EPS impact and tariffs, could you just kind of level set? I know you gave the impact in the quarter, you said you mark to market the European tariffs, but you had the $0.50 potential from China. Think you recaptured some of that. Could you just kind bottom line, like how much ultimately kind of the tariff changes occurred and kind of what's happening in 4Q? Thank you. Stephen Williamson: Yes. Thanks, Dan. So when I think about the tariffs and the kind of the actual experience in Q3 came in favorably to what we'd had in the prior guide. In my prepared remarks, called out the $0.11 pickup, and that's a combination of tariffs and the related FX to, in terms of the changes in the kind of tariff and trade environment. Looking to Q4, given the tariffs increased from the time of our last guide most materially between U.S. and Europe. Our initial view is that that kind of assumptions we had around tariffs pretty much hold for Q4. So I'm not expecting a significant pickup in Q4. That's kind of how we've kind of framed the guidance for in terms of this update. Operator: Great. Thanks, Sam. Our next question is from Andrew Tupa from Raymond James. Your line is open. Please go ahead. Andrew Tupa: Great. Thanks everybody for the time. Just first, would love a little bit more color on the contract research side of the house and maybe in particular, how that accelerator bundled program has gained traction and kinda layering that into the context of all the discussion that's already occurred in terms of onshoring, how that changes the applicability to customers, and how they look at know, that kind of wraparound March partnership versus, CRO and CDMO kinda separately historically? Marc Casper: Yeah. So, Andrew, thank you for the question. So when I think about accelerator, right, we are one of the largest clinical research organizations. We are also one of the largest pharma services organizations that's developing medicines on the physical side, from early development all the way through commercial scale production. Both in drug substance and drug product and all of the physical clinical trials like activities around there. So we are touching these pipeline, these molecules in many different ways. And a hypothesis that we had at the time of deciding to acquire PPD back in 2021 was that there would be insights and capabilities that could streamline the way that companies develop medicines and how they produce them ultimately. We didn't bake that into our models, but we had a strong hypothesis. We spent a couple years doing a significant number of co-creation with our customers to bring that to life. We launched the official capabilities a year ago, and the adoption has been very strong. You see it very aggressively in biotech. Because, effectively, they outsource pretty much all of their work. Right? So when they think about it, they are looking for a partner that can help them bring insights, not only in how to design and execute their trials, but on also how do you develop and produce the medicines. And it's been very compelling. It's built us a nice book of authorizations. That turns into revenue over time. Takes a while for this flow through the pipeline. And in large pharma, there's been great interest in our leading clinical trials, physical capabilities, the logistics packaging, distribution of experimental medicines. And what that has allowed us to do is continue to drive share and gain momentum because, again, there, the linkages with clinical research shaves time and cost out of the process as well. So it's been, you know, it's early days, but they've been very positive. Andrew Tupa: That's helpful. Thank you. And then maybe just one of financial question. Your $0.2 operational beat in 3Q, you had the FX and tariff tailwinds as well. But you're raising the range about 20¢ in the midpoint as well. Maybe what's going on to off some of that operational traction as we think about 4Q? Is it reinvestment? Is it a little bit of mix? Is there something different to think about knowing we have that $5 of dilution from the acquisitions you called out as well? Just would love a little bit of color on kind of 3Q to 4Q. Stephen Williamson: Yes. Understood. We beat by $0.30 in Q3. As you mentioned, we have $0.05 of additional dilution from the acquisitions. And overall $0.20 raise in midpoint given where we are in the year, how we're performing, what the end markets are like, I think this is an even stronger raise on the low end of our guide. I think that's a good to be in as I think about going into the Q3. Q4 quarter. Operator, we have time for I just we're in a good position for finish the year. I don't overread into raising our guidance by $0.20 in the midpoint, but significantly raising on the low end I think that's a strong statement. Andrew Tupa: Thanks, Andrew. Okay. Thank you. Operator, are set for one more question? Operator: Lovely. Our next question comes from Patrick Donnelly from Citi. Your line is open. Please go ahead. Patrick Donnelly: Great. Thanks for taking the questions, guys. Mark, maybe one for you on just the capital allocation side. Obviously, continue to buy back stock as you talked about. You just talk about the M&A appetite, what those discussions look like? Any areas you're focused on? I know you guys always have a good pulse on that front, just curious what appetite there looks like for the conversations. And I just have a quick follow-up. Marc Casper: Yeah. So we have been active all year. We have deployed about $7.5 billion on M&A, $3.5 billion on return on capital through buybacks and dividends. We have a very busy pipeline. It's exciting. I like this environment because there are good companies that you know, struggle in environments where it's all about execution. And so we're busy, and we're looking at some interesting things. Obviously, those things will always fit well with our strategy. Going to be whether we can generate really good returns. And for those that feel good about, you'll see us continue to be active. Are many parts of the company given how fragmented our industry is, to expand our offerings that would be highly valued for our customers. So we're going to execute well against what we closed. And, at the same point in time, continue to look for great opportunities build more value. Patrick Donnelly: Okay. That's helpful. And then as we look ahead, it seems like the exit rate for 4Q somewhere at two or 3% organic. Obviously, you talked a little bit about 26% last quarter. Is the view that growth just continues to accelerate throughout next year? It sounds like China is turning the corner to a degree. Pharma sounds a little bit better. I guess, what segments are holding you back, if any, in terms of when you look at what's improving right now? And again, as that acceleration happens next year, are the key drivers? And what are you looking for still turn the corner? Thank you guys so much. Marc Casper: We are looking forward to our call at the beginning of the year to give you all the details. We'll benefit from, obviously, the perspective on how we exit the year. And our view is, over the next couple of years, growth is going to build over time. And I'm very excited about exiting this year. A couple percent organic and 3% when you have the non-repeats of the final bits of COVID runoff. So we entered the year at a good part, and going to execute really well in turning the revenue growth into excellent, excellent earnings growth. And we did in the quarter and finish up on a great note in '25 and set ourselves up for a great '26 and beyond. So Patrick, thank you for the final question. Let me wrap up. Thanks, everyone, for joining us on the call today. We're very pleased to deliver another strong quarter. We're well positioned to deliver differentiated performance in 2025 and continue to create value for all of our stakeholders and build an even brighter future for our company. Look forward to updating you on the fourth quarter and the full year performance early 2026. And as always, thank you for your support of Thermo Fisher Scientific. Thanks, everyone. Operator: This concludes today's call. You all for joining. You may now disconnect your lines.
Operator: Good day, and thank you for standing by. Welcome to the BankUnited, Inc. Third Quarter 2025 Earnings Conference Call. At this time, participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session. To ask a question during this session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Jacqueline Bravo, Corporate Secretary. Ma'am, please go ahead. Jacqueline Bravo: Thank you, Michelle. Good morning, and thank you, everyone, for joining us today for BankUnited, Inc.'s Third Quarter 2025 Results Conference Call. On the call this morning are Rajinder P. Singh, Chairman, President and CEO; Leslie N. Lunak, Chief Financial Officer; Jim Mackie, Incoming Chief Financial Officer; and Thomas M. Cornish, Chief Operating Officer. Before we start, I'd like to remind everyone that this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, that reflect the company's current views with respect to, among other things, future events and financial performance. Any forward-looking statements made during this call are based on the historical performance of the company and its subsidiaries, or on the company's current plans, estimates, and expectations. The inclusion of this forward-looking information should not be regarded as a representation by the company as the future plans, estimates, or expectations contemplated by the company will be achieved. Such forward-looking statements are subject to various risks, uncertainties, and assumptions, including those relating to the company's operations, financial results, financial condition, business prospects, growth strategy, and liquidity, including as impacted by external circumstances outside the company's direct control, such as adverse events impacting the financial services industry. The company does not undertake any obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments, or otherwise. A number of important factors could cause actual results to differ from those indicated by the forward-looking statements. These factors should not be construed as exhaustive. Information on these factors can be found in the company's Annual Report on Form 10-K for the year ended December 31, 2024, and any subsequent quarterly report on Form 10-Q or current report on Form 8-K, which are available at the SEC's website. With that, I'd like to turn the call over to Mr. Rajinder P. Singh. Rajinder P. Singh: Thank you, Jackie. Welcome, everyone. Thanks for joining us. Third quarter results were pretty solid. I will try not to get into the level of detail that Leslie and Tom will but just hit the highlights. For the quarter, earnings are up, ROA is up, EPS is up, ROE is up, margin is up, and expenses are very controlled, and credit is flat. So if I was to summarize this, this is, you know, as good a quarter as I could have expected even just a month ago. This is, you know, if there if there's oh, by the way, deposits did exactly what we've had expected them to do, almost to a T. Loans CRE was up modestly. Mortgage warehouse was up nicely. C and I was down, unfortunately, not because of production, but of the ongoing payoffs that we've been seeing. So hitting margin 3% a quarter early, I think that's sort of the highlight. We're very happy about that. We kind of hinted on that. Even on our last call, we were running further ahead. We've been running further ahead all year, so we're very happy that we're at 3%. And by no means is 3% the destination. This was just a waste of, we want to get further, and we will get further, and we'll give you more guidance in January where margin can get to. In the short term. ROA of 82 basis points is improvement over last quarter certainly a big improvement over last year. ROE of 9.5%, EPS of $0.95 I think our I checked a couple of days ago. The consensus was 88¢. So happy to beat that. Capital continues to grow. Set one is now at 12.5%, and tangible capital book value per share is up to $39.27 I think total book value per share is now over 40. The buyback is in place, though we didn't really hit much of it, or any of it, in the third quarter. We're being more opportunistic with the buyback. Rather than in the past, our buyback strategy has been by a little bit every day. This time around, we have a strategy because the amount of volatility we see in the marketplace, we think it's better to be more opportunistic and lean in hard when there is the opportunity to do so. So you'll see that play out over the course of next few months. What else am I missing? Like I said, with credit, everything was about as flat. You know, criticized, classified, NPLs, our ACL, our charge offs, everything was like when I first looked at the numbers, I I thought maybe there a typo, but it's not. Everything has been just very, very flat this quarter. So we have put in some new disclosures around NDFI, Leslie and Tom will walk you through because those are the kind of questions we're expecting. But, again, there also there is not much sensational news either. But with that, I'll turn it over to Tom, and and then Tom will turn it over to Leslie. Great, thank you, Raj. So before I dive into a little bit of details about Thomas M. Cornish: the quarter, just a couple of comments from an environment perspective that we're operating in right now. And what we kind of see as we look forward into this coming quarter and the start of next year. So Raj and I have done a number of events with major clients over the last few weeks. We've visited almost all of our offices, including the new office locations that we've been announcing. We've seen a fair amount of hiring that's really good quality hiring that we're starting to see a really good build. In those areas. So we have traditionally been an early of the year deposit grower an end of the year asset grower on the loan side. And I would expect that we would see that based upon what we're looking at right now. We've got very, very good pipelines in commercial teams across the bank. We've got very good pipelines in the real estate team. Real estate's been a good growth area for us all year long. Deposit pipelines look strong. From an operating account perspective in the fourth quarter. So I think the and when we track business sentiment of clients both on the commercial side and on the CRE side, I think businesses are feeling pretty optimistic. Right now. And we had a lengthy session for the group of CRE clients the other night, probably over 100 clients. And I think the optimism in the free markets heading into the end of this year and next year is is very strong. So we're quite optimistic about what we expect to see in the near term environment. A little bit more detail on the quarter. As Raj said, total deposits were basically flat for the quarter. Declined by $28,000,000 We did experience the normal seasonal fluctuations that we always see in the title business at this point in the year and to a lesser extent HOA and government banking, the municipal quarters generally and outgo during the third quarter. Overall, are pleased with $1,200,000,000 in non brokered deposit growth that we've had over the last twelve months We expect to see seasonality continue. In the fourth quarter, but kind of broadly across the bank, the level of market penetration, new relationships, net new relationships in each of our operating segments and geographies, is really very strong and very encouraging. On the loan side, as Raj mentioned, of course CRE and C and I loan portfolio declined by $69,000,000 for the quarter, CRE being up 61 while C and I segment declined by 130,000,000 For the quarter, we still see payoffs larger than we have historically seen, but we also see those kind of coming to a close as it relates to relationships that we may have decided to exit. We are seeing a little less utilization than we've traditionally seen on the book. I think part of that is because we are continuing to focus on relationships that tend to be more deposit rich. That's one of the reasons. But we're seeing a slight dip in utilization. But nothing that I don't think new business opportunities in production can outrun as we move forward. Mortgage warehouse grew by $83,000,000 in the quarter, which was a good quarter. And the resi franchise equipment in the municipal finance were down in line with what we have guided to in the past and what we expect Overall loan to deposit ratio, finished at 82.8% for the end of the quarter. Raj mentioned NDFI, so there's been a lot of talk about that recently. So we added some information on slide 16 in the supplemental deck about our NDFI exposure. In total, we have 1,300,000,000.0 in NDIF exposure as of ninethirtytwenty five. Which excludes mortgage warehouse lines, That's about 5% of our total loan portfolio. The largest components are B2B credit and subscription lines or subscription line outstandings as you look at the exhibit. Are almost all predominantly investment grade very high risk graded from a quality perspective portfolio. And our B2B portfolio is predominantly secured lending facilities that we have to real estate investment funds. We're not really in the kinds of larger lending to private credit that people are reading about and talking about. Our facilities are more moderate in size and generally secured by the pledges of assets and real estate collateral. That we have Substantially all of the September only one loan was on non accrual for 26,000,000 through a real estate investment fund. Brief comments on CRE exposure. Our CRE exposure totaled 6,500,000,000.0 or 28% of loans and 185% of risk based capital. Pretty consistent with the prior quarter. I think if you look at Page 11 of the supplemental deck, you can see we've got a well balanced portfolio. It's kind of interesting. It's almost $1,000,000,000 in every major asset class from retail to to industrial to office, including medical office, and to multi family when you include the construction portfolio. Which is predominantly multifamily. So very balanced overall real estate portfolio. Consistent with last quarter at September 30, the weighted average LTV of degree portfolio was 55%. Weighted average debt service coverage was one point seven seven, 49% of the portfolio was in Florida. 22% in the New York Tri State area. And these numbers are becoming a little less concentrated in those two as we do more real estate in the Atlanta market, the Southeast market and the Texas market. Over a period of time. Office exposure was down $122,000,000 or 7%. From the prior quarter end criticized classified CRE loans declined by $41,000,000 in the third quarter primarily as a result of payoffs and pay downs. We are seeing a more normalized refinancing market in the office market. I think everybody has seen positive comments about most of the office markets that we're in, particularly the New York market. In the recent months, the CMBS market, has picked up and there are more players involved in looking at new office. So that's part of the reason why the portfolio continues to trend down. We're seeing a little bit more of a normalized refinancing market out there. Pages 11 through 14 of the deck have more details on the CRE portfolio including the office segment. And with that, I think I'll turn it over to Leslie. Leslie N. Lunak: Thanks, Tom. Just one quick point. That $41,000,000 decline was specifically CRE office, not CRE overall in size and classified. So to reiterate, net income for the quarter was $71,900,000 or $0.95 per share. Net interest income was up $4,000,000 and as Raj said, we're very happy to report that the NIM was up seven basis points to 3%. So we hit that target that we had put out there for you a quarter sooner than we thought we would at the beginning of the year. To reiterate what we've been saying for a while now, margin expansion has been and will continue to be primarily driven by a change in mix on both sides of the balance sheet rather than by the Fed's actions with respect to rates. Continued execution on this has continued to remain our priority in the static balance sheet remains modestly asset sensitive. We've done some hedging to protect the margin if rates should decline more than the forward curves would suggest. And there'll be details about those in the upcoming 10 Q filing. This quarter margin expansion was mostly attributable to an improved funding Average NIDDA grew by $210,000,000 and average interest bearing liabilities declined by $526,000,000 On average, higher cost brokered deposits were smaller part of the funding mix this quarter. We did redeem the $400,000,000 of outstanding senior debt in August, that improved the funding mix from a cost perspective. The yield on that was 5.12. So that was helpful also. The average cost of interest bearing liabilities declined to three fifty two from three fifty seven, and the average cost of deposits declined by nine basis points to 2.38 The average cost of interest bearing deposits was down eight basis points to three forty And on a spot basis, the APY of deposits continued to trend down to two thirty one and with the rate cuts that we expect in the fourth quarter, that trend should continue. The average rate paid on FHLB advances did increase and that was mainly due to the continued expiration of cash flow hedges. Again, there'll be details on all of that in the the queue. The average yield on interest earning assets was flat at five thirty eight this quarter. While the yield on loans decreased marginally, the yield on securities was up a little bit to offset offset that. All of our guidance assumes two additional rate cuts in 2025, one in October and a 75% chance of another in December. On the provision and reserve, the provision this quarter was $11,000,000 The ACL to loans ratio was 93 basis points, consistent with the prior quarter end. And I'd refer you to slide 17 of the deck for a waterfall chart that talks about the changes in the ACL for the quarter. Couple of things that were driving the movement in the ACL and provision for the quarter. We had improvement in the economic forecast. Offset largely offsetting an increase in specific reserves, and the majority of that increase in specific reserves was related to one C and I credit and, to a lesser extent, one office loan. That C and I credit appears to be idiosyncratic in nature, Doesn't seem to be any kind of common thread with respect to industry. Or geography emerging there. We also had increases in certain qualitative overlays and obviously net charge offs. Reduced the reserve. Net charge offs totaled 14,700,000.0 The net charge off rate was 26 basis points. For the nine months ended September thirty and twenty seven basis points for the trailing twelve months, so pretty consistent. And those net charge offs primarily related to those same two loans. The one C and I loan and the one office loan. The commercial ACL ratio was pretty consistent with last quarter at 135. And the reserve remains a little more than double historical net charge offs over the weighted average life of the portfolio. As Raj mentioned, NPLs were essentially flat quarter over quarter, up 3,000,000. Of $136,000,000 in total CRE non accruals, 119,000,000 is office and the other 17,000,000 is New York rent regulated multifamily. NPA ratio was pretty flat quarter over quarter, 99 points this quarter compared to 98 last, excluding guaranteed SBA loans. Nothing of note to point out in non interest income or expense this quarter. I will point out, however, that year over year noninterest income for all categories combined other than lease financing, which we know is running down as expected, is up 24% as some of our commercial fee businesses start to gain traction. So I think I think that's very noticeable. We've been pointing that out. Think that 24% increase is worth noting. And that's early innings for us? Yes. Very much so. Yep. And noninterest expense remains well controlled. Couple of comments on guidance. For the fourth quarter. We expect margin for the fourth quarter to be flattish, essentially flat. Double digit NIDDA growth for the year is what we have guided to. We're at 13% year to date. And while we do expect some headwinds to that in the fourth quarter, I think we'll easily hit that double digit guidance that we gave you for the full year. Total loans likely flat year over year. And core C and I we expect year over year to end with low single digit growth, which echo Tom's comments that we do expect pretty strong core commercial loan growth in the fourth quarter. Because of some opportunistic purchasing activity, I think know, the securities portfolio will be down in Q4, but still up slightly year over year. Non interest expense, we had guided to being up mid single digits for the year. I think we'll do a little bit better than that, probably closer to the 3% area. So those remain well controlled. So with that, I will turn it over to Raj for any closing comments. Rajinder P. Singh: No. Listen, I'll I'll I'll close with where I started. And I'll just add one thing to to it, which you just alluded to, which is 20% growth in core fee income is something we're very happy about and celebrating. And and but not again, it's a it's not a destination. This is just this maybe the first or the second inning what we wanna do in the in the in that category. So we're very off you know? Optimistic about long term prospects for fee income. But like I said, I'll I'll end where we started you know, strong EPS growth ROA, ROE got better, margin got to 3% a little earlier than we thought. And the balance sheet for the most part behaved like we had expected it to, and credit remains pretty stable. So and capital continue to accrue. So the other thing I would like to say is this is Leslie's last earnings call. And I talked to her yesterday. I wanted to make sure she tear up. I am a little bit. She has been my partner as CFO for thirteen years. Yep. Thirteen years. So they've come you know, they've gone by very fast. But I just wanna thank her for her partnership helping me build what we have and not just a strong finance department, but a strong company. And the transition to Jim is going very well. It's been a couple of months. And over the next couple of weeks we will see the transition actually officially happen. Leslie will be with us through the end of the year. And will be a friend of the company forever. So I'll probably still reach out to her for advice into next year. Wherever she is traveling. But Good luck finding me. I'll find you. I'll find you. But but thank you. Thank you for everything you've done for the company and and for me specifically. Leslie N. Lunak: Thanks, Raj. And just one thing I would add to that, Seriously, and I mean this very sincerely, one of my favorite parts of this job has been interacting with and working with and getting to know all of you in the analyst and investor community. I really have enjoyed that. I've enjoyed working with each and every one of you. And that's one of the parts of this job that I'm gonna miss the most. With that, let's, turn it over, for Rajinder P. Singh: Q and A. Operator: Thank you. Star one one on your telephone and wait for your name to be announced. To withdraw your question, please press 11 again. One moment while we compile our Q and A roster. Our first question is going to come from the line of Benjamin Tyson Gerlinger with Citi. Your line is open. Please go ahead. Benjamin Tyson Gerlinger: Hi. Good morning. Leslie N. Lunak: Good morning. Thomas M. Cornish: Thanks again, Leslie, for all the help and really, really dumbing, dumbing, dumbing things Benjamin Tyson Gerlinger: down for me. Appreciate that. Not to start on credit, but I'm gonna start on credit. When you think about the the one C and I and CRE, you have a specific reserve, and you're also charging off. But the reserve was the build was bigger than the charge off. Is it fair to anticipate a potential charge off in four q or another one down the road as we wait for those two loans? Leslie N. Lunak: Yeah. I think with the one c and I credit yes, there will be an additional set few million dollars charge off in April. Related to that loan, but it's been fully reserved for And then with the other one, the office loan, the charge off has already been taken. Benjamin Tyson Gerlinger: Oh, got it. Okay. And then as we kind of finish out the year, I know you gave some preliminary guidance When you just think about the loan opportunity, when you think are clients becoming more comfortable with the environment we're working in? And are are you seeing it increased traction in Atlanta? And I know the Charlotte one is is fairly new, but just kinda think, like, longer term, is is the opportunity set getting better over because, I mean, you're arguably the most competitive area in The United States. So I'm just trying to think, like, is it risk adjusted spread that's not meeting the hurdles? Or why why are loans so kinda stuck? I get there's payoffs, but what what can we expect over the road? Rajinder P. Singh: I'll I'll have Tom answer this, but I just wanna start by saying our without being in markets outside Florida, the the opportunity set is actually bigger. And, yes, these are competitive markets, but they're also healthy growing markets. Right? That that that's a trade off. You wanna be in good markets, but good markets are competitive markets. So you know, we've chosen these markets intentionally and we'd rather be in growing markets that are healthy that are competitive than the opposite. So I'll let Tom speak specifically where we're seeing the opportunities and we are being very disciplined about pricing. Right? Because we have one eye on margin and the other on volume. So it is a it is you have to and, of course, credit is always front and center. So you have to balance all those three things But I would still say that it is the miss that we've had in specifically in C and I, is not about missing on production. It has been mostly because of a large amount of runoff Some of it that we don't control, but some that we do control, which is you know, pricing and credit and letting those things run out prudently. But, Tom, you just add some more color to it, please. Thomas M. Cornish: Yeah. I would say when you talk about opportunity in markets, Raj has asked me to find great markets that are not competitive and I've not been able to do that yet. Every every great market we're in is pretty competitive but I think if you look at the pricing piece of it for a second, I think we have held there is a lot of price compression and there is a lot of price competition When we look at pricing through the end of the third quarter, I was actually very happy with where we held spreads. At the end of the third quarter and we had some key segments that actually had a couple of basis points of spread increase for the quarter and that might not seem too exciting, but this is a game of inches. In keeping spreads at the level that we're keeping them is a big part of making the overall margin numbers we're looking at. I think the environment is is very good. I am always heavily impacted by ensuring that we're hitting overall production numbers. Because I believe as long as we're hitting overall production numbers, we will will see growth over the long run and we're also growing core relationships which are really, really critical to the bank. I think new markets we've invested a lot in new markets and we're investing even in markets that were maybe older markets that we were a bit under invested in. Like Tampa in the past, we're investing in new producers. In these markets. So I'm very optimistic about what we're going to see The environment's good. Business owners and executives are optimistic. About what they see in the economy and they're optimistic about what they see in companies. To some extent, it is a very complicated answer, but to some extent mix plays a big role in what we've seen in loan growth, particularly on the upper end of the C and I market more towards the corporate banking market. In terms of a lot of times you're in deals and you're approving deals that have delayed term funding in it, they have acquisition components in it. So your production on some of these kinds of opportunities doesn't immediately turn in the funding. It almost looks like a construction loan. In many ways. But I feel very good about what we're looking at in the very near term and in the next year in terms of business environment, where clients are, where we're positioned in the market, and actually how we're doing from a spread perspective and a competitive perspective in the in the market. I feel very, very enthused about where we are. Leslie N. Lunak: And I will reiterate on a little bit shorter term focus, Q4 has traditionally and historically been a stronger loan production quarter for us. With respect to next quarter in particular, that's another factor that comes play. We're a big Q4 player. Benjamin Tyson Gerlinger: Gotcha. Thank you again. Operator: Thank you. And one moment for our next question. Our next question comes from the line of David Rochester with Cantor. Your line is open. Please go ahead. David Rochester: Hey. Good morning, guys. And, Leslie, know I've already told you this before, but, it's been a real pleasure of the the years working with you. You've been extremely helpful. Good luck in retirements. And, Jim, looking forward to to picking it up with you. Thanks. Just Yeah. Absolutely. On expenses for next year, know you may still be working on those at this point, but is there any reason for expense growth to accelerate next year just given everything you want to do in the new markets or upgrading systems, anything like that? And then is there anything big that's coming that people should be aware of? Thanks. Leslie N. Lunak: I mean, Dave, I we're not prepared to give any 2020 guidance on this call. We'll you'll hear all that from Jim in January. But but there you know, we've talked about some investments in in teams and, you know, platforms and whatnot, but it's not like any giant rip everything out and replace kind of investment that we're looking at. But we'll give more specific guidance on the January call. David Rochester: Yep. That sounds good. I figured I'd try one last time. On deposits, if you could give an update on the title business on some of the trends this quarter, just from a customer growth perspective. Know you gave the balance of title, which is great. But be great to hear just what the customer acquisition was this quarter. I know you typically grow around 40 customers plus or minus. Yeah. And then, how how many customers do you have at this point? And and what's your outlook there? Rajinder P. Singh: It's very similar to the run rate that we've over the last many quarters. So I don't have the exact number in front of me, but I also am looking at you know, I'd I'd gotten an update on the pipeline for the next couple of quarters and very strong. So that title business is doing just great. And you know, it's total customers. You know, we have about 10% market share. If not more. Of the entire industry already. I'll leave it at that. Yeah. And that's the best we can tell because nobody publishes it to the to the perfect accuracy. But this business is growing It's growing at the same speed as it has over the last two, three years. And I don't I don't expect anything to slow down. Slow us down. Someday, hopefully, the mortgage market will come back, and that'll help us. But but David Rochester: yeah. Not counting on it. We're we're not counting on it. We're just when that happens, it happens. Yep. It'll it'll be nice. Just one last one on on capital. At this point, trading below tangible book, it's about a 6% discount right now. It seems like a great time to lean into that. Your capital levels are very strong. Just wanted to get your thoughts there. Rajinder P. Singh: Yeah. Like I said in my comments, we are being opportunistic with the buyback because there's been a a lot of volatility in the marketplace. So the 10 b five one plan we have out there is designed to take advantage of that opportunity of that volatility. David Rochester: Sounds great. Thanks, guys. Thanks again, Leslie. Rajinder P. Singh: Yep. Operator: Thank you. And one moment for our next question. Our next question will come from the line of Wood Neblett Lay with KBW. Your line is open. Please go ahead. Wood Neblett Lay: Hey. Good morning, guys. Good morning, Steve. Wanted to start on fee income. I I appreciate you sort of highlighting the core growth trends because it does get masked a little bit just with lease financing Yep. Cuts down. So that so that growth rate is pretty impressive. And I know a lot of it gets lumped into the other noninterest income bucket. So I was just curious if you could sort of break down some of those initiatives and given we're in the early innings, what are what are some what's the growth potential of those businesses? Rajinder P. Singh: Yeah. I'll tell you what is in that, like, the big buckets. Without breaking it out like dollars and cents, but things that are in there. It's lending fees, syndication fees, capital markets, interest rate derivatives, business capital markets, FX business, which is very new and very small so far, but could be much bigger. There's capital commercial card purchasing card businesses in there. All of that Effects more broadly, not just the derivatives? Yeah. Exactly. The FX, the spot business as well. So all of those are investments that were made over the last three, four years, some as recently as just twelve months ago, some about four, five years ago. But they're all different levels of their I'd say they're all in early innings, question is, what is in first inning and what is in second So there's a lot of room to grow. And, you know, probably the most exciting part of the bank right now growing that. Lease financing business absolutely is something which is being wound down you can see quarter over quarter, those numbers are coming down. And the deposit business, the deposit service charges, that's more related to DDA. Some of the benefits of growing DDA get picked up at margins, some in that fee income. But that's also growing at a healthy clip, not at 24%, but it's also growing. So overall fee income, should grow very nicely, especially once that lease finance drag is behind us, which we're getting close to. So we're excited about this contributing to profitability in a meaningful way very soon. Leslie N. Lunak: Yeah. And I would say all of those buckets that Raj mentioned are complementary to our core commercial lending and deposit businesses. Yeah. And Yeah. I and I think that's an important Rajinder P. Singh: And there's no, like, gain on sale type of stuff in there. We don't a mortgage origination business that can you know, go up and down on a on a moment's notice. It's all related to a core commercial business. You're making a loan, you sell a swap. You're moving money around internationally, you sell an FX product. You know, purchasing card, it's it's an annuity. Once some you know, once you sell it you know, it's a recurring income item. So we focus on trying to build stuff that is recurring, and it's closely tied to our core business, didn't just go out there and say, let's start something totally different and just generate fee income. So we don't have wealth management. We don't have some funky servicing income in here. It's very, very core to what we are doing with our clients. Leslie N. Lunak: And I do think the derivatives business, the FX business, the card business, the syndications business, all of those have tremendous growth potential. Yeah. Thomas M. Cornish: Yeah. Would add that, you know, if you look two years ago, we have invested a lot in syndication's capability. If you look two years ago, we were normally either in a bilateral deal where we were the only bank or we may have been in in a deal led by somebody else. Today, are leading more and more deals on both the CRE side and the corporate side, and that's what's driving the syndication revenue. And FX is brand, brand new. It's a baby business. Wood Neblett Lay: Yeah. Leslie N. Lunak: And, you know, not even make you know, making today a pretty insignificant contribution and that's one of the areas where we see the biggest growth potential in the markets we're in. Thomas M. Cornish: We're in high international business markets where you have a lot of international trade. And I think this gives us the opportunity to focus on when you're in places like Miami and New York and Atlanta and Dallas. You're in big international trade markets and having this capability allows us to not just take advantage of sort of daily transactions, but to focus on this kind of a client base that will drive that revenue. Business we can win that Leslie N. Lunak: we couldn't have won when we didn't have the capability as well. And, you know, like I said, I Jim will now be looking forward to the day when those numbers are all big enough that we have to break them out on the P and L. Right now, they're still new and they're a bit lumpy, but Wood Neblett Lay: Right. That that's really great color. I I appreciate it. And, obviously, there's a bunch of sub verticals there. But if I kind of just track, you know, compensation from a year ago, it feels like the fee income growth is is you know, growing a lot faster than the expense side. Yeah. So how do you how do you expect sort of, like, the efficiency ratio impact of those businesses. It feels like it should help drive improvements. Leslie N. Lunak: A 100%. I think all of those businesses are very efficient from that you know, from a cost revenue relationship perspective without question. And I do expect you know, operating leverage to continue. Wood Neblett Lay: Alright. That's great to hear. And then last I appreciate the updated disclosures on the NDFI lending book. I I was just interested on sort of how that portfolio has grown over the past several years. Is it been pretty stable? Or has it just any note on the growth trends over the years in that specific portfolio? Thomas M. Cornish: Yeah. I'd say there's been modest growth in it. Leslie N. Lunak: Yeah. I don't have all the numbers in front of me, but I would agree with that. I mean, there are certain segments Thomas M. Cornish: that have grown more. There are certain segments that have grown less when we look at that. We have grown more in business to business and sort of real estate underlying businesses and we've reduced substantially the portion of it that was consumer lending related over the last couple of years as we had more concerns about what was happening at consumer level. In some of those. So the overall bucket has grown modestly, but there's been some shifts within those buckets to kinda reflect portfolio strategy. Wood Neblett Lay: Got it. All right. Well, for taking my questions and congrats, Leslie, on the upcoming retirement. Really appreciate all all the help you've given given me in my seat. Thanks, Woody. Operator: Thank you. And one moment for our next question. Our next question is going to come from the line of Jared Shaw with Barclays. Your line is open. Please go ahead. Jared Shaw: Hey. Good morning, everybody, and congratulations also, Leslie. I guess, you know, maybe on on the CRE side, where's your appetite for incremental CRE here, multifamily balances? Rajinder P. Singh: Were down quarter over quarter. The office was down Jared Shaw: quarter over quarter. Where do see sort of opportunity and and, you know, within those subsectors. Thomas M. Cornish: I I would say it's in, three areas. I think the retail market has been very strong, particularly the gross anchored urban market and every market that we're in. We've seen good growth in that asset segment over the last eighteen months, twenty four months. We continue to feel good about the industrial segment, which has had good growth over the last few years. Industrial is performing well in virtually every market that we're in and even in the Northeast as well in places like New Jersey. The industrial market is very good. And multifamily has shifted a bit because we have a little bit less in stabilized lending and a little bit more in construction. When you look at the construction line, that's virtually all multifamily. Most stabilized loans are now moving to permanent markets. But we still see in all the markets that we're in, for the most part particularly in the South, you're still seeing good population migration You're seeing good development of new multifamily. And when you look at big picture data, around the cost of owning versus the cost of renting, In most of the markets we're in, we still see a very big differential in cost of owning versus cost of renting for homeowners. So we see continued growth in multifamily in virtually all of the markets that we're in. So those would be the three you know, primary points of emphasis that we would have. We we will still be open to a little bit of medical office But I would say the big three will be retail, industrial, and multifamily. Leslie N. Lunak: Yes, Jared, I think the decline in multifamily, the quarter wasn't any anything intentional or by design. It's just the way the chips fell for the quarter. Jared Shaw: Okay. Alright. Great. And then on the on the the non performers in office, I know it's relatively small numbers overall, but what drove sort of the incremental weakness that caused that that uptick in non performers? Was it Leslie N. Lunak: I I don't know. Or vacancy or rate? I don't even know if I'd really call it an incremental weakness, Jared. I I I think it was just episodic as these things work their way through the resolution process. I don't think it was a trend or, you know, if anything, looking forward over the medium term, I would expect it to trend down as opposed to up. Wouldn't make that comment necessarily for any one quarter specifically. But I don't think it was a trend or or incremental weakness. I think it was just the kind of episodic things that are going to happen as we work through that portfolio. Yeah, there's a small batch of loans Rajinder P. Singh: Yeah. If you look at the overall portfolio and look at the average debt service coverage ratio, Thomas M. Cornish: obviously, overall portfolio is performing pretty well to be over 1.5 We you know? But there are a handful of assets Rajinder P. Singh: that can move up or down, and there are situations where you, you know, you lose a Thomas M. Cornish: tenant in any one building and now you're in abatement period even if you bring in a new asset that things can shift up and down. Just step aside. Yeah. Overall, when we look at the whole portfolio, which I'm staring at the printout right now, the general trends in most markets are improving each quarter as abatements run off. That's the big driver is abatement runoff. Leslie N. Lunak: Yeah. And I would say the one we took the charge off on this quarter Jared, that's one that's been sitting in workout for a long time, and it finally just reached its final resolution. And yeah. So that that's what was going on with that one. Jared Shaw: Okay. And then just finally, going back to the capital discussion, we've seen a steady increase in capital CET1 and TCE. And I guess if we're assuming that the buyback is more limited in opportunistic, Any other uses of capital we should be thinking of, whether that's accelerated increase in dividends or a special dividend or M and A? And I guess what would be the upper end of capital where you would start to be more interested in the buyback versus opportunistic? Rajinder P. Singh: Yeah. I I I don't think my answer is gonna be very exciting. It's going to be the same that I've given in the past. Which is, yeah, you know, dividend growing dividend is a priority for us. And that usually we do early in the year, so stay tuned for that. Special dividends are not on the table We have gotten feedback from investors that has been very clear that don't do special dividends. Buyback is certainly something that is one of the tools that people use, though opportunistically. M and A has never really been a lever for us. As demonstrated by our history of building the bank organically. So my number one priority would be to grow. Right, organic growth. And but if it is not that, then buybacks and dividends but not special ones, just regular ones, Those will be the way to deploy it. Leslie N. Lunak: And the only other thing I would add to that, Jared, I know we're being a little maybe vague we're right in the thick right now of our annual business and capital planning process. Yeah. So you know, probably maybe a little bit more to say about this on the January call when we give you guidance for 2026. Jared Shaw: Yep. Okay. Thank you. Appreciate it. Operator: Thank you. And one moment for our next question. Our next question comes from the line of Timur Felixovich Braziler with Wells Fargo. Your line is open. Please go ahead. Timur Felixovich Braziler: Hi. Good morning. Rajinder P. Singh: Good morning. Leslie N. Lunak: Good morning. Timur Felixovich Braziler: Looking at you know, margin over 3%, reach on equity, if you round up, you're you're you're at that 10% level. I know you'll give us more detail as to the margin trajectory on the January call, but for the 10% return on equity, benefited a little bit this quarter, maybe from a lower provision. But is that pretty sustainable here going forward? Are are we kind of at that level where we're gonna continue grinding that higher? Or is there still going to be potentially some kind of back and forth the either provision expense or PPNR or whatever else? Rajinder P. Singh: I expect it to grow. Yeah. A 100%. Margin to grow. I expect ROA to grow, and I expect ROE to grow. Leslie N. Lunak: Yep. Absolutely. And I would say with respect to provision, I don't think it was abnormally low this quarter. Because we have largely a commercial lending base and things can be episodic, you can see some volatility quarter over quarter. But I don't know that I would characterize this quarter's provision overall as being abnormally low in terms of the range of what we could one could expect. Timur Felixovich Braziler: Okay. Got it. That's good color. A couple on credit. Just the $26,000,000 NDFI loan that was called out for the real estate investment fund. Can you just give us some more detail there? What's driving that MPL status? And then The underlying the underlying assets or office? The underlying what? Leslie N. Lunak: At real estate assets or office. That's what? The underlying That's that's the answer. And that that's the only one we have with an office concentration. Timur Felixovich Braziler: Okay. And then the bucket that b to c I guess, how big is that bucket and and just in terms of underlying collateral there, is there any exposure to the subprime consumer? Maybe just talk me through kind of what's in that bucket more broadly. Thomas M. Cornish: Yeah. The if you look at the b to c Which is in other in that chart. Which is Yeah. That portfolio is relatively small. Timur Felixovich Braziler: Okay. Timur Felixovich Braziler: Okay. Leslie N. Lunak: And then maybe the And it's been substantially reduced over the last few Timur Felixovich Braziler: Okay. Timur Felixovich Braziler: But in terms of in terms of of borrower type, is there any kind of distribution either by FICO or collateral type? Leslie N. Lunak: It's literally a handful of loans. Timur Felixovich Braziler: Okay. Yeah. We've been negative on the lending space for a couple of years, so we've been working that portfolio down is why it's not even making the chart. In that other, there are a lot of different categories, but, you know relative. All of which are are tiny. But it it it's you know, if we had done this chart, years ago or three years ago, that would have been you know, bigger and would have stood out here. Timur Felixovich Braziler: But now it's it's a rounding error. We say handful. It's only one handful. Leslie N. Lunak: Got it. Timur Felixovich Braziler: Okay. How about on the commercial side? Commercial delinquencies, you know, ticked up across the board. You had the the the charge and reserve for one c and I credit, but allowance looks like it's it's down kinda couple quarters in a row in the C and I book. Can you just maybe talk through is that an indication that maybe we're getting through some of the more kind of ringed in credits and and the outlook is is improving indicative of the reserves, or is there, maybe a chance for commercial allowance has to catch up on the back end of the year just given some the way the delinquencies? Leslie N. Lunak: So I really I'm pulling up this slide now, but I think the commercial reserve overall was pretty consistent quarter over quarter. The slight downtick in C and I was really because of charge off that we took. For the one loan. So I I don't think really there's anything changing at a high level about how we think about the reserve for that that portfolio. I think the delinquencies are exactly what you said. They're just you know, the normal ins and outs. I did actually ask for a list of them. It's you know, a couple loans and, I I don't think there's anything going on in there that feels like a trend. Timur Felixovich Braziler: Got it. And then just last for me, Raj, one of your Southeast peers made a comment last week that there's a lot more banks potentially for sale in the Southeast. Maybe just talk through that dynamic. Are you getting more inbounds? How are you just thinking about the the broader m and a environment in the Southeast? Rajinder P. Singh: I think mostly, I'm getting calls from investment bankers trying to you know, do the best that they can to to, you know, they're feeding the FOMO sentiment if anything else, like, everybody's doing a deal. Everyone's you better be talking. So that's the the sentiment I would say. It's mostly driven from innocent bankers Having said that, I will say it. There will be more deals. I've been saying that for for better part of a year that there's a pent up demand for deals. And we're seeing it, and we'll see more of it in the coming weeks, months, And as a buyer, you know where I stand. We're we're we're we're we wanna build the bank organically. We've had that stand for ever since we started the company. But any other deal that makes sense for us, we're always open to having a discussion. But we don't spend our day to day thinking about a deal, because if you do that, you're not gonna build a company. So we're focused on building, and if a deal ever comes along that makes sense, whether it's tomorrow or ten years from tomorrow, we're always here. To talk about it. Timur Felixovich Braziler: Great. Thank you. And and, Leslie, again, just echo the, congratulations on on retirement. Leslie N. Lunak: Thank you. And just a quick follow-up on your delinquency question in the c and I bucket. It's actually three loans, and they've been in the criticized classified bucket, but paying for a while. And so not unexpected. Timur Felixovich Braziler: Great. Thank you. Thomas M. Cornish: Nor nor are we seeing any trends No. With the language perspective that we're gonna Trevor doesn't like a trend. Yeah. Operator: You. And one moment for our next question. Our next question comes from the line of Jon Glenn Arfstrom with RBC Capital Markets. Your line is open. Please go ahead. Jon Glenn Arfstrom: Thanks. Good morning. Leslie N. Lunak: Good morning, John. Congrats, Leslie. Rajinder P. Singh: Thank you. Jon Glenn Arfstrom: Yep. Just a few follow ups. This can be rapid fire as well, but has your buyback appetite changed at all? Or is it just your approach and timing? Rajinder P. Singh: Our approach. Yeah. Jon Glenn Arfstrom: Okay. And and do you wanna grow the balance sheet over time, Raj? Or are we still kind of in the medium term in the loan mix shift mode? Rajinder P. Singh: I I we certainly wanna grow the balance Hold on one second. Getting weird music. Yeah. Emphatically, yes. We wanna grow the balance. Jon Glenn Arfstrom: Yes. The investment bankers calling, Raj. They are entertaining if nothing else. Okay. And then I I I think I know the answer but you touched a little on CRE optimism and some slower utilization as well. But is borrower sentiment better? Than it was a quarter ago? Is it generally improving at this point? Or is it Yeah. Kinda the same as it was a quarter ago? Thomas M. Cornish: I wouldn't necessarily compare it to quarter ago as much as I'd compare it to the beginning of the year. There was a lot more concern about tariff issues and which way the economy was going to head and would interest rates decline as much as people expected that was particularly in CRE investors' mind. So I would say clients have a more clear and optimistic view. That's getting a little bit better every day. Mhmm. Okay. Good. Jon Glenn Arfstrom: I guess, Raj, on the balance sheet growth question, I guess, back to that, we were interrupted. But medium term, do you expect to grow the balance sheet? Is it still a near term mix shift? What are your thoughts there? Yes. Rajinder P. Singh: Yes. I expect the balance sheet to grow in the medium term. I do expect the balance sheet to also keep changing the mix. Because we're not gonna stop on the resi runoff. So that'll keep happening, but I eventually expect C and I growth to overtake that runoff. Jon Glenn Arfstrom: Okay. Okay. Thanks a lot. I appreciate it. Operator: Thank you. And one moment for our next question. Our next question will come from the line of David Jason Bishop with Hovde Group. Your line is open. Please go ahead. David Jason Bishop: Yes. Thank you, and congrats again Leslie. You've enjoyed the working with you over the years, and, I I think I will cry if you tell me Isis is leaving as well. Hey. Quick follow-up question on the NDFI. Appreciate the color there. Just curious in terms of the the granularity of both the other and the b two b NDFI. Is that comparable average loan size to the rest of the commercial bank? Just curious if you have granularity there you can share. Leslie N. Lunak: Probably. I would say if Thomas M. Cornish: you looked at the NDFI portfolio, the average credit size is maybe slightly larger but not much. It's pretty comparable. Pretty comparable. You know, it's a fairly granular portfolio as you look at the entire like the overall loan portfolio is. We're generally prudent about taking very large exposures and credits. And if you look at this portfolio or the remainder of the whole, portfolio, you'll see a lot of mid sized credit exposures. You will not tend to see extremely large individual credit exposures. Leslie N. Lunak: Is it fair to say, Tom, that we're really not in the business of or we're really not concentrated in lines to private credit fund? Thomas M. Cornish: Yeah. No. No. We're not at all. I mean, our our b two b exposure would look like a small handful of BDC corporations which are very modest facilities. In size and we would have credit facilities that are predominantly to real estate investment funds largely in the Northeast. That have been long term historical clients and major depository clients. Of the institution and were secured by pledges of assets. These are not like not to say anything negative about any of the large private credit funds. But we're not in, you know, the $2,000,000,000 fund to, you know, whatever fund you wanna pick. That's an unsecured facility for, you know, supporting their general obligations. We're not in those kinds of deals. David Jason Bishop: Got it. Appreciate the color then. Tom, maybe a a a follow-up question, final question for you. You noted some of the headwinds on the some of the runoff in the C and I segments and such. Just curious, I don't know if you have a dollar basis or maybe what inning we're maybe in, in terms of runoff from some of those maybe noncore portfolio. Thanks. Thomas M. Cornish: Yeah, I'd say we're in the bottom of the ninth inning on that We're we're we're pretty much finished with the work that we wanted to do. From a rate perspective or a risk perspective or, you know, client focus perspective, we're at the very bottom of the game. David Jason Bishop: Got it. Thank you. Operator: Thank you. And one moment for our next question. Our last question will come from the line of Stephen Scouten with Piper Sandler. Your line is open. Please go ahead. Stephen Scouten: Thanks, guys. So Tom, your last comment was encouraging, kind of similar to what I was curious about. You know, thinking about you guys in, man, 2013, '14, was a strong double digit kinda loan grower. Haven't you know, loans have basically been flat since 2019. So what's kind of the spectrum of how we could think about potential loan growth if we really are kind of past all the needed remixing? Is it is it kind of a mid single digit run rate in a perfect world, or or could it be better than Rajinder P. Singh: We'll give you the exact guidance in January. Leslie N. Lunak: But expect growth. Yeah. Yeah. Yeah. Thomas M. Cornish: And I would say expect balanced growth across the segments that we're in, across geographies that we're in. And when you look at the CRE book, expect us to keep a very balanced portfolio. And as the overall size of the bank grows, decree book will grow, but it will remain reasonably in line with a 28% to 30% kind of size range. And when you look at the asset distribution that we have today, it will be evenly spread among major asset categories. We will We will not be overly indulgent in chasing any one asset category. It will be a balanced growth portfolio. Stephen Scouten: Got it. But it sounds like 2026 could kinda be the inflection point from versus what we've seen the last, you know, five or six years in terms of loan and balance sheet growth. Is that fair to say? Leslie N. Lunak: I think that's fair. Thomas M. Cornish: Yeah. And you you should remember during that five to six year time frame, we were taking the leasing portfolio from $2,000,000,000 to a couple $100,000,000 and we were taking multifamily rent regulated multi Leslie N. Lunak: family. That dropped dramatically by Thomas M. Cornish: three plus Minor matter of a global pandemic. Three plus billion dollars in we're awful happy to be sitting where we are. Yeah. Yeah. No. For sure. I think that's why the remix question is important to know if if if that process is kinda completed after all the puts and takes. And then maybe last thing for me, just you know, obviously, we we've seen a bit of an uptick in in the banking space in terms of more activism from investors. Stephen Scouten: I'm kind of curious if you've seen any incremental pushback from your around the path and the pace of progress and kind of what your response would be you know, if anyone were to get more more aggressive in terms of you know, asking you guys where where's profitability and what's really the pace of improvement to come? Leslie N. Lunak: I'll take the first part, then I'll let Raj take the second part. We have not been getting any increase level of pushback, and I will let Raj answer what we say if we did. We engage. We we hope we're we're Rajinder P. Singh: we're we're happy to engage with anyone. Yeah. And and we actually reach out and, you know, do as many conferences as we can. And try and go see investors as often as we can. So, you know, what I wanna make sure is that our investors understand the approach that we've taken and the progress that we're making, I wish I could just do, you know, give you a catalyst that tomorrow everything will improve. This is as Tom said in his earlier remarks, this is a game of inches. But that's how you build a franchise. It's not something know, this is a nuts and bolts business, one client at a time business. And but that's how you build something which sustains in value for a long time. So we're we're open to engaging with any investor who wants to talk to us. We do. And we do all the time. And when we sit down and talk to them, I rarely have I come across an investor saying, don't agree with what you're doing. Yeah. No. They've been very supportive of what we've been doing. You know? And they've asked some of the same questions Leslie N. Lunak: that you guys are asking. What's our more medium and longer term thoughts about growth? But but we haven't gotten you know, I think there's been supportive of what we've done thus far. Yeah. Stephen Scouten: Perfect. Thanks, guys. Appreciate the transparency. And, Leslie, congrats on the retirement. Leslie N. Lunak: Thank you. Thank you. Operator: Thank you. And I would now like to hand the conference back over to Rajinder P. Singh for closing remarks. Rajinder P. Singh: Thank you all for joining me and joining us And we will talk to you again minus Leslie in ninety days. I'll be listening. She'll be listening. She'll be asking questions. Yeah, know. I'm getting Q and A. Thank you so much. But if you have any more detailed questions, you know how to reach, either Jim or Leslie. Feel free to call us. Thank you. Bye. Yep. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.
Operator: Good day, everyone, and welcome to the Moody's Corporation third quarter 2025 Earnings Call. At this time, I would like to inform you that this conference is being recorded and that all participants are in a listen-only mode. At the conclusion of the prepared remarks, we will open the conference up for Q&A. As a reminder, the call will last one hour. I will now turn the call over to Shivani Kak, Head of Investor Relations. Please go ahead. Thank you. Good morning, and thank you for joining us today. Shivani Kak: I'm Shivani Kak, Head of Investor Relations. This morning, Moody's released its results for 2025 and updated guidance for select metrics. The earnings press release and the presentation to accompany this teleconference are both available on our website at ir.moodys.com. During this call, we will also be presenting non-GAAP or adjusted figures. Please refer to the tables at the end of our earnings press release filed this morning for reconciliations between all adjusted measures referenced during this call in U.S. GAAP. I call your attention to the safe harbor language, which can be found towards the end of our earnings release. Today's remarks may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In accordance with the act, I also direct your attention to the management's discussion and analysis section and the risk factors discussed in our annual report on Form 10-Ks for the year ended December 31, 2024, and in other SEC filings made by the company which are available on our website and on the SEC's website. These, together with the safe harbor statement, set forth important factors that cause actual results to differ materially from those contained in any such forward-looking statements. I would also like to point out that members of the media may be on call this morning in a listen-only mode. Rob, over to you. Robert Scott Fauber: Thanks, Shivani, and thanks everybody for joining today's call. This morning, I'm going to start with the highlights from Moody's strong third quarter results, and I'm going to provide some insights from our latest refunding wall studies as well as some examples of how we're winning in the deep currents that we're operating in. But let me give you the punch line. We delivered record quarterly revenue, we're raising our full-year guidance across almost all metrics, and we continue to drive significant innovation throughout the firm all at the same time. Now following our prepared remarks, Noemie and I, as always, will be glad to take your questions. So with that, let's get to the results. We finished the third quarter on a high note. Markets closed with the busiest September on record, and Moody's notched a new record of our own. We exceeded $2 billion in quarterly revenue for the first time ever in our history, that was up 11% from the third quarter of last year. Moody's adjusted operating margin was almost 53% in the third quarter, up over 500 basis points from a year ago demonstrating the tremendous operating leverage that we've created in our business. We delivered adjusted diluted EPS of $3.92 in the third quarter, which was up 22% from last year. And that's particularly impressive given the tough comp in 2024 when we posted 32% year-over-year growth on top of the 31% growth in 2023. And just to put this in perspective, we've more than doubled adjusted diluted EPS from the same quarter just three years ago. Consistently strengthening the earnings power of the firm year after year after year. And all of this while investing to harness the immense opportunities and the deep currents that we've talked about over the past several years. Now on to the highlights for our ratings business. MIS delivered 12% revenue growth for the quarter and surpassed $1 billion of quarterly revenue for the third consecutive quarter, setting an all-time record. Our position as the agency of choice enabled us to capitalize on a healthy issuance environment and record tight spreads. And the strategic investments we've made in technology, analytical tools, and talent are equipping us to meet surges in issuance volume and capital markets innovation. Now looking forward, the issuance pipeline is robust. Demand is solid with spreads hovering around near record lows. And the refi walls continue to build. Additionally, demand for debt financing remains strong in areas that we've consistently spotlighted over the past year or two. That includes private credit, AI-powered data center expansion, infrastructure development, and transition finance. And you can see this coming through in some of the marquee deals that we rated in the quarter. First, we were the sole rating agency on the first of its kind emerging market CLO in APAC for the International Finance Corporation, which is a member of the World Bank Group. And that was a very innovative financing vehicle for frontier markets. Second, our corporate ABS team rated a more than $1 billion data center securitization, also the first transaction of its kind. Which is backed by three high-quality newly constructed data centers and their related leases. And third, we rated the largest Asian corporate bond ever issued at almost $18 billion with much of the proceeds being used for data center investment. And all of these are notable examples of deep currents driving demand for debt financing. And while those deep currents are driving new issuance, refunding needs continue to grow as well. Our most recently published refunding study shows that refunding needs over the next four years are projected to surpass $5 trillion, which represents a compound annual growth rate of 10% from 2018 to 2025. That number is approximately double the dollar volume seen in 2018 and this gives us some real confidence in the medium-term growth trajectory for MIS. Now there's typically a lot of interest in these reports, on this call, so let me just share a few key findings with you. First, non-financial corporate refinancing walls in both the US and EMEA grew 6% over the upcoming four-year maturity horizon. Overall, investment-grade maturities are up 5%, while spec-grade maturities are up 7%. And notably, within spec-grade, US bond maturities have increased by more than 20% and in EMEA, spec-grade bonds and loans each rose by approximately 20%. And all of this points to a favorable backdrop for future issuance and the mix is especially encouraging. Given that spec-rate issuance tends to be more accretive to our revenue profile. So for those of you interested in exploring the full reports, they're available on moodys.com. Or through our investor relations team. Now beyond the refunding walls, we remain well-positioned to meet the evolving market needs in private credit. And that's a theme that we've consistently highlighted on prior calls. Private credit continues to be a growth driver for ratings. In the third quarter, the number of private credit-related deals grew almost 70%. Notably, direct lending remains the smallest portion of our private credit-related activity, while fund finance and securitization are leading the way in both deal counts and issuance volumes. Revenue tied to private credit grew over 60% in the third quarter across multiple MIS business lines, albeit off a relatively small, but expanding base. We're also seeing a growing number of private deals returning to the public debt markets for refinance. And according to Bloomberg's left Fin Insights, issuers are realizing material savings. On average, something like 200 basis points, but in some cases, as much as 400 basis points. When compared to private market rates. And as I've mentioned before, this dynamic effectively acts as a deferred maturity wall as we see unrated private direct lending deals refi into the rated BSL market. And as this market continues to grow, we continue to invest in experienced analytical teams and methodological rigor to ensure ratings quality. Now turning to Moody's Analytics. We delivered strong results again this quarter. Revenue growth was 9% year over year, including 11% in Decision Solutions. ARR is now nearly $3.4 billion, which is up 8% versus last year. And we're delivering margin improvement ahead of our plans just earlier this year. Our cross-MA initiatives are yielding results, delivering a 34.3% adjusted operating margin up 400 basis points versus last year, and as a result, we're increasing our full-year margin outlook for MA to approximately 33% and we believe this puts us solidly on track to meet our medium-term margin commitments. Now we're continuing to invest in scalable solutions across high-growth end markets, while at the same time simplifying the product suite and optimizing our organizational structure. So one example of that simplification in the third quarter, we entered into a definitive agreement to sell our Learning Solutions business to Fitch. We had a good run with our learning business, but we felt it no longer fit the profile of where we're seeking to invest in scalable recurring revenue businesses. In parallel with these portfolio simplification efforts, we remain very focused on the deep currents driving demand for our analytics offerings. And in MA, that includes an increasing focus on fiscal climate risk, and enhancing and expanding our solutions to help customers embed AI more deeply into their workflows. On a recent trip to Asia where we celebrated forty years of Moody's in the region, I heard firsthand about two customers who are investing in our physical risk solutions to understand the impact of extreme weather events and both of these are outside of the insurance sector. First, one of the largest banks in Japan and for that matter, the world, is using the RMS models that are traditionally used by our property and casualty insurance customers to understand physical climate risk across lending and portfolio management. Second, we recently won a multiyear deal with an Asian regulatory agency to deliver physical climate risk data to 11 banks and insurers. And this marks the first time globally that a regulator has purchased Moody's Climate Solutions on behalf of its financial sector. And this initiative enables the integration of physical risk analytics into regulatory reporting, and core business functions and also establishes a precedent for further regional adoption and collaboration. Now on AI, you've heard me talk before about the very encouraging engagement that we have with a number of large banks who are interested in leveraging our data and models their internal AI-enabled workflows. And while these discussions have taken time to move through banks' risk governance frameworks, we're now seeing some tangible momentum. In the third quarter, we signed over $3 million in new business with a Tier one U.S. Bank, which included solutions to automate credit memo creation and to deploy early warning systems across its real estate portfolios. These solutions are driving meaningful efficiency gains for our customers, are accelerating time to decision, and delivering a competitive edge. And this is a powerful example of how Moody's is uniquely positioned to bring together proprietary data advanced analytics, software and now GenAI capabilities and agents into our customers' mission-critical workflows. Now these Agenza capabilities are just one part of a broader investment strategy, one that's focused on unlocking the full potential of our data and analytics estate. And we're not only investing in how we build intelligent AI-powered workflows, but also in how we package and deliver our proprietary data and analytics, embedding that directly into our customers' internal systems and our partners' platforms. As we've discussed on recent calls, partnerships are an important part of this strategy. And we're embedding our data into partner ecosystems extending our reach while preserving the depth of our domain expertise. And this approach not only scales our impact, it also deepens customer integration, improves retention, and it will help to continue to drive durable growth across our portfolio. So a prime example this quarter is our partnership with Salesforce, where we continue to see strong growth from our integrated suite of connectors, includes company firmographic data news and other content. And this supports third-party risk management and compliance monitoring among other functions. Bringing Moody's unique data and intelligence directly into Salesforce workflows. With great success. We're now expanding our partnership to make available our proprietary GenAI-ready data and analytics within Salesforce's AgentForce 360, and in addition, Moody's will make available on agent exchange our new agentic AI sales tool, that I think I've talked about on prior earnings calls, and that elevates sales teams by automating lead prioritization and delivering predictive insights. Leveraging our data. And this is one part of our broader AI strategy. So zooming out, there are a few dimensions to that AI strategy. The first is our foundational AI agent builder platform that all of our employees can use to reimagine workflows and increase productivity. As we've highlighted before, we're delivering efficiencies in engineering and customer support, and we're now setting our sights on sales, product development and a variety of corporate functions as well as ratings workflows. The second dimension is our AI Studio factory, which is a platform designed for agentic product development. And the third is our recently announced AgenTic solutions, enabling us to commercialize smart APIs, MCP servers, and domain-specific agents that leverage our vast proprietary data and content estate and deep subject matter expertise. So switching gears, we also continue to invest in growing our ratings footprint in emerging markets. And this past quarter, we signed a definitive agreement to acquire majority interest in MIRAS, the leading ratings agency in Egypt. And this transaction will deepen Moody's presence in The Middle East and Africa giving us a very strong first-mover advantage across all of the region's domestic debt markets. And you've heard me say this before, these are generational investments. As emerging markets, including China, are expected to account for more than 60% of global GDP by 2029. And to that end, of the approximately $30 trillion of debt outstanding in those markets, only about 10% is cross-border. That means that the remaining 90% is issued locally, and rated locally. And that's why these domestic market investments are so important. So before I hand it over to Noemie for more details on the numbers, a few key takeaways. This past quarter, we delivered strong growth, significant operating leverage, and we have good momentum heading into next year. And of course, just a quick shout-out to all of my teammates for the fantastic work this quarter helping deliver one of the strongest quarters in Moody's history. Noemie, over to you. Thanks, Rob, and hello, everyone. Noemie Clemence Heuland: Q3 was outstanding. We showcased the full force of our earnings power. We are lifting both our top and bottom line guidance. And we're proving we can invest for growth and expand margins at the same time. Let's dive right in. Starting with MIS, revenue grew 12%. A very strong result, especially given the typical softness in Q3. All Ratings lines of business contributed to the growth, supported by the constructive issuance environment. The largest increase came from leveraged finance activity, followed by financial institutions driven by heightened issuance from infrequent issuers including fund finance and BDCs. Issuance totaled nearly $1.8 billion marking the highest third quarter on record. This reflects a combination of factors we've previously discussed, including historically tight spreads, strong investor demand, and the announced rate cut near quarter end as well as a pickup in M&A activity. MIS transaction revenue rose 14% slightly trailing the 15% growth in issuance due to high volume of repricing activity this quarter. As noted before, simpler and less complex bank loan repricings typically yield lower revenue and are less favorable from a mix perspective. MIS recurring revenue increased 8% year over year, reflecting the impact on ongoing pricing initiatives portfolio expansion and sustained monitoring fees. Foreign exchange contributed to a favorable 1% uplift consistent with the benefits seen in the second quarter. Now some color on Q3 transactional revenue by asset class. Corporate Finance transaction revenue increased by 13% supported by a 29% rise in bank loan revenue compared to 58% issuance growth. This issuance surge was largely driven by repricing activity which rebounded following subdued levels in Q2. Spec grade revenue rose 43% marking the strongest quarter for rated issuance since 2021. This was fueled by positive investor sentiment and robust market access for these issuers. Investment grade revenue declined 176% drop in issuance. Despite the decline, overall activity remained solid supported by several large M&A transactions. Notably, Q3 of last year was the second highest third quarter on record for investment grade. Driven by significant yield volume in the energy, oil and gas sector, creating a bit of a challenging comp base. In Financial Institutions, transactional revenue grew 34%, significantly above the 3% issuance growth. This was driven by the strongest volumes in a decade from frequent issuers within the banking sector. Public, Project, and Infrastructure finance transactional revenue remained relatively flat reflecting weaker activity in Project Finance and Sovereign. However, this was partially offset by strong performance in U.S. Public finance especially within the Regional and Muni space. Structured Finance transaction revenue rose 10%, supported by strong activity in CLOs especially new deals driven by growth in leveraged loan formation. This was complemented by improving activity in U.S. RMBS, underpinned by sustained investor demand and healthy deal flow. As Rob mentioned, private credit continues to be an important driver of MIS revenue growth, mainly from fund finance and business development companies or BDC activities. First-time mandates reached 200 in Q3, that's up 5% year over year. Growth was strong across both North America and LatAm, putting us on track to reach $700 million to $750 million for the full year. This momentum was partially driven by private credit-related mandates across financial institutions structured finance, and private investor requested ratings in PPIF. As a reminder though, with the growth in private credit, some issuance activity will not be captured in rated issuance figures, reported by external data providers. Now turning to margins, MIS delivered an adjusted operating margin of 65.2%, which is an expansion of 560 basis points year over year. And as a result, we are raising our full-year guidance to a range of 63% to 64%. Looking forward, and as shown on this slide, we are updating our issuance outlook by asset class. Our forecast for the remainder of 2025 assumes continued momentum from the quarter, even as we approach the typical and expected normal seasonal slowdown towards year-end. We expect issuance growth to be mid-single digit for the full year, with notable updates in investment grade, leveraged loan and high yield bond issuance bolstered by improving M&A activity. As previously noted, we expect spreads to remain near historic lows, despite some modest widening. Investor demand remained strong and size of renewed M&A momentum are emerging. That's actually reflected in the uptick in our Rating Assessment Service or RAS business, which often serves as a leading indicator for M&A. In fact, Q3 marked record quarterly revenue for RAS, this reinforces our expectation that M&A will be a positive contributor as we head into 2026. In the near term, we're raising our estimate of M&A issuance to a range of 15% to 20% for the full year 2025. Now translating this to revenue, we now anticipate full-year MIS revenue growth in the high single-digit range, and that's an upward revision from our previous outlook. Overall, we remain optimistic about issuance activity, but it's important to note that our guidance doesn't factor in a significant disruption like the one we've experienced earlier this year. Risks remain with ongoing tariff and trade negotiations, and the full impact of a prolonged government shutdown on market conditions is difficult to predict. That said, we believe we've accounted for the broad spectrum of the most plausible scenarios in our updated guidance. Turning to Moody's Analytics. This business continues to deliver an impressive financial profile. 93% recurring revenue, a 93% retention rate, and consistent growth at scale. Reported revenue grew 9% year over year, while recurring revenue grew 11% or 8% on an organic constant currency basis. As we've talked about a lot in recent years, we've been actively reshaping the revenue mix by downsizing lower margin services, and increasingly leveraging implementation partners across regions. As a result, transactional revenue continues to decline, down 19% this quarter. ARR growth of 8% is consistent with last quarter, you'll notice some quarter-to-quarter movement in individual line of business growth rates. Often driven by large new business wins or large attrition events. Across the portfolio, though, retention rates consistently hold in the low to mid-ninety range, and that supports high single-digit AR growth. Now let me double click into each of the lines of businesses to give you a clearer view of the underlying dynamics. First, Decision Solutions, which includes our banking, insurance and KYC delivered double-digit AR growth this quarter at 10%. KYC continues to be the fastest growing part of Decision Solutions, with sustained growth in the low to high teens over the last several quarters. This quarter, we reported 16% AR growth and I want to highlight two recent sales in the tech sector that illustrate the appetite for our KYC solutions beyond financial service customers. First, a large technology company signed a major deal to integrate Moody's Orbitz data into its denied party screening system. Helping block transactions with entities in countries of concern. This deal positions Moody's as a trusted provider of critical data for regulatory compliance, and showcases our ability to address complex challenges with innovative solutions. Second, a global social media platform is using Moody's to strengthen fraud detection and business verification across its ecosystem. Our data helps uncover hidden ownership structures, circular directorships, and brand inconsistencies streamlining investigations, reducing minor review, and accelerating decision making. Insurance delivered 8% AR growth this quarter and there are a few dynamics worth noting, given the diversity in the end markets we serve. First, growth in our Life business remains strong and has been bolstered recently by customers adopting more sophisticated models and increased usage. On the Property and Casualty side, 2024 was a standout year for both new business and retention, with several large cross-sell wins and retention rates in the high 90s, presenting a bit of a tougher comp. In our banking line of business, which includes our lending suite, as well as risk regulatory and finance solutions, we delivered ARR growth of 7% in Q3. Reported revenue was flat in the third quarter versus last year, influenced by the revenue accounting for multiyear sales of on-premise solutions. With risk, regulatory and finance solutions growing at mid-single digit, the headline growth rate masks the strength of our lending business, including Credit Lens, which continues to grow AR at a low to mid-teens pace and is the largest revenue contributor. We're investing to expand our offering into a more comprehensive solution that spans the full lending workflow. This approach is resonating with our core customer base. Mid-tier banks, and is increasingly enabling us to cross an upsell across our solution set. Next, turning to Research and Insights, we delivered AR growth of 8%, and that's an improvement as we lapped last year's attrition events. Growth was further supported by strong upsell execution fueled by our ongoing investments in CreditView, including research assistance and our suite of organic adjunctive solutions. Finally, Data and Information ARR grew 7%, and continues to be affected by cancellations from earlier this year. On the positive side, we still see strong pricing power, sustained demand for ratings data feeds and strong Orbis new business volume. Moving on to margin, We delivered ahead of our initial plan so far this year with a 400 basis points improvement in Q3, and we now expect approximately 33% for the full year. This represents over 300 basis points of year-over-year margin expansion before absorbing a headwind of about 100 basis points from the three M&A deals within the last year. But let me be clear, we're not stopping there. This progress is rooted in programs designed to maximize investments in strategic growth areas, and realize a more efficient organization footprint. We remain focused on expanding margins towards our medium-term commitment of mid to high 30s over the next two years. To get there, we are prioritizing and redeploying R&D spend across our portfolio, redesigning enterprise processes with GenAI, deploying productivity tools, and optimizing vendor relationships. We remain confident in Moody's Analytics' high quality, predictable ARR growth our ability to deliver sustained margin expansion strengthening the earnings durability. Now, to help with modeling, I'll walk through a few additional details behind our updated outlook assumptions. You can see the MIS and MA guidance updates here on slide 13. We now expect MCO revenue to grow in the high single-digit percent range. We are reaffirming our operating expense guidance which supports an adjusted operating margin of about 51% highlighting the strong operating leverage of our business. At the MCO level and excluding restructuring charges, we anticipate operating expenses to increase by $10 million to $20 million quarter over quarter consistent with expectations we shared in the second quarter. We also expect incentive compensation to be approximately $100 million in line with Q3. As demonstrated by our margin performance, particularly in MA, our efficiency program continues to deliver meaningful improvements. We have already executed over $100 million of annualized savings, helping offset annual salary increases and variable costs. We're updating our adjusted diluted EPS guidance range of $14.5 to $14.75 which implies roughly 17% growth at the midpoint versus last year. One modeling note on our tax rate. In October, a statute of limitations expired related to certain pre-acquisition tax exposures Moody's assumed in a prior year M&A transaction. This will result in a one-time approximate 200 basis point favorable impact on our full-year 2025 effective tax rate. Please note, this benefit will be fully offset by the release of the indemnification asset so there will be no impact to net income or EPS. Turning to cash flow, we now anticipate our free cash flow to be approximately $2.5 billion and we are increasing our share repurchase guidance to at least $1.5 billion. That puts us on track to return over 85% free cash flow to our shareholders this year. To wrap it up, this quarter's results reflect the strength of our strategy and execution. We are approaching transformative shifts in technology from a position of financial strength, allowing us to invest in innovation while continuing to expand margins and grow revenue as seen again in Q3. And with that, operator, we're now happy to take any questions. Operator: Thank you. Star one on your telephone keypad. If you are on the speaker phone, please pick up your handset and make sure your mute function is turned off so that your signal reaches our equipment. We ask that you please limit yourself to one question. The option to rejoin the queue will be unavailable. Again, that is star one to ask a question. Our first question will come from the line of Mona McNayat with Barclays. Please go ahead. Brendan: Good morning. This is Brendan on for Manav. Just wanted to ask, oh, just to get your guys' thoughts on just pros and cons of AI in your analytics business? It sounds like you had some recent wins, but just curious how you're thinking about seat-based exposure, whether or not it's explicitly tied to your contract or not, and just and just what you're hearing from your key financial services customers. On the topic. Robert Scott Fauber: Yeah. Hey, Brendan. So first of all, we've really never had, you know, kinda seat-based exposure. That's generally not the way the contracts have been structured. So, you know, AI is not gonna be any different. I would say maybe just to kinda zoom out in terms of how we're thinking about it and going about it. First of all, we're embedding AI into a bunch of our own workflow solutions and software, obviously, we've done that with research assistant. We now have something like 20 different standalone or AI-enabled applications. So we're that that gives us an opportunity to monetize there. But we also just launched what we call agentic solutions. So we've got smart APIs and MCP servers, and think about that as, like, tools that are built on top of Moody's data. You know, this huge data estate that we talk about all the time. And they can power LLMs and third-party agents with that Moody's data. And then we, we have been building a suite of highly specialized workflow agents. We've got more than 50 domain-specific agents already today. That leverage our proprietary data and subject matter expertise. And support all that automation and can be embedded into customers' internal workflows. I gave one example of that. On the call. So and I think what you're seeing from us is you know, we have this massive content estate. AI is really an unlock and we're trying to meet our customers where they are. Whether they need to have access to that content through our own workflow and supported by AI, whether they want it on partners platforms, or whether they want it embedded into their own internal AI workflow or orchestration. So everything we're doing is to try to meet our customers where they are. Operator: Our next question comes from the line of Peter Knutson with Evercore. Please go ahead. Peter Knutson: Hi. Thanks so much for taking my question. I'm just wondering if you could help me think about what extent, if any, did third quarter's record issuance reflect pull forward activity? And then within that as well, what you guys are assuming for CLO activity maybe in 4Q, but more broadly in 2026? Since that was such a large driver of that upside? Robert Scott Fauber: Yeah. I can start with the kind of the pull forward. I would say, you know, and I we've talked about this before that there's a lot more pull forward that goes on in spec grade than there is investment grade. Understandably, right, because investment grade issuers tend to always have market access, and that's less true for spec grade issuers. So we tend to see pull forward more in spec rate. I would say the pull forward that we've seen in 2025 is pretty consistent with what we've seen over the last, call it, four years. So it's in line with that. Very little pull forward from investment grade. As we've talked about, we've got some pretty healthy maturity walls going forward. Operator: Our next question comes from the line of Jason Haas with Wells Fargo. Please go ahead. Jason Haas: I wanted to focus on the KYC business. Can you talk about what data sets were within that business are proprietary? And are you seeing the longer tail of competitors there stronger by being able to integrate AI. That's a concern that we've been hearing, so I was hoping you could you could weigh in on that. Thank you. Robert Scott Fauber: Yeah. So there there's a few datasets that really go together for our KYC solutions. The first is Orbis, which is our massive company database. And I think it's we think of that as derived data, first of all. It's accessed through a global commercial ecosystem where we've got the right to use and aggregate the data, and then we cleanse it and we normalize it. And that really enhances the value of all that data. So it's not as easy as just going out and web scraping that content. That's first of all. And the second dataset that we have is around politically exposed people and risk relevant people. That's a fairly unique dataset that we have. That was originally that that was actually part of our RDC business that we purchased years ago that was formed by a consortium of banks after nine-eleven. Who wanted to combat, terrorist financing. And so that business grew out of that. And then the third is our AI curated news. And then I think part of the secret sauce is that we then link that together, and we have really the world's best beneficial ownership in a hierarchy data. And that really gives our customers a 360-degree view of who they're doing business with. That I think is relatively unique in the marketplace. Operator: Our next question comes from the line of Andrew Steinerman with JPMorgan. Please go ahead. Andrew Steinerman: Hi, Rob. If you saw, there's a Wall Street Journal article from October 15 that wrote up the Moody's report on refi walls. And the way they portrayed it, was for US companies that there was a decline in refi walls Again, I don't know if you saw the article. It caught my eye. But, obviously, that's framed a lot differently than slide six. Where you're seeing a really favorable environment for refi walls And if you could try to square the difference that would be helpful and, you know, mention something about The US refi walls. Robert Scott Fauber: Yeah. Andrew, I think that article was citing US spec grade which was down, call it, five to 6%. That's right. Yeah. That's right. So it was really a subset of the of the broader maturities. And, you know, I think I might point out, you know, a couple things that there there's actually as we kinda look farther out, there's actually a significant portion of maturities that are actually a good bit farther than four years out. And that's because of the basically the steepening of the yield curve you know, the last, know, call it year or so. So we've actually seen average tenors shortening. We've seen issuance less than seven years being more attractive than issuance out past, you know, kinda seven to ten years. We've seen average tenors shorten up. And all of that ultimately is going to be, I think, positive. As we think about the stock of what needs to get refinanced over you know, not only the four-year walls that we quote, but even beyond. Operator: Our next question comes from the line of Toni Kaplan with Morgan Stanley. Please go ahead. Toni Michele Kaplan: Thanks so much. Rob, usually during the third quarter, you talk about your early thoughts into 2026 for issuance and just in light of that, you know, refi wall is still healthy, but maybe less of a tailwind next year and M&A, though, could provide a nice uplift. And then wanted to also get your thoughts on the data infrastructure financing and if that's gonna be a meaningful driver in '26 and how you think about that opportunity overall. Thanks. Robert Scott Fauber: Yeah. Thanks, Toni. So you know, it's as always, in October, it's a little too early for us to actually give guidance for next year, but we can kind of tell you how we're thinking about next year. And I would say that and you've heard me use this, you know, kind of framework in years past. Right now, I think there are more tailwinds than there are headwinds going into 2026. So we're thinking it's going to be a pretty constructive issuance environment into 2026. And let me talk about let me start with the tailwinds because we think they're they're more tailwinds. So first of all, we've we've got spreads at at at very tight ranges right now. We have Fed easing, so we have the potential for lowering benchmark rates. You touched on M&A. We've certainly seen the M&A environment really pick up in the third quarter. You heard Noemie talk about our RAS pipeline is very robust. We're hearing very positive commentary from the bank about the M&A discussions and pipelines that they have. So 2026 may be the year that we really see not just M&A, but sponsor-backed M&A come back into the market We've talked about what a positive that will be. We do have the potential for further resolution in some of these geopolitical conflicts that I think could provide a little bit more market confidence. You know, kind of a mixed sentiment really around economic growth, a slowdown, the current thinking is that we're not looking at a recession while there's been a little bit we think the current levels of growth across the G20 are generally sustainable into next year. You mentioned the refi walls And we do think that the default rates will continue to decline. They're a little bit above historical averages at the moment, but we look for that to continue to decline. So all that feels pretty good. And just in terms of what the headwinds could be, I mentioned economic growth. And obviously, we're looking at things like job growth and consumer confidence and spending to get a sense of whether there could be actually you know, a further deceleration of economic growth. Obviously, we've got some headline risk around global trade dynamics, particularly with The US China that creates volatility in the markets. That's usually a negative for issuance. It can create some risk-off environments. It can widen out spreads. So in general, Toni, feeling pretty good about it. And you asked the last thing you asked about data centers. That's why we talk about these deep currents. You're seeing tens and hundreds of billions of dollars going into infrastructure investment and particularly around digital infrastructure and data centers. And we're having a lot of dialogue all around the world, and we expect that to continue into 2026. So that'll that'll be a deep current that continues. Operator: Our next question will come from the line of Alex Kramm with UBS. Please go ahead. Alexander Kramm: Yes. Hi. Good morning, everyone. Just coming back to Moody's Analytics. A lot of things going on there. It seems that things are maybe tracking a little bit slower than your expectations at the beginning of the year. Correct please, me if I'm wrong. And I know I know you you mentioned a couple of things, but but maybe just talk about relative to expectations at the beginning of the year, what maybe are the things that the surprised you negatively and how we should be thinking about those items as we get into 2020? Thanks. Thank you. Noemie Clemence Heuland: Yes. Maybe, Alex, I'll start, and then Rob can add if needed. So if I look at the top line for the third quarter in MA, we were right on our expectations in Q3. You may recall earlier in the year, we took slightly down our guidance for the full year because of some attrition in 8%, very in line with with the second quarter. We have a strong pipeline for the fourth quarter growing nicely, very strong coverage. So pretty heavy weighted in December. I think there's a very strong focus on execution. The way we look at the portfolio, I know there's a few puts and takes in each of the different lines. But overall, we're managing to a high single-digit growth. We're investing in our lending, underwriting, KYC for corporate. We had a few very nice wins in the third quarter. So that balances out to a high single-digit growth, and we're pretty confident with the outlook for the full year. And we'll talk about next year bit more color in February, but we're delivering as expected. Operator: Our next question comes from the line of Scott Wurtzel with Wolfe Research. Please go ahead. Scott Darren Wurtzel: Hey, good morning, guys, and thank you for taking my question. Just wanted to ask one on private credit. You know, we're starting to hear more you know, see more headlines, hear more concerns about just the health of private credit. I'm wondering if you can talk about you know, how you see that potentially impacting your growth there. Like, I think there's potentially a school of thought that if there is more concern around the health there, there could be more demand for understanding of risk and ratings. There could also be more debt as you said, moving from public or private to public markets. Just wondering if you can kind of, tease out some of the potential ramifications of that. Thanks. Robert Scott Fauber: Yes, Scott, it's Rob. I think you started to nail it there. You know, we've been talking for a number of these calls about you know, how important it is to have a rigorous you know, third-party independent assessment of credit risk in the private credit market. And that was the driver behind what we did with MSCI and you know, it's interesting. I mentioned on the in my prepared remarks, we don't have a lot of rating exposure in the direct lending market. Right? And that's, again, one of the reasons that we partnered with MSCI to be able to provide investors with that third-party view. And I mentioned that so I'd say two things. You know, whenever you start to see a little bit of credit stress in the market, and I talked about at least in the public markets, the spec rate default rate is higher than historical averages. So you can imagine that there's some similar, you know, stress in the private credit market, that drives more demand for credit insight and research. We see that with the usage of our website and all sorts of things, the engagement that we have with investors. So I would say that's true. And then second, you're right. I mean, we're now seeing a little bit of a flow back into the public markets because at the end of the day, those coupons that you can get in the public markets are typically represent a fairly substantial savings versus, you know, funding in the private market. So, you know, I think we could see an ebb and flow between the private and public markets. But I think we're pretty well positioned to serve the needs of investors and issuers, whether it's you know, in the private market or the public market. And that's what we've really been working on over the last you know, call it two years. Operator: Our next question comes from the line of Jeff Silber with BMO Capital Markets. Please go ahead. Jeffrey Marc Silber: Thanks so much. I just wanted to shift back to the MA discussion we talked about a bit earlier. Noemie, I think you said that you're managing MA growth top line to high single digits If I remember correctly, before you came, there was an Investor Day. I think the medium-term guidance for that business was low to mid-teens. Has that changed? Or should we be looking more medium-term MA growth the high single digits? Thanks. Noemie Clemence Heuland: Yes. We've updated our medium-term outlook for MA earlier this year in February. So we're looking at a high single-digit growth for AR and revenue. That said, there's different dynamics within the portfolio. We are obviously having printing more higher growth rates in areas where we're strategically investing. And that was also the logic behind the restructuring program and looking at our organizational footprint. The way we deploy our engineering teams, the way we deploy our product groups, our sellers to the areas where we think we can generate higher growth. But overall, the growth rate is expected to be high single-digit. And we've also expanded margin quite significantly We've updated that also in February, and we are now going very well on track to meet those commitments. As a matter of fact, we've increased our full-year guidance for MA margin to approximately 33% So that's another thing we've also updated along the top line. Robert Scott Fauber: Yeah. And I would just say, you know, we talked to a lot of investors, and you know, over the over the years, and we had heard about this idea of the kind of the sweet spot being kind of high single-digit growth and getting some further margin expansion. And so that's what you see reflected in the medium-term targets, and that's where what you see us executing on. Operator: Our next question comes from the line of Craig Huber with Huber Research Partners. Please go ahead. Craig Huber: Great, thank you. Rob, I want to ask you, there's a school of thought out there with investors for the last year plus that AI on a net basis is bad for your company. And for other information services stocks. So I wanna give you a chance to just talk about that, about the moats around your businesses, both on the rating side as well as MA. You could fight that off any new potential entrants out there. And then secondly, just wanted to quickly ask, what in your mind was better about debt issuance so far this year versus your original expectations coming into the year? Thank you. Robert Scott Fauber: All right. So first on the AI is bad for our business. I'd love to double click with you on that. I just don't see that. You know? And I've been pretty consistent about it. You think about we have a massive, mostly proprietary data and analytics estate. And remember, what anchors that, Craig, is it starts with the ratings agency. We're producing unique proprietary rating content and research every single day. That is our largest content set. And then I talked about Orbis and how it's not just aggregating publicly available company data. This is a complex curated web of information providers where you have to have the rights to this data. And then we're aggregating it and normalizing it and creating value. You know, even where we've got workflow software. Right? Let's so let's talk about you know, let's talk about our insurance franchise. Yes, we're delivering our solutions through software, but at the core of what we do in insurance, are, I would say, you know, mission-critical models. Right? It's the access actuarial models. And it's the RMS physical risk and catastrophe models. That is really, really unique IP. That's delivered through software. And so, Craig, I actually think about in some ways, we have a lot of this content that has been effectively trapped in our workflow software. Right? If you wanted to get access to our cat models, you had to be a subscriber to our software. And you're a cap modeler. Guess what? Now we have the ability to democratize that access to this content. To commingle the access and get unique insights. So it makes it much easier to access our content, in many more channels as you heard me talk about, that's gonna open up new ways for us to monetize the content on different platforms with different customer segments. Where there's different value that they derive out of our content. And it's also gonna allow us to have unique insights as this content is commingled. So I feel very good about AI. And that's why, Craig, we've been really trying to be so front-footed on this. From back in 2022 is because we believe that this ultimately is an unlock. And you know, we've talked about this on these calls. It takes a little bit of time, we're working with the regulated financial industries But we are seeing some good signs of traction. Your second question was you know, what is driving you know, the issuance? I'd say, look. In the first four months of the year, obviously, April, we had a lot of in the market with the tariffs. That was, in a way, kind of a lost month. Right? And, you know, we hadn't factored that into the guidance at the time. But you've seen, I think, and you see it with the equity markets. The markets have gotten much more comfortable with the current environment. You've seen I said default rates are a little bit above average, but still fairly close to the long-term average. So spreads are tight. You've got and you've got a real pickup in M&A activity. And you remember back in February, we had talked about our M&A assumptions and that this would be back half loaded. And so I think we are starting to see that M&A volume and activity that's supporting issuance and business investment that we had been thinking we would see back in the that call in February. It's just that we hadn't anticipated the volatility in the first half of the year. Yeah. And to that point, we if you look at our Q4 implied guidance for MIS, that's pretty consistent with what we had at the beginning of the year. We've always had a pretty strong fourth quarter with low teens MIS transaction revenue growth, and that's been pretty consistent throughout the year. Operator: Our next question will come from the line of Russell Quelch with Rothschild and Co Redburn. Please go ahead. Russell Quelch: Hi, guys. Thanks for having me on. Noemie, you cut out some headwinds around slowing retention and sales driving that slowdown in insurance ARR. I wonder if you can elaborate on that a little bit more, given insurance has been a strong pillar of MA growth over the last twelve months. Wondering how you're thinking about insurance growth into 2026, given the slowdown in premium growth in the underlying P&C market and normalization in storm activity. Noemie Clemence Heuland: Yeah. Insurance, we have few dynamics going on in the third quarter, and that translates into the full-year outlook that I talked about. We have actual data and models, so access is running very nicely. We have high double-digit growth. We continue to see customers switching to a higher definition. Models, and that's been really driving growth this quarter. The RMS and the RRP migration, we had a lot of significant transactions in 2024 and early 2025. There's bit of pull forward of pipeline. So now there's a digestion going on with our customers. We're going after the largest the remaining pool of customers who haven't yet moved to the platform. So that's one driver. So we have a lot of pipeline there that we expect will drive growth of that business in long term. There's just a it's not so much of a headwind in fact, it's just more like tough comparison from 2024 where we had a lot of those customers migrating into the RMS platform and we still have a lot of pipeline with the remainder as we head into 2026. Yeah. Russell, I would also I mean, I spent a lot of time, with our insurance customers, and I feel pretty bullish about what we can do in that industry. You've got insurers who I would say are behind the banks in terms of their adoption of digital platforms know Amy talked about moving to the cloud. But, but also just sophisticated third-party data and analytics. And so there's a lot of interest from insurers in thinking about how they can leverage a lot of our content to get signal value to help them understand risk. And you've seen us broaden from really a property focus with our cat business and obviously we have a have a life business as well. But in the P&C business, we've moved into casualty. There's a lot of interest from insurers to have a more data-driven approach to thinking about casualty risk, and that's what we did when we acquired Predicate. We've pulled together a cyber working group, across the industry. I think there's still a lot of opportunity for that market to grow in terms of GWP and so do the insurers. But they need to have models and data that they can be very confident in to help that market grow. So, I feel very good about it. Over, you know, let's call it the medium term. Operator: Our next question comes from the line of Sean Kennedy with Mizuho. Please go ahead. Sean Kennedy: Thanks for taking my question and nice results. I had a follow-up on Moody's Analytics. So I believe last quarter, you mentioned that sales cycles were lengthening a bit. I wanted to ask if anything has changed there as we got further away from the spring. Also, how's the general demand environment for banking? Thank you. Robert Scott Fauber: Yes. So I'll with the demand environment for banks. It's actually pretty good. We're having some very good discussions and wins, frankly, with our banking customers. I talked about that one kind of marquee deal, but actually we're seeing very good engagement and growth from our biggest banking customers. For the reasons that I talked about. And so I'd say I'm not sure there's much of a change from the last quarter in terms of how we talked about kind of sales cycles. I think we talked about you know, there was a little bit of a lengthening in the sales cycles, know, over the, you know, call it last year. But there was also an expansion of the size and the complexity and number of products that we're pulling together as solutions for our customers as well. So, you know, to me, when I look at those together, you know, I feel fairly comfortable, you know, when those things are moving in tandem. And I would say the last thing I would say, spend a lot of time with our customers. There's a lot of focus right now on growth. And that, at the end of the day, and we get asked about is it regulatory drivers that drive the growth of your solutions, There's nothing better than being able to talk to your customers about how you can drive growth. And that ultimately means that there's a more positive sentiment across the customers as they're thinking about you know, the future and investing in their business. Operator: Our final question will come from the line of Jeff Meuler with Baird. Please go ahead. Jeff Meuler: Yes. Thank you. Rob, you had a couple of callouts on climate solution wins outside of PNC Insurance. That was one of the thesis points of the RMS acquisition. Is the message behind the message that you feel like you're at an inflection point where you expect that to really start taking off, or are you just kind of conveying some large ones that you had in the quarter? And then just to be clear, does that revenue when you sell climate solutions outside of insurance does that get reported within insurance or elsewhere? Thank you. I guess, you know, one of the reasons I brought it up is, you know, that was as you as you noted, that was one of the theses that we had when we bought RMS was that this content the this the models and the data to help institutions really understand the physical risk of extreme events was gonna be important beyond just the insurance business over time. And so we you know, I've been trying to give some examples of where we've had some wins of banks who are taking these solutions. Would say that that started with the biggest, most sophisticated banks who are who are who are using the RMS models. We've been thinking about how do we take some of that content and package it differently so that we can make it more useful and available to a broader segment of banks over time. But, you know, you can you know, we hear from banks as they're underwriting loans that they're interested in understanding physical risk of the collateral they're taking. We hear from corporates. They're interested in understanding the physical risk of locations across their supply chain and across their own physical footprint. We're engaging with governments who want to understand vulnerability of communities to various extreme events. And of course, we're starting to hear that from investors as well. So you know, there's some product development work as we start to see the demand from these other sectors to be able to package the content in a way that's useful for those different customer segments. So I'd say it's still relatively early, but I am giving examples of demand outside of insurance. Yep. And we're gonna continue to lean in on the last point on two point, On your question about where that the revenue goes, goes into the insurance line within Decision Solution. And then the other thing I'd add is we when we acquired RMS, we had revenue synergy targets that we've published, and we are well on track to achieve those. Operator: And that will conclude our question and answer session. I will turn the call back to Rob for any closing remarks. Robert Scott Fauber: Okay. That's a wrap everybody, for joining. We'll talk to you next quarter. Bye. Bye. Operator: This concludes Moody's Corporation third quarter 2025 earnings call. Immediately following this call, the company will post the MIS revenue breakdown under the Investor Resources section of the Moody's IR homepage. Additionally, a replay will be made available after the call on the Moody's IR website. Thank you. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the PROG Holdings Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please note that today's conference is being recorded. I will now hand the conference over to your speaker host, John Baugh, Vice President of Investor Relations. Please go ahead. John Baugh: Thank you, and good morning, everyone. Welcome to the PROG Holdings third quarter 2025 earnings call. Joining me this morning are Steve Michaels, PROG Holdings' President and Chief Executive Officer, and Brian Garner, our Chief Financial Officer. Many of you have already seen a copy of our earnings release issued this morning, which is available on our Investor Relations website, investor.progholdings.com. During this call, certain statements we make will be forward-looking, including comments regarding our revised 2025 full-year outlook, our guidance for 2025, the health of our lease portfolio, our capital allocation priorities, and the benefits we expect from our sale of the Vive Financial portfolio to Atlantica Holdings Corporation, such as improving our capital efficiency and profitability profile. Listeners are cautioned not to place undue emphasis on forward-looking statements we make today, all of which are subject to risks and uncertainties that could cause actual results to differ materially from those contained in the forward-looking statements. We undertake no obligation to update any such statement. On today's call, we will be referring to certain non-GAAP financial measures, including adjusted EBITDA and non-GAAP EPS, which have been adjusted for certain items that may affect the comparability of our performance with other companies. These non-GAAP measures are detailed in the reconciliation tables included with our earnings release. The company believes that these non-GAAP financial measures provide meaningful insight into the company's operational performance and cash flows and provides these measures to investors to help facilitate comparisons of operating results with prior periods and to assist them in understanding the company's ongoing operational performance. With that, I would like to turn the call over to Steve Michaels, PROG Holdings' President and Chief Executive Officer. Steve? Steve Michaels: Thanks, John, and good morning, everyone. Thank you for joining us today as we report our third quarter results and share our perspective on how we are positioned heading into the final stretch of 2025. I'll also provide context around the recently announced sale of our Vive portfolio and how that decision aligns with our long-term strategic priorities. In the third quarter, we surpassed the high end of our outlook for revenue and earnings. These results were driven by continued strength in portfolio performance and strong momentum within our BNPL business for technologies. Non-GAAP diluted EPS of $0.90 exceeded our outlook range of $0.70 to $0.75 per share, marking our third consecutive earnings beat this year. This quarter's outperformance reflects the discipline of our team, the strength of our business model, and our ability to execute through macroeconomic volatility. Throughout the quarter, we navigated persistent consumer challenges marked by ongoing inflationary pressures, growing financial stress among lower-income households, and early signs of labor market softening, all of which impact discretionary spend in our leasable verticals. While the overall unemployment rate is still low, the heightened financial stress and greater caution among lower-income consumers across our leasable categories is a headwind to GMV. As I shared in July, two primary factors weigh on Progressive Leasing GMV this year, including in the third quarter. The first is the previously disclosed Big Lots bankruptcy, which created a significant GMV headwind. The second is our intentional tightening actions of lease approvals, a necessary step to preserve portfolio health in an unpredictable environment. Adjusting for these two discrete items, underlying GMV in Q3 grew in the mid-single digits, reflecting strong operational execution and healthy demand across other areas of the business. We are growing balance of share with key retail partners, strengthening existing relationships, and scaling our omnichannel ecosystem. As Brian noted in July, we expected approval rate comparisons to ease slightly in Q3, and they did. Our progressive leasing two-year GMV stack improved from negative mid to low single digits in the first half of the year to flat in Q3, which had the toughest year-over-year compare given the strong growth in Q3 2024. These trends give us confidence in the durability of our go-to-market strategy and the long-term scalability of our platform. Progressive Leasing's portfolio performance remains strong and within our targeted 6% to 8% annual write-off range. Q3 write-offs of 7.4% improved both sequentially and year-over-year. These results reflect the success of our ongoing refinements to our decisioning posture and risk analytics. We are encouraged by the early stage performance indicators and believe we can deliver consistent portfolio outcomes while driving profitable GMV. Consolidated revenue came in at $590.1 million, which reflects a slight decline compared to the same period last year. This result was driven by the impact of the Big Lots GMV loss and a smaller portfolio entering the quarter for our leasing business, offset by another standout quarter from four Technologies, which again delivered triple-digit revenue growth. Consolidated adjusted EBITDA was $67 million, and non-GAAP EPS was $0.90, both exceeding the high end of our outlook. Before diving deeper into the Q3 business results, I want to take a moment to address today's announcement regarding the sale of our Vive Financial credit card receivables portfolio to Atlantica Holdings Corporation. This transaction represents a meaningful step in our long-term strategy to improve our capital efficiency as we focus on opportunities with the greatest economic returns. While Vive has been part of our ecosystem since 2016, we believe this decision enhances our overall profitability profile and positions us to deploy capital more effectively. We are pleased to be partnering with Fortiva, the second look credit offering of Atlanticus, to ensure continuity for our retail partners and consumers, allowing us to maintain access to a comprehensive set of flexible payment options to underserved consumers while aligning our resources with the future of the product platform. The sale of the Vive receivables strengthens our balance sheet, giving us additional flexibility to invest in strategic priorities. Brian will speak to the capital implications shortly, but I want to underscore that we are committed to deploying capital in ways we believe will drive sustainable shareholder value through investments in growth, strategic M&A, and disciplined return of capital through share repurchases and dividends. I want to take a moment to thank the entire Vive team for their contributions. Their hard work and commitment played a critical role in helping us serve customers who may not have otherwise had access to credit, and we are proud of the positive impact they have made. We have made every effort to support Vive team members through this transition, including identifying some opportunities within the broader PROG Holdings organization. We wish them all the best as they move into this next chapter. Moving back to the business, we made significant progress in our strategic pillars of grow, enhance, and expand in Q3. Under grow, we continue to ramp direct-to-consumer performance, saw strong returns from our omnichannel partner marketing initiatives, and increasing e-commerce penetration. Our marketplace team also onboarded additional affiliate and e-commerce partners. E-commerce GMV is at 23% of total progressive leasing GMV in Q3 2025, up from 20.9% in Q2 and 16.6% in Q3 2024. Additionally, we launched or signed three recognizable new retail partners since our last earnings call, each representing GMV expansion opportunities. These exclusive partnership wins, all earned through a competitive selection process, underscore our leadership position, the strength of our value proposition, and our ability to drive incremental sales. Our pipeline is healthy, with a focus on converting near-term opportunities and deepening engagement with existing accounts as we expand our footprint across both national and regional segments. We strengthened our position within existing retail relationships by extending long-term exclusive agreements with several of our major national partners, reinforcing our role as their exclusive lease-to-own provider. We have successfully renewed nearly 70% of our Progressive Leasing GMV to exclusive contracts reaching to 2030 and beyond. With these additional renewals in place, we can focus on integrations and accelerating our initiative roadmap with these partners to drive future growth. As I have mentioned previously, millennials and Gen Z make up a growing share of our customer base, and we are evolving our marketing, product design, and engagement strategies to meet the expectations of these digitally savvy consumers. Their strong preference for mobile and self-service is driving increased adoption of our digital application flows and mobile platform, emphasizing our omnichannel strategy and validating the investments we made in personalization and seamless user experiences. Steve Michaels: PROG Marketplace, our direct-to-consumer platform, remains a meaningful growth engine, delivering another quarter of strong double-digit GMV expansion. This channel not only broadens our reach beyond traditional retail partnerships but also plays an increasingly important role in building relationships with consumers and enabling us to direct consumers to our POS partners through a new renew channel. We are investing in brand building, personalization, and lifecycle marketing to increase customer engagement, and we are seeing encouraging trends in repeat usage and retention as a result. PROG Marketplace is helping us create a more durable and self-sustaining customer ecosystem, one that supports growth across our leasing, BNPL, and cash advance offerings alike. Under our enhanced pillar, we made strategic investments in technology that improve both customer and employee experiences across the Progressive ecosystem. Our innovation team at PROG Labs is at the forefront of these efforts. Our AI-powered transactional consumer chat platform has now handled over 100,000 customer interactions, supporting customers from the approval stage through conversion into the servicing of their lease agreements. We are proud of how this tool is already enhancing our ability to deliver timely, personalized support, and it is reducing friction in our service model. With new capabilities introduced in Q3, customers can now make payments, request approval amount increases, and inquire about the account status directly within this chat platform. These initiatives are already proving valuable, but we believe we are still in the early innings of what is possible. We expect these AI-driven capabilities to be a key differentiator as we scale customer personalization, drive efficiencies, and set the bar for digital innovation in lease-to-own. Under our expand pillar, our multiproduct ecosystem is maturing, growing connectivity between offerings. Our cross-marketing campaigns between PROG and Progressive Leasing have proven effective in increasing repeat usage and driving incremental GMV. Turning to our BNPL platform, four technologies have exceeded expectations once again, delivering its eighth consecutive quarter of triple-digit GMV and revenue growth. As we first shared last quarter, engagement trends are strong, with an average purchase frequency of approximately five transactions per quarter for the last year and more than 160% growth in active shoppers year-over-year. We are seeing strong momentum in unique shoppers and merchant relationships, driving high engagement across the platform and contributing to overall GMV. Additionally, our four-plus subscription model continues to be a key driver, with over 80% of GMV coming from active subscribers. Importantly, four's take rate of approximately 10%, defined as revenue generated as a percentage of GMV over the trailing twelve-month period, is a strong indicator of monetization efficiency. Four has operated profitably year-to-date, and its role in our broader ecosystem is expanding meaningfully, not just as a standalone business but as a cross-sell driver for Progressive Leasing and as a catalyst for customer acquisition. From a profitability standpoint, four generated year-to-date adjusted EBITDA of $11.1 million through Q3 2025, representing a 23% margin on revenue. As we look ahead to Q4, we are forecasting an adjusted EBITDA loss driven by seasonal dynamics that require an upfront provision for credit losses for new originations. Despite this anticipated Q4 loss, we believe four will have positive adjusted EBITDA for the year. Given that the peak holiday season will account for more than 20% of four's full-year GMV, this provision creates a timing impact on profitability. This pattern is well understood and consistent with our operating model, as these holiday originations generate the majority of their revenue in Q1, we expect to see a meaningful rebound positioning four to deliver its highest quarterly adjusted EBITDA margin of the year in 2026. Looking ahead, we are closely monitoring the macro environment, especially as consumers face ongoing liquidity constraints and shifting spending behavior. The demand environment remains soft across many durable goods categories, which will likely continue in Q4. That said, we are not waiting for the environment to improve. We are leaning into the areas we can control: portfolio health, disciplined spending, deepening partner engagement, and driving sustainable profitable revenue through our multiproduct ecosystem. Our capital allocation priorities are unchanged. We are investing to drive long-term growth through sales initiatives, marketing investments, AI and other innovation, digital infrastructure, exploring strategic M&A opportunities that strengthen our ecosystem, and returning excess cash to shareholders through share repurchases and dividends. We did not repurchase shares during the quarter due to ongoing discussions with Atlanticus regarding the sale of the Vive portfolio. Those discussions began in January and progressed to a stage in Q3 that restricted our ability to be in the market until the transaction was publicly announced. As Brian will outline, we ended Q3 with a strong cash position and generated meaningful free cash flow, reinforcing our capability to fund growth while maintaining financial flexibility. To close, we are confident about how we are executing across the business. We delivered strong earnings, improved portfolio performance, and successfully executed the strategic divestiture of a portfolio business, allowing us to reallocate capital towards our highest conviction opportunities. At the same time, we are building momentum in our fastest-growing segment, four technologies. I am proud of what we have accomplished this quarter and confident in our ability to sustain this momentum into the future, which we expect will create long-term value for our customers, partners, and shareholders. With that, I'll turn the call over to Brian for more details on Q3 results and our 2025 outlook. Brian? Brian Garner: Thanks, Steve, and good morning, everyone. Our third quarter results highlight execution and innovation across our product offerings. Once again, we exceeded the high end of our guidance on revenue and earnings, despite pressures on consumer demand across our key categories. Non-GAAP diluted EPS at $0.90 per share beat the high end of our outlook by $0.15 and was up approximately 17% compared to the same period last year. This outperformance reflects a combination of three key factors: strength in our portfolio performance, mostly monitoring levels of spend, and momentum from our buy now, pay later and direct-to-consumer initiatives. We are focused on profitable growth and actively managing the business to optimize returns while staying agile in a dynamic operating environment. Let me start with the Progressive Leasing segment. GMV came in at $410.9 million, which represents a year-over-year decline of 10%. However, as Steve noted, the underlying performance tells a more compelling story. Adjusting for the loss of GMV related to the Big Lots bankruptcy and the impact of our deliberate tightening of approval rates, the business would have delivered mid-single-digit growth, driven by solid balance of share gains within key retail relationships and growing traction among e-commerce and direct-to-consumer channels. PROG Marketplace, our direct-to-consumer channel, delivered 59% year-over-year GMV growth for the quarter. Q3 revenue for Progressive Leasing was down approximately 4.5% at $556.6 million compared to $582.6 million in the prior year. Revenue benefited from slightly better customer payment performance. This tailwind, however, was offset by GMV headwinds, primarily driven by the Big Lots bankruptcy and tightening actions we took in '24 and early 2025. Portfolio performance remains strong, with write-offs coming in at 7.4%, representing an improvement sequentially and year-over-year. This result reflects the impact of our deliberate tightening actions. As always, we are actively monitoring early performance indicators to ensure our decisioning posture is consistent with delivering write-offs within our targeted annual range of 6% to 8%. Progressive Leasing's gross margin in Q3 came in at 32%, representing an approximately 80 basis point improvement year-over-year. This margin expansion was driven in part by a higher proportion of customers staying in their lease agreements longer as well as higher year-over-year yield from our lease portfolio. Progressive Leasing's SG&A for the quarter was $79.3 million or 14.2% of revenue, compared to 13.1% in 2024. As we have discussed in prior quarters, we have made targeted investments to support long-term growth focused on customer-facing capabilities, technology modernization, and partner enablement, while maintaining cost discipline across the organization. EBITDA for Progressive Leasing came in at $64.5 million or 11.6% of revenue, landing within our 11% to 13% annual margin target and improving by 20 basis points year-over-year. This performance underscores our ability to deliver profitability through disciplined execution, even in the face of challenging year-over-year GMV comps and a softer demand environment. Turning to consolidated results, Q3 revenue was $595.1 million, which reflects a slight decline compared to the same period last year at $606.1 million. That came in at the high end of our guidance range. The year-over-year decline is driven by the impact of the Big Lots GMV loss and a smaller lease portfolio entering the quarter, largely offset by another triple-digit revenue growth quarter at four Technologies. Consolidated adjusted EBITDA was $67 million or 11.3% of revenue, compared to $63.5 million or 10.5% of revenue in 2024. This year-over-year improvement reflects strong adjusted EBITDA performance of four and year-over-year margin improvement at Progressive Leasing. Non-GAAP diluted EPS came in at $0.90, exceeding the top end of our outlook, driven primarily by strong underlying earnings performance. As Steve noted, we did not repurchase shares during the quarter due to the ongoing discussions with Atlanticus related to the Vive portfolio sale, which restricted our ability to be in the market until the transaction was finalized. Let me now turn to the divestiture of the Vive portfolio, which was announced earlier this morning. The transaction will be reflected in our Q4 financial results and classified as discontinued operations. As I'll discuss later, our updated outlook reflects the impact of the divestiture. The proceeds of approximately $150 million provide incremental liquidity and strengthen our balance sheet, bringing greater flexibility as we assess opportunities through our capital allocation framework. In the near term, we will continue our investments across our ecosystem of products. As always, we remain disciplined in our capital allocation approach. Our priorities are unchanged. We are focused on funding impactful growth initiatives, pursuing selective high-return M&A opportunities that complement our ecosystem strategy, and returning excess capital to shareholders through our ongoing share repurchases and quarterly dividends. These actions reflect our commitment to driving long-term profitability and delivering sustained shareholder value. Moving to the balance sheet, we ended Q3 with $292.6 million in cash and $600 million of gross debt, resulting in a net leverage ratio of 1.1x, which is comfortably within our target range. We maintained ample liquidity during the quarter and had no borrowings outstanding on our $350 million revolver. In Q3, we paid a quarterly cash dividend of $3 per share. As of quarter-end, we had $309.6 million of unused capacity under our $500 million repurchase program. For our 2025 consolidated outlook, in light of this morning's announcement regarding the Vive divestiture, we have removed Vive from our outlook for both the fourth quarter and full year 2025. Our revised outlook has consolidated revenues in the range of $2.41 billion to $2.435 billion, adjusted EBITDA in the range of $258 million to $265 million, and non-GAAP EPS in the range of $3.35 to $3.45. This outlook assumes a difficult operating environment, soft demand for consumer durable goods, no material changes in the company's current decisioning posture, an effective tax rate for non-GAAP EPS of approximately 27%, and no impact from additional share repurchases. To summarize, Q3 was a strong quarter across the board. We delivered earnings above expectations, maintained healthy portfolio performance, advanced key initiatives aimed at supporting long-term growth, and subsequent to the quarter-end executed a strategic divestiture. With a solid balance sheet, scalable cost structure, profitable growth in our buy now, pay later business, and a proven multiproduct ecosystem, we are well-positioned to deliver sustained value for our customers, retail partners, and shareholders. With that, I'll turn the call back over to the operator for questions. Operator? Operator: Thank you. And wait for your name to be announced. To withdraw your question, simply press 11 again. Please stand by while we compile the candidate roster. Operator: Our first question is coming from the line of Kyle Joseph with Stephens. Your line is now open. Kyle Joseph: Hey. Good morning, guys. Thanks for taking my questions. Given all the headlines we've seen around the consumer, I was just looking to get an update and I recognize there's some moving parts. But you know, we're looking at write-offs coming down for you guys, you know, even though you guys have headwinds from Big Lots on that front. And then it sounds like, you know, GMV ex Big Lots are underwriting. There's some positive trends there. And then just weighing that with some of your commentary in terms of macro data and some of the headlines we've seen in the consumer finance arena, just kind of looking for an update on the pulse of the consumer in your opinion. Steve Michaels: Yeah. Thanks, Kyle. And, yeah, it's certainly been in the headlines, and it's something that we are constantly battling and analyzing. But to your point, we're pleased with where the portfolio is. I'm really proud of our data science teams, and they do a job delivering that consistent portfolio in a very dynamic environment. The write-offs did improve both sequentially and year-over-year due to the, you know, our deliberate actions that we took earlier this year for the most part. Some of them late last year. But we're watching it very closely. I mean, we feel pretty good about where we are right now. But we are seeing some stress in the consumer as you said, there's lots of headlines around liquidity pressures and just macro pressures on the consumer, especially in the cohort that we serve. Our DQs are elevated at this time compared to previous years, including last year. And we're watching it very closely. We haven't found the need or seen the need to tighten additionally yet. I'm not saying that that won't happen based on how the data comes in the door, and that's one of the great aspects of our short-duration portfolios across our products. And the fact that we get quick feedback loop that we can adjust very quickly to trends we're seeing in the data. So I mean, we're defensively postured and kind of braced for potentially having to tweak additional dials, but we have not done that in any material way since earlier this year. We always are looking for, you know, we're always adjusting dials, some positive and some negative. But in what I would call a tightening action, we haven't had to do that since earlier this year. But we're not ruling it out based on what we see for the rest of the year. Kyle Joseph: Got it. Really helpful. And then in terms of the GMV outlook for the rest of the year, I think Steve, you highlighted that 3Q was a tough comp in terms of 03/2024 growth. But, you know, just factoring in the timing of Big Lots and the timing of underwriting changes, should we think about 3Q as kind of the bottom point or similar headwinds into 4Q before things really ease up into 2026? Steve Michaels: I think the comps really don't clear up until Q1. We put out that supplemental slide page with Big Lots, and Q4 is a similar headwind to previous quarters this year. And the tightening, while we did do some of it in late last year, most of what we're referring to was in Q1 of this year. So from a comp standpoint, I don't think the pressures are still roughly the same. I will say that, you know, our Q3 GMV did come in slightly below where we expected it to, and we were updating you in July. I think a lot to do with some of those pressures that you're talking that you were referring to on the consumer. And so we've adjusted some of our view on Q4 as well. We're continuing to fight every day, and we have big plans for the holiday season. But there's mixed reports out there about what to expect from a consumer discretionary spend during the holiday as well. So got some internal initiatives, some things we're trying to get across the goal line with existing retail partners before we go into code freeze for the holidays. And we're pleased with where we are, but the macro is a challenge and has been impacting GMV in addition to the discrete headwinds that we've called out. Kyle Joseph: Got it. One last one for me. Just in terms of the guidance on other, it looks like better revenue guidance and then marginally lower profitability. Is that just a function of timing and growth math really? Steve Michaels: Yeah. We tried to address that in the prepared remarks. Our four business is we're very pleased with what it's doing, how it's growing, and its profitability year-to-date. And then there's just a very understandable seasonal dynamic in Q4, and more specifically, in kind of November, December with the surge of GMV that we have observed in last year as well as are predicting for this year. And how that upfront provisioning with very little revenue recognition will cause four to swing to a loss for Q4. Nothing to be concerned about. It's just the dynamic of the model. And it'll swing back in Q1 of next year. But the strength of BNPL business year-to-date is undeniable, and it's going to continue. But there will be some P&L dynamics, which have been reflected in the other segment and are impacting our PROG Holdings level guidance for the full year or implied for the fourth quarter because of that swing to adjusted EBITDA loss. Kyle Joseph: Yep. That all makes sense. Great. Thanks a lot for taking my questions. Brian Garner: Thanks, Kyle. Operator: Our next question is coming from the line of Bobby Griffin with Raymond James. Your line is now open. Bobby Griffin: Good morning, guys. Thanks for taking the questions. Hey, Steve. I guess good morning. I wanted to just maybe talk more on the current environment. I you know, your comments on the low end and some of the pressure make a lot of sense. I didn't hear much on trade down. So can you maybe just touch on that? Is part of what's going on here, you guys are having to be a little bit tighter or incrementally tighter as you did this year. You're not seeing that happen in the tiers above you. Just trying to get a sense of how this environment might be evolving versus some of the earlier trade down we saw when everybody started tightening together. Steve Michaels: Yeah. It's a good call out, Bobby, and we certainly saw the impacts of the supply above us tighten in 2024. And then kind of stayed static while they saw what their portfolios were doing. Earlier this year, I think there were calls that folks may be loosening here in the back half of 2025. I think providers are reevaluating that potential strategy. But based on the headlines that we've seen over the last I don't know, six to twelve weeks, which would indicate some stress out there. And auto portfolios and elsewhere. We have not yet seen or observed in the credit stacks where we participate and have good visibility any trade down or any tightening with the supply above us. So we did have to tighten earlier this year. We have not seen any additional benefit from supply above us tightening so far. I think it's you know, just my opinion is it's unlikely that they will loosen in the holiday season, but I'm not we haven't seen any evidence of them tightening and creating more of that trade down for us. Bobby Griffin: Okay. That's helpful. And then maybe on just the GMV cadence through the quarter, I mean, interesting or notable kind of how the month played out and anything in October to help us think about you know, kind of the early I know we're still a little early for holiday, but just anything in October as well. Steve Michaels: Yeah. Nothing on holiday yet. You know, obviously, it's difficult right now, but this is the case every year. That such so much of the quarter is made in the five weeks between Black Friday or the seven days of Black Friday, whatever you want to call it, to Christmas Eve for the leasing business. The quarter for Q3, it was fairly similar, but it did you know, September was lower than August and July from a negative standpoint. But you know, I don't know if the headlines and the psychology from the pending government shutdown and all those things kind of played into people's confidence and sentiment. But, you know, we did see some softness. Bobby Griffin: Okay. And then lastly for me, Brian, I hate to be the guy that asks about 26, but I'm going to do that here just because there's a lot of moving parts. But, like, when you think about 26 and you just want to maybe level set the model, not ask for guidance, of course, but, like, you got Vive flowing out. Got a smaller portfolio because of this GMV, but then you have the Big Lots headwind coming off. So just help us frame up, you know, kind of all those moving parts and, you know, to keep kind of in line with the smaller portfolio, but potentially GMV actually starting to show growth again? Brian Garner: Yeah. I think starting with the tailwinds, you look at '26. And, again, not providing guidance, but just you know, as things are shaping up. I think you're right. So from a decisioning standpoint, as Steve alluded to, the biggest relief from a year-over-year comp comes in Q1. That was the most meaningful tightening that we did here in 2025. So as that rolls off, should start to see some relief there. Along with that, and obviously getting past the Big Lots comp, which we've provided information about in our supplemental deck. And I think the other positives are the portfolio is being managed effectively. So, you know, we've as we talked about, we're down year-over-year and sequentially with the 7.4% that we posted this year. So I think a similar kind of write-off posture is probably appropriate. You've also got this growth in four that's really exciting and buoying the results here in the quarter. And I think we've got a trajectory there that's encouraging. And, you know, I think the offset or, you know, what we're paying attention to a little bit is this macro. And the impact on leasing just more broadly that'll I think, continue to serve a challenge here in Q4, and we'll see what 02/2026 holds. But I think that's how it's shaping out from a you know, we talked about this 11, 13% EBITDA margin target for the leasing segment. There's not been an intent to revisit that, at least at this point in time. So that's our mandate is to actively manage the cost structure in light of what our top line allows. And that's you know, those are really the inputs as I shape up 2026. The buy portfolio, as you said, is really not consequential to earnings. It's about a $65 million haircut off of revenue from a run rate perspective, and so that's how I'd size that up. Bobby Griffin: Perfect. That's very helpful. Appreciate the details here, and congrats on the transaction and the portfolio management. Best of luck, guys. Brian Garner: Thanks, Bobby. Appreciate it. Operator: Thank you. Our next question is coming from the line of Anthony Chukumba with Loop Capital Markets. Your line is now open. Anthony Chukumba: Good morning. Thank you for taking my question. Guess my first question, you mentioned the three new retail partners. Can you tell us who those retail partners are? Steve Michaels: Hi, Anthony. Good morning. And I had money that you would be the one that noticed that and talked about that, so I appreciate that. Yeah, we're not going to name them. We just wanted to highlight because our biz dev teams are out there working their tails off all the time, and they can't control the timing of when we get things across the goal line. But it's not for, you know, a lack of effort and a lack and or quite frankly. So we were pleased with the results in the quarter. And actually, one of them was subsequent to the quarter end. But we use the term recognizable retail logos on purpose because while they may not have been, you know, standalone press releases, they are logos that you would recognize. And so we're pleased with those wins, those competitive processes, and prevailing in those processes. And while they'll have very minimal impact in 2025, they will be part of the building blocks of how we're building the GMV picture and profile for 2026. And the teams also have a number of other opportunities in the pipeline that we're excited about. And unfortunately, as you've observed with us for many years, the timing is very choppy on when those things come across. Anthony Chukumba: Got it. Okay. So I guess that's a new project for my research associate to figure out who those retailers are. So second question. Okay. So you got $150 million for the Vive portfolio, that's more than 10% of your market cap. And then you've got this nine-figure windfall coming from the one big beautiful bill, which makes me feel dumber every time I have to say that. I guess my question then becomes, you know, how do you think about capital allocation? Right? You mentioned you're at 1.1 times leverage. You're very comfortable with that. I would think, particularly given where your stock is, that you would, you know, back up the truck in terms of buying back stock. But how do you sort of think about that? Brian Garner: Yeah, you're right. And that 1.1 times leverage was previous to the sale of the Vive portfolio. So but point taken. Yeah, I mean, you set it up. We look at it through the lens of net leverage ratio, right, which we think is kind of one and a half to two turns is kind of a comfort level. But then we look at our capital allocation priorities. And growing the business is priority one. And, obviously, we're in a negative GMV situation currently with leasing, but we don't expect that to be the case for, you know, forever. So, hopefully, we'll have some working capital requirements to grow GMV within the leasing business. Four is obviously a juggernaut. And while very short-duration transactions, will need some capital here, especially in the fourth quarter. And so but we're fortunate in that our business models do allow us to kind of check that box when it comes to organic growth and reinvesting in the business. Second, we have said that strategic or opportunistic M&A is something that's on our radar. And we would look for something synergistic to our ecosystem and that fits into our strengths of serving this below prime and underserved customer and assessing risk. And then absent those two first things, then we would define excess capital and look to return it to shareholders, and our history has been through repurchases. And, you know, obviously, we initiated a dividend about two years ago. So the capital lens and capital allocation priorities haven't changed. We just have a high-level problem of having more of it on the balance sheet right now, and so we'll look to check those three boxes and be good stewards of capital. Anthony Chukumba: Got it. That's helpful. Thanks, and good luck with the remainder of the year. Brian Garner: Thanks, Anthony. Operator: Thank you. Our next question is coming from the line of Hoang Nguyen with TD Cowen. Your line is now open. Hoang Nguyen: Good morning, team, and thanks for taking my questions. I guess you are now seeing some softness from maybe the consumers, the lower-end consumers. So but then you haven't tightened yet. So can you talk about the difference between now and maybe this time a year ago when you guys started to tighten? What's the difference that hasn't made you guys do additional tightening at this point, given the pressures that are starting to surface? Steve Michaels: Yeah, I mean, I think the difference is that the portfolio is in a different place than it was last year because of the tightening. So as you know, it turns over fairly quickly. And so the actions that we took in the back half of 'twenty-four, but more specifically in 'twenty-five, have helped to make the portfolio more healthy. We are seeing some elevated DQs, the delinquencies, but one of the good achievements of our data science teams are some of the changes they made to the approvals, approval amounts, is that we have been able to choke off, if you will, kind of some of the straight rollers or the no-pays that roll right to charge off or write off. So the idea that you can have some elevated delinquencies but not negative dispositions or negative outcomes, those things can be true at the same time. And so we are again, we're white-knuckled like we always are because portfolio is job one. We're watching the portfolio and poised if we have to do something, but the early indicators are showing us things that we should be paying attention to but have not just have not told us that we need to do additional tightening at this point. Brian Garner: Yeah. And I would just add to that. Dynamic Steve just illustrated is coming through in that 80 basis points of gross margin expansion. And so you asked what from a year-over-year perspective, what's the dynamic? We're certainly seeing a more favorable mix in the way that this plays out, and those changes we've made from a decisioning scientist standpoint are playing through. And so I think that's an important element in comparing and contrasting last year to this. Hoang Nguyen: Got it. And follow-up is on the Vive sales. Given that you guys are getting $150 million, and you guys didn't do buyback in 3Q, I mean, should we expect catch-up buyback in 4Q, and what you plan to do with this proceed going forward? Steve Michaels: Yeah. I mean, I guess I would just kind of refer to the answer previously about what we're going to do with the capital and just kind of go back to our capital allocation priorities. And then we don't really guide or speak to what we're going to do in the future about repurchases in any given quarter. And we would just look to the three-pillared strategy on capital allocation. Hoang Nguyen: Got it. Thank you. Operator: Thank you. Our next question is coming from the line of Brad Thomas with KeyBanc Capital Markets. Your line is now open. Brad Thomas: I wanted to follow-up on four. And first of all, congratulations on the nice momentum in that business, a really exciting outlook that I think is still underappreciated by many investors. I was curious, Steve, as you continue to grow that business, there's this sort of ongoing question of does BNPL compete with lease-to-own? And so I was curious as you have success cross-marketing, what your new learnings are as you have more overlap in who those customers are. Steve Michaels: Yeah. Thanks, Brad. And, yeah, we're very excited about four and its current state, but also its potential and where we're going to where we think we can take it. Yeah, I mean, it's been interesting to have that product in our ecosystem to be able to watch it because I you know, before well, we've had it for four years, but it's you know, it was very small in '21, '22, and '23. And the view has always been that BNPL and more specifically, the pay in four providers not you know, not some of the longer installment sales that people call BNPL. Are not really a competitor to leasing. Most very simply because of the average order value. Right? And the average order value is still in the 125 to a $140 range. Which is materially different than an $1,100 average ticket for our leasing business. Also, the categories that are predominant in our four business are different. Right? You have consumables and cosmetics and apparel and sneakers, and it's provided us a nice insight into those shopping patterns. And I think that is also a reason why they have diverging growth rates currently because people are still consuming those things that I mentioned at a $140 purchase, but they're maybe more reluctant or deferring purchases of the larger ticket durable goods that are traditionally in the leasing business. We are excited and encouraged by our cross-sell motions and developing those further. Because there is overlap in the consumer for four will serve a low prime consumer all the way up to a super prime consumer. But there is considerable overlap with the leasing customer. And to the extent that they can come to us if they need a new refrigerator from Samsung versus, you know, a shoe drop on a Saturday afternoon for some new Jordan. And use our different products for that is, we think, a big opportunity for us. And we're doing that currently, and we have plans to do it more and better in the future. But we don't really see the Pay in four as a competitor to leasing. It's and we believe that it can be complementary. Brad Thomas: That's very helpful. Thank you, Steve. And maybe a follow-up for Brian. I know you're not giving 2026 guidance, and Bob, you already took a stab at this. But as we think about the margin side of things, I guess, is there anything you would call out? Again, as you talked about with Bobby, it does feel like the revenue outlook at the beginning of next year would be challenging if the GMV is down at the end of this year? Outside of the leverage side of things, are there any broad steps that we should keep in mind as we think about margins? Brian Garner: Yes. No, it's a good question. It's something that we're very focused on and trying to make decisions internally to balance the investments that need to get made in this business that have high ROI potential and also adhering to this 11 to 13% for the lease certainly, for the leasing segment that we have set as a standard for prior years. And, you know, as implied in our guidance, I think we're right around the bottom end of that 11 to 13%. And as we look into 2026, the factor that really breathes some oxygen into the room is getting GMV moving in the right direction. You've got this right now in part of the headwind we're facing is a bit of a deleveraging just from a revenue perspective. And so that's task number one is to reinject a positive of, you know, a more favorable trend in GMV and working towards that end. And that's not stating, you know, anything for '26. That's just the mission as we try and improve that result. I think the other factor that I would point to, and Steve also offered some color in the prepared remarks, which was you know, four is north of 20% here in the quarter in terms of EBITDA margin. And so the ability to grow that business profitably and the contributions that we believe it can offer particularly as it gets scale, I think is really encouraging. You know, as you go kind of down to P&L, gross margin, we obviously had a really strong gross margin print here for the quarter. And I think there are some things that we have done internally around decisioning and trying to optimize that. And so I think that may very well be something that we can maintain into next year, which is encouraging. So all that being said, I think there are certainly the building blocks for us to maintain that 11 to 13% is the north star and, you know, try to work against this deleveraging component, build for and keep our costs in line while addressing the investments that need to get made. I think that's the task at hand. But we understand the mandate of not growing costs substantially faster than revenue. But we think we've got some good things in the hopper that'll help GMV going forward. Operator: Thank you. Our next question is coming from the line of John Hecht with Jefferies. Your line is now open. John Hecht: Good morning, guys. Thanks very much for taking my question. I guess just a little bit more into four just because, I know, Steve, you gave us some of the seasonality facts and so forth, but, you know, it's had very, you know, eight quarters of really good kind of growth patterns. Maybe can you give us some, you know, some insight as to, like, customer acquisition and Steve, you even mentioned, like, some the opportunity to cross-sell maybe just a little bit more into that opportunity. Steve Michaels: Sure. Yeah. And one of the really nice things about four so far, and we think it can continue, is just the organic growth that it's seeing in its MAUs, its installed the app downloads. And, ultimately, the GMV has really been driven primarily by referral and word-of-mouth, and user-generated content that wasn't paid for. We have a lot of good ambassadors out there that are really happy with four and getting their friends and family to use it. And that's evidenced by, you know, sometimes the four app in the App Store for iOS will be a top 10 shopping app for a period of time because of some TikTok video or something that we didn't pay for. We are leaning into some marketing as much to prove that we have the sophistication of that muscle in case we need it. Not really to sustain or to juice the growth rates. And so far, we're very pleased with the cost per download and the cost of customer acquisition in the small dollars that we're spending, but we believe that that's a lever that we can pull in the future if necessary. So the referral rate, the word-of-mouth, has been really strong. Four plus has been a very pleasant adoption rate. We introduced it in early 2024. And we have a very growing subscriber base. And as we said, about 80% of our GMV coming from four plus subscribers, which certainly helps that take rate metric that's prevalent in the industry. The cross-sell is an exciting area as well. It's an internal initiative for all of our teams. And we're doing some marketing primarily from the Ford acquired customers to the leasing business. But there's certainly opportunities to go bidirectional. And those are things that we'll be looking at, you know, for 2026 as well to go in both directions across the ecosystem of products. But four is, you know, really becoming a standout in the ecosystem. And getting more integrated. And we think that there's a lot of opportunities across the products. But one of the really nice things has been this organic word-of-mouth and referral marketing or sorry. Customer acquisition without paid marketing that we've been able to achieve. And it's kudos to the brand that the team has built. And the user acceptance and the frictionless experience. John Hecht: Okay. That's super helpful. And then I guess, follow-up maybe, Brian. I think you mentioned if you correct for Big Lots, and some of the tightening that your GMV growth is mid-single digits. I think I heard, you know, in a normal environment, and I know that's a tough question, to define what's a normal environment, but, you know, maybe if you think about the period of 2015 to 2020 or something, what do you perceive as kind of normal secular growth trends for GMV growth relative to that mid-single-digit number? Brian Garner: Yeah. I appreciate you directed that at me versus Steve, but that is a tough question. You know? And, look, the period that you're referring to for 2015 to 2020, that was an environment where I think it was certainly, there was a lot of momentum on the enterprise level. Retailers. And in 2019, launching Lowe's and Best Buy was certainly a high growth period. So it's tough to normalize for it. I guess what I would say is we're looking at the GMV opportunity. We see the pipeline is strong. We see conversations with meaningful retailers that while the sales cycle is long, we are engaging them. And we think there's a lot of opportunity still within our current installed base. As we look at, you know, the metrics across the board, whether it's levels of conversion, or leases per door productivity type metrics, there's a lot of opportunity there. And I'm not giving a satisfying answer about a specific range that you can take, say, into '26 and beyond. I would just say that, you know, if we're growing mid-single digits with the headwinds that are existing today, when you adjust for decisioning and the Big Lots bankruptcy, it gives it's encouraging to me to think about what still leverage still exists for us to penetrate the existing book and beyond? And it makes you feel comfortable that we should be able to drive that north. And that's you know, our best days are not behind us, and I think we've got a lot of opportunity ahead. So that's probably the color I would offer, and welcome any thoughts you might have on that. Steve Michaels: No. I mean, you nailed it. We've got good growth available to us from within our installed base. And, you know, we'd love to rerun the 2015 to 2020 time frame because it was a growth period of, you know, our retailers had positive comps, and we were adding new retailers to the platform all the time. So that's certainly what we're rooting for now. John Hecht: Right. Thank you guys very much for the context. Operator: Thank you. Our next question is coming from the line of Vincent Caintic with BTIG. Your line is now open. Vincent Caintic: Hey. Good morning. Thanks for taking my questions. Kind of first one on GMV, and I guess a two-part question. We talked earlier about the underwriting posture and that you know, feel the needs to tighten yet just kind of wondering if you can put give us some sort of framework for what your underwriting posture, I guess, currently can absorb and maybe in terms of what how we think about the macro or consumer deterioration and maybe what would cause it you have to have to tighten further. And then, second part, so you mentioned those retailers that you signed up. And if you could maybe disclose, like, what the potential opportunity is in terms of the GMV size, that would be very helpful. Thank you. Steve Michaels: Yeah. I mean, Vincent, on the decisioning side, I mean, we've got all kinds of indicators that we look at from first pay bounces to four-week delinquencies to roll rates from bucket to bucket, all the things that you would imagine we're looking at. And, you know, we don't just look at one. We look at all of them because, as I mentioned, DQs are elevated, but it's not something that is impacting overall portfolio yield or negative disposition outcomes currently. So it's, you know, it's a mosaic, if you will, of all those things. And we know what we need to see in order to tighten. And I want to be clear, though. It's when we say like, we may see something to tighten, but it won't be, like, a broad brush stroke changing internal risk scores across every retailer. It could be pockets. It could be in a particular vertical. It could be in a particular retailer. It could be in particular geography. It's very dialed in. Credit to the team for that. So are the things we're looking at, and we look at them very, very frequently. With a lot of folks around the room and on the Teams meeting weighing in. So the three retailers, I would say that we would look at those. They're recognizable logos, so they're not some two-store mattress chain in Denver. And of the three, it's new to them. So as you probably remember from previous when someone adopts a new payment type, it doesn't go from zero to 60 overnight. It kind of ramps up through training and productivity gains. And so we will be working with the counterparts at those retailers to make sure that we move up that productivity curve as fast as possible. I guess you kind of look at them as, like, a super regional, if you will, from a sizing standpoint. Vincent Caintic: Okay. Perfect. That's super helpful. Thank you. And then last question. I wanted to go back to four. So great GMV results over the past eight quarters, and then it was nice to see that strong EBITDA margin this quarter. I know there's variability as you're growing that business significantly. But I'm just wondering if you can maybe talk about how you think of that business at some point in the future when it reaches maturity. What sort of what's the economics? What's the maybe the EBITDA margins of that business? Because I guess when I look at it, I'm making comparisons to some of the other public buy now pay later companies like, you know, Sezzle and Affirm and seeing their high EBITDA margin. So I'm just kind of wondering how you're thinking about that framework, if you can help us out. Thank you. Steve Michaels: Yeah, Vincent. I mean, I think that, you know, the public comps are certainly a place to look. And four has pivoted over the last several years to a direct-to-consumer model. So probably similar, but several years behind, Sezzle. And so if you think about where we were year-to-date with four from an EBITDA margin standpoint, and even though it's going to swing to a loss here in Q4, which like I said, is not a surprise to us and is nothing to be worried about, but it'll bring probably that full-year EBITDA margin down into the mid to, you know, mid-ish single digits. But we do expect with two dynamics scale, as you mentioned, and then with that scale comes more GMV coming from repeat shoppers, so scale and improving loss rates over time we believe, can will result in margin improvement over the next several years. And the unknown is just the rate of growth. Right? So we've been growing, you know, of a 150% GMV each quarter this I guess, it was, like, one forty-seven in Q1, but been over one sixty in Q2 and Q3. You know, just from the law of numbers, you would expect that to decelerate in 2026. But you know, whether there's an opportunity for us to it decelerates a lot, then you'd have more margin expansion. But if we keep the growth there in an effort to get to that scale faster, then we'll have margin expansion, but not as much as you would if you really throttled the growth. So we're not in the business of throttling growth as long as we feel good about the unit economics of each deal we're putting out. And so but over the next several years, we see no reason why we can't look more like those public comps that you're citing there. And that's an exciting opportunity. Vincent Caintic: Okay. Great. Very helpful. Thank you. Operator: Thank you. And I'm showing no further questions in the queue at this time. I'll now turn the call back over to Steve Michaels for any closing remarks. Steve Michaels: Yeah. Thank you very much. Appreciate everybody joining us today. Your interest in PROG. We delivered another strong quarter and are excited about our opportunity to finish the year strong and then set up for 2026, which we'll talk more about here in February. Thank you so much, and have a great day. Operator: This concludes today's conference call. Thank you for your participation. And you may now disconnect. Goodbye.
Operator: Greetings, and welcome to the Lithia Motors, Inc.'s 2025 third quarter Earnings Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance, it is now my pleasure to introduce your host, Jardon Jaramillo. Thank you. You may begin. Good morning. Thank you for joining us for our third quarter earnings call. Jardon Jaramillo: With me today are Bryan DeBoer, President and CEO; Tina Miller, Senior Vice President and CFO; and Chuck Lietz, Senior Vice President of Driveway Finance. Today's discussion may include statements about future events, financial projections, and expectations about the company's product, markets, and growth. Such statements are forward-looking and subject to risks and uncertainties that could cause actual results to materially differ from the statements made. We disclose those risks and uncertainties we deem to be material in our filings with the Securities and Exchange Commission. We urge you to carefully consider these disclosures and not to place undue reliance on forward-looking statements. We undertake no duty to update any forward-looking statements that are made as of the date of this release. Our results discussed today include references to non-GAAP financial measures. Please refer to the text of today's press release for reconciliation of comparable GAAP measures. We have also posted an updated investor presentation on our website investors.lithiadriveway.com, highlighting our third quarter results. With that, I would like to turn the call over to Bryan DeBoer, President and CEO. Bryan DeBoer: Thank you, Jardon. Good morning, and welcome to our third quarter earnings call. This quarter was all about execution at speed. We improved our same-store revenue across all business lines, focused on cost control, and deepened the integration of our adjacencies within store operations. The result is a high-quality earnings mix with more profits coming from recurring streams to create compounding cash flows. Quarterly revenue was $9.7 billion, up 4.9% year over year, and adjusted diluted EPS was $9.50, up 17%. These outcomes reflect the power of our ecosystem in combining local market leadership with a unique omnichannel platform. This quarter highlights an inflection in our performance with strong top-line growth across all business lines, highlighted by the accelerated growth in our highly profitable used vehicle and aftersales segments, demonstrating our focus on execution. We look to continue to capture market share and increase customer loyalty, finishing strong in 2025 and springboarding into 2026. Tina Miller: Our team is quickly converting our momentum into share gains, faster throughput, and sustained cost efficiency so earnings power builds from here. Our unique and diversified earnings engine is the industry while also being more durable, despite a mixed customer backdrop of normalized GPUs and customer affordability issues. The gross profit growth in our recurring aftersales department, resilient F&I attachments, and a focus on increasing market share created strong top and bottom-line results. Combined with tight SG&A control and a focus on fast-turning used cars, we have multiple levers to expand margin and cash flow in any environment. Our results reflect our momentum in building value for customers through simple, empowered, and convenient solutions. As such, same-store revenues for the quarter increased 7.7%, driven by growth in every business line. Despite continued normalization of front-end GPUs, total gross profit also increased 3.2%. Total vehicle GPU was $4,109, down $216 year over year, consistent with industry trends. Note that all vehicle operation results are on a same-store basis from this point forward. New and used volumes both contributed nicely to top-line growth. New retail revenue grew 5.5% with units up 2.5%. New GPU was $2,867, down $348 sequentially. The past few quarters of lagging domestic brand performance shifted this quarter and drove most of our year-over-year improvement. Adversely, luxury brands performed the weakest year over year and import brands were relatively flat. Our used vehicle performance continues to improve nicely, now considerably outperforming the industry with used retail revenue increases of 11.8% over last year. This was driven by a 6.3% increase in unit growth and higher average selling prices. Our value segments continue to deliver high growth with a 22.3% unit increase year over year. Well done, team Lithia. Lastly, used front-end GPU was $1,767, declining by $90 sequentially. Our strategic focus on used vehicles provides another durable layer in any cycle and affordability level. Bryan DeBoer: We will continue to prioritize high ROI used vehicles, keeping all price levels of our vehicles in our ecosystem, turning inventory efficiently, and increasing the F&I and aftersales attachment to deliver more connected and repetitive ownership experiences with our customers. F&I also continues to grow with F&I revenue up 5.7%, reflecting our continued focus and opportunity in this high throughput area. F&I per retail unit reached $1,847, up $20 year over year, which includes the impact of lower F&I from increasing penetration of EV leases and strengthening DFC penetration in the quarter. Vehicle inventory and carrying costs improved nicely with new day supply at 52 days, a decrease of 11 days sequentially. Used DSO was 46 days versus 48 in Q2. Floorplan interest expense declined $19 million year over year due to tailwinds from decreases in inventory balances and slightly lower interest rates. Aftersales continues to be the largest single driver of customer retention and earnings growth. Aftersales revenue increased 3.9% while gross profit rose a hefty 9.1%, with margins expanding to 58.4%, up 280 basis points year over year. We saw strength in all key aftersales categories with customer pay gross profit up 9.2% and warranty gross profit up 10.8%. The strong growth across both categories shows the resilience and opportunity of aftersales and illustrates the value of increasing the number and frequency of customers in our ecosystem. Cost discipline driven by productivity gains and managing performance through people is a key element of our earnings engine. North America's adjusted SG&A was flat sequentially at 64.8%, as we bent the cost curve even as GPUs continued to normalize. In The UK, our teams are responding to market conditions and regulatory labor costs that increased in the year by improving productivity and managing performance through people. Globally, we are increasing market share and growing our high-margin aftersales business as we simplify the tech stack with Pinewood AI, retire duplicative systems, and increase sales efficiency without compromising the customer experiences to drive incremental SG&A leverage. This leverage is amplified by our digital platforms, where we're unifying the customer experience across driveway.com, green cars, and our My Driveway owner portal to make shopping, financing, and service simpler and faster. The sale of our North American JV back to Pinewood AI streamlines the path to market for North America rollout, creating a single industry platform for stores and customers, reducing duplication, and increasing speed of delivery by empowering associates and customers. Together, these steps deepen retention, support SG&A leverage, and reinforce the power of our ecosystem. Driveway Finance continues to build a growing base of stable earnings, with healthy spreads and disciplined underwriting. The path to higher penetration is clear as our focus on growing market share provides us a larger funnel of high-quality loans as we move towards our long-term targets, converting retail demand into recurring stable earnings through any economic cycle. I'm happy to congratulate our DFC team and our store leaders for achieving our 15% penetration rate milestone a few quarters earlier than expected. Well done, team. Turning to capital strategy. We remain focused on investing where we can create the most shareholder value. With our stock trading at a meaningful discount, this quarter we prioritized repurchases, buying back 5.1% of our outstanding shares at prices that will drive significant long-term accretion. This quarter, we issued low-cost, well-priced bonds, increasing our flexibility without stretching risk. Looking ahead, we'll keep making incremental accretive decisions, buying back more when the discount is wide, funding selective acquisitions when returns are clear and more affordable, and continuing to invest in technology. Each element of our ecosystem is building traction and momentum. We're increasing market share and productivity, building stable earnings power in our service drives, accelerating high ROI, value autos, and scaling our adjacencies while improving SG&A leverage. Optionality in our free cash flows and expertise in M&A provides a strong foundation to grow durable EPS and cash flow in any environment. Strategic acquisitions remain a core pillar and key differentiator of our growth model. From $12.7 billion of revenue in 2019 to approaching $40 billion today, we've paired scale with consistent EPS compounding in one of the most unconsolidated retail sectors. This growth was accomplished while also building a much more diversified and profitable business model. Today, our cash engine and unique ecosystem give us the flexibility to both accelerate buybacks and continue to grow organically through exceptionally high return targeted acquisitions. We remain disciplined and U.S.-focused in our acquisitions, prioritizing stores that strengthen our network, especially in the Southeast and South Central regions, where population growth and operating profits are strongest. Alongside these additions to our network in the quarter, we reiterate our $2 billion acquisition revenue estimate for 2025, expecting a strong finish with some complementary acquisitions by year-end. Our acquisition financial hurdle rates are unchanged to acquire at 15 to 30% of revenue, or three to six times normalized EBITDA with a 15% minimum after-tax return. It is important to note that our track record over the past decade has yielded high rates of return, nearly doubling these hurdle rates. Over the long term, we continue to target $2 to $4 billion of acquired revenue annually, deploying capital where each incremental dollar compounds value per share the fastest. If seller expectations stay elevated, we'll lean harder into repurchases. When fit and value align, we move with speed to integrate accretive acquisitions. With the foundation set, and strategic design now providing meaningful tailwinds, Lithia Motors, Inc.'s differentiated model is delivering. Our long-term $2 of EPS per $1 billion of revenue targets are powered by a consistent set of levers. Lift store level productivity and throughput, expand our footprint and digital reach to grow U.S. and global market share, increase DFC penetration, reduce costs through scale efficiencies, SG&A discipline, and an optimized capital structure, and capture rising contributions from omnichannel adjacencies. Together, these levers will continue to convert momentum into durable EPS and cash flow growth. Our nationwide network of amazing people, paired with industry-leading digital tools, is driving engagement across the full ownership life cycle. Strengthening used vehicle aftersales in our captive finance business deepens customer economics and smooths out any economic cycles while inventory and network scale improve speed and choice. Operational leaders across the network are driving store and departmental towards potential, integrating adjacencies, leveraging our ecosystem, and elevating our customers' experiences. The result is a model with consistency, resilience, flexibility, and visible compounding power that will deliver accelerating shareholder value. With that, I'll turn the call over to Tina. Tina Miller: Thank you, Bryan. Our third quarter momentum is clear. Year-over-year EPS improved, financing operations delivered continued growth on solid credit and healthy spreads, and we made progress on SG&A efficiency. Strong free cash flow generation supported meaningful share repurchases, and our balance sheet remains flexible with ample liquidity to fund growth and returns. These outcomes reflect disciplined cost actions, a maturing captive finance platform, and balanced capital deployment. Taken together, they position us to continue compounding value per share. Adjusted SG&A as a percentage of gross profit was 67.9% versus 66% a year ago. On a same-store basis, SG&A was 67.1% compared with 65.1%. As Bryan mentioned, sequential SG&A in North America was essentially flat at 64.8%, which reflects the cost discipline of our teams considering the sequential decrease in total vehicle GPU of $315. Our teams continue to focus on managing costs through growing market share and gross profit as we start to lap prior comps that reflect our sixty-day cost saving last year. In The UK, macro and mixed headwinds pressured margins and labor costs, we are focused on actions to increase gross profit, including increasing market share in used autos and aftersales and reducing SG&A through efficiency and cost control. We've seen solid SG&A results as we bend the cost curve in North America, we're making improvements across our network. Particularly in The UK with specific levers raising productivity through performance management and technology, simplifying the tech stack, and retiring duplicative systems, renegotiating national vendor contracts, and automating back-office workflows. These actions should build benefits each quarter, containing the SG&A trend even if front-end GPUs continue to normalize. Driveway Finance Corporation continues to scale profitably, underscoring the differentiation of our model. Financing operations income was $19 million in the quarter, with portfolio growth offsetting seasonal trends and profitability. We achieved $52 million in financing operations for the year to date, hitting the low end of our full-year expectations a quarter early. Net interest margin of 4.6% was up 70 basis points year over year, while North America penetration reached 14.5%, up 290 basis points year over year. Our disciplined underwriting and credit management practices resulted in strong provision experience, and we have not seen meaningful changes in consumer credit trends within our portfolio. Our position at the top of the demand funnel and high-quality originations keep credit risk low and capital efficient, managed receivables now above $4.5 billion, the maturing portfolio is delivering profitability that our earnings trajectory with steady, consistent growth. Strong origination flow, improving margins, and a clear runway to increase retail penetration rates gives us confidence in the path of our long-term DFC profitability targets. Now moving on to our cash flow and balance sheet health. We reported adjusted EBITDA of $438 million in the third quarter, a 7.7% increase year over year, primarily driven by lower flooring interest. We generated $174 million of free cash flow, converting operating momentum into liquidity, that lets us both return capital and invest for growth while maintaining a strong balance sheet. This steady self-funded cash engine keeps us nimble and focused on deploying dollars where they compound value fastest. This quarter, we strengthened our capital allocation commitment to focus on share buybacks. With our share price significantly lower than intrinsic value, we allocated approximately 60% of capital deployment to share repurchases, buying back 5.1% outstanding shares at an average price of $312. So far in 2025, we have repurchased 8% of outstanding shares at an average price of $313. Slightly less than one-third of capital was deployed to high-quality acquisitions in targeted regions and the remainder to store capital expenditures, customer experience, and efficiency initiatives. Our capital allocation philosophy is to act opportunistically and with leverage in our target range and ample liquidity, accelerated share repurchases to capitalize on the meaningful disconnect between our stock price and the fundamental value of our business. This quarter, higher buyback pace allows us to compound returns for shareholders while still preserving capacity for high-return strategic acquisitions. Our strategy remains consistent while we continue to grow. Generating differentiated stable earnings from an omnichannel platform that serves the full ownership cycle. With talented teams, class-leading digital and financing capabilities, and a strong flexible balance sheet, we're scaling core operations and high-margin adjacencies with measured discipline. Our omnichannel model creates durability and flexibility as business conditions evolve. Preserving capital flexibility to deploy where returns are highest. As we move into 2026 and beyond, we will continue our focus on translating share gains and throughput into cash flows compounding value per share. This concludes our prepared remarks. With that, I'll turn the call over to the operator for questions. Operator? Operator: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press 2 to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. One moment, while we poll for questions. Our first question comes from the line of Ryan Sigdahl with Craig Hallum Capital Group. Please proceed with your question. Ryan Sigdahl: Hey. Good morning, Bryan. Tina. Nice to see the operational improvements. Wanna start with EVs. EVs were given the tax credit expiration. But it seems like Lithia Motors, Inc. cleared through most of their EV inventory or refreshed a lot of it anyways. But can you talk through kind of what you saw in the quarter, what that meant from a sales standpoint and then also GPU standpoint, and then how you think about that category going forward? Bryan DeBoer: Sure, Ryan. This is Bryan. Thanks for joining us today. Believe it or not, our electrified vehicles in the quarters were back to 43% of our total new car mix. Which was a nice number. We actually started the month of September and this is close to correct. Okay? I think we had 6,000 electrified vehicles that qualified for the $7,500 federal credit. Going into the month, and then we ended at just under 2,000. With really the only product that's remaining is a little bit of the higher price stuff. Which we spoke to in the past. The other thing that's pretty important to remember is manufacturers incentivized those cars quite nicely as well. Many of the manufacturers are carrying over those incentives plus that we they're basically replacing the $7,500 credit on top of that. To be able to keep that volume, hopefully, somewhat static. I imagine it's gonna drop a little bit, and I don't have the preliminary October results, but I would imagine it'll drop a little bit. But the important thing to remember is that the way that they push those units out the door and what the impact is of the $7,500 is basically an affordability issue because most of those vehicles were leased. So our lease penetration I think, was the highest we've ever had on a blended basis. We were almost 40% lease penetration on new vehicles, which was quite nice, which means most of those customers are coming back in the next twenty-four to thirty months or whatever the length of those terms are. So need to see that we can move the market when we need to. And I think what I would take away from it is those vehicles, those 4,000 vehicles or so that we pushed out, in September were really first-generation BEVs. A lot of first-generation BEVs, Hondas, Toyotas, Subarus, and some of the domestic products that now second-generation cars are coming either in the twenty-sixth model cycle by the end of the year or early in 2026. So we're gonna have rather than a 200-mile range car, we're gonna have three to 400-mile range car. For about the same price. Ryan Sigdahl: Yeah. It's great color, and not just consumers coming back, but like you said, the first rate of refusal for that inventory on the used side coming in the door for you guys. Wanna switch over to The UK. Appreciate the disclosure on kinda North America SG&A to gross. If I back into it, I think it implies The UK was something in the high 80 range. Understanding kind of the margin challenges there, the labor challenges, etcetera. But sounds like a lot of company-specific initiatives from cost efficiencies focusing on parts and service and used and things that The US did, you know, a decade ago. But do you see any kind of line of sight to improve market conditions there, or is it really kind of a self-help do what you can do given the Chinese mix and kind of the constraints in the market? Bryan DeBoer: No, Ryan. Great questions. And I think the insights on the labor market really happened in January. And it was twofold. One was a minimum wage, and then one was a payroll tax. And the actual impact to the organization was $20 million. For us. Okay? And they curbed about $11 million of it in the first six months, sheerly through headcount reductions and productivity gains. They've now earmarked another 8 or $9 million, but it'll get them beyond what the impact was, but there's another 3 million coming in 2026. So they're really working on how to do that. And I think even though our SG&A is higher than last year, and the market has shifted, our team's doing a pretty nice job relatively speaking of how to respond to that. And a lot of the increases I think we were up $1,010 million dollars approximately in operational net profit in parts and service. So big improvement there. Our used cars are beating the market by a little bit, and our new cars are in line with the marketplace. And I would say this, last year, we had let's see, we had three BYD stores and an MG store which are Chinese brands. This year, right now, we have seven total brand total Chinese stores with, I believe, five more that open in the next sixty days. So unlike The United States where you have to go buy and pay goodwill to be able to shift your manufacturer mix in The UK If you've got a facility and you've got good relationships, with manufacturers, you have the ability to add and respond pretty quickly to the marketplace. So we're pretty pleased about what we're seeing there and our team there is doing a really nice job responding. So we should exit the year with almost a dozen Chinese brands, which are up a pretty nice amount. Now some brands like Ford and stuff are up quite nicely as well. So you know, I think we're able to respond to the market. But like you said, it's our response. It's not necessarily coming from strength in the marketplace right now. Ryan Sigdahl: Helpful. Thanks, Bryan. Good luck. Bryan DeBoer: Thanks, Ryan. Operator: Thank you. Our next question comes from the line of Federico Merendi with Bank of America. Please proceed with your question. Federico Merendi: Good morning, everybody. We've seen some turmoil in the supply market, and today, there were more news on that front. So what my question is, Bryan, could you give us an overview of the used market and how subprime can impact it? I understand that your higher credit quality, but what are the ramifications for this the credit portfolio? Bryan DeBoer: Would love to, Federico. And I think let me speak directly to the used car market as a whole. And as a whole for Lithia Motors, Inc. not specifically to our DFC part of our organization. Okay? Because their buying behaviors are different in the marketplace. Of more of a prime type of lender. What we're seeing in the in the marketplace, in the used car marketplace, is a lot of opportunity. This is from a Lithia standpoint. In the value auto segment. Okay? And the value auto segment is our most affordable cars. And I think there's a general belief in the industry that value autos are driven off of low-quality credit. It's the exact inverse of what you think. Okay? Lower-priced vehicles are only financed about 50% of the time. Okay? Whereas a certified vehicle is typically financed 90% of the time. The reason why is that lower-priced vehicles or what we call value auto are typically quite scarce. Okay? They take money to recondition. So your price to book value is typically quite high, meaning it's difficult to finance. Okay? And I got Chuck sitting next to me here shaking his head that those are really hard cars to finance because you know, at a $15,000 car, if you've got $3 in disequity, you're now financing 20% over LTV with profitability and without down payment. So you've got some big anomalies that remember that value autos are driven off a higher credit quality customer typically saves their money or has the ability to finance at a fairly high LTV. Loan to value. Okay? So really interesting dynamic, and this is what we teach our stores and why our value autos were up 22% on a unit basis. In the quarter. And a lot of our real strong tailwinds. Other market dynamics that are important to remember. We actually achieved 74% of our used car sourcing. In the quarter was bought directly from consumers. Okay? And that's trade-in, obviously, or buying them directly off the street from consumers. Or off-lease vehicles. So on and so on. That's the highest we've had all year. Okay? Meaning, that our teams are keeping pretty much every vehicle that they can make stop, steer, and go. So you're selling a safe vehicle, but you're digging into the affordability landscape of these high-quality customers that ultimately you make pretty good money on because the vehicle is scarce. Okay? Some other little tidbits of information Our margins on used vehicles, and I believe this is more of a Lithia thing because we now have driveway and green cars to be able to spread our wings and get more eyes in front of every type of car. And this is a little better than what we've been in the past. We made 5.1, 5.2% margins on both certified and core product. Okay? As a percentage. Right? Our value auto this quarter was almost 16%. Okay? And remember, that's a lot lower-priced car So our actual annual return on our value add is a 130% cash on cash return. Okay? Massive improvement. Relative to certified and core, that's under 50%. Okay? So nice improvements. We're pretty excited about what's happening in that space. To finish that thought, Federico, remember that the mix in the market nationally in North America only 11% of used vehicles sold are one to three-year-old vehicles. Okay? Only 11%. Okay? So we spend very little of our time, and it only makes up about a fifth of our total sales. Selling those. We do it because we've got the off-lease returns, and it's easy People expect us to have those certified cars. Another quarter of the market comes from Coradas or three to eight-year-old vehicles. Okay? And we were about you know, that makes up 26% of the market which leaves over nine-year-old vehicles makes up 63% of the marketplace. Okay? That's a huge amount. Okay? That's a number that's bigger than new car star. Okay? So remember, that's where the big money is in the business, and as a new car retailer, we're top of funnel to get the first waterfall effect of trade-in and then the second waterfall effect and ultimately, that second and third trade-in, which is really that value auto that brings those nice returns that we're looking at. Hopefully, that helped, Federico. Thanks for your question. Federico Merendi: Thank you, Bryan. It was super helpful. And the second question I have is on The UK and the regulatory environment. I mean, we have seen that in The US, the EV regulatory environment has changed. And Continental Europe is it seems that they're moving to that direction. What do you think is going to happen in The UK over the next I don't know, eighteen months in the regard of EVs. Bryan DeBoer: Yeah. So, Federico, let me just reiterate for everyone that UK makes up a little over 10% of our revenue and makes up about five to 6% of our net profit. So we don't have a ton of impact coming from The UK. But what we're seeing is growth of the Chinese brand but it's not coming from the electrified segment. It's coming from their introduction of ICE vehicles, into the marketplace. So and I think when they when BYD when MG and those others first came in the market, they were electrified vehicles. Okay? Today, the reason why they're gaining market share is they're selling ICE vehicles and plug-ins. Okay? And I was there four weeks ago, okay, and traveled the marketplace. We now have a cherry franchise there as well. Looking at the product and what I see in the electrified vehicles. At the price point that they're selling them for in The UK, they have zero ability to compete in North America. Okay? And that may change, and they may have margin that they can still take out of the formula. But I looked at a cherry vehicle that was £37,000, which is an equivalent to almost $48,500 American dollars. Okay? It was an electrified vehicle that had about a 256, 57-mile range. Okay? And wouldn't hold a candle to any of the imports or the domestic cars at about $10,000 less. Okay? So we're actually not as concerned, and it's great to be able to see what's happening in The UK. Remember this also. In China and UK, they've plateaued in terms of electrified vehicle sales. They both sit at about 55%. Penetration rates. Okay? And that's the same as it was last year. Okay? So, really, the impact that's happening is coming from the ICE vehicles that I don't think that message gets out there. I do believe that the labor Party in The United Kingdom is definitely into sustainable vehicles. You know? At times, I wish we were a little bit more into that as well, but you know, that's probably now five to seven years out in in The United States. But you know, it is making it hard expense-wise. In the in The United Kingdom, and I imagine they'll embellish that further with more quotas on electrified vehicles. Federico Merendi: Thank you very much, Bryan. Bryan DeBoer: Thank you. Operator: Thank you. Our next question comes from the line of Michael Ward with Citi Research. Please proceed with your question. Michael Ward: Good morning, Bryan. How are you, sir? Bryan DeBoer: Good. Did you Two things. On the USB EV sales, you mentioned there are about 4,000 units. If I believe what I hear of the industry, the margin on those is very light. So if you take that out, you probably your overall gross new vehicle gross has been relatively flat. If I'm doing the math right, over the last couple of quarters. Is that correct? Bryan DeBoer: I believe you're correct, Tina. Do you got any insights there? I'm looking here real quickly. Tina Miller: Yeah. I think that that's a fair assumption, Mike, that the BEVs are a little bit lighter, and we're pushing those out the doors. Our manufacturers are asking us to help them meet their CAFE standards so they can ultimately continue to build other higher demand cars at the current time. Michael Ward: You know? And Yeah. Now we need better cars. It is. It is. What kind of plan? It's a much higher repeat buyer too. Right? The EVs? Like, once they people buy them, they love them. Bryan DeBoer: I think you're right about that. The big thing is is we're conquesting second and third-generation Tesla customers. Massively conquesting them. So that's a positive thing, especially in the West where Tesla penetration is high. And I would say our managers and store leaders are not as opinionated of whether they should sell an electric car plug-in hybrid, or an ICE engine. You know? They seem pretty savvy on being able to convert customers. And I think what a customer gets is a wonderful service and aftersales experience. So the life cycle of the ownership is a much different experience than maybe their first one or two experiences with the Teslas. And to be fair, most manufacturers now have competitive product in price in range, and in speed, which is something that a man that a lot of consumers are looking at that the performance elements of the car are quite excited and we're really excited about the next gen of the of the Japanese and Korean imports that are hitting in the next couple months. Okay, to really be able to start to push those vehicles out to the consumers at really affordable levels. Michael Ward: And it sounds like the profitability aspect probably bottomed with the three q. With the the rush to buy. So maybe that's just a little bit. The second thing is, you kind of alluded to that you have about it sounds like, about $1 billion in acquisitions that could close by year-end. Is that what you're seeing? And is have the multiples come back into check? And it looks like it sounds like you have a lot of opportunity there. Bryan DeBoer: Yeah. You know us. I mean, we don't use these threats on deals. We're fortunate that we've got great relationships with our manufacturer partners, allows us to fish in every possible pond. And I think in North America, we've been real fortunate to be able to find a few deals in the first March of the year. But we've got some really nice deals coming in Q4. And are pretty excited that you can find them in this type of market, especially the quality of the deals and you know, it's those long-term relationships that may take three to five years to be to be get into that point where certain things start to drive the decisioning of those sellers. And we're fortunate that they chose us to be able to be their suitors. And their successors at what we would look at as, you know, well within our 15% hurdle rates on ROI and three to six times EBITDA and on and so on. Michael Ward: Well, you're keeping that allocation plan tight. It's nice to see, so thank you. Bryan DeBoer: Thank you, Mike. Michael Ward: Appreciate it. Operator: Thank you. Our next question comes from the line of Rajat Gupta with JPMorgan. Please proceed with your question. Rajat Gupta: Great. Thanks for taking the questions. I just wanted to dig in a little bit more on The U.S. Versus UK performance. Anything more you can share in terms of, you know, how the GPUs were in US versus UK? And how was the services growth, I appreciate the SG&A comment, but just any more clarity around the profit performance would be helpful. And then, relatedly, any more color on US in terms of how you feel you're doing versus the marketplace now? Particularly given, like, historically, you've had some tough exposure in terms of your regional mix. So curious, like, how that's doing versus the broader market. And I have a quick follow-up. Thanks. Bryan DeBoer: Yeah. Sure, Raj. I think maybe I'll spend most of the time on what we think of our North American performance and where we where we sit in the marketplace. I mean, the it does look like that we massively beat on used cars. The market is showing flat. Okay? So think we sit quite nicely at 11.8% revenue increase and almost 7% unit increase. Also, you reflect back on the used-only retailers that have reported so far, remember, they were down 6%. So it speaks to the strength of our model and ability to respond to the marketplace in a little bit tougher conditions. We're pretty excited about that. Also, if you look at our aftersales business, we were up over 9% in gross profit. Okay, which was a really really nice number as well. And that's driving a lot of the profitability. In The United States. Which is great. I mean, really, the new car market was where maybe a little bit of weakness lied. Okay, because ultimately, our GPUs did come down. Even though we were up five or 6%, that also looks better than what the marketplace was. So I'd say this. I think our team is responding and you know, to be fair, last quarter, our results were kind of middle of the pack. This quarter, I believe that we're going to be we're going to look nice in terms of top-line revenue growth and we'll see tomorrow and next week of where we sit. And no matter what, I believe that we've got lots of opportunity I think our team believes there's lots of opportunity. And they're really driving towards that two to one ratio. In terms of The UK, The UK's profitability was only was down 2.4% year over year. So it wasn't that much, and it didn't affect things that much in terms of our overall numbers. So most of the $300 in GPU was truly North America. Okay, which is the sound byte. Now we did we have read some third-party information. It appears that the GPUs as a whole were down almost 16% on new vehicles. Okay, for the nation. Okay? So if that's true, we probably beat by five to 7% in terms of GPUs and obviously on the top-line side on new unit volume, we beat on a pretty good amount there as well. So all in all, I can tell you this. My team is looking forward to the challenge, and I think being back in operations and getting to know a lot of our operational middle leaders and top leaders a little bit better. We've got great people. That understand the opportunity and know it's game on and are looking for how to show that Lithia Motors, Inc. is the best operator in the segment. And most importantly, how to leverage the ecosystem and the massive amounts of acquisitions that we've added over the last five years, to really differentiate ourselves as operators. Rajat Gupta: Got it. Got it. That's helpful color. I just wanna follow-up on, you know, Mike's question around just m and a. Just a little more finer point on that. If possible. You reiterated your $2 billion target for the year. But you also noted, like, you're very return focused. So I'm curious, like, is that, like, a hard target that you wanna meet here in the fourth quarter? If not, like, would we expect that excess cash flow to go into buybacks? I'm just curious, like, know, how much of I mean, is that something you're, like, you're forcefully working towards to achieve? Know, in the fourth quarter? Thanks. Bryan DeBoer: Yeah. I think the return thresholds at any given time are balanced. But we that is a hard number. We don't flex. Okay? And we haven't had to flex even over the last three or four years where earnings were elevated and as such prices were elevated, we've always bought off normalized earnings. We have not put in the value creation that comes from the ecosystems in our return metrics still. Okay, which gives us another 50% of lift when we think about, where we stand there. So you know, there's good opportunity out there. You just gotta be able to fish in a bigger pond. To find the opportunities that are great. Okay? And I think you know, one thing that I know about how we think about our network is we do look at density. We are starting to gain market share and expand loyalty. Okay? And at about 188 miles from over 95% of the population in our in in, The United States. We sit in a nice place to be able to grow and push market share. And I think our team spent the last three or four years getting to understand the benefits of what driveway.com can do what the My Driveway consumer portal can do, and how DSC can help drive sales. While still being extremely controlled in what we buy. In DFC to be able to get there. So we're pretty pleased and you saw that we bought, what, 5.1% of our shares back in one quarter. Okay? The implications of that, we buy the whole company back in five years. Okay? That's 20 quarters. Okay? So I don't believe that can happen. And if but if the world can't see what we built, and can't see that we know what we're doing and that we had the courage and the boldness to be able to redesign our organization for a higher profit model that has lower costs okay, and can't see that the synergies that are coming from DSC and Driveway and Fleet Management businesses and Pinewood experiences and partnerships I'm not sure what they're looking at, but this management team and our board believe that we have the we have a rocket launching into space. And if people don't get it, we'll continue to buy our shares back. Rajat Gupta: Understood. Thanks for all the color, and good luck. Operator: Thank you. Our next question comes from the line of Glenn Chin with Seaport Research Partners. Please proceed with your question. Glenn Chin: Good morning, folks. Finally. Can we just scroll down a little more into your use performance? So you know, as you pointed out, very promising 6.3% same-store unit growth. I mean, that's the best number you've put up in almost four years. Can you just tell us what drove that, Bryan? Was it a change in focus? Change in process? It doesn't sound like it was a change in market. Bryan DeBoer: Well, I can tell you this. Adam did a nice job kicking off used car focus. And to be fair, that's my love. Okay? So everyone's getting the message and it's very clear that we know what we're doing. It's a matter of keeping those. And remember this, Glenn. We bought $25 billion in revenue, with not a lot of messaging to the stores over that first three or four years of ownership. That we keep every car. Okay? And we bring people into our ecosystem through affordability, and then they eventually step up to buy better or newer cars then eventually buy new cars. Okay? And that is our model. And I think I'm proud of that $25 billion that joined us to be able to clear their mind that they can actually sell these cars in a respectful way and it's a higher quality car than 16% profit margin on those value auto cars. We're gonna continue to push, though, in all three of the buckets. Okay? And I know that our team can do it, and it's truly a focus. On being able to walk, chew gum, and then eventually run at the same time. And I think our top our teams in the walk stage and we'll continue to get to jog and run on used cars. But it's the biggest area that we built the ecosystem for. Okay? And even our sustainable vehicles and used cars is looking like a quite quite nice number at almost 20%. Of our sales were electrified and used cars as well. Glenn Chin: And you've emphasized that messaging to me the last several quarters that was it was going to be a point of focus for you and the team. I mean, so so is last quarter the inflection point? Meaning, I mean, should we expect positive comps from from here on out? Is that a safe assumption? Bryan DeBoer: Absolutely. Okay. If you remember pre-COVID, Clint, pre-COVID, the company the company basically for eight years. Had high single-digit, low double-digit, increases in used cars quarter over quarter. I don't remember a quarter that we were ever below seven and a half, 8%. Okay? I mean, the market is there. Remember, we have less than 2% of the used car market. Okay? And we're top of funnel. Okay? We we built our ecosystem to be able to grow used cars out by finding the best cars reconditioning them closest to the consumer, meaning I don't got the fees to transport cars because I got 350 reconditioning locations in North America. Okay? And on top of that, 75% of our cars or three-quarters of our cars are coming directly from consumers, so we don't have to pay option fees. Okay? It's about a thousand dollar advantage over used car retailers. Okay? Important thing to remember and we're just getting started. Glenn Chin: Yep. And to your point, I mean, I'm looking at my model here. You have positive comps every quarter prior to COVID. Apologize for the noise. Back to as far as my model goes from so from 2012 through 2020, you have positive comps every quarter. Bryan DeBoer: Well, great. Well, since I've got everyone on the call, in October, we're trending up 10% in unit sales. Okay? And we've got tough comps. Okay? And we had tough comps last quarter. Because we had all the carryover units from CDK. That gave us a bigger number last year in used car sales. So we're just getting started. Glenn Chin: Very good. Thank you. Operator: Thank you. Our next question comes from the line of Christopher Bottiglieri with BNP Paribas. Please proceed with your question. Christopher Bottiglieri: Hey, guys. Thanks for taking the question. Two quick ones for me. The self-sourcing was 74%. This quarter, the highest of the year. Can you just remind us what that looked like pre-COVID? Bryan DeBoer: Actually, pre-COVID, we were low seventy percentile. The area that's grew is what we procure directly private party. Meaning, what we buy directly from a consumer, they don't actually trade in the car. And buy a car from us. And that was three or four percent if I remember pre-COVID. And that's pushing eight to ten percent in most quarters now. A lot of that is driven off of the driveway ability to be able to procure a couple thousand cars a month. Okay? And that driveway procurement is really retraining a lot of our store leaders that cars are worth more than what they think. And when they pay a little bit more on a trade-in, somehow they sell them for a little bit more. Because remember, our thesis on our design elements ten years ago is that we buy cars for about 12 to $1,500 less than what the used-only retailers. Primarily driven off what I just spoke about of reconditioning closer to the customers and closer to what car sale not having auction fees, having more of our cars come off trade-in, okay, that gives us a distinct advantage. But unfortunately, we pass it all through to the consumer, and we sell cars for about a thousand to $1,500 less than what Carvana and CarMax sell them for. Okay? And that's purely because we believe because they've got more eyes on cars and it's a pretty nice transparent selling process that they have much like what we have in Driveway. Christopher Bottiglieri: Gotcha. Okay. Yeah. That's what my I show that too, that thousand $15 gap in my price surveys and whatever believes me. But, anyway, my follow-up question would be can you just give elaborate more on the net losses as percentage of managed receivables this quarter and then also the allowance for the end of the quarter? A percentage of ending receivables. Just wanna get a sense. Sure. Great. Check with You had a, yeah, you had a really good quarter last quarter. The allowance didn't really move much. Just wondering if that's conservatism or just you're a little bit spooked by maybe some of the fringe part of the subprime market. You guys don't really play there, but just kinda curious how you're thinking about that allowance going forward. Chuck Lietz: Yeah. Chris, this is Chuck. I would say know, there's a lot of noise in the marketplace, but we're very happy how our portfolio is performing. Just a couple of quick data points. Our first payment default, which is the biggest in the of fraud and highly likely fraud, is actually down year over year. Our delinquency rates are down year over year. On a sequential basis, and our default rates, which leads to the provision that you're talking about, are also at or below at each credit segment year over year after we adjust for seasonal adjustments. So this really speaks to the power of our ecosystem. Of being top of funnel, Chris. And that this credit discipline while still increasing our originations by 33% over last year, That's pretty much, you know, key to DFC's ability to drive and hit our long-term goals of 500,000,000 of pretax profit. And as it relates back to the provision, we're very comfortable that keeping that at where we've got it should be more than enough to cover what our losses are on a go-forward basis. So thanks for your question, Chris. Operator: Thank you. Our next question comes from the line of Jeffrey Lick with Stephens Inc. Please proceed with your question. Jeffrey Lick: And the rest of the team. Good morning, Bryan. Congrats on a great quarter. Bryan, I was wondering if we could if you wouldn't mind just drilling down a little more on the new GPUs as we go forward, I think we're gonna be lapping a tougher Q4 than last year with the election bump and I think the OEMs had some dealer incentives. And you know, then we as we get into next year, I mean, we there really hasn't been any talk on this call of tariffs, which is amazing in itself. I'm just curious how you see the outlook for new GPUs as we go through Q4 and 2026? Bryan DeBoer: I think that's a good insight Jeff, that Q4 of last year did have some nice numbers in it. But to be fair, when we think about how we grow our business, it's taken us a year or so to get back to Performance Through People. And our store leaders out there are making good people decisions, and a lot of those were made in the summer and are now taking hold. Now what happens in the in the quarter? Will we'll we'll have to see. I would say this, when we look at tariffs, and the impact of those tariffs on GPUs I would say it's offset more by the competitive environment that manufacturers are all dealing with new entrants. They're dealing with new product lines. It feels like incentives are starting to creep even though they only show up slightly year over year. We feel like there's a turn there I just got from one of the Korean manufacturers this morning that dropped that dropped their APR on their two highest moving products. Down to 0% again. On top of the big rebates that they already have on the table. So I'm feeling like that could help offset some of the some of the the comparative numbers that came from the election period last year So we're feeling pretty good. I would also say that the tariffs though there is some pretty big implications and it does look like some of those may stick, I think the biggest sound bite is to whether we're at 50% or 150% tariffs on China the North American market is not gonna behave. Like Europe or the rest of the world. Okay? Knowing that those vehicles are selling for a certain price and the rest of the world, and then adding on a doubling factor to the cost of that vehicle there's no chance that I think that Chinese manufacturers are here in the next half decade at or so at scale. Okay? Someday, they may be able to do that. And the product quality that I saw was pretty good. I mean, it was it was up there with the Koreans and the Japanese, which are truly some nice high-quality vehicles. So we'll see what happens there. The good news is I believe that the Koreans and the Japanese are responding to the market nicely. They are not raising prices. I think our increases in two of the main import Japanese brands talking about 250 to $300 increases. On their main product lines like CRVs RAV fours, and so on. And these cars are now full hybrids or they're plug-in hybrids that are just better and more economical cars. So on an affordability level for a consumer, I don't think tariffs I think tariffs can be overcome by better gas mileage and lower bills at the pump or electrification. To be able to help with the affordability. Component and offset that or maybe even more than offset that. Jeffrey Lick: And just a quick follow-up. Any elaboration on the 300 basis point improvement service and parts gross margin percent, that's obviously pretty impressive. Just curious what's driving that? How sustainable you view it? Any details would be great. Bryan DeBoer: Yeah. A lot of times, Jeff, that's driven off of the mix between the 30% margin inventory or parts business. And the 65% labor businesses. And our labor portion of our business was up a lot more. But will say this, we are retaining more growth. And our manufacturer partners, because of inflation, it they are increasing our labor rates on warranty. And corresponding, we will increase our customer pay labor rates. And as a competitive environment, we're able to maintain pretty good profit margins because generally speaking, inflation and our labor costs are going up. Yeah. K? And we're able to bring that to the bottom. Mike, go ahead, Tina. I would add to that, Jeff, too. We had strong performance both in customer pay and warranty in the third quarter. And those are more heavily labor-based. And so that shift and that overall performance also drove some of the margin improvement. Tina Miller: Yeah. That outpaced by seven, 6%. Yeah. Jeffrey Lick: That's a good point. Great. Well, it was a great quarter. I'm happy for you guys, and I look forward to catching up later. Bryan DeBoer: Thanks, Jeff. Operator: Thank you. Our next question comes from the line of Bret Jordan with Jefferies. Please proceed with your question. Bret Jordan: Hey, good morning, guys. As you build out the Chinese brand mix in The UK, could you talk about the rooftop economics of BYD or an MG, the sort of seen as lower price point or lower ASP units maybe in some cases. Are you getting similar GPUs and aftersales and mix out of those brands as you do out of your legacy UK product? Bryan DeBoer: Good question, Brett. And the answer is yes, on GPUs. Are getting margins similar to what the mainstream brands are getting. Now BYD is a little bit different. They are a little bit higher priced Chinese brand. So they kinda fall in this area between The US manufacturers and the Japanese and Korean and other European mainstream manufacturers. And luxury cars. Okay? So important to remember that. Here's the difficult thing. So even though our volumes are increasing quite nicely, with the Chinese brands, there's no units in operation. Okay? So the way that we're making a difference is we're going out and doing what Lithia Motors, Inc. does best and we've got this great mainstream leader, Gary, who knows how to sell used cars. In fact, I probably could learn some things from Gary because he's selling almost three to one used to new. In the mainstream or Evans Hallsha brand. In The United Kingdom. So a lot of our business model, when we think about adding Chinese or opening those points, is in the interim, why you build your units and operations, which is what drives your aftersales business, you've gotta sell used cars. And he's doing a nice job being able to quickly get to those two, three, and four to one one ratios. Keep it up. It's neat. It's neat to be able to see that in set the buy bar maybe even a little higher for our North American store stores because ultimately, I'll tell you this, we sit at 1.2 used to new ratio on in in North America. The marketplace is at 2.5 to one. Okay? Just to put in in reference of what we're looking at, that's what we believe the potential is. Okay? And in The UK, it's a little bit better use to new ratio, and Gary gets all of it. Okay? Which tells us that we should be able to get that. So Gary and Neil in The UK, big shout out to you guys. Bret Jordan: Okay. And then a question on aftersales, the growth rate. Could you parse that out between price and car count? You know, how much is, just same service price inflation versus incremental traffic in the bay? And I guess, how do you see the price on a year-over-year basis in the fourth quarter on a same service basis? Are you seeing tariff impact or labor inflation flowing through? Bryan DeBoer: Good question, Brett. A little bit more than half is coming from price increases. With a little less than half coming from, from customer count. And RO. Bret Jordan: Okay. And we continue to sort of see inflation being a comp driver at the end of the year, or we seen most of it play out already? Guess, what what how long is the tailwind from price? Bryan DeBoer: I think that the way that we go to market and the way that my presidents and vice presidents are thinking about things, is we've gotta grow our RO count. And you know, our top performing or what we call our Lithia Partners Group stores they somehow seem to be able to do both, and they're carrying a lot of that 9.1% year-over-year same-store sales gross profit growth. But they're also carrying along with it most of the improvements in top-line growth. Okay? And that shouldn't be that way. Our Northeast and Northwest regions are a little bit softer in terms of RO count. But we're challenging them, and I think they see the opportunity. And there could be some nice tailwinds there that that that that come into play as you know, we really start to help people see a more bright future on growing your customer base. Bret Jordan: Great. Thank you. Bryan DeBoer: Thanks, Brett. Operator: Thank you. Our next question comes from the line of Daniela Haigian with Morgan Stanley. Please proceed with your question. Daniela Haigian: Thanks. Just squeezing one in here on forward demand. Bryan. As we pass through the peak tariff fears from April. Excuse me. And now we're seeing OEMs revise up their guidances. It kinda clears the bar. On this, and I appreciate the color on sales tracking 10% higher in October. Just wanted to get your commentary on how you're seeing pricing on these new model year vehicles and how you're thinking about demand going into '26? Bryan DeBoer: Sure. Sure. Daniela, real quick, the 10% was used vehicle. Volume. Okay. Okay? Thank you. So just to clarify that to make sure that was clear. And that's an early October number where two-thirds of the way through the month. In terms of peak tariff, I think when we think about the tariff impact, I think we're through most of the impact. I think that it's going to get better. I think the manufacturers need to know how stable the ground is that they stand on. And then determine what their three to five-year product cycle is going to look like. To decide where they're gonna ultimately build those cars. Okay? And I think we sit in a nice position as new car retailers and we have to remember this. We're a new car retailer. But less than a quarter of our profitability is derived from new cars. Okay? Remember that 61% of our profitability is coming from aftersales business. I think that's why we spend a lot of time in aftersales. New cars is somewhat a function of your marketplace. Okay, and what your manufacturer's incentives are. So as a retailer, I'd love to be able to say that I could take a bunch of market share in new We, to some extent, we can be plus or minus 10%. But outside of that, our manufacturers and our mixed base is what dictates that. In our geographic base. So, hopefully, that helps you a little bit, Daniela. You have a follow-up on that? Daniela Haigian: Thanks. No. That's alright. We went through a lot of topics here. Bryan DeBoer: Great. Thanks for your question. Operator: Thank you. Our next question comes from the line of Michael Albanese with Benchmark Company. Please proceed with your question. Michael Albanese: Yeah. Hey, guys. Thanks for taking my question. Hung with you till the end here. Just a quick one circling back on used, specifically the value autos. Just given what you said about the, you know, typical credit quality of a buyer there and generally how much is financed, Are the value autos or value auto demand inversely or, you know, correlated with consumer affordability. Or maybe a better way to ask the question is, if new and used again a question. Go ahead. Bryan DeBoer: Go ahead. That's a yes on the first question. Go ahead and balance sheet. Yeah. Okay. Michael Albanese: And to take that a step further, I guess, and maybe a better way I thought to ask it was you know, if the gap between new and used pricing kinda widens and there is a trade down, you know, where does value fit within that? And you know, is there a segment within your mix, CPO core value that generally sees a pickup in demand or, you know, does it depend on a host of different variables at any given time? Bryan DeBoer: Yeah. I would say that value auto vehicles have very little impact caused by new vehicles. It's too different of customer. Okay? It's too different levels of affordability. So definitely certified vehicles and some of the you know, I would say one to five-year-old vehicles. Have an impact based off new vehicle pricing. Tariffs, so on and so on. But value auto is so far downstream. Remember this, value auto, that 63% of the market that I told you is based off what, 41 million units. Okay. 42 million units, something like that. You're talking about 24 million units or a 160% of what your new car SAAR is in that segment. It is a bulletproof segment. Okay? It's where it's where probably most of the money is made in used car. Okay? And it's something that everyone can do. As a new car retailer or as a used car retailer. Keep the car that you take in on trade is the way to do it. I mean, we get 80, 90% of those cars from trade-in. Okay? So it's a very stable thing. But again, we have a third of our stores that probably don't keep those cars. You know? We've gotta help them understand that you're making 16% margin, and you know, yeah, I get it that you make a little bit less in f and I. But as a whole, the returns are massively better than any other segment. Michael Albanese: So does it come down to essentially sourcing being able to source these vehicles? And hold on to them and right? Like, what's driving demand specifically above the office? It's sourcing, but remember, the sourcing is right under your nose. Bryan DeBoer: It's just the it's it's it's a mindset of your sales department leaders and then a mindset of your service department leaders that they can make this car stop, steer, and go and that they can lower the expectations that I don't just sell new cars. Okay? And then you've got a secondary problem. Once those two people decide, then your salespeople and your technicians are gonna convince you you shouldn't do it. Why? Because they get comebacks. Okay? Meaning that there's a car that breaks forty-five days later or four days later, and they're trying to keep a car deal together rather than just take the person out of the car sell them another car, okay, and go fix that car so it's an easy experience for your consumer. Okay? So that sets you back. So we've always said that it typically takes a couple years to get people on that treadmill. To be able to keep all different all three of our categories. Okay? And I would say this, most of our growth was growing in value. It shouldn't. It should also be growing in certified. It should also be growing in late model conquest vehicles. And it should be growing in core product. Okay? All three of those buckets have the potential to grow in a double-digit manner, and we'll get those there. Michael Albanese: Do you generally see if you have a customer in value over time move up into core or CPO? Or You do. I think there's half of the customers that are always gonna buy a car that's depreciated and that they can buy that's a value. Okay? And they don't care that the car is scarce, and they don't really care what Kelley Blue Book says or what Black Book says. They just buy the card that's $10,000 because they're using it for transportation. They're not using it for status. The other half of the cars are using it as a stepping stone. A lot of parents will pay cash for cars for their kids. And it's an entry-level car. And then, hopefully, next time they're buying a certified used car and maybe eventually they buy new cars. So the waterfall, believe it or not, goes both ways. That as a new car retail abreth we look at affordability and how do we keep everyone in the Lithia Motors, Inc. life cycle at every affordability level. And I think as you see us move through economic cycles, affordability will shine and reign supreme at Lithia Motors, Inc. Because of our ability and the behavioral mindset of most of our stores today that understand that we can walk and chew gum at the same time. Meaning, new car, sell core product, sell value auto products, and then sell a certified product. Michael Albanese: Got it. Thank you, Bryan. Nice quarter, guys. Bryan DeBoer: Appreciate it. Operator: Thank you. Our next question comes from the line of Mark Jordan with Goldman Sachs. Please proceed with your question. Mark Jordan: Hey. Thanks for fitting me in here. Just a quick one on m and a. Bryan, you mentioned you don't buy dealerships based on expected value creation. But can you talk about what the drivers of value creation are when you bring a dealer into your system? You know, whether it be instituting best practices, putting inventory on the driveway platform, or maybe just consolidating systems. What are the drivers there that you expect when you bring a new dealership on? Bryan DeBoer: Sure. So, typically, the way that we get the returns that we're expecting and it's typically two to three times lift in net profitability, about a quarter of it comes automatically from scale synergies, lower interest rate costs, better vendor contracts, getting consolidation of vendors where you've got duplication even within the store that you buy, and that comes in the first, I would say, six months. Okay? The other two key drivers and like I said, they support each other. Is used vehicles. I mean, it's the ability to sell late model conquest cars, meaning if you're a Honda store, you sell Toyotas and you sell Fords too. Okay? Most new car dealers get spoiled off of selling the cars that they sell new. Okay? I believe our current run rates on all the stores that we bought it's somewhere north of two-thirds of the cars that they sell when we buy them. With it that they sell used or the same like model that they sell new. Okay? And for reference, when a store is mature at Lithia Motors, Inc., it's a sixty-forty split the other way. Meaning we sell about 40% of the brand we sell new We sell about 60% of Conquest vehicles. Okay? A lot of that comes from the ability to keep an over five-year-old car. Okay? Because of those that alignment of your consumer your service advisers, your salespeople, your other personnel that it's just a mindset that you have to get past. Okay? Alongside that all also, is this new car retailers, it's really easy to get spoiled off of maintenance in service. And off of warranty work. It makes great profit. Okay? So why do warranty work after the sale? It's more difficult. It takes more time. You've gotta do diagnostic. There's drivability issues, so on and so on. Okay? Well, we sell non-OEM parts for a reason. Keep our customers at an affordable level post-warranty period. Okay? So that's the other big lift that we get. Believe it or not, both of those things help embellish the life cycle of a customer which helps us sell more new cars as well. Okay? And then we can get into the gross profit part of the equation and if you've got more eyeballs looking at cars when we've got 10 million eyeballs looking at an average car, And when we buy a dealership, they've got 10,000 eyeballs looking at a car. Are you following me? So there is a supply and demand issue that comes from selection. Okay, that helps us as well in terms of what our price to market is. Is relatively better than what they're able to get. On an individual basis. So, hopefully, that gives you some color on how do we get that two to three times improvement in profitability. That's how we get it. Mark Jordan: Great. Thanks very much. Operator: Thanks, Mark. Thank you. Our next question comes from the line of Colin Langan with Wells Fargo. Please proceed with your question. Colin Langan: Oh, oh, thanks for taking my questions. If I look at your full-year targets, most of them seem pretty wide, but SG&A to gross, it's actually been trending pretty close to the high end of that target. And, usually, Q4, things tend to step up seasonally. So is the outlook that SG&A actually could even Seasonality hold in in Q4? Or is it just a more muted increase sequentially that should be looking at? And then how should we think about SG&A maybe longer term? Bryan DeBoer: Sure, Colin. Thanks for the question. I think when we think about SG&A, or we most importantly think about $2 of EPS for every billion dollars of revenue? We've given light guidance. I think it's on slides 14, if I recall from the slide deck. Okay. As to where we believe it can be, but that's not how we manage our business. We manage our business on a net profit basis year over year and a top-line basis that will ultimately generate more net profit in aftersales and reciprocal trade-in values and our reciprocal businesses like DFC and our wheels, you know, fleet management businesses. And those type of things. So that's it is an important delineation. But we purely look at that our goal is to get to $2 of EPS for every billion dollars of revenue. And the easiest way that I can get there is to have quarters like this where we grow top line at seven and a half percent. And we continue to grow used cars at double-digit numbers, and grow our gross profit in the in the aftersales space. So in terms of the quarter, we'll see where it comes out. A lot of that is dictated based off volume and GPUs. As well. So, hopefully, that gives you some insights and remember, slide 14 helps lay out our pathway to the $2. And you know, I would say this. The entire foundation is built, and like I said, we're just getting started. Colin Langan: Just one quick modeling follow-up. Tax is really low in the quarter. Is that what's driving that? And is that sustainable, I guess, as we move forward? Should we put in the new rate, or is that just a one-off? Bryan DeBoer: Colin, don't I think we got a half an hour later together. We're running awfully we'll get we'll get you that information. On our one and one. Colin Langan: Yeah. No problem. Thanks, Colin. Operator: Thank you. And we have reached the end of the question and answer session. I would like to turn the floor back to Bryan DeBoer for closing remarks. Bryan DeBoer: Thank you, everyone, for joining us today. Look forward to seeing, you on Lithia Motors, Inc.'s here, and results. And believe it or not, February. It was a vast year. Looking forward to continue to delight you. Operator: Thank you. This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.