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Operator: To all sites on hold, appreciate your patience, and please continue to standby. Please stand by. Your program is about to begin. If you require assistance throughout the event today, please press Good morning. Thank you for joining OFG Bancorp Conference Call. My name is Chloe, and I will be your operator today. Our speakers are José Rafael Fernández, Chief Executive Officer and Chairman of the Board of Directors, Maritza Arizmendi, Chief Financial Officer, and Cesar Ortiz, Chief Risk Officer. A presentation accompanies today's remarks. It can be found on the homepage of the OFG website under the Third Quarter 2025 section. This call may feature certain forward-looking statements about management's goals, plans, and expectations. These statements are subject to risks and uncertainties, outlined in the Risk Factors section of OFG's SEC filings. Actual results may differ materially from those currently anticipated. We disclaim any obligation to update information disclosed in this call as a result of developments that occur afterwards. All lines have been placed on mute to prevent any background noise. Instructions will be given at that time. I would now like to turn the call over to Mr. Fernández. José Rafael Fernández: Good morning and thank you for joining us. We are pleased to report our third quarter results. Let's go to Page three of the presentation. We had a strong quarter with earnings per share diluted of $1.16, up 16% year over year on a 5.6% increase in total core revenue. Loans and core deposit balances increased year over year with particular growth in commercial loans, which has been a strategic focus as auto loans moderated, something we have been anticipating for a while. Performance metrics continue to be strong. Credit was solid. Capital continued to grow, and we repurchased $20.4 million of common shares. Business activity remains strong in Puerto Rico with a continued outlook for growth. Please turn to Page four. Our Digital First strategy is making significant strides expanding our positioning as leaders in banking innovation in Puerto Rico. As a result of our digital first strategy, we're gaining strong momentum in both adoption and new accounts. During the third quarter, nearly all our routine retail customer transactions were made through our digital and self-service channels. This is driven by continued year-over-year growth in digital enrollment at 8%, digital loan payments at 5%, virtual teller utilization at 25%, net new customer growth at 4.6%. All this is being enhanced by two related strategies. The first is our innovative product service offerings. Last year, we introduced the Libri account for the mass market and the Elite account for the mass affluent. Both offer reward programs unique to Puerto Rico and have been successful in attracting deposits from new and existing customers. The number of Libre new customers increased 17% year over year, 27% of Libre accounts have been opened digitally versus 19% last year. And new Libre accounts generated a 14% increase in related deposits. The Elite account continues to lead the market as a unique alternative for clients who want to maximize their financial progress. We have also enhanced our oriental biz account suite making treasury management easier and secure for small businesses driving higher new account openings and deposits. The second strategy is leveraging AI. Customers now receive tailored insights based on cash flows and payment habits, helping them monitor their budgets and access value-added tools to improve their finances directly from their mobile phones. We are providing an average of nine insights per month per account. Customer feedback has been running 93% positive. This quarter, we also launched internal initiatives to apply AI to boost efficiency across all banking operations and make it faster and easier to solve our customer questions and needs. All this has directly contributed to our increased market share in retail deposits and positions OFG for continued success in the coming years. Now here's Maritza to go over the financials in more detail. Thank you, José. Maritza Arizmendi: Let's turn to Page five to review our financial highlights. All comparisons are to the second quarter unless otherwise noted. Core revenues totaled $184 million driven by solid performance across key areas. Total interest income was $200 million, an increase of $6 million. This mainly reflects higher balances of loans and investments and $1 million from one additional business day. Total interest expense was $45 million, an increase of $3 million. This mainly reflects higher average balances of core deposits, higher average balances of wholesale funding, and a $500,000 impact from the extra business day. Total banking and financial services revenues were $29 million, a decrease of $1 million. This mainly reflects a decline in mortgage banking revenues due to a change in MSR valuation. Compared to a year ago, when we were first subject to reviews interchange fees under Derby, total banking and financial services revenues were up $3 million or 11%. Other income category was $2.2 million. This included gains from OFG Ventures investment in FinTech-focused funds. Looking at non-interest expenses, they totaled $96.5 million, up $1.7 million. This reflected a strategic investment of $1.1 million in technology, people, and process improvement. Dollars 1,100,000.0 tied to increased business activity and marketing and an $800,000 reduction in foreclosed real estate costs. Income tax expenses were $9.5 million with a tax rate of 15.53%. This reflects a benefit of $2.3 million in this great items during the quarter and an anticipated rate of 23.06% for the year. Looking at some other metrics, tangible book value was $28.92 per share. Efficiency ratio was 52%. Return on average asset was 1.69%. Return on Tangible Common Equity was 16.39%. Now let's turn to Page six to review our operational highlights. Total assets were $12.2 billion, up 7% from a year ago and steady compared to the second quarter. Average loan balances were $8 billion, up close to 2% from the second quarter. End of period loans held for investment totaled $8.1 billion. Sequentially, loans declined $63 million or 0.8%, mainly due to repayment of commercial lines of credit funded in the second quarter. Year over year, loans increased 5% reflecting our strategy to grow commercial lending in Puerto Rico and the U.S. Loan yield was 7.9%, down one basis point. New loan origination was $624 million. As José mentioned, this reflected in part moderation in auto loans that we have been anticipating and an expected easing of our auto sales after a surge of pre-tariffs purchasing in the second quarter. Year over year originations were up 9% and the commercial pipeline continues to look good. Average core deposits were $9.9 billion, up close to 1%. End of period balance $800 million decreased $76 million or 0.8%. This reflected increased retail and government balances and reduced commercial deposits. By account type, it reflected increased savings deposit and reduced demand and time deposits. Compared to the year-ago quarter, core deposits were up $287 million or 3%. Core deposit cost was 1.47%, up five basis points. Excluding public funds, the cost of deposit was 103 basis points compared to 99 basis points in the second quarter. The increase in costs mainly reflects higher average balances in savings accounts within the upper pricing tiers. Investments totaled $2.9 billion, up $151 million. This reflected purchases of $200 million of mortgage-backed securities yielding 5.32% partially offset by repayments. Cash at $740 million declined 13% reflecting the new securities purchases. Average borrowings and broker deposits totaled $769 million compared to $672 million. The aggregate rate paid was 4.11%, level with the second quarter. End of period balances were $746 million compared to $732 million. The third quarter reflected increased variable rate borrowings and decreased brokered deposits. Net interest margin was 5.24% compared to 5.31%. This quarter NIM reflected increased interest income from the securities portfolio and slightly higher cost of deposits and increased variable rate borrowings. Please turn to Page seven to review our credit quality and capital strengths. Credit quality continues to be stable. Provision for credit losses was $28.3 million, up seven reflected $13.5 million for increased loan volume. Maritza Arizmendi: $5.6 million for specific reserves on two commercial loans, the impact of two items from our annual assumptions update to $300,000 from updated repayment assumptions in commercial loan and residential mortgage portfolio. And $2.9 million for macroeconomic factors. Provision also included $1.3 million due to the auto qualitative adjustment related to the seasonal increase in early delinquency not captured in the model. Net charge-offs totaled $20 million, up $7.4 million. Total net charge-off rate was 1%, up 36 basis points sequentially. This includes $3.6 million from one of the two commercial loans mentioned before. Year over year, the net charge-off rate improved in consumer and auto portfolios. Recovery rate in mortgage. Looking at other credit metrics, the early and total delinquency rates were up from the second quarter but in line with the range over the past year. The non-performing loan rate was 1.22%. On the capital side, our CET ratio was 14.13%. Stockholders' equity totaled $1.4 billion, up $41 million. And the tangible common equity ratio increased 35 basis points to 10.55%. Now to summarize the quarter. The third quarter. Net interest income continued to grow reflecting our strategy of an increased volume of loans in particular commercial more than offsetting our lower NIM. We continue to anticipate annual loan growth in the range of 5% to 6%. While deposits were down sequentially, they increased year over year. We continue to expect annual growth driven by both retail and commercial accounts. Net interest margin was 5.32%, for the nine months. In line with our target range of 5.3% to 5.4% for the year. During the fourth quarter, we anticipate a range of 5.1% to 5.2%. Credit quality remains stable. Reflecting the strong economic environment in Puerto Rico. Third quarter, non-interest expenses were a little above our range, but we continue to anticipate that will be between $95 million to $96 million a quarter. As I mentioned, we now anticipate our effective tax rate for the year to be 23.06% compared to our previous expectation of 24.9%. Capital continued to build we anticipate continuing to buy back shares on a regular basis. Now, here's José. Thank you, Maritza. José Rafael Fernández: Please turn to Page eight. The Puerto Rico economy continues to perform well. Wages and employment remain at historically high levels. Consumer and business liquidity is solid. The economy also got a boost this summer from a surge in tourism. More importantly, new developments in onshoring confirm Puerto Rico's position as a world leader in medical device and pharmaceutical manufacturing. Turning to OFG, we will continue to pursue our differentiated unique customer-centric strategies, our Libre and Elite accounts and our Oriental commercial accounts are helping to grow core deposits and loans. Our commercial pipeline and credit trends are solid. And our risk management capabilities and asset liability management discipline are strong. Combined with the level of business activity, all this continues to position OFG well for growth and expanded market share. Having said that, we continue to be watchful regarding all the global macroeconomic and geopolitical uncertainties. As always, we could not have achieved these results without the hard work of our dedicated team members. We are thankful to them and excited about the future. With this, we end our formal presentation. Operator, let's start the Q&A. Operator: Certainly. Star two. We will take our first question from Erin Cyganovich with Truist. Your line is open. Erin Cyganovich: Good morning. Thank you. Maybe you talked a little bit about the deposits in the quarter, the costs of your deposits rose modestly. Is that driven by the competitive environment? Maybe you could talk a little bit about the dynamics impacting that? José Rafael Fernández: Yes. First of all, welcome to our call. Your first call with OFG and thank you for covering us at Truist. So appreciate that. To answer your question regarding the higher deposit cost, it's really driven by our strategy. When we talk about the Libre account, which is mass but we talk about the elite account, which is mass affluent, we really are strategically positioning ourselves to attract mass affluent clients through that account paying a little higher rate and that's kind of the short-term cost of it. But also betting on a long-term strategy of deepening that relationship with the customer. And that's how that product is structured. So what you're starting to see is a little bit of a higher cost on the savings side because we're being very successful with our strategy. We're really happy with the results. And we'll continue to leverage the added features that we're adding to our positive customers in terms of the insights and the predictive insights that we provide through AI are unique to each customer. And that's actually something that no other bank in Puerto Rico offers and it's giving us great momentum for us to attract new customers and potential for deepening. So that's a little bit of what's driving some of that higher customer cost on the savings side. Erin Cyganovich: Okay. That helps. And then in terms of the commercial loan originations, those were solid, but yet some pay downs on lines of credit. Maybe you'd talk about the dynamics for commercial and outlook for commercial loan growth ahead? José Rafael Fernández: Sure. So as Maritza pointed out in her remarks, part of what occurred in the third quarter was the repayment of some of the commercial lines that were drawn in the second quarter. So that's a little bit of what drove the balances to be to go down. But going forward, we have a very solid pipeline. We continue to see great business activity in Puerto Rico. And Oriental going after those opportunities. So we're very confident about our commercial pipeline in the fourth quarter and starting to build the 2026 pipeline also. Erin Cyganovich: All right. Thank you. José Rafael Fernández: Yes, you're welcome. Thank you. And again, welcome to the team. Erin Cyganovich: Appreciate it. Operator: We'll take our next question from Timur Braziler with Wells Fargo. Your line is open. Timur Braziler: Hi, good morning. Thanks for the question. José Rafael Fernández: Good morning, Timur. Timur Braziler: Just a follow-up on paying up for some of the savings account deposits. Can you just maybe talk us through what type of rate is being required to win some of those balances? And as you think about from a competitive landscape, where are you really targeting to take some market share here? José Rafael Fernández: Yes. So as I explained earlier a little bit, just we go after the mass market with a zero-cost account. It's a checking account and we drive the growth through our uniqueness in terms of the offering. On the Elite account, average cost is around 1% plus, let's say, 0.5% on average. Let's just say. And it's targeting the mass affluent. And again, it's us driving value add and focusing on the customer just to attract those customers to OFG and be able to deepen those relationships as we build trust with them. And that is again, paying playing very nicely for us on our strategy. And the key here is deepening, right? And how do we be are able to deepen that relationship through debit card utilization, auto loans, mortgage loans, wealth management, etcetera, which we offer throughout. And that's kind of what's driving that higher cost on the savings side. There's nothing else to it. Timur Braziler: Got it. Thanks. And then maybe two questions around credit. The first, if you could just provide any kind of additional color on the commercial loans. And then looking at that commercial portfolio, on the mainland in particular, two out of the last three quarters, we saw some pretty large charge-offs out of that portfolio. Can you just maybe speak a little bit more broadly about what you're seeing within Mainland CRE? José Rafael Fernández: Yes. So let me answer your second question first. On the Mainland portfolio, we do see some very good opportunities for us to continue to build the book and use it as a geographic diversification. We do small participations on the small and mid-sized commercial lending. With some partners and that strategy continues to play out. On the second on the first part of your question, where you've seen some charges in the last several quarters. It's part of our way of managing risk within that portfolio. And it's actually started like a couple of years ago when we started to feel pressure in the U.S. economy and felt that we should reduce some of those risks and it required some charge-offs. So that's kind of we don't see that as we see it more idiosyncratic than being more market-wide. And feel comfortable with our team and the efforts that we're doing. Now in particular to the quarter, the two commercial loans. One is a U.S. loan and one is a Puerto Rico loan. The U.S. loan it's a $5 million loan where we basically took a provision and the charge-off this quarter because we sold it. And the second loan is a Puerto Rico commercial loan. It's a company that acquired a large did a large acquisition. They're having some operating and financial weaknesses and we're proactively provisioning for that loan. So these are idiosyncratic. We see them as being market related. Timur Braziler: Okay. Thanks. And then just lastly on auto loans, the pickup in charge-offs there, it's kind of more in line where it had been 3Q, 4Q, 1Q. Is this kind of just getting back to that type of rate? I know you've been calling for origination sales down in auto for quite some time. We finally got that there. Just talk a little bit more about just broader auto trends, both from a growth standpoint and then from a credit standpoint? José Rafael Fernández: So I'll talk about the growth and I'll pass it to Cesar to talk about the credit. On the growth side, we were expecting the slowdown. I think on the auto lending side, what we're seeing is we see the bottoming coming in right now in terms of loan originations. And we might see a slightly higher in the fourth quarter. But these are more normal levels in our view. And we feel comfortable with the originating levels that we're having right now, Timur. Can you talk about the credit? Cesar Ortiz: Yes. On the charge-offs, what we're seeing is seasonal dynamics of the retail portfolios. Usually at the lowest levels of the first quarter and then gradually those statistics come up and they peak towards the fourth quarter. So what we saw quarter over quarter is a modest increase on charge-off and all the statistics. But when we compare it to last same period last year, we see a better trend. So we're optimistic, based on those comparisons. Timur Braziler: Great. Thanks for the color. José Rafael Fernández: Yep. Thank you, Timur. Thank you for the call. Operator: We will take our next question from Kelly Motta with KBW. Your line is open. Kelly Motta: Hey, good morning. Thanks for the question. José Rafael Fernández: Hi, Kelly. Kelly Motta: Maybe circling back to the Q4 margin guidance, 5.10 to 5.20. Wondering, Maritza, what that what that what the Fed funds assumption is in that given that you guys are asset sensitive? One. And then two, maybe you could talk a little bit about I think we on on the last quarter call, you were calling for some margin expansion provided we got some loan growth all else equal. Just with the margin being down kind of if there was anything in that that you know, differed from your expectations maybe three months ago that that drove that? Thank you. Maritza Arizmendi: Yes. Thank you, Kelly, for your question. And first, I think one point when we look back at the quarter and the inflows into the deposits that has been better than expected in the savings account that one of the deviation from our original estimate. So that's the answer to that. So the second part relates to what we are expecting in the fourth quarter. And the reality is that we are asset sensitive on the last cut was end of September. So we will have most of that impact during the fourth quarter. The repricing, the full effect will be on the cash and in the variable rate portfolio that we have in the commercial that is half of it. So that's why we are reviewing our guidance towards 5.1 to 5.2 and always depending on the funding mix. So right now, everything remaining equal is mostly related to the 25 basis point cuts. José Rafael Fernández: And I don't know if you realize too, but we do have inflows and outflows throughout the quarter. Of large deposits. And that is also part of what creates a little bit of the quarter volatility. But as Maritza said, fourth quarter guidance as as the one that she mentioned, $510 million to $5.20. Kelly Motta: Does that just to clarify, does that $5.10 to $5.20 contemplate any additional cuts here in fourth quarter? Maritza Arizmendi: Well, we are expecting 50 basis points cuts, but since it won't be outstanding most of the quarter, the most of this impact relates to the 25 basis point that was made late September. José Rafael Fernández: Yes, we are modeling 50 basis points reduction in Fed funds in the fourth quarter. Kelly Motta: Great. That's really helpful. Maybe one for you José. You've highlighted the investments you're making in AI to drive some efficiencies ahead and that drove expenses a bit higher. I know that's over time to generate greater revenues or recognize better improvement on the expense side. So maybe if you could talk a bit more about that and kind of, like, the cadence because I know it takes some time to realize that. So how how you strategically approaching? Thanks. José Rafael Fernández: Yep. Thank you. Not only, you know, just to clarify, we are making the investments, but we're also delivering on the features and the benefits for our customers on the value proposition that we provide and it's unique. And no other bank in Puerto Rico is actually today providing any insights to their customers based on their cash flows and their payments and whatnot. So that's a very big differentiation that we're going to continue to drive forward. Now regarding the investments that we're making in technology, we will continue to make those investments but we are also starting to see opportunities for us to bring efficiencies in our banking operations and we will be guiding you guys into the expenses of 2026 in the fourth quarter. But we're starting to see opportunities for us to bring efficiencies and be able to pass those efficiencies as part of our investment in technology. So we're very cognizant of the investments that we're making in technology, but we're equally cognizant of the importance of bringing efficiency and we're seeing it in the operating side of the bank particularly with people efficiencies. Kelly Motta: That's really helpful. Maybe last question for me. You guys were more active on the buyback this quarter. Given capital is strong, you're generating a ton of earnings, like what's the go forward outlook? Can you remind us of capital priorities here, including M&A? José Rafael Fernández: Sure. I mean, capital is strong. We feel that we have great opportunity to fund loan growth and that's our priority. But we're seeing we're going to be a lot more active on the buyback in the fourth quarter and into 2026. Because the earnings momentum that we have and the earnings power that we're having puts us in a great spot in terms of capital management. Also backed up by Puerto Rico economy that remains pretty good and it's driving infrastructure investments. We mentioned the onshoring benefits that are starting to become somewhat of a reality. It will take some time, but it's moving along. We're also seeing Puerto Rico well positioned given the current geopolitical challenges in The Caribbean and Puerto Rico being the hub for that. All those things give us confidence on the Puerto Rico economy. And certainly, it's going to drive our business forward. So from a capital management perspective, loan growth number one, buybacks and dividends number two and number three. Because we really are in a good spot right now. Kelly Motta: Great. Thank you so much for all the color. I'll step back. José Rafael Fernández: Yep. Thank you, Kelly, for your question. Operator: We'll move next to Anya Pellshaw with Hubd. Your line is open. Anya Pellshaw: Hey, guys. I'm asking questions on behalf of Brett here. I know you guys already talked about loan growth, but I was hoping you could expand on any payoff activity that might also affect commercial in the future? José Rafael Fernández: I'm sorry, I could not understand well your question. Can you repeat it? Anya Pellshaw: Yes. You've already talked about loan growth. But could you expand and talk about any payoff activity that might also affect commercial from here? José Rafael Fernández: Yep. Payoffs are hard to predict. But what we are seeing is there's usually some small seasonality on the lines of credit in the third quarter, given some clients that we have that receive funds, federal funds either for construction services or education. And they kind of draw on the line of credit in the second quarter. Then they get the funding in the third quarter and pay them off. That's usually on the third quarter. But we are not expecting any significant variability on the lines of credit in the fourth quarter. Anya Pellshaw: Thank you. And you've talked about charge-offs a little bit. But is there anything else you guys might be seeing as far as credit quality goes? José Rafael Fernández: As I mentioned, we're not seeing anything apart from a couple of idiosyncratic commercial loans that I mentioned earlier, the rest on the consumer book and the auto book we're not seeing anything that concerns us. We're seeing, again, supported by an economy that has a lot of activity. So and liquidity in the system. So not seeing anything that drives us to be concerned on credit. Anya Pellshaw: Thank you. Appreciate it. José Rafael Fernández: Yep. Thank you for your questions. Operator: At this time, there are no further questions. I will now turn the call back over to management for closing remarks. José Rafael Fernández: Thank you, operator. Thanks again to all our team members. Thank all our stakeholders. Who have listened in. Operator: My apologies. We do have a follow-up from Timur. Timur Braziler: Thank you. Got in there at the last second. José, you made a comment on new onshoring investments in Puerto Rico. Can you just maybe talk us through what those have been and maybe how that's progressed? In the Trump two point o administration? José Rafael Fernández: What we are what we know is what we hear and read in the papers. We are seeing around 10 or 11 multinationals that are already announcing investments in Puerto Rico. Some of them are medical devices, others are pharmaceuticals. We're seeing solar panels. We're seeing textiles. It's a little bit broader than what we have seen in the past. Again, it points out to Puerto Rico's positioning in terms of manufacturing that we've been for many years and is an opportunity for these companies to expand their production lines. Some of them have already operations. There's one or two that are going that have announced new operations in Puerto Rico, but the majority are existing companies that are announcing investments in additional production lines in the island. So overall, I think it's all driven because of the onshoring benefits that provide the tariffs, the tariff threats and all the tariffs that have been imposed. And Puerto Rico being a U.S. jurisdiction and being a manufacturing hub for medical devices and pharmaceuticals is just the right hub for those companies to invest further in the island. So it's something new for Puerto Rico because we haven't seen this in several decades. And for the first time, we're starting to see those announcements. So it's encouraging. And that will drive indirect benefits because there's a lot of hires with well-paid employees. It also drives indirect suppliers to these companies and all that. So it has a trickle-down effect to the economy that is pretty positive. So we're encouraged with that. Again, this is not flowing in now. But it's a great way of starting to see the light at the end of the tunnel when federal funds start to fade away and we have some private investments coming in. To us, it's a win-win. Timur Braziler: That's great color. Thank you. José Rafael Fernández: Yes. Thank you, Timur. Well, thank you everybody for the call. I appreciate everyone participating and looking forward to the fourth quarter results. Have a great day. Operator: This does conclude today's program. Thank you for your participation. You may disconnect at any time and have a wonderful afternoon.
Operator: Good day, and thank you for standing by. Welcome to the Q4 2025 UniFirst Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Steven Sintros, President and Chief Executive Officer. Please go ahead. Steven Sintros: Thank you, and good morning. I'm Steven Sintros, UniFirst's President and Chief Executive Officer. Joining me today is Shane O'Connor, Executive Vice President and Chief Financial Officer. I'd like to welcome you to UniFirst Corporation's conference call to review our fourth quarter results for fiscal year 2025. This call will be on a listen-only mode until we complete our prepared remarks. But first, a brief disclaimer. This conference call may contain forward-looking statements that reflect the company's current views with respect to future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties. The words anticipate, optimistic, believe, estimate, expect, intend, and similar expressions that indicate future events and trends identify forward-looking statements. Actual results may differ materially from those anticipated depending on a variety of risk factors. For more information, please refer to the discussion of these risk factors in our most recent Form 10-Ks and 10-Q filings with the Securities and Exchange Commission. We closed our fiscal 2025 with a solid fourth quarter that modestly exceeded our expectations in top-line performance and was in line with our expectations on the profit side. We accomplished a lot as a team in fiscal 2025 that will help strengthen and grow our company as we move forward while advancing our investments in technology and other organizational initiatives. I want to sincerely thank all our team partners who continue to always deliver for each other and our customers as we strive towards our vision of being universally recognized as the best service provider in the industry. All while living our mission of serving the people who do the hard work. We serve the people who do the hard work as they are the workforce that keeps our communities up and running. They are our existing and prospective customers as well as our own UniFirst team partners. Our mission is to enable those employees and their organizations by providing them the right products and services to do their jobs successfully. Whether that means providing uniforms, workwear, facility services, first aid and safety, clean room, or other products and services, our goal is to partner with our customers to ensure that we structure the right program, products, and services for their business and their team. All while providing an enhanced customer experience. Shane will soon share further regarding our quarterly performance. However, I would like to provide a brief overview of the fiscal year. Full-year revenues reached $2,432,000,000, representing an increase of 2.1% compared to fiscal 2024 after adjusting for last year's additional week of operations. While this level of top-line growth does not yet reflect our long-term ambitions, we are confident that we are establishing a strong foundation for elevated performance in the years to come. From an adjusted EBITDA perspective, our performance reflects solid progress in operational execution and gross margin. In fiscal 2025, both the sales and service saw improvements in key performance metrics. We installed more new business than we did in fiscal 2024, even though fiscal 2024 included an additional week of operations and the installation of a top-three account. Although fiscal 2025 started slowly, the year concluded with the highest quarter of new account installations providing momentum into fiscal 2026. We also saw notable improvements in retention in fiscal 2025 after two years of lost business. We remain confident in our ability to drive continued improvement in customer retention as key leading indicators such as NPS scores and customers under contract continue to trend positively. Recent enhancements to our growth strategy are delivering progress. Though the pace of improvement has been moderated by a softer employment environment impacting parts of our customer base. As noted over the past few quarters, reductions in wearer numbers have become more pronounced and continue to affect overall growth rates. Nonetheless, fluctuations in employment cycles are a familiar challenge to our company and we remain committed to concentrating on factors within our control to drive improved performance. During fiscal 2025, we made some important organizational changes that generated positive momentum in our overall execution during the year and more importantly, positions us well going forward for greater improvements in overall performance. Earlier this year, the organization welcomed Chief Operating Officer Kelly Rooney, a strategic addition to our leadership team. Kelly has unified our operational approach and accelerated the company's transition toward a process-oriented and results-driven operating model. She introduced the UniFirst Way, a growing collection of service-focused procedures designed to enhance the customer experience and promote operational excellence. The positive impact of her contributions is already evident as we anticipate further advancements in retention, customer growth, efficiency, and overall performance as these initiatives progress. Equally important, Kelly has successfully preserved and strengthened the core aspects of UniFirst culture, which remain a competitive advantage and essential to our long-term success. Her extensive operational expertise combined with her commitment to empowering employees aligns seamlessly with our dedication to always deliver both to our customers and our team partners. Aligning operations under Kelly has enabled the change in ownership and structure of our sales organization as well. Direct oversight over local sales resources is now moving from our operations team to the sales organization led by our Executive Vice President of Sales and Marketing, David Katz. This adjustment is intended to clarify responsibility for performance within both sales and operations with ongoing collaboration between both functions. The sales team will continue advancing toward a tiered selling model to align each sales representative's skills and experience with the most appropriate prospects. This model has already delivered measurable improvements in sales effectiveness and conversion rates. Building on this momentum, further investment, including strategic headcount growth, is planned for fiscal 2026, positioning the organization for stronger customer acquisition and overall revenue growth in the future. In addition to sales, we are making other investments impacting fiscal 2026 to ensure we can support our primary near-term goal of accelerating organic growth. For example, during 2025, we invested in strengthening our service teams, expanding both capacity and stability. These enhancements position us to drive improved performance across all key aspects of our growth model, expansion of products and services for existing customers, customer retention, and strategic pricing approaches. We will accomplish this through key initiatives targeting each of these areas of opportunity. Together, these initiatives are designed to continue improving our promise to provide a differentiated level of service and business partnering with our customers to ensure we provide all the value we can to their business. We further expect to enhance overall operating performance and create a stronger foundation for continued growth in the years ahead. Near-term profitability will also be impacted by the ongoing investments in costs related to completing the remaining phases of our technological transformation. Over the next couple of years, we expect these investments will reach their peak as we complete the implementation of our ERP system and other related efforts. These efforts are essential to building a more efficient, data-driven foundation that will enhance performance and scalability over the long term. Looking ahead, we also expect the influence of tariffs will impact our short to medium-term profitability. Through 2025, newly imposed tariffs have not had a significant impact on our results primarily because goods procured at higher costs require time to move through our supply chain and then are usually amortized over an estimated useful life. We believe we are better positioned to navigate the evolving trade situation with our efforts over the last several years to improve the diversification within our supply chain. However, the situation remains dynamic with continued developments. Depending on how the situations evolve, the impact of tariffs on fiscal 2026 could escalate from our current estimates. We continue to take patient and prudent steps to minimize the impact of any cost increases through leveraging the most advantageous sources for our products as well as by working with our customers where appropriate to share the cost increases we are seeing. As we move through fiscal 2026, we will continue to provide updates on the impact that these factors are having on our results. Beyond the near-term impact of the items I discussed, we remain highly optimistic about our ability to drive meaningful improvements in overall profitability. As we look ahead, several key areas have been identified that are expected to strengthen margins and enhance returns in the coming years. Notable examples include robust incremental profitability resulting from accelerated growth, particularly through improved customer retention and increased adoption of products and services by existing customers, which delivers higher returns compared to new account installations. Focused operational leadership committed to promoting execution, consistency, and continuous improvement in line with the UniFirst Way, optimized procurement, inventory management, and sourcing facilitated by our Oracle ERP platform, strategic rationalization of resources and infrastructure that was built to support our multiyear digital transformation, and advancing our commitment to safety and operational efficiency through the ongoing implementation of our telematics program which will soon cover our entire vehicle fleet. This initiative features both inward and outward-facing cameras in every vehicle, representing a strategic investment that delivers multiple long-term benefits. Most importantly, it enhances the safety of our team partners while also contributing to improved profitability by reducing claims, insurance costs, and boosting fuel efficiency. This is also a good example of where we are incurring costs today which will provide measurable returns for the organization in the years ahead. To summarize, we are laser-focused on our goal of driving organic growth to mid-single digits and driving meaningful EBITDA margin improvements into the high teens. We are confident over the next couple of years we can make steady progress, particularly towards those top-line goals. While fiscal 2026 is expected to reflect a temporary step back in profitability, we are resolute in our belief that investments in growth are essential to achieve our longer-term objectives and unlock a new set of opportunities in the years to come. We also believe that working through the current sourcing and cost environment will require time, patience, and thoughtful execution to ensure we are taking care of both our customers and our shareholders as we work through these changes. Although most of my comments thus far have focused on our largest segment, Uniform and Facility Service Solutions, we also continue to be excited about our First Aid and Safety Solutions segment which offers significant potential for sustained growth and enhanced profitability. Adjusted for the additional week in the previous year, we achieved close to 10% growth in fiscal 2025 and anticipate double-digit expansion again in fiscal 2026. Investments in sales and service infrastructure, along with the completion of several small acquisitions, continue to strengthen our market presence enabling us to better serve both existing UniFirst customers and prospective customers seeking these solutions. Our first aid and safety products and services play an integral role in addressing customer challenges through comprehensive integrated services. By improving route density and increasing customer adoption of our full range of services, we expect continued improvement in this profit segment's profitability. Notably, we saw incremental advancement in first aid's adjusted EBITDA during fiscal 2025, and while further growth investments will mute significant profitability improvements in fiscal 2026, we do expect the inflection point to sustain higher profits is within reach. Our balance sheet and overall financial position remain robust, supported by a strong year of operating cash flow. We intend to continue deploying cash flows and making strategic investments that enhance our company's strength and increase shareholder value. We continue to identify several promising opportunities for investment including infrastructure enhancements and automation initiatives to promote growth, efficiency, and profitability, strategic acquisitions aiming at expanding scale and improving efficiency, and increased activity in our share buyback program reflecting our confidence that investing in UniFirst stock will deliver significant long-term returns as we execute on our strategic focus on accelerated growth and sustainable profitability. In conclusion, we are confident in the company's strategic direction to deliver enhanced performance in fiscal 2026 and beyond. Our initiatives are designed to accelerate growth, strengthen profitability, and deliver a differentiated experience for our customers. By embracing our always deliver philosophy, we remain committed to creating value for all stakeholders including our employees, customers, the communities we serve, and our shareholders. With that, I'll turn the call over to Shane, who will provide more details on our outlook as well as our fourth quarter results. Shane O'Connor: Thanks, Steve. Consolidated revenues in our 2025 were $614,400,000 compared to $639,900,000 a year ago. The 2025 had one less week of operations compared to the prior year due to the timing of our fiscal calendar. Excluding the extra week in fiscal 2024, revenue growth in 2025 was approximately 3.4%. Consolidated operating income for the quarter was $49,600,000 compared to $54,000,000 in the prior year. And net income for the quarter decreased to $41,000,000 or $2.23 per diluted share from $44,600,000 or $2.39 per diluted share. Consolidated adjusted EBITDA for the quarter was $88,100,000 compared to $95,000,000 in the prior year. Our fourth quarter results or our financial results in 2025 and fiscal 2024 included $1,400,000 and $1,800,000 respectively, of costs directly attributable to our key initiatives. The effect of these items on 2025 and 2024 decreased operating income and adjusted EBITDA by $1,400,000 and $1,800,000 respectively. Net income by $1,100,000 and $1,300,000 respectively diluted EPS by $0.05 and $0.07 respectively. As announced in last week's press release, starting in 2025, we are reporting our results under three segments entitled Uniform and Facility Service Solutions, First Aid and Safety Solutions, and Other. Our primary segment, Uniform and Facility Service Solutions, now includes our clean room operations along with our industrial operating locations. Due to it having a similar business model as well as having shared customers, resources, and technologies. This new structure aligns with our management approach and resource allocation. This change will also allow investors more visibility to our Nuclear Services division which is now broken out in the Other segment and experiences more volatility on an annual and quarterly basis. For further details on this change and our segment methodology, please see the Form 8-Ks filed with the SEC on 10/17/2025. Uniform and Facility Service Solutions revenues for the quarter were $560,100,000, a decrease of 4.4% from 2024. Organic growth, which excludes acquisition-related revenues, the impact of any fluctuations in the Canadian dollar, and the impact of the extra week, was approximately 2.9%. Uniform and Facility Service Solutions organic growth rate benefited from solid new account sales and improved customer retention. In addition, we discussed last quarter that our growth was impacted by the timing of direct sales which trended lower in the third quarter compared to the same period in fiscal 2024. As expected, the timing of those direct sales contributed to our fourth-quarter growth. As did a large customer buy-up. Uniform and Facility Service Solutions operating margin decreased to 8.3% for the quarter from 8.7% in the prior year. And the segment's adjusted EBITDA margin decreased to 14.8% from 15.3%. The cost we incurred related to our key initiatives were recorded to the Uniform and Facility Service Solutions segment, which decreased its operating and adjusted EBITDA margins for 2025 and 2024 by 0.2% and 0.3%, respectively. The segment's operating and adjusted EBITDA margins in 2025 were down from 2020 which benefited from the extra week of operations. Furthermore, quarterly results reflect some of the additional investments that Steve discussed that are intended to accelerate growth, improve customer retention through operational excellence, and support our digital transformation. Energy costs for the quarter were 4% of revenues, down from 4.1% a year ago. Our First Aid and Safety segment's revenues in 2025 increased to $31,100,000 with organic growth of 12.4%, driven by the segment's van business. Operating income and adjusted EBITDA during the quarter was $500,000 and $1,500,000 respectively, as the results continue to reflect the investments we are making in the business. Revenues from our Other segment, which consists of our nuclear services business, were $23,300,000, a decrease of 5.3% from 2024 due to lower activity out of the North American nuclear operation. As we mentioned in the past, this segment's results can vary significantly from period to period due to seasonality as well as timing and profitability of nuclear reactor outages and projects. At the end of our fiscal year, we continued to reflect a solid balance sheet and financial position with no long-term debt, and cash, cash equivalents, and short-term investments totaling $209,200,000. In 2025, we generated solid cash flows from operating activities totaling $296,900,000. Capital expenditures totaled $154,300,000 as we continue to invest in our future with new facility additions, expansions, updates, and systems. During the year, we capitalized $26,400,000 related to our ongoing ERP, which consisted primarily of third-party consulting costs and capitalized internal labor costs. During fiscal 2025, we also purchased approximately 402,000 shares of common stock worth $70,900,000. At this time, we expect our full-year revenues for fiscal 2026 to be between $2,475,000,000 and $2,495,000,000. And fully diluted earnings per share will be between $6.58 and $6.98. This guidance includes $7,000,000 in costs that we expect to incur directly attributable to our key initiatives, which at this point relate primarily to our ERP project. Our guidance further assumes at the midpoint of the range, that net income is $124,100,000, consolidated operating income and adjusted EBITDA $158,800,000 and $319,700,000 respectively. Uniform and Facility Service Solutions organic revenue growth is 2.6%. Uniform and Facility Service Solutions operating and adjusted EBITDA margins are 6.6% and 13.3% respectively. Energy costs will be 4% of revenues in fiscal 2026, in line with 2025. And fiscal 2026's effective tax rate is expected to be 26%, an increase from 2025 primarily due to lower expected tax credits benefiting the upcoming year. As Steve discussed, additional investments we are making in our Uniform and Facility Service Solutions segment to accelerate growth, improve customer retention, and support our digital transformation, contributing to a margin headwind in 2026. In addition, our operating results also reflect our current expectations of the impact of tariffs. Share-based compensation increased in fiscal 2025 and a larger increase is anticipated in fiscal 2026. These increases are primarily due to a change the company made last year in our share-based grants vesting lives. As a result of the change over the next couple of years, share-based compensation expense will be elevated prior to returning to a more normalized level. As a reminder, increases in stock-based compensation impact operating income but are excluded from adjusted EBITDA. Our First Aid and Safety segment's revenues are expected to be up approximately 10% compared to 2025, as the ongoing investments in our van business are expected to drive continued double-digit growth. The segment's profitability is expected to once again be nominally positive as the results continue to reflect the investments we are making in the business. The Other segment's revenues are forecast to be down from 2025 by 16.3%. This assumes that our nuclear service business will take a step back in fiscal 2026 primarily due to the expected wind-down of a large reactor refurbishment project during the year, as well as a cyclically lower number of reactor outages in 2026. The top-line headwind will have a more meaningful impact on the profitability of the segment due to the high fixed cost nature of the nuclear services business. Although 2026 is expected to be a down year, we feel we are well-positioned to capitalize on this segment's unique capabilities as future projects become available as well as with the recent resurgence in nuclear investments in the market. We expect that our capital expenditures in 2026 will again approximate $150,000,000, to remain elevated as a percentage of revenue primarily due to higher application development investments we are making, most significantly related to the ERP implementation. For an update on our ERP initiative, our project continues to progress largely in line with our intended schedule. That has the implementation continuing through 2027. As of 08/30/2025, we had capitalized $45,300,000 related to this initiative. Midway through fiscal 2026, we expect to go live with our current release, which is focused on moving our general ledger and finance capabilities into the new Oracle Cloud solution. On deployment of the system, we will start to amortize the amount capitalized. As a result, the outlook includes an additional $4,000,000 in fiscal 2026 related to the amortization of the system. Our guidance assumes our current level of outstanding common shares and no unexpected changes generally affecting the economy. This concludes our prepared remarks, and we would now be happy to answer any questions that you might have. Operator: Thank you. As a reminder, to ask a question, please press 11 on your telephone, and wait for your name to be announced. To withdraw your question, please press 11 again. And our first question comes from Manav Patnaik of Barclays. Your line is open. Ronan Kennedy: Hi, good morning. This is Ronan Kennedy on for Manav. Thank you for taking our questions. Can I confirm please at a high level, perhaps the puts and takes to the guided 2.6% organic for Uniform Facility Services? Given the constructive commentary on positioning the company for stronger organic through better acquisition retention. Already seeing some measurable improvements in the sales effectiveness and the conversion rates. Is it that the initiatives will take time, or is there also an element of the environment and what you alluded to as the more pronounced reductions in errors and anticipating further fluctuations in the employment cycles kind of a high-level characterization of the drivers for that outlook, please. Steven Sintros: Yes. I think you covered it pretty well there, but you're right. I think the momentum we're getting on the sales and retention side. We talked about elevated or reduced retention, I should say, over a couple of years. It improved meaningfully in '25. We're projecting additional improvements in '26. That will affect 2026 and into 2027. Your comment about the economic outlook in terms of impact on wearer adds versus reductions, over the last quarter or two. Based on limited hiring. We've been negative in adds versus reductions. And effectively, you're assuming a similar situation looking at kind of employment outlook over this year. So we're not expected to get any pull and probably or are expected some headwind in that area. So that is part of the formula that leads to the current year organic growth. But as we sort of build on some of the initiatives and investments we're making that I talked about, we expect to gain momentum to put us in a position to accelerate growth in the following years as well. Ronan Kennedy: That's helpful. Thank you. And then a similar question, if I may, please, on margins. In terms of for '26, the puts and takes, in terms of the improved execution, consistency, the continuous improvement, and then other things such as the optimized procurement inventory management, offset by, I think, you know, the investments on growth retention, digital transformation, and then also the tariff impact. If you can kind of size how to think about the puts and takes from those drivers for 26 for margins, please? Steven Sintros: Sure. A couple of the items you mentioned there on better inventory management and so on. These opportunities are more ERP enabled that will tail this year a bit. But in general, on the items impacting the year most significantly, we really mentioned four things as being the primary factors. We mentioned tariffs, we mentioned sales investments, service investments, and a peaking of investments to kind of get through the digital transformation that we're going through. All of those things probably contributed reasonably evenly to the call it, you know, 80, 90 basis points impact on our margins. Now it's not a perfect characterization across all of those items, but generally it's in that range. We do expect some offsets to those things. In terms of the operational efficiency and so on. But again, we're really trying to unlock that better retention, improved selling to our existing customers. We are seeing momentum in those areas that we think can expand growth, particularly beyond this year's guidance. And so really, we view this year as a transitional year of making some of those investments. And to your point, know how this business works. As you build momentum it builds through your numbers. It doesn't sort of hit all of a sudden in a quarter, in some cases even a year. But again, those investments, sales, service getting to our digital transformation and then the tariffs, all have a pretty, you know, call it 20 basis points or so impact then offset by some of the other positives. Ronan Kennedy: Thank you. Appreciate it. Steven Sintros: Thank you. Operator: Thank you. And our next question comes from Kartik Mehta of Northcoast Research. Your line is open. Kartik Mehta: Hey. Good morning. Steve. Just maybe to add a little bit more color to the margin impact and investment. Would you like to any of those benefits occurring in the latter part of 'twenty six? Or do you think the way the investments are scheduled, it will take till '26 before you start seeing some of the benefits. Steven Sintros: Until '27. Is that what you're referring to? Kartik Mehta: Yeah. I apologize. Yeah. Till '27. Yeah. Steven Sintros: Yeah. No. Look. I mean, I think as we as we you can use sales or service I think the technology ones that are ERP enabled, which we've been talking about, for the last year or so. Are not going to emerge in 2026 as much. We're talking about going live with part of our ERP system, which is really the financial core. But as we move into more of the inventory management procurement and other things, those are really '27 and beyond benefits. In terms of the investments we're making in sales and service, those will start to build throughout the year. We've been ramping up in some of those areas. We've made good momentum in sales efficiency and retention improvements in the last year. And in my comments, I sort of talked about how some of those improvements have been offset by some of the challenges from a wearer and employment growth perspective. But part of the reason we're making those investments is to make sure we can sort of power through maybe what might be a bit of a softer employment environment in '26 and then start to see more momentum in the back half and as we get into the following year. Kartik Mehta: And so maybe this is a little bit harder, but is there a way to quantify the benefits you'll get from the investments in the sales and servicing? Part of the business. Steven Sintros: Yeah. That that that is a little tougher. I mean, I certainly from the sales and the service, it's a balance. Right? Like, we are driving toward mid-single-digit growth. When you look at our sales organization, I'll start there. It's a little bit easier to talk about. When you look at our sales organization, we continue to look at ways to drive sales effectiveness and efficiency. With the heads we have. But also recognizing as we grow and as we shift our sales organization, I alluded to this, to one where we have more of a tiered selling model with different sellers responsible for different prospects. That transition is causing us to probably run a little bit heavy on the sales side as we kind of go through that transition. We want to make sure we carry that momentum and that's why I talked about a couple of times that driving that organic growth higher is really our top priority right now. We do believe that the benefits on the margin side are there for the taking. But without that strong organic growth, which we think these investments are necessary to make sure we achieve, the profit benefits in and of themselves would be nice. But not as sustainable as if we can get this growth to the places we think we can. On the service side, similarly, it's a balance. Right? We have benefited from a more stable service organization this year, and we've talked about that a little bit from the perspective of if you go a few years before that, the overall employment environment was stronger, but also led to more challenges and employee turnover and things like that. That has stabilized. And now we're capitalizing on that stability with some additional investments to ensure that we can unlock all the different areas of growth that exist in our service team. When you think about growth, sales is obviously the one that stares you in the face. But the other three aspects of the growth model retention, selling to our existing customers, through our service team, as well as managing price in an effective way are really on our service team. We want to make sure we're strong enough there to capitalize on all of those avenues. Kartik Mehta: Perfect. I appreciate that. Thank you very much. Steven Sintros: Thank you. Operator: Thank you. And our next question comes from Tim Mulrooney of William Blair. Your line is open. Luke McFadden: Hi. Good morning. This is Luke McFadden on for Tim. Thanks for taking our questions today. My first was just on price. Shared in recent quarters that pricing remains challenging. I'm curious if you're expecting that to alleviate as we move through 2026 just maybe as customers find their footing with tariffs or is this the go-forward dynamic you're expecting to operate under for the foreseeable future here? Steven Sintros: Yeah. It's a good question, Luke. I think, you know, as you reiterated, we had gone through a couple of years of heavy inflation. Which made a more call it, productive pricing environment. That has certainly shifted and we were experiencing that. I think the environment with the tariffs as I alluded to a couple of times is still pretty fluid. I think many organizations, as we certainly are, are trying to take a patient and prudent approach particularly because the impact of our tariffs on our business sort of flow in over time. And the dynamics around changing trade regulations and trade agreements is fluid in their development seemingly every week. And so we are going to manage our approach during that. I think historically, customers have been good partners to us. When we've been good partners, and managed through periods of increasing cost. And so we do anticipate that being an avenue that we will work through. But I think in general, there also is some inflation what's the right word, inflation fatigue. Thank you, Shane. Oh, from the last few years, so it's sort of a difficult inflection point where I think a lot of people are looking to recover from the inflationary period. And now seeing some of the tariff impact I think it does make it a challenging environment in that regard. Which is why we're trying to be patient and deal with the dynamics of the situation over time. So I know it's a little bit of a long-winded answer, but I think we will be working through things and expect our partners our customers to partner with us. Luke McFadden: No. Yeah. That's great. Really helpful color. And kind of maybe building off that, more nuanced question specifically around know, client bases. I wanted to ask, about any changes you're seeing with in your manufacturing clients. I know earlier you had talked about kind of a pullback from these clients due to those tariffs. Being more impacted. But starting to see some headlines from some larger manufacturers that this group might be adjusting to and acclimating to the current situation. Has that at all aligned with what you're seeing, around this client group specifically? Steven Sintros: Yeah. Probably too nuanced at this point to really say one way or the other, Luke. I would say that looking at the broader employment trends across kind of our more traditional uniform-wearing industries, I spoke to sort of the weakness we're seeing in the hiring there. I think a lot of companies are digesting and look over the long term, is there an impact that some of these manufacturing operations digest and potentially bring some tailwind to employment back here in North America. I think that's possible. I think at this point, probably too nuanced and we're not seeing big momentum one way or the other. Luke McFadden: Understood. We'll leave it there. Thanks so much. Steven Sintros: Thank you. Operator: Thank you. And our next question comes from Jason Halk of Baird. Your line is open. Justin Hauke: It's Justin. Hi. How's up? Steven Sintros: Good morning. Operator: Good morning. I just Steven Sintros: I guess I'm still confused on the sales service investments that you're talking about for 26. That is outside of the $7,000,000 key initiative costs. Right? I mean, the key initiative is still just the ERP and the system investments you've already been making. And I just want to make sure I understand that. Steven Sintros: Yeah. Absolutely. The $7,000,000, and at this point, I think it's a good clarify that the $7,000,000 is really very specifically directly related to the ERP. And it really is from as you go through a large project like that, there are aspects that are not capitalizable. And it's really the fallout from those additional costs we're spending with some of our primary contractors for that project. Sales and service investments, I mean, is a very simplistic way of looking at it, Justin, is in both of those organizations, we're making investments a bit ahead of the projected revenue growth for next year. Designed to accelerate the growth in years to come, right? It's really finding that right balance of each of those organizations. Quite frankly, sales is the best example. You could pull back on sales and probably show similar growth next year and better profits. But that's not going to get you to the more sustainable high levels of growth that we're working to get to. But those are two completely different things, just to clarify and answer your question. Justin Hauke: Okay. Alright. That's that's that's that's helpful. And then I there was a comment you made in maybe an missed it. I apologize. But I thought you said that you guys had record new sales this year, and I guess, just confirming if if that's what you said or or if I misunderstood that. And then where that's primarily coming from? Is it is it cross sell? Is it new business? Just you know, any color on vertical maybe? Steven Sintros: Yep. The comment I made about sales is that we did exceed our total selling new business from a year ago. Even though a year ago had the extra week and a very large account installed from a national perspective. If you look at the results this year, is it the biggest year of sales ever? I'd have to go back and look been a couple of other large ones. But it is probably one of the best install years that we've had. When you look at where it's coming from, yeah, it's it's pretty broad-based. I think we continue to have some success on the national side. Over the last couple of years, we've had some good larger wins. But the bulk of the business still comes from what I'll call the local and regional business. I think that line between national and local is becoming a little more blurred and that goes back to that tiered selling approach as we have diversified our rep base to include reps in that middle ground that are specifically focused on what we'll call major accounts versus national accounts. And those are more the larger regional accounts. And I think we've had some real good success there. That helped this year's sales. And that's the organization we're continuing to build out and causing some of that cost investment. Justin Hauke: Got it. Okay. Appreciate it. Thank you. Steven Sintros: Thank you. Operator: Thank you. And as a reminder, to ask a question, please press 11. Our next question comes from Brianna Kandam of UBS. Your line is open. Good morning, Steven and Shane. This is Brianna Candom on for Josh Chan. Thanks for taking my questions. Can you provide some color on the trajectory of margins in fiscal 2026? Are you expecting to see margin expansion at any point during the year? Steven Sintros: That's a good question. We don't typically give that quarterly breakdown, particularly at this point. I think our margins and the trajectory of them will probably reasonably follow our prior patterns. One thing I will say, and I have this fully quantified but as I talk about the impact of tariffs, those probably do become a bit more pronounced in the back half of the year based on what I said. Right? You bring in more products that are at a higher cost base. They sit in your distribution center for a month or two. They start getting amortized into your merchandise and service. And so that impact of the tariffs does build throughout the year. I'd have to kind of go back to the model to give you a best answer on the rest of it. But it's something we can give you updates on as we move throughout the year for sure. Shane O'Connor: Yeah. I would I would probably I would echo that, the fact that it's probably or the a good is that it's going to follow our margin trajectory that we've historically had. Most notable difference would be that second quarter. Where the profitability is down because of a number of costs that that we incur specifically in that in that quarter. So that that would probably be the best assumption. Brianna Kandam: Thanks for that. And and then for a follow-up, you mentioned softer results in nuclear. Can you frame out what impact you expect to have in fiscal 2026? And can you remind us which quarters are more likely to see softness understanding that this is a more volatile business? Thank you. Steven Sintros: Sure. I think when you look at the nuclear business, we talk about the expected wind-down of a large project, we expect that wind-down to occur over the first quarter. Our first quarter and third quarter for that business is always seasonally the best quarter. It may be a little more pronounced in the first quarter this year because that project is still active. Other than that, we expect the normal seasonality in that business across the quarters. Brianna Kandam: Great. Thank you, and good luck in the next fiscal year. Steven Sintros: Thank you. Operator: Thank you. I'm showing no further questions at this time. I'd like to turn it back to Steven Sintros for closing remarks. Steven Sintros: Again, I'd like to thank everyone for joining us today to review our results and about our fiscal 2025 and our outlook. We look forward to speaking with you all again in January when we expect to report our first-quarter performance. Thank you and have a great day. Operator: This concludes today's conference call. Thank you for participating, and you may now disconnect.
Operator: Welcome to the Old National Bancorp Third Quarter 2025 Earnings Conference Call. This line is being recorded and has been made accessible to the public in accordance with the SEC's Regulation FD. Corresponding presentation slides can be found on the Investor Relations page at oldnational.com and will be archived there for twelve months. Management would like to remind everyone that certain statements on today's call may be forward-looking in nature and subject to certain risks, uncertainties, and other factors that could cause actual results or outcomes to differ from those discussed. The company refers you to its forward-looking statement legend in the earnings release and presentation slides. The company's risk factors are fully disclosed and discussed within its SEC filings. In addition, slides contain non-GAAP measures with management's beliefs provide more appropriate comparisons. These non-GAAP measures are intended to assist investors' understanding of performance trends. Reconciliations for these numbers are contained in the appendix of the presentation. I would now like to turn the call over to Ovation's Chairman and CEO, Jim Ryan, for opening remarks. Mr. Ryan? Jim Ryan: Good morning. Earlier today, Old National Bancorp reported outstanding third quarter 2025 results that reflect our strong financial performance and our continued commitment to being a better version of ourselves quarter after quarter. We delivered third quarter performance at or above our guidance across all major income statement line items. We beat earnings expectations, delivered an adjusted 20% return on average tangible common equity, a 1.3% plus ROA, and a sub 50% efficiency ratio with improved credit metrics. Provision and charge-offs aligned with expectations, and we saw a meaningful decline in both the thirty-plus day delinquencies and criticized and classified loans. There has been discussions this earning season about some potential credit cracks within our industry. From my perspective, these are not indicative of something larger yet to come in future quarters. In fact, many of the credit items reported by other banks are quite manageable and within normal long-term operating conditions. In my conversation with the peers, there does not seem to be a plague of, quote, cockroaches on the horizon. Our industry, including Old National, is well reserved, well capitalized, and has robust operating results, which serve as a strong buffer for potential credit changes. Meanwhile, at Old National, we continue to build a stronger franchise by leveraging our leading market position, investing in ourselves, and strategically recruiting top-tier talent. We are taking advantage of market disruptions and have accelerated talent conversations across our footprint. This has been one of the catalysts behind our momentum. At the same time, we are actively pursuing opportunities to enhance efficiency and effectiveness. Our efficiency ratio is below 50% and improving. But we are still investing in our future to enhance growth opportunities. We also continue to exceed expectations by growing core deposits and managing our deposit costs. Our franchise is built to perform in any environment, and this quarter was no exception. Capital management remains a top priority. Our high return profile drives significant capital generation and opens the door for additional capital returns. 28 basis points this quarter to despite merger-related charges and while repurchasing 1,100,000 shares late in the quarter. We are threading the needle between growing capital coming off our Bremer partnership and returning capital to our shareholders. And let me be clear, the best acquisition we can make in the next twelve months is ourselves. We are not chasing new partnerships. We are focused on organically growing our balance sheet and capital and delivering the best return for our shareholders. Last weekend, our team successfully completed the systems conversion and branding for our Bremer Bank partnership. We are now operating as Old National, all former Bremer locations, and are excited about future growth opportunities. Thank you to all of our team members for their collaboration, hard work, and dedication to the integration. We believe our quarterly results speak for themselves with strong and increasing profitability, better efficiency, improved credit, and the recognition of our focus on being a better bank and rewarding our shareholders. If you step back a bit from the quarterly results, our core EPS has grown 7.6% on a compounded annual growth rate since 2018 with even stronger momentum heading into 2026. Objectively, we have become a better bank each year, and there has never been a better time to invest in us. Thank you. I will now turn the call over to John who will provide more quarterly insights. John Moran: Thanks. As Jim mentioned, our third quarter was highly successful. Beginning on Slide five, we reported GAAP 3Q earnings per share of $0.46. Excluding $0.13 of net merger-related expenses, adjusted earnings share were $0.59, an 11% increase over the prior quarter and a 28% increase year over year. Results were driven by the full quarter impact of Bremer operations, margin expansion, better than expected growth in fee income, and well-controlled expenses. Importantly, credit remained benign with a 6% reduction in total criticized and classified loans and normalized levels of charge-offs. Our profitability profile, as measured by return on assets and on tangible common equity, remained in the top decile among our peers. Lastly, our capital position has rebuilt quickly with CET1 over 11%, 28 basis points higher linked quarter we grew tangible book value per share over 17% annualized. On Slide six, you can see our quarterly balance sheet trends. Highlighting improvement in our liquidity and our strong capital position. Our deposit growth over the last year has continued to allow us to fund our loan growth, our loan to deposit ratio is now 87%. We grew tangible book value per share by 4% from 2Q, and 10% over the last year, even with the impact of the Bremer close, and absorbing approximately $70,000,000 of merger charges while repurchasing 1,100,000 shares this quarter. These liquidity and capital levels continue to provide a strong foundation, which strengthens our position as we end 2025 and look forward to 2026. On slide seven, we show trends in our earning assets. Excluding Bremer, total loans grew 3.1% annualized from last quarter. Production was up 20% from the prior quarter was strong throughout our commercial book while the legacy Old National pipeline is up nearly 40% year over year. Higher production levels were partly offset by late quarter payoffs it is worth noting that our average loan balances exceeded second quarter's end of period balances by nearly $300,000,000. These payoffs were mostly due to strategic portfolio management as evidenced by our lower criticized and classified levels as well as by increased transactional velocity in commercial real estate and lower line utilization. Bremer balances declined due to payoffs, largely due to strategic portfolio management. The investment portfolio increased approximately $430,000,000 from the prior quarter given favorable rates and changes in fair values. We expect approximately $2,800,000,000 in cash flow over the next twelve months. Today, new money yields are running about 70 basis points above back book yields on securities as the repositioning of the Bremer book lifted the yield on our back book. The repricing dynamics for both loans and securities, combined with loan growth in the Bremer partnership support our expectation that net interest income and net interest margin should be stable to improving in the 2025. Moving to Slide eight, we show trends in total deposits. Total deposits increased 4.8% annualized and core deposits ex brokered increased an even better 5.8% annualized primarily driven by growth from both existing and new commercial clients. Non-interest bearing deposits remained 24% of core deposits. Our brokered deposits decreased modestly and at 5.8% total deposits, our use of brokered remains below peer levels. With respect to deposit costs, the four basis point linked quarter increase in our cost of total deposits played out as we expected due to the full quarter impact of Bremer's cost of deposits and our offensive posture with respect to client acquisition. We achieved an approximate 85% beta on our exception price, both spot in conjunction with the Fed rate cut in September. These actions resulted in a spot rate of 1.86% on total deposits at September 30. Overall, we remain confident in the execution of our deposit strategy, and we are prepared to proactively respond to the potentially evolving rate environment. As has been the case for the last several years, we are proactively driving above peer deposit growth at reasonable costs. Slide nine shows our quarterly income statement trends. As I mentioned earlier, adjusted earnings per share were $0.59 for the quarter, with all key line items in line or better than our guidance. Moving to Slide 10, we present details of our net interest income and margin, both of which increased as we had expected and guided driven by the full quarter impact of Bremer as well as asset repricing and organic growth. Slide 11 shows trends in adjusted noninterest income which was $130,000,000 for the quarter, exceeding our guidance. All line items showed increases reflecting Bremer, and organic growth in our primary key businesses with outsized performance within capital markets driven by a handful of larger swap fees. While we are very pleased with our performance in fee income this quarter, we do expect trends to normalize somewhat in the fourth quarter. Continuing to Slide 12, which show the trend in adjusted noninterest expenses of $376,000,000 for the quarter, reflective of a full quarter impact of Bremer operations. Run rate expenses remained well controlled and we generated positive operating leverage on an adjusted basis year over year, with a low 48% efficiency ratio. As a reminder, the full run rate cost saves from Bremer will materialize later in the fourth fourth quarter, and will be more evident in the first quarter's reported results. On slide 13, we present our credit trends. Total net charge-offs were 25 basis points or 17 basis points excluding charge-offs on PCD loans. Our non-accrual loans in thirty-plus day DQs as a percentage of total loans declined one basis point and 12 basis points, respectively, during the quarter. Importantly and positively, criticized and classified loans decreased $223,000,000 or 6%, reflective of the continued focus on active portfolio management. The third quarter allowance for credit losses for total loans, including the reserve for unfunded commitments, was 126 basis points up two basis points from the prior quarter, primarily driven by Bremer related TCV reserves. Consistent with the second quarter, our qualitative reserves incorporate a 100% weighting on the Moody's s two scenario, which additional qualitative factors to capture global economic uncertainty. Lastly, given the increased focus on loans to non-depository financial institutions, we'd like to emphasize that our exposure is de minimis. All said, NDFIs are less than 50 basis points of total loans, All are performing. And like other businesses that we bank, most are long term relationships. Slide 14 presents key credit metrics relative to peers. As discussed in past calls, we have historically experienced a lower conversion rate of NPLs to NCOs as compared to our peers driven by our approach to credit and client selection. We remain comfortable around the credit outlook. It is also worth noting that roughly 60% of our non-accruals are from acquired books with appropriate reserves and or marks. In addition, roughly 50% of our NPLs are paying principal and interest or interest only, and approximately 40% of our classified and criticized assets are in investor CRE, we continue to have confidence in collateral values and the quality of our sponsors. On slide 15, we review our capital position at the end of the quarter. All regulatory ratios increased linked quarter due to strong retained earnings. Tangible book value was up 4% linked quarter and 10% year over year, and we expect AOCI improve approximately 20% or a $105,000,000 by year end 2026. Our strong profitability profile continues to generate significant capital which opened the door for capital return this quarter. As previously mentioned, late in the quarter, we repurchased 1,100,000 shares of common stock. Slide 16 includes updated details on our rate risk position and net interest income guidance. NII is expected to increase with the benefit of fixed asset repricing and continued growth. Our assumptions are listed on the slide, but I would highlight a few of the primary drivers. First, we assume two additional rate cuts of 25 basis basis points each in 2025, which aligns with the current forward curve. Second, we assume a five-year treasury rate that stabilizes at 3.55%. Third, we anticipate our total down rate deposit beta to be approximately 40% in line with our up rate terminal betas. And fourth, we expect the non-interest bearing mix to remain relatively stable as a percentage of core deposits. Importantly, our balance sheet remains neutrally positioned to short term interest rates. As such, the path of NIM and NII in 2026 will depend on growth dynamics and the shape of the yield curve more than the absolute level of short term rates. Slide 17 includes our outlook for the fourth quarter and full year 2025. With the exception of full year 2025 loan growth all guidance includes Bremer. We believe our current pipeline support full year loan growth excluding the impact of Bremer, of 4% to 5%. We anticipate continued success in the execution of our deposit strategy and expect to meet or exceed industry growth in 2025. Other key line items are highlighted on the slot. Note that we have increased fee income guidance to reflect our strong third quarter performance with other lines unchanged. Importantly, our full year outlook once again proved durable as compared to the initial guidance that we provided in January. As we always have. Do our absolute best to transparently tell you what we know we know it, and then deliver against the plan. At the midpoint of the ranges, you'll note that we expect full year results that yield earnings per share in line with current analyst consensus estimates and, again, feature positive operating leverage and a peer leading return profile, with good growth in fees, controlled expenses, and normalized credit. In summary, echoing Jim's opening comments, year to date 2025 has been exceptionally strong. We have successfully completed the core systems conversion for Bremer Bank, We delivered 3Q twenty five and year to date performance at or above plan while demonstrating improvement in our credit, capital, and liquidity profile. We are focused on organic growth and returning capital to shareholders, while investing in ourselves strategically recruiting talent, and maintaining our peer leading profitability. With those comments, I'd like to open the call for your questions. Operator: At this time, I would like to remind everyone in order to ask a question Your first question comes from the line of Scott Siefers with Piper Sandler. Scott Siefers: Good morning, Scott. Thanks for taking the question. Hey, let's see, maybe John, first one is for you. So really strong third quarter for NII but a little bit of reduction in the expectations for the fourth quarter. So maybe if you can sort of walk us through puts and takes of what drove the anticipation for the you know, I guess, I mean, we'll still grow, but, you know, million dollars less than had been the case sort of previously. John Moran: Yeah. Hey. Hey, Scott. Thanks. Yeah. Hey. Look. $5,000,000 down on on what had been $5.90 is now squiggly line $585,000,000 We're talking about a balance sheet of close to $65,000,000,000 in earning assets. I mean, we're slicing the cheese pretty dang thin there, if you ask me. Look, I I would I would tell you I I view that as very stable and we're just doing our best to kind of tell you exactly what we think it's going to be. I think the dynamics are you know, look, five year came in a little bit. And and the launch point for the quarter is a little bit lower than where we had had thought it was gonna be, when we when we set the the guide ninety days ago. But, again, you know, 1% of NII on a $65,000,000,000 earning asset base And I'd I'd say that's pretty dang good. Scott Siefers: Alright. Fair enough. Fair enough. And then, let's see. Jim, next one is for you. So it sounds like m and a is off the table for now, but, you know, by contrast, I was glad to see the a little over 1,000,000 shares of repurchase there late in the quarter. Maybe just if you could spend a bit more time kind of discussing your preferred uses for capital and then is that 1,100,000 shares representative of what we should expect going forward or could we see that pace get bumped up just given the strong and improving capital levels? Jim Ryan: Let me start with M and A. And again, we think the best acquisition we can make is in ourselves. And so the most important thing we can do. Given where we're trading at, we think it's particularly great investment. That's why we encourage you all to continue to buy more shares. For us, I think we're going to be opportunistic on the buyback. You know, we're trying to thread that needle between building some capital back coming off our Bremer partnership, but also recognizing that we are accreting capital back very quickly. And so we're going to continue to do that in the fourth quarter. Once we get through the fourth quarter, then I think we'll have a better perspective on what the full year would look like terms of returning capital. But I'd say the first use is organic growth, But even with the organic growth, given that high relative return, we still have an opportunity to return capital back to you all via buybacks. Scott Siefers: Alright. Terrific. Thank you guys very much. Jim Ryan: Thanks, Scott. Appreciate your support. Operator: Your next question comes from the line of Jared Shaw with Barclays. Jared Shaw: Everybody. Good morning. Jim Ryan: Good morning. Jared Shaw: Just looking at the at the dynamic of acquired Bremer or loans acquired through Bremer, Were they did you have loan sales this quarter? Bringing that down? You talked about running balances off. Is that just organic or were you able to sell any of those? And what sort of the expectation for additional flow from from acquired loans in fourth quarter? Jim Ryan: Yes, Jared, I'll just start. Anytime we partner with another institution, there are books of businesses. Particularly any national related we're just not going to continue on here. And I think if you saw that in this quarter, you saw it at the CapStar and you saw it at First Midwest. I mean, it's just a normal part of that. We don't anticipate large swings. So this is just kind of normal attrition in those lines of businesses that we don't plan to continue to operate. So I don't expect it to be dramatic, but it puts a little bit of pressure in that transition period you just kinda stop doing business. So but but I wouldn't plan anything material and certainly don't have any loan sales teed up, to run that portfolio off any faster than than it would just happen naturally. Jared Shaw: Okay. And then when we look at the the provision on the PCD loans and then the charge offs on PCD What was driving, I guess, that incremental weakness? Was that just you're in there and get to see it? Or was that just that exit There were there were exit costs Yes. Pretty normal sort of first quarter or second quarter, third quarter post acquisition. You get your arms around credit and you know, for as long as that, that mark stays open, those will run PCD. Okay. And then just finally, a any update on how the systems conversion went? And when we look at the accelerated merger charge this quarter, is that just pulling forward from from being able to bring everything online on systems? Jim Ryan: Yeah. I think it's just normal merger charges. There'll be some pluses and minuses along the way. I would say, knock on wood, I don't want to this has been our best our best systems conversion to date. We've got a lot of monitoring places. Client sentiment is high. The branch locations have been busy. There have been a lot of calls to the contact center, but we monitor all the statistics and look. I've been doing these integrations now for more than twenty years at Old National. I can tell you this is the best one we've ever done. I think that's a reflection of the client base that Bremer had. I think it's a reflection of the hard work for our teams and and the and the fact that we try to get better just every single time. So I'm really pleased with where we stand. I don't want to knock that they're with any transition, there's always little minor bumps in the roads for our clients as they navigate you know, new systems and new passwords and and new login IDs and all that, but it's gone very, very well from my perspective. Jared Shaw: Jared, in terms of charges, 70,000,000 this quarter was about right in line with where we thought they were going to land. There'll be some more coming in fourth quarter, about 50,000,000, in the fourth quarter. And then it really trails off. Front half of next year will have a couple of little stragglers. And as John said, we start to realize the cost savings really thirty days post conversion. And so the full run rate you should assume would be impacting us in 1Q next year. Jared Shaw: Okay. Alright. Appreciate that. And then just finally I guess Jim talking about the optimism for organic growth in your markets. Do you anticipate increasing hiring to take advantage of that? Or do you think you have the team on the field that that you need to take advantage of that? Jim Ryan: Well, me start with we got a great team on the field and we've got great market opportunities in front of us, and there's a little bit of help with just disruption wins out there. So all of that's kind of net positive. And Tim and I talk weekly about hiring new team members. We've met with a bunch of new folks. You know, we're looking at the organization to to make sure we got the right people in the right seats and we're absolutely gonna be out hiring folks. It's a little bit of arm wrestling between our CFO and myself about how much money we're gonna spend on talent, but I know you all would be supportive of hiring talent that quickly adds to the revenue outlook. So definitely going to plan on doing that for we might get a little bit done yet this year, but we'll definitely be doing it all of next year. Jared Shaw: Great. Thank you. Operator: Your next question comes from the line of Ben Gerlinger with Citi. Ben Gerlinger: Hi, good morning. Jim Ryan: Good morning, Ben. Ben Gerlinger: Your fourth quarter loan growth guide implies a step up. It's not by no means a heroic, and I mean wouldn't give that guide unless we're a quarter of the way through the fourth quarter here. So I imagine it's probably pretty accurate. Can you just give a little color on, like, where it's coming from? Is it some Bremer relationships deepening quickly with a bigger balance sheet? Is it across the footprint? Is there anything specific you would highlight? John Moran: Ben, this is Tim. Our legacy year over year pipelines are up close to 40%, so we feel very well positioned to achieve that fourth quarter guidance. So we're seeing a good healthy mix on legacy Old National Bank pipelines and feel very good about achieving that. Ben Gerlinger: Alright. Was great color. What do you think about the, the savings and opportunity? I know that the one q next year is probably the clean quarter. But when you think about opportunities for reinvestment across the board, it should we assume that there's reinvestment already baked in 1Q? Or could you theoretically be kind of over earning a little bit because it just doesn't hit in the first ninety days of the year? John Moran: No. I think we're in a really good place in term in terms of operating expense and investment. Know, Jim's kinda teasing me a little bit. It is an arm wrestle. Right? I and and I get it. A good talent will pay for themselves very, very quickly. On the revenue line, particularly in commercial bank. Right? On wealth, earn back can be a little bit of a longer period of time. Those relationships take longer to move over. It's a longer sell cycle. But I think we're going to be on offense with respect to investment And and there's clearly look. There's disruption across our footprint. There's a lot of opportunities out there. And we're getting a lot of looks. We've got a great story to tell. We're out there telling I would also say, and you all know us well enough. I mean, becoming a better bank, being more efficient, more effective is what we do day in, out. So we will also look for ways to continue to just be more efficient and to pay for those investments And, you know, net net, I mean, we're driving just amazing efficiency as of this organization, but it's a part of the culture in our DNA here. So is so is investing in our future. And, that's what we absolutely plan to do. And as John said it well, I don't think anything, you know, materially changes how we're thinking about the year out of the gate. I would love it quite frankly if we could do that, right? That means we've hired many more people. That would be fantastic. We can do that. Ben Gerlinger: And that would be my goal, but but not nothing to give you any guidance on at the hard time. Ben Gerlinger: Gotcha. Okay. Thanks, guys. Operator: Your next question comes from the line of Brandon Nosal with Hovde Group. Brendan Nosal: Hey, good morning. Thanks for taking the question. Hi. Just to start off here, could you unpack this quarter's increase in loan yields a little bit? And just kind of dig into the various pieces, whether it's back book loan repricing, new origination yields or maybe some pull through of the fair value mark that you took on the book? Thanks. John Moran: No. The fair value mark was relatively unchanged. There was a little bit of an impact on a full quarter of Bremer, and the credit component of that added about one basis point to the total margin. In terms of production yields, pretty steady. It was really sort of fixed asset repricing, I think, drove the bulk of the loan yield improvement. Brendan Nosal: Okay. Okay. John Moran: That's helpful. And then kind of maybe turning to deposit growth and liquidity. Really nice core deposit growth this quarter. To the extent that going forward funding inflows out loan growth, just talk about how you think about liquidity deployment and plans for the overall size of the securities book? John Moran: Yeah. Look, we'll wave in new deposits every single quarter, quarter in, quarter out. That is, made up t-shirts around here that says iHeart deposits. And has become famous for running around the footprint pounding on things saying we're all deposit gatherers. So we'll take deposit in excess of earning asset growth all day every day. We're on offense there. That's client acquisition. In terms of if it were to in any given quarter, sort of have loan growth that didn't keep up with deposit growth. In my mind, that might be a high problem to have, and we would just deploy it in short liquidity. Brendan Nosal: Okay. Fantastic. Thanks for taking the questions. Operator: Your next question comes from the line of Terry McEvoy with Stephens. Terry McEvoy: Hi, thanks. Good morning, everybody. John, just to follow-up on that last question, when you talked about pull forward, I just want to make sure the proactive portfolio actions how did that impact accretion or NII in the third quarter? I know Slide 10 has that one basis point impact from credit accretion. I just want to make sure I'm clear on your last response. John Moran: Yeah. The total, the total accretable was relatively unchanged. Terry McEvoy: Okay. John Moran: And I guess more I guess I'll call this a softball question, but I think it's important this quarter. Virtually no NDFI loans, that's where all the focus is. Just when you take a step back, others were chasing after that growth because it sounds like it was easy, you guys were not. So Jim, could you just maybe talk about how that's reflective of Old National, how you run a business? And I think it's a good example of how you're different than many of your peers or at least some of your peers. Jim Ryan: Thank you, Terry. It's a great question. No, Terry, you've known us a long time. We call this old fashioned basic banking, right? We're not trying to we it's banking the hard way. You know, we call it the old national way. I mean, this is just bread and butter. And I will tell you, since Tim's been here for the last ninety days, we've had a lot of fun talking about doubling down on those issues. Building more small business business banking capabilities, building business banking capabilities, doubling down on C and I, putting more talent in all of that space. That's what we will continue to do. We're not going to build big, large specialty teams that go after national businesses You know, this is banking, by and large, in our footprint for clients that we know and trust will continue to bank for a long, long time. Somebody pointed out in some commentary to us about one of our peers growing by multiple billions of dollars during the quarter And I said, if we ever do that, you ought to be asking us really hard questions about what we're doing to get there. So that's just not our style. This is old fashioned. Bread and butter banking. So, thanks for the question. But that's our plan. We're With Tim coming on board, we're doubly committed to doing this. And I think that's going to serve our shareholders over the long term. And to John's comment around deposit growth, we are always going to be out in the market running and looking for good long term deposit relationships And as long as we can continue to fund that bread and butter loans those business banking loans with retail commercial deposits, that's a good trade, and we'll do that every day. Terry McEvoy: Perfect. Thanks for taking my questions. Jim Ryan: Thanks Terry. Operator: Your next question comes from Brian Foran with Truce. Brian Foran: Good morning. Hi. Maybe to come back and ask the Bremer loan question a different way. Certainly appreciate your comments there's always going be some trimming you want to do as you take in the business. But as we look to 2026, would you think we should be whatever we think Old National loan growth is consolidated loan growth should be a similar number. Or would you say 2026 Okay. So we call it in low grade. Jim Ryan: Right. Same organization. Same objectives, same goals. Absolutely. And in fact, I mean, if you look at how we would think about that internally, we would expect based the Bremer footprint, Minnesota, where we've been for a long time now, actually generate more on average than than our total company would do. So absolutely, we think about it It's just, you know, some quarterly changes, you know, due to the newness of the portfolios And as John said, we're going through all the portfolios reviewing those, looking at those national businesses that we just don't do. And it had a small impact this quarter. And will continue to have a small impact, but absolutely the growth should be more like our total average loan growth. Brian Foran: And maybe to ask about the same dynamic on the deposit side, is Bremer already contributing to deposit growth? In the current quarter? And think it will have a similar trajectory as the old fashioned legacy going forward. Jim Ryan: Yes. I mean, overall, it the total balance sheet should have a similar mix. Total fee income line should have a similar mix. We in fact, again, I would suggest just everything, just given the relative size of that, markets, the opportunities for growth, on average, it's going to lead our organization So I don't expect any kind of outline differences as we head into 2026. Brian Foran: Okay. Thank you for that. That's great. Operator: Your next question comes from the line of Chris McGratty with KBW. Chris McGratty: Good morning. Good morning, Chris. Chris McGratty: Good morning, everybody. Jim or John, the capital buyback comment on that you made in your prepared remarks and I kind of want to square it up with your comments about being sensitive to CET1 growing versus returning capital. So you're 11% today. If you grow the balance sheet low single digit, keep the dividend and continue to buy back stock, you're still going to build 50 basis points of capital per year. I mean, is I guess the question is, is 11 the right number? It feels like a lot of your peers are moving 10.5 or even 10. Jim Ryan: Yeah. It is just there's a healthy tension between you know, making sure that we're looking at all of the constituencies. Obviously, shareholders have a view. The ratings agencies have a view. We're looking at forward at the economic conditions And I do think there is opportunities to let that come down over time. And not build as quickly as it would build just organically given our high profit profitability. We're just not ready to make that commitment quite yet. But it's something we're actively looking at. And you're right, we could have substantially more buyback and still keep capital unchanged. And so I would suspect though as you look forward, we might see a little bit of capital build here just as we get more optics in all this. And but we're very sensitive. And I think that is the best use of of our capitals to return it back to our shareholders. And I think we could do substantially more than that you know, in future periods, once we just kind of get a view of of those competing factors. Chris McGratty: Okay. Perfect. And then, John, one for you on NII comments. I think you said irrespective of the short end, you talked about the NII guide with the cuts. Jumping off point of 5.85% in the fourth quarter, if you kind of say to Brian's question about 3% to 5% Old National type of growth next year, Does NII grow from here into '26? John Moran: Yes. I think NII will absolutely grow. I think margin would be you know, stable ish or or depending. I you know, it'll depend a little bit on yield curve dynamics and and look, the point of the curve that matters to us is still inverted and projected to be inverted for the first half of next year. That's no different than it's been for a long time. You know? But if we got some steepening in take your pick, whether it's three month, five year, effective Fed funds against five year, If there were steepening in that in the back half of the year, I think that would be really this is not unique to Old National, but it would be good for Old National, and I think it'd be good for our industry. Chris McGratty: Okay. The growth off the fourth quarter is definitely the base case. Okay. Thank you. Yes. Operator: Your next question comes from the line of Jeanette Lee with TD Cowen. Jeanette Lee: Good morning. Morning. Going back to Bremer, could you could you size up how much of a runoff that you saw from Bremer and when you say when in terms of the loan growth guidance, when you say excluding the Bremer, is it also excluding the impact of Bremer runoffs or just the whatever the loan amount that was added initially in the second quarter? John Moran: Yeah, Janet. The third quarter runoff was about $200,000,000. The loan growth guidance for the fourth quarter is inclusive of everything. So that's Old National plus Bremer. Reason that we're still guiding full year excluding Bremer is that Bremer wasn't there for the first you know, four four months of the year. The fourth quarter, that three to 5% that's there, on the guide for for April, that is inclusive of everything. Jeanette Lee: Okay. And and the expectation is that the runoffs from the Bremer impact will be reduced in the coming quarters versus the $200,000,000 Is that the right way to think? John Moran: Well, I think Jim said it well. There's a handful of lines of business that that Bremer was in that that you know, are unlikely to continue here. And there'll be there'll be a little bit of up out of those portfolios, but that's totally normal course for any m and a transaction that that Old National has been involved in certainly for the last five plus years. Jeanette Lee: Got it. That's helpful. And just on fee income, that came in nicely above It looks like it's a lot of it is just, you know, organic growth. The the jump in capital markets, other fee and bank fees, Did you, like, are these the organic trends that you're seeing or is there any unusual trend that was embedded in it? Is that a good run rate that we could grow off of? John Moran: Yeah. I think the right level to be thinking about total fee income is probably in the $120,000,000 sort of ZIP code. This quarter was really exceptionally good, particularly in capital markets So some rate volatility is good for that line of business. But I would expect that that probably comes back down to earth. You know, they're they're doing great. You know, we're really pleased with those results, but I don't think $13,000,000 in quarter is gonna run rate on that business. And then, obviously, mortgage is seasonally strong in three and that'll come down in the fourth quarter and that's totally normal. Jeanette Lee: Got it. Alright. Thank you. Operator: Your next question comes from the line of Jon Arfstrom with RBC Capital Markets. Jon Arfstrom: Good morning, Jon. Jim Ryan: Good morning. Jon Arfstrom: Couple of follow ups here. Just on expenses and efficiency, maybe John or Jim, can you remind us the Bremer related efficiencies, what you expect in the fourth quarter and rolling into the first quarter? And then are there you have any type of broader efficiency objectives Or does this current efficiency ratio feel kind of like the right range for the company? John Moran: Yeah. So fourth quarter, we'll start to see some, John. But it really Jim said, you know, it it happens sort of thirty days post conversion, which puts us into, you know, the November. So, you know, you'll get a little bit here in the fourth quarter, but but I wouldn't count on a ton of cost saves showing up in 4Q. Really, the number that that you'll see a cleaner quarter on will be first quarter of next year. At that point, we'd be fully realized and fully realized is a touch over $115,000,000 on an annualized basis. Yes. So the efficiency ratio has some room to get a little bit better from here. Jim Ryan: And, you know, we are planning for growth and investments within our budget set there. But John as you know, this is not a program. This is not a one-time thing. This is just an ongoing effort to constantly find ways to be a better organization to be more efficient, more effective, to serve our clients in a little bit better ways. And we've got you know, a lot of the investments we make each and every day are self funded. And that's what we're gonna, obviously, try to do. And I hope I have to come to you and tell you that I spent more money on talent and to take your expense guys up. That means we're that means we're hiring a lot more people. So that would be a good thing. So we're not there yet We're not saying that's gonna happen, but that would be a good thing if I had to come ask for a little bit of forgiveness. Jon Arfstrom: Yep. Yep. Okay. A follow-up on credit. I see your numbers. They look fine. And I understand your comments on non-performing loans. But would you guys describe credit as stable, mixed bag, no change, getting a little tougher. How would you big picture, describe the credit environment? John Moran: Yes. I would say, from a credit perspective, very stable, in our outlook. You know, we feel comfortable with the guidance we've provided and the trends we're seeing in the portfolio we feel good about. Jim Ryan: Hey, John. I'd say stable to improving. I mean, the the deep in classified criticized assets was a was a good, a good guy for the quarter. Continue to feel really comfortable with where we We had this conversation too in our preparation here, Carrie said, hey, We work really hard every single day to scrub our bucks to make sure there's nothing unusual in there and nothing we don't know about. We're going through the portfolios constantly. You know, we're trying not to surprise anybody. And so that's just our our ongoing monitoring is, tough. And aggressive. We wanna call it as early as possible. And we continue to do that. But we feel really good about what we saw this quarter. John Moran: And we've seen that delinquencies really improved, which was also a good factor. Okay. Jon Arfstrom: Good. Yeah. It obviously looks fine, but just it's a hot button issue. Jim Ryan: Yeah. And I just wanna We can appreciate that. Hopefully, everybody takes it off the table for Old National. Jon Arfstrom: Yep. Yep. For sure. And then just curious on on the ticky tacky, but the timing of the repurchase late in the quarter, any reason behind that? Is that just more confidence in capital and Bremer Why was it later in the quarter? Thanks. Jim Ryan: Yes. I think there were a lot of questions around our desire to return capital back and we got more confidence that we saw the trajectory and we also felt good about you know, we were able to sell the Bremer Insurance Agency too, which continue to bolster the capital ratios. And so I think all that just gives a lot more confidence in our ability to start returning capital, probably a little bit sooner than we had planned as we talked about on this last quarter's call. But I think that gives us an ability to continue to be more active here, you know, as we head into the fourth quarter and into next year. Jon Arfstrom: Okay. Thanks a lot. I appreciate it. Jim Ryan: Thanks, John. Operator: There are no further questions at this time. I'd like to turn the call back over to Jim Ryan for closing remarks. Jim Ryan: Well, thank you all for joining us. We appreciate your support. As usual, the whole team will be available to answer any follow-up questions you have. Hope you have a great day. Operator: This concludes Old National's call. Once again, a replay along with the presentation slides will be available for twelve months on the Investor Relations page of Old National's website oldnational.com. A replay of the call will also be available by dialing (800) 770-2030, access code 939-4540. This replay will be available through November 5. If anyone has additional questions, please contact Lanell Durkholz at (812) 464-1366. Thank you for your participation in today's conference call. You may now disconnect.
Operator: Thank you all for standing by. The Vertiv Third Quarter 2025 Earnings Conference Call is going to be starting in about four minutes' time. Good morning. My name is Breeka, and I will be your conference operator today. At this time, I would like to welcome everyone to Vertiv's Third Quarter 2025 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. Please note that this call is being recorded. I would now like to turn the program over to your host today, to begin, Lynne M. Maxeiner, Vice President of Investor Relations. Please go ahead. Lynne M. Maxeiner: Great. Thank you, Breeka. Good morning, and welcome to Vertiv's Third Quarter 2025 Earnings Conference Call. Joining me today are Vertiv's Executive Chairman, David M. Cote, Chief Executive Officer, Giordano Albertazzi, and Chief Financial Officer, David J. Fallon. We have one hour for the call today. During the Q&A portion of the call, please be mindful of others in the queue and limit yourself to one question. And if you have a follow-up question, please rejoin the queue. Before we begin, I'd like to point out that during the course of the call, we will make forward-looking statements regarding future events, including the future financial and operating performance of Vertiv. These forward-looking statements are subject to material risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. We refer you to the cautionary language included in today's earnings release, and you can learn more about these risks in our annual and quarterly reports and other filings made with the SEC. Any forward-looking statements that we make today are based on assumptions that we believe to be reasonable as of this date. We undertake no obligation to update these statements as a result of new information or future events. During this call, we will also present both GAAP and non-GAAP financial measures. Our GAAP results and GAAP to non-GAAP reconciliations can be found in our earnings press release and in the investor slide deck found on our website at investors.vertiv.com. With that, I'll turn the call over to Executive Chairman, David M. Cote. David M. Cote: Good morning, all. Well, this is a very strong quarter by any measure. Although I have to say, by looking at the stock price reaction right now, I wonder what would have happened if we hadn't blown the doors off of every single metric. We exceeded guidance across all metrics in a very convincing way. I continue to say I'm more excited now than ever, and you're seeing why. We're in the early stages of the digital age, and Vertiv's position today reflects the years of focus on customer relationships, disciplined investment, operational excellence, and R&D expansion. Selecting a good strategy, sticking with it day by day, and reinforcing it with monthly growth days works. Our technology leadership comes from consistently staying ahead of where the industry is going. This digital transformation is just beginning. The scale and speed of what we're seeing in AI and data centers today is just a preview of what's ahead. Data will continue to increase rapidly, and data centers are essential to storage and processing. We are very well positioned to continue to lead through it. I've seen many business transformations over the years, and what's clear is that our strategy is working. As our technology focus grows market share, investments we've made in R&D and capacity are delivering results today, and more importantly, we believe they're building a sustainable competitive advantage that will serve us well for years to come. I'm more confident than ever that we're in the early stages of what I believe will be a multiyear period of significant growth and value creation. And we couldn't have a better leadership team than Gio and his group to make it happen. So with that, I'll turn it over to Giordano Albertazzi. Giordano Albertazzi: Well, thank you, Dave. And welcome, everyone. We go to Slide three. Our Q3 performance demonstrates the strength of our strategy and execution. Our adjusted diluted EPS of $1.24 was up about 63% year over year, driven by higher adjusted operating profit. Q3 organic sales grew 28% with a strong Americas up 43% and APAC up 21%. EMEA declined 4%, relatively in line with our expectations. Particularly encouraging is the 1.4 times book-to-bill ratio in Q3. Our trailing twelve-month organic orders growth of about 21% demonstrates strong momentum with Q3 orders up 60% year over year and 20% sequentially. The market growth ranges from our November 2024 Investor Day remain valid, though tracking at the higher end with the Kola Cloud share expanding as the fastest-growing segment. The overall market growth is accelerating. We continue to outgrow the market through superior technology and execution. Q3 adjusted operating profit reached $596 million, up 43% year on year with a 22.3% margin and exceeding guidance. Adjusted free cash flow of $462 million was up 38%, reflecting our strong operating performance. Our 0.5 times net leverage demonstrates our strong balance sheet. Given our momentum heading into Q4, we're raising full-year guidance for adjusted EPS, net sales, adjusted operating profit, and adjusted free cash flow. And with that, we go to Slide four. Vertiv's order momentum and pipeline continued to outpace the strong market. While orders can be lumpy, our Q3 about 21% trailing twelve-month organic orders growth and the 1.4 times book-to-bill ratio showcase our competitive advantages. As mentioned in July, starting next year, we'll move to providing full-year orders projections with quarterly updates to better reflect our long-term strategic focus. Our sales grew 29% in the quarter while building an additional $1 billion in backlog from Q2. Our total backlog now stands at $9.5 billion, up about 30% year on year and 12% sequentially. This clearly gives us a strong visibility into 2026. The phasing of our backlog remains consistent with historical patterns, a healthy backlog in a healthy market. Our application expertise and proven track record have positioned us as a preferred partner for strategic projects. Early involvement in project technology and in project planning further drives our above-market growth. Pricing remains favorable, expected to exceed inflation. EMEA sales continued to be muted as a market due mainly to power availability and regulatory challenges. Here, we're implementing regional restructuring programs to have the right structure for future strong growth. Though acceleration may not come until the second half of 2026. When we talk about tariffs, we view them as another cost to our business. The situation remains fluid. And we're addressing it with comprehensive mitigation actions. And pricing programs. We expect to materially offset current tariffs impacts as we exit Q1 2026. While optimizing our supply chain and manufacturing footprint. We are progressing well in addressing the operational and supply chain challenges we experienced in Q2. We are accelerating manufacturing and service capacity investments across all regions, and particularly in The Americas. While maintaining disciplined fixed cost management. Our engineering and R&D spending continues to accelerate to further strengthen our industry leadership. And speaking of leadership, let's go to Slide five. And let me elaborate on our services capabilities. Services turn market complexity into opportunity. From liquid cooling to higher voltages, services are fundamental to our competitive position. We support the complete customer journey from consultancy through implementation to life cycle and optimization. Our advanced technology platform combines remote monitoring, predictive analytics, and energy optimization. Our advanced diagnostic and predictive capability, including thermal mapping and power quality analysis, are helping customers maximize reliability and efficiency with a similar system integration. What truly sets us apart in combining this technology with our unmatched global scale. The recent WeiLay acquisition accelerates this advantage by analyzing real-time machine data, identifying operational trends, and proposing predictive actions from maintenance to energy optimization. As rack densities increase and systems become more complex, this integration of AI-enabled capabilities with our established field service becomes even more advantageous. But technology alone is not enough, presence and capacity in the field are fundamental. We're scaling our service capacity in parallel with manufacturing, staying ahead of the demand curve. Services, combining advanced technology, global reach, and growing capability is truly one of Vertiv's superpowers. And with that, over to you, David Fallon. David J. Fallon: Thanks, Gio. Turning to slide six. Let me walk you through our strong third-quarter financial results, starting with adjusted diluted EPS of $1.24, up approximately 63% from last year's third quarter with the improvement driven by higher adjusted operating profit and a lower effective tax rate, primarily from progress with tax planning and timing of some discrete items in the quarter. Organic net sales were up 28% with continued momentum in The Americas up 43%, while APAC was up 21% as we continue to drive top-line expansion across that region. EMEA was down 4%, but as Gio mentioned, we continue to see encouraging signs of accelerated growth in that region likely looking to 2026. Our adjusted operating profit of $596 million was up 43% from last year and $86 million higher than guidance. Adjusted operating margin of 22.3% exceeded prior year by more than 200 basis points primarily driven by operational leverage on the higher sales, positive price cost, and productivity, but partially offset by the negative tariff impact. And as we summarized last quarter, operational inefficiencies driven by supply chain actions to mitigate tariffs. This 22.3% adjusted operating margin was 230 basis points higher than guidance. Aided by operational leverage on the higher sales, but also by strong operational execution, including addressing supply chain inefficiencies more quickly than expected just three months ago. Still work to do, but we are encouraged as we move into the fourth quarter and 2026. Importantly, our year-over-year incremental margin in the third quarter was approximately 30%, a good indication that we continue the path towards full-year adjusted operating margin target of 25% in 2029. And finally, on this page, we generated $462 million of adjusted free cash flow. That's up 38% from last year, and that translates into approximately 95% free cash flow conversion. And that is consistent with our long-term expectations. Net leverage was 0.5 times at quarter end and we expect to exit the year at 0.2x providing significant flexibility with future capital deployment. Moving to Slide seven. This page illustrates our segment results. And as mentioned, Americas delivered strong organic top-line growth of 43% driven by accelerated AI demand across product lines and customer segments. And margin expanded 400 basis points despite the tariff headwinds, as we continue to drive operating leverage productivity and positive price cost. Moving to the right. Operating leverage was critical for margin expansion in APAC, which saw 21% organic growth as AI infrastructure continues to drive current and future expected growth across that region. In EMEA, organic sales were down 4% due to continued industry challenges. However, sales were higher than expectations heading into the quarter, reason for optimism as we expect EMEA to reaccelerate in the back half of 2026. Driven by the latent, although inevitable, AI infrastructure demand there. Third quarter adjusted operating margin was significantly below prior year and we think at a low point. Driven by deleverage on lower sales and higher fixed cost as we continue to invest in regional capacity to ensure readiness for the anticipated market recovery. As Gio mentioned, we are implementing a restructuring program primarily in EMEA, but also impacting other regions. And this global program, which commenced in the third quarter cost approximately $30 million and we expect an annualized benefit of approximately $20 million commencing in 2026. Now let's move to guidance, where we will address the midpoint of our guidance ranges for both 4Q and full year in slides. Eight and nine. Turning to Slide eight. Our fourth quarter guidance. We expect adjusted diluted EPS of $1.26 up approximately 27% from prior year and primarily driven by higher adjusted operating profit. We project net sales at $2.85 billion with organic growth of approximately 20%. Looking at regional growth rates, we expect momentum to continue in The Americas up high 30s. With APAC up mid-single digits and EMEA down high single digits but up mid-teens sequentially from the third quarter. Adjusted operating profit is expected to be $639 million up approximately 27% year over year with adjusted operating margin of 22.4%, ten basis points higher than the third quarter despite higher sales, due to headwinds from new tariffs announced since our last earnings release. Including those implemented under Section 232, and also a sequential quarterly increase in growth investment as we ready for future strong customer demand. Next, turning to Slide nine, our full-year guidance. We are raising our projection for adjusted diluted EPS to 4.1044% higher than 2024. This improvement is primarily driven by higher adjusted operating profit with benefit from lower interest expense and a lower effective tax rate. Are raising our expectations for net sales to $10.2 billion translating into 27% organic growth for the full year we expect adjusted operating profit of $2.602 billion up 33% from last year and full-year adjusted operating margin of 20.2% approximately 80 basis points higher than 2024, demonstrating strong expansion despite the negative impact from tariffs. We are raising our adjusted free cash flow guidance to $1.5 billion with free cash flow conversion at approximately 95%. And before turning it back to Gio, I do note that this guidance assumes tariff rates active on October 20 are maintained for the remainder of the year. So now with that said, back to you. Giordano Albertazzi: Well, thank you very much, Dave. And we go to Slide 10 to share some thoughts on 2026. So the data center market continues to show remarkable strength. Driven by accelerating AI adoption. Globally. Our order pipeline and market indicators give us confidence. In this trajectory. Though EMEA remains softer, and we expect it to rebound in 2026. Based on our substantial backlog and clear visibility of pipeline, when anticipate continued significant organic sales growth in 2026. To anticipate and stay ahead of our customers' evolving needs and timelines we expect to accelerate our investments in supply chain and services capabilities and capacity. Tariffs remain dynamic but we have a clear action plan and strong execution. Our mitigation strategies are progressing well. And under current conditions, we expect to materially offset their impact as we exit Q1. On profitability, multiple drivers support continued margin expansion. Strong operating leverage, certainly at these growth levels, ongoing productivity initiatives and effective price cost management. We remain fully committed to our November 2024 Investor Day margin targets. Our robust free cash flow provides significant strategic flexibility. And let me elaborate on this a little bit more on page 11. So let's go to slide 11. And we are accelerating our investments for growth. Along three dimensions: Capacity, we're investing globally, with a significant focus on Americas across multiple technologies. Some examples. Our infrastructure solutions capabilities are growing. With prefabricated solutions for both gray and white space and entire data center. Vertiv Infrastructure Solutions enable faster deployment, shorter time to revenue and alleviate skilled labor constraints on-site. Smart Run, our innovative prefabricated white space system shared with you in July exemplifies this acceleration capability. The Great Lakes acquisition strengthens our IT systems offering and deepens our white space presence. We are scaling these capabilities as we have done with previous acquisitions. A playbook that we know quite well. In general, our capacity expansion strategy keeps us six months, twelve months ahead of demand curves. Maintaining technology leadership while driving operational efficiency. The other axis of course is technology, And our engineering and R&D spending will grow 20% plus in 2026 with flexibility to accelerate further. Through aggressive R&D investment, we're committed to stay in multiple GPU generations ahead. We are accelerating our funding for the system layer, connecting all critical infrastructure elements and this is a crucial advantage as data centers are becoming increasingly complex. When it comes to M&A, our strong balance sheet enables us both opportunistic bolt-ons and the largest strategic acquisitions. All according and in line with our value creation framework. We maintain a vibrant pipeline across technologies, regions and deal sizes. As the industry accelerates we need to stay ahead whether through smaller technology acquisitions or larger scale opportunities. This strategy strengthens our complete system solution offering. Expands our TAM and enhances our global reach. So we will continue investing to expand our technology leadership and deepen our capabilities to serve customers in ways no one else can. So let's now go to Slide 12. I'll last slide. And we're we're certainly pleased with our performance this quarter. Confidence with what we see leads us to raise our full-year guidance. Our 2025 execution demonstrates the strength of our strategy. And it positions us well for 2026. Our strategic acquisitions and increased investment in CapEx and engineering R&D reflect a sense of urgency. In capturing opportunities ahead. While the global landscape presents complexities, from tariffs to geopolitical shifts, our approach remains unwavering. Develop robust mitigating strategies assign clear accountability, and execute with precision. We are pleased with our progress but there is more work to do And as you know, we're never satisfied. Looking ahead, our 800 volt DC portfolio planned for release in the 2026, aligns directly with NVIDIA's 2027 rollout of their Rubin Ultra platforms. Are collaborating closely with NVIDIA to advance these platform designs. This is about staying ahead of where the industry is going not just where it is today. What sets Vertiv apart is our system level expertise across AC and DC power combined with our thermal management and service capabilities. Delivering solutions that address the complete power and cooling infrastructure. Our team understands that leadership means constantly raising the bar for tomorrow. And that's exactly what we'll continue to do. So with that, I'll turn it over to Breeka for our question. Operator: Thank you, Gio. We will now begin the question and answer session. In the interest of time, please limit yourself. Your first question comes from Amit Daryanani with Evercore. Your line is open. Amit Daryanani: Morning, everyone. Thanks for taking my question. Impressive set of results here despite the stock reaction today. Do have hoping you could just maybe help us understand the order of that you're seeing that you're talking about today up 60%. What is driving this And really the part I would love to understand is, when you see Oracle reported $300 billion plus RPO number or OpenAI announced a 10 gigawatt deal with NVIDIA, what's the cadence for these big announcements to flow into orders and revenues for Vertiv? I suspect none of these multiple recent announcements have really made it to orders for the ecosystem yet. But love to understand just a little bit on what's driving this order growth in September and the timeframe for when these big headlines we're seeing start to become orders for the company? Thank you. Giordano Albertazzi: So good morning, first of all, Amit. Thank you for your question. So certainly the drivers are a combination of things. Very good market. Certainly, technology evolution in the market that goes into in our direction. Certainly, an industry that trusts the scale that Vertiv is displaying. And, you know, what we have multiple times being vocal about our competitive advantages, our service, our technology, etcetera. So all things that certainly drive that demand combined with a reliable execution. On the Oracle side, as an example, I don't want to go too specific, but in general, we see some of the players, many of the players, the large players in this space that talk about backlog expansion that really has to do with their service agreements. So I don't want to go into details of what these customers and how they look and measure their backlog. But typically those are different types of backlog, different types of agreements. And on the back of this, in the back of these plans and facts and commercial situations, we have an that is being built. And that build-out is rapid, but gradual nonetheless. So the dynamics of the orders to Vertiv or to the likes of us relative to the dynamics of the order intake and the backlog of our customers can be very But there are two sides of the same very positive coin, if you will. But they beat to a slightly different drum, you see what I mean. Amit Daryanani: Great. Thank you. Operator: We now have the next question from Scott Reed Davis with Melius Research. Line is open. Scott Reed Davis: Hey, good morning, guys. And congrats on having a great year so far. Giordano Albertazzi: Thank you. Scott Reed Davis: Gio, since you emphasized it on Slide five, kind of the services opportunity here, could you give us a little bit more color on perhaps the margin structure of services versus equipment, the growth rate? Is it outgrowing equipment? Or since we're in such a hyper-growth period for equipment, perhaps it's not, but it comes in later. Just a little bit more color about how that service opportunity kind of flows through the P&L over the next few years. Thanks. Giordano Albertazzi: Yes. Thanks for the question, Scott. So clearly, we love our service business a lot. We believe it's a unique competitive advantage, uniquely strong competitive advantage. Certainly accretive. Now if you go to Page five, you see there are various components to our services portfolio. Of course, different slightly different dynamics in the various components. But certainly, overall, accretive to our business and certainly generating a lot of recurring revenue in everything that is linked to everything lifecycle services optimization. It's a very robust business. But in times where the product system side of the business is growing at this pace typically and it's very normal that the service business lags. But again, it's a very strong flywheel. That is catching up speed. So it is it's almost you know, bound to happen. It's going to happen. We see it accelerating. We like the direction in which it is going. And quite frankly, I'm really let's say excited about the technology that we're bringing about. So it's really the combination of technology and capacity and presence and customer experience. So expand that to continue to accelerate that flywheel continue to accelerate. I think an important element is that the type of equipment that is being deployed, the density of technology that is being deployed nowadays is new and newer data centers certainly conducive to more business service penetration. Scott Reed Davis: Helpful. Thank you. Operator: Your next question comes from Charles Stephen Tusa with JPMorgan. You may proceed. Charles Stephen Tusa: Hey, good morning. Giordano Albertazzi: Good morning, Steve. David J. Fallon: Just you guys had said, I think in the release maybe in the presentation that you're on track for, I think it was the margins that are embedded in kind of the long-term outlook. I would assume that that means that's more of a that's kind of more of an absolute margin comment. So if revenues are looking better that we should assume that those margins are good, but that would obviously imply a bit lower decremental margin. I guess I'm just curious as to kind of the outlook for sorry, incremental margin. The outlook for incrementals and once you get through these tariffs, can we kind of get back on the horse of 35%? Or are we now in a at a point where with the types of projects you're doing and all the modular work and things like that that maybe a little bit less than more revenue, same margins, which is still very good, but not quite the incremental. Giordano Albertazzi: Same incremental. David J. Fallon: Yeah. Yeah. No. Understand your question, Steve. This is David. I would say our path to the 25% long-term margin target in 2029 stays intact. I think we certainly had some noise this year specifically as it relates to tariffs, not only with the tariffs themselves, but also some of the supply chain countermeasures to address those. Our long-term model assumes incrementals in that 30% to 35% range. I think low 30s gets us to that twenty-five percent and twenty-nine If we're at the upper end of that range, we could do it sooner. But I would say everything that we see certainly based on Q3 and what we see shaping up for Q4 certainly keeps us on that path. The one variable, and we were very clear with this, in both Investor Days, is going to be the timing of growth investments. And their investments. So you invest upfront, you get the return over time. But even with that, we would believe going into any given year, our expectation is to be in that 30% to 35% range. Maybe the one dynamic for next year is we certainly wouldn't anticipate a headwind from tariffs. They continue to remain volatile and uncertain, but that was probably the most significant headwind that got us below that $30.35 dollars percent range in 2025. Operator: Thank you. We now have Christopher M. Snyder with Morgan Stanley on the line. Christopher M. Snyder: Thank you. I wanted to follow-up on the prior margin commentary. The one thing that really stood out to me Q2 to Q3 was the sequential margins. Operating profit up more than revenue sequentially. So I know margins are swinging around a lot with tariffs and how that's being phased in. But I guess kind of the question is if we step back, do you think the price conversations or negotiations versus the customers have changed versus a year ago? Specifically, do you think they've gotten any harder? Or is this kind of still the same environment where they're paying for speed of supply and innovation of the technology? Thank you. Giordano Albertazzi: Thank you for the question, Chris. So I'd say that first and foremost, we continue to be focused on and deliver on a on a price cost positive type of performance. When it comes to the conversation with a customer, I think we have to be all very, very, very careful. In the sense that I don't think we should think about as price conversations ever being easy. I mean, we have very professional knowledgeable, savvy customers And they correctly behave as such. So the price that one can achieve is really in the back of the value that is being delivered to our customers. And very commercially savvy, technically savvy customers I don't see a dramatic change in that respect. What is absolutely critical is really innovation, but the innovation not in and of itself, but innovation that enables additional value creation for them, for our customers, It is a service level It is a quality you bring to the party. We think we're doing a very good job in that respect across all axes. But our customers more or less price sensitive. They're very business sensitive. They've always been very business sensitive. So it's up to us to deliver. Value to them that enables price to be achieved for us. Christopher M. Snyder: Thank you. I appreciate that. Operator: Thank you. Thank you. Your next question comes from Jeffrey Todd Sprague with Vertical Research. You may proceed. Jeffrey Todd Sprague: Have two questions on my mind. I guess I'll ask one, actually. Just curious on Europe, actually. Your apparent confidence that it does, in fact, get better 2026 sounds like a long way away. Mean, watching France, think, is on on their fourth government here in twelve months. So just your confidence that they get their act together, do you actually see a product pipeline, coming together there? And maybe just address a little bit, I guess, the restructuring you're doing prepare for that eventual growth that you're expecting? Giordano Albertazzi: Sure. Well, Jeff, thanks a lot. So I probably have been more sanguine about the Europe reacceleration in the past that have been now. So saying it is going to be a year from now, I mean, year from now when we sit around the same table and phone summarizing our twenty-six Q3 twenty twenty-six performance, that means that we are building some wiggle room therefore thanks to to really come back. And I truly believe that they will come back because the market is in a bad need for capacity AI capacity. And there are very stringent data sovereignty reasons why that capacity for inference needs to be in country, in region, in the EU or in The UK etcetera. So vacancy rates are extremely, extremely low. And, oh, by the way, new technology data center design need to be built. Pipelines, are encouraging in terms of the total size of the pipeline. But what I see different is there is a certain vibrancy in the conversation with customers that was not there to the same extent. So one of the things I've said in the past to say, hey, the people, our customers have many open fronts and the American front is so demanding that it's absorbing them a lot. While that continues to be the case, I think that they are making headroom, if you will, or let's say, the dedicated few more brain cycles to the rest of the world and Europe is certainly one of those. We are positive also about The Middle East landscape from a margin standpoint. We will not go into the details of the restructuring. For obvious reasons. But rest assured that it means making sure that as the market accelerates in the direction of AI infrastructure build out, want to have an organization that from a delivery and execution and also go to market standpoint is exactly tailored to that. So I want to make sure that we do not miss any opportunity and certainly are agile in our full year reacceleration. So but I will not go too much into these. Jeffrey Todd Sprague: Bye. Thank you. Operator: Thank you. We now have Andrew Burris Obin with Bank of America. Your line is open. Andrew Burris Obin: Hi, guys. Good morning. Giordano Albertazzi: Hey, Ender. Andrew Burris Obin: Yeah. Just a question on services, the team services, part of your moat, being the industry leader. As you're getting the strong equipment orders, could you just comment on your investment in services and specifically any KPIs you can give us on headcount, you know, how are you scaling up your support function to keep up with the top line? Thank you. Giordano Albertazzi: Yes. Well, certainly, those big orders and A orders in general infrastructure requires a service for in sometimes installation, not always. Certainly, all the time, very often project management and commissioning and start So very, very important. I agree with you. That is moat or as we like to call it, superpower. When it comes to the headcount, we were talking about 4,000 engineers globally I think we were on 4,400. So there we go. We are certainly accelerating and continue to invest. The way we approach that is really when we do our SIOP for product demand, on the back of that, there is SIOP for services. And SIOP for services has also a geographic dimension by which we have to understand where our backlog will land and where we will need to increase capacity. So it's of course a much more disposed than a manufacturing capacity for obvious reasons, but they are all dimensions that we'll that we are taking into consideration. So if you think about that call it about $4,400 4,500 field engineers expect that to continue to expand. By the way, just like just like we talked about productivity in the manufacturing environment, there is productivity in the service environment. So we really look at services. From a from a way we run it. In terms of a distributed supply chain, distributed factory. So we are very rigorous in terms of how we measure the performance in terms of the service level, in terms of time it takes to be on-site relative to our contractual commitments, etcetera. Very, very, very experienced, mature and paranoid about our service level in the field. Andrew Burris Obin: Thank you. Operator: Thank you. We now have Andrew Alec Kaplowitz with Citigroup. Andrew Alec Kaplowitz: Good morning, everyone. Giordano Albertazzi: Hi, Andy. Hi, Andy. Andrew Alec Kaplowitz: Gio, can you give us a little more color into your capacity investments that you talked about that you're making, particularly North America? You mentioned you're increasing R&D by 20% plus but how do we think about CapEx growth in 2026? And we have enough capacity to keep up with your current backlog growth of 30%. With the assumption that your revenue growth may not slow much, if at all, think, high twenties this year? Giordano Albertazzi: So we will not be explicit when it comes to CapEx in 2026, Andy. But clearly, as usual, there are two things at play. One is more footprint and CapEx. The other is productivity and vertical operating system. So that's not get the second part because to us it's very, very, very common. But you're right. I mean, clearly with the backlog, it's expanding with the comments that I made, very encouraging comments on the pipelines. We clearly are expanding our capacity. And that's particularly true in North America. The expansion as we have said in other occasions is predominantly expansion of existing sites That's something that we like a lot in terms of the speed that it enables from the decision to having that capacity available and the ability to scale very experienced teams that are already running running Vertiv Vertiv plan. So that will continue. That is our philosophy. I don't rule out of course, brand new locations. But in general, what we do and what we do well is grow the footprint six to twelve months ahead of when the footprint is needed. Now I think we do a very, very good job. Never perfect, It's never perfect. There's always multiple product lines, multiple regions, but we're pretty satisfied with direction of travel. And we believe it will it will well sustain our future trajectory. That That's that's really don't know. If I'm ready because, Eddie, that I can that I can have that. Andrew Alec Kaplowitz: Helpful. Thank you. Operator: We now have Nigel Edward Coe with Wolfe Research on the line. Nigel Edward Coe: Thanks. Good morning, everyone. To go back to margins. Obviously, very impressive outcome in 3Q. Maybe, David, give us an update on sort of where we are on plank reconfiguration. I think was meant to be completed by the end of the year. And just on the 4Q margins specifically, you did take it down by maybe a point versus the original what was embedded in the 4Q plan. Just wondering if that's tariff inflation, some of these secondary tariffs or whether there's an EMEA mix there. And I know I'm rambling a bit here. I just clarify the points about 2026 Because tariff mitigation, maybe yeah. Yeah. So so Do we think '26 can be above above stage of phase out? Sorry. Do we think '26 can be above the bar in terms of that incremental margin guiding Got it. David J. Fallon: Yes. Would say you weren't rambling until the last five to ten seconds. But, no. I think all your questions are are are very much very much linked together. But, looking at Q4 margins, we did take those down versus prior guidance about 100 basis points as you mentioned. I would say half of that on the contribution margin side. And certainly, driven by the incremental tariffs that we saw post earnings last time. In addition, and we're very proud of our operating leverage but we're not afraid to invest in fixed costs. And are planning to accelerate fixed cost investment into Q4. That were previously planned in the first half of next year. So if you put those two together, it's probably half related to contribution margin, with tariffs and the other half related to operating leverage. And if you look at margins sequentially, relatively flat Q3 to Q4. Once again, we see benefit as it relates to addressing the operational challenges, but we do have the additional tariff headwinds. Your question related to incrementals for 2026, probably premature to provide any specific numbers. But once again, we'll reiterate, we expect to be in that 30% to 35% range in any given year over the next three to five years that the 25% target is pertinent. We're still evaluating the impact of tariffs, but we do anticipate to materially offset the tariffs that we have line of sight to today. With countermeasures we're enacting with both pricing and also transitioning the supply chain. We expect to be materially offset exiting Q1. Which would imply certainly tariffs not being a headwind year over year. And despite uncertainty, we would expect that actually to be somewhat of a tail tailwind. So again, too soon to give any specific numbers as it relates to incrementals. But if you backtrack a year, there's nothing in particular that we're looking at, at 2026 that would be different than any other year as it pertains to incrementals. Nigel Edward Coe: Great. Thanks, David. Yep. Operator: We now have a question from Nicole Sheree DeBlase with Deutsche Bank. Your line is open. Nicole Sheree DeBlase: Yeah. Yeah. Thanks. Good morning, guys. David J. Fallon: Good morning. Operator: So I just wanted to ask on EMEA margins. I think David, the opening remarks, you kind of shared confidence that 3Q was kind of below watermark for EMEA margins. So what is the path back to mid-20s? Can we get there without volume growth driven by what you're doing on restructuring? Or do we really need volumes to come back to kind of get back to where margins were within EMEA? Thanks. David J. Fallon: I would say a combination of both. And we we we did mention that we do anticipate number one, a sales acceleration in EMEA in I think I mentioned in my comments up mid-teens That certainly facilitates improved operating leverage versus Q3. And I would say overall that we do anticipate margins in Q4 in EMEA to be significantly higher than what we we saw in Q3. Including addressing operational inefficiencies. So when we talk about the operational inefficiencies as we put in place to address some of the tariffs. We have a global supply chain and a lot of those actions have been put in place to address those inefficiencies. In EMEA. And we would start to certainly see some definitive impact in Q4. Nicole Sheree DeBlase: Thank you. David J. Fallon: Thank you. Operator: We now have a question from Mark Trevor Delaney with Goldman Sachs. You may proceed. Mark Trevor Delaney: Yes. Thank you very much for taking my question. I was hoping to circle back to the order and pipeline topic. Do you, I think, you said in your remarks that the backlog phasing is within typical levels for Vertiv at this point. And I think that implies backlog that is project related would typically be for shipments that are up to twelve to eighteen months forward. And so when I take that comment on the phasing of your backlog, it would seem to imply that most of these bigger data center that have come out in recent months and are often for projects that are over the next many years have not yet been fully booked by Vertiv. So one, is that right? And two, is that what's underpinning some of your comments about the pipeline being healthy? Giordano Albertazzi: Let me elaborate a little bit on this, Mark. Thank you for the question. So when we talk about the phasing of the backlog is if you take a snapshot now of the $9.5 billion backlog, and you look at what is in the twelve months, eighteen months, twenty-four months, whatever, And you look at the same picture, for the backlog a year ago, you will see pretty much a similar shape, clearly bigger 30% bigger, but similar shape. That means that our backlog has not grown by virtue of, let's say, elongation or overstretching. So that's good. For us. We believe that, that is good because that represents the way the industry works. Now clearly, have seen a lot of very strong, very credible announcement and projects. And one would expect Vertiv to be involved in many of those. And that would probably be a very reasonable expectation. Let's put it this way. But those projects are then deployed in phases. And if we go back to our pretty maniacal let's say sticking to sticking to the rule of only a PO is a legally binding PO constitute backlog, then you'll see that that backlog pretty much mimics the way and the speed at which deployments occur. So I in that respect, there's certainly a lot of the more that will be done to fulfill those announcements in our pipeline. And as those projects mature, as those projects projects mature in terms they are ready for deployment maybe the next two fifty megawatts in a one gigawatt deployment, that's the time when orders start to flow in the likes of us and hopefully for us. Hopefully, addresses your question, Marc. Mark Trevor Delaney: Thank you. Operator: We now have Michael Elias with TD Securities. Go ahead when you're ready. Michael Elias: Great. Thanks for taking the question. So, Geo, on the ground, I'm seeing a massive acceleration in data center demand. Think in the third quarter, run rate data center demand is up close to 4x. So it's great to see you guys investing in production capacity. My question for you is that as you think about adding production capacity, could you help us understand from when you make the decision to expand capacity? How long does it take to have the first unit come off the lot in that new production capacity? And as part of that, what's the earliest that you could book into that new production capacity? I only ask if I think you're going to need the equipment in a hurry. Giordano Albertazzi: Well, Mike, first of thank you for for the question. We like the reinforcement about the market trajectory. We wholeheartedly agree on a very, very strong market, too. To the point of capacity. I wouldn't say I would that there is one answer. To that. A lot of our capacity expansion is used more use that 25%, 30% of capacity that we have latent in the way we build things. If you think about our capacity build out, do not please think of it inaccurate as one discrete step happening sometimes. That's been going on for forever. We continue to expand. What we are saying expand the expansion rate will accelerate, but expansion has always been going on. It depends again the time to first unit, let's say, the time to revenue for new capacity. Is it can vary from a few months for line reconfiguration, like, three, four, five months. Two, maybe twelve months for for larger expansion that require building from scratch. Again, one thing that we like a lot and that's why we like a lot is that if we just expand existing facilities that is really the just a technical time to have the new equipment available. But, you know, we have the systems, the people, the leadership, all ready to go and and really expanding their their their volume of business, a lot of scale and a lot of speed. So think about something that can go from a few months to maybe nine to fifteen months window. So we of course build on on our backlog, but also on on the visibility that we have in a pipeline. Hopefully addressing your question Mike. Michael Elias: Yes, it does. Thank you. Really appreciate it. Giordano Albertazzi: Thanks. Operator: We now have Amit Singh Mehrotra with UBS on the line. Amit Singh Mehrotra: Thanks, operator. Hi, everybody. Gio, I wanted to maybe ask you to address, you know, the competitive environment across all your products and only reason I asked that, seems like every three or four months, there's some announcement or some innovation that gets everybody to question the entire thesis around Vertiv's position in the market. You know, there was obviously AWS in in row heat exchangers a few months ago. Recently, Microsoft Microfluidics and people are talking about 800 volt DC eliminating the need for PSUs. May maybe address all of those, if you don't mind. Obviously, not AWS, microfluidics and the 800 volt DC dynamic and and and kind of how your content is evolving against that $3,000,000 per megawatt, and and maybe what your message is to to folks when they on the receiving end of these innovations every three or four months that causes them to question the entire thesis? Giordano Albertazzi: Oh, well, we will use the next two hours Amit, for this. This is a great question. But I'll try to be super concise here. We love the innovation intensity in the industry. We love it because we are at the center of it. If anything, we drive it. And that's exactly we go back to one of the questions we had. How do you make sure that the the price equation, I think it was Chris, the the price equation stays favorable. That's exactly what innovation does. And being ahead in the innovation curve enables us to continue down that path. So very important that's why we relentlessly invest more and more in innovation. That's why we nurture our relationships so intensely as you know we do. When it comes to specific examples, take microfluidics take 800 volt DC, different stories. For example, take microfluidics and you say, oh, if anything, this is exactly direct to chip direct to chip liquid cooling just done with other means than a cold plate. It preserve everything, thermal chain. Vertiv is a thermal chain absolutely intact if anything. Would have probably smaller microchannels and more pressure drop and more cleanliness needs in the system. So let's not be afraid of innovation. Innovation is absolutely our friend. Our friend certainly is the 800 volt DC, leveraging our decades-long DC power and AC power experience and DC power specifically. So being at the forefront as our page 12, I think it was explains at the forefront of it is a competitive advantage. When we think about our TAM per megawatt, start to see really a range that goes from three to 3.5 megawatts sorry, million per megawatt. So So if you will narrowing a little bit on the upper end of the spectrum that we have given you in the past. And that's a good thing. Again, it's because of that technology. Clearly, the industry is becoming more interesting. To many players, but also we think better we see a better delineation of the competitive landscape. If we compare, for example, everything thermal and liquid cooling now compared to what it was a year and a year and a half ago, So that is in the direction of more consolidated, more rational players not bad. And again, we continue hold true to our competitive advantages and reinforcing them, service, innovation, ability to scale, all the things that you heard from us. So absolutely intact. If anything, we love this environment. This innovation intense environment. Amit Singh Mehrotra: Okay. Thank you very much, Gio. Appreciate it. Giordano Albertazzi: Thank you. Operator: Thank you. This concludes our question and answer session. I would like to turn it back over to Gio Albertazzi for any closing remarks. Giordano Albertazzi: Enrique, thanks a lot. And thanks, everyone, for your for your questions. And time today. But before I wrap up, I want to take a moment to express my sincere gratitude to David J. Fallon our CFO, who will be retiring So whoever has been kind of 12 earning calls together. Probably 12 plus one. I was kind of a semi in the row. So big thank you. David has been instrumental in our success, bringing great financial leadership and strategic insight during a period of significant wealth transformation and acceleration and growth. So David, thank you wholeheartedly for your partnership and for your dedication. Absolutely excited to welcome Craig Chamberlain as our incoming CFO. Craig brings strong experience and capabilities that will help drive Vertiv's next phase of growth. I couldn't be more excited about our future. We continue to demonstrate our ability to execute and adapt in every in an ever-evolving market. While our progress has been strong, we stay focused on doing more. Opportunities ahead are extraordinary. With our technology leadership, global scale and deep customer partnership, Vertiv is uniquely positioned for the future. A big thank you to team Vertiv constantly focused on delivering value for our customers and investors. And with that, thank you, and have a great rest of your day. Operator: The conference has now concluded. Thank you for attending today's presentation. May now disconnect.
Operator: Good day, everyone. Welcome to Western Alliance Bancorporation's Third Quarter 2025 Earnings Call. To one question and one follow-up only. You may also view the presentation today via webcast through the company's website at www.westernalliancebancorporation.com. I would now like to turn the call over to Miles Pondelik, Director of Investor Relations and Corporate Development. Please go ahead. Miles Pondelik: Thank you. Welcome to Western Alliance Bancorporation's third quarter 2025 conference call. Our speakers today are Kenneth A. Vecchione, President and Chief Executive Officer, and Dale M. Gibbons, Chief Financial Officer. Before I hand the call over to Ken, please note that today's presentation contains forward-looking statements, which are subject to risks, uncertainties, and assumptions. Except as required by law, the company does not undertake any obligation to update any forward-looking statements. For a more complete discussion of the risks and uncertainties that could cause actual results to differ materially from any forward-looking statements, please refer to the company's SEC filings, including the Form 8-Ks filed yesterday, which are available on the company's website. Now for opening remarks, I'd like to turn the call over to Ken Vecchione. Kenneth A. Vecchione: Thanks, Miles. Good afternoon, everyone. I'll make some brief comments about our third quarter performance before handing the call over to Dale to discuss our financial results and drivers in more detail. I'll then close our prepared remarks by reviewing our updated outlook for the remainder of 2025. As usual, our Chief Banking Officer for Regional Banking, Timothy R. Bruckner, will then join us for Q&A. Also sitting in today is Vishal Adani, who recently joined the team as he and Dale begin their CFO transition. Western Alliance continued our solid business momentum in the third quarter that generated record net revenue and pre-provision net revenue of $938 million and $394 million, respectively. Healthy and broad-based balance sheet growth, with $6.1 billion in deposits along with stable net interest margin supported a 30% linked quarter annualized expansion in net interest income. Firming mortgage banking revenue from lower rates bolstered a $40 million increase in noninterest income. This contributed to a high operating leverage as our efficiency improved almost 3% in the quarter to 57.4%. The adjusted efficiency ratio excluding ECR deposit costs dropped below 50%. In total, Western Alliance generated EPS of $2.28 and improved profitability with return on average assets of 1.13% and return on average tangible common equity of 15.6%. 11.3% as we moved our loan loss reserve to 78 basis points from 71 basis points in the previous quarter. Asset quality performed in line with guidance as total criticized assets declined 17% with reductions in three of the four major subcategories and net charge-offs of 22 basis points. In light of the recent news regarding two credit relationships, let me address those head-on because I and the entire Western Alliance management team take these and any potential credit migrations extremely seriously. You have heard me say previously, early identification and elevation are the hallmarks of our credit migration strategy to protect collateral and minimize potential losses. And that's what's paying dividends now. For the $98.5 million note finance loan to Cantor Group V, which was the subject of our October 16 8-Ks, we believe our circumstances are different than other organizations and that our loan to this specific investment vehicle is secured by loans with a perfected interest in the CRE properties. We have confirmed our lien position through lien searches and title company verification. However, we have determined that in some cases we are junior to other lenders in violation of the credit agreement, hence our allegation of fraud. Although the most recent appraisals indicate sufficient collateral coverage, our reserve methodology for a $98 million non-accrual loan resulted in a reserve of $30 million. This reserve and our portfolio's qualitative overlays raised total loan ACL to funded loans ratio to 85 basis points. We believe the collateral coverage, limited and unlimited springing guarantees, as well as up to $25 million of insurance coverage for mortgage fraud losses will cover losses from this credit if any. Excluding this fraud, non-accrual loans would have remained flat. Once learning of the fraud, we initiated a title review of our $2 billion note finance portfolio. To date, we have reverified titles and liens for all notes greater than $10 million and have found no irregularities and are in the process of confirming titles for more granular notes. No additional derogatory filings or lien discrepancies have been discovered today. While incredibly frustrating, we believe this is a one-off issue in our note finance business and have adjusted our onboarding and ongoing portfolio monitoring practices. Regarding our ABL facility to Leucadia Asset Management subsidiary Pointe Benita Fund One as of October 20, the current balance stands at $168 million with a loan to value of below 20%. This facility is backed by $189 million in accounts receivable from investment-grade retailers led by Walmart, AutoZone, O'Reilly Auto Parts, NAPA, and other investment-grade borrowers. None of these companies have disavowed their obligation. The loan remains current and we continue to receive principal and interest payments as modeled. Jefferies has publicly stated they feel confident in PointBenita's near-term ability to pay off all debt due to the diverse set of assets apart from the First Brands related receivables. Jefferies remains confident and so do we. Overall, this is part of a small ABL portfolio of approximately $500 million and we do not see any other similar risks for this well-secured structured facility. As further support, we have investment-grade obligors that cover our loan balance greater than four times. As a reference point, it's important to remember we have operated in private credit business for over fifteen years. We view our underwriting expertise, ability to evaluate structured credit, and sophisticated approach to minimizing uncovered risks through strong collateral with low advance rates as core competencies of the bank that prevent and mitigate losses. Over the past five and ten years, our net annual charge-offs averaged just ten and eight basis points, respectively. Placing us among the top five U.S. Banks with assets greater than $50 billion. Our deep sector expertise in these areas will continue to separate Western Alliance from our peers and enable us to deliver superior commercial banking services to our clients. And now Dale will take you through the results in more detail. Dale M. Gibbons: Thank you, Ken. I'd first like to start just clarify one comment that Ken made. The facility from Leucadia Asset Management the collateral behind our loan amount is $890 million. That's how you get to this, this 19% advance rate. On the total. Looking closer at the income statement, net interest income of $750 million grew $53 million or 8% quarter over quarter as a result of solid organic loan growth and higher average earning asset balances. Non-interest income rose nearly 27% from Q2 to $188 million led by firming mortgage banking results as AmeriHome grew revenue $17 million quarter over quarter. Overall, lower mortgage spreads and rate volatility are beginning to improve home affordability and demand for adjustable-rate mortgages in particular. Loan production volume increased 13% year over year and the gain on sale margin improved seven basis points to twenty-seven. Non-interest expenses increased $30 million from the prior quarter to $5.44 mostly from the normal seasonally elevated balances and average ECR related deposits in advance of tax and insurance payments made in the fourth quarter. Overall, we delivered solid operating leverage this quarter with net revenue growing nearly 11% which outpaced sub-six percent growth in non-interest expense. Similarly, net interest income inclusive of deposit costs rose 5% or $25 million over the prior quarter driving adjusted efficiency ratio below 50%. Record pre-provision net revenue of $394 million grew 19% over the prior quarter. Overall, total provision expense of $80 million primarily rose from Q2 levels as a result of $30 million reserve and augmented portfolio qualitative overlays to reflect portfolio composition mix change towards C and I providing greater absorption for tail risks. Turning to our net interest drivers, interest-bearing deposit costs were stable. However, overall liability funding costs compressed eight basis points from the prior quarter and benefited from lower rates on borrowings and growth in ECR paying DDA accounts. The held for investment loan yield was relatively stable, ticking up one basis point despite resumption of FOMC rate cuts toward the end of the quarter. The securities yield declined nine basis points from Q2 to 04/1972 its average holdings of lower-yielding securities increased $2.1 billion quarter over quarter. As discussed earlier, net interest income rose $53 million from Q2 to $750 million driven by healthy loan growth as higher average earning assets increased $4.8 billion. Net interest margin was stable from Q2 at three point five three. As the impact of a slightly higher loan yield and lower debt costs offset lower securities yields and stable net interest bearing deposit costs. Non-interest expenses increased $30 million or percent quarter over quarter. Deposit costs of $175 million landed squarely in the middle of our Q3 guidance. Excluding deposit costs, however, non-interest expense was only $2 million higher compared to Q2. Our adjusted efficiency ratio of 48% declined 400 basis points from the prior quarter as we continue to achieve positive operating leverage from revenue growth outpacing non-deposit costs operating expenses. We remain asset sensitive on a net interest income basis but essentially interest rate neutral on an earnings at risk basis in a ramp scenario. This offset is supported by a projected ECR related deposit cost decline and an increase in mortgage banking revenue based upon our rate cut forecast. Our updated forecast is for two twenty-five basis point cuts next week and another one in December. The balance sheet increased $4.2 billion from Q2 to $91 billion in total assets which resulted from sustained healthy held for investment loan and deposit growth $7.00 $7 billion and $6.1 billion respectively. This strong deposit growth allowed us to reduce borrowings by $2.2 billion. On this slide, we also see the allowance for loan loss growth relative to the increase in loans. Over the past year, the allowance rose from 67 to 78 basis points. This explains how our strong year to over year EPS growth of 27% is dwarfed by our industry leading PPNR growth of 38% over the same period. This reflects our robust revenue growth alongside with rising efficiency. Finally, equity increased to $7.7 billion and tangible book value per share climbed 13% year over year. Hold for investment loans grew $7.00 $7 billion quarterly though average loan balances were up $1.3 billion from Q2. Which supported our strong net interest income growth Commercial and Industrial continues to lead loan growth momentum while construction loans fell $460 million as these loans converted to term financing. Regional banking produced $150 million of loan growth with leading contributions from end market commercial banking and homebuilder finance. National business lines provided the remainder of the growth with mortgage warehouse and mortgage servicing rights financing being the primary contributors. Deposits grew $6.1 billion in Q3 with mortgage warehouse clients only contributing $2.8 billion. Solid growth was achieved in non-interest bearing and savings in money market products and mitigated the impact of $635 million in designed higher cost CD runoff. Deposit growth was well diversified across all areas of the bank. Of note, during the quarter, regional banking deposits grew $1.1 billion with over $600 million in end market commercial banking $500 million from innovation banking. Specialty escrow deposits grew $1.8 billion in Q3 with contributions of over $750 million from Juris Banking and approximately $400 million each from our Corporate Trust and business escrow services businesses. This growth positions us to meet our funding for 2025 while incorporating the normal seasonal mortgage warehouse outflows in Q4. As Ken explained, asset quality continues to perform in line with guidance from last quarter. Criticized assets dropped $284 million from $196 million decline in criticized loans. And an $88 million reduction in OREO properties. The decline in criticized loans resulted from special mention loans falling $152 million and classified accruing loans decreasing $139 million. As for our resolution efforts with other real estate owned properties, stabilizing leasing and occupancy rates as well as improved net operating income on these properties reinforce our confidence in the current carrying values. Quarterly net charge-offs were $31 million or 22 basis points of average loans. Provision expense of $80 million was primarily driven by replenishment of charge-offs in the Cantor V reserve. Our allowance for funded loans moved from 46,000,000 higher from the prior quarter to $440 million. The total loan ACL to funded loans ratio rose seven basis points to 85. Relevant to current our current discussions with working with non-depository financial or NDFI clients, it is important to consider that some of the safest asset classes in commercial banking are categorized as NDFI. As mortgage warehouse and capital call and subscription lines of credit, have had virtually no losses across the entire industry. Our overall NDFI loan exposure is disproportionately weighted to mortgage warehouse lines but we have never experienced a loss. Our NDFI loan exposure excluding mortgage credit intermediaries would represent 8% of loan balances, which is aligned with peer averages and below a number of larger banks as seen on Slide 24 in the appendix. On slide 14, will see that Western Alliance's concentration and load loss category skews our ACL lower relative to peers. Reflecting the portfolio's lower embedded loss content. The top chart is our updated adjusted adjusted total loan ACL walk illustrates how credit enhancements such as credit linked notes in structurally low risk segments like fund banking, our low LTV, high FICO residential portfolio and mortgage warehouse elevate our normalized reserve coverage from 85 basis points to 1.4%. The bottom table demonstrates how a applying an industry median loan mix to our portfolio reducing our outside proportion of loans in lower risk categories like mortgage warehouse and residential loans while also increasing our proportion of loans at higher risk loan risk categories like consumer, which shift our allowance above 1%. Our CET1 capital ranks around median for the peer group If you add our less adverse AOCI marks and the loss reserve, our adjusted CET1 ratio capital would be 11.3% The 30 basis point quarterly increase reflects organic growth generating higher stated CET1 supported by improved AOCI marks. The augmented reserve ranks in line with the median for our asset peer group on a one quarter lag basis. We remain confident in our capacity to absorb any losses in concert with steady loan growth review the adjusted capital as the total amount available to absorb losses and support balance sheet expansion. Our CET1 ratio shifted higher to 11.3% from organic earnings accumulation. Our tangible common equity to total assets ratio edged down 10 basis points to 7.1%. Our stable capital levels demonstrate our ability to generate sufficient or capital organically to support balance sheet growth and given stock price volatility, the company is evaluating to issue subordinated debt and using a portion of the proceeds to augment its share repurchase program. We believe will be accretive to EPS. Tangible book value per share increased 2.69 from June 30 to 58.56¢ as a function of organic retained earnings. Of note, since initiating our $300 million share buyback program in September, we completed $25 million in purchases through October 17. Consistent with upward growth in tangible book value per share remains a hallmark of Western Alliance and has exceeded peers by five times over the past decade. Western Alliance has been a consistent leader in creating shareholder value. On Slide 18, we have provided nine metrics we believe are key factors in driving leading financial results strong profitability, sustainable franchise value that ultimately compounds tangible book value and produces long term superior total shareholder returns. For the last ten years, our TSR EPS intangible book value per share accumulation has ranked in the top quartile relative to peers. Based on business metrics, we are the leader in ten year loan deposit and revenue growth while maintaining top tier performance for the net interest margin. Lastly, return on tangible common equity should approach top quartile performance as we generated higher equity returns this quarter and should continue the upward trend in 2026. I'll now hand the call back to Ken. Kenneth A. Vecchione: Thanks, Dale. Our 2025 outlook is as follows: We reiterate our loan growth outlook of $5 billion and raise year-end deposit growth expectations to $8.5 billion. Pipelines remain in good shape, but we remain flexible to changes in the macro environment. Regarding capital, our CET1 is comfortably above 11% and we expect that to hold during the last quarter of the year. Net interest income remains on track for 8% to 10% growth and should lead to a mid-3.5 percent net interest margin for the full year, which has been our expectation. Non-interest income was up sharply in Q3 and positions us to exceed our lofty targets and finish the year up 12% to 16%. Non-interest expense is expected to be up 2.5% to 4% for the year. ECR related deposit costs are projected to land between $140 million and $150 million in Q4, which implies slightly above $600 million for the full year. Operating expenses absent ECR costs now expect to be $1.465 billion to $1.505 billion for the full year. Asset quality should remain should continue to perform as expected with full year net charge-offs in the 20 basis point area. Finally, our fourth quarter effective tax rate is forecasted to be about 20%. At this time, Dale and I and Tim will take your calls. Operator: Thank you. We will now begin the question and answer session. During Q&A, ask questions for your colleagues who request that you please limit yourself to one and Our first question today comes from the line of Christopher Edward McGratty with KBW. Chris, please go ahead. Christopher Edward McGratty: Hello, Greg. Good morning. Kennard Dale, the buybacks post quarter end and the comments about being supportive with the capital arbitrage. Could you just unpack that a little bit? Sure. Sure. So you know, we authorized a $300 million stock buyback We're not changing that number. We executed $25 million against it in advance of this call. And and but to perhaps accelerate some of that usage of that $300 million providing more liquidity at the parent would be helpful and doing a a subordinated debt deal at the bank will take our capital ratios, and you can see that we're about 14% kind of flat. Our capital is really supported Our capital growth has really supported our balance sheet growth, but it would it would enable us to have a little more with that. As you know, though, we also have another goal of 11% CET one, So I can see us come down from where we are at eleven three. That 11 number near there. Yeah. Chris, I'll add just a few other points there. So for the quarter, we purchased 101,000 shares at $83.08. Notably, a 128,000 of those shares were acquired at $77.83. And what that should tell you before the announcement of first brands, and the canter, we were feeling very confident to be buying this stock back in the mid to high eighties, and we even got more confidence to buy it back when the stock dropped. And so, the rest is what Dale said, is we'll we'll put out a subordinated deal and sometime in the future, and we'll look to continue to support the stock, which is what we said when we announced the authorization. Yep. If there was a disruption in the stock, we'd be to support it. Okay. So you chip away to 300 sooner versus you're not raising the 300. Got it. Then a follow-up just on the guidance, we have one quarter left, but the ranges are are fairly wide. Could you just speak to biases within the range for for the various items, would you steer us in any direction for NII fees expenses? Thanks. Well, I mean, maybe go with a couple of things. I mean, so coming out of the out of the second quarter for performance, there were some discussions about our about kind of our fee income levels. And we had a stronger in the other category and noninterest income, you can see it was up significantly. Think that's at least going to continue into the fourth quarter. We're in the process now of distributing one of the largest class action settlements of all time. And that will come in through. On the expense side, based upon kind of where we're headed, we believe that there are incentive accruals may need to be bolstered in the fourth quarter. To get to where we think our where we're going to be on a relative to our bonus targets, which were outlined in the proxy earlier this year. So that'll be a factor there. On the insurance piece, you can see that we had a significant significant decrease in FDIC costs. We've been talking about how we're going to continue to roll back, you know, what we've done in terms of, you know, network deposit like Intrify. We've also been scaling back broker. This is largely the fruits of that but we also had a benefit in the in the third quarter from a rebate from prior, overpaid insurance cost a little bit. That said, I think the fourth quarter we're going to earn through that that add back that we had or the benefit we had. And I think insurance costs are going to be fairly stable. Yeah. I want to take a step back here. You know, based on consensus estimates that you guys all produce, we're gonna grow earnings somewhere between 1719% for 2025. Just wanna make sure people remember, as we entered this year, the earnings trajectory had a very steep back end curve, and we're on track to achieving that curve. So, it's also noteworthy that I think there are very few banks at or above our size growing EPS at this pace. Operator: Thank you. Our next question comes from Andrew Terrell with Stephens. Andrew, please go ahead. Andrew Terrell: Hey, good morning. Had a question just around the seasonal kind of deposit flows. I appreciate $8.5 billion plus of deposit growth guidance for the year. You just talk about expectations of the seasonal component in the fourth quarter or how much that takes out specifically the ECR balances? And then just the strength you're seeing in other verticals that would, I'm assuming, offset some of that? Dale M. Gibbons: Yeah. I mean, really, the ECR pickup, you know, that we saw or that half of the deposits that we gained in the in the third quarter was really related to the mortgage cycle. We've talked about this, and those payments are gonna be made you know, sometime around the November, December. And so that's what's really gonna come off. So it ramped up and then it comes down, but it's here for most of the quarter, you know, in terms of an average balance basis, which, of course, is how we compute earnings credit rates. And then and then, you know, kind of more stabilized after that going into 2026. Andrew Terrell: Got it. And if I could ask on on the mortgage banking piece, I know fourth quarter of last year benefited pretty heavily from, I think, direct securities and loan sales directly to banks. I know that's something you guys invested in. Did you guys experience any of that in the third quarter of this year? Led to some of the margin increase? And is that something we should expect again in the fourth quarter of this year? Kenneth A. Vecchione: So for the third quarter, there was less fall volatility, so vol did not take a bite out of the revenue growth that we are showing here for the quarter. That's number one. Number two, we did take a position that rates were going to come down and we held on to a lot of a lot of our securities bonds, if you will, and did not sell them until later in the quarter. And we caught we caught the rise up in price on that. And that helped us a little bit. I I'm not we are not modeling that in our Q4 expectations again. As I said, I I just think Q4 mortgage revenues, come down a little bit from Q3 just because of the seasonal nature. And also, November and February are the two worst mortgage months of the year. And, you know, starting around Thanksgiving through the end of the year, activity begins to slow somewhat. Yeah. We we had some dispositions as we generally do on mortgage servicing rights, but it wasn't, it wasn't for any any type of a gain here. Operator: Thank you. Next question comes from Jared Shaw with Barclays. Jared, please go ahead. Jared Shaw: Thanks. Hi, everybody. Thanks for the color on credit. I guess looking at more broadly the trends in classified loans, What was driving driving that reduction? Was that credits leaving the bank or was that improving underlying fundamentals? And or was any of that from Cantor and First Brands potentially moving out of classified and into nonperforming? Kenneth A. Vecchione: No. So there's a lot of stuff there. So, let me kinda break it down. Our REO decreased $88 million. That is one property that was sold at a marginal profit to what we brought it in at. And another property that was transitioned out of REO. So that's the 88 million. Special mention declined because several credits got resolved with borrowers putting up incremental margin to make us comfortable, and then we were able to elevate the quality of that loan or the rating of that loan. And same thing I would say in terms of sub accruing substandard loans. Where we just got we just resolved a few credits, and those got upgraded in terms of its rating. In terms of nonaccrual substandard, the Cantor loan is in that category. Okay? So that's the one that went up. Right? So special mention went down by one fifty two. Accruing substandard loans fell by one thirty eight. REO decreased by $88 million, and the increase in non-accrual loans was the 95 was $95 million, which all that was for the Cantor Group five. Had that not happened, we would have been flat there. So that hopefully, unpacks it a little bit for you. Jared Shaw: Yeah. That's great. Thank you. And then I guess just as a follow-up Dale, you mentioned growth in Corporate Trust. Deposits. How is that market share gain? I mean, what's what's going on there? Should we expect to see sort of continued continued momentum and growth on Corporate Trust? Dale M. Gibbons: Yes. It is market share gain. I mean, I'm really proud of kind of how we've executed in this category. We we started two and a half years ago, really. And, really, with the the focus we have on CLOs to start, we're now going to be expanding into municipal. But we have become the the seventh largest CLO trust depository in the world. In just two years. And so I think we're gonna be continuing to move up that those ranks, in that in that in that group. It you know, I can't say it's gonna be exactly what's gonna do for the for the fourth quarter. Because some of these are, you know, these are $50 million deals, let's say, and and and there's some you said some of them are refinanced and things like this until they get they get taken out. But we have, we have strong expectations, for how this is gonna go in 2026. Kenneth A. Vecchione: I'll add one other thing too here, which, we've got a very powerful one two punch here. Which is our corporate finance where some of the private credit lending is done. Works alongside of corporate trust when we go in and see clients. And so we get the corporate trust business as well as a credit mandate. And those two things work really well. And what we are seeing, and this is really we're very excited about this on the corporate trust side, is once we get in there, our service level is so superior to some of the larger banks which have not invested in this area. That we get repeat business. And there are repeat businesses coming a fairly nice pace. So we have a great expectations for next year on the deposit growth. From corporate trust. Operator: Thank you. Our next question comes from Timothy Coffey with Ginne. Timothy, please go ahead. Timothy Coffey: Thanks. Everybody, thanks for helping us Looking at the loan to deposit ratio, that clearly come down the past couple of years. Is that a level now that you think is the right size for it? I've got kind of the mid to low 70% range. Kenneth A. Vecchione: So Actually, we think it's a little too low. Alright? And we'd like to see that be higher. And and so we're working on that. So we have plenty of liquidity to put to work. And what we're looking for are good, safe, sound loans that we can do very thoughtful credit underwriting. On. And if we find those loans, then we have the liquidity in front of us. Right now, that liquidity is probably not making any money, not losing any money for us, maybe on the on the on the margin, maybe it makes a couple of bps. But we like to put it to to good use. And so we can see strong activity which we're seeing decent activity in the in the in our markets, we'll put that liquidity to work. Timothy Coffey: Okay. Another question was on the OREO, that you your operating rental income on right now. How should how should we be thinking about that that line item going forward? Is that kind of a recurring revenue line item for right now? Dale M. Gibbons: Yeah. So it has two places. It has a place in other revenue where that's where we get the revenue the the collection of the rents. And then it has an operating expense, is in the other expense category. The net of those two are just marginally profitable, maybe a million to $2 million over the year. And so we took in these properties because we thought we could execute faster upon leasing up these buildings than the sponsors were. And the sponsors were happy to give it to us and we were able to we think we believe we were able to maintain the value of those properties and actually improve them over time. So our goal is as we are able to increase the occupancy of these buildings and then sell them, those the revenues from that will be adjusted accordingly. But right now, you know, the net benefit to the PPNR is really marginal at 1,000,000 to $2 million for the year. Operator: Thank you. Our next question comes from Ebrahim Poonawala with Bank of America. Please go ahead. Ebrahim Poonawala: Hey. Good good morning. I just wanted to follow-up Ken. So I I think credit's obviously a huge overhang on the stock, and I heard your comments around asset quality. But but just speak to us in terms of one, I think within the NDFI, the business services piece, on a macro level, like, you seen, and this is not just for Western Alliance, but have you seen underwriting standards weaken where we should be expecting more issues coming out of this area? And banks being exposed to non bank financials around this one. Just your comfort level in this space given your still quite active, would be helpful And then beyond this, as we think about asset quality, we had some commercial real estate issues you had in last quarter. Now this as you look forward, I think just your level of comfort when we talk about tested, are they getting better, at as if versus risk of, like, one offs popping up. Thank you. Kenneth A. Vecchione: Okay. You came in a little choppy. And so if I miss something in terms of one of your questions, just just do a follow-up. Or if Dale heard it, clearer than I did, then he'll jump in there. You know, right now, think the overall backdrop to the economy is is pretty good. You've got GDP growing at 3.8 to 3.9% You got the ten year rate coming down to under 4%. Employment for as much as people are talking about and nervous about it, are still in a rather low 4% area. You have greater investments being made into the country from foreign countries. So so that should help continue with economic growth. And you've got a a pro business president. So that's the backdrop to a lot of things that we're seeing. As it relates to us, and some of your question was, I think how do we feel about the non depository financial institution loans? Let me say that a good chunk of those are all mortgage related and MSR related. And as Dale said in some of his prepared comments, we've never the industry has not experienced any losses. And for those people that aren't really knowledgeable, what happens on these mortgage warehouse lines the average loan that we put on there stays for sixteen to eighteen days. And it rolls off very, very quickly. And so these are government generally qualified loans These are government loans, government backed. Credits. They're very high FICO scores. We we like these these these credits, meaning the specialized mortgage credits, the warehouse lending, they're very strong and so are the MSR credits that we have on our books. And we have not seen any weakness in the in that at all. Okay? As it relates to the other part of of our nondepository financial institutions, has gotten some exposure through the Point Bonita controversy that was disclosed about two weeks ago. We like private credit. And I think, for us, it's important that people understand why we like private credit. How it works here in the bank. First, we lend to lenders. Just remember that. We're lending to people that are lending to private equity. Our interests are automatically aligned. And anytime we recommend a covenant, if that means it's good for us, it's gotta be good for the private equity credit lender. And so we're very much aligned. Number two, we are working only with the brand name private credit funds. And we went back and looked at what their average loss rates were, only 25 basis points. All right? Now we still underwrite the losses in the funds because that's the right thing to do. K? But our attachment point which is defined as where will we first take a loss, is at 35%. So the fund has to lose 35% before we take $1 of loss. Right? Contrast that to the 25 basis points that their average loss rates are from these private credit shops. Alright? Most of our structures are rated either double a or triple a. Right? And that's what gets a lower risk weighting on these structures. Now on top of that, we have an active portfolio management process that connects with an active portfolio management process at the private equity private credit shops. And lastly, we have the ability we've got kick out in eligibility rights. On these credits as well. Right? And as we said, we don't think there's a loss here. With the Point Bonita credit. It's paying as we expected. It's unfortunate that our name got put out there. We put it out there, but it's unfortunate that it did. We've never we're we we were not worried because of the diversity of retailers and their investment grade and the fact that we have a loan to value relationship of 20% there when we have $890 million of credit accounts receivable backing up our loan amount, which, as I said, is over four times. So unless I missed anything, Dale, did I miss anything? Did I hear anything? Got it. Okay. Dale said I got it. Hopefully, I got it. Ebrahim Poonawala: Got it. Alright. So that is full response. On the buybacks, I think, Dale, you mentioned you were at 11.3 versus the 11% that you're targeting. Is there an implication there given where the stock is right now? You could accelerate some of the buybacks the first 30 basis points of CET1, you could do in short order if the stock remains where it is today? Dale M. Gibbons: I think that's a I think that's a safe inference. Ibrahim. I mean, we haven't done our debt deal yet. But, but, yeah, do I think we're gonna come down from eleven three closer to our target? Yes. Operator: And key. Our next question comes from Casey Haire with Autonomous. Please go ahead. Casey Haire: Great. Thanks. Good morning, guys. Ken, great answer. Long answer on the, NDFI, but I do have a follow-up. Specifically on on the collateral and how it's validated, You know, it it's all of these I mean, it sounds like you scrubbed the the note finance book the big ticket items there, which is $2 billion, but that leaves about $11 billion of NDFI exposure. It just seems like it's as long as you're not afraid to go to jail, seems easy to double pledge collateral. So what are you doing to validate your collateral and safeguard against future frauds? Dale M. Gibbons: Well, as as Ken indicated and, you know, in his in his remarks, you know, we are you know, confirming through direct sources, you know, with know, with the title insurance or with the title itself, that our lien has been placed in the first position, and then we and then we periodically check those to make sure nothing happened that pushed us down a second. I mean, the issue we had with, you know, with the Cantor deal is we were supposed to be in first position. And in some cases, we see that we are now in second. And, and but the reason why we say that we're okay with collateral is because if I net out the first in front of us, relative to the as is appraisals that we have that we're getting updated, we still have enough money to cover the entire amount of this loan of $98 million. Dollars which excludes the springing guarantees, from two individuals that are ultra high net worth as well as as well as the insurance policy that that we have to for fraud losses ourselves for '25 And, Casey, I wanna just correct you. I I I think I heard a number that Our note finance portfolio is only $2 billion. Okay? Casey Haire: No. I'm Right. And I think you're including that, but I'm talking about the the remaining in the exposure of $11 billion The rest of the NDFI exposure is the overwhelming preponderance. Is, is really these you know, basically lines for residential mortgage. And and those loans are only they only last two weeks, maybe seventeen days. So, you know, so the loan is cable funded to close a house or do a refi. You put the money in, we hold it, then it's pushed off to a GSE you know, two weeks later. So those those clear out all the time. Casey Haire: Gotcha. Okay. Alright. Just switching to the guide on on loans and deposits. It sounds like loan growth is going to have to have a pretty strong quarter. You guys you know, are certainly capable of that, but it's been some time to to that you've put up a $2 billion quarter. So just some color on the pipelines. And then on the deposit side of things, I think you guys had said that you are pricing it differently so that mortgage runoff would be less than the $1 billion that you've experienced last year. But the guide implies about $3 billion of of runoff. So just just looking for some clarification there. Kenneth A. Vecchione: I will split it up. I'll take the loans. I'll let Dale take deposits. You know, so we grew $700 million this quarter. That was a little below what our internal projections were. Had two, maybe three loans that were pushed out For closing from the end of the Q3, and they're coming into Q4. So, that's what gives us sort of the confidence that We'll have a much better Q4 than we did Q3. Dale M. Gibbons: Yeah. If you you'll go to the the deposit guide, like you mentioned, that that your your your analysis is is correct, Casey. So so what's transpired is, you know, gosh, we had this kind of, you know, kind of a rocket third quarter in terms of deposit growth. Mike, My instinctive reaction is, does that give us pricing leverage? Whereby we can we can maybe put put something down and still have, you know, a strong performance. So I think in some respects, in some respects, you know, our our guide, you know, anticipates maybe the run up would be a little bit higher. If we did that. But I hope we'd be able to save on pricing, in that scenario. I would say, that there is one other caveat though, So, you know, if the AmeriHome operation and mortgage banking generally picks up, what goes into those deposits is normally it's just, you know, your principal and interest. You make a payment, you know, for x thousand dollars. You know, we're gonna go in there and we're gonna see those funds. We're gonna have them for three weeks and then we're gonna remit them to a GSE typically. But, you know, if somebody does a purchase, you know, then maybe it's $500,000 that goes in there. And so those deposits could rise if we get into more of a purchase and or refi business moving in as rates continue to decline. Operator: Thank you. Our next question comes from Matthew Clark with Piper Sandler. Matthew, please go ahead. Matthew Clark: Hey, good morning. Thank you. Morning. Just on that lawsuit in the in the Juris Banking division, just quantify the the settlement or that you anticipate to realize here in the fourth quarter? Dale M. Gibbons: Yeah. So, so so the the the lawsuit was a it was I guess I'll it was Facebook. Cambridge Analytica deal. You probably heard about it. It has more plaintiffs or more participants in the class than anything ever. In the over 10 million. And, and that that process is taking place now. And so and and and if we're the distributor of that, gonna take, you know, a few months to do it. But, but get fees associated with distributing 15 million payments and going through the the process of verification of the individual you know, are they are they certified for the class, things like this? Matthew Clark: Got it. And then I don't think I saw it in the slide deck, but if you had spot rate on deposits at the September and the beta, we should assume as we go through you know, a rate cutting cycle here potentially? Dale M. Gibbons: Yeah. So so the the ending rate was $3.17. For interest bearing deposits. Know, the the beta that we've, you know, we've got, you know, it's we're a little bit little bit faster on the ECR, so it's going to be a little slower than that. In terms of what we're doing. But you know, hence, you know, you see on the net interest income guide in total, we're showing that we're know, slightly, you know, asset sensitive with maybe a little bit of compression as rates come down. But we more than make up for that with what we save on ECR costs and what we save in additional income from the Emera home operation. Operator: Thank you. Next question comes from Ben Gerlinger with Citi. Please go ahead. Ben Gerlinger: Hi. Hi. Good morning. I know we talked through Oreo a little bit. With respect to the properties of the office properties last quarter, seems like you've already sold one and you're leasing up others. I know, Ken, that you you acknowledge that, like, fees and and rent rolls going to in that in or fee income, and then expenses are basically de minimis to one another. Towards your net impact to the income statement. But as you roll those out, it seems like on occupancy levels, you probably acknowledge some gains over the next twelve months was just kinda curious if any timeline you might project on getting rid of the other four that you still have on the REO. Kenneth A. Vecchione: Yeah. I I really don't have a timeline for you. We We'd like to get them off our balance sheet as quickly as possible. The best way to do that is to lease these properties up. We see good leasing activity on the properties, as Dale said, in his prepared remarks. In addition, we're getting some tailwinds. With interest rate cuts coming, which should really improve cap rates. So the best I can say is fingers crossed, that I like to see a couple of those leave us sometime during the course of next year. But we're looking to maximize value here. We're looking to improve our tangible book value now that we brought them on And so we don't wanna sell them too cheaply. Because I we're kind of optimistic that we could we could improve the occupancy of these buildings. Dale M. Gibbons: Every one of these, we have a reasonably current appraisal on, and they're two values in that appraisal every time. Like, one is the as stabilized value, which is, hey. If this thing is operating normally and isn't under some kind of, you know, duress or distress. And then the, the as is guys, nope. Here's what it is today. You know, yes. Of the things don't work. You just see us at you know, you gotta take those into consideration as the buyer. So we're in a situation now that the disparity between the as is value and the as stabilized values on these are some of the highest we've ever seen. And so what you're getting at is, gosh, would it, you know, would it be nice as we stabilize these that maybe we can migrate those numbers up? I'd love to do that. We're obviously never gonna forecast anything like that. Ben Gerlinger: Got it. Okay. That makes sense. Are you looking to buy a building? Nothing. Not for what you're selling it for. I don't have that money. But in terms of in terms of danger, it might be a naive question, but was that an NDFI loan? And if so, what what kind of subcategory was it? Dale M. Gibbons: Yeah. It it was an India pie loan. And it was in, you know, you know, know, the mortgage cap or yeah. It's in our net in our you know, yeah, market banking situation and be you know? So so it it was because as a financial institution that it it's gonna be in there. And, as Ken indicated, you know, what we're doing in our know, our our advances here is our numbers would have been very strong had we had the first position as the borrower you know, presented that they did and as their contracts demand. That's where we get into this fraud situation. Otherwise, this would have never even come up. Operator: Thank you. Our next question comes from David Smith with Truist Securities. Please go ahead, David. David Smith: Hi there. You give us some more details on the mortgage assumptions in your overall earnings sensitivity guide for down rates? Just with a 75% ECR beta on top of what you disclosed about your NII sensitivity, Seems like there's very little, if any, mortgage upside in there. I was wondering if you could help us unpack that some. Thank you. Dale M. Gibbons: Well, so we we you know, one of the key factors in terms of how we do on our it's basically the valuation on the MSR relative to what we have as our hedge against it, is is the spreads that have increased over the past few years. We're seeing today those spreads compress. As if that continues, as spreads compress to historical levels, likely to see higher revenue. In that scenario, because the volatility is something that doesn't really work in our favor. And we saw the inverse of this at the beginning of the the basically, the tariff situation back in April. In terms of what the Mortgage Bankers Association is actually projecting a little bit a little bit better, in terms of, you know, purchase activity or total one to four family in the fourth quarter than in the third. We're not really counting on that. We're thinking it's going to maybe slip slightly just because that's been the seasonal trend. But maybe there will be some higher level of activity because of the rate cuts as long as people are comfortable that the shutdown and things like this aren't gonna move, unemployment higher. Kenneth A. Vecchione: Yeah. The numbers from the MBA for next year they they expect mortgage activity to rise, 10% to $2.2 trillion. Where almost $1.5 trillion will be purchased volume, and then about $700 billion will be refinancings. So again, Q4 revenues for mortgage should be just a little weaker than Q3. Although, you know, I've got some I got my fingers crossed here that could maybe get some tailwinds here. But we we are becoming more optimistic about where that revenue stream is gonna be for 2026. David Smith: Okay. And then just to circle back to the earnings at risk scenario, could you help us just roughly size how much of the offset to the NII asset sensitivity is coming from ECR benefiting and down rates versus mortgage benefiting and down rates for you? Dale M. Gibbons: Yeah. I think the preponderance is gonna be kind of in the mortgage side. But, yeah, but they're both contributors. And if there's more variability, in terms of it improving better in the earnings at risk, it's gonna be the mortgage related as well. I think we're gonna have have a higher beta on the beta based upon kind of what could happen there versus the ECRs, which we talked about those betas already. Operator: Thank you. Our next question comes from Bernard von-Gizycki with Deutsche Bank. Please go ahead. Bernard von-Gizycki: Hey, guys. Good morning. So you have a bit over a third of your total deposit base that has ECRs related to them. And when we think about the composition of the deposit base, and the ECR related costs, which represent about 30% of the total expenses, Can you just talk to expectations of how these change? Know, Dale, you're moving over to a new role next year focusing on deposit initiatives. But are you looking to drive down the percentage of the ECR related balances? Have them grow but more focused on reducing, ECR costs related to them or a combination of both? Any color, you can share with these dynamics? Dale M. Gibbons: Yeah. So so the ECR is really driven by two sectors. The largest, of course, is the kind of what we're doing in the mortgage warehouse deposits. We've talked about that. And the other one is our homeowners association. So going forward, I believe that the homeowners association deposits are not going to shrink. They're not going to grow as quickly as the overall footings of deposits for the company. So proportionately that will decline Meanwhile, I our HOA group, you know, we're the largest in the nation, in terms of what we provide services there. That growth is continuing to be strong. And I think that was going to at least keep pace with the overall size of the company as it grows. So in total, think you're gonna see that it becomes kind of less significant. And in terms of the expenses associated with it, you know, as you go to lower rate levels, you know, numbers just come down and there's really not as much of an offset anywhere else. It's just the dollars are going to fall back a bit. You know, to, to lower levels if, say, we get, you know, four rate cuts over the next twelve months. Bernard von-Gizycki: Okay. And then just on equity income, the uptick there in 3Q, was that primarily due to the reversal in losses from 1Q? Just curious if that's come back. And just given the cap markets activity picking up, how should we look at this line item from here? Dale M. Gibbons: I we don't have that reversal yet. Thanks for remembering that. But, that's still that's still pending. I know this was this these were other types of things. Look. That number does bounce around a bit. You can obviously see that. So, you know, this $8 million handle you know, certainly higher than usual. A little bit of a haircut there. Going forward, but we don't have anything that indicates that anything is either getting dramatically better or worse. Operator: Our next question comes from Anthony Elian with JPMorgan. Please go ahead, Anthony. Anthony Elian: Hi, everyone. You increased the range for ECR costs again this quarter, but this time you maintained the NII range of up 8% to 10%. The increase in the ECR deposit cost range tied to just higher balances or because of a lower ability to reprice? Down those deposits? Dale M. Gibbons: It's it's really balance driven. You know, I mean, frankly, we got a little more in the third quarter than we thought we would. So it's it's balance driven, and and there's been you know, we you know, it's it's a I guess it's a good problem to have in that, you know, some of these dollars grown more quickly, but, know, it does show up in expenses and and it contributes to, you know, the situation where you've gotta look at adjusted you know, adjusted, efficiency ratio, adjusted NIM. Anthony Elian: Okay. And then on my follow-up on your earlier comments, reviewing the note finance portfolio, have you given any thought to potentially casting a wider net in your reviewing the loan portfolio credit procedures more broadly? Beyond note finance and NDFIs. Just investor concerns on the company's credit quality? Thank you. Kenneth A. Vecchione: Hi. Yeah. The I I wanna quell any misconceptions that might be implied through even some of the questions. No one is is more concerned about credit governance, asset quality, than than our executive management. We we've got an entire construct built around the control environment for credit The the second line or credit risk review that's intimately involved. And so the at the earliest stages of something that didn't work, as we expected, those teams are involved inside of our company. We're we're we're listening and and reviewing on a much broader scale. So this work's been ongoing. It goes on all the time as part of our quarterly full portfolio review process. But in addition to that, we we we hold ourselves accountable and we hold our our business accountable through our second and third line who are actively, engaged in that. And so we're not asking ourselves, could this happen again? We're receiving validation of those things through through our internal control network. Operator: Thank you. Our next question comes from Jon Arfstrom with RBC Capital Markets. Jon, please go ahead. Jon Arfstrom: Hey, thanks. Hi, everyone. Hey, John. Ken, maybe for you. Hey, do do you have any balance sheet size limitations It looks like you're going through $100 billion very quickly the next couple of quarters. Anything for us to consider and how are you thinking about no. Not really. Think you're right. You know, of course, not gonna have a lot of growth in the balance sheet for Q4 just because as we've talked about the seasonal outflow of the warehouse lending deposits or the mortgage deposits. But two things we're doing. One, we're growing the business based upon opportunities that we have, and we're not holding our ourselves back. Because we're gonna cross over a $100 billion. Number two, we continue to build out the infrastructure to crossover a $100 billion and be LFI ready. Number three, we're waiting and we're hopeful that the tailing rules will come out probably sometime in the middle of next year. That will move it to $2.50. Alright? But, you know, in all the expense numbers, remember, non non ECR operating expenses quarter to quarter only went up $2 million For the first 3 quarters of this year, non ECR operating expenses were in a band of $5 million and that includes all the development and investment we're making to be LFI ready. So to your balance sheet question, we know we'll cross over a 100 when it's the right time. Based on the opportunities that are in front of us. Okay? And we'll be ready and we continue to invest And if the tail end rules come out, then we may slow some of our investment down to match what some of the tailwind rules are. Jon Arfstrom: Okay. Alright. Fair enough. And then, Dale, for you, in your prepared comments, talked about an upward bias in ROTCE. And top quartile and ability to show improvement I'm assuming you're thinking a starting point that includes a more normalized provision So maybe normalized ROTCE right now is high teens rather than the mid teens you printed? And you can do better from there. Is that fair? Dale M. Gibbons: Sure. Yeah. Yeah. Yeah. Know that that that's completely fair, John. You know, maybe just talk timing a little bit here as well. Yeah, normalized provision, you know, that would have obviously augmented the number, in in the third quarter. As we get to the first quarter in particular, it's a little bit strange. You know, we we lose a couple of days. That's meaningful for us. And, also, you step up again, everyone knows, on, you know, certain types of tax and things like this, you know, kind of starting the new year. So I'm looking for I'm looking for something to, you know, that kind of kick in you know, kind of in the back half of 2016 to hopefully get to the levels you're talking about. Kenneth A. Vecchione: Yeah. You know, one of the things that can really supercharge the return on average tangible common equity will be the mortgage business next year and the growth in the mortgage business. You know, if it grows more than moderately, that's gonna really provide excess earnings and that will improve the return on equity, John. Thank you. Operator: Our next question is a follow-up from Ebrahim Poonawala with Bank of America. Please go ahead. Ebrahim Poonawala: Thanks for taking my question. Dale, just follow-up, I think it's important Just wanna make sure sure in your slide 24, the 16% loans NDFI loans, mortgage intermediaries is about $9.1 billion. The warehouse is about $6 billion and change. I'm trying to figure what the balance is between the 6 and 9, and are those nonresidential warehouse loans, so, like, commercial real estate driven. And would you be holding reserves against those loans, as opposed to the resi mortgage where you show on the slide where you don't need reserves because of the zero loss nature. Just clarify that for us. Dale M. Gibbons: You know, I think we maybe need to pick this up you know, at maybe at the next call, Ebrahim, in terms of in terms of what this what this looks like. I mean, so we you know, we've talked about the the the warehouse piece. And and where we are on the, you know, the NDFI elements whereby we're assuming a first out position and another lender is, is in front of us with the, with the higher level of risk against loans that typically have low loss to begin with. So let's pick this up later today. Operator: Thank you. Our next question comes from Timur Braziler with Wells Fargo. Please go ahead. Timur Braziler: Hi, good morning. Just I guess looking at the Cantor relationship specifically, what internal controls maybe failed to detect some of the collateral deficiencies there? And then it looks like in going through the lawsuit that the credit was converted from the line of of credit in July to a term loan, and then the the suit was filed in August. Was the loan re underwritten in July and the new issues kind of identified we later? Maybe just give me a little bit of a timeline as to what happened around, July, August there. Kenneth A. Vecchione: Yeah. So I'll provide some updates. But, you know, appreciate that this is an active litigation. And our discussion here is gonna be somewhat limited. I'll try to help you with your question. First, we had a long term relationship with this borrower. Alright? It dates back to 2017. And as of this past August, the borrower was current. We made the decision to exit the relationship and convert the revolving loan to a term loan with a May 2026 maturity. It was during that time that we discovered the borrower failed to disclose material facts to us. Consequently, we wasted no time in filing a lawsuit alleging fraud. So that's probably as much as I can tell you given that we have an active lawsuit here. We're working hard to get a receiver in there as soon as possible. And with that, we're gonna have greater insight into the books and records of Cantor five. Operator: Thank you. This concludes our Q&A session. And I would now like to turn the call back over to Kenneth A. Vecchione for closing remarks. Kenneth A. Vecchione: Yes. Thank you all for attending the meeting. Appreciate all your questions. We look forward to the next call. Be well. Operator: Thank you everyone for joining us today. This concludes our call, and you may now disconnect your lines.
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 M/I Homes third Quarter Earnings Conference Call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press 0. This call is being recorded on 10/22/2025. I would now like to turn the conference over to Phil Creek. Please go ahead. Phil Creek: Thank you for joining us today. On the call with me is Robert Schottenstein, our CEO and president, and Derek Klutch, president of our mortgage company. First, to address regulation for disclosure, we encourage you to ask any questions regarding issues that you consider material during this call because we are prohibited from discussing nonpublic items with you directly. As to forward-looking statements, I want to remind everyone that the cautionary language about forward-looking statements contained in today's press release also applies to any comments made during this call. Also, be advised that the company undertakes no obligation to update any forward-looking statements made during this call. With that, I'll turn the call over to Robert Schottenstein. Robert Schottenstein: Thanks, Phil. Good morning, and I too want to thank you all for joining us today. Despite the continued challenging market conditions and choppy uneven demand environment, we had a very solid third quarter. We generated $140 million of pretax income, though down 26% from last year's record third quarter results. Our pretax income percentage was a very solid 12% of revenue with gross margins of 24% and resulted in a strong return on equity of 16%. Consistent with our first and second quarter commentary, and also consistent with what our industry peers have reported, housing demand and overall market conditions remain somewhat challenging. In our view, housing conditions are just okay. Certainly not great, but still just okay. Probably about a C plus. We continue to incentivize sales and drive traffic primarily with mortgage rate buy downs. The cost of such buy downs is the primary reason for the decline in our gross margins. We will continue to use such rate buy downs where necessary on a subdivision-by-subdivision basis in order to drive traffic and generate sales. In terms of our third quarter performance, we closed a third quarter record 2,296 homes, a 1% increase compared to a year ago. Our third quarter total revenue decreased 1% to $1.1 billion. We sold 1,908 homes during the quarter, down 6% compared to 2024's 2,023 homes sold. Our monthly sales pace averaged 2.7 homes per community compared to a monthly pace of 3.2 homes in 2024. Year to date, we have sold 6,278 homes, down 8% from a year ago. Encouragingly, we continue to see quality buyers in terms of creditworthiness with a strong average credit score of 745 and average down payments of around 16%. Our Smart Series, which is, as we've stated previously, our most affordable line of homes, continues to be an important contributor to sales performance. During the third quarter, Smart Series sales comprised about 52% of total sales compared to just about 50% a year ago. We continue to make important progress in our cycle time. Our third quarter cycle time was about ten days better than last year as well as about ten days better than this year's first quarter. We ended the quarter with 233 communities and remain on track to grow our community count, balance of 2025 by about 5% from 2024. As Derek Klutch will review in a few minutes, our mortgage and title operations had a very strong quarter, highlighted by capturing a record 93% of our business in the quarter. Now I will provide some additional comments on our markets. Our division income contributions in the third quarter were led by Columbus, Chicago, Dallas, Minneapolis, Orlando, and Cincinnati. New contracts for the third quarter in the Northern Region decreased by 17% and new contracts in our Southern Region increased by 3% compared to last year's third quarter. Our deliveries in the Southern Region increased by 8% and our deliveries in the Northern Region decreased by 7% from a year ago. 59% of deliveries came out of the Southern Region, 41% out of the Northern Region. We feel very good about all 17 of our markets. That said, we are expecting particularly strong full-year results in Columbus, Chicago, Dallas, Minneapolis, Cincinnati, Orlando, and Charlotte. We have a strong land position. Our owned and controlled lot position in the Southern Region decreased by 6% compared to last year and increased by 3% versus last year in the Northern Region. 36% of our owned and controlled lots are in the North, the other 64% in the Southern Region. Company-wide, we own approximately 24,400 lots, which is slightly less than a three-year supply. In addition, we control approximately 26,300 lots via option contracts resulting in a total of 50,700 owned and controlled lots, equating to about a five to six-year supply. With respect to our balance sheet, we once again ended the quarter in excellent shape. During the quarter, we extended our bank credit facility by five years to 2030 and increased the borrowing capacity under that line from $650 million to $900 million. We ended the third quarter with an all-time record $3.1 billion of equity, equating to a book value per share of $120, up 15% from a year ago. We had zero borrowings under the $900 million unsecured line and over $700 million in cash, all resulting in a very strong debt to capital ratio of 18%, down from 20% last year, and a net debt to capital ratio of negative 1%. As I conclude, let me just say, we remain quite optimistic about our business and continue to believe that our industry will benefit from the undersupply of homes and growing household formations throughout our markets. Our backlog remains healthy and with our strong balance sheet and strong liquidity, we have tremendous flexibility as conditions evolve. We are well-positioned as we begin 2025. With that, I'll turn it over to Phil. Phil Creek: Thanks, Bob. Our new contracts were down 6% when compared to last year. They were flat in July, up 4% in August, and down 18% in September. Our cancellation rate for the third quarter was 12%. Last September sales were strong, it was our second highest September in our history. During the third quarter, our sales were really pretty consistent. We sold 618 in July, 660 in August, and 630 in September. 50% of our third quarter sales were to first-time buyers, and 75% were inventory homes. Our community count was 233 at the end of the third quarter, compared to 217 a year ago, up 7%, with the Northern Region up 9% and the Southern Region up 6%. The breakdown by region is 96 in the Northern Region and 137 in the Southern Region. During the quarter, we opened 14 new communities while closing 15. We currently estimate that our average 2025 community count will be about 5% higher than last year. We delivered a record 2,296 homes in our third quarter, delivering 89% of our backlog. About 35% of our third quarter deliveries came from inventory homes that were sold and delivered in the quarter. At September 30, we had 5,000 homes in the field versus 5,100 homes in the field a year ago. Revenue decreased 1% in the third quarter and our average closing price in the third quarter was $477,000, a 2% decrease when compared to last year's third quarter average closing price of $489,000. Our third quarter gross margin was 23.9%, down 320 basis points year over year, with 60 basis points of the decline due to $7.6 million of inventory charges. The breakdown of the inventory charges is $6 million of impairments and $1.6 million of lot deposit due diligence costs that were written off. Our construction costs were down about 1% in the third quarter compared to the second quarter. Our third quarter SG&A expenses were 11.9% of revenue compared to $11.2 million a year ago. Our third quarter expenses increased 6% versus a year ago. Our increased costs were primarily due to higher community count and higher selling expenses. Interest income, net of interest expense for the quarter was $4.5 million. Our interest incurred was $8.7 million. We had solid returns for the third quarter given the challenges facing our industry. Our pretax income was 12%, and our return on equity was 16%. During the quarter, we generated $157 million of EBITDA compared to $198 million in last year's third quarter, and our effective tax rate was 23.8% in the third quarter compared to 22.9% in last year's third quarter. Our earnings per share per diluted share for the quarter decreased to $3.92 per share from $5.10 last year, and our book value per share is now $120, a $16 per share increase from a year ago. Now Derek Klutch will address our mortgage company results. Derek Klutch: Thanks, Phil. Our mortgage and title operations achieved pretax income of $16.6 million, an increase of 28% from $12.9 million in 2024's third quarter. Revenue increased 16% from last year to a third quarter record $34.6 million due to higher margins on loans sold, a higher average loan amount, and an increase in loans originated. The average loan to value on our first mortgages for the third quarter was 84%, compared to 82% in 2024's third quarter. We continue to see an increase in the use of government financing, as 55% of the loans closed in the quarter were conventional, and 45% FHA or VA, compared to 66% and 34% respectively, for 2024's third quarter. Our average mortgage amount increased to $406,000 compared to $403,000 last year. Loans originated increased to 1,848, which was up 9% from last year, while the volume of loans sold increased by 19%. Finally, as Bob mentioned, our mortgage operation captured 93% of our business in the third quarter, and this was up from 89% last year. Now I'll turn the call back over to Phil. Phil Creek: Thanks, Derek. Our financial position continues to be very strong, highlighted by Moody's recent upgrade of our credit rating and the extension of our unsecured credit facility to September 2030, which increased our borrowing capacity from $650 million to $900 million. We ended the third quarter with no borrowings under this facility and had a cash balance of $734 million. We continue to have one of the lowest debt levels of the public homebuilders and are well-positioned with our maturities. Our bank line matures in 02/1930, and our public debt matures in 2028 and 02/1930. Our unsold land investment at 09/30 is $1.8 billion, compared to $1.6 billion a year ago. At September 30, we had $931 million of raw land and land under development, and $859 million of finished unsold lots. During the third quarter, we spent $115 million on land purchases and $181 million on land development for a total of $297 million. At the end of the quarter, we had 776 completed inventory homes and 3,001 total inventory homes. Of the total inventory, 1,245 were in the Northern Region, and 1,756 were in the Southern Region. At 09/30/2024, we had 555 completed inventory homes and 2,375 total inventory homes. We spent $50 million in the third quarter repurchasing our stock and have $100 million remaining under our current board authorization. Since the start of 02/2022, we have repurchased 15% of our outstanding shares. This completes our presentation. We'll now open the call for any questions or comments. Operator: Thank you. Ladies and gentlemen, we will now begin the question and answer session. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. Your first question comes from Kenneth Zener with Seaport. Good morning, everybody. Kenneth Zener: Good morning. If we could talk about orders a little bit, you had, as we measure, kind of normal seasonality, which is, you know, pretty impressive, and they so-so market, you reflect. Can you talk to that dynamic of you wanting to achieve right, what we see as seasonality? I mean, you might look at it differently. But and the use of incentives, and if you could quantify the incentives level in general and the mix between price and mortgage buy down closing costs, please? Robert Schottenstein: Yeah. Great question. Clearly, a somewhat challenging market, unpredictable too. You know, from week to week, a fair amount of intramarket volatility within our divisions. One month, certain of our divisions might have stronger sales and unexpectedly, things slow down then they pick back up. As I said, I think things are just okay. That said, it's critically important for us to drive traffic and do everything we can to incent sales in this market. And I don't think we're alone in this, but we have concluded that there is no better way to do that than through the selective use of mortgage rate buy downs. We have not offered any specifics on the exact amount that we're spending. It tends to change over time based upon what's happening in the market. You can go on our website and you can see that both with respect to conventional as well as FHA, we're offering rates in the very high fours. And that has we have found that to be a pretty good sweet spot to do what we are currently doing. Absent the inventory charges that Phil mentioned that accounted for about 60 to 70 basis points of our gross margin decline, our margins are down about 250 basis points year over year. And I would just simply say, that the majority of that is due to mortgage rate buy downs. There is some subdivision by subdivision incentivization, you know, that might be going on here and there. But the significant majority of it is rate buy downs. And then, frankly, some of the other decline is just increased cost on the land side. We've had a lot of success. I don't think we're alone on this, which is also encouraging. You don't want to be the only one doing something because it may not be sustainable. But we've had a lot of success on our sticks and bricks. Our, you know, our raw materials and cost with our subcontractors and suppliers relatively flat to down. Which has been very encouraging notwithstanding all the chatter about the impact of tariffs. We have seen no impact of tariffs to date. I think the jury's out on how things shake out as we move into next year. But thus far, we haven't seen any of that flow through to our results. But you know, we're gonna continue, as I said, Ken, to use rate buy downs as the primary driver for both traffic and sales as long as it keeps working. And, you know, if rates were to drop, there's been a little bit of movement recently. It didn't seem to have that much of an impact on demand. That's a bit of a fit and start kind of a situation. But if rates begin to drop, the cost of such buy downs hopefully will drop as well. And then more importantly, if we do see a drop in rates, that could help unlock the existing home market which, you know, we're getting these results really without much help from the sale of existing homes. That could be a big tailwind for housing if and when that begins to unlock because even though inventory levels of existing homes in our markets are not anywhere near the all-time highs, they are up considerably year over year and over the past two years and past three years. It's a long answer to your question. I hope it tells you most of what you asked. Kenneth Zener: Yes. And appreciate it. My second question, because you report this South, as a segment versus the North, the South obviously has Texas, Florida, which can be different which are different markets. Gross margins were about the same last quarter in those regions, EBIT a little different. But could you comment on kind of prior to the Q coming out, the gross margin trends we're seeing in those two segments? And if you any comments you could to illuminate, you know, the aggregation of Texas and Florida would be appreciated. Thank you, sir. Robert Schottenstein: I'll say a couple things about it. For us, Orlando on the East relative East Coast is stronger than Tampa and Sarasota. Fort Myers, we have a relatively new operation. So it's not really that meaningful in terms of results. But demand and margins for us are clearly holding up better in Orlando than they are in Tampa and Sarasota. I think Austin in Texas, that market was red hot a couple of years ago. And over the last twelve to eighteen months, it's cooled considerably. It's probably struggling the most in Texas. We have seen margins drop also in Houston and Dallas. But comparatively, I think they're still holding up quite well. We're expecting, as I said, a strong year in Dallas. Charlotte and Raleigh have both been pretty good. And as I also mentioned, we're expecting a strong year in Charlotte. So, you know, it's a not to be snarky, but it's a bit of tale of 17 cities. They're all a little bit different. And, you know, we've long said that this business is a subdivision business. We got about 233 of them, and we try to manage them that way. But within the cities, what I've just described is probably a pretty good snapshot from 10,000 feet. If you look also this is Phil. If you look at community count, you know, last year, our average community count was up about 7%. And this year, you know, our estimate is we'll be up about 5% on average. We feel good about that. If you look inside those numbers, as I said, both regions do have community count growth. Our Florida community count has actually been down a little bit this year. Our Texas community count's been up a little bit. And as Bob said, in general, you know, our Midwest and Carolina business as far as pricing and margins and so forth held up a little better than Texas Florida. But overall, we feel really good about where we are. Thank you. Kenneth Zener: Thanks. Operator: Your next question comes from Alan Ratner with Zelman and Associates. Your line is now open. Alan Ratner: Hey, Bob. Hey, Phil. Good morning. Thanks for the information so far. So, Bob, a lot of chatter over the last few weeks about some tweets from our administration and the FHFA about the homebuilders business. And I'm just curious, have you had any discussions with the administration or have any thoughts on, I guess, what some of the headlines are out there? Robert Schottenstein: We have not had any discussions at this point, and nothing is currently planned for us. Obviously, we're aware of it. Look. I think the I don't know if I can comment much more. I read what you read. I think that the good news from my view and this is both at the local and state level as well as federal, there's a lot of talk right now about what can be done to help unlock, if you will, housing improve affordability. We're seeing it, you know, in a lot of different levels. I was in an event last night where that was the primary topic of discussion as it relates to markets in the Midwest. I'll be at an event in another week or two as it relates to just Ohio, where that is a primary topic. I think people understand how important housing is as a driver of the overall economy. And that, you know, housing while it's certainly by no means dead, it's underperforming. And we need to be building more homes and we need to make sure we do the smartest and best things to help create that environment. I think we'll get there eventually. But if there could be some policies here or there at the local level, you know, we certainly would welcome those. We have long said and I think this view is widely shared, but we have long said that the greatest impediment in my in our judgment to affordability and to improve volume levels is local zoning regulations. And some markets are more favorable than others, but that to me remains the biggest impediment. You know, we're all sick of the NIMBY term, but the NIMBYism and the antigrowth. Again, some markets, the situation is more acute than in others. I think there's a reason why Texas has led the nation in housing production. I don't know if it's 15, 18% of total new home production, but it's a big number. And I think in general, while it's not easy there either, there's just been a much more favorable zoning climate that has contributed to more development, frankly, more affordability. Alan Ratner: I appreciate your thoughts. And, yeah, that seems to be the general sentiment so far is that, at least builders are happy to see it being talked about. So, hopefully, there could be some real change implemented from whatever discussion. Robert Schottenstein: Right. It's always bad when no one wants to talk to you. Be careful what you wish for. And as long as there's conversation, you got a chance. Alan Ratner: Exactly. Alright. Couple quick ones on just the margin both gross and SG&A. So on gross margin, it looks like this quarter, obviously, things are still under a little bit of pressure, but looks like things are stabilized a bit quarter over quarter. I know you don't guide, but, you know, maybe just if you could talk to the puts and takes going forward in terms of land costs flowing through? It sounds like construction costs are stable. Pricing and incentives, I mean, should we are we kind of getting a little closer to the bottom here on margin, do you think? Or is there more room for margins to drop in over the next handful of quarters? Robert Schottenstein: Well, I think we're a lot closer to the bottom than we were last quarter. How close are we? That remains to be seen. Look, going into this year, even though we didn't share this, internally, we believe that our margins would be under pressure somewhere. This was internal budgeting. Between two and three hundred basis points. Because we knew we were gonna have to spend a lot of money on mortgage rate buy downs as we've talked about this call, second quarter, first quarter. Absent the impairments, they're about 250 basis points down year over year. You know, could they drop a little more perhaps? I think we're getting close to some point. And the other thing that's hard to gauge and no one knows the answer to this is, you know, even though we may continue to be spending money on rate buy downs, if the cost drops by 50 to 100 basis points, that's a big plus on the margin side. And Phil, I don't know if you have anything to add on that. Phil Creek: Yeah. The pressures we have really, you know, we said in the third quarter, we sold 75% specs. The second quarter was, like, 73%. So it is up a little bit. And in general, our specs have a lower average sale price than our to be built and they also have a lower margin. So the amount of specs continues to be a pressure. Also, Bob mentioned higher land cost. We do have higher land cost coming through than we did a year ago. The good news is the last couple of quarters, land development costs, which actually were increasing more than the raw land, land development cost seemed to have stabilized. And, obviously, we're being very careful as far as buying new land parcels since we do feel very strong about our land position and also the choppy market conditions. So we're doing all we can. You know, you're always market pricing. We always need a certain amount of volume to come through. But, overall, we think our margins are holding up pretty well. But, again, there do continue to be pressures. And, you know, we have certain internal targets. We want to always have hopefully, double-digit pretax income percentage. We were 12% for the quarter. Given the market, we feel really good about that. Given our size, we feel particularly good about our return on equity. It's lower than it was a year ago, but it's still a very, very, I think, respectable 16%. We've got minimum targets on that that we're hitting. And, you know, we're gonna keep aiming to hit those targets. Alan Ratner: Absolutely. Alright, guys. Well, appreciate all the thoughts, and best of luck in happy holidays if we don't talk before then. Robert Schottenstein: Yeah. Take care of yourself, Alan. Operator: Your next question comes from Buck Horne with Raymond James. Your line is now open. Buck Horne: Good morning, guys. Wanted to go back to those regional splits on the order growth trends between the North and the South, just if I heard correctly, I believe you still had higher year-over-year community count in the North region, but orders dropped off 17%. I know there was a tough comp against last year, but just, you know, sounded like, you know, markets like Columbus and Cincinnati and Chicago were doing better, but just wondering if you can add any color kind of that divergence in order trends. Robert Schottenstein: I think we're very pleased with how well our Midwest markets have held up. You know, they may be off from where they were a year ago, but I think they're, you know, a very strong operation in Columbus since, frankly, Indianapolis. I didn't call out Indianapolis, but we have a much improved operation in Indianapolis over where we were several years ago. Very bullish about that market as well. Chicago is having a very strong year for us as is Minneapolis. And, you know, there's sometimes there's little noise in these numbers, you know, given when new communities open up and, you know, you gotta sort of look over a longer period of time. But, you know, we remain bullish about the Midwest. Bullish about the Carolinas, I don't think Florida's, you know, Florida's has a few struggles here and there, particularly on at least for us on the West Coast. And Texas is a little bit of a transition, but there's still tremendous economic vitality generally speaking, throughout nearly every one of our markets. You know, we're a relative newcomer in Nashville. We've got high hopes for Nashville going forward. Lots of job growth there. Lots of projected household formations. You know, Houston and Dallas continue to be very strong markets. In terms of just total macroeconomic conditions, off a little bit. I get that. Austin slowly coming back. You know, in general, in migration still in Austin. Terrific place. Glad we're there. If we weren't, we'd open up there. So we feel very good about all of our markets. And I think the diversity, you know, you never hit, you know this. You never hit on all cylinders. And if you do, it's lucky. Always something somewhere. And I think it's important to have the geographic diversities, the geographic diversity that we have. And I think it's particularly helpful to us right now. Where, you know, there's a little bit of a slowdown in Florida and, you know, parts of Texas as well, but the Midwest is, you know, as a Midwestern, I'm glad to see the Midwest, you know, standing pretty tall these days. Phil Creek: Hey, Buck. This is Phil. When you actually look at the numbers, as I said, our third quarter sales overall really were pretty consistent. You know, 618 in July, 660 in August, and 630 in September. The real last September, we sold, like, 775 homes. Last September. And the Midwest was really strong last September for different reasons. We do run periodic sales events. Last September was the start of a sales event. So that is really the reason that you're seeing the down sales quarter to quarter. The Midwest sales, as Bob said, really were fairly decent. Pretty consistent through the quarter. It's really just last September was a little unusual. Buck Horne: Gotcha. That's very helpful color. Appreciate that. Phil Creek: Yeah. Thanks for all the details there. Really good. Going to SG&A and kind of selling cost, I think one of your competitors noted that just in this competitive environment, you know, there's a lot of spec homes and a lot of, you know, builders are trying to clear before year-end. And they're one of the tools they utilize is more co-brokers and, you know, utilizing more realtors to try to get those inventory homes cleared before year-end. Are you guys pursuing a similar strategy? Should we think about that being an added cost into the fourth quarter in terms of just selling expenses? Robert Schottenstein: Phil's gonna give you the best and most detailed answer, but I just want to say a couple things first. You know, we've got over 200 more completed specs today than we did a year ago at this time. And, it's probably a little more than we'd ideally like to have. We're very, very careful from a management standpoint on our paying close attention to that broker coop percentage. You know, I wish, frankly, we welcome brokers. We need brokers. Company-wide, we're in the low to mid-seventies, I think, 75, 76 maybe. 77%. I know the exact percentage Phil does. I wish it were lower. We have a lot of, you know, programs that we think are effective in bringing that down without alienating an important part of our selling efforts, which is the third-party brokers. Phil, I don't know if you want to comment any further. Phil Creek: Yeah. When you look at the SG&A, as I said, the actual expenses were up 6% versus a year ago. We have 7% more communities, and you do have cost for every store, maintaining those stores. We have 3% more people. Again, you know, we have 7% more stores, those type of things. We also did have a slightly higher sales commission rate internal and external. Again, trying to drive traffic in sales. So that's how we kind of get to that 6% increase, Buck. Robert Schottenstein: One thing we have not done, there might be one or two minor exceptions, we're not out there incentivizing traffic or sales by offering more money to the third-party brokers. Some of our peers have. We're not doing that. Don't feel we need to do it. And we also think that, it's like a lot of things in life. Once you start, it's hard to stop. Buck Horne: Right. Yep. Alright. That's really helpful. Appreciate that added color. My last, if I can sneak it in, is just given the strength of the balance sheet here and the cash position and the increased financial flexibility you got with the credit facility, is there anything that's necessarily holding you back from, you know, accelerating repurchases into year-end? Working capital needs or otherwise, or, you know, you just want to continue to be very programmatic and consistent on that. Robert Schottenstein: Yeah. I mean, I'll say one thing, and then I think Phil's gonna add to this, which he should. Job one is to grow the company. Job and to do so with a very strong balance sheet. We thought we had a strong balance sheet back in 02/1956. Only to learn that we didn't. Our debt to cap was in the high forties, low fifties. So were many of our peers. We're not going back to that movie. And we're gonna maintain a very, very strong balance sheet with comparatively low debt levels as we are right now. That is our goal going forward. We also want to grow the company. But, you know, when we have this excess cash and for all these other reasons, we think we can also, at the same time without compromising growth, selectively buy back shares. Phil, if you want to add anything. Phil Creek: Exactly. We continue every quarter with our board, you know, to talk about stock repurchases and so forth. We have consistently for the last few quarters, repurchased, you know, $50 million a quarter. As far as the bank line, the bank line was going to mature in December '26. We really did not want to get within a one-year window of that. We just offer safety and flexibility, plus it now is a five-year term. We thought it made sense to go from $650 to $900. We're definitely kind of low leverage, conservative type people. We do like to keep that leverage low, especially during these times. You know, I do have, you know, 3,000 specs, compared to, you know, 2,300 or so a year ago. We think that makes a lot of sense in today's market. Especially take advantage of these rate buy downs, which are a lot more effective, you know, in shorter periods of time. So we're just gonna continue to adapt as best we can to market conditions but, you know, keeping a strong balance sheet and strong liquidity is, definitely job one. Buck Horne: Alright, guys. Congrats. Good luck. Thanks for the color. Robert Schottenstein: Thanks so much. Operator: Ladies and gentlemen, your next question comes from Jay McCanless with Wedbush. Your line is now open. Jay McCanless: Hey. Good morning, guys. Robert Schottenstein: Good morning, Jay. Jay McCanless: Just wanted to ask where your gross margins are right now on spec versus your build-to-order homes. Robert Schottenstein: They're a little lower. You know, it really depends on the community. Every location is a little different. But in general, they're just a little lower than to be built. Jay McCanless: And then, Bob, you were talking about some of your competitors increasing co-broker spend. I guess, in terms of some of the larger competitors who said they might be pulling back a little bit. Are you seeing any evidence of that in the field? Or is everyone selling pretty hard to get lighter ahead of the spring season? Robert Schottenstein: I don't think I made a comment about pulling back. What I said is that we have not elected to pay brokers more to drive traffic and incent sales. Our co-op rate has remained consistent throughout all of our divisions. Probably over the last five years. We've tried to be very consistent on that. Do what we can to have the best relationships we can but not interested in buying the business and fearful of how you go back to where you once were if you start that as I made comment. I don't know if and I'm not saying a lot are doing it, but I know there's a few examples out there of some that are. Whether they've pulled back, I don't know. I don't have current information on that. What was the other part of your question? Jay McCanless: Well, just the, you know, our people we've heard that some of your competitors are slowing down starts. But at the same time, we're hearing a lot of conversation about aggressively selling into year-end. I mean, to me, feels like this is just a normal year where the industry is a little heavy on inventory. People are gonna have to sell aggressively in the year-end. Is that what you're seeing out in the field right now? Or people being a little more reasoned with some of the discounts and incentives they're trying to offer? Robert Schottenstein: A community that's always a community by community discussion. I mean, some builders 100% spec, you know, they're fairly aggressive. Some are not. It just depends on the location, etcetera. And you just need to be aware of what's going on in the marketplace. You know, getting back to kind of our sales effort, we're trying to focus very much on internally, to make sure we're getting all the leads that we can, that we follow-up on the leads, as best we can. We have more people focused on those leads. We have in most of our communities, you know, more than one salesperson. We try to be focused very much on controlling all the things we can control. We're spending more money today on sales training, and driving leads online than we ever than we have in a long, long time. And we're gonna continue to. That's the blocking and tackling of our business. Don't often mention that on calls like this. But I'd rather spend money on that than on realtors. I'd rather spend money on that than on incentives. Now we may have to do both sometime, but it all starts with us. And, it's easy to get complacent during hot markets. But now more than ever, focusing on us is just absolutely the most important thing we can do. And we have an opportunity. I mean, last year, we opened about 75 stores. You know, this year, we're gonna open more than 75 stores. So, again, different location, different product, different price point in many situations. Those are the things we control. So those are the things we focus on, you know, every day and yeah, we do have higher spec limits, but, again, we don't accept going in that specs have to be a lower margin. Hopefully, we're putting the best products on the best lots. And that we're getting paid for that. Because that's the way the business is right now. And, you know, I want to give an I'm gonna give a very specific example. I bragged about the fact that our mortgage and title operations had a tremendous quarter because they did. And I mentioned that we had a record capture rate of 93%. I think a year ago, it was, like, 84% or something like eighty-nine. On the one hand, you could say, well, it should be higher. Because you're so aggressively using mortgage rate buy downs. And that is true. It should be higher. But I think it's even higher than it would be because of the training and the efforts that we're putting on the side of making certain that at each branch, each mortgage and mortgage branch, that we're doing the best we can to help people figure out the financing that's best for them. In this somewhat challenging market. And you know, we could easily be happy with a capture rate of 85 or 88%. It probably be at or near best in class. But with this higher capture rate, not only does that contribute to profitability, but we think it's contributing to sales performance. And every buyer is different. Some buyer, especially more affordable homes, they may very well need help in closing costs. Some builder some buyers do need help, they want a thirty-year fixed lowest rate possible. Some buyers are okay with ARMs. Some are okay with buy downs. So, you know, again, it just depends on what the customer needs. We're not just throwing the most money at every deal we have. Jay McCanless: Understood. And thank you for that. I guess the last one for me, with the balance sheet as strong as it is right now, is there any thought to doing some M&A, especially in the Midwest down into The Carolinas where you're already seeing pretty strong performance? Robert Schottenstein: There's nothing on the horizon. You know, if something happened to show up in one of our existing markets or perhaps in a market that we're not in, that we thought made a lot of sense, I think we take a very serious look at it. I mean, in the last six months, we've probably looked at a couple of deals. But right now, our job is to make sure we keep our balance sheet really strong, to your point, and to grow in our existing markets. Every one of our existing markets has growth goals. You know, we've said this before, and I'll say it again right now, our run rate today is around 9,000 units. You know, we believe in the 17 markets that we're in, that we can grow 13, 14,000 units without opening up in any new markets, just with the headroom that we have within our existing geographic footprint. That if we could grow that way, that would be the one that would be the most desirable. On the other hand, if something showed up and it made sense, you know, we'd analyze it like any other land dealer opportunity. But there's nothing planned at this point. Jay McCanless: Okay. And then one more just to kind of follow on that. Any inclination to talk about 26 community count especially with the amount of lots you guys have built up? It feels like y'all can grow count and unit volumes in 26. Any thoughts on that? Robert Schottenstein: You mean you're asking for guidance on projected community count growth? For 2026? Jay McCanless: I would never ask you for guidance, Bob. I'm just asking for how you're feeling about potential growth for next year. Robert Schottenstein: I think there will be community count growth next year. Yeah. I mean, we own 24,000 lots and we expect to have community count growth next year. Target is always to, you know, grow community count, you know, in that five to 10% range a year. Like I said, last year was seven. This year is probably gonna be about five. Even though we've slowed land purchases down the last couple of quarters. You know, we're still in great shape to continue growth. Jay McCanless: Sounds great. Okay. Thanks, guys. Appreciate it. Robert Schottenstein: Thanks, Jay. Appreciate it. Operator: There are no further questions at this time. I will now turn the call over to Phil for closing remarks. Phil Creek: Thank you very much for joining us. Look forward to talking to you next quarter. Operator: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.
Operator: Welcome to TrustCo Bank Corp NY earnings call and webcast. All participants will be on a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key. After today's presentation, there will be an opportunity to ask questions. Before proceeding, we would like to mention this presentation may contain forward-looking information about TrustCo Bank Corp NY that is intended to be covered by the safe harbor forward-looking statements provided by the Private Securities Litigation Reform Act of 1995. Actual results, performance, or achievements could differ materially from those expressed or implied by such statements due to various risks, uncertainties, and other factors. More detailed information about these other risk factors can be found in our press release that preceded this call and in the Risk Factors and Forward-Looking Statements section of our annual report on Form 10-Ks and as updated by our quarterly reports on Form 10-Q. Forward-looking statements made on this call are valid only as of this date hereof, and the company disclaims any obligation to update the information to reflect the events or developments after the date of this call, except as may be required by applicable law. During today's call, we will discuss certain financial measures derived from our financial statements that are not determined in accordance with U.S. GAAP. The reconciliations of such non-GAAP financial measures to the most comparable GAAP figures are included in our earnings press release, which is available under the Investor Relations tab of our website at trustcobank.com. Please also note that today's event is being recorded. A replay of the call will be available for thirty days, and an audio webcast will be available for one year, as described in our earnings press release. At this time, I'd like to turn the conference call over to Mr. Robert J. McCormick, Chairman, President, and CEO. Please go ahead. Robert J. McCormick: Morning, everyone, and thank you for joining the call. I'm Robert J. McCormick, President of TrustCo Bank Corp NY. I'm joined today as usual by Michael M. Ozimek, our CFO, who will go through the numbers, and Kevin M. Curley, our Chief Banking Officer, who will talk about lending. It is often said that actions speak louder than words. TrustCo Bank Corp NY's performance this quarter and year to date speaks volumes about the tactical effective application of our corporate strategic vision. TrustCo Bank Corp NY's mission is to deliver the best possible loan and deposit products, making the dream of home ownership come true for customers who we treat with respect. It is a fundamental principle of our company that loans are underwritten with professionalism and care to ensure fair lending outcomes and solid credit quality. This is true both in our residential and commercial lending areas. Looking back just five years, we have never exceeded annualized net charge-offs of more than 0.02% compared to our average loan portfolio. Throughout this year, our strong customer relationships have enabled us to grow deposits and loans while holding the line on cost of funds as the loan portfolio repriced. All of these elements have combined to generate these stellar financial results we proudly announced today. Both our profitability and efficiencies improved greatly over the quarter, compared to this time last year. Our return on average assets increased 21.4%, return on average equity grew 20%, and our efficiency ratio decreased by almost 9%. This is all done while staying focused on high-quality underwriting standards and loan processing functions, sticking to our lending philosophy by never sacrificing credit quality. We improved our nonperforming loans to total loans by 5% over the quarter, and our coverage ratio increased to over 280%, up 9% from the third quarter last year. Also, part of our longstanding TrustCo tradition, we do not rest upon our successes. Throughout this year, our management team has demonstrated we are not satisfied with simply delivering outstanding corporate performance in the present term. We always have an eye on building long-term shareholder value. Toward that end, we sought and received approval to repurchase 1,000,000 shares of our company's stock. So far, we have repurchased nearly half of that number. Further, we anticipate that the company will complete the currently authorized buyback and expect to seek approval for further substantial repurchase. It is our view that the stock is significantly undervalued and presents an outstanding investment opportunity without exposing us to the risks inherent with another investment. Could not be more pleased with the driving corporate value in the safe, sound, and strategically purposeful manner. Now Michael will go over the details with the numbers, and some impressive numbers. Michael? Michael M. Ozimek: Thank you, Robert, and good morning, everyone. I will now review TrustCo Bank Corp NY's financial results for the 2025Q3. As we noted in the press release, once again, the company saw strong financial results for the 2025Q3, marked by increases in both net income and net interest income of TrustCo Bank Corp NY during the 2025Q3 compared to the 2024Q3. This performance is underscored by rising net interest income, continued margin expansion, and sustained loan and deposit growth across key portfolios. This resulted in third-quarter net income of $16.3 million, an increase of 26.3% over the prior year quarter, which yielded a return on average assets and average equity of 1.02% and 9.29%, respectively. Capital remains strong. Consolidated equity to assets ratio was 10.9% for the 2025Q3, compared to 10.95% in the 2024Q3. Book value per share at 09/30/2025 was $37.30, up 6% compared to $35.19 a year earlier. During the 2025Q3, TrustCo Bank Corp NY repurchased 298,000 shares of common stock under the previously announced stock repurchase program, resulting in 467,000 shares repurchased year to date, and we have the ability to repurchase another 533,000 shares under the repurchase program. And as always, we remain committed to returning value to shareholders through a disciplined share repurchase program, which reflects our confidence in the long-term strength of the franchise and our focus on capital optimization. Credit quality continues to improve. As we saw nonperforming loans decline to $18.5 million in the 2025Q3 from $19.4 million in the 2024Q3. Additionally, nonperforming loans to total loans also decreased to 0.36% in the 2025Q3, from 0.38% in the 2024Q3. Nonperforming assets to total assets also reduced to 0.31% in the 2025Q3 compared to 0.36% in the 2024Q3. Our continued focus on solid underwriting within our loan portfolio and conservative lending standards positions us to manage credit risk effectively in the current environment. Average loans for the 2025Q3 grew 2.5% or $125.9 million to $5.2 billion from the 2024Q3, an all-time high. Consequently, overall loan growth has continued to increase, and leading the charge was the home equity credit lines portfolio, which increased by $59.9 million or 15.7% in the 2025Q3 over the same period in 2024. The residential real estate portfolio increased $34 million or 0.8% of average commercial loans, which also increased $34.6 million or 12.4% over the same period in 2024. This uptick continues to reflect a strong local economy and increased demand for credit. For the 2025Q3, the provision for credit losses was $250,000. Retaining deposits has been a key focus as we navigate through 2025Q3. Total deposits ended the quarter at $5.5 billion and was up $217 million compared to the prior year quarter. We believe the increase in these deposits compared to the same period in 2024 continues to indicate strong customer confidence in the bank's competitive deposit offerings. The bank's continued emphasis on relationship banking combined with competitive product offerings and digital capabilities has continued to stable deposit base that supports ongoing loan growth and expansion. Net interest income was $43.1 million for the 2025Q3, an increase of $4.4 million or 11.5% compared to the prior year quarter. Net interest margin for the 2025Q3 was 2.79%, up 18 basis points from the prior year quarter. The yield on interest-earning assets increased to 4.25%, up 14 basis points from the prior year quarter, and the cost of interest-bearing liabilities decreased to 1.9% in the 2025Q3 from 1.94% in the 2024Q3. The bank is well-positioned to continue delivering strong net interest income performance even as the Federal Reserve signals a continued potential easing cycle in the months ahead. The bank remains committed to maintaining competitive deposit offerings while ensuring financial stability and continued support for our communities' banking needs. Our wealth management division continues to be a significant recurring source of non-interest income. They had approximately $1.25 billion of assets under management as of September 30, 2025. Non-interest income attributable to wealth management and financial services fees represent 41.9% of non-interest income. The majority of this fee income is recurring, supported by long-term advisory relationships and a growing base of managed assets. Now on to non-interest expense. Total non-interest expense net of ORE expense came in at $26.2 million, down $42,000 from the prior year quarter. ORE expense net came in at an expense of $8,000 for the quarter as compared to $204,000 in the prior year quarter. We are going to continue to hold the anticipated level of ORE expense to not exceed $250,000 per quarter. All of the other categories of non-interest expense were in line with our expectations for the third quarter. Now Kevin will review the loan portfolio and non-performing loans. Kevin M. Curley: Mike, good morning to everyone. Our loans grew by $125.9 million or 2.5% year over year. The growth was centered on our home equity loans, which increased by $59.9 million or 15.7% over last year, and residential mortgages, which increased by $34 million. In addition, our commercial loans grew by $34.6 million or 12.4% over last year. For the second quarter, actual loans increased by $35.1 million as total residential loans grew by $38.5 million, and commercial loans were slightly lower for the quarter. Overall, residential activity is picking up. We are seeing additional refinance volume as mortgage rates remain in the 6% range. Our home equity lending also continues to grow steadily as customers continue to use their equity for home improvements, education expenses, or paying off higher-cost loans such as credit cards. In all our markets, rates have fluctuated within a 25 basis point range, with our current thirty-year fixed rate mortgage at 6.125%. In addition, our home equity products are very competitive, with rates starting below 6.75%. Our products are well situated across our markets, as we are ready to capture more growth as activity picks up. As a portfolio lender, we have the flexibility to manage pricing and implement targeted promotions to increase loan volume. Overall, we are encouraged by the loan growth in the quarter and remain focused on driving stronger results moving forward. Moving to asset quality. Asset quality of the bank remains very strong. At TrustCo Bank Corp NY, we work hard to meet strong credit quality throughout our loan portfolio. As a portfolio lender, we have consistently used prudent underwriting standards to build our loan portfolio. Our residential loans originated in-house, focusing on key underwriting factors that have proven to lead to sound credit decisions. These loans are originated with the intent to be held in our portfolio for the full term rather than originated for sale. In addition, we have no foreign or subprime loans in our residential portfolio. In our commercial loan portfolio, which makes up just about 6% of our total loans, we focus on relationship-based loans secured mostly by real estate within our primary market area. We also avoid concentrations of credit to any single borrower or business and continue to require personal guarantees on all our loans. Overall, our disciplined underwriting approach has produced strong credit quality across our entire loan portfolio. Here are the key metrics. Our early-stage delinquencies for our portfolio continue to be steady. Charge-offs for the quarter amounted to a net recovery of $176,000, which follows a net recovery of $9,000 in the second quarter and $258,000 in recovery in the first quarter, totaling a year-to-date net recovery of $443,000. Non-performing loans were $18.5 million at this quarter-end, compared to $17.9 million last quarter and $19.4 million a year ago. Non-performing loans to total loans was 0.36% this quarter-end, compared to 0.35% last quarter and 0.38% a year ago. Non-performing assets were $19.7 million at quarter-end versus $19 million last quarter and $21.9 million a year ago. At quarter-end, the allowance for credit losses remained solid at $51.9 million with a coverage ratio of 281%, compared to $51.3 million with a coverage ratio of 286% at year-end and $49.95 million with a coverage ratio of 157% a year ago. That's our story. We're happy to answer any questions you might have. Operator: Thanks very much. We will now begin the question and answer session. Before pressing the keys, our first question comes from Ian Lapey from Gabelli Funds. Your line is open, Ian. Please go ahead. Ian Lapey: Good morning, Robert and team. Congratulations on the great financial results. I was hoping maybe you could quantify a little bit. The release mentions that you expect meaningful net interest income upside for quarters to come. You mentioned the rates on the fixed rate and home equity. What about the CDs that are going to be maturing over the next quarter? What's sort of the average rate for that compared to what you're paying on new CDs that you're issuing? Robert J. McCormick: The highest rate we're offering right now, Ian, is 4%, and that's a three-month rate. And there's about a billion dollars in CDs that are coming due over the next four to six months. So we expect, based on what happens with the Fed and some competition, there should be opportunity in that CD portfolio to reprice. Ian Lapey: What's roughly the average, so for the billion coming due, what is the average roughly rate on those? Robert J. McCormick: The average rate on the billion coming due is about 3.75%. Okay. And then on the recoveries, obviously, very impressive. I was just hoping you could unpack that a little bit. For example, for the quarter, in New York, you had $194,000 in recoveries. Just curious, like how many homes typically would that relate to? Is this just a function of borrowers defaulting with significant equity still in the home? Maybe you can just explain a little bit. Robert J. McCormick: A lot of that, as you can imagine, Ian, in the real estate market, Upstate is still very, very strong, and there's still great demand with relatively limited inventory. So a lot of the transactions happened before we even end up taking the property back, which is the best possible scenario. But the $194,000 is probably around five properties we've taken back, and I think there was one commercial property in there and four residentials. Ian Lapey: Okay, great. And then I guess my only follow-up, my only remaining question. So it looked like branches were flat at 136 sequentially. What are you thinking about in terms of expansion, if at all, and would Florida still be sort of your targeted range for growth? Robert J. McCormick: We're looking at, well, Pasco County is something that we're very interested in, Ian. I'm sure you're tracking this, but on the West Coast of Florida, because of development and prices and things like that, people are being pushed further and further out from Tampa. We're seeing opportunity in loan demand in Pasco County. And then there are a couple of other infill locations that we would like to find something in Florida. But, you know, we are pretty cheap people, so we want the right transaction if we can in the right location. So and then there's always opportunity throughout Downstate New York as things open up there as well. So those would be the two opportunities we're seeing right now. Ian Lapey: Okay. Terrific. Thank you. Operator: Thank you. We currently have no further questions at this time. Now I'd like to turn the conference back to Robert J. McCormick for any closing remarks. Robert J. McCormick: Thank you for your interest in our company, and we hope you have a great day. Thank you. Operator: The conference call has now concluded. Thank you very much for attending. You may now disconnect your lines.
Operator: Good morning, and welcome to AT&T Inc.'s Third Quarter 2025 Earnings Call. At this time, all participants are in a listen-only mode. Should you need assistance during the call, please press star. Following the presentation, the call will open for your questions. If you would like to ask a question, if you are in the question queue and would like to withdraw your question, as a reminder, this conference is being recorded. I would now like to turn the conference call over to our host, Brett Feldman, Senior Vice President, Finance and Investor Relations. Please go ahead. Brett Feldman: Thank you, and good morning. Welcome to our third quarter call. I'm Brett Feldman, Head of Investor Relations for AT&T Inc. Joining me on the call today are John Stankey, our Chairman and CEO, and Pascal Desroches, our CFO. Before we begin, I need to call your attention to our Safe Harbor statement. It says that some of our comments today may be forward-looking. As such, they are subject to risks and uncertainties described in AT&T Inc.'s SEC filings. Results may differ materially. Additional information as well as our earnings materials are available on our Investor Relations website. With that, I'll turn the call over to John Stankey. John? John Stankey: Thank you, Brett, and good morning, everyone. I appreciate you making the time to join us, and I hope everybody is doing well. I am pleased to report that we had another solid quarter and remain on track to achieve this year's consolidated financial guidance. We continue to attract and retain high-value customers and perform well across different operating environments, thanks to the durable and differentiated connectivity franchise we continue to build. In mobility, we delivered over 400,000 postpaid phone net adds in the quarter, which is slightly ahead of our performance a year ago. In Consumer Wireline, the scale we have achieved as a nationwide provider of home Internet services through our significant investments in fiber and 5G is proving to be a winning play. At the end of the third quarter, we passed more than 31 million total locations with fiber, and we expect to reach more than 60 million customer locations by 2030. We also offer our fixed wireless service, AT&T Internet Air, in parts of 47 states, and we continue to expand availability into new areas as we open and modernize our mobile network. You can see the durable impact of these investments in our third quarter results, which include over 550,000 new subscribers to our most advanced broadband services, AT&T Fiber, and Internet Air. This resulted in our highest total broadband net adds in more than eight years. Let me say that again. We achieved our highest total broadband net adds in eight years. This includes a major milestone by reaching over 10 million premium AT&T Fiber subscribers, more than doubling our fiber customer base in less than five years and nearly tripling our quarterly fiber revenues over that same period, and the train keeps rolling. We offer fast and reliable connectivity for 5G and fiber at attractive price points, and more people are choosing AT&T Inc. for both wireless and home internet services. Today, more than 41% of AT&T Fiber households also choose AT&T Inc. for wireless. The pace of this convergence trend within our customer base continues to grow. These customers remain our most valuable, with the lowest churn profile and highest lifetime values. Our success with convergence also extends to fixed wireless. More than half of our Internet Air subscribers also choose AT&T Inc. for their wireless service. Similar to fiber, these customers exhibit lower churn and drive higher lifetime values than customers with standalone services. We continue to make solid progress, but our work is not done. Our goal is to become the best advanced communications provider in America and to lead our industry in share of retail connectivity service revenue by the end of this decade. This year, we've made a series of strategic moves that both strengthen our ability to lead in convergence and accelerate our future growth trajectory. Our planned acquisitions of spectrum licenses from EchoStar and fiber assets from Lumen significantly enhance and expand our advanced connectivity portfolio. This aligns with our vision to build the most efficient high-performance network with an ability to deliver traffic at the lowest marginal cost. We believe this will establish a durable competitive advantage for AT&T Inc. in the coming years. The EchoStar spectrum we agreed to acquire will improve our 5G wireless performance in a cost-efficient manner while allowing us to grow Internet Air at a faster pace. We are already making great progress delivering on our commitment to deploy this valuable spectrum for the benefit of American consumers and businesses. We started deploying the 3.45 gigahertz spectrum that we agreed to acquire from EchoStar under a short-term spectrum manager lease. Based on our current rate and pace, we expect these mid-band licenses will be deployed in cell sites covering nearly two-thirds of the U.S. population by mid-November. This should position us to further expand the availability of Internet Air in our sales channels in 2026. Our ability to move this quickly reflects the great work of our teams and the FCC's pro-investment and supportive policy environment. We are also making great progress in preparing to close our transaction with Lumen. Most of the senior leadership team has been identified, and we now expect to close this transaction in 2026. As I've said before, where we have fiber, we win. With both fiber and 5G, we plan to win even more as our investments in these assets bring advanced connectivity to more Americans. The supportive policy environment is also making it easier for us to transition away from outdated legacy infrastructure and invest in the AI-ready connectivity that Americans want and need. The bottom line is that we now have the right building blocks in place to realize our scaled fiber and fixed wireless ambitions, complete our wireless modernization, and successfully transition away from legacy infrastructure. As we complete our key investments, acquisitions, and transformation initiatives, we expect to increase our fiber and convergence penetration rates and see a majority of incremental revenue growth originate from converged customer relationships. For several consecutive years, we have demonstrated that this strategy works by efficiently growing our business while investing in our network, strengthening our balance sheet, and returning value to shareholders. The opportunities ahead of us are in our control, and I wouldn't trade our assets and position for anyone else's in our marketplace. Now it's up to us to continue executing on our vision to become the best advanced communications provider in America. With that, I'll turn it over to Pascal for a detailed review of our third quarter results and outlook. Pascal Desroches: Thank you, John, and good morning, everyone. At a consolidated level, total revenues grew 1.6% year over year. Adjusted EBITDA grew 2.4%, and we expanded adjusted EBITDA margins by 30 basis points. Adjusted EPS was $0.54 in the quarter, consistent with the prior year. Adjusted EPS excludes a gain recognized on the sale of the DIRECTV investment, legal settlement costs, and other items. Third-quarter free cash flow was $4.9 billion versus $4.6 billion a year ago. Capital investment was $5.3 billion, which was down $200 million year over year. We also contributed $400 million to our employee pension plan in the third quarter, which is reported within cash from operations and therefore impacts free cash flow. We discussed in our second-quarter results, we expect to contribute $1.5 billion to our pension plan by 2026 using a portion of the cash tax savings from provisions within the One Big Beautiful Bill Act. This includes an additional $400 million of contributions planned in the fourth quarter, with the remaining $700 million of contributions next year. Turning next to our business unit results. Starting with mobility, our third-quarter performance highlights how our differentiated strategy enables us to deliver consistent results across various operating environments. Similar to the first half of the year, switching activity remains elevated. However, our playbook is working, and we continue to execute well. We grew mobility service revenue by 2.3% year over year, which contributed to EBITDA growth of 2.2%. As a reminder, the prior year quarter included approximately $90 million in one-time service revenues related to certain administrative fees. This impacted our reported growth rates during the third quarter in mobility service revenue by about 60 basis points and in mobility EBITDA by about 100 basis points. We reported 405,000 postpaid phone net adds, which is up slightly from the third quarter of last year. Postpaid phone churn was 0.92%, up 14 basis points versus a year ago. This reflects increased marketplace activity and, to a lesser degree, an increase in the portion of our customer base reaching the end of device financing periods, which normalized as we exited the quarter. Based on this operating environment, we continue to plan for postpaid phone churn and upgrades to follow seasonal patterns in the fourth quarter when we typically see more switching and upgrade activity due to new device launches and the holiday season. Postpaid phone ARPU was $56.64, essentially consistent with a year ago when normalizing for the previously mentioned one-time service revenue impact in 2024. ARPU was also impacted by our success in attracting customers in underpenetrated segments that have lower ARPUs, such as our plan that targets adults 55 years old or older. Success in these underpenetrated segments drives higher incremental service revenues and attractive returns. The trend also reflects our success in growing our base of converged customers with higher lifetime values. These subscribers are typically eligible for a service discount but support growth in home Internet revenues, which we report in Consumer Wireline. We expect these dynamics to continue in the fourth quarter, which typically sees seasonally lower ARPU with some offsetting benefits related to a pricing action that becomes effective in December. Similar to the first half, we continue to operate in a marketplace where the cost of acquiring and retaining subscribers has increased. However, our continued success at adding high-value converged customer relationships points to the attractive returns we're driving through our offers. While total mobility operating expenses were up year over year, this was primarily driven by higher equipment costs and other acquisition-related expenses. We otherwise continue to execute well at managing our costs through operational efficiencies, including reductions in cost of service and customer support. I'm really pleased with how well the team is executing and remain confident in our ability to deliver on our full-year outlook for mobility service revenue growth of 3% or better and mobility EBITDA growth of approximately 3%. Our consumer wireline business unit also delivered another strong quarter. Total revenues grew 4.1% year over year, driven by 16.8% growth in fiber revenue. 15% for the quarter. This was driven by top-line growth and cost takeout, including lower expenses associated with our legacy copper network. As a result, Consumer Wireline EBITDA margins expanded by a robust 350 basis points year over year. Customer demand for our leading home Internet offerings is growing. As we reported strong gains in both fiber and Internet Air customers. We added 288,000 AT&T Fiber customers during the third quarter, reflecting seasonal tailwinds and the continued expansion of our fiber footprint. As a reminder, in the fourth quarter of last year, we benefited from some pent-up demand following the third-quarter work stoppage in the Southeast. This year, we expect our fiber net adds to exhibit typical seasonality in the fourth quarter, when we usually see lower levels of new connections as we get deeper into the holiday season. Once again, we saw strong growth in the portion of our fiber customer base that also subscribes to mobility services. At the end of the third quarter, this convergence rate reached 41.5%, up 180 basis points from a year ago. This represents one of our largest convergence gains over the past three years. We also reported 270,000 AT&T Internet Air net adds, doubling our subscriber gains year over year. Based on our operating momentum and strong performance through the first three quarters of the year, we continue to expect to achieve full-year growth in consumer fiber broadband revenue in the mid to high teens and Consumer Wireline EBITDA growth in the low to mid-teens range. Business wireline revenues declined 7.8% year over year, while EBITDA declined about 13%. As we shared last quarter, we've been reinvesting some of our cost savings into driving improved growth in fiber and fixed wireless, and our third-quarter results reflect early traction with these efforts. Fiber and advanced connectivity service revenues grew 6% year over year, representing an acceleration from 3.5% growth in the second quarter. Value-added services, which contribute about one-third of these revenues, can be variable from quarter to quarter. But we expect continued acceleration in our fiber and wireless connectivity revenues in the fourth quarter. While Business Wireline continues to manage through structural declines in legacy services, the team is doing a great job positioning the business to drive sustained growth in advanced connectivity services while operating more efficiently. Based on this solid execution, we continue to expect Business Wireline EBITDA pressures to moderate versus last year, with a full-year decline in the low double-digit range. During the third quarter, we returned $3.5 billion to our shareholders. This includes nearly $1.5 billion in stock repurchases, keeping us on pace to achieve our full-year target of $4 billion in buybacks. We ended the third quarter with net debt to adjusted EBITDA of 2.59 times, down slightly from 2.64 times last quarter, reflecting strong cash generation and growth in adjusted EBITDA. We ended the quarter with more than $20 billion of cash, including proceeds from recent debt issuances. This puts us in a great position to fund our capital returns program and pending acquisitions. We closed the sale of our remaining stake in DIRECTV in July and received approximately $320 million in cash in the quarter. We expect to receive an additional $3.8 billion of cash, with the large majority expected over the course of the fourth quarter and the early part of next year. As a reminder, these post-sale proceeds are reported within investing activities in the statement of cash flows and excluded from our reported free cash flow. Overall, our third-quarter results showed that we're executing well and are reiterating our full-year financial guidance. At a consolidated level, this includes service revenue growth in the low single-digit range and adjusted EBITDA growth of 3% or better. We had an opportunity to settle some out-of-pattern legal settlements that will impact our fourth-quarter free cash flow by approximately $500 million. The expense associated with these settlements was accrued in the third quarter and excluded from adjusted EPS. However, we continue to expect full-year free cash flow in the low to mid $16 billion range, including about $4 billion in the fourth quarter. We also continue to expect full-year capital investment in the $22 billion to $22.5 billion range, which implies fourth-quarter capital investments of roughly $7 billion to $7.5 billion. We also reiterate our full-year outlook for adjusted EPS of $1.97 to $2.07 and expect that we will come in closer to the high end of this range. Embedded within this guidance is an outlook for full-year depreciation and amortization expense that is up slightly versus 2024. In the fourth quarter, we expect to see sequentially lower depreciation and amortization expense as certain legacy assets become fully depreciated. So we expect our fourth-quarter depreciation and amortization expense of about $5 billion is more aligned with the quarterly run rate we expect heading into next year. As John noted, we're making great progress towards closing our pending acquisitions of fiber assets from Lumen and spectrum licenses from EchoStar. So we expect to provide an update to our long-term financial outlook early next year. We expect both of these transactions to boost our organic growth in revenues and profitability, and you should expect that this will be reflected in our updated outlook. In summary, we continue to deliver value for our customers and our shareholders, and we're really pleased with the team's performance through three quarters of the year. Brett, that's our presentation. Now ready for the Q&A. Brett Feldman: Thank you, Pascal. Operator, we are ready to take the first question. Operator: We will now begin the question and answer session. To ask a question, if you are using a speakerphone, the first question today comes from Peter Supino with Wolfe Research. Please go ahead. Peter Supino: Hi, good morning. The broadband results were really striking, and I have two questions on broadband. Take them in whichever order you like. First, your 60 million fiber home target is the most important among numerous industry-wide fiber expansion plans. Our best attempt to estimate the intentions of all the fiber expanders, builders, developers rolled up is about 110 million in a country with 135 million homes. And so a question we hear frequently and I think is important is, at what point do AT&T Inc. investors have to worry about insurgents getting to some of the homes that AT&T Inc. plans to pass before you do? And if they do, could that alter your plans at all? Would you be responsive to that? And then a related question is within two years, your DSL base will be gone or declining much more slowly? I mean, your VDSL base. And what should that mean for your broadband strategy and for your competitive outlook? Thank you. Hi. Good morning, Peter, and thank you for noting the broadband results. They are very, very strong. I'm delighted with them. And as I said in my comments, despite all the other things going on in the industry and the questions that come in around change of tactics by various other players, this team continues to consistently deliver results quarter over quarter in this space because we have a great product. John Stankey: I'll tell you we pride ourselves on being smart about how we build. We think we have the most scaled build engine in the industry. With that scalability comes a degree of agility. It means we have the flexibility to work with our base and move supply around. We try to be very deliberate about ensuring that everybody knows when the train rolls into town that the train's in town and it's probably not a good place for anybody else to come and deploy their capital because this is a company that has a track record of going in and penetrating aggressively and being successful in markets, and there's probably easier places for people to go than come up against us. And so we try to be very, very deliberate in how we allocate our capital in the markets that we're building in to make sure everybody knows where we're going and how aggressively we're going because we believe the right thing to do is to ensure that there's a good solid market structure for ourselves moving forward. And occasionally there are times where while we lay our plans out three years in advance and we believe we have some insight and fidelity of what's going on in the market, something changes in that period, and we have to recalibrate and think differently about how we're going to draw the boundaries about where we're going to build and how we're going to build. But while I know there's a lot of announcements out there that may add to 110 million homes being built, it doesn't mean they're getting built. It doesn't mean the people are effectively getting permits. So they have their supply chain issues worked out. And our job is to remove that friction and be better than everybody else and ensure the 60 million that we're building are in fact the first and that we're doing it more than anybody else. And when we run into those occasional circumstances where they're not, we rethink about where we deploy our capital and what we do. So I feel pretty comfortable that the team understands that and has been doing that by and large. And we also know that when somebody overbuilds a small portion of a metropolitan area, this is a scale business. Having 230,000 homes passed isn't going to cut it. And so when we come in and we're able to use our brand and use our marketing position, we can do very, very well when there's this small amount of overlap and still get the share we need to drive the returns into our business. Your observation on the DSL base is accurate. As you know, we're trying to turn down our legacy infrastructure. The DSL base is part of that. We don't want that equipment on our network anymore. We don't want it sucking down power. We don't want to be maintaining copper. And so, part of what you're seeing is a very deliberate approach. In almost all instances, we can replace DSL with fixed wireless. In places where we're not building fiber or we can actively replace it with fixed wireless if we're in a holding pattern where we know we're not going to be getting our overbuild in place of fiber for another two years or so. And we're actively trying to hold those customers with more attractive conversion offers. And that's part of the motion and the momentum that you're seeing in our converged basis and how we're using these products, and we're really excited about the advanced spectrum that we picked up because we think it's going to give us even more tools to make that happen both within our base where we're going to overbuild in those places where we will be wireless first. And we don't intend to build fiber as part of that deployment of capital that gets us just above 60 million. So we'll actively manage it. As you can see, we're getting better at managing it. That's why our nets are the best they've been in eight years. And I'm really confident that we haven't quite hit our full stride on that yet. But we can do even better on that front as we move forward in the coming quarters. And to my point in my comments, I would not change position with any company in this industry right now given the asset base we have and the place it affords us to run. Brett Feldman: Thanks, Peter. We'll take the next question, operator. Operator: The next question comes from Benjamin Swinburne with Morgan Stanley. Please go ahead. Benjamin Swinburne: Thank you. Two questions. John, the AT&T Internet Air momentum is pretty clear in your results. I'm wondering if you could talk a little bit as the company expands your footprint, you mentioned parts of 47 states, how are you making sure you're sort of segmenting the market the right way between fiber and fixed wireless and being efficient with your marketing, etcetera? And maybe you could comment on how you're approaching SMB as well. And then for Pascal, Pascal, you've mentioned the competitive environment in wireless this year. Has led to some higher equipment costs and subscriber acquisition costs, which we can see in mobility EBITDA margins being a little pressured this year. Your three-year guidance assumes that gets better, that margins expand next couple of years. Wondering if you could talk a little bit about how you deliver that if we think that the competitive environment maybe stays this elevated over the period? Thank you. John Stankey: Good morning, Ben. So first of all, one of the big changes you've seen us make in our messaging is we're no longer leading kind of top-of-funnel awareness and advertising with a specific technology bent. We talk about getting Internet from AT&T Inc. and we're doing that in the business market and the consumer market because we're now approaching this point that we can offer Internet nationwide. So the first thing is to make awareness that people just think about going to AT&T Inc. for Internet and that our messaging supports that, and you probably picked up on that if you watch any football or anything else in mass media. And then to your point, underneath that top-of-funnel messaging is to make sure that we're tuning the messaging for what we offer in a particular geography. And digitally that's really straightforward because we can ring-fence literally what we want to do with a lead offer, and that's one reason why we're spending a little bit less in mass media is because given our targeted approach to how we want to converge customers, we can get a lot more out of digital marketing based on knowing where the customer is and what the right best offer is to put in front of them. We've had pretty good success doing that. I think we even shared with you in December during the Analyst Day, if I recall correctly, an example of the map of the metropolitan area where we sell both products, and you will see that there isn't Internet Air subscribers sitting in the fiber footprint. And there really shouldn't be. There not only shouldn't be any of our Internet Air subscribers in the fiber footprint, but there shouldn't be anybody else's Internet Air subscribers in a fiber footprint. And my intent is to ultimately market and sell and structure the product in a way that we make sure that that is in fact the case. Because there is no lower marginal cost way to deliver broadband than fiber. And once it's in, it's in, and it should basically have a preferred run at the market. And I think we can still even get better than that. And that's one reason why I'm not as attached to ARPUs right now and worried about that. I'm worried about our growth in service revenues and managing our profitability because I think there's segments in the market that we can even do better at given the technology and what we've deployed. So you'll see us be very targeted in that, and it's very specific in our support systems when people come into the stores, etcetera. A lot of this is not left at the discretion of the individual. It's supported to them as to what they should be selling and can sell. And our effectiveness, as I mentioned when I answered Peter's question, and doing that over the coming years is a really important part of the success of this management team and managing the sustainability and durability of our profitability in the company. And we're very focused on making that happen operationally both with our messaging as we work our way through the funnel and operationally how people move forward on it. We're getting our momentum in business around Internet Air. We're still not as good as we can be. But as I've told you many times before, we've always viewed fixed wireless as a good solution in the business market given the usage characteristics of a small business or a medium-sized business and the nature of how those companies operate. And it's getting your distribution lined up. I think we're doing pretty well on our owned and operated distribution channels. But as you know, in the mid and low portion of the market, a large part of your distribution comes through third party, and we're not fully ramped in the third-party distribution yet. When I compare our effectiveness to others in the market, we can get there, and we will get there, and we're scaling it and ramping into it, and that's why you're seeing results improve. But I think our mix of business can be a little bit stronger moving forward. And I think it will hinge on how effectively we ramp in third-party channels to make that happen. So that's part of the when I say I think we can even get better than where we are, which I'm really pleased with the strong results, but I think we can get better. This would be an area, for example, where I think we can get better. Pascal? Pascal Desroches: Hey, Ben. Good morning. With regards to margins, we continue to expect overall company margin expansion consistent with what you saw this quarter. Keep in mind when you look out the next several years, we are working through several transformations, all of which will continue to drive overall efficiency. With each passing day, we have less and less copper in the network and less underlying infrastructure to support it. Similarly, we're in mid-flight in modernizing our wireless network. We expect that to be substantially complete by 2027. As more and more towers get modernized, it's going to drive efficiency in maintenance and power, and it's going to deliver superior service. Also embedded in our strategy is a goal to continue to drive convergence. And over time, the more convergence we drive, the overall churn should come down. And as a result, the efficiency of our acquisition spend should also improve. So all those things together make me feel really good about how we're positioned for the future to continue to drive profitable growth. Benjamin Swinburne: Thank you. Thanks for the question. Thanks, Ben. Operator, we'll take the next question, please. Operator: The next question comes from John Hodulik with UBS. Please go ahead. John Hodulik: Great, thanks. Good morning, guys. If I may. Maybe first on wireless, John, how would you say the company is positioned? If we see higher promotional activity in the fourth quarter given the changes at Verizon and T-Mobile actually? And maybe touch on the sort of cohorts coming off plan, if you could, given what versus what you've seen in the last couple of quarters? And then for Pascal, the comments on ARPU and actually with a follow-up comment from John in your recent response, I mean, it sounds like you guys are down the pressure on ARPU is a little bit stronger than we expected in wireless and in broadband. With most of the growth coming from converged services going forward, and your comments, should we expect continued pressure on ARPU on both wireless and broadband as we look out over the next several quarters? Thanks. John Stankey: Good morning, John. Look, I think the answer to the question is we're well-positioned for a competitive market. Excuse me, it's been competitive. It continues to be competitive. There are shifts in tactics all the time that occur in this market, and we're in a cycle right now that because of the maturity level, tactics have shifted. And as Pascal just very effectively articulated to you, our shift in tactic is to focus on converged customers. And we know that there are some things we have to do differently for that to happen, but we also can project out given how we know they behave and their lifetime values and what occurs that when we're successful doing this, and we drive the percentages of our base up higher on converged customers, we're going to get in a position where we drive down churn, we make that base more profitable, we have happier customers who ultimately move up the continuum and buy more, and we believe that. And that is why we're architecting the business the way we are with the asset base we have and the strategies we're using moving forward. In terms of the fourth quarter, I may be probably sit in a little different chair. I actually don't believe many of my peers walk into their job and say my goal is to lose share and I'm going to deliberately do things to make that happen. I think most CEOs want to win, and I think they try to operate their business to win. And you can debate whether or not the tactics are right or need to be adjusted. We all make good decisions and bad decisions. But just because there's a change at the top, I don't know that that suggests to me that there's going to be a 180-degree posture change. I think our competitors have been pretty aggressive, and they've tried to win, and they're going to continue to try to win moving forward. And we've demonstrated that we can be successful against all those tactics. And if there's a recalibration or a change, just like there may have been a recalibration or change in one of my competitors early this year, or last, we're going to adjust to that, and we're going to continue to run the plays that we've outlined, which is to focus on convergence and focus on those customers that we can bring together and make sure that when we're acquiring new customers, we're getting those that we think can be accretive. Which may be leaning into what Pascal is going to talk to you about on ARPU, I would describe what's going on in ARPU more as a feature, not a bug. When we talk to you about the fact that we're underpenetrated in certain segments, and we know that we can do better in certain places, and we talk to you about our desire to push convergence, which at the front end of investing in convergence means that we give the customer a square deal and a lot of value. That's what happens at the front end of those things. And we believe we get to a more sustainable place moving forward. And over time, what we do is we end up getting more value out of the relationship as a result of that. We deepen that relationship with the customer. We move them up a continuum of products and services. We, as I've said before, we don't just raise prices to raise prices. We raise prices when we think we've given the customer greater value. And we try to time it to that. And so investing in our wireless network to deliver massively superior performance with new spectrum that we're deploying opens up opportunities for us to do things like drive more value price relationship into the customer base to return on those investments. Pascal, do you want to talk about the ARPU characteristics? Pascal Desroches: Sure thing. Good morning, John. Here's the thing to keep in mind. When we look at our base of customers, we have a pretty broad base of customers. Candidly, we tend to over-index on the higher ARPU continuum. In order to grow service revenue, we have to be willing to also target other places where we're underpenetrated. And as John effectively laid out, that is a part of our strategy. But it doesn't mean that going down ARPU is at the sacrifice of overall service revenue. We are trying to maximize service revenue. And in the fourth quarter, as an example, we expect to have a pricing action that becomes effective that will contribute to service revenue growth. So overall, when you're managing a big base of customers like we are, it's important that we try to expand that base as well as over time drive more value by giving the customer more and driving more overall top-line growth. John Hodulik: Great. Thanks, guys. Brett Feldman: Thanks, John. Operator, we will take the next question. Operator: The next question comes from David Barden with New Street. Please go ahead. David Barden: Hey, guys. Thank you so much for taking the questions. I appreciate it. So John, just if I put all the pieces together, the Lumen deal, the Spectrum deal, the desire to get leverage back down to 2.5 times, the desire to maintain a dividend and an equity stock buyback return, recognizing the upper C band auction is coming, is it fair to say that when you say that you wouldn't trade assets with anybody, that you don't need any more assets? That AT&T Inc. is out of the M&A acquisition game, the inorganic game, and now it's time to build on what you have organically at the margin. And then I have a follow-up. Thank you. John Stankey: Hi, Dave. First of all, never going to answer a question absolutely and say never. But I will tell you what I've shared with the management team, which is we have all the assets in front of us. We've run the plays that we need to run to be successful over the next five years, and everything that's going on outside of our business right now is external and distraction. And there's going to be, to the question earlier, maybe new leadership or different tactics taken or approaches used. I feel very, very confident in the path we set for this business. And I feel very confident that the actions we've taken over the course of the last several years have put us in a position to be the leader in this industry, to lead on retail service revenues by the time we get to 2030. To effectively have better and deeper relationships with more customers for communication services than anybody else. And we have that asset base to do that at this point. And our job now is to organically invest in this business and make it a better company, operate better, serve customers better, become more efficient, and put a nail in the coffin of the legacy infrastructure that we have. Those plays all sit in front of us and are all contained within the four walls of AT&T Inc., and they don't require uncertain regulatory approvals or difficult external issues or other partners to get it done about us getting it done. And that is absolutely the focus and the rallying cry within the four walls of AT&T Inc. and how we're talking about it at the leadership level. I think you should take that as a strong indication that the management team right now is focused internally about doing the things we need to do to run those plays and do them effectively and not worrying much about what's going on outside of our industry and where assets are. David Barden: And so John, thank you so much for that. And so to key off that comment, I feel like I have to ask outside the four walls of AT&T Inc., there's been a lot of change in the C suites. That's obviously what people don't know what they don't know. What is your or AT&T Inc. Board's succession plan? How would that look? When might it happen? Would you become Chairman and give up the CEO title to Jeff? And then watch that happen. And could you just kind of elaborate a little bit because everybody is talking about it? John Stankey: Dave, nice question, but we're focused on what we need to do to operate our business every day right now. We don't have those distractions that others have. And I know what I'm entirely focused on, which is making sure that the management team understands their priorities and executes effectively, and that's all we're worried about. We're not worried about your question. David Barden: Okay, great. Thank you very much, guys. Brett Feldman: Thanks, Dave. Operator, we'll take the next question. Operator: The next question comes from Michael Ng with Goldman Sachs. Please go ahead. Michael Ng: Hey, good morning. Thank you for the questions. Following up on the comment related to boosting the long-term organic revenue growth and EBITDA outlook early next year, has your confidence around accretion from the Lumen Fiber assets and the EchoStar spectrum licenses increased as you've spent more time strategizing and looking at those assets? And you could spend a little bit of time also talking about kind of the key buckets in terms of the EchoStar spectrum accretion, whether that's AT&T Internet Air passing acceleration, some of the infrastructure deployment, cash tax savings, the Boost Hybrid MNO, would be very helpful. Thank you. John Stankey: Hi, Mike. I don't think there's any change in our point of view. First of all, we're not that far down the road of when we did the transaction as to where we stand. I think we continue to get data points to support that we had very conservative modeling in our approach to these things. The most notable would be the Lumen asset base. Certainly, we have not seen anything in our planning that is unexpected, that we said where did that come from or that's different than what we expected. I think most importantly, because we did pretty good diligence before we announced the transaction. We're buying a hard asset in this case, and we did our diligence literally at the hard asset level. So I think we know what we're getting. We've managed to get additional confidence. As you know, we're operating out of region with Giga Power. Giga Power has been scaling nicely. We're in that point right now where we can see the data coming in and markets that we've been able to build enough that we're beyond very smallpox of overbuild. And the assumption set that we've used in Lumen is based on our experience in having built outside the footprint. And we see that results are coming in the way we would have expected. And it's doing all the things that we said we need to do on a converged basis, which is driving both products into a household, driving them at the right ARPU, seeing customer satisfaction levels go up, brand gets a better image, churn goes down, all those things are happening, and that data is coming in. So it gives us confidence that we're on the right path. And that's why I said earlier that our job is to look organically internally and go the plays that we know we need to go execute. I would tell you on probably the upside around that is, as you know, largely built this as a consumer-oriented play. As we build brand reputation in a market and presence in a market, there's no reason to think we can't even move beyond that. And so I think there's upside in our conservative modeling on these things. On EchoStar, there's the old-fashioned way that accretion is driven in, which is it's going to defer some capital because of the depth we get in the network in places for capacity. So we defer out splits and augments on capacity, that's an important driver. That's pretty rote. We do that every time we buy spectrum. We know how to do those things. We have a better wholesale play. As you know, this moves into a wholesale network as a service construct for the Boost brand and for whatever DISH EchoStar chooses to do moving forward. That movement is underway now. I know that EchoStar is working through some of the regulatory issues around their consent decree to give them the freedom to do everything they need to do. That's probably a question better suited for them to ask how that progress is going. But I can see it on my side that they're migrating a lot of customers over to our network right now. So what we expected to have happen is happening, which is our wholesale revenues are growing and improving right now as a result of that, and we expect some incremental accretion over what we would have had in the business plan because of our previous wholesale relationship with EchoStar, which will add value into the acquisition. And then, of course, as you noted, the scaling that's going on in Internet Air, this is only going to allow us to be more successful in places where we're not building fiber and find those right business customers and find the right segment of the consumer base that we think has more durability with the converged offer and grow in that area. When Pascal shared with you that we're going to be out talking with you in the early part of next year as we get close to the approval of both of these transactions that we would expect to happen early next year, we'll come out and we'll give you the texture around that as to how we have that market segment and what we expect to do. The good news is, as you can see, operationally we're moving through those continuums now, including deploying the 3.45 spectrum that allows us to get the machine up and running even before we close that transaction, which should by the time we get those things in order start to reflect our volumes in 2026, that we can ultimately give you some better insights to as we move forward. Pascal Desroches: Mike, one other point to note, John said this, but I think it's worth underscoring. When you look at, in addition to adding fixed wireless, the mobility attachment associated with that currently across our footprint, we are at 50%. We're better than 50%. And that's really before any meaningful marketing that put behind it. As the spectrum is deployed and as we become more aggressive with marketing, that's another pool of value that we're really excited about. Michael Ng: Great. Thank you, Pascal. Thanks, John. That's very clear. Brett Feldman: Thanks, Mike. We'll take the next question, please. Operator: The next question comes from Sebastiano Petti with JPMorgan. Please go ahead. Sebastiano Petti: Hi, thanks for taking the question. Maybe Pascal or John, just a clarification question on FWA. You talked about the seasonality within the fiber business typically in the fourth quarter. You get towards the holidays, see a little bit of a step down in 4Q 2024 had a little bit of one-timer because of the work stoppage. In FWA, I mean, have you noticed a similar pattern on an underlying basis? Because obviously, you will see an acceleration. I think John you talked about lighting up some of the 3.45 for two-thirds, I think, of POPs by mid-November. Any help on how we think about the pacing of FWA underlying subscriber results and then as we kind of think about the broader expansion from the EchoStar spectrum coming on. Then I guess also sticking with broadband, I mean any update on Giga Power and how that's perhaps going? I think there was a press report in the third quarter about Giga Power perhaps bringing on a new ISP onto their network. Any way to kind of think about that and the risk that your wholesale partners within the, I think, piggybacking on Peter's question about getting to the 60 million within that obviously a decent portion of that would come from open access wholesale partners. How do you assess the risk of your partners meeting that target? Over time? Thanks, John. John Stankey: Good morning, Sebastiano. So, I'd say there are elements about the holiday season that I can speak to the Stankey household and what we notice in some of our customer base as people become busy and distracted and they have a lot going on. And as a result of that, I think we all prioritize our time and energy. And while we like to make an acquisition of our product and service seamless and without friction, it isn't yet there. And so people sometimes do research and have to ask themselves some questions. Is this the time they want to change a very important in their life, which is their Internet service provider? And I think because of that nature of that season and the bandwidth that people have to get things done, there's just some decisions that are deferred as a result of that. And I wouldn't expect that that would be entirely different for fixed wireless than it might be for a fiber installation, short of the fact that somebody doesn't have to come out to the house. So, do I think we can still move the product during the period? Yes, I do. I think businesses are a little bit different than consumers, and certainly fixed wireless has a little bit more of a dent on the business side right now with some of the penetration. So I wouldn't expect that to be as dramatic, but I do believe there's some seasonality that just works its way into consumers and businesses that are busy at that time of year. And that's why you get a degree of seasonality that occurs. Moves are down, people don't move homes during the fourth quarter. I don't think that's going to change. That's a dynamic of a buying decision. But we don't have multiple years of experience on fixed wireless where I can be perfectly empirical with you and tell you I know exactly where that's gonna come in. On Giga Power, look, I think our relationship with our partner there has been great. I think they're really satisfied. I think we're satisfied. We'd all like to go a little bit faster, but once the footprint is turned up, I think people are looking at the model and saying it's working exactly the way it's working. And I would expect with our partner the way we meet our obligations around rate of penetration and how we bring customers on, we are going to continue to be the anchor provider on that network. And have the dominant share of customers that are supported over that network, and that is as it was intended to do when the construct was designed, will be the foundation of the profitability and the return on that network. And I don't see anything changing in our results to date, anything that's going to be done going forward to be inconsistent with that. And I'm confident that we're going to get the customers that we need to get and that we're penetrating in the way we want to penetrate, and I don't worry about whether or not a second or third provider on the network ultimately creates a problem for AT&T Inc.'s retail activities and brand in the market. As opposed to are we attacking a segment that we just weren't effective at getting at that wholesale can be an extension and increase in penetration with the margin. Thanks, Sebastiano. Brett Feldman: All right. We'll take our next question. Operator: The next question comes from Michael Rollins with Citi. Please go ahead. Michael Rollins: Thanks and good morning. John, there's some about whether or not LEO satellites pose competitive threats to your mobile services, direct to device LEOs get access to spectrum and improve their technology. And also, whether these constellations will impact the future competitive landscape for broadband to the home and business locations. So just curious if you can give us an update on your views with respect to these constellations as competitors to your strategic wireless and broadband services? And if you can also give us an update on how you're planning to offer your own direct to device satellite offering to customers? Thanks. John Stankey: Hi, Mike. Don't know that I'm going to add anything to what you probably heard me say before publicly. Have you the LEO technology is really exciting technology. I think it's going to be fantastic for consumers and businesses. I think it's going to bring a realm of innovation into networking that we're gonna see new things pop up that are gonna make networks more resilient, more trusted, do some things that they couldn't do before. So I'm really excited about them. I think we're a natural integrator of that technology given our extensive customer relationships, our ability to market, use our brand to aggregate, take friction out of acquisition. So I would expect moving forward that we can be a big purveyor of those products and services. As you know, we have a very close relationship with AST. We want to help them move along and scale their product, and we think it's a unique approach to it where they right from the start were designing satellites to be perfectly compatible with consumer end-user devices that were out there that didn't require large investment and CPE and equipment to make it work. And we think there's a space for that, and that's why we've advocated for that. I'm interested to see now that others in the LEO space are understanding that they maybe need to engineer these constellations to do more directed device, and that will be good because I'd like to see a market where there's more than one purveyor of products and services. I think that would be healthy. And we'd certainly support that occurring over time. The way I think about it is mostly complementary. I can give you my reasons for that in a minute, but there's going to be places where the LEO constellation becomes maybe a better alternative to a terrestrial solution. Certainly in the IoT space, there's going to be circumstances where it might be easier to use LEO to solve certain types of IoT-related applications that will be part of the innovation of what they bring forward. Complete replacement of terrestrial wireless networks strikes me as a it's probably not that it couldn't be done, but it would require an awful lot of time and money. I think you can probably ask Charlie Ergen about that. People don't always recognize the fact that we do deploy cell sites, and that's part of our capital deployment. We do an awful lot of deployment of capital inside buildings, hospitals, stadiums, high rises, hotels, those aren't things that are easily served necessarily from just laying up some 40 megahertz of spectrum on a satellite. And so if you really want a cohesive network that is going to deliver on the kind of AI demands moving forward, which is really managing traffic aggressively, giving strong quality of service on the uplink, low latency, I would tell you that just generally speaking, it takes a lot of engineering to do that. It's embedded over years and years of deployment of capital and work. It's not replaced quickly, and it's not necessarily optimal to see from the sky. I would tell you the other thing you need to think about is while spot beam technology will, of course, get better than maybe a 20-mile radius over time, there are physical limitations to what that can do. A typical cell site right now is probably running roughly about a two-mile radius, a little bit more, a little bit less in some cases. And when you have over 300 megahertz of spectrum, in a two-mile radius, it's really hard to see 40 megahertz spectrum over a 20-mile radius replacing that capacity, especially when you multiply the fact that there are three providers on a stick that are doing that and have those kind of scaled networks that have massive backhaul at that cell site, 10 gig or better. It's hard to replace that, and it's also hard to outperform that from a performance perspective. So I do believe they can be really complementary. I believe that ultimately hybrid networks can play. I think it's very hard in an AI world to build a hybrid network going to deliver the kind of performance indoor and outdoor over time that we're building. That's why we think fiber is so important. When you have dense fiber and you can pick up workloads closer to the customer, you're always going to have a better performing network and a more scalable network and a network that operates at a lower marginal cost. And that's our belief and why we're playing the way we're playing. Brett Feldman: Thanks for the question. We have come to the end of our time. That was going to be our last one. Operator, I'll turn it back over to you. Operator: This concludes our question and answer session. I would like to turn the conference back over for any closing remarks. Brett Feldman: We're all set. Thanks for everyone for joining us today. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Ladies and gentlemen, welcome to Avery Dennison's Earnings Conference Call for the Third Quarter Ended on 09/27/2025. During the presentation, all participants will be in a listen-only mode. Afterward, we will conduct a Q&A session. If you have joined via Zoom, please use the raise hand function. As a reminder, this webcast is being recorded and will be available for replay on the Avery Dennison Investor Relations website. I'd now like to turn the call over to William Gilchrist, Avery Dennison's Vice President of Investor Relations. Please go ahead, sir. William Gilchrist: Thank you, Karina, and welcome to Avery Dennison's Third Quarter 2025 Earnings Conference Call. Please note that throughout today's discussion, we will be making references to non-GAAP financial measures. The non-GAAP measures that we use are defined, qualified, and reconciled from GAAP on schedules A-4 to A-8 of the financial statements accompanying today's earnings release. We remind you that we will make certain predictive statements that reflect our current views and estimates about our future performance and financial results. These forward-looking statements are made subject to the Safe Harbor statement included in today's earnings release. On the call today are Dion Stander, President and Chief Executive, and Greg Lovins, Senior Vice President and Chief Financial Officer. I'll now turn the call over to Dion. Dion Stander: Thanks, Gilly, and hello, everyone. Delivered a solid third quarter with earnings up 2% year over year and above the midpoint of expectations while continuing to execute in a dynamic environment. This outcome underscores the strength and durability of our franchise, demonstrating our ability to activate multiple levers in our portfolio to deliver across a range of macro scenarios. As expected, our business continues to be impacted by ongoing trade policy changes. Encouragingly, we fully mitigated direct cost increases through strategic sourcing adjustments and select pricing surcharges. Moreover, while base apparel volumes were still in the third quarter, we did see improvement sequentially relative to the organic growth headwind in the second quarter. In Materials Group, operational excellence was key to margin expansion during the quarter. A sustained focus on productivity and benefits from modest volume mix growth drove margins up 50 basis points year over year. Modest revenue declines in high-value categories were primarily driven by low single-digit declines in graphics and performance tapes, which faced headwinds from isolated customer and distributor inventory management adjustments. This is partially mitigated by continued strong growth in specialty durable labels and adhesives. We expect the inventory adjustments impacts to be short-lived and to see high-value categories return to growth in the fourth quarter. Overall, Materials Group and base label materials volumes were up slightly compared to the prior year. Importantly, we continue to see growth in our differentiated films volumes, which is a positive mix driver for the business. Solutions Group delivered organic sales growth of 4% driven by high single-digit growth in high-value categories. VESCOM continued its momentum, growing over 10%, and Embellix delivered more than 10% growth as well. Overall, apparel sales exceeded expectations, rising low single digits in the quarter. As you can see on Slide seven, our apparel business is seeing divergent trends. High-value category apparel sales grew high single digits, benefiting from strength in Embellix with strong growth related to next year's World Cup and mid-single-digit apparel IL growth. While base apparel sequentially improved as expected, it remains down low single digits, reflecting soft retail retailer and brand demand as they continue to navigate the impacts of tariff policies. Solutions margins performed better than typically sequential declines, were down 90 basis points compared to the prior year. Profitability was impacted by higher employee costs, continued growth investments, and network inefficiencies stemming from tariff policy changes. Turning to enterprise-wide Intelligent Labels, sales grew approximately 3% compared to the prior year, in line with our expectations. We are encouraged by the sequential improvement in the business, which was driven by key growth market segments. Specifically, apparel and food, logistics, and industrial grew at mid-single digits rate. In apparel and general retail, both market segments are still being impacted by tariff policy changes. However, apparel partially recovered in the quarter while general retail remained soft. Strong growth continued in food as our strategic collaboration with Kroger ramps up as expected. Longer term, our conviction in this large addressable market continues to grow. This morning, we jointly announced a major partnership with Walmart to leverage Avery Dennison's RFID innovation and solutions in their fresh grocery categories of bakery, meat, and deli. This adoption of IL in fresh food in the second large grocer is a key industry milestone and reinforces our conviction in the growth potential of this large addressable market. In logistics, the business expanded sequentially but was down slightly compared to the prior year. Our share in this market segment remained strong, and we have a robust pipeline of opportunities. As we highlighted in the second quarter call, executing initiatives to reduce identified network inefficiencies and associated costs created by the tariff policy changes. These improvements will help drive profitable growth while maintaining high quality and reliability for our customers. Looking forward, we anticipate the fourth quarter will deliver an improved rate of year-over-year growth versus what we saw in the third quarter. While growth will likely continue to remain constrained by trade policy uncertainty, particularly in apparel and general retail market segments, we view this as a temporary headwind. Our conviction in the long-term growth of this high-value category platform remains strong given the value we are creating for our customers and the adoption we see across new segments. Turning back to the total company. Taking into account the continued dynamic environment, we are anticipating both overall sales and earnings per share growth in the fourth quarter. We remain prepared for a range of scenarios, leveraging our proven playbook to safeguard earnings in the near term while accelerating initiatives to drive differentiation and growth over the cycle. Shifting to our core strategies. I am confident that we have the initiatives, innovation, capital allocation framework, and team in place to consistently deliver strong profitable growth and top quartile returns across the cycle. Progress in each of these strategies was evident in the fourth quarter, further cementing our conviction. Our business is positioned for success with secular growth tailwinds that fundamentally outweigh cyclical events over the cycle. Key trends including item-level digitization, enhanced consumer engagement, product customization, and business productivity needs are aligned with a growing portion of our business. The drivers in our high-value categories are clear, and our exposure to them continues to expand. These categories now represent 45% of our total business year to date. An increase compared to the prior year, underscoring our strategic shift towards higher growth and higher margin opportunities. Intelligent Labels adoption is accelerating, with our largest addressable market segment in food now gaining significant traction. Our focus on innovation outcomes and commercial excellence is creating differentiation across our businesses. Examples include introducing new RFI innovation in food, our stalling software in VESCOM, and expanding our Clean Flake adhesive adoption in filmic labels for recycling purposes. Finally, we continue to harness the power of our disciplined capital allocation approach and balance sheet strength to return capital to shareholders and strategically expand our presence in high-value categories where we hold competitive advantages. Year to date, repurchased approximately $454 million in stock and have grown our dividend by 7%. Concurrently, we closed the $390 million Taylor adhesive bolt-on, immediately strengthening our materials group high-value category adhesives franchise with clear cost synergies and strong growth potential. In summary, while the current backdrop has muted our overall growth in 2025, we have further strengthened the resilience of our franchise, deployed capital into attractive opportunities, and advanced our strategic priorities. This underpins our confidence in returning to strong growth and maintaining top quartile returns for our business and shareholders. I want to extend my gratitude to our entire team for their unwavering focus on excellence, dedication to overcoming the challenges at hand, and relentlessly focusing on executing our strategic priorities. Over to you, Greg. Gregory Lovins: Thanks, Dion, and hello, everybody. We delivered adjusted earnings per share of $2.37, up 2% compared to the prior year and above the midpoint of our expectations. Results were driven by productivity and higher volume mix, partially offset by higher employee-related costs investments. While trade policy uncertainty continued to present a headwind to our results, the impact improved sequentially. Compared to the prior year, reported sales were up 1.5%, and sales were comparable to the prior year on an organic basis. As positive volume mix was offset by deflation-related price reductions. Adjusted EBITDA margin was strong at 16.5% in the quarter, up 10 basis points compared to the prior year. And we again generated strong adjusted free cash flow of nearly $270 million in the quarter. Our balance sheet remains strong with a quarter-end net debt to adjusted EBITDA ratio of 2.2. And during the quarter, we issued a €500 million note to pay down some commercial paper and to fund the Taylor Adhesives acquisition closed earlier this week. We continue to effectively execute our disciplined capital allocation strategy, successfully balancing significant cash return to shareholders with strategic M&A. In the first nine months of the year, we returned roughly $670 million to shareholders through the combination of share repurchases and dividends, and we allocated $390 million to the Taylor Adhesives acquisition. Turning to segment results for the quarter. Materials group sales were down 2% on an organic basis. As modest volume mix growth was more than offset by low single-digit deflation-related price reductions. Organically, both high-value categories and the base businesses were down low single digits. Turning now to regional label materials organic volume mix trends versus the prior year in the quarter, continued soft consumer product demand led to roughly comparable volume in both North America and Europe. Offset by continued growth in emerging markets. With Asia Pacific up low single digits and Latin America up mid-single digits. High-value categories declined at low single digits compared to the prior year. Graphics and Performance tapes declined low single digits were impacted by customer inventory adjustments, which we expect to normalize in Q4. The Materials Group once again delivered strong margins with an adjusted EBITDA margin of 17.5% in the quarter, up 50 basis points compared to the prior year. Regarding raw material costs, including the cost of tariffs, we experienced modest sequential global raw material cost deflation in the third quarter. Mitigated tariff cost through strategic sourcing adjustments and the implementation of select pricing surcharges. Overall, including tariffs, our outlook is for relatively stable sequential material cost in Q4. Shifting to Solutions Group. Sales were up 4% organically, and high-value categories were up high single digits. And base solutions were down low single digits. Improving sequentially from down mid-single digits in the second quarter but still impacted by tariff-related uncertainties. Within High-Value Categories, VESCOM was up more than 10% driven by the continued benefit from new program rollouts. Embellix was also up more than 10% as we saw a ramp ahead of the World Cup next year and apparel intelligent label sales recovered to mid-single digit growth. Enterprise-wide, intelligent label sales expanded approximately 3% compared to the prior year. In addition to apparel improving to mid-single digit growth, food, logistics, and industrial categories combined were also up mid-single digits. General retail categories continued to experience tariff-related softness. With sales down mid-teens which impacted both Solutions Group and Materials Group Intelligent Label sales. Solutions Group adjusted EBITDA margin was 17%, relatively flat sequentially but down 90 basis points compared to the prior year. As benefits from productivity and volume were more than offset by higher employee-related costs such as wage inflation, and growth investments. Shifting to our outlook. For the fourth quarter, we expect reported sales growth of 5% to 7% with the following contributing factors: sales growth excluding currency of 1% to 3% with organic growth of 0% to 2%. With approximately 2% from currency translation, approximately 2% from extra days in the quarter due to the shift to the Gregorian calendar next year, approximately 1% from the Taylor Adhesives acquisition. We expect adjusted earnings per share to be in the range of $2.35 to $2.45 above the prior year at the midpoint as benefits from organic growth, productivity, and share count are partially offset by wage inflation, investments, and higher interest expense. Our Q4 guidance incorporates seasonality and incremental productivity, which is partially offset by higher interest expense and less favorable currency. We've outlined some contributing factors to our full-year results on Slide 14 of our supplemental presentation materials. To highlight a few of the key drivers, we now anticipate a $5 million currency translation benefit operating income slightly below our previous projection of a $7 million tailwind. We now expect restructuring savings net of transition costs of approximately $60 million, up $10 million from our previous expectation as we continue to ramp our productivity efforts. And we continue to expect strong free cash flow targeting roughly 100% conversion for the year. We now expect interest expense to be $135 million, an increase from our prior outlook largely driven by interest expense from the €500 million notes we issued in September. And finally, expect tailored adhesives will have an immaterial impact on Q4 earnings per share due to the timing of the close in the quarter and expected intangible amortization expense. In summary, we delivered a solid third quarter achieving EPS above the midpoint of our expectations through a continuing dynamic environment. Expect slight improvements in organic sales growth and continued year-over-year EPS growth in the fourth quarter. And we remain well prepared for a variety of macro scenarios. We're strongly positioned to execute our profitable growth in disciplined capital allocation strategies, which we expect to deliver exceptional long-term value to all of our stakeholders. And now we'll open up the call for your questions. Operator: Thank you. Ladies and gentlemen, if you've joined via telephone, and would like to register a question, you will hear a confirmation of your request. Please press star followed by the number 6 to unmute your line. If you have joined via Zoom, please raise your hand using the raise hand function. If your question has already been answered, and you would like to withdraw your registration, please press star followed by the number 9 again, use the raised hand function. To accommodate all participants, we ask that you please limit yourself to one question and then return to the queue if you have additional questions. One moment for the first question. Your first question comes from the line of Ghansham Panjabi from R. W. Baird. Your line is open. Please go ahead. Ghansham Panjabi: Hey, guys. Good morning. Can you hear me okay? Gregory Lovins: Yeah. We can, Ghansham. Good morning. Ghansham Panjabi: Okay. Good morning. Sorry. Just getting used to the new system. First off, as it relates to the materials segment, is it your sense that volumes are starting to how are how are volumes progressing on a sequential basis just given the macro uncertainty in and so on and so forth? I know you called out the impact on apparel as you have over the last couple of quarters, but is it your sense that materials are starting to sequentially weaken as well? Dion Stander: No. Ghansham, I'd say in the third quarter, volumes, while positive overall, were less than our expectation and pretty much across all regions. And I think there's a couple of factors playing into that. One of which is certainly, we see we continue to see lower retail volumes overall, particularly in North America and Europe, and our scanner data also suggests that there's lower muted demand coming from CPGs overall and when they think about volume. The second thing is, in our high-value categories, we also had a couple of episodic events that happened really around our graphics and reflective business, which we know will remediate as we get into the fourth quarter. Our outlook for the fourth quarter is actually to see kind of similar growth as we move forward. I think the final thing I'll say is it's certainly clear in certain pockets that we're emerging markets have had exposure to tariffs those economies and the consumers in those economies are more cautious as they look into the impact of what those tariffs mean for those countries. And so we're seeing slightly lower volume in those areas as well. I think fundamentally for us as we look forward, I'll just remind everybody, our materials business is really anchored in consumer staples. And so over time, it's been a GDP plus business. And I anticipate that changing once the trade environment, the trade policy normalizes. Operator: Your next question comes from the line of George Staphos from Bank of America. Your line is open. Please go ahead. George Staphos: Hi, everybody. Getting used to the new technology here. For the time, the details. I guess with one question at a time, I'll go with the Walmart news today. If you can talk a little bit about that. And what it might mean for you over the next couple, three years. We're doing some quick searching over the last hour or two it be fair to say that the the opportunity here, recognize you're not going to get that next quarter or the following, would be roughly maybe a million and a half packages when you think about, you know, the Walmart protein cabinet and other related end markets, how would you have us size that? Thank you. Dion Stander: Yes. Thanks, George. I think it's for us, we see this as twofold. First of all, I think it's a critical validation of the effectiveness of our technology and solutions to solve challenges that all grocers really have, which is around freshness of perishable products, labor effectiveness, gross margin expansion, and Net Promoter Score increases because consumers are getting the products that they want, which is the freshest they need. And we saw that start in Kroger, and now I've been manifest in Walmart and our partnership announcement this morning. So we see it both strategically important because we believe it will further catalyze the largest growth segment there is which is in food, which we estimate to be about net order of 200 billion units. And the second large growth are going really sends a signal that the technology has application, the returns are there and the rollout now will commence. In terms of Walmart specifically, while we don't necessarily always comment on exact details of partnership, perhaps I can just frame the scale of what we think it could be. Our estimates are and this will be subject to typical rollout timing, what will happen intra quarter, the number of stores that goes, the individual pieces of those departments of bakery, deli and protein and sorry, meat and when they go. We would typically see this across a two-year period being in the order of sort of high single digit to low double digits growth on our total 25 enterprise IL revenue. And we typically would see that ramping as we go through the couple of years. One other point I'd make on this is we are driving this partnership because we to provide differentiation in the market. A lot of our differentiation over here is anchored in what we've been able to do from an innovation perspective as it relates to activating proteins and meats, particularly for intelligent labels, something that had been very challenging in the past that we've been able to solve for. And so we look forward to seeing the results of that partnership and the results of our effort we've been leaning forward for very long in the market to make sure that we continue to drive activation. Operator: Your next question comes from the line of John McNulty BMO Capital Markets. Please go ahead. John McNulty: Yeah. Good morning, Thanks for taking my question. Can you speak to what you're seeing in the IL pipeline right now? Obviously, there's been a lot of chaos around tariffs and delays in certain programs and yet it seems like there may be some acceleration. So other areas as people try to get better understanding of supply chains, etcetera. So I guess, can you speak to that? And also, just given the size and scale of the Walmart program that's being added in, do you have to start thinking about putting new capital to work around intelligent label capacity, etcetera? I know you put some in a while ago. I guess, where do we stand on that need now? Dion Stander: Thanks, John. So in terms of pipeline, we continue to see our pipeline grow actually both by number of opportunities and by dollar value across all of the key segments. I'm just once again reinforcing that when the benefits are obvious, and they're implementable, then we tend to see good traction because it fundamentally solves challenge of our supply chain visibility, inventory accuracy. And then when you're into the store, specifically labor productivity, fresh produce, waste reduction, and employee and associate experience is much better as well. So from a pipeline perspective, we continue to see good progress overall. In terms of Walmart size and scale, yes, it's a substantial add to the adoption now within the overall food and more broadly the IL market. I'll remind you that in terms of capital allocation, we typically, from a roofline perspective, have added capacity from an infrastructure perspective, typically three to five years out. Hence why we added our Queretaro facility in Mexico to we started that two years ago. When it comes to individual assets for production, we tend to be investing twelve months to eighteen months ahead of the curve. So in the initial phase of this, I don't anticipate us needing additional capacity. As we get through to the end of the second year, we'll revisit that and adjust accordingly. For us, that's much more of a modular approach. These are assets where we've significantly improved our capital reduced our capital intensity billion units produced over the last five years. And so I'm looking forward to that continuing to take advantage of the scale manufacturing that we have in this regard. Operator: Your next question comes from the line of Jeff Zekauskas JPMorgan. Your line is open. Please go ahead. Jeff Zekauskas: Hey, Jeff. Can you hear us? Thanks. Gregory Lovins: I can. Thank you very much. In the in the press release that that came out over the Walmart announcement, there was, a phrase about joint sensor technology. Is there something about technology that you're using with Walmart that's really unique to your relationship with them Or maybe another way of saying this is is is what you're doing with them something that would constrain you in being able to use the same technology with other customers? Dion Stander: No. Jeff, what we've done with Walmart is we've really focused on the three areas that in much of our pilots and trials up until this point. And those are around bakery which is very similar to what we do with some other customers as well. Protein specifically is where we've had to lean into our innovation capability, both on our material science side think about adhesive technology required in cold environments, and then environments that ultimately will be defrosted and even microwaved at that stage. So from material science, have put a lot more effort into solving some of those problems. And then more specifically from what we call the RF side things, radio frequency side of things is how do we make sure that our uniquely designed antennas are capable of being able to sense within very, very densely packed items that are very high dielectrics meet has those properties. And so how do you make sure that you're able to read everything even within a freezer container or a fridge container as well? And those are presented significant challenges in the past. So our ability to generate innovation in this area I think, is going to help us unlock not just the Walmart partnership, but also more broadly across the market as we look forward as well, Jeff. Operator: Your next question comes from the line of Matt Roberts Raymond James. Your line is open. Please go ahead. Matthew Roberts: Morning, Matt. Operator: Mister Roberts, you'll need to unmute yourself. Matthew Roberts: Can you hear me now? Dion Stander: Yes, Matt. Thank you. Matthew Roberts: Okay. Good morning, everybody. Sorry about that. I may, in regard to intelligent labels, so understand you're probably not going give the 2026 guide here and understanding visibility is limited. 2025 certainly had its unique headwinds from tariffs but we're starting to see some momentum that you referenced for Walmart and others. So maybe more broadly in Intelligent Labels, how much of the initial five points that you expected in 2025 from new programs have shifted into 2026? How many incremental points could you get from new program rollouts other than Walmart that you just gave? And given weak comps in apparel and general and some of the headwinds you've seen there, do you believe 2026 could support at or above the long-term growth rate? Or if you only want to give one quarter ahead, any color on 4Q could be helpful as well. You for taking the question. Dion Stander: Yes, Matt. Specifically, we talked to remember those are incrementally about those five basis points that will come through through. Program rollouts. Largely, those actual rollouts are on track through this year. And they came really in a couple of buckets. One bucket was in apparel themselves, some new rollouts new technology deployments, The second bucket was really in some of our food rollouts, which we've talked about. The third bucket was also in some of the additional general merchandise rollouts that were happening as part of the compliance programs with some of our customers. Across all three of those, if you exclude the impact of tariffs, we're actually roughly on track. Now in apparel, we haven't seen any rollout delay, but what we've seen is some of the volume being a little bit more muted than we would expected given, as I'm sure, you recognize the tariff implications. It's a little early for us to look out currently to 2026 as well. And I said in the context, I think the environment remains highly uncertain. Just call everybody's attention to fact that the tariff policy changes have only impacted India more recently by up to 50%. And as all you know, we're on the road currently with China being currently 100% again. And so I think that uncertainty certainly limits our near-term visibility. What I am confident in is our continued ability to drive not only innovation that secures our differentiation, but drive adoption, particularly with things like Walmart, that will certainly help deliver growth as we go through next year. We'll characterize and wrap that all together when we get to the January outlook as well, Matt, for you. The other thing I would just add to what Dion's earlier comments in his prepared remarks, Matt, is that we talked about Q4 expecting our growth rate in IL to be better than what we grew in Q3 versus prior year. Operator: Your next question comes from the line of Anthony Pettinari, Citigroup. Your line is open. Please go ahead. Anthony Pettinari: Good morning, Good morning, Anthony. Hey, just another question on the Walmart partnership. You know, during the quarter, they they had a a press release talking about deploying IoT technologies with Williotte and and know, Avery has a strategic partnership with Willyot. And I'm I'm just from a big picture perspective, can you talk about how RFID and maybe other IoT technologies, you know, coexist in an environment like Walmart Are are you kind of agnostic to what wins in the market? Or how do they interact with each other? How should know, investors think about those two sets of technologies? Dion Stander: Yes, Anthony, I think I've always said from the start, we fundamentally believe that UHF RFID is the most ubiquitous best placed sensing technology for item level identification visibility through supply chain and in a store environment. But we've also said that there are other sensing technologies particularly when it relates to ambient issues, things you want to monitor temperature pressure and so forth, that will also have a specific use case. Now Williard is a strong partner of ours. We have strengthened our strategic partnership. We're going to be supporting them in their rollout that they have fact, we're gonna be managing part of the rollout for them with Walmart as well overall. And that is really orientated around palette and case level. So at a high level, think about UHF RFID being applied at an item level, most likely set broader sensing devices like WILIA technology we provided at the palette and case level. And we're involved in both of those areas I think they present a suite of solutions that in the long term are going continue to drive to what I think will be the end outcome, which is digital identities, on all physical objects. In time. Operator: Your next question comes from the line of Mike Roxlin Truist Securities. Your line is open. Please go ahead. Michael Roxland: Hi, can everybody hear me? Dion Stander: Hey, Mike. Thanks, Mike. Thanks. Yes. Thank you, guys. And getting used to the new congrats on all the progress and the new Walmart deployment. Michael Roxland: Thank you. Just one question for me in terms of logistics. Obviously, was a little bit weaker in this quarter. As you mentioned. Any potential for new deployments in the near term? Any comments you may have on potential like share gains? Obviously, there was some share loss last year. Any insights as to whether maybe you're going to regain some share from that business? Anything you can help around logistics and what's happening with deployments and potential share gains on the horizon? Thank you. Dion Stander: Yes. Sure, Mike. We continue to do really solid work in our partnership with UPS. And that fact that partnership continues to grow. My sense is through the end of this year, we'll actually expand our share with UPS. It's a good performance by both our team, both on service quality, delivery and some new innovation we've even brought to UPS as well in terms of how they can drive higher speed application to their packages relative using our technology as well. If I think more broadly about the logistics environment, I think we've been very clear. We didn't anticipate another rollout during 2025. And we're going to be assessing what the likelihood of that will be during 2026. We'll give more color on that as we get to the January. But I'd say overall, we continue to make really good progress with a number of the key logistics providers. Our pilots and trials have expanded with almost all of them And we spent a lot of time engaging around all the various use that could come out of not just managing last mile fulfillment accuracy, but also how do you originate parcels that go back to source at shipper, what role can we play in that. So as always, I'm encouraged by what I see when I look across the business and our relationship we have with all the large logistics providers. And for me, it's just going to be a case of when we're able to get them to adopt at scale. We'll be able to give a broader update, I think, by the time we get to January, Mike. Operator: Your next question comes from the line of Josh Spector from UBS. Your line is open. Please go ahead. Joshua Spector: Hey, good morning guys. Can you hear me? Dion Stander: Yeah, we are. Joshua Spector: Okay, great. So I wanted to ask kind of a technical one around the quarter and the guide here. Is I think from a sales perspective, you're guiding sales up about $100 million maybe a bit more sequentially But from an EPS perspective, you're close to flat I think historically there's some accretion of margins in fourth quarter So I know with the M and A piece of it that maybe creates a bit of noise as Meridian layers in. But are there other factors that we need to consider, like some lagged price downs or Some other costs that maybe mute the accretion q on q? Gregory Lovins: Yes. Thanks, Josh. So when we look at sequentially, there's a number of puts and takes, of course. Seasonality, as you mentioned, is historically, has been a little bit positive. I would say this quarter, we're probably expecting a little less than typical. Since we saw apparel have a bit of a catch up in Q3. From the tariff impacts that we had in the second quarter. We'll still have some positive logistics volume improvement sequentially into Q4 materials is usually a little bit of a headwind Q3 to Q4 given the holiday period. On the biggest parts. Of that business in North America and Europe. So sequentially, expect seasonality to be relatively flat this year, I think. When we looked in, have some slight positives from share buyback that we've been doing across the year. And continuing to do as we enter the fourth quarter here. We've got some slight favorability from restructuring. I talked about ramping that up we're moving through the back half. And then we've got a little bit of a slight headwind quarter over quarter I think Dion talked about our network inefficiencies we've had related to some of the tariff moves and our sourcing moves or our production moves accordingly with that. We've got a little bit higher inventories in the system over the last few quarters. And as we're bringing that down, we'll have a little bit of an inventory absorption impact on the P and L in the fourth quarter. Sequentially. Otherwise, price deflation, somewhat immaterial sequential impact those are kind of the big puts and takes when we look Q3 to Q4. Operator: Your next question comes from the line of John Dunnigan from Jefferies. Mr. Dunnigan, please press 6 unmute your line. John Dunnigan: Hey, guys. Thank you very much for all the details. I just wanted to ask a quick one on the Walmart collaboration, and then have one other here. So the the collaboration, when when will that start flowing through? Is that more of a 2026 event? And then it just looking at Embellis, I mean, the inflection in volumes was pretty impressive, not to something that we were necessarily expecting. I get that it's related to the World Cup, but is that that kind of trend kind of high single digit, low double digit expected going into 4Q twenty twenty six. Kind of what your expectations are for that business would be helpful? Dion Stander: Thanks. Sure, John. Yes, on the Walmart collaboration, we've been piloting a trial, as I'm sure you sense for a while now. And the full the rollout will start sequentially at very small amount in the fourth quarter really, and then we'll go from there as we go through 2026 and 2027. The current plan. Again, that may be subject to change into quarter shift depending on what stores rollout at what pace and which departments go in which sequence in order. In terms of AmbelliX, yes, I've been very pleased with our AmbelliX performance in the third quarter. Largely, on the performance that we have as related to the World Cup. So we do a lot of preparation for the key World Cup teams and the brands that support them. In advance. And that typically happens a little bit in the second quarter, the majority in the third quarter and a small amount happen in the fourth quarter. What we would call happening at source. The garments are produced at source. They're decorated at source. And then as we get into next year, when the actual World Cup happens, there will be a smaller opportunity for us to do what we call on in stadium venue customization, the names and numbers that you can do when you go there. We haven't necessarily given a perspective on how that decides that, but an opportunity certainly for us as we get into next year. Aside from that, on our base Imbellx business, we continue to see improvement is largely anchored in our Performance Brands as they start to ramp up as well. And then separately, in our Embellis business, we continue to make progress in what we call our in venue and consumer customization applications. I'll give you an example of that. We recently launched a NFC connected device in a garment for a Turkish football club We've done the same thing again for the San Francisco 49ers. And this really helps clubs and fans engage more directly on a one to one basis. So leveraging our technology with some of our adhesive science and our Embellics business overall. And in the long term, we continue to see this as a kind of mid- to high single digit growth segment for us as we move forward. Operator: Your final question comes from a follow-up from Jeff Zekauskas from JPMorgan. Your line is open. Please go ahead. Jeff Zekauskas: Great. Thanks for taking my call. Another question about the Walmart arrangement. Different RFID tags have different prices. In that, you know, apparel tags, you know, tend to be priced higher than logistics tags. Where do tags on Meet fall? Are they in the middle or higher? Or lower? And then for Greg, what calendar are you switching over to for next year? Dion Stander: Jeff, so let me address the warm up one and Greg can take on the calendar question. Yes, I mean, typically across our estate, we have I'd characterize our products as kind of good, better, best. And ranging in differentiation from good all the way through to best. There's also unique circumstances, which certain products or certain inlays are put into more complex tags or format. So an inlay that goes on to, let's say, plain white label has less complexity and typically a lower price point than something that goes into a highly decorated graphic tag to make an apparel. So you can see a range of ASPs across them. As it relates to meat, given some of our proprietary innovation, would see these as typically products that are in the best range. And our AS there will probably be a little higher there's also mix in with the bakery products that we have and some of the deli products. And so overall, anticipate our ASPs across that program to really reflect our portfolio largely at an aggregate level and with profitability to be in a similar aggregate range we currently see across our IL portfolio as as well. Gregory Lovins: Thanks, Ian. And Jeff, on your question on the calendar, we are moving from our historical fourfourfive calendar to a fiscal calendar that aligns with the actual calendar, the Gregorian calendar. So we're making that shift at the end of this year. So this year, we'll extend to the December 31. Then from now on, heading into 2026, we'll be following the Gregorian calendar. And if I go back to Josh's question a little bit earlier, that does add about two points of growth in our fourth quarter sequentially and versus prior year. By adding those extra days into the fourth quarter They're not really high quality days. We had four days to the calendar this year. That includes a Sunday and it includes New Year's Eve, so they're not really high quality days. But nonetheless, we'll get some incremental revenue from that Not a huge flow through because we'll have four or so days of fixed cost with less than that of actual revenue given the softness of those typical days. But that's the impact we're we're shifting to the Gregorian counter next year. Operator: Your final question comes from the line of George Staphos from Bank of America. Your line is open. Please unmute. George Staphos: Hi, Thanks for taking the follow on. A two part one. And again, thanks for all the details. First of all, can you talk a bit about where you're seeing deflation in materials such that prices are a touch lower And kind of where you sit right now, how would you gauge what is normal deflation versus price competition given the macro Related point, the last couple of quarters, again, third quarter was nice to see the improvement. But apparel's weakness in base was one of the reasons that IL is having some difficulty growing. This quarter, with apparel being up 3%, on IL, base is down Why is it why are we getting a positive disconnect this quarter that we were not getting in prior quarters with IEL relative to apparel. Thanks and good luck in the quarter. Gregory Lovins: Thanks, George. I'll start with your deflation question. Overall, what we've been seeing and we've talked about from a year over year perspective, think the biggest drivers we've seen are in paper. Particularly in Europe and Asia. Where overall we've got low single digit deflation year over year in the third quarter Paper is a little bit more than that specific to a couple of regions. And we saw pulp kind of coming down through the quarter in those areas as well. We've got a little bit of year over year benefit on chemicals and films as well also primarily in Europe and Asia. And then in The U. S, we've got some tariff related inflation that we've put surcharges through as we talked about. We do have a little bit from a price perspective then We've got a little bit of low single digit impact on pricing as well. And net net, we've got a slight headwind between price inflation. And I think some of that is still over the cycle when we look over on multiyear horizon we had a lot of inflation a few years ago. It's been slightly deflationary for a couple of years now. And prices have come down to go with that. So that's something we expected as we've gone through the quarters this year. We'll probably have another quarter or so as that continues from a year over year perspective in Q4. Dion Stander: And George, on your second question, even in the second quarter, our base apparel performance was lower than our apparel IL performance, both were down. And as you saw, our base apparel performance has improved, it's still low single digits, the base apparel piece. And our aisle performance is now sort of low single digits around 3%. The difference there really is in rollouts, not necessarily relative to the absolute volume of the base apparel. It's new rollout. For example, we extended our rollout with the Inditex Group, leveraging our new proprietary loss detection technology that they've introduced. And separately, we've also got continued rollout in new apparel customers, a couple of them small, one of them large, that have been rolled out through the third and then the fourth quarter increasingly as well. Operator: Mr. Gilchrist, there are no further questions at this time. I will now turn the call back to you for any closing remarks. William Gilchrist: Thank you, Karina. Just to recap, we delivered a solid third quarter in a dynamic environment. We are well prepared for a variety of macro scenarios. And well positioned to deliver superior value through the cycle. We want to thank you for joining today's call. This now concludes our call. Operator: Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.
Edra: Hello, everyone, and welcome to the SmartFinancial, Inc. Third Quarter 2025 Earnings Release and Conference Call. My name is Edra, and I will be your coordinator today. We will be taking questions at the end of the presentation. I will now hand you over to Nathan Strall, Director of Investor Relations, to begin. Please go ahead. Thanks, Edra. Nathan Strall: Good morning, everyone, and thank you for joining us for SmartFinancial, Inc.'s third quarter 2025 earnings conference call. During today's call, we will reference the slides and press release that are available in the Investor Relations section on our website, smartbent.com. William Carroll, our President and Chief Executive Officer, will begin our call followed by Ronald Gorczynski, our Chief Financial Officer, who will provide some comments and some additional commentary. We will be available to answer your questions at the end of the call. Our comments include forward-looking statements. These statements are subject to risks and uncertainties. The actual results could vary materially. We list the factors that might cause these results to differ materially in our press release and in our SEC filings, which are available on our website. We do not assume any obligation to update any forward-looking statements because of new information, early development, or otherwise, except as may be required by law. During the call, we will reference non-GAAP financial measures related to the company's performance. You may see the reconciliation of these measures in the appendices of the earnings release and investor presentation filed on 10/21/2025 with the SEC. And now I'll turn it over to William Carroll to open our call. William? William Carroll: Thanks, Nathan, and good morning, everyone. Great to be with you. And thank you for joining us today and for your interest in SmartFinancial, Inc. I'll open our call today with some commentary, then hand it over to Ronald Gorczynski to walk through the numbers in some greater detail. After our prepared comments, we'll open it up with Ronald, Nathan, Rhett Jordan, Miller Welborn, and myself available for Q&A. It's been a busy quarter for us, and we've had a number of very positive things happening with our company. The focus on execution that's going on right now is outstanding. Our team continues to have a keen focus on hitting targets we've set for this year in regard to revenue, returns, and prudent expense growth, and I remain very bullish on our outlook. So let me jump right into some of our highlights. First, and in my opinion, one of the most important metrics, we continue to increase the tangible book value of our company. Moving up to $26 per share including the impacts of AOCI, and $26.63 excluding that impact. That's growth of over 26% annualized quarter over quarter. For the quarter, we posted operating earnings of $14.5 million or $0.86 per diluted share. This is our sixth consecutive quarter of positive operating leverage and hit our $50 million quarterly revenue target in Q3, which we had set for our team this year. We actually hit it a few months early, and I look forward to seeing that number continue to grow. We had outstanding growth on both sides of the balance sheet, posting 10% annualized growth in loans and 15% annualized growth in deposits. Our history of strong credit continues. Only 22 basis points in nonperforming assets. I'm pleased to see these numbers continue at exceptionally low levels. Total operating revenue came in at $50.8 million as net interest income continued to expand and noninterest income was solid again. Our operating noninterest expenses also came in on target at $32.6 million. Looking at the charts on page four and five, you'll see very nice trends. We're building our return metrics and most importantly, growing our total revenue, EPS, and as I mentioned earlier, tangible book value. All those charts are great graphics to illustrate our execution. I'm looking forward to and expecting these trends to continue. So just a couple of additional high-level comments from me. On growth, our continued balance sheet expansion is a direct result of the focus of our sales team. I've enjoyed watching this company transform into a very good organic grower. As we have hired well over the last several years, we've also built an outstanding foundational process that includes aggressively going after new client relationships, growing existing ones along with a very diligent prospecting process. As I stated, we grew our loan book at a 10% annualized rate quarter over quarter. As sales momentum stays strong and balanced across all of our regions. Our average portfolio yield, fees, and accretion, was up to 6.14% and our new loan production continues to come onto the books accretive to our total portfolio yield levels. Regarding deposits, again deposits were up 15% annualized or $179 million for the quarter inclusive of reducing some of our brokered CD positions. It's important to recognize how we're building this bank with core relationships as we have an intense focus on both sides of the balance sheet. We've made investments in our treasury management team over the last several quarters and it's nice to see this line of business gain outstanding momentum. Our loan to deposit ratio was at 84% which is actually down quarter over quarter even with 10% loan growth. This strong position gives us continued flexibility to leverage a great balance sheet. Our pipelines continue to look good, and I'll discuss these a little bit more in closing comments. But, also, when you look at the highlight bullets, in our earnings release, we've had a lot going on this quarter. All of it tied back to building the foundation of a bank that is on track to becoming one of the Southeast's strongest regional community banks. Everything accomplished this quarter is part of our focus on efficiency and growth. A well-executed sub-debt issuance, a sale with a subsequent minority reinvestment on our insurance platform, a repositioning trade with our bond portfolio that did not impact our book value as we leverage the gain off the insurance deal. And continued contract evaluations and renegotiations. Including our core data processing vendor interchange payment rails, and some new tech token tech-focused initiatives looking into 2026. So all in all, a very nice third quarter for our company. And I'm gonna stop there, hand it over to Ronald Gorczynski to let him dive into some greater detail. Ronald? Ronald Gorczynski: Thanks, William, and good morning, everyone. I'll start by highlighting some key deposit results. For the quarter, we had strong non-broker deposit growth of $283 million representing more than 24% growth on an annualized basis. This increase resulted from both new deposit production and seasonal client liquidity build following the previous quarter outflows. The cost of new non-brokered production was 3.47%. This growth gave us the opportunity to pay down $104 million of brokered deposits which had a weighted average cost of 4.27%. Our overall interest-bearing cost rose by three basis points to 2.98% but were down to 2.93% for the month of September. Despite funding almost $100 million of loan growth, and paying down $104 million of brokered deposits, our overall liquidity position which includes cash and securities, at quarter end was approximately 21%. Included in our liquidity position was $98 million in net proceeds from our sub-debt issuance which closed in August. As we look ahead to Q4, we anticipate our liquidity position normalizing as we already retired $40 million in our existing sub-debt on October 2, and we expect to pay down an additional $111 million in brokered deposits with a weighted average rate of 4.28% during the fourth quarter. As William had mentioned, we utilized the gain generated from the sale of our insurance operations to offset losses associated with selling $85 million of securities with a weighted average rate of 1.4%. The proceeds of the security sale were reinvested in securities yielding 4.95% which will generate $2.6 million of additional annual interest income and increase our overall weighted average securities portfolio yield to 3.7%. During the quarter, our net interest margin experienced some temporary compression declining four basis points to 3.25% primarily as a result of timing differences between issuing new sub-debt prior to paying off our existing sub-debt and higher rates for new deposit production. However, the average rate of new loan production was 7.11% which continues to push the yield on our overall portfolio higher. Furthermore, any future cuts to the Federal Rates Fund will positively impact our deposit portfolio costs as approximately 45% is variable cost adjusting in lockstep with any Fed actions. We believe these factors in conjunction with anticipated broker deposit pay downs and enhanced yields on our overall securities portfolio has our balance sheet well positioned heading into the fourth quarter and into 2026. Looking ahead, we're projecting our fourth quarter margin to be in the 3.3% to 3.35% range. Our quarterly provision expense decreased to $227,000 from $2.4 million reported in the previous quarter. The growth-related provision this quarter was offset by the adjustment to our qualitative factors specifically an improvement in our CRE concentration ratio which decreased to 271% from 301% in the previous quarter. This decrease was due to the downstream of $45 million of proceeds from our sub-debt issuance to the bank as equity capital. Additionally, our asset quality continues to remain robust with non-performing assets comprising 0.22% of total assets and net charge-offs to average loans of 10 basis points on an annualized basis. Our allowance for credit losses is now at 0.93% of total loans. Operating non-interest income after adjusting for the gain in sale of our insurance operations and the loss on the securities restructuring was $8.4 million which is $500,000 lower than the previous quarter. As a result of the sale. All other income items remain consistent with our expectations. Operating non-interest expenses after adjusting for previously noted items totaled $32.6 million aligning with results from the prior quarter. We made progress again in our operating efficiency ratio which improved to 64% compared to 66% from the previous quarter. Our ongoing commitment to expense management has allowed us to maintain a level of expense base over the past four quarters and continue to trend positively towards our long-term efficiency goals. For the fourth quarter, with insurance operations removed, non-interest income is projected to be approximately $7 million and non-interest expense is expected to be in the range of $32.5 million to $33 million. Salary and benefit expenses are anticipated to range from $19 million to $19.5 million comparable to the previous quarter due to higher levels of variable compensation and anticipated costs associated with the new hires. Both our bank consolidated Tier two capital ratios increased during the quarter primarily due to the sub-debt issuance. Our total consolidated risk-based capital ratio rose to 13.3% up from the 11.1% in the previous quarter and the company's TCE ratio also improved to 7.8%. Looking ahead, we are confident that our capital ratios are appropriately balanced and well-positioned to sustain growth while optimizing returns on equity. With that said, I'll turn it back over to William. William Carroll: Thanks, Ronald. I want to reiterate again the value proposition with our company, drawing your attention back to page seven of our deck. We are successfully executing on the leveraging phase of growth for our company. We hit our 112% ROE and ROE targets this quarter. And have confidence that this will build from here as we gain even more operating leverage. We're building a great franchise. We're in arguably some of the most attractive markets in the country. And have put together a team that is rapidly moving us forward. You've heard me say before, I believe we are one of the Southeast's brightest stories. Outstanding markets, strong experienced bankers, coupled with a great operational and support team, plus very nice complementary business lines. We expect the remainder of 2025 to have a similar look to what we've seen in the last few quarters. And I believe this will continue into 2026. Our focus will be on doubling down on this current strategy. Getting deeper into our markets and our business lines. As I mentioned, pipelines are good and I think we can continue growing at this high single digits plus pace. On talent acquisition, this continues to be a focus as well. Recruiting is a process. We've added a number of great bankers this year, and have several more in our pipelines. Made some outstanding additions in the third quarter. And I believe we are included with a very small handful of banks that have built a culture where outstanding regional bankers want to work. We will continue to look for these organic growth opportunities and will remain very focused on recruiting. One of the reasons for our successful execution on adding great people is our culture. Arguably, one of the biggest highlights for the quarter for us internally was our company being named to Fortune's list of best workplaces. It is an honor we don't take lightly, and a big shout out to our people team led by Becca Boyd as we continue with huge accomplishments with the culture of our company. So to summarize, we're positioned well for our clients, our associates, our shareholders. We are executing, growing revenue, EPS, and book value while staying prudent on expense growth. We remain optimistic around our margin, as new production stays strong and as we see the tailwind coming with rate reset on our loan portfolio, over the next couple of years. Credit continues to be very sound and we're seeing great new client acquisitions coupled with great overall energy around our company. I appreciate the work of our SmartFinancial, Inc., SmartBank team and the efforts of all of our associates. I'm very proud of what we have going on here at SmartFinancial, Inc. And I'll stop there and open it up for questions. Edra: Thank you very much. Our first question comes from Brett Rabatin with Hofde Group. Your line is now open. Please go ahead. Brett Rabatin: Hey, good morning, guys. Thanks for the question. Wanted to start maybe, William, you mentioned some hires, and I think in the past, you've said the Alabama franchise could double in size over time and you felt pretty optimistic about Alabama. Can you talk maybe about where the hires were in the geographies? And then just, thinking about Alabama, just any update on the growth outlook for that franchise in particular? William Carroll: Yeah. Brett, thanks. It has. You know, as far as just geography, it's really been fairly evenly spread. You know, I think last quarter, I think we've talked about we had we hired several, and then we had several in the pipeline. We continue to add those. We added a couple in Alabama, added a couple in Tennessee, over the last little bit. And so it's really been throughout all of our zones. I do think we're still extremely bullish on Alabama as we're getting started. We're bullish on all of our markets. But we're seeing a lot of this Alabama growth starting to catch stride, especially with some of these teams that we've got in the Birminghams. In the Auburns, the Dothans, the Montgomery's. Those offices really are starting to generate some great momentum in Mobile too. I know Miller and I have been we've done we've been on we've been on the road a lot the last several weeks. And so we've been in most all of those markets over the last little bit. And it's exciting. A lot of new folks coming on. We had a new ad in Panama City. Did have a new ad in Murfreesboro as well. So it's really been across the board, Brett. But we're continuing to focus not just on Alabama, really all of our zones. That had you know, like I said, Florida as well. We're seeing some nice Panhandle opportunity there. And don't see that slowing down. Yeah. Yeah. It's just really been across the board. So again and I made the comment in here the momentum that we've got really everywhere in the company is just really good right now. Our culture's good. We're attracting some great bankers and you know, and our existing legacy teams are performing extremely well. So we're kinda hitting on most all cylinders. Still got always still got work to do and gaps to close, but it's been really good. Brett Rabatin: Okay. That's helpful. And then on the margin guidance for the fourth quarter, obviously a lot is going into that. Wanted to make sure I understood of the guidance relative to the liquidity that you added in 3Q. How much of that drains out? How should we think about maybe the average balance sheet size in the fourth quarter, you know, and how that might impact NII. Yeah. William Carroll: Ronald, do you wanna talk a little more on the margin detail? Ronald Gorczynski: Yeah. You know, a lot of our cash on the balance sheet today will be more deployed. You know, we did $40 million for the sub-debt. Another $100 million for brokered, and we expect to shrink some of the cash put into loans. So I don't think our asset size of our balance sheet's gonna move anything materially. We're just gonna use really the cash on hand to fund most of the production for Q4. Brett Rabatin: Okay. That's helpful. Then if I could sneak in one last one, you mentioned, William, you know, focused initiatives and next in the next year. Does that increase productivity, like AI, so you can have bots doing work that maybe frees up FTEs or any thoughts on how much that might add to an expense base? William Carroll: You know, it really you know, what we've done, Brett, over the last little bit, as I said, we've really worked and had some very favorable outcomes with some new contract renegotiations on several fronts across the company. But some of the stuff that we're doing in tech I think, is allowing us to get some expense reduction so we can reinvest. I obviously, Ronald will continue to quarterly kind of give our quarterly non-interest expense guidance moving forward. I don't see it having a really meaningful impact from an increase standpoint, even these new initiatives. I think we've got those kind of built in kind of where we think run rates are today. But, we've got some great platform enhancements. We're looking at AI. We've started using bots. I think we will continue to do more of that. We're looking at some new things on the digital front as well from a consumer-facing digital piece. We're leveraging Copilot a lot. In our company today. And I do think it overall, I think it increases efficiency. I don't know yet if it doesn't necessarily don't think it necessarily impacts you in from a spot where we're gonna look to reduce that. But I do think it continues to allow you not to add staff as you scale. And I think that's the biggest thing. We're seeing a lot of tools that we're starting to use. I know we've got great support stuff going on, our risk platform tools. Are very helpful. We're spending a lot of time, you know, evaluating risk, evaluating fraud in your company. So a lot of those technologies, I think, will allow us to continue at current staffing levels. Or maybe add just a few instead of adding a lot over the coming year. So it's kind of a mix it's a mixed bag. There's a lot of different moving parts to it, but I'm really excited. I think our technology team is as good as we've ever had it in our company today. And I feel really good about our ability to advance that while still staying within a very reasonable expense profile. It's as much a reallocation and reinvestment as it is. Ronald Gorczynski: Well, additionally, the first sliver of this will be to you know, we wanna provide our clients with better experience, easy to do business easier to do business with. So that's really our first focus when we're going down this path. Brett Rabatin: That's all really helpful. Thanks so much, guys. Ronald Gorczynski: Thanks, Brett. Edra: Our next question comes from Russell Gunther with Stephens. Your line is now open. Please go ahead. Russell Gunther: Hey, good morning, guys. I wanted to begin with just a follow-up on the expense. So six consecutive quarters of positive operating leverage. You've talked about continuing to hire bankers as the opportunity arises. We just touched on the expense initiative the tech initiatives. So how are you thinking about that streak of positive operating leverage going forward? Is that something we should expect to see over the course of 2026 alongside this franchise investment? William Carroll: Yeah. I'll start, and then, Ronald, maybe you can add some additional color as well. Yeah, Russell. I think so. I mean, you know, when you look at where the company's positioned today, we're really bullish on our ability to continue to grow that revenue line. Again, the production that we're seeing happen throughout all of our markets, the repricing that we've got going on, we're gonna get we're gonna continue to get that revenue lift. You know? And it's definitely gonna outweigh our expense run rates. Now we're gonna wanna continue to invest and add people but we're gonna do that balanced as we grow this revenue line. I think it's really important for us right now to continue hitting these operating leverage targets over the next few quarters. We really believe we can do that. We feel good. We're starting to run Air 26 models and feel very good about where our company can be. Again, we've gotta execute. We've gotta do the right things to do that. But, we've demonstrated our ability to do that. In '24 and '25. We think we can continue that in '26. So, yes, I do think we can continue to increase this consecutive streak of gaining operating leverage. But Ronald, I have any additional comments that you've got. Ronald Gorczynski: Yeah. No. Exactly right, William. You know, we're probably you know, again, we're not going into '26 guidance, but we're probably keeping our band tight. We've been focused on containment for the prior four or five quarters. And we're probably looking around the 34, if you want numbers, 34 to max $35 million range for the full year next year. So yes, we will be focused on containing it with our growth. Russell Gunther: That's great color, guys. I appreciate it. And then just switching gears, to the margin. Appreciate the sort of level set for 04/2025 given the moving pieces in March. You give great detail in the deck, around the average earning asset repricing schedule. And in the past, you've talked about how that would translate to about two to three basis points of margin expansion quarterly. Is that still sort of the range you're thinking about as we move beyond April, or have some of the actions taken this quarter changed that in any way? Ronald Gorczynski: No. Actually, you know, the prior quarters was two to three basis points. We're pretty bullish in our margin expansion going into 2026. Overall, I think we're probably looking at five to seven basis points expansion quarter over quarter for '26. Russell Gunther: That's very helpful. Scott. Thank you, guys. Okay. Thanks for taking my question. Thanks, Russell. Edra: Our next question comes from Catherine Mealor with KBW. Your line is now open. Please go ahead. Catherine Mealor: Thanks. Good morning. Ronald Gorczynski: Good morning. Edra: Maybe just one follow-up on the margin on the deposit side. With growth improving as much as it has into next year, how do you think the deposit beta could be on the next 100 basis points of cuts versus what we've seen on the past 100 basis points of cuts? Just given I think we'll see better growth rates coming, you know, in the next the next course of the year. Ronald Gorczynski: Yeah. I think I think, for the variable intend to, as best we can, is to really follow dollar or basis point per basis point. So we're still targeting 45%. I know we're probably in the thirties right now, but we wanna target that 40% range beta. Catherine Mealor: Okay. And from the past twenty-five of cut, I know it's early, but have you already seen the ability to do that? Ronald Gorczynski: Yes. Yes. We have. William Carroll: Yeah. We've been trying to step down, Catherine, a little bit as we were. You know, we've got we have we have some of the deposits are tied directly to, the rates or market rates. And so those come down as rates come down. Some are more correlated. Some and that gives us the ability to move a little bit faster in some other too. So, yeah, we've been able to move those down and still pick up the growth that we've needed. Teams have done a nice job to be able to do that. And I think, yeah, we're still staying right there in market and staying on top of of what's going on in all of our different zones, and each of our different zones have different competitive pressures. And different competitors, but, but we've done a nice job being able to pull that down. Catherine Mealor: Okay. Great. Then just a quick question on fees. Any outlook for fees as we go into next year of just things to be aware of that could drive better fee growth? I know that the insurance fees settled be over the moving piece. I was just kind of curious on how we're seeing that fee growth into twenty-six. William Carroll: Yeah. I'll start, and then, Ronald, I'd love to get your you know, some color Catherine as well on that. We yeah. We've got several things working. Again, yeah, we'll kinda reset without that insurance component line item going forward. But, yeah, we've got I think we still got some really good plans when you look at fees for us on the whole. Continue to think that that's gonna, have the ability to trend up. I know you know, we've talked a little bit about payment rails and renegotiation. I think we've got some things that we're working on on our, on our interchange income. I did mention I think there's some opportunities there. And I did in my comments our mortgage unit. I'll tell you. Our mortgage unit is having probably as good a year as we've ever had. And really excited about what that mortgage team is bringing to the company. We're seeing, as we've grown our footprint, grown our platform, we continue to add some, great new sales team members on the mortgage side, and our legacy team continues to perform well. So that's a, that's I think that'll be a plus. You know, our investments arm continues to really execute, you know, continue to grow our AU in there. We've added a really nice producer in one of our Alabama markets. New FA down there this year. Yes. And, you know, Ronald, I know we talk we always talk about TM. Well, TM is a piece of it as we continue to grow that TM platform. I know that those dollars continue to just kinda build and become a really nice annuity. So Catherine, I think there are several pieces. I don't know, Ronald, if there's any others that you think of, but I do think we'll continue to get some nice growth. We'd love to see that accelerate. That's going to be a strategic focus for us next year. But I know, Ronald, any comments on that from you? Ronald Gorczynski: Other than, you know, more like more looking at the customer fees and making sure more market. But, no, you hit all the highlights, William. Yeah. Catherine Mealor: Okay. Great. Thank you. William Carroll: Thanks. Edra: Our next question comes from Steve Moss with Raymond James. Your line is now open. Please go ahead. William Carroll: Maybe just starting here on loans, just on the pipeline here, Bill, you sound really optimistic on things. So I'm assuming it's going to be likely to be a really good fourth quarter. Just kind of curious as to is that pipeline enough to support double-digit growth into 2026 Again, I keep guiding to kind of the high singles. We've been able to beat that a little bit. You know? And you know, I think we'll be right there I think we'll be right there at that plus minus 10 number. You know, that's and that's a that's a big bogey as we get larger. I'll tell you, one of the things that we talk about a lot internally you know, the production levels that we've had have really been outstanding. Again, the teams are doing a nice job. You know, we're still seeing the payoffs in paydowns that that, you know, that'll you know, a lot of our as we read and look at other releases, and see a lot of other things going on the market, you know, we're not immune to that. We're getting a lot of pass paydowns. It's just our production is so strong It's still allowing us to get up there and kinda hit this 10% ish number. So, you know, that's know, that's that's a lot to continue to ask our team to do. But as we look over the at least the near term, I do think we can continue at at or around that pace. Again, pipelines are solid, you know, when you're out when you know when we're out in these markets and and with the rents at renting a lot of them, the miller and I are in a lot of them. I mean, we're out, and there's just there's a there's an energy and a really good calling effort. Going on throughout, throughout the company. So, yeah, I think we can continue that know, there might be a quarter that we're a little lighter. Little heavier, but I still think we'd be right around that plus minus 10. Ronald Gorczynski: Yeah. I like the markets. Okay. And they're just all so positive, and the teams seem to be so positive. It does get harder to feed the beast, but I think we're certainly up for. William Carroll: Right. And maybe just in terms of being the beast, I hear you guys in terms of hiring as well. Just curious, you know, as you think about I know you guys are always opportunistic, but know, you obviously have merger disruption in your markets. You'll kind of do you think there's a possibility of a step up in hiring over the next twelve months Just kinda curious. I know you guys are talking about positive operating leverage, but just curious on that aspect expense. William Carroll: Yeah. I'll tell you. See, we're we we're all we're very selective as we go through this hiring process. I you know, I don't necessarily think it's gonna pick up dramatically. I think couple of reasons. I think that it you know, you the disruption that you we see in the market I mean, these are these are good banks, they're gonna be they're gonna be fighting to hold on to good talent. And, you know, and I just and I think over the over a period of time, you may see some you know, dislocation in in in some different bankers and some of those, you know, different markets throughout the Southeast. But I don't think there's a lot. I think we're just gonna continue to be diligent and trying to find just incrementally good bankers that that fit our culture, that fit our teams, And I think we're probably gonna be I would imagine, looking into 26. Kinda keeping the same tight pace that we saw in '25, which will just be just, you know, add great talent. We can find it. Like I said, I think we probably in the process. I think we've added Nate, I think we stopped. We're probably maybe 12 to 15 net for, you know, kind of what we've done, you know, in the pipeline or on we've added this year, I think we'll continue to do that. And, I I think Steve, for us, it's just gonna be just continuing to be diligent. Again, find the right types of bankers that fit the types of of of deals that we wanna look at. William talks off about ADR, always be recruiting. Always be recruiting. That's talent and clients, and I but I think it's it takes a special we're recruiting the quality, not the quantity. And I think that's important for us, culture fit and who they are. Yeah. Alright. Appreciate appreciate that color there. William Carroll: Maybe just one more for me here on the loan loss reserve release. Ronald Gorczynski: Did I understand that correctly because you did I hear correctly that downstream some capital and therefore a lower reserve ratio lower, CRE concentration ratio, that was kinda one of the qualitative factors that drove the reserve lower. Ronald Gorczynski: Yeah. Our, our share concentration ratio one of our qualitative factors was there was our because we're over to 300 that we downstream $45 million from, you know, the parent to the bank, it lowered it to $2.71. Yeah. That was a that was one of the main factors. Okay. William Carroll: Okay. So going forward, you know, relatively stable to maybe a modest build on reserve ratio as as you continue to grow here? Ronald Gorczynski: Yes, sir. Correct. Okay. Awesome. Well, I'll step back in the queue. I really appreciate all the color here, and nice quarter, guys. William Carroll: Thanks, Steve. Thanks, Steve. Edra: Thank you very much. Our next question comes from Stephen Scouten with Piper Sandler. Your line is now open. Please go ahead. Stephen Scouten: Good morning, guys. Just wanted to clarify a couple of things real quick. Ronald, did you say that 45% of your deposits are variable costs? And is that to say, if I heard that right, that those are directly indexed? Ronald Gorczynski: We have the ability to move 45%. We have about 32% that are directly indexed, and we have the remainder that's tied to internal index that will move with the rate moves. So, yeah, 45% all in, though. Stephen Scouten: Okay. Great. Perfect. And then on the on the NIM trajectory, I think you said five to seven basis points a quarter in 2026. Is that your expectation each quarter in 2026? Or just wanna make sure I'm hearing that right. Ronald Gorczynski: Yes. Each quarter in 2026. Stephen Scouten: Great. Fantastic. Okay. And then last thing, think I know Catherine maybe had asked this on the on the fee revenues and insurance. Did you give a guidance for expected fourth quarter overall fee revenues? Ronald Gorczynski: Yes, $7 million. Stephen Scouten: $7 million. Great. Okay. Perfect. And then, on the broker deposit front, you obviously had some nice reductions here this quarter. Sounds like think you said maybe another 111 next quarter. So I'm doing math remotely correct. Like maybe a $120 million or so left in that ballpark. What's the plan for the remaining broker deposits? Would the objective still to get those down from here? Or is that kind of an acceptable level moving forward? Ronald Gorczynski: Yeah. We were at $268 million in June. September at $164 million. Minus the $111 million. Yeah. We intend to as soon as they are due, we're gonna pay those down. So yes, we're looking not to have brokered deposits at someday. That's our goal objective is not have those. Stephen Scouten: Okay. Great. And then I guess last thing for me, you know, the stock's been trading fantastically. The results have been great, kind of ahead of schedule on our operating revenue line. Sounds like hiring has continued well. Do you think about M&A as a piece of that puzzle at all? I think there were some a note maybe in the slide deck, that said you know, maybe more trying to find the verbiage. Maybe more strategic than it was previously. M&A focus shifted to strategic and or needle moving opportunities. I guess, maybe if you could kind of speak to that comment and what that might look like? William Carroll: Yeah. Steven, us, it really and I'm in my comments, said we've our strategy really hasn't changed a ton. A lot of it is just, again, doubling down on this organic strategy, deeper into the markets. That's strategy one a. You know? Yeah. Yeah. I think, you know, we're really not shifting that to really look at M&A. But we've said and continue to say, you know, we will evaluate you know, needle moving opportunities that make sense. I've said you know, before, we don't necessarily, you know, we don't wanna do M&A just to be bigger. You know, we want if we did it, we'd want it to make us better. And sometimes that's just tough to find. You know, if we find that unicorn, we find the right piece that fits us and we would evaluate. But, really, I mean, it's I say that because, you know, you never know what could come down the road. But, man, our strategy is really focused on continuing just to lever you know, this balance sheet and grow as we've done the last couple of years the way we've done it. That's the primary focus. You can't ever say you're not gonna look. I think we are open to look. But William talks often about now, you know, organic is one a and M&A would be one b. M&A might be one c, but we're continuing to look. Yeah. That makes a lot of sense. Well, the strategy is working, so I guess if it ain't broke, don't fix it. Right? So great job, guys. Stephen Scouten: Well, it is. You know, it is. But I but I think I do think you know, and as we've talked to you and a lot of your colleagues, I mean, it's just you know, it's really important for us to message what we've messaged. It's you know, we've built this company by design. We were, again, a little bit kinda mile wide inch deep. By design for a reason. And we it's been very important for us gain this operating leverage and do that. And that's done that. We've executed well. We're executing well. We still got room to grow, and we've got wanna continue to see this move forward. So not really changing anything, on our outlook moving forward. It's just we're gonna just keep doubling down on what we're doing. Stephen Scouten: Perfect. Thanks a lot. Edra: Thank you very much. Miller Welborn: Thanks. Edra: Currently have no further questions. So I will hand back over to Miller Welborn for any closing remarks. Miller Welborn: Thanks, Edra, and thanks, everybody, for being part of the call today. We are very excited about where we are and where we're going. Thank you for being part of the SmartBank family, and have a great day. Edra: Thank you very much, Miller, and thank you to all the speakers for joining today's line. That concludes today's conference call. Thank you, everyone, for joining. You may now disconnect your lines.
Operator: Good morning, and welcome to the Bridgewater Bancshares, Inc. 2025 Third Quarter Earnings Results Call. My name is Megan, and I will be your conference operator today. After Bridgewater's opening remarks, there will be a question and answer session. Please note that today's call is being recorded. At this time, I would like to introduce Justin Horstman, Vice President of Investor Relations, to begin the conference call. Please go ahead. Justin Horstman: Thank you, Megan, and good morning, everyone. Joining me on today's call are Jerry Baack, Chairman and Chief Executive Officer; Joseph M. Chybowski, President and Chief Financial Officer; Nicholas L. Place, Chief Banking Officer; Katie Morell, Chief Credit Officer; and Jeffrey D. Shellberg, Deputy Chief Credit Officer. In just a few moments, we will provide an overview of our 2025 third quarter financial results. We will be referencing a slide presentation that is available on the Investor Relations section of Bridgewater Bancshares, Inc.'s website investors.bridgewaterbankmn.com. Following our opening remarks, we will open the call for questions. During today's presentation, we may make projections or other forward-looking statements regarding future events or the future financial performance of the company. We caution that such statements are predictions and that actual results may differ materially. Please see the forward-looking statement disclosure in the slide presentation and our 2025 third quarter earnings release for more information about risks and uncertainties which may affect us. The information we will provide today is as of and for the quarter ended September 30, 2025, and we undertake no duty to update the information. We may also disclose non-GAAP financial measures during this call. We believe certain non-GAAP financial measures, in addition to the related GAAP measures, provide meaningful information to investors to help them understand the company's operating performance and trends, and to facilitate comparisons with the performance of our peers. We caution that these disclosures should not be viewed as a substitute for operating results determined in accordance with GAAP. Please see our slide presentation and 2025 third quarter earnings release for reconciliations of non-GAAP disclosures to the comparable GAAP measures. I would now like to turn the call over to Bridgewater's Chairman and CEO, Jerry Baack. Jerry Baack: Thank you, Justin, and thank you, everyone, for joining us this morning. In the third quarter, our team continued to demonstrate our ability to take market share by growing deposits and generating loans, which resulted in steady net interest income growth. We saw strong core deposit growth with balances up 11.5% annualized. This continues to be a testament to our talented banking teams and the relationship model we prioritize. The relatively steady pace of core deposit growth we have seen over the past year has positioned us to be more aggressive on the loan front as our loan-to-deposit ratio remains near the lower end of our target range. We generated strong loan growth of 6.6% annualized during the third quarter as we continue to see growth across multiple asset classes, including the affordable housing space. This helped drive a $1.6 million increase in net interest income during the quarter. We also saw one basis point of net interest margin expansion to 2.63%. Joe will talk more about the margin in a minute, but we are optimistic about our ability to see more meaningful expansion in the coming quarters. Asset quality continues to be a strength as non-performing assets remained at consistently low levels and net charge-offs were just 0.03% of loans. We continue to see some modest risk rating migration within the portfolio, which our Chief Credit Officer, Katie Morell, will touch on shortly, but we continue to feel good about the portfolio overall. Lastly, we've developed a reputation for consistently building tangible book value, which you can see on Slide four. As tangible book value per share increased 20% annualized in the third quarter, and is up 14% annualized year to date. This continues to be how we drive shareholder value. Before I turn it over to Joe, I want to share an update regarding the successful completion of two significant initiatives in the third quarter: the launch of our new retail and small business online banking platform in July, and the systems conversion of our acquisition of First Minnetonka City Bank in September. The new online banking platform gives our clients an updated, robust platform to enhance the way they manage their finances at Bridgewater. In addition, it provides our smaller entrepreneurial clients with a platform designed specifically for them. The team worked tirelessly to ensure smooth migrations initially for Bridgewater clients and then convert to our newly acquired clients a few months later. The success of both conversions reinforced my confidence that we have the right team to take advantage of future M&A opportunities as they become available. In August, we also announced some transitions to our strategic leadership team. Most notably, Mary Jane Crocker, our Chief Strategy Officer, and Jeffrey D. Shellberg, our Chief Credit Officer, will both be retiring in 2026. Mary Jane will join our Board of Directors next year while Jeff will continue to work alongside Katie in a Deputy Chief Credit role until his retirement, ensuring Bridgewater's credit culture remains consistent. Jeff and Mary Jane have been with me at Bridgewater since founding the bank in 2005. I'm so appreciative of their contributions and quite simply, Bridgewater would not be what it is without them. By executing the succession plan we have been working on for a few years, I am confident in the leadership of the bank going forward. We elevated Katie Morell to Chief Credit Officer, Jessica Stetskull to the new role of Chief Experience Officer, and Laura Aspisov to her role of Chief Administrative Officer. All three are talented individuals with strong work ethics bringing a diverse set of skills. I am thrilled that we have the internal talent to continue to drive our unconventional culture and continue our growth trajectory. Overall, I believe Bridgewater is well-positioned as we head into the fourth quarter and in 2026. Our outlook for loan and deposit growth remains very strong as we continue to see opportunities from M&A disruption in the Twin Cities. Our goal is to grow to become a $10 billion bank by 2030, and we believe we are on track to get there. Our balance sheet is well-positioned for meaningful net interest margin expansion in this rate-down environment. With the systems conversions behind us, we look for expense growth to return to more normalized levels in line with asset growth. And the Twin Cities market trends remain favorable, which will hopefully support continued strong asset quality. With that, I will turn it over to Joe. Joseph M. Chybowski: Thank you, Jerry. Slide five highlights another quarter of strong net interest income growth, driven by annualized average earning asset growth of 16%, and one basis point of net interest margin expansion to 2.63%. As we mentioned last quarter, we were not expecting much margin expansion in the third quarter as we anticipated the higher asset yield repricing to be mostly offset by a couple of specific headwinds, which is what we saw. The most notable headwind was the $80 million of subordinated debt at 7.625% we issued in June, which we used to redeem $50 million of outstanding subordinated debt at 5.25%. This created a six basis point net drag on margin in the third quarter. We also continued to see the ongoing benefit of the purchase accounting accretion diminish as it contributed just four basis points to margin during the quarter. In addition, we had higher than expected average cash balances in the third quarter due to our strong deposit growth. While this put added pressure on the margin, we view it as a good thing as it created more net interest income dollars and gives us more funding to deploy into future loan growth. Looking ahead, we are well-positioned for more meaningful net interest margin expansion in the fourth quarter and into 2026, especially given the full quarter impact of the September rate cut and the potential for additional cuts. In fact, we believe we have a path to get to a 3% margin by early 2027. Combining our margin expansion with the loan growth outlook that Nick will talk about in a few minutes, we are in a great position to continue driving net interest income growth from here. Turning to slide six, our loan yields continue to reprice higher even in the current environment. Loan yields increased five basis points during the third quarter, which was a slower pace than the second quarter as we saw less new originations and payoffs, resulting in less overall churn of the portfolio. With $68 million of fixed rate loans scheduled to mature over the next twelve months, at a weighted average yield of 5.69%, and another $140 million of adjustable rate loans repricing or maturing at 3.85%, we still have more loan repricing upside ahead of us as new originations in the third quarter were in the mid-6s. We would expect this repricing to be a tailwind to margin going forward, especially as the portfolio continues to turn over. Overall, total earning asset yields increased seven basis points to 5.63% as we also saw an increase in securities yields during the quarter. The cost of total deposits was 3.19%, continuing the stabilization trend we have seen throughout 2025. However, we should see deposit costs decline in the fourth quarter as we have $1.7 billion of funding tied to short-term rates, including $1.4 billion of immediately adjustable deposits, that we repriced lower immediately following the recent rate cut in mid-September. Turning to Slide seven, we continue to see strong revenue growth trends, driven by the momentum in net interest income. Fee income has also been a contributing component to revenue growth in recent quarters due to increased swap fee income and investment advisory fees. We did see fee income decline in the third quarter, however, due to the lack of swap fee income. We mentioned last quarter that swap fees would continue to be part of the revenue mix going forward, and we expect that to continue to be the case. However, this just highlights the lumpiness of these fees. Over the past five quarters, swap fees have averaged about $300,000 per quarter, but have ranged from $0 to nearly $1 million. I can say that we expect a rebound in swap fees in the fourth quarter as we have already booked some in October. On slide eight, as expected, the higher than usual increase in noninterest expenses we have seen year to date continued in the third quarter as we have had some redundant expenses this year leading up to the core conversion. We added 17 full-time equivalent employees during the quarter, which drove an increase in salary expense. Marketing expenses were also elevated during the quarter due to advertising directly related to our focus on bringing talent and clients from the Old National and Bremer disruption, which have been bearing fruit. We feel much of the higher expenses in the third quarter were really opportunistic in nature as we continue to position the bank for ongoing growth. Now that the systems conversion is behind us, we would expect expenses to return to growing more in line with asset growth over time. With that, I'll turn it over to Nick. Nicholas L. Place: Thanks, Joe. Slide nine highlights the strong core deposit momentum we have seen over the past year, which continued in the third quarter as core deposits grew 11.5% annualized and are now up 7.4% annualized year to date. Core deposits are the lifeblood of what we do here. This more consistent growth we have seen recently provides us the ability to grow the bank in a more profitable way. You can see it from a deposit mix shift standpoint. During the third quarter, non-interest-bearing deposits increased approximately $35 million while brokered deposits declined by about the same amount. Overall, we continue to feel good about the core deposit pipeline, especially given opportunities out there related to the local M&A disruption. Turning to Slide 10, as we mentioned last quarter, we expected loan growth to be in the mid to high single digits in the second half of the year, after outperforming these expectations in the first half. And this is what we saw in the third quarter as loan balances increased 6.6% annualized and are now up 12% annualized year to date. Generating loan growth has never been a problem for Bridgewater. With more consistent core deposit growth, loan pipelines that remain at three-year highs, opportunities from M&A disruption, and a 98% loan-to-deposit ratio that is in the lower half of our target range, we are in a good position to continue being aggressive on the loan front. We also had several deals we expected to close in the third quarter that were pushed out a quarter. As a result, we should have a bit of a head start here in the fourth quarter. Overall, we continue to expect near-term loan growth to be in the mid to high single-digit range. This will, of course, be dependent on the ongoing pace of core deposit growth, as well as loan payoffs, which can be difficult to predict. Turning to slide 11, you can see our loan origination activity, which was down a bit in the third quarter, primarily due to some deal closings sliding from the third quarter to the fourth quarter, as I mentioned earlier. We would expect this to pick back up in the fourth quarter as our pipeline remains at a three-year high. Payoffs have also trended a bit lower recently. While payoffs are a drag on loan growth, these recycled dollars will allow us to continue to fund new loan originations at attractive yields. Turning to Slide 12, the loan growth we saw in the third quarter was spread across several key asset classes, including construction, multifamily, non-owner-occupied CRE, and even one to four family. As mentioned last quarter, construction was an area where we would be seeing more balance sheet growth following an increase in new construction projects in 2024. These projects are now starting to fund, driving an increase in balances in the third quarter. We would expect this to continue being a catalyst for loan growth throughout 2026. While it isn't called out in its own section of the portfolio, we continue to have success in our national affordable housing vertical as this drove much of the multifamily growth during the quarter. With that, I'll turn it over to Katie. Katie Morell: Thanks, Nick. Slide 13 provides a closer look at our multifamily and office exposure. We continue to see positive multifamily trends in the Twin Cities. This includes lower vacancy rates, which recently dropped below 6%, strong absorption, and reduced use of concessions, all of which suggest a favorable outlook for higher levels of net operating income. We continue to expand our affordable business both locally and on a national basis. The portfolio now totals $611 million, with $467 million in multifamily, while the rest is in land, construction, or non-real estate. The total portfolio has grown at a 27% annualized pace year to date. We feel good about this portfolio from a credit standpoint, as we continue to work with experienced developers across the country and because of the shortage of affordable housing nationwide. Our non-owner-occupied CRE office exposure remains limited at just 5% of total loans. We continue to work through the one Central Business District office loan that is rated substandard and on non-accrual, but overall, we feel good about our office portfolio. Turning to Slide 14, our overall credit profile remains strong. Our reserve level of 1.34% is conservative compared to peers, and our nonperforming assets held steady at just 0.19% of total assets, well below peer levels. Net charge-offs also remained very low at 0.03% of average loans. The minimal amount of charge-offs we had during the quarter were related to the legacy First Minnetonka City Bank portfolio. Turning to slide 15, our classified loans remain at relatively low levels. We did have one multifamily loan that migrated from special mention to substandard during the quarter. This was the loan that we moved to special mention last quarter while it was under a purchase agreement. Unfortunately, that purchase agreement was canceled, and we decided to move the loan to substandard. We actively monitor new sales prospects for the property. The borrower remains engaged with the bank and is committed to moving the asset quickly. Importantly, we do not see any systemic credit issues as our overall portfolio is performing well and the multifamily sector continues to show favorable trends. I'll now turn it back over to Joe. Joseph M. Chybowski: Thanks, Katie. Slide 16 highlights our capital ratios, which remained relatively stable in the third quarter, with our CET1 ratio increasing slightly from 9.03% to 9.08%. We did not repurchase any shares during the quarter given our strong organic growth pipeline and where the stock was trading. As of quarter end, we still have $13.1 million remaining under our current share repurchase authorization. In the near term, we expect capital levels to hold relatively stable given retained earnings and our stronger growth outlook. Turning to slide 17, I'll recap our near-term expectations. Given our strong loan pipelines and opportunities we continue to see in the market, we believe we can continue to generate mid to high single-digit loan growth in the near term. Core deposit growth will continue to be a governor here, but we feel we are in a good spot to be offensive-minded, as our target loan-to-deposit ratio remains 95% to 105%. While net interest margin increased just one basis point in the third quarter, we feel bullish about more meaningful margin expansion over the next several quarters. We believe we have a path to get back to a 3% margin by early 2027, driven both by loan yields repricing higher and deposit costs declining, with additional Fed rate cuts. At the end of the day, our focus is on driving net interest income growth, which will come from both the margin expansion and our stronger loan growth outlook. Non-interest expense growth has been higher than what we have typically seen due to the later systems conversion, but now that that is behind us, we expect to return to growing expenses relatively in line with asset growth over time. We also feel we are well-reserved at current levels and would expect provision to remain dependent on the pace of loan growth and the overall asset quality of the portfolio. I'll now turn it back to Jerry. Jerry Baack: Thanks, Joe. Finishing on Slide 18, I want to provide a quick update on our 2025 strategic priorities. As we suggested earlier, we have clearly returned to a more normalized level of profitable growth in 2025, with 12% annualized loan growth and 7% annualized core deposit growth year to date. With a strong marketing campaign and talented team of bankers, we continue to take market share in the Twin Cities, both on the loan and deposit fronts. Our brand is stronger than ever. We continue to build strong relationships and we are taking advantage of the ongoing M&A disruption. Our technology and operations team successfully rolled out our new retail and small business online banking platform, while also completing the systems conversion of our First Minnetonka City Bank acquisition. As we look forward, we do plan to close one of the two branches we acquired from First Minnetonka City Bank. This will provide some additional efficiencies as we have branch coverage in the area. While this brings us to eight branches, we will be bumping back up to nine when we open a De Novo branch, expanding our footprint into the East Metro of the Twin Cities in early 2026. With that, we'll open it up for questions. Operator: The first question comes from the line of Jeffrey Allen Rulis with D.A. Davidson. Jeffrey Allen Rulis: Jeff, are you there? We can't hear you. Jeffrey Allen Rulis: Hi. Can you hear me now? Joseph M. Chybowski: There you go. Hello? Jeffrey Allen Rulis: Yep. We can hear you. Okay. Sorry about that. On to the margin path that you outlined towards 3%. Wanted to see if appreciate the visibility there, but I guess over the course of a year plus, you expect that improvement to be fairly measured? Or is ramp later? Any sense, I know there's a lot of inputs there with rates and such, but any idea how that kind of that path towards there transitions? Joseph M. Chybowski: Hey, Jeff. This is Joe. Yeah, I think generally it's fairly steady. I mean, it's two basis to three basis points a month. I will say we are assuming those cuts happen just two of them happened in October and in December. So the deposit piece might be more front-loaded, but the asset side as we lay out our portfolio, roughly $750 million of fixed and adjustable rolling off kind of in the mid-5s. So I think that'll happen pretty steady throughout 2026. But, yeah, we think it's very much achievable with just two cuts assumed early on. Jeffrey Allen Rulis: Got it. Thanks. And then maybe rate related and turning towards the credit side and maybe for Katie or Jeff, just on kind of a clumsy question, but I would assume rate cuts would offer some relief to your borrowers. Have you run any analysis of the percent of borrowers sort of a tangible benefit of 50 basis points of cuts or more? I don't know if there's a or come in the form of upgrades with cash flow relief. Anything you could quantify on the expected rate cuts and what that might mean for the health of the loan portfolio? Katie Morell: You know, I don't think we have anything quantified to share, but, I mean, we are proactively getting ahead of any loans with repricing risk. We feel like that's getting materially better since the last eighteen to twenty-four months. So certainly any further reduction in rates will only benefit those loans that are repricing and currently at a fixed rate over the next year. And a lot of those also with the repricing risk we potentially had action plans already in place with borrowers due to covenant failures or the pending reprice. So we feel really good about having gotten ahead of any from a credit risk standpoint that have repricing risk. Jeffrey Allen Rulis: Appreciate it. Yes, probably a little early, but that's helpful. And maybe just one last one, just sort of a housekeeping. Trying to map the merger costs, was that truly in other? I know you kind of broke out in Slide eight that the cost. I was just trying to mesh that with the press release. Anything in professional and consulting? Or was it truly absent out of comp, out of professional consulting? Truly other? Joseph M. Chybowski: Yes. The slide in that we lay out noninterest expense pulls it out and just highlights it. So those costs that were specifically related to the merger itself. So I think when we talk about this quarter, kind of the increase in expenses was more salaries related ordinary course marketing given our offensive-minded efforts around ONB and Bremer. Advertising specifically and then just general consulting fees. I don't know if that's answering your question. Jeffrey Allen Rulis: Yes. I guess to go forward, messaging is that obviously we think the merger costs kind of go away and you're talking about the core costs even coming down or normalizing with the pace of growth. Joseph M. Chybowski: That's essentially the message. Yes, definitely. I think this was kind of the last quarter where we had that redundancy in expenses. But I think as we look forward into 4Q and then into 2026, we view expenses growing similar to how they did pre-deal where it's assets and expenses growing in line. You can see that in the core kind of NIE to average assets. It's been steady at one and forty-three the last couple of quarters. We envision we grow at a mid to high single-digit pace next year that expenses would grow in line. Jeffrey Allen Rulis: Great. Thank you. Operator: The next question comes from the line of Brendan Nosal with Hovde Group. Please go ahead. Brendan Nosal: Hey, good morning, folks. Thanks for taking the question. Hope you're doing well. Just to circle back to kind of the margin outlook. We really appreciate you guys putting a stake in the ground a little further out than you typically do. Just kind of on the moving pieces of that 3% margin, get the rate cut commentary out of the Fed that's underpinning that. Can you just speak to kind of assumptions for what the belly of the yield curve does and how that impacts back book lowering pricing? And then if we look at that roughly 40 basis points of margin improvement that you're kind of calling for, can you just bifurcate that between relief on the funding side and yield pickup on the loan side? Joseph M. Chybowski: Yes, Brendan, this is Joe. You know, I think we envision kind of the belly of the curve really staying where it is. Maybe some slight decline. But I think there I think slope as we've always said is our friend certainly. So if we kind of have a terminal fed funds rate in the mid-3s and the five ten-year part of the curve where it's at. I mean, that's what our assumption is. Now granted you get more cuts or you get some flattening or steepening, I think obviously those have impacts too. But nonetheless, I think slope is certainly our friend. On the other side in terms of bifurcating loans and deposits, I just think the comment is similar to earlier where there's continued repricing throughout 2026 on the asset side. Both fixed and adjustable rate loans. Also think just given the pickup in origination activity, the churn of the portfolio certainly buoys or increases earning asset yields specifically in the loan book. And then the deposit portfolio, I think is most sensitive that $1 billion that we highlight will obviously benefit with those first two cuts that we're assuming here in October and December. And then the rest of the portfolio we continue to rationalize lower in a different rate environment. So I think it's both sides coordinated effort, I think very achievable as we think about it. Throughout 'twenty six. Like I said, it's two to three basis points a month. Considering the dynamics of composition of the balance sheet, for putting on loans low to mid-6s. And kind of incremental additional new funding in the low threes. We think that spread in itself is very much accretive to the existing margin. So all of that coupled together is how we can feel confident about that path to early twenty twenty seven. Brendan Nosal: Yes. Okay. Okay. Thanks for the color there. That makes sense. Maybe just kind of switching gears to the affordable housing piece. Just kind of curious what the comfort level is and kind of growing the national piece of that book. I think the national piece is only like 4% of loans today maybe that are kind of out of market at this point. Just kind of curious how high you're comfortable taking this over time? Nicholas L. Place: Brendan, this is Nick. Yeah. This has been maybe somewhat recent that we've been sharing our activity level. Within this space, but it's certainly not a new business line for us. It's something that we've been involved with going back to probably 2007. So we have a deep history in working knowledge within the space. So I think that is sort of a foundational piece that gives us a lot of comfort in understanding not only the transactions that we get involved with, but vetting through the borrowers that we're meeting with that are new to us as we've expanded our reach beyond, you know, the Minneapolis St. Paul market. So the quality of borrower that we've been focusing on, is really top tier and we feel really good about the pieces of that we're getting involved with on those transactions. Relatively short term in nature, refinancing stabilized properties as they're coming out of their compliance period. Or providing sort of ancillary pieces of debt that are short term that turn pretty quick. So overall, we feel really good about how we're positioned in that space. We feel like it's an underserved market that we're well-positioned to be able to provide our banking services to and grow on both sides of the balance sheet. Certainly, the loan side is maybe what we shared within the prepared remarks, but that has been a really good source of growing core deposits as well. As those client relationships are eager for a relationship bank that understands their business and are open to moving their deposit balances to us even if they are based outside of the Twin Cities. So it certainly is a relationship game for us. And we're not looking for transactional business there. So for a lot of those reasons, we feel good about where we're positioned in that space and how we see it providing a growth path for us in the future. Brendan Nosal: Okay. Well, thank you for your thoughts, Nick, I appreciate you guys taking the questions. Operator: Next question comes from the line of Nathan Race with Piper Sandler. Nathan Race: Good morning, everyone. I appreciate taking the questions. Just going back to the loan growth outlook, I appreciate your term expectations haven't really changed, but it seems like you're guys are being pretty offensive in terms of some of the hires that you completed in the quarter and you're maybe there's more to come on that point. So just curious if we can expect any step change function in terms of kind of the growth trajectory into next year. Is it possible we can get back to kind of a stronger pace of growth that we saw both in terms of loans and deposits prior to the rate hiking cycle starting in 2022? Nicholas L. Place: Yes. Hey, Nate. This is Nick. I mean, feel really good about where we're at. From a loan growth outlook perspective. I think one thing that we're mindful of is and I think we made a lot of progress in the last eighteen months about aligning our loan growth to be more consistent with our deposit growth, specifically on the core deposit front. So I think that that's a strategy that trying to employ as we think about our future loan growth. That does provide us with a more profitable path on a go-forward basis. So I think it's certainly that engine is there and the potential is there to grow faster than that. We're just trying to be both selective on sort of the client relationship front and the profitability front as we think about our loan growth to ensure that we're not putting ourselves in a loan or deposit position that forces us to really pull back hard on growth in a quarter or two just as we if we outperformed our expectations. So we feel good about a lot of the verticals that we're in, the disruption that we talked about, within the Twin Cities, is real and you know, we've been able to have great conversations with both clients that are impacted and production staff. And I think those conversations will continue here over the next year as clients are transitioned over and as personnel find their new normal at the new organization. And, we're expecting to be beneficiaries on both of those fronts. So that certainly something that could impact the amount of our loan growth as we bring on production staff hopefully over the next year or so. Nathan Race: Got it. That's really helpful. And Nick, maybe just touch on where you expect to see these hires impact? I mean, are these more C and I related? Or color in terms of potential growth impacts that we can see across the balance sheet? Nicholas L. Place: Yes. I mean, that's certainly something that we've had as a strategic priority to improve our expertise and depth of knowledge in that space. So yeah, there's conversations within that front. But we've always been opportunistic in our hiring and that's really across the bank. Whether that's production staff or operations folks compliance and BSA, I mean, there's a lot of really talented banking personnel here in the Twin Cities and we're open to having conversations with all of them. Specific to the production front though, I think, you know, we've tried to differentiate ourselves by thinking about sort of niche business lines and to the extent that we can expand into a new vertical through the acquisition of a person or a team, we're definitely open to that as well. And we're having conversations sort of across all of those fronts now and hopeful that some of those will pay off here in 2026. Nathan Race: Okay, great. Then a couple of questions for Joe. There's some differences in the end of period average cash balances. I've mentioned the sub-debt impact has some relevancy there. Curious if you can touch on kind of where you'd like to run in terms of cash levels going forward? And then also, it looks like securities yields ticked up nicely in the quarter. Just any thoughts on the securities yield trajectory from here in light of the rate outlook? Joseph M. Chybowski: Yes. I think on the cash side, I think we were generally just really pleased with the core deposit growth that translated during the quarter. I think a lot of that we'd message with some seasonal outflows in the second quarter would come back in the third. So we did certainly have higher average cash balances throughout the quarter. I think we're always ultimately loan growth being top priority and given pipelines where they're at, I think we when we think about cash and securities, we always want to have liquidity such to fund that growth. From the security standpoint yields going forward, there were opportunities I think given where rates were at kind of more mid-quarter where we saw some opportunities to put on some longer duration paper. So part of that contributed to the higher boost in securities yields during the quarter. And then I think where we're at today, we're definitely active just kind of redeploying as there's pay downs, payoffs, maturities. Some of that's also just recycling FMCB's portfolio which we had always kind of planned once we closed the deal last year. So I think we're opportunistic in the security space as well, but I think ultimately we want to support the loan growth outlook. And think where the pipeline is at, I think that's certainly bullish on continued growth there. Into 2026. Nathan Race: Okay, great. And then maybe a couple for Katie. On the loan that we've talked about a couple quarters now, I believe you guys have a specific allocation there. Just curious if you're still expecting some charge-offs there at some point in the future and if there's any specific reserves on the credit that moved to substandard in 3Q? Katie Morell: So yeah, starting with the office loan, our specific reserve hasn't changed on that one. It's just under $3 million. And we continue to see leasing prospects and some interest. There's been more return to the office in Downtown St. Paul. So we're not planning a charge-off at this time on that loan. And then in regards to the multifamily loan that we moved this quarter, that one does not have a specific reserve. And like we shared in the prepared remarks, the borrower is sort of moving quickly to reengage a new buyer and hopefully sell that asset quickly. Nathan Race: Okay. I appreciate all the color. Thanks, everyone. Operator: This concludes our question and answer session. I will now turn the call back over to Jerry Baack for any closing remarks. Jerry Baack: I want to thank everybody for joining the call today. Really excited about our ability to take market share in the Twin Cities market and believe the fourth quarter in 2026 will certainly be a good year for us. Do want to call out and thank some of the team members that we have here, our deposit operations, technology, and operations team have really busted their butts these last few months to get the conversions done successfully. And also just want to do another shout-out for Mary Jane Crocker and Jeffrey D. Shellberg and how incredible they've been as partners for me. Considering twenty years ago we started this bank in our basement. It's great to still both be on the board supporting us going forward, but a great shout-out to them. Thanks for everybody taking the call today. Thanks. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good day, and welcome to the Northern Trust Corporation Third Quarter 2025 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Jennifer Childe, Director of Relations. Please go ahead. Jennifer Childe: Thank you, operator, and good morning, everyone. Welcome to Northern Trust Corporation's Third Quarter 2025 Earnings Conference Call. Joining me on our call this morning is Michael O’Grady, our Chairman and CEO; David W. Fox, our Chief Financial Officer; John Landers, our Controller; and Trace Stegeman from our Investor Relations team. Our Third Quarter Earnings Press Release and Financial Trends Report are both available on our website at northerntrust.com. Also on our website, you will find our Quarterly Earnings Review Presentation, which we will use to guide today's conference call. This October 22 call is being webcast live on northerntrust.com. The only authorized rebroadcast of this call is the replay that will be made available on our website through November 22. Northern Trust disclaims any continuing of the information provided in this call after today. Please refer to our Safe Harbor Statement regarding forward-looking statements in the back of the accompanying presentation, which will apply to our commentary on this call. During today's question and answer session, please limit your initial query to one question and one related follow-up. David W. Fox: This will allow us to move through the queue and enable as many people as possible the opportunity to ask questions as time permits. Thank you again for joining us today. Let me turn the call over to Michael O’Grady. Michael O’Grady: Thank you, Jennifer. Let me join in welcoming you to our Third Quarter 2025 Earnings Call. Our third quarter results underscore the momentum and disciplined execution of our One Northern Trust strategy. For the fifth consecutive quarter, we delivered positive organic growth and operating leverage, demonstrating our ability to capitalize on a constructive market environment while advancing our transformation agenda. Supported by favorable equity markets and well-managed expense growth, third quarter revenue increased 6%. Our pretax margin expanded by nearly 200 basis points, and our earnings per share grew 14%, each as compared to the prior year and excluding notable items. Return on equity reached 14.8%, and year to date, we have returned 110% of earnings to shareholders, contributing to a 5% decrease in shares outstanding. Our strategy is firmly rooted in our mission to be our clients' most trusted financial partner, powered by a culture of high performance. Our enterprise growth program is driving steady improvement in organic growth, particularly within private markets, where our integrated solutions are gaining traction across all business lines. The transition to a client-centric, capability-driven operating model is already yielding measurable productivity gains. For example, in our enterprise COO organization, we have created approximately 40 capability teams, moving thousands of people from regional reporting structures to global capability reporting lines. This has enabled us to create a baseline for improving resiliency, process efficiency, and quality. AI is rapidly becoming a catalyst for innovation and efficiency. Our early investments, inclusive of providing all employees with access to Copilot, are already generating measurable results. Across the organization, AI is embedded in more than 150 use cases, enabling teams to more efficiently service client requests, automate workflows, analyze data, and digitize documents, saving our partners tens of thousands of hours and allowing them to focus on higher value initiatives. As we continue to deploy AI across the company, we expect it to accelerate these improvements, driving greater efficiency, further bending the cost curve, and unlocking additional capacity for reinvestment in growth initiatives. Let me turn to our businesses, starting with wealth management. We advanced key strategic priorities in the third quarter, adding experienced leadership and strengthening our geographic strategy. Our value proposition continues to resonate most with the highest wealth tiers, driving elevated win rates and client retention. Our deep expertise, institutional-grade capabilities, and high-touch service culture position us to offer services across the entire continuum of family office structures, from the largest stand-alone single-family offices supported by our GFO business to virtual and outsourced solutions offered by our new Family Office Solutions Group. This offering for ultra-high-net-worth families is most mature in the Central Region, where robust demand has translated into several high-profile wins this quarter. Building on this momentum, we see significant runway for future growth as we replicate our playbook across other regions. Client appetite for alternative investments within wealth management is accelerating, fueling both innovation and adoption. We continue to expand the number of third-party fund offerings in the quarter and are on pace to more than double the number of funds we have had in market within a calendar year. This builds upon the substantial amount of alternative assets raised by 50 South Capital this year, with wealth and GFO clients making meaningful commitments. Notably, 50 South Capital introduced a feeder fund structure in the third quarter, giving wealth clients direct and exclusive access to top-tier alternatives managers. Overall, new business activity remains brisk, contributing to healthy growth in core advisory fees. However, this positive momentum has been tempered by ongoing challenges at the investment product level. Moving to asset management. In September, we announced the transition in leadership, appointing Mike Hundstedt, a 25-year industry veteran and proven leader within Northern Trust, as President of NTAM. Under his leadership, NTAM will continue its focus on strengthening foundational core capabilities, including liquidity, indexing, and quant equity, while accelerating growth across alternatives, custom SMAs, and our ETF platform. The third quarter was marked by product innovation, including the launch of 11 new ETF strategies, eight of which are industry-first fixed income distributing ladder ETFs, developed in collaboration with wealth management investment leaders to address the needs of taxable clients seeking more tax and cost-efficient cash flow management. Liquidity continues to be a standout area, with NTAM reporting its eleventh consecutive quarter of positive flows. We expanded our global money market fund platform in the quarter with the launch of a US dollar treasury liquidity strategy for European clients, building on the success of our onshore US treasury instrument strategy, which has already amassed more than $6 billion since its launch in June 2024. Beyond liquidity, we saw positive flows in ETFs and custom SMAs, both key areas of focus, and fixed income, including two large high-yield mandates. And finally, moving to asset servicing. Our Asset Servicing business delivered strong results this quarter, executing on a disciplined strategy centered on scalable growth across key focus areas, including large asset owners, capital markets, and alternatives. Success with large asset owner clients continued, with year-to-date revenue from front office solutions increasing materially relative to the prior year period. This growth was driven by the strategic appeal of our integrated product offering, differentiated service model, and ability to deliver meaningful efficiencies for clients. Notable third quarter custody and fund administration wins included the $14 billion Sacramento County Employees Retirement System, a $16 billion Atlanta-based private foundation, and the $19 billion New Mexico Educational Retirement Board. Not-for-profit health care was another highlight, with strong third quarter wins bringing our coverage to 75% of the nation's top 50 not-for-profit health care systems, a clear testament to our competitive positioning and deep commitment to the space. Capital markets activity remains strong, with more than 100 new clients added year to date, primarily through cross-sell, driving significant growth in core brokerage and FX trading. Capitalized businesses that carry highly attractive margins. Momentum in the alternative space also remained robust, with our hedge fund services and private capital practices generating double-digit year-over-year increases in both reported revenue and won but not funded business. This included continued success in the LTIP and LTAPH space, highlighted by a marquee win in The UK, extending our market-leading position in this attractive high-growth area. Our commitment to exceptional client service was recognized with the Best Administrator Overall Service Award at the US Hedge Fund Management Service Awards. We were also honored as Custodian of the Year by the European Pensions Awards, our third win in six years, further validating our leadership and reputation in the industry. Our disciplined strategy to drive scalable, profitable growth continues to yield tangible results. While recent wins may be smaller in scale compared to some of our prior asset manager mandates, they remain meaningfully accretive to pretax margins. We are also selectively allowing noncore and underperforming business to roll off as contracts expire. Therefore, we expect to see a continued gradual trajectory of margin improvement and overall growth. To wrap up, as we enter the fourth quarter, our foundation is strong and our momentum is unmistakable. Nearly two years into our One Northern Trust strategic journey, I am deeply encouraged by the progress we have made and grateful to my Northern Trust partners for their hard work and dedication. This decisive, collaborative spirit that defines our organization is unlocking new opportunities to accelerate execution and fully capitalize on our core strengths. Looking ahead, we remain laser-focused on the disciplined execution of our strategy, which is positioning us to deliver consistently strong financial performance and create enduring value for our stakeholders, regardless of the broader economic environment. And with that, I'll turn it over to Dave to review the financials. David W. Fox: Thanks, Mike. Let me join Jennifer and Mike in welcoming you to our Third Quarter 2025 Earnings Call. Let's discuss the financial results of the quarter starting on Page five. This morning, we reported third quarter net income of $458 million, earnings per share of $2.29, and our return on average common equity was 14.8%. Our third quarter results reflect another quarter of solid progress toward achieving our financial objectives and enhancing the durability of our financial model. We delivered positive operating leverage of 110 basis points, 120 basis points of year-over-year improvement in our expense to trust fee ratio, which was down to 112% in the third quarter, and returned nearly 100% of our earnings. Relative to the prior year, currency movements favorably impacted our revenue growth by approximately 50 basis points and unfavorably impacted our expense growth approximately 30 basis points. Relative to the prior period, currency movements were immaterial to both revenue and expense growth. Trust and investment and other servicing fees totaled $1.3 billion, a 3% sequential increase and a 6% increase compared to last year. Interest income on an FTE basis was $596 million, down 3% compared to the prior period and up 9% year to date from a year ago. Excluding notables in the prior year, other noninterest income was up 10% year over year, largely reflecting stronger capital markets activities, particularly securities commissions and trading, and FX trading income, reflecting our focus on driving growth in these areas. Our assets under custody and administration were up 1% sequentially and up 5% compared to the prior year. Our assets under management were up 4% sequentially and up 9% year over year. Overall, our credit quality remains very strong, with all key credit metrics in line with historical standards. We recorded a $17 million release of the credit reserve in the third quarter, largely reflecting changes in macroeconomic projections. On a year-to-date basis, our provision remained essentially unchanged. Our effective tax rate was 26.1% in the third quarter, up 70 basis points over the prior period's rate as a result of higher tax impacts from international operations. Expect the full year's effective tax rate to be in line with the year-to-date effective rate. Relative to the prior year period and excluding notable items, revenue was up 6%, expenses were up 4.7%, our pretax margin was up 200 basis points, earnings per share increased 14%, and our average shares outstanding decreased by 5%. Turning to our wealth management business on page six. Wealth management had a healthy quarter with particular strength in the regions. Assets under management for our wealth management clients were $493 billion at quarter end, up 11% year over year. Trust investment other servicing fees for wealth management clients were $559 million, up 5% year over year, primarily due to strong equity markets. Trust fees within the regions were up 7% year over year and are up 6% year to date, with strength mostly attributable to favorable equity markets. Within 1% year over year and are up 5% year to date. Sequentially, GFO growth was muted by a combination of asset allocation changes and portfolio restructurings. Importantly, the underlying business remains very healthy. We generated positive flows of $2 billion in September alone, and new businesses on pace to break last year's record levels. Average wealth management deposits were flat, and average loans were up 2%, both relative to the second quarter. Wealth Management's pretax profit increased 11% over the prior year period, and the pretax margin expanded 250 basis points to 40.5%. Moving to asset servicing results on page seven. Our Asset Servicing business delivered another strong quarter. As expected, transaction volumes normalized from elevated second quarter levels. Capital markets activities remained robust, on pace to beat 2024's record levels, and new business generation continues to be healthy and margin accretive. Assets under custody and administration for asset servicing clients were $17 trillion at quarter end, reflecting a 4% year-over-year increase. Asset servicing fees totaled $707 million, reflecting a 6% increase over the prior year. Custody and fund administration fees were $483 million, up 7% year over year, largely reflecting the impact from strong underlying equity markets, net new business, and favorable currency movements. Assets under management for asset servicing clients were $1.3 trillion, up 9% over the prior year. Investment management fees with asset servicing were $160 million, up 5% year over year, due mostly to favorable markets. Average deposits within asset servicing declined 6% sequentially, while loan volume decreased by 7%, albeit off a small base. Asset servicing pretax profit grew 14% over the prior year period, and the asset servicing pretax margin was up 150 basis points year over year to 24.7%. This reflected the benefit from favorable markets, that pivot in our new business approach, including our focus on cross-selling high-margin capital markets and other adjacent products and services, and our efforts to streamline operations. Moving to page eight and our balance sheet and net interest income trends. Our average earning assets were down 4% on a linked quarter basis, as softer deposit levels drove a decline in cash held at the Fed and central banks. At the same time, we opportunistically added fixed price securities to the portfolio to provide downside protection. Fixed floating breakdown of the securities portfolio is now 54% to 46%, including the impact of swaps. The duration of the portfolio remained flat at 1.5 years, and the duration of our total balance sheet continued to be under one year. Net interest income on an FTE basis was $596 million, down 3% sequentially but up 5% as compared to the prior year. Sequentially, NII was unfavorably impacted by the lower deposit levels. This was partially offset by favorable deposit pricing actions we have taken outside of rate cuts. The quarterly contribution from transactional and other one-time items normalized in the third quarter following elevated second quarter levels. Our net interest margin increased sequentially to 1.7%, reflecting the favorable deposit pricing actions taken, partially offset by unfavorable change in asset mix. Deposits performed largely as we expected. Average deposits were $116.7 billion, down 5% compared to second quarter levels, reflecting typical seasonal patterns coupled with normalization from elevated second quarter levels. Within the deposit base, interest-bearing deposits declined by 5%, and noninterest-bearing deposits decreased by 3%, but remained at 14% of the overall mix. Turning to our expenses on page nine. Expenses increased 4.7% year over year in the third quarter. There were no notable expenses in the current or prior periods. Excluding unfavorable currency movements, expenses were up 4.4%. Turning to page 10. Our capital levels and regulatory ratios remained strong in the quarter, and we continue to operate at levels well above our required regulatory minimums. Our common equity Tier one ratio under the standardized approach increased by 20 basis points on a linked quarter basis to 12.4%, driven by capital accretion and a decrease in RWA. Our tier one leverage ratio was 8%, up 40 basis points from the prior quarter. At quarter end, our unrealized after-tax loss on available-for-sale securities was $437 million, and we returned $431 million to common shareholders in the quarter, through cash dividends of $154 million and common stock repurchases of $277 million, reflecting a payout ratio of 98%. Year to date, we returned over $1.3 billion, reflecting a 110% payout ratio, which puts us on track to return at least 100% for the full year. Turning to our guidance. Continue to expect our operating expense growth to be below 5% for the full year, excluding notable items in both periods and regardless of currency movements. We now expect full year NII to grow by mid to high single digits over the prior year. And with that, operator, please open the line for questions. Operator: Thank you. If you would like to ask a question, please signal by pressing star one on your tone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question. We'll pause for just a moment to assemble the queue. We will take our first question from Ebrahim Poonawala with Bank of America. Ebrahim Poonawala: Hey, good morning. Morning. I guess maybe this first Dave, where you ended on the NII outlook. The mid to high. Maybe address it two ways if you could. One, on the deposit trends, it felt like this the runoff was more than we expected. Are you seeing in terms of growth outlook and the mix shift in deposits going forward? And how should we think about the asset sensitivity of the balance sheet the Fed were to cut three or four times in quick succession? Does that put negative pressure on the NII? As we think about the first half of next year? Thanks. David W. Fox: Yeah. Sure. Happy to answer that. You know, deposits actually did perform pretty much in line with what we had previewed. And they're actually up from last year at this time. So from that perspective, may be less than you had anticipated, but I think generally, in the area we we had anticipated. You know, we've already seen a slight pickup in deposits in Q4, and we ended, obviously, September at $135 billion. But we think that Q4 deposits are gonna be, I think, a little bit higher on average during the quarter. You know, and since we've already posted a 9% year to date year over year NII growth, that's why we feel comfortable tweaking our our guidance a bit to mid to high single digits in NII. And then which would imply, frankly, that would be about flat to marginally one to 2% up in the fourth quarter. As far as 2026 is concerned, we have some mitigating factors that we can take going forward. We obviously have a rate cuts built into our in into our projections. We not anticipating more than two rate cuts, in The US, next year, for example. We have carry in, that we've done in terms of our repricing initiatives that we've taken. We have deposit pricing initiatives as well. We have all the securities that we know are gonna be rolling off in in that quarter in the in the various quarters in '26. So when you do the puts and takes, we feel that NII in 2026 should be you know, flat to up one to 2%. Ebrahim Poonawala: Got it. That's helpful. I'm not sure if I caught this when you were in in your prepared remarks when talking about when you go into sort of wealth management, then you talked about some of the challenges at the investment product level. I was wondering if you could just kind of elaborate on what the issues were when it on that front. And what sort of what are the actions you're taking to kind of get that back on track? Michael O’Grady: Sure, Ebrahim. It's, it's Mike. I'll take that. And so as you know, through NTAM, we offer a number of different, investment solutions and products to our wealth management clients. And we're also open architecture. So that we're offering, you know, the products of of other asset managers as well. And where we tend to focus is on those core foundational areas. So think about liquidity, index, quant, other areas like that. And the areas where we've seen pressure some of it on the index, where it can be a combination of just asset allocation, but also pricing pressure. Fee pressure, and that then, causes flows to lower fee products. And then second is asset allocation when it comes to areas of whether it's growth versus value. And on that front, we offer a multi manager platform solution and it tends to lean more towards the value side of the equation. And there where we've seen know, a very narrow market, as you well know, it's difficult for those active managers to to outperform. And so we've seen some flows out of that multi manager platform and so that's been a drag as well. Now as to what we're doing to, address that, in addition to just focusing on those areas and making sure the the products are not only performing but pricing, at the right level. Also, as we've talked about, focus on ETFs. SMAs, for the wealth management clients. But also alternatives. And that's an area as you heard, where we've, increased the number of offerings for our clients on the alternatives platform, for our wealth clients. Ebrahim Poonawala: That's good color. Thanks, Mike. Operator: We will take our next question from Kenneth Michael Usdin with Autonomous Research. Kenneth Michael Usdin: Thanks. Good morning. Just wanted to ask you to talk a little bit about just some of the the the moving pieces of this quarter. I know it might just be temporary, but, AUCA up 1%. I know you're talking about new business wins. You saw also in the press release some some outflows. So is that just kind of a the normal state of kind of getting some wins and some losses every quarter? Just a a dynamic for this quarter that you saw just relative to the market strength that we saw? Thanks, guys. David W. Fox: Yes. I would say that you take a look at the AUCA growth, there were you know, a number of individual clients that drove those, AUCA numbers. And had they not done that, we would have probably been on par with our peer group. These are asset management clients, and there was one client in particular that represented know, two thirds of, I think, of the degradation in the in the AUC. You have to remember that not all AUC is created equal. You know, not all AUC creates the same level of fees. And in this particular case, the vast majority was a was a restructuring that an asset manager made you know, moving from mutual funds through a like kind conversion into a CIT structure that's less expensive to the participants. And so still we didn't lose clients. We lost assets. And that happens, as you as you mentioned, the the the sort of puts and takes. Of the asset manager space. One other loss was really just a redemption by one large client as part of a fund. That fund has actually started to fill back up again. And so you add it all up in terms of impact, the total AUC that we're talking about is is the fee realization on that AUC is gonna be less than 10%. What we would normally see on a normalized AUC. And so, you know, you have to just take into consideration the type of business that is. And so you wanna translate that into dollars, all combined, all the degradation that we saw won't amount to more than 3 to $400,000. You know, a month of, of, you know, of of fee changes. You know, of fee decreases. Some of that could be earned back by the next quarter. So, yeah, I I think it's it's a lot of ebb and flow in the asset manager space is the way I would put it. Kenneth Michael Usdin: Great. That that's that's really great. Helpful, Dave. Second point, you're obviously firmly committed to that sub five. We saw it again this quarter. And just as you're starting to think about looking forward, I know you've said that you're strongly committed to it inclusive of FX translation. I just any any any incremental thing we should think about, you know, that as we go forward just know you're gonna be thinking about positive operating leverage. We don't know what the markets will do from here. They've obviously been a big helper. But as you continue to kind of, you know, hone that messaging around the expense base, Any new thoughts about, like, where you can kinda try to hold that level on expense growth overall? Thank you. David W. Fox: Yeah. So for fourth quarter, we're pretty locked in. We're not changing our expectations at all. We feel like we have the measures in place to flex if necessary. And so I'm sticking very strongly to the below 5% growth number for for Q4 and for the full year. So I think we feel very good about that. Nothing nothing in particular that I would really cite We're just starting to think about 2026. We're we're just getting into the the the planning of that. And I one thing I would say is that, you know, we continue to bend the cost curve down on expenses. If you if you look at where I started, I think we were coming off a 6% growth. Down to 5% or five and a half. It's been grinding down every quarter and without currency, we would have been closer to four than we are to five. Right? So and we're not done. I think the message there is we're not done bending that cost curve down. The productivity that we have have are going to realize in twenty five, is great, but '26 will probably be greater. And and so I think that we're just know, we're we're still seeing some opportunity there to keep grinding that expense curve down going going forward. Kenneth Michael Usdin: Got it. Thanks, Dave. Operator: We will take our next question from Brennan Hawken with BMO. Brennan Hawken: Good morning. Thanks for taking my questions. Mike, I'd love to drill into a comment that you made in your prepared remarks where you talked about sort of allowing more marginal business to roll off So it's and you you you spoke to that aiding growth. Is that growth comment, like, an indication that it's gonna be more about profit growth than top line growth? Do you expect that some of these efforts might result in more of a top line headwind, but you're gonna be able to make it up for it in the, you know, sort of better unit economics. On each of the new businesses that you're focused on? Can can you help me maybe think through some of that? Michael O’Grady: Sure. So it is definitely a focus on profitability. So we have a great asset servicing business. But right now, the margins are below the level that we think the business should be performing at. We're seeing nice improvement in that So we were, you know, at one point, kind of, like, 22%. We moved up to 23. Saw this this quarter moving up, closer to 25%. That's a combination of, I'll I'll say, a number of factors. First is the new business that comes in. We're making sure that it's coming in at very accretive margins. And that to your point, that can have an impact on you know, the the gross top line growth that you're going to get. In our view at this point, again, we wanna see greater profitability and growth and profitability. Second, I would say is in the the business that we do have and the activities that we do have, just trying to look very carefully at those areas and see if, one, if we can improve on the situation, either the activity, or with the economics with the client. But to the extent that we're not achieving that, then it is something where, you know, we'll have to look over time to transition that that business out. And so that that's the second piece of it, which, again, will aid profitability. And then the third, you know, Dave touched on it a little bit just with his comments around expenses, but really, you know, focusing on the efficiency of our operations. I and so I talked to my comments as well, Brennan, about our client centric capability operating model. You know, everything around that is is trying to be organized in such a way that we can deliver our services in a way that is both resilient, but also efficient. And so that that's where a year ago, we reorganized in a way that brought a lot of those activities together, and centralized them under a COO organization. So that we could be, you know, more aligned both between operations and technology to drive the scalability and efficiency that's necessary to see that continued improvement in, profitability. Brennan Hawken: Great. Thanks for that, Mike. And then you you there's there's been a lot of movement in the markets. You you already spoke a bit to GFO and some of the changes that happened within some portfolios, but but we did see fee rates the way at least the way we're able to calculate them, and I know that that's sort of flawed given how you guys bill. Because we don't have intra quarter visibility. But but did you guys see fee rate pressure in some of the other businesses this quarter as well. Or was it just around the mass in how you bill and how much the markets moved? If you could help maybe disentangle that a bit. Thank you. David W. Fox: Yeah. So think about GFO, in particular, as resembling a little bit more of the asset servicing side of the business than the wealth management side of the business. They've got extremely strong pipeline, and and they're gonna produce a record year of new business. Off another a previous record year. And so what you do see in GFO is large shifts in portfolio composition. And a higher sensitivity to cash. And so Q2 is pretty volatile, and then there's a lot of movement going in there. Other thing I'd say about GFO is they're much they're less exposed, at least at Northern, to fixed income and equity, movements. They are very cash focused. And so unlike the regions, not as influenced as much. By the overall equity market. A better way to look at the business like a GFO business would be look at their year to date fees. So year to date fees are up 5% and revenues are up 9%. And then, you know, GFO had Brennan Hawken: Yeah. Hey, I'm I'm I'm sorry. I'm sorry. I'm I'm probably boarded my question poorly. I was looking at the businesses aside from GFO. Like, I I get that GFO had some of those I mean, like, in the servicing business and the investment management business, we felt a little fee rate pressure there too. So I was just curious about whether that was the mass, you know, in markets or whether there was actually some you guys experienced fee rate pressure. Michael O’Grady: Sure. I what I would say, Brennan, is on the asset management side, you know, there's consistently, you know, persistent pressure on fees overall. Nothing, that I would note in the quarter. I did mention know, in a previous question just about making sure that our pricing is competitive for all of our clients but particularly within wealth management. So from time to time, yes, we will, you know, bring down the fees on an investment management product to to make it more more competitive. On the servicing side, I would say, you know, once again, there's always, you know, it's a competitive marketplace. But there's nothing that transpired in the quarter that necessarily you know, resulted in a reduction in fee levels. And in fact, if anything, Brennan, you know, to your to your first question, you know, we're we're trying to be very disciplined around pricing and economics to make sure that the the business we're bringing on is at those accretive margins. Brennan Hawken: Makes a lot of sense. Thanks for taking my questions. Michael O’Grady: Absolutely. Operator: We will take our next question from Michael Mayo with Wells Fargo Securities. Michael Mayo: Hi. Just want to make sure I understand the big picture correctly. So I think you're running you know, asset management and wealth, especially GFO, for growth. And you're running, asset servicing, relatively more for profitability. And to get there, you're putting some low margin business runoff. Did I get that correctly? Michael O’Grady: Yes. Michael Mayo: Okay. So I guess the question is, you know, under what circumstances would you say, you know what? The the custody business you know, maybe you should downsize even more or disinvest. And I know this is an old question, and you I think you've usually said, look. You might not have scale in absolute terms, but you have scale where you wanna compete. I think that's kind of where you've been. But does does that still hold and under what circumstances? Would that change? Michael O’Grady: Yeah. So it absolutely still holds. And if anything, Mike, I would say, you know, the both the market, if you will, and what we're doing it takes it even more that direction, I e, that we have the necessary, scale, to be able to deliver these services efficiently. And what I mean by the market part, first, of all, is just everything that's happening around both digital assets and AI make these activities more scalable. And and when we talk about, you know, our operating model, it's just trying to make sure that we're then organized in such a way to take advantage of those things. So of all, when you think about digital assets, tokenization, and even stablecoins, The whole idea there is around you know, greater efficiency in the marketplace. And so as that happens, again, that that leads to you know, more straight through activities, more liquidity in those markets, in those products, etcetera. And we're certainly making sure that we have the capabilities to do that. With AI, it's about, you know, automating processes and taking things that right now maybe not be so straight through. So if you take an example like you know, private capital and and the processing of private capital, for our clients. So thinking, you know, we're their LPs, and they're invested in literally you know, hundreds of funds, and a lot of that activity is still paper based. Mean, I would say we could estimate that right now, only maybe a quarter of that activity that we do for our clients on that front is straight through. What we're focused on is how do we turn that into, you know, 50%, 75% automated, and that's where we're utilizing AI. To be able to do that. So all of those things take us to a model that I think gives us the necessary scale, meaning that as you grow, the unit economics, improve. And to your point, you know, these are all measurable things both from a I'll call it, internal perspective, but also from a financial performance perspective. That if it's not, you know, proving to be the case there, you certainly have to look at it differently. Michael Mayo: And then last follow-up. If the the one liner why someone of your size can compete with the the Goliaths of the industry, I mean, it's always skill versus scale, the the argument. Why can you win in in tech and AI if you don't spend as much money? Michael O’Grady: Yeah. It's I first of all, it's differentiation. Right? So our strategy is focused on delivering a unique value proposition to our clients. I and in doing so, that requires greater focus for us. So as I think you pointed out in one of your earlier comments, we're not looking to compete in every segment across the globe. We're picking areas like asset owners in The United States, like pension funds in The UK, like Global Family Office, you know, like hedge fund services, where we believe that that value proposition, that differentiation resonates because there's still it's still about, you know, the overall package. What do they get when it comes to you know, not only the technology, but the service that goes with that and who that financial partner is. But then can we deliver it in an efficient way such that the value they're getting overall is more attractive relative to other alternatives. So there's no doubt in my mind that in the marketplace, that clients want differentiated, offerings, and we believe that that's what we offer. And we just focus on those areas where we think that we can be successful with it. Michael Mayo: Alright. Thank you. Michael O’Grady: Sure. Operator: We'll take our next question from Betsy Graseck with Morgan Stanley. Betsy Graseck: Hi, good morning. Michael O’Grady: Morning. Betsy Graseck: So just one more question on this thread. Regarding AI. I know at the beginning you highlighted that AI is already generating measurable results with 150 plus use cases. Could you give us a sense as to where, you see AI helping the you know? Well, let me put it this way. Is there any differentiation within the organization about how much AI will be helping out. In other words, do you expect to see it more in the servicing services side or wealth side or it's equal across the organization. I'm just wondering if the efficiency improvements coming from AI are different materially different between the different businesses that you run. Michael O’Grady: Sure. So, Betsy, what I would say what's so exciting about this is it is impacting all of the areas of the company. And just to give you, you know, some idea because you know, how it's being utilized, is different, and and maybe the results yes, they may vary in different groups, but the applicability is basically across the board. So, you you know, we talked about operations there. I talked a little bit about know, what we're doing in the private capital space. So that gives you some idea, but think about so many processes that are involved in operations. It clearly lends itself there. And know, arguably a very high level. That you'll get. I'm gonna do another easy one, which is within technology. You know, utilizing GitHub and other types of, of AI, we're seeing you know, I'm gonna call it about 20% improvement in the the programming, the engineering part of technology there. And I think, again, still in the the earlier days of that. But as you move to the businesses, take asset management. That's an area where a lot of the activity can be automated. Think about what we're even doing here with you know, investor calls. We're already utilizing AI in our fixed income muni, area within asset management to essentially you know, summarize and analyze all the transcripts for all of the investor calls, where they have investments. And this is, you know, in the hundreds of calls that normally you know, an analyst has to listen to calls, summarize them, and and most importantly, take away the key points. Well, so much of that now has been automated, so it saves dramatic you know, time, but also provides better insights. Within wealth management, this is making, at this point, our advisers much better. And much more efficient. Because in advance well, first of all, in thinking about where the opportunities might be and prospecting, You know, AI is enabling that process to happen in such a way that it's highlighting, you know, where the best prospects are. But then from there, it's how to prepare for that. And so it can go in and it can pull the information both from our internal databases, but also what's publicly available about a particular, prospect and do so much more quickly than someone could do you know, say, on their own to be able to do that. And when they have a question, you know, once again, we're working on the ability for our advisers essentially to be able to tap in to proprietary databases that we have, like the Northern Trust Institute, to be able to immediately answer those questions. So it makes them better at serving the client. On that front. You think about risk, you know, again, and whether it's AML, KYC, whether it's fraud detection, these are all things right now where we have you know, hundreds of people who do this activity, and we'll still have plenty of doing, but they'll be using better tools to be able to do it better. And faster. So know, cuts across I I would say, the entire company. And I think at this point, we're still in the early days. Betsy Graseck: Okay. And then just to follow-up on the technology impacts on the business. Could you give us an update on how you're thinking about the outlook for how you would utilize a stablecoin? Do you your own? Do you get involved with the industry consortium? As we move towards $24.07 trading? Having a stable coin cash leg is gonna be critical. So I wanna understand how you're thinking about that dynamic as we roll forward here. Thank you. Michael O’Grady: Sure. So I think that what's happening in the digital asset space there there are four key drivers from my perspective. Innovation, regulation, client demand, and then interoperability. And on the innovation front, to your point, you know, whether it's stablecoins or tokenizations, there's so many things that are coming out and the technology is getting much better, much more scalable. Things like blockchain becoming more scalable. Going from private blockchains to public blockchain. So the innovation front, I think, is you know, probably leading. What's been lagging is more on the regulation front. And, obviously, now with the the the Genius Act, this is going to change. And that is going to I think, significantly facilitate further demand on the client front. And then you get to the idea of interoperability. Which the point on that is you know, our clients don't wanna have to, I'll say, operate in two worlds. They wanna be able to utilize whether it's stable coins or a tokenized asset, with their other assets. And so we're just making sure that our platform can do both of them. Now specifically to Stablecoin, know, I would say stablecoin will, you know, find the areas that have the greatest friction. And a lot of that, as you know right now, is, you know, probably you know, cross border or outside The US. And I I'll say we'll we'll have the ability to you know, utilize stablecoin, but we're not planning to issue a Stablecoin on that front. Where we're more focused is on tokenization. Because we believe that that will impact multiple asset classes. And a good place to start would just be around money market funds. Thinking about a tokenized money market fund, know, that's an area where I'd say we would look to be an issuer of a tokenized money market fund. So that gives you some idea of the the direction that we see. Betsy Graseck: Thank you so much. And, yeah, tokenized money market fund is a type of stable coin cash like too. Michael O’Grady: Exactly. Betsy Graseck: Appreciate that. Thank you. Operator: We will take our next question from Glenn Schorr with Evercore. Glenn Schorr: Hi, there. Michael O’Grady: Hi. Glenn Schorr: Hello. Small but interesting one, re regarding the deposit rate paid on saving money market. And other deposits. So so after going down for four quarters straight because rates have been coming down it was actually up six basis points, and we had a cut in the quarter, I think. So it's just a it's interesting. I'm more thinking about the go forward. But what what caused the the that saving in money market rate to go up in a quarter when there's a rate cut. And I know you gave us the the your thoughts on next year, so I appreciate that. I'm just curious what's going on on on these deposits. David W. Fox: Yeah. Well, deposits are also multicurrency. They're not just US dollar. Right? So may be some some differences there. You might wanna take a look at, but we could certainly get more granular with you. But on the top of it, I can't I can't say in particular. I'd have to look at each currency in each particular investment that we made to to kind of give you that read. Glenn Schorr: No worries. We can move on to the the bigger question. You've been talking about some of the initiatives that you've picked up pace on on private market side across wealth, asset management, and asset servicing. You dangled a little bit with your comment on the fifty South Feeder Fund. I would love to know a little bit more about what that is, what's on it, and, what's in it. If it's a fund to fund structure, things like that. And then maybe you could also just complete the thought on what's going on in terms of the asset servicing side as well. Thanks. Michael O’Grady: Sure, Glenn. So the the feeder fund, basically, as you know, 50 South, historically, was focused on fund to fund. And that business has performed very well and has been I'll say, a perfect fit for our wealth clients. And continues to be. And they've continued to expand their offering, both for our wealth clients, but then for other wealth platforms and and institutionally as well. Specifically, what happened in the in the third quarter is they have the relationships and have done the diligence and everything on hundreds of managers. And as a part of that, we're now using those relationships to be able to have specific single fund offerings for our wealth clients. And this enables us, I'll say, to pick, like, the best of the best, funds, where access is all often an issue. But through our relationship and by having, you know, the diligence done, we're able to to offer it to our wealth clients. And so this was one of the, I'll say, you know, high performing, venture funds that, that was offered to wealth clients in the quarter. And then to you said to the to the broader picture there, say, just first of on the on the wealth front in 50 South, once again, an area of a lot of innovation. And, I think you know, coming our direction when you think about evergreen funds and other things that just have greater liquidity, that only enables our clients to get more comfortable, I'll say, investing in, alternatives. And then on the asset servicing side, you know, there, you know, not only is it the work that we're doing with as I mentioned, hedge fund hedge funds, but then also private capital administration, for other private equity funds, private capital funds. But then specifically, around the vehicles, the LTAP and the LTIP vehicles. And I would say that, is a similar you know, trend phenomena, if you will, in the European markets where there's, the introduction of more vehicles that have greater liquidity. So that it allows for greater distribution and expansion of alternatives. So we think it's still kind of earlier days for those vehicles as well. But whether it's you know, The UK vehicle or the Luxembourg vehicle, we're we're well positioned to be able to provide those, capabilities for the asset managers. Glenn Schorr: Okay. Thanks very much. Michael O’Grady: Sure. Operator: We will take our next question from Steven Alexopoulos with TD Cowen. Steven Alexopoulos: Good morning everyone. Michael O’Grady: Morning. Steven Alexopoulos: I wanted to start so I know on the pretax margin, and I know it bounces around quite a bit. But when you look at the revenue trajectory, expense trajectory, right, the guidance you're giving for 4Q and full year, you're bending the cost curve down. Do you guys think you could remain fairly comfortably above that 30% medium term target moving forward? And even if the Fed's cutting rates? Michael O’Grady: So to your point, Steve, that there there's certainly the impact of of markets and and rates. And levels of liquidity in the marketplace. So there's lots of factors out there. But our view is that the financial model that we have definitely, should operate in that 30 plus percent pretax margin on an ongoing basis. So you have a quarter like this where you know, we we got there somewhat because of the environment, but also because of the provision release. That bumped it up a little bit. All the same, the the longer term trend longer term meaning over the last you know, couple years, has been an improvement in the pretax margin. So when you look at the year to date margin, it's closer to kind of 29%. And, we expect to move into to 30%. And then even though we're in that 30%, it doesn't mean that we're not still trying to drive positive operating leverage. We very much are. And so, yes, the the objective is to stay above that 30%. Steven Alexopoulos: Got it. That's helpful. And and then going back to all the commentary on AI and productivity gains, terms of the financial impact, so far, is this material Like, is this helping you this year keep expenses below 5%? Or is 99% of that benefit still to comp? Michael O’Grady: Yeah. So it's a great question. Because it's it's what I call capture. So, you know, we have these efficiencies, and everybody's utilizing Copilot and other tools to become more efficient. How do we make sure that we're capturing that? And to your to your point, know, it's it's difficult if somebody's, I'll say, you know, 3% more efficient as a result of it, well, how does that actually affect your your financials and and your need for resources? And so that's why you know, we've also been, you know, very disciplined around head count, around span of control, around how we're organized. So that it's a way to to capture that. So that you know, as you go forward and as you add new business and you grow, you know, you're not adding more know, people, in order to service that, but instead you're capturing the efficiencies that you're getting from utilizing those tools. Some areas are easier to do than others. So know, we talked about GitHub and with the programmers. Like, those are the areas, Steve, where I'd say yes. We're getting savings now. But to your point, it it's still in the earlier days of capturing the the efficiencies that you're gonna get. Steven Alexopoulos: Got it. That's great color. Thanks for taking my questions. Michael O’Grady: Of course. Operator: We will take our next question from David Charles Smith with Truist Securities. David Charles Smith: Good morning. Michael O’Grady: Good morning. David Charles Smith: Is there any more color you can offer on the relative strength in FX trading and securities commissions and what you're what you've been doing to drive this? You mentioned some initiatives to drive growth here. I wonder if you could just kind of help us frame how much of the strength you feel like is a result of share gains and other things that are more result of things that were in your control, as opposed to just simply benefiting from broader market volumes being healthy. Thank you. Sure. Michael O’Grady: Sure. So capital markets our capital markets business has performed extremely well. And it's a combination of both execution of their strategy and then also the favorable market conditions. But on on the strategy parts specifically, what the the team has been doing there over the last several years is building out a more durable capital markets business. So what I mean by that is yes, know, historically, the business has performed well when the the markets and volatility are strong, but then you know, has gone down when it's not there. What they've tried to do is turn it into more of a service, if you will, in the activities that they, that they pursue. And so what that means, for example, on the trading side, on the brokerage side, is being the outsource provider of trading for the asset manager. So instead of some of our asset manager clients having their own trading desk, they've outsourced that to us. And as a result, that's when I talk about adding a 100 clients A number of those clients are where they've outsourced, the trading to us. And that produces a more kind of recurring predictable stream of know, brokerage commissions as a result of that. On the FX front, we're you know, we've always, in that business, basically enabled our clients to hedge positions that they want in one currency or another. But it's in the past, done just on a transactional basis, where what we've, done over the last few years, several years, is to turn that more into a service again by providing currency management as a service where it becomes automated and it's just done over time. As opposed to, you know, a transactional business. So that has also built up over time. And then also from a liquidity perspective, we've expanded our liquidity capabilities know, certainly, we talk all the time about, deposits and and, money market funds and being able to be on that side of it. The other side is at times, they need over, overnight liquidity the other direction. So not only securities lending, but also, thick repo has been an an area where we've added capabilities. To be able to serve those clients, but then create a business that's, both, I would say, diversified from the other activities we have, but also attractive financial profile. David Charles Smith: Got it. Thank you. Michael O’Grady: Sure. Operator: We will take our next question from Gerard Cassidy with RBC. Gerard Cassidy: Good morning, Dave. Good morning, Mike. Morning. Kinda different questions for you guys. I always like to get the perspective from folks like you because you know, I have a big exposure to this area. There's been a lot of talk this quarter about loans to nondepository financial institutions, and, of course, your in the top 20 banks. You're at the lowest. You've got the least amount of exposure. Can you give us some color on what you know, I'm not asking you to talk about other banks, but these categories that are within this NDFI whether it's private equity or mortgage, credit intermediaries, etcetera, What how do you guys look at that NDFI category? David W. Fox: Yeah. That's a good question, and I'll I'll start, and then maybe Mike can talk about the broader, industry, issues. There was a reclassification in the reporting methodology implemented by the FDIC that moved some loans into other categories, that were into the n FDI category. So when you look at Northern you know, the vast majority of what we do are subscription lines to private equity firms. And those are lines of credit backed by the LP's capital commitments. And on top of that, there's borrowing bases that reflect uncalled capital as well. And so that is not the same thing as lending directly to a you know, a private credit fund. Right? There's also sometimes loans to management companies that we do. But in that case, you've got the the management fees that secure your loan. Right? And then thirdly, on the wealth side, we have, obviously, some NAV loans that we do. The advance rates are extremely low. Like, I wanna say around 30%. Those could have some private credit funds in them, but they're highly across their entire private equity portfolios. We don't lend against one particular fund. So that that's sort of how Northern has looked at that business. Individually. I'll let Mike talk broader about the industry in terms of what's what's going on. But we don't have we don't have any of the similarities as you pointed out to what's going on with everybody else. Gerard Cassidy: Correct. No. I I would agree, Jared. The and then as a follow-up question, the IMF has come out as as well as the Bank of England with reports in the last couple of weeks citing I hate to use the word bubble, but really inflated asset prices. And they point out then we've gotta be careful of some maybe serious corrections. Obviously, when you look at your wealth management business, it's not all equities. You've got fixed income and cash in there. Can you share with us how you guys approach you know, managing wealth management should a big correction come or or or just your view on how you approach it with your clients. Michael O’Grady: Sure. So to your point, you can never you know, say, time the markets or predict the markets. There's gonna be volatility. Valuation is know, one one person may say it's a bubble, another person say, you know, there's still tremendous upside, you know, to that. And as a result True. That's why with our wealth clients, we take a different approach which is what we call goals driven wealth management. And that is it's not only an approach, but it's also a technology. It's a a platform that is utilized with those clients where upfront, we go through the process of really determining what their needs are going to be. Not just in the next year, but literally over their lifetimes and often cases then, you know, into next generations. And as a result of that, we can then back into what is the right asset allocation. As a part of that. And one of the most important components of it, Gerard, then is knowing that there will be drawdowns in the equity markets over time, how do you make sure that you have the right reserve capacity in essentially risk off assets? Such that you, you know, do not get into a liquidity situation, not get into a situation where you don't have the the funds necessary for achieving what your objectives are. Frankly, at that point, it's a lot easier also to have the conversation with the client. And make sure that, you know, they're they're able to digest what's happening in a volatile market and, you know, be able to stay focused on what their long term goals are. And not, I'll say, overreact which, again, the empirical you know, research would tell you that, you know, overreacting to market volatility is not the best long term strategy. Gerard Cassidy: Great. Thank you for the insights, Mike. Michael O’Grady: Sure. Operator: And there are no further questions in the queue at this time. I will now turn the conference back over to Jennifer Childe for closing remarks. Jennifer Childe: Thanks, operator, and thanks, everyone, for joining us today. We look forward to speaking with you again soon. Operator: This concludes today's call. Thank you for your participation. You may now disconnect.
Operator: To all sites on hold, we appreciate your patience. Please continue to stand by. To all sites on hold, we appreciate your patience. Continue to stand by. Tulsi is on hold. We appreciate your patience, and as you continue to stay by. Please stand by. Your program is about to begin. Welcome to the Lennox Third Quarter Earnings Conference Call. All lines are currently in a listen-only mode. You may enter the queue to ask a question by pressing star and one on your phone. Exit the queue, please press star and two. As a reminder, this call is being recorded. I would now like to turn the conference over to Chelsey Pulcheon, Lennox Investor Relations. Chelsey, please go ahead. Chelsey Pulcheon: Thank you, Katie. Good morning, everyone. Thank you for joining us as we share our 2025 third quarter results. Joining me today is CEO, Alok Maskara, and CFO, Michael P. Quenzer. Each will share their prepared remarks before we move to the Q&A session. Turning to slide two, a reminder that during today's call, we will be making certain forward-looking statements which are subject to numerous risks and uncertainties as outlined on this page. We may also refer to certain non-GAAP financial measures that management considers relevant indicators of underlying business performance. Please refer to our SEC filings available on our Investor Relations website for additional details, including a reconciliation of GAAP to non-GAAP measures. The earnings release, today's presentation, and the webcast archive link for today's call are available on our Investor Relations website at investor.lennox.com. Now please turn to Slide three as I turn the call over to our CEO, Alok Maskara. Alok Maskara: Thank you, Chelsey. Good morning, everyone. I'm proud to report that Lennox International Inc. maintained resilient margins and high customer service levels amidst a very challenging external environment. Our talented team worked tirelessly with our loyal customers and channel partners to deliver these results, and I'm very grateful for their hard work. Our results were also fueled by our recent investments, which will accelerate our growth and expand our margins as the industry turns the corner into a brighter 2026. Let us turn to slide three for an overview of our third quarter financials. Revenue this quarter declined 5% as growth initiatives and share gains were unable to fully offset the impact of soft residential and commercial end markets. Ongoing channel inventory rebalancing and weak dealer confidence following the regulatory transition created more complexity for the quarter. Our segment margin was 21.7%, a record for the third quarter. Operating cash flow was $301 million, which was lower than last year as a sharp industry decline has temporarily elevated our finished goods inventory levels. Adjusted earnings per share was a third quarter record of $6.98, a 4% year-over-year increase. HCS segment profit margin expanded by 30 basis points as the team executed meaningful cost actions to offset industry headwinds. HCA's revenues declined 12% as the residential industry faced a weak summer selling season, and as both contractors and distributors rebalance inventory post-regulatory transition. BCS segment results were impressive as profit margins expanded 330 basis points and revenue grew 10% even though the end markets remained weak. The team was able to offset end market conditions with rigorous execution of growth initiatives such as share gains in emergency replacement, business development in refrigeration, and full life cycle value proposition in commercial services. Given current end market conditions, we are adjusting our full-year outlook to reflect an anticipated sales decline of 1%. We now expect adjusted earnings per share in the range of $22.75. Now, let's move to slide four to discuss how our recent acquisition will increase the attachment rate for our parts and accessories. Differentiated growth at Lennox International Inc. is driven by four growth vectors: heat pump penetration, emergency replacement share gains, higher attachment rates for parts and services, and total addressable market expansion through joint ventures such as Samsung and Aristang. Our bolt-on acquisition of AES Industries in 2023 helped accelerate the attachment of commercial services and was a tremendous success based on financial and strategic metrics. As a result, our commercial services business has more than doubled over the past three years. Similarly, the recent acquisition of Durodyne and Subco will help accelerate attachment of parts and accessories across both HCS and BCS segments. The acquired business has annual revenues of approximately $225 million and a solid growth trajectory with strong margins. This acquisition meets our discipline criteria and will be accretive in 2026. The acquired business provides Lennox International Inc. with additional products, brands, and distribution scale to accelerate the growth of our parts and accessories portfolio. We see a significant opportunity to increase the attachment rates, one of our four key growth vectors. The integration of Durodyne and Subco will also lead to meaningful cost synergies that make this transaction even more attractive to Lennox stakeholders. Our integration team has already identified sourcing opportunities, and we are confident about creating additional value as we align the business with Lennox's standard infrastructure and implement our unified management system. Now let me hand the call over to Michael who will take us through the details of our Q3 financial results. Michael P. Quenzer: Thank you, Alok. Good morning, everyone. Please turn to Slide five. As Alok outlined, in the third quarter, we continued to navigate a dynamic operating environment characterized by uneven demand due to the new refrigerant transition, and broader macroeconomic uncertainty. These pressures resulted in a 5% decline in revenue. However, our team acted decisively and maintained operational discipline delivering 2% growth in segment profit and achieving margin expansion. This profit improvement was primarily driven by favorable product mix and pricing supported by the successful launch of our new R254B products. We also saw benefits from improved cost management, including reductions in selling and administration expenses. These gains were partially offset by lower sales volumes and increased product costs, largely due to ongoing inflationary pressures. Let's now turn to slide six to review the performance of our Home Comfort Solutions segment. Home Comfort Solutions experienced softer demand in the third quarter with revenue declining by 12% primarily due to a 23% decline in unit sales volumes. While we anticipated a decline in sales volume, the extent was greater than expected due to several contributing factors. Contractors and distributors actively reduced inventory levels. Macroeconomic softness weighed on both new and existing home sales. Moderate weather dampened demand, and there was a clear shift towards systems repair rather than full replacements. Despite these challenges, mix and pricing remained favorable, supported by ongoing transition to the new R454B products. On the cost front, inflationary pressures on materials and components continue to weigh on product costs. These headwinds were partially offset by successful tariff mitigation strategies and sustained improvements in operational efficiency driven by targeted cost actions. We also benefited from SG&A cost reductions, though these were partially offset by ongoing investments in our distribution network. Moving on to slide seven. Building Climate Solutions gained momentum in the quarter, delivering a strong 10% revenue growth driven by a 10% benefit from favorable product mix and pricing, while volumes were flat. Like commercial HVAC, which represents approximately 50% of BCS revenue, continued to see year-over-year declines in industry shipments. Despite these market headwinds, we maintained volume levels through share gains in emergency replacement products and solid growth across our refrigeration and service offerings. On the cost side, material inflation remained elevated, but was partially offset by gains in factory productivity as our new facility continues to enhance operational efficiency. Turning to slide eight, let's review cash flow and capital deployment. From a free cash flow standpoint, we are revising our full-year 2025 guidance to approximately $550 million. This adjustment reflects elevated inventory levels driven by lower than expected sales volumes. We expect inventory levels to normalize in 2026 while continuing to support strategic investments in commercial emergency replacement and the launch of our new Samsung ductless product line. The $550 million of free cash flow includes approximately $150 million in capital expenditures, primarily focused on expanding our distribution network, enhancing the customer digital experience, and establishing multiple innovation and training centers designed to help our customers succeed in their local markets. On capital deployment, we have repurchased approximately $350 million in shares year to date and with $1 billion remaining under our current authorization, we will continue to opportunistically repurchase shares. We also continue to evaluate strategic bolt-on acquisition opportunities that enhance our distribution capabilities and expand our product portfolio. As we pursue these initiatives, we remain committed to preserving a healthy debt leverage across all capital allocation decisions. If you'll now turn to slide nine, I'll review our full-year 2025 guidance. In response to evolving market conditions, we are updating our full-year guidance to reflect deeper inventory destocking trends and continued macroeconomic weakness, particularly in home sales and consumer confidence. Starting with revenue, we now expect full-year revenue to decline by 1% compared to our previous guidance of 3% growth. This revision is primarily driven by lower total sales volumes in Home Comfort Solutions, which are now expected to decline in the mid-teens range compared to our previous guidance of a high single-digit decrease. With the successful closing of our Durodyne and Subco acquisition, we expect an approximate 1% contribution to full-year revenue growth with a minimal impact on EBIT due to purchase price amortization of approximately $10 million. On mix and price, we continue to expect a combined benefit of 9%, consistent with our prior estimate. Turning to cost estimates, we now expect cost inflation to increase total cost by approximately 5%, down from our prior estimate of 6%. This improvement is driven by successful tariff mitigation efforts and additional cost actions. Looking at other key metrics, we now expect interest expense to be approximately $40 million reflecting our recent $550 million acquisition and lower free cash flow due to elevated inventory. Our tax rate is projected to be around 19.3%. On earnings per share, we are updating our EPS guidance to a range of $22.75 to $23.25, down from the previous range of $23.25 to $24.25. And finally, as mentioned earlier, we now expect full-year free cash flow to be approximately $550 million, revised from our prior guidance of $650 million to $800 million. In summary, while 2025 remains challenging with industry softness and double-digit declines in sales volumes, our continued focus on operating discipline positions us to grow earnings per share, and we remain optimistic about a return to market growth in 2026. With that, please turn to Slide 10, and I'll turn it back over to Alok. Alok Maskara: Thanks, Michael. As we reflect on this quarter, I want to acknowledge the challenges we have faced as a company and an industry. The environment has been tough, with destocking, higher interest rates, and shifting consumer patterns, all of which have weighed on our results. However, I am confident that these headwinds are temporary. Our team has navigated this period with discipline and resilience, and the actions we have taken have positioned us for a strong rebound next year. Looking ahead to 2026, we expect channel inventory to normalize, and with the prospect of lower interest rates, both new and existing home sales should begin to recover. We are also moving past the disruption of this year's refrigerant transition. While dealers were understandably cautious due to industry-wide canister shortages and supply chain friction, we expect dealers to regain confidence as the transition-related component shortages are finally in the rearview. We are positioned to gain share through several avenues, including a renewed focus on new product introductions and contributions from joint ventures, including ductless products and water heaters. Of course, we are mindful of some headwinds. As economic pressures persist, we anticipate higher demand for value-tiered products along with elevated repair activity in lieu of system replacements. As federal energy efficiency incentives sunset, they may create some additional uncertainty. However, we do not expect them to materially impact overall demand, especially as some states and utility incentives for energy efficiency are expected to continue. On the margin side, we expect mix improvement from carryover of our 454B refrigerant products, particularly in the first half of the year. In addition, we also anticipate customary annual pricing actions to offset inflation. Beyond pricing, we are driving disciplined cost productivity efforts to sustain margin resiliency. Optimization of our distribution network will lead to lower logistics costs, higher fill rates, and better customer experience. Targeted SG&A cost actions will streamline our processes and enhance efficiency across the organization. With our new commercial factory in Saltillo now fully operational and delivering measurable improvements, we expect additional manufacturing productivity in 2026. At the same time, we are making strategic investments that strengthen our foundation for future growth, including digital front-end tools that simplify how our businesses work with our dealers. Expansion of our distribution network enhances our capabilities and reach, and the addition of new innovation and training centers accelerates product development and dealer loyalty. We continue to closely monitor inflation, tariff, and rising input costs across commodities, components, health care, and benefits. However, our disciplined cost management, effective pricing, and focus on operational excellence give me confidence in our ability to navigate these pressures while sustaining margin resilience. Now let's turn to slide 11 for why I believe Lennox International Inc. outperforms the industry. As highlighted last quarter, our strategic focus has not wavered. Even with recent challenges, we continue to execute ahead of schedule on the commitments outlined in our transformation plan. Looking forward, we expect growth to accelerate, supported by consistent replacement demand and initiatives across digital enablement, ductless solutions, commercial capacity, and the parts and services ecosystem. Cost productivity has become increasingly important to maintain resilient margins, and we are achieving this without compromising growth investments. We continue to make targeted investments to elevate customer experience and product availability. Simultaneously, we are scaling our digital capabilities across both product offerings and customer touchpoints, leveraging proprietary data and broadening our portfolio of intelligent controls. This progress is made possible by a highly talented team and a culture rooted in accountability and results. I remain confident in our strategic direction, and I am committed to delivering sustained value for our customers, employees, and shareholders. I firmly believe our best days are ahead. Thank you. We'll be happy to take your questions now. Katie, let's go to Q&A. Operator: Thank you. You may remove yourself from the queue at any time by pressing star 2. Our first question will come from Ryan Merkel with William Blair. Your line is open. Ryan Merkel: Hey, everyone. Thanks for the question and nice job on margins. Alok Maskara: Thanks, Ryan. Good morning. Ryan Merkel: My first question is just a little, can you put the residential volume declines into perspective a little bit more? Comment on what was the performance of one step versus two step? And then if you excluded the destock, any sense for what sell-through volumes would be for resi in the quarter? Michael P. Quenzer: Hey, Ryan, what I can do is I'll give you some clarity. On the total sales, within Q3, we saw total sales and sell-through down about 10%. And about 20% down on sell-in. So that's total sales, would include the price mix benefit. Alok, did you want to talk about that? Alok Maskara: Yeah. And I think, Ryan, one thing that's been very clear to us during this quarter is when we look at our sales to our contractors, whom we call dealers, they also were holding inventory. And in some cases, it was more than we thought. So as we've gone around and spoken to hundreds of our contractors and dealers, we have realized they have done some destocking as well. It's not purely as the numbers are coming through. So I think there was destocking happening on both sides. But if your question is taken differently and said, what do we believe the consumer demand for this looks like? We do think it's weak. Impacted by interest rates, impacted by housing stock that's not turning over as it used to be. And in some cases, impacted by the type of a summer we had. You know, for the past ten summers were the hottest summer on record for the ten years. So I think that also impacted our relative sales. And Ryan, I'll just add on parts and supplies. We did see some growth on parts and supplies in our business, which suggests that there is a bit of a trend toward more of a repair versus replace. Ryan Merkel: Okay. Thanks for that. And then my follow-up would be on fourth quarter margins. Third quarter was much better than I expected, but sequentially, the margins are coming down a little more than I would have expected on sort of similar volume declines in 4Q versus 3Q. So what are some of the key assumptions there that you can unpack for us? Alok Maskara: Sure. I think, Ryan, the biggest one is we are pulling back on manufacturing to rightsize our inventory level. And that's the absorption benefit that we had in Q3 would be less as we look forward to Q4. Probably the single largest factor, Ryan. Ryan Merkel: Got it. Right. Thanks. I'll pass it on. Operator: Thank you. Our next question will come from Damian Karas with UBS. Your line is open. Damian Karas: Hey, good morning, everyone. Alok Maskara: Good morning, Damian. Damian Karas: So just a follow-up question thinking about this channel inventory destocking, what's your sense on when those inventory levels will be more normalized? Is that gonna happen kinda sooner rather than later? Is this gonna kinda be a trend that we see through the first half of next year? And you know, getting the sense that you know, the destocking is not just kind of a two-step. I think you mentioned also on the one-step side. Is the reality that like, maybe some of the contractors out there just have been carrying more inventory than you guys have suspected. Alok Maskara: Yeah. I think we talked about in the past that many of our contractors rented barns and put inventory in the barns during the COVID situation. Now that the supply chains have improved and our own lead times are down to one or two days, they no longer feel the need to maintain that extra barn full of inventory. So these are not months of inventory that our contractors were carrying, but they were carrying a few weeks of inventory. And that destocking did take us a little bit by surprise. But I think, in a way, it's testament to the improved industry lead times. And just the lack of confidence they had after a weak summer selling season. Damian Karas: Okay. That's helpful. And then I wanted to ask you about the BCS segment. Obviously, you're seeing some nice trends there in relative strength. You know, when the dust settles on 2025, where do you think you'll be in terms of the emergency replacement market share? And what do you view as achievable thinking about 2026? Michael P. Quenzer: Yeah. We're really pleased with the progress in emergency replacement. It started the factory, getting inventory availability, getting it all deployed. So we saw significant growth, nearly 100% growth on a very small base of emergency replacement in the quarter. To put in perspective, you look at the total 5% of the revenue is emergency replacement. We see a lot more growth potential there. Because we didn't fully catch the full season with emergency replacement. So we're ready for next year. We've got the inventory deployed, and we see multiple multiyear growth within that channel. Damian Karas: Thank you very much. Good luck. Operator: Thank you. Our next question will come from Nigel Coe with Wolfe Research. Your line is open. Nigel Coe: Thanks. Good morning. And really, really good job on the margin preservation. Really impressive, Alok. And Mike as well, of course. Just on the going back to the inventory, obviously, your inventory levels are quite high. Pretty flat q by q, which is very unusual. I'm just wanna make sure that the bulk of that would be within your captive distribution network. Which seems to suggest that maybe inventory levels across the industry are still at a pretty high level. So I just wanna maybe just, you know, kind of double click on that inventory number. You know, is it a buildup of emergency replacement inventory? Just some context, it does look like we got a fair way to go here on the destock. Alok Maskara: Yeah. I think from our inventory levels, it's true. It's mostly in the direct to contractor level. And I think we were cautious and optimistic going into the quarter as we have got more inventory than we would have liked to be. I didn't fully answer the question that was asked in the last question as well. You know, it's hard to predict when the destocking would be over. If I had to guess right now, I'd say the destocking would probably be over by Q2 of next year. So not the entire first half, but I think this is gonna continue for a while, and we are preparing accordingly. And I think that's the same forecast we have for our inventory. Is that we'll be back to normal levels by Q2 next year. Nigel Coe: Okay. That's helpful. And then just quickly on the repair versus replace dynamics. Maybe just your perspective on why now? Is it consumer confidence? Is it more around the A2L dynamics? Is it the price? Is it all three? Any context there would be helpful. Alok Maskara: Yeah. I mean, clearly, by the way, this is a difficult thing to come back and give you a database, and I think it is all three, but the primary reason in our view was the A2L conversion. Our contractors and dealers who are the ones who convince homeowners that replacement is a better economic decision in the long term were just hesitant to sell new products because of canister shortages, everything else that was going on. So they were not as effective as they normally are. There is obviously some impact of consumer confidence, as you know, is now in multi-month low. So it will be all three, but I think the primary was the confidence of our own dealers. Michael P. Quenzer: And I'll just add one more on the existing home sales. Some of these homeowners have very low interest rates. They're wanting to move into new homes, but they don't wanna put a whole new system investment in it. The next two years, interest rates come down, and they can move to a new home as well. Nigel Coe: Okay. Thank you. Operator: Thank you. Our next question will come from Joseph John O'Dea with Wells Fargo. Your line is now open. Joseph John O'Dea: Hi, good morning. Thanks for taking my questions. I just wanted to start on trying to take a step back and think about what normalization means from a volume standpoint in the industry. And so, when we look at resi volumes over the past number of years, it's been anywhere from kinda 8 million to 10 million units. This year is probably pacing below that eight. But, you know, as you think about a setup for a return to normalization as we head next year, how do you think about that? And in particular, if we're still in a period of time where we've got lack of turnover in existing homes or waiting on interest rates, just how it all comes together to think about industry volumes for you next year. Alok Maskara: Yeah. You know, as you know, that's been a hard thing to predict. And our goal, being one of the smaller players in the HVAC industry, has always been to outperform the industry no matter where the industry goes. I mean, the eight to 10 range, as you mentioned, has been the range, and this year is abnormally low. And that we can be 100% confident is due to destocking. Then if you look at the actual number of units that go on the ground, I think that's obviously a higher number. I would say the normal next year that we are gonna be working through and will probably have more details when we are declaring Q4 results in January. We look at a number closer to our $9 million to $10 million number for the industry as a normal year for 2026. A lot more to come. We want to see how Q4 comes through. But I do think a normal is closer to a 9 million to 10 million for next year. Joseph John O'Dea: Perfect. And then also, just wanted to touch on pricing and how you think the industry will approach pricing moving into next year, when you think about coming out of a period with minimum efficiency and then A2L, the amount of inflation that customers have faced. I think, you know, we think about a normal algorithm where maybe we're looking at list that's kind of mid-single in realization that's sort of one to two. Are we in a place where that can repeat? Or, you know, just given the amount of price that's hit the market, is that something that could be difficult? Alok Maskara: Sure. So I would first say I was pleased with the industry's pricing discipline. In this year, both for A2L conversion and to offset tariff. We saw a uniform approach across all the key competitive players. So we were pleased with that. In some pockets, such as residential new construction, we chose to walk away from businesses where we were losing money or were low margin. And I think that's probably the one area you would see some impact for us going forward is we would not be taking negative margin businesses that are often associated with new construction. The answer to your broader question for next year, I do think we would all be looking at pricing to offset inflation. I mentioned that in my script a little bit. And I think it's gonna be similar to what has happened in the past. Now keep in mind, 2026 will have some carryover effect. Both from tariff-related pricing and from A2L-related mix. But I do think 2026, you will find pricing would again offset inflation. Which would probably be the range that you were referring to earlier. Joseph John O'Dea: Great color. I appreciate it. Thank you. Operator: Thank you. Our next question will come from Julian C.H. Mitchell with Barclays. Your line is open. Julian C.H. Mitchell: Maybe just wanted to start with the sort of operating margin trajectory. So I think the guidance implies sort of flattish operating margins year on year in the fourth quarter. Wondered within that if you could unpack maybe any sense of magnitude around how much HCS is down year on year because of that underproduction. And when we're thinking about the margin headwinds from underproduction and also from acquisition amortization, how severe or how long through next year or the next several quarters are those expected to last? Michael P. Quenzer: Sure. I'll take that one, Julian. Yes, on the full-year guide, we're still projecting our gross to expand, our profit margin expansion of about 50 basis points. And that includes some headwinds that we have with the Breeze acquisition where we're picking up revenue with zero EBIT on that. And within that guide of 50 basis points improvement for the segment, we have the HCS full year up slightly from a gross expansion, BCS kind of flat. Then on the corporate expenses, we see them go corporate gains losses and other going from about $120 million last year closer to the $105 million to $100 million this year. So still real pleased with the margin trajectory and implies about a 20% decremental in the fourth quarter. So we think that's a good guide. And then your second question for next year, yes, we'll continue to see some absorption go through the first quarter. Normally, we do in the first quarter of every year is we grow inventory by about $150 million to achieve the summer selling season. We already have that inventory, so we'll see a little bit of absorption headwind in the first quarter of next year as well. Julian C.H. Mitchell: That's very helpful. Thank you. And then just, a second question, you know, trying to understand, on that HCS side of things, when you're looking at sort of sell behavior, you know, maybe help us understand how you've seen that change in recent months and help us understand, I suppose, how quickly you think you can get back to some kind of volume growth in the coming quarters, assuming inventory reduction takes maybe another six months? Alok Maskara: Sure. I mean, I will try and tell you, like, you know, things are no longer getting worse. So let's start with that. I mean, we are now at a stage where we have bounced along the bottom, and I'm starting to see some green shoots and looking at some growth going forward. And that's obviously driven by multiple factors. We have moved from air conditioning to furnace season, in many of the areas where the inventory generally was low. So there's not that much destocking. And, also, I think some of the bad news around consumer confidence, tariffs, and all that's kind of coming up in the rearview mirror. So if you put that all together, we remain confident about growth next year, especially as there's no destocking. I do think it will be about Q2 next year where destocking ends. And we start looking at meaningful growth numbers. But net net, I would expect 2026 to be a growth year for both the segments. Julian C.H. Mitchell: That's great. Thank you. Operator: Thank you. Our next question will come from Thomas Allen Moll with Stephens. Your line is now open. Thomas Allen Moll: Good morning and thank you for taking my questions. Alok Maskara: Good morning, Tommy. Thomas Allen Moll: On the fourth quarter outlook, really the implied outlook you can infer from your guidance for the HCS volumes. Is there a finer point you can give us on the direct versus two-step expectations? It's only a quarter, but the comps there are substantially different if we just look at the 4Q performance from last year. Just so we're not surprised, a quarter from now, is there anything you would frame for us in terms of the expectations there? Alok Maskara: You know, Tommy, I'll start by saying our forecast in Q2 and expectations did not turn out to be true. So it's hard for us to like, you know, give you something with a lot of confidence. We simply took our Q3 direct versus indirect and applied that to Q4. So we took a Q3 actuals, applied that to Q4, which would mean that obviously, the two-step would decline more than one-step. So that part is gonna be true. We do see the part and accessories growing. Growing across both, but growing more in the two-step than in the one-step. And the one-step where we have higher exposure to residential new construction, that seems to impact us as well. Because that has remained pretty weak. So net net, I mean, essentially took our Q3 performance on one-step versus two-step. And applied that to Q4 as the kind of best guess we can have at this point. And so far as we have looked at three weeks of October, I think we are right close to our expectations. Thomas Allen Moll: Thank you, Alok. Wanted to follow-up with a question on the acquisition. No, you don't wanna get too specific on what the accretion might be in '26 but similar to my last question, just anything you can do to frame the art of the possible or what's reasonable here. Are we thinking low single digits just on a percentage for increase for accretion in '26? Or is there anything you would do to frame expectations for? Michael P. Quenzer: Yeah. We're going through and doing a lot of the work on the final purchase price allocation. I think that's gonna be the amortization around that a big driver for the year. But overall, we do see accretion. I mean, it could be somewhere to the 30 to 40¢ range. We have some more work to do on it, but it's a great business. 25% EBITDA margins before we look at purchase price amortization. So it should be incremental from an EBITDA margin perspective as well and definitely on the top-line growth accretion as well. Thomas Allen Moll: Thank you, Michael. I appreciate it. I'll turn it back. Operator: Thank you. Our next question will come from Christopher M. Snyder with Morgan Stanley. Your line is open. Christopher M. Snyder: Thank you. Alok, earlier you were talking about, you made part of the pressure this year is that the dealers' incentives maybe weren't aligned with the OEM incentives and they were pushing more repair given the supply chain challenges. I guess do you think there is risk into 2026 that these incentives will remain misaligned just because, you know, as we move through the refrigerant transition and homeowners have to replace both the indoor and the outdoor unit, that delta between the repair and the replace bill is widening. Which we just kind of keep that maybe misalignment in place? Thank you. Alok Maskara: Thanks, Chris. I think the biggest cause of why our contractors did not push replacement as much as they do normally was the shortage of canisters. They were just not comfortable selling a 454B unit when they were not sure if they would have a canister and be able to top off the system as required. So they were more willing to do that. That's formally behind us at this stage. There is sufficient supply of 454B canisters. So I think it was less about incentives, more about just product availability, and in some cases, just training. We have taken up some contractors got trained well earlier, others just delayed their training to a different date, and they needed tools and preparedness. So I think from an incentive perspective, it was less of an issue. The indoor versus outdoor thing, I mean, that's kind of settled down pretty well. I mean, they've all figured out how to best serve the customer at the lowest cost by being able to use older furnaces and put the sensors like RDS kits in the system. Of course, the coil is almost always replaced with the outdoor unit anyway. So I think that's less of an issue. It was mostly around part shortage. Christopher M. Snyder: Thank you. I appreciate that. And then I guess maybe turning to Q4 and I know this is a very difficult market to forecast. But I guess, it seems like we're effectively calling for unchanged volumes in resi versus a comp that's about 10 percentage points harder in Q4 versus Q3? And the destock doesn't seem to be letting up. It seems to be going into about Q2 of next year. So obviously, two-year stack in Q4 versus Q3. Are there any positive offsets here that could keep that growth unchanged versus the more difficult comp into Q4? Alok Maskara: I think from our perspective, putting the destock thing aside, because I think all the OEMs, we were caught with like, you know, greater surprise and the destock was more than we expected. We do see the green shoots. Right? I mean, the lower interest rates and the resulting impact on mortgage rates, that's been positive. All the conversations with our customers are more optimistic these days given where the mortgage rates are trending. We also see, like, you know, homebuilder confidence finally turning the corner. I mean, it's still not great, but it's turning the corner. I expect new home sales to maybe languish, but existing home sales to pick up from next year. So we see those. And I think finally, when a lot of units got repaired instead of replaced, all they did is tag on a year or two to the life of the unit, and that creates a pent-up demand situation. Which will start coming loose as well. So net net, that's what gives us confidence in 2026 being a growth year despite all the factors that we talked about earlier. Christopher M. Snyder: Thank you. I appreciate that. Operator: Thank you. Our next question will come from Noah Duke Kaye with Oppenheimer. Your line is open. Noah Duke Kaye: Thanks for taking the questions. I guess on the 2026 early thinking, you highlighted meaningful JV growth from Samsung. Can you what meaningful would look like? Is that a point or two of growth? Top line? Alok Maskara: You know, as you know, we launched the product this year. We still spend the majority of the year selling the old 410A product, and we were faced with inventory shortages in that. So this year is gonna be sort of neutral compared to the previous year on that category. Over the long term, you've talked about, I mean, expect that to add like a point or so of growth every year for the next multiple years. I think 2026 would be the first year where we would have the full portfolio and then launch it. So I think that's kind of the range I would look at is half point to a point of growth with Samsung JV. Ariston JV adds value only in 2027 in a meaningful way, but it's gonna get some growth next year. Because that's when the product will be launched. Michael P. Quenzer: Just to add within the HCS segment. The ductless product represents about 2% of our sales. If you look at the industry, ductless is closer to 10%. So we have a multiyear benefit here within the ductless product, and we saw growth in our Samsung product for the first quarter for the first time in Q3. So really pleased with that progress. And the sales force is really pleased with the progress on selling that with customers really appreciating the brand name. Noah Duke Kaye: Thank you both. And then also indicated rationalizing the low margin RNC accounts which seems prudent. But know that it's about typically 25% or so of sales. RNC total. Can you help us understand or dimensionalize what level within that we'd be talking about in terms of a tier of low margin accounts? Is this, you know, like the lowest 10% or so? We're just trying to understand what kind of a headwind that could be for next year. Alok Maskara: Yeah. I think the lowest 10% to 15% is a good way to think about it. I mean, we were overweight on RNC compared to the industry, especially when it came to our one-step model. So I think first of all, we don't give up any easily. We only give up when we feel like we are taping dollar bills to every outgoing box. So, again, those are not easy decisions for us. I think 10 to 15% of RNC volume over multiple months is the way to think about it. Noah Duke Kaye: Oh, okay. So you said over multiple months or years? I just wanna clarify. Alok Maskara: Multiple months. Noah Duke Kaye: Okay. Thank you. Operator: Thank you. Our next question will come from Jeffrey Todd Sprague with Vertical Research. Your line is open. Jeffrey Todd Sprague: Maybe just wanted to come back to channel and inventory, maybe one last time. Maybe somebody behind me has another one. But you know, it just looks to me, you know, you overproduced in Q3. Right? It sounds like it was unintentional. Things kinda really dropped off. But if you're looking at, you know, kind of this hangover lasting into the first half of next year, is there not scope to more severely cut production in Q4 and just clear this up more quickly? Or, you know, are you just kinda facing labor retention or other issues that maybe are not popping to mind? But it just seems to me like you could take it down a lot harder in Q4 than what implied in the guide and just really set up 2026 instead of having this lingering issue through the first half. Alok Maskara: Yeah. No, Jeff. That's a good question and good observation. I think the issue is more around the mix of the products because in Q4, as you know, most of our production and sales plans are switching towards furnaces. We ramp up air conditioning back in Q1 again. So I think we have done a balanced job with fairly aggressive actions. I mean, headcount across factories is down by more than a thousand people, and if you look at some of the WARN notices, in fact, we have ratcheted back pretty fast. But at the same time, if we go any further, we believe it will crimp our ability to restart production next year. So I think by Q2, and Q1, when we have heavy production months, we'll just go slower at that point. Net net, by the end of Q2, we'll be back to normal level. So we think that's just a better approach. To make sure we don't face challenges that Lennox International Inc. has faced in the past where we couldn't ramp up in time. Jeffrey Todd Sprague: Mhmm. Yeah. No. That makes sense. And then just thinking about your comment about the value tier, I think the value tier has shrunk over the years, right, as the SEER levels have moved up and up and up. But, how big is that tier for you now, in 2025? Like, how much of your business would you characterize as operating in kind of the lowest possible price point in your portfolio? Alok Maskara: So if you think about the overall portfolio, 70% of the business now is what we call the lowest SEER. And that's not the way we think about the value tier, though. So value tier would be within the lowest SEER, what's like, you know, value product with no bells and whistles, limited warranty, cages versus casing across on the outdoor units. And I think that's dropped probably in the 10 to 20% range. And we expect it to remain in that range. As, like, you know, other products with better warranty, better controls, continue to be the majority of the business. But that business, even taking from 10 to 20% is a trend that we are prepared for, and we wanna make sure we address it appropriately. Jeffrey Todd Sprague: Great. Thank you for the color. Appreciate it. Operator: Thank you. Our next question will come from Joseph Alfred Ritchie with Sachs. Your line is now open. Joseph Alfred Ritchie: Hey, good morning, guys. Alok Maskara: Good morning. Hi, Joe. Joseph Alfred Ritchie: So, yeah. So sorry to disappoint Jeff, but I did wanna ask another question on inventories. So just thinking about this, quantifying the fact that your inventories are up roughly $300 million year over year. And the sales growth for the company is gonna be, let's just call it, roughly flattish, down modestly. How do I think about, like, what is kind of, like, the right size of inventories heading into 2026? And then I guess, really just my follow-on question, is more of a clarification for Michael. I heard you say 20% decrementals in the fourth quarter. Was that for the entire business? Was that for HCS? And then how do we think about the decrementals in HCS as you're continuing to wind down inventories through the beginning part of next year? Michael P. Quenzer: Sure. I'll answer that one first. Yes, the 20% decremental was the entire business within the fourth quarter. So it's a little bit more of a decremental on the HCS side. Mostly because the absorption impact there will be more than the BCS side. Alok Maskara: And I think on the inventory question, first of all, we'll acknowledge that our inventory is higher than where we expected and wanted. Let me just acknowledge that part. If we look at the $100 million or so number that you came, I think it's about $150 to $200 million. Is what we wanna bring down. The other is a result of just like, in our investment trying to get into emergency replacement. Making sure our fill rate is higher, and that's the number we expect to normalize by Q2 next year. So I think you kind of break it up into two-thirds, one-third of the 300 number. Joseph Alfred Ritchie: Okay. That's helpful. And I guess just as part of the two-part question I asked, I guess, in you're thinking about decremental margins then as you're bringing down your inventory, is there an appropriate way for us to think about that within HCS in the first half of the year? Alok Maskara: I would say the first half usually has the opposite, has a benefit of production, but at the same time, we are structurally at a lower cost situation because of all the changes we have made. But as we finish Q4 and we come back in January, we can give you a lot more color at that point with a lot more confidence. Right now, everything has just got too many error bars on any of the numbers I'll give you. Joseph Alfred Ritchie: Okay. Fair enough. Thank you, guys. Operator: Thank you. Our next question will come from Jeffrey David Hammond with KeyBanc Capital Markets. Your line is open. Jeffrey David Hammond: Hey, good morning. Alok Maskara: Hi, Jeff. Jeffrey David Hammond: Hey. Maybe just to start with price. I mean, I think the last, you know, five years that the price increases, the levels between COVID regulatory changes have been pretty eye-popping. And, you know, now we're kinda finally seeing this kinda consumer tightening, shift to value repair or replace. I'm just wondering, you know, when you think if at all the industry kinda starts to think about price elasticity more and taking a breather from pricing actions. Alok Maskara: Yeah. Jeff, I mean, that's a fair point. If you look at over the past four, five years, if the price from OEM to the channel has gone up 40%, the price from the channel to the consumer in some cases, has gone up 100 to 200%. So as we look at where the pricing pressure is gonna be, it's gonna be more between the consumer and the channel. Less so between OEM and the channel. And we are seeing consumers getting multiple quotes. During COVID, they're very happy. One contractor came in and gave them one quote. And they would go with that. Today, consumers are definitely getting more quotes than they were getting last year. And often, it's about three quotes versus the one quote that I was referring to in COVID. So I think that's where you're gonna see some price adjustments that will need to happen on the installation of the consumer price. Keep in mind, the OEM price has gone up much, much less than the price that the consumer is paying today. Jeffrey David Hammond: Okay. That's helpful. Just on the 26 moving pieces, I'm just wondering if you can put any kind of quantification or numbers around just the commercial plant getting to full efficiency, you know, all the transition R454B transition noise. Like, what is the delta on that, you know, 25 to 26? Seems like a pretty big tailwind. Alok Maskara: It is gonna be a good tailwind. I mean, first of all, we talked about having $10 million in productivity from like, you know, the new Saltillo plant and avoid a bad news, and we delivered that. So I think we are pleased to say that we are on track to deliver that productivity. I think that continues going into next year. Have to balance it out with any absorption impact, and we'll give you greater color next year. I mean, we do historically, we've always talked about like, about $20 to $30 million in productivity with MCR and other factors. And I think next year is gonna look more normal versus the past recent year where there were too many moving pieces. Jeffrey David Hammond: Okay. Thanks a lot. Operator: Thank you. Our next question will come from Deane Michael Dray with RBC Capital Markets. Your line is open. Deane Michael Dray: Thank you. Good morning, everyone. Alok Maskara: Hi, Deane. Deane Michael Dray: I was hoping you could help us understand the magnitude of the free cash flow guidance cut that implies a pretty low 70% conversion. Is this all the destocking, you know, higher finished goods? Is there anything else going on there that you can share? Alok Maskara: No. It's all destocking. I think we cut it by about $150 million compared to the previous number, and that's all finished good inventory, and we expect to recover all of that by Q2 next year. And as you know, I mean, our depreciation has been lower than our CapEx for the past few years. And I think that continues as we have invested more in the business. Deane Michael Dray: Great. I appreciate that. And then on the new factory, you said it's fully operational. So what kind of efficiencies are you expecting to be realized in 2026? And maybe just kind of give us some examples. Alok Maskara: Sure. So I think there are two specific things that I'll point out too. Right? One is we had startup inefficiencies all through the first half of this year. We won't have that. So I think that's part of it what you're gonna see immediately. There were transfer costs, especially in Q1 of 2025, where we had talked about and we had some moves go wrong, and we had taken some hits to a margin, significant hits to our BCS margin in Q1 because of that. And then finally, keep in mind that the labor arbitrage that we get by making these products in Saltillo versus making them in Stuttgart, that's gonna add too as well. So one whole bucket is startup inefficiency, and the other is just the labor arbitrage. Michael P. Quenzer: And I'll just add to that. It's taking some pressure off the existing factory in Stuttgart, Arkansas, which is helping drive some efficiencies there as well. Deane Michael Dray: That's real helpful. Thank you. Operator: Thank you. Our next question will come from Charles Stephen Tusa with JPMorgan. Your line is open. Charles Stephen Tusa: Hi, good morning. Alok Maskara: Good morning, Steve. Charles Stephen Tusa: Can you just maybe help, like, quantify what you think the overabsorption benefit was? I mean, you said you're going to get some under absorption, but any kind of like rough math, I would assume it's in the kind of tens of millions, there's kind of a wide range on how that calculation could be kind of complex. Maybe just a bit of help on that front. Michael P. Quenzer: Yeah, so within Q3, there really wasn't an absorption kind of benefit or hit. It's the fourth quarter where we're going to see an impact. And if you think about our cost of goods sold, 15% to 20% of our cost of goods sold are factory costs. So you can kinda do some math there to figure out depending on how much we're going to reduce down the factory to normalize inventory. It will have an impact within the fourth quarter. Charles Stephen Tusa: Okay. But I mean, you don't get a benefit from kind of overproducing though and putting that cost in inventory? Alok Maskara: No. I think in the beginning of Q3, we had higher production, and we did ramp it down substantially towards the second half of Q3. So I think Q3, I would call it neutral. Q4 is when we see the full hit. Most of the inventory growth was by the second quarter. Charles Stephen Tusa: Okay. That makes sense. Are you guys seeing any in the channel? I mean, there are some online pricing stats that look relatively weak. I mean, are you seeing anybody kind of get out of line from a price competition perspective? Here? I mean, guys are not chasing the low margin RNC business I guess. Anywhere else where you're seeing competitors try and pick away from a market share perspective? Alok Maskara: I mean, the industry remains competitive. I mean, we see account by account battle everywhere. But in general, all OEMs have maintained the pricing that we got to A2L pricing due to tariff, and we think that's continue. A lot of the online and skirmishes are again between the contractor and the consumer, less so between the OEM and the contractor. So no change in any behavior that we can call out. Besides the low margin RNC business that I called out earlier. Charles Stephen Tusa: Okay. Great. Thanks a lot for the color as always. Appreciate it. Michael P. Quenzer: Thanks. Operator: Thank you. Our next question comes from Brett Logan Linzey. Your line is open. Brett Logan Linzey: Good morning. Yeah, thanks. Wanted to follow-up on free cash flow. Obviously, a lot of moving pieces this year with the regulatory transition and the ramp on emergency. But sounds like that normalizes next year. But you also do have potentially some load in from NSI. As you move through the one-step. So hoping you could maybe frame some of those moving pieces in the next year and what the conversion could look like. Alok Maskara: Yeah. We expect good conversion next year. I mean, NSI will sort of clearly call out, but NSI, we are getting it at a fairly healthy or even better than healthy level of inventory. So I don't expect any specifically load and impact of NSI. If anything, I think once we get through all the accounting and intangible amortization and inventory setup, I expect NSI to convert free cash at a pretty high level. So I think the biggest impact would be reduction in finished goods inventory level whatever we reduce this year would be a gain next year. Brett Logan Linzey: Understood. Just one more on resi, and I'm to maybe drill down on the magnitude and the scope of the consumer trade down. I guess in the context of regional variances or any correlation to regions that maybe had cooler weather conditions as a determinant for the repair decision. Or was it, you know, it's fairly broad-based on this trade down that we're seeing? Alok Maskara: We saw more of that in the Northeast and I'm not sure if it's related to the weather pattern. I think it's probably more related to just different states of the economy. We don't see as much of that in the Southern states. Because that's where, I mean, air conditioning is just super important and people know that this thing will break versus in other areas. They might look at that. So I wouldn't say there's a specific regional trend. Also, I mean, as you know, all of this is a bit of a guesswork and based on anecdotal data. There's no scientific data that's available, but what we have seen is an increase in spare parts sales, an increase in our coil sales, which is typically used for replacement, and I think that's how we put this hypothesis together. We do think a lot of that turns around next year. When the canister availability is no longer an issue. Our contractors are fully trained on R454B, and I think the lower interest and consumer confidence will also help. Brett Logan Linzey: Alright. Appreciate the detail. Operator: Thank you for joining us today. Since there are no further questions, this concludes Lennox International Inc.'s 2025 third quarter conference call. You may disconnect your lines at this time.
Operator: Ladies and gentlemen, it's Taylor Morrison Home Corporation's 2025 Earnings Webcast and Conference Call will begin shortly with your host Mackenzie Jean Aron. We appreciate your patience as we prepare your session today. During the call, we encourage participants to raise any questions they may have. We will begin shortly. Good morning, and welcome to Taylor Morrison Home Corporation's Third Quarter 2025 Earnings Conference Call. Currently, all participants are in listen-only mode. Later, we will conduct a question and answer session and instructions will be given at that time. As a reminder, this conference call is being recorded. I'd now like to introduce Mackenzie Jean Aron, your host. Vice President of Investor Relations. Please go ahead. Mackenzie Jean Aron: Appreciate you joining us today. Before we begin, let me remind you that this call, including the question and answer session, will include forward-looking statements. These statements are subject to the Safe Harbor statement for forward-looking information that you can review in our earnings release on the Investor Relations portion of our website at taylormorrison.com. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These risks and uncertainties include, but are not limited to, those factors identified in the release and in our filings with the SEC, and we do not undertake any obligation to update our forward-looking statements. In addition, we will refer to certain non-GAAP financial measures on the call, which are reconciled to GAAP figures in the release. Now I will turn the call over to our Chairman and Chief Executive Officer, Sheryl Denise Palmer. You, Mackenzie, and good morning, everyone. Joining me is Curt VanHyfte, our Chief Financial Officer, and Erik Heuser, our Chief Corporate Operations Officer. We are pleased to report strong third quarter results despite the continuation of challenging market conditions. Driven by our diversified portfolio and our team's careful calibration of pricing and pace across our well-located communities, we once again met or exceeded our guidance on all key metrics, including home closings volume, price, and gross margin. The ongoing execution of our balanced operating strategy has allowed us to maintain healthy performance even as we have adjusted pricing and incentives, particularly in entry-level price points. Combined with a thoughtful approach to land lighter financing tools and effective cost management, our business is generating strong bottom-line earnings, cash flow, and returns for our shareholders. With approximately 70% of our portfolio serving move-up and resort lifestyle homebuyers, our financial performance is supported by the strength of our broad consumer set. However, even though these generally well-qualified buyer groups are less sensitive to affordability constraints, all consumer segments have been impacted by macroeconomic and political uncertainty, which has weighed on buyer urgency and shopper sentiment. In addition, consumers are aware of the current competitive dynamics in the marketplace and are carefully weighing available incentives, pricing, and spec offerings in their purchase decisions. Appreciating these dynamics, we are focused on deploying innovative and compelling incentives and pricing offers to support buyer confidence and improve affordability. Leaning into the appeal of our well-designed spec and to-be-built homes to meet consumer preferences and carefully managing new starts as we continue to right-size inventory and prepare for next year's spring selling season. Given our quality land locations, the majority of which are in prime core submarkets, our sales strategies are driven community by community based on their unique selling proposition, competitive analysis, and consumer profile. In all communities, we strive to price to market to remain competitive and offer our homebuyers the greatest value. In some communities, this results in a price-focused approach to drive volume, especially where we serve predominantly first-time buyers and differentiation is more challenging given market competitive pressures. However, in move-up and resort lifestyle communities, we are inclined to be more patient to protect values given our distinct locations and product offerings in hard-to-replace communities. We are able to execute this balanced approach in part because we have a well-structured land bank that provides a flexible and capital-efficient lot supply. As I said last quarter, while the near-term outlook calls for a more patient trajectory, we strongly believe that we have the platform to jump-start outsized growth as market dynamics stabilize. In the meantime, we are doubling down on opportunities for cost management with our suppliers, value engineering with our product offerings, and overhead efficiencies in our back office. These efforts helped drive year-over-year improvement in our direct construction costs and 80 basis points of SG&A leverage. We are also continuing to expand our industry-leading tech-enabled sales tools, which are contributing to growing cost efficiencies as well as an improved customer experience. I'm pleased to share that we recently launched an industry-first AI-powered digital assistant across select on taylormorrison.com. Unlike traditional chatbots seen in our industry that rely on scripted responses forcing home shoppers through a predetermined path, our new digital assistant leverages generative AI to provide dynamic data-driven guidance that better mirrors an in-person sales interaction. Our digital assistant guides consumers through their discovery journey, provides them detailed answers to each shopper's unique questions, and helps convert interest into action, supporting lead generation and customer acquisition. This technology marks a meaningful advance in how we engage prospective buyers online, and it's another step in our ongoing digital innovation strategy as today's consumers increasingly seek intuitive, personalized shopping experiences. As to recent demand trends, we were encouraged to see monthly net absorption paces improve each month during the quarter, with September pacing at the strongest level since May, in contrast to typical seasonal slowing into the end of the summer as the improvement in mortgage interest rates helps spur activity. In total, our monthly absorption pace was 2.4 per community for the quarter and has averaged 2.7 year-to-date, slightly below our long-term target as demand has remained somewhat choppy. However, there are positive signs that potential buyers are cautiously engaged in the market. For one, our latest national home buying webinar, a free educational opportunity, we offer home shoppers to equip them with the knowledge needed for a successful home buying journey attracted over 400 attendees. That's a 155% increase from our last webinar. In addition, total website traffic is up double digits and mortgage prequalification volume is trending similarly to year-ago levels. I continue to believe that for our generally well-qualified diverse customer base, improved confidence in the broader economic and political outlook will be the most important determinant of demand stabilization, especially for discretionary home purchase decisions in our move-up and resort lifestyle communities. Among the many headlines impacting confidence, uncertainty related to H-1B policy and broader immigration-related changes have weighed on nonresident buyer activity, with Dallas, Austin, Atlanta, and the Bay Area feeling the greatest impacts. From a consumer standpoint, the mix of our orders by buyer groups stayed relatively consistent sequentially in the third quarter at 30% entry-level, 51% move-up, and 19% resort lifestyle. On a year-over-year basis, our first and second move-up set held in most strongly, while our entry-level segment pulled back as did our resort lifestyle segment due to performance in our non-Esplanade communities. Going a step further, specific to our Premier Esplanade segment, which accounts for just over 10% of our portfolio orders, were flattish year-over-year benefiting from a handful of new community openings. Given the brand's affluent customer base, this segment of our portfolio is relatively insulated from interest rate concerns and instead more reliant on consumer confidence. Positively, we did see improved shopper engagement in Esplanade during the quarter with many consumers exploring multiple communities across markets with a willingness to travel to find their preferred combination of lifestyle, location, and price. With a healthy pipeline of new Esplanade communities scheduled to open in 2026, we remain encouraged by the strength of this consumer group and the opportunity to capitalize on this brand's unique lifestyle offerings in the years ahead. As we look ahead to 2026, it's still too early to provide guidance, but there are a few strategic priorities I would emphasize as we contemplate next year's opportunities against ongoing uncertainties. To begin, we have well over 100 communities expected to open next year, resulting in mid to high single-digit anticipated outlet growth. Many of these communities are slated to open in time for the spring selling season, which should help support our sales pace and delivery goals next year. We also have realized significant cycle time savings as Kurt will detail, providing improved flexibility to start and close homes within the year, including build-to-order homes. While we hope to begin gradually shifting our deliveries closer to a more balanced mix of to-be-built and spec homes over time from our current mix of roughly 70% spec and 30% to-be-built sales, this normalization will take time and be dependent on customer demand. For now, specs will continue to bridge the gap between current buyer preferences for incentivized quick move-in inventory and an eventual return to more historic preferences for personalizing to-be-built homes, especially in our move-up and resort lifestyle communities, which have long been heavily weighted to to-be-built sales. Recognizing this unique environment, we are fortunate to have experienced teams across our divisions with the expertise to respond to local market conditions effectively to best serve our homebuyers. With that, let me now turn the call over to Erik. Erik Heuser: Thanks, Sheryl, and good morning. At quarter end, we owned or controlled 84,564 homebuilding lots. Of these, just under 12,000 lots were finished. The balance are being and will be value-enhanced by normal course entitlement and development efforts over time. Based on trailing twelve-month closings, this represented 6.4 years of total supply, of which 2.6 years was owned. The majority of our lots are in prime locations and core submarkets where we believe long-term fundamentals are healthiest. This core location strategy has helped to partially insulate us from the elevated level of new and existing home inventory in some markets. We control 60% of our lot supply via options and off-balance sheet structures. This is up from 57% at the 2024 and is considerably higher than the year-end low watermark of 23% in 2019, as we have made significant progress in our asset lighter strategy. Importantly, we have done so by prioritizing seller financing, joint ventures, and other option takedown structures, complemented by land banking at rates not historically seen. By utilizing each of these vehicles, we look to optimize the trade-off between gross margin and expected returns. As we continue to strategically deploy these tools, we believe we are well on our way to achieving our goal of controlling at least 65% of our lots. With respect to the land market, we have seen some development cost relief and favorable in land sellers' expectations regarding land structures and values. This has translated into an increased receptiveness on the part of land sellers to structure deals with terms, our preferred financing route, or in a growing share of deals to also adjust pricing. In the third quarter, our investment committee reviewed land acquisition updates that contemplated favorable transaction enhancements impacting nearly 3,400 lots and more than $500 million of purchase price. These enhancements resulted in an 8% average price reduction, six-month average closing deferral, and other structural improvements. These negotiations related to current deal flow as well as deals that were originally approved as far back as 2023. Partially as a result, we have invested $1 billion in homebuilding land year-to-date as compared to $1.8 billion at this time last year. We regularly review and evaluate our deal pipeline to underwriting assumptions and ensure each new deal and additional phase meet our thresholds prior to closing. With the flexibility to be patient, given our existing lot supply, we now expect to invest approximately $2.3 billion this year, down from our prior expectation of approximately $2.4 billion and our initial projection of $2.6 billion coming into the year. Especially in volatile markets, our investment discipline is critically important to ensuring our portfolio is set up to perform for the long term. Turning to our Build to Rent platform. We previously announced that we had entered into a $3 billion financing facility with Kennedy Lewis to support our Yardley business, which as a reminder provides an attractive and affordable single-family living experience in amenitized rental communities. During the third quarter, we transferred 14 of our 22 non-JV projects from our balance sheet into the vehicle, providing capital relief of approximately $140 million. We expect to complete the transfer of a handful of additional projects by year-end, which would release another approximately $50 million. In total, these transfers address over $1 billion of funded project costs. Even more meaningfully, on a go-forward basis, the structure allows us to jointly underwrite new Yardley opportunities, which can then be acquired, developed, and constructed fully off-balance sheet within the vehicle, providing significant capital efficiency and optionality as we continue to scale this unique business and optimize disposition strategies. Consistent with this optionality, we now expect to sell two projects by year-end as we have taken a more patient approach given recent market conditions. Now I will turn the call to Curt. Curt VanHyfte: Thanks, Erik, and good morning, everyone. Turning to the details of our financial results for the third quarter. We reported net income of $201 million or $2.01 per diluted share. This included inventory impairments, pre-acquisition abandonments, and warranty adjustments. Excluding these items, our adjusted net income was $211 million or $2.11 per diluted share. During the quarter, we delivered 3,324 homes, which slightly exceeded the high end of our guidance range of 3,200 to 3,300 homes due to faster cycle times. The average closing price of these homes was $602,000, also slightly ahead of our guidance of approximately $600,000 due to a favorable mix. In total, this generated home closings revenue of $2 billion. We are closely managing our starts volume based on community-specific inventory levels and incremental sales. During the quarter, we started 1.9 homes per community equating to 1,963 total starts. We ended the quarter with 6,831 homes under construction, including 3,313 specs of which 1,221 were finished. Our total spec count was down approximately 15% from the second quarter. As we look ahead to 2026, we will be strategic in putting new spec starts into production in advance of the spring selling season. Appreciating that our current spec inventory remains elevated and the demand environment is fluid. Positively, the ongoing improvement in cycle time has significantly strengthened our ability to flex production levels. In the third quarter, we realized another roughly ten days of sequential savings, leaving us about thirty days faster than a year ago and ninety days faster than two years ago. Even still, we believe there's further room for improvement as we are continuing to find opportunities for additional efficiencies throughout the construction schedule aided by the slowdown in industry-wide starts. Based on our current inventory position, we expect to deliver between 3,100 to 3,300 homes in the fourth quarter. This implies an updated full-year home delivery target of 12,800 to 13,000 homes. Reflecting our current backlog and recent sales paces, we expect the average closing price of our fourth-quarter deliveries to be approximately $590,000, which would leave our full-year closing price at the low end of our prior range of $595,000. Our reported home closing gross margin was 22.1%. While our adjusted home closing gross margin, which excludes inventory impairment and certain warranty charges, was 22.4%. This was slightly ahead of our guidance of approximately 22%. The upside was due in part to a favorable mix of higher-margin to-be-built home closings, which benefited from faster cycle times. Conversely, for the fourth quarter, we expect a modest mix headwind from a higher penetration of spec home closings. With spec homes accounting for 72% of third-quarter sales, but 61% of closings, we expect our spec closing penetration to increase in the near term. As a result, we expect our home closings gross margin, excluding any charges, to be approximately 21.5% in the fourth quarter. This would imply a full-year home closing gross margin of approximately 22.5% on a reported basis and roughly 23% on an adjusted basis, consistent with our prior expectations. Erik Heuser: Now to sales, Curt VanHyfte: Net orders in the third quarter totaled 2,468 homes, which was down just under 13% year over year. This was driven by moderation in our monthly absorption pace to 2.4 homes per community from 2.8 a year ago, partially offset by a 3% increase in our ending community count to 349 outlets. Cancellations equaled 10.1% of our beginning backlog and 15.4% of gross orders. While cancellation activity has increased due to a change in consumer sentiment, we believe our cancellation rates remain below industry averages driven by our emphasis on pre-qualifications, $45,000 average customer deposits, and the overall financial strength of our buyers. Looking ahead, we now expect our outlet count to be approximately 345 at year-end, slightly below our prior guidance as we have intentionally delayed some openings into the New Year when anticipated selling conditions are stronger. As Sheryl said, we have well over 100 communities expected to open next year, resulting in mid to high single-digit anticipated outlet growth in 2026. We once again realized strong expense leverage as our SG&A ratio improved 80 basis points year over year to 9% of home closings revenue. This improvement was driven primarily by lower payroll-related costs and commission expenses. For the year, we continue to expect our SG&A ratio to be in the mid-nine percent range. Our financial services team maintained a strong capture rate of 88% during the quarter, which drove financial services revenue of $56 million with a gross margin of 52.5%. This was up from $50 million and 45% respectively a year ago. Among buyers using Taylor Morrison Home Funding, credit metrics remained healthy and consistent with recent trends with an average credit score of 750, down payment of 22%, and household income of $179,000. Before turning to our balance sheet, I wanted to highlight that during the quarter, we incurred net interest expense of $13 million, up from $3 million a year ago driven primarily by our land banking vehicles. We expect to incur a similar amount of net interest expense in the fourth quarter. Now on to our balance sheet. We ended the quarter with strong liquidity of approximately $1.3 billion. This included $371 million of unrestricted cash and $955 million of available capacity on our revolving credit facility. At quarter-end, our net homebuilding debt to capitalization ratio was 21.3%, down from 22.5% a year ago. During the quarter, we repurchased 1.3 million shares of our common stock outstanding for $75 million. Year to date, we have repurchased a total of 5.3 million shares for approximately $310 million, representing approximately 5% of our outstanding share count at the beginning of the year. As a result, we are well on track to achieve our full-year repurchase target of at least $350 million as we remain focused on returning excess capital to shareholders and taking advantage of the attractive valuation of our equity. At quarter-end, our remaining repurchase authorization was $600 million. Inclusive of our repurchase target, we expect our diluted shares outstanding to average approximately 101 million for the full year, including approximately 99 million in the fourth quarter. Now I will turn the call back over to Sheryl. Sheryl Denise Palmer: Thank you, Kurt. I'd like to end by acknowledging the recent focus on addressing the country's critical need to help make housing more affordable. At Taylor Morrison Home Corporation, we welcome the opportunity to work collaboratively towards expanding homeownership and improving accessibility. We have long strived to build strong communities and deliver affordable, desirable housing options that serve the needs of our customers with both for sale and for rent offerings. We applaud the administration's commitment to improving the cost and availability of housing and look forward to contributing towards meaningful solutions. I also want to end by thanking our entire team for once again delivering results we are proud to share. Your commitment to our customers, communities, and each other is second to none, and I am confident we will continue to navigate this market successfully. Thank you to everyone who joined us today, and let's now open the call to your questions. Operator, please provide our participants with instructions. Operator: Of course. Thank you very much. We'd now like to open the lines for the Q&A. Our first question comes from Trevor Scott Allinson from Wolfe Research. Trevor, your line is now open. Trevor Scott Allinson: Hi, good morning. Thank you for taking my questions. Want to start with your views on the potential action from the administration to encourage volume. And Sheryl, I appreciate your comments in the prepared remarks. Have you guys had conversations directly with the administration on the topic? And if so, can you talk about specifically what they're looking for from you as a home builder? And do these conversations change your views at all on your approach to volume versus pace in the current environment? Sheryl Denise Palmer: Well, thanks, Trevor. Appreciate the questions. You know, as has been reported, there's a number of meetings that have been held. And, honestly, I believe it's great for the industry that we're having these very productive conversations with the administration. So the discussions are really about how we can overcome the housing shortages in this country and most critically, how do we make housing more affordable. You know, we do have some excess inventory in the system. Everyone knows today that builders are working through, and we need to be very thoughtful about how that happens. But I think we can all agree that we have an affordability issue, and it didn't happen overnight. It's gonna require tremendous collaboration by a number of stakeholders to solve. It's a very complicated issue, you know, but the good news is it's getting tremendous focus by a lot of smart people. We need to tackle rising land costs, local regulations. The list just goes on and on. I would tell you we are in the early days. So more to come. But rest assured that Taylor Morrison Home Corporation and all the big builders want to be part of the solution on providing the right housing for Americans. And I'm quite confident given the meetings we've had that we'll see opportunities and progress. I'd also point you to the LDA statement that went out a couple of weeks ago. I think it did a really nice job representing the position of all the big builders. And as far as your second part of that question, you know, we're gonna continue to do the right thing community by community, asset by asset. As we've talked about for years, Trevor, we don't make that decision globally. We really look at the balance of price and pace in consumer group in every community. And we'll continue to do that. It's not gonna be helpful to flood the market with inventory that can't be absorbed. So we just need to be very conscious of, you know, the dynamics in each submarket. Trevor Scott Allinson: Thanks for that, Sheryl. And makes a lot of sense. I think that's a very logical approach. And then second, on recent demand trends, you talked about demand improving sequentially throughout the quarter, which is very encouraging. Are you seeing a difference by consumer segment just thinking as rates came down, did you see entry-level traffic become more engaged? Or is it more broad across consumer segments? And then any color on if those improved trends continued into October? Thanks. Sheryl Denise Palmer: Yeah. Great question. You know, I would tell you it's been pretty broad-based, Trevor. And I shared just like, you know, prior discussions, that it almost comes down to, once again, community by community. You know, for example, entry-level, absolutely, we've seen traffic pick up. But we know we have, you know, affordability issues we're trying to solve for. When we look at our move-up and our resort lifestyle business, you know, there continues to be increases in traffic, increases in web traffic, foot traffic, and actually, I'm quite encouraged, you know, with the resort lifestyle as we move into the shoulder season. That's gonna continue. That consumer group is, you know, more sophisticated. They know what's going on in the market. So the opportunity is to convert them from traffic to action. And we have a lot of tools if it's anything from everything from our incentives, our mortgage programs to our new AI tool to help consumers get from start to finish. Trevor Scott Allinson: Thank you for all the color, good luck moving forward. Sheryl Denise Palmer: Thank you. Appreciate the questions. Operator: Thank you very much. Our next question comes from Michael Glaser Dahl from RBC. Michael, your line is now open. Michael Glaser Dahl: Hi, great. Thanks for taking my questions. Cheryl, as part of the sequential trends, I was hoping you could elaborate on incentives. You talked in your remarks in the press release about kind of innovative and compelling. I mean, obviously, rate buy-downs have been out there for years now. So you know, what are you doing that's different? Is this kind of lower teaser rate? Is it arms? Like, what do you think you're doing that may be playing a role in helping to drive that customer off the sidelines? Sheryl Denise Palmer: Yeah. I would tell you, honestly, Mike, it's all of the above. As you know, we continue to use, you know, both on the conventional and the FHA loans, we're using buy-downs. We're using adjustable loans. We also have proprietary loans for our inventory that's, you know, just gotten in the ground or specifically our to-be-built. Really trying to stimulate that business. Have recently just introduced a new proprietary nine-month program for our to-be-built. I think most of those are done with Fannie and Freddie through the window. We've got a slightly different program. And it really gives our customers flexibility on a forward lock. But the, you know, security of a longer period of time they, you know, if they believe rates are gonna drop. Obviously, in most of these programs, we also have the ability for a free float down. So you know, I think for us, Mike, it's really about making sure we personalize each customer's experience. Some of them need help with closing costs. Some of them, you know, don't know how, you know, aren't expecting to be in the house a long time and adjustable program seems most helpful. Some need the confidence of a thirty-year lower fixed rate. So it's really making sure we understand the customer needs and we just have a plethora of programs to provide. Michael Glaser Dahl: Okay. Got it. That's helpful. And then, Cheryl, I know it's early to give 2026 commentary. You did highlight a couple of things around community account growth. Specs maybe being a bridge to help you a little bit in the near term. I think some of that probably alludes to the fact that your backlog down nearly 40% in dollar terms year on year and probably the year somewhat similarly. The obvious question we get from investors is if you have a traditional kind of build-to-order builder go into next year with backlog down that much? How can you possibly drive to even flat revenues? Or do you have a significant gap out? So maybe can you just talk to how you're viewing that as you go into the spring? It sounds like maybe you're a little more willing to put some specs in the ground where others are pulling back a little. But just give a little more detail on how we solve thinking about that positioning. Sheryl Denise Palmer: Yeah. I think you have to hit it from a number of angles. Mike, first of all, I think we've been very clear that we're gonna do look at each community and make sure we understand the right need and put the right number specs in the ground. Our specs, as I said, I think both Kurt and I said in our prepared remarks, are a little higher. We pulled back a little bit in the third quarter to see what happened to sales paces. We have the fourth quarter given the reduction in construction cycle. It gives us much more time. I think back to a year ago where we probably had to have houses in the ground by January and February and probably no later than March depending on the community or market. Today, that can go till next July or August. So you've fundamentally picked up at least another quarter of production cycle next year. You combine that with our ability to add new to-be-built, you know, well into next year and the community count growth, then we're gonna really seek to understand the market, and we have the platform to ramp up starts if the market is there for it. But as I've said, we're not gonna force inventory in the ground. In some communities, we find that pricing has been inelastic. And so we really have to make that decision community by community and balance, you know, profitability along with volume. Michael Glaser Dahl: Got it. Okay. Thank you. Operator: Thank you very much. As a reminder, if you'd like to raise a question, our next question comes from Michael Jason Rehaut from JPMorgan. Michael, your line is now open. Michael Jason Rehaut: Great. Thanks very much. Good morning, everyone, and congrats on the results. Sheryl Denise Palmer: Thank you. Operator: Wanted to first drill down on, you know, how you're thinking about, you know, specifically about spec inventory. Sorry. Saying early that it remains elevated, I think it's kind of one of the key reasons why you're looking for a little bit of a dip down sequentially in 4Q gross margins. Trying to get my arms around how you're thinking about this going into the first half of next year, if you would expect this kind of drag or headwind to remain in place or even accelerate. And, you know, if you're kind of working through excess spec inventory, let's say, the current fourth-quarter pace, when might assuming the market trends follow normal seasonality, when might that overhang dissipate? Sheryl Denise Palmer: Yeah. I think similar to what I said to Mike Dahl, I think it's a balancing act, Mike. I mean, obviously, it's our intention to work through the inventory, and then we have a lot of new communities that will be bringing new inventory to the marketplace, and we'll be monitoring it month by month as we look at our fourth-quarter starts. We've always said we're going to align sales pretty close to start. You saw us pull back a little bit on that in the fourth quarter because the inventory was in the third quarter. Going into the fourth quarter, and so we're gonna play that by ear, but we're in a position if it's permits on the shelf, ready to respond to the demand in the marketplace. But like I said, we're not gonna flood the market with inventory, so we're really going to pace it based on sales and opportunity. Michael Jason Rehaut: Okay. Appreciate that. And I guess just looking at your different regions, you talked about September being a little bit better from a within the quarter and perhaps that's continued into October. From a regional standpoint, I'm curious if you've seen the strength more concentrated in any areas and specifically maybe you could kind of go around the world in terms of which markets remain on the margin stronger than average, weaker than average. We heard comments yesterday that maybe Florida showing a little bit of signs of stabilization. So love your thoughts on that as well. Sheryl Denise Palmer: Certainly. I'd be happy to. Yeah. You know, I would with the comments on Florida, Mike. You know, we continue to be very bullish around Florida. I think Florida was the last to really adjust if we think about the last few years, but the good news is given how late it was to the party, we're already seeing green shoots on inventory sales activity. When I look at our sales, half of our Florida markets were up year over year. In fact, Orlando had the highest paces in the country. Closings for the quarter were up almost across the board in all of our Florida markets. And half the market saw improvement in their margin in the quarter year over year. Heading in the shoulder season, like I said, I stay optimistic that we'll have a good season for the resort lifestyle business. We're also seeing a decent reduction in both new and resell inventory. And once again, I'm delighted to see that. If I go to Texas and you see it in the numbers, Mike, you know, it was a tougher quarter from a volume standpoint. Inventories have been elevated in Texas. If I kind of run around the state, you know, Austin, they've been at this for it feels like darn close to three years. It does feel like we're starting to see the bottom, which I would say is encouraging. Months of supply have come down. And it feels like it's holding pretty steady. You know, we'll go a couple more months and see if that's true. But when we look at, like, underproduction QMIs in the market, they've settled. More reasonable levels. Margin recovery, you know, we've seen them up a little bit quarter over quarter. And the land market, I would tell you, continues to be tough. The teams have been very diligent in their assumptions not to get ahead of themselves. Until we really find final pricing in the But the good news is we have a very strong portfolio of quality assets, that will continue to carry the day. You know, Dallas I think it slowed down a bit, a little bit more. The lowest price points in Dallas are hypercompetitive. And most builders, it appears as real have subscribed to, I would say, more of an inventory strategy. Resales have remained generally stable, maybe up a bit. Once again, I tell you our balanced portfolio gives us some great opportunities because it's a high-growth market for us as we look forward. Great land pipeline. Margins are still strong. Probably the thing I'd point to in Dallas I think I said it in my prepared remarks. Say that three times. Prepared remarks, Mike, is the H-1B buyers. You know, we've seen that both in the demand and from a cancellation standpoint. And then if I wrap up with Houston there, you know, the first-time buyers it's competitive, very competitive for them. The good news is there's lots of them. It actually hasn't one of our highest paces in the quarter in the country. Our core communities continue to do well. But you have to put it on a relative basis. Paces are down from the peak levels. Certainly in Texas, more than we've seen across the board. But I think our locations doing well. The ones in the court are doing better. Qualifications qualification seems to be the biggest issue for our first-time buyers there. And we're having to use both rate incentives buy downs, really every tool we have in our toolbox to assist these buyers get to a payment that they can afford. I'd probably describe it as competitive but steady. But like I said, pulled back from our peak levels. Carolina is broadly doing really good. You can really start to see the difference between core and some of the fringe markets, and our core assets are really performing nicely. I move to California, you know, we've been discussing for a while. On the capital front. We've really, you know, tightened up our investment. The communities we have in SoCal are doing well. We have pulled back the investment a little bit. You know, once again, SoCal's above the company average or even pull so it's pulled back from its peak. Their absorptions are above the company average. If I go to the Bay I would say tech has had an impact on both probably Bay and Seattle. And if I go to stack and round out California, you know, I'd say they're holding steady. They're getting more than their fair share in the marketplace. When I look at our resort lifestyle business there, we have one that's approaching closeout, one that's in the new stage. In a new state you know, newer stages of opening without the amenity. So those are kind of balancing each other out. I'd say Sacramento overall stable, consistent community count paces year over year. And then maybe I'll wrap up with Phoenix. I think that market probably provides the most diverse offering across all consumer groups for us. It's a balanced market with our to-be-built and inventory offering. We've seen good improvement on cycle time. We definitely, with our move-up buyers here, have a more discerning buyer. But we have the options to meet their needs. Paces have been constant sequentially. Once again, I'd say this is a market that's kind of punching about their weight, strong margins for us. Modest incentives compared to the rest of the country. You know, in the land market, it's a little bit mixed. We're seeing some wonderful opportunities. We're very deal specific. We've been able to renegotiate terms and price. We've seen, you know, just coming out of an auction, a state that was pretty frothy. So a little bit of everything in the marketplace. You know, I just wrap my with just a macro that I know there's been a lot of discussion on California. I mean, excuse me, Florida and Texas. When you look at migration patterns, they're still leading the country. They continue to be very important markets for the industry. Consumers still have strong equity in their homes. Income networks are growing. So I'd say, you know, the green shoots are starting. But, Erik, I'm sure I missed a lot. Anything you can think of? Erik Heuser: You covered it long term. You know, excited about the population gains. And net move-ins that we've seen in those markets over time. And specifically, as you think about months of supply and price in the retail market, if you're to indicators we've watched carefully. You know, seeing some real stabilization, a few examples, maybe Sarasota and Tampa, by way of example, were months of are actually down and pricing has stabilized, so there's no real movement there. Houston's been interesting in that the months of supply are down about 4%. On a moving average. And stable pricing. And so some real examples of some stabilization. Of course, we'll continue to watch seasonality. And evolution. And on a new inventory side, the cycle is a little different than all others. There is always a little bit of seasonality. But we continue to monitor the core versus noncore benefits that we think we have. Sheryl Denise Palmer: I really see difference in performance. Erik Heuser: Right. Sheryl Denise Palmer: Yeah. Michael Jason Rehaut: Great. Thank you very much. Sheryl Denise Palmer: Thank you. Operator: Thank you very much. Our next question comes from Matthew Adrien Bouley from Barclays. Matthew, your line is now open. Matthew Adrien Bouley: Morning, everyone. Thank you for taking the questions. So I wanted to ask on the I guess, the over 100 new communities to come next year. I'm curious any detail on how that may break out either from a regional or product perspective? And specifically, I'm curious on your Esplanade expansion. I think you said it's still hanging around kind of 10% of sales today. I know you guys had some, you've got some, ambitious goals of expanding that product. So should we expect to see any movement on that mix of Esplanade next year as well with all those openings? Thank you. Sheryl Denise Palmer: You know, we really leaned in, Matt, talking about 26. So we we're not gonna go too far. But I will give you a tidbit. I'll give you an Esplanade we have three new Esplanade opening in the first quarter. Along with amenity centers, nine holes of golf in one of our communities, so very exciting when I look at next year and just across the Esplanade. Portfolio with the amenities that are opening along with new communities. I think we're excited. Very consistent with what we discussed at our investor day. I think before we get into more detail, on community's card, I think you wanna add to that. We really wanna wait till next quarter. Yes. I think we'll wait, Matt, until we kind of wrap up the year. But as you can imagine, I think the outlet growth will be pretty broad-based kind of throughout the country. So I think we'll leave it at that for now. We can handle that more when we wrap up the year. Matthew Adrien Bouley: Okay. Got it. I appreciate that. Secondly, just SG&A. Looked like a lot of leverage there despite sort of flattish homebuilding revenue year over year. Can you speak a little more around what you're doing to control costs here? Was there anything one-time in that 3Q result? Or should we think you've kind of found a new run rate level here in Q3 that we can kind of use to model out the next year on SG&A? Thank you. Curt VanHyfte: Yeah, Matt. Thanks for the question. SG&A, yeah, that's a focus of ours. Ideally, it's part of the culture. The teams are focused on it. We're constantly looking at kind of our throughput kind of results that we get on various metrics. In the quarter specifically, we benefited from some lower kind of payroll-related costs and lower commission costs as well. And as we said in our prepared comments, we're tracking to be in that mid-nine percent range for the year. So all in all, I'm very happy with where we're at from an SG&A perspective. The teams are focused on it. And we're doing a lot of good things from a cost control perspective. And I should also highlight the fact that from a back-office standpoint, we're continually trying to find ways to improve kind of how we're operating whether it's our shared contract kind of program that we have where we're centralizing all of our contracts and we're moving the needle on that as well on some of the other aspects of the business. The other one I'd point to, I think you're Sheryl Denise Palmer: our contracts department that we've had in place for a year now, right, where all the contracts are centralized. I think that's a good one. I think the other one I'd point to, Kurt, is what we're seeing in the reservation system. I mean, even just in September, we saw about an 800 basis point reduction from our overall business to those that came in reservation and co-broke. So if we can keep that up, generally month to month, we've been seeing four, 500 on average. 800 was a September was a peak for us. But, obviously, the more we get through our reservation system with that reduction that will continue to show the leverage in the SG&A. Matthew Adrien Bouley: Got it. Super helpful. Thank you, Sheryl and Kurt. Good luck, guys. Sheryl Denise Palmer: Thank you. Operator: Thank you very much. Excuse me. Our next question comes from Alan S. Ratner from Zelman and Associates. Alan, your line is now open. Alan S. Ratner: Guys. Good morning. Thanks for all the details so and nice quarter. I guess just first on the SG&A just since that was the last topic there. Just trying to back into what the implied guide for 4Q is and to get to mid-9s for the year. I think it does imply that rate does tick up a bit sequentially on a fairly similar revenue base. So is that just some conservatism around that 800 basis point reduction in the broker side that you just mentioned, Cheryl? Or is there some other that I should be aware of on Curt VanHyfte: Yes. Hi, Alan. I think it's a couple of things. A, yeah. We are seeing a potential influx of commission costs for Q4 as what we're seeing from some of the competitors in the marketplace and what everyone's doing to drive maybe their closings for the year. With Sheryl Denise Palmer: brokers, right? With brokers. And then what I would also say is that based on our guide of, you know, the midpoint of our range of 3,200 units, with our average sales price at $590,000, we are losing a little bit of leverage just because of the top line. It's going to be a little bit less than it was in Q3. Alan S. Ratner: Got it. Okay. Understood. Thanks for that Kurt. Second question, and I apologize, I missed some of these numbers, but I thought the detail that Erik gave surrounding some of the successes you've had on land renegotiation was really encouraging to hear. So I was hoping, first, you just repeat that? And second off, on the deals where you were actually able to get lower pricing, can you quantify like what maybe the margin impact is on those particular projects? And just the general timing of when we should expect to see that benefit beginning to flow through? Hi, Alan. Yes, great question. Appreciate it. It was about 3,400 lots in the quarter that rolled through our investment committee that were renegotiated. And that renegotiated a renegotiation took the form of deferrals. So those on average were about six months. But a relatively surprising level were actually on price, and it was basically an 8% decrease in the original purchase price on deals that were rolling back through the investment committee that had been negotiated from fourth quarter twenty-three through relatively current. So, you know, as you think about navigating this particular cycle, it's been interesting to me in participating in it. That this one's been relatively quick in terms of seller receptiveness for the call. But also, you know, our proactiveness in making sure that we're playing offense and communicating clearly. And we've seen success. And so maybe to your question relative to what should we expect, as we review deals that we had in our original expectation in terms of gross margin and return production, we want to make sure that we're holding those. And sometimes that does require an adjustment. And so I wouldn't say that's going to result in significant upside. But we are maintaining our original expectations in most cases. And then in terms of timing, those are gonna roll through. You know, over time. So again, relatively current on deals that we'll be closing on in the next few months. Developing. And so it's gonna take some time for that to roll through the system. The last thing I would say, interestingly, as we're talking about the land environment, this one being a little bit different than past, is we have seen some interesting finished lot pickups. And so about 25% of the land rolling through our system most recently are actually finished lots. Those have been difficult to find, over the last couple of years. And I think that's Alan S. Ratner: likely Erik Heuser: the case of some other builders maybe walking from deals on our ability to renegotiate those in a way that makes sense for us. And as I alluded to, we're also seeing some development cost relief. So those would be a couple of other upsides that we see. Sheryl Denise Palmer: And, Erik, would you just so we don't get over our ski test. I mean, it's been interesting. Right? Because your point, we've had some tremendous renegotiation. We've had other guys that just won't move. And we've been forced into a position to walk away. Erik Heuser: Completely agree. The success cases, as I mentioned, are the deferrals and the purchase price and, in some cases, just some restructuring of the deal. But there are also instances where they just don't work and we're standing our ground and just having to walk from those. And so that was you'll see it all through the system as well. Hey, Erik. Can I squeeze in one more on that topic? Because I think it's really, really interesting. Have you seen any common thread on the deals that you have been able to renegotiate? Are you more are you seeing more success with, say, land bankers or kind of your more institutionalized land sellers and developers or more success perhaps with kind of the one-off mom and pop landowners, farmers, etcetera, curious if there's a common thread on the deals that people are kinda holding their guns or versus the ones that seem to be a bit more willing to negotiate? Yes. It's really all categories. Alan. And so we start with the seller financing, you know, can you just carry this? And we need some more time on it. And so we've seen success there. The land banking appetite continues to be relatively strong so we use that as a in a surgical way where we can optimize our return by using by using land banking. But would say the supply of the availability of land banking is been very high. And then lastly, with regard to just the price changes, as I mentioned of those 3,400 lots, about 75% of the lots actually resulted in some kind of price change. And so it's been really interesting as we think about the solutions, which are many. Alan S. Ratner: Great. Thanks for all the detail, guys. I appreciate Sheryl Denise Palmer: Thank you, Alan. Operator: Thank you very much. Our next question comes from Rafe Jason Jadrosich of Bank of America. Rafe, your line is now open. Rafe Jason Jadrosich: Hi, good morning. It's Rafe. Thanks for taking my question. I wanted to ask in terms of the incentive change, you comment sort of that entry-level was where you're seeing the most pressure, but you're also seeing some hesitancy on the move-up in resort lifestyle. Like, you sort of quantify where the margins are for each of the segments and then maybe how much the incentives have changed for each of them? Like, how different is it across the different segments? Sheryl Denise Palmer: Yeah. I mean, the incentives by consumer group, you know, I always hate averages. Because I think it doesn't tell the whole story. But, certainly, you would expect our most expensive incentives go with those forward commitments. And those are generally our first-time buyers, and we're having to help them get the rate as low as we can. So as to total dollars, the sales price less. So the total dollars are a little less, but the percentage, you know, that's where once again, I think our most expensive set. You go all the way to the resort lifestyle buyer, where that's our, you know, that ASP is probably about $200,000 higher than our average. And those folks generally as concerned about interest rates. And so those incentives work differently. You know, we'll see a lot of support there on helping them with options. You know, if you spend this, we'll give you that. Sometimes it's reduction in lot premiums. They're more sophisticated. They know what's happening in the market. They don't wanna overpay. And if they can't get it in a mortgage incentive, they want it somewhere else. But I'd say, you know, generally, you know, we're using incentives across the board. It's just the how for each customer. But I wouldn't point to significant differences in range except for the call out that our most expensive incentives tend to be with first-timers. Kurt, is that No, think generally speaking, you're in the ballpark. And Rafe, we don't Curt VanHyfte: really provide kind of margins based on kind of the segment. Overall. But I think you could probably imagine what we have said in the past is that our resort lifestyles margins are typically the highest kind of in the portfolio. But to Cheryl's point, it comes down to kind of each buyer's specific situation and we apply and we try to align the to maximize each buyer's situation. Rafe Jason Jadrosich: Okay. That's helpful. And then, you sort of mentioned that cycle times are hard, but they're still coming down. How do we think about how much higher the backlog conversion can go? And then how much opportunity do you have on the cycle times from here? How much more can they come down? Curt VanHyfte: Yes. Rafe, I would say that just from a cycle time perspective, we're essentially at pre-COVID levels for the most part. We have a couple of markets that maybe still have a little bit of opportunity. To kind of run through the tape there. So we do feel like there's continued opportunity there overall for the entire business. Relative to the conversion kind of rate I think we were at about 74%, 75% in Q3. And based on our closing guide and where backlog is today, I think you can expect that that conversion rate will be higher. In Q4 just based on kind of the sheer numbers of the numerator and the denominator there. So you can expect that to be higher probably in Q4 than it was in Q3. Rafe Jason Jadrosich: Is that like a sustainable level going forward? Or is that just because of the mix of spec relative to BTO? Curt VanHyfte: Yes. Rafe, it's more of a function of where specs are today. As you've heard Sheryl talk about, we intend over time to be able to see it in flux or to raise the level of to-be-built over time. So it's a point in time kind of where we're at today. And then as I said we'll see what we can do on the 2B build side of the business in the coming months and quarters. Sheryl Denise Palmer: But the next couple of quarters are going to likely be higher conversion. It's going to be a higher conversion for the next Curt VanHyfte: couple of quarters, yes. Rafe Jason Jadrosich: Okay. That's helpful. Thank you. Thank you. Operator: Thank you very much. Our next question comes from Kenneth Robinson Zener from Seaport Research Partners. Your line is now open. Kenneth Robinson Zener: Good morning, everybody. Sheryl Denise Palmer: Hi, Ken. Good morning. Operator: So Erik Heuser: a couple of things here, just kinda housekeeping. But with incentives, if you were to think about the bucket, I think some of the builders have been Kenneth Robinson Zener: describing it to me, like, you know, half of the incentive is the price reduction. Half and then the other half is kind of split equally between mortgage buy downs and closings. Do you within those three buckets, do you have a comment Sheryl Denise Palmer: Yeah. I would tell you that you know, move a little bit quarter to quarter. And it will be a little different if you're talking growth or net price or you're talking units. But you know, somewhere around 45% of our incentives are specific to financial services. And a subset of that would be what we would call the most expensive. Forward commitments. And then the balance, the other 50%, is gonna be a combination of all the other things we've talked about. You know, it could be options. It could be lot premiums. In some instances, we may have had to reset pricing to market. But it's a combination. Erik Heuser: And just to be clear, when you say financial services, Sheryl, it's Kenneth Robinson Zener: you're recording all that stuff in the homebuilder segment net pricing. Is that correct? Or is there stuff running through financial services, just to be clear? Sheryl Denise Palmer: No. It's running through the margin. Most of the Right. Financial services are running through the margin. I mean, actually, all of them. Are running through ASP, and some are running through cost of goods. Erik Heuser: Right. Okay. Just wanna clarify. And then, Kenneth Robinson Zener: you know, Erik Heuser: obviously with orders, you generally want to follow your starts, we'll generally follow your orders. Kenneth Robinson Zener: I'm just wondering, looking back, so 3Q, starts for below Erik Heuser: orders, both down inventory units make sense. 2Q it was higher Kenneth Robinson Zener: And the idea was there you wanted to build, right? Operator: To have specs. Erik Heuser: Which you know, if let's say spring is Kenneth Robinson Zener: softer, than expected, would you guys still be in the position where you want to keep that volume up relative to the start volume up relative to orders. And I'm thinking you did so much work on it fixed G and A, right? It's like down 20% comparable to your inventory units. I'm just trying to think about how your guys' playbook works there or if you really just have starts follow orders wherever they go, you know, in spring of next year. Curt VanHyfte: Yes, Ken, great question. At this point in time relative to next Kenneth Robinson Zener: year, Curt VanHyfte: probably not going to get into specifics there. But what I can say is we're going to continue to probably we've adjusted our starts in Q3 relative to sales to kind of right-size our inventory position. And generally speaking, we're gonna stay sticky from a start standpoint to sales. But then it's going to come down to a community by community kind of analysis. And how each community is doing, and we'll fluctuate that as necessary. Necessary based on A, the community Entry level is going to be more spec. Townhomes are going to be more spec. And then of course as we move our way up in the consumer segmentation profile we'll look to kind of hopefully pursue more to be built business. But I think the market is going to tell us and lead us to that path down the road. Kenneth Robinson Zener: Okay. No, I appreciate that. I wasn't trying to get next year's guidance as much as kind of your thinking about when to start go above and below orders. Thank you very much for your time. Sheryl Denise Palmer: Thanks, Ken. Bye, Ken. Operator: Thank you very much. Our next question comes from Jay McCanless from Wedbush. Your line is now open. Jay McCanless: Hey, good morning, everyone. Operator: Wanted to ask where is the spread now between spec closings Jay McCanless: and build to order closings? On a closing standpoint, we were sixty-forty, 60% spec or 61% spec and 39% to be built for the quarter. Operator: Okay. Then what's the gross margin spread on that now? Curt VanHyfte: Yes. We continue to run-in that several you know, 100 kind of basis points. As you can imagine Jay, nothing new there. Within our Esplanade communities, with the high premiums and the high option revenue. We can see some of these get up to 1,000 basis points. So but generally speaking, it's at several 100 basis point And then We continue to track to. Sheryl Denise Palmer: Also believe, do you think it's fair, Kurt, even within our Esplanade, non-Esplanade, resort lifestyle? We have a spread. Right? There's our Esplanade tends to deliver the highest. Yep. And our Non-Esplanade still aged targeted restricted a little low. Operator: Okay. Thanks. And then the question I had Jay McCanless: it's encouraging to hear that maybe the land prices are breaking a little bit. But just as we think about how when that can start to help the gross margin Operator: Is it going to be a back half of 2026 event? And also, Jay McCanless: one of your competitors called out, there was a small number, I think it was $1,500 per home tariff impact. Curt VanHyfte: Have you all tried to assess what impact the new tariffs might have on costs for next year? Yes. I'll start with land. Jay. From a timing standpoint, this is current current updates to our underwriting. So you're probably practically not gonna see it really roll through until '27 and beyond for most of that. And in some cases, I would tell you that it's we're just on you know, holding our original underwriting expectations in terms of retrading. And in some limited sort circumstances, we are seeing some opportunistic deals roll through, and those are the ones that you might some future upside on. But kind of a blend of the two, I would just, and then with regard to tariffs, I'll just make a brief comment on the land market, and Kurt can take the balance and vertical But, you know, we are hearing from our teams that, generally speaking, on the land development receipt standpoint, and there's not gonna be a whole lot of specific tariffs impacts, but kind of the magnitude of five to 6% release on cost on the development side. Curt VanHyfte: Yes. And Jay, on the House side, yes, I think we subscribed to the thinking that it will be a modest increase from a tariff standpoint. There's the cabinet stuff that came out the vanities, the steel is out there. But again, I think what I would also add to that is we're doing a lot of things behind the scenes just from an operational kind of execution standpoint. Working with our trade partners, our suppliers on what I'll call cost reduction strategies that the teams are doing a great job working through. I would also add that we've recently hired a new national VP of Purchasing and construction that is helping us lead that charge. And that's one of its focal points as well. So all in all I think we have a pretty good balance approach and dealing with the tariff potential increases. Through some of the other things that we're working on behind the scenes relative to our cost reduction strategy. In light of some of the start activity. That we're seeing. Jay McCanless: Okay. Operator: Thanks, Jay. Thank you very much. We currently have no further questions, so I'd like to hand back to Sheryl Denise Palmer for any further remarks. Sheryl Denise Palmer: Thank you very much for joining us for our third-quarter call, and wish you all a wonderful holiday season, and we'll look forward to talking to you early in the New Year. Operator: As we conclude today's call, we'd like to thank everyone for joining. You may disconnect your lines.
Operator: Good 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 Q4 2025 UniFirst Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Steven Sintros, President and Chief Executive Officer. Please go ahead. Steven Sintros: Thank you, and good morning. I'm Steven Sintros, UniFirst's President and Chief Executive Officer. Joining me today is Shane O'Connor, Executive Vice President and Chief Financial Officer. I'd like to welcome you to UniFirst Corporation's conference call to review our fourth quarter results for fiscal year 2025. This call will be on a listen-only mode until we complete our prepared remarks. But first, a brief disclaimer. This conference call may contain forward-looking statements that reflect the company's current views with respect to future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties. The words anticipate, optimistic, believe, estimate, expect, intend, and similar expressions that indicate future events and trends identify forward-looking statements. Actual results may differ materially from those anticipated depending on a variety of risk factors. For more information, please refer to the discussion of these risk factors in our most recent Form 10-Ks and 10-Q filings with the Securities and Exchange Commission. We closed our fiscal 2025 with a solid fourth quarter that modestly exceeded our expectations in top-line performance and was in line with our expectations on the profit side. We accomplished a lot as a team in fiscal 2025 that will help strengthen and grow our company as we move forward while advancing our investments in technology and other organizational initiatives. I want to sincerely thank all our team partners who continue to always deliver for each other and our customers as we strive towards our vision of being universally recognized as the best service provider in the industry. All while living our mission of serving the people who do the hard work. We serve the people who do the hard work as they are the workforce that keeps our communities up and running. They are our existing and prospective customers as well as our own UniFirst team partners. Our mission is to enable those employees and their organizations by providing them the right products and services to do their jobs successfully. Whether that means providing uniforms, workwear, facility services, first aid and safety, clean room, or other products and services, our goal is to partner with our customers to ensure that we structure the right program, products, and services for their business and their team. All while providing an enhanced customer experience. Shane will soon share further regarding our quarterly performance. However, I would like to provide a brief overview of the fiscal year. Full-year revenues reached $2,432,000,000, representing an increase of 2.1% compared to fiscal 2024 after adjusting for last year's additional week of operations. While this level of top-line growth does not yet reflect our long-term ambitions, we are confident that we are establishing a strong foundation for elevated performance in the years to come. From an adjusted EBITDA perspective, our performance reflects solid progress in operational execution and gross margin. In fiscal 2025, both the sales and service saw improvements in key performance metrics. We installed more new business than we did in fiscal 2024, even though fiscal 2024 included an additional week of operations and the installation of a top-three account. Although fiscal 2025 started slowly, the year concluded with the highest quarter of new account installations providing momentum into fiscal 2026. We also saw notable improvements in retention in fiscal 2025 after two years of lost business. We remain confident in our ability to drive continued improvement in customer retention as key leading indicators such as NPS scores and customers under contract continue to trend positively. Recent enhancements to our growth strategy are delivering progress. Though the pace of improvement has been moderated by a softer employment environment impacting parts of our customer base. As noted over the past few quarters, reductions in wearer numbers have become more pronounced and continue to affect overall growth rates. Nonetheless, fluctuations in employment cycles are a familiar challenge to our company and we remain committed to concentrating on factors within our control to drive improved performance. During fiscal 2025, we made some important organizational changes that generated positive momentum in our overall execution during the year and more importantly, positions us well going forward for greater improvements in overall performance. Earlier this year, the organization welcomed Chief Operating Officer Kelly Rooney, a strategic addition to our leadership team. Kelly has unified our operational approach and accelerated the company's transition toward a process-oriented and results-driven operating model. She introduced the UniFirst Way, a growing collection of service-focused procedures designed to enhance the customer experience and promote operational excellence. The positive impact of her contributions is already evident as we anticipate further advancements in retention, customer growth, efficiency, and overall performance as these initiatives progress. Equally important, Kelly has successfully preserved and strengthened the core aspects of UniFirst culture, which remain a competitive advantage and essential to our long-term success. Her extensive operational expertise combined with her commitment to empowering employees aligns seamlessly with our dedication to always deliver both to our customers and our team partners. Aligning operations under Kelly has enabled the change in ownership and structure of our sales organization as well. Direct oversight over local sales resources is now moving from our operations team to the sales organization led by our Executive Vice President of Sales and Marketing, David Katz. This adjustment is intended to clarify responsibility for performance within both sales and operations with ongoing collaboration between both functions. The sales team will continue advancing toward a tiered selling model to align each sales representative's skills and experience with the most appropriate prospects. This model has already delivered measurable improvements in sales effectiveness and conversion rates. Building on this momentum, further investment, including strategic headcount growth, is planned for fiscal 2026, positioning the organization for stronger customer acquisition and overall revenue growth in the future. In addition to sales, we are making other investments impacting fiscal 2026 to ensure we can support our primary near-term goal of accelerating organic growth. For example, during 2025, we invested in strengthening our service teams, expanding both capacity and stability. These enhancements position us to drive improved performance across all key aspects of our growth model, expansion of products and services for existing customers, customer retention, and strategic pricing approaches. We will accomplish this through key initiatives targeting each of these areas of opportunity. Together, these initiatives are designed to continue improving our promise to provide a differentiated level of service and business partnering with our customers to ensure we provide all the value we can to their business. We further expect to enhance overall operating performance and create a stronger foundation for continued growth in the years ahead. Near-term profitability will also be impacted by the ongoing investments in costs related to completing the remaining phases of our technological transformation. Over the next couple of years, we expect these investments will reach their peak as we complete the implementation of our ERP system and other related efforts. These efforts are essential to building a more efficient, data-driven foundation that will enhance performance and scalability over the long term. Looking ahead, we also expect the influence of tariffs will impact our short to medium-term profitability. Through 2025, newly imposed tariffs have not had a significant impact on our results primarily because goods procured at higher costs require time to move through our supply chain and then are usually amortized over an estimated useful life. We believe we are better positioned to navigate the evolving trade situation with our efforts over the last several years to improve the diversification within our supply chain. However, the situation remains dynamic with continued developments. Depending on how the situations evolve, the impact of tariffs on fiscal 2026 could escalate from our current estimates. We continue to take patient and prudent steps to minimize the impact of any cost increases through leveraging the most advantageous sources for our products as well as by working with our customers where appropriate to share the cost increases we are seeing. As we move through fiscal 2026, we will continue to provide updates on the impact that these factors are having on our results. Beyond the near-term impact of the items I discussed, we remain highly optimistic about our ability to drive meaningful improvements in overall profitability. As we look ahead, several key areas have been identified that are expected to strengthen margins and enhance returns in the coming years. Notable examples include robust incremental profitability resulting from accelerated growth, particularly through improved customer retention and increased adoption of products and services by existing customers, which delivers higher returns compared to new account installations. Focused operational leadership committed to promoting execution, consistency, and continuous improvement in line with the UniFirst Way, optimized procurement, inventory management, and sourcing facilitated by our Oracle ERP platform, strategic rationalization of resources and infrastructure that was built to support our multiyear digital transformation, and advancing our commitment to safety and operational efficiency through the ongoing implementation of our telematics program which will soon cover our entire vehicle fleet. This initiative features both inward and outward-facing cameras in every vehicle, representing a strategic investment that delivers multiple long-term benefits. Most importantly, it enhances the safety of our team partners while also contributing to improved profitability by reducing claims, insurance costs, and boosting fuel efficiency. This is also a good example of where we are incurring costs today which will provide measurable returns for the organization in the years ahead. To summarize, we are laser-focused on our goal of driving organic growth to mid-single digits and driving meaningful EBITDA margin improvements into the high teens. We are confident over the next couple of years we can make steady progress, particularly towards those top-line goals. While fiscal 2026 is expected to reflect a temporary step back in profitability, we are resolute in our belief that investments in growth are essential to achieve our longer-term objectives and unlock a new set of opportunities in the years to come. We also believe that working through the current sourcing and cost environment will require time, patience, and thoughtful execution to ensure we are taking care of both our customers and our shareholders as we work through these changes. Although most of my comments thus far have focused on our largest segment, Uniform and Facility Service Solutions, we also continue to be excited about our First Aid and Safety Solutions segment which offers significant potential for sustained growth and enhanced profitability. Adjusted for the additional week in the previous year, we achieved close to 10% growth in fiscal 2025 and anticipate double-digit expansion again in fiscal 2026. Investments in sales and service infrastructure, along with the completion of several small acquisitions, continue to strengthen our market presence enabling us to better serve both existing UniFirst customers and prospective customers seeking these solutions. Our first aid and safety products and services play an integral role in addressing customer challenges through comprehensive integrated services. By improving route density and increasing customer adoption of our full range of services, we expect continued improvement in this profit segment's profitability. Notably, we saw incremental advancement in first aid's adjusted EBITDA during fiscal 2025, and while further growth investments will mute significant profitability improvements in fiscal 2026, we do expect the inflection point to sustain higher profits is within reach. Our balance sheet and overall financial position remain robust, supported by a strong year of operating cash flow. We intend to continue deploying cash flows and making strategic investments that enhance our company's strength and increase shareholder value. We continue to identify several promising opportunities for investment including infrastructure enhancements and automation initiatives to promote growth, efficiency, and profitability, strategic acquisitions aiming at expanding scale and improving efficiency, and increased activity in our share buyback program reflecting our confidence that investing in UniFirst stock will deliver significant long-term returns as we execute on our strategic focus on accelerated growth and sustainable profitability. In conclusion, we are confident in the company's strategic direction to deliver enhanced performance in fiscal 2026 and beyond. Our initiatives are designed to accelerate growth, strengthen profitability, and deliver a differentiated experience for our customers. By embracing our always deliver philosophy, we remain committed to creating value for all stakeholders including our employees, customers, the communities we serve, and our shareholders. With that, I'll turn the call over to Shane, who will provide more details on our outlook as well as our fourth quarter results. Shane O'Connor: Thanks, Steve. Consolidated revenues in our 2025 were $614,400,000 compared to $639,900,000 a year ago. The 2025 had one less week of operations compared to the prior year due to the timing of our fiscal calendar. Excluding the extra week in fiscal 2024, revenue growth in 2025 was approximately 3.4%. Consolidated operating income for the quarter was $49,600,000 compared to $54,000,000 in the prior year. And net income for the quarter decreased to $41,000,000 or $2.23 per diluted share from $44,600,000 or $2.39 per diluted share. Consolidated adjusted EBITDA for the quarter was $88,100,000 compared to $95,000,000 in the prior year. Our fourth quarter results or our financial results in 2025 and fiscal 2024 included $1,400,000 and $1,800,000 respectively, of costs directly attributable to our key initiatives. The effect of these items on 2025 and 2024 decreased operating income and adjusted EBITDA by $1,400,000 and $1,800,000 respectively. Net income by $1,100,000 and $1,300,000 respectively diluted EPS by $0.05 and $0.07 respectively. As announced in last week's press release, starting in 2025, we are reporting our results under three segments entitled Uniform and Facility Service Solutions, First Aid and Safety Solutions, and Other. Our primary segment, Uniform and Facility Service Solutions, now includes our clean room operations along with our industrial operating locations. Due to it having a similar business model as well as having shared customers, resources, and technologies. This new structure aligns with our management approach and resource allocation. This change will also allow investors more visibility to our Nuclear Services division which is now broken out in the Other segment and experiences more volatility on an annual and quarterly basis. For further details on this change and our segment methodology, please see the Form 8-Ks filed with the SEC on 10/17/2025. Uniform and Facility Service Solutions revenues for the quarter were $560,100,000, a decrease of 4.4% from 2024. Organic growth, which excludes acquisition-related revenues, the impact of any fluctuations in the Canadian dollar, and the impact of the extra week, was approximately 2.9%. Uniform and Facility Service Solutions organic growth rate benefited from solid new account sales and improved customer retention. In addition, we discussed last quarter that our growth was impacted by the timing of direct sales which trended lower in the third quarter compared to the same period in fiscal 2024. As expected, the timing of those direct sales contributed to our fourth-quarter growth. As did a large customer buy-up. Uniform and Facility Service Solutions operating margin decreased to 8.3% for the quarter from 8.7% in the prior year. And the segment's adjusted EBITDA margin decreased to 14.8% from 15.3%. The cost we incurred related to our key initiatives were recorded to the Uniform and Facility Service Solutions segment, which decreased its operating and adjusted EBITDA margins for 2025 and 2024 by 0.2% and 0.3%, respectively. The segment's operating and adjusted EBITDA margins in 2025 were down from 2020 which benefited from the extra week of operations. Furthermore, quarterly results reflect some of the additional investments that Steve discussed that are intended to accelerate growth, improve customer retention through operational excellence, and support our digital transformation. Energy costs for the quarter were 4% of revenues, down from 4.1% a year ago. Our First Aid and Safety segment's revenues in 2025 increased to $31,100,000 with organic growth of 12.4%, driven by the segment's van business. Operating income and adjusted EBITDA during the quarter was $500,000 and $1,500,000 respectively, as the results continue to reflect the investments we are making in the business. Revenues from our Other segment, which consists of our nuclear services business, were $23,300,000, a decrease of 5.3% from 2024 due to lower activity out of the North American nuclear operation. As we mentioned in the past, this segment's results can vary significantly from period to period due to seasonality as well as timing and profitability of nuclear reactor outages and projects. At the end of our fiscal year, we continued to reflect a solid balance sheet and financial position with no long-term debt, and cash, cash equivalents, and short-term investments totaling $209,200,000. In 2025, we generated solid cash flows from operating activities totaling $296,900,000. Capital expenditures totaled $154,300,000 as we continue to invest in our future with new facility additions, expansions, updates, and systems. During the year, we capitalized $26,400,000 related to our ongoing ERP, which consisted primarily of third-party consulting costs and capitalized internal labor costs. During fiscal 2025, we also purchased approximately 402,000 shares of common stock worth $70,900,000. At this time, we expect our full-year revenues for fiscal 2026 to be between $2,475,000,000 and $2,495,000,000. And fully diluted earnings per share will be between $6.58 and $6.98. This guidance includes $7,000,000 in costs that we expect to incur directly attributable to our key initiatives, which at this point relate primarily to our ERP project. Our guidance further assumes at the midpoint of the range, that net income is $124,100,000, consolidated operating income and adjusted EBITDA $158,800,000 and $319,700,000 respectively. Uniform and Facility Service Solutions organic revenue growth is 2.6%. Uniform and Facility Service Solutions operating and adjusted EBITDA margins are 6.6% and 13.3% respectively. Energy costs will be 4% of revenues in fiscal 2026, in line with 2025. And fiscal 2026's effective tax rate is expected to be 26%, an increase from 2025 primarily due to lower expected tax credits benefiting the upcoming year. As Steve discussed, additional investments we are making in our Uniform and Facility Service Solutions segment to accelerate growth, improve customer retention, and support our digital transformation, contributing to a margin headwind in 2026. In addition, our operating results also reflect our current expectations of the impact of tariffs. Share-based compensation increased in fiscal 2025 and a larger increase is anticipated in fiscal 2026. These increases are primarily due to a change the company made last year in our share-based grants vesting lives. As a result of the change over the next couple of years, share-based compensation expense will be elevated prior to returning to a more normalized level. As a reminder, increases in stock-based compensation impact operating income but are excluded from adjusted EBITDA. Our First Aid and Safety segment's revenues are expected to be up approximately 10% compared to 2025, as the ongoing investments in our van business are expected to drive continued double-digit growth. The segment's profitability is expected to once again be nominally positive as the results continue to reflect the investments we are making in the business. The Other segment's revenues are forecast to be down from 2025 by 16.3%. This assumes that our nuclear service business will take a step back in fiscal 2026 primarily due to the expected wind-down of a large reactor refurbishment project during the year, as well as a cyclically lower number of reactor outages in 2026. The top-line headwind will have a more meaningful impact on the profitability of the segment due to the high fixed cost nature of the nuclear services business. Although 2026 is expected to be a down year, we feel we are well-positioned to capitalize on this segment's unique capabilities as future projects become available as well as with the recent resurgence in nuclear investments in the market. We expect that our capital expenditures in 2026 will again approximate $150,000,000, to remain elevated as a percentage of revenue primarily due to higher application development investments we are making, most significantly related to the ERP implementation. For an update on our ERP initiative, our project continues to progress largely in line with our intended schedule. That has the implementation continuing through 2027. As of 08/30/2025, we had capitalized $45,300,000 related to this initiative. Midway through fiscal 2026, we expect to go live with our current release, which is focused on moving our general ledger and finance capabilities into the new Oracle Cloud solution. On deployment of the system, we will start to amortize the amount capitalized. As a result, the outlook includes an additional $4,000,000 in fiscal 2026 related to the amortization of the system. Our guidance assumes our current level of outstanding common shares and no unexpected changes generally affecting the economy. This concludes our prepared remarks, and we would now be happy to answer any questions that you might have. Operator: Thank you. As a reminder, to ask a question, please press 11 on your telephone, and wait for your name to be announced. To withdraw your question, please press 11 again. And our first question comes from Manav Patnaik of Barclays. Your line is open. Ronan Kennedy: Hi, good morning. This is Ronan Kennedy on for Manav. Thank you for taking our questions. Can I confirm please at a high level, perhaps the puts and takes to the guided 2.6% organic for Uniform Facility Services? Given the constructive commentary on positioning the company for stronger organic through better acquisition retention. Already seeing some measurable improvements in the sales effectiveness and the conversion rates. Is it that the initiatives will take time, or is there also an element of the environment and what you alluded to as the more pronounced reductions in errors and anticipating further fluctuations in the employment cycles kind of a high-level characterization of the drivers for that outlook, please. Steven Sintros: Yes. I think you covered it pretty well there, but you're right. I think the momentum we're getting on the sales and retention side. We talked about elevated or reduced retention, I should say, over a couple of years. It improved meaningfully in '25. We're projecting additional improvements in '26. That will affect 2026 and into 2027. Your comment about the economic outlook in terms of impact on wearer adds versus reductions, over the last quarter or two. Based on limited hiring. We've been negative in adds versus reductions. And effectively, you're assuming a similar situation looking at kind of employment outlook over this year. So we're not expected to get any pull and probably or are expected some headwind in that area. So that is part of the formula that leads to the current year organic growth. But as we sort of build on some of the initiatives and investments we're making that I talked about, we expect to gain momentum to put us in a position to accelerate growth in the following years as well. Ronan Kennedy: That's helpful. Thank you. And then a similar question, if I may, please, on margins. In terms of for '26, the puts and takes, in terms of the improved execution, consistency, the continuous improvement, and then other things such as the optimized procurement inventory management, offset by, I think, you know, the investments on growth retention, digital transformation, and then also the tariff impact. If you can kind of size how to think about the puts and takes from those drivers for 26 for margins, please? Steven Sintros: Sure. A couple of the items you mentioned there on better inventory management and so on. These opportunities are more ERP enabled that will tail this year a bit. But in general, on the items impacting the year most significantly, we really mentioned four things as being the primary factors. We mentioned tariffs, we mentioned sales investments, service investments, and a peaking of investments to kind of get through the digital transformation that we're going through. All of those things probably contributed reasonably evenly to the call it, you know, 80, 90 basis points impact on our margins. Now it's not a perfect characterization across all of those items, but generally it's in that range. We do expect some offsets to those things. In terms of the operational efficiency and so on. But again, we're really trying to unlock that better retention, improved selling to our existing customers. We are seeing momentum in those areas that we think can expand growth, particularly beyond this year's guidance. And so really, we view this year as a transitional year of making some of those investments. And to your point, know how this business works. As you build momentum it builds through your numbers. It doesn't sort of hit all of a sudden in a quarter, in some cases even a year. But again, those investments, sales, service getting to our digital transformation and then the tariffs, all have a pretty, you know, call it 20 basis points or so impact then offset by some of the other positives. Ronan Kennedy: Thank you. Appreciate it. Steven Sintros: Thank you. Operator: Thank you. And our next question comes from Kartik Mehta of Northcoast Research. Your line is open. Kartik Mehta: Hey. Good morning. Steve. Just maybe to add a little bit more color to the margin impact and investment. Would you like to any of those benefits occurring in the latter part of 'twenty six? Or do you think the way the investments are scheduled, it will take till '26 before you start seeing some of the benefits. Steven Sintros: Until '27. Is that what you're referring to? Kartik Mehta: Yeah. I apologize. Yeah. Till '27. Yeah. Steven Sintros: Yeah. No. Look. I mean, I think as we as we you can use sales or service I think the technology ones that are ERP enabled, which we've been talking about, for the last year or so. Are not going to emerge in 2026 as much. We're talking about going live with part of our ERP system, which is really the financial core. But as we move into more of the inventory management procurement and other things, those are really '27 and beyond benefits. In terms of the investments we're making in sales and service, those will start to build throughout the year. We've been ramping up in some of those areas. We've made good momentum in sales efficiency and retention improvements in the last year. And in my comments, I sort of talked about how some of those improvements have been offset by some of the challenges from a wearer and employment growth perspective. But part of the reason we're making those investments is to make sure we can sort of power through maybe what might be a bit of a softer employment environment in '26 and then start to see more momentum in the back half and as we get into the following year. Kartik Mehta: And so maybe this is a little bit harder, but is there a way to quantify the benefits you'll get from the investments in the sales and servicing? Part of the business. Steven Sintros: Yeah. That that that is a little tougher. I mean, I certainly from the sales and the service, it's a balance. Right? Like, we are driving toward mid-single-digit growth. When you look at our sales organization, I'll start there. It's a little bit easier to talk about. When you look at our sales organization, we continue to look at ways to drive sales effectiveness and efficiency. With the heads we have. But also recognizing as we grow and as we shift our sales organization, I alluded to this, to one where we have more of a tiered selling model with different sellers responsible for different prospects. That transition is causing us to probably run a little bit heavy on the sales side as we kind of go through that transition. We want to make sure we carry that momentum and that's why I talked about a couple of times that driving that organic growth higher is really our top priority right now. We do believe that the benefits on the margin side are there for the taking. But without that strong organic growth, which we think these investments are necessary to make sure we achieve, the profit benefits in and of themselves would be nice. But not as sustainable as if we can get this growth to the places we think we can. On the service side, similarly, it's a balance. Right? We have benefited from a more stable service organization this year, and we've talked about that a little bit from the perspective of if you go a few years before that, the overall employment environment was stronger, but also led to more challenges and employee turnover and things like that. That has stabilized. And now we're capitalizing on that stability with some additional investments to ensure that we can unlock all the different areas of growth that exist in our service team. When you think about growth, sales is obviously the one that stares you in the face. But the other three aspects of the growth model retention, selling to our existing customers, through our service team, as well as managing price in an effective way are really on our service team. We want to make sure we're strong enough there to capitalize on all of those avenues. Kartik Mehta: Perfect. I appreciate that. Thank you very much. Steven Sintros: Thank you. Operator: Thank you. And our next question comes from Tim Mulrooney of William Blair. Your line is open. Luke McFadden: Hi. Good morning. This is Luke McFadden on for Tim. Thanks for taking our questions today. My first was just on price. Shared in recent quarters that pricing remains challenging. I'm curious if you're expecting that to alleviate as we move through 2026 just maybe as customers find their footing with tariffs or is this the go-forward dynamic you're expecting to operate under for the foreseeable future here? Steven Sintros: Yeah. It's a good question, Luke. I think, you know, as you reiterated, we had gone through a couple of years of heavy inflation. Which made a more call it, productive pricing environment. That has certainly shifted and we were experiencing that. I think the environment with the tariffs as I alluded to a couple of times is still pretty fluid. I think many organizations, as we certainly are, are trying to take a patient and prudent approach particularly because the impact of our tariffs on our business sort of flow in over time. And the dynamics around changing trade regulations and trade agreements is fluid in their development seemingly every week. And so we are going to manage our approach during that. I think historically, customers have been good partners to us. When we've been good partners, and managed through periods of increasing cost. And so we do anticipate that being an avenue that we will work through. But I think in general, there also is some inflation what's the right word, inflation fatigue. Thank you, Shane. Oh, from the last few years, so it's sort of a difficult inflection point where I think a lot of people are looking to recover from the inflationary period. And now seeing some of the tariff impact I think it does make it a challenging environment in that regard. Which is why we're trying to be patient and deal with the dynamics of the situation over time. So I know it's a little bit of a long-winded answer, but I think we will be working through things and expect our partners our customers to partner with us. Luke McFadden: No. Yeah. That's great. Really helpful color. And kind of maybe building off that, more nuanced question specifically around know, client bases. I wanted to ask, about any changes you're seeing with in your manufacturing clients. I know earlier you had talked about kind of a pullback from these clients due to those tariffs. Being more impacted. But starting to see some headlines from some larger manufacturers that this group might be adjusting to and acclimating to the current situation. Has that at all aligned with what you're seeing, around this client group specifically? Steven Sintros: Yeah. Probably too nuanced at this point to really say one way or the other, Luke. I would say that looking at the broader employment trends across kind of our more traditional uniform-wearing industries, I spoke to sort of the weakness we're seeing in the hiring there. I think a lot of companies are digesting and look over the long term, is there an impact that some of these manufacturing operations digest and potentially bring some tailwind to employment back here in North America. I think that's possible. I think at this point, probably too nuanced and we're not seeing big momentum one way or the other. Luke McFadden: Understood. We'll leave it there. Thanks so much. Steven Sintros: Thank you. Operator: Thank you. And our next question comes from Jason Halk of Baird. Your line is open. Justin Hauke: It's Justin. Hi. How's up? Steven Sintros: Good morning. Operator: Good morning. I just Steven Sintros: I guess I'm still confused on the sales service investments that you're talking about for 26. That is outside of the $7,000,000 key initiative costs. Right? I mean, the key initiative is still just the ERP and the system investments you've already been making. And I just want to make sure I understand that. Steven Sintros: Yeah. Absolutely. The $7,000,000, and at this point, I think it's a good clarify that the $7,000,000 is really very specifically directly related to the ERP. And it really is from as you go through a large project like that, there are aspects that are not capitalizable. And it's really the fallout from those additional costs we're spending with some of our primary contractors for that project. Sales and service investments, I mean, is a very simplistic way of looking at it, Justin, is in both of those organizations, we're making investments a bit ahead of the projected revenue growth for next year. Designed to accelerate the growth in years to come, right? It's really finding that right balance of each of those organizations. Quite frankly, sales is the best example. You could pull back on sales and probably show similar growth next year and better profits. But that's not going to get you to the more sustainable high levels of growth that we're working to get to. But those are two completely different things, just to clarify and answer your question. Justin Hauke: Okay. Alright. That's that's that's that's helpful. And then I there was a comment you made in maybe an missed it. I apologize. But I thought you said that you guys had record new sales this year, and I guess, just confirming if if that's what you said or or if I misunderstood that. And then where that's primarily coming from? Is it is it cross sell? Is it new business? Just you know, any color on vertical maybe? Steven Sintros: Yep. The comment I made about sales is that we did exceed our total selling new business from a year ago. Even though a year ago had the extra week and a very large account installed from a national perspective. If you look at the results this year, is it the biggest year of sales ever? I'd have to go back and look been a couple of other large ones. But it is probably one of the best install years that we've had. When you look at where it's coming from, yeah, it's it's pretty broad-based. I think we continue to have some success on the national side. Over the last couple of years, we've had some good larger wins. But the bulk of the business still comes from what I'll call the local and regional business. I think that line between national and local is becoming a little more blurred and that goes back to that tiered selling approach as we have diversified our rep base to include reps in that middle ground that are specifically focused on what we'll call major accounts versus national accounts. And those are more the larger regional accounts. And I think we've had some real good success there. That helped this year's sales. And that's the organization we're continuing to build out and causing some of that cost investment. Justin Hauke: Got it. Okay. Appreciate it. Thank you. Steven Sintros: Thank you. Operator: Thank you. And as a reminder, to ask a question, please press 11. Our next question comes from Brianna Kandam of UBS. Your line is open. Good morning, Steven and Shane. This is Brianna Candom on for Josh Chan. Thanks for taking my questions. Can you provide some color on the trajectory of margins in fiscal 2026? Are you expecting to see margin expansion at any point during the year? Steven Sintros: That's a good question. We don't typically give that quarterly breakdown, particularly at this point. I think our margins and the trajectory of them will probably reasonably follow our prior patterns. One thing I will say, and I have this fully quantified but as I talk about the impact of tariffs, those probably do become a bit more pronounced in the back half of the year based on what I said. Right? You bring in more products that are at a higher cost base. They sit in your distribution center for a month or two. They start getting amortized into your merchandise and service. And so that impact of the tariffs does build throughout the year. I'd have to kind of go back to the model to give you a best answer on the rest of it. But it's something we can give you updates on as we move throughout the year for sure. Shane O'Connor: Yeah. I would I would probably I would echo that, the fact that it's probably or the a good is that it's going to follow our margin trajectory that we've historically had. Most notable difference would be that second quarter. Where the profitability is down because of a number of costs that that we incur specifically in that in that quarter. So that that would probably be the best assumption. Brianna Kandam: Thanks for that. And and then for a follow-up, you mentioned softer results in nuclear. Can you frame out what impact you expect to have in fiscal 2026? And can you remind us which quarters are more likely to see softness understanding that this is a more volatile business? Thank you. Steven Sintros: Sure. I think when you look at the nuclear business, we talk about the expected wind-down of a large project, we expect that wind-down to occur over the first quarter. Our first quarter and third quarter for that business is always seasonally the best quarter. It may be a little more pronounced in the first quarter this year because that project is still active. Other than that, we expect the normal seasonality in that business across the quarters. Brianna Kandam: Great. Thank you, and good luck in the next fiscal year. Steven Sintros: Thank you. Operator: Thank you. I'm showing no further questions at this time. I'd like to turn it back to Steven Sintros for closing remarks. Steven Sintros: Again, I'd like to thank everyone for joining us today to review our results and about our fiscal 2025 and our outlook. We look forward to speaking with you all again in January when we expect to report our first-quarter performance. Thank you and have a great day. Operator: This concludes today's conference call. Thank you for participating, and you may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the BankUnited, Inc. Third Quarter 2025 Earnings Conference Call. At this time, participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session. To ask a question during this session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Jacqueline Bravo, Corporate Secretary. Ma'am, please go ahead. Jacqueline Bravo: Thank you, Michelle. Good morning, and thank you, everyone, for joining us today for BankUnited, Inc.'s Third Quarter 2025 Results Conference Call. On the call this morning are Rajinder P. Singh, Chairman, President and CEO; Leslie N. Lunak, Chief Financial Officer; Jim Mackie, Incoming Chief Financial Officer; and Thomas M. Cornish, Chief Operating Officer. Before we start, I'd like to remind everyone that this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, that reflect the company's current views with respect to, among other things, future events and financial performance. Any forward-looking statements made during this call are based on the historical performance of the company and its subsidiaries, or on the company's current plans, estimates, and expectations. The inclusion of this forward-looking information should not be regarded as a representation by the company as the future plans, estimates, or expectations contemplated by the company will be achieved. Such forward-looking statements are subject to various risks, uncertainties, and assumptions, including those relating to the company's operations, financial results, financial condition, business prospects, growth strategy, and liquidity, including as impacted by external circumstances outside the company's direct control, such as adverse events impacting the financial services industry. The company does not undertake any obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments, or otherwise. A number of important factors could cause actual results to differ from those indicated by the forward-looking statements. These factors should not be construed as exhaustive. Information on these factors can be found in the company's Annual Report on Form 10-K for the year ended December 31, 2024, and any subsequent quarterly report on Form 10-Q or current report on Form 8-K, which are available at the SEC's website. With that, I'd like to turn the call over to Mr. Rajinder P. Singh. Rajinder P. Singh: Thank you, Jackie. Welcome, everyone. Thanks for joining us. Third quarter results were pretty solid. I will try not to get into the level of detail that Leslie and Tom will but just hit the highlights. For the quarter, earnings are up, ROA is up, EPS is up, ROE is up, margin is up, and expenses are very controlled, and credit is flat. So if I was to summarize this, this is, you know, as good a quarter as I could have expected even just a month ago. This is, you know, if there if there's oh, by the way, deposits did exactly what we've had expected them to do, almost to a T. Loans CRE was up modestly. Mortgage warehouse was up nicely. C and I was down, unfortunately, not because of production, but of the ongoing payoffs that we've been seeing. So hitting margin 3% a quarter early, I think that's sort of the highlight. We're very happy about that. We kind of hinted on that. Even on our last call, we were running further ahead. We've been running further ahead all year, so we're very happy that we're at 3%. And by no means is 3% the destination. This was just a waste of, we want to get further, and we will get further, and we'll give you more guidance in January where margin can get to. In the short term. ROA of 82 basis points is improvement over last quarter certainly a big improvement over last year. ROE of 9.5%, EPS of $0.95 I think our I checked a couple of days ago. The consensus was 88¢. So happy to beat that. Capital continues to grow. Set one is now at 12.5%, and tangible capital book value per share is up to $39.27 I think total book value per share is now over 40. The buyback is in place, though we didn't really hit much of it, or any of it, in the third quarter. We're being more opportunistic with the buyback. Rather than in the past, our buyback strategy has been by a little bit every day. This time around, we have a strategy because the amount of volatility we see in the marketplace, we think it's better to be more opportunistic and lean in hard when there is the opportunity to do so. So you'll see that play out over the course of next few months. What else am I missing? Like I said, with credit, everything was about as flat. You know, criticized, classified, NPLs, our ACL, our charge offs, everything was like when I first looked at the numbers, I I thought maybe there a typo, but it's not. Everything has been just very, very flat this quarter. So we have put in some new disclosures around NDFI, Leslie and Tom will walk you through because those are the kind of questions we're expecting. But, again, there also there is not much sensational news either. But with that, I'll turn it over to Tom, and and then Tom will turn it over to Leslie. Great, thank you, Raj. So before I dive into a little bit of details about Thomas M. Cornish: the quarter, just a couple of comments from an environment perspective that we're operating in right now. And what we kind of see as we look forward into this coming quarter and the start of next year. So Raj and I have done a number of events with major clients over the last few weeks. We've visited almost all of our offices, including the new office locations that we've been announcing. We've seen a fair amount of hiring that's really good quality hiring that we're starting to see a really good build. In those areas. So we have traditionally been an early of the year deposit grower an end of the year asset grower on the loan side. And I would expect that we would see that based upon what we're looking at right now. We've got very, very good pipelines in commercial teams across the bank. We've got very good pipelines in the real estate team. Real estate's been a good growth area for us all year long. Deposit pipelines look strong. From an operating account perspective in the fourth quarter. So I think the and when we track business sentiment of clients both on the commercial side and on the CRE side, I think businesses are feeling pretty optimistic. Right now. And we had a lengthy session for the group of CRE clients the other night, probably over 100 clients. And I think the optimism in the free markets heading into the end of this year and next year is is very strong. So we're quite optimistic about what we expect to see in the near term environment. A little bit more detail on the quarter. As Raj said, total deposits were basically flat for the quarter. Declined by $28,000,000 We did experience the normal seasonal fluctuations that we always see in the title business at this point in the year and to a lesser extent HOA and government banking, the municipal quarters generally and outgo during the third quarter. Overall, are pleased with $1,200,000,000 in non brokered deposit growth that we've had over the last twelve months We expect to see seasonality continue. In the fourth quarter, but kind of broadly across the bank, the level of market penetration, new relationships, net new relationships in each of our operating segments and geographies, is really very strong and very encouraging. On the loan side, as Raj mentioned, of course CRE and C and I loan portfolio declined by $69,000,000 for the quarter, CRE being up 61 while C and I segment declined by 130,000,000 For the quarter, we still see payoffs larger than we have historically seen, but we also see those kind of coming to a close as it relates to relationships that we may have decided to exit. We are seeing a little less utilization than we've traditionally seen on the book. I think part of that is because we are continuing to focus on relationships that tend to be more deposit rich. That's one of the reasons. But we're seeing a slight dip in utilization. But nothing that I don't think new business opportunities in production can outrun as we move forward. Mortgage warehouse grew by $83,000,000 in the quarter, which was a good quarter. And the resi franchise equipment in the municipal finance were down in line with what we have guided to in the past and what we expect Overall loan to deposit ratio, finished at 82.8% for the end of the quarter. Raj mentioned NDFI, so there's been a lot of talk about that recently. So we added some information on slide 16 in the supplemental deck about our NDFI exposure. In total, we have 1,300,000,000.0 in NDIF exposure as of ninethirtytwenty five. Which excludes mortgage warehouse lines, That's about 5% of our total loan portfolio. The largest components are B2B credit and subscription lines or subscription line outstandings as you look at the exhibit. Are almost all predominantly investment grade very high risk graded from a quality perspective portfolio. And our B2B portfolio is predominantly secured lending facilities that we have to real estate investment funds. We're not really in the kinds of larger lending to private credit that people are reading about and talking about. Our facilities are more moderate in size and generally secured by the pledges of assets and real estate collateral. That we have Substantially all of the September only one loan was on non accrual for 26,000,000 through a real estate investment fund. Brief comments on CRE exposure. Our CRE exposure totaled 6,500,000,000.0 or 28% of loans and 185% of risk based capital. Pretty consistent with the prior quarter. I think if you look at Page 11 of the supplemental deck, you can see we've got a well balanced portfolio. It's kind of interesting. It's almost $1,000,000,000 in every major asset class from retail to to industrial to office, including medical office, and to multi family when you include the construction portfolio. Which is predominantly multifamily. So very balanced overall real estate portfolio. Consistent with last quarter at September 30, the weighted average LTV of degree portfolio was 55%. Weighted average debt service coverage was one point seven seven, 49% of the portfolio was in Florida. 22% in the New York Tri State area. And these numbers are becoming a little less concentrated in those two as we do more real estate in the Atlanta market, the Southeast market and the Texas market. Over a period of time. Office exposure was down $122,000,000 or 7%. From the prior quarter end criticized classified CRE loans declined by $41,000,000 in the third quarter primarily as a result of payoffs and pay downs. We are seeing a more normalized refinancing market in the office market. I think everybody has seen positive comments about most of the office markets that we're in, particularly the New York market. In the recent months, the CMBS market, has picked up and there are more players involved in looking at new office. So that's part of the reason why the portfolio continues to trend down. We're seeing a little bit more of a normalized refinancing market out there. Pages 11 through 14 of the deck have more details on the CRE portfolio including the office segment. And with that, I think I'll turn it over to Leslie. Leslie N. Lunak: Thanks, Tom. Just one quick point. That $41,000,000 decline was specifically CRE office, not CRE overall in size and classified. So to reiterate, net income for the quarter was $71,900,000 or $0.95 per share. Net interest income was up $4,000,000 and as Raj said, we're very happy to report that the NIM was up seven basis points to 3%. So we hit that target that we had put out there for you a quarter sooner than we thought we would at the beginning of the year. To reiterate what we've been saying for a while now, margin expansion has been and will continue to be primarily driven by a change in mix on both sides of the balance sheet rather than by the Fed's actions with respect to rates. Continued execution on this has continued to remain our priority in the static balance sheet remains modestly asset sensitive. We've done some hedging to protect the margin if rates should decline more than the forward curves would suggest. And there'll be details about those in the upcoming 10 Q filing. This quarter margin expansion was mostly attributable to an improved funding Average NIDDA grew by $210,000,000 and average interest bearing liabilities declined by $526,000,000 On average, higher cost brokered deposits were smaller part of the funding mix this quarter. We did redeem the $400,000,000 of outstanding senior debt in August, that improved the funding mix from a cost perspective. The yield on that was 5.12. So that was helpful also. The average cost of interest bearing liabilities declined to three fifty two from three fifty seven, and the average cost of deposits declined by nine basis points to 2.38 The average cost of interest bearing deposits was down eight basis points to three forty And on a spot basis, the APY of deposits continued to trend down to two thirty one and with the rate cuts that we expect in the fourth quarter, that trend should continue. The average rate paid on FHLB advances did increase and that was mainly due to the continued expiration of cash flow hedges. Again, there'll be details on all of that in the the queue. The average yield on interest earning assets was flat at five thirty eight this quarter. While the yield on loans decreased marginally, the yield on securities was up a little bit to offset offset that. All of our guidance assumes two additional rate cuts in 2025, one in October and a 75% chance of another in December. On the provision and reserve, the provision this quarter was $11,000,000 The ACL to loans ratio was 93 basis points, consistent with the prior quarter end. And I'd refer you to slide 17 of the deck for a waterfall chart that talks about the changes in the ACL for the quarter. Couple of things that were driving the movement in the ACL and provision for the quarter. We had improvement in the economic forecast. Offset largely offsetting an increase in specific reserves, and the majority of that increase in specific reserves was related to one C and I credit and, to a lesser extent, one office loan. That C and I credit appears to be idiosyncratic in nature, Doesn't seem to be any kind of common thread with respect to industry. Or geography emerging there. We also had increases in certain qualitative overlays and obviously net charge offs. Reduced the reserve. Net charge offs totaled 14,700,000.0 The net charge off rate was 26 basis points. For the nine months ended September thirty and twenty seven basis points for the trailing twelve months, so pretty consistent. And those net charge offs primarily related to those same two loans. The one C and I loan and the one office loan. The commercial ACL ratio was pretty consistent with last quarter at 135. And the reserve remains a little more than double historical net charge offs over the weighted average life of the portfolio. As Raj mentioned, NPLs were essentially flat quarter over quarter, up 3,000,000. Of $136,000,000 in total CRE non accruals, 119,000,000 is office and the other 17,000,000 is New York rent regulated multifamily. NPA ratio was pretty flat quarter over quarter, 99 points this quarter compared to 98 last, excluding guaranteed SBA loans. Nothing of note to point out in non interest income or expense this quarter. I will point out, however, that year over year noninterest income for all categories combined other than lease financing, which we know is running down as expected, is up 24% as some of our commercial fee businesses start to gain traction. So I think I think that's very noticeable. We've been pointing that out. Think that 24% increase is worth noting. And that's early innings for us? Yes. Very much so. Yep. And noninterest expense remains well controlled. Couple of comments on guidance. For the fourth quarter. We expect margin for the fourth quarter to be flattish, essentially flat. Double digit NIDDA growth for the year is what we have guided to. We're at 13% year to date. And while we do expect some headwinds to that in the fourth quarter, I think we'll easily hit that double digit guidance that we gave you for the full year. Total loans likely flat year over year. And core C and I we expect year over year to end with low single digit growth, which echo Tom's comments that we do expect pretty strong core commercial loan growth in the fourth quarter. Because of some opportunistic purchasing activity, I think know, the securities portfolio will be down in Q4, but still up slightly year over year. Non interest expense, we had guided to being up mid single digits for the year. I think we'll do a little bit better than that, probably closer to the 3% area. So those remain well controlled. So with that, I will turn it over to Raj for any closing comments. Rajinder P. Singh: No. Listen, I'll I'll I'll close with where I started. And I'll just add one thing to to it, which you just alluded to, which is 20% growth in core fee income is something we're very happy about and celebrating. And and but not again, it's a it's not a destination. This is just this maybe the first or the second inning what we wanna do in the in the in that category. So we're very off you know? Optimistic about long term prospects for fee income. But like I said, I'll I'll end where we started you know, strong EPS growth ROA, ROE got better, margin got to 3% a little earlier than we thought. And the balance sheet for the most part behaved like we had expected it to, and credit remains pretty stable. So and capital continue to accrue. So the other thing I would like to say is this is Leslie's last earnings call. And I talked to her yesterday. I wanted to make sure she tear up. I am a little bit. She has been my partner as CFO for thirteen years. Yep. Thirteen years. So they've come you know, they've gone by very fast. But I just wanna thank her for her partnership helping me build what we have and not just a strong finance department, but a strong company. And the transition to Jim is going very well. It's been a couple of months. And over the next couple of weeks we will see the transition actually officially happen. Leslie will be with us through the end of the year. And will be a friend of the company forever. So I'll probably still reach out to her for advice into next year. Wherever she is traveling. But Good luck finding me. I'll find you. I'll find you. But but thank you. Thank you for everything you've done for the company and and for me specifically. Leslie N. Lunak: Thanks, Raj. And just one thing I would add to that, Seriously, and I mean this very sincerely, one of my favorite parts of this job has been interacting with and working with and getting to know all of you in the analyst and investor community. I really have enjoyed that. I've enjoyed working with each and every one of you. And that's one of the parts of this job that I'm gonna miss the most. With that, let's, turn it over, for Rajinder P. Singh: Q and A. Operator: Thank you. Star one one on your telephone and wait for your name to be announced. To withdraw your question, please press 11 again. One moment while we compile our Q and A roster. Our first question is going to come from the line of Benjamin Tyson Gerlinger with Citi. Your line is open. Please go ahead. Benjamin Tyson Gerlinger: Hi. Good morning. Leslie N. Lunak: Good morning. Thomas M. Cornish: Thanks again, Leslie, for all the help and really, really dumbing, dumbing, dumbing things Benjamin Tyson Gerlinger: down for me. Appreciate that. Not to start on credit, but I'm gonna start on credit. When you think about the the one C and I and CRE, you have a specific reserve, and you're also charging off. But the reserve was the build was bigger than the charge off. Is it fair to anticipate a potential charge off in four q or another one down the road as we wait for those two loans? Leslie N. Lunak: Yeah. I think with the one c and I credit yes, there will be an additional set few million dollars charge off in April. Related to that loan, but it's been fully reserved for And then with the other one, the office loan, the charge off has already been taken. Benjamin Tyson Gerlinger: Oh, got it. Okay. And then as we kind of finish out the year, I know you gave some preliminary guidance When you just think about the loan opportunity, when you think are clients becoming more comfortable with the environment we're working in? And are are you seeing it increased traction in Atlanta? And I know the Charlotte one is is fairly new, but just kinda think, like, longer term, is is the opportunity set getting better over because, I mean, you're arguably the most competitive area in The United States. So I'm just trying to think, like, is it risk adjusted spread that's not meeting the hurdles? Or why why are loans so kinda stuck? I get there's payoffs, but what what can we expect over the road? Rajinder P. Singh: I'll I'll have Tom answer this, but I just wanna start by saying our without being in markets outside Florida, the the opportunity set is actually bigger. And, yes, these are competitive markets, but they're also healthy growing markets. Right? That that that's a trade off. You wanna be in good markets, but good markets are competitive markets. So you know, we've chosen these markets intentionally and we'd rather be in growing markets that are healthy that are competitive than the opposite. So I'll let Tom speak specifically where we're seeing the opportunities and we are being very disciplined about pricing. Right? Because we have one eye on margin and the other on volume. So it is a it is you have to and, of course, credit is always front and center. So you have to balance all those three things But I would still say that it is the miss that we've had in specifically in C and I, is not about missing on production. It has been mostly because of a large amount of runoff Some of it that we don't control, but some that we do control, which is you know, pricing and credit and letting those things run out prudently. But, Tom, you just add some more color to it, please. Thomas M. Cornish: Yeah. I would say when you talk about opportunity in markets, Raj has asked me to find great markets that are not competitive and I've not been able to do that yet. Every every great market we're in is pretty competitive but I think if you look at the pricing piece of it for a second, I think we have held there is a lot of price compression and there is a lot of price competition When we look at pricing through the end of the third quarter, I was actually very happy with where we held spreads. At the end of the third quarter and we had some key segments that actually had a couple of basis points of spread increase for the quarter and that might not seem too exciting, but this is a game of inches. In keeping spreads at the level that we're keeping them is a big part of making the overall margin numbers we're looking at. I think the environment is is very good. I am always heavily impacted by ensuring that we're hitting overall production numbers. Because I believe as long as we're hitting overall production numbers, we will will see growth over the long run and we're also growing core relationships which are really, really critical to the bank. I think new markets we've invested a lot in new markets and we're investing even in markets that were maybe older markets that we were a bit under invested in. Like Tampa in the past, we're investing in new producers. In these markets. So I'm very optimistic about what we're going to see The environment's good. Business owners and executives are optimistic. About what they see in the economy and they're optimistic about what they see in companies. To some extent, it is a very complicated answer, but to some extent mix plays a big role in what we've seen in loan growth, particularly on the upper end of the C and I market more towards the corporate banking market. In terms of a lot of times you're in deals and you're approving deals that have delayed term funding in it, they have acquisition components in it. So your production on some of these kinds of opportunities doesn't immediately turn in the funding. It almost looks like a construction loan. In many ways. But I feel very good about what we're looking at in the very near term and in the next year in terms of business environment, where clients are, where we're positioned in the market, and actually how we're doing from a spread perspective and a competitive perspective in the in the market. I feel very, very enthused about where we are. Leslie N. Lunak: And I will reiterate on a little bit shorter term focus, Q4 has traditionally and historically been a stronger loan production quarter for us. With respect to next quarter in particular, that's another factor that comes play. We're a big Q4 player. Benjamin Tyson Gerlinger: Gotcha. Thank you again. Operator: Thank you. And one moment for our next question. Our next question comes from the line of David Rochester with Cantor. Your line is open. Please go ahead. David Rochester: Hey. Good morning, guys. And, Leslie, know I've already told you this before, but, it's been a real pleasure of the the years working with you. You've been extremely helpful. Good luck in retirements. And, Jim, looking forward to to picking it up with you. Thanks. Just Yeah. Absolutely. On expenses for next year, know you may still be working on those at this point, but is there any reason for expense growth to accelerate next year just given everything you want to do in the new markets or upgrading systems, anything like that? And then is there anything big that's coming that people should be aware of? Thanks. Leslie N. Lunak: I mean, Dave, I we're not prepared to give any 2020 guidance on this call. We'll you'll hear all that from Jim in January. But but there you know, we've talked about some investments in in teams and, you know, platforms and whatnot, but it's not like any giant rip everything out and replace kind of investment that we're looking at. But we'll give more specific guidance on the January call. David Rochester: Yep. That sounds good. I figured I'd try one last time. On deposits, if you could give an update on the title business on some of the trends this quarter, just from a customer growth perspective. Know you gave the balance of title, which is great. But be great to hear just what the customer acquisition was this quarter. I know you typically grow around 40 customers plus or minus. Yeah. And then, how how many customers do you have at this point? And and what's your outlook there? Rajinder P. Singh: It's very similar to the run rate that we've over the last many quarters. So I don't have the exact number in front of me, but I also am looking at you know, I'd I'd gotten an update on the pipeline for the next couple of quarters and very strong. So that title business is doing just great. And you know, it's total customers. You know, we have about 10% market share. If not more. Of the entire industry already. I'll leave it at that. Yeah. And that's the best we can tell because nobody publishes it to the to the perfect accuracy. But this business is growing It's growing at the same speed as it has over the last two, three years. And I don't I don't expect anything to slow down. Slow us down. Someday, hopefully, the mortgage market will come back, and that'll help us. But but David Rochester: yeah. Not counting on it. We're we're not counting on it. We're just when that happens, it happens. Yep. It'll it'll be nice. Just one last one on on capital. At this point, trading below tangible book, it's about a 6% discount right now. It seems like a great time to lean into that. Your capital levels are very strong. Just wanted to get your thoughts there. Rajinder P. Singh: Yeah. Like I said in my comments, we are being opportunistic with the buyback because there's been a a lot of volatility in the marketplace. So the 10 b five one plan we have out there is designed to take advantage of that opportunity of that volatility. David Rochester: Sounds great. Thanks, guys. Thanks again, Leslie. Rajinder P. Singh: Yep. Operator: Thank you. And one moment for our next question. Our next question will come from the line of Wood Neblett Lay with KBW. Your line is open. Please go ahead. Wood Neblett Lay: Hey. Good morning, guys. Good morning, Steve. Wanted to start on fee income. I I appreciate you sort of highlighting the core growth trends because it does get masked a little bit just with lease financing Yep. Cuts down. So that so that growth rate is pretty impressive. And I know a lot of it gets lumped into the other noninterest income bucket. So I was just curious if you could sort of break down some of those initiatives and given we're in the early innings, what are what are some what's the growth potential of those businesses? Rajinder P. Singh: Yeah. I'll tell you what is in that, like, the big buckets. Without breaking it out like dollars and cents, but things that are in there. It's lending fees, syndication fees, capital markets, interest rate derivatives, business capital markets, FX business, which is very new and very small so far, but could be much bigger. There's capital commercial card purchasing card businesses in there. All of that Effects more broadly, not just the derivatives? Yeah. Exactly. The FX, the spot business as well. So all of those are investments that were made over the last three, four years, some as recently as just twelve months ago, some about four, five years ago. But they're all different levels of their I'd say they're all in early innings, question is, what is in first inning and what is in second So there's a lot of room to grow. And, you know, probably the most exciting part of the bank right now growing that. Lease financing business absolutely is something which is being wound down you can see quarter over quarter, those numbers are coming down. And the deposit business, the deposit service charges, that's more related to DDA. Some of the benefits of growing DDA get picked up at margins, some in that fee income. But that's also growing at a healthy clip, not at 24%, but it's also growing. So overall fee income, should grow very nicely, especially once that lease finance drag is behind us, which we're getting close to. So we're excited about this contributing to profitability in a meaningful way very soon. Leslie N. Lunak: Yeah. And I would say all of those buckets that Raj mentioned are complementary to our core commercial lending and deposit businesses. Yeah. And Yeah. I and I think that's an important Rajinder P. Singh: And there's no, like, gain on sale type of stuff in there. We don't a mortgage origination business that can you know, go up and down on a on a moment's notice. It's all related to a core commercial business. You're making a loan, you sell a swap. You're moving money around internationally, you sell an FX product. You know, purchasing card, it's it's an annuity. Once some you know, once you sell it you know, it's a recurring income item. So we focus on trying to build stuff that is recurring, and it's closely tied to our core business, didn't just go out there and say, let's start something totally different and just generate fee income. So we don't have wealth management. We don't have some funky servicing income in here. It's very, very core to what we are doing with our clients. Leslie N. Lunak: And I do think the derivatives business, the FX business, the card business, the syndications business, all of those have tremendous growth potential. Yeah. Thomas M. Cornish: Yeah. Would add that, you know, if you look two years ago, we have invested a lot in syndication's capability. If you look two years ago, we were normally either in a bilateral deal where we were the only bank or we may have been in in a deal led by somebody else. Today, are leading more and more deals on both the CRE side and the corporate side, and that's what's driving the syndication revenue. And FX is brand, brand new. It's a baby business. Wood Neblett Lay: Yeah. Leslie N. Lunak: And, you know, not even make you know, making today a pretty insignificant contribution and that's one of the areas where we see the biggest growth potential in the markets we're in. Thomas M. Cornish: We're in high international business markets where you have a lot of international trade. And I think this gives us the opportunity to focus on when you're in places like Miami and New York and Atlanta and Dallas. You're in big international trade markets and having this capability allows us to not just take advantage of sort of daily transactions, but to focus on this kind of a client base that will drive that revenue. Business we can win that Leslie N. Lunak: we couldn't have won when we didn't have the capability as well. And, you know, like I said, I Jim will now be looking forward to the day when those numbers are all big enough that we have to break them out on the P and L. Right now, they're still new and they're a bit lumpy, but Wood Neblett Lay: Right. That that's really great color. I I appreciate it. And, obviously, there's a bunch of sub verticals there. But if I kind of just track, you know, compensation from a year ago, it feels like the fee income growth is is you know, growing a lot faster than the expense side. Yeah. So how do you how do you expect sort of, like, the efficiency ratio impact of those businesses. It feels like it should help drive improvements. Leslie N. Lunak: A 100%. I think all of those businesses are very efficient from that you know, from a cost revenue relationship perspective without question. And I do expect you know, operating leverage to continue. Wood Neblett Lay: Alright. That's great to hear. And then last I appreciate the updated disclosures on the NDFI lending book. I I was just interested on sort of how that portfolio has grown over the past several years. Is it been pretty stable? Or has it just any note on the growth trends over the years in that specific portfolio? Thomas M. Cornish: Yeah. I'd say there's been modest growth in it. Leslie N. Lunak: Yeah. I don't have all the numbers in front of me, but I would agree with that. I mean, there are certain segments Thomas M. Cornish: that have grown more. There are certain segments that have grown less when we look at that. We have grown more in business to business and sort of real estate underlying businesses and we've reduced substantially the portion of it that was consumer lending related over the last couple of years as we had more concerns about what was happening at consumer level. In some of those. So the overall bucket has grown modestly, but there's been some shifts within those buckets to kinda reflect portfolio strategy. Wood Neblett Lay: Got it. All right. Well, for taking my questions and congrats, Leslie, on the upcoming retirement. Really appreciate all all the help you've given given me in my seat. Thanks, Woody. Operator: Thank you. And one moment for our next question. Our next question is going to come from the line of Jared Shaw with Barclays. Your line is open. Please go ahead. Jared Shaw: Hey. Good morning, everybody, and congratulations also, Leslie. I guess, you know, maybe on on the CRE side, where's your appetite for incremental CRE here, multifamily balances? Rajinder P. Singh: Were down quarter over quarter. The office was down Jared Shaw: quarter over quarter. Where do see sort of opportunity and and, you know, within those subsectors. Thomas M. Cornish: I I would say it's in, three areas. I think the retail market has been very strong, particularly the gross anchored urban market and every market that we're in. We've seen good growth in that asset segment over the last eighteen months, twenty four months. We continue to feel good about the industrial segment, which has had good growth over the last few years. Industrial is performing well in virtually every market that we're in and even in the Northeast as well in places like New Jersey. The industrial market is very good. And multifamily has shifted a bit because we have a little bit less in stabilized lending and a little bit more in construction. When you look at the construction line, that's virtually all multifamily. Most stabilized loans are now moving to permanent markets. But we still see in all the markets that we're in, for the most part particularly in the South, you're still seeing good population migration You're seeing good development of new multifamily. And when you look at big picture data, around the cost of owning versus the cost of renting, In most of the markets we're in, we still see a very big differential in cost of owning versus cost of renting for homeowners. So we see continued growth in multifamily in virtually all of the markets that we're in. So those would be the three you know, primary points of emphasis that we would have. We we will still be open to a little bit of medical office But I would say the big three will be retail, industrial, and multifamily. Leslie N. Lunak: Yes, Jared, I think the decline in multifamily, the quarter wasn't any anything intentional or by design. It's just the way the chips fell for the quarter. Jared Shaw: Okay. Alright. Great. And then on the on the the non performers in office, I know it's relatively small numbers overall, but what drove sort of the incremental weakness that caused that that uptick in non performers? Was it Leslie N. Lunak: I I don't know. Or vacancy or rate? I don't even know if I'd really call it an incremental weakness, Jared. I I I think it was just episodic as these things work their way through the resolution process. I don't think it was a trend or, you know, if anything, looking forward over the medium term, I would expect it to trend down as opposed to up. Wouldn't make that comment necessarily for any one quarter specifically. But I don't think it was a trend or or incremental weakness. I think it was just the kind of episodic things that are going to happen as we work through that portfolio. Yeah, there's a small batch of loans Rajinder P. Singh: Yeah. If you look at the overall portfolio and look at the average debt service coverage ratio, Thomas M. Cornish: obviously, overall portfolio is performing pretty well to be over 1.5 We you know? But there are a handful of assets Rajinder P. Singh: that can move up or down, and there are situations where you, you know, you lose a Thomas M. Cornish: tenant in any one building and now you're in abatement period even if you bring in a new asset that things can shift up and down. Just step aside. Yeah. Overall, when we look at the whole portfolio, which I'm staring at the printout right now, the general trends in most markets are improving each quarter as abatements run off. That's the big driver is abatement runoff. Leslie N. Lunak: Yeah. And I would say the one we took the charge off on this quarter Jared, that's one that's been sitting in workout for a long time, and it finally just reached its final resolution. And yeah. So that that's what was going on with that one. Jared Shaw: Okay. And then just finally, going back to the capital discussion, we've seen a steady increase in capital CET1 and TCE. And I guess if we're assuming that the buyback is more limited in opportunistic, Any other uses of capital we should be thinking of, whether that's accelerated increase in dividends or a special dividend or M and A? And I guess what would be the upper end of capital where you would start to be more interested in the buyback versus opportunistic? Rajinder P. Singh: Yeah. I I I don't think my answer is gonna be very exciting. It's going to be the same that I've given in the past. Which is, yeah, you know, dividend growing dividend is a priority for us. And that usually we do early in the year, so stay tuned for that. Special dividends are not on the table We have gotten feedback from investors that has been very clear that don't do special dividends. Buyback is certainly something that is one of the tools that people use, though opportunistically. M and A has never really been a lever for us. As demonstrated by our history of building the bank organically. So my number one priority would be to grow. Right, organic growth. And but if it is not that, then buybacks and dividends but not special ones, just regular ones, Those will be the way to deploy it. Leslie N. Lunak: And the only other thing I would add to that, Jared, I know we're being a little maybe vague we're right in the thick right now of our annual business and capital planning process. Yeah. So you know, probably maybe a little bit more to say about this on the January call when we give you guidance for 2026. Jared Shaw: Yep. Okay. Thank you. Appreciate it. Operator: Thank you. And one moment for our next question. Our next question comes from the line of Timur Felixovich Braziler with Wells Fargo. Your line is open. Please go ahead. Timur Felixovich Braziler: Hi. Good morning. Rajinder P. Singh: Good morning. Leslie N. Lunak: Good morning. Timur Felixovich Braziler: Looking at you know, margin over 3%, reach on equity, if you round up, you're you're you're at that 10% level. I know you'll give us more detail as to the margin trajectory on the January call, but for the 10% return on equity, benefited a little bit this quarter, maybe from a lower provision. But is that pretty sustainable here going forward? Are are we kind of at that level where we're gonna continue grinding that higher? Or is there still going to be potentially some kind of back and forth the either provision expense or PPNR or whatever else? Rajinder P. Singh: I expect it to grow. Yeah. A 100%. Margin to grow. I expect ROA to grow, and I expect ROE to grow. Leslie N. Lunak: Yep. Absolutely. And I would say with respect to provision, I don't think it was abnormally low this quarter. Because we have largely a commercial lending base and things can be episodic, you can see some volatility quarter over quarter. But I don't know that I would characterize this quarter's provision overall as being abnormally low in terms of the range of what we could one could expect. Timur Felixovich Braziler: Okay. Got it. That's good color. A couple on credit. Just the $26,000,000 NDFI loan that was called out for the real estate investment fund. Can you just give us some more detail there? What's driving that MPL status? And then The underlying the underlying assets or office? The underlying what? Leslie N. Lunak: At real estate assets or office. That's what? The underlying That's that's the answer. And that that's the only one we have with an office concentration. Timur Felixovich Braziler: Okay. And then the bucket that b to c I guess, how big is that bucket and and just in terms of underlying collateral there, is there any exposure to the subprime consumer? Maybe just talk me through kind of what's in that bucket more broadly. Thomas M. Cornish: Yeah. The if you look at the b to c Which is in other in that chart. Which is Yeah. That portfolio is relatively small. Timur Felixovich Braziler: Okay. Timur Felixovich Braziler: Okay. Leslie N. Lunak: And then maybe the And it's been substantially reduced over the last few Timur Felixovich Braziler: Okay. Timur Felixovich Braziler: But in terms of in terms of of borrower type, is there any kind of distribution either by FICO or collateral type? Leslie N. Lunak: It's literally a handful of loans. Timur Felixovich Braziler: Okay. Yeah. We've been negative on the lending space for a couple of years, so we've been working that portfolio down is why it's not even making the chart. In that other, there are a lot of different categories, but, you know relative. All of which are are tiny. But it it it's you know, if we had done this chart, years ago or three years ago, that would have been you know, bigger and would have stood out here. Timur Felixovich Braziler: But now it's it's a rounding error. We say handful. It's only one handful. Leslie N. Lunak: Got it. Timur Felixovich Braziler: Okay. How about on the commercial side? Commercial delinquencies, you know, ticked up across the board. You had the the the charge and reserve for one c and I credit, but allowance looks like it's it's down kinda couple quarters in a row in the C and I book. Can you just maybe talk through is that an indication that maybe we're getting through some of the more kind of ringed in credits and and the outlook is is improving indicative of the reserves, or is there, maybe a chance for commercial allowance has to catch up on the back end of the year just given some the way the delinquencies? Leslie N. Lunak: So I really I'm pulling up this slide now, but I think the commercial reserve overall was pretty consistent quarter over quarter. The slight downtick in C and I was really because of charge off that we took. For the one loan. So I I don't think really there's anything changing at a high level about how we think about the reserve for that that portfolio. I think the delinquencies are exactly what you said. They're just you know, the normal ins and outs. I did actually ask for a list of them. It's you know, a couple loans and, I I don't think there's anything going on in there that feels like a trend. Timur Felixovich Braziler: Got it. And then just last for me, Raj, one of your Southeast peers made a comment last week that there's a lot more banks potentially for sale in the Southeast. Maybe just talk through that dynamic. Are you getting more inbounds? How are you just thinking about the the broader m and a environment in the Southeast? Rajinder P. Singh: I think mostly, I'm getting calls from investment bankers trying to you know, do the best that they can to to, you know, they're feeding the FOMO sentiment if anything else, like, everybody's doing a deal. Everyone's you better be talking. So that's the the sentiment I would say. It's mostly driven from innocent bankers Having said that, I will say it. There will be more deals. I've been saying that for for better part of a year that there's a pent up demand for deals. And we're seeing it, and we'll see more of it in the coming weeks, months, And as a buyer, you know where I stand. We're we're we're we're we wanna build the bank organically. We've had that stand for ever since we started the company. But any other deal that makes sense for us, we're always open to having a discussion. But we don't spend our day to day thinking about a deal, because if you do that, you're not gonna build a company. So we're focused on building, and if a deal ever comes along that makes sense, whether it's tomorrow or ten years from tomorrow, we're always here. To talk about it. Timur Felixovich Braziler: Great. Thank you. And and, Leslie, again, just echo the, congratulations on on retirement. Leslie N. Lunak: Thank you. And just a quick follow-up on your delinquency question in the c and I bucket. It's actually three loans, and they've been in the criticized classified bucket, but paying for a while. And so not unexpected. Timur Felixovich Braziler: Great. Thank you. Thomas M. Cornish: Nor nor are we seeing any trends No. With the language perspective that we're gonna Trevor doesn't like a trend. Yeah. Operator: You. And one moment for our next question. Our next question comes from the line of Jon Glenn Arfstrom with RBC Capital Markets. Your line is open. Please go ahead. Jon Glenn Arfstrom: Thanks. Good morning. Leslie N. Lunak: Good morning, John. Congrats, Leslie. Rajinder P. Singh: Thank you. Jon Glenn Arfstrom: Yep. Just a few follow ups. This can be rapid fire as well, but has your buyback appetite changed at all? Or is it just your approach and timing? Rajinder P. Singh: Our approach. Yeah. Jon Glenn Arfstrom: Okay. And and do you wanna grow the balance sheet over time, Raj? Or are we still kind of in the medium term in the loan mix shift mode? Rajinder P. Singh: I I we certainly wanna grow the balance Hold on one second. Getting weird music. Yeah. Emphatically, yes. We wanna grow the balance. Jon Glenn Arfstrom: Yes. The investment bankers calling, Raj. They are entertaining if nothing else. Okay. And then I I I think I know the answer but you touched a little on CRE optimism and some slower utilization as well. But is borrower sentiment better? Than it was a quarter ago? Is it generally improving at this point? Or is it Yeah. Kinda the same as it was a quarter ago? Thomas M. Cornish: I wouldn't necessarily compare it to quarter ago as much as I'd compare it to the beginning of the year. There was a lot more concern about tariff issues and which way the economy was going to head and would interest rates decline as much as people expected that was particularly in CRE investors' mind. So I would say clients have a more clear and optimistic view. That's getting a little bit better every day. Mhmm. Okay. Good. Jon Glenn Arfstrom: I guess, Raj, on the balance sheet growth question, I guess, back to that, we were interrupted. But medium term, do you expect to grow the balance sheet? Is it still a near term mix shift? What are your thoughts there? Yes. Rajinder P. Singh: Yes. I expect the balance sheet to grow in the medium term. I do expect the balance sheet to also keep changing the mix. Because we're not gonna stop on the resi runoff. So that'll keep happening, but I eventually expect C and I growth to overtake that runoff. Jon Glenn Arfstrom: Okay. Okay. Thanks a lot. I appreciate it. Operator: Thank you. And one moment for our next question. Our next question will come from the line of David Jason Bishop with Hovde Group. Your line is open. Please go ahead. David Jason Bishop: Yes. Thank you, and congrats again Leslie. You've enjoyed the working with you over the years, and, I I think I will cry if you tell me Isis is leaving as well. Hey. Quick follow-up question on the NDFI. Appreciate the color there. Just curious in terms of the the granularity of both the other and the b two b NDFI. Is that comparable average loan size to the rest of the commercial bank? Just curious if you have granularity there you can share. Leslie N. Lunak: Probably. I would say if Thomas M. Cornish: you looked at the NDFI portfolio, the average credit size is maybe slightly larger but not much. It's pretty comparable. Pretty comparable. You know, it's a fairly granular portfolio as you look at the entire like the overall loan portfolio is. We're generally prudent about taking very large exposures and credits. And if you look at this portfolio or the remainder of the whole, portfolio, you'll see a lot of mid sized credit exposures. You will not tend to see extremely large individual credit exposures. Leslie N. Lunak: Is it fair to say, Tom, that we're really not in the business of or we're really not concentrated in lines to private credit fund? Thomas M. Cornish: Yeah. No. No. We're not at all. I mean, our our b two b exposure would look like a small handful of BDC corporations which are very modest facilities. In size and we would have credit facilities that are predominantly to real estate investment funds largely in the Northeast. That have been long term historical clients and major depository clients. Of the institution and were secured by pledges of assets. These are not like not to say anything negative about any of the large private credit funds. But we're not in, you know, the $2,000,000,000 fund to, you know, whatever fund you wanna pick. That's an unsecured facility for, you know, supporting their general obligations. We're not in those kinds of deals. David Jason Bishop: Got it. Appreciate the color then. Tom, maybe a a a follow-up question, final question for you. You noted some of the headwinds on the some of the runoff in the C and I segments and such. Just curious, I don't know if you have a dollar basis or maybe what inning we're maybe in, in terms of runoff from some of those maybe noncore portfolio. Thanks. Thomas M. Cornish: Yeah, I'd say we're in the bottom of the ninth inning on that We're we're we're pretty much finished with the work that we wanted to do. From a rate perspective or a risk perspective or, you know, client focus perspective, we're at the very bottom of the game. David Jason Bishop: Got it. Thank you. Operator: Thank you. And one moment for our next question. Our last question will come from the line of Stephen Scouten with Piper Sandler. Your line is open. Please go ahead. Stephen Scouten: Thanks, guys. So Tom, your last comment was encouraging, kind of similar to what I was curious about. You know, thinking about you guys in, man, 2013, '14, was a strong double digit kinda loan grower. Haven't you know, loans have basically been flat since 2019. So what's kind of the spectrum of how we could think about potential loan growth if we really are kind of past all the needed remixing? Is it is it kind of a mid single digit run rate in a perfect world, or or could it be better than Rajinder P. Singh: We'll give you the exact guidance in January. Leslie N. Lunak: But expect growth. Yeah. Yeah. Yeah. Thomas M. Cornish: And I would say expect balanced growth across the segments that we're in, across geographies that we're in. And when you look at the CRE book, expect us to keep a very balanced portfolio. And as the overall size of the bank grows, decree book will grow, but it will remain reasonably in line with a 28% to 30% kind of size range. And when you look at the asset distribution that we have today, it will be evenly spread among major asset categories. We will We will not be overly indulgent in chasing any one asset category. It will be a balanced growth portfolio. Stephen Scouten: Got it. But it sounds like 2026 could kinda be the inflection point from versus what we've seen the last, you know, five or six years in terms of loan and balance sheet growth. Is that fair to say? Leslie N. Lunak: I think that's fair. Thomas M. Cornish: Yeah. And you you should remember during that five to six year time frame, we were taking the leasing portfolio from $2,000,000,000 to a couple $100,000,000 and we were taking multifamily rent regulated multi Leslie N. Lunak: family. That dropped dramatically by Thomas M. Cornish: three plus Minor matter of a global pandemic. Three plus billion dollars in we're awful happy to be sitting where we are. Yeah. Yeah. No. For sure. I think that's why the remix question is important to know if if if that process is kinda completed after all the puts and takes. And then maybe last thing for me, just you know, obviously, we we've seen a bit of an uptick in in the banking space in terms of more activism from investors. Stephen Scouten: I'm kind of curious if you've seen any incremental pushback from your around the path and the pace of progress and kind of what your response would be you know, if anyone were to get more more aggressive in terms of you know, asking you guys where where's profitability and what's really the pace of improvement to come? Leslie N. Lunak: I'll take the first part, then I'll let Raj take the second part. We have not been getting any increase level of pushback, and I will let Raj answer what we say if we did. We engage. We we hope we're we're Rajinder P. Singh: we're we're happy to engage with anyone. Yeah. And and we actually reach out and, you know, do as many conferences as we can. And try and go see investors as often as we can. So, you know, what I wanna make sure is that our investors understand the approach that we've taken and the progress that we're making, I wish I could just do, you know, give you a catalyst that tomorrow everything will improve. This is as Tom said in his earlier remarks, this is a game of inches. But that's how you build a franchise. It's not something know, this is a nuts and bolts business, one client at a time business. And but that's how you build something which sustains in value for a long time. So we're we're open to engaging with any investor who wants to talk to us. We do. And we do all the time. And when we sit down and talk to them, I rarely have I come across an investor saying, don't agree with what you're doing. Yeah. No. They've been very supportive of what we've been doing. You know? And they've asked some of the same questions Leslie N. Lunak: that you guys are asking. What's our more medium and longer term thoughts about growth? But but we haven't gotten you know, I think there's been supportive of what we've done thus far. Yeah. Stephen Scouten: Perfect. Thanks, guys. Appreciate the transparency. And, Leslie, congrats on the retirement. Leslie N. Lunak: Thank you. Thank you. Operator: Thank you. And I would now like to hand the conference back over to Rajinder P. Singh for closing remarks. Rajinder P. Singh: Thank you all for joining me and joining us And we will talk to you again minus Leslie in ninety days. I'll be listening. She'll be listening. She'll be asking questions. Yeah, know. I'm getting Q and A. Thank you so much. But if you have any more detailed questions, you know how to reach, either Jim or Leslie. Feel free to call us. Thank you. Bye. Yep. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.
Operator: To all sites on hold, appreciate your patience, and please continue to standby. Please stand by. Your program is about to begin. If you require assistance throughout the event today, please press Good morning. Thank you for joining OFG Bancorp Conference Call. My name is Chloe, and I will be your operator today. Our speakers are José Rafael Fernández, Chief Executive Officer and Chairman of the Board of Directors, Maritza Arizmendi, Chief Financial Officer, and Cesar Ortiz, Chief Risk Officer. A presentation accompanies today's remarks. It can be found on the homepage of the OFG website under the Third Quarter 2025 section. This call may feature certain forward-looking statements about management's goals, plans, and expectations. These statements are subject to risks and uncertainties, outlined in the Risk Factors section of OFG's SEC filings. Actual results may differ materially from those currently anticipated. We disclaim any obligation to update information disclosed in this call as a result of developments that occur afterwards. All lines have been placed on mute to prevent any background noise. Instructions will be given at that time. I would now like to turn the call over to Mr. Fernández. José Rafael Fernández: Good morning and thank you for joining us. We are pleased to report our third quarter results. Let's go to Page three of the presentation. We had a strong quarter with earnings per share diluted of $1.16, up 16% year over year on a 5.6% increase in total core revenue. Loans and core deposit balances increased year over year with particular growth in commercial loans, which has been a strategic focus as auto loans moderated, something we have been anticipating for a while. Performance metrics continue to be strong. Credit was solid. Capital continued to grow, and we repurchased $20.4 million of common shares. Business activity remains strong in Puerto Rico with a continued outlook for growth. Please turn to Page four. Our Digital First strategy is making significant strides expanding our positioning as leaders in banking innovation in Puerto Rico. As a result of our digital first strategy, we're gaining strong momentum in both adoption and new accounts. During the third quarter, nearly all our routine retail customer transactions were made through our digital and self-service channels. This is driven by continued year-over-year growth in digital enrollment at 8%, digital loan payments at 5%, virtual teller utilization at 25%, net new customer growth at 4.6%. All this is being enhanced by two related strategies. The first is our innovative product service offerings. Last year, we introduced the Libri account for the mass market and the Elite account for the mass affluent. Both offer reward programs unique to Puerto Rico and have been successful in attracting deposits from new and existing customers. The number of Libre new customers increased 17% year over year, 27% of Libre accounts have been opened digitally versus 19% last year. And new Libre accounts generated a 14% increase in related deposits. The Elite account continues to lead the market as a unique alternative for clients who want to maximize their financial progress. We have also enhanced our oriental biz account suite making treasury management easier and secure for small businesses driving higher new account openings and deposits. The second strategy is leveraging AI. Customers now receive tailored insights based on cash flows and payment habits, helping them monitor their budgets and access value-added tools to improve their finances directly from their mobile phones. We are providing an average of nine insights per month per account. Customer feedback has been running 93% positive. This quarter, we also launched internal initiatives to apply AI to boost efficiency across all banking operations and make it faster and easier to solve our customer questions and needs. All this has directly contributed to our increased market share in retail deposits and positions OFG for continued success in the coming years. Now here's Maritza to go over the financials in more detail. Thank you, José. Maritza Arizmendi: Let's turn to Page five to review our financial highlights. All comparisons are to the second quarter unless otherwise noted. Core revenues totaled $184 million driven by solid performance across key areas. Total interest income was $200 million, an increase of $6 million. This mainly reflects higher balances of loans and investments and $1 million from one additional business day. Total interest expense was $45 million, an increase of $3 million. This mainly reflects higher average balances of core deposits, higher average balances of wholesale funding, and a $500,000 impact from the extra business day. Total banking and financial services revenues were $29 million, a decrease of $1 million. This mainly reflects a decline in mortgage banking revenues due to a change in MSR valuation. Compared to a year ago, when we were first subject to reviews interchange fees under Derby, total banking and financial services revenues were up $3 million or 11%. Other income category was $2.2 million. This included gains from OFG Ventures investment in FinTech-focused funds. Looking at non-interest expenses, they totaled $96.5 million, up $1.7 million. This reflected a strategic investment of $1.1 million in technology, people, and process improvement. Dollars 1,100,000.0 tied to increased business activity and marketing and an $800,000 reduction in foreclosed real estate costs. Income tax expenses were $9.5 million with a tax rate of 15.53%. This reflects a benefit of $2.3 million in this great items during the quarter and an anticipated rate of 23.06% for the year. Looking at some other metrics, tangible book value was $28.92 per share. Efficiency ratio was 52%. Return on average asset was 1.69%. Return on Tangible Common Equity was 16.39%. Now let's turn to Page six to review our operational highlights. Total assets were $12.2 billion, up 7% from a year ago and steady compared to the second quarter. Average loan balances were $8 billion, up close to 2% from the second quarter. End of period loans held for investment totaled $8.1 billion. Sequentially, loans declined $63 million or 0.8%, mainly due to repayment of commercial lines of credit funded in the second quarter. Year over year, loans increased 5% reflecting our strategy to grow commercial lending in Puerto Rico and the U.S. Loan yield was 7.9%, down one basis point. New loan origination was $624 million. As José mentioned, this reflected in part moderation in auto loans that we have been anticipating and an expected easing of our auto sales after a surge of pre-tariffs purchasing in the second quarter. Year over year originations were up 9% and the commercial pipeline continues to look good. Average core deposits were $9.9 billion, up close to 1%. End of period balance $800 million decreased $76 million or 0.8%. This reflected increased retail and government balances and reduced commercial deposits. By account type, it reflected increased savings deposit and reduced demand and time deposits. Compared to the year-ago quarter, core deposits were up $287 million or 3%. Core deposit cost was 1.47%, up five basis points. Excluding public funds, the cost of deposit was 103 basis points compared to 99 basis points in the second quarter. The increase in costs mainly reflects higher average balances in savings accounts within the upper pricing tiers. Investments totaled $2.9 billion, up $151 million. This reflected purchases of $200 million of mortgage-backed securities yielding 5.32% partially offset by repayments. Cash at $740 million declined 13% reflecting the new securities purchases. Average borrowings and broker deposits totaled $769 million compared to $672 million. The aggregate rate paid was 4.11%, level with the second quarter. End of period balances were $746 million compared to $732 million. The third quarter reflected increased variable rate borrowings and decreased brokered deposits. Net interest margin was 5.24% compared to 5.31%. This quarter NIM reflected increased interest income from the securities portfolio and slightly higher cost of deposits and increased variable rate borrowings. Please turn to Page seven to review our credit quality and capital strengths. Credit quality continues to be stable. Provision for credit losses was $28.3 million, up seven reflected $13.5 million for increased loan volume. Maritza Arizmendi: $5.6 million for specific reserves on two commercial loans, the impact of two items from our annual assumptions update to $300,000 from updated repayment assumptions in commercial loan and residential mortgage portfolio. And $2.9 million for macroeconomic factors. Provision also included $1.3 million due to the auto qualitative adjustment related to the seasonal increase in early delinquency not captured in the model. Net charge-offs totaled $20 million, up $7.4 million. Total net charge-off rate was 1%, up 36 basis points sequentially. This includes $3.6 million from one of the two commercial loans mentioned before. Year over year, the net charge-off rate improved in consumer and auto portfolios. Recovery rate in mortgage. Looking at other credit metrics, the early and total delinquency rates were up from the second quarter but in line with the range over the past year. The non-performing loan rate was 1.22%. On the capital side, our CET ratio was 14.13%. Stockholders' equity totaled $1.4 billion, up $41 million. And the tangible common equity ratio increased 35 basis points to 10.55%. Now to summarize the quarter. The third quarter. Net interest income continued to grow reflecting our strategy of an increased volume of loans in particular commercial more than offsetting our lower NIM. We continue to anticipate annual loan growth in the range of 5% to 6%. While deposits were down sequentially, they increased year over year. We continue to expect annual growth driven by both retail and commercial accounts. Net interest margin was 5.32%, for the nine months. In line with our target range of 5.3% to 5.4% for the year. During the fourth quarter, we anticipate a range of 5.1% to 5.2%. Credit quality remains stable. Reflecting the strong economic environment in Puerto Rico. Third quarter, non-interest expenses were a little above our range, but we continue to anticipate that will be between $95 million to $96 million a quarter. As I mentioned, we now anticipate our effective tax rate for the year to be 23.06% compared to our previous expectation of 24.9%. Capital continued to build we anticipate continuing to buy back shares on a regular basis. Now, here's José. Thank you, Maritza. José Rafael Fernández: Please turn to Page eight. The Puerto Rico economy continues to perform well. Wages and employment remain at historically high levels. Consumer and business liquidity is solid. The economy also got a boost this summer from a surge in tourism. More importantly, new developments in onshoring confirm Puerto Rico's position as a world leader in medical device and pharmaceutical manufacturing. Turning to OFG, we will continue to pursue our differentiated unique customer-centric strategies, our Libre and Elite accounts and our Oriental commercial accounts are helping to grow core deposits and loans. Our commercial pipeline and credit trends are solid. And our risk management capabilities and asset liability management discipline are strong. Combined with the level of business activity, all this continues to position OFG well for growth and expanded market share. Having said that, we continue to be watchful regarding all the global macroeconomic and geopolitical uncertainties. As always, we could not have achieved these results without the hard work of our dedicated team members. We are thankful to them and excited about the future. With this, we end our formal presentation. Operator, let's start the Q&A. Operator: Certainly. Star two. We will take our first question from Erin Cyganovich with Truist. Your line is open. Erin Cyganovich: Good morning. Thank you. Maybe you talked a little bit about the deposits in the quarter, the costs of your deposits rose modestly. Is that driven by the competitive environment? Maybe you could talk a little bit about the dynamics impacting that? José Rafael Fernández: Yes. First of all, welcome to our call. Your first call with OFG and thank you for covering us at Truist. So appreciate that. To answer your question regarding the higher deposit cost, it's really driven by our strategy. When we talk about the Libre account, which is mass but we talk about the elite account, which is mass affluent, we really are strategically positioning ourselves to attract mass affluent clients through that account paying a little higher rate and that's kind of the short-term cost of it. But also betting on a long-term strategy of deepening that relationship with the customer. And that's how that product is structured. So what you're starting to see is a little bit of a higher cost on the savings side because we're being very successful with our strategy. We're really happy with the results. And we'll continue to leverage the added features that we're adding to our positive customers in terms of the insights and the predictive insights that we provide through AI are unique to each customer. And that's actually something that no other bank in Puerto Rico offers and it's giving us great momentum for us to attract new customers and potential for deepening. So that's a little bit of what's driving some of that higher customer cost on the savings side. Erin Cyganovich: Okay. That helps. And then in terms of the commercial loan originations, those were solid, but yet some pay downs on lines of credit. Maybe you'd talk about the dynamics for commercial and outlook for commercial loan growth ahead? José Rafael Fernández: Sure. So as Maritza pointed out in her remarks, part of what occurred in the third quarter was the repayment of some of the commercial lines that were drawn in the second quarter. So that's a little bit of what drove the balances to be to go down. But going forward, we have a very solid pipeline. We continue to see great business activity in Puerto Rico. And Oriental going after those opportunities. So we're very confident about our commercial pipeline in the fourth quarter and starting to build the 2026 pipeline also. Erin Cyganovich: All right. Thank you. José Rafael Fernández: Yes, you're welcome. Thank you. And again, welcome to the team. Erin Cyganovich: Appreciate it. Operator: We'll take our next question from Timur Braziler with Wells Fargo. Your line is open. Timur Braziler: Hi, good morning. Thanks for the question. José Rafael Fernández: Good morning, Timur. Timur Braziler: Just a follow-up on paying up for some of the savings account deposits. Can you just maybe talk us through what type of rate is being required to win some of those balances? And as you think about from a competitive landscape, where are you really targeting to take some market share here? José Rafael Fernández: Yes. So as I explained earlier a little bit, just we go after the mass market with a zero-cost account. It's a checking account and we drive the growth through our uniqueness in terms of the offering. On the Elite account, average cost is around 1% plus, let's say, 0.5% on average. Let's just say. And it's targeting the mass affluent. And again, it's us driving value add and focusing on the customer just to attract those customers to OFG and be able to deepen those relationships as we build trust with them. And that is again, paying playing very nicely for us on our strategy. And the key here is deepening, right? And how do we be are able to deepen that relationship through debit card utilization, auto loans, mortgage loans, wealth management, etcetera, which we offer throughout. And that's kind of what's driving that higher cost on the savings side. There's nothing else to it. Timur Braziler: Got it. Thanks. And then maybe two questions around credit. The first, if you could just provide any kind of additional color on the commercial loans. And then looking at that commercial portfolio, on the mainland in particular, two out of the last three quarters, we saw some pretty large charge-offs out of that portfolio. Can you just maybe speak a little bit more broadly about what you're seeing within Mainland CRE? José Rafael Fernández: Yes. So let me answer your second question first. On the Mainland portfolio, we do see some very good opportunities for us to continue to build the book and use it as a geographic diversification. We do small participations on the small and mid-sized commercial lending. With some partners and that strategy continues to play out. On the second on the first part of your question, where you've seen some charges in the last several quarters. It's part of our way of managing risk within that portfolio. And it's actually started like a couple of years ago when we started to feel pressure in the U.S. economy and felt that we should reduce some of those risks and it required some charge-offs. So that's kind of we don't see that as we see it more idiosyncratic than being more market-wide. And feel comfortable with our team and the efforts that we're doing. Now in particular to the quarter, the two commercial loans. One is a U.S. loan and one is a Puerto Rico loan. The U.S. loan it's a $5 million loan where we basically took a provision and the charge-off this quarter because we sold it. And the second loan is a Puerto Rico commercial loan. It's a company that acquired a large did a large acquisition. They're having some operating and financial weaknesses and we're proactively provisioning for that loan. So these are idiosyncratic. We see them as being market related. Timur Braziler: Okay. Thanks. And then just lastly on auto loans, the pickup in charge-offs there, it's kind of more in line where it had been 3Q, 4Q, 1Q. Is this kind of just getting back to that type of rate? I know you've been calling for origination sales down in auto for quite some time. We finally got that there. Just talk a little bit more about just broader auto trends, both from a growth standpoint and then from a credit standpoint? José Rafael Fernández: So I'll talk about the growth and I'll pass it to Cesar to talk about the credit. On the growth side, we were expecting the slowdown. I think on the auto lending side, what we're seeing is we see the bottoming coming in right now in terms of loan originations. And we might see a slightly higher in the fourth quarter. But these are more normal levels in our view. And we feel comfortable with the originating levels that we're having right now, Timur. Can you talk about the credit? Cesar Ortiz: Yes. On the charge-offs, what we're seeing is seasonal dynamics of the retail portfolios. Usually at the lowest levels of the first quarter and then gradually those statistics come up and they peak towards the fourth quarter. So what we saw quarter over quarter is a modest increase on charge-off and all the statistics. But when we compare it to last same period last year, we see a better trend. So we're optimistic, based on those comparisons. Timur Braziler: Great. Thanks for the color. José Rafael Fernández: Yep. Thank you, Timur. Thank you for the call. Operator: We will take our next question from Kelly Motta with KBW. Your line is open. Kelly Motta: Hey, good morning. Thanks for the question. José Rafael Fernández: Hi, Kelly. Kelly Motta: Maybe circling back to the Q4 margin guidance, 5.10 to 5.20. Wondering, Maritza, what that what that what the Fed funds assumption is in that given that you guys are asset sensitive? One. And then two, maybe you could talk a little bit about I think we on on the last quarter call, you were calling for some margin expansion provided we got some loan growth all else equal. Just with the margin being down kind of if there was anything in that that you know, differed from your expectations maybe three months ago that that drove that? Thank you. Maritza Arizmendi: Yes. Thank you, Kelly, for your question. And first, I think one point when we look back at the quarter and the inflows into the deposits that has been better than expected in the savings account that one of the deviation from our original estimate. So that's the answer to that. So the second part relates to what we are expecting in the fourth quarter. And the reality is that we are asset sensitive on the last cut was end of September. So we will have most of that impact during the fourth quarter. The repricing, the full effect will be on the cash and in the variable rate portfolio that we have in the commercial that is half of it. So that's why we are reviewing our guidance towards 5.1 to 5.2 and always depending on the funding mix. So right now, everything remaining equal is mostly related to the 25 basis point cuts. José Rafael Fernández: And I don't know if you realize too, but we do have inflows and outflows throughout the quarter. Of large deposits. And that is also part of what creates a little bit of the quarter volatility. But as Maritza said, fourth quarter guidance as as the one that she mentioned, $510 million to $5.20. Kelly Motta: Does that just to clarify, does that $5.10 to $5.20 contemplate any additional cuts here in fourth quarter? Maritza Arizmendi: Well, we are expecting 50 basis points cuts, but since it won't be outstanding most of the quarter, the most of this impact relates to the 25 basis point that was made late September. José Rafael Fernández: Yes, we are modeling 50 basis points reduction in Fed funds in the fourth quarter. Kelly Motta: Great. That's really helpful. Maybe one for you José. You've highlighted the investments you're making in AI to drive some efficiencies ahead and that drove expenses a bit higher. I know that's over time to generate greater revenues or recognize better improvement on the expense side. So maybe if you could talk a bit more about that and kind of, like, the cadence because I know it takes some time to realize that. So how how you strategically approaching? Thanks. José Rafael Fernández: Yep. Thank you. Not only, you know, just to clarify, we are making the investments, but we're also delivering on the features and the benefits for our customers on the value proposition that we provide and it's unique. And no other bank in Puerto Rico is actually today providing any insights to their customers based on their cash flows and their payments and whatnot. So that's a very big differentiation that we're going to continue to drive forward. Now regarding the investments that we're making in technology, we will continue to make those investments but we are also starting to see opportunities for us to bring efficiencies in our banking operations and we will be guiding you guys into the expenses of 2026 in the fourth quarter. But we're starting to see opportunities for us to bring efficiencies and be able to pass those efficiencies as part of our investment in technology. So we're very cognizant of the investments that we're making in technology, but we're equally cognizant of the importance of bringing efficiency and we're seeing it in the operating side of the bank particularly with people efficiencies. Kelly Motta: That's really helpful. Maybe last question for me. You guys were more active on the buyback this quarter. Given capital is strong, you're generating a ton of earnings, like what's the go forward outlook? Can you remind us of capital priorities here, including M&A? José Rafael Fernández: Sure. I mean, capital is strong. We feel that we have great opportunity to fund loan growth and that's our priority. But we're seeing we're going to be a lot more active on the buyback in the fourth quarter and into 2026. Because the earnings momentum that we have and the earnings power that we're having puts us in a great spot in terms of capital management. Also backed up by Puerto Rico economy that remains pretty good and it's driving infrastructure investments. We mentioned the onshoring benefits that are starting to become somewhat of a reality. It will take some time, but it's moving along. We're also seeing Puerto Rico well positioned given the current geopolitical challenges in The Caribbean and Puerto Rico being the hub for that. All those things give us confidence on the Puerto Rico economy. And certainly, it's going to drive our business forward. So from a capital management perspective, loan growth number one, buybacks and dividends number two and number three. Because we really are in a good spot right now. Kelly Motta: Great. Thank you so much for all the color. I'll step back. José Rafael Fernández: Yep. Thank you, Kelly, for your question. Operator: We'll move next to Anya Pellshaw with Hubd. Your line is open. Anya Pellshaw: Hey, guys. I'm asking questions on behalf of Brett here. I know you guys already talked about loan growth, but I was hoping you could expand on any payoff activity that might also affect commercial in the future? José Rafael Fernández: I'm sorry, I could not understand well your question. Can you repeat it? Anya Pellshaw: Yes. You've already talked about loan growth. But could you expand and talk about any payoff activity that might also affect commercial from here? José Rafael Fernández: Yep. Payoffs are hard to predict. But what we are seeing is there's usually some small seasonality on the lines of credit in the third quarter, given some clients that we have that receive funds, federal funds either for construction services or education. And they kind of draw on the line of credit in the second quarter. Then they get the funding in the third quarter and pay them off. That's usually on the third quarter. But we are not expecting any significant variability on the lines of credit in the fourth quarter. Anya Pellshaw: Thank you. And you've talked about charge-offs a little bit. But is there anything else you guys might be seeing as far as credit quality goes? José Rafael Fernández: As I mentioned, we're not seeing anything apart from a couple of idiosyncratic commercial loans that I mentioned earlier, the rest on the consumer book and the auto book we're not seeing anything that concerns us. We're seeing, again, supported by an economy that has a lot of activity. So and liquidity in the system. So not seeing anything that drives us to be concerned on credit. Anya Pellshaw: Thank you. Appreciate it. José Rafael Fernández: Yep. Thank you for your questions. Operator: At this time, there are no further questions. I will now turn the call back over to management for closing remarks. José Rafael Fernández: Thank you, operator. Thanks again to all our team members. Thank all our stakeholders. Who have listened in. Operator: My apologies. We do have a follow-up from Timur. Timur Braziler: Thank you. Got in there at the last second. José, you made a comment on new onshoring investments in Puerto Rico. Can you just maybe talk us through what those have been and maybe how that's progressed? In the Trump two point o administration? José Rafael Fernández: What we are what we know is what we hear and read in the papers. We are seeing around 10 or 11 multinationals that are already announcing investments in Puerto Rico. Some of them are medical devices, others are pharmaceuticals. We're seeing solar panels. We're seeing textiles. It's a little bit broader than what we have seen in the past. Again, it points out to Puerto Rico's positioning in terms of manufacturing that we've been for many years and is an opportunity for these companies to expand their production lines. Some of them have already operations. There's one or two that are going that have announced new operations in Puerto Rico, but the majority are existing companies that are announcing investments in additional production lines in the island. So overall, I think it's all driven because of the onshoring benefits that provide the tariffs, the tariff threats and all the tariffs that have been imposed. And Puerto Rico being a U.S. jurisdiction and being a manufacturing hub for medical devices and pharmaceuticals is just the right hub for those companies to invest further in the island. So it's something new for Puerto Rico because we haven't seen this in several decades. And for the first time, we're starting to see those announcements. So it's encouraging. And that will drive indirect benefits because there's a lot of hires with well-paid employees. It also drives indirect suppliers to these companies and all that. So it has a trickle-down effect to the economy that is pretty positive. So we're encouraged with that. Again, this is not flowing in now. But it's a great way of starting to see the light at the end of the tunnel when federal funds start to fade away and we have some private investments coming in. To us, it's a win-win. Timur Braziler: That's great color. Thank you. José Rafael Fernández: Yes. Thank you, Timur. Well, thank you everybody for the call. I appreciate everyone participating and looking forward to the fourth quarter results. Have a great day. Operator: This does conclude today's program. Thank you for your participation. You may disconnect at any time and have a wonderful afternoon.
Operator: Good day, 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.