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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: Greetings, and welcome to the Lithia Motors, Inc.'s 2025 third quarter Earnings Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance, it is now my pleasure to introduce your host, Jardon Jaramillo. Thank you. You may begin. Good morning. Thank you for joining us for our third quarter earnings call. Jardon Jaramillo: With me today are Bryan DeBoer, President and CEO; Tina Miller, Senior Vice President and CFO; and Chuck Lietz, Senior Vice President of Driveway Finance. Today's discussion may include statements about future events, financial projections, and expectations about the company's product, markets, and growth. Such statements are forward-looking and subject to risks and uncertainties that could cause actual results to materially differ from the statements made. We disclose those risks and uncertainties we deem to be material in our filings with the Securities and Exchange Commission. We urge you to carefully consider these disclosures and not to place undue reliance on forward-looking statements. We undertake no duty to update any forward-looking statements that are made as of the date of this release. Our results discussed today include references to non-GAAP financial measures. Please refer to the text of today's press release for reconciliation of comparable GAAP measures. We have also posted an updated investor presentation on our website investors.lithiadriveway.com, highlighting our third quarter results. With that, I would like to turn the call over to Bryan DeBoer, President and CEO. Bryan DeBoer: Thank you, Jardon. Good morning, and welcome to our third quarter earnings call. This quarter was all about execution at speed. We improved our same-store revenue across all business lines, focused on cost control, and deepened the integration of our adjacencies within store operations. The result is a high-quality earnings mix with more profits coming from recurring streams to create compounding cash flows. Quarterly revenue was $9.7 billion, up 4.9% year over year, and adjusted diluted EPS was $9.50, up 17%. These outcomes reflect the power of our ecosystem in combining local market leadership with a unique omnichannel platform. This quarter highlights an inflection in our performance with strong top-line growth across all business lines, highlighted by the accelerated growth in our highly profitable used vehicle and aftersales segments, demonstrating our focus on execution. We look to continue to capture market share and increase customer loyalty, finishing strong in 2025 and springboarding into 2026. Tina Miller: Our team is quickly converting our momentum into share gains, faster throughput, and sustained cost efficiency so earnings power builds from here. Our unique and diversified earnings engine is the industry while also being more durable, despite a mixed customer backdrop of normalized GPUs and customer affordability issues. The gross profit growth in our recurring aftersales department, resilient F&I attachments, and a focus on increasing market share created strong top and bottom-line results. Combined with tight SG&A control and a focus on fast-turning used cars, we have multiple levers to expand margin and cash flow in any environment. Our results reflect our momentum in building value for customers through simple, empowered, and convenient solutions. As such, same-store revenues for the quarter increased 7.7%, driven by growth in every business line. Despite continued normalization of front-end GPUs, total gross profit also increased 3.2%. Total vehicle GPU was $4,109, down $216 year over year, consistent with industry trends. Note that all vehicle operation results are on a same-store basis from this point forward. New and used volumes both contributed nicely to top-line growth. New retail revenue grew 5.5% with units up 2.5%. New GPU was $2,867, down $348 sequentially. The past few quarters of lagging domestic brand performance shifted this quarter and drove most of our year-over-year improvement. Adversely, luxury brands performed the weakest year over year and import brands were relatively flat. Our used vehicle performance continues to improve nicely, now considerably outperforming the industry with used retail revenue increases of 11.8% over last year. This was driven by a 6.3% increase in unit growth and higher average selling prices. Our value segments continue to deliver high growth with a 22.3% unit increase year over year. Well done, team Lithia. Lastly, used front-end GPU was $1,767, declining by $90 sequentially. Our strategic focus on used vehicles provides another durable layer in any cycle and affordability level. Bryan DeBoer: We will continue to prioritize high ROI used vehicles, keeping all price levels of our vehicles in our ecosystem, turning inventory efficiently, and increasing the F&I and aftersales attachment to deliver more connected and repetitive ownership experiences with our customers. F&I also continues to grow with F&I revenue up 5.7%, reflecting our continued focus and opportunity in this high throughput area. F&I per retail unit reached $1,847, up $20 year over year, which includes the impact of lower F&I from increasing penetration of EV leases and strengthening DFC penetration in the quarter. Vehicle inventory and carrying costs improved nicely with new day supply at 52 days, a decrease of 11 days sequentially. Used DSO was 46 days versus 48 in Q2. Floorplan interest expense declined $19 million year over year due to tailwinds from decreases in inventory balances and slightly lower interest rates. Aftersales continues to be the largest single driver of customer retention and earnings growth. Aftersales revenue increased 3.9% while gross profit rose a hefty 9.1%, with margins expanding to 58.4%, up 280 basis points year over year. We saw strength in all key aftersales categories with customer pay gross profit up 9.2% and warranty gross profit up 10.8%. The strong growth across both categories shows the resilience and opportunity of aftersales and illustrates the value of increasing the number and frequency of customers in our ecosystem. Cost discipline driven by productivity gains and managing performance through people is a key element of our earnings engine. North America's adjusted SG&A was flat sequentially at 64.8%, as we bent the cost curve even as GPUs continued to normalize. In The UK, our teams are responding to market conditions and regulatory labor costs that increased in the year by improving productivity and managing performance through people. Globally, we are increasing market share and growing our high-margin aftersales business as we simplify the tech stack with Pinewood AI, retire duplicative systems, and increase sales efficiency without compromising the customer experiences to drive incremental SG&A leverage. This leverage is amplified by our digital platforms, where we're unifying the customer experience across driveway.com, green cars, and our My Driveway owner portal to make shopping, financing, and service simpler and faster. The sale of our North American JV back to Pinewood AI streamlines the path to market for North America rollout, creating a single industry platform for stores and customers, reducing duplication, and increasing speed of delivery by empowering associates and customers. Together, these steps deepen retention, support SG&A leverage, and reinforce the power of our ecosystem. Driveway Finance continues to build a growing base of stable earnings, with healthy spreads and disciplined underwriting. The path to higher penetration is clear as our focus on growing market share provides us a larger funnel of high-quality loans as we move towards our long-term targets, converting retail demand into recurring stable earnings through any economic cycle. I'm happy to congratulate our DFC team and our store leaders for achieving our 15% penetration rate milestone a few quarters earlier than expected. Well done, team. Turning to capital strategy. We remain focused on investing where we can create the most shareholder value. With our stock trading at a meaningful discount, this quarter we prioritized repurchases, buying back 5.1% of our outstanding shares at prices that will drive significant long-term accretion. This quarter, we issued low-cost, well-priced bonds, increasing our flexibility without stretching risk. Looking ahead, we'll keep making incremental accretive decisions, buying back more when the discount is wide, funding selective acquisitions when returns are clear and more affordable, and continuing to invest in technology. Each element of our ecosystem is building traction and momentum. We're increasing market share and productivity, building stable earnings power in our service drives, accelerating high ROI, value autos, and scaling our adjacencies while improving SG&A leverage. Optionality in our free cash flows and expertise in M&A provides a strong foundation to grow durable EPS and cash flow in any environment. Strategic acquisitions remain a core pillar and key differentiator of our growth model. From $12.7 billion of revenue in 2019 to approaching $40 billion today, we've paired scale with consistent EPS compounding in one of the most unconsolidated retail sectors. This growth was accomplished while also building a much more diversified and profitable business model. Today, our cash engine and unique ecosystem give us the flexibility to both accelerate buybacks and continue to grow organically through exceptionally high return targeted acquisitions. We remain disciplined and U.S.-focused in our acquisitions, prioritizing stores that strengthen our network, especially in the Southeast and South Central regions, where population growth and operating profits are strongest. Alongside these additions to our network in the quarter, we reiterate our $2 billion acquisition revenue estimate for 2025, expecting a strong finish with some complementary acquisitions by year-end. Our acquisition financial hurdle rates are unchanged to acquire at 15 to 30% of revenue, or three to six times normalized EBITDA with a 15% minimum after-tax return. It is important to note that our track record over the past decade has yielded high rates of return, nearly doubling these hurdle rates. Over the long term, we continue to target $2 to $4 billion of acquired revenue annually, deploying capital where each incremental dollar compounds value per share the fastest. If seller expectations stay elevated, we'll lean harder into repurchases. When fit and value align, we move with speed to integrate accretive acquisitions. With the foundation set, and strategic design now providing meaningful tailwinds, Lithia Motors, Inc.'s differentiated model is delivering. Our long-term $2 of EPS per $1 billion of revenue targets are powered by a consistent set of levers. Lift store level productivity and throughput, expand our footprint and digital reach to grow U.S. and global market share, increase DFC penetration, reduce costs through scale efficiencies, SG&A discipline, and an optimized capital structure, and capture rising contributions from omnichannel adjacencies. Together, these levers will continue to convert momentum into durable EPS and cash flow growth. Our nationwide network of amazing people, paired with industry-leading digital tools, is driving engagement across the full ownership life cycle. Strengthening used vehicle aftersales in our captive finance business deepens customer economics and smooths out any economic cycles while inventory and network scale improve speed and choice. Operational leaders across the network are driving store and departmental towards potential, integrating adjacencies, leveraging our ecosystem, and elevating our customers' experiences. The result is a model with consistency, resilience, flexibility, and visible compounding power that will deliver accelerating shareholder value. With that, I'll turn the call over to Tina. Tina Miller: Thank you, Bryan. Our third quarter momentum is clear. Year-over-year EPS improved, financing operations delivered continued growth on solid credit and healthy spreads, and we made progress on SG&A efficiency. Strong free cash flow generation supported meaningful share repurchases, and our balance sheet remains flexible with ample liquidity to fund growth and returns. These outcomes reflect disciplined cost actions, a maturing captive finance platform, and balanced capital deployment. Taken together, they position us to continue compounding value per share. Adjusted SG&A as a percentage of gross profit was 67.9% versus 66% a year ago. On a same-store basis, SG&A was 67.1% compared with 65.1%. As Bryan mentioned, sequential SG&A in North America was essentially flat at 64.8%, which reflects the cost discipline of our teams considering the sequential decrease in total vehicle GPU of $315. Our teams continue to focus on managing costs through growing market share and gross profit as we start to lap prior comps that reflect our sixty-day cost saving last year. In The UK, macro and mixed headwinds pressured margins and labor costs, we are focused on actions to increase gross profit, including increasing market share in used autos and aftersales and reducing SG&A through efficiency and cost control. We've seen solid SG&A results as we bend the cost curve in North America, we're making improvements across our network. Particularly in The UK with specific levers raising productivity through performance management and technology, simplifying the tech stack, and retiring duplicative systems, renegotiating national vendor contracts, and automating back-office workflows. These actions should build benefits each quarter, containing the SG&A trend even if front-end GPUs continue to normalize. Driveway Finance Corporation continues to scale profitably, underscoring the differentiation of our model. Financing operations income was $19 million in the quarter, with portfolio growth offsetting seasonal trends and profitability. We achieved $52 million in financing operations for the year to date, hitting the low end of our full-year expectations a quarter early. Net interest margin of 4.6% was up 70 basis points year over year, while North America penetration reached 14.5%, up 290 basis points year over year. Our disciplined underwriting and credit management practices resulted in strong provision experience, and we have not seen meaningful changes in consumer credit trends within our portfolio. Our position at the top of the demand funnel and high-quality originations keep credit risk low and capital efficient, managed receivables now above $4.5 billion, the maturing portfolio is delivering profitability that our earnings trajectory with steady, consistent growth. Strong origination flow, improving margins, and a clear runway to increase retail penetration rates gives us confidence in the path of our long-term DFC profitability targets. Now moving on to our cash flow and balance sheet health. We reported adjusted EBITDA of $438 million in the third quarter, a 7.7% increase year over year, primarily driven by lower flooring interest. We generated $174 million of free cash flow, converting operating momentum into liquidity, that lets us both return capital and invest for growth while maintaining a strong balance sheet. This steady self-funded cash engine keeps us nimble and focused on deploying dollars where they compound value fastest. This quarter, we strengthened our capital allocation commitment to focus on share buybacks. With our share price significantly lower than intrinsic value, we allocated approximately 60% of capital deployment to share repurchases, buying back 5.1% outstanding shares at an average price of $312. So far in 2025, we have repurchased 8% of outstanding shares at an average price of $313. Slightly less than one-third of capital was deployed to high-quality acquisitions in targeted regions and the remainder to store capital expenditures, customer experience, and efficiency initiatives. Our capital allocation philosophy is to act opportunistically and with leverage in our target range and ample liquidity, accelerated share repurchases to capitalize on the meaningful disconnect between our stock price and the fundamental value of our business. This quarter, higher buyback pace allows us to compound returns for shareholders while still preserving capacity for high-return strategic acquisitions. Our strategy remains consistent while we continue to grow. Generating differentiated stable earnings from an omnichannel platform that serves the full ownership cycle. With talented teams, class-leading digital and financing capabilities, and a strong flexible balance sheet, we're scaling core operations and high-margin adjacencies with measured discipline. Our omnichannel model creates durability and flexibility as business conditions evolve. Preserving capital flexibility to deploy where returns are highest. As we move into 2026 and beyond, we will continue our focus on translating share gains and throughput into cash flows compounding value per share. This concludes our prepared remarks. With that, I'll turn the call over to the operator for questions. Operator? Operator: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press 2 to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. One moment, while we poll for questions. Our first question comes from the line of Ryan Sigdahl with Craig Hallum Capital Group. Please proceed with your question. Ryan Sigdahl: Hey. Good morning, Bryan. Tina. Nice to see the operational improvements. Wanna start with EVs. EVs were given the tax credit expiration. But it seems like Lithia Motors, Inc. cleared through most of their EV inventory or refreshed a lot of it anyways. But can you talk through kind of what you saw in the quarter, what that meant from a sales standpoint and then also GPU standpoint, and then how you think about that category going forward? Bryan DeBoer: Sure, Ryan. This is Bryan. Thanks for joining us today. Believe it or not, our electrified vehicles in the quarters were back to 43% of our total new car mix. Which was a nice number. We actually started the month of September and this is close to correct. Okay? I think we had 6,000 electrified vehicles that qualified for the $7,500 federal credit. Going into the month, and then we ended at just under 2,000. With really the only product that's remaining is a little bit of the higher price stuff. Which we spoke to in the past. The other thing that's pretty important to remember is manufacturers incentivized those cars quite nicely as well. Many of the manufacturers are carrying over those incentives plus that we they're basically replacing the $7,500 credit on top of that. To be able to keep that volume, hopefully, somewhat static. I imagine it's gonna drop a little bit, and I don't have the preliminary October results, but I would imagine it'll drop a little bit. But the important thing to remember is that the way that they push those units out the door and what the impact is of the $7,500 is basically an affordability issue because most of those vehicles were leased. So our lease penetration I think, was the highest we've ever had on a blended basis. We were almost 40% lease penetration on new vehicles, which was quite nice, which means most of those customers are coming back in the next twenty-four to thirty months or whatever the length of those terms are. So need to see that we can move the market when we need to. And I think what I would take away from it is those vehicles, those 4,000 vehicles or so that we pushed out, in September were really first-generation BEVs. A lot of first-generation BEVs, Hondas, Toyotas, Subarus, and some of the domestic products that now second-generation cars are coming either in the twenty-sixth model cycle by the end of the year or early in 2026. So we're gonna have rather than a 200-mile range car, we're gonna have three to 400-mile range car. For about the same price. Ryan Sigdahl: Yeah. It's great color, and not just consumers coming back, but like you said, the first rate of refusal for that inventory on the used side coming in the door for you guys. Wanna switch over to The UK. Appreciate the disclosure on kinda North America SG&A to gross. If I back into it, I think it implies The UK was something in the high 80 range. Understanding kind of the margin challenges there, the labor challenges, etcetera. But sounds like a lot of company-specific initiatives from cost efficiencies focusing on parts and service and used and things that The US did, you know, a decade ago. But do you see any kind of line of sight to improve market conditions there, or is it really kind of a self-help do what you can do given the Chinese mix and kind of the constraints in the market? Bryan DeBoer: No, Ryan. Great questions. And I think the insights on the labor market really happened in January. And it was twofold. One was a minimum wage, and then one was a payroll tax. And the actual impact to the organization was $20 million. For us. Okay? And they curbed about $11 million of it in the first six months, sheerly through headcount reductions and productivity gains. They've now earmarked another 8 or $9 million, but it'll get them beyond what the impact was, but there's another 3 million coming in 2026. So they're really working on how to do that. And I think even though our SG&A is higher than last year, and the market has shifted, our team's doing a pretty nice job relatively speaking of how to respond to that. And a lot of the increases I think we were up $1,010 million dollars approximately in operational net profit in parts and service. So big improvement there. Our used cars are beating the market by a little bit, and our new cars are in line with the marketplace. And I would say this, last year, we had let's see, we had three BYD stores and an MG store which are Chinese brands. This year, right now, we have seven total brand total Chinese stores with, I believe, five more that open in the next sixty days. So unlike The United States where you have to go buy and pay goodwill to be able to shift your manufacturer mix in The UK If you've got a facility and you've got good relationships, with manufacturers, you have the ability to add and respond pretty quickly to the marketplace. So we're pretty pleased about what we're seeing there and our team there is doing a really nice job responding. So we should exit the year with almost a dozen Chinese brands, which are up a pretty nice amount. Now some brands like Ford and stuff are up quite nicely as well. So you know, I think we're able to respond to the market. But like you said, it's our response. It's not necessarily coming from strength in the marketplace right now. Ryan Sigdahl: Helpful. Thanks, Bryan. Good luck. Bryan DeBoer: Thanks, Ryan. Operator: Thank you. Our next question comes from the line of Federico Merendi with Bank of America. Please proceed with your question. Federico Merendi: Good morning, everybody. We've seen some turmoil in the supply market, and today, there were more news on that front. So what my question is, Bryan, could you give us an overview of the used market and how subprime can impact it? I understand that your higher credit quality, but what are the ramifications for this the credit portfolio? Bryan DeBoer: Would love to, Federico. And I think let me speak directly to the used car market as a whole. And as a whole for Lithia Motors, Inc. not specifically to our DFC part of our organization. Okay? Because their buying behaviors are different in the marketplace. Of more of a prime type of lender. What we're seeing in the in the marketplace, in the used car marketplace, is a lot of opportunity. This is from a Lithia standpoint. In the value auto segment. Okay? And the value auto segment is our most affordable cars. And I think there's a general belief in the industry that value autos are driven off of low-quality credit. It's the exact inverse of what you think. Okay? Lower-priced vehicles are only financed about 50% of the time. Okay? Whereas a certified vehicle is typically financed 90% of the time. The reason why is that lower-priced vehicles or what we call value auto are typically quite scarce. Okay? They take money to recondition. So your price to book value is typically quite high, meaning it's difficult to finance. Okay? And I got Chuck sitting next to me here shaking his head that those are really hard cars to finance because you know, at a $15,000 car, if you've got $3 in disequity, you're now financing 20% over LTV with profitability and without down payment. So you've got some big anomalies that remember that value autos are driven off a higher credit quality customer typically saves their money or has the ability to finance at a fairly high LTV. Loan to value. Okay? So really interesting dynamic, and this is what we teach our stores and why our value autos were up 22% on a unit basis. In the quarter. And a lot of our real strong tailwinds. Other market dynamics that are important to remember. We actually achieved 74% of our used car sourcing. In the quarter was bought directly from consumers. Okay? And that's trade-in, obviously, or buying them directly off the street from consumers. Or off-lease vehicles. So on and so on. That's the highest we've had all year. Okay? Meaning, that our teams are keeping pretty much every vehicle that they can make stop, steer, and go. So you're selling a safe vehicle, but you're digging into the affordability landscape of these high-quality customers that ultimately you make pretty good money on because the vehicle is scarce. Okay? Some other little tidbits of information Our margins on used vehicles, and I believe this is more of a Lithia thing because we now have driveway and green cars to be able to spread our wings and get more eyes in front of every type of car. And this is a little better than what we've been in the past. We made 5.1, 5.2% margins on both certified and core product. Okay? As a percentage. Right? Our value auto this quarter was almost 16%. Okay? And remember, that's a lot lower-priced car So our actual annual return on our value add is a 130% cash on cash return. Okay? Massive improvement. Relative to certified and core, that's under 50%. Okay? So nice improvements. We're pretty excited about what's happening in that space. To finish that thought, Federico, remember that the mix in the market nationally in North America only 11% of used vehicles sold are one to three-year-old vehicles. Okay? Only 11%. Okay? So we spend very little of our time, and it only makes up about a fifth of our total sales. Selling those. We do it because we've got the off-lease returns, and it's easy People expect us to have those certified cars. Another quarter of the market comes from Coradas or three to eight-year-old vehicles. Okay? And we were about you know, that makes up 26% of the market which leaves over nine-year-old vehicles makes up 63% of the marketplace. Okay? That's a huge amount. Okay? That's a number that's bigger than new car star. Okay? So remember, that's where the big money is in the business, and as a new car retailer, we're top of funnel to get the first waterfall effect of trade-in and then the second waterfall effect and ultimately, that second and third trade-in, which is really that value auto that brings those nice returns that we're looking at. Hopefully, that helped, Federico. Thanks for your question. Federico Merendi: Thank you, Bryan. It was super helpful. And the second question I have is on The UK and the regulatory environment. I mean, we have seen that in The US, the EV regulatory environment has changed. And Continental Europe is it seems that they're moving to that direction. What do you think is going to happen in The UK over the next I don't know, eighteen months in the regard of EVs. Bryan DeBoer: Yeah. So, Federico, let me just reiterate for everyone that UK makes up a little over 10% of our revenue and makes up about five to 6% of our net profit. So we don't have a ton of impact coming from The UK. But what we're seeing is growth of the Chinese brand but it's not coming from the electrified segment. It's coming from their introduction of ICE vehicles, into the marketplace. So and I think when they when BYD when MG and those others first came in the market, they were electrified vehicles. Okay? Today, the reason why they're gaining market share is they're selling ICE vehicles and plug-ins. Okay? And I was there four weeks ago, okay, and traveled the marketplace. We now have a cherry franchise there as well. Looking at the product and what I see in the electrified vehicles. At the price point that they're selling them for in The UK, they have zero ability to compete in North America. Okay? And that may change, and they may have margin that they can still take out of the formula. But I looked at a cherry vehicle that was £37,000, which is an equivalent to almost $48,500 American dollars. Okay? It was an electrified vehicle that had about a 256, 57-mile range. Okay? And wouldn't hold a candle to any of the imports or the domestic cars at about $10,000 less. Okay? So we're actually not as concerned, and it's great to be able to see what's happening in The UK. Remember this also. In China and UK, they've plateaued in terms of electrified vehicle sales. They both sit at about 55%. Penetration rates. Okay? And that's the same as it was last year. Okay? So, really, the impact that's happening is coming from the ICE vehicles that I don't think that message gets out there. I do believe that the labor Party in The United Kingdom is definitely into sustainable vehicles. You know? At times, I wish we were a little bit more into that as well, but you know, that's probably now five to seven years out in in The United States. But you know, it is making it hard expense-wise. In the in The United Kingdom, and I imagine they'll embellish that further with more quotas on electrified vehicles. Federico Merendi: Thank you very much, Bryan. Bryan DeBoer: Thank you. Operator: Thank you. Our next question comes from the line of Michael Ward with Citi Research. Please proceed with your question. Michael Ward: Good morning, Bryan. How are you, sir? Bryan DeBoer: Good. Did you Two things. On the USB EV sales, you mentioned there are about 4,000 units. If I believe what I hear of the industry, the margin on those is very light. So if you take that out, you probably your overall gross new vehicle gross has been relatively flat. If I'm doing the math right, over the last couple of quarters. Is that correct? Bryan DeBoer: I believe you're correct, Tina. Do you got any insights there? I'm looking here real quickly. Tina Miller: Yeah. I think that that's a fair assumption, Mike, that the BEVs are a little bit lighter, and we're pushing those out the doors. Our manufacturers are asking us to help them meet their CAFE standards so they can ultimately continue to build other higher demand cars at the current time. Michael Ward: You know? And Yeah. Now we need better cars. It is. It is. What kind of plan? It's a much higher repeat buyer too. Right? The EVs? Like, once they people buy them, they love them. Bryan DeBoer: I think you're right about that. The big thing is is we're conquesting second and third-generation Tesla customers. Massively conquesting them. So that's a positive thing, especially in the West where Tesla penetration is high. And I would say our managers and store leaders are not as opinionated of whether they should sell an electric car plug-in hybrid, or an ICE engine. You know? They seem pretty savvy on being able to convert customers. And I think what a customer gets is a wonderful service and aftersales experience. So the life cycle of the ownership is a much different experience than maybe their first one or two experiences with the Teslas. And to be fair, most manufacturers now have competitive product in price in range, and in speed, which is something that a man that a lot of consumers are looking at that the performance elements of the car are quite excited and we're really excited about the next gen of the of the Japanese and Korean imports that are hitting in the next couple months. Okay, to really be able to start to push those vehicles out to the consumers at really affordable levels. Michael Ward: And it sounds like the profitability aspect probably bottomed with the three q. With the the rush to buy. So maybe that's just a little bit. The second thing is, you kind of alluded to that you have about it sounds like, about $1 billion in acquisitions that could close by year-end. Is that what you're seeing? And is have the multiples come back into check? And it looks like it sounds like you have a lot of opportunity there. Bryan DeBoer: Yeah. You know us. I mean, we don't use these threats on deals. We're fortunate that we've got great relationships with our manufacturer partners, allows us to fish in every possible pond. And I think in North America, we've been real fortunate to be able to find a few deals in the first March of the year. But we've got some really nice deals coming in Q4. And are pretty excited that you can find them in this type of market, especially the quality of the deals and you know, it's those long-term relationships that may take three to five years to be to be get into that point where certain things start to drive the decisioning of those sellers. And we're fortunate that they chose us to be able to be their suitors. And their successors at what we would look at as, you know, well within our 15% hurdle rates on ROI and three to six times EBITDA and on and so on. Michael Ward: Well, you're keeping that allocation plan tight. It's nice to see, so thank you. Bryan DeBoer: Thank you, Mike. Michael Ward: Appreciate it. Operator: Thank you. Our next question comes from the line of Rajat Gupta with JPMorgan. Please proceed with your question. Rajat Gupta: Great. Thanks for taking the questions. I just wanted to dig in a little bit more on The U.S. Versus UK performance. Anything more you can share in terms of, you know, how the GPUs were in US versus UK? And how was the services growth, I appreciate the SG&A comment, but just any more clarity around the profit performance would be helpful. And then, relatedly, any more color on US in terms of how you feel you're doing versus the marketplace now? Particularly given, like, historically, you've had some tough exposure in terms of your regional mix. So curious, like, how that's doing versus the broader market. And I have a quick follow-up. Thanks. Bryan DeBoer: Yeah. Sure, Raj. I think maybe I'll spend most of the time on what we think of our North American performance and where we where we sit in the marketplace. I mean, the it does look like that we massively beat on used cars. The market is showing flat. Okay? So think we sit quite nicely at 11.8% revenue increase and almost 7% unit increase. Also, you reflect back on the used-only retailers that have reported so far, remember, they were down 6%. So it speaks to the strength of our model and ability to respond to the marketplace in a little bit tougher conditions. We're pretty excited about that. Also, if you look at our aftersales business, we were up over 9% in gross profit. Okay, which was a really really nice number as well. And that's driving a lot of the profitability. In The United States. Which is great. I mean, really, the new car market was where maybe a little bit of weakness lied. Okay, because ultimately, our GPUs did come down. Even though we were up five or 6%, that also looks better than what the marketplace was. So I'd say this. I think our team is responding and you know, to be fair, last quarter, our results were kind of middle of the pack. This quarter, I believe that we're going to be we're going to look nice in terms of top-line revenue growth and we'll see tomorrow and next week of where we sit. And no matter what, I believe that we've got lots of opportunity I think our team believes there's lots of opportunity. And they're really driving towards that two to one ratio. In terms of The UK, The UK's profitability was only was down 2.4% year over year. So it wasn't that much, and it didn't affect things that much in terms of our overall numbers. So most of the $300 in GPU was truly North America. Okay, which is the sound byte. Now we did we have read some third-party information. It appears that the GPUs as a whole were down almost 16% on new vehicles. Okay, for the nation. Okay? So if that's true, we probably beat by five to 7% in terms of GPUs and obviously on the top-line side on new unit volume, we beat on a pretty good amount there as well. So all in all, I can tell you this. My team is looking forward to the challenge, and I think being back in operations and getting to know a lot of our operational middle leaders and top leaders a little bit better. We've got great people. That understand the opportunity and know it's game on and are looking for how to show that Lithia Motors, Inc. is the best operator in the segment. And most importantly, how to leverage the ecosystem and the massive amounts of acquisitions that we've added over the last five years, to really differentiate ourselves as operators. Rajat Gupta: Got it. Got it. That's helpful color. I just wanna follow-up on, you know, Mike's question around just m and a. Just a little more finer point on that. If possible. You reiterated your $2 billion target for the year. But you also noted, like, you're very return focused. So I'm curious, like, is that, like, a hard target that you wanna meet here in the fourth quarter? If not, like, would we expect that excess cash flow to go into buybacks? I'm just curious, like, know, how much of I mean, is that something you're, like, you're forcefully working towards to achieve? Know, in the fourth quarter? Thanks. Bryan DeBoer: Yeah. I think the return thresholds at any given time are balanced. But we that is a hard number. We don't flex. Okay? And we haven't had to flex even over the last three or four years where earnings were elevated and as such prices were elevated, we've always bought off normalized earnings. We have not put in the value creation that comes from the ecosystems in our return metrics still. Okay, which gives us another 50% of lift when we think about, where we stand there. So you know, there's good opportunity out there. You just gotta be able to fish in a bigger pond. To find the opportunities that are great. Okay? And I think you know, one thing that I know about how we think about our network is we do look at density. We are starting to gain market share and expand loyalty. Okay? And at about 188 miles from over 95% of the population in our in in, The United States. We sit in a nice place to be able to grow and push market share. And I think our team spent the last three or four years getting to understand the benefits of what driveway.com can do what the My Driveway consumer portal can do, and how DSC can help drive sales. While still being extremely controlled in what we buy. In DFC to be able to get there. So we're pretty pleased and you saw that we bought, what, 5.1% of our shares back in one quarter. Okay? The implications of that, we buy the whole company back in five years. Okay? That's 20 quarters. Okay? So I don't believe that can happen. And if but if the world can't see what we built, and can't see that we know what we're doing and that we had the courage and the boldness to be able to redesign our organization for a higher profit model that has lower costs okay, and can't see that the synergies that are coming from DSC and Driveway and Fleet Management businesses and Pinewood experiences and partnerships I'm not sure what they're looking at, but this management team and our board believe that we have the we have a rocket launching into space. And if people don't get it, we'll continue to buy our shares back. Rajat Gupta: Understood. Thanks for all the color, and good luck. Operator: Thank you. Our next question comes from the line of Glenn Chin with Seaport Research Partners. Please proceed with your question. Glenn Chin: Good morning, folks. Finally. Can we just scroll down a little more into your use performance? So you know, as you pointed out, very promising 6.3% same-store unit growth. I mean, that's the best number you've put up in almost four years. Can you just tell us what drove that, Bryan? Was it a change in focus? Change in process? It doesn't sound like it was a change in market. Bryan DeBoer: Well, I can tell you this. Adam did a nice job kicking off used car focus. And to be fair, that's my love. Okay? So everyone's getting the message and it's very clear that we know what we're doing. It's a matter of keeping those. And remember this, Glenn. We bought $25 billion in revenue, with not a lot of messaging to the stores over that first three or four years of ownership. That we keep every car. Okay? And we bring people into our ecosystem through affordability, and then they eventually step up to buy better or newer cars then eventually buy new cars. Okay? And that is our model. And I think I'm proud of that $25 billion that joined us to be able to clear their mind that they can actually sell these cars in a respectful way and it's a higher quality car than 16% profit margin on those value auto cars. We're gonna continue to push, though, in all three of the buckets. Okay? And I know that our team can do it, and it's truly a focus. On being able to walk, chew gum, and then eventually run at the same time. And I think our top our teams in the walk stage and we'll continue to get to jog and run on used cars. But it's the biggest area that we built the ecosystem for. Okay? And even our sustainable vehicles and used cars is looking like a quite quite nice number at almost 20%. Of our sales were electrified and used cars as well. Glenn Chin: And you've emphasized that messaging to me the last several quarters that was it was going to be a point of focus for you and the team. I mean, so so is last quarter the inflection point? Meaning, I mean, should we expect positive comps from from here on out? Is that a safe assumption? Bryan DeBoer: Absolutely. Okay. If you remember pre-COVID, Clint, pre-COVID, the company the company basically for eight years. Had high single-digit, low double-digit, increases in used cars quarter over quarter. I don't remember a quarter that we were ever below seven and a half, 8%. Okay? I mean, the market is there. Remember, we have less than 2% of the used car market. Okay? And we're top of funnel. Okay? We we built our ecosystem to be able to grow used cars out by finding the best cars reconditioning them closest to the consumer, meaning I don't got the fees to transport cars because I got 350 reconditioning locations in North America. Okay? And on top of that, 75% of our cars or three-quarters of our cars are coming directly from consumers, so we don't have to pay option fees. Okay? It's about a thousand dollar advantage over used car retailers. Okay? Important thing to remember and we're just getting started. Glenn Chin: Yep. And to your point, I mean, I'm looking at my model here. You have positive comps every quarter prior to COVID. Apologize for the noise. Back to as far as my model goes from so from 2012 through 2020, you have positive comps every quarter. Bryan DeBoer: Well, great. Well, since I've got everyone on the call, in October, we're trending up 10% in unit sales. Okay? And we've got tough comps. Okay? And we had tough comps last quarter. Because we had all the carryover units from CDK. That gave us a bigger number last year in used car sales. So we're just getting started. Glenn Chin: Very good. Thank you. Operator: Thank you. Our next question comes from the line of Christopher Bottiglieri with BNP Paribas. Please proceed with your question. Christopher Bottiglieri: Hey, guys. Thanks for taking the question. Two quick ones for me. The self-sourcing was 74%. This quarter, the highest of the year. Can you just remind us what that looked like pre-COVID? Bryan DeBoer: Actually, pre-COVID, we were low seventy percentile. The area that's grew is what we procure directly private party. Meaning, what we buy directly from a consumer, they don't actually trade in the car. And buy a car from us. And that was three or four percent if I remember pre-COVID. And that's pushing eight to ten percent in most quarters now. A lot of that is driven off of the driveway ability to be able to procure a couple thousand cars a month. Okay? And that driveway procurement is really retraining a lot of our store leaders that cars are worth more than what they think. And when they pay a little bit more on a trade-in, somehow they sell them for a little bit more. Because remember, our thesis on our design elements ten years ago is that we buy cars for about 12 to $1,500 less than what the used-only retailers. Primarily driven off what I just spoke about of reconditioning closer to the customers and closer to what car sale not having auction fees, having more of our cars come off trade-in, okay, that gives us a distinct advantage. But unfortunately, we pass it all through to the consumer, and we sell cars for about a thousand to $1,500 less than what Carvana and CarMax sell them for. Okay? And that's purely because we believe because they've got more eyes on cars and it's a pretty nice transparent selling process that they have much like what we have in Driveway. Christopher Bottiglieri: Gotcha. Okay. Yeah. That's what my I show that too, that thousand $15 gap in my price surveys and whatever believes me. But, anyway, my follow-up question would be can you just give elaborate more on the net losses as percentage of managed receivables this quarter and then also the allowance for the end of the quarter? A percentage of ending receivables. Just wanna get a sense. Sure. Great. Check with You had a, yeah, you had a really good quarter last quarter. The allowance didn't really move much. Just wondering if that's conservatism or just you're a little bit spooked by maybe some of the fringe part of the subprime market. You guys don't really play there, but just kinda curious how you're thinking about that allowance going forward. Chuck Lietz: Yeah. Chris, this is Chuck. I would say know, there's a lot of noise in the marketplace, but we're very happy how our portfolio is performing. Just a couple of quick data points. Our first payment default, which is the biggest in the of fraud and highly likely fraud, is actually down year over year. Our delinquency rates are down year over year. On a sequential basis, and our default rates, which leads to the provision that you're talking about, are also at or below at each credit segment year over year after we adjust for seasonal adjustments. So this really speaks to the power of our ecosystem. Of being top of funnel, Chris. And that this credit discipline while still increasing our originations by 33% over last year, That's pretty much, you know, key to DFC's ability to drive and hit our long-term goals of 500,000,000 of pretax profit. And as it relates back to the provision, we're very comfortable that keeping that at where we've got it should be more than enough to cover what our losses are on a go-forward basis. So thanks for your question, Chris. Operator: Thank you. Our next question comes from the line of Jeffrey Lick with Stephens Inc. Please proceed with your question. Jeffrey Lick: And the rest of the team. Good morning, Bryan. Congrats on a great quarter. Bryan, I was wondering if we could if you wouldn't mind just drilling down a little more on the new GPUs as we go forward, I think we're gonna be lapping a tougher Q4 than last year with the election bump and I think the OEMs had some dealer incentives. And you know, then we as we get into next year, I mean, we there really hasn't been any talk on this call of tariffs, which is amazing in itself. I'm just curious how you see the outlook for new GPUs as we go through Q4 and 2026? Bryan DeBoer: I think that's a good insight Jeff, that Q4 of last year did have some nice numbers in it. But to be fair, when we think about how we grow our business, it's taken us a year or so to get back to Performance Through People. And our store leaders out there are making good people decisions, and a lot of those were made in the summer and are now taking hold. Now what happens in the in the quarter? Will we'll we'll have to see. I would say this, when we look at tariffs, and the impact of those tariffs on GPUs I would say it's offset more by the competitive environment that manufacturers are all dealing with new entrants. They're dealing with new product lines. It feels like incentives are starting to creep even though they only show up slightly year over year. We feel like there's a turn there I just got from one of the Korean manufacturers this morning that dropped that dropped their APR on their two highest moving products. Down to 0% again. On top of the big rebates that they already have on the table. So I'm feeling like that could help offset some of the some of the the comparative numbers that came from the election period last year So we're feeling pretty good. I would also say that the tariffs though there is some pretty big implications and it does look like some of those may stick, I think the biggest sound bite is to whether we're at 50% or 150% tariffs on China the North American market is not gonna behave. Like Europe or the rest of the world. Okay? Knowing that those vehicles are selling for a certain price and the rest of the world, and then adding on a doubling factor to the cost of that vehicle there's no chance that I think that Chinese manufacturers are here in the next half decade at or so at scale. Okay? Someday, they may be able to do that. And the product quality that I saw was pretty good. I mean, it was it was up there with the Koreans and the Japanese, which are truly some nice high-quality vehicles. So we'll see what happens there. The good news is I believe that the Koreans and the Japanese are responding to the market nicely. They are not raising prices. I think our increases in two of the main import Japanese brands talking about 250 to $300 increases. On their main product lines like CRVs RAV fours, and so on. And these cars are now full hybrids or they're plug-in hybrids that are just better and more economical cars. So on an affordability level for a consumer, I don't think tariffs I think tariffs can be overcome by better gas mileage and lower bills at the pump or electrification. To be able to help with the affordability. Component and offset that or maybe even more than offset that. Jeffrey Lick: And just a quick follow-up. Any elaboration on the 300 basis point improvement service and parts gross margin percent, that's obviously pretty impressive. Just curious what's driving that? How sustainable you view it? Any details would be great. Bryan DeBoer: Yeah. A lot of times, Jeff, that's driven off of the mix between the 30% margin inventory or parts business. And the 65% labor businesses. And our labor portion of our business was up a lot more. But will say this, we are retaining more growth. And our manufacturer partners, because of inflation, it they are increasing our labor rates on warranty. And corresponding, we will increase our customer pay labor rates. And as a competitive environment, we're able to maintain pretty good profit margins because generally speaking, inflation and our labor costs are going up. Yeah. K? And we're able to bring that to the bottom. Mike, go ahead, Tina. I would add to that, Jeff, too. We had strong performance both in customer pay and warranty in the third quarter. And those are more heavily labor-based. And so that shift and that overall performance also drove some of the margin improvement. Tina Miller: Yeah. That outpaced by seven, 6%. Yeah. Jeffrey Lick: That's a good point. Great. Well, it was a great quarter. I'm happy for you guys, and I look forward to catching up later. Bryan DeBoer: Thanks, Jeff. Operator: Thank you. Our next question comes from the line of Bret Jordan with Jefferies. Please proceed with your question. Bret Jordan: Hey, good morning, guys. As you build out the Chinese brand mix in The UK, could you talk about the rooftop economics of BYD or an MG, the sort of seen as lower price point or lower ASP units maybe in some cases. Are you getting similar GPUs and aftersales and mix out of those brands as you do out of your legacy UK product? Bryan DeBoer: Good question, Brett. And the answer is yes, on GPUs. Are getting margins similar to what the mainstream brands are getting. Now BYD is a little bit different. They are a little bit higher priced Chinese brand. So they kinda fall in this area between The US manufacturers and the Japanese and Korean and other European mainstream manufacturers. And luxury cars. Okay? So important to remember that. Here's the difficult thing. So even though our volumes are increasing quite nicely, with the Chinese brands, there's no units in operation. Okay? So the way that we're making a difference is we're going out and doing what Lithia Motors, Inc. does best and we've got this great mainstream leader, Gary, who knows how to sell used cars. In fact, I probably could learn some things from Gary because he's selling almost three to one used to new. In the mainstream or Evans Hallsha brand. In The United Kingdom. So a lot of our business model, when we think about adding Chinese or opening those points, is in the interim, why you build your units and operations, which is what drives your aftersales business, you've gotta sell used cars. And he's doing a nice job being able to quickly get to those two, three, and four to one one ratios. Keep it up. It's neat. It's neat to be able to see that in set the buy bar maybe even a little higher for our North American store stores because ultimately, I'll tell you this, we sit at 1.2 used to new ratio on in in North America. The marketplace is at 2.5 to one. Okay? Just to put in in reference of what we're looking at, that's what we believe the potential is. Okay? And in The UK, it's a little bit better use to new ratio, and Gary gets all of it. Okay? Which tells us that we should be able to get that. So Gary and Neil in The UK, big shout out to you guys. Bret Jordan: Okay. And then a question on aftersales, the growth rate. Could you parse that out between price and car count? You know, how much is, just same service price inflation versus incremental traffic in the bay? And I guess, how do you see the price on a year-over-year basis in the fourth quarter on a same service basis? Are you seeing tariff impact or labor inflation flowing through? Bryan DeBoer: Good question, Brett. A little bit more than half is coming from price increases. With a little less than half coming from, from customer count. And RO. Bret Jordan: Okay. And we continue to sort of see inflation being a comp driver at the end of the year, or we seen most of it play out already? Guess, what what how long is the tailwind from price? Bryan DeBoer: I think that the way that we go to market and the way that my presidents and vice presidents are thinking about things, is we've gotta grow our RO count. And you know, our top performing or what we call our Lithia Partners Group stores they somehow seem to be able to do both, and they're carrying a lot of that 9.1% year-over-year same-store sales gross profit growth. But they're also carrying along with it most of the improvements in top-line growth. Okay? And that shouldn't be that way. Our Northeast and Northwest regions are a little bit softer in terms of RO count. But we're challenging them, and I think they see the opportunity. And there could be some nice tailwinds there that that that that come into play as you know, we really start to help people see a more bright future on growing your customer base. Bret Jordan: Great. Thank you. Bryan DeBoer: Thanks, Brett. Operator: Thank you. Our next question comes from the line of Daniela Haigian with Morgan Stanley. Please proceed with your question. Daniela Haigian: Thanks. Just squeezing one in here on forward demand. Bryan. As we pass through the peak tariff fears from April. Excuse me. And now we're seeing OEMs revise up their guidances. It kinda clears the bar. On this, and I appreciate the color on sales tracking 10% higher in October. Just wanted to get your commentary on how you're seeing pricing on these new model year vehicles and how you're thinking about demand going into '26? Bryan DeBoer: Sure. Sure. Daniela, real quick, the 10% was used vehicle. Volume. Okay. Okay? Thank you. So just to clarify that to make sure that was clear. And that's an early October number where two-thirds of the way through the month. In terms of peak tariff, I think when we think about the tariff impact, I think we're through most of the impact. I think that it's going to get better. I think the manufacturers need to know how stable the ground is that they stand on. And then determine what their three to five-year product cycle is going to look like. To decide where they're gonna ultimately build those cars. Okay? And I think we sit in a nice position as new car retailers and we have to remember this. We're a new car retailer. But less than a quarter of our profitability is derived from new cars. Okay? Remember that 61% of our profitability is coming from aftersales business. I think that's why we spend a lot of time in aftersales. New cars is somewhat a function of your marketplace. Okay, and what your manufacturer's incentives are. So as a retailer, I'd love to be able to say that I could take a bunch of market share in new We, to some extent, we can be plus or minus 10%. But outside of that, our manufacturers and our mixed base is what dictates that. In our geographic base. So, hopefully, that helps you a little bit, Daniela. You have a follow-up on that? Daniela Haigian: Thanks. No. That's alright. We went through a lot of topics here. Bryan DeBoer: Great. Thanks for your question. Operator: Thank you. Our next question comes from the line of Michael Albanese with Benchmark Company. Please proceed with your question. Michael Albanese: Yeah. Hey, guys. Thanks for taking my question. Hung with you till the end here. Just a quick one circling back on used, specifically the value autos. Just given what you said about the, you know, typical credit quality of a buyer there and generally how much is financed, Are the value autos or value auto demand inversely or, you know, correlated with consumer affordability. Or maybe a better way to ask the question is, if new and used again a question. Go ahead. Bryan DeBoer: Go ahead. That's a yes on the first question. Go ahead and balance sheet. Yeah. Okay. Michael Albanese: And to take that a step further, I guess, and maybe a better way I thought to ask it was you know, if the gap between new and used pricing kinda widens and there is a trade down, you know, where does value fit within that? And you know, is there a segment within your mix, CPO core value that generally sees a pickup in demand or, you know, does it depend on a host of different variables at any given time? Bryan DeBoer: Yeah. I would say that value auto vehicles have very little impact caused by new vehicles. It's too different of customer. Okay? It's too different levels of affordability. So definitely certified vehicles and some of the you know, I would say one to five-year-old vehicles. Have an impact based off new vehicle pricing. Tariffs, so on and so on. But value auto is so far downstream. Remember this, value auto, that 63% of the market that I told you is based off what, 41 million units. Okay. 42 million units, something like that. You're talking about 24 million units or a 160% of what your new car SAAR is in that segment. It is a bulletproof segment. Okay? It's where it's where probably most of the money is made in used car. Okay? And it's something that everyone can do. As a new car retailer or as a used car retailer. Keep the car that you take in on trade is the way to do it. I mean, we get 80, 90% of those cars from trade-in. Okay? So it's a very stable thing. But again, we have a third of our stores that probably don't keep those cars. You know? We've gotta help them understand that you're making 16% margin, and you know, yeah, I get it that you make a little bit less in f and I. But as a whole, the returns are massively better than any other segment. Michael Albanese: So does it come down to essentially sourcing being able to source these vehicles? And hold on to them and right? Like, what's driving demand specifically above the office? It's sourcing, but remember, the sourcing is right under your nose. Bryan DeBoer: It's just the it's it's it's a mindset of your sales department leaders and then a mindset of your service department leaders that they can make this car stop, steer, and go and that they can lower the expectations that I don't just sell new cars. Okay? And then you've got a secondary problem. Once those two people decide, then your salespeople and your technicians are gonna convince you you shouldn't do it. Why? Because they get comebacks. Okay? Meaning that there's a car that breaks forty-five days later or four days later, and they're trying to keep a car deal together rather than just take the person out of the car sell them another car, okay, and go fix that car so it's an easy experience for your consumer. Okay? So that sets you back. So we've always said that it typically takes a couple years to get people on that treadmill. To be able to keep all different all three of our categories. Okay? And I would say this, most of our growth was growing in value. It shouldn't. It should also be growing in certified. It should also be growing in late model conquest vehicles. And it should be growing in core product. Okay? All three of those buckets have the potential to grow in a double-digit manner, and we'll get those there. Michael Albanese: Do you generally see if you have a customer in value over time move up into core or CPO? Or You do. I think there's half of the customers that are always gonna buy a car that's depreciated and that they can buy that's a value. Okay? And they don't care that the car is scarce, and they don't really care what Kelley Blue Book says or what Black Book says. They just buy the card that's $10,000 because they're using it for transportation. They're not using it for status. The other half of the cars are using it as a stepping stone. A lot of parents will pay cash for cars for their kids. And it's an entry-level car. And then, hopefully, next time they're buying a certified used car and maybe eventually they buy new cars. So the waterfall, believe it or not, goes both ways. That as a new car retail abreth we look at affordability and how do we keep everyone in the Lithia Motors, Inc. life cycle at every affordability level. And I think as you see us move through economic cycles, affordability will shine and reign supreme at Lithia Motors, Inc. Because of our ability and the behavioral mindset of most of our stores today that understand that we can walk and chew gum at the same time. Meaning, new car, sell core product, sell value auto products, and then sell a certified product. Michael Albanese: Got it. Thank you, Bryan. Nice quarter, guys. Bryan DeBoer: Appreciate it. Operator: Thank you. Our next question comes from the line of Mark Jordan with Goldman Sachs. Please proceed with your question. Mark Jordan: Hey. Thanks for fitting me in here. Just a quick one on m and a. Bryan, you mentioned you don't buy dealerships based on expected value creation. But can you talk about what the drivers of value creation are when you bring a dealer into your system? You know, whether it be instituting best practices, putting inventory on the driveway platform, or maybe just consolidating systems. What are the drivers there that you expect when you bring a new dealership on? Bryan DeBoer: Sure. So, typically, the way that we get the returns that we're expecting and it's typically two to three times lift in net profitability, about a quarter of it comes automatically from scale synergies, lower interest rate costs, better vendor contracts, getting consolidation of vendors where you've got duplication even within the store that you buy, and that comes in the first, I would say, six months. Okay? The other two key drivers and like I said, they support each other. Is used vehicles. I mean, it's the ability to sell late model conquest cars, meaning if you're a Honda store, you sell Toyotas and you sell Fords too. Okay? Most new car dealers get spoiled off of selling the cars that they sell new. Okay? I believe our current run rates on all the stores that we bought it's somewhere north of two-thirds of the cars that they sell when we buy them. With it that they sell used or the same like model that they sell new. Okay? And for reference, when a store is mature at Lithia Motors, Inc., it's a sixty-forty split the other way. Meaning we sell about 40% of the brand we sell new We sell about 60% of Conquest vehicles. Okay? A lot of that comes from the ability to keep an over five-year-old car. Okay? Because of those that alignment of your consumer your service advisers, your salespeople, your other personnel that it's just a mindset that you have to get past. Okay? Alongside that all also, is this new car retailers, it's really easy to get spoiled off of maintenance in service. And off of warranty work. It makes great profit. Okay? So why do warranty work after the sale? It's more difficult. It takes more time. You've gotta do diagnostic. There's drivability issues, so on and so on. Okay? Well, we sell non-OEM parts for a reason. Keep our customers at an affordable level post-warranty period. Okay? So that's the other big lift that we get. Believe it or not, both of those things help embellish the life cycle of a customer which helps us sell more new cars as well. Okay? And then we can get into the gross profit part of the equation and if you've got more eyeballs looking at cars when we've got 10 million eyeballs looking at an average car, And when we buy a dealership, they've got 10,000 eyeballs looking at a car. Are you following me? So there is a supply and demand issue that comes from selection. Okay, that helps us as well in terms of what our price to market is. Is relatively better than what they're able to get. On an individual basis. So, hopefully, that gives you some color on how do we get that two to three times improvement in profitability. That's how we get it. Mark Jordan: Great. Thanks very much. Operator: Thanks, Mark. Thank you. Our next question comes from the line of Colin Langan with Wells Fargo. Please proceed with your question. Colin Langan: Oh, oh, thanks for taking my questions. If I look at your full-year targets, most of them seem pretty wide, but SG&A to gross, it's actually been trending pretty close to the high end of that target. And, usually, Q4, things tend to step up seasonally. So is the outlook that SG&A actually could even Seasonality hold in in Q4? Or is it just a more muted increase sequentially that should be looking at? And then how should we think about SG&A maybe longer term? Bryan DeBoer: Sure, Colin. Thanks for the question. I think when we think about SG&A, or we most importantly think about $2 of EPS for every billion dollars of revenue? We've given light guidance. I think it's on slides 14, if I recall from the slide deck. Okay. As to where we believe it can be, but that's not how we manage our business. We manage our business on a net profit basis year over year and a top-line basis that will ultimately generate more net profit in aftersales and reciprocal trade-in values and our reciprocal businesses like DFC and our wheels, you know, fleet management businesses. And those type of things. So that's it is an important delineation. But we purely look at that our goal is to get to $2 of EPS for every billion dollars of revenue. And the easiest way that I can get there is to have quarters like this where we grow top line at seven and a half percent. And we continue to grow used cars at double-digit numbers, and grow our gross profit in the in the aftersales space. So in terms of the quarter, we'll see where it comes out. A lot of that is dictated based off volume and GPUs. As well. So, hopefully, that gives you some insights and remember, slide 14 helps lay out our pathway to the $2. And you know, I would say this. The entire foundation is built, and like I said, we're just getting started. Colin Langan: Just one quick modeling follow-up. Tax is really low in the quarter. Is that what's driving that? And is that sustainable, I guess, as we move forward? Should we put in the new rate, or is that just a one-off? Bryan DeBoer: Colin, don't I think we got a half an hour later together. We're running awfully we'll get we'll get you that information. On our one and one. Colin Langan: Yeah. No problem. Thanks, Colin. Operator: Thank you. And we have reached the end of the question and answer session. I would like to turn the floor back to Bryan DeBoer for closing remarks. Bryan DeBoer: Thank you, everyone, for joining us today. Look forward to seeing, you on Lithia Motors, Inc.'s here, and results. And believe it or not, February. It was a vast year. Looking forward to continue to delight you. Operator: Thank you. This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.
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: Ladies and gentlemen, thank you for standing by. Welcome to Teck Resources Limited's Third Quarter 2025 Earnings Release Conference Call. At this time, all participants are in listen-only mode. Later, we will conduct a question and answer session. This conference call is being recorded on Wednesday, October 22, 2025. I would now like to turn the conference over to Emma Chapman, Vice President, Investor Relations. Please go ahead. Emma Chapman: Thank you, operator. Good morning, everyone, and thank you for joining us for Teck Resources Limited's third quarter 2025 conference call. Today's call contains forward-looking statements. Actual results may vary due to various risks and uncertainties. Teck Resources Limited does not assume the obligation to update any forward-looking statements. Please refer to Slide two for the assumptions underlying our forward-looking statements. We will reference non-GAAP measures throughout this presentation. Explanations and reconciliations are in our MD&A and the latest press release on our website. On today's call, Jonathan Price, our CEO, will provide third quarter 2025 highlights. Crystal Prystai, our CFO, will follow with further details on the quarter. Jonathan will then wrap up with closing remarks and an opportunity for Q&A. Over to you, Jonathan. Jonathan Price: Thank you, Emma, and good morning, everyone. Starting with highlights from our third quarter 2025 results on Slide four. The most significant highlight of the quarter was our September 8 announcement of a merger of equals agreement with Anglo American. This is a unique opportunity to create a global leader in critical minerals and a top five copper producer, and I could not be more excited about it. Particularly about the substantial value creation that could be generated. Anglo Tech will have an industry-leading portfolio with more than 1,200,000 tons of annual copper production underpinned by six world-class copper assets and outstanding future growth optionality. This will make Anglo Tech one of the world's leading investable copper opportunities. Offering both scale and quality with over 70% copper exposure. This transformative combination will unlock significant value for shareholders through compelling adjacencies generated by integrating the resources and infrastructure of QB and neighboring Coahuasi and through meaningful corporate synergies. Anglo Tech will work with stakeholders to optimize the value of the adjacencies. We expect to produce 175,000 tons of incremental copper and generate an annual average underlying EBITDA uplift of at least $1.4 billion per year for at least twenty years on a 100% basis. Working together as Anglo Tech will materially de-risk and accelerate our ability to realize this value opportunity. With aligned incentives on both the QB and Coyoacci sites, over $800 million recurring annual synergies have also been identified, and we expect approximately 80% of that to be achieved by the end of the second year following completion. In addition, the combined company is expected to have a strong balance sheet supported by a larger, more diversified asset and cash flow base including premium iron ore and zinc. Anglo Tech's scale and balance sheet will expand the opportunity set as we optimize the approach to growth. Through the combination of two significant project pipelines that will compete for capital based on risk-adjusted returns. Both Anglo American and Teck Resources Limited believe the merger will enhance portfolio quality, financial and operational resilience, and strategic positioning and it will be highly attractive for our respective shareholders and stakeholders. Another key highlight of the quarter was the completion of our comprehensive operational review. The focus of our review was on improving performance, through a detailed QB action plan and identifying opportunities to enhance practices across the portfolio. This included a detailed assessment of operational plans for all our assets. With review and input from third-party technical experts and independent advisers and with oversight by the Safety, Operations, and Projects Committee of our Board of Directors. As a result, we now have updated risk-adjusted operational plans that are reasonable, achievable, and more conservative as we embed assumptions based on demonstrated performance rather than design rates. At QB, our revised operating operational plan reflects ongoing work on development of the tailings management facility, or TMF, and the resulting constraint on our mill. In the QB action plan, our near-term priority remains enabling safe, unconstrained production by raising the crest height of the dam and working on solutions to improve sand drainage towards design targets. We are confident that we have thoroughly assessed and understood the issues at QB we have a defined and measurable path forward. And from 2027 onwards, we expect that TMF development work will no longer be a constraint on the mill. Overall in the third quarter, our profitability improved compared to the same period last year to $1.2 billion of adjusted EBITDA. Our established operations performed well, particularly Red Dog and Trail, with Red Dog sales exceeding guidance and continued improvement in Trail's profitability. Performance also improved at Highland Valley and CDA, compared with Q3 2024. Excluding QB, our copper production increased from the same period last year. Our balance sheet remains very strong, with $9.5 billion of liquidity including $5.3 billion in cash. And the Board sanctioned the Highland Valley mine life extension in July which will extend production from a core asset to 2046. Turning to safety and sustainability on slide five. Year to date through September 30, our high potential incident frequency rate was 0.06 at Teck Resources Limited controlled operations. Safety performance is considered a key indicator of stable operating performance, and we have seen a strong improvement with our HPI rate trending 50% below the annual rate last year. And we were thrilled to see our Chilean operations reach 100% renewable power on October 1, when our long-term Clean Power Agreement for QB's electricity supply came into effect. We'd signed that agreement some time ago when there was not enough renewable in place in Chile to be able to make that switch. The agreement enabled our partner to put additional renewable capacity in place and it's great to see the benefit of that come to fruition. And with that, I will turn it over to Crystal. Crystal Prystai: Thanks, Jonathan. Good morning, everyone. I will start with our third quarter 2025 financial performance on Slide seven. Our adjusted EBITDA increased by 18% in the quarter compared to a year ago to $1.2 billion driven by higher base metals prices, byproduct revenues, and significantly lower copper smelter processing charges as well as strong performance across our established operations, most significantly in our zinc business. Red Dog zinc sales and another profitable quarter from Trail Operations drove an increase in our adjusted EBITDA although this was partially offset by higher operating costs at QB. And while we completed $144 million of share buybacks in July, we have not executed share buybacks since July 25 and will not be permitted to execute further buybacks through the closing of our proposed merger with Anglo American. Importantly, we will continue to return cash to shareholders through our annual base dividend of $0.50 per share which is paid quarterly. Slide eight summarizes the key drivers of our financial performance in the third quarter compared to the same period in 2024. Our adjusted EBITDA increased by $185 million to $1.2 billion. In Q3, we realized higher copper and zinc prices as well as higher byproduct revenue. Lower smelter processing charges, and an increase in sales volumes. This was partially offset by an increase in royalties at Red Dog, due to strong profitability and higher operating costs at QB. Our Q3 2024 EBITDA was impacted by a post-tax impairment charge on Trail operations. Now looking at each of our reporting segments in greater detail and starting with copper on slide nine. In the third quarter, gross profit before depreciation and amortization from our copper segment improved 23% to $740 million compared with the same period last year, primarily due to higher base metals prices and lower smelter processing charges. QB production was constrained due to TMF development work, but we expect to see less downtime impacting performance in the fourth quarter. Excluding QB, our production increased from Q3 2024, driven by higher throughput and grades at Highland Valley, and higher grades and recoveries at Carmen De Adecollo. Antamina's production reflects a higher proportion of copper zinc ore this year as expected in the mine plan. Our copper net cash unit costs improved by $0.16 U.S. per pound despite higher operating costs at QB, primarily due to lower smelter processing costs and increased byproduct credits including QB molybdenum. Following Board sanction of the Highland Valley mine life in July, the project has entered the execution phase. Engineering and procurement activities are well underway and site mobilization has begun. Our outlook for our Copper segment is aligned with our October 7, news release. For 2025, we expect annual copper production of 415,000 to 465,000 tons and copper net cash unit costs of $2.05 to $2.30 per pound. Turning to our zinc segment on slide 10. In the third quarter, gross profit before depreciation and for our zinc segment improved 27% to $454 million compared with the same period last year. This was primarily due to higher byproduct revenues, higher zinc prices, and lower zinc treatment charges partially offset by higher adjusted cash cost of sales and higher royalties tied to Red Dog's profitability. Red Dog and Trail Operations both had a strong quarter of performance. At Red Dog, zinc sales of 203,000 tons were above our guidance range of 200,000 to 250,000 tons following a successful shipping season as we experienced favorable weather conditions. Production reflected lower grades as expected in our mine plan. In the third quarter, Red Dog inventories were drawn down by approximately $200 million. However, this was more than offset by elevated trade receivables of $570 million at quarter end, due to the volume of sales in Q3 and higher zinc prices. We expect Red Dog's trade receivables will be substantially reduced in the fourth quarter, providing a source of cash through the reduction in working capital. As of October 21, approximately $350 million of Red Dog receivables were collected, driving an increase in our cash balance post Q3. Our zinc net cash unit cost improved by $0.08 per pound driven by lower smelter processing charges and higher byproduct credits. We reported another quarter of profitability at Trail Operations, reflecting our focus on improving Trail's profitability and cash generation through prioritizing processing of residues over maximizing refined zinc production. Processing residues enables us to reduce concentrate purchases in the low treatment charge environment. Looking forward, we expect Red Dog zinc sales to be between 125,000 to 140,000 tons in the fourth quarter, reflecting normal seasonality. Red Dog shipping season commenced on July 11 and was completed yesterday. Our outlook for our zinc segment is aligned with our October 7 news release. For 2025, as a result of Red Dog's strong year-to-date performance, we expect Red Dog zinc production to come in towards the top end of our guidance range of 430,000 to 470,000 tons. We continue to expect our total zinc to be 525,000 to 575,000 tons, including Antamina. We also expect to be at the high end of our annual refined zinc production guidance range for Trail Operations. We continue to expect zinc net cash unit costs of $0.45 to $0.55 per pound. With Red Dog's strong performance, we continue to build the NANA royalty accrual which is expected to be a source of working capital in Q4 and a use of working capital in Q1 2026. Turning to our balance sheet on Slide 11. We have maintained a strong balance sheet and currently have liquidity of $9.5 billion including $5.3 billion of cash. Our cash balance has increased by approximately $500 million in the month of October so far, particularly due to the collection of Red Dog receivables built in Q3. Our use of cash through September reflects significant cash returns to shareholders of over $1.2 billion, as well as the payment of taxes related to the sale of the steelmaking coal business and the advancement of our copper growth options, including the start of the execution of the Highland Valley mine life extension. And while we completed $144 million of share buybacks in July, we have not executed buybacks since July 25, and will not be permitted to execute further buybacks through the closing of our proposed merger with Anglo American. Importantly though, we will continue to return cash to shareholders through our annual base dividend of $0.50 per share which is paid quarterly. Overall, our very strong balance sheet ensures we maintain our resilient position. Back to you, Jonathan. Jonathan Price: Thanks, Crystal. Looking forward on Slide 13, our priorities are disciplined execution across our operations and projects, and on progressing our transformative merger of equals with Anglo American. We are advancing approvals for the transaction, and both Anglo American and Teck Resources Limited strongly believe it is a significant value creation opportunity for our respective shareholders and stakeholders. At the same time, we are laser-focused on delivering against our operational guidance provided following completion of the comprehensive operational review. This includes continuing to progress the QB action plan and the necessary work on QB's tailings management facility to complete the ramp-up of the operation. At QB, there are multiple paths to value and significant upside potential beyond our current guidance, and we aim to realize the full value of this Tier one asset. Finally, our Highland Valley mine life extension project to extend production from a core asset to 2046 has moved into the execution phase and we are progressing early works. Turning to the outlook for QB on slide 14. Significant work has been undertaken to improve sand drainage times and complete the TMF development work. We have started the implementation of the new cyclone technology in one of the cyclone stations and we are seeing positive early results. We have finished the construction of the new paddock designs, we are also seeing improvements in sand drainage. Collectively, these results give us confidence that we are on the right track to finding solutions to improve sand drainage. We currently expect to be well-positioned to catch up on the construction of the sand dam and we aim to install the permanent infrastructure that will hydraulically deposit tailings and sand, replacing the current mechanical process by 2026. This will allow us to push QB to run at steady state from 2027 onwards. Turning to Slide 15. Importantly, QB remains a world-class Tier one asset. The foundation of QB's potential is its large long-life deposit, with around 10 billion tons of reserves and resources. The operation has the advantage of a very low strip ratio. Which enables competitive all-in sustaining costs. And QB has a tax stability agreement in place through 2037. QB has previously demonstrated that it is capable of operating at design recovery and throughput levels when there is no constraint on the mill. The design, construction, and operational capability of the plant was previously validated by independent specialists through completion testing and found to be robust. Beyond our current guidance for QB, there is significant upside potential. Optimization and debottlenecking offer the potential for efficient, near-term throughput uplift to at least 165,000 tonnes per day with a potential to go to 185,000 tons per day. We are working on improving recoveries towards our design recovery rates of 86% to 92% with more consistent plant online time and geometallurgical testing to optimize reagents and drive improvements in recovery. And while we expect 2028 to be impacted by transition ores, average grades are expected to improve on average for the five years thereafter. Overall, we have multiple potential paths to create value for our shareholders through QB including the potential adjacencies with neighboring Koyoasi and the value of QB continues to be validated by Anglo American through their due diligence for our merger of equals. We look forward to welcoming many of you to QB on November and we are confident that you will see the significant progress that has already been made and that QB remains a world-class Tier one asset. Turning to slide 16, I'll wrap up where I started with the merger of equals with Anglo American. The combination is truly compelling, and will lead to significant value creation opportunities for shareholders. Together, we will become a leading critical minerals producer a top five global copper portfolio. We will deliver tangible corporate synergies of $800 million per year with a roadmap to unlock an additional $1.4 billion of annual underlying EBITDA uplift from the substantial adjacencies between QB and Koyawasi. And we will have the resilience and enhanced financial capacity to balance shareholder returns with valuable investment opportunities from this incredible suite of assets. The scale of the combined entity will increase the company's relevance in the global capital markets and could see a significant multiple rerating that will further increase the value generation of the combined Anglo Tech. Slide 17 is a reminder of the expected timeline and required approvals for the transaction. We expect completion within twelve to eighteen months from announcement. Both Boards support and recommend this merger, and there will be concurrent separate votes by the shareholders of Teck Resources Limited and Anglo American on December 9. We expect to publish our circular in mid-November. And it will be available on our website at teck.com. The transaction will then be subject to regulatory approval and customary closing conditions. Including approval under the Investment Canada Act competition and antitrust approvals, and various other applicable regulatory approvals globally. We are excited at the potential of Anglo Tech to create a global leader in critical minerals substantial value creation opportunity for shareholders. With that, operator, please open the line for questions. Operator: Certainly. To join the question queue, The first question comes from Liam Fitzpatrick with Deutsche Bank. Please go ahead. Liam Fitzpatrick: Good morning, Jonathan sorry, good afternoon. Depends where you're based. Jonathan and team, I've got two questions. The first one is just on the deal. And whether any preliminary discussions have started with Glencore. Over the JV of the two assets? And if not, any rough guidance on when that could begin? And the second question, just on the guidance or the updated guidance for 2025, it looks like you're tracking towards the low end across unit cost guidance and CapEx guidance. Just wanted to check if that's the case or whether there's something we should be looking out for in Q4. Thank you. Jonathan Price: Thanks, Liam. It is indeed morning here in Vancouver. So Starting with your first question just on the QB Koyawasi synergies. Of course, with this being structured as a friendly deal, ourselves and Anglo American, it did give us significant ability to understand the capability of both assets and comprehensively assess the potential opportunities that could be generated from cooperation both through the and, of course, through the extensive infrastructure. As we've said, much of that value comes from the processing of the higher grades softer Coahuasi ore through the QB plant and it's a very capital way to add low-cost production into the combined portfolio. These synergies of course were also reviewed and validated by external advisers in order for them to be published. So there's a good deal of rigor that's been put around that. But, you know, we think this will be the benefit to significant benefit of the owners of QB and of Koyoasi and we expect all parties to be motivated to work together to generate this value for their shareholders. And of course, much of that work in terms of the commercial agreements and the structure of the agreements going forward remains ahead of us. But as I said, we think this is a compelling opportunity, and we do expect all shareholders to be engaged here to capture that value for their shareholders. Crystal, maybe if you just like to comment on Liam's second question in terms of where we're trending on guidance. Crystal Prystai: Yeah. Sure. Hi, Liam. Good morning. Just in the context of CapEx first, I think the guidance range remains reasonable as we look at where we're trending with our growth capital as we, you know, continue to progress the MyLife extension. Program through the fourth quarter. I'd expect a come in within that range. Similarly, on the capitalized stripping side of things. And then on the sustaining capital side, of the guidance, we are obviously continuing to progress the work on the TMF and expect that spending to continue into the fourth quarter. So I would suggest you continue to use a midpoint on the aspects. Similarly on unit costs for the copper business, I would I would expect us to come in towards the middle of the range. I wouldn't use the low point. And for Zinc, I think you're probably it's probably reasonable to be using somewhere between the low and the mid-case just based on where we're tracking there. But there isn't anything, there isn't anything anomalous in those numbers. Liam Fitzpatrick: Okay. Jonathan, if I could briefly follow-up just point taken, Reed, the discussions are ahead of you. Should we be thinking that the discussions will get going post-deal completion? Which is well into next year? Or is the plan to begin those earlier? Jonathan Price: Look, there's nothing that requires the deal to be completed to enable discussions between QB and Coyoacci. I mean, I think over the past couple of months since the announcement of the merger of equals with Anglo American. We've clearly surfaced the value here that's available to all of the owners of both QB and Coyoacci, and I think that creates a good platform for engagement. Liam Fitzpatrick: Okay. Thank you. Thanks, Liam. Operator: The next question comes from Myles Allsop with UBS. Please go ahead. Myles Allsop: Great. Thank you. Maybe just bring up slightly on Liam's question first on QB Colossae. I presume that all shareholders need to agree to the joint venture to be able to execute if Glencore or another shareholder gets difficult they you can't force them into a joint venture. Jonathan Price: No. There's no way of forcing anybody into a joint venture. I think it will require the agreement of all parties. Of course, Coahuasi is an incorporated entity. So unlike QB, is unincorporated where Teck Resources Limited is clearly the operator and takes the lead. Koyoasi has to engage as a consolidated entity. We've said before, we think there's a significant advantage from the cross-ownership that will be created through this merger of equals with 60% of QB being owned by Anglo Tech and 44% of Coyoacci being owned by Anglo Tech, and we consider that to be a significant de-risking and accelerating factor. In capturing these synergies. Over time. But again, I've just said, all shareholders of both assets should be highly motivated to work together to capture what we think is significant new value for our shareholders. Myles Allsop: Yes, and it wasn't that long ago, so I was quite excited about it. Could you just on QB, where should we think normal like I guess it's hypothetical now that in when production normalizes in 2027, 2028, where will unit costs normalize? What's your best guess? Is it the $1.15 or $1.52 What's the kind of new norm based on your current best guess? Jonathan Price: So Miles, there is no structural change to the asset based on the guidance we've previously given for QB. Of course, there's the impact of inflation that is across the whole of the industry. At the moment. So we would expect that to develop over time. But structurally, as we've said, we see the asset capable of performing at the levels that we'd used previously to define unit cost guidance. And I think that's probably the best indication I can give you at this stage. Myles Allsop: All the original normalized unit cost when you did the feasibility and stuff? Jonathan Price: So we were using $1.40 to $1.60 US dollars per pound previously. Obviously, that's predicated on the plant running at full capacity on hitting the design recovery rates on the full production of molybdenum and of course operating the port through our shiploader, which is a situation we expect to return to in the first quarter of next year. And of course, as I mentioned before, they are unescalated numbers as in they don't reflect the impact of inflation over the coming years. Myles Allsop: Yeah. Cool. That's clear. Thank you. Jonathan Price: Thanks, Miles. Operator: The next question comes from Anita Sarney with CIBC. Please go ahead. Anita Sarney: Good morning, Jonathan and team. Thanks for taking my question. The first one, just I just wanted to see if you could give us some more color in terms of the improvement in sand drainage rates. Could you quantify that? And I think previously, was like we're taking about seven days for the sand to drain. Is that has that improved from could you quantify it in the number of days? Jonathan Price: Hi, Anita. Thanks for the question. I'll hand this over to Dale. We won't quantify that, but I can get Dale to give a description of the work that's ongoing and some of the progress that we have seen. Particularly in the underlying drivers of sand drainage. Thank you very much, Jonathan, and thank you for the question. Dale: I think as Jonathan mentioned earlier, we've made a few changes to the operations since our startup in October. One, we have started the replacement of Cyclone technology, and with that we are starting to see improvements in sand drainage in the paddocks. And that at the same time, as was changing some of our operational practices and design of paddocks as well. And those together are indicating some good initial results. But it's still too early to tell in terms of what magnitude of improvement is. Other than we're on the right track, and that's giving us some confidence on the path we're going forward. So that's where we sit today. Jonathan Price: I would say, Anita, of course, awesome opportunity to see this up close in weeks' time with far more detail around the work that's ongoing and how we see this developing. Anita Sarney: Yeah. I'm I will be attending the tour. And then my second question is with respect to the mill product rates. I think previously you talked about well, I can't remember off the top of my head, but the utilization and the availability, could you put it in context of what you seen over up October? October to date in terms of when you provided the guidance for Q3 results, yeah, I think it was I don't want to say incorrectly, but I think it was, like 61% availability or and 70% utilization. But can you just tell us what the old one was and what you've seen to date in October? Jonathan Price: Yeah. So year-to-date, when we communicated a couple of weeks ago, we'd seen 87% availability in the mill, but only 70% utilization because of the constraints put on the mill by the downtime associated with the TMF since starting up. In early October, we've seen very good availabilities. I won't quantify that right now, but very strong. Anita Sarney: Okay. And then am I correct in thinking when you're looking at the 87 in the 70, you should be multiplying those to get to your total capacity. Is that correct? Jonathan Price: No. It doesn't quite work like that. I mean, the utilization is a function ultimately of that availability. But we were only able to utilize the mill 70% of the time. Ultimately, you don't need to multiply the two things. Anita Sarney: Okay. Alright. Thank you. Thanks very much for clarifying that. Jonathan Price: Thanks very much. Operator: The next question comes from Lars van Wunder with Bank of America Securities. Please go ahead. Lars van Wunder: Thank you very much, operator. Good morning, Jonathan, and Crystal. Thank you for today's update. If I could come back to the merger, could I ask to what extent Teck Resources Limited and or Anglo American have engaged with Investment Canada on the transaction? Is there any indication that moving the combined head office is sufficient? And then just a follow-up to that, if you could address what you would perceive as sort of the bottleneck an antitrust and other approval point of view once the vote is done? Thank you very much. Jonathan Price: Yeah. Thanks, Lawson. Thanks for those questions. Look, we are engaging on an ongoing and collaborative basis with the Canadian government here. Those discussions have been frequent and productive. As we've said, we've put forward what we believe to be a very strong and comprehensive package of commitments to Canada in particular. You know, as you note, a key element of that is Anglo Tech having its headquarters in Canada in perpetuity, and that's in addition to the significant capital spending commitments we've made of $4.5 billion over five years and other assurances and meaningful undertakings associated with the activities of the new company. So those conversations are ongoing and we're very pleased in the way that they're unfolding at the moment. We don't see a particular bottleneck here Lawson, necessarily. You know, we'll work through the shareholder vote, of course, in early December. We'll continue in parallel to work with the Canadian government under the Investment Canada Act. And, of course, then this week, we will complete all of our filings related to antitrust and competition regulators globally. Of course, then those processes will unfold in due course. So now a lot of activity going on a lot of engagements underway, and, you know, we hope to continue that in a very productive and to the extent possible expedited fashion. Lars van Wunder: Okay. Thanks very much, Thanks, Lawson. Operator: The next question comes from Chris Lipponen with Jefferies. Please go ahead. Chris Lipponen: Thanks, operator. Hi, Jonathan. Thanks for taking my question. Just wanted to follow-up another question on the QB Kalawasi synergies. The shareholder vote is going to be on December 9, but at that time, we won't know whether the JV is certainly going to happen. We won't know what the economic split would be between Teck Resources Limited, Anglo, and your partners in those assets. And obviously, that JV is a big component of this deal. And my first question would be, whether you think it's a compelling merger even if you cannot get that JV done. I understand that it's compelling from all parties involved, under the assumption that that JV doesn't happen, it's just still a very good deal for Teck Resources Limited. That's my first question. Jonathan Price: Yeah. Thanks for that, Chris. So look. Absolutely. I mean, you know, we think the creation of this, this new company, the fifth largest copper producer in the world, sixth world-class assets, 1,200,000 tons of annual copper production, a company of both scale and quality. We expect this to trade very, very well in equity markets. In addition to that, of course, we've got the $800 million of synergies that we will work through coming through the corporate combination, coming from marketing, coming from procurement. In addition to that, of course, Teck Resources Limited shareholders will gain access to synergies being created through the agreement that Anglo American has put in place with Codelco for Los Bronces Andina. Etcetera. There are lots of sources of value creation here. We do think that the QB Koyoasi, of course, is a very meaningful component of the value creation here. And as I mentioned before, I would expect all of the owners of both QB and Koyoasi to be highly motivated on behalf of their shareholders to work collaboratively to capture that value that's ahead of us. Chris Lipponen: Right. That makes sense. Then in terms of a framework for how you value the split of the economics in that JV, have you had discussions with partners regarding just generally how to think about that? Because each partner is going to want to maximize their cap for the economics. I would that's going to be a sticking point. You think about the framework to value to each partner involved? Thank you. Jonathan Price: So that is to be worked out, Chris. That is part of the commercial agreements we have ahead of us. Of course, again, with Anglo Tech, at 60% of QB and Anglo Tech at 44% of Coyoacci, you can see a win-win. There on both sides of this transaction. We will get into the nuts and bolts of this in the period ahead of us. But, again, I would expect all owners of both to be highly motivated to capture this value on behalf of their shareholders. Chris Lipponen: Got it. Thanks, Jonathan. Good luck. Jonathan Price: Thank you very much, Chris. Operator: There being no further questions, I will now pass the call back to Jonathan for closing remarks. Please go ahead. Jonathan Price: Thank you, operator, and thanks again to everyone for joining us today. As mentioned, we look forward to seeing many of you at our QB site visit and to many others joining us via webcast on November three. Wish you all a good day. Thank you. Operator: This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a great day.
Operator: Good morning, ladies and gentlemen, and welcome to the Thermo Fisher Scientific 2025 Third Quarter Conference Call. My name is Claire, and I will be coordinating your call today. During the presentation, you can register a question by pressing star followed by one on your telephone keypad. If you change your mind, please press star followed by two on your telephone keypad. I would like to introduce our moderator for the call, Mr. Rafael Tejada, Vice President, Investor Relations. Mr. Tejada, you may begin the call. Rafael Tejada: Thank you for joining us. On the call with me today is Marc Casper, our Chairman, President and Chief Executive Officer, and Stephen Williamson, Senior Vice President Chief Financial Officer. Please note this call is being webcast live and will be archived on the Investors section of our website thermofisher.com, under the heading News, Events and Presentations, until February 1, 2026. A copy of the press release of our third quarter earnings is available in the Investors section of our website under the heading Financials. So before we begin, let me briefly cover our Safe Harbor statement. Various remarks that we may make about the company's future expectations, plans, and prospects constitute forward-looking statements within the meaning of applicable securities laws. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in the company's most recent reports on Form 10 and Form 10-Q under the heading Risk Factors. These forward-looking statements are based on our current expectations and speak only as of the date they are made. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even in the event of new information, future developments, or otherwise. Also, during this call, we will be referring to certain financial measures not prepared in accordance with generally accepted accounting principles or GAAP. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures is available in the press release of our third quarter 2025 earnings and also in the Investors section of our website under the heading Financials. So with that, I'll now turn the call over to Marc. Marc Casper: Thank you, Raf. Good morning, everyone, and thanks for joining us today for our third quarter call. As you saw in our press release, we delivered an outstanding quarter that included excellent operational performance reflecting our active management of the company. Strong execution from our team was ongoing focus meaningfully advanced a number of our customer relationships. And we made significant progress advancing our proven growth strategy, which continues to strengthen our foundation and build an even brighter future for our company. So first, let me recap the financials. Our revenue grew 5% in the quarter to $11.12 billion. Our adjusted operating income grew 9% to $2.59 billion. Adjusted operating margin expanded by 100 basis points to 23.3% and we grew adjusted EPS by 10% to $5.79 per share. Our performance in the third quarter enables us to raise our full year guidance. Now turning to our end markets. In pharma and biotech, we delivered another quarter of mid-single-digit growth. Performance in the quarter was led by our bioproduction and analytical instruments businesses, as well as our research and safety market channel. Turning to academic and government, revenue declined in the low single digits, representing a modest improvement versus last quarter. To provide some additional context, conditions in the U.S. in this end market were similar to Q2. In Industrial and Applied, revenue grew in the mid-single digits store in the quarter, representing a nice sequential step up. Performance in the quarter was led by our electron microscopy business, as well as our research and safety market channel. Finally, in Diagnostics and Healthcare, revenue growth improved over Q2, though it remained down low single digits for the quarter, largely due to conditions in China. Highlights in this quarter included strong growth in our transplant diagnostics and immunodiagnostics businesses. Wrapping up my comments on end markets, our team executed very well to capture the opportunities during the quarter. Let me turn to our growth strategy, which consists of three pillars: high-impact innovation, our trusted partner status with customers, and our unparalleled commercial engine. Starting with innovation, it was another excellent quarter for our company. Our new offerings demonstrate our continued leadership and further enable our customers to unlock scientific breakthroughs, advance precision medicine, and enhance productivity in their labs. In clinical next-gen sequencing, we continue to expand our offerings, strengthening our ability to help clinicians and researchers advance targeted care for patients. The OncoMindDx Express test on our iNTRON GenexisDx integrated sequencer received FDA approval as a companion diagnostic for a targeted therapy used to treat non-small cell lung cancer and for broader tumor profiling applications. We also introduced the Oncomine Comprehensive Assay Plus on the GeneXus system, providing clinical research labs with an all-in-one comprehensive genomic profiling solution that delivers next-day results. This capability provides clinical researchers with faster, more actionable insights to advance precision medicine. For proteomics, we launched the OLINK target 48 neurodegeneration panel to advance research into conditions such as Alzheimer's, Parkinson's, and multiple sclerosis. The new panel helps address the need for reliable detection and measurement of biomarkers that can unlock insights into these and other complex neurological diseases, while also enabling researchers to monitor disease progression and therapeutic responses. In analytical instruments, we unveiled two new electron microscopes at the recent Microscopy and Microanalysis Conference. These include the Thermo Scientific CALOS-twelve transmission electron microscope. This powerful new platform built on our popular Talos line and delivers exceptional image quality and ease of use for structural cellular analysis and biological research, pathology, drug development. We also introduced the Thermo Scientific SkyOS three, focused ion beam scanning electron microscope. Engineered with advanced automation precision and ease of use, this instrument accelerates material science research supports the development of new materials used across clean energy, aerospace, and digital devices. In chromatography and mass spectrometry, we launched 7.4, the first enterprise-ready compliance-focused software platform that unifies chromatography and mass spectrometry workflows. This system offers centralized secure data management and remote access across labs, empowering regulated bio clinical and environmental labs to streamline workflows, improve their productivity, and accelerate scientific decision-making. This launch is a great enabler for both our mass spec and chromatography instruments. Let me give you a quick update on our trusted partner status and our unparalleled commercial engine. We have a unique relationship with our customers, one that has been earned over many years through a relentless focus on anticipating, understanding, and meeting their needs. Our trusted partner status provides us with unique insights to guide our strategy and continually strengthen our capabilities. At the same time, our entry-leading commercial engine enables us to deliver those capabilities at scale. I'll share a few highlights of the actions we've taken recently to deliver even greater value to our customers and position our company for the future. One example is our strategic collaboration with OpenAI. The collaboration is focused on two broad areas. The first opportunity is to embed these capabilities into our products and services to make an even bigger impact for our customers. And the second opportunity is to make Thermo Fisher even more productive. As part of this collaboration, we are embedding OpenAI in advanced technology into critical areas of our business, including product development, service delivery, customer engagement, and operations. Our initial focus is on clinical research, to help improve the speed and success of drug development, ultimately enabling customers to get medicines to patients faster and more cost-effectively. We are deploying these capabilities to improve the cycle time of clinical trials. We'll also look to leverage OpenAI's capabilities to unlock value in our deep repository of data and experience to enable customers to focus on the most promising opportunities in their drug development pipelines. To enable the second focus area, we've launched ChatGPT Enterprise internally across the company to drive productivity, innovation, and ultimately, smarter customer engagement. I'm really excited about the ways Thermo Fisher and OpenAI, two innovation leaders, will work together to make a real difference in advancing science and bringing new medicines to patients. Another good example of our trusted partner status this quarter was the recently announced strategic partnership with AstraZeneca BioVenture Hub in Gothenburg, Sweden. This partnership will leverage the combined expertise of Thermo Fisher and AstraZeneca to drive innovation and strengthen the life sciences ecosystem. A dedicated team from Thermo Fisher will co-locate with AstraZeneca scientists to work on collaborative R&D projects with an initial focus on chromatography, molecular genomics, and proteomics. And it was also great to celebrate the grand opening of our Manufacturing Center of Excellence in Nevin, North Carolina this quarter. A high-volume, low-cost facility, this site was developed with support from the U.S. Government and is capable of producing at least 40 million laboratory pipette tips per week to support life science research and diagnostic laboratories and adds to the U.S. National supply chain resilience. So wrapping up our growth strategy, this was an excellent quarter where our actions strengthened our industry leadership today and positions our company for an even brighter future. Moving on now to capital deployment. We also had a very active quarter successfully executing our proven capital deployment strategy, which, as you know, is a combination of strategic M&A and returning capital to our shareholders. In September, we completed our acquisition of our filtration and separation business from Solventum, which is now part of our Life Sciences Solutions segment. As you know, this business expands our bioprocessing offering for pharma and biotech, as well as industrial filtration capabilities. The integration is progressing smoothly, and the early feedback from our customers has been incredibly positive. We also closed our acquisition of the Ridgefield, New Jersey sterile finish site from Sanofi, expanding our U.S. Drug product manufacturing. This is an excellent addition to our industry-leading sterile fill-finish network within our pharma services business. At this site, we'll continue to manufacture a portfolio of Sanofi's therapies and we'll invest in additional production lines to meet the growing demand for U.S. Manufacturing from our pharma and biotech customers as they reassure more activity to the U.S. Also in the quarter, we repurchased $1 billion of our shares. This brings our total repurchases to $3 billion for the year. So overall, a very active quarter of capital deployment. We have a company culture based on continuous improvement through our PPI business system, which once again was a key enabler of outstanding execution. We made great progress in the quarter leveraging PPI to manage our cost base and deliver very strong earnings growth. The PPI business system continues to drive great impact. And with the OpenAI collaboration, it will have even more impact going forward. The practical application of AI will enhance our colleagues' ability to find a better way, increasing our productivity and improving the customer experience. As I reflect on the quarter, I'm proud of what our teams accomplished and grateful for their contributions to our success. Let me now turn to our guidance. Given our strong performance in the quarter, we are raising both our revenue and earnings guidance for 2025. Steven will take you through the details in his remarks. I'll cover the highlights. We're raising our revenue guidance to a new range of $44.1 billion to $44.5 billion and raising our adjusted EPS guidance to a range of $22.6 to $22.86 per share. So to summarize our key takeaways from Q3, this was a terrific quarter. We delivered excellent operational execution reflecting consistent and active management of the company and the power of the PPI business system, which resulted in outstanding earnings growth. We continue to advance our growth and capital deployment strategies. And we're raising our full-year guidance and remain confident in our midterm and long-term outlook and the proven strength of our strategy to create meaningful value for our shareholders and continued success for our company. With that, I'll now hand the call over to our CFO, Stephen Williamson. Stephen Williamson: Thanks, Marc, and good morning, everyone. I'll take you through an overview of our third quarter results for the total company, then provide color on our four business segments, and I'll conclude by providing our updated 2025 guidance. Before I get into the details of our financial performance, let me provide you with a high-level view of how the third quarter played out versus our expectations at the time of our last earnings call. In Q3, our team executed really well and delivered results significantly ahead of what we'd assumed at the midpoint of our prior guidance on both the top and bottom line. Q3 reported revenue was approximately $300 million ahead of what we'd included in the midpoints of the prior guide, driven by stronger FX tailwind, a benefit from our recent acquisitions, and a slight beat on organic revenue. The beat on the bottom line was even more significant. We delivered $0.30 of adjusted EPS ahead of what was included in the midpoint of our prior guide for Q3. $0.11 of that beat was from a lower impact of tariffs and related FX than had been assumed in the prior guide. $0.20 of the beat was from very strong operational performance, and this was partially offset by $0.01 of dilution from the recent acquisitions. So to summarize, in Q3, once again delivered excellent operational performance. Let me now provide you with some additional details on Q3. Starting with earnings per share. In the quarter, adjusted EPS grew 10% to $5.79. GAAP EPS in the quarter was $4.27, in line with the prior year quarter. On the top line, Q3 reported revenue grew 5% year over year. That included 3% organic revenue growth, a 1% contribution from acquisitions, and a 1% tailwind from foreign exchange. Turning to our organic revenue performance by geography, in Q3, North America grew low single digits, Europe and Asia Pacific both grew mid-single digits with China declining mid-single digits. With respect to our operational performance, we delivered $2.59 billion of adjusted operating income in the quarter, an increase of 9% year over year. Adjusted operating margin was 23.3%, 100 basis points higher than Q3 last year. The very strong earnings results reflect our active management of the business and the power of our PPI business system. Total company adjusted gross margin in the quarter was 41.9%, 10 basis points higher than Q3 last year. We delivered very strong productivity, which enabled us to fund strategic investments further advance our industry leadership, and offset the impact of tariffs and related FX and unfavorable mix. Moving on to the details of the P&L. Adjusted SG&A in the quarter was 15.5% of revenue, R&D expense was $346 million in Q3. Reflecting our ongoing investments in high-impact innovation, R&D as a percent of our manufacturing revenue was 6.9% in the quarter. Looking at results below the line, our Q3 net interest expense was $113 million. As expected, the adjusted tax rate in Q3 was 11%, and average diluted shares were 378 million, approximately 5 million lower year over year driven by share repurchases net of option dilution. Turning to free cash flow on the balance sheet. Year-to-date cash flow from operations was $4.4 billion and free cash flow was $3.3 billion after investing $1 billion of net capital expenditures. Q3 was a very active quarter of capital deployment, we deployed approximately $4 billion of capital through the acquisition of our filtration and separation business from Silventum and the sterile fill-finish site from Sanofi. In addition, we repurchased $1 billion of shares during the quarter and returned $160 million of capital through dividends. Ended the quarter with $3.5 billion in cash and short-term investments, $35.7 billion of total debt. Our leverage ratio at the end of the quarter was 3.2x gross debt to adjusted EBITDA and 2.9 times on a net debt basis. Completing my comments on our total company performance, adjusted ROIC was 11.3%, reflecting the strong returns on investment that we're generating across the company. I'll provide some color on our performance of our four business segments. In Life Sciences Solutions, Q3 reported revenue in this segment increased 8% versus the prior year quarter, and organic revenue growth was 5%. Growth in this segment was led by our bioproduction business, which had another quarter of excellent growth. Q3 adjusted operating income for Life Science Solutions increased 15%, and adjusted operating margin was 37.4%, up 200 basis points versus the prior year quarter. During Q3, we delivered very strong productivity and volume leverage, which is partially offset by unfavorable mix strategic investments and the impact of the acquisition of our filtration and separation business. Which is included within this segment. In the analytical instruments segment, reported revenue increased 5% and organic revenue growth was 4%. Growth in the quarter was led by electron microscopy, and chromatography and mass spectrometry businesses. In this segment, Q3 adjusted operating income decreased 5% adjusted operating margin was 22.6%. Down 230 basis points versus the year-ago quarter. But this is a sequential improvement from Q2 2025. The majority of the year-over-year margin change was driven by the impact of tariffs and related FX. Outside of that impact, strong productivity was partially offset by strategic investments. And unfavorable mix. Seniors and Specialty Diagnostics in Q3 reported revenue grew 4% year over year, and organic revenue growth was 2%. In Q3, growth in this segment was led by our transplant diagnostics, and immunodiagnostics businesses. Q3 adjusted operating income for Specialty Diagnostics increased 10% and adjusted operating margin was 27.4%, 150 basis points higher than Q3 2024. During the quarter, we delivered strong productivity and volume leverage. Finally, in the Laboratory Products and Biopharma Services segment, reported revenue increased 4% and organic revenue growth was 3%. Growth in this segment was led by a research and safety market channel. The runoff of pandemic-related revenue had a 1% impact on the revenue growth in the segment in the quarter. Q3 adjusted operating income in this segment increased 12% adjusted operating margin was 14.5%. 100 basis points higher than Q3 2024. In the quarter, we delivered very strong productivity, which is partially offset by unfavorable mix, strategic investments. Turning to guidance. As Marc outlined, we're raising our 2025 full-year guide on both the top and bottom line, reflecting our continued active management of the company. Let me provide you with the details. We're raising our revenue guidance to an expected range of $44.1 to $44.5 billion. Organic revenue growth at the midpoint of the guide continues to be 2% for the full year, and as a reminder, that includes a one point of headwind from the run-up of pandemic-related revenue. Increasing our outlook for adjusted operating margin in 2025 to a new range of 22.7% to 22.8%. And we're raising our adjusted EPS guidance to a new range of $22.6 to $22.86. The increase of the midpoint of the guidance range reflects $420 million higher revenue than the prior guide. Driven by the benefit of our recent acquisitions, and an increase in the tailwind from FX. From an earnings standpoint, the increase in the midpoint of the guide reflects 20 basis points of improved adjusted operating margin expansion and $0.20 of higher adjusted EPS. This change includes $0.05 of dilution from the recent acquisitions. Continue to actively manage the company drive excellent operational performance once again enabling us to increase our guidance for the year. I'll now move on to an update of some of the modeling elements for the full year. Our guidance now includes the impact of the recently closed acquisitions, these deals added $260 million to revenue to our prior full-year guide, $20 million of adjusted operating income, and as I mentioned earlier, $0.05 for adjusted EPS dilution. In terms of tariffs, our guidance reflects the tariffs that are currently in place as of today. This includes the increase in tariff rates between the U.S. and Europe that occurred since the time of our last guidance. The changes in tariffs and trade policy once again caused intra-quarter volatility in FX rates in Q3, as a result, FX in Q3 was $220 million revenue tailwind to our prior guide, and a $0.10 adjusted EPS headwind. So for the full year, we now expect FX to be a year-over-year tailwind to revenue of $230 million and a headwind to adjusted operating income and adjusted EPS of $110 million and $0.37 respectively. Below the line, we now expect net interest expense to be $440 million in 2025, and we continue to expect an adjusted tax rate of 10.5% for the full year. We expect between $1.4 billion and $1.7 billion of net capital expenditures and around $7 billion of free cash flow for the year. Then in terms of capital deployment, our guidance now assumes that we deploy $7.6 billion of capital in 2025. $4 billion on the recently closed acquisitions, $3 billion on already completed share buybacks, and $600 million of capital return to shareholders through dividends. Finally, we estimate that full-year average diluted share count will be approximately 378 million shares. So to conclude, we delivered an excellent Q3, we're in a great position to deliver on our 2025 objectives. With that, I'll turn the call back over to Raf. Rafael Tejada: So with that, let's get started for the Q&A portion of the call. Operator: Thank you. When preparing to ask your question, please ensure your device is unmuted locally. The Thermo Fisher management team, please limit your time on the call to one question and only one follow-up. If you have any additional questions, please return to the queue. Our first question comes from Michael Ryskin from Bank of America. Your line is now open, Michael. Please go ahead. Michael Ryskin: Great. Thanks for the question and congrats on another strong print guys. I'll start just on market conditions and what you're hearing and what your customers' mark. I mean a lot has changed since we last spoke on the 2Q call. Especially on pharma, there's been a lot of progress in, I would say, de-escalation on some of the MFN and tariff concerns with pharma. Just wondering if anything has changed in your conversations with your major customers. Over the last couple of weeks and months. Talk of reshoring longer term. Could you just talk about how Thermo would benefit from that? Both from a facility build-out perspective, but also from Patheon and some of the other pharma services, some of your fill-finished capacity in the U.S. Just sort of how that come up in conversations? Marc Casper: Mike, thanks for the question. Very topical. So in terms of our dialogue with our pharma and biotech customers, as you know, we're very engaged, right, with this customer set, the senior executives, and if I say, what are they focused on? Probably is the first thing. Right? A lot of, you know, excitement around scientific breakthroughs. A lot of confidence actually in their pipelines. And they're partnering with us to help them drive their success. As we talk about the actual environment, right, which is a part of how they think about the world and the decisions they make, you know, there's a quiet confidence, actually, that they're going to be able to navigate the government policies effectively. And you're seeing that in some of the announcements that have been made on pricing as well as on reshoring more activity in the U.S. in terms of not being exposed to potential tariffs. On that dynamic, what I would say is we're very engaged in helping those customers think about, you know, new sites, how to best equip them, and support our customers. In that effort. And, you know, that will benefit our channel business, it will benefit our bioproduction business, analytical instruments businesses, will all benefit from those new construction. And that's really largely 27%, 28% by the time ground is broken on new things. For expansions, within existing facilities, it could be a little bit faster than that. So that is something we're actively engaged in, but it takes some time to gestate. More rapidly than that and in a way more cost-effectively for our customers, is leveraging our pharma services network to be able to move more of their volume to the U.S. You know that we are the industry leader in drug products sterile fill finish. We have very strong capabilities here. We've had very strong demand for those capabilities and our arrangement with Sanofi where we acquired one of their sites gives us another production node in the U.S. That is well trained, great workforce, and the ability to expand that facility as well. So we're excited to be able to enable our customers and pharma biotech has been a good environment for us. So thanks, Mike. Michael Ryskin: Okay. Thanks. That's all really helpful. And then maybe on the academic and government front, I mean, think you called out a low single-digit decline in the quarter. It seems like slight improvement from last quarter. But a lot of updates there as well. It looks like we're on track for hopefully flat budget next year, which is encouraging. But on the other hand, you've got the government shutdown over the last couple weeks now. So just give us an update on what you're hearing there. Is there any risk from government shutdown starting to hurt some of that? Potential recovery in A and G? Just sort of how you think about that playing out? Thanks. Marc Casper: Yeah. So, when I think about academic and government, in the quarter, the improvement was really slightly better in Europe. U.S. was very similar. China was very similar. To what we experienced in Q2 in both of those markets have headwinds, obviously different drivers of those headwinds. And when I think about so that government shutdown is kind of post-quarter. So I'll talk about that in a moment. But I say what's going on in the environment, in Q3, in the US, customers actually feel better about the idea of a more stable funding environment. Obviously, we'll have to get a budget in place and all of those things. But I think there's more consensus around relatively a flattish budget. And I think that will remove a headwind over time as the market stabilizes, once we get that funding in place. So I actually say from that perspective, while the conditions were, muted, I would say actually the noise or the it's less noise in a way. It feels a little bit better. On government shutdown, the way I would say is, obviously post-quarter, we're in the middle of it. Right now. I think it adds a little bit to customer hesitancy, right? It does add some uncertainty. And it obviously will delay some expenditures by the US government as well. On the things that they actually purchase. We put into our implied guidance range for the fourth quarter a reasonable set of action outcomes based on the government shutdown and based on our own experience. And how we think it's playing out and feel well positioned to navigate that. So that's how we thought about it. At this point in time. Michael Ryskin: Thank you, Mike. Thank you so much. Thanks. Operator: Thank you. Our next question comes from Tycho Peterson from Jefferies. Tycho, your line is now open. Please go ahead. Tycho Peterson: Hey. Thanks. Mark, I wanna maybe unpack some of the analytical instrument strengths. We're certainly better we've been modeling. Appreciate your comments on academic and pharma. But maybe just a little bit more color. Is this mostly mass spec? Is it cryo EM? Any particular segments that are emerging? And I guess, importantly, how do you think about kind of momentum on analytical instruments in the year-end? Any thoughts on budget flush and '26 at this point? Obviously, little bit too early to see a real pickup from onshoring, sounds good. Marc Casper: Yes. So Tycho, thank you for the question. So the team has been doing a good job in our analytical insurance business I'm proud of the efforts. The innovation that we've been talking about is really being incredibly well adopted. Say what is one of the drivers? Great launches in both mass spec and cryo electron microscopy. You know, it makes a real difference. And many of you have heard me say over the years, irrespective of funding environments, because they ebb and flow over time, you have relevant innovation and you think about what our customers are actually doing, they're doing their life's work. With this innovation. And if they don't have the best tools, effectively, they're really wasting their time. And because of that, you see an incredibly resilient and entrepreneurial set of customers getting funding. So the team's done a good job on that respect, and I'm proud of the mid-single-digit growth that we delivered in the quarter. When I think about what drove it really electron microscopy and chromatography and mass spectrometry. Were the drivers. We still have headwinds in our chemical analysis business. It was a little better. Than the previous quarter, but still pressure in some of the industrial and environmental segments. So largely, the two big businesses drove the strong performance. I think about the momentum going into the fourth quarter, really the only thing that's different, we have a much stronger comparison in the fourth quarter. We had very strong high single-digit growth last year. So comparison is difficult. Different. So that really is the will be the factor. But the underlying health of the business is quite good. Tycho Peterson: Great. And then a follow-up on Diagnostics You did flag China. Obviously, this has been a pressure point for some of your peers in China Diagnostics. Maybe Just Give Us A Sense Of What's Going On, You Know, On The Ground There. What If What Would Especially Specialty Diagnostics Have Done Ex That China drag? And then overall, I guess, just what are your assumptions around China for remainder of the year and early twenty six? Marc Casper: Yeah. So when I think about our specialty diagnostics, business, we provide high value medically relevant, critical testing. Right? And you think about that it's transplant diagnostics, it's immunodiagnostics, It's our protein diagnostics, which is our multiple myeloma business, which is part of our clinical diagnostics business. Our biomarkers for sepsis. These are just critical capabilities. And businesses that are, you know, a healthy long-term set of prospects. When I think about the environment in China, we have a much smaller presence than the market average for the diagnostic businesses in China in terms of what we do. So we saw very weak conditions based on the pricing and reimbursement environment. It's not different than what we expected. And those pressures flow through, but it's relatively modest portion of our business. And saw a little bit of improvement relative to the prior quarter in terms of what the growth rate was in the business. So think we're well positioned there over time. And you know, not much beyond that, I would say. Tycho Peterson: Okay. Thank you. Operator: Thank you. Our next question comes from Jack Meehan from Nephron Research. Your line is now open. Please go ahead. Jack Meehan: Thank you, and good morning. First question Good morning, Jay. Mark, just wanted just wanted to test your pulse You know, last quarter, you gave some initial framing thoughts around 2026 and kind of progression around the 3% to 6% organic growth. I guess just based on everything you've seen and the dialogue that you've had with customers, just great to get your latest thoughts on how you felt like you were tracking relative to that. Marc Casper: Yeah. So you know, when I think about the progression and the midterm outlook in the long-term outlook, we feel very good about that. Right? So nothing has changed about our confidence in the next couple of years. 3% to 6% organic is the right level of assumptions and strong operating margin and operating income growth coming out of that. So that's consistent. When I think about the first few agreements, on MFNs between the pharmaceutical companies, and the industry and the government in the US, that's what we expected to happen. Right? So that's a good thing, right, which is we expected that companies or the vast majority of companies would navigate the environment successfully. You're seeing the early ones do that. And that gives us confidence that the market conditions will continue to progress. I think it's worth remembering that today, we're basically at 2% organic and is about full point headwind from the COVID runoff, which doesn't which won't repeat next year. So we're kind of running at the 3% range. And over time, over this next couple of year period, the absence of negatives, meaning that academic and government won't decline as much, China at some point will stabilize, that in and of itself, without even improving the market conditions, ultimately gets higher in the range and then ultimately continued share gain in market conditions will get us further and further in the range over time. I feel very good about the position. I think for Stephen, it's worth commenting a couple of things that have changed. Stephen Williamson: Yes. So Jack, a couple of things to think about when you're doing the modeling for 2026. So based on current FX rates, there'll be a tailwind to revenue of a couple of million dollars. Obviously, I'd obviously monitor how rates change between now and the end of the year. We'll give more detail in terms of the current view in early 2026. Then in terms of the recent M&A, maybe it's worth actually taking a step back and giving a little bit more detail on kind of the implications for the current guide '25 and some thoughts in terms of modeling for you going forward. Starting with the filtration and separation business, revenue for this business for the full year 2025, not just the period we own but as I think about the full calendar year, expected to be just under $750 million in scale, so good sized business. When I think about going forward, the revenue growth there will be likely around or above the average for the company going forward. A good growing business. For the first twelve months of ownership, we continue to expect the transaction to be $0.06 dilutive, just under half of that is occurring in 2025. And then we're bringing this company this business into the company as a low double-digit margin business, and that quickly gets up to mid-teens and above. Once the integration stand-up costs are behind us. At that point, strong top-line growth, including strong synergies, will be nicely accretive to both margins and earnings for the business. Then moving to the Sanofi site acquisition. This comes with, as Mark mentioned, an existing book of business from Sanofi, approximately $75 million. And over the next couple of years, we're investing in additional lines that we're drive much stronger utilization of that site going forward. And as we go through the investment phase over twelve months of ownership, we expect the transaction to be dilutive by about $0.05. To get into 2027, the revenue profitability builds nicely as the new lines start to generate revenue there. So hopefully, that's some good color that will help you with modeling here. Jack Meehan: Yeah. That was all great. Wanted to follow-up and talk about the clinical research business. Mark, just any additional color you can share on trends and new authorizations, how you feel like pharma customers are feeling about getting back to work on trials, and any any just color around traction there would be great. Marc Casper: Thanks. Jack, thanks for the questions. They never stop working. It's really the business has progressed really well, very very proud of how the team is executing. The year has played out strongly. When I think about Q3, revenue growth stepped up. So we're growing in the quarter. Remember, we were just slightly positive in Q2. We're back to low single-digit growth. Authorization is incredibly strong. So ahead of that. So that positions that step up that we're expecting over time is playing out nicely. Are also innovating in what we do in clinical research. Right? And if you think about why that's relevant is because it is the lifeblood of the pharmaceutical and biotech industry is to be able to improve the speed and efficiency of the drug development process because that creates opportunities to improve the ROI on drug development. Which creates a virtuous cycle of more investments by our customers. A couple examples in the clinical research business where one is actively being, you know, implemented. We talked about accelerated drug development about a year ago. We're winning significant business. It's resonating incredibly well. Because what it's allowing us to do is shave time and cost out for our customers and leveraging our capabilities of not only our CRO business, but also our pharma services business to help our customers bring exciting medicines to market. The OpenAI collaboration is what we're creating together and what's new. Right, which is where, you know, deploying artificial intelligence in a way to help improve the cycle time of our clinical trials. We're co-creating new capabilities, right, in terms of effectively leveraging the large repository of data that we have to be able to add new value to our customers. So it's a super exciting time. Clinical research business, and the business is progressing nicely. During the course of this year. Jack Meehan: Yeah. It seems interesting. Talk to you. Marc Casper: Thank you. Operator: Thank you. Next question comes from Daniel Anthony Arias from Stifel. Your line is now open. Please go ahead. Daniel Anthony Arias: Hey, good morning guys. Thank you. Mark, maybe just following up on your biopharma comments. I'm just curious whether demand from small and emerging biotech is getting any better from where you sit. I mean, obviously, the BTK index is doing better, but I'm wondering if spending is loosening up at all. Marc Casper: Yeah. So, Dan, in terms of biotech, I'm sure it's a strong quarter. Right? When I look at what was going on sort of in the more detail, we really saw very nice momentum in our clinical research business. Of the early activities in pharma services. Obviously, in pharma services, it's going be smaller dollars as you get going. But there was a really nice progression there, which I feel good about. So I think that is encouraging. Actually think some of the M&A transactions that were done by large pharma acquiring biotech also helps sort of the ecosystem more broadly. So if I say not only do the equities perform better, but I think also you're seeing deal activity. And that deal activity ultimately will help drive a reinvestment cycle or cycling in of new capital. The market over time. So I think Q3 was a nice progression from that perspective. Daniel Anthony Arias: Yeah. Okay. That's great. Then maybe just taking the other side of Tycho's China question as it relates to pricing and just the initiatives that they have going on over there to control price. You know, the diagnostics markets are evolving, obviously, but what are you seeing on the research and industrial side? Is that fluid in a way that you think introduces some additional risk, or do you have your hands around the pricing dynamic? Such that you can think about it being stable into year-end or into the beginning of '26? Thanks a bunch. Marc Casper: Yeah. Dan, thanks for the question. So maybe if I step back on China. Right? Because we've been able to deliver stronger growth, around the world now for some period of time, China has become a smaller percentage of the company's total. Still an important market, but smaller. When I look at what's going on in China, know, academic and government, does benefit from some of the stimulus programs, but relatively pressured. As the government has tried to manage its own economic challenges, which are meaningful. But what was encouraging was that pharma biotech grew in the quarter modestly, but it was nice to see that happen. When I think about the quarter we declined in the mid-single digits. That was an improvement versus Q2. Really, the difference over those trends was we had that month of succession of trade activities back in the April timeframe. That absence really allowed us to have a bit more moderate declines. I would expect China for this year full year, to be down between mid and high single digits. The pricing dynamics, less government affected in the industrial sector, in pharma and biotech. They're more private enterprises or state-backed enterprises, but they don't have the same reimbursement dynamics. That you would see in the diagnostics and health care market. So that's a bit more manageable. Thanks for the questions. Operator: Thank you. Our next question comes from Daniel Gregory Brennan from T. D. Cohen. Line is now open. Please go ahead. Daniel Gregory Brennan: Great. Thank you. Thanks for the questions. Congrats, Mark and Stephen. Maybe, Mark, just going back to the onshoring announcement since it's been tremendous focus in the investor community. How to think about that? You gave a lot of color already in to some questions. I was hoping you can elaborate a little bit on two parts. First is, you know, we all ultimately think, like, kind of CapEx and, you know, capacity following drug volumes. So if drug volumes aren't necessarily changing, just trying to understand how to think about like what will be incremental in the U.S. Versus kind of that wasn't there before. So any way to help us think about that at this point? I know you talked about for the greenfield that would come with time, maybe like '27 and beyond. Just trying to think about that. And then I know you did talk about maybe more near term, maybe some of the brownfield there could be some equipment uptake. 'twenty six. Anyway, just help frame sizing magnitude or just any way to kind of contemplate what this can mean for Thermo Fisher? Marc Casper: Yeah. So, Dan, thanks for the question. So when I think about what is the aggregate dynamic, let's say, what the dollars are for us, but just what's going on. It is true incremental onetime demand. Right? And what I mean by that is there's gonna be new equipment new initial stocking inventory, new labs, all these things. I mean, none of these things are material in itself, but, you know, you just go through that process of getting a facility online. You do qualification runs. You just there's just a bunch of activity. That will generate demand over the next few years. But the volume in the industry hasn't changed. You do they're just real incremental in terms of that start up. But effectively, it doesn't mean that your ongoing consumables business grows more quickly because you're producing the exact same amount of medicines around the world, you're just producing in different sites. So from that perspective, it's kind of an unexpected positive over the next few years. We have a strong presence there. And interestingly enough, have a much stronger presence today than when those facilities were built many years ago in Europe. Right? Just if you think about how strong our bioproduction business is how strong the capabilities we're bringing in from solventum and filtration, the product launches around Dynaspin, which is our bioreactor technology. These are great things that position us actually have a higher share in the new facilities than the existing installed base. So I feel very good about the prospects. And we do it site by site in terms of what the opportunity is. So I don't have a good number to say how big is it in total, but should be a tailwind a bit in bioproduction. What I would say is our bioproduction is doing incredibly well, right? So when I able to look at a few of the companies that I've reported, very strong growth in Thermo Fisher. Clearly faster than what the others have reported. Broad-based strength geographically across our different businesses there. Really, the team did an excellent job. Bookings outpacing the strong, you know, teens growth in revenue is really the Teams are just doing great work. So it's an exciting business for us, and one with great momentum in the market. Daniel Gregory Brennan: Terrific. And then just a follow-up maybe to Steven. Just on the EPS impact and tariffs, could you just kind of level set? I know you gave the impact in the quarter, you said you mark to market the European tariffs, but you had the $0.50 potential from China. Think you recaptured some of that. Could you just kind bottom line, like how much ultimately kind of the tariff changes occurred and kind of what's happening in 4Q? Thank you. Stephen Williamson: Yes. Thanks, Dan. So when I think about the tariffs and the kind of the actual experience in Q3 came in favorably to what we'd had in the prior guide. In my prepared remarks, called out the $0.11 pickup, and that's a combination of tariffs and the related FX to, in terms of the changes in the kind of tariff and trade environment. Looking to Q4, given the tariffs increased from the time of our last guide most materially between U.S. and Europe. Our initial view is that that kind of assumptions we had around tariffs pretty much hold for Q4. So I'm not expecting a significant pickup in Q4. That's kind of how we've kind of framed the guidance for in terms of this update. Operator: Great. Thanks, Sam. Our next question is from Andrew Tupa from Raymond James. Your line is open. Please go ahead. Andrew Tupa: Great. Thanks everybody for the time. Just first, would love a little bit more color on the contract research side of the house and maybe in particular, how that accelerator bundled program has gained traction and kinda layering that into the context of all the discussion that's already occurred in terms of onshoring, how that changes the applicability to customers, and how they look at know, that kind of wraparound March partnership versus, CRO and CDMO kinda separately historically? Marc Casper: Yeah. So, Andrew, thank you for the question. So when I think about accelerator, right, we are one of the largest clinical research organizations. We are also one of the largest pharma services organizations that's developing medicines on the physical side, from early development all the way through commercial scale production. Both in drug substance and drug product and all of the physical clinical trials like activities around there. So we are touching these pipeline, these molecules in many different ways. And a hypothesis that we had at the time of deciding to acquire PPD back in 2021 was that there would be insights and capabilities that could streamline the way that companies develop medicines and how they produce them ultimately. We didn't bake that into our models, but we had a strong hypothesis. We spent a couple years doing a significant number of co-creation with our customers to bring that to life. We launched the official capabilities a year ago, and the adoption has been very strong. You see it very aggressively in biotech. Because, effectively, they outsource pretty much all of their work. Right? So when they think about it, they are looking for a partner that can help them bring insights, not only in how to design and execute their trials, but on also how do you develop and produce the medicines. And it's been very compelling. It's built us a nice book of authorizations. That turns into revenue over time. Takes a while for this flow through the pipeline. And in large pharma, there's been great interest in our leading clinical trials, physical capabilities, the logistics packaging, distribution of experimental medicines. And what that has allowed us to do is continue to drive share and gain momentum because, again, there, the linkages with clinical research shaves time and cost out of the process as well. So it's been, you know, it's early days, but they've been very positive. Andrew Tupa: That's helpful. Thank you. And then maybe just one of financial question. Your $0.2 operational beat in 3Q, you had the FX and tariff tailwinds as well. But you're raising the range about 20¢ in the midpoint as well. Maybe what's going on to off some of that operational traction as we think about 4Q? Is it reinvestment? Is it a little bit of mix? Is there something different to think about knowing we have that $5 of dilution from the acquisitions you called out as well? Just would love a little bit of color on kind of 3Q to 4Q. Stephen Williamson: Yes. Understood. We beat by $0.30 in Q3. As you mentioned, we have $0.05 of additional dilution from the acquisitions. And overall $0.20 raise in midpoint given where we are in the year, how we're performing, what the end markets are like, I think this is an even stronger raise on the low end of our guide. I think that's a good to be in as I think about going into the Q3. Q4 quarter. Operator, we have time for I just we're in a good position for finish the year. I don't overread into raising our guidance by $0.20 in the midpoint, but significantly raising on the low end I think that's a strong statement. Andrew Tupa: Thanks, Andrew. Okay. Thank you. Operator, are set for one more question? Operator: Lovely. Our next question comes from Patrick Donnelly from Citi. Your line is open. Please go ahead. Patrick Donnelly: Great. Thanks for taking the questions, guys. Mark, maybe one for you on just the capital allocation side. Obviously, continue to buy back stock as you talked about. You just talk about the M&A appetite, what those discussions look like? Any areas you're focused on? I know you guys always have a good pulse on that front, just curious what appetite there looks like for the conversations. And I just have a quick follow-up. Marc Casper: Yeah. So we have been active all year. We have deployed about $7.5 billion on M&A, $3.5 billion on return on capital through buybacks and dividends. We have a very busy pipeline. It's exciting. I like this environment because there are good companies that you know, struggle in environments where it's all about execution. And so we're busy, and we're looking at some interesting things. Obviously, those things will always fit well with our strategy. Going to be whether we can generate really good returns. And for those that feel good about, you'll see us continue to be active. Are many parts of the company given how fragmented our industry is, to expand our offerings that would be highly valued for our customers. So we're going to execute well against what we closed. And, at the same point in time, continue to look for great opportunities build more value. Patrick Donnelly: Okay. That's helpful. And then as we look ahead, it seems like the exit rate for 4Q somewhere at two or 3% organic. Obviously, you talked a little bit about 26% last quarter. Is the view that growth just continues to accelerate throughout next year? It sounds like China is turning the corner to a degree. Pharma sounds a little bit better. I guess, what segments are holding you back, if any, in terms of when you look at what's improving right now? And again, as that acceleration happens next year, are the key drivers? And what are you looking for still turn the corner? Thank you guys so much. Marc Casper: We are looking forward to our call at the beginning of the year to give you all the details. We'll benefit from, obviously, the perspective on how we exit the year. And our view is, over the next couple of years, growth is going to build over time. And I'm very excited about exiting this year. A couple percent organic and 3% when you have the non-repeats of the final bits of COVID runoff. So we entered the year at a good part, and going to execute really well in turning the revenue growth into excellent, excellent earnings growth. And we did in the quarter and finish up on a great note in '25 and set ourselves up for a great '26 and beyond. So Patrick, thank you for the final question. Let me wrap up. Thanks, everyone, for joining us on the call today. We're very pleased to deliver another strong quarter. We're well positioned to deliver differentiated performance in 2025 and continue to create value for all of our stakeholders and build an even brighter future for our company. Look forward to updating you on the fourth quarter and the full year performance early 2026. And as always, thank you for your support of Thermo Fisher Scientific. Thanks, everyone. Operator: This concludes today's call. You all for joining. You may now disconnect your lines.
Operator: Good morning, and welcome to the Agree Realty Corporation Third Quarter 2025 Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. To withdraw your question, please press star then 1 again. Please limit yourself to two questions during this call. Note, this call is being recorded. I would now like to turn the conference over to Reuben Goldman Treatman, Senior Director of Corporate Finance. Please go ahead, Reuben. Reuben Goldman Treatman: Thank you. Good morning, everyone, and thank you for joining us for Agree Realty Corporation's third quarter 2025 earnings call. Before turning the call over to Joey Agree and Peter Coughenour to discuss our results for the quarter, let me first run through the cautionary language. Please note that during this call, we will make certain statements that may be considered forward-looking under federal securities law, including statements related to our updated 2025 guidance. Our actual results may differ significantly from the matters discussed in any forward-looking statements for a number of reasons. Please see yesterday's earnings release and our SEC filings, including our latest annual report on Form 10-K, for a discussion of various risks and uncertainties underlying our forward-looking statements. In addition, we discuss non-GAAP financial measures, including core funds from operations, or core FFO, adjusted funds from operations, or AFFO, and net debt to recurring EBITDA. Reconciliations of our historical non-GAAP financial measures to the most directly comparable GAAP measures can be found in our earnings release, website, and SEC filings. I'll now turn the call over to Joey Agree. Joey Agree: Thanks, Reuben, and thank you all for joining us this morning. I'm pleased to report another very strong quarter at Agree Realty Corporation as we further expanded and strengthened what we view to be the nation's leading retail portfolio. The unmatched value proposition of our three-pronged approach continues to drive a compelling opportunity set and expansive pipelines across all platforms. We achieved our largest quarterly investment volume since the depth of COVID five years ago, deploying over $450 million across all three platforms, while maintaining a high level of discipline in our underwriting process. Given growing pipelines across our three external growth platforms, we are increasing our full-year 2025 investment guidance to a new range of $1.5 to $1.65 billion. At the midpoint, this represents an increase of over 65% above last year's investment volume. This exceptional level of activity demonstrates our ability to efficiently scale our investment platforms while partnering with the best retailers in the country. We will continue to be disciplined capital allocators while maintaining our stringent real estate quality underwriting standards. Our best-in-class portfolio is paired with a fortress balance sheet that is over $1.9 billion of liquidity and no material debt maturities until 2028. With 3.5 times, and over $1 billion of forward equity available to us, we enjoy significant runway and have prefunded our growth well into next year. During the quarter, we received an A- issuer rating from Fitch Ratings, making us one of only 13 publicly listed U.S. REITs with an A- credit rating or better. This was a significant milestone for our growing company and is a testament to over fifteen years of disciplined growth and keen portfolio construction, having invested over $10 billion during that period while maintaining a preeminent balance sheet and leading the way on capital markets activities. Given our robust liquidity profile, fortress balance sheet, and strong portfolio performance, we are raising our AFFO per share guidance to a new range of $4.31 to $4.33 for the year. The new midpoint represents approximately 4.4% year-over-year growth. Peter will provide more details on our guidance momentarily. Turning to our three external growth platforms, during the third quarter, we invested over $450 million in 110 high-quality retail net lease properties across our three platforms. This includes the acquisition of 90 assets for over $400 million. The properties acquired during the quarter are leased to leading operators in home improvement, auto parts, grocery, off-price, farm and rural supply, convenience stores, and tire auto service. The acquisitions had a weighted average cap rate of 7.2% and a weighted average lease term of 10.7 years. Investment-grade retailers accounted for 70% of the annualized base rent acquired, the highest mark so far this year. Notable transactions during the quarter included a sale-leaseback with a relationship tenant in the tire and auto service sector, multiple Aldis, a high-performing Kroger in Cincinnati, a Sherwin-Williams portfolio, a Home Depot in New York, as well as a Walmart Supercenter in Illinois. Through the first nine months of the year, we've invested nearly $1.2 billion across 257 retail net lease properties spanning 40 states and 29 retail sectors. Approximately $1.1 billion of our investment activities originated from our acquisition platform, with the remainder emanating from our development and developer funding platforms. During the third quarter, we commenced five development for DSP projects with total anticipated costs of approximately $51 million. We are well on our way to commencing over $100 million of projects in the second half of the year as discussed on last quarter's call. Through the first nine months of the year, we've committed approximately $190 million across 30 projects that are either completed or under construction, representing a significant increase in development and DFP spend compared to prior years. We remain confident that we'll achieve our medium-term goal of $250 million commenced annually. In the third quarter alone, we invested a record of approximately $50 million across 20 development and DXP projects, representing a twofold increase in capital deployment quarter over quarter. These platforms are a growing component of our investment strategy, allowing us to partner with best-in-class retailers and private developers to add high-quality real estate to our portfolio at superior returns that we can achieve via acquisitions. Of note, during the quarter, we commenced construction on two of our first 7-Eleven developments. Located in Michigan and Ohio, we anticipate total costs for the two projects will be approximately $18 million. The Ohio location marks our first commercial fueling site for 7-Eleven, a compelling addition to our large-format convenience store portfolio. These projects underscore the strategic depth of our relationship with yet another leading retailer. We're delivering our full complement of capabilities: round-up development, developer funding projects, as well as acquisitions. I look forward to providing more details as we continue to roll out additional projects in the coming quarters. On the asset management front, we executed new leases, extensions, or options on approximately 860,000 square feet of gross leasable area during the quarter, including the 50,000 square foot TJ Maxx and HomeGoods combo in Eugene, Oregon, a 27,000 square foot Burlington in Midland, Texas, and two Walmarts comprising over 310,000 square feet. Through the first nine months of the year, we executed new leases, extensions, or options on 2.4 million square feet of gross leasable area with a recapture rate of approximately 104%. We are in an excellent position for the remainder of the year, with just nine leases or 20 basis points of annualized base rents maturing. Dispositions this quarter totaled approximately $15 million and included our only At Home in Provo, Utah, as well as three Advance Auto Parts. The At Home disposition is emblematic of our underlying focus on real estate. The disposition cap rate of approximately 7% is nearly 50 basis points inside of where we acquired the asset, resulting in an unlevered IRR of approximately 9%. Our best-in-class portfolio now spans over 2,600 properties across all 50 states, including 237 ground leases representing 10% of total annualized base rents. Occupancy for the quarter remained very strong at 99.7%, and our investment-grade exposure remained sector-leading at 67%. Heading into the fourth quarter, we are extremely excited to wrap up the year as we head into 2026 in a tremendous position as our earning algorithm kicks into gear. I'll now hand the call over to Peter, and then we can open it up for questions. Peter Coughenour: Thank you, Joey. Starting with earnings, core FFO per share for the third quarter of $1.09 was 8.4% higher than the same period last year. AFFO per share for the third quarter increased 7.2% year over year to $1.11, which is $0.02 above consensus. A portion of the beat is attributable to lease termination fees, which contributed roughly $0.01 to AFFO per share in the quarter. As Joey highlighted, we have updated our 2025 earnings outlook to reflect our strong performance year to date. We raised both the lower and upper end of our full-year AFFO per share guidance to a new range of $4.31 to $4.33, which implies year-over-year growth of approximately 4.4% at the midpoint. Our new guidance range includes an assumption for approximately 25 basis points of credit loss for the year. As a reminder, the treasury stock method impact is included in our diluted share count prior to settlement if Agree Realty Corporation stock trades above the net price of our outstanding forward equity offers. The aggregate dilutive impact related to these offerings was fairly de minimis in the third quarter. Our updated guidance range contemplates a minimal treasury stock method dilution in the fourth quarter as well, though that remains subject to how the stock trades for the remainder of the year. For full-year 2025, we still anticipate roughly $0.01 of dilution related to the treasury stock method, largely given the impact recognized in the first half of the year. In the third quarter, we declared monthly cash dividends of $0.256 per share for July, August, and September. This represents a 2.4% year-over-year increase. While raising our dividend twice over the past year, we maintained conservative payout ratios for the third quarter of 70% of core FFO per share and AFFO per share, respectively. Subsequent to quarter end, we again increased our monthly cash dividend to $0.262 per share for October. The monthly dividend reflects an annualized dividend amount of over $3.14 per share or a 3.6% increase over the annualized dividend amount of $3.04 per share from the fourth quarter of last year. Moving to the balance sheet, as Joey mentioned, in August, we achieved an A- issuer rating from Fitch with a stable outlook. This significant accomplishment is a testament to the strength of our portfolio as well as our balance sheet and reflects the thoughtful and disciplined way we have and will continue to grow the company. The A- rating reduced the interest rate on our 2029 term loan by five basis points. In addition, the F1 short-term rating assigned by Fitch translated into a similar pricing improvement for our commercial paper notes. During the quarter, we settled approximately 3.5 million shares of forward equity for net proceeds of over $250 million. As of September 30, we had approximately 14 million shares remaining to be settled under existing forward sale agreements, which are anticipated to raise net proceeds of over $1 billion upon settlement. At quarter end, total liquidity stood at $1.9 billion, including cash on hand, forward equity, as well as over $850 million of availability on our revolving credit facility, which is net of amounts outstanding on our commercial paper program. Pro forma for the settlement of all outstanding forward equity, our net debt to recurring EBITDA was approximately 3.5 times. Excluding the impact of unsettled forward equity, our net debt to recurring EBITDA was 5.1 times. Our total debt to enterprise value was approximately 29%, while our fixed charge coverage ratio, which includes principal amortization and the preferred dividend, remains very healthy at 4.2 times. Subsequent to quarter end, we further strengthened our balance sheet, securing commitments for a $350 million five-and-a-half-year delayed draw term loan that will mature in 2031. We anticipate closing later this quarter and have entered into $350 million of forward-starting swaps to fix SOFR until maturity. Including the impact of the swaps, the interest rate on the term loan is fixed at approximately 4% based on our current A- credit rating. The term loan demonstrates continued strong support from our key banking partners and enables us to fill a gap in our debt maturity schedule while achieving opportunistic pricing in today's rate environment. Upon closing, the term loan will increase our pro forma liquidity to approximately $2.2 billion, and we have now locked in attractively priced equity and debt capital to fund our growth well into 2026. With that, I'd like to turn the call back over to Joey. Joey Agree: Thank you, Peter. At this time, we will open it up for questions. Operator: Thank you. We will now begin the question and answer session. Please limit yourself to two questions during the call. We'll take our first question from Smedes Rose at Citi. Nick Joseph: Thanks. It's Nick Joseph here with Smedes. Appreciate the color around the treasury method for the forward equity. But can you just walk through what's required in terms of the actual timing and settlement, just given the upcoming expirations around the forward equity? Peter Coughenour: Sure, Nick. In terms of our outstanding forward equity, we have about 14 million shares of forward equity outstanding as of the end of the third quarter. Roughly 6 million of those shares have contracts that mature at some point during the fourth quarter. And so we anticipate settling those shares, those 6 million shares, at some point during the fourth quarter as those contracts come to maturity. As for the remainder of the outstanding forward equity, we would anticipate settling that at some point in 2026. Nick Joseph: Thanks. That's very helpful. And then just on acquisitions, I understand the visibility is limited, but it does continue to track ahead of expectations. But is there anything on the horizon that you're seeing right now that could slow that pace that you're currently seeing? Joey Agree: Nick, it's Joey. Nothing on the horizon that we see that pace slowing in 2025. Obviously, the ten-year treasury is down to the 3.95, 3.96 level, but we haven't seen anything that just slows down this year. Nick Joseph: Thank you. Thanks, Nick. Operator: We'll move next to Michael Goldsmith at UBS. Michael Goldsmith: Yes. Good morning. Thanks a lot for taking my questions. First on the cap rates, the acquisition cap rates actually ticked up in the period, and we keep hearing from others about the pricing landscape, and there's a narrative of increased competition. So are you seeing any of that there? And how have you been able to navigate some of those headwinds that others are seeing? Joey Agree: Yeah. As I talk about all, you know, pretty frequently, Michael, I wouldn't get overly enthralled with the narratives that are out there from different institutional acquirers. We haven't seen any material change in cap rates year to date through September 30. Or frankly, today. What we do is differentiated. It's bespoke. We're doing one-off transactions generally, short-term, blend and extends. Different types of transactions. And the output this quarter was 10 basis points higher than last quarter just because of the composition. So, like I said, I wouldn't get carried away in the overall narratives of the largest, most fragmented, at least institutionally owned market in commercial real estate, that being retail net lease. Michael Goldsmith: Thanks for that, Joey. And as a follow-up, the fourth quarter implied AFFO per share is with the third quarter. So any reason why that would be kind of flat sequentially or any one-time items that impacted the third quarter or impact the fourth quarter that to expect that to be kind of consistent? Joey Agree: I'll turn it over to Peter, but I don't really see anything. I think the third quarter was fairly front-loaded in terms of acquisition volume. Nothing overly material there, Peter. Am I missing anything? Peter Coughenour: No. Michael, the only thing I would add is just in my prepared remarks, I did mention the term fees received during the third quarter, which contributed to AFFO per share in the third quarter. We typically don't receive much in the way of term fees. We don't have anything contemplated in the fourth quarter. And so as you look at Q4 being roughly flat at the midpoint to Q3, I think the term fees are a contributing factor there. Michael Goldsmith: Thanks very much. Good luck with the fourth quarter. Joey Agree: Thanks, Mike. Operator: Our next question comes from Jana Galan at Bank of America. Jana Galan: Thank you. Good morning. Following up on your comments on the growing pipeline for the different external growth platforms, can you talk to how much is current tenants versus new to portfolio? And then kind of where you see cap rates trending for Q4 and potentially into 2026? Joey Agree: Good morning, Jana. No new tenants that I can think of that we don't already own existing in the 2,600 assets. Staying within our sandbox amongst all three external growth platforms. In terms of cap rate trends, we'll see how the macro works out. Again, we haven't seen anything different to date. We don't anticipate any material deviation in Q4. Our Q4 pipeline in terms of acquisitions is very strong. I will say that there's a significant component of ground leases in there in Q4. And then as we've said previously, we anticipate breaking ground at over $100 million projects in the second half of this year. Obviously, that was approximately $50 million in Q3. Would anticipate a potential acceleration of that as well into Q4 through development and developer funding platform. Jana Galan: Thank you, Joey. And then, maybe for Peter, you had mentioned in the guidance, there's 25 basis points of credit loss. Can you just kind of update us on where you stand as of the third quarter? Peter Coughenour: Yes. So in the third quarter, we experienced just under that, about 21 basis points of credit loss during the third quarter. To your point, for the year, we're assuming in our guidance range of approximately 25 basis points of credit loss. And with only a couple of months left here in the year, at this point, most of that is known or identified at this point. Again, I do want to reiterate, I know we've talked about it on past calls, but how we think about credit loss here. That is a fully loaded number inclusive not only of credit events but also of any occupancy loss related to releasing assets that may not have been tied to a tenant that is in any form of distress or having credit issues. It also includes not only base rent but any nets associated with any space that we get back and that we're responsible for during a period of downtime. And so fully loaded number, I think, it's different than somehow others in the space think and talk about credit loss. And again, 25 basis points is what we assume for the year. Jana Galan: Great. Thank you very much. Joey Agree: Thanks, Jana. Operator: We'll move next to Jim Kammert at Evercore. Jim Kammert: Good morning. Thank you. Joey, maybe I should have been listening more carefully. Did you indicate or say that on the releasing activity in aggregate, it was 104% recovery for the quarter? Or did I mishear that? Joey Agree: That's correct, Jim. Jim Kammert: And is that and what could you remind me what the year to date was? Is that... Peter Coughenour: You're right. Can't recall. Yeah. So we've released 2.4 million square feet of GLA year to date with the recapture rate of 104%. And through the first six months of the year, we were also at 104%. And so that recapture rate has trended pretty steadily around that 104% throughout the year. Jim Kammert: Okay. My apologies. Great. And then obviously, Peter, you mentioned obviously you have the new term loan that will be funding here in November probably. There's no given you have no unsecured maturities, etcetera. As you say, we just think about it as liquidity and you're putting in cash or just pay down the line. There's no real target use for the funds immediately. Peter Coughenour: Yes. So we'll close on that term loan in November. We have a twelve-month delay draw feature on that term loan, and so we don't necessarily need to draw down the proceeds right away. We have flexibility there. In terms of when we draw those proceeds down, what the intended use is, we do have about $390 million of outstanding commercial paper notes as of the end of the quarter. And so I think the intended use will be to pay down short-term borrowings with any remaining funds used to fund incremental investment activity. Jim Kammert: Great. Thanks for the clarification. Thank you. Peter Coughenour: Thanks, Jim. Operator: Next, we'll move to Linda Tsai at Jefferies. Linda Tsai: Hi. With the ground leases being a bigger portion of the Q4 acquisitions and 10% of the overall portfolio ABR, any thoughts on how much you want to grow this piece of the business? Joey Agree: We'd love to continue to grow it, Linda. We're going to do so opportunistically if we find opportunities that obviously hurdle qualitatively and quantitatively, we're going to strike. Like I said, there are a number of ground leases, a much higher percentage in Q4 currently. That could change here as we wrap up sourcing for Q4 over the next couple of weeks. But they're just opportunistic sellers here generally that we're finding opportunities, institutional as well as individual sellers. Linda Tsai: Thanks. And then, I know you said, you know, the term fees are always minimal for you always, but would you be okay sharing who the retailer was in Q3? Joey Agree: Yeah. That was two Advance Auto Parts stores that we liked the real estate and we are actively working on tenanting those assets. You'll also notice we divested of a few Advance Auto Parts during the quarter, as I mentioned during the prepared remarks. So just continuing to diversify the portfolio and take advantage of opportunities. Operator: Thanks. We'll move next to Omotayo Okusanya at Deutsche Bank. Omotayo Okusanya: Yes. Good morning, everyone. Good to see you guys firing on all cylinders. The credit rating, the upgrade, you just talk a little bit about how you expect that to ultimately impact your cost of debt? Are you suddenly, you know, 25 bps tighter or, like, how do we kind of think about that as a potentially a long-term debt and maybe term loan funding? Peter Coughenour: Sure. I think with the receipt of the A- rating from Fitch during the quarter, we saw an immediate impact on our existing 2029 term loan where we saw five basis points of pricing improvement there. We were also active issuing commercial paper during the quarter and we saw a similar pricing improvement on commercial paper issuance after receiving the A- rating. We think about long-term debt issuance in the public markets going forward, I certainly think the A- rating helps. I think it's validation of the manner in which we've built the company in a very conservative manner, the strength of balance sheet and our portfolio. And frankly, what we hear from fixed income investors about how they view the credit today. And so I think in time that will allow us to continue to compress spreads and achieve better pricing in the public unsecured markets when we come back to those markets. But we've seen immediate pricing improvement on our term loan and commercial paper issuance this year as well. Omotayo Okusanya: That's very helpful. And then on the DFP side, could you just talk a little bit about again, you're ramping up pretty nicely. You guys have put out a really good target for that business, which implies a decent amount of growth and demand. I mean, probably every other property type everyone's kinda talking about development is really, really hard whether it's due to construction costs or what have you. So could you just talk a little bit about what's driving all of a sudden, you know, your ability to kind of ramp up that business? Joey Agree: Yeah. Just to clarify. When development, we talk about the Speedway projects in the prepared remarks, those are true development projects. We're working hand in hand. The team here with 7-Eleven Speedway, everything from site selection to entitlements and permitting, A and E, overseeing construction, and turning over. So that's true organic development projects, Agree Realty working with 7-Eleven hand in glove. The developer funding platform is really being utilized as a bridge for developers to get projects complete. And many times in the developer funding projects, usually we're providing the capital as more of a financial structure. We own the asset upon completion. The developer is able to obtain a TIF to help make his numbers work or her numbers work on their side of the equation. Or we'll retain out lots or ancillary real estate where they see eventual upside. I will note both pipelines have both platforms, excuse me, have deep pipelines. There are some fairly large projects also in both platforms right now that could hit in Q4 or due to entitlement and permitting issues could hit in Q1. That's why we've got kind of a wide stance there in terms of what we're anticipating. But that number could be well over $100 million or could move to for the back half this year, as I mentioned, or could move into Q1 really out of our control, third-party municipal and governmental control there. Omotayo Okusanya: Great. Thank you. Joey Agree: Thanks, Tom. Operator: We'll move next to John Kilichowski at Wells Fargo. John Kilichowski: Good morning. Maybe just starting off, given the distress we've seen in autos this year, I think there was an announcement this morning for a subprime lender. How do you think about your exposure there? And are there any of those tenants entering watch list territory for you? Joey Agree: No. I think the subprime lending market actually plays into our thesis on, frankly, auto parts, the distress you're seeing in those borrowers. Every day is a new record for cars on the road. Auto parts, obviously, is a substantial part of our portfolio being number five in terms of sector concentrations at 6.8% where amongst O'Reilly's and AutoZone's largest landlords and partners. I'll be down in O'Reilly pretty soon with the team here. We continue to work with leading auto parts operators and then, obviously, Gerber Collision as well. But I think that really plays into the hands here. We're not ownership of, we're not owning new car dealerships. That's not our business. And so we're really focused on the age of the cars on the road, the durability of cars on the road, and ultimately the fungibility of the boxes of the real estate that we're acquiring. So we put a white paper out on that. It's on our website, and I think it we stayed aligned with that thesis. John Kilichowski: Got it. That's very helpful. And then maybe jumping to the 7-Eleven developments there. Are those discussions for new builds on a one-off basis? Or is there any sort of visibility in a larger opportunity set there where you have some idea of what the runway is? Joey Agree: The latter. We're working with 7-Eleven in defined geographic territories and have a pipeline of opportunities behind this. John Kilichowski: Got it. Very helpful. Thanks, Joey. Joey Agree: Thanks, John. Operator: Next, we'll move to Rob Stevenson at Janney. Rob Stevenson: Good morning. Joey, given the spreads on developments over comparable acquisitions and the fact these already have tenants in place, what's the limiting factor for you today in terms of growing that beyond the sort of $250 million in the external growth story? Is it the construction partners and finding those? Is it targeted tenants and their expansion or just a reluctance to make this too big of a percentage of the balance sheet? Joey Agree: Again, we're not doing anything on a speculative basis here. We know our returns when we go into the project here. So we have everything in hand when we are when we close, including a guaranteed maximum price bid from a general contractor for that contract. Is executed. The only limiting factor is opportunities. I'd love to grow it, commensurate, obviously, with the returns being appropriate. Would love to grow it more. And I think you've seen this material acceleration in these platforms. We hope to continue to materially accelerate it further. As I talked about, there is a deep pipeline behind this. Where we do have visibility. These are projects that generally take twelve to eighteen months. Sonic acquisitions will return and burn in sixty to seventy days, and so we are working actively through site selection permitting in We've closed projects subsequent to the quarter end. And we will close more projects this quarter, first quarter, and second quarter, or next year. Rob Stevenson: Okay. And then in terms of conversations with major tenants, anybody changing, like or thinking about expanding or shrinking the size of their prototypical boxes for example, a typical 10,000 square foot tenant wanting to downsize towards 7,500 square feet going forward or upsizing to 15,000? Any sort of material changes to any of your major tenants' boxes preferred boxes going forward? Joey Agree: No, it's a great question. Tenants are always tinkering with their prototypes and square footages for those different prototypes. We've seen a move to a larger prototype, obviously. There's always been nothing material in terms of just quantity of tenants changing prototypical structures. What we've seen over the last few years, frankly, is more of the focus on elements here. And the pickup from store, the parking spaces, the drive-throughs, the pickup windows, those are the types of elements we've seen a lot more change than prototypical size. Rob Stevenson: Okay. Guys. Appreciate the time this morning. Joey Agree: Thank you, Rob. Operator: We'll go next to Spencer Glimcher at Green Street. Spencer Glimcher: Thank you. Maybe just another one on the development front. In your conversations with these clients, are you getting a sense of future growth appetite beyond these initial projects that are either commenced during some form of zoning or entitlement? And then if so, how much confidence does this give you in your ability to achieve those annual DFP goals that you outlined, Joey? Joey Agree: What we hear from major tenants in the largest retail in this country is they want to grow, grow, grow, grow, grow their store base. I think I talked about it on the last call. There was too much attention in terms of both physical attention, mental attention, and capital turned to distribution for e-commerce. And what all retailers have now realized is the store is the hub of a successful omnichannel operation and not just a spoke. And so whether it's auto parts or off-price, Walmart, Costco, BJ's, Home Depot, Lowe's, all the way down, obviously, to the fast-food operations, that we're seeing today. C stores are growing voraciously across this country. It's the continued expansion mode even in the face of tariffs and construction costs and the other macro challenges that are out there. Will you repeat the second part of your question, Spencer? Spencer Glimcher: No. Well, I was just asking if you have a sense of their, like, near-term growth appetite, if that gives you confidence in achieving those annual DFP goals, you know, the few hundred million that you want to put to work in that vertical. Joey Agree: Yeah. Look. We were lucky enough to have the president of a major off-price retailer up here speak to our board and talk about their growth ambitions with their differentiated banners recently. Speak to the entire real estate team, Yeah. That gives me confidence, but it also gives me, I think, the most confidence is our capabilities and our team here and the fact that we can effectuate all three growth platforms. And I'll tell you, I think what we've created here, and I talked about this a little bit on the last call, is a different type of net lease company. And I think it's imperative now that the sell side and the buy side start being discerning about the types of net lease companies. I know it's easy to group companies, obviously, in property types and sectors. But we have companies in the net lease space that are high yield spread investors, that are sale-leaseback organizations, are global investors across asset classes, And now we have Agree Realty Corporation, which is a real estate company that happens to be in the retail net lease space. And so when we talk about these other two platforms and acquisitions is in the obviously, that's predominance of the investing capital will put to work this year, and I assume next year and the year after, it's not typical spread investing anymore. You know? And I talked about it. I grew up on a site moving dirt, and the goal was always to create that real estate company in the net lease space. And so we started as a developer, and it's quite ironic. We launched the acquisition platform, and we had never acquired a property in 2010. Development kind of dropped off the radar, but was still a small piece of what we were doing at the time. Today, we're in a position where we can invest and have invested in all three platforms, and they are firing on all cylinders. And I think it's time for everyone to use, hopefully, a different I would hope a different lens when they're viewing net lease companies than just multiple spreads because we have a lot of different types of businesses on operations and, frankly, investment philosophies in this space. And what we're doing today is differentiated. It's been fifteen years in the making, as I've talked about. In prepared remarks. And it's here and it's here now. And so we're excited about development. We're excited about the developer funding platform. We're excited about the acquisition platform. And I'll tell you, retailers are just as excited with us we can help them grow across all of those different efforts. Spencer Glimcher: Okay. Great. Thank you for that color. And then maybe just one on the ground lease front. You've recently had a really favorable releasing outcome with an existing ground lease. Can you just remind us if you have any other near-term lease maturities? And would you expect to have similar favorable outcomes? Joey Agree: We have a few there, I'll call naked leases, don't have any options. Nothing overly material. We have had a vacant Brinker ground lease Brinker backed ground lease sitting out front of a former border's my father developed, which is now a Walmart neighborhood market. Which is shorter term in nature. But nothing overly material in 2026. There will be a significant mark to market opportunity. Spencer Glimcher: Okay. Thank you. Joey Agree: Thanks, Spencer. Operator: We'll go next to Upal Rana at KeyBanc Capital Markets. Upal Rana: Great. Thanks for taking my question. I wanted to get your stance on the current consumer environment given continued ambiguity on the macro tariffs and softness in the jobs market, have you noticed any impact starting to creep into any industry categories you have exposure to? You already mentioned auto parts earlier, but any other categories that you'd you're seeing any impact? Joey Agree: I think we're seeing positive flow through for the majority of the vast majority of the categories we invested. And so we're not doing entertainment. We're not doing experiential. We're not doing anything fun. We are the trade down. We own the trade down. Walmart. TJX, auto parts. Right? So we own we focus on the trade down. And so we're our tenants are the beneficiaries. Generally speaking, of that trade down effect. And it continues to permeate I think most notably right now, the middle class. The target customer is shifting to TJX and Walmart. We see that in their prints. And so that middle-class customer is trading down to our tenant base. We love Target. I think we own two or three, three of them. But we see that tenant that customer trading down looking for savings, and being a more discerning shopper today. Upal Rana: Great. That was helpful. And then are you seeing an impact on the accelerated depreciation policy from the big beautiful bill creeping in as well? On the transaction market or the ten thirty-one market? Joey Agree: Not in any spaces we file. You know, maybe in the car wash space where you get the accelerated depreciation with ten thirty-one or private investors. Maybe on the edges on the C store space. But nothing overly beautiful. Upal Rana: Okay. Great. Thank you. Joey Agree: Thank you. Operator: We'll take our next question from Eric Borden at BMO Capital Markets. Eric Borden: Hey, good morning everyone. Just going back to the forward equity contracts, Peter, can you remind us if forward equity in place has to be settled before the date of expiry or can those agreements be rolled forward? Peter Coughenour: Yeah. I think there's certainly the opportunity to go back to the banks or counterparties to extend those contracts if we thought that was the appropriate thing to do. I think for a few reasons, we think it makes sense to settle our upcoming forwards at maturity. First and foremost, it's not like we're going to be sitting in cash when we settle that forward equity. We have $390 million of short-term borrowings outstanding as of quarter end. And obviously, as we continue to invest, that number will grow. And so I think there is a use of proceeds for the forward equity settlements that we have contemplated here in the fourth quarter. And I think there are other considerations as well when you think about extending those contracts from a rating agency or leverage perspective. Eric Borden: Okay. Thank you. And then can we get your early thoughts on the Series A preferred shares that be redeemed in September? Peter Coughenour: We think that is a very attractive piece of paper today, and I would not anticipate that that gets called anytime in the near future given the coupon on it, which was the lowest recoupon in history for preferred outside of PSA, and we continue to view that as an attractive piece of paper. Eric Borden: Alright. Thank you very much. Peter Coughenour: Thank you. Operator: Next, we'll go to Brad Heffern at RBC Capital Markets. Brad Heffern: Yes. Good morning. Thanks, Erway. Joe, you talked about cap rates not really changing them in a material way. I'm wondering why you think that is I mean, obviously, we've seen cost of debt come down quite a bit. So first, hopefully, moving lower. And we've heard these anecdotes about increased competition. So we're spreads just anomalously narrow before and they're getting back to normal levels now? Or is there something that you would call out? Joey Agree: Just to clarify, Brad, I'm not predicting cap rates for 2026. I'm just talking about my visibility into 2025. By the time I had any visibility into 2026, we'll get a new true social post and something will change. So I'm not predicting it. We just haven't seen any material change in cap rates year to date, and I don't expect it in 2025. Obviously, things outside of our control will drive that overall narrative, but we'll continue to try to look for opportunities to push cap rates. And obviously, when we transact, where we think the appropriate pricing levels are. Brad Heffern: Okay. Got it. Then I know you've had kind of a self-imposed hiatus on new equity issuance since the April offering, and obviously, have plenty of equity as you sit here today. But I'm curious how you view the attractiveness of equity right now and when you might look to issue again? Joey Agree: I appreciate the, yeah, self-imposed hiatus. I hadn't thought I hadn't thought about that way. When we did that deal, we promised investors and we stick to our word here. Consistency is the third slide in their deck. We told investors, we're not coming back. Right? And then that's what we've done. We obviously don't need to raise equity. At 3.5x levered and $1 billion Peter in liquidity. Is that correct? $1.2 including the term on the close. So we obviously don't need to raise any cap. The term loan, as Peter mentioned, the delayed draw feature of that term loan gives us a lot of flexibility. And so when we raised that equity, I guess we did put on a self-imposed hiatus. But I think the most important piece of that was that we stayed true to our word to investors, that we work at a constant be flooding the equity markets with new issuance, whether it would be the ATM or, obviously, block or overnight transaction. We'll continue to look, obviously. We're an ex-growth driven company as a net lease REIT. We are growing. We'll continue to look at all different types of access to sources of capital. But we're in the pole position here. Peter, we can spend how much until we got the five times levered? We could spend approximately $1.5 billion excluding free cash flow until we get to five times. We can execute on the high end of our investment guidance range this year without raising any additional equity and we would end the year at four times pro forma net debt to EBITDA. So we have plenty of runway, and we're in a great position. They add in free cash flow next year of over $125 million minimally. And then you add in disposition proceeds, and we clearly don't need a dollar. And no debt maturities. We maintain full flexibility. I think the most important thing to I appreciate, again, the self-imposed hiatus was we want to be consistent with investors so they understand where we're going and what we're doing. This is net lease. It should be predictable. Brad Heffern: Got it. Thank you. Operator: Our next question comes from Wes Golladay at Baird. Wes Golladay: Hey, good morning, guys. I want to I have a question on the true development platform. Are you willing to develop for all your targeted tenants? Or do you have do you view some as being a little bit more risk or too complex? Joey Agree: Interesting question. Complexity certainly would not be an issue. We generally stick to rectangles. Those aren't overly complex. We're not building anything overly difficult. Yeah. I think we would. I can't think one off thing off my hand of when we wouldn't develop for. Again, all three platforms are targeting the same tenant base. And so, will we do industrial for those retailers or distribution? No. But will we develop their traditional retail formats? Certainly. I'll tell you, we have been approached to develop in Canada. That's a no. We have been approached in other instances to try new concepts. That's generally a no as well. We're not interested in 180,000 square foot sporting goods experiential constructs. And so but I think would tell you for 95% of them, yeah. We will develop. We will use our developer funding platform, and we will acquire third-party or sale-leaseback. Wes Golladay: Okay. Thank you. Joey Agree: Thank you. Operator: Next, we'll go to RJ Milligan at Raymond James. RJ Milligan: Hey. Good morning, guys. Joey, I just wanted to get your higher level views as we look into 2026. Third quarter, invested volume jumped quite a bit. You've got all the growth platforms that are delivering. You've got just a debt and equity lined up with the forwards and the term loan. Guidance for this year is about $1.6 billion of investment volume. And so two questions. Would you want to do more next year in terms of investment volume? And two, is the gating factor really what's just available on the market? Or is there is there, like, a number of incremental investment activity that just doesn't deliver enough, so you'd wanna smooth it out. I'm just trying to gauge, like, what levels of investment volume are you comfortable on a longer-term basis? Joey Agree: A great question, RJ. We have never thought of pacing. Here. We don't do pacing. We take advantage of opportunities. We turn windows into doors, and then we sprint through them. And so whether it was COVID, or whether it was a disruption from a macro perspective or when we launched the acquisition platform, if we find a $5 billion transaction that fits this company's profile from a quality perspective, and it provides for accretive spreads and making up the number 5 billion, obviously. Will strike. And so I don't think of any gating factor except qualitative and quantitative hurdles. We have a cost of capital. We now have 93 team members here. We or 90 team members. Excuse me. We've hired 23 new team members this year. Hence the increase in the in G and A as a percentage of revenue in the updated guidance. Don't anticipate anything like that. We are built to grow. Only thing that will limit that growth is opportunities, and we will not stretch long. RJ Milligan: Okay. That's helpful. That's it for me, guys. Thank you. Joey Agree: Thanks, Kevin. Operator: We'll go next to Rich Hightower at Barclays. Rich Hightower: Hey, good morning guys. Thanks for taking the question here. I guess Joey, just to continue the line of thinking from the last question, you know, you just talked about it, you've talked about it before sort of increasing the size of the investment team. And so I guess, you know, all else constant, does that is it reasonable to think that that implies you can sort of continue along the pace of acquisitions, and other deal volumes, you know, that you that you sort of pasted in the third quarter going forward, or is that not the right way to think about that? Joey Agree: Well, I think the size and scale of the team is to accommodate all different types of transactions. That we're managing, and we don't see that as a constraint. Right? Again, it's opportunity dependent. Q4 will be a strong quarter for us. We know what development in DFP looks like going into 2026 for the first half right now, and that looks strong. But, again, we are able to handle 400 discrete transactions. We had 110 transactions, not including dispositions or leasing in Q3 alone. And the team has incremental capacity. We continue to invest in systems. We're launching ARC 3.0 in 2026. We continue to lean out and eliminate waste and inefficiencies here. And the team continues to get better at all levels. We've built redundancy in succession. So in a great position to take advantage of those opportunities. In terms of how it materializes and the numbers and volume, that's going to be subject to what we find the grit and determination that we put forth, and in context of the overall marketplace. Rich Hightower: Okay. That's helpful. And then one just small one, I did notice I guess, your exposure to Dollar Tree. Fell quarter on quarter. So just maybe talk about the moving parts there. Was that part of the group of assets that was sold? And maybe just talk about, you know, you feel about the dollar or concept in general kinda relative to everything else that you own, if you don't mind. Joey Agree: Yeah. The bulk piece of that is the separation of Family Dollar, from Dollar Tree with that sale. We've also made a couple of dispositions. Dollar stores, I'll note, year over year have dropped 87 basis points as a component of our portfolio. Similarly, pharmacy has dropped 30 basis points from 4% to 3.7%. We will continue to be extremely discerning. We're not going to increase exposures, especially in any material way, to either of those sectors. If we find a unique opportunity, we will strike. But they're certainly not at the top of our list. In terms of new investment appetite. Rich Hightower: Understood. Thank you. Joey Agree: Thank you. Operator: We'll move next to Ronald Kamdem at Morgan Stanley. Ronald Kamdem: Hey. Two quick ones. Just going back on tenant health, 25 basis points I think baked into the guide. I think that's lower from last quarter. Is that part of the sale of the at home maybe talk through that and just general color of know we've talked to a few tenant groups, so how are you feeling about tenant health today? Thanks. Joey Agree: To the at home question, that was an opportunistic sale. We bought that seven years ago, I think. Peter, correct me if I'm wrong. Let's seven years ago, it was a street real estate play. It was directly across from a mall. It was to be redeveloped a high growth area, obviously, Provo, Utah, at a signalized intersection. With out lot capability to be developed in the future. At a very, very low basis, effectively below land basis. The purchaser of that at a seven cap is gonna do multifamily for BYU, which is just north. And so it obviously worked out for us in terms of the acquisition and disposition. Again, I think that's emblematic of our real estate vision here. We were never and will never be focused on at home. Or secondary or tertiary home furniture and accessory retailers. Terms of the 25 basis points, Peter, you want to add anything to color there? Peter Coughenour: Yeah. Around last quarter, our guidance contemplated 25 basis points of credit loss at the high end of our AFFO per share range and 50 basis points credit loss at the low end of the range. So we have tightened that up to 25 basis points. And that compares to the 50 basis points of credit loss that we assumed in our initial guidance range going back to February. And so as the portfolio has continued to perform very well and we haven't realized that higher level of credit loss, we've continued to trim up and bring down our assumption for credit loss for the year. Ronald Kamdem: Great. And then just back on the cap rate question, I know it's been asked a bunch of different ways, but maybe can you comment on any sort of larger deals or larger portfolios? And what you see in terms of cap rates there? Thanks. Joey Agree: I will say we have passed on a couple larger deals that I'm sure you'll see hit the wires that we didn't think were priced appropriately. Most notably sale-leaseback portfolios. We think we can create more value through alternative means including development. But that's really only the color I can give. Ronald Kamdem: Thank you. Joey Agree: Thanks, Ron. Operator: And we'll go next to Linda Tsai at Jefferies. Linda Tsai: Hi. Just a follow-up to an earlier question. Given your investment levels reverting back to historical highs, I just wanted to confirm, are you growing the investment team? Or is the investment team getting more productive with the AI technology like ARC? Joey Agree: Both. We have grown the investment team. Again, that's part of the 23 team members that we've added this year. We have grown the investment team, all three platforms. All the way down to the analyst level and interns that have become analysts. And so we feel like we're fully staffed that team. We continue to make IT improvements from the use of AI for lease abstraction. And lease underwriting checklists. And continue to work on ARC 3.0. But we think that team has been built, and we're and but we'll continue to coach, obviously, coach and develop the younger team members. So we're in a we're in we're in position for 2026, and I anticipate any any material hires there. Linda Tsai: Thank you. Joey Agree: Thanks, Linda. Operator: And that concludes our Q and A session. I will now turn the conference back over to Joey Agree for closing remarks. Joey Agree: Well, thank you, everybody, for joining us. We look forward to seeing you in Dallas or any upcoming conferences and good luck through the rest of earning season. Appreciate it. Operator: And this concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Good morning, ladies and gentlemen. Welcome to the Third Quarter 2025 Matador Resources Company Earnings Conference Call. My name is Jonathan, and I will be serving as the operator for today. At this time, all participants are in a listen-only mode. We will facilitate a question and answer session at the end of the company's remarks. As a reminder, this conference is being recorded for replay purposes. And the replay will be available on the company's website for one year as in the company's earnings press release issued yesterday. I will now turn the call over to Mr. Mac Schmitz, Senior Vice President, Investor Relations for Matador. Mister Schmitz, you may proceed. Mac Schmitz: Good morning, everyone, and thank you for joining us for Matador's third quarter 2025 earnings conference call. Some of the presenters today will reference certain non-GAAP financial measures, regularly used by Matador Resources in measuring the company's financial performance. Reconciliations of such non-GAAP financial measures with the comparable financial measures calculated in accordance with GAAP are contained at the end of the company's earnings press release. As a reminder, certain statements included in this morning's presentation may be forward-looking and reflect the company's current expectations or forecast of future events based on the information that is now available. Actual results future events could differ materially from those anticipated in such statements. Additional information concerning factors that could cause actual results to differ materially is contained in the company's earnings release and its most recent annual report on Form 10-Ks and any subsequent Quarterly reports on Form 10-Q. In addition to our earnings press release yesterday, I would like to remind everyone that you can find a slide presentation in connection with the third quarter 2025 earnings release under the Investor Relations tab on our website. And with that, I would now like to turn the call over to Mr. Joe Foran, our Founder, Chairman and CEO. Joe Foran: Thank you, Mac. It's good to talk to everybody again. We think we've had a heck of a quarter. And really pleased with our process. In all of our different areas. And the progress and gonna try to go around the table so you can hear directly from a lot of the people doing the actual work. And but I think they've just done an outstanding job today. We're particularly excited on this quarter because anytime you get to raise the dividend, you generally get a lot of edibles from some from your shareholders, particularly the rank and file shareholders. But also pleased that recognized by the Dallas Moore News as one of the larger companies and in the Dallas Fort Worth area. But the NICE is part of the bill is that when you do the calculations, we're although 36 in size, we're number one in profit per employee. So give a lot of credit to the staff and their contributions. And look forward to this report. And, I know, everybody is interested in knowing about capital spending and and the thought processes behind that. But would tell you if I were faced with the same situation, we would still spend this money just as we did this year. I think the teams really work together on that. And the executive committee of the board and the executive committee of the company all went through this and and and said not only about this quarter, but setting up next year is gonna be one of the most fruitful years we have as we have lots of inventory, lots of cash flow, and good liquidity. And and room on our RBL. So, ask away. I might turn it over to Chris, our chief operating officer, just to describe some of the thought and process that we went through before deciding on this capital structure. Christopher Calvert: Yeah. Thank you, Joe. This is Chris Calvert, executive vice president Chief Operating Officer. Thank you guys for taking the time to be on the call. And really, I'd like to take a few minutes here to highlight the positives of what was written in the release last night surrounding the capital program and really focus on three things that I feel were probably maybe overlooked. First, I'd like to talk about the underlying economics related to the projects that came into this capital plan. Specifically, we mentioned 12 additional wells that were going to be brought into the 2025 program. To highlight these wells specifically, you know, these wells are in excess of 50% rate of return, million BOE wells, half of which of these fourth quarter TILs we're going to be talking about are in Antelope Ridge. Which is what we've talked about of the highest EURs, not only in our company profile, but also in the basement. So really strong projects associated with this capital plan. Secondly, you know, I think it was somewhat overlooked or taken for granted the advantages and the efficiencies that have been made at the well cost level. We initially came out in 2025 and guided to a midpoint of $880 per completed lateral foot. 've since revised that number down to $8.35 to $8.55 with a midpoint of $8.44. And as we turn on, we expect to turn on roughly 1,200,000 net lateral feet this year that $30 to $45 savings equates to about 50,000,000 to $60,000,000 in capital savings. So not only are we turning on extremely economic projects, we're doing it at a lower well cost level. So our initial investments are actually reduced, which in turn help the economics of the wells. Thirdly, talking about the accelerated operations, I'd already spoken to the 12 wells that we accelerate into 2025. Will also have a positive springboard looking into 2026 with 13.6 net wells that will be turned on at the January. And so as we look to that, can provide extreme good excuse me, positive momentum going into 2026 to achieve 2% to 5% organic growth rate of what we feel is somewhat of an inorganic growth rate in 2025 And so I think when you consider those three things, you know, the economic underlying economic returns of the project, the reduced cost at the well level, and then the positive momentum leading into 2026. I think it leads to a very strong report and a positive outlook for 2026. Robert Macalik: Yeah. And this is Rob, CFO. So I just wanted to pile on a little bit to what Chris is talking about. So even though I'm CFO today, I've been chief accounting officer for the past ten years and I've been sitting here at this table with this management team And we're really proud of what we've accomplished and created in a consistent manner over those past ten years. And so one, just to bring in an accounting metric know, we've gone from accumulated deficit as early as just three and a half years ago to, for the first time this quarter, over 3,000,000,000 in retained earnings. So that strong balance sheet, and I'll refer you We have the slide deck out there. I'll refer you to slide 11 You know, I think it highlights the strength of our balance sheet with a point four leverage ratio, Over the past year, we paid 670,000,000 of our revolving debt and have about 2,000,000,000 in liquidity. So that allows us the flexibility to take advantage of like what Chris is just talking about. And so really excited about the well returns and the results that we've had so far this year. And, like Chris said, feel like that sets us up really nicely for 2026. So and at the same time, we're able to, at accomplish the other priorities that we have for free cash flow. We've as Joe mentioned, raised our dividend by 20% this quarter. Land spend, we continue to add on to our land position when we can find the accretive deals that we think make sense for us. And, we don't need to do anything, but we have a really good strong inventory of of greater than 50% returns even at $50 as we mentioned in the release. And then the last kind of piece of that is the opportunistic, share buyback. You know, the management team are buyers, and so, the company is as well. But overall, I think we were able to hit all those priorities this quarter. Like Joe said, had an excellent quarter. And really excited about how this sets us up for 2026. Jonathan, with that, we'll turn it over. Operator: To q and a. All right. Thank you. If your question has been answered and you'd like to remove yourself from the queue, simply press we would ask that you please limit yourself to one question until all have had a chance to ask a question after which we would welcome any additional follow-up questions. And one moment for our first question. Our first question comes from the line of Neal Dingmann from William Blair. Your question please. Neal Dingmann: Good morning, guys. Nice to see another nice quarter and solid outlook. Joe, my question is really for you or Chris and the team. Just on the op efficiency, something you were just getting at with the capital spend. I'm just wondering as you all continue to see the improvement, I'm just wondering, how do you all decide between continuing potentially with the same capital spend and likely increase in production growth or, you know, maybe continuing with the same production and decreasing capital spend? Is it one or the other? Or how do you all make that decision from a higher level? Thank you. Joe Foran: Neil, thanks for the question. It's a good question. And I wish I could give you an easy always answer. But it's always a balance between those two areas And and taking in account a number of other factors. It's just not a one variable question. Or one variable answer that is price oil up or price oil down because we've often made more money in the bad times than you know, and more robust times, by taking on some projects when others out the sideline. A great example of that if I don't is going back in time to when we bought the Rodney Robinson lease and the Bonnie and those leases they paid out at $20 a barrel. During the COVID. Period, and that's one of the best deals we ever did. There's a time of worst oil pricing. And they've really kept kept giving, during that time and come forward the same thing can be applied to times where the drilling rigs were stacking up we've kept the same rigs for ten fifteen years or more. And have found that that's sometimes where you have good rigged hands good pricing on your rigs, good pricing on your completion, Is it time to build that foundation? So we talk about it in committee system, and it's pretty lively. About what we want to do. And who wants to do something slightly different. But we weigh when you start out with just $270,000, as I did, get to where we are today you can be sure you've had lots of discussions and thoughts about how much to spend and where to spend And we've kinda worked out a system among ourselves where we really try to stress test it. And and think about all the factors because there's other factors that weigh in on keeping a rig and keeping it going. What's gonna happen next year what is the quality of the prospects, and I'm pleased to say our geologists have really knocked it out of park on some of their ideas on grilling here and there. As y'all have seen, so we've had steady rise in our, our our engineering reports. And and reserve studies that we do twice a year for the banks. There's been steady growth there. And so the capital spending, is it something that we weigh by itself, but in connection with everything else, and the other capital request from midstream and marketing for example, is another area that they've come up with ideas and have pointed out, let's spend some money here on the midstream. And, of course, with the flow assurance, the added flow assurance that you get out of the basin, has been a lifesaver for us at times when the rest of the basin was more or less shut down. So it's it's a multifactor deal, and it's lively discussions. And I think I gotta give a lot of credit to all the guys on the team that are helping make these decisions. I think they've been very wise and is as Rob pointed out, look what it's done for our retained earnings. Over the last three and a half years, we moved from a deficit to over 3,000,000,000 and retained earnings. So, it's a pleasure to come back in light of those good decisions and say we're raising the dividend again. Which in fact is now the fourth time in seven years. And, you know, getting up there to three and a half percent or more, And, we plan to keep going in that direction as long as Chris and his team and Tom and his team and the midstream guys are all making these I think, very good capital decisions. So, I think you can expect more of the same in the same manner but we look at it more broadly than just looking at capital decisions based solely on oil price. Christopher Calvert: Yeah. And, Neil, this is this is Chris Calvert again. And I think Joe hit it on the head and just provide a little more color. I think, you know, when we look at specific project returns, you obviously, like Joe said, you have two factors really multiple factors, one that has really what we feel dislocated in the back half of this year, and that is the cost components to those returns. And so that cost dislocation can come from efficiencies, which we have proven to be extremely good at to where whether it's simul frac, triaml frac, U turns, the efficiency driven cost dislocation has been the large player in 2025. Now as we look into the back half of this year, we are able to take advantage of some more competitive service costs pricing. And so when you have the confluence of efficiency and service cost reduction, you can really tip the scale on project economics. Now I would also say that as we look forward, the tenant of what we have always operated on is optionality. And so when we look at this, it is October right now when we provide a more clear picture of 2026 in February, we have the ability to flex up, flex down, to to revise this soft for 2026 if market conditions have changed. And so I think that is something that is extremely important to where if we see this cost dislocation somewhat converge back, we have the ability to make that change moving forward. Operator: Thank you. And our next question comes from the line of Derrick Whitfield from Texas Capital. Your question please. Derrick Whitfield: Good morning, Joe and team, and thanks for taking my question. Good morning. Perhaps leaning in on some of the efficiency gains you've highlighted this quarter, where are you seeing the greatest opportunity for continued gains And more broadly, how much of your recent projected gains have been factored into your soft guide 2026? Christopher Calvert: Yeah, Derek. This is Chris Calvert again. From an efficiency standpoint, I still think there is there's always going to be ground to be gained. We have talked a lot about completion operation, trimul frac, 2025, we utilize those two processes on about 80%, 85% of our wells. There's still ground to be made to where we can get that number. Right now, it's about 40% for 2025. Look to boost that in '26. There's going to be logistical operations to where we can look to to utilize money. Partnerships with San Mateo play a key part in this when it comes to treated produced water and using recycled water for fracturing operations is going to be a large part of efficiency gains from a logistics perspective moving forward. On the drilling side, extending laterals, excited that as we move into the fourth quarter, we're going to some of our longest laterals today, 3.4 mile laterals at the AmeriDev asset. So something where we are extremely excited to bring some of that value forward. From an efficiency standpoint, it's really across the board with completion drilling, production, facilities, measurement that we look to push forward. Now how does that play into 2026? Everybody on the call is is very aware that this $50 price world that we live in is relatively recent. You know, it's probably within the last seven to fourteen days. And so when we've looked at how we guide from a cap perspective, you know, if oil continues to be in this $50 region, I think there's potential to where we could improve upon a D and C cost per full range that we guided $835 to $855 for the back half of this year. So I think any sort of service cost reductions from a $50 oil commodity world I think there's potentially grounds to improve upon. But I think from an efficiency standpoint, we started the year at $8.80. We're going to finish $8.35, $8.45, give or take. A large part of that is efficiencies. So I think as we look into 2026, we look to improve upon that number. And, like like we've said in the release, we'll turn in line a similar net lateral footage, but do it on a cheaper capital budget from a DNC or more efficient capital budget from a DNC side. Operator: Thank you. And our next question comes from the line of Leo Mariani from Roth. Your question please. Leo Mariani: Hey guys, want to to to harp on the the same, you know, sort of point here. But clearly, you folks do have flexibility in your plans, which you certainly spoke to that you certainly could adjust some things, you know, come kind of formal guide. In February. Wanted to kind maybe get a better sense and terms of the variables that you guys are looking at. A number of folks out there are expecting kind of an oversupplied oil market in 2026. Just want to get a sense of how much kind of the oil macro kind of plays into your thought and I know you've certainly got some returns here, but if oil goes another leg lower here, is there kind of price level, where you maybe decide not to grow so much? Would that be kind of in the 50 to 55 range? Just trying to get a better sense of how you're kind of thinking about oil macro and how that factors in your decisions here on spending. Christopher Calvert: Yeah. Hey, Leo. That that is a great question. You know, I think as we look it'll go back to Joe's answer. I think it was on on Neil's first question. You know, I think that's a story that we unfold and we tell when we live in that world. You know, as we get closer to February, if commodity continues to slide, I think that's how we have to approach it. And like Joe said, done at the committee level here with all teams participating with with board contribution, and it's really an internal discussion. However, think as we look at that, the optionality that we maintain, whether it's at the rig level, even more flexibly at the completion level that we are able to to reduce activity in that world if cost don't continue to go down in that in that reduced commodity price. And so I think that's how we would kinda look at it, but it is not a single variable. And so I know if Joe or would like to chime in. Joe Foran: Look. Chris, yeah, those are all good points. But remember, that if we don't look just at the oil price, one factor that has influenced us and made us more active is the fact we've reduced days on well that if you drill these wells faster, you save about a $100,000 a day. And that makes it big difference in looking at your rate of return. So it it as each day you save, you improve what makes sense to drill. And what particular rate of return. This second thing that I'd say is that the the drilling companies use Patterson more often than anybody else. And Patterson is making improvements all the time on their equipment, and there's people. That you have that also creating the efficiency. So price some drops in price can be replaced by efficiency gains. But also these wells are gonna produce for thirty years. So to look at it just on the price of oil, what the price of oil is today, is narrow minded Because, again, I point you back to the Rodney Robinson Wells And the other wells we drilled in the COVID period, you had low oil prices then, but they were paid out within a year. The on the strength of its production, the low well cost. So they're just these other factors have to be not weighed once, and then you wait six months to drill the well, they're may close in time when you spud, and you can always postpone it. You can just say we're not gonna do it now. And if you have a long relationship with that service company, they'll they'll work with you. They don't wanna lose the business. So everybody works together on these things to do it. At or more or less optimal times. So the capital decision really isn't the one that drives it so much For a company like us that have the capital resources, do. 2,000,000,000 on our line of credit, know, paid down debt. To a small amount, it it really is a larger question on that is what efficiency gains taken into account what efficiency gains what these other costs are, and cost of product. And I really commend Chris and his team for reducing that where you're your per foot cost is less now than it what know, it's considerably less, in my mind, you can save $60,000,000 has to be taken into account on the decision. Do you go ahead with this capital spending now thinking that anticipating that with the efficiencies and the like here, you're gonna still come out ahead. And and they're gonna use their best equipment and best hands And, they they all know that reducing cost is a is there major objective and ours is working for the long term, and we're not spending just to be spending. But we're spending fully intending to make money. And you can see that by the number of shares as participation by our employees in buying buying stock in the open period. So I feel real comfortable that everybody's taking things into account and pointing out the positive. Of drilling these wells or doing other capital events at the same time and coordinating it So it's a balance between what the choices you have, to drill or to acquire properties or use them to keep building out your midstream, which he's worked at to be a real good deal. So we have a lot of opportunities, a lot of choices. And, there's a lot of thought and effort put into it. Yeah, Joe. This is, Brian Willard, exec vice president of midstream. I think you're exactly right. You mentioned the midstream business and, just a couple items on that. That business is before extremely well. We had a new processing record last quarter. 533,000,000 cubic feet per day of natural gas was processed. And we continue to have that success as we we get into the fourth quarter. It's been a great start to the fourth quarter. And not only is the business performing well, but we've talked a lot about the different options with that business because we don't believe that the value of the midstream is fully reflected in Matador share price. And so we continue to explore the options and and we can be patient there. We don't necessarily have to have that money as Matador, so we can be patient and make sure it's the right opportunity and the right transaction a matter of our shareholders and provide the most value. Maybe the last one I'd make is just Matador also has some wholly owned assets. That they retain and they continue to operate. And those are assets that we acquired in the advanced acquisition and the Emerative acquisition. 250 miles of pipeline altogether. Great assets. And those assets are about 30 to $40,000,000 this year, and EBITDA is what we expect. And we also, next year, expect it to to be between 40 and $50,000,000 in EBITDA for those assets. So those are great assets that we could could drop down eventually down to San Mateo with the right situation. And know, it's a great business at at San Mateo. And and the midstream business because it's a fee based business. It's something that, you know, despite the ups and downs of commodity prices, we continue to get the the fees from our customers, including Matador, but also including third parties. Know, it's been a great year for third party. We've had a new customer on the oil side, and we continue to expand the relationships with our existing customer and repeat customers as we move forward. And so the midstream business continues to perform very well. And that relationship and partnership with Matador, the team there, and and and team here at San Mateo This really is a benefit that that I think is hard to replicate and very unique Matador and its shareholders. Gregg Krug: This is Greg Krug, EVP of Marketing and Midstream Strategy. I just wanted to pile on a little bit as far as the midstream business is concerned. As as Brian mentioned, as far as it is a a fee based business and not commodity. So these lower commodity prices do not have an effect on on the on the fees that we get on San Mateo. Also, I wanted to point out that know, as far as flow assurances, we parked on that every time have an opportunity to do so just because it is so important. To to Matador and to our third party customers. And, we feel like we're a step above, some of the other third party midstream companies just for the simple reason I mean, we're we're tied to those with some of our midstream or or wells at Matador, those other companies. And they're they're just not as reliable as as we are. We feel more comfortable with going to, the San Mateo and and Matador owned systems. So I think that's a huge a huge factor for us as well. And this this is Brian Willie. One other thing to add, if Slide 12 actually shows an outline of our assets. You can see the 50 miles of pipeline, the seven twenty million cubic feet per day of processing and and I think just generally, if you just look at the slides generally, if somebody took a minute to look at the slides, you'd be able to see what a great job Matador is doing altogether. And what a fantastic job that that we're doing. And so you know, I think if if you haven't taken the time to look at the slides, I think great opportunity to be able to look at those and get a great summary of the progress that we are making at Matador. And so now this slide 12 has Matador wholly owned assets. You can see those in blue on the map. But even all the different slides, they just really summarize the great progress that we're making Right. I hope that answers your question. But another thing to look at is that, look on slide number four. And you can see the progress we've made over these twelve years since we went public. In in this matador. And you know, where we sit and why having that midstream to service our area. And the other midstream companies have been very cooperative. We've all tried to cooperate with each other on offloads. So there's good having the midstream gives you puts you in that club where everybody helps each other. If if some is down for maintenance and wanna thank everybody for the way they do that. And get gas out of the market. Greg, you wanna add to that? Yes. I do wanna say I had a shout out to our third some of our third party offloads that we have. One of which is I wanna congratulate MPLX for their acquisition of of Northwind. We'd be we're gonna have a long relationship with the NBLX, and we're looking forward to working with them further on our North the Northwind asset and the the fact that's gonna be a solution for us for our our shower, our sour gas and c o two. And I might add as far as enterprise is concerned as well, you know, with their acquisition opinion, We'll have we've got quite a bit of of gas dedicated to them as well, and we look forward to that. We're also doing quite a bit of business with Target and, so we're, we're looking forward to doing additional business with them. And we've got a great relationship with all those folks. So Hope that answers your question. But if you need more, we, again, invite everybody on the call to come see us. We'll devote more time to you and to see our operation because there's aspects of our operation such as our MaxCom room, which is monitoring all of our drain activity. That has added to the efficiency gains that's led us to lower prices, which is opened up the door to more capital decisions. And and adds to the long term nature of what we're trying to establish in New Mexico. Operator: Thank you. And our next question comes from the line of Noah Hungness from BofA. Your question please. Noah Hungness: Good morning everyone. For my question here, was hoping to kind of ask the on water handling. We've seen a lot of activity in the water handling sector this year. Obviously, San Mateo has a large watering handling business. And as you guys continue to leverage Trimofrac and Simofrac operations, it seems to be playing a increasingly important role there. But I guess, could you maybe talk about just general growth aspects for that company or growth outlook and how you're thinking about that business today? Joe Foran: Yeah. Hey, Noah. I'll I'll start, from the Matterware side of things, and then and then Brian can also talk about it from the San Mateo side. But you know, next year, there is gonna be we're looking at roughly 40,000,000 to $50,000,000 investment in Matador's wholly owned midstream business. And a lot of that has to do with the build out of our water gathering system, both in the Ameridev area and in our Hat Maes kind of Ranger area. And so, of because that investment is really talks to speaks to the integrated nature of of of the upstream business with the midstream business. And to be able to provide an increased percentage of produced water for these intense hydraulic fracturing operations. Chris talked about of the efficiency gains that we've seen in that realm. And and, I think it is a great example of us working together to increase the amount of produced water It lowers use for hydraulic fracturing operations, which reduces our lease operating expenses. And it reduces the capital spend for the on the frac side. And so, there is an investment there. To to increase our watering handling capabilities. Operator: Thank you. And our next question comes from the line of Jon Abbott from Wolfe Research. Your question please. Jon Abbott: Thank you very much for taking our question. Question is going be on natural gas pricing. I mean, we did see some negative Waha negative during you know, the October. And then and then as you sort of look out in the Permian, could be additional takeaway capacity you think that gets filled So I just really sort of like, how do you think about gas pricing in April? And then how do you think of gas pricing longer term Do these pipes get filled? How do you think as you sort of report on a two stream basis? How do you think about the gas price? In your realizations? Joe Foran: Hey, John. I'll I'll start if if Greg and Anton wanna to pile in here, that's great. But yes, so in Q4, we as we highlighted in the release, we did elect to curtail some wells for a few weeks during this long haul maintenance long haul pipeline maintenance period. And in doing so, we avoided paying those those kind of deep negative, Waha pricing. I I do think it speaks to Matador and our ability to be nimble. And and make sure that you know, we have that lever as an as an option to pull, in this in this sort of environment. And and, you know, we saved a lot of money in doing so and really just just deferred that production to, you know, where Waha prices are positive as they are today. And then on your question, about these long haul pipes that have been already decided to be funded for building. You've got you've got Hugh Brinson. That's coming on later this year and Blackcomb and GCX expansion, all of which will add roughly four Bcf towards the latter part of this year. And so we do think that the longer term view of and really, I mean, just twenty '26. That the capacity you know, issues, if you call them, in the basin for Waha will be a leak be relieved by those by those pipelines. Anton Langland: Yeah. The other thing, Glenn, is to mention weather still plays a role in the gas pipeline business. And so you hit October each year or September, you're faced with this risk. You wanna be sure you have the you know, the balance sheet that you can work through those those periods. And the the second thing, is that that solutions are coming that the industry midstream industry, is is very responsive to this and finding ways out. And I'm pleased to that report today. Anton, you have a better handle, but price it gas or the selling price is a buck 50 now. This is Anton Langland, executive vice president of marketing. Is correct. Cash has gotten a little bit stronger out there as well at Waha, and we anticipated of this, and so we went out and put in hedges 2026 where we have a big hedge position to protect downside risk on Waha. As we know, all these pipelines are coming online in '26 We'll have TCX expansion mid twenty six for half a BCF, Blackcomb will come on for 2.5 BCF, and Hugh Brinson will come on at 1.5 BCF. And that's all gonna happen in 2026, which should alleviate of this pressure downward pressure on Waha prices. Going forward when you start looking at the '26 and the '27 should be a great time for Waha production and our gas and give us a lot more opportunity to produce more of our gassy wells that we have in inventory that we haven't drilled yet. Because of these lower gas prices. But in '27, '28, we'll have a lot of opportunity drill a of gas here benches out there. Operator: Thank you. And our next question comes from the line of Zach Prem from JPMorgan. Your question please. Zach Prem: Yes. Thanks for taking my question. I wanted to ask on well productivity Just looking at the publicly available state data, your well productivity on a per lateral foot basis is down a little bit year over year in 2025, though relatively in line with where you were in 'twenty two and 'twenty three as 'twenty four was a really strong year. I know there'll always be some variability in productivity data just given the geographical mix of wells and various lateral lengths But could you talk a little bit about your expectations for well productivity going forward and how you see that trending into 2026? Tom Nelson: Hey, Zach. This is Tom Nelson, our EVP for Reservoir Engineering. Going into 2026. We have a very strong program. We expect the same or better, VO per foot in 2026 as we have seen in 2025. Coupled with all the commentary about these longer laterals, we expect to see lateral length increase approximately 10% going into 2026 So that should be really positive for the for the total EURs. Really positive for the capital efficiencies, lowering well costs. These are very strong projects as we've talked about with rate of returns over 50%. And these are 1.1, 1,200,000 BOE wells. These are very strong wells that are very durable, a wide variety of of lower oil and gas prices. I think that the team should be commended for all the the hard work and cooperation they've, they put together. I think it's quite the opportunity to to bring these these flows forward. As Chris mentioned, you know, things have gone better than expected operationally. The teams coordinating with with midstream to have all the permits, the pipelines, all the drilling and execution, the completions, all the wells turned online, on time and under budget. I think has has really been been something that, really been something that we're we're proud of, and we expect to see that going forward. Think it'll continue on beyond 2026. I think that a lot of these really high quality, Wolfcamp and Bone Spring wells have been pushed further north, And as one example of that has been our Avalon well that we highlighted in the release. That at Gabilon. That's a well that has produced over 280,000 barrels of oil in the first twelve months of life. It's already paid out. It will continue to pay out many more times into the future. So I think our inventory is very strong, and, we're very, very excited for wells we're putting up on the board for this year. Operator: Thank you. And our final question for today comes from the line of Kevin McCurdy from Pickering Energy Partners. Your question, please? Kevin McCurdy: Hey, good morning. Thanks for taking my question. Just continuing to touch on the midstream angle, what is the impact of the increased activity on the San Mateo volumes and EBITDA outlook? Thanks. Brian Willey: Yeah. This is Brian Willig, Executive Vice President of Midstream. You know, it it that partnership we have with with Matador is critical to us. It's about, you 70 to 80% of our revenues come from Matador. And so as Matador grows, oftentimes, that leads to growth at San Mateo as well. Just depending on where the growth is. So I think we'll have more to talk specifically about that, of course, next year when we lay out our plan, but, that's a great partnership that we have with Matador. And it's something as you as you look at the capital expenditures for next year, Glenn mentioned earlier the Matador owned capital expenditures. I think we had mentioned in the release the eight to 12% tablet venture increase Approximately 90 to a 100,000,000 of that is is midstream, whether that's San Mateo and our shares of 51%, whether that's Matador owned. And so you know, we have some really great projects on on tap for next year to continue to grow the company. Continue to expand the business. So we support Matador. Operator: Thank you. Ladies and gentlemen, this ends the Q and A portion of this morning's call. I'd like to hand the call back to management for closing remarks. Joe Foran: Thank you very much, and thanks thank you everybody for spending the time in here with us. And again, I repeat, if you want more information or have more questions, you'll find us successful. Rob will be happy to take your questions and get answers for you. And we try to pride. I came didn't come up through private equity, but came up through friends and relatives. And with friends and relatives, they have a higher standard for communication and being accessible, and we wanna make that. You know, a lot of people, as I said, I think one of the issues just confronted directly, is quote, capital spending. Are we outspending our cash flow? And I think the answer is clearly not. If you don't believe the accounting that we've grown from a deficit to to over 3,000,000,000 having made good decisions, then look at it this way. I've never sold a share of stock in Matador. And we have a whole group of executives that haven't either. And the far as the employees go, we have a employee share purchase plan with over 95% participation. So the one the the people that know the company best we're we're buyers. Basically, not sellers. And, we can see the future coming up. We don't look upon it We look upon the more upon the quality of the rock and quality of the operations as opposed to what the oil price. Per barrel is. Because you can have a, a very high oil price, and the capital decisions. They don't have good operations. Or something else can affect it. That they're spending too much on their bank debt. And are in a bad position. But over forty years, remember, we started with just that 270,000. So over forty years, we've grown to this point. And it's from having a good decision making process. Not that we've never made a bad decision, but not many of them. And made a whole lot more in times of of oil price being shaken for one reason or another. And and I pointed out some of those instances. But if you keep going, and be that much more selective in your decisions, you can build an organization and there are more good people become available, And, it's worked to our advantage. Not that I've welcome $50 oil for a sustained period. But it's not fatal either. If you've maintained your balance sheet all through time and your bank relationships. You just have to be a little more careful. The midstream has helped. Because it's a fee based it gives us further balance. So as we say around here, we like our chances. And I think if you come to visit and meet the staff, you'll say these are people I could trust with my come on, say it's your life savings, but you could trust your investment because we come along a long way. You got a forty year history to look at. And we're pretty optimistic and we see the opportunities growing for us. Rather than being reduced. And and I think this this period going into the fourth quarter frankly, we've never looked so good with more options than we had before. And and and more targets of opportunity. For 2026. So we're we're excited. But I do think that helpful as these questions are on these kind of calls, it's even better to come see us. Have breakfast or lunch with us, or even dinner and meet the people behind these capital decisions. And say that, hey. They're they're reasonable people. They're professional. And they wouldn't be spending the money on this well or that well. If they didn't have a high degree of trust and confidence in it. And I think that's what you get for investing in Matador. We do have a sheet that says why Matador? It's at the back of your of the earnings release. And really encourage everybody to look through, those exhibits And I think they tell the story in five to ten minutes of why Matador. And an original investor in First Matador was in at 85¢. I mean, you know, sold for $18.95. And an original shareholder in this Matador is in for $3.56. So it's come a long way and we like our chances. And, better today than than ever. And I think we thank the board for working with us. We think they're distinguished and it's a good process. We rank up there Van can tell you more where we rank in New Mexico, but it's a top five top 10, type of companies. So start out with, you have on page four, how little we started with. Back in the early nineties to where we are today. So please give it serious consideration. And if you're want more information, we're here. And if you want a personal in person discussion to if that would give you greater comfort. Just give MAC a call. And he'll schedule it. And we'll enjoy meeting you. We would like to wish we could meet every one of our shareholders. So they would have that personal relationship. So thank you very much for your attention today. And come see us. We like our chances. And, we feel very comfortable that next year is gonna be a a good year for us one way or the other. Operator: Thank you. Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.
Operator: Good day and welcome to the Westinghouse Air Brake Technologies Corporation Third Quarter 2025 Earnings Conference Call. All participants will be in a listen-only mode. After today's presentation, please note today's event is being recorded. I would now like to turn the conference over to Ms. Kyra Yates, Vice President of Investor Relations. Please go ahead. Kyra Yates: Thank you, operator. Good morning, everyone, and welcome to Westinghouse Air Brake Technologies Corporation's Third Quarter 2025 Earnings Call. With us today are President and CEO, Rafael Ottoni Santana, CFO, John A. Olin, and Senior Vice President of Finance, John Mastlers. Today's slide presentation, along with our earnings release and financial disclosures, were posted to our website earlier today and can be accessed on the Investor Relations tab. Some statements we are making are forward-looking and based on our best view of the world and our business today. For more detailed risks, uncertainties, and assumptions relating to our forward-looking statements, please see the disclosures in our earnings release and presentation. We will also discuss non-GAAP financial metrics and encourage you to read our disclosures and reconciliation tables carefully as you consider these metrics. I will now turn the call over to Rafael. Rafael Ottoni Santana: Thanks, Kyra, and good morning, everyone. Let's move to Slide four. I'll start with an update on our business by perspectives on the quarter, and progress against our long-term value creation framework. And then John will cover the financials. We delivered a very strong quarter evidenced by continued growth in our backlog, sales, margin, and earnings. Sales in the third quarter were $2.9 billion, which was up 8% versus the prior year. Revenue growth was driven by both the Freight and Transit segments, including the acquisition of Inspection Technologies, which we closed at the beginning of the third quarter. And adjusted EPS was up 16%, driven by increased sales and margin expansion. Total cash flow from operations for the quarter was $367 million. The twelve-month backlog was $8.3 billion, representing an increase of 8.4%, while the multi-year backlog achieved an all-time high. These results demonstrate sustained revenue and earnings momentum and provide enhanced visibility for the fourth quarter and into the future. Shifting our focus to slide five, let's talk about our 2025 end market expectations in more detail. While key metrics across our Freight business remain mixed, we are encouraged by the underlying momentum of our business and the continued strength of our pipeline of opportunities across the globe. Despite the strong momentum that we are experiencing, we are continuing to exercise caution to navigate a volatile and uncertain economic landscape as we move into the final quarter of the year. North America traffic was up 1.4% in the quarter. Despite this traffic growth, Westinghouse Air Brake Technologies Corporation's active locomotive fleets were down slightly when compared to last year's third quarter. However, up sequentially. During the quarter, Westinghouse Air Brake Technologies Corporation outperformed the industry in terms of share of active locomotives running. Looking at the North America railcar builds, last quarter, we discussed the industry outlook for 2025, which was for approximately 29,000 cars to be delivered and which has again been reduced by the industry sources to approximately 28,000 cars. This forecast represents a 34% reduction from last year's car build. Internationally, activity is strong across core markets such as Asia, India, Brazil, and CIS. Significant investments to expand and upgrade infrastructure are supporting a robust international locomotive backlog and orders pipeline. In mining, an aging fleet continues to support activity to refresh and to upgrade the truck fleet. Finally, moving to the Transit sector, we continue to see underlying indicators for growth. Ridership levels are increasing in key geographies along with fleet expansion and renewals. Next, let's turn to Slide six to discuss a few business highlights. International demand for our products and services remained strong, highlighted in the quarter by the $4.2 billion order secured with Kazakhstan's National Railway, the largest single rail order in history. This historic agreement embodies KTZ's visionary approach for the country's rail network as the primary link between Europe and Asia, which is supporting the growth momentum that we are continuing to see in the region. By delivering advanced locomotives and long-term service solutions, Westinghouse Air Brake Technologies Corporation is a proud partner in Kazakhstan's progress, helping to unlock the region's enormous potential and developing the engineering competencies in the country's rail industry. Moving to mining, we secured a $125 million multi-year agreement for ultra-class drive systems. In transit, we secured $140 million brake orders driven by increased activity in India. Also in the quarter, the first four Simandou locomotives arrived in Guinea. These events marked the first quarter of heavy haul locomotives assembled and exported at our best cost facility, the Marora India locomotive plant. This milestone is a tribute to a global team that designed and built these locomotives specifically tailored to meet the customer demand of the largest untapped iron ore reserve in the world. All of this demonstrates the underlying strength across our businesses and the strong pipeline of opportunities which we continue to execute on. Moving to slide seven, before turning it over to John, I want to take a few minutes here to highlight the Transit segment's attractive value creation framework. Transit sustained orders growth is supported by unprecedented backlogs at car builders, rising passenger growth in key markets like Europe and India, and ongoing public investment in rail infrastructure around the world. Similar to the car builders, our transit backlog has been growing, and along with the consistent growth, we are experiencing increased quality and margin expansion with our backlog reflecting our commitments to deliver value and innovation. The team also remains focused on enhancing competitiveness and driving innovation. Through our integration initiatives, we are streamlining operations and achieving significant cost efficiencies, all while maintaining excellence in execution of our orders. We target leadership positions in segments where we offer clear differentiation, which positions us for long-term success. This is not only an organic story; our ongoing efforts in portfolio optimization alongside accretive bolt-on acquisitions are further strengthening our business and expanding our capabilities. This disciplined strategy is delivering tangible financial results. We are executing on our commitments with our value creation framework driving both top-line growth and margin expansion. Year to date, our revenue is up 7.5% and our operating margins have grown to the mid-teens. Given this momentum, we are confident that we will continue to expand our margins into the high teens of our planning horizon. And with that, I'll turn the call over to John to review the quarter segment results and our overall financial performance. John? John A. Olin: Thanks, Rafael, and hello, everyone. Turning to slide eight, I will review our third quarter results in more detail. Our third quarter played out largely as we planned with revenue, and with slightly better than expected operating margins. As we discussed in our last quarter call, we expected second half new locomotive deliveries to provide robust growth while being partially offset by lower mod production in the second half. This is exactly how the third quarter played out and we expect the fourth quarter's revenue cadence to be similar to the third quarter but at a higher growth rate in the fourth quarter. Sales for the third quarter were $2.89 billion, which reflects an 8.4% increase versus the prior year. Sales growth in the quarter was driven by both the Freight segment, including Inspection Technologies, and the Transit segment. Our operating margin expansion came in slightly better than expected. For the quarter, GAAP operating income was $491 million. The increase versus prior year was driven by higher sales, improved gross margin, and proactive cost management. Adjusted operating margin in Q3 was 21%, up 1.3 percentage points versus the prior year. This increase was driven by improved gross margins of 2.3 percentage points, which were partially offset by operating expenses, which grew at a higher rate than revenue. GAAP earnings per diluted share was $1.81, which was up 11% versus the year-ago quarter. During the quarter, we had net pretax charges of $6 million for restructuring, which were primarily related to our integration and portfolio optimization initiative, as well as $33 million of charges related to M&A activity. In the quarter, adjusted earnings per diluted share was $2.32, up 16% versus the prior year. Overall, Westinghouse Air Brake Technologies Corporation delivered a very strong quarter, demonstrating the underlying strength of the business. Now turning to slide nine, let's review our product lines in more detail. Third quarter consolidated sales were up 8.4%. Our quarter results were driven by growth in our equipment, digital, and transit businesses, partially offset by our service business. Services revenue was down 11.6% from last year's third quarter. This decline was planned and driven by the timing of modernization deliveries, which we expect to be down in the second half. As mentioned earlier, we expect services revenue to be down again in Q4 as a result of lower mod deliveries on a year-over-year basis. Services lower mod deliveries are expected to be offset by significant growth in new locomotive deliveries. Equipment sales were up 32% from last year's third quarter. This robust sales growth was driven by higher year-over-year new locomotive deliveries as well as the partial catch-up of delivering the new locomotives that were delayed from last quarter. We also expect this double-digit growth rate to continue in the fourth quarter as well. Component sales were up 1.1% versus last year due to growth seen in industrial products offsetting the impact from significantly lower North American railcar build and lower revenue associated with our portfolio optimization initiative. Digital Intelligence sales were up 45.6% from last year. This was driven by the Inspection Technologies acquisition. When excluding Inspection Technologies, digital continues to see growth internationally with continued softness in the North America market. In our Transit segment, sales were up 8.2% in the quarter, driven by our Products and Services businesses. Foreign currency exchange had a favorable impact on sales of 3.0 percentage points. As a key to our value creation strategy, we have been focused on optimizing our portfolio by divesting and exiting low-margin non-strategic businesses. We believe portfolio transformation will lead to improved growth resiliency. We adjust the third quarter's revenue for these divestitures and exits that we have executed; our revenues are up roughly an additional 0.5 percentage point of growth to 8.9%. Moving to Slide 10, GAAP gross margin was 34.7%, which was up 1.7 percentage points from the third quarter last year. Adjusted gross margin was also up 2.3 percentage points during the quarter. In addition to higher sales, gross margin benefited from cost recovery through contract escalation and the addition of Inspection Technologies, while mix was a headwind in the Freight segment as expected. Raw materials were unfavorable due to higher material costs largely due to increased tariffs. Foreign currency exchange was a benefit to revenue in the quarter, as well as to gross profit and a marginal impact on operating margin. During the quarter, we also benefited from favorable manufacturing costs. Turning to Slide 11, for the third quarter, GAAP operating margin was 17%, which was up 0.7 percentage points versus last year. Adjusted operating margin improved 1.3 percentage points to 21%. GAAP and adjusted SG&A expenses were higher versus the prior year. Both GAAP and adjusted SG&A expenses were impacted by the addition of Inspection Technologies, while GAAP SG&A also experienced increased transaction costs related to the acquisition. Engineering expense was $59 million, which was up $9 million versus last year as a result of the addition of Inspection Technologies. We are committed to allocating engineering resources toward existing business opportunities with high returns and we prioritize strategic investments that position us as an industry leader in fuel efficiency and digital technologies. These advancements are designed to enhance our customers' productivity, capacity utilization, and safety. Now let's take a look at segment results on Slide 12. Starting with the Freight segment. As I already discussed, Freight segment sales were up 8.4% during the quarter. GAAP segment operating income was $414 million, driving an operating margin of 19.8%, down 0.4 percentage points versus last year. GAAP earnings were adversely impacted by purchase accounting charges resulting from our acquisition of Inspection Technologies. Adjusted operating income for the Freight segment was $513 million, up 9.9% versus the prior year. Adjusted operating margin in the Freight segment was 24.5%, up 0.4 percentage points from the prior year. The increase was driven by improved gross margin behind contract escalation and the addition of Inspection Technologies, partially offset by unfavorable mix between services and equipment businesses. Finally, segment twelve-month backlog was $6.09 billion. Our twelve-month backlog was up 9.5% on a constant currency basis, while the multi-year backlog reached a record level of $20.91 billion, up 18.4% on a constant currency basis. Turning to Slide 13, Transit segment sales were up 8.2% at $793 million. When adjusting for foreign currency, Transit sales were up 5.2%. GAAP operating income was $115 million. Restructuring costs related to integration and portfolio optimization were $3 million in Q3. Adjusted segment operating income was $123 million. Adjusted operating income as a percent of revenue was 15.5%, up 2.7 percentage points. The increase was driven by higher adjusted gross margin behind integration and portfolio optimization efforts as well as strong operational execution. Over the past couple of quarters, the Transit team has focused on more appropriately balancing production across the year, and as such, we do not expect the typical lift that we have seen in the fourth quarter. We expect fourth quarter adjusted margins to be relatively flat prior year. Additionally, we expect adjusted margins to expand to the mid-teens on a full-year basis. Finally, Transit segment twelve-month backlog for the quarter was $2.18 billion, which was up 3.9% on a constant currency basis. The multi-year backlog was up 1% on a constant currency basis. Now let's turn to our financial position on Slide 14. Third quarter operating cash flow generation was $367 million, which was lower on a year-over-year basis resulting from higher tariffs and increased working capital. We continue to expect greater than 90% cash conversion for the full year. Our balance sheet and financial position continue to be strong as evidenced by first, our liquidity position, which ended the quarter at $2.75 billion, and our net debt leverage ratio, which ended the third quarter at 2.0 times. After the funding of the purchase of Inspection Technologies for approximately $1.8 billion, we expect our leverage ratio to remain in our stated range of 2 to 2.5 times upon closing of both the Delner and Frauzer Sensor Technology acquisitions, which we believe will close within the next couple of quarters. We continue to allocate capital in a disciplined and balanced way to maximize return for our shareholders. With that, I'd like to turn the call back over to Rafael to talk about our 2025 financial guidance. Rafael Ottoni Santana: Thanks, John. Now let's turn to slide 15 to discuss our 2025 outlook and guidance. As you heard today, our team delivered a very strong quarter while continuing to navigate through a challenging environment. Our global pipeline remains strong, and our twelve-month and multi-year backlogs provide visibility for profitable growth ahead. We remain encouraged by the pipeline of opportunities that remains ahead of us. Our team's commitment to product innovation, disciplined cost management, and partnership with our customers has been instrumental in driving our ongoing success. As we look to the fourth quarter, in light of our strong third quarter results and our ongoing underlying momentum, we are raising our full-year adjusted EPS guidance. We now expect adjusted EPS to be between $8.85 to $9.05, up 18% at the midpoint. Looking ahead, I'm confident that Westinghouse Air Brake Technologies Corporation is well-positioned to drive profitable growth to close out 2025 and beyond. Now let's wrap up on Slide 16. As you heard today, our team continues to deliver on our value creation framework thanks in large part to our resilient installed base, world-class team, innovative technologies, and our continued focus on our customers. As we move into the final quarter of the year, we remain focused on our commitment to creating value for our stakeholders and maintaining the momentum we have generated. Our team's dedication positions us to continue driving Westinghouse Air Brake Technologies Corporation's success even in a dynamic and uncertain economic environment. With that, I want to thank you for your time this morning. And I'll now turn the call over to Kyra to begin the Q&A portion of our discussion. Kyra? Kyra Yates: Thank you, Rafael. We will now move on to questions. But before we do, and out of consideration for others on the call, I ask that you limit yourself to one question and one follow-up question. If you have additional questions, please rejoin the queue. Operator, we are now ready for our first question. Operator: Thank you. We will now begin the question and answer session. First question is from Angel Castillo, Morgan Stanley. Angel Castillo: Hi, good morning and congrats on another strong quarter here. Just wanted to touch on one of the primary concerns that we sometimes hear from I think so this year your organic growth has been in the low single digits versus your algorithm of kind of mid-single digits here. So Rafael, could you just talk about maybe why you do not share this concern by unpacking two key things that I think are important here? So just first maybe you give us more color on the strong pipeline of opportunities that you talked about and just kind of what that tells you about the magnitude or the pace of kind of ultimately orders that you anticipate particularly in North America freight? And then two, your backlog itself already seems to imply a reacceleration in organic growth, I think, next year toward kind of high single digits range. So is that correct? And any preliminary thoughts you can share on just kind of organic growth expectations? For 2026 and just kind of the shape across your businesses? Rafael Ottoni Santana: Hal, as you speak here, I mean, you have got to look into the pipeline dynamics and it continues to be strong. I think one of the elements is the twelve-month backlog. The growth in the twelve-month backlog has outpaced the growth we saw last year. And with that, we have a stronger coverage right now this year than we had a year ago. So that's a positive right there and stronger coverage as we look into 2026. I think the other element is the total backlog, which even though it reached an all-time high in the third quarter, our pipeline of opportunities remained strong and we actually expect further growth moving to the fourth quarter. And the reason for that is really tied to I'll start first. I mean, we're bullish across some key international markets. Kazakhstan continues to see strong demand and that's driven not just by volume growth, I mean, you've got new rail lines, you've got fleet renewal, we're seeing similar momentum. Where if you look across CIS countries, in East Asia, you take for instance Brazil, we're saying the same things on fleet renewal in iron ore. We are seeing volume growth in agriculture, which remains strong. In Africa, we continue to see opportunities to expand the revenues in the continent. In mining, demand for ultra-class is another bright spot and it's right where we play. On transit, you see we continue to grow profitably. We're continuing to enhance the competitiveness of the business. So all in all, I think there are elements of the pipeline, which continues to be strong. Our total active fleet is running harder and we're continuing to expand our fleets around the world. We now expect combined volumes for both new locomotives and mods to keep growing as we head into 2026. And backlog numbers support it. I think you continue to see international outpace North America. And I think with that, they're both positive. Angel Castillo: That's very helpful. Thank you. And maybe just a quick follow-up on the services side. You just unpack what core services versus maybe the mod are in kind of second half 2025? And as you look at I think you just mentioned for 2026, you expect margins and equipment to grow or locomotives to grow next year. You expect mods to grow within that as well next year? Rafael Ottoni Santana: So the valuation you see there on the results in the quarter for services is exactly tied to mods and we expect that to continue to vary and it's going to be really a function here of where our CapEx is allocated. It's more towards new or some elements of modernizations. You asked about the core services. We continue to see that growth in the 5% to 7% range. As we look forward. And I think we continue to have fundamentals that drive that, which is ultimately connected to the age of the fleet, the innovation that allows customers to have a return on those investments. And we're continuing to win share of wallet with customers. Even when fleets are down, we see us last down the overall market. So, I think the dynamics and the fleet dynamics do not change. International continues to expand. And the North America market, the fleets continue to run hard. Angel Castillo: Very helpful. Thank you. Operator: Next question is from Ken Hoexter, Bank of America. Ken Hoexter: Hey, great. Good morning. And I concur, a great job on the quarter and the 8.5% growth in sales and backlog. So I guess similar questions, just want to focus on that backlog and thoughts on what we have in this upcoming, I guess twelve-month process. So how should we think about the two upcoming acquisitions? And then organic growth after that is maybe talk about your near-term backlog a little bit or your view on organic growth there? Rafael Ottoni Santana: I'll start and I'll let John comment on the specifics here. But as I said, as we stand here today, we've got stronger coverage for '26 than we did a year ago coming to 2025. So that's a positive. I think we're seeing stronger momentum. You asked about acquisitions in that regard. Evidence is really more of a flow business. So minimum really impact in terms of the total backlog. But with that, let me pass it on to John. Ken, with regards to the acquisitions, when we look at Evident, obviously, we've built in the first quarter has the first quarter of our ownership, the third quarter has progressed on track. Volumes are right where we expected them to be. And we're seeing in the first quarter of ownership both accretive margin to the overall company as well as slightly accretive EPS. So things are checking there really well. Through one quarter of ownership. We've got two more to go, as you know, Ken. With regards to Frauzer, we'd expect by the end of the year and Delner sometime prior to the within the 2026. Neither of those are in our guidance today. And we will include those when we close on them. And that will provide obviously inorganic growth as we move into 2026. And I also expect those two to be accretive from a margin standpoint as well as slightly accretive from EPS. But everything is tracking well. On the three acquisitions. Ken Hoexter: And then for my follow-up, you talked about the shift to builds versus mods, you telegraphed that well. Obviously, we're not seeing maybe as much of the margin impact. John, you kind of mentioned that in prepared remarks. That more a cost offset in the cost programs? Was it something else in terms of better margin on pricing that you can walk us through? I think you noted more muted margin expectation for the fourth quarter. I know if that was just for freight. Overall. So I don't know if you want to dig into the margin view though. A couple of things Ken. Number one is, as we certainly felt the impact of unfavorable mix in the third quarter. We had a lot of other things going well. Which we had anticipated overall. From our expectations, we came in slightly favorable in terms of margin in the third quarter, but largely on track. And again, that was running by driven by running the business very well. Operational excellence was very strong in the quarter. We had some favorable timing with regard to price escalation. And then the integration programs are dropping a fair amount of favorability. So that was offset by that unfavorable mix. As we look to the fourth quarter, very similar as we talked about last quarter, Ken, is we expect margin margins to expand the margin growth to expand in the fourth quarter from what we've seen in the third quarter. Now on an absolute basis, as you know, margins will be down absolute basis. On our fourth quarter you seasonally lower largely because of fewer production days and the absorption that goes along with that. So again, we're tracking to where we expected for the fourth quarter. Raised guidance a little bit this period and that was for the fact that we're coming in a little bit favorable on margins in the third quarter. We'd expect that to carry forward. Ken Hoexter: Great. Thanks, John. Thanks, Rafael. Operator: Next question is from Bascome Majors, Susquehanna. Bascome Majors: Thanks for taking my questions. Rafael and John, release and the deck talk a bit about tariff pressure on cash flow as it seems to be flowing into inventory. Can you talk about where we are on your net offset and just as that flows into the P&L over the coming quarters, how should we think about the impact on both the top line gross profit and ultimately the bottom line of the business? Thank you. John A. Olin: Sure, Bascome. So let's kind of talk about the cadence of the tariffs coming in. When our product comes across the border, the tariff is owed, right? So that hits cash first. We're certainly seeing pressure on overall cash. As that increased expense comes through. Now what that does is that gets inventoried and flow through our regular inventory. And it being a long cycle product as we are, or a fair amount of our products are. It typically is going to take two to four quarters for that to come through the P&L. So in the third quarter, are seeing the financial impact of tariffs and certainly have seen the cash impact. Now that's the kind of the gross impact, right? And then the net impact is couched with what we're doing to offset those tariffs or to mitigate them. And we've talked Bascome in the past and worth repeating I think today, is there's four-pronged approach that we're spending a lot of time on and working very hard at all facets. The first one is to get all the exemptions that we're entitled to. And I think the best example of that Bascome is the USMCA. And this is for Canada and Mexico tariffs and qualifying our products. I think our team has done an extraordinary job of getting off and getting that done, and we've a very high percentage that qualify there. The second area is on the supply chain. Right? We can move products around, not always easy, not always cheap, but we're looking at those opportunities in given the shifting landscape of tariffs should we be sourcing in other jurisdictions. And that's going on and that will continue to go on, as we move through the next several quarters. The third area is sharing costs with our customers. And so we've been doing a fair amount of that. As well. And the fourth area, Bascome, I'd call it kind of a wraparound. Is we are taking the entire enterprise and making sure that we make our commitments, and we're being incredibly prudent on spending that we do and very cost-focused on everything across the company. To again assure that we can do our best to cover the tariffs that are coming at us. Bascome Majors: Thank you for that comprehensive answer, John. And just to clarify something from earlier, Rafael, you said new locos and mods, expect units to be up again next year. Was that a North America comment or a global comment? And as you roll out the new mod product, I think later next year in North America, do you think that mix kind of shifts more balanced back into mods as that grows? Thank you. Rafael Ottoni Santana: It was a comment with regards to total. So if you look at the combination of mods and new units, and with that, I mean, the stronger variation we see between those dynamics between new and mods is in North America. In that regard. But dynamics are positive. As we look at the total and the backlog certainly supports that from both twelve-month backlog and special as some of those products have longer lead times. Operator: Next question is from Rob Wertheimer, Melius Research. Rob Wertheimer: Hi, thanks. Good morning. So there's a lot that went well in the quarter. To me, I guess the gross margin was maybe the most and I know you touched on it. John just mentioned some of the contract issues in your prepared remarks, but seemed like you had some headwinds on mix and material. I wonder if you could expand on what went right in gross margin? And then is that escalation contract escalation steady thing that continues over the years? Was there a lumpiness to it? Maybe just comment on that. Thank you. John A. Olin: Yes. In terms of the escalation, it is exactly what it means is it's recovering our costs. So there's no net benefit, but the timing of it does have an impact, Rob. Right? These are typically annual escalators. And so there's differences sometimes between when the cost hit and when we recover that money, there's typically a lag. But we saw a little bit of positive there. The other thing that you're seeing in gross margin is a favorable mix as we bring inspection technologies in. Inspection Technologies comes at a significantly higher gross margin than the rest. So we're seeing a little bit of a mix favorability with Inspection Technologies. But again, the biggest piece of all of this Rob, is just the company is running well. Everyone is in the company is focused on cost. And the momentum that we've got is we continue to see and it's coming out of the first and second quarter seeing it in the third quarter and we'd expect that to continue into the fourth quarter and into 2026. Rob Wertheimer: Okay. Thank you. Operator: Next question is from Scott Group, Wolfe Research. Scott Group: Hey, thanks. Good morning. So John, I thought that last answer on tariff was really helpful. I just I had a follow-up. When you think about the gross impact of tariff in the timing issues, what quarter would you say is like the peak gross impact of tariff? And then given all the mitigation efforts, is the is the quarter of like the biggest like net impact any different meaning is that is the net impact sooner or later if you understand what I'm trying to figure. John A. Olin: Yes, I do, Scott. I don't think we're that precise to start with. But I think the highest gross the highest net would be the very similar. And certainly the gross part of the tariffs is a driver of the movement. Right? And it's hard to tell exactly what quarter that's going to be because of how everything's flowing through inventories. But we're focused on doing everything we can to mitigate them and the entire company is working hard, at doing that. Scott Group: Maybe just ask like a little differently, like do you think we've seen the biggest impact yet? Or I know like last quarter you said like you think the net impact of tariff after mitigation is sort of immaterial. Do you still feel that way? John A. Olin: I don't think we've seen the largest gross or net impact on tariffs. I think that's still in front of us over the next couple of quarters. And that's why we continue to work a lot of our cost out plans, a lot of the elements in terms of supplier mitigation as John described and make no mistake pricing. Is a key element of that too. Scott Group: Makes sense. And if I could just ask one last one, you've done like such a good job getting these transit margins better, like do you think those can go over the next couple of years? I know you've got long-term margin guidance for the consolidated business. Should think about similar sort of upside in terms of couple of 100 basis points more to go in transit? That the right way to think about. Rafael Ottoni Santana: Hey, we see it as continuous improvement. You go back four, five years ago, we had given really a direction of heading to mid-teens. We're now heading to high teens. And I think it really not just a function of running the business better which we'll continue to do it. The other piece is also how you continue to rethink the. And as John has highlighted, we've exited also some businesses starting the process of acquiring better businesses into that portfolio. So we look at this as continuous improvement. We look at this as an evolution of the portfolio. Scott Group: Good stuff. Thank you guys. Appreciate it. Rafael Ottoni Santana: Thank you, Scott. Operator: Next question is from Saree Boroditsky, Jefferies. James: Good morning. This is James on for Saree. Thanks for taking questions. So you gave a great color on international pipeline. But you also kind of talked about strong pipeline in North America. So can you kind of talk about what you're seeing in terms of like customer activity, order trends? Or any key drivers in the North America pipeline? Rafael Ottoni Santana: Yes. So I think, well, I'm not going to make any comments with regards to specific customers. But what I'll tell you is, the view that the fundamentals of the fleet, they remain the same. I mean customers are running aged fleets. If you look at the fleet running in North America right now, over 25% of that fleet is over twenty years old. And that's excluding the two thousand modernizations we've done since 2015. So that's a significant element. The other one is, if you think about the fleet that's running, also a similar amount of over 25% are still DC locomotives. And you know, you can replace here for every three locomotives you could have two AC running. So the sense of modernizing units to AC, upgrading control systems, that actually allows the Class 1s to cut fleet sizes. It not just addresses things like obsolescence, it improves asset productivity, it improves reliability, and if you think about services, it lowers maintenance cost. So the way we look at it, I mean, I don't see fleet renewal it's not discretionary. I think it's actually a key lever for how they improve their operating ratio, how they improve quality in terms of the service and the overall competitiveness. So think we see this very much aligned those dynamics have not changed. James: Great. That's a great color. And I guess kind of on the international side, it's great to see like $4.2 billion like Kazakhstan contract win. Like can you kind of talk about what exactly is included in that contract? And when do you expect it to kind of begin to convert into revenue? Rafael Ottoni Santana: So I'll let John go into the specifics of each contract. But the way we look at it, very much this is providing us coverage for a region that continues to grow. And it's not just an element of volume that's growing. There's new projects and new lines that will accelerate that growth further. There are elements of just fleet renewal fleet that continues to age in that context. So I think those are all positive. And most importantly, we also have the service agreements where we ultimately support those fleets from an availability and reliability perspective. John A. Olin: Yes. And Jason, the contract the deal with Kazakhstan is made up several contracts. One is for locomotives, for 300 locomotives over a ten-year period of time. The other contracts are for the service, as Rafael had just mentioned. So what we've done is re-upped the service for all the existing re-upped it and extended it. All the existing locomotives that we're currently servicing there. We've also added a new service contract for all those 300 that will be coming in. And those will average over a fifteen-year period of time. James: Great. Thanks for taking questions. Thank you. Operator: Next question is from Brady Steven Lierz, Stephens. Brady Steven Lierz: Thanks. Good morning, everyone. Rafael, recently we've seen a change in FRA leadership and I wondered if you could give us an update on the regulatory environment. Are you seeing any increased momentum or desire from your customers to implement kind of some of these advanced technologies Westinghouse Air Brake Technologies Corporation has worked to develop? I think of Zero to Zero as a great example. Is that something we could see implemented here in 2025 or 2026? Or is there more kind of wood to chop on the regulatory front? Rafael Ottoni Santana: I think, yes, we are. It's good to see that momentum and pointed absolutely right. I think zero to zero is the first one, but we've got other digital tools that we've been working with customers and it's great to see the new leadership with the new incoming administrator. And I think the support is there. To focus on really advancing what I'll call both rail safety and supporting innovation there. So dynamics are positive and that certainly will contribute to the digital business here as we gain momentum in North America. Brady Steven Lierz: Thanks. Maybe just as a follow-up, you've had a full quarter with Inspection Technologies now you just talk about how integration has gone so far and maybe any customer feedback. Are you seeing kind of signs of cross-selling momentum or is it a little too early for that? Rafael Ottoni Santana: I think it's been a positive. I mean it's early days. It's still, but it's a positive. I think we've described how well we knew some of the leadership team and the leadership team knew some of us. So I think it's been a good process and full edge in a lot of ways. There's a lot what the teams are working on right now but it's good to see the first quarter. The first results, which are really I'll call very much aligned a bit ahead but aligned to what we touch. And I think it's a testament to the quality of really the acquisitions we've looked into it and the quality of the leadership team. That are involved in this. Brady Steven Lierz: Great. Thanks so much. Leave it there. Operator: Next question is from Ben Moore, Citigroup. Ben Moore: Yes, good morning. Thanks for taking our questions and congrats on a great quarter. Going back to the gross margin discussion, very strong deep there above consensus and year over year. Appreciate your color on the contract escalation and adding inspection technologies and mix was a headwind. Along with the unfavorable materials on the higher tariffs. But can we maybe hone in on how pricing is trending as part of that gross margin growth? You're working together with your customers on kind of sharing the tariffs. Would love to hear any color you share on how pricing is trending? John A. Olin: Yes. Ben, we are working all of those four levers. Certainly pricing is one of them. And with that, in the third quarter, we are seeing a marginal amount of pricing that's included in the revenue side. And again, it's still work to be done ahead of us. But I would not say that's any a core driver of what we're seeing in the third quarter, but pricing is certainly included in the results. Ben Moore: Really appreciate that. Maybe as a next one, you raised your EPS guide with a hold on your revenue guide, implying more opportunity on the cost side. The guide slide in presentation mentioned adjusted operating margin up but the implied 4Q EPS would be at $2.08 below consensus at $2.12. Is that due to below the line items? John A. Olin: Number one, Ben, typically we don't comment on consensus. What we've talked about is where what we've said and versus what we've said, we feel better about the fourth quarter and have raised our consensus by $0.1. And with that, we would expect when you look at kind of the implied fourth quarter we expect a very strong fourth quarter. Matter of fact, when you look at what's implied is a midpoint of 11.25% in terms of revenue growth and we'll see very strong organic growth during that period of time. And on a bottom line, we're looking at about 24% on EPS growth. Ben Moore: Okay. Really appreciate that. Maybe if I could squeeze in just one last one. With the UPNS proposed merger progressing, can you comment on your experience with CPKC as they merged in 2023 and increased their locomotives and active service in their first year combined winning volume from truck and how might your experience with a potential UPNS or BNCSX be similar as they potentially increase their locomotives and active service as they grow volume from truck in their first year combined? Rafael Ottoni Santana: Well, couple of comments. First, I'm not going to comment on any specific mergers here. But we continue to see this as a significant opportunity for what I'll call increased carloads and rail volumes over time. Which would be a positive for us. So I'll start there first. I think what's most important is as you look into any consolidation, I think the sense that temporarily you could see fleet reductions and pacing of near-term investments I think that misses that bigger picture view which is the one I gave you on the fleet dynamics. Which is both associated with the age of the fleet. It's associated with the fact that you still have a lot of DC locomotives. And customers can actually gain from those investments. And as I said before, I don't see fleet renewal as discretionary. It's actually a core lever ultimately. I mean, you're bringing those units that are 25 years of age or older and they're running hard. I mean it becomes highly costly to maintain those units. And that's what really triggers the elements of modernizing and sometimes really having to shift more towards the acquisition of new. Ben Moore: Really appreciate your time and insights. Rafael Ottoni Santana: Thank you. Thanks, Ben. Operator: Next question is from Tami Zakaria, JPMorgan. Tami Zakaria: Hi, good morning. Thank you so much. I wanted to touch on the component segment. It's great to see it inflected to growth in the third quarter. Should we expect this growth to accelerate in the fourth quarter and maybe build momentum in 2026? Or asked another way, how should we think about components growth on a normalized basis, if you could comment? Rafael Ottoni Santana: I think, Tami, a couple of things. I mean, you're looking to the year, I'd say our businesses are largely really tracking to plan in terms of growth. I think the notable exception has been the railcar builds, which is really rough what $100 million impact for us versus last year. Which I mean it was kind of expected, but it gotten worse. Since the beginning of the year. So I think that's one of the elements to keep in mind. And overall business, we continue to be pleased with the progress. I think the team has continued to take action here. To adjust operations to new volume realities. We're doing very well internationally. On that business and the team is finding opportunities here to continue to grow in that. And I think the other element of the components business is the dynamics you see on industrial. They are positive and that's really a function of demand that comes from especially the heat exchanger business and that's both for mining. If you look at the L and M acquisition, we did, but it's also from power generation with more demand for heat exchangers in that context. And that's to a large extent AI driven. Tami Zakaria: Understood. Thank you. If I may ask one more, the Kazakhstan deal, very impressive, definitely boosted backlog, total backlog. I'm just curious, the 300 locomotives under that contract, is that also over the next fifteen years or could the delivery of those could be more front-end loaded? Rafael Ottoni Santana: I think the way we look at the contract and the way it has played out even with the previous agreement, it provides us more coverage to support. So the previous agreement we ended up exhausting it a lot sooner and it's really a function of the continued growth. You see in Kazakhstan which is threefold. One is the volume growth on the existing lines. You've got new lines and new projects that are being built. And you've got some locomotives that are quite old. I mean, some of the first locomotives we worked in Kazakhstan they're like early two thousand. Those were modernizations that they've really exhausted their life. So it's really threefold what we've seen the dynamic and it's a market we continue to expect acceleration into it. John A. Olin: Tami, the 300 are for ten years. So now again, as Rafael had mentioned, the last contract ended prior to its natural end because they exhausted those. But right now, this is kind of a think of it as a baseload over the next ten years. Tami Zakaria: Appreciate the time. Thank you. Rafael Ottoni Santana: Thank you. Operator: Next question is from Steve Barger, KeyBanc Capital Markets. Steve Barger: Hey, thanks. Good morning. Good morning, Just a follow-up on Kazakhstan. Did that deal for the new locomotives include the full suite of digital products upfront? And with subscriptions in the service part. And then can you just give us an update on digital penetration for international more broadly? Rafael Ottoni Santana: Yes. So it does not include the digital products. So that's actually an opportunity we have, but capitalize on it. And it goes from, I'll call some very much proven products, such as STO and well, zero to zero and so forth. But I mean, we also continue to have opportunities with PTC and those are some of the things that are being discussed. I think what's most exciting here is the fact that could all remains there besides Kazakhstan. We're seeing that in the CIS countries. We've got a lot of support from what I call governments here to make sure that we land those fleets in other countries around the region. So that's a positive. And on the digital electronics, as per your question, I think we continue to see opportunity here to expand penetration on that. And that touches both onboard electronics which speaks for TL, smart HPT, zero to zero but PTC is also continues to be a bright spot in terms of how railroads look at improving safety of their operations around the world in a cost-effective way. Steve Barger: Yes. That's good detail. Thanks. And just I know it's early to talk about Frauzer and Delner, but just high level, does the technology side of those deals integrate to your existing software and service stack easily do you think? Just trying to get a sense of how fast you can kind of get that going for cross-selling? Rafael Ottoni Santana: It does. It integrates very well. And I think we've got really, I think, the element of scale to help those business get further momentum which would really spell growth into various markets that were present. We see the opportunity here not just to deliver on the cost synergies, is really what we based acquisitions on, I think there is really momentum to be gained here in terms of growth and share gain, share of wallet gain with customers in overall markets. Steve Barger: Great. Thank you. Appreciate the detail. Rafael Ottoni Santana: Thank you. Operator: This concludes our question and answer session. I would like to turn the conference back over to Ms. Yates for any closing remarks. Kyra Yates: Thank you, Alicia, and thank you everyone for your participation today. We look forward to speaking with you again next quarter. Operator: Conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the Fulton Financial Corporation Third Quarter 2025 Results 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 the session, you will need to press star 11 on your telephone. You would 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, Matt Jozwiak, Director of Investor Relations. Please go ahead. Matt Jozwiak: Good morning, and thanks for joining us for Fulton Financial Corporation's conference call and webcast to discuss our earnings for the third quarter ending September 30, 2025. Host for today's conference call is Curtis Myers, Chairman and Chief Executive Officer. Joining Curtis is Richard Kraemer, Chief Financial Officer. Our comments today will refer to the financial information and related slide presentation included with our earnings announcement which we released yesterday afternoon. These documents can be found on our website at fult.com by clicking on Investor Relations and then on News. The slides can also be found on the Presentations page under Investor Relations on our website. On this call, representatives of Fulton Financial Corporation may make forward-looking statements with respect to Fulton's financial condition, results of operations, and business. These statements are not guarantees of future performance and are subject to risks, uncertainties, and other factors, and actual results could differ materially. Please refer to the Safe Harbor statement and forward-looking statements in our earnings release and on Slide two of today's presentation for additional information regarding these risks, uncertainties, and other factors. Fulton Financial Corporation undertakes no obligation other than as required by law to update or revise any forward-looking statements. In discussing performance, representatives of Fulton Financial Corporation may refer to certain non-GAAP financial measures. Please refer to the supplemental financial information included with Fulton's earnings announcement released yesterday and Slides 30 through 37 of today's presentation for a reconciliation of those non-GAAP financial measures to the most comparable GAAP measures. Now I'd like to turn the call over to your host, Curtis Myers. Curtis Myers: Well, thanks, Matt, and good morning, everyone. For today's call, I'll be providing a few high-level comments as well as some operating highlights for the quarter. Then Richard will review our financial results in more detail and discuss updates to our 2025 operating guidance. After our prepared remarks, we'll be happy to take any questions you may have. We were pleased with our strong third-quarter operating results. Our community banking strategy and regional scale continue to deliver customer value and strong results for our shareholders. Operating earnings of $101.3 million or $0.55 per share demonstrate the impact of positive operating leverage, strong profitability, and a diversified balance sheet. Total revenue increased linked quarter as we grew both net interest income and fee income while we continue to show strong expense discipline. All of these positive factors combine to generate quarterly trends that drove our efficiency ratio down to 56.5%. Delivered an operating ROA of 1.29%, and resulted in an operating ROTCE of 15.79%. These are all strong results for the quarter. Touching on capital, we repurchased 1,650,000 shares during the quarter at a weighted average cost of $18.67 per share. We routinely evaluate all of our capital deployment options and found the opportunity to repurchase shares at attractive levels. Plan to continue to use our share repurchase authorization. Even with this quarter's repurchase activity, we grew our tangible book value per share 18% on a linked quarter annualized basis. Our strong performance, disciplined approach to balance sheet management, and our diversified business model provide us financial flexibility and position the company for continued success. Now let me provide a few operating highlights on the quarter. Deposit growth outpaced loan growth at $194 million for the quarter. Deposit growth was primarily driven by targeted sales campaigns and seasonal net inflows of municipal deposits. During the quarter, total demand and savings balances grew $387 million offset by declines in brokered and time deposits. We were able to drive this growth while maintaining a disciplined and targeted pricing strategy. Turning to loans, originations were up linked quarter as well as compared to the prior period. Total loan balances grew $29 million for the quarter as increased originations were offset by the impact of strategic actions we have been executing on throughout the year. Year to date, these actions represented more than a $600 million headwind to our loan balance growth. Moving forward, we expect these actions to moderate and loan growth to return to our long-term growth trends. Turning to the income statement. Revenue growth was driven by a strong net interest margin and a solid linked quarter increase in our non-interest income. As a result, total quarterly revenue hit an all-time high. Our non-interest income as a percentage of revenue ended the quarter at 21%, with our fee-generating businesses growing nicely and we are positioned well for continued growth. Lastly, let me touch on credit. While we remain cautious on credit given general economic and geopolitical uncertainty, we continue to see steady performance in our portfolio. During the quarter, we saw improvement in non-performing loans and charge-offs. Additionally, we saw improved risk rating migration and a continued reduction in classified and criticized loans. The provision for loan losses remained favorable to expectations and the allowance ratio was stable compared to the prior quarter. Overall, we are encouraged by the trends we're seeing but always remain focused on identifying and managing any potential areas of weakness that may arise. Now let me turn the call over to Richard to discuss the details of our financial results and provide comments on our 2025 operating guidance in more detail. Richard Kraemer: Thank you, Curtis, and good morning. Unless I note otherwise, the quarterly comparisons I discuss are with the 2025. Loan and deposit growth numbers I reference are annualized percentage on a linked quarter basis. Starting on Slide five, operating earnings per diluted share was $0.55, $101.3 million of operating net income available to common shareholders. Net interest income growth driven by a strong NIM and a stable balance sheet, combined with increasing fee income helped to more than offset the anticipated increase in operating expenses. We are encouraged by the improved positive operating leverage we generated when compared to the previous quarter and on a year-over-year period basis. Total end-of-period loans increased $29 million during the quarter. Residential and commercial mortgage drove growth offset by declines in C&I. We continue to proactively work certain credits out of the portfolio that don't align to our long-term strategy. During the quarter, we saw a runoff of approximately $32 million of indirect auto and sold approximately $40 million of small ticket equipment finance loans. Additionally, we saw about $40 million in note sales and resolved an additional $139 million of C&C loans. Combined, these actions accounted for over $250 million of loan balance headwinds during the quarter. With the exception of the continued planned runoff of indirect auto, we expect the impact of these activities to moderate as we move into 2026 and expect growth to revert towards our long-term historical organic growth trends. Deposits grew $194 million or 3%. Growth of $387 million in demand and savings products offset a $192 million decline in time deposits which included a $108 million decline in broker deposits. A primary driver of growth was a seasonal increase in municipal balances of $450 million in line with expectations. We anticipate outflows in municipal balances in the fourth quarter similar to historical trends. Our non-interest-bearing balances trended lower, ending the quarter at 19.5% of total deposits. The decline in balances appears to be driven by normal corporate customer activity as our number of commercial accounts remained stable. As a result, our loan-to-deposit ratio ended the quarter at 91%. Moving to investments. Securities purchases lagged cash flows by about $100 million partially offset by an improvement in AOCI. Investments as a percentage of total assets were 15.8%, a level that provides balance sheet optionality moving forward. Net interest income on a non-FTE basis was $264.2 million, a $9.3 million increase linked quarter. While net interest margin increased 10 basis points to 3.57%. Loan yields increased seven points to 5.93%. Fixed rate asset repricing represented a tailwind during the quarter. We believe this will continue to provide some cushion for margin in the face of declining short-term rates as illustrated on slide 21 of our earnings presentation. Over the next twelve months, we have approximately $5.4 billion of fixed and adjustable rate earning assets subject to repricing. Currently at a blended yield of 5.08%. Our net interest margin further benefited from a modestly higher level of accretion interest which was up $1.3 million linked quarter to $12.7 million. For the quarter, our average cost of total deposits decreased two basis points to 1.96% while our total cost of funds declined four basis points due to quarterly wholesale repositioning aided by municipal inflows. Through the current rate cutting cycle, our cumulative interest-bearing deposit beta has been 33% while our total deposit beta has been 22%. Our deposit pricing strategy continues to balance the desire to fund future balance sheet growth while defending margin. Turning to Slide seven. Non-interest income for the quarter was $70.4 million. The linked quarter increase was driven by our wealth and consumer businesses, and aided by modest gains from asset sales. Non-interest income as a percentage of total revenue equaled 21% for the third quarter. Notably, our wealth management business, Fulton Financial Advisors, reached $17 billion in assets under management and administration and continues to be a material driver of fee income growth. Moving to slide eight, non-interest expense on an operating basis was $191.4 million, an increase of $3.8 million linked quarter. This was mostly attributable to an increase in salaries and benefits driven by one extra day in the quarter, a lower level of deferred loan origination cost, and outside service spend related to planned internal projects. Items excluded from operating expenses as listed on slide eight include charges of $5.4 million of core deposit intangible amortization and $207,000 benefit of other items. Turning to asset quality. Provision expense of $10.2 million was slightly higher than last quarter. However, well within the guidance we provided last call. As Curtis mentioned, we saw positive trends throughout the book. Net charge-offs declined to 18 basis points while non-performing assets to total assets improved four basis points to 0.63%. Our allowance for credit losses to total loans ratio remained at 1.57% while our ACL to non-performing loan coverage increased to 189%. Slide 10 shows a snapshot of our capital base. We maintain a healthy capital position that provides us with balance sheet flexibility. During the quarter, we repurchased 1,650,000 shares at a weighted average cost of $18.67. As of September 30, we had remaining buyback authorization of $86 million under the current plan. Inclusive of the share repurchases, internal capital generation was robust at $84 million. This was driven by a combination of strong earnings and a $44 million benefit to AOCI from the impact of lower interest rates. Our tangible common equity to tangible asset ratio increased to 8.3% while CET1 increased to 11.5%. On Slide 11, we are updating our operating guidance for 2025. Considering the recent Fed action, associated dot plot, we have updated our rate forecast to include the recent 25 basis point cut in September, one 25 basis point cut in October, and an additional 25 basis point cut in December. Given these macro assumptions and our strong year-to-date performance, we have made the following adjustments to our guidance with emphasis on the midpoint of the ranges. We are increasing net interest income to a range of $1.025 billion to $1.035 billion. We are lowering and tightening provision expense to a range of $45 million to $55 million. We are raising the bottom end of fee income tightening to a range of $270 million to $280 million. We are lowering the top end of operating expense to a range of $750 million to $760 million. We are modestly increasing our effective tax rate to a range of 19% to 20%. And last, lowering our estimate of non-operating expenses from $10 million to $7 million. And with that, we'll now turn the call over to the operator for some questions. Thank you. Operator: Your telephone and wait for your name to be announced. To withdraw your question, please press. Our first question comes from the line of Daniel Tamayo with Raymond James. Your line is now open. Daniel Tamayo: Thank you. Good morning, guys. Good morning, Curtis. Good morning, Richard. Good day. Maybe, first on the net interest income guidance. Being revised higher, it looks like it implies some margin compression, if that's correct. And the fourth quarter. Presumably related to the rate cut. Just curious for your thoughts around the impact, if that's correct, the impact of this first cut that we had last quarter relative to future cuts, if there's kind of a rebound or less impact after, you know, with future cuts going forward. Thanks. Richard Kraemer: Yeah. Thanks for the question, Danny. Yeah. No, you're right. Interpretations, I mean, would imply a little bit of margin pressure in 4Q. Look, I'll say that for every 25 basis points on an annualized basis, it's about $2 million of annualized NII headwind. That said, you know, as we continue to manage the deposit side of this, you know, and try to reach for higher betas, that does offset some of that over time. But there's a lag to that. Right? So for every 25 bits that happens, you really don't catch up on the cost of the interest expense side for probably about three months. All in. So there will be some kind of near-term pressure, but you're right. If the Fed stops or when the Fed stops cutting, you will start to level out several months after that. Daniel Tamayo: Got it. Okay. Helpful. And then maybe one more high level for you, Curtis. Just curious of your thoughts on positive operating leverage in 2026. It sounds like the rate cuts could certainly have an impact on that. But just curious how you're thinking about if that's a possibility for the company, if it's likely, and if there is some kind of breakeven point in terms of cuts, how you're thinking through that. Thanks. Curtis Myers: Yeah. So I mean, we're focused on continuing to generate organic growth so that we can drive positive operating leverage. You know, there's a lot of components, expense levels, revenue levels, some things within our control and some things that are not. You know? But we're gonna manage to a point that we are our goal is to generate positive operating leverage on a consistent basis. To Richard's point in your prior question, around the impact of rate cuts, I mean, we are more neutral on our balance sheet than we have been in prior periods. And we think that will help. And then we will manage the other components of that operating leverage calculation to focus on generating that. Daniel Tamayo: Okay. Helpful. Alright. Well, I appreciate the color, guys. I'll step back. Operator: Thanks, Dan. Thank you. Our next question comes from the line of Casey Haire with Autonomous. Your line is now open. Casey Haire: Yes, great. Thanks. Good morning, guys. I guess one more follow-up on sort of the NIM outlook, Richard. Cumulative interest-bearing deposit beta, I think you mentioned was 33%. Just where do you expect that to trend as the Fed cuts? Richard Kraemer: Yeah. I think that's a level we aim to maintain, if not to get a little bit more. Obviously, you know, as we start to revert to more normalized loan growth, that could be some pressure. But I think around that 30% level is really the target. Casey Haire: Okay. Very good. And on the asset side of things, fixed rate asset repricing was a nice tailwind. You know, can you any color on where new money yields are versus, I think, you mentioned that $5.08 coupon on what's coming, what's maturing in the next year? Richard Kraemer: Yeah. New originations during the quarter were right around six and a half percent. Just, I think, a couple of bps below that. $6.48. Casey Haire: Okay. Great. And just lastly on capital management. So, you guys have been one of the banks that have been openly, you know, kinda looking for deals. Just wonder it feels like it is active in that part of the market, that $1 billion to $5 billion asset bank crowd. Just wondering why we haven't seen a deal from you. Is it a bid ask, lack of targets? Just some color there. Curtis Myers: Yes. So our strategy remains the same. And that as you referenced and I previously referenced that $1 billion to $5 billion community bank that would be an infill to give us a greater market penetration in our five-state market is the focus. We feel we continue to have opportunities there, and we want to be positioned to always be able to move forward with the things that we want to move forward with. And it is an active strategy for us. Casey Haire: Thank you. Operator: Our next question comes from the line of Christopher Marinac with Janney Montgomery Scott. Your line is now open. Christopher Marinac: Good morning. Curtis, I wanted to extend on your answer there and just look further at sort of your organic opportunities in Virginia, Maryland, and even Philadelphia? And how much more opportunity do you see there in the next several quarters? Curtis Myers: We definitely have opportunity for organic growth. So, you know, primarily, we drive that by winning customers each and every day. We also drive that by adding to our commercial banking team, our wealth team, and we're always focused on talent recruitment. Strategy. And then, you know, we have Fulton First strategies around small business to enhance growth there and, you know, we really have a lot of levers for organic growth, and think what you've seen this year is we have, you know, decent originations, and we've had some strategic headwinds that have offset balances. This year. So underlying, we're really focused on those organic originations right throughout the company. But in those areas where we have a lot more growth potential, with more limited market share. Christopher Marinac: Good. Thank you for that. And then just a follow-up on the commercial fee income line from your commercial deposits. Does that track typically with the growth of those deposits? Or do you see other opportunities even if those balances were to be flat? Grow the fee income side? Curtis Myers: Yeah. So there's a lot of components to that. So on the account level, cash management, and account level fees, they track with account growth and then activity. Expansion, you know, within or contraction within those account like the activity volume. You know, we also have our swap fees or in that that are tied to originations. As well. So it's a real mix of transactional account level growth and then things that are more tied to originations. And, you know, we've had steady performance overall. Feel good about the overall fee income or a commercial fee income trajectory. Christopher Marinac: Great. Thank you for taking my questions this morning. Curtis Myers: Welcome. Thank you. Operator: Our next question comes from the line of Matthew Breese with Stephens Inc. Your line is now open. Matthew Breese: Hey. Good morning. Good morning, Matt. Richard Kraemer: Rick, in your opening remarks, thought you had mentioned a little bit of a mismatch in securities purchases versus maturities, and maybe there's some optionality there going forward. Could you just talk a little bit about to what extent we might see securities purchases and maybe some framing for where you want cash and securities as a percentage of total assets. Richard Kraemer: Yeah. I think we've, you know, we kinda positioned in the past. We probably coming into the year, we're a little light from a liquidity perspective on security. So we've moved that higher. I think managing around that 16 to 17% level of assets is about right. For investments where we are. We've been fairly opportunistic and kinda pick our points when we want to invest and when we have additional liquidity. I think there's, you know, the expectation, obviously, we mentioned earlier is that you'll get some municipal headwinds in the fourth quarter, so deposits will those deposit balances will be down a little bit. I think just managing kind of for those, you know, for those really depends on when we buy. But like I said, 16 to 17% long term is probably the right target. Matthew Breese: And looking at securities yields three seventy today, I'm guessing what you're putting on the books has either a high four, maybe low five handle on it. Richard Kraemer: That's right. Matthew Breese: Yeah. When might I yeah. When might we see a more pronounced better than others and acceleration in securities yield? It's like there is there a cash flow year work towards that 45% level? Sorry to interrupt you. Richard Kraemer: No. No. Sorry. Yeah. I think you're right on the yield, and more recently, it's been in the high high fours. But no. There really isn't a pronounced cash flow. It's pretty steady stream, barring any acceleration in prepayment. So I think that's kind of the wild card, which we haven't really seen a material pickup yet. But now it's pretty steady now. And we kinda we gave a little bit of additional color. I think it's on slide 21 of our deck. On some of that fixed repricing fixed and adjustable repricing schedule. So when you go out beyond twelve months, so basically everything right at that left column, the weighted average yield on those on those segments combined are around four and a half percent. That just gives you some idea of upside in the outer years as well, assuming elevated rates. Matthew Breese: Okay. Then also in both your opening remarks and Curtis's, you made reference to loan growth headwinds dissipating. You talked about reverting to kind of longer-term levels of loan growth. Could you just talk a little bit about the pipeline, how your strength of pipeline, where you're expecting to see growth over the next few quarters? And is it fair to say that that longer-term average is kind of low to mid-single digits? If you had to pick a side, low or mid, where would you lean over the next few quarters? Thank you. Curtis Myers: Yes. So the long-term trends have been 4% to 6%. You know, and I think we're trying to climb back to that 4%. We've been below that given the headwinds in strategic actions we've taken. So we want first get to the low end of that and see where we go from there. You know, the pipelines are up a little bit. Year over year, and we've had an increasing trend. But the pull-through rate is still lower than historical norms. Customers still remain cautious in spending. So we do see improvement, but it's modest. At this point. Overall, where we want the growth having a very diversified balance sheet, has served us really well over time, and we want to grow in all categories. And we feel like we're positioned that we can grow in all categories. You know, even CRE, our position relative to the market is good, so we can really attract high-quality borrowers, high-quality projects there. So really across the board, we're trying to get organic growth because we want to win customers. And that really is the engine behind the growth over the long haul. Matthew Breese: Great. And then just last one for me. Curtis, as you climb back to that 4% loan growth threshold, does that leave room in kind of the capital stack for repurchases? Or what are your capital priorities as you get to a 4% loan growth rate? That's all I had. Thank you. Curtis Myers: Yes. So the thanks, Matt. The priorities are the same. Organic growth and corporate activities, whether it be M&A or asset purchases or, you know, uses of capital and then buybacks. And I think you saw us in this last quarter that in the absence of those first two things and really strong capital generation. We lean more into the buyback. I think if those things persist like we think over the next couple of quarters, then you know, we'll probably be more in that buyback focus. We have $86 million, I believe, left in the authorization, and then we typically, you know, look at that each year, but we still have $86 million remaining on the buyback that we have in place. Richard Kraemer: And Matt and maybe just to add, I mean, you made reference to climbing back to 4%. I want to just reiterate that the strategic actions we took this year as Curtis said earlier, were over $600 million. It's about 3.5% annualized growth, you know, if you added that back in. So I think moving from three and a half to four is not that big of a lift here. So we are seeing the growth. It's just, you know, you're obviously, we're masking that with some very strategic runoff. Operator: Thank you. Our next question comes from the line of David Bishop with Hovde Group. Your line is now open. Kyle Garmin: Hey, guys. Good morning. This is actually Kyle Garmin asking questions on behalf of David. Morning, Kyle. So with the recent scrutiny around loans to NDFIs, could you update us on your current exposure levels and how you think about the sector? Curtis Myers: Yeah. So we have very low levels, pretty de minimis levels of NDFI overall. And the primary in that is loans to bank holding companies, community bank holding companies in our market. We put them in that bucket if they're non-rated debt issuances. So that's the primary. So we really, you know, are not heavily engaged in that activity. Richard Kraemer: Yeah. It's tier two sub-debt structured as notes. Because they're non-rated non-CUSIP institutions. And that's the primary thing in our NDFI disclosures as you would see in the call report. Kyle Garmin: Thank you. That was helpful. Operator: Thank you. Our next question comes from the line of David Conrad with KBW. Your line is now open. David Conrad: Real quick follow-up for me. And I think Richard already answered this one a little bit. But, you know, deposit cost came down four bps, quarter over quarter. As you paid off the broker CDs. With the municipality seasonality in the fourth quarter. Is the $2.45 a good jumping off point? Or will you increase your broker CDs, or will it just be a reduction in cash and a smaller balance sheet? Thanks. Richard Kraemer: Yeah. We so we did we ran off brokered during the quarter, obviously. We also had some declines in SHLB as well. So I think, you know, as we look towards fourth quarter and run out, typically, we saw about $450 million come in municipal during third quarter. We usually see 40% to 50% of that move out. So we'll look. We'll look towards the most cost-effective way to manage that and it could also be customer deposits and specials on that end too. But any of those alternatives work for us. David Conrad: Okay. Perfect. Thank you. Richard Kraemer: You know, we're gonna continue to manage our loan deposit ratio appropriately. Operator: Thank you. And I'm currently showing no further questions at this time. I'd like to turn the call back over to Curtis Myers for closing remarks. Curtis Myers: Well, thank you again for joining us today. We hope you'll be able to be with us when we discuss fourth-quarter results and year-end results in January. Thank you. Operator: This concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Welcome to Winnebago Industries Q4 and Fiscal 2025 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Raymond Posadas, Vice President of Investor Relations and Market Intelligence. Please go ahead, sir. Raymond Posadas: Thank you, Towanda. Good morning, everyone, and thank you for joining us to discuss our fiscal 2025 fourth quarter and full year earnings results. This call is being broadcast live on our website at investor.wgo.net. And the replay of the call will be available on our website later today. The news release with our fourth quarter and fiscal 2025 results was issued and posted to our website earlier this morning. Please note that the earnings slide deck that follows along with our prepared remarks is also available on the Investors section of our website under Quarterly Results. Turning to Slide two. Certain statements made during today's conference call regarding Winnebago Industries and its operations may be considered forward-looking statements under securities laws. The company cautions you that forward-looking statements involve a number of risks and are inherently uncertain. A number of factors, many of which are beyond the company's control, could cause the actual results to differ materially from these statements. These factors are identified in our SEC filings, which we encourage you to read. In addition, on today's call, management will refer to GAAP and non-GAAP financial measures. The reconciliation of the non-GAAP measures to the comparable GAAP measures is available in our earnings press release. One additional housekeeping item. Beginning with our Q4 and full year 2025 results, we are transitioning our segment profitability measure from adjusted EBITDA to operating income. To assist with modeling, our investor supplement provides a table detailing segment quarterly operating income along with depreciation and amortization for fiscal 2025 and 2024. It should be noted that operating income at the segment level excludes both interest expense and tax expense, which is held at the corporate level. Please turn to slide three. Joining me on today's call are Michael Happe, president and chief executive officer of Winnebago Industries, and Bryan Hughes, senior vice president and chief financial officer. Mike will begin with an overview of our Q4 performance, Bryan will then discuss the associated drivers of our financial results in addition to sharing our forward view of the market and our fiscal year 2026 guidance. Mike will conclude our prepared remarks, and then management will be happy to take your questions. With that, please turn to Slide four as I hand the call over to Mike. Michael Happe: Thanks, Ray, and good morning, everyone. On our Q3 call in June, I spoke with you about the importance of staying focused on the areas of the business within our control. As I reflect on our fourth quarter performance, the entire Winnebago Industries team has reasons to be proud. We ended a challenging fiscal year with a strong fourth quarter that reflects the resilience of our team and the strength of our diversified portfolio. Our results also demonstrate the progress of the strategic actions we've taken to begin transforming our Winnebago branded RV businesses. Complementing our healthy stable of industry-leading brands, these initiatives and others across the enterprise enabled us to return to positive operating cash flow in the quarter, improve working capital, and meaningfully reduce our net leverage ratio. We generated adjusted diluted earnings per share of $0.71 on net revenues of $777.3 million. Momentum across brands and product lines more than offset operating margin pressure from the ongoing turnaround at our Winnebago branded businesses. Our improved Q4 performance enabled us to achieve the high end of our revised 2025 financial guidance. Driving our growth in Q4 were standout motorized RV products like Newmar's Class A Summit Air and Grand Design's Lineage Series M, which is rapidly gaining momentum in the Class C diesel category. On the towable side, the affordable Grand Design Transcend series is resonating with new consumers to the RV lifestyle. We also continued to see strong performance in our marine segment from multiple Barletta products, including the ARIA, which have become the definition of affordable luxury in the aluminum pontoon segment. Turning to key RV trends on slide five. Following a brief uptick earlier in the summer, RV retail registrations declined in August. On a trailing three-month basis, retail demand remained stable and dealer inventories continue to improve. This environment is contributing to a healthier channel, even as monthly results remain variable. From a wholesale perspective, total RV shipments declined low single digits in August. The industry continues to demonstrate discipline, with manufacturers closely aligning shipments with retail demand. As we move through the remainder of calendar 2025, we expect dealers to remain selective in restocking, supporting channel stability in the off-season. We now expect wholesale RV shipments in the range of 320,000 to 340,000 units for calendar 2025, or a median of 330,000 units. For calendar 2026, we are estimating wholesale RV shipments of 315,000 to 345,000 units. Our production strategy centers on disciplined planning and execution, enabling us to align output with market conditions. Our inventory turn rate of 1.9 times at the end of Q4 reflects seasonal dynamics and dealer demand. While we're targeting higher turns over time to support operational efficiency and steady growth, we recognize that dealer behavior and market conditions ultimately drive those turns. Our strategy remains focused on maintaining a prudent demand-driven approach. On slide six, our continued momentum in our core RV market segments underscores our strategic focus, product innovation, and deep customer engagement. Shown on this slide are some of our current success stories that our team here has every right to be very proud of. Newmar's Dutch Star continues to be the number one brand in the Class A diesel category, a position it has held since 2021. In Class B, three Winnebago brands, Solis, Travato, and Rebel, have led all models in that category for the past five consecutive years. We also continue to win in Class C diesel, The Winnebago Echo is currently the number one selling brand in this class. And while not shown on the slide, the Winnebago View is the second selling brand in that class. Additionally, in just its first full year on the market, the Lineage Series M has become the number three brand in the Class C diesel market for the August trailing three and trailing six-month periods. And a recent ad is the emerging Grand Design Transcend, which advanced three spots versus last year to the number eight position of the highly competitive travel trailer category, joining the Grand Design Imagine in the top 10. And finally, the Grand Design Momentum holds the number one position in both the fifth wheel and travel trailer toy hauler segments. Moving to the marine segment on slide seven, Barletta and Chris Craft have done an exceptional job managing inventory, building dealer relationships, and creating an outstanding boating experience for consumers. This discipline and customer-centric approach has enabled both brands to maintain strong performance, despite significant industry headwinds. For the trailing twelve months ended August 31, Barletta increased its market share 20 basis points to 9%. The brand's dealer network called model year '26 the best top-to-bottom product launch in Barletta's history, including new features, design elements, and technology updates. Now turning to slide eight, in order to deliver a successful fiscal year 2026, we are focused on executional drivers that directly contribute volume, share, and profitability. We expect our Winnebago branded motorhomes business to benefit from new product introductions, like the recently launched Class C Sunflyer, alongside stronger dealer partnerships, and improved operational efficiency. We are positioning the Winnebago branded travel trailer business for growth as well, through innovative products, a revitalized dealer channel, and operational leverage. In addition, we expect to see the Grand Design Motorhomes business continue to capture share as a result of new products, continued dealer momentum, and strong growing brand loyalty. Grand Design Towables will drive share gains and profitability through continued quality enhancements and product innovations like its new foundation, the brand's first destination trailer. Newmar and Barletta will contribute selective share gains and profit stability through sharper price points and competitive new offerings. We are also focused on a multitude of operational initiatives across manufacturing optimization, vertical integration, capacity utilization, sourcing coordination, quality improvement, and working capital management. All of which will further strengthen profitability and cash flow in fiscal year '26. I'll now turn the call over to Bryan Hughes for the financial review. Bryan? Bryan Hughes: Thank you, Mike. Good morning, everyone. Starting on Slide nine, higher consolidated net revenues were primarily driven by favorable product mix and targeted price increases, partially offset by higher discounts and allowances. In aggregate, volumes across our portfolio were roughly flat versus the prior year's fourth quarter. Consolidated gross profit increased on the higher revenues, although gross margin declined primarily due to costs associated with the ongoing transformation of the Winnebago branded businesses, partially offset by targeted price increases. Consolidated adjusted EBITDA increased 33.1% year over year. Consolidated operating income also improved significantly from 2024, which was impacted by an impairment charge we took against the Chris Craft goodwill. Adjusted EPS of $0.71 was up 2.5 times from the prior year fourth quarter. Turning to our Towable RV segment results on Slide 10. Revenue, as anticipated, was down slightly year over year, reflecting a mix shift toward a more value-oriented consumer and driving higher volume in products such as our Grand Design Transcend series. Targeted price increases and improved operating efficiencies within our Winnebago Towables business drove a 210 basis point increase in operating income margin, outweighing higher warranty experience and slight deleverage on the lower sales. As shown on Slide 11, double-digit top-line growth in the Motorhome RV segment was powered by higher unit volume and favorable mix, driven by the continued ramp-up of Grand Design RV's motorized Lineage lineup, as well as a stronger quarter from Newmar. This growth was partially offset by higher discounts and allowances versus last year in the Winnebago branded motorhome business. On the margin side, improved volume leverage and lower warranty expense partly offset costs associated with the ongoing transformation of the Winnebago branded motorhome business and higher discounts and allowances. As part of this ongoing transformation, we took decisive action in Q4 to dramatically reduce production schedules and consolidate the brand's manufacturing footprint by closing two of our four Winnebago Motorhome locations in Northern Iowa. While this had a meaningful negative impact on our operating income and our yield, on the positive side, it drove significant cash conversion in the quarter. As shown on Slide 12, our Marine segment continues to perform well. Net revenues were up double digits from a year earlier on higher unit volume and targeted price increases. Both Chris Craft and Barletta have done an outstanding job managing production in a cautious retail environment. From a profitability standpoint, the year-over-year margin improvement largely reflects the prior year goodwill impairment as well as volume leverage and price increases on model year 26 products. While we are pleased with our performance, unit sales across the marine industry continued to show soft trends. Turning to balance sheet highlights on Slide 13. We sharply reduced accounts receivable and inventories to improve working capital between the end of the third quarter and year-end. This resulted in $181.4 million in cash from operations in Q4. And when combined with the 33% year-over-year improvement in adjusted EBITDA, contributed to a net leverage ratio of 3.1 at the end of the year, a substantial improvement from our 4.8 net leverage ratio at the end of the third quarter. For fiscal 2025, we returned $88.9 million to our shareholders consisting of $50 million in share repurchases and $38.9 million in dividends. Our $0.35 per share cash dividend paid on September 24 marked our forty-fifth consecutive quarterly dividend payment. This underscores our commitment to creating shareholder value and our confidence in the future of the business. Importantly, while not highlighted on this page, we also repaid $159 million of debt during the past year. We remain committed to our targeted range for net leverage and we will continue to prioritize improvements to growth and net leverage in the near term. On slide 14, let me update you on our tariff mitigation initiatives in fiscal 2026. As we enter fiscal 2026, our proactive strategy to address ongoing tariff challenges remains front and center. Over the past year, we've strengthened supplier engagement, tracking policy shifts, reassessing sourcing, and prioritizing high-duty materials. Our sourcing and engineering teams have diversified supply routes, identified alternate vendors, and redesigned bills of materials to enhance supply chain agility. Looking ahead, we're assessing the tariff structure and the rates and their impacts on us going forward. We remain vigilant and adaptable and will continue to provide timely insights as market and trade conditions evolve. Turning to our fiscal 2026 outlook on slide 15, based on the current market environment and our expectations for North American RV wholesale shipments of 315,000 to 345,000 units in calendar year 2026, we expect consolidated net revenues in the range of $2.75 billion to $2.95 billion, reported earnings per diluted share of $1.25 to $1.95, and adjusted earnings per diluted share of $2.20 to $2.70. The midpoint of $2.35 represents an increase of 41% from our fiscal year 2025 results. Our outlook takes into account prevailing trends in the RV sector, including competitive dynamics, shifts in consumer preferences, key macroeconomic factors that may influence overall demand, and current trade policy positions and tariff rates. With the exception being the most recent 100% additional tariffs that were the administration's reaction to rare earth mineral restrictions threatened by China. We have held that risk aside for now pending the upcoming scheduled talks between The US and China. All of these factors remain dynamic and we will continue to provide further updates to our expectations as we progress through the year. Let me share a couple of additional data points to help frame the business trajectory for fiscal 2026. First, as it relates to our sales growth, we are not building in or counting on an improvement to retail units sold in the industry as mentioned earlier. Instead, we expect growth in our portfolio to be driven in part by healthy growth in the Motorhome RV segment due to the success of the Grand Design RV Motorhomes expanded Lineage lineup. Lineage has seen exceptionally strong dealer and end consumer demand to date, which gives us tremendous confidence in the success of this portfolio. We look for flat to modest low single-digit growth in the Towable RV segment. The Marine segment is expected to produce a decline in sales due to continuing soft retail trends in that part of the market. As we continue executing on our margin improvement initiatives, we expect to deliver meaningful annualized cost savings. These savings are driven by targeted operational actions, including footprint optimization, supply chain enhancements, and strategic workforce alignment. That are already underway and will continue to generate meaningful efficiencies. Specifically, we expect operating income margin in the Motorhome RV segment to improve to low single digits for fiscal 2026 from negative 0.6% in fiscal 2025. This expectation reflects both the impact of our enterprise-wide margin improvement initiatives and the focused margin recapture efforts within our Winnebago branded motorhomes business, including a targeted and refreshed product line cost structure optimization, most of which has already been executed during the fourth quarter of our fiscal 2025. The footprint consolidation that has also already been accomplished, focused mix improvements, and other cost efficiencies. From a capital allocation perspective, we are aiming for a net leverage ratio approximating two times by the end of fiscal 2026. This remains a strategic priority in the coming year. Now please turn to Slide 16 as I hand the call back to Mike for his closing comments. Michael Happe: Thanks, Brian. In closing, we ended the year with a strong fourth quarter, delivering solid results across revenue, profitability, and cash flow. A testament to the strength of our diversified portfolio and disciplined execution. We're energized by the momentum building across our enterprise. The strategic actions we're taking to revitalize the Winnebago motorhome and towables lineup, align operations with market demand, and streamline our cost structure are beginning to generate a meaningful improvement to results. We're seeing the early stages of what we believe will become a powerful flywheel effect. Great products attracting top-tier dealers, stronger retail performance reinforcing brand strength, and renewed energy across our distribution network. After all, Winnebago remains the most recognized brand in the entire RV industry. Across our outdoor portfolio, the trends are encouraging. Grand Design Motorized is off to an outstanding start in its first full year, Newmar continues to lead in core motorized Class A segments, and Grand Design Towables is expanding with new offerings that balance quality and affordability. Our marine brands, Chris Craft and Barletta, remain pillars of innovation and premium customer experiences. As we look ahead to fiscal 2026, our optimism is grounded in execution, not assumptions about market recovery. With a strong foundation in place, we expect the cadence of improvement to accelerate through the year as we continue to execute on our strategic initiatives. Now Brian and I are happy to take your questions this morning. Operator, please open the line for the Q and A session. Operator: Thank you. Ladies and gentlemen, wait for your name to be announced. To withdraw your question, please press 11 again. Our first question comes from the line of Scott Stember with Roth. Your line is open. Scott Stember: Good morning, and thanks for taking my questions. Maybe we could dig into tariffs a little. Last quarter, you guys had talked about some unmitigated expense in that 50 to 75¢ worth of EPS range. And it sounds like there's still a lot of variability at least within your guidance. Can you talk about how much or where the unmitigated portion is? Is it at the lower end of your guidance? Or maybe just frame out what that number is. Michael Happe: Scott, good morning. Thanks for the question. As we had indicated at our open house investor event, this morning's guidance does include what we currently anticipate to be the full impact of tariffs on our business performance in the next twelve months. As Brian highlighted in his comments, the tariff subject continues to be very dynamic. And there certainly could be changes in the tariff environment in the future. And as those happen, we will certainly continue to keep the investor community updated as to the relevance and the impact on our business. But we chose for this morning's purpose of providing fiscal 2026 guidance to include the full impact in the guidance. So we won't be calling out this morning a specific number for tariffs in terms of the net impact on the business. But our teams continue to do an outstanding job of finding avenues to mitigate the tariff exposure. And as we also indicated in our Q4 commentary, we have made difficult decisions to do some disciplined pricing actions as well to cover some of those costs where we believe the market can take that. But the tariff environment continues to be very dynamic. And we imagine it will remain that way throughout the year. But we think we've built muscles and processes to mitigate that subject as effectively as most of our competitors are doing. Scott Stember: Got it. And last question on the cadence of guidance. I know you touched on it briefly. A lot of stuff going on, you know, retail, back and forth, and we're coming out of the you know, some of the actions that when the big motorized. But can you just maybe help us for modeling purposes maybe a little bit more granular what we should be looking at near term in quarters ahead versus maybe the first half? Versus the back half of the year? Michael Happe: Chad, I'll comment and then ask Brian to provide certainly more substance. You know, many of our fiscal years tend to be a bit back half loaded in terms of profit generation Q3 and Q4 especially. Fiscal 2026 will be similar in that regard. You know, we do believe that we'll be able to get off to a better start in the first half of the year than we had a year ago. But a majority of the upside will likely happen in the back six months of the year. I do want to reiterate and we stated it on the call, that our assumptions for fiscal 2026 are based on a relatively flattish retail and wholesale shipment environment. And so we believe most of the opportunity to drive stronger results in fiscal 2026 is really a result of actions that we can control. And some of the very difficult decisions we made in fiscal 2025 we believe that we are in a better position in fiscal 2026 to drive the business forward, especially on the bottom line. Brian, what would you add? Bryan Hughes: Not much more than that, Mike. I guess the only other add that I would have is that we do expect each quarter to show improvement year over year at this stage. That's the additional color I would provide. Scott Stember: Got it. That's all I have for now. Thank you. Operator: Thank you. Our next question comes from the line of James Hardiman with Citi. Your line is open. James Hardiman: I wanted to dig into the guidance a little bit. Let's start with the industry numbers. I'm having a tough time getting the sort of full year shipment numbers to foot. I guess what are your assumptions for retail for '25 and '26? I think you said flattish for '26, but where do you expect that to finish in 2025? It seems like based on your wholesale assumption, that we're still gonna be looking at a pretty meaningful inventory reduction at the industry level in '25. Is that right? Michael Happe: James, I think that assumption is right. When we started both fiscal but also calendar year '25, I think there was certainly stronger optimism amongst the industry participants that we had finished most of the destocking from the prior two or three years, 2022 through '24. But that, in fact, was not the case. And, you know, retail in calendar '25 did not show itself to the degree that I think, again, everybody in the industry would have liked. And dealers continued to be disciplined in how they managed, obviously, their inventory both in terms of quality and quantity. For our fiscal 2026 year, you know, and calendar 2026 year as well, we really aren't anticipating a significant increase in dealer inventory. We think in many of our categories that we are near a situation where the industry can shift at a one-to-one level. I would say that there are pockets of the motor home category where that may not be the case, and we are watching the pontoon segment very carefully from the marine side. So I think your characterization of 2025 is correct in that there's potentially a little bit more destocking than we had anticipated. We are not necessarily building in 2026. But as Brian noted, the category we're watching the closest is some weakness in the marine space. As dealers continue to probably have slightly elevated inventory on pontoons that they're managing downward. James Hardiman: That makes sense. But then I guess if putting Marine aside for the second for a second, if I just think about a 2025 in which there was significant destock and then a 2026 where if we assume sort of one-to-one, wholesale to retail, that would seem to suggest material growth in wholesale if retail is in fact flat. And so help me sort of understand, like, RVIA, for example, has a meaningfully higher shipment number at their midpoint. I just wanna make sure I'm not missing something. And maybe one way to talk about it is in the context of your business. I think you finished that 1.9 turns for the fiscal year. Do you expect that number to go higher next year? How should I think about that? Michael Happe: I would tell you that we're striving for two turns in all of our businesses and brands. We've got some of our businesses and product segments were a little further away from that than we'd like. But in a couple other segments, I think we're almost right on top of that number. So there may be places, James, where we undership the market a bit with the ambition of pursuing the turns goal. But there'll be other parts of our business that just have natural momentum in terms of the strategies we're executing. Grand Design Motorized, Winnebago Towables are two that come to mind. Again, I would tell you that I think for calendar year 2026, we anticipate that both for the RV business, that industry retail and industry wholesale can potentially be around that 330,000 unit mark. That's the midpoint of our 315 to 345 forecast. And that being said, over the course of those twelve months, you would not see significant dealer destocking in the RV industry. So, you know, we've got that modeled in a detailed fashion within our business for planning purposes. At the end of the day, we think 330,000 units for calendar year '26 is a reasonable assumption for us to use for planning purposes. If the market's healthier, fantastic. If it's a little softer, we still believe we have the levers within the business to be able to generate profitability in the guidance range that we offered this morning. James Hardiman: Okay. And just sorry. Just to put a finer point on it. If three thirty is the expectation for wholesale and retail next year, what do you have penciled in for retail this year? Because at least based on my numbers, that would suggest a much bigger decline than where we've been year to date. Do you expect the last I don't know, four or five months of the year to be down significantly in terms of retail? Or is my math off here somewhere? Thanks. Michael Happe: Well, we don't know what retail will be, obviously, for sure in the last several months. Obviously, the gross number for August was a little bit higher than the industry had hoped it would be, but we think that net number will settle in a little bit more healthy place. It would not surprise us to see retail in the remaining months of the calendar year be down slightly, in that low to mid-single-digit range. But the variability of the industry is difficult to forecast right now. So, I'm not trying to evade an answer, James, here. It's just really, really hard to forecast either over an extended period of time but also to know what month to month the industry is gonna give us. And so but we are focused on our business, trying to drive our turns to as close to two point o as we can. We believe we have share gain opportunities in multiple spots within our portfolio. Grand Design Motorized, Winnebago Towables, Barletta, pontoons, travel trailers on the Grand Design side, and so regardless of what the market gives us, we believe we can deliver within the numbers for fiscal 2026 that were offered today. James Hardiman: Got it. That's really helpful. Thanks, guys. Operator: Thank you. Please stand by for our next question. Our next question comes from the line Craig Kennison with Baird. Your line is open. Craig Kennison: Hey, good morning. Thanks for taking my question. I had a question around market share. You've had a really good story in the last five years with respect to market share in RVs and in marine. But at least in RVs, it appeared to take a step back in fiscal 2025, and that's probably due to a mix shift favoring some low-end units where you just don't play aggressively. I guess I'm wondering what's your view on market share trends for your brand, especially if this trend towards low-end RV units persists? Michael Happe: Yeah. Good morning, Craig. The most significant areas of pressure in the RV industry for us from a market share perspective have been the Class B category in motorhomes and some fifth-wheel retail share pressure we've also seen on the towable side. And I think those are due to similar but different reasons. The Winnebago brand of vans has long been the industry leader, both in terms of volume but also in terms of innovation. And in our comments this morning, we did mention that we continue to have the top three performing singular product brands in the Class B segment. But the reality is that that segment has gotten incredibly crowded over the last three or four years. Literally, there has been an explosion of brands and floor plans in that space and candidly, dealer distribution points. And almost by the default of math, with us only having one brand in Class B vans, until recently with Grand Design's launch. And us having primarily one distribution network under that one brand. The explosion of competition there really mathematically has pressured our share. But we continue to make the best product in that segment without a doubt. On the fifth-wheel side, that has been a combination of new competition that we've seen over the last three or four years and some very competitive offerings from those competitors, along with some shifts in price point attractiveness from some of our higher volume competitors in the industry. Our fiscal 2026 plans have us stabilizing volume in the RV market and slightly growing it for that particular fiscal year. And the two primary drivers are going to be Grand Design Motorized in the second year of their launch and some of the significant retail momentum continuing that we're seeing. And we intend to make meaningful strides on Winnebago Towables as well in fiscal year 2026. We had the strongest dealer ordering open house for that particular business that we've ever had in September. And we feel well-positioned to grow share in that space. We'll also see some share gains we believe continue in Class A diesel with Newmar and Grand Design Towables as we continue to work on the imagined and Transcend lines within that particular brand. So we're well aware, Craig, certainly, as you stated of some of the dilution in share here recently. But we believe we have plans in place to stabilize that and even in spots to strengthen our share in certain areas. Craig Kennison: Thank you, Mike. And I wondered if you would also just compare the RV consumer versus the marine consumer today and then how those dealer bodies view the market differently? Michael Happe: Well, the RV consumer candidly is probably younger and more diversified in terms of a consumer base, and we think that has been even though obviously every industry has seen a significant volume pullback here in the last couple of years. You know, I think the RV industry as a whole has done a good job attracting consumers from all walks of life and keeping the products as affordable as possible given some of the cost pressures we've seen. To make sure that younger consumers are still participating in the lifestyle. The marine industry has some work to do candidly in that area. As an industry, we need to work within boating to bring the average age of the consumer down and get younger generations not only in the lifestyle but candidly owning more boats. And the diversity has been moving in the right direction. We continue to believe that the marine industry is a little bit further behind the RV industry in terms of the cycle. You know, Craig, I think even your recent report cited that many of the marine dealers feel they still have too much inventory. And we agree with that, and we're working closely with our dealers to try to right-size our particular inventory positions. We think we're in pretty good shape. But by and large, we think the marine consumer is a little bit more hesitant than the RV consumer right now. And the dealers are also probably more focused on destocking in many of those categories even more so than the RV dealers have been lately. But we believe our brands are positioned well. I'm optimistic that our Barletta Pontoon business especially will continue to unveil new strategies in the future to remain very competitive and continue to take share. And again, I think you can tell from us this morning that the theme of fiscal year 2026 for us is control what we can control, and we believe we have a number of actions and strategies in place to, again, deliver the results that we foreshadowed this morning. Craig Kennison: Helpful. Thanks a lot, Mike. Michael Happe: Thank you. Operator: Please stand by for our next question. Our next question comes from the line of Joe Altobello with Raymond James. Joe Altobello: Thanks. Hey, guys. Good morning. Mike, that was actually a good segue into my question. But if we think about the guidance for 26% and I think at the midpoint implies about $0.70 of earnings improvement, call it. Based on my math, the improvement in motor home margins is all of that and then some. So I guess my first question there is how much visibility or line of sight do you have into those cost improvements for this year? Bryan Hughes: Yeah. Sure. You know, I made some of the comments, Joe, in the script as it relates to the Winnebago Motorhome business in particular. A lot of the cost actions have already been taken in Q4 as it relates to some of our cost structure, both in cost of goods and in our SG and A. And then it is, likewise, related to product. As I mentioned. And having a product line and as well as a finished goods position that doesn't require the same level of incentives that were required here in February. So those are the two biggest areas of improvement that we're expecting. Some of which, as I mentioned, have already been executed. So we've got good visibility into it. We'll be tracking it very closely. Most importantly, I think, Joe, we've got the right team in place there, the right leadership. They're highly engaged. We sense a great improvement in culture and motivation of the team. And so we think we got the right team in place to execute. Joe Altobello: Got it. Very helpful. Is there a price involved here too, particularly with tariffs? Bryan Hughes: Pricing is some of the story. But that really is an offset to the increased cost as you referenced as it pertains to tariffs. So I wouldn't call that out as a margin improvement in terms of pricing through tariffs. I think it's more the better-positioned product lineup and the reduction in the incentives that are required. Joe Altobello: Got it. Got it. And maybe one quick one for Mike, if I could. I mean, if we think about sort of a big picture view of the industry, you know, the assumption of mid-cycle I think, on the RV side has always been around, you know, call it 425,000 to 450,000 units. You know, given where we've been the last three or four years, do you still think that's a good mid-cycle estimate? Michael Happe: Joe, we're working on that model as we speak, and it's likely here in the relatively near future that we'll find an opportunity to share an updated mid-cycle model for Winnebago Industries with you. Specific to your question, I think you'll see in our next version of that mid-cycle model that we believe that the RV mid-cycle volume estimates specifically will be lower than what we offered last. It will probably be somewhere in that 400,000 to 425,000 range. We may choose to be even more specific when we release that. And that's just a byproduct, I think, of the reality that this trough in this particular down cycle has lasted longer than most of us have experienced in our careers in this industry. But also, we believe the next peak may be a little lower than what we had been previously modeling. I do want to say this, though. The Winnebago Industries portfolio in its entirety has really not seen a mid-cycle environment yet. The acquisition of Newmar in 2019, the acquisition of Barletta in 2021, and then the acquisition of Lithionics in 2023, plus new strategies and Grand Design Motorized and now, even Winnebago Towables as an example being renovated. We believe we have a portfolio that really hasn't seen its full potential realized in a mid-cycle environment. And we hope that day comes someday. We can't predict the exact year when that will happen, but we're really excited about getting some tailwinds from a market stability standpoint because we believe these five OEM brands and then our Lithionics business from a strategic technology vertical can really start to show some significant performance upside in the future. But stay tuned, Joe. We'll come back to you all shortly with an update on that topic. Joe Altobello: Sounds good. Thank you. Bryan Hughes: Thank you. Operator: Please stand by for our next question. Our next question comes from the line of Bret Jordan with Jefferies. Your line is open. Patrick Buckley: Hey, good morning, guys. This is Patrick Buckley on for Bret. Thanks for taking our questions. Could you talk a bit more about any takeaways from the RV open house? Anything notable as far as recent retail demand or year-over-year sales trends? And I guess how did that general sentiment from the open house factor into the 2026 outlook? Michael Happe: Patrick, good morning. Thanks for being with us. We thought the September open house in Elkhart was a good event as it normally is. Attendance from the dealer community was very strong. I thought the engagement from the OEM and supply side was also fantastic. You know, we have to answer that question in almost brand by brand and given the state of our different businesses. But we were really pleased with dealer engagement on each of our three RV brands. It's not a huge order writing show for our Newmar business. Just the rhythm of how we take orders in that business and work with the dealers, you know, that's a show at Newmar that is more about showing some of the latest products, some of the beds or in the cab on some of the super c's were exciting there, but not a huge order writing show. However, on the Grand Design and Winnebago brands, it is a meaningful order writing show, and we were pleased with the orders that we took on both Grand Design and Winnebago. And as I've already mentioned this morning on the call, Winnebago Towables was a record-setting order-taking event at Open House. And, obviously, Grand Design Motorized being a new business still going into its second full year, you know, we saw good activity and reception there. So Grand Design Towables continues to be a large business for us, our largest single revenue stream. We were pleased with the reception to especially the travel trailer segment there, the work we've done at Imagine and Transcend. The unveiling of the foundation destination trailer, and then as Brian just recently mentioned, our Winnebago Motorhome team really has a lot of cultural momentum right now. We unveiled our Sun Flyer affordable Class C product in Elkhart that month to very strong reviews, took a number of good orders on that. And really just more importantly, validated with the dealers around the Motorhome brand that we're coming, that this business is headed in a stronger direction and that now is the time for many of them to get on board and support that business. So all in all, a really good show. Recent retail trends have been very similar to what you guys have public access to Visa SSI. We're seven or eight weeks into our fiscal year already, so we've got a decent amount of retail underneath us for Q1. Retail trends are similar to what you've seen in the July, August months. Some weeks are good. And some weeks are a little weaker. And collectively, I wouldn't say that there's been a significant change in retail momentum, you know, up or down in the first month and a half of our fiscal 2026 year. So it again, it goes back to the theme of we're assuming the market will be flat, and we believe we have the strategies in place to have a good fiscal 2026 year as we showed today with our guidance. Patrick Buckley: Got it. That's helpful. Thank you. And then just following up on the tariff questions, are you expecting any specific or maybe incremental chassis impact from the most recent tariffs on medium truck? Medium duty trucks? Michael Happe: We are not at this point. The whole tariff subject for us has many puts and takes. And as you all know, there'll be some pretty significant decisions made here in the future, both in terms of any additional tariffs that the administration places on China if they do so. And, also, obviously, the entire subject of tariffs and the justification for tariffs is before the Supreme Court. So that whole topic continues to be very dynamic. You know, every day, there seems to be a new wrinkle or curveball. And our teams continue to do both, both at the centralized sourcing level at the enterprise, but also within the businesses at a procurement level. We continue to be able to mitigate a good majority of those tariff costs before we have to face a decision as to whether to price or not. So you know, again, we're never comfortable with tariffs, but unfortunately, we've gotten better at managing it. And we just have to do that every day now as part of our business model. Patrick Buckley: Got it. That's all for us. Thanks, guys. Operator: Thank you. Please stand by for our next question. Our next question comes from the line of Patrick Scholes with Truist Securities. Your line is open. Patrick Scholes: Hey, good morning, Thank you. Any color on ASP expectations for the upcoming year by segment category that you might be able to provide? Thank you. Bryan Hughes: Yeah. I'll take that one. Mike. Generally speaking, we'll have some favorability in the motor home business just from a perspective of declining incentives that are required to move that product. I mentioned that earlier. For the most part, that's the story in motorized. In towables, I think we'll have a couple of different stories. I think we'll have pricing that will be a natural lift to ASPs in the coming year. That will be offset in many respects by continued mix shift towards affordability-minded consumers. And then on the marine side, we expect again, some negative mix. We've got growth that's occurring at the lower end of Barletta's offering. And then we also have within the Chris Craft business the Sportster, which is showing high receptivity, and that drives an unfavorable mix. Those being offset by some modest pricing activity. So not as much volatility downward, I'd say, as what we've experienced in the past call it, eighteen months. More stability still some negative mix impacts offset by some pricing. Patrick Scholes: You're welcome. Thank you. Operator: Please stand by for our next question. Our next question comes from the line of Noah Zaskin with KeyBanc. Noah Zaskin: I guess most of my questions have been kind of asked and answered, but maybe just one on warranty expense. Any way we should be thinking about warranty expenses in FY '26 relative to '25? And just anything to be aware of there. Michael Happe: Brian, I'll have you comment on maybe the direction that you're willing to share there. Noah, thanks for the question. I want to reiterate that the warranty expense that is shared at times includes both real warranty expense that are often driven by quality issues that we can continue to address and do a better job of. But it also includes significant goodwill and other ways of us taking care of the customer. I'll give you an example. Our Barletta pontoon business, Barletta makes I believe, potentially some of the highest quality pontoons in the entire industry. Yet we continue to run our warranty spending there at a level that incorporates a significant amount of customer goodwill. To provide support coverage to our dealers and our consumers. At a level higher than anybody else in the industry. There's no other pontoon manufacturer that I'm aware of that has a significant holiday consumer hotline on Fourth of July or Memorial Day or Labor Day when consumers are out on the water and something goes wrong. And we're there to support them and cover them. So warranty for us is not just a barometer of the cost of quality. But it's also an investment at times in how we take care of our customers. But Brian, any thoughts on Noah's question in terms of the trend line on that particular item? Bryan Hughes: Yeah. We've cited improved warranty from a year over year in the motor home segment. And then slightly elevated warranty experience in the towable segment and marine segment. We don't see any significant changes or drivers to changing of warranty experience in 2026. I'm expecting, call it, consistent types of rates but no major drivers to OI yield in 2026 as we sit here today. Noah Zaskin: Very helpful. Thank you. Operator: Thank you. Ladies and gentlemen, we have reached the end of the call. I would now like to turn the call back over to Raymond for closing remarks. Raymond Posadas: Thank you, Towanda. This is the end of our fourth quarter earnings call. Thank you to everyone for joining us. We look forward to further updating you on future calls. Enjoy the rest of your day. Operator: Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Welcome to the KKR Real Estate Finance Trust Inc. Third Quarter 2025 Financial Results Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note that this event is being recorded. I would now like to hand the conference over to Mr. Jack Switala. Jack Switala: Please go ahead. Jack Switala: Great. Thanks, operator, and welcome to the KKR Real Estate Finance Trust earnings call for 2025. As the operator mentioned, this is Jack Switala. This morning, I'm joined on the call by our CEO, Matt Salem, our President and COO, Patrick Mattson, and our CFO, Kendra Decious. I'd like to remind everyone that we will refer to certain non-GAAP financial measures on the call which are reconciled to GAAP figures in our earnings release and in the supplementary presentation. Both of which are available on the Investor Relations portion of our website. This call will also contain certain forward-looking statements which do not guarantee future events or performance. Please refer to our most recently filed 10-Q for cautionary factors related to these statements. Before I turn the call over to Matt, I will go through our results. For 2025, we reported GAAP net income of $8 million or $0.12 per share. Book value as of 09/30/2025, is $13.78 per share. Reported a distributable loss of $2 million due primarily to taking ownership of our Raleigh multifamily property. And prior to net realized losses, DE was $12 million or $0.18 per share. We paid a $0.25 cash dividend with respect to the third quarter. With that, I'd now like to turn the call over to Matt. Matt Salem: Thank you, Jack, and thank you everyone for joining us today. I'll begin with a brief update on the commercial real estate lending market. The number of real estate opportunities remains robust. As we enter the $1.5 trillion wall of maturities over the next eighteen months. The debt markets are liquid with banks returning to the market while increasing their back leverage lending. Despite a tightening of whole loan spread since the beginning of the year, with lower liability costs we are still able to generate strong returns and we believe that real estate credit offers attractive relative value. As lenders, we think about safety first, and the ability to lend on reset values well below replacement cost combined with decreasing new supply creates a unique credit environment with strong downside protection. Overall, sentiment for real estate is turning positive as investors recognize the lagging values and strengthening fundamentals. We've been actively lending into this opportunity. In the fourth quarter, we expect over $400 million in originations and have already closed $110 million across the United States and Europe. In October, we closed our first real estate credit loan in Europe for KREF, secured by a 92.5% occupied portfolio of 12 light industrial assets across Paris and Lyon, France. This transaction highlights the breadth of our platform and our ability to draw on KKR's global resources. Although this is KREF's first European loan, over the last couple of years we have been strategically building our European real estate credit platform. Establishing a dedicated team and originating over $2.5 billion to date. Through our European real estate equity business, we have strong connectivity across markets, giving us unique insight access to opportunities that align with our disciplined approach. Within our broader real estate credit platform, we have been actively investing across the risk reward spectrum. Our platform lends on behalf of bank insurance, and transitional capital targeting institutional sponsors and high-quality real estate. Our CMBS team is one of the larger investors in investment grade and B pieces. Across our global team, we will invest approximately $10 billion in 2025. To support our investing activity, we built a dedicated asset management platform called KSTAR, which now has over 70 professionals across loan asset management, underwriting special servicing, and REO. KSTAR manages a portfolio of over $37 billion in loans and is named special servicer on $45 billion of CMBS. Moving next to our third quarter results. We reported distributable earnings of negative $0.03 per share or distributable earnings excluding losses of $0.18 per share compared to our $0.25 per share dividend. We set our dividend at a level which we believe we can cover distributable earnings prior to realized losses over the long term. We continue to see upside in our REO portfolio where we are making progress. And as we stabilize and sell those assets, we can repatriate that capital and reinvest into higher earning assets. Therefore, there's embedded earnings power of $0.13 per share per quarter that we will be able to unlock over time. Looking at risk rating, we downgraded Cambridge Life Science loan from risk rated three to four. With increased CECL provisions due to the downgrade, book value per share remained mostly unchanged at $13.78, a decrease of 0.4% quarter over quarter. We are proactively managing our current portfolio of $5.9 billion. We received repayments of $480 million this quarter. Year to date, we have received $1.1 billion in repayments and have originated $719 million with $400 million of originations circled in the fourth quarter. Underlying activity level remains strong, we continue to see robust market activity. In 2026, we expect greater than $1.5 billion of repayments and expect to continue to match repayments with originations. With that, I'll turn it over to Patrick. Patrick Mattson: Thanks, Matt. Good morning, everyone. Thanks to strong investor demand and close coordination with the KKR Capital Markets team, we successfully upsized our Term Loan B by $100 million to $650 million, which now has approximately six point five years remaining until its 2032 maturity. The loan repriced 75 basis points tighter, reducing the coupon to SOFR plus two fifty basis points and locked in more efficient funding. During the quarter, we also upsized corporate revolver to $700 million up from $610 million at the beginning of the year. With continued momentum for repayments, and the term loan B upsize, we ended the quarter with near record liquidity levels of $933 million including over $200 million of cash plus our $700 million undrawn corporate revolver. Overall financing availability sits at $7.7 billion including $3.1 billion of undrawn capacity. Importantly, 77% of our financing is non-mark to market and KREF has no final facility maturities until 2027 and a corporate debt due until 02/1930. In the quarter, we continued our share repurchases totaling $4 million representing a weighted average price of $9.41. Year to date, we repurchased $34 million for a weighted average price of $9.7. And since inception, we have repurchased over $140 million of common stock. We remain committed to deploying capital through buybacks, as well as new investments. Overall, our liquidity position gives us meaningful flexibility to manage the portfolio, stay on offense, and take advantage of new opportunities. We're encouraged by the market backdrop and momentum we're seeing. Turning to our watch list. Our current portfolio has a weighted average risk rating of 3.1 on a five-point scale. Our total CECL reserve at quarter end is $160 million representing around 3% of the loan portfolio. Over 85% of loan portfolio is risk rated three or better. And as of the third quarter, our debt to equity ratio is 1.8 times and total leverage ratio is 3.6x consistent with our target range. Now turning to our REO portfolio. We took title to the Raleigh multifamily loan which is already appropriately reserved for and therefore no additional impact on book value. Our business plan is to invest additional capital into the property to enhance the amenity base, improve operations, and reposition the asset for sale. On our Mountain View, California office, market continues to heal with leasing demand picking up. And as mentioned last call, we're actively responding to tenant requests for proposals. Given our asset offers to tenants the ability to have a full campus setting and control their amenities and security perimeter, we believe positioning for a single user is the optimal strategy. On our West Hollywood asset, we launched condo sales. We launched the condo sale process last week and are focused on executing our sales strategy. Finally, on our Portland, Oregon redevelopment, our entitlement process is progressing with final entitlements expected in 2026 giving us the ability to unlock value and return capital through parcel sales. In summary, we see significant opportunity ahead. Origination pipeline continues to build. We remain focused on optimizing our REO portfolio, working through the watch list, and redeploying capital efficiently as we position the business for its next phase of growth. Thank you for joining us today. Now we're happy to take your questions. Operator: Thank you. We will now begin the question and answer session. And your first question today will come from Tom Catherwood with BTIG. Please go ahead. Tom Catherwood: Maybe Matt or Patrick's help us triangulate something here. So there's kind of two ways to view the lower leverage and higher liquidity that you had going into the end of the third quarter. One is like a defensive positioning to kind of bolster the company against headwinds. Or the second one is really a timing issue, where if a couple of originations had closed a week or so earlier, it might look very different from FUD's level of the distance between repayments and originations and might be a very different story. Which is the case here? Is this just timing? Or is it could we see further deleveraging and further liquidity building as we get through the rest of this year? Jack Switala: Hey, Tom. It's Jack. Give us, give us just a minute here. We're just having some technical difficulties. We'll be right back to you. K. So just give us about two minutes here. We're redialing in and folks should join shortly. Thank you. Pardon me, ladies and gentlemen, please standby as we reconnect. Thank you for your patience. Pardon me, is the conference operator. I've reconnected speaker lines. Please proceed. Matt Salem: Okay. Thank you. Tom, can you hear me now? It's Matt. Tom Catherwood: Yes, I can. Matt Salem: Okay, thanks. Sorry about that everyone. We are down in our Dallas office and had a new system here and just had some technical difficulties, but I think we're working now. So we'll jump back in and appreciate everyone joining. Tom, you for the question. It's really the latter, I'd say. It's just a timing issue and it's really related to two things. I'd say the first one, just when you think about repayments, one of our repayments this quarter just happened to be a larger repayment. It actually the largest loan in our portfolio repaid. It was multifamily property just outside of Washington DC that got taken out by the agencies. On a refinance. And so that is a relatively large single repayment. And then secondly, when you think about our originations this quarter, I think we mentioned this in the prepared remarks, a bunch of our originations just happened to be in Europe, and those take a little bit longer to close. Just the closing timelines are somewhat elongated in Europe versus The U. And so that's why you see the bigger pipeline, I think in the fourth quarter and a little bit of a slower originations and closings I'd say in third quarter. So just timing, we haven't really changed our strategy at all. And certainly, expect to continue to invest and originate in line with our repayments. Right now we're at the lower end of our leverage ratio. So we've got the ability to kind of take that up and grow the portfolio back to where we were before. Tom Catherwood: That's perfect. And maybe just following up on that and thinking of the cadence of earnings and you talk about the lag between receiving repayments and putting that capital back to work. And also you mentioned, I think it was greater than $1.5 billion of repayments that you're expecting in 2026. Could that lag take us lower from an earnings front for a longer period of time just while you put that capital back to work? Or are there some other levers you can pull to boost distributable earnings as you're repatriating and redeploying capital? Matt Salem: No, I wouldn't look at it like we're always behind. I think some quarter like this quarter obviously we got a little behind and again, kind of do the timing of those closings, but I think other quarters will be ahead. You can see us getting ahead of it a little bit. So it you can't time the repayments, right? And you can't necessarily time the closing dates of your origination. So there's just a little bit of ebb and flow that happens naturally, in the business. So but I wouldn't necessarily, like, model anything. Like, we're always waiting for a repayment to come in before we originate. So we're forty five days behind. I think there's just a little bit of give and take in the overall investing profile. Tom Catherwood: Understood. And then last one for me. We've had a number of lab space owners this past quarter that have noted kind of an early stage rebound in demand from smaller life science tenants looking for space kind of following a upturn in VC funding over the past twelve months. In terms of the four assets in your life science loan portfolio, that remain three rated, how are they proceeding on their business plans? And are you starting to see that least early stage recovery in tenant demand? Matt Salem: Yes. I think we're starting to see green shoots and from the sponsors, right, and some of the commentary about about leasing. And I'd say we've got honestly a little bit of a mix. Most of our assets that we've lent on are more the tenants are going to be larger pharma companies and not necessarily some of the smaller VC funded ventures. But we are starting to see a little bit pickup in sector. And again, we're long term like we're pretty positive on that on that sector. And certainly understand, it can be cyclical both from a capital perspective and certainly some of the things you see going on at the NIH and things like that. But I'd say over the medium to long term, say we're still pretty positive on the overall sector. Tom Catherwood: Got it. Appreciate all the answers. Thanks everyone. Operator: Thank you. And your next question today will come from Jade Rahmani with KBW. Please go ahead. Jade Rahmani: Thank you very much. Wanted to follow-up on Tom's question. Can you give an update as to the state of dialogue with the sponsors across the life science deals? And then on Cambridge, you could touch on what drove the downgrades? Matt Salem: Yeah. I'd say really the the let's go starting with the with the last question. What drove the downgrade was we've entered negotiations and modification negotiations with that sponsor. And so it was really as it related to those discussions. And then I think on the other three rated loans, Jade, there's no other really discussions happening outside just a normal course. We're getting leasing updates and any any property level financial updates. But really no other detailed conversations happening at this point in time. Jade Rahmani: Thank you. And then broadly speaking, have you done an NPV analysis comparing the cost and benefit of weighting on these deals. As well as any other sub performing deals versus selling down the exposure, taking that capital and reinvesting in the current uptick in deal flow that we're seeing, which that would drive stronger distributable earnings and eventually dividend growth more near term than perhaps the market expects. How do you view the trade offs versus waiting since I think that the life science recovery is quite nascent at this point. So, for at least that sector, it's probably going to be a while before these buildings get to stabilized occupancy. Matt Salem: Yes. It's a great question. And it's something that I'd say we look at every quarter, something that we certainly discuss with the Board in terms of portfolio positioning and specifically Jada as it relates obviously to the REO, which is directly impacting our earnings. And as we liquidate that, obviously, we can redeploy that capital and increase earnings which we talked about on the last few calls. And so it's something we're consistently looking at. When you look at where we've decided to hold things, and I'm talking more about the REO because that's really the biggest impact right now. It's really around quality and we feel like we've got quality real estate and our job as fiduciaries is to maximize, the outcome there. And if we've got a great asset, we think it's going to lease over time. And we'll be able to to optimize the value. But we definitely look at NPVs and we look at what's that IRR and is it better to sell today versus and redeploy capital now versus holding out? So far, I'd say we're pretty I think we've we've been right to kind of be patient. And certainly, when you think about things like our our office, in Silicon Valley, that market has come back significantly and we're seeing real leasing demand in that market. So to be patient, wait, quality asset, let's get a tenant and then we can evaluate liquidity options. I think that strategy has will work out over time. But we have to continuously evaluate this because I know that we can't we have forever, that we need to and we need to repatriate some of this capital. Jade Rahmani: Thanks very much. Operator: Thank you, Jade. And your next question today will come from Rick Shane with JPMorgan. Please go ahead. Rick Shane: Hey, guys. Thanks for taking my question. Looking back last quarter, there was commentary about $1 billion repayments in the second half. It seems like you're on track with that. And I think the implication least the way we interpret it was that that capital would be redeployed and suggested sort of again, not we didn't fully assume this, but targeting towards that $1 billion in reinvestment. Should the way we think about this be there's a one quarter lag, you get the repayment and quarter '1, you're able to redeploy in quarter two, you get repayments in quarter two that are redeployed in quarter three. Should we see this as sort of the $1 billion of repayments in the second half of this year manifesting into Q4 and Q1 originations close to $1 billion? Patrick Mattson: Rick, it's Patrick. Good morning. Yeah, thanks for that question. I think as Matt sort of referencing a little bit earlier, I think the goal is to sort of match up the repayments minimize some of the timing that happens between repayment and origination. That always when we snap the line, at quarter end, that always won't sort of match up. But we think over time, there's going to be some quarters where get a little bit ahead of that. If you think about our liquidity position today, certainly have ample capital to be able to do that. There are going to be some quarters where we're ahead of it. Maybe there are some quarters that were behind it. But on balance, we should think about as we're getting those repayments, they're going to be matched. And our goal effectively is to minimize some of that of that drag because ultimately we want to optimize what we can return to shareholders in terms of earnings. Rick Shane: Got it. Yes. I mean, think the thing that's that confuses me about it is I understand that the difference between a deal closing on September 30 and October 1 from your perspective, it's a day from an accounting perspective it's very different. You've talked about $400 million of originations this quarter. I think what surprises me is given the lag in 3Q originations again, a big deal, but that that Q4 pipeline doesn't look bigger given that sort of timing issue. I think that's what's confusing people a little bit here today. Patrick Mattson: Understood. Thanks. Yeah. I think look as we think about the fourth quarter obviously a lot of that will be front ended in the quarter in terms of the originations. The year is not out. The pipelines are still very active. I think we've been focused on being disciplined around deployment focused on diversity, So when you look at these asset sizes, they'll reflect that. Obviously, Matt mentioned some of the activity that we have in Europe. But as I said, our goal is to continue to deploy capital. I suspect that, if things continue to proceed as they are, going into year end and into first quarter, we're continuing to see build for that origination pipeline. And we know what we have a good idea of what we expect to come forth in the next two quarters. And I think we're preparing to to match that up and to close some of that gap. Rick Shane: Got it. Okay. Thank you. And then the other question is this and Jade's touched on this in but if we look at the current ROE, it's about half of what you need to support the dividend as it exists today. Obviously, moving resolving challenged properties and challenged loans is the key to that. Realistically, how long do you think it takes for you to be able to double that ROE to put yourself in a position where and again, we there are all these different earnings metrics, but at the end of the day, this really is an NII issue. How long do you think it really takes to get there? Matt Salem: Yes, can jump in there Rick. It's a good question and certainly something we think about a lot. In my mind, we kind of bucket the REO into kind of three timelines. One is like near term twelve to eighteen months. Medium term maybe that's twenty four or so months, twenty four to thirty six months and then longer term. And I'd say about about half of that we think we can get back in the near term and that's concentrated on things like our Portland, Oregon asset, which we should be fully entitled to then the market with next next year on an individual parcel basis. The West Hollywood condo, which Patrick mentioned, we're in the market now live selling selling or offering units there. The Raleigh, North Carolina multifamily deal, which is largely stabilized and we're doing a little bit of value add there. But can kind of execute on that in a short amount of time. And then the Philadelphia office, which there's kind of one or two leases outstanding that were that we're working on and then kind of effectively sell that as well. So if you if you group those together, that's really the short term. And again, it's about half of that. Number. So we can that back more quickly. I'd say in that medium term bucket, is the Mountain View asset. As I mentioned to Jade, like we're making good progress. The market is really coming back there, and we're kind of actively engaged there with tenants. So I put that more in medium term, although we could have something happen there shorter than that, but then there'd be a business spend to execute if we were able to sign a lease there in terms of just tenant improvements and CapEx etcetera. And then lastly, I kind of put the Seattle Washington Life Science and just given where Life Science is, we'll see that market come back quickly. But just given where we're seeing there, we did it execute a pretty important lease on that asset. So we're pretty happy about that. But, it could take longer to fully stabilize that asset. Rick Shane: Hey, Matt and Patrick, really always appreciate your willingness to try to dimensionalize the answers these tough questions and I appreciate it a great deal. Thank you guys. Matt Salem: Sure. Thank you. Operator: And your next question today will come from Chris Muller with Citizens. Please go ahead. Chris Muller: Hey, Thanks for taking the questions. It's nice to see you guys branching out into Europe. Can you contrast some of the EU loans versus U. S. Loans? Guess what I'm looking for is our term similar, return similar, any color here would be very helpful. Matt Salem: Sure. Yes. Thank you for the question. Let's start with kind of how they're similar and then we can think about how they're different. I'd say from a quality of real estate perspective, from a sponsorship perspective, it's the same program we're running in The United States. This is institutional quality real estate in sponsorship. And in fact, a lot of the clients we went to in Europe are the exact same clients we're lending to in The U. S. And so it's nice to have that global connect connectivity there. I'd say the opportunity set there is a little bit different than what we're seeing in The U. S. The loan sizes tend to be a little bit bigger. There tend to be more portfolios, where we're and then also I would say multi jurisdictional is an opportunity as well. It's a heavily banked market. So contrast think about Europe is like 80% of that market is is banks, whereas in The U. S. it's around 40%. And the back leverage there structurally I think is a little bit more advanced in our favor than what we're seeing in The U. S. From a whole loan perspective spread wise, now you're talking about different base rates, between The UK and EU. But I'd say overall, spreads on whole loan and and then the ability to back leverage and generate ROE are largely in line with The U. S. From a relative value perspective, I think it's pretty balanced right now, although we've been living there for a few years now, it has not always been like that. I'd say two years ago, we probably saw a lot more opportunities and relative value in Europe versus The U. S. And but now as The U. S. Activity has picked up materially, it's probably a little bit more balanced. So but ultimately, I think the ROEs are really about the same between The U. S. And Europe right now. And that's on a U. S. On a hedge U. S. Dollar basis. Chris Muller: Got it. That's all very helpful. And I guess on the Long Island family loan you guys originated this quarter, is this ground up construction? And then are you guys looking at heavier transition projects now? Or was this more of a one off type loan? Matt Salem: It is ground up. Yes, it's ground up construction to a repeat sponsor who we've went to a couple of times now on construction projects. So it's we know them well and we think they do a great job and build a really high end product. So it's great to be able to sign that one up again with with the repeat sponsor there. I don't think we've really changed the DNA of what we want to do. We've always had a small percentage of construction in the portfolio and we'll continue to do that. Think there's some some relative value in that sector. The bulk of the opportunity of what we're seeing right now is what I still refer to as like almost stabilized versus transitional lending. I still think that there's like stretch the market is really the opportunity around the market is really around stretch seniors where it's like a 70% LTV mostly leased assets. And so that's where we've been participating. We think that's where there's the most relative value. We'll look at projects that have a larger business plan, but just a relative value perspective again, like it seems like, the kind of almost stabilized lending is just offers a better better investment right now? Chris Muller: Got it. That's all very helpful. Thanks for taking the questions. Operator: And your next question today is a follow-up from Jade Rahmani of KBW. Please go ahead. Jade Rahmani: Wanted to ask about the platform overall. I know you mentioned you're in Dallas with K Star and you all have a servicing operation quite substantial. You buy B pieces. So a nice complement to that could be the CMBS conduit business, which is capital light and I think the securitization outlook seems quite healthy given that the regional banks still continue to pull back. Any interest in that? And then another follow-up would just be on the special situation side, if you see any opportunities to combine with another, either public or privately held mortgage REIT, I think scale is a huge differentiator across the real estate landscape. We see huge premiums between market cap ranges in all real estate sectors. And I think it's clear that having gone through this cycle, there's also a big differentiator in the commercial mortgage REIT space. So, you could combine stock for stock or NAV for NAV transaction gain scale, that probably would help with consistency of dividend. So you just respond to those two items? Thanks very much. Matt Salem: Sure, Jade. Thank you again for the question. First on the CMBS side, it's something we've looked at we have a the expertise I think in house to do that, whether it's from the credit or the origination side. Or some of us have backgrounds in that business and capital markets. I think right now, real plans to begin a CMBS originations business. I think the one thing that we is a real consideration for us is it doesn't really overlap with our client base for the most part. Think about we're lending in major markets to institutional sponsors and that tends to be a more diverse set of borrowers and markets. So we'd have to probably change a little bit of the way we're oriented and that's not sure that's in our kind of credit DNA to do that. But we'll continue to to evaluate it as I think as the market evolves. On the M and A question, I would say we continue to, look at opportunities as they arise. I think there'll be consolidation in the industry over time. We'd like to grow not for the sake of of scale for scale sake, but to have a more liquid stock as as you mentioned, I think would be able to attract more shareholders and and create a better cost of capital. And as we've discussed, we want to try to do things that also give us the ability to diversify our portfolio and moving into Europe is one of those things, but also potentially adding duration to the portfolio. So we're going to continue to evaluate, opportunities that are on the table but there's nothing we're looking at currently. Jade Rahmani: Thanks very much. Operator: Thank you, Jade. This concludes our question and answer session. I would like to turn the conference back over to Jack Switala for any closing remarks. Jack Switala: Great. Thanks, operator. Thanks, everyone, for joining today. Please reach out to me or the team here if you have any questions. Take care. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good morning, and welcome to the Hilton Worldwide Holdings Inc. Third Quarter 2025 Earnings Conference Call. All participants will be in a listen-only mode. After today's prepared remarks, there will be a question and answer session. Please note this event is being recorded. I would now like to turn the conference over to Charlie Ruer, Vice President Corporate Finance and Investor Relations. You may begin. Charlie Ruer: Thank you, Chuck. Welcome to Hilton Worldwide Holdings Inc.'s third quarter 2025 earnings call. Before we begin, we'd like to remind you that our discussions this morning will include forward-looking statements. Actual results could differ materially from those indicated in the forward-looking statements, and forward-looking statements made today speak only to our expectations as of today. We undertake no obligation to update or revise these statements. For a discussion of some of the factors that could cause actual results to differ, please see the Risk Factors section of our most recently filed Form 10-Ks. In addition, we will refer to certain non-GAAP financial measures on this call. You can find reconciliations of non-GAAP to GAAP financial measures discussed in today's call in our earnings press release and on our website at ir.hilton.com. This morning, Chris Nassetta, our President and Chief Executive Officer, will provide an overview of the current operating environment and the company's outlook. Kevin Jacobs, Executive Vice President and Chief Financial Officer, will then review our third quarter results and discuss our expectations for the year. Following their remarks, we'll be happy to take your questions. With that, I'm pleased to turn the call over to Chris. Christopher Nassetta: Thank you, Charlie, and good morning, everyone. We certainly appreciate you joining us for our call today. Our third quarter results continue to demonstrate the resilience of our business as strong net unit growth, disciplined cost control, and our capital-light business model delivered solid bottom-line performance. Adjusted EBITDA and adjusted EPS both meaningfully exceeded the high end of our expectations despite softer-than-expected industry RevPAR performance. Our strong portfolio of brands, powerful commercial engines, and disciplined execution continue to drive meaningful free cash flow conversion, which we expect to be greater than 50% of adjusted EBITDA for the full year. We remain on track to return $3.3 billion to our shareholders in the form of buybacks and dividends for the full year. Turning to results for the quarter, system-wide RevPAR was down approximately 1% year over year as unfavorable holidays and events, softer international inbound to the U.S., declines in U.S. government-related travel, and portfolio renovations weighed on results. In the quarter, leisure transient RevPAR was roughly flat, driven by strong demand in Europe and the Middle East, offset by unfavorable holiday shifts in the U.S. Business transient RevPAR decreased approximately 1%, driven by continued economic uncertainty. Group RevPAR decreased approximately 4%, driven by tougher comparables as we lap major international events, renovation impacts, and holiday shifts. We did see group demand strengthen, which is reflected in our stronger fourth-quarter group position and our 2026 position, which is up in the mid-single digits. As we look to the fourth quarter, we expect RevPAR to be up approximately 1%, driven by holiday shifts, easier year-over-year comps, and relative group strength. We now expect RevPAR for the full year to be flat to up 1%. As I lift up and think about the opportunity ahead, I remain optimistic about the next few years. We continue to believe that in the U.S., lower interest rates, a more favorable regulatory environment, certainty on tax policy, and a significant investment cycle will result in accelerated economic growth and meaningful increases in travel demand. This, when paired with limited industry supply growth, should drive stronger RevPAR growth over the next several years. Turning to development. During the third quarter, we opened 199 hotels totaling over 24,000 rooms and achieved net unit growth of 6.5%. Openings increased more than 35% year over year on an organic basis. Our luxury and lifestyle brands continue to expand around the world, comprising approximately 20% of total openings in the third quarter. In Asia Pacific, we announced our plans to exceed 250 luxury and lifestyle hotels in the coming years, representing portfolio growth of over 50%. In Europe, we opened the Conrad Hamburg to expand our award-winning luxury brand into one of Europe's most iconic destinations. Conversions remain integral to our growth story. We expect nearly 40% of openings in 2025 to be conversions across 12 of our brands, sourced from a mix of independent hotels and competitor brands. We recently celebrated Hilton Worldwide Holdings Inc.'s 9,000th hotel following the conversion of the Signia by Hilton La Cantera Resort and Spa, a landmark property set atop 550 acres overlooking the rolling hills of Texas Hill Country. We also added the 1,000-room Sunseeker Resort as part of our Curio Collection. After eclipsing 8,000 hotels just a year ago, we opened nearly three hotels per day to reach this latest milestone, further underscoring our incredible growth momentum. In the years to come, we continue to believe the conversion opportunity is immense globally. To help capture this opportunity and leverage our skill set in identifying white space and developing new brands, earlier this month, we launched our newest brand, Outset Collection by Hilton, the company's 25th brand and eighth in our growing lifestyle portfolio. Outset Collection by Hilton is defined by soulful, story-led properties featuring a diverse range of hotels across urban destinations, small towns, adventure outposts, and offbeat hubs. Grounded in deep research, we determined that the upper midscale to upscale collection space represents an enormous opportunity for unbranded or independent hotels that currently comprise more than 50% of the global hotel supply. To date, we have more than 60 hotels in development with a long-term growth potential of more than 500 hotels across North America alone, and will open our first several in the fourth quarter. Hilton Worldwide Holdings Inc. has consistently delivered an industry-leading share of conversions in the United States, and we expect that to strengthen with the addition of the Outset Collection. More broadly, we continue to deploy our brands into new markets around the world, driven by industry-leading premiums they deliver for owners. In the quarter, we marked brand debuts in 12 new countries and territories, including DoubleTree in Pakistan, Hampton in the U.S. Virgin Islands, and Motto in Hong Kong, which also represented the brand's debut in Asia Pacific. Globally, Hilton Worldwide Holdings Inc. operates properties in 141 countries and territories with an average of only four of our 25 brands per country, demonstrating the huge runway of growth ahead. In addition to strong openings, we signed 33,000 rooms in the quarter, up over 25% year over year on an organic basis. We increased our development pipeline to more than 515,000 rooms, growing both year over year and sequentially versus the second quarter, with expansion in key strategic markets and across chain scales. In Japan, we announced several agreements to further bolster our luxury and lifestyle portfolio, including Waldorf Astoria Residences in Tokyo, marking the region's first residences under the iconic Waldorf Astoria brand. We approved LXR, Curio, and Tapestry properties at the foot of Mount Anapore, Japan, offering guests easy access to Niseko's exceptional ski slopes when the hotels open later this year. In Vietnam, we approved nearly 1,800 rooms across five hotels to debut our Conrad, LXR, and DoubleTree brands and to expand the Hilton brand in one of Asia's most dynamic markets. We also signed our first LXR hotel in Phuket, Thailand, our first Canopy in Manila, Philippines, and announced three Curio Hotels in key Italian destinations, including Genova, Milan, and Sorrento. New development construction starts in the U.S. were strong during the quarter, and for the full year, we expect global new development starts to finish up nearly 20% and up over 25% in the U.S. year over year. Even with this year-over-year growth, new development construction starts remain below 2019 levels, implying strong continued runway for growth. Our record-setting pipeline, combined with conversion momentum and acceleration in construction starts, will continue to fuel our growth in the coming years. We expect to achieve net unit growth of between 6.5% and 7% in 2025 and 6% to 7% annually over the next several years. Our development success is incumbent on us being the premier partner for our owner community. Thus, we're always innovating to continue delivering industry-leading RevPAR premiums and profitability for owners while exceeding guest expectations. During the quarter, we communicated a first-of-its-kind program that offers owners system fee reductions, many of which are tied to hotel-specific product and service quality scores. The fee reductions will share the efficiencies we have gained through scale and technology with our owners while reinforcing the need to continue maximizing the customer experience. We think we are well-positioned to continue finding new efficiencies and strengthening our value proposition for guests, owners, team members, and shareholders. Our proprietary tech platform, envisioned a decade ago, was built for agility, with 90% of our enterprise solutions in the cloud today, up from 20% in 2020 when we started deployment. This modern platform has established Hilton Worldwide Holdings Inc. as a pioneer and leader in hospitality technology and is allowing us to rapidly introduce new innovations that elevate guest experiences and drive greater value for our entire network. Because of where we are in our technology platform roadmap, we feel uniquely positioned in the industry to embrace AI and drive greater differentiation for our Hilton network. During the quarter, we continued to drive our award-winning workplace culture, including being named number one best workplace in Australia, New Zealand, and Sri Lanka, marking a total of 18 number one wins in the past year, the most since we began participating in the Great Place to Work survey. We're more confident than ever that our team is poised to deliver for our shareholders in the years ahead. Overall, we're very optimistic about our business and what is on the horizon globally. Our brand-led, network-driven, and platform-enabled strategy will continue to help us achieve our dramatic growth trajectory and meet the evolving needs of our travelers around the world while delivering great returns to owners and shareholders. Now, I'm going to turn the call over to Kevin for a few more details on the quarter and expectations for the full year. Kevin Jacobs: Thanks, Chris, and good morning, everyone. During the quarter, system-wide RevPAR decreased 1.1% versus the prior year on a comparable and currency-neutral basis, driven by modest declines in both occupancy and rate. Adjusted EBITDA was $976 million in the third quarter, up 8% year over year and exceeding the high end of our guidance range. Outperformance was predominantly driven by better-than-expected growth in non-RevPAR-driven fees, disciplined cost control, ownership, and some timing items outweighing RevPAR softness. Management franchise fees grew 5.3% year over year. For the quarter, diluted earnings per share adjusted for special items was $2.11. Turning to our regional performance. Third-quarter comparable U.S. RevPAR decreased 2.3%, largely driven by pressure across business transient and group as holiday shifts, declines in government spend, portfolio renovations, and softer international inbound demand weighed on performance. For full year 2025, we expect U.S. RevPAR to be roughly flat versus 2024. In The Americas outside the U.S., third-quarter RevPAR increased 4.3% year over year, driven by strong demand in both leisure and group segments. For full year 2025, we expect RevPAR growth to be in the mid-single digits. In Europe, RevPAR grew 1% year over year, driven by a rebound in the U.K. and Ireland and offset by a tough year-over-year comparison from major events last year. For full year 2025, we expect low single-digit RevPAR growth. In the Middle East and Africa region, RevPAR increased 9.9% year over year, driven by robust intra-regional travel growth for both business and leisure segments. For full year 2025, we expect RevPAR growth in the high single-digit range. In the Asia Pacific region, third-quarter RevPAR was up 3.8% in APAC excluding China, led by strong group trends in Japan, Korea, and South Asia. RevPAR in China declined 3.1% in the quarter, largely driven by the impact of the government travel policy on business transient group travel, particularly in Tier two and Tier three cities. For full year 2025, we expect RevPAR growth in the Asia Pacific region to be roughly flat, assuming modest RevPAR declines in China. Turning to development. As Chris mentioned, for the quarter, we grew net unit 6.5% and have more than 515,000 rooms in our pipeline, of which nearly half are under construction. We expect to deliver 6.5% to 7% net unit growth for the full year. Moving to guidance. For the fourth quarter, we expect system-wide RevPAR growth to be approximately 1%. We expect adjusted EBITDA of between $906 million and $936 million and diluted EPS for special items to be between $1.94 and $2.03. For the full year, we expect RevPAR growth of 0% to 1%, adjusted EBITDA between $3.685 billion and $3.715 billion, and diluted EPS adjusted for special items of between $7.97 and $8.06. Please note that our guidance ranges do not incorporate future share repurchases. Moving on to capital return. We paid a cash dividend of $0.15 per share during the third quarter, bringing dividends to a total of $108 million for the year to date. Our Board also authorized a quarterly dividend of $0.15 per share in the fourth quarter. For the full year, we expect to return approximately $3.3 billion to shareholders in the form of buybacks and dividends. Further details on our third-quarter results can be found in the earnings release we issued earlier this morning. This completes our prepared remarks. We would now like to open the line for any questions you may have. We would like to speak with as many of you as possible, so we ask that you limit yourself to one question. Chuck, can we have our first question, please? Operator: The first question will come from Shaun Kelley with Bank of America. Please go ahead. Shaun Clisby Kelley: Hi, good morning everyone and thank you for taking my questions. Chris, like usually around this time of year, we start to think about the setup for next year and I know it's hard to put you on the spot without guidance out there, but we'll kind of talk around it anyways a little bit. Could you just give us your thoughts about kind of the timeline for the improvement you're hoping to see on the top line and operating environment? And then just we're getting a lot of feedback this morning about how well you've done on the cost side. Let's play the counterfactual. If the top line and we're talking really RevPAR here, but if that environment doesn't get a little bit better, could you just talk about what you can do in your comfort continuing to execute so well on the bottom line of the side of the business and drive some operating leverage? Across the Hilton Worldwide Holdings Inc. enterprise worldwide? Thanks. Christopher Nassetta: Yes. Thanks, Shaun. Happy to cover both. So obviously, yes, we're not giving we gave you a form of guidance on unit growth. For next year, we're not at this time of year going we're just starting the budget season. And so we don't we're not going to give guidance on RevPAR. But here's what I'd say. I said it at your conference. I said it on the last call, I believe we feel incrementally a lot better about the setup for 2026. I sort of said it briefly in my prepared comments. I mean, think while there's certainly a lot of noise in the world and you saw in Q3 industry numbers were less were lower than everybody expected. I still think if you sort of lift up and you get away from the noise that structurally in the U.S. at the moment, since that's still 75% of our business. There's a lot of really good things going on. I mean, inflation is definitely coming down. Rates are coming down with it. Expectation that rates will continue to come down. You have certainty on tax policy which is unusual and probably lasts for at least three to five years. You have some meaningful benefits in that tax policy like bonus depreciation and things that that stimulate investment. You have regulatory regime that is going to be much more friendly. And you have an investment cycle that is coming and sort of happening, but it takes time to get embedded in the economy. And what is that investment cycle? I mean, I hate being redundant, it's worth noting. I mean, you have the core infrastructure bill that was done approved by Congress signed by President Biden you know, if you add up all the pieces of it, roughly $1.6 trillion, like, less than 20% of that's been spent. You had $800 billion from the CHIPS Act less than 5% of that's been spent because it takes time to get the money in the system. And then on top of that, have the whole AI investment thesis that's going on, not just the tech companies that are obviously investing at into the trillions when you put when you put it all together. But all of the infrastructure that goes behind that. So all the data center development that's going on, all the energy development that has to go because without energy you don't have data centers, without data centers you don't have AI. And so while it takes time to get all of that embedded and I can't like I cannot tell you like I think it's like January 18 that all I think it's like a benefit that we are going to be getting for several years. I do believe you will start to see it. In the first half of next year. I almost think you you you have to. And then another couple of reasons for optimism on next year is one obvious one is comps get a lot easier. Right? I hate to rely on that. I mean, I obviously just gave you a pretty good setup for much better fundamentals. But the comps get easier. You've got some event-driven benefits next year. You have midterm elections, which mean a lot of activity. These are big midterms. People are in every state in the union, people are going to be running around raising money campaigning. That's good for business. You have America's 250 which is going to be a year-round celebration. There's a lot of energy going into that from a lot of different places including the administration. You have World Cup, which isn't like Super Bowl where it's a weekend or whatever. It's a fairly extended sort of experience. And so all of those things are going to be good. And then, of course, on the other side of it, while we're benefiting from what I think is a pretty darn good development story and getting much greater than our fair share, you're still in a in super cycle of underdevelopment. In the industry where you're you're adding capacity at less than 1% against the two point five point five percent thirty year average. So, like again, you can all get caught up in the noise and tariffs and like there's a lot geopolitically. Listen, I'm not don't have my head in the sand, but I like to try and lift up above noise. That's sort of what I do in my personal and professional life. And when I do that, it makes me feel pretty good about the next few years. So I would bet a lot of money that 26% going be better 25% and I'd bet a lot of money 27 is going be better than 26%. The exact slope of that is difficult to determine. We'll obviously try and do a little bit more precise job through the rest of this year. In doing a very granular analysis market by market as we as we go through the budget season. But I feel really good about it. On the cost discipline side, listen, I think I would hope everybody would agree, we've been super disciplined forever on costs. Like since we went public, if you look at us versus core competitors, relative to our size and scale, we've always been pretty efficient. And I believe we will continue to be, as I said, very briefly in my prepared comments, there are a lot of tools available to us to continue to drive efficiencies and we're going to use those. I mean in the world of AI, by redefining a lot of processes there are opportunities to continue do things more efficiently and be able to accomplish more with less. And that by the way holds true for our G and A, but also importantly very importantly, because our job is ultimately deliver profitability for our owner community I think it affords us opportunities to continue to find efficiencies that can translate into higher margins by reducing incrementally system costs more. I noted very quickly and it's reasonably broadly known because we've communicated to our community, but we did a first of its kind reduction in system fees to be clear, not our royalty rates and our not our license fees, but the fees that owners pay us to operate the system, And that's been done because we've just found ways to be more efficient, whether that lots of different use in AI where we're redoing processes and getting efficiency and we think we're doing things better. But more efficiently. And that that's translating to benefit us, but it's also translating because the bulk of the cost structure of this whole enterprise really is running the system. It's benefiting our owners. And we want to do more of that. Like we want to this has been a difficult time for the owner community in this sort of air pocket where I think really good things are coming. But at the moment, you're sort of in The U.S. Seeing modestly negative top line. And while inflations come down, it's still a little bit elevated. That's not good for owner community. And so that's why we put this program in place But it's also why we want to continue as we're in this transition period to a faster growth period of time utilize every weapon in our arsenal and we have a lot to to continue to drive efficiencies. That's a long-winded way of saying I think we've always been frankly on the tip of the spear in driving very efficient cost structures and we will continue to do so. And that's sort of a mentality I have and we have that will never change. And now we just have more ways to do it. Shaun Clisby Kelley: Thank you very much. Operator: The next question will come from Stephen Grambling with Morgan Stanley. Please go ahead. Stephen Grambling: Hey, thanks. Chris, I appreciate the comments you made about the tech stack and also some of the opportunities in AI, but just to dig in a bit on that. On the back of partnerships being formed by some retailers and e-commerce companies with large language models, how do you think about potentially partnering with some of these companies as another source of distribution? Maybe also remind us of some of the internal efforts on AI as we think about both direct and indirect opportunities. Christopher Nassetta: Yes. We can spend the whole call plus we spend the days together talking about this. And we're obviously like most, spending a huge amount of time understanding where AI is, the art of the possible. I mean, have to be exact, think 41 use cases that are being utilized inside the company at this moment. As we test and learn. I'm not going to torture everybody going through it. And competitively, I'm not going to into granular detail for obvious reasons. But I'd say broadly I look at it as AI for us at the moment and I think it'll evolve and change and like you just have to be really agile that with the speed at which this is moving. But I think for the foreseeable future, meaning the next year in AI world, there's probably three buckets. I talked about one, which is reinventing processes to garner efficiencies. And that can be wherever we have a lot of process and historically you have antiquated ways of doing things that require a lot of people. There are different ways to do it and repurpose people to do higher value. Things. And so, again, I think that benefits that can benefit our G and A, which you've you've seen like some of the use cases are are you're seeing a benefit. But again, we're at the tip of the spear. And you've seen a little bit of it vis a vis the system, relative to our owners, but there's more of that. That's one big bucket. The second big bucket is go to market like basic basically how you market distribution, the whole distribution landscape and that's what you started with Stephen, and I agree wholeheartedly. I think I think there are all sorts of risks with AI, like but in the end, here is the thing, we're in the business of fulfillment. We're not yes, we we have a platform and a network But in the end, we have all we have 9,000 and growing hotels that we control rate inventory and availability and the only way you get it is through us. Okay? No other way. You either get it from us or you don't get it. And we are in charge and control of fulfillment, the actual experience for the customer. In the world we're going into, having multiple LLMs and a really what I would argue much more competitive environment for how people get information. I view that, again, I'm not I don't have my head in the sand. There's all sorts of risk. I view that as a very good thing. Right? If we do our job, we have control over inventory, If we do a really good job in delivering product service, loyalty, to our customers and we are viewed which we are as the best of the best at fulfillment then we're going to we have all sorts of new ways to think about how we distribute our products. So you can assume yes, we're talking to all these all these people in their early days. They're in a bit of an arms race trying to figure out who the winners and losers are and it is organized, but it's a little bit like the Wild West at the moment. But I think where it's going is super super good. For us in how we go to market and how we distribute our products if we are intelligent about how we control our and how and making sure we always deliver on the fulfillment side. The third bucket is CX customer experience. We're already not just testing, we're doing like we have because, as I said in my prepared comments, we've evolved our tech stack and we're basically micro open source cloud based We have massive flexibility in how what we do with our tech stack and we are already utilizing that in ways to deliver a much better customer experience, meaning mass customization, understanding your customer, being able to take all this data that we've had, manage the data, get outputs that actually allow people enable people on property to do things to customize the experience to resolve a problem real time in a way that that we've never been able to do because you just you always had massive amounts of information. The question is, did you have the right information? Could you manage the information? Could you translate the information in ways that could spit out a command to get somebody to take an action? And now we have that. And so this isn't like a pipe dream that we like I'm thinking about. This is like inaction, we're doing it, we're testing, we're learning, And we think there's a huge opportunity. I think the winners in fulfillment and back to my fulfillment, comment, are the winners across all industries in a world where everybody wants what they want, right? And they get it now more and more is mass customization. I mean, I've been thinking for twenty years. It just hasn't been quite as possible as it is with how technology has evolved, particularly particularly with AI. And so the most I mean, they're all very exciting to me, but the customer experience side of it as you can probably tell, really excites me. The other two buckets are are super important and I think will ultimately, all of them will allow us to differentiate ourselves in terms of how we serve customers and ultimately drive greater profitability into the network. Stephen Grambling: Love it. Thank you. Operator: The next question will come from Daniel Brian Politzer with JPMorgan. Please go ahead. Daniel Brian Politzer: Hey, good morning everyone and thanks for all the great detail thus far. The net unit growth obviously it's a bit of an acceleration or organically here from that 5% that you've been running at ex LCLH and Graduate. Can you maybe parse that out as we think about going forward between your expectations for conversions next year versus some of the newer brands that you've launched? Maybe if there's any element of that accelerating, albeit off a low base construction starts that you mentioned? Kevin Jacobs: Yes. Thanks Dan. I think look the composition for the acceleration I think is just if you think about it, if you go ex as you said, if you go ex partnerships and look at it, is it just an acceleration still out of COVID, right, because the development cycle picks back up and delivers on a lag. So what you're seeing here, we raised our six point five to from six percent to seven percent to six 0.5 seven percent for this year. That's really broad based. There's really no one area. We said we think nearly 40% of that's going to come from conversion. So we keep winning well more than our fair share conversions. But if you look at new development and Chris mentioned, we think new development starts this year are going be up 20% and then The U.S. Over 25%. That bodes well for the setup for new development going forward. And really is the underpinning of the 6% to 7% for the next couple of years. And then you layer in with conversions. And so look, new brands is going to be part of it just like Spark been an important part of it the last couple of years. The new brands that are oriented towards conversions will be part of the conversion story. But then a good a big part of the story is taking our core brands and exporting them around the world in emerging markets, right? So it really is pretty broad based across the board. And we would expect something on the order of magnitude of in the 30 percentage points 35%, mid-30s, call it, to be from conversions versus new builds for the next couple of years? Daniel Brian Politzer: Got it. Thank you so much. Operator: The next question will come from David Katz with Jefferies. Please go ahead. David Brian Katz: Good morning, everybody. Thanks for taking my for all the details. I wanted to just talk about you frankly asked us a lot about the higher end of the luxury end of the scale. You've in the past how it provides somewhat of an as well as the financial benefit. We certainly hear and see this getting to be a more expensive arena to play in. Talk please about how you sort of balance that tangible and intangible return opportunity and sort of where you're at? Thank you. Christopher Nassetta: Yes. I'm happy to and good question. Luxury is is very important. I mean, we do make money in the luxury space. But if you look at the you looked at our our EBITDA driven by segment, it's not a huge contributor as a slice of the size of the slice of the pie. But it's important because it does help create halo effect that helps the whole system and network effect work. It's aspirational product that our customers want. And so have been very focused on it. You are right that if you looked at where our ultimately where the bulk of our key money goes in any particular year, it is disproportionately at the high end of the business. It's not all luxury, but big convention resort convention and luxury hotels. And so by by so doing those investments, we're saying it's important. And we'll continue to do that. But we're not going to go crazy doing that, meaning right now, you look at where we are in luxury, I would think I think we can prove scientifically. It's really working. We have as many dots on the map as anybody. As a result of the SLH deal, which was 100% capital light deal. We have 600 dots on the map. We have 100 plus more in our core brands coming in terms of pipeline. We have, we think, all the most important covered. I mean, there are always a couple. I'd like to see Waldorf in Paris. And there are a few places that are hard that we're focused on, but if you look at the whole world where we think we're in all the right places and the reality is with all respect to the competition, our loyalty program is the best performing loyalty program in the space. I mean, we're approaching against a target a multiyear target of 75% Honors occupancy, we're approaching 70% at a faster rate than we thought. We're growing the program 15% to 20% a year Active members are increasing or crazy healthy, people are really engaged with the program. The patterns that we've seen in redemption with luxury, including SLH, have proven that what we were trying to do, we've accomplished that And so that's we're going to continue to focus on luxury. You're going to see us do things to to continue I mean SLH will continue to grow not at a really not the way it has grown zero to 500, but it'll grow incrementally because we are helping them and they are they are working on growing that growing that business. So that will continue to grow. But you'll see most of the growth come in our in our core brands. We're going to be sensible about it. We only only even when we're making these investments, we don't make these investments to lose money. I mean, we're always investing against a a market a deal opportunity where we think that whatever we're giving is a lot less than the value of what we're getting. We'll continue to do those. But I don't we do not I do not and we do not feel particularly post SLH that we have to do anything unnatural. And obviously, the luxury business has been performing really well and we like that. My own belief is it will continue to perform well. But what you're going to see over the next two or three years on the basis of what I is going to happen, you can disagree with me, you're going to see broader economic growth in The U.S. Pickup and it's also going to be much broader based you're going to see all of the mid market start to converge with the high end. And almost I mean, eventually it has to, because it always does. And makeup of what's going on, which is really what's really driving it as an investment cycle, that's a middle class game, like the investment cycle of building data centers, bridges, highways, power plants, that's getting everybody in the game. And so again, luxury is great, performing really well. We're focused on it. It's a good halo effect. We think we have what we need. And we'll keep grinding it out with these deals. But I do believe that the relative performance gap will close. In a meaningful way over the next couple of years. David Brian Katz: Thanks. Nice quarter. Operator: The next question will come from Steven Donald Pizzella with Deutsche Bank. Please go ahead. Steven Donald Pizzella: Hey, good morning everyone. Thank you for taking our question. Chris, just wanted to follow-up on the offer to provide owners system wide fee reductions tied to product and quality scores. If I heard you correct, Can you elaborate on what the genesis of that was? How we should think about any impact from a franchise and royalty fee perspective moving forward, if any at all? And does this incentivize more conversions for loaners moving forward? Christopher Nassetta: The answer to the last part is yes, I think it does. But the genesis of this was sort of what what I implied. It started with the fact that, listen, in the end, our job is to deliver not just top line. Got to deliver bottom line to owners or this wonderful virtuous cycle of getting them to reinvest and build us more hotels does not work as well. And so we know that they are they are having a difficult time. They had a great run-in the initial years coming out of COVID, but it's gotten much more challenging. And so we want to help. And we think we should be able to, meaning same comments I won't repeat them about, we can garner efficiency. We can use AI We can think about all of our processes where it's a big system, in ways that in ways that will benefit them. So that was really the genesis. The other thing we're trying to accomplish and it was I said it very quickly, but it's an important note, is that and this isn't unique to Hill. The whole industry industry during COVID had a cycle of underinvestment in assets. That's because everybody the owner community rightfully had to survive. They were having to pay interest and like they didn't have the money that they would normally have to invest. So you went through a unique cycle in my forty years of doing this of under Again, just across the board. Thankfully, we went into it in a very good place. So we feel pretty good about where we are, but we want more investment in the system. And so we have been encouraging and by the way, I sort of mentioned, we have a in The U.S, we have over 20% of the system is in renovation right now. That we've been encouraging it and it's been happening, but we thought if we're going to do this, we want to help provide another incentive to accelerate it to go even faster. And so we did create, I think, pretty unique setup where we have stay scores etcetera. But you think about customer satisfaction scores and it's a complex equation, but one that they understand because it's the way we manage the system the franchise system already where we provided gates essentially that people need to get through by brand with and it's stair step, it's a very complex system. But again, so what sort of the way we've managed the business, they understand it. And so that's the second area. The first was we want to help our owners. The second was we want to help our owners also in the long term, which to make sure that the product quality is where it needs to be. And even without it hitting it doesn't start until January. The relief doesn't start until January. We've seen a pretty meaningful uptick in activity. So I mean people get it. They want to get They want to get through the gate. And a large part of the system will. I think when we did it, it was like 50 I think it's last I looked at maybe approaching 60 without even having rolled out. To be clear, it doesn't I do think it will the more the higher our margins more people want to build us hotels. So I think it's helpful in that regard. And it doesn't have any impact on our royalty management rates and license fees, management fees. It's all in the the other part. The part of the system we manage on behalf of owners for the whole system. So there's no impact on our P and L. Operator: Your next question will come from Robin Margaret Farley with UBS. Please go ahead. Robin Margaret Farley: Great. Thank you. Looking at your fee revenue the year, kind of fee revenue per room, it's growing even with more economy rooms and more rooms in China, but I think a lot of investors might worry would hurt that number. What What's driving the economics there? And I guess is there anything that you'll be comping next year for us to think about anything unusual in those numbers for this year that you'd be comping next year or do you feel good about those economics continuing next year? Kevin Jacobs: You're talking about comps that would drive fee per room year over year? No. Just things like the non RevPAR, yes, sorry. Go ahead, yes. Well, non RevPAR is different, but fees per room, no, there's nothing that would comp year over year. And yes, you are seeing a little bit of our mix shift over time in terms of what we're delivering shift to emerging markets including China, which is normal as we continue to grow outside The U. But I think as we've said before, and I know we all know why you're asking because you get this question a lot from your clients and from investors and we get it a lot. So we get that it's on investors' mind. 've talked about this a lot in the sense that even if you take the mix of what we're delivering, which is slightly different, if you combine that with the existing mix, we're really not shifting the overall mix of of contribution over time from higher fee paying things to lower fee paying things The rooms we're opening largely around the world if you exclude China, are at the same fee per room rates or higher than our existing in place fee per room rates. And then you think about other factors like RevPAR continuing to grow, our take rate continuing to increase as we regrow license fees The bulk of our deliveries being in our strong mid market brands where we charge our highest fees per room If you put all of that in the model, and sorry, I should add that even in the case of emerging markets, we're starting to grow our higher end brands and in China, we're moving more towards our own brands in the MLAs. The MLAs are going to continue to grow, but we're growing our own brands that are 100% off at higher rates. So you put all that in the model and we believe and we know that fees per room will continue to grow over time. Christopher Nassetta: Yes. We I know Kevin's right, it comes up too often. And so right or wrong, it does. We've modeled it. In the most granular way which by definition is more granular than anybody else can model it. And our five and ten year models and it keeps going up. For the reasons Kevin described. A little bit more visibility on the China thing, we did two MLAs. We're not planning to do any more. Those have highly productive. They've helped us build an incredible network effect in China. Our market share in China is incredible. I'm not going to but it's off the charts. It's the highest market share that we have anywhere in the world. So it has worked. We're not doing any more MLAs. We those are productive. We learn from those. And now we're taking our mid market brands like Garden Inn and others and doing it ourselves. So if you look at even in China, with those continuing to grow just based on the velocity of growth that we have the ones we're doing ourselves. The fees per room are going up in China, they're not going down. So you put all that together, and when we do it bit by bit by bit, these per room are going up. Robin Margaret Farley: Great. Thank you. Operator: The next question will come from Brandt Antoine Montour with Barclays. Please go ahead. Brandt Antoine Montour: Great. Good morning. Thanks for taking my question. So apologies for more of a near term question, Chris or Kevin. I just curious in terms of the corporate travel trends into the fourth quarter. I mean, you do have tougher comps on that side of the ledger. But I think more of the question is, guys talk to a lot of companies you see a lot of data. From within your system. Does it tell a bit of a story in terms of which corporates are putting their people on the road large companies or small companies, region by region And when you speak to those companies, are they sort of if they agree with your view, of this sort of future economic tailwinds, what do you think that they're waiting for? Christopher Nassetta: Yes. I mean, listen, it's a lot of yes, we talk to our customers. We do customer events all the time. We did a big one recently where I had tons of our customers and talked to our sales teams. And I'd say broadly people are pretty constructive. Mean it's anecdotal, but I don't really talk to any of our major customers that say like they're not going to be traveling more year. I don't talk to any of our customers that don't understand they're going be paying a little bit more for the product. Next year. I think they like everybody think inflation should come down. So maybe they don't want to see the big increases that they have been seeing. But they understand they're going to have an increase. I think what's been holding them up is the obvious, just noise in the system. I mean, think the big guys the tariff stuff has sort of affected them. They were way behind. So I'd say in a relative sense, maybe they have performed in the very short term a little bit better because they were so far behind But they're rattled. And then the little the SMBs are always more resilient. But they're a little bit relative. So I just think there's been a lot of noise in the system The reason I'm more optimistic about next year, again, I can't prove it. It's just anecdotally. I'm talking to a lot of them. I think you're going to see these if I'm right about when you lift up, you see some of these broader macro macroeconomic trends start to take hold and people feel more confident and you get as you get closer to midterms, some of the tariff stuff sort of goes a little bit more in the back seat, I believe people will settle down and get back to their And again, anecdotally, they're not telling us, they're not telling me when I talk to the folks that run travel departments anything, but think we're going to travel more and we're going have to pay more for it. Next year. Brandt Antoine Montour: Great color. Thank you, Chris. Operator: Your next question will come from Elizabeth Dove with Goldman Sachs. Please go ahead. Elizabeth Dove: Hi, there. Thanks for taking the question. You're clearly seeing amazing traction on the development side and with conversion side of things speaks to the strength of the brand everything else. But maybe it'd helpful just to get like a pulse check on the key money side of things, like what you're seeing in terms of key money per room, the competitive environment, any kind of shift there over the last few months? Kevin Jacobs: I wouldn't say there's been a shift, Lizzie, over the last few months. I think you've had a shift over the last few years in the sense that it is a more competitive environment. I mean with unit growth being an important part of all of our stories in the industry, it's really important. And then some of us sort of take a little bit of a lead in that regard, our competitors are sort of anxious to catch up and get out there and sort of deals get a little bit more expensive. But with that said, I would say, Chris mentioned it, something like 85% or 90% of the key money we deploy is on full service and above. It tends to be on luxury. It tends to be on the big convention center type hotels. It tends to be the bigger projects garner the bigger checks. Every once in a while, you have part of it depends on which brands are available a certain deal, right? If you have a conversion, and it's an independent hotel and all the brands are available and that owner is fortunate enough to be able to create some competition, that can make it a little bit more expensive. But that said, if you look back we're still broadly in terms of what is under construction, we're still under 10% high single single digits of our deals overall are using any form of key money So you're still sort of 90% plus in terms of what's under construction, has no key money associated with at all. And if you look back in the last few years, we've had some years that are a little bit higher. We've had some years that are a little bit lower. But that tends to be more some of the big chunky deals that the timing of when they happen changes that answer. If you had asked us six months ago, a year ago, we would even back to our most recent Investor Day, we would have set a good run rate for key money is $150 million to $200 million a year and we would still say that's a good run rate. So it hasn't really changed dramatically. It is a more competitive world, a slightly more competitive world, but it isn't changing dramatically. And part of that is, and Kevin alluded to it, I mean, we're trading listen, our brands perform better than everybody else's. So like we have trained our development teams to have the dialogue with with our partners, our owner partners to make sure as they're thinking about key money that they're not being penny wise and pound foolish. So they get a little bit more key money or they get some versus none but they get 500 or 1,000 basis points lower RPI or market share, obviously, that's a losing trade. And so we've worked really hard with our development teams. We make it hard on them. I mean, we basically don't don't believe we should have to do it. To Kevin's point, we think it should be consistent with where we've And we've been able to do it because I think we've got a really good story with really good performing brands. And I think our development teams are understand how to make that argument. And it doesn't always win, but it's winning a lot more than it's not. Operator: Next question will come from Michael Joseph Bellisario with Baird. Please go ahead. Michael Joseph Bellisario: Thanks. Good morning, everyone. A question for you. Just a question on pricing sort of broadly maybe help us understand what are you seeing in terms of how and where customers are booking, especially on the leisure side? And then much more are you running promotions and discounts? And is that weighing on ADR at all looking ahead? Thanks. Christopher Nassetta: We are running when it's weaker, we're always going to do honors specials and use a little bit more OTA business and access other distribution channels. And in third quarter, it was weaker. So we did those things. I mean, you look at the numbers, you'll see it was pretty we're not you haven't seen any sort of collapsing in rate integrity. I mean, declines were pretty much balanced between rate and occupancy, which is what you'd see. You definitely add in categories you had a lower in third quarter, lower group base. So that means you have more rooms sell, you got to do more transient, business transient, was a bit weaker for the reasons I just described. Everybody is rattled about everything going on in the world. Leisure was pretty strong, but then leisure isn't the highest rated business. So what does that mean It has impact on rate. What I would say is when you dissect so far, and you know my view now because I've said it three or four times that the world coming our way So far if you dissect it, it's really been a mix shift that has affected rate You're just taking lower rated customers and their sub substituting for higher rated customers, meaning you're taking leisure customers that pay less not necessarily that the leisure rates dumping. It's just it's a lower rate than you're substituting in for business transient, which is a higher rate. So I think when you when you deconstruct it scientifically, I think you feel pretty good that rate integrity has been reasonably good, not that shouldn't be surprising intellectually to any of us in the sense that inflation is alive and well. And while it's come down, it's still somewhat stubbornly high. And so you know, we will be a beneficiary of the, you know, of that of that broader trend. So, technically, it's pretty evenly split but things I can is off, we replace it with lower rate business As a result, rate will will come down a bit. Yes, just the weighted average will bring it down. Operator: The next question will come from Smedes Rose with Citi. Please go ahead. Smedes Rose: Hi. Thank you. I know you've covered a lot of territory here. I just I just wanted to ask you. I I think the full year sort of trimming on RevPAR and slightly more modest outlook doesn't really come as surprise. But as you think about the fourth quarter and kind of the implied guidance, is the government shutdown impacting your forecast at all or is that is everything sort of just going on? It's business as usual? Kevin Jacobs: No. I mean, look, we're sort of almost a month in into twenty two days I guess into the government shutdown with them so a month of that in the forecast. So we have factored for that into the forecast in the fourth quarter. And our full year scenarios, which is a range really encompass if the government even if the government shutdown keeps going, we think we'll be within that range. So it is affecting the numbers. I think that who knows if our forecast would have come down anyway probably given what came in the third quarter, we might have been a little bit lower for the fourth quarter anyway, but we are factoring for it and it is affecting the numbers. Smedes Rose: Thank you. Appreciate it. Operator: Ladies and gentlemen, this concludes our question and answer session. I would like to turn the conference back over to Chris Nassetta for any additional or closing remarks. Please go ahead. Christopher Nassetta: Thanks, Chuck. Thank you everybody. As always, we appreciate the time. As you can see, I remain pretty darn optimistic about what the next several years are going to look like. And even I think if you look at all the numbers and everything we talked about today, even in the midst of what's been a bit of an air pocket as we sort of get through this time to a little bit higher growth time, the resilience of our model business model and our execution I think is been really, really good and we're continuing to deliver and outperform on unit growth, deliver and outperform on the bottom line with taking what the world gives us and and doing everything we can to make it better. So we're feeling good about the business. Feeling good about where we are, feeling good about where the future is going. And we'll look forward on the next call to giving you a fulsome update once again. Thanks again and talk soon. Operator: The conference has now concluded. Thank you for your participation. You may now disconnect.
Operator: Good morning, and welcome to United Community Banks, Inc.'s Third Quarter 2025 Earnings Call. Hosting our call today are Chairman and Chief Executive Officer, Lynn Harton; Chief Financial Officer, Jefferson Harralson; President and Chief Banking Officer, Rich Bradshaw; and Chief Risk Officer, Rob Edwards. United's presentation today includes references to operating earnings, pretax, pre-credit earnings, and other non-GAAP financial information. For these non-GAAP financial measures, United has provided a reconciliation to the corresponding GAAP financial measure in the financial highlights section of the earnings release as well as at the end of the investor presentation. Both are included on the website at ucbi.com. Copies of the first quarter's earnings release and investor were filed this morning on Form 8-Ks with the SEC. A replay of this call will be available in the Investor Relations section of the company's website at ucbi.com. Please be aware that during this call, forward-looking statements may be made by United Community Banks, Inc. Any forward-looking statements should be considered in light of risks and uncertainties described on Pages 5 and 6 of the company's 2024 Form 10-Ks as well as other information provided by the company in its filings with the SEC and included on its website. At this time, I will turn the call over to Lynn Harton. Good morning and thank you for joining our call today. Lynn Harton: The third quarter was a strong one for United Community Banks, Inc. Revenue grew more than $16 million compared to the second quarter, driven by an eight basis point improvement in our margin and 5.4% annualized loan growth. Our provision for credit losses declined by approximately $4 million compared to last quarter, supported by continued strong credit results and the release of $2.6 million from our Hurricane Helene special reserve. Expenses grew by only $2.9 million over last quarter or $4.3 million on an operating basis, largely due to increased incentive accruals. Taken together for the quarter, we recorded earnings per share on an operating basis of $0.75 per share, a 32% year-over-year improvement, a return on assets of 1.33%, and return on tangible common equity of 13.6%. I was pleased to see great balanced performance and teamwork across the company this quarter. All of our states delivered positive loan growth this quarter. Our treasury team and our frontline bankers have worked together with better analytics and improved communication to reduce deposit costs while continuing to grow customer deposits. As our capital continues to grow, we have taken the opportunity to both increase our dividend and redeem our costly preferred stock. Our tangible book value reached $21.59, a 10% year-over-year growth. Credit losses were only 16 basis points for the quarter and only five basis points in the core bank excluding Navitas. Other credit risk metrics such as past dues, non-accruals, and special mention all remained in very good ranges. Clearly, there have been announcements of a few cracks in the broader credit environment over the last several weeks. I believe these announcements are isolated events somewhat tied to private credit. Given the very rapid growth in private credit and the number of new entrants, it would not be surprising to see additional defaults in that sector that should have limited impact on most banks. Our own strategy has been to be very cautious and selective in considering lending to any non-depository financial institution. And accordingly, we have very little exposure there. Jefferson, why don't you cover the quarter in more detail? Jefferson Harralson: Thank you, Lynn, and good morning to everyone. I will start on page five of the deck. We were very pleased with our deposit performance in the third quarter. Excluding the seasonal public outflows, we grew deposits by $137 million or 2.6% annualized, with DDA comprising a good portion of the growth. Looking ahead to the fourth quarter, we expect about $400 million of public funds deposit inflow that will serve to make our balance sheet larger as we plan to hold the funds in cash and short-term investments. We were also able to push down our cost of deposits in the quarter to 1.97% to achieve a 37% total deposit beta so far. We have been saying we thought we could get to a high 30% range total deposit beta through the cycle, but on these first five cuts, I now believe we can get to the 40% range. In September, we averaged a 1.92% cost of deposits, so we are expecting more improvement in the fourth quarter. On page six, we turn to the loan portfolio, where our growth continued at a 5.4% annualized pace. Excluding the impact of senior care runoff, we grew loans at a 6.2% annualized pace. Our growth came primarily in the C&I, Equipment Finance, and HELOC categories. Turning to page seven, where we highlight some of the strengths of our balance sheet. We believe that our balance sheet is in good position from a liquidity and capital standpoint to be ready for any economic volatility. We have no wholesale borrowings and very limited brokered deposits. Our loan-to-deposit ratio remained low, increased for the second quarter in a row, and is now at 80%. Our CET1 ratio was relatively flat at 13.4% and remains a source of strength for the bank. On Page eight, we look at capital in more detail. As I mentioned, our CET1 ratio was 13.4%. You'll notice the impact at the end of the quarter, we redeemed the remaining $88 million of our preferred issue. All things equal, this lowered our Tier one total capital and leverage ratio towards peer levels. Our TCE ratio was up 26 basis points in the third quarter as the balance sheet stayed relatively flat. We have been fairly active in managing our capital. Since the beginning of 2024, we have now paid down $100 million of senior debt, $68 million in Tier two capital, repurchased $14 million of common shares, and now we have redeemed the $88 million of preferred. Moving on to spread income on page nine. We grew spread income 14% annualized in the quarter. Our net interest margin increased eight basis points to 3.58%, mainly driven by lower cost of funds and a mix change towards loans. We remain slightly asset sensitive, and because of this, in the fourth quarter, I would expect our net interest margin to be flat to down two basis points. A key will be how we are able to reprice the $1.8 billion of CDs maturing in the fourth quarter at 3.6%. We also have the medium-term benefit of our back book of loans and securities that will mature at low rates. In the next year, using just maturities, we have about $1.4 billion of assets paying down in the 4.93% range. Rich Bradshaw: Moving to page 10, on an operating basis, non-interest income was $43.2 million, up $8.5 million from last quarter. We had a $1.5 million BOLI gain that we do not expect to repeat and an MSR write-up of $800,000. On the slide, we mentioned that unrealized gains on equity investments swung up $2.1 million. This moved from a $500,000 loss last quarter to a $1.6 million gain as this category will bounce up and down. Besides these items, we had strong across-the-board increases in most of our fee categories. We feel good about our progress in the quarter. Operating expenses on page 11 were up $4.3 million in the quarter. This $4.3 million increase was primarily driven by higher variable compensation. With strong revenue growth in the quarter, our efficiency ratio improved to 53.1%. Moving to credit quality on Page 12. Net charge-offs were 16 basis points in the quarter, improved compared to last quarter and last year. NPAs and past dues moved a little higher off a low base as credit quality remained strong. I will finish on Page 13, with the allowance for credit losses. Our loan loss provision was $7.9 million in the quarter as compared to our $7.7 million in net charge-offs. The $7.9 million provision included a $2.6 million release of our Hurricane Helene reserve, which now stands at just $1.9 million remaining. Net-net, our allowance coverage of credit losses moved down slightly to 1.19%. With that, I'll pass it back to Lynn. Lynn Harton: Thank you, Jefferson. As we move into Q4, the optimism we mentioned last quarter for the remainder of the year seems well-founded. And as we close, I'd like to recognize our leaders throughout the footprint. We recently completed our regular employee survey and the overall results reflected very well on your care for your teams, your communication of our strategies, and the exhibition of our values. You ranked in the 92nd percentile for employee engagement compared to over 2,000 companies that did the same survey. Becoming a legendary bank begins with being a great place to work for great people. I want to thank you for what you're doing to make that a reality. Now I'd like to open the floor to questions. Operator: Yes. Thank you. We will now begin the question and answer session. And today's first question comes from Stephen Scouten with Piper Sandler. Stephen Scouten: Hey, good morning guys. Appreciate the time. I guess maybe if we could start on loan growth trends. Seemed like a really nice quarter here from a loan growth perspective. I'm wondering kind of what you're seeing within your pipelines and then also if you could talk about maybe what kind of inning we're in, in terms of the senior care runoff. And lastly, that HELOC product in growth, if there's anything unique to that product or just something you guys have been marketing a little bit more or customers unlocking existing equity, that sort of thing? Appreciate it. Rich Bradshaw: Hi, good morning Stephen. This is Rich. I'll address the loan growth. We feel we do feel very good about the loan growth. Florida led with South Carolina, North Carolina as the geography is right behind that. As Lynn mentioned earlier, this is our most balanced quarter since I've been here with all the geographies contributing. So that felt really good. I also like the heavy emphasis on C&I. We worked really hard on hiring people, strategy, pricing to really drive C&I. So that feels key. So we're very in terms of the pipelines and how that looks for Q4, we feel very it'd be a very similar type quarter, maybe slightly better. The activity is strong. The pipelines are strong and that's all been confirmed with my credit partners. So the credit teams are validating that they're seeing a lot of activity. In terms of the HELOC, we that's not by accident. We've spent a lot of time. We did a reorg in January with the one of the purposes of that reorg was a bigger emphasis on retail. And we're proud to tell you that 100% of our branch managers are now lending. That wasn't the case before and really good about that. And we've also ran a campaign throughout the year on HELOC. I'm trying to think did I answer all the questions? Stephen Scouten: Senior Care, yes. Senior Care, great point. We have about $230 million left. We had 35 runoffs roughly this quarter expect something similar feel next quarter. And then next year, we do not plan on running off the whole portfolio because some of that are long-term customers that we've been in business with a long time. But the non-part of that we do expect most of that to go away next year. Perfect. Thanks for all that color. And then, Jefferson on the deposit beta guide, anything you said you think that could get into the 40% range now. What's what leads you to believe that could get better? I tend to think about deposit betas waning as we get incremental cuts and rates get lower. So is it just a cliff of the short duration CDs that you have that gives you more confidence there or any color there would be great? Jefferson Harralson: Yes. Lot of it thanks, Stephen. A lot of it is really already been done. The some rate cuts that we've made later in the quarter. We were unsure of what we're going to see with competition. And we've been able to cut rates by a little more than we thought. We've seen CD growth even though we've customer rates it's not really so much, I think this will come to an end if we don't get any more rate cuts. But just believe that the success that we've had the last two quarters, you'll see that kind of flow through in the full quarter in the fourth. Stephen Scouten: Okay, perfect. And then just lastly for me, I think you said, let's see, fixed rate loans four ninety-three, repricing over twelve months and the CD book, I think was three sixty. Can you give me a feel for where you think at least as of today, CD yields and new loan yields would be coming on at relative to those numbers? Jefferson Harralson: Yes. The new loan yields would be in the 7% range. New CDs 3%, that's a little some variable to it. So maybe three twenty, three thirty. Stephen Scouten: Great. Appreciate all the color. Congrats on a great quarter. Lynn Harton: Thank you. Operator: Thank you. And the next question comes from Gary Tanner with D. A. Davidson. Gary Tanner: Thanks. Good morning. I wanted just to ask about capital Jefferson, you flood kind of how active you all have been since early 2024. With some of the stuff behind you including the preferred redemption, how are you thinking about capital deployment via buyback here or are you wanting to push Tier one a little higher just through earnings for a quarter? Before you can consider that? Jefferson Harralson: Thanks, Gary. So just to list out our capital priorities, Number one is organic growth. We are as Rich mentioned feeling better about where our loan growth is going. Number two and priority is the dividend. We just raised that by 4%. M and A, there's some possible opportunities out there and maybe even ones you could put some cash into and use capital that way. Buyback is on the list. We have authorization. We'll be opportunistic. But we have these the other three priorities or above it. We have used buyback in the past. We may do it in the future. But I put in the order of organic growth dividend M and A. And then buyback. Gary Tanner: Got it. Thanks. And then just on the fee side, one of the line items that I think had a notable jump was service charge income this quarter went from what 10.1% to 11.4%, if I recall correctly. Anything unusual there? Any change in the fee structure or anything you could point out to? Jefferson Harralson: Yes, nothing unusual, just some better volume there. So I cannot point to anything specifically there. Gary Tanner: All right. Thank you. Operator: Thank you. And the next question comes from Michael Rose of Raymond James. Michael Rose: Hey, good morning guys. Thanks for taking my questions. Just wanted to ask on expenses. I know you guys have talked about some hiring efforts in the back half of the year. I know some of it was incentive comp related, but just wanted to see how much of the sequential increase was related to those efforts and then what that could look like, particularly in light of some of the M and A discussion that we have going on, how opportunistic you plan to be as we move forward? Thanks. Jefferson Harralson: Yes. I'll start maybe with the expense piece and maybe talk to pass to Rich on the hiring. For the medium to longer-term expense run rate, think of us being in the 3% to 4% range. We did mention the higher variable comp this quarter. So I think that would not necessarily repeat next quarter. So I think flat is a good guide for the fourth quarter and then in general 3% to 4% growth is how you should think about where we are. Pass to Rich on how we think about hiring or Sure. Good morning, Michael. We continue to be opportunistic about hiring throughout the footprint. So we're always after top talent that's going on. I'd say the other just kind of interesting note is in the recruiting compensation incentive program usually is on the conversations and now it's kind of turned to culture. Culture tends to be first and I truthfully think that gives us an advantage. Michael Rose: Perfect. Maybe just a follow-up Gary's question. Just as it relates to M and A, I think you guys have been pretty sour on M and A prospects just given I think some pricing concerns. I want to put words in your mouth, but it does seem like you're a little bit more open than you've been kind of in the past two or three quarters at least. I assume some of that has to do with the regulatory backdrop, but are you seeing more opportunities? Meaning, are more people raising their hands at this point? And is there a better opportunity set than, say, two or three quarters ago? Just want to make sure I understand what you guys are trying to communicate. Thanks. Lynn Harton: Yes. Thank you, Michael. This is Lynn. Yes, from a regulatory perspective, we've always been really confident with the size deals that we do. So I haven't really wouldn't put the change into that category. But I would say that we are seeing more people raise their hands, to today than two to three quarters ago. So gives us a little more optimism. I mean, still early. You still got to see what develops out of that. But I think there is we are seeing more interest on the part of sellers than we have seen. Michael Rose: Okay. Very helpful. I'll step back. Thanks for taking my questions. Operator: Thank you. The next question comes from Russell Gunther of Stephens. Russell Gunther: Hey, good morning guys. Jefferson Harralson: Good morning, Russell. Russell Gunther: Wanted to ask morning Jefferson. From a balance sheet growth perspective, how should we think about average earning assets going forward? Would you guys expect securities, the investment portfolio to continue to decline from here or kind of trend water as a percentage of average earning assets? Jefferson Harralson: That's a great question. I mentioned we have a seasonal piece to our balance sheet which in the fourth quarter will be seasonally strong. Mentioned $400 million likely of public funds coming in on an average basis. That's probably $300 million for the fourth quarter. Would expect to see securities portfolio is going to be more of a derivative of how strong the deposit growth is. But I could see it being flat to slightly down in the near term. But over if you think about 2026, I would expect deposit growth there and then the securities book to flatten out. Russell Gunther: Okay. Excellent. Thank you. For that. And then just last one for me. With regard to your capital deployment. Priority list. And sort of adjacent to the securities portfolio. But how are you guys thinking, if at all, in terms of any action from a restructuring perspective with regard to the investment portfolio? Jefferson Harralson: That's a it's a great question and that is, something that we have talked about at the board level. I do not see anything imminent there but it is a conversation that we've had over the last six months and probably continue to. Russell Gunther: Okay, great. Very good. Thank you guys. That's it for me. Operator: Thank you. The next question comes from Catherine Mealor with KBW. Catherine Mealor: Thanks. Good morning. Catherine? First on credit, maybe first and I know your level of NPAs are still low, but just any kind of color on to the increase in C&I NPLs? And then just any kind of update or color you can give us on the Navitas book. It feels like the loss have normalized from the long haul trucking piece and other exposures really low. But just curious any trends that you're seeing within that book as well? Thanks. Rob Edwards: Yes. Thanks, Catherine. Good morning. This is Rob. Good morning. Catherine Mealor: Hey, Rob. Rob Edwards: Hey. On the NPA side, on the commercial side, we exited three of our top non-performing C&I credits. One was in the service business, one was in the light manufacturing business, one was in the distribution business. So we added one that was in the service business and added one two in the service business I guess and one in the light manufacturing business. So it kind of just feels like the normal cycle of movement of in and out. We are able to exit credits successfully and we'll continue to do that. So we had some come in and some go out during the quarter. Not feeling like there's any trend to be noticed there. And like you said, still from year end, we've come down from 64 basis points to 51 basis points if you look at year end till now. So we feel like it's just kind of the normal ebb and flow on the commercial NPA side. On Navitas, they've been pretty stable. I've been impressed from we acquired them seven years ago and I've been impressed at their forecasting, the complexity of how they forecast losses. And they're really right on track for how their forecast looked at the beginning of the year. And expect it to we've always said we expect loss in a normal environment to be around 1%. Of course, the long haul has taken them over that a little bit. But if you take that out, you can see that it really is just staying pretty close. We're at 92 basis points this quarter and feel like that kind of a normal range for them longer term. Catherine Mealor: Okay. Great. Very helpful. And then maybe just a bigger picture question. It feels like the NIM has seen some nice recovery over the past year and growth is improving. As we look to 2026, is this a year that you think you will still have perhaps profitability improvement and positive operating leverage? Are there any kind of investments within expenses or staff that you think that we should expect to see kind of before we get to that really big ramp in profitability? Thanks. Jefferson Harralson: Thanks, Catherine. I would think yes for 2026 and operating leverage. We're in the budget season now. I cannot imagine coming out of a budget season without strategizing operating leverage in there. And the powerful driver is going to be the margin. If you think about our loan yield at 6.21% and if you think about putting on new loans at seven, and back book coming off. You can see a nice medium-term opportunity in the margin. So I think the combination of those things is yes, we think we will continue to have operating leverage in 2026. Catherine Mealor: Great. Thank you. Operator: Thank you. And the next question comes from Kyle Guerman with the AbbVie Group. Kyle Guerman: Hey guys, good morning. Jefferson Harralson: Good morning. Kyle Guerman: Good morning. I'm shifting shift to the revenue side, I was wondering if I can get a bit more color on the core fee income and what are your expectations for the next quarter? Jefferson Harralson: Yes. I'll give that a shot. And I would say we laid a lot of that out on that fee page. If you look at the $43 million, we laid out the MSR. We do not think the BOLI that we do not think repeat. We also have the unrealized equity gains that again bounces around been a little bit negative, little bit positive, so hard to know. Think if you take those three items out, you're at a pretty good fee income run rate. Kyle Guerman: Awesome. Thank you. Jefferson Harralson: That's helpful. Kyle Guerman: Thank you. Operator: And that concludes our question and answer session. So I would like to turn the floor to Lynn Harton for any closing comments. Lynn Harton: Great. Well, once again, thank you all for joining the call. And as always, if you have any additional questions, please feel free to reach out to Jefferson or myself. And we look forward to seeing you soon and talking to you soon. Thank you so much. Operator: Thank you. The conference has now concluded. Thank you for attending today's presentation, and now disconnect your lines.
Travis Axelrod: Good afternoon, everyone, and welcome to Tesla's third quarter 2025 Q&A Webcast. My name is Travis Axelrod, Head of Investor Relations. I am joined today by Elon Musk, Vaibhav Taneja, and a number of other executives. Our Q3 results were announced at about 3 PM Central Time in the Update deck we published at the same link as this webcast. During this call, we will discuss our business outlook and make forward-looking statements. These comments are based on our predictions and expectations as of today. Actual events or results could differ materially due to a number of risks and uncertainties, including those mentioned in our most recent filings with the SEC. We urge shareholders to read our definitive proxy statement, which contains important information about the matters we voted on at the 2025 annual meeting. During the question and answer portion of today's call, please limit yourself to one question and one follow-up. Please use the raise hand button to join the question queue. Before we jump into Q&A, Elon has some opening remarks. Elon? Elon Musk: Thank you. We are at a critical inflection point for Tesla and our strategy going forward as we bring AI into the real world. I think it's important to emphasize that Tesla really is the leader in real-world AI. No one can do what we can do with real-world AI. I have pretty good insight into AI in general. I think that Tesla has the highest intelligence density of any AI out there in the car. And that is only going to get better. We are really just at the beginning of scaling at a quite massive level, full self-driving and robotaxi, and fundamentally changing the nature of transport. I think people just do not quite appreciate the degree to which this will take off. It's honestly going to be like a shock wave. So it's because the cars are all out there. We have millions of cars out there that, with a software update, become full self-driving cars. We are making a couple of million a year. In fact, with the advent of what we see now as clarity on achieving full self-driving, unsupervised full self-driving, I should say, I feel confident in expanding Tesla's production. So that is our intent, to expand as quickly as we can our future production. I was ready to do that until we had clarity on achieving unsupervised full self-driving. But at this point, I feel like we've got clarity, and it makes sense to expand production as fast as we reasonably can. We are also making a huge impact on the energy sector with battery storage. With both Powerwall and especially with the Megapack, we are dramatically improving the ability to generate more energy from the grid. Let me sort of talk a little bit about that, which is if you look at total US energy capability, for example, there's roughly a terawatt of continuous power available in the US. But the average usage over a twenty-four-hour cycle is only half a terawatt because of the big difference between day and night usage. If you buffer the energy with batteries, you can effectively double the energy output in the United States just with batteries, pulling no incremental power plants. It's very difficult to build power plants. They take a long time. There's a lot of permitting. It's not an industry that's used to moving fast. We see the potential there for Tesla battery packs to greatly improve the energy output per year for any given grid, US or otherwise. We are also on the cusp of something really tremendous with Optimus, which I think is likely to be, has the potential to be, the biggest product of all time. It's a difficult project. It's worth noting that it's not just automatic. I'm unaware of any robot program by Ford or GM or, you know, in the by USC of car companies. People might think of Tesla as a car company that mostly makes cars and battery packs. It's not just an obvious fall of a log thing to make Optimus, but we do have the ingredients of real-world AI and exceptional electrical mechanical engineering capabilities and the ability to scale production, which I don't think anyone else has all of those ingredients. With version 14 of self-driving, people can see the reactions of people online. They're quite amazed. Actually, anyone in the US can get version 14 if they just go and select "I want the advanced software" in their car. If you're listening right now and you'd like to try it out, just go into settings and say, "I want the advanced software," and you will get version 14. On the Megapack front, we unveiled Megablock, Mega Pack three. We also have exciting plans for MegaPack four. MegaPack four will incorporate a lot of what is normally in a substation and be able to output at probably 35 kilovolts directly. This greatly improves our ability to deploy Megapack because it's not dependent on building a substation up through 35 KB for MegaPack four. That's the engineering priority for Megapack. We look forward to unveiling Optimus b three probably in Q1. I think it'll be ready to show off. That, I think, is going to be quite remarkable. It won't even seem like a robot. It'll seem like a person in a robot suit, which is kind of how we started off with Optimus. It'll seem so real that you'll need to poke it, I think, to believe that it's actually a robot. Obviously, the real-world intelligence we've developed for the car, most of that transfers to Optimus. It's a very good starting point. In conclusion, we're excited about the updated mission of Tesla, which is sustainable abundance. Going beyond sustainable energy to say, sustainable abundance is the mission, where we believe with Optimus and self-driving, we can actually create a world where there is no poverty, where everyone has access to the finest medical care. Optimus will be an incredible surgeon, for example. Imagine if everyone had access to an incredible surgeon. Of course, we make sure Optimus is safe and everything, but I do think we're headed for a world of sustainable abundance. I'm excited to work with the Tesla team to make that happen. Travis Axelrod: Great. Thank you very much, Elon. Vaibhav also has some opening remarks. Vaibhav Taneja: Thanks, Travis. Q3 was a special quarter at multiple levels. We set new records not just for deliveries and deployments, but also around a range of financial metrics from total revenues, energy gross profit, energy margins to fresh free cash flow. This was the result of continued confidence of our customers in our products and the relentless efforts of the Tesla team. The strength in deliveries was attributed to strong performance across all regions. Greater China and APAC were up sequentially 33%, North America was up 28%, while EMEA was up 25%. The pace in deliveries was the function of continued excitement around the new Model Y. I had previously talked about 2025 being the year of the Y, and we have since delivered on that promise. Model Y was released in Q1, followed by Model Y long wheelbase and performance, and more recently, Standard Y in North America and EMEA. We are now operating a robotaxi in two markets, Austin and most various cities. We have already expanded our coverage area in Austin three times since the initial launch and are on pace to continue expanding further. Unlike our competitors, our robotaxi fleet blends in the markets we operate in since they don't have extra sensor sets or peripherals which make them stick out. This is an underappreciated aspect of our current vehicle offerings, which are all designed for autonomous driving. We feel that as people experience the supervised FSD at scale, demand for our vehicles, like Elon said, would increase significantly. On the FSD adoption front, we've continued to see decent progress. However, note that the total paid FSD customer base is still small, around 12% of our current fleet. We are working with regulators in places like China and EMEA to obtain approvals so that we can deploy FSD in those regions as well. Now covering a little bit on the financial side, automotive revenues increased 29% in line with the growth in deliveries. While regulatory credits declined sequentially, we entered into new contracts and continued delivery on previously entered contracts. Our automotive margins, excluding credits, increased marginally from 15% to 15.4%. This was attributed to improvements in material cost and better fixed cost absorption due to higher volumes. The energy storage business continued to deliver with record deployments, gross profit, and margins. As discussed before, this business has a bigger impact from tariffs, as measured by percentage of COGS since currently all sales procured are from China while we're still working on other alternatives. However, as the ramp of mega factory Shanghai is happening, this is helping us avoid tariffs. We are using this factory to supply the non-US demand. Like Elon said, grid-scale storage is the only way we can get to electricity fastest by using storage. The other thing to keep in mind is we are seeing headwinds in this business given the increase in competition and tariffs. The total tariff impacts for Q3 for both businesses were in excess of $400 million, generally split evenly between them. Services and other demonstrated a marked improvement sequentially. This was a function of improvements primarily in our insurance and service center businesses. Note that while small, our robotaxi costs are included within services and other along with our other businesses like paid supercharging, used car, parts and merchandise sales, etc. Our operating expenses increased sequentially. The largest increase included in restructuring and other related to certain actions undertaken to reduce cost and improve efficiency to convergence of our AR AI chip design efforts. Additionally, we incurred legal expenses related to proceedings in certain legal cases. As incremental cost incurred preparation for our shareholder meeting. Such costs are recorded within SG&A. Further, our employee-related spend is increasing, especially in R&D. We have recently granted various performance-based equity awards to employees working on AI initiatives. Therefore, such spend will continue to increase forward. On other income, our other income decreased sequentially primarily from mark-to-market adjustments on BTC Holdings, which was a much smaller gain of $80 million in Q3 versus $284 million in Q2. With the rest of the movement attributable to FX movements in the quarter. Our free cash flow for the quarter was approximately $4 billion, which was yet another record. Our total cash and investments at the end of the quarter were over $41 billion. On the CapEx front, while we are expecting to be around $9 billion for the current year, we're projecting the numbers to increase substantially in 2026 as we prepare the company for the next phase of growth in terms of not just our existing businesses, but our bets around AI initiatives, including Optimus. In conclusion, note that bringing AI into the real world is hard. But we have never shied away from doing what is hard. We are extremely excited about the future and are laying down the foundation, the benefits of which will be realized over years to come. I would like to end by thanking the Tesla team, our customers, our investors, and supporters for the continued belief in us. Thank you very much, Vibhav. Now let's go to investor questions. Travis Axelrod: From say.com, the first question is, what are the latest robo taxi metrics fleet size, cumulative miles, rides completed, intervention rates, when will safety drivers be removed? What are the obstacles still preventing unsupervised FSD from being deployed to customer vehicles? Elon Musk: I'll start off with that, and then Ashok can elaborate. We are expecting to have no safety drivers in at least large parts of Austin by the end of this year. So within a few months, we expect to have no safety drivers at all in at least parts of Austin. We're obviously being very cautious about the deployment. Our goal is to be actually paranoid about deployment because, obviously, even one accident will be front-page headline news worldwide. It's better for us to take a cautious approach here. But we do expect to have no safety drivers in the car in Austin within a few months. I think that's perhaps the most important data point. We do expect to be operating robotaxi in, I think, about eight to ten metro areas by the end of the year. It depends on various regulatory approvals. You can actually think most of our regulatory applications are online. You can kind of see them because they're public information. We expect to be operating in Nevada, Florida, and Arizona by the end of the year. Ashok? Ashok Elluswamy: Yeah. We continue to operate our fleet in Austin without anyone in the driver's seat, and we have covered more than a quarter million miles with that. In the Bay Area, we still have a person in the driver's seat due to the regulations, and we've crossed more than a million miles. We continue to see that the robotaxi fleet works really well. Customers are really happy, and there are no notable issues. On the customer side, we have FSD supervised for a total of 6 billion miles as of yesterday. That's a big milestone. Overall, the safety continues to be very good. As Elon mentioned, we are on track to remove the person from inside the car altogether, starting with Austin. Travis Axelrod: Great. The next question is, what is the demand and backlog for Megapack, Powerwall, solar, or energy storage systems? With the current AI boom, is Tesla planning to supply power to other hyperscalers? Elon Musk: Thanks. Michael Snyder: Demand for Megapack and Powerwall continues to be really strong into next year. We received very strong positive customer feedback on our Mega Block product, which will begin shipping next year out of Houston. We're seeing remarkable growth in the demand for AI and data center applications as hyperscalers and utilities have seen the versatility of the Megapack product. It increases reliability and relieves grid constraints, as Elon was talking about. We've also seen a surge in residential solar demand in the US due to policy changes, which we expect to continue into 2026 as we introduce the new solar lease product. We also began production of our Tesla residential solar panel in our Buffalo factory, and we will be shipping that to customers starting Q1. The panel has industry-leading aesthetics and shape performance and demonstrates our continued commitment to US manufacturing. Travis Axelrod: Great. Thank you, Mike. Unfortunately, the next question is related to future products. This is not the appropriate venue to cover that, so we're going to have to skip it. The question after that is, what are the present challenges in bringing Optimus to market considering app control software engineering hardware, training general mobility models, training task-specific models, training voice models, implementing manufacturing, and establishing supply chains? Elon Musk: Yeah. I mean, bringing Optimus to market is an incredibly difficult task, to be clear. It's not like some walk in the park. At some point, I mean, actually, technically, Optimus can walk in the park right now. We do have Optimus robots that walk around our offices at our engineering headquarters in Palo Alto, California, basically twenty-four hours a day, seven days a week. Any visitors that come by can actually stop one of the Optimus robots and ask it to take them somewhere, and it'll literally take them to that meeting room or that location in the building. I don't want to downplay the difficulty, but it's an incredibly difficult thing, especially to create a hand that is as dexterous and capable as the human hand, which is incredible. The human hand is an incredible thing. The more you study the human hand, the more incredible you realize it is, and why you need four fingers and a thumb, why the fingers have certain degrees of freedom, why the various muscles are of different strengths, and fingers are of different lengths. It turns out that those are all there for a reason. Making the hand and forearm, because most of the actuators, just like the human hand, the muscles that control your hand are actually primarily in your forearm. The Optimus hand and forearm is an incredibly difficult engineering challenge. I'd say it's more difficult than the rest of the robot from an electromechanical standpoint. The forearm and hand are more difficult than the entire rest of the robot. But really, in order to have a useful generalized robot, you do need an incredible hand. Then you need the real-world AI, and you need to be able to scale up that production to have it be relevant because it's not relevant if it's just a few hundred robots. You need to be able to make Optimus robots at volumes comparable to vehicles, not significantly higher. So trying to make a million Optimus robots per year, that manufacturing challenge is immense considering that the supply chain doesn't exist. With cars, you've got an existing supply chain. With computers, you've got an existing supply chain. With a humanoid robot, there is no supply chain. In order to manufacture that, Tesla actually has to be very vertically integrated and manufacture very deep into the supply chain, manufacture the parts internally because there just is no supply chain. This is the kind of thing where I'm like, if I put myself in the position of a startup trying to make a humanoid robot, I'm like, I don't know how to do it without an immense amount of manufacturing technology. That's why I think Tesla is in almost a unique position when you consider manufacturing technology, scaling real-world AI, and a truly dexterous hand. Those are generally the things that are missing when you read about other robots that just don't have those three things. I think we can achieve all those things with an immense amount of work, and that is the game plan. My fundamental concern with regard to how much voting control I have at Tesla is if I go ahead and build this enormous robot army, can I just be ousted at some point in the future? That's my biggest concern. That is really the only thing I'm trying to address with this. It's called compensation, but it's not like I'm going to go spend the money. It's just, if we build this robot army, do I have at least a strong influence over that robot army, not current control, but a strong influence? That's what it comes down to in a nutshell. I don't feel comfortable wielding that robot army if I don't have at least a strong influence. Ashok Elluswamy: Great. Thank you. Travis Axelrod: We've already covered robotaxi expansion. Unfortunately, the question after that is another future product question, so we're going to have to skip that. The next one, though, is can you update us on the $16.5 billion Samsung chip deal in Taylor? The importance of semiconductors to autonomy in Tesla's AI-driven future, what gives you confidence Samsung can fulfill AI six at Tesla's timelines? And achieve relatively better yields and cost versus TSMC. Elon Musk: Okay. I'm going to give quite a long answer to this question because I have to unpack this question and then answer the unpacked version. First of all, I have nothing but great things to say about Samsung. They're an amazing company. Samsung, it's worth noting, does manufacture our AI four computer and does a great job doing that. Now with the AI five, and here's where I need to make a point of clarification relative to some comments I've made publicly before, which is we're actually going to focus both TSMC and Samsung initially on AI five. The AI five chip designed by Tesla is, I think, an amazing design. I've spent almost every weekend for the last few months with the chip design team working on AI five. I don't hand out praise easily, but I have to say that I think the TensorFlow team is really an incredible chip here. By some metrics, the AI five chip will be 40 times better than the AI four chip. Not 40%, 40 times. Because we have a detailed understanding of the entire software and hardware stack, we're designing the hardware to address all of the pain points in software. I don't think there's really anyone that's doing this thing the entire stack all the way through real-world. You know, calibrating against the real world where you've got cars and robots in the real world, we know what the chip needs to do, and we know just as importantly, we know what the chip doesn't need to do. To sort of use some examples here, with the AI five, we deleted the legacy GPU or the traditional GPU, which is in AI four. But AI five does not have, we just deleted the legacy GPU because it basically is a GPU. We also deleted the image signal processor. This looks like a long list of deletions that are very important. As a result of these deletions, we can actually fit AI five in a half reticle and with good margin for traces from the memory to the Tesla accelerators, the ARM CPU cores, and the PCI blocks. This is a beautiful chip. I've poured so much life energy into this chip personally, and I'm confident this is going to be a winner. Next level. It makes sense to have both Samsung and TSMC focus on AI five. Even though technically, Samsung fab has slightly more advanced equipment than the TSMC fab. These will both be made in the US, one TSMC in Arizona, Samsung in Texas. We're going to make starting off just to be confident. Our explicit goal is to have an oversupply of AI five chips. If we have too many AI five chips for the cars and robots, we can always put them in the data center. We already use AI four for training in our data center. We use a combination of AI four and NVIDIA hardware. We're not about to replace NVIDIA, to be clear, but we do use both in combination. AI four and NVIDIA hardware, and the AI five excess production can always be put in our data centers. NVIDIA keeps improving. The challenge that they have is that they've got to satisfy a large range of requirements from a lot of customers. Tesla only has to satisfy requirements from one customer, Tesla. That makes the design job radically easier and means we can delete a lot of complexity from the chip. I can't emphasize how important this is. When you look at the various logic blocks in the chip, you increase the number of logic blocks, you also increase the interconnections between the logic blocks. If you can think of it like there are highways, like how many highways do you need to connect the various parts of the chip? Especially if you're not sure how much data is going to go between each logic block on the chip, then you kind of end up having giant highways going all over the place. It's a very, it becomes almost an impossibly difficult design problem, and NVIDIA has done an amazing job of dealing with almost an impossibly difficult set of requirements. But in our case, we're going for radical simplicity. The net effect is that I think AI five will be the best performance per watt, maybe by a factor of two or three, and best performance per dollar for AI, maybe by a factor of 10. We'll have to, the proof's in the pudding, so obviously, we need to actually get this chip made and made at scale. But that's what it looks like. Travis Axelrod: Great. Thank you, Elon. We've already covered unsupervised FSD. So the next question is, instead of trying to replace hardware three with hardware four, why not give an equal incentive to trade in for a new vehicle? Vaibhav Taneja: Yeah. We've not completely given up on hardware three. However, over the last year, we've offered the customers the option to transfer FSD to their new vehicle. At times, we've been running some promotions. If they've got FSD, they can get better preferential rates. We've been taking care of this. We do want to solve autonomy first. Then we'll come back with a way to take care of these customers. These customers are very important. They were the early adopters. For what it's worth, my daily commuter is a hardware three car, which I use FSD on a daily basis. We will definitely take care of you guys. Ashok Elluswamy: Once the v 14 release series is fully done, we are planning on working on a v 14 Lite version for hardware three. Probably expected in Q2 next year. Travis Axelrod: Awesome. Thanks, Ashok. Alrighty. Our final question from Se is, how long until we see self-driving Tesla Semi trucks? And could you see this technology replacing trains? Elon Musk: Yeah. So I guess I'll start with that in terms of the semi, Lars Moravy: production plan and schedule. The factory is going on schedule. We've completed the building and are installing the equipment now. We've got our fleet of validation trucks driving on the road. We'll have a larger build towards the end of this year and then our first online builds in the first part of next year, ramping into the Q2 timing with real volume coming in the back half of the year. That's going quite well, and that's the first step to obviously getting autonomous trucks on the road. In terms of trains, they're really great for long point-to-point deliveries. They're super efficient, but that last mile, the load-unload can be better served for shorter distances with autonomous semis, and that would be great. We do expect that to probably shift in as we, as Elon said, change the way transportation is considered. We're looking forward to that timeline. Ashok, I know you can take the full self-driving part. Ashok Elluswamy: Currently, the team is super focused on solving for passenger vehicles autonomy. That said, the same technology will apply quite easily to the semi truck once we have a little bit of data from the semi trucks. Travis Axelrod: Great. And now we will move over to analyst questions. The first question comes from Emmanuel, at Wolfe. Emmanuel, please go ahead and unmute yourself. Emmanuel Rosner: Great. Thanks so much. Hi, everybody. So Elon, you talked about expanding production of vehicles as fast as possible now that you have confidence in the unsupervised autonomy. How should we think about that in the context of your existing capacity of 3 million units? Is that where you're hoping to get volume to? What sort of timeline are we talking about? And would this require some level of boosting or incentivizing demand? Like would this basically be prioritizing volume over near-term profitability given the longer-term opportunity? Elon Musk: Well, capacity isn't quite 3 million. But it will be 3 million at some point. Aspirationally, it could be 3 million within, we could probably hit an annualized rate of 3 million within twenty-four months, I think. Maybe less than twenty-four months. Bear in mind, there's an entire supply chain, a vast supply chain that's got to also move in tandem with that. I think we're going to expand production as fast as we can and as fast as our suppliers can keep up with it. Then we're going to think about where we build incremental factories beyond that. The single biggest expansion in production will be the Cyber Cap, which starts production in Q2 next year. That's really a vehicle that's optimized for full autonomy. It, in fact, does not have a steering wheel or pedals and is really an enduring optimization on minimizing cost per mile for fully considered cost per mile of operation. For our other vehicles, they still have a little bit of the horse carriage thing going on where, obviously, if you've got steering wheels and pedals and you're designing a car that people might want to go very direct past acceleration and tight cornering, like high-performance cars, then you're going to design a different car than one that is optimized for a comfortable ride and doesn't expect to go past sort of 85 or 90 miles an hour. It's just aiming for a gentle ride the whole time. That's what Cyber Cap is. Do I think we'll sacrifice margins? I don't think so. I think the demand will be pretty nutty. Here's the killer app, really. What it comes down to is, can you text while you're in the car? If you tell someone, yes, the car is now so good, you can be on your phone and text the entire time while you're in the car, anyone who can buy the car will buy the car. End of story. That's what everybody wants to do. In fact, not everyone wants to. They do do that. That's why, in fact, the reason you've seen an uptick in accidents, pretty much worldwide, is because people are texting and driving. Autopilot actually dramatically improves the safety here. If someone's looking down at their phone, they're not driving very well. That's really the game changer. At this point, I feel essentially 100% confident, I say not essentially, 100% confident that we can solve unsupervised full self-driving at a safety level much greater than human. We've released 14.1, got a technology roadmap that's, I think, pretty amazing. We'll be adding reasoning to the car. Our world simulator for reinforcement learning is pretty incredible. Our Tesla reality simulator, when you see it, the video that's generated by the Tesla reality simulator and the actual video looks exactly the same. That allows us to have a very powerful reinforcement learning loop to further improve the Tesla AI. We're going to be increasing the parameter count by an order of magnitude. That's not in 14.1. There are also a number of other improvements to the AI that are quite radical. This car will feel like it is a living creature. That's how good the AI will get with the AI four computer before AI five. AI five, like I said, is by some metrics forty times better. But just to say safely, it's a 10x improvement. It might almost be too much intelligence for a car. I do wonder, like, how much intelligence should you have in a car? It might get bored. One of the things I thought of, like, well, if we've got all these cars that maybe are bored, well, why they're sort of, if they are bored, we could actually have a giant distributed inference fleet. If they're not actively driving, just have a giant distributed inference fleet. At some point, if you've got tens of millions of cars in the fleet, or maybe at some point 100 million cars in the fleet, and let's say they had, at that point, I don't know, a kilowatt of inference capability of high-performance inference capability, that's 100 gigawatts of inference distributed with power and cooling taken with cooling and power conversion taken care of. That seems like a pretty significant asset. Travis Axelrod: Great. Thanks, Elon. The next question comes from Adam from Morgan Stanley. Adam, please feel free to unmute yourself. Adam, go ahead and ask your question. Seems like we might be having some audio issues with Adam, so we'll come back to you. Next question will then come from Dan, from Barclays. Dan Meir Levy: Hi. Good evening. Thank you for taking the question. Elon, I know that Tesla's really focused on with master plan for bringing AI into the physical world. I think we've seen over the past, you know, this willingness for Tesla to engage and go into new markets, new TAMs. So when you think about the growth prospects, how do we define the areas that are really within Tesla's core competency versus where do you draw the line for markets or AI applications that are outside of Tesla's core competency? Elon Musk: Actually, I'm not sure what you mean by AI applications outside of Tesla's core competency. We kind of didn't have any of these core competencies when we started, you know. We had zero core competencies, total competency of zero, actually. You can think of Tesla as, like, I don't know, a dozen startups in one company. I've initiated every one of those startups. We didn't used to make battery packs, stationary battery packs, but now we do. We make them for the home, make them for utility scale with Powerwall and Megapack. We created the supercharger network globally. No one else has created a global supercharger network. In fact, the North American supercharger network is so good that basically, yeah, every other manufacturer in North America has converted to our standard and uses the Tesla Supercharger network. If it was so easy, why didn't they just do it? The Chef Design team started that from scratch. The Tesla AI software team was started from scratch. I literally just said, hey, we're going to start this thing. I posted it on Twitter, now X. Join us if you'd like to build it. In fact, Ashok was, I believe, the first person I interviewed for the Tesla autopilot team, which we now call Tesla AI software team because it is the AI software team. Core competencies created while you wait. Optimus at scale is the infinite money glitch. It's difficult to express the magnitude of, like, if you've got something that, like, if Optimus, I think, probably achieves five times the productivity of a person per year because it can operate twenty-four seven. It doesn't even need to charge. It can operate tethered. It's plugged in the whole time. That's why I call it, like, if you're true of sustainable abundance, where working will be optional. There's a limit to how much AI can do in enhancing the productivity of humans. There is not really a limit to AI that is embodied. That's why I called the infinite money glitch. Vaibhav Taneja: I mean, one thing which I'll further add is, I mean, forget, like, our first iteration of autopilot was ten years back. Elon had started this way back in the day. We've got the twist to prove it. Exactly. Even on the Optimus side, as much as people think, oh, good, this is a new thing. Still remember, was it four plus years back? We were in a meeting with Elon, and Elon said, hey, our car is a robot on wheels. That's where we started developing. In fact, most of the engineering team working on Optimus has come from the vehicle side. That's why, you know, when we talk about manufacturing progress, we have the wherewithal because the same engineers who worked back in the day on drive units are working on actuators now. If there is any company which can do it at scale, that is going to be us. Elon Musk: We also have actually added a lot of new engineers as well to the team. A lot of the credit for the Optimus engineering is actually also near new engineers, many of them that are just out of college, actually. The Optimus engineering team is a very talented engineering team. I'd say, like, wow, actually. The Optimus reviews at this point are that there's the engineering review and then there's the manufacturing review. Being done simultaneously. With an iterative loop between engineering design and manufacturing. We design something and we say, like, oh, man, that's really difficult to make. We need to change that design to make it easier to manufacture. We've made radical improvements to the design of Optimus while increasing the functionality, but making it actually possible to manufacture. I'd say Optimus two is almost impossible to manufacture, frankly. But my two-point, we've gone from a person in a robot outfit to what people have seen with Optimus 2.5 where it's doing kung fu. Optimus was at the Tron premiere doing kung fu, just up in the open, with Jared Leto. Nobody was controlling it. It was just doing kung fu with Jared Leto at the Tron Premier. You can see the videos online. The funny thing is, a lot of people walked past it thinking it was just a person. Even though with Optimus 2.5, you can see that it has a waist that's three inches wide. It results in not a human. But the movements were so human-like that a lot of people didn't realize they were looking at a robot. What I'm saying is, Optimus three will be a giant improvement on that. Made at scale, like I said, a very difficult thing. The Optimus engineering and manufacturing reviews and there's the Friday night meeting with Optimus, which sometimes goes till midnight. My Saturday meeting is with the AI chip design team. Two things are crucial to the future of the company. Travis Axelrod: Great. And Dan, do you have a follow-up? Dan Meir Levy: Yeah. I think just as a related, maybe you could just talk about to what extent are the AI efforts at Tesla and x AI complementary, or are they just different forms of AI? Maybe you can just distinguish for the audience. Thank you. Elon Musk: Yeah. There are different forms of AI. The XAI, so Grok is like a giant model. You could not possibly squeeze Grok onto a car. That's for sure. It is a giant piece of a model. With Grok, it's trying to solve for artificial general intelligence with a massive amount of AI training compute and inference compute. For example, Grok five will actually only run effectively on a GV 300. That's how much of a beast Grok five is. Whereas Tesla's models are, I don't know, maybe about less than 10% the size, maybe closer to 5% the size of Grok. They're really at the problem from very different angles. XAI and Grok are competing with Google Gemini and OpenAI ChatGPT and that kind of thing. Some of it's complementary. For example, for Grok voice, being able to interact with Grok in the car is cool. Grok for Optimus voice recognition and audio voice generation is Grok, so that's helpful there. But they are coming at it from kind of opposite ends of the spectrum. Travis Axelrod: Alrighty. Adam, let's give it another try. When you're ready, please unmute yourself for the next question. Alrighty. Unfortunately, Adam is having audio issues. So we're going to move on to Walt from LightShed. Walt, please go ahead and unmute yourself. Walt: Can you hear me now? Travis Axelrod: Yes. Perfect. Thank you. Walt: Just getting back to Austin. If you can remove the safety driver at year-end, is the limitation in the Bay Area just regulatory, or is it kind of the market by market learning process? Similarly, in the eight to ten markets that you mentioned to get added, is the decision there to put a safety attendant in the passenger seat or the safety driver in, is that like your step-by-step process to opening up a market, or is it really just the regulation and the individual market? Elon Musk: Well, I think even if the regulators weren't making us do it, we'd still do that as the right sort of cautious approach to a new market. Just to make sure that we're being paranoid about safety, I think it makes sense to have a safety driver or safety occupant in the car when we first go to new markets to confirm that there's not something we're missing. All it takes is one in 10,000 trips to go wrong, and you've got an issue. It just makes sure, like, is there some peculiarity about a city, like a very difficult intersection or something that's an unexpected challenge in a city for that one in 10,000 situation. We probably could just let it loose in these cities, but we just don't want to take a chance. What we're talking about here is maybe three months of safety driver in a new metro to confirm that it's good, and then we take the safety driver off, that kind of thing. Walt: Okay. Then on FSD 14, it has a different feel than 13, and it's also, I think, a little different than what it feels like in Austin. Is it basically different development paths that you're doing in terms of the robotaxi stuff versus what you're dropping to the early adopters? When you push these new builds, is it that you're looking for notable improvements in intervention rates, or is that largely solved and it's more about adding the functionality, like the parking, the drive modes, or just the overall comfort? Elon Musk: The first priority when we release a major new software architecture for Autopilot is safety. It starts off with safety, obviously, safety prioritized, and then solve comfort thereafter. That's why I don't recommend people take the initial version. That's why I say, like, yeah, most people should wait until 14.2 before they actually download version 14. By 14.2, we will have addressed many of the comfort issues. The priority is very much safety first and then thereafter, the comfort issues. That's why most people are like, it'll be safe but jerky. We just need time to smooth the rough edges and solve for comfort in addition to safety with a major new autopilot architecture change. I know what the roadmap is for the Tesla real-world AI in very granular detail. Obviously, Ashok is leading that. I mean, I spend a lot of time with the team going in excruciating detail here on what we're doing to improve the real-world AI. This car is going to feel like it is a living creature. That's with AI four before even AI five. Ashok Elluswamy: Yeah. The roadmap is super exhilarating. We're waiting so much, like, at least all the stuff we are working on. In terms of what we ship to customers versus robotaxi, it's mostly the same. Customers have some more features like, you know, they can choose the car wants to park in a spot or drive you or something like that, which is not super relevant for robotaxi. But there's only a few minor changes like those ones. But the majority of the algorithms and architecture, everything is the same between those two platforms. Elon Musk: Yeah. As I mentioned earlier, we'll be adding reasoning to, I don't know, reasoning in 14.3, maybe 14.4, something like that. Ashok Elluswamy: Yeah. See here. Or by end of this year, for sure. Elon Musk: Yeah. With reasoning, it's literally going to think about which parking spot to pick. It's going to say, this is the entrance, but actually, probably, there's not a parking spot right at the entrance. If it's a full, you know, if the parking lot is fairly full, the probability of an open parking spot right at the entrance is very low. But actually, what it'll simply do is drop you off at the entrance of the store and then go find a parking spot. It's going to get very smart about figuring out a parking spot. It's going to spot empty spots better than a human. It's got 360-degree vision, and it's going to, yeah. Ashok Elluswamy: Yeah. Like I said, it's going to use reasoning to solve things. Elon Musk: Yep. Putting that all inside the computer that has AI four is the actual challenge. That's what the team is working on. Obviously, you can do reasoning on the server that takes forever. But then in the car, you need to make real-time decisions. Putting all the, you know, that's in the car, that's the challenge. Elon Musk: Yeah. That's why I say, like, I have a pretty good understanding of AI, you know, the giant model level with Grok and with Tesla. I'm confident in saying that Tesla has the highest intelligence density. When you look at the intelligence per gigabyte, I think Tesla AI is probably an order of magnitude better than anyone else. It doesn't have any choice because that AI has got to fit in the AI four computer. The discipline of having that level of AI intelligence density will pay great dividends when you go to something that has an order of magnitude more capability like AI five. Now you have that same intelligence density, but you've got 10 times more capability in the computer. Travis Axelrod: Great. The next question will come from Colin at Oppenheimer. Colin, please unmute yourself when you're ready. Colin Langan: Colin, go ahead and unmute yourself, please. Colin Langan: Thanks so much, guys. I appreciate you bringing up the challenges of hand dexterity in humanoids, along with the state of the supply chain and the vertical integration you guys are pursuing. I'm just trying to harmonize the timeline for the start of production next year with the state of the supply chain. What sounds like a fair amount of work remains on the dexterity before you can really freeze the hardware design and start to scale up production. Elon Musk: Well, the hardware design will not actually be frozen even through the start of production. There'll be continued iteration. A bunch of the things that you discover are very difficult to make. You only find that pretty late in the game. We'll be doing rolling changes for the Optimus design even after the start of production. I do think that the new hand is an incredible piece of engineering. We'll actually have a production intent prototype ready to show off in Q1, probably February or March. We're going to be building a million units Optimus production line, hopefully with the production start towards the end of next year. That production ramp will take a while to get to an annualized rate of a million because it's going to move as fast as the slowest, dumbest, least lucky thing out of 10,000 unique items. But it will get to a million units. Ultimately, we'll do Optimus four. That'll be 10 million units. Optimus five, maybe 50 to 100 million units. It's really pretty nutty. Travis Axelrod: Alrighty. That is unfortunately all the time we have for Q&A today. Before we conclude though, Vaibhav has some closing remarks. Vaibhav Taneja: Thanks, Travis. I want to take the time to talk about an extremely important work which is being held on November 6. The meeting will shape the future of Tesla. We are asking you as our shareholders to support Elon's leadership through the two compensation proposals and the reelection of Ira, Kathleen, and Joe to the board. Note that it is a team sport. Here at Tesla, the board is an integral part of the winning team. Shareholders are the center of everything we do at Tesla, and a special committee has laid out a compensation package. Like Elon said, we don't even want to call it a compensation package. Elon Musk: Yeah. It's just like the point is that I just need enough voting control to give a strong influence, but not so much that I can't be fired if I go insane. I think that sort of number is in the mid-twenties approximately. As a company that has already gone public, we've investigated every possible way to achieve voting control without, you know, is there some way to have a supervoting stock, but there really isn't. There is no way to have a supervoting stock after you've gone public. For example, Google, Meta, many other companies have this. But they had it before they went public. It sort of gets, I guess, grandfathered in. Tesla does not have that. Like I said, I just don't feel comfortable building a robot army here and then being ousted because of some asinine recommendations from ISS and Glass Lewis who have no freaking clue. I mean, those guys are corporate terrorists. The problem, yeah. Let me explain, like, the core problem here is that so many of the index funds, passive funds, vote along the lines of whatever Glass Lewis and ISS recommend. They've made many terrible recommendations in the past. If those recommendations had been followed, they would have been extremely destructive to the future of the company. But if you've got passive funds that essentially defer responsibility for the vote to Glass Lewis and ISS, then you can have extremely disastrous consequences for a publicly traded company if too much of the publicly traded company is controlled by index funds. It's de facto controlled by Glass Lewis and ISS. This is a fundamental problem for corporate governance. They're not voting along the lines that are actually good for shareholders. That's the big issue. That's what it comes down to. ISS, Glass Lewis, corporate terrorism. Vaibhav Taneja: Yeah. I would say, you know, the special committee did an amazing job constructing this plan for the benefit of the shareholders. There's nothing which gets passed on till the time shareholders make substantial returns. That's why in the end, I would say, would urge you to not only vote on the plan but also vote on all the three directors because of their exceptional knowledge and experience. Literally, you know, we at Tesla work with these directors day in, day out. There is not even a single day that one of the directors I haven't spoken to or one of my colleagues hasn't spoken to. Even the directors out here are not just reading out of PowerPoint presentations. They're actually working with us day in, day out. Again, I just urge you guys as shareholders to vote along the board's recommendation. Thank you, guys. Travis Axelrod: Great. Thank you, Vaibhav. We appreciate everyone's questions today. We look forward to talking to you next quarter. Thank you very much, and goodbye.
Operator: Ladies and gentlemen, thank you for standing by. Good day, and welcome to the WD-40 Company Fourth Quarter and Full Fiscal Year 2025 Earnings Conference Call. Today's call is being recorded. At this time, all participants are in a listen-only mode. At the end of the prepared remarks, we will conduct a question and answer session. Please make sure your mute function is turned off to allow your signal to reach our equipment. If at any time during the conference, you need to reach an operator, I would like to turn the presentation over to our host for today's call, Wendy D. Kelley, Vice President, Stakeholder and Investor Engagement. Please proceed. Wendy D. Kelley: Thank you. Good afternoon, and thanks to everyone for joining us today. On our call today are WD-40 Company's President, Chief Executive Officer, Steven A. Brass, Vice President and Chief Financial Officer, Sara K. Hyzer. In addition to the financial information presented on today's call, we encourage investors to review our earnings presentation, earnings press release, and Form 10-Ks for the period ending 08/31/2025. These documents will be made available on our Investor Relations website at investor.wd40company.com. A replay and transcript of today's call will also be made available shortly after this call. On today's call, we will discuss certain non-GAAP measures. The descriptions and reconciliations of these non-GAAP measures are available in our SEC filings as well as the earnings documents posted on our Investor Relations website. As a reminder, today's call includes forward-looking statements about our expectations for the company's future performance. Actual results could differ materially. Company's expectations, beliefs, projections are expressed in good faith but there can be no assurance that they will be achieved or accomplished. Please refer to the risk factors detailed in our SEC filings for further discussion. Finally, for anyone listening to a webcast replay, or reviewing a written transcript of this call, please note that all information presented is current only as of today's date, 10/22/2025. The company disclaims any duty or obligation to update any forward-looking information as a result of new information, future events, or otherwise. With that, I'd now like to turn the call over to Steven A. Brass. Thank you, Wendy, and thanks to all of you for joining us this afternoon. Steven A. Brass: Fiscal year 2025 was marked by complexity and resilience. A tale of navigating global headwinds while making strategic progress. Despite challenges ranging from geopolitical tensions to shifting economic policies, WD-40 Company seized opportunities and continued to build on the strong foundation that has supported our success for more than seventy-two years. Today, I'll start with an overview of our sales results for the fourth quarter and full fiscal year 2025. And then provide an update on the progress we've made against our 4x4 strategic framework. Then Sara will dive deeper into our financial performance, review our business model, give an update on the divestiture of our Home Care and Cleaning businesses, and share our outlook for fiscal year 2026. After that, we'll open the floor for your questions. Today, we reported consolidated net sales of $163 million for the fourth quarter and $620 million for the full fiscal year. Each reflecting approximately 5% growth compared to the prior year. This performance represented a record quarter for the company and underscores the continued strength of our brand and the resilience of our business. As you know, maintenance products remain our primary strategic focus accounting for approximately 95% of total net sales in both the fourth quarter and the full fiscal year. Net sales for these products reached $156 million in Q4 and $591 million for the year. Each reflecting a 6% year-over-year increase. This performance is consistent with our long-term growth target of mid to high single digits and reinforces the strength of our core business. In addition, I'm pleased to report that our gross margin continues to improve and has now surpassed our target of 55%. For the full fiscal year, we delivered a gross margin of 55.1%. Gross margin would have been 55.6% if we remove the financial impact of the assets held for sale. For the fourth quarter, delivered a gross margin of 54.7%, an impressive 730 basis point improvement from 2021 when we hit our inflection point and our long-term gross margin recovery plan began to take hold. Sara will share more details about gross margin in just a few minutes. Now let's talk about fourth quarter sales results in dollars by segment starting with The Americas. Unless otherwise noted, we will discuss net sales on a reported basis compared to the fourth quarter of last fiscal year. Sales in The Americas, which includes The United States, Latin America, and Canada, decreased 2% to $77 million compared to last year. In reported currency, sales of maintenance products decreased 2% or $1.2 million to $74 million compared to last year. The decline was primarily driven by lower sales in Latin America influenced by the impacts of foreign currency exchange fluctuations, the timing of customer orders, and broader macroeconomic challenges especially in Mexico. Sales of maintenance products in The United States and Canada also down slightly primarily due to the timing of customer orders and in Canada, broader macroeconomic challenges. In The Americas, sales of WD-40 Specialist remained constant to the same period last year. Home care and cleaning product sales declined $600,000 compared to last year, reflecting our strategic shift towards higher margin maintenance products in alignment with our 4x4 strategic framework. In total, our Americas segment made up 47% of our global business in the fourth quarter. For the full fiscal year, maintenance product sales in The Americas totaled $277 million reflecting a 4% increase compared to the prior year. Although this growth was slightly below our long-term target of 5-8% annual growth for the region, we remain confident in the TradeBlock's long-term growth potential. Now let's take a look at sales in EMEA, which includes Europe, India, The Middle East, and Africa. Total sales grew 7% or $4.1 million to $63 million compared to last year. After adjusting for the impact of foreign currency translation, EMEA net sales were unchanged in the same quarter last year. In reported currency, sales of maintenance products increased 8% or $4.6 million to $60.7 million compared to last year. The strong growth is driven most significantly by higher sales volumes of WD-40 Multi-Use Product in our direct markets. Sales increased most significantly in DACH, France, and Benelux which were up 20%, 19%, and 23% respectively. Strong sales in our direct markets were offset by softer performance in our EMEA distributor markets driven by the timing of customer orders and ongoing instability in certain regions. In EMEA, sales of WD-40 Specialist increased 18% compared to last year driven primarily by increased demand and higher volumes across several direct markets especially in DACH and France where targeted promotional activity with key customers proved highly effective. Home care and cleaning product sales declined approximately $500,000 compared to the same period last year. In the fourth quarter, we completed the divestiture of our U.K. Home Care and Cleaning product businesses to Supreme Imports Limited. This strategic move allows us to sharpen our focus on higher growth, higher margin maintenance products and reinforces our commitment to growing the blue and yellow brand with a little red top. In total, our EMEA segment made up 38% of our business in the fourth quarter. For the full fiscal year, maintenance product sales in EMEA totaled $230 million, a 9% increase compared to the prior year. This growth aligns with our long-term target of 8% to 11% annual growth. Now turning to Asia Pacific. Sales in Asia Pacific, which includes Australia, China, and other countries in the Asia region, grew 28% or $5.1 million to $23 million compared to last year. Foreign currency translation had no material impact on our fourth quarter results. Sales and maintenance products increased 30% or $4.8 million to $21 million compared to last year. This growth was primarily driven by a 44% increase in sales of the WD-40 Multi-Use Products in our Asia distributor markets where we saw strong demand across nearly all countries, particularly in Indonesia, Malaysia, Singapore, and The Philippines. Fueled by geographic expansion, broader distribution, and the timing of customer orders. Sales and maintenance products also grew in Australia and China, increasing by 12% and 6%, respectively, compared to the same period last year. In Asia Pacific, sales of WD-40 Specialist increased 38% compared to last year, due to higher sales volume from successful promotions and marketing efforts in our Asia distributor markets and China. Sales of home care and cleaning products, including No Vac Carpet Cleaners and Solvol Hand Cleaners sold in Australia, increased 15% or approximately $300,000 compared to the same period last year. Our Home Care portfolio in Australia benefits from strong brand recognition, a solid competitive position, and meaningful growth opportunities. In total, our Asia Pacific segment made up 15% of our global business in the fourth quarter. For the full fiscal year, maintenance product sales in Asia Pacific totaled $84 million, a 6% increase compared to the prior year. While this growth falls short of our long-term target of 10% to 13% annual growth for the region, we remain confident in the strong fundamentals of this high-growth trade block. Now, let's take a look at the strategic progress we made in fiscal year 2025 against our 4x4 strategic framework. As you recall, this framework was designed to drive profitable growth and sustainable value creation. And is built around our four Must Win Battles and four strategic enablers. Must Win Battles focus on what we do to increase sales and profitability and these are long-term growth drivers. We will focus on full-year results. Starting with Must Win Battle number one, the geographic expansion. Global sales of WD-40 Multi-Use Product in fiscal year 2025 were $478 million, representing growth of 6% over the prior year. We experienced solid sales of our signature multi-use product brand in all three trade blocks with 8% growth in EMEA, 4% growth in The Americas, and 6% growth in Asia Pacific. We saw solid sales growth this year, 12% in Latin America, 10% in China, 14% in France, and 20% in India. But what's most important to emphasize is that we still have significant room to grow. Geographic expansion is our most significant long-term growth opportunity. Over the last five years, we've achieved an annual growth rate for net sales of WD-40 Multi-Use Product of 9.4%. Our path forward is clear. We're expanding availability across more channels and geographies while deepening product penetration by increasing brand awareness through sampling and putting more cans in the hands of end users around the world. We estimate the global attainable market for the WD-40 Multi-Use Product to be approximately $1.9 billion based on our updated benchmark sales potential. And to date, we've achieved only 25% of our benchmark growth potential, leaving a growth opportunity of approximately $1.4 billion. Our second Must Win Battle is accelerating premiumization. Innovation is at the core of this strategy. We developed products like Smart Straw and Easy Reach with our end users at the center of every decision. Their needs drive our product development efforts, enabling us to deliver high-performance solutions that solve real-world problems. End-user focused innovation fosters brand loyalty and contributes to gross margin expansion and differentiated offerings. In fiscal year 2025, global sales of Smart Straw and Easy Reach when combined were up 7% over the prior year. Premiumized products currently account for approximately 50% of WD-40 Multi-Use Product sales and 40% of units sold, leaving considerable room for continued growth. Over the last five years, we've achieved a compound annual growth rate for net sales of premiumized products of 9.4%. On a go-forward basis, we'll be targeting a compound annual growth rate for net sales of premium format products of greater than 10%. Our third Must Win Battle is to drive growth in WD-40 Specialist. This product line is a strategic extension of our trusted core brand. Designed to meet the evolving needs of professionals and industrial users. When we introduced the WD-40 Specialist alongside the WD-40 Multi-Use Product, we're not just adding variety, we're strengthening our brand, capturing new segments, and offering end users more choice without diluting what makes our core brand iconic. By leveraging the strength of the WD-40 brand, we're driving category leadership and expanding market share in adjacent segments. In fiscal year 2025, global sales of the WD-40 Specialist products were $82 million, up 11% over the prior year. Once again, we saw growth of WD-40 Specialist products across all three trade blocks with growth of 6% in The Americas, 15% in EMEA, and 12% in Asia Pacific. Over the last five years, we've achieved a compound annual growth rate for net sales of the WD-40 Specialist of 14.4%. On a go-forward basis, we'll be targeting a compound annual growth rate for net sales of WD-40 Specialist of greater than 10%. As the WD-40 Specialist has matured and its market base has expanded, we've recalibrated our long-term growth expectations to reflect the product line's evolution within its life cycle. We estimate the global attainable market for WD-40 Specialist to be approximately $665 million based on our updated benchmark sales potential. And today, we've achieved only 12% of our benchmark growth potential, leaving a growth opportunity of approximately $583 million. Our fourth and final Must Win Battle is to accelerate digital commerce. Our digital commerce strategy is a catalyst for growth across the business. Not merely a channel for online sales, it plays a vital role in advancing each of our Must Win Battles by increasing brand visibility, improving accessibility, and driving deeper engagement with end users across global markets. In fiscal year 2025, e-commerce sales increased 10%, reflecting strong momentum in our digital strategy. But digital is more than a transactional platform, it's a powerful engine for brand building and education. For example, the digital space serves as a dynamic environment for product discovery. It allows us to showcase new applications for our products while fostering peer-to-peer learning. Many of these insights originate from our end users themselves, who continually uncover innovative ways to use our products, often in ways we hadn't imagined. By leveraging digital touchpoints, we're deepening engagement, enhancing product understanding, and strengthening brand affinity across the globe. Turning to the second element of our 4x4 strategic framework, our strategic enablers. Our strategic enablers focus on operational excellence and they collectively underpin and drive the success of our Must Win Battles. Strategic Enabler number one is ensuring a people-first mindset. At WD-40 Company, our most powerful competitive advantage is the commitment of our 714 employees. We've long said we're a purpose-driven, values-guided organization, and that's not just a tagline. Our values are the foundation of our culture. They shape how we lead, how we collaborate, and how we make decisions every day. In our February 2025 Global Engagement Survey, 94% of our people reported being engaged in their work, more than four times Gallup's global average of 21%. 90% said they feel a strong sense of belonging and 95% expressed pride in our purpose, mission, and values. This deep connection to who we are and what we stand for translates directly into growth and opportunity. Nearly 40% of our people experience career progression within their first five years at the company. To our employees, thank you for consistently showing what it means to live our purpose. To create positive, lasting memories in everything you do. What our investors and stakeholders see in our performance is a direct reflection of your commitment to doing meaningful work the right way. Strategic Enabler number two is to build an enduring business for the future. At WD-40 Company, long-term value creation means operating with a clear commitment to balancing economic growth, environmental responsibility, and social impact. One of our primary objectives under this strategic enabler is to lead our category with high-performing products designed for environmental sustainability. I'm excited to share that in the upcoming fiscal year, we'll introduce a new innovation under the WD-40 Specialist product line, which will be our first bio-based format of our multi-use product. Our latest maintenance product is designed to reduce our environmental impact and to have a reduced carbon footprint, utilizing ISO standard 14,067 while still delivering the trusted performance expected from the WD-40 brand products. The product will launch in select European markets later this fiscal year, and we look forward to sharing updates with you in the quarters ahead. Strategic Enabler number three is achieving operational excellence in our supply chain. Profitable growth at WD-40 Company depends on a supply chain that is optimized, high-performing, and resilient. In fiscal year 2025, this strategic enabler played a vital role in protecting gross margins. We delivered several million dollars in economic value through cost reduction initiatives such as packaging enhancements, logistics efficiencies, and strategic sourcing. These efforts helped to offset the financial impact of tariffs, underscoring the importance of this enabler. Operationally, in fiscal year 2025, we achieved global on-time delivery of 96.4%, above our current target, and also inventory levels of ninety-nine days on hand, coming closer to our target of ninety days. Strategic Enabler number four is to drive productivity through enhanced systems. At WD-40 Company, technology is a key enabler of productivity and resilience. We're building a scalable digital infrastructure designed to support global growth and enhance operational agility, accelerating our strategic execution. By partnering with leading technology companies, we're investing in proven AI-enabled systems such as D365 and Salesforce that we believe will drive future gains in productivity. While we are taking a pragmatic approach to adopting AI across our organization, we've already identified several promising use cases that will help us to boost employee productivity, build our brand more effectively around the world, and accelerate learning and improve collaboration within our global community. With that, I'll now turn the call over to Sara. Sara K. Hyzer: Thanks, Steve, for that overview of our sales results and strategic framework. I'm pleased to share that we delivered a strong fourth quarter performance, culminating in an excellent bottom-line finish to fiscal year 2025. Today, I'll walk through how we performed against our fiscal year 2025 guidance, share insights into our business model, and highlight key takeaways from our fourth quarter financial results. I'll also provide an update on the divestiture of our home care and cleaning business in The UK and close with our outlook for fiscal year 2026. Let's start with a discussion about how we performed against our fiscal year 2025 guidance. As a reminder, we issued our guidance in fiscal year 2025 on a pro forma basis. I encourage investors to review our earnings presentation, which includes a pro forma view. Since we issued our fiscal year 2025 guidance on a pro forma basis, I will provide the following summary on a non-GAAP pro forma basis. We expect net sales growth adjusted for currency to be between 6-9%, with net sales of between $620 and $630 million over our pro forma 2024 results. Today, we reported pro forma net sales adjusted for currency of $603 million, a 6% increase over the 2024 pro forma results. If we include the assets held for sale, consolidated net sales adjusted for currency were $622 million in fiscal year 2025. We expected full-year gross margin to be in the range of 55% to 56%. Today, we reported a gross margin of 55.6%, in line with our expectations. We expected our advertising and promotion investment to be around 6% of net sales. Today, we reported an A&P investment of 6%. We expected operating income to be between $96 and $101 million. Today, we reported operating income of $98.1 million, in line with our expectations. We expected diluted EPS of between $5.30 and $5.60. Today, we reported diluted EPS of $5.50, in line with our expectations. I'm pleased with the resilience and performance of our business in what has been a volatile and uncertain environment. Throughout fiscal year 2025, we navigated a range of challenges, from tariffs and macroeconomic instability to geopolitical tensions and a shifting policy landscape. Despite these headwinds, we grew our top line, expanded margins, and delivered solid bottom-line growth. Thank you to all our employees for their focus, adaptability, and commitment to delivering meaningful results for our stakeholders. Let's start with a look at our business model. Our business model is a strategic tool we use to guide our business. The model is built around three core areas: gross margin, cost of doing business, and adjusted EBITDA. Let's look at our fourth quarter gross margin performance. In the fourth quarter, our gross margin was 54.7% compared to 54.1% last year, which represents an improvement of 60 basis points and was most significantly impacted by the following favorable factors: 110 basis points from lower specialty chemical costs, 110 basis points from higher average selling prices, including the impact of premiumization, and 60 basis points from lower input costs. Offsetting those benefits to gross margin were a few unfavorable factors: 140 basis points from unfavorable sales mix and other miscellaneous mix impacts, and 60 basis points from higher warehousing, distribution, and freight costs, primarily in The Americas. I'm happy to share that gross margin performance this quarter was strong across all three trade blocks, with results either exceeding our stated target or showing year-over-year improvement. In The Americas, gross margin increased by 70 basis points compared to the prior year fourth quarter, reaching 53.2%. EMEA held steady at 55.5%, remaining above our target. And in Asia Pacific, gross margin increased by 110 basis points compared to the prior year fourth quarter, reaching 57.5%. For the full fiscal year, gross margin was 55.1%, compared to 53.4% last year, which represents an improvement of 170 basis points. As Steve mentioned earlier, we're very encouraged by the consistent improvement to gross margin we've seen over the past three years. Today, we're proud to report full fiscal year gross margin over the high end of our targeted range of 50% to 55%, recovering our gross margin a year ahead of schedule and marking a significant milestone in our recovery journey. It's important for stakeholders to understand that while certain risks, such as cost volatility, tariff uncertainty, and inflationary pressures, will always be part of the operating environment, we're actively pursuing a range of initiatives designed to help us mitigate those risks and strengthen gross margin over time. These include supply chain cost reduction projects, cost optimization efforts, progress on asset divestitures, new product introductions, premiumization strategies, and geographic expansion. Each of these levers contributes positively to gross margin and reinforces our confidence in its long-term potential. Supported by our current performance and strategic initiatives, we're confident in our ability to sustain gross margin above 55% in fiscal year 2026. In addition, gross margin enhancement remains a key priority for senior leaders who continue to be incentivized to drive further improvement. Now turning to our cost of doing business, which we define as total operating expenses plus adjustments for certain non-cash expenses. Our cost of doing business is primarily driven by three key areas: strategic investments in our people, global brand-building efforts, and freight expenses associated with delivering products to our customers. In the fourth quarter, our cost of doing business was 36% compared to 38% in the prior year quarter. In dollar terms, our cost of doing business remained relatively stable period over period. For the full fiscal year, the cost of doing business was 37% compared to 36% last year. In dollar terms, our cost of doing business increased $19 million or 9% period over period. In the fourth quarter, advertising and promotion expenses increased $1.6 million or 15% period over period. As a percentage of net sales, A&P investment was 7.6% this quarter compared to 7% in the same period last year. The phasing of our A&P investments is not evenly distributed over the course of the year. And in recent years, our brand-building activities have been more heavily weighted in the second half of the year. For the full fiscal year, our A&P investment remains within our annual expectations. While our long-term goal is to manage the cost of doing business within the 30% to 35% range, we continue to make thoughtful strategic investments to support long-term growth. WD-40 Company has long been committed to operating with discipline and efficiency, a commitment reflected in our ability to manage the business with just 714 employees, each generating approximately $860,000 in revenue. This level of productivity speaks volumes about the strength of our culture, the effectiveness of our operating model, the awareness of our brand, and the value we deliver across our global footprint. What continues to evolve is our need to operate as a global business in an increasingly complex and uncertain environment. To reduce risk and drive top-line growth, we've implemented a number of structural changes in recent years to strengthen and sustain our business for the future. We're investing with discipline across technology, sustainability, innovation, research and development, legal risk management, and brand building to strengthen our foundation, build brand awareness, and ensure long-term resilience and growth. We also need time to absorb the loss of revenues associated with the home care and cleaning divestitures. These investments have pushed our cost of doing business above our target range. However, we believe they've strengthened the business, enhanced its resilience, and positioned us to deliver sustainable long-term value to our stakeholders. Turning now to adjusted EBITDA margin. We believe adjusted EBITDA as a percentage of sales is a valuable metric for assessing both profitability and operational efficiency. It reflects our operating performance and cash-generating ability, providing the clearest view of our company's underlying financial health. Our 25% target for adjusted EBITDA margin is a long-term aspiration. However, we continue to believe we can move adjusted EBITDA margin back to our mid-term target range of 20% to 22% once we have absorbed the loss of revenues associated with the home care and cleaning divestitures. In the fourth quarter, our adjusted EBITDA was $30.5 million, up 16% from the same period last year. Our adjusted EBITDA margin this quarter was 18% compared to 17% in the same period last year. For the full fiscal year, our adjusted EBITDA was $114.4 million, up 8% from the same period last year. Adjusted EBITDA margin this year was 18%, which is the same as last year. Now let's turn to other key measures of our financial performance: operating income, net income, and earnings per share in the fourth quarter. Operating income improved to $28 million in the fourth quarter, an increase of 17% over the prior period. Net income improved to $21.2 million in the fourth quarter, an increase of 27% compared to the prior period. Diluted earnings per common share for the quarter were $1.56 compared to $1.23 in the prior period, reflecting an increase of 27% over the prior period. Our diluted EPS reflects 13.6 million weighted average shares outstanding. Now let's review our balance sheet and capital allocation strategy. We maintain a strong financial position and healthy liquidity, enabling a disciplined capital allocation approach that both fuels long-term growth and generates significant value for our stockholders. Maintaining a disciplined and balanced capital allocation approach remains a priority for us. For the foreseeable future, we expect CapEx of between 1-2% of sales per fiscal year. Our cash flow from operations this quarter was $30 million, and we elected to use approximately $9.5 million of that cash to pay down a portion of our short-term higher interest rate borrowing. Although our usual target for debt to adjusted EBITDA is one to two times, we are currently slightly below that range. This provides us with strategic flexibility as we explore opportunities to return capital to stockholders and drive long-term growth. We continue to return capital to our stockholders through regular dividends and buybacks. Annual dividends will continue to be our priority and are targeted at greater than 50% of earnings. On October 9, the Board of Directors approved a quarterly cash dividend of $0.94 per share. During fiscal year 2025, we repurchased approximately 50,000 shares of stock at a total cost of $12.3 million under our share repurchase plan. We have approximately $30 million remaining under our current repurchase plan, which is set to expire at the end of this fiscal year. Looking ahead, we intend to accelerate our buyback activity and fully utilize the remaining authorization, underscoring our strong conviction in the long-term fundamentals of the business. We're focused on accretive capital returns that reflect our confidence in the long-term value of our stock. In fiscal year 2025, excluding the positive impact of the one-time non-cash income tax adjustment, our return on invested capital was 26.9%, improving from 25.5% last fiscal year and ahead of our target of 25%. Steven A. Brass: In September, we announced the sale of our 1001 and 1001 Carpet Fresh brands in The UK to Supreme Imports Limited, a Manchester-based consumer products company. The all-cash transaction valued at up to $7.5 million was completed in 2025. WD-40 Company is providing limited transition services for up to three months. This divestiture reflects our continued focus on optimizing our portfolio and directing resources toward areas that drive long-term value. We continue to make progress on the sale of our America's home care and cleaning product brands. Our investment base continues active discussions with multiple potential buyers. Although there's no certainty of the deal, we remain optimistic, and I will provide further updates as appropriate. Now moving to FY '26 guidance. Given the anticipated divestiture of our America's Home Care and Cleaning brands, we are continuing to present this year's guidance on a pro forma basis excluding the financial impact of the assets held for sale. We're also providing a pro forma view of fiscal year 2025 excluding the brands we divested in The UK in the fourth quarter, the brands currently held for sale, and the impact of the one-time tax benefit recorded in the second quarter, to help with modeling and period-over-period comparison. Please refer to our fourth quarter and full-year earnings presentation on our Investor Relations website for those details. Now with that backdrop, let's take a closer look at our guidance for fiscal year 2026. We're excited about what lies ahead in fiscal year 2026. By balancing strong performance today with thoughtful investments for tomorrow, we're building a foundation for lasting growth and long-term value creation. For fiscal year 2026, we expect net sales growth from the pro forma 2025 results is projected to be between 5-9% with net sales between $630 and $655 million after adjusting for foreign currency impact. Gross margin is expected to be between 55.5-56.5%. Advertising and promotion investment is projected to be around 6% of net sales. Operating income is expected to be between $103 and $110 million, representing growth of between 5-12% from the pro forma 2025 results. The provision for income tax is expected to be between 22.5-23.5%. And diluted earnings per share is expected to be between $5.75 and $6.15, which is based on an estimated 13.4 million weighted average shares outstanding. This range represents growth of between 5-12% over the pro forma 2025 results. This guidance assumes no major changes to the current economic environment. Unanticipated inflationary headwinds and other unforeseen events may affect our view of fiscal year 2026. In the event we are unsuccessful in the divestiture of The Americas Home Care and Cleaning brands, our guidance would be positively impacted by approximately $12.5 million in net sales, $3.6 million in operating income, and $0.20 in diluted EPS on a full-year basis. That completes the financial overview. Sara K. Hyzer: Now I would like to turn the call back to Steven A. Brass. Thank you, Sara, for that update. Steven A. Brass: As we close another fiscal year at WD-40 Company, I'm reminded how fortunate we are to lead such a remarkable business. We have a world-class brand with a sustainable competitive advantage, a highly diversified global footprint, and a long runway for growth. Our capital-light efficient business model generates significant cash, providing a strong financial foundation that allows us to invest in growing our brands and accelerate the development of our future leaders while continuing to prioritize returning capital to our investors. And if that's not enough, what did you hear from us on this call? You heard that we reported currency-adjusted pro forma net sales of $603 million, a 6% increase over FY 2024 results and right in line with our expectations. You heard that sales of our maintenance products were up 6% in both the fourth quarter and fiscal year and that this performance aligns with our long-term growth target. You heard that we estimate the benchmark sales opportunity for WD-40 Multi-Use Product to be approximately $1.9 billion and that we have achieved only 25% of that benchmark opportunity. You heard that we estimate the benchmark sales opportunity for WD-40 Specialist to be approximately $665 million and that we've achieved only 12% of that benchmark opportunity. You heard that we sold our UK home care and cleaning product brands. You heard that the full fiscal year delivered a gross margin of 55.1% or 55.6% if we remove the financial impact of the assets held for sale. You heard that for the fourth quarter, delivered a gross margin of 54.7%, an impressive 730 basis point improvement from 2021. You heard that supported by current performance and our strategic initiatives, we believe we're well-positioned to target a gross margin of above 55% in FY 2026. You heard that by looking ahead to fiscal year 2026, we intend to accelerate our buyback activity and fully utilize the remaining authorization, underscoring our strong conviction in the long-term fundamentals of the business. And you heard that we're issuing guidance for fiscal year 2026 on a pro forma basis excluding the brands we expect to divest this year. Thank you for joining our call today. We'd now be pleased to answer your questions. Operator: Ladies and gentlemen, please make sure your mute function is turned off to allow your signal to reach our equipment. If your question has been answered and you would like to withdraw your registration, please press the pound key then the number one on your telephone keypad. Your first question comes from the line of Daniel Rizzo from Jefferies. Hey, guys. Thanks for taking my question. Daniel Rizzo: I just need a clarification. So when you guys gave your initial guidance last year, that excluded the home care sales. Same thing as this year. But when you reported throughout the year, you reported including the home care sales. Is that correct? Sara K. Hyzer: Hi, Daniel. Yes. So in the press release and in the 10-Q, you'll see those include them, obviously, because those are reported on a GAAP basis or U.S. GAAP basis. In the investor deck on every quarter, we showed a pro forma view so that you could back out those sales, although you can easily see those sales in our footnotes because we do break out the HCCP sales in both The Americas and EMEA regions. But the pro forma view went a step further to take you all the way down in the P&L, you could actually see the impact down to EPS. Daniel Rizzo: Okay. So I'm looking at now. So the pro forma is $5.50 in EPS in 2025. Right? Sara K. Hyzer: That's correct. Daniel Rizzo: Alright. Sorry. I just wanted clarification on that. Thanks. Thank you for that. So then with you mentioned that I said kind of a mixed headwind. I was wondering if you could provide color on that. I mean, I've assumed the premiumization is kind of a mixed tailwind, but I was wondering what's kind of countering that that you pointed out in the gross margin. Sara K. Hyzer: Oh, on the gross margin from a tailwind for the year? Daniel Rizzo: Well, you said there was a mixed headwind there and all the things. I was wondering what that what that what you're referring to. Sara K. Hyzer: Oh, I think the mixed what I, so maybe it clear. The mix is a sales mix and other miscellaneous sales or other miscellaneous mix impact. So yes, so the premiumization, if you look at it for the full year, it's more for the quarter, the impact for the quarter, the sales mix, and other miscellaneous mix impacts had a headwind of about 140 basis points. Daniel Rizzo: I'm sorry. Was just looking what what exactly that is. Is that, like, is that I mean, just going distributor versus direct or or how? Sara K. Hyzer: It's a mix. So, yes, it's a mix of both, how the market play out, so direct and distributors, but then there is also a mix of product. So premiumization, into that, but also bulk and specialist and MUPs. It's just a general product sales mix in addition to the market mix. Daniel Rizzo: Okay. And then my final question, you know, with premiumization, that's doing fairly well with the multi-use product. I wonder if premiumization like an easy reach straw or or something like that would be applied to, like, the specialist product line. Is that something that's being considered? Or are we kind of far from that, or how we should think about it? Steven A. Brass: Hey, Daniel. It's Steve. And so the specialist the specialist yeah. The whole specialist line, you know, sells at a higher gross margin as well. So effectively, that is a premium. Every kind of the WD-40 Specialist we sell is margin accretive. And so that is a separate form of premiumization. Having said that, we already in several countries around the world, we've also launched particularly Easy Reach delivery system on things like our penetrant product, which you have in The U.S. and one or two other countries around the world. And so and certainly, Smart Straw, we leverage as part of our specialist premiumization strategy. So yes, it applies to both the core product and to specialists as well, Dan. Daniel Rizzo: Alright. Thank you very much. Operator: Your next question comes from the line of Keegan Cox from D.A. Davidson. Your line is open. Hi, guys. Keegan on for Michael Allen Baker today. Keegan Cox: I just wanted to ask if you could, you know, give any color or thoughts on potential gross margin headwinds and tailwinds that you're expecting within your 2026 guidance? Sara K. Hyzer: Hi, Keegan. This is Sara. So yes, I would say in our guidance, we have, you know, we have built in both headwinds and tailwinds. We are seeing stability from a cost input standpoint. And when you look at what we've built into our gross margin guidance, if oil stays at the levels that they're at right now, that could be a small tailwind for us since we've tried to be a little bit conservative in what we've built in for an oil assumption because you just never really know which direction that is going to go. There are a number of cost-saving initiatives that we have in the pipeline based on actions that we've taken in FY 2025. That will feed into FY 2026 along with new actions that we've built around cost supply chain optimization and continuation of the efforts that we've had in FY 2025 on the sourcing side. We had a lot of success this year from a global sourcing standpoint and our cost savings expectations that we had this year. Some of those will then benefit our margin going into FY 2026. Keegan Cox: Got it. And then as I looked at kind of the sales results in Asia Pacific specifically, say that five times, it looks like the distributors accounted for, you know, most of the growth there. What what did kind of the runway left for, I guess, the that distributor market? Steven A. Brass: Sure. It's a very, very long runway. And so China also had a good well, all three areas were up, right? So Australia, I believe, was up 6% for the year. China was up in double digits. And then yes, for the fourth quarter in particular, we had a very strong comeback in distributor. And so as we look at all of those markets, there's a very, very long runway for growth. In places like Indonesia, where we've introduced our new kind of hybrid business model, it's been growing at a CAGR of around 20% over the past few years. Many of those other key markets across the Asia region have a very, very long runway for growth. And so the improved performance in the back half in Asia and there may be some kind of impact in terms of customer distributors are a little more lumpy, right? And so going into the first quarter, you may see some kind of pullback. That's just really, again, kind of inventory management in Asia for Q1. But beyond that, we see a really strong rebound in Asia Pacific later in the fiscal year. Keegan Cox: Got it. Thank you. Operator: Ladies and gentlemen, that does conclude our conference for today. We thank you for your participation on today's conference call. We ask that you please disconnect your line.
Operator: Good day, and welcome to QuantumScape Corporation's Third Quarter 2025 Earnings Conference Call. Dan Conway, QuantumScape Corporation's Principal Analyst Investor Relations. You may begin your conference. Thank you, operator. Dan Conway: Afternoon, and thank you to everyone for joining QuantumScape Corporation's third quarter 2025 earnings call. To supplement today's discussion, please go to our IR site at ir.quantumscape.com to view our shareholder letter. Before we begin, I want to call your attention to the Safe Harbor provision for forward-looking statements posted on our website as part of our quarterly update. Forward-looking statements generally relate to future events, future technology progress, or future financial or operating performance. Our expectations and beliefs regarding these matters may not materialize. Actual results and financial periods are subject to risks and uncertainties that could cause actual results to differ materially from those projected. There are risk factors that may cause actual results to differ materially from the content of our forward-looking statement for the reasons that we cite in our shareholder letter, Form 10, and other SEC filings, including uncertainties posed by the difficulty in predicting future outcomes. Joining us today will be QuantumScape Corporation's CEO, Dr. Siva Sivaram, and our CFO, Kevin Hettrich. With that, I'd like to turn the call over to Siva. Thank you, Dan. Siva Sivaram: I'd like to begin with one of the highlights of the year. On September 8, at IAA Mobility in Munich, Germany, we unveiled our launch program with the Volkswagen Group. The Ducati V21L race motorcycle, developed as a collaboration among Ducati, Audi, PowerCo, and QuantumScape Corporation. The Ducati V21L is a first-of-its-kind vehicle demonstration planned as a showcase for the exceptional performance of our no-compromise next-generation battery technology. As a launch program, the Ducati V21L is ideal. It is a low-volume but high-visibility demonstration that allows us to put the QSC5 technology into a demanding real-world application. The next step in the Ducati program is field testing. Turning to our annual goals, we are pleased to report that during Q3, we began shipping COBRA-based QSC5 B1 samples, completing another of our key annual goals for 2025. These cells are part of the Ducati launch program and were featured at the IAA Mobility conference. Our remaining operational goal for the year is to install higher volume cell production equipment for our highly automated pilot line in San Jose, named the Eagle Line. Equipment for certain key assembly steps has already been installed on the Eagle Line, and this goal remains on track. Another important goal for 2025 has been to expand our commercial engagement, including deepening relationships with existing customers, engaging new customers, and bringing additional partners into our growing QS technology ecosystem. In Q3, we made substantial progress on all three fronts. With respect to existing customers, the successful launch event with Ducati, Audi, and PowerCo at IAA Mobility was a major milestone in our long collaboration with the Volkswagen Group. Last quarter, we also announced a new joint development agreement with an existing customer, and we are continuing to work closely with them as we progress through the first phase of development and commercialization engagement. We are also in active engagement with a new top 10 global automotive OEM in addition to our existing customers. With regard to QS ecosystem development, we continue to add world-class partners. On September 30, we announced an agreement with Corning to jointly develop ceramic separator manufacturing capabilities based on our COBRA process. Corning is a global leader in advanced materials, and they bring deep expertise in ceramics processing and proven manufacturing excellence to the QS ecosystem. In parallel, we successfully completed the initial phase of our collaboration with Murata Manufacturing, have signed a subsequent contract, and progressed to the next phase of that relationship. Our goal is to make QS technology the clear choice by providing our customers with a turnkey ecosystem to serve the global demand for better batteries. With Murata and Corning, we have two of the most world-renowned technical ceramics manufacturers as ecosystem partners, and we will continue to grow the ecosystem further. With our achievements this quarter, our vision for the commercialization of our next innovation in battery technology is beginning to take shape. We are executing consistently towards our key annual goals, demonstrating our technology, engaging with partners, and building out our capital-light development and licensing business model. Everything starts with execution, and we are proud of our team's performance. This year, we have already accomplished two of our key operational goals, baselining our COBRA process and beginning shipment of the COBRA-based QSC5 cells, continuing our track record of consistent execution against our goals. Q3 also saw our first technology demonstration with the Volkswagen Group, the Ducati V21L. We are expanding our collaboration with existing customers and adding new customers. We have also expanded our global ecosystem of world-class partners. The third quarter also marks another exciting milestone. We are beginning to show returns from our capital-light development and licensing business model, driving over $1 million in customer billings in Q3. Our ambitious targets naturally present many challenges to overcome, and there is much left to do. Our objective is clear: revolutionize energy storage, capitalize on our enormous market opportunity, and create exceptional value for our shareholders. With this aim in mind, we are excited to update shareholders on our continued progress over the months and years to come. With that, let me hand things over to Kevin for a word on our financial outlook. Thank you, Siva. Kevin Hettrich: GAAP operating expenses and GAAP net loss in Q3 were $115 million and $105.8 million, respectively. Kevin Hettrich: Adjusted EBITDA loss was $61.4 million in Q3, in line with expectations. A table reconciling GAAP net loss and adjusted EBITDA is available in the financial statement at the end of our shareholder letter. We continue to drive operational efficiency consistent with our capital-light licensing focus. We revised and improved our full-year guidance for adjusted EBITDA loss to $245 million to $260 million. Capital expenditures in the third quarter were $9.6 million. Q3 CapEx primarily supported facilities and equipment purchases for the Eagle Line. As a result of efficiency gains and process improvements, including from the COBRA process, as well as a change in timing of certain equipment ordering, we revised the range of our full-year guidance for CapEx to $30 million to $40 million. In Q3, we bolstered our balance sheet and completed our at-the-market equity program, raising $263.5 million of net proceeds in advance of the August 10 expiration of our shelf registration. We ended the quarter with $1 billion in liquidity. We now project our cash runway extends through the end of the decade, a twelve-month extension from our previous guidance of into 2029. Going forward, we plan to move away from providing updates on cash runway and will begin providing updates on customer billings. Customer billings represent the total value of all invoices issued by QS to our customers and partners in the period, regardless of accounting treatment. Customer billings is a key operational metric meant to give insight into customer activity and future cash inflows. The metric is not a substitute for revenue under US GAAP. Customer billings in Q3 were $12.8 million. In Q3, we invoiced VW PowerCo under the upgraded deal announced in July. The resulting cash inflows benefit QS shareholders. They will be directly reflected on the balance sheet as cash when we receive payment. During the collaboration phase of this particular deal, because of the related party relationship with VW, in accordance with US GAAP, a liability of equivalent value will also be created. QS has no repayment obligation with respect to these liabilities. Once relieved, rather than impacting the P&L, this value will accrue directly to shareholders' equity. Payments from other customers or partners, we expect, will be accounted for differently due to the lack of equity ownership or significant related party ties. Dan Conway: Thanks, Kevin. We'll begin today's Q&A portion with a few questions we've received from investors or that I believe investors would be interested in. Siva, the world's first live demonstration of QS solid lithium metal batteries in a Ducati V21L motorcycle premiered at IAA Mobility on September 9. Why is this such an important milestone? What are the next steps on your commercialization roadmap? Siva Sivaram: Dan, that announcement and seeing the bike ride across the stage was an emotional moment for all of us at QuantumScape Corporation. And it was obviously a huge milestone for all of our employees, investors, and partners. This is long in the making. Now we'll be demonstrating our battery in the field and gathering as much data as possible from field testing. Stepping back a bit, this was a major step in our strategic blueprint. You can think of this as four tracks that are running in parallel: the Ducati program, our PowerCo relationship, our other customers, and our ecosystem development. With respect to PowerCo more broadly, announced at IAA Mobility, we are working toward automotive-grade standards with the goal of a series production car with QS technology before the end of the decade. With respect to other customers, we are working towards commercialization deals with additional automotive OEMs. And, of course, we are building out our ecosystem with world-class partners like Murata and Corning. That way, we can handle a customer automotive customers at a turnkey supply chain to serve the massive and growing demand for our technology. These are the main areas that we have to execute on. Thanks, Siva. Dan Conway: On that note, QS continues to advance discussions with key high-precision ceramic players, most recently announcing an agreement with Corning and advancing our partnership with Murata. How does this fit into the company's overall strategy of building out the QS global partner ecosystem? What are the key benefits of this business model and some potential ways QS may receive economics from these partnerships? Siva Sivaram: Ben, QS' proprietary ceramic solid-state separator is our core IP. It enables our anode-free architecture and its performance advantage. Our strategy involves partnering with specialized high-precision ceramic manufacturers such as Murata and Corning to scale up separator production. These partners would supply QS separators to cell manufacturers like PowerCo, who would handle final cell assembly. This aggregated model allows QS to leverage the manufacturing expertise and balance sheets of partners with strong reputations in manufacturing as well as IP protection. Ceramic production is a highly specialized skill set, and this allows our cell production partners to focus on their core competency. It accelerates the scale-up of our technology by tapping into their manufacturing capabilities. In short, Corning and Murata are part of a complementary and expanding global ecosystem designed to de-risk scale-up and enable a capital-efficient path to commercialization. We believe each partner contributes unique strengths to help us efficiently scale our separator production into high volumes. As you would expect, we are continuing to build out the entire QS ecosystem with additional partners. Kevin Hettrich: And just to add on to that, in the fullness of time, the ecosystem would represent a third source of cash inflow under our capital-light development and licensing business model. The first is monetizing collaboration and customization work with our OEM partners. The second and largest source of inflows would be licensing as our customers produce cells using our technology. The third one would be value sharing from our ecosystem partners. Dan Conway: Thanks, Kevin. Can you expand further on customer billings as a key operational metric? How do customer billings translate into cash inflows? First, to expand on the significance of customer billings. Kevin Hettrich: Our first-ever invoices totaling $12.8 million in Q3 2025 are by themselves an important commercial milestone in the history of our company. It's nice to have arrived at the chapter where we're billing customers. I'd also highlight to investors that customer billings are evidence of our capital-light business model at work. On the front end, we monetize development activities for our customers to tailor our core technology to meet their specific needs. Subsequently, as the customer ramps production, we realize royalties over the lifetime of the project. Kevin Hettrich: As we continue to develop further generations of our technology, we'll seek to maintain these lines of business to generate consistent and compelling cash flows. Payment for development activities has the benefit of being near-term. The royalty payments represent the majority of the value capture opportunity through a consistent long-term stream of high gross margin revenue. Value sharing from ecosystem partners represents further opportunity for shareholder returns. I'd also ask investors to keep four things in mind when interpreting our customer billings metric. First, the metric is not a substitute for revenue under US GAAP. Second, the accounting for individual customer billings may differ significantly. Third, the amounts billed to customers may vary from quarter to quarter due to fluctuations in activity as we progress through various phases of an agreed scope of work. Lastly, it is important to note that future cash inflows can diverge from customer billings, for example, as a result of timing differences, payment terms, prepaid customer deposits, or any adjustments to final payment amounts. Dan Conway: Okay. Thanks so much, Kevin. Now ready to begin the live portion of today's call. Operator, please open up the line for questions. Operator: Thank you. If you are called upon to ask your question and are listening via speakerphone on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. To be able to take as many questions as possible, we ask that you please limit yourself to one question and one follow-up. Again, our first question comes from the line of Winnie Dong with Deutsche Bank. Your line is open. Winnie Dong: Hi. Thank you guys so much for hosting. First question is, I was hoping you can help me understand a bit more about the joint development of the ceramic separators with Corning, which you recently announced. If you can help me sort of understand maybe some similarities and differences in comparison to Murata. And then on Murata itself, you say you've successfully completed the initial phase of collaboration and then signed a subsequent contract. I was hoping if you can also help me better understand the nature of the agreement, perhaps some details of the economics or the technology know-how in terms of the transfer of it? That's my first question. Thank you. Siva Sivaram: Winnie, thank you. Thanks for the question. As you pointed out, this is an extremely important part of our business model to bring an ecosystem together for QS. Ceramic manufacturing is, as I mentioned earlier, an extremely specialized skill set. We want to bring people with us who can manufacture in high volume, taking our COBRA process and ramping it into the volume and using their balance sheet to put capital in building these factories up. When we started out with Murata about nine months ago, we both entered into a development agreement where they came in to evaluate what we needed to do, what they need to do, etc. They concluded that we entered into the next system where we start to ramp our relationship into a much higher level with commitments of volumes, etc. They understand what the volumes involved are and what our customers' needs are, etc. So we are getting to be in that phase. We can take COBRA and ramp in volume. We have been working with Corning throughout this time as well. Corning had also been under an early development contract with us, and then we came into a more detailed relationship as we announced in early September. The reason we need them is, as you would think, it's pretty obvious, the opportunity is so large that it is good for us to have two suppliers. Initially, they'll be complementary in different aspects of ceramic processing. I expect over the long term to have a much larger portion that each one of them does. Both of them are extraordinarily competent manufacturing partners, and they are excited to be part of this relationship. I spent time with both CEOs at length, and they are very, very eager to get launched into high volume production and work with our big OEM partners. Winnie Dong: That's very helpful. Thank you. And then the second question is the new metric that you just introduced, the customer billing metric. I was wondering if you can give us maybe a rough idea on the conversion time to revenue or to collection of those funds. And then is that sort of the main metric you will be providing over time as opposed to sort of bringing out what revenue could look like in the next maybe one to two years or so? I just wanted to understand that dynamic a little bit better. And then I think last quarter, you mentioned there is some investigation being done in terms of revenue recognition. I was hoping if you can also tie that into your response. Thank you. Kevin Hettrich: Hi, Winnie. So, just to outline back the question parts, there was a going to the definition of customer billings, talk about their importance, and also on the accounting treatment of VW PowerCo. So I'll take them in order. Just to be on the same page, we define customer billings as the total value of all invoices issued by QS to our customers and partners in the period, regardless of accounting treatment. Where we hope it's useful to investors is it's a key operational metric to get insight into customer activity and into future cash inflows. I think you also had a question about how those translate into the timing of cash flow payments. There, I did mention in my remarks that you could see a divergence from billings to future cash inflows for a variety of reasons. Could include things like timing differences in payment from customers, prepaid customer deposits, adjustments to final payment amounts, typical operational considerations there. You asked about the importance. First of all, it is very nice to be in this chapter where we're doing work of value to customers and billing them for it. That's a nice moment for our company. On the VW PowerCo treatment, the way that the accounting works is the cash inflows, of course, at a broader perspective benefit QuantumScape Corporation shareholders. They'll be reflected on the balance sheet as cash when we receive them. During the collaboration phase of the VW PowerCo deal, because of the related party relationship with VW, in accordance with US GAAP, a liability of equivalent value will also be created. A reminder to shareholders, we do not have a repayment obligation with respect to these liabilities. Upon relief of the liability, rather than impacting the P&L, this value will accrue directly to shareholders' equity. This accounting treatment is specific to the collaboration phase of VW PowerCo. Payments from other customers or partners we expect to be accounted for differently due to the lack of equity ownership or significant related party ties. Winnie Dong: Got it. That's very helpful. Thank you. I'll pass it on. Operator: Our next question comes from the line of Jed Dorsheimer with William Blair. Your line is open. Mark Shooter: Hi, everybody. You have Mark Shooter on for Jed Dorsheimer. Congrats on the progress and especially the Ducati demo. It's always a lot of learnings in actually creating the pack and integration. So, congrats on that. During that presentation, VW mentioned cells and EVs by the end of the decade. If we were to take this as 2029, does this track with your development timeline? So if we're assuming that these samples meet all the required cell specs, and a C-sample stage gate is when you're producing those cells at scale. Four to five years seems a bit longer than we expected. What do you think are the remaining technical boxes that need to be checked? Is there any opportunity to pull this forward with VW? Or potentially a little competition with the other two customer engagements you have ongoing? Siva Sivaram: Mark, thanks for the question. By the way, just to be technically correct, the end of the decade is 2029. So just to make sure we don't add an extra year into the calendar. The second thing is, look, actual prioritization belongs to the customer, and they announce plans the way they see it. Our job is to make sure we are going all out. We do everything that we can to make sure they are able to ramp as fast as they can. We are working hand in glove very closely with Volkswagen PowerCo. They know exactly the status of the industrialization because we are working closely with them. We will continue to do that. Now in parallel, when we go work with the new customers that we are talking about, both with an existing customer and the new customer, it's a completely independent path from what we are doing with Volkswagen. We don't try to create competition for our customers, but we work very, very, very closely with each customer, adapting our technical roadmap to their product roadmap. So work goes on in real-time so that we can get to market as quickly as possible. As Kevin points out, in the meantime, they continue to pay us for the development activity that we do together. Mark Shooter: Appreciate the color. Thanks, Siva. 2029 it is. I didn't mean to assume 2030 there. Just it's not bad. I was that would be a separate track here. One engineering group grew to another before the end of the decade. December 30 worst 12/31/2029. Got it. Loud and clear. About the VW relationship as well, in the last iteration of this, there was some space left in for other potential applications where VW could source cells and sell to other markets potentially. Was this written in to give space to the Ducati program? Or should we be looking at even more adjacent markets? Is there any potential there? Siva Sivaram: Yeah. I actually do not want to, again, talk for the customer. But you are absolutely right. We are looking at non-Volkswagen Group applications as well into that contract. The Ducati being part of the Volkswagen Group would be included in the regular production. We do expect to have partnerships across independent of the Volkswagen Group with other new customers and customers working with PowerCo that we both work together. Mark Shooter: Great. Thank you. Operator: Our next question comes from the line of Delaney with Goldman Sachs. Your line is open. Aman Gupta: Hey guys, you have Aman Gupta on for Mark. Thanks. Congrats on the progress. Maybe on the other two customers that you mentioned in your prepared remarks, Siva, could you maybe help us get a sense of where the JDA stands with the customer you announced last quarter and what needs to happen to get that to a more complete commercial agreement? And similarly, on the top 10 global auto OEM, you mentioned you're in active engagement with what it would take to go from the active engagement to a licensing or a JDA agreement? Thanks. Siva Sivaram: Aman, thanks for the question. Of course, we are very excited about these two additional opportunities. We have been alluding to them over the last couple of quarters as to their maturation. We've been already in active engagement with them. As always, we let the OEMs do the announcement, and we follow them. You saw that at the IAA Mobility, we had Volkswagen come out and talk in detail about how they are taking the product into different applications that they have in mind. The same way, we will be doing that with these two as well. As much as I would love to talk about it ahead of time, it would not be appropriate for me to come and tell you how they are doing. But you will see over time as they start to talk about it more and more, you will get a clearer idea of who they are, what they are doing, and how they are doing. I'm very excited about these prospects. Aman Gupta: Thank you for that call, everyone. Maybe secondly, on this partnership approach, recognizing the Corning and Murata relationships for the ceramic separator, I think you mentioned the possibility of expanding the ecosystem to other areas for QS. Can you give us a sense of what areas you might be looking to include for partnerships? And what the kind of structure of these partnerships looks like from maybe a financial standpoint as well? Thank you. Siva Sivaram: Yeah. I'll start with the partnership, and then Kevin will give you the financial impact of those. Look, we are developing a technology ground up that is very, very different in both its potential capabilities and scale-up from regular battery technologies. So wherever possible, we like to include competent and reliable partners from the ecosystem to be with us to invest capital. We talked about these two with respect to the ceramic separators. Have the high-touch transfer. When we develop this no-compromise solution, we want to be able to give them whether it is materials, equipment, processing, software, or metrology. We want to wrap all of this together in a package that they can ramp. In each of these, where we have original IP and unique capabilities, we like partners to come along with us. We want to make it as easy as possible for our OEM customers to ramp production quickly. It would behoove us to bring these partners along. We continue to evaluate additional partners to join the team, and you can see the quality and caliber of the partners that we choose to work with us. Kevin Hettrich: On the finance side, as much as the cell is differentiated, their solid-state lithium metal technology, the energy density, the charge time, and the safety, we think that we're equally proud of the business model as well. We think that's good for shareholders. It's capital-light. It helps us focus on where we think we add value the most, which is in innovation and customer empowerment. It allows each member of our cell manufacturer customer ecosystem player to play to their strengths, which we think is in terms of time and effectiveness and risk-adjusted path to market. Best, and in terms of how our QuantumScape Corporation shareholders see value from that, it really comes from three ways. The differentiation of the self-performance creates value, and our shareholders capture it in three ways. The first would be the monetization of the collaboration work. You saw that in the quarter, $12.8 million of customer billings, longer-term licensing when our customers are producing cells from their factories, we'd get a licensing stream. And then finally, would be value sharing with our ecosystem partners. That together, we think, each of those is important in itself and also gives a robustness to our approach. Aman Gupta: Thank you. Operator: And as a reminder, it is. And with no further questions at this time, I will now turn the conference back over to QuantumScape Corporation management for closing remarks. Siva Sivaram: Thank you, operator. Finally, today, I would like to take this opportunity to congratulate the entire QS team on their outstanding performance this quarter, the execution that they have shown making this IAA announcement so powerful and well-received. And as always, thank you to our shareholders for their continued support. We look forward to updating you on further progress in the months to come. Thank you. Operator: And ladies and gentlemen, this concludes today's call, and we thank you for your participation. You may now disconnect.
Operator: Good day, and welcome to the Q3 2025 SEI Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Bradley Burke, Head of Investor Relations. Please go ahead. Bradley Burke: Thank you, and welcome, everyone. We appreciate you joining us today for SEI's third quarter 2025 earnings call. On the call, we have Ryan Hicke, SEI's Chief Executive Officer, Sean Denham, Chief Financial Officer and Chief Operating Officer, and members of our executive management team including Jay Cipriano, Paul Klauder, Michael Lane, Phil McCabe, Mike Peterson, Sneha Shah, and Sanjay Sharma. Before we begin, I'd like to point out that our earnings press release and the presentation accompanying today's call can be found under the Investor Relations section of our website at seic.com. This call is being webcast live and a replay will be available on the Events and Webcast page of our website. With that, I'll now turn the call over to Ryan. Ryan? Ryan Hicke: Thank you, Brad, and good afternoon, everyone. We appreciate your time today, especially since we recently spent nearly three hours together during our Investor Day just five weeks ago. First, let me express our gratitude for the overwhelmingly positive feedback we've received since Investor Day. Many of you highlighted the energy, enthusiasm, and clarity of our long-term vision as standout themes. That affirmation reinforces our strategic confidence. We are committed to disciplined execution, transparent communication, and creating long-term value for our clients and shareholders. Turning to the quarter's results, we delivered outstanding performance with EPS reaching 1.3¢. Excluding one-time items, that's an all-time high for SEI. Earnings growth was robust both sequentially and year over year, driven by strong revenue growth and margin expansion. This is the kind of consistent performance we have been messaging over the past few years. Net sales events totaled $31 million with our investment managers business leading the way. IMS posted a record sales quarter reflecting surging demand for outsourcing and client expansions. This is a testament to the strength of our sector, our competitive position in that sector, and our continued investment in future capabilities. As we said at Investor Day, we believe the growth runway here is exceptional. Congratulations to Phil and his team. IMS sales activity was notable for its broad-based nature, with no single client driving the performance. Approximately two-thirds of our sales events were tied to client expansion, increasing our wallet share. Additionally, two-thirds of the events came from alternative managers. This level of diversification and momentum across client types, both new and existing, reinforces our conviction in the durability of our growth strategy. We also continue to engage with large well-known alternative asset managers who are new to exploring outsourcing fund administration. We believe we are well-positioned in these processes given our best-in-class capabilities, track record of execution, and client reference ability. Due to the size and complexity of these opportunities, the contracting process tends to be longer. And we expect to be able to provide more clarity on the nature of these opportunities in our pipeline in early 2026. Switching units, sales activity in our asset management business was highlighted by the single largest mandate win in our institutional segment to date. A multibillion-dollar fixed income assignment for a state government client. We believe this win reflects the early impact of Michael Lane and the entire team's evolved approach, introduced to this audience last month. We are delivering targeted solutions in areas where SEI has deep expertise while complementing our established OCIO offering. The win also reinforces our ability to compete successfully for specialized mandates and demonstrates our capacity to meet the growing demand for tailored investment strategies from large clients. Private banking secured a $13 million win this quarter, partnering with a leading super-regional U.S. bank on a comprehensive transformation initiative across all business lines. This engagement is strategically significant, encompassing technology, outsourced operations, and a substantial professional services component. Our multiyear engagement with this firm to help them define their targeted operating model and build a business case was instrumental in winning the business. This win is an enormous affirmation of the pivot we made a few years ago to be the market leader in the regional bank segment. We anticipate the project will involve extensive work to retire the client's legacy systems, execute complex data conversions, and integrate new platforms. Importantly, SEI is uniquely positioned to support our clients throughout this transition with our professional services offering, representing an incremental opportunity that is not reflected in Q3 sales results. Our strong wins this quarter were offset by a contract loss in private banking, which drove lower net sales for the segment. We've noticed since 2022 that this client was at risk due to a strategic shift away from their bank trust model. And we received formal notice at the very end of September. This is our only notable loss year to date in private banking. The financial impact should be modest as fee conversions typically occur over multiple years. Importantly, we're confident that recent and future wins will more than offset this loss, supported by a healthy diversified pipeline of opportunities nearing the finish line. Net sales would have approached $47 million for the quarter excluding this single client loss. Even with the loss, posting $31 million in net sales events is a strong result, especially as our new wins are well aligned with SEI's long-term strategic direction. Stepping back, SEI's net sales events have surpassed $100 million year to date, a record for SEI through the third quarter. And as we sit here today, we have more confidence in our sales pipelines when compared to Q3 last year. Building on this momentum, our confidence in the Stratos partnership has only grown since the July announcement. Although we have not yet closed, we are already seeing tangible benefits. Awareness of SEI is increasing across both broker-dealer and RIA channels, and we are receiving renewed inbound interest in our capabilities as a result of the announcement. That enthusiasm was on display at the Stratos National Meeting in mid-September, where advisers consistently asked how they could do more with SEI. And earlier this month, Stratos' leadership, including CEO Jeff Concepcion, joined us at our annual SEI Advisor Summit on Marco Island, which saw record client attendance. Our SEI advisers responded very positively to the partnership and the expanded opportunities it creates. We are on track towards the initial closing, which is expected in late 2025 or early 2026. As we said in New York, we are allocating capital to the highest return opportunities and driving margin expansion through cost optimization and targeted investments in technology, automation, and talent. We're in the early innings of AI and tokenization at SEI. Internally, adoption is encouraging, and we're applying AI to real workflows. Externally, we're advancing tokenization pilots with partners. We expect these initiatives to support efficiency and scalability over time. But near term, our focus is on use case validation and a disciplined rollout. In summary, our year-to-date sales events, record EPS, and expanding pipeline reflect SEI's continued momentum, underpinned by disciplined execution and a clear enterprise strategy. Our integrated approach is breaking down silos, enabling us to scale across segments, capture wallet share, and deliver consistent repeatable growth. We are laser-focused on value creation, measured by operating margin, EPS growth, and total shareholder return. Significant opportunity is ahead, and our confidence in SEI's ability to execute and outperform is stronger than ever. And with that, I'll turn it over to Sean. Sean Denham: Thank you, Ryan. Turning to slide four, SEI delivered an excellent quarter. Let me start by calling out the unusual items that impacted our Q3 earnings. We recognize the benefit of approximately $0.03 from insurance proceeds related to a 2023 claim into other income. An additional $0.00 from an earn-out true-up in our advisors business. These gains were offset by $0.02 of M&A expense tied to our planned acquisition of Stratos and $0.02 of severance expense related to cost optimization initiatives. For context, unusual items benefited EPS by $0.58 last quarter and $0.08 in Q3 of last year. Excluding these items, EPS grew meaningfully, up 8% sequentially and 17% year over year. It's worth repeating, Q3 represents an all-time record level of EPS for a quarter excluding unusual items like the significant gain on sale realized last quarter. Let's take a closer look at how each of the business units performed on Slide five. Private banking saw a 4% increase in revenue year over year, thanks in large part to healthy growth on our SWP platform. Our investment manager segment delivered another standout performance, posting double-digit revenue and operating profit growth. We continue to see robust growth in alternatives across both the U.S. and EMEA. Traditional revenue in IMS also grew at a healthy pace, benefiting in part from favorable market appreciation. Turning to advisers, this business posted the highest year-over-year revenue growth among all of our segments. We're seeing growth driven by market appreciation, contribution from our integrated cash program, and improving momentum in the underlying business. Institutional revenue and operating profit were essentially flat for the quarter, reflecting lower equity exposure and less benefit from market appreciation compared to our advisors business. On a sequential basis, both revenue and operating profit increased across all business units, with especially strong margin expansion in investment managers and advisers. As you'll see on Slide six, margins were solid in Q3 with meaningful improvement both year over year and sequentially. The year-over-year decline in private banking margin was due to one-time items that benefited last year's results. If we exclude those, private banking margins would have increased by approximately 60 basis points. Institutional margins declined sequentially mainly due to a handful of choppier items in both the current and prior periods. None of these were individually material, but the impact is more pronounced given the lower revenue base in this segment. For investment managers, margins came in ahead of what we communicated last quarter, supported by revenue growth that exceeded 25% annualized from Q2 to Q3. This growth was fueled by factors that are inherently difficult to forecast, such as market appreciation in the traditional business and the timing of capital deployment in the alternatives business. Advisors margin growth reflected strong revenue growth in $2 million earn-out true-up contributing about 120 basis points to Q3 margin. Margin improvement also benefited from our integrated cash program, which added $10 million to operating profit versus the prior year. Finally, we incurred severance costs of nearly $4 million this quarter, reflecting our commitment to supporting employees through transitions as we continue to evolve our business. The impact was spread across all business units, and most notably corporate overhead. Excluding severance and approximately $3 million of M&A costs related to Stratos, corporate overhead came in at $38.5 million for the quarter. Turning to sales events on Slide seven, Ryan discussed the most notable items in the quarter, including strong wins in investment managers, our large regional bank win in private banking, and a significant institutional win with a new government client. In Asset Management, this quarter's wins offset client departures, most notably in our institutional segment. While losses were previously the only story in this segment, we are now seeing growth elsewhere that offsets these headwinds. A promising sign for the trajectory of our asset management business. Turning to Slide eight, SEI delivered strong asset growth, both sequentially and year over year. Growth in assets under administration was broad-based across CITs, alternatives, and traditional funds. While CITs and traditional funds receive some benefit from market appreciation, the majority of the AUA growth was driven by alternatives. Assets under management also increased, with modestly positive net flows in advisers driven by accelerating growth in ETFs and SMAs, which offset continued pressure on traditional mutual funds. Institutional flows were essentially flat, reflecting offsetting sales events. While overall net flows were modest, this trend marks a clear improvement over prior years and supports our evolving asset management strategy. LSV assets under management each increased over 4% from Q2 driven by strong market performance and outstanding performance relative to benchmarks. Market appreciation was only partially offset by nearly $3 billion of net outflows, similar to the pace realized in the first half of this year. LSV performance against relative benchmarks is supporting continued strength in performance fees, which totaled $8 million or $3 million at SEI's share in Q3. Turning to capital allocation on Slide nine, we ended the quarter with $793 million of cash and no net debt. We are maintaining an excess cash balance in anticipation of funding the first Stratos close with the balance sheet cash. Share repurchases represented a primary use of capital, totaling $142 million in Q3 and $775 million for the trailing twelve months. That represents SEI repurchasing more than 7% of shares outstanding just over the last year. At the same time, we're deploying incremental capital to strategic investments that support long-term growth. This quarter, we made a $50 million anchor investment in LSV's market neutral hedge fund. Our early commitment adds credibility to the new strategy and is expected to support future fundraising from institutional investors. Our investment had a strong start, contributing $1.5 million to Q3 results before tax, which has captured a net gain on variable interest income. In summary, SEI's third quarter results reflect continued progress across our core businesses. We are focused on driving growth, optimizing margins, and deploying capital to maximize shareholder value. With that, operator, please open the call for questions. Operator: Thank you. Please press 11 on your telephone and wait for your name to be announced. To withdraw your question, press 11 again. And our first question will come from the line of Crispin Love with Piper Sandler. Your line is open. Crispin Love: Thank you. Good afternoon. Hope you're all well. Ryan, you mentioned that two-thirds of your sales events were from alternatives. I don't recall you ever making a comment quite like that as it pertains to sales events. First, are those two-thirds similar to recent quarters, give or take? And then second, when you look at those sales events, the recent ones, are the vast majority from the largest alternative players out there, such as the ones that you called out on a slide at Investor Day being clients, or are there smaller nonpublic alts as well that make up a good portion of those wins? Ryan Hicke: Hey, Crispin. Great to hear from you. It's a great question. I'll go kinda high level and then kick to Phil. So, again, I think it's just an opportunity for us to offer continued transparency into sort of where we're seeing growth. And as we touched on in the investor day, when you look at alternatives in that overall space and the surging demand for outsourcing that I mentioned, we're just kinda calling that out and trying to give a little bit more transparency and granularity. But when you go to Phil, if you wanna chime in here, I think the Crispin's question is, is it a lot of the same names that we highlighted that day or new names or a little bit of both? Phil McCabe: Thanks, Crispin. And this is Phil. Actually, it's a mixture of everything, large clients, small clients, but no single event was greater than 10% of the overall number. So it really is a mixture of things anywhere from private credit to insourcers moving to outsourcing, retail, all to, you know, pretty much across the board. We're seeing a lot of alternatives in CITs. It really was a mix. We expect some other announcements, probably early next year to talk a little bit more about some of the larger managers that are moving from insourcing to outsourcing. Crispin Love: Great. Thank you. Appreciate that and, definitely good news there. Second question, can you just give any color on the known contract loss in private banking with a long-time client? Any details on the losses of merger, competitive takeaways? Just any color would be great. Ryan Hicke: Sanjay? Sanjay Sharma: Yep. I can answer that question. First of all, this is I to highlight this is one of loss in last three plus years since I took over to responsibility. And this is something, as Ryan mentioned, knew about it since 2022. This was a major operating model change for this client. And so we should not read this like a trend. This is one-off scenario. We have worked with the client. And as you could see, these kinds of deconversions, they take a long time. The onboarding takes time. The deconversion also takes longer time. But as Ryan has mentioned and Sean has called out that to be on the safer side, we took the hit and announced it in one go. Ryan Hicke: I do. And I think, Crispin, it's really important to note, and we try to call this out specifically in the script. We got the notice literally at the very end of September. And it's a firm that we have known a long time. We have been actively engaged in trying to help them think through their future operating model. But as Sanjay just highlighted there, we got the notice. We took the entire loss. I don't think we have full insight into the entire deconversion schedule. And exactly what will go when. So we're definitely erring on the side of conservative here. And I think it's really important to emphasize Sanjay's point that this is a one-off event. This is absolutely not a trend. And it can't be ignored, the win that we also have in this quarter as well. But you know, certainly not one. We don't like losses. We worked really hard with this firm. We will support the firm actively as a great partner. Through their transition to a new operating model. As you know, I always live in a world of optimism. I think there's always gonna be more opportunity for us when we treat the client right on the way out. They will probably find a way back to SEI in other ways. Crispin Love: Perfect. Thank you. I appreciate taking my questions. Operator: Thank you. One moment for our next question. And that will come from the line of Jeff Schmidt with William Blair. Your line is open. Jeff Schmidt: Hi, thank you. For the integrated cash program, you're earning close to the Fed funds rate on that cash. With a little spread. Is Internet getting a fixed rate? Or are you considering allocating some of that to fixed rates now that the Fed is easing again? Or how should we think about that? Paul Klauder: This is Paul, Jeff. So on that, we're earning about 370 basis points presently and we're giving the investor about 55 basis points yield. Which is pretty attractive versus our competitors. So we'll continue to look at that investor yield as rates come down. Typically, when a rate comes down 25 basis points, we usually impact the investor by 15 and then we would impact ourselves at 10. At some point, we'll get to a floor, but that's kind of the current program and the current state of affairs on the integrated cash. I think one thing to note when it comes to the integrated cash is to also note that we have 20 times the amount integrated cash and fixed income portfolios. And so when you see a decline in rates, you typically are going to see over time an increase in price. And so some of that you look at it in isolation, it'll have an impact. But overall, it'll be muted by the amount of fixed income we have in our portfolio. Jeff Schmidt: Okay. And then in private banks, just looking at the expense growth there, it's running a little bit higher over last quarter '2 than we had seen in the previous really a year or two. Is that mainly investments in talent that you've been calling out recently? Or what's driving that? And then how should we think about the offshoring with the new service center? Would that bring growth down over time? Ryan Hicke: Jeff, I don't think there's anything unusual to call out here with banking if Sanjay wants to provide color. Some of it's just, as Sean mentioned, investments we make to kind of onboard the backlog. Make sure that we're kind of set up to, you know, really successfully create the experience that we want with these clients. But I don't think there's anything you should read into that, Sanjay. Sanjay Sharma: No. And I would act with the same. I think for us, the number one most important thing is backlog delivery. Signing a new client is a great thing. Yes. We all celebrate. Successfully delivering and onboarding those clients is equally important. And that's why we would see sometimes that, yes, and that could be for professional services delivery, or it could be converting new clients. Jeff Schmidt: Okay. Great. Thank you. Operator: Thank you. One moment for our next question. And that will come from the line of Alex Bond with KBW. Your line is open. Alex Bond: Just wanted to start with the IMS business. Obviously, a strong quarter there. And I know you mentioned the growth there was in part driven by market appreciation and the deployment timing. But just trying to size up the 3Q margin level is the right way to think about, the margin for this business on a forward basis considering, the Alt's deployment. And then also, just how the margin here might be impacted sequentially by the ongoing investments you're making and, you know, just trying to see if there will be any impact there you know, from a timing perspective just in terms of a higher expected investment level, in one quarter or the other? Sean Denham: Sure. So, so this is Sean. So as I indicated last quarter, we were actually kinda given some light guidance to the street that the margin improvement we were we're anticipating good margins going forward, but we do know we need to make certain whether it's anticipation of new clients coming on board and us hiring ahead of those clients, Again, as I mentioned in my remarks, the Q3 improvement in margins did take us a little bit by surprise. Some of that, as Phil mentioned, was due to market appreciation. I mentioned that in my comments. That margin or market appreciation obviously is not tied to cost. So when with the market appreciation, you're going to have higher margins than expected. On your the second part of your question on what we expect in the future, we're still expecting strong margins. When I give guide or light guidance, I would I would call it, light guidance on what we may expect or what you can expect from margins going forward, I'm really giving more guidance over a period of time as opposed to quarter over quarter. So we do have, you know, for Q4 going to Q1 into next year, we will continue to be making investments into platform. There's certain things that in Phil's business we need to invest in front of. Whether that's hiring talent in order to support future growth, whether that is certain parts of our technology base, So in in a broad brush, we would expect margins you know, to be relatively flat, if not a downtick especially as we move into 2026. Ryan Hicke: Got it. Understood. That's thing I think it's important to add I think it's important to add to that, though, that I think we try to continue to emphasize this message. When we think about how we run the company, we're not trying to run the company on a unit by unit basis. And get too focused on the individual margins in the unit. So if we saw and and I'm not forecasting or foreshadowing anything. I'm just saying, what we see as Phil talked about in New York, what we see with that pipeline and what we see with that client base right now we are going to maximize that opportunity. And if that required us to take the margins down a little bit in IMS, we would be more focused on SEI's margins and what we would do in other units to make sure SEI's margins continue to grow and expand, as Sean talked about, in New York. But, I mean, Phil, I think, is really consistent as he was in New York and here. We are really, really enthusiastic about what we see right now with our existing client base and pipeline in IMS. And where we're positioned competitively, we will not let that window pass us by. Alex Bond: Got it. Understood. No. That's helpful. And then maybe just one more. Just wondering if you could speak to the sales mix between, US and international this quarter and also maybe how that's tracking year to date relative to last year. I know it's still early days on the on the revamp for that area of the business, but maybe additionally, if you could just walk us through maybe what we should be looking for over the coming months and quarters as it relates to just tracking the progress you're making on the on the international front. Thank you. Sanjay Sharma: Yeah. This is Sanjay here. So on the international front, as I said on the Investor Day, we are in the early phases. Defining our go to market strategy. And as I as I said at that time, we're going to focus on maximizing our presence in the jurisdictions we already have presence. So, for example, UK or Dublin or Luxembourg, those jurisdictions have been we continue to expand our presence there. And we are in in the process of defining our strategy. And and the other part, we're looking at, okay, how we maximize our opportunities to existing clients. The clients, they we already had the assistance in US market. And they have presence in those jurisdictions. So that's what our focus would be. Ryan, Sean, you want to add anything? Sean Denham: Yeah. I I will just this is Sean. I'll just echo what Sanji said. Coming off the heels of Investor Day just a few weeks ago, kind of letting everyone there know that, you know, we are looking at the the the difference between domestic and international. Would echo what Sanjay said. Little bit early days. So I don't think as we sit here today, we're ready to start giving color around revenue mix between international That that'll come more as we realign our segments, as we start disclosing our segments and with anticipation that at that time we'll give more breakdown between international growth versus domestic growth. Alex Bond: Got it. Thank you. Operator: Thank you. One moment for our next question. And that will come from the line of Ryan Kenny with Morgan Stanley. Your line is open. Ryan Kenny: Can you unpack a little bit more how you're thinking about the pace of buybacks you did 1.6 million shares in the quarter. Is that the right pace going forward? Or should we expect to slow down as the Stratos acquisition moves forward? Sean Denham: Yeah. So you know, the way I would answer that is, very similar to the way I I answered at investor day. So we are expecting that free cash flow on a you know, forward looking twelve month run rate would be we would be returning that 90 to 100% through dividends or buyback. So that's the way I'm looking at it. So the cash build, as I is anticipation of drawing that cash down through the Stratos consummation of the Stratos deal And then going forward, I think you can expect whatever our free cash flow that we generate, we're gonna be returning that 90 to 100% back to the shareholders either through dividends but primarily through buybacks. Ryan Kenny: Thanks. That's helpful. And then separately, we've seen some modest credit fears in the market with a few bankruptcies, and you're a big private credit servicer. So are you seeing any impact at all in your private credit servicing pipeline? It sounds like no, all good, but be helpful to clarify. Phil McCabe: Sure, Ryan. This is Phil McCabe. I would start by saying that IMS has been IMS has business is really, really diversified by product, by jurisdiction, by type of client. So, but we have spoken to a lot of our private credit managers. They literally are the best of the best in the industry. And they really know how to manage credit risk. They tell us that they're not concerned at all. They're still launching products aggressively. And, you know, collectively, they they do, say that there could be a new manager that entered the space on the smaller side. And there could be some struggles in the future. But that's in a part of the market that we really don't play in. We're on the higher end of the market. They're doing really well. The one inch fact on top of all that, is that we really get paid for the most part with private credit based on invested capital. So we're not subject to mark to market or NAV. So we don't really you know, as of right now, we see any real risk for the business. Ryan Kenny: Thank you. Operator: Thank you. And our next question will come from the line of Patrick O'Shaughnessy with Raymond James. Your line is open. Patrick O'Shaughnessy: Hey. Good afternoon. So I understand I heard you when you said that we should not read today's chunky client loss that you spoke about in private banks. As a trend going forward, but to what extent are there other high-risk relationships your existing private bank's client portfolio that you're keeping an eye on at this point? Sanjay Sharma: Patrick, that's a great question. As of today, we are not aware of any such large client or any such large risk. I also no. Share one one example. Early this month, we hosted all of our clients here in Oaks Campus. The engagement was best engagement over the last three years. So I don't see that as a trend or a big risk. Ryan Shaw? No. I completely agree with you. I mean, if there's you know, we we are always gotta be you know, vigilant in front of our clients, engaged with our clients. But relative to where we were a few years ago, we feel extremely confident that we are in the right place with our clients in the banking business. Patrick O'Shaughnessy: Got it. Appreciate that. Same time. I will say that was that answer. I think I was I appreciate that answer. Sorry. He said he appreciates the answer. Oh, okay. Great. Sorry to interrupt. So and then for my follow-up question, with the divestiture of the Archway family offices business from the investment in new businesses segment, Can you just remind us what's left in that investment in new businesses segment and the strategic importance of that for SEI? Sean Denham: So included in ventures, there's really two main revenue streams, although albeit they're not large. One is our Sphere business, and other the other pieces are private wealth management business. And those, as I mentioned on Investor Day, if and when we resegment the organization, that segment from a revenue standpoint or even from a segment standpoint will cease to exist. That revenue will then follow the client and the related other segment that it pertains to. Patrick O'Shaughnessy: Got it. Thank you. Operator: Thank you. And we do have a follow-up question. I believe that will come from the line of Ryan Kenny with Morgan Stanley. Ryan Kenny: Hi. Thanks for taking my follow-up. Can you quantify how much margin suppression there's been from accelerated investment? Any numbers or quantification we can think about? Sean Denham: Yeah. Ryan, I this is Sean. I'm I I don't think I could quantify that. That's actually not really the way we think about the business. It's a great question, but I could not sit here and quantify that for you. Ryan Kenny: Alright. Thanks. Operator: Thank you. I'm showing no further questions in the queue at this time. I would now like to turn the call back over to Mr. Ryan Hicke for any closing remarks. Ryan Hicke: Thank you all for your questions and for joining us today. As we close the quarter, I want to emphasize that SEI is on a strategy that positions us for long-term success. But I think it's important as we close the call, we reflect a little bit on the results this quarter. We delivered record earnings per share. The IMS unit had a record sales quarter. We had an important strategic win in the banking business and I know we didn't touch on this so much in the Q and A, but there are some really good leading indicators and lagging indicators when we start to unpack what's going on in the asset management businesses at SEI. And for those reasons, we're confident in our ability to capitalize on opportunities ahead, deliver for our clients, and create value for our shareholders. But thanks again everybody for your time and interest in SEI, and we look forward to updating you next quarter. Operator: This concludes today's program. Thank you all for participating. You may now disconnect.
Operator: Good afternoon, ladies and gentlemen. Welcome to the Century Communities Third Quarter 2025 Earnings Conference Call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press 0 for the operator. This call is being recorded on Wednesday, October 22, 2025. I would now like to turn the conference over to Tyler Langton. Please go ahead. Tyler Langton: Good afternoon. Thank you for joining us today for Century Communities earnings conference call for the third quarter of 2025. Before the call begins, I would like to remind everyone that certain statements made during this call may constitute forward-looking statements. These statements are based on management's current expectations and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those described or implied in the forward-looking statements. Certain of these risks and uncertainties can be found under the heading Risk Factors in the company's latest 10-K as supplemented by our latest 10-Q and other SEC filings. We undertake no duty to update our forward-looking statements. Additionally, certain non-GAAP financial measures will be discussed on this conference call. The company's presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. Hosting the call today are Dale Francescon, Executive Chairman; Rob Francescon, Chief Executive Officer and President; and Scott Dixon, Chief Financial Officer. Following today's prepared remarks, we will open up the line for questions. With that, I'll turn the call over to Dale. Dale Francescon: Thank you, Tyler, and good afternoon, everyone. In the third quarter, we performed well in a challenging environment and generated solid financial and operational results, meeting or exceeding the expectations detailed on our second quarter conference call. We delivered 2,486 homes, hitting the high end of our guidance, and our adjusted homebuilding gross margin of 20.1% was up slightly on a sequential basis as reductions in our direct costs offset higher incentives in the quarter. We continue to control our fixed G&A costs and successfully refinanced our 2027 senior notes with the offering of our 2033 notes at a slightly lower interest rate. We also repurchased an additional $20 million of our shares this quarter, bringing our year-to-date repurchases to 6% of our shares outstanding at the beginning of the year. While homebuyer demand has been more muted this year due to weaker consumer confidence, we continue to believe there is pent-up demand for affordable new homes supported by solid demographic trends. Buyers remain hesitant and cautious given the current level of economic uncertainty but still have the desire to own a new home. As a result, we expect that any interest rate relief and improvement in consumer confidence will start to unlock buyer demand. Before turning the call over to Rob, I wanted to briefly talk about our current strategy and some recent achievements. While we will remain disciplined in slower markets like we are experiencing now, we are still positioning the company for future growth as demonstrated by our expectations for our 2025 year-end community count to increase in the mid-single-digit percentage range. As we have said in the past, we expect this growth to come primarily from increasing our share within our existing markets. We currently hold top 10 positions in 13 of the 50 largest U.S. markets, with a goal of further increasing this penetration. We have also continued to invest in people, processes, and systems that will drive top and bottom-line improvements going forward. And we have made significant progress even in this difficult environment. While the operational benefits of our strategy are already apparent, as Rob will discuss, some of the financial benefits have been clouded by the higher incentives we've been offering this year and the impact of lower deliveries on our fixed G&A. Once the market begins to normalize, we are confident the value of these investments will be fully realized. I'll now turn the call over to Rob to discuss our operations and land position in more detail. Rob Francescon: Thank you, Dale, and good afternoon, everyone. We are encouraged by the operational improvements that continue to accrue at the company and believe Century is well-positioned to further leverage these gains as the market normalizes. These improvements run throughout the organization, including continued success in reducing our costs in the third quarter. Our direct construction costs on the homes we delivered are down 3% on a year-to-date basis. Through the third quarter, we have not seen any material increases in direct costs from tariffs and do not expect any impacts in the fourth quarter given the price protection agreements with our preferred supplier partners. During the third quarter, our cycle times also continued to improve on both a year-over-year and sequential basis and currently sit at an average of 115 calendar days, with one-third of our divisions at 100 calendar days or less. Our customer satisfaction scores are at all-time highs, which leads to more referrals for both homebuyers and brokers as well as lower warranty costs. We have and continue to make meaningful improvements to both cost structures and cycle times and are proud of the best-in-class operations our teams have built. Our third-quarter net new contracts of 2,386 homes declined by 6% on a sequential basis, better than our historical average decline of 9% from 2019 through 2024. We saw a month-over-month increase in our web traffic from June to September, and in line with typical seasonality, our net orders and absorption rates were the lowest in July, with both August and September levels ahead of July. So far in October, our orders are seasonally consistent with August and September levels. Even with headwinds from the market and seasonal pressures, our incentives on closed homes in the third quarter came in lower than the 100 basis point increase we forecasted on our second quarter conference call and averaged roughly 1,100 basis points in the third quarter of 2025. Looking forward, we continue to expect incentive levels to be the largest driver of changes to our gross margins in the near term, given our success in managing costs. We currently expect incentives to increase by another 100 basis points in our fourth-quarter deliveries as we compete with other builders for year-end closings. In the third quarter, we started 2,440 homes and, similar to the past several quarters, have continued our focus on maintaining an appropriate level of spec home inventory by generally matching our starts with our sales. Our third-quarter ending community count of 321 communities increased by 5% on a year-over-year basis. We continue to expect our year-end 2025 community count to increase in the mid-single-digit percentage range, which, coupled with our 28% year-over-year growth for the full year 2024, will position us well for the upcoming spring selling season and provide a strong base for future growth in the years ahead. On the land side, our finished lot costs on the homes we delivered in the third quarter increased in the mid-single-digit range on both a year-over-year and sequential basis, and we expect our finished lot costs in the fourth quarter to be roughly flat on a sequential basis. We ended the third quarter with over 62,000 owned and controlled lots. Our owned lot count has remained relatively steady since the third quarter of last year. We have remained disciplined on the land front and continue to underwrite deals to current market assumptions. Land sellers are adjusting terms, and we are starting to see some in our raw land and development costs. I also want to briefly talk about a trend that we have recently seen with mortgages in our financial services business. In the first quarter of this year, adjustable-rate mortgages accounted for less than 5% of the mortgages that we originated. In the third quarter, however, ARMs accounted for close to 20% of the mortgages we originated. Given the length of time that the average first-time buyer stays in their home and the lower interest rates of ARMs, they can make sense for many of our homebuyers and help partially address the market's affordability challenges. We are pleased with the results we achieved in the third quarter. Our focus on cost reductions and controlling increases in incentives allowed us to improve our homebuilding gross margin as well as pretax and net margins on a sequential basis. Our team has done a good job operating within a difficult market environment, and I want to thank them for their hard work and dedication. I'll now turn the call over to Scott to discuss our financial results in more detail. Scott Dixon: Thank you, Rob. In the third quarter, pretax income was $48 million, and net income was $37 million, or $1.25 per diluted share, up 710% respectively, on a sequential basis. Adjusted net income was $46 million, or $1.52 per diluted share. EBITDA for the quarter was $70 million, and adjusted EBITDA was $82 million. Sales revenues for the third quarter were $955 million, down 2% on a sequential basis. Our deliveries of 2,486 homes declined by 4% on a sequential basis, while our average sales price of $384,000 increased by 2% on a quarter-over-quarter basis, benefiting from a higher percentage of deliveries from our West and Mountain regions and a lower percentage from Century Complete. At quarter-end, our backlog of sold homes was 1,117, valued at $417 million, with an average price of $373,000. In the third quarter, adjusted homebuilding gross margin was 20.1%, compared to 20% in the second quarter of this year. GAAP homebuilding gross margin was up 30 basis points, 17.9% versus 17.6% in the second quarter. The improvement of our third-quarter gross margin versus second-quarter levels was driven by lower direct costs offsetting higher incentives and finished lot costs. Purchase price accounting associated with our two acquisitions in 2024 reduced our third-quarter 2025 gross margin by 30 basis points. We would expect purchase price accounting to have a similar impact on our homebuilding gross margin in 2025. We took an inventory impairment charge of $3.2 million in the third quarter related to several closeout communities. The $6.1 million of other expense this quarter was comprised of $5.2 million with the abandonment of lot option contracts and $1.4 million for the loss of extinguishment of debt, with a partial offset from other income. For the fourth quarter of 2025, we expect our homebuilding gross margin to ease on a sequential basis up to 100 basis points compared to our third quarter, primarily due to higher levels of incentives. SG&A as a percent of home sales revenue was 12.6% in the third quarter and benefited from ongoing cost reduction efforts. Assuming the midpoint of our full-year home sales revenue guidance, we expect our SG&A as a percent of home sales revenue to be roughly 13% for the full year 2025, with SG&A as a percentage of home sales revenue of 12.5% for the fourth quarter. Revenues from financial services were $19 million in the third quarter, and the business generated pretax income of $3 million. We currently anticipate that the contribution margin from financial services in the fourth quarter will be similar to our third-quarter results. Our tax rate was 21.8% in the third quarter of 2025, which was driven by 45 percentile tax credits received in excess of previous estimates. We expect our full-year tax rate for 2025 to be in the range of 24.5% to 25.5%. Our third-quarter 2025 net homebuilding debt to net capital ratio improved to 31.4% compared to third-quarter 2024 levels of 32.1%. Our homebuilding debt to capital ratio also improved to 34.5% in the third quarter compared to year-ago levels of 35.8%. We ended the quarter with $2.6 billion in stockholders' equity and $836 million of liquidity. During the quarter, we completed a private offering of $500 million of 6.58% senior notes due February 19, 2033, with the proceeds being used to redeem our $500 million 6.5% senior notes due 2027. With this transaction, we have no senior debt maturities until August 2029, providing ample flexibility with our leverage management. During the quarter, we maintained our quarterly cash dividend of $0.29 per share and repurchased 297,000 shares of our common stock for $20 million at an average share price of $67.36, or a 23% discount to our company record book value per share of $87.74 as of the end of the third quarter. Assuming similar attractive valuations, we expect to continue repurchasing our shares in the fourth quarter. Through the first nine months of the year, we have repurchased 1.9 million shares, or 6% of our shares outstanding at the beginning of the year. Turning to guidance, we are narrowing our full-year 2025 home delivery guidance to be in the range of 10,000 to 10,250 homes and home sales revenues to be in the range of $3.8 billion to $3.9 billion. In closing, our healthy balance sheet allows us to both return capital to our repurchases and dividends, as well as continue to invest in our business to generate future growth. We believe we are well-positioned to navigate the current headwinds facing the market and prosper when the market rebounds. We remain focused on our strategy of deepening our share in our existing markets, growing our community count, lowering our direct costs and cycle times, and maintaining an adequate supply of land while controlling our finished lot comps. With that, I'll open the line for questions. Operator: Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the one on your touch-tone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press the star followed by the two. If you are using a speakerphone, please lift the handset before pressing any key. One moment, please, for your first question. Your first question comes from Alex Rygiel with Texas Capital. Please go ahead. Alex Rygiel: Hey, Alex. Can you hear us, Alex? Tyler Langton: Yes, I can. Sorry about that, guys. Appreciate it. As it relates to your adjusted gross margin that came in a bit above your guidance, was this more due to sort of prudent cost controls? Or was it due to, you know, incentives to some of the new sales? Rob Francescon: Yeah, Alex, great question. A handful of factors obviously running through that line item. I think we were very pleased with the continued success that we've seen on the direct cost side in terms of sticks and bricks, not only in the third quarter, but really earlier in the first and second quarter as well. So we really saw some of that benefit come through in the third quarter. I think in our prepared remarks, we mentioned that from a year-to-date perspective, we're down 3% on the direct cost. We did see and anticipated that we would see some additional pressures from a competitive standpoint on incentives, that we certainly did see that during the quarter. I believe we were up about 50 basis points on incentives or so. But really, it was moderated by the cost savings that came through the P&L during the quarter. So we were pleased with that result. Our teams have been doing tremendous work really to get as much cost out of our homes as possible as we navigate the current environment. Alex Rygiel: And then secondly, you brought up the shift here in the buyers' use of adjustable-rate mortgages. Can you talk about how that might change going into the fourth quarter and talk about how that sort of impacts your business? Are they generally more profitable, less profitable, the margins a little bit better or less, and so on? Rob Francescon: Yes, Alex, the way we really look at it is it's a product that has certainly continued to gain wider consumer acceptance this year. Especially for our buyer type, from a first-time homebuyer perspective, really when you look at historical trends in terms of how long they're in the home, there's not a lot of need for us to buy down a fixed rate for a thirty-year period of time. So it allows us to get a buyer into a home that maybe a little bit of a lower rate initially, go ahead and buy down that rate and provide that really exceptional benefit to the buyer from a monthly payment perspective, but not need to do it over the entire thirty-year term. So something that we're excited to see the consumer continue to have some acceptance with. We're seeing acceptance on 7/1 ARMs, on 7/6 ARMs as well as 5/1 ARMs. So really across the different opportunities that are out there, we're certainly seeing good momentum. A little difficult to tell what that will look like in Q4, but I would expect it to continue to be a meaningful part of the loans that we're originating with our financial services side. Alex Rygiel: Thank you very much. Rob Francescon: Absolutely. Operator: Your next question comes from Rohit Seth with B. Riley Securities. Please go ahead. Rohit Seth: Hi. Thanks for taking my question. Execution in the quarter, guys. On the community count guidance, you mentioned if I heard this correctly, the community count going up mid-single digit by year-end. Is that right? Rob Francescon: That's correct. That's a year-over-year from beginning of the year to end of the year number, so around that 5% mark year-over-year. So that does imply a significant ramp-up in the fourth quarter. A pretty sizable one. Can you help me bridge that? Rohit Seth: Yeah. Correct. And it's, you know, when that number specifically isn't ending, community counts and not necessarily the average during the quarter? And it's something that we've been monitoring really throughout the year and been pretty consistent with anticipating those communities continuing to come online. Rohit Seth: Okay. Absorption rates are also, I guess, pretty good, sequentially into the quarter. Just maybe any color on what you're seeing in the consumer side and how the consumer is behaving? You did mention that didn't need as much incentives in the quarter, but then you're raising incentives in the fourth quarter. And so just help me understand what's happening on the consumer level. Rob Francescon: Well, we're still seeing a very uncertain consumer at the entry-level price points that we serve. And if we look at the fourth quarter, the reason we're putting that out there that it could be up another 100 basis points as all the builders compete for year-end closings. We just think that there's going to be more incentives in the market. But generally speaking, from a consumer standpoint, the entry-level consumer has been the hardest hit along the chain of the various price points. And we're hopeful that going into next year that starts to settle down a little bit. But just based on some of the uncertainty out there, people are a little more cautious right now. Rohit Seth: Understood. Okay. Alright. I'll pass along. Thank you. Operator: Thank you. Your next question comes from Natalie Kulzicker with Zelman Associates. Please go ahead. Natalie Kulzicker: Hey. Congratulations on a good quarter. I wanted to drill in a bit more on the SG&A upside you saw this time around and what drove your cost lower year-over-year. Is it operational efficiencies that you've been working on in the back end, or is it, you know, through maybe headcount reductions, which we've heard in the past? And just wanted to get your thoughts on what would be a sustainable rate for this going forward. Scott Dixon: Sure. Absolutely. Let me touch on a handful of things, and this is Scott. So really, when we look at the SG&A line item, it's certainly been, as we've mentioned on previous calls, a pretty big focus area for us this year just given overall market and the tightening on the consumer side. So we have discussed at various points in time this year various different cost control activities that we've initiated, and we do believe that we're seeing some of the benefits of those coming through here in the third quarter. Those kind of are across the board from back-office efficiencies to ensuring that our headcount is really where we think it needs to be to support the current organization. Some additional compensation-related benefits that came through the quarter as well that are in there. And then when we look at go forward, we have given some specific outlines in terms of where we anticipate the fourth quarter to come in at. There's a handful of things that could potentially drive the numbers. From a fourth-quarter perspective, we're looking at about 12.5% at the midpoint of our guide. It does assume continued use of broker commissions as well as potentially utilizing a little bit more on the advertising line just given the competitive market set that's out there. So a line item that we're continuing to focus on to ensure we're as efficient as possible. Natalie Kulzicker: All right. Got it. And one more for me. You drill in a bit more on the lots that you walked away from during this quarter? Are you pretty sizable similar to the second quarter as well? Like, maybe about, like, what year these communities set to come online and, you know, what stage of, like, due diligence they were in. Scott Dixon: Yeah. So as we mentioned in the prepared remarks, we're underwriting to current market conditions. So as we look at that, our owned lots have remained fairly steady for some period of time right now at just under 37,000. But our control lots have changed. We still have almost 26,000 uncontrolled lots. But that has come down, as you mentioned. And the vintage of those, a lot of those would have been near-term projects that just didn't think they fit the underwriting today. And so those were positions we exited. And so I wouldn't say that we had necessarily a larger spike in Q3. This is something that's kind of been going on for the most part of '25. And as we look going forward, we're still looking to grow in our various markets, have plenty of land that's owned on our balance sheet to handle us over the next couple of years. But as we look at projects, we're looking for things, projects that would come on potentially a little bit later in the timeframe as opposed to immediate. Operator: Got it. Thank you. Please press 1. The next question comes from Michael Rehaut with JPMorgan. Please go ahead. Andrew Azzi: Hi, everyone. This is Andrew Azzi on for Michael. Congrats on the quarter. Just wanted to touch a little bit on the order ASP. Looks like there was a little bit of a sequential lift. Would love to just get some more context on that number. Was that driven more so by incentives, or were there any mix dynamics that might have driven that improvement? Scott Dixon: Yeah. Andrew, thanks for the question. Really, from an ASP perspective, any volatility that we're seeing currently within various different metrics is a little bit more driven by mix. The incentives commentary that we walked through in our prepared remarks, while we certainly have some regions that may be a little bit higher on the incentive, from a trend perspective, it's fairly consistent across the board. So what you're seeing on the ASP is really a little bit more driven by mix. For instance, on the delivery side, we're a little higher here in Q3 than we had been in Q2. And a lot of that is just a little bit more from the West and Mountain regions coming through this quarter as compared to our Century Complete business line. Andrew Azzi: I appreciate that. And then sorry. I didn't mean to cut you off if I did, but just maybe moving on to kind of the tariff impact, I believe you said earlier in your prepared remarks that there isn't really an expected impact in 4Q. I was wondering if there's any way you can kind of size or estimate maybe an impact towards next year, or is it a little bit too early? Would love to hear your thoughts there. Scott Dixon: Yeah. It's really too early to tell for next year. It's obviously a fluid environment as it relates to the tariffs. But for Q4 and historically, we have not had an impact this year. But going into next year, it's really too early to say exactly what an impact could be. Andrew Azzi: Got it. I appreciate that. I'll pass it on. Thank you. Operator: There are no further questions at this time. I will now turn the call over to Dale Francescon for closing remarks. Please continue. Dale Francescon: To everyone on the call, thank you for your time today and interest in Century Communities. To our team members, thank you for your hard work and dedication to Century and commitment to our valued homebuyers. Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Ladies and gentlemen, thank you for joining us. And welcome to the LendingClub Corporation Q3 2025 Earnings Conference Call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please raise your hand. If you have dialed in to today's call, please press 9 to raise your hand, 6 to unmute. I will now hand the conference over to Artem Nalivayko, Head of Investor Relations. Please go ahead. Artem Nalivayko: Thank you, and good afternoon. Welcome to LendingClub Corporation's third quarter 2025 earnings conference call. Joining me today to talk about our results are Scott C. Sanborn, CEO, and Drew LaBenne, CFO. You can find the presentation accompanying our earnings release on the Investor Relations section of our website. On the call, in addition to questions from analysts, we will also be answering some of the questions that were submitted for consideration via email. Our remarks today will include forward-looking statements, including with respect to our competitive advantages, demand for our loans and marketplace products, and future business and financial performance. Our actual results may differ materially from those indicated by these forward-looking statements. Factors that could cause these results to differ materially are described in today's press release and earnings presentation. Any forward-looking statements that we make on this call are based on current expectations and assumptions, and we undertake no obligation to update these statements as a result of new information or future events. Our remarks also include non-GAAP measures related to our performance, including tangible book value per common share, pre-provision net revenue, and return on tangible common equity. You can find more information on our use of non-GAAP measures and a reconciliation to the most directly comparable GAAP measures in today's earnings release and presentation. Finally, please note all financial comparisons in today's prepared remarks are to the prior year-end period unless otherwise noted. And now, I'd like to turn the call over to Scott. Scott C. Sanborn: Thank you, Artem. Welcome, everybody. We delivered another outstanding quarter with 37% growth in originations, 32% growth in revenue, and a near tripling of diluted earnings per share. Innovative products and experiences, compelling value propositions, a 5 million strong member base, consistent outperformance on credit, and a resilient balance sheet are all coming together to deliver sustainable, profitable growth. I'm excited to share more on our vision and our many competitive advantages at our upcoming Investor Day in two weeks, so I'll keep it brief today. Quarterly originations of $2.62 billion came in above the top end of our guidance, reflecting strong demand from both consumers and loan investors, our increased marketing efforts, and the power of our winning value proposition and customer experiences. With competitive loan rates enabled by our sophisticated credit models and a fast, frictionless process, we continue to be very successful at attracting our target customers. In fact, when our loan offers are made side by side on a leading loan comparison site, we close 50% more customers on average than the competition. We continue to be disciplined in our underwriting. Our asset yield remains strong, and our borrower base continues to perform well. In fact, we're delivering our originations growth while also demonstrating roughly 40% outperformance on credit versus our competitor set. Consistent strong credit performance on a high-yielding asset class has allowed us to confidently build our balance sheet, which now stands at over $11 billion, delivering a durable, resilient revenue stream that nonbanks can't replicate. In fact, this quarter we generated our highest ever net interest income of $158 million, enabled by a growing balance sheet and expanding net interest margin. Our loan marketplace is also thriving, with our reputation for strong credit performance and innovative solutions attracting marketplace investors at improving loan sales prices. We grew marketplace revenue by 75% to our highest level in three years and had our best quarter ever for structured certificate sales totaling over $1 billion. We also secured earlier in the quarter a memorandum of understanding by which funds and accounts managed by BlackRock would purchase up to $1 billion through LendingClub Corporation's marketplace programs through 2026. What's more, our new rated product, specifically designed to attract insurance capital, is capturing strong interest, which should help us to continue to improve loan sales prices and further boost marketplace revenue. As excited as I am about our financial performance, I'm equally excited about what we're seeing in member engagement and behavior. Our mobile app, combined with high engagement products and experiences like LevelUp checking and DebtIQ, are successfully encouraging members to visit us more often and are driving new product adoption. We launched LevelUp checking in June as the first of its kind banking product designed specifically for our borrowers. Members are responding positively, with a 7x increase in account openings over our prior checking product. In a recent survey, 84% of respondents said they were more likely to consider a LendingClub Corporation loan given the offer of 2% cash back for on-time payments through LevelUp checking. And what's really encouraging is that nearly 60% of new accounts being opened are being opened by borrowers. Our efforts are driving a nearly 50% increase in monthly app logins from our borrowers, and with that engagement, an increasing portion of our repeat loan issuance is now coming through the app. That's proof that these investments are enabling lower-cost acquisition from repeat members, keeping pace with our new member growth as we continue to ramp our marketing efforts. We'll share more examples at Investor Day of how our intentional product design, coupled with an engaging mobile experience, is creating a flywheel to increase lifetime value. Before I turn it over to Drew, I want to thank all LendingClubbers for their incredible execution and dedication to improving banking for our more than 5 million members. Their efforts are paying off, and I look forward to building on our momentum. With that, I'll turn it over to you, Drew. Drew LaBenne: Thanks, Scott, and good afternoon, everyone. We delivered another outstanding quarter, extending the momentum we built throughout the first half of the year. For the third quarter, we generated improved results across all key measures, including originations, revenue, profitability, and returns. Total originations grew 37% year over year to over $2.6 billion, reflecting the impact of our growth initiatives, scaling of our paid marketing channels, and continued expansion of loan investors on our marketplace platform. Revenue grew 32% to $266 million, driven by higher marketplace volume, improved loan sales prices, and expanding net interest income. Pre-provision net revenue, or revenue less expenses, grew 58% to $104 million, reflecting the scalability of our model. The net impact of all these items is that we nearly tripled both diluted earnings per share and return on tangible common equity to $0.37 per share and 13.2%, respectively. The business is firing on all cylinders, demonstrating the earnings power of our digital marketplace bank model. Now, let's turn to Page 12 of our earnings presentation. We will go further into originations growth. We delivered our highest level of originations in three years. Borrower demand remained strong, as the value we are providing in the core use case of refinancing credit card debt continues to be compelling. Loan investor demand also remains strong, with marketplace buyers looking to increase orders and prices steadily improving. Demand for our structured certificate program continues to grow as we added the rated product attracting new insurance capital. In addition to $1.4 billion of new issuance sold, we also sold $250 million of seasoned loans out of the extended seasoning portfolio, which included a rated transaction supported by Insurance Capital. Our consistently strong credit performance sets us apart from the competition and is one of the reasons we have been able to sell all of these loans without any need to provide credit enhancements. Leveraging one of the benefits of being a bank, we grew our held-for-sale extended seasoning portfolio to over $1.2 billion, consistent with our strategy to grow our balance sheet while maintaining an inventory of seasoned loans for our marketplace buyers. Finally, we retained nearly $600 million on our balance sheet in Q3 in our held-for-investment portfolio. Now let's turn to the two components of revenue on Page 13. Non-interest income grew 75% to $108 million, benefiting from higher marketplace sales volumes, improved loan sales prices, continued strong credit performance, and lower benchmark rates. Fair value adjustment of our held-for-sale portfolio benefited by approximately $5 million in the quarter from lower benchmark rates. Net interest income increased to $158 million, another all-time high, supported by a larger portfolio of interest-earning assets and continued funding cost optimization. The growth in this important recurring revenue stream is expected to continue into the future as we leverage our available capital and liquidity to further grow the balance sheet. If you turn to Page 14, you will see our net interest margin improved to 6.2%. We continue to see healthy deposit trends, and total deposits ended the quarter at $9.4 billion, a slight decrease from last year. The change was primarily attributable to a $100 million decrease in brokered deposits, which was mostly offset by an increase in relationship deposits. LevelUp savings remains a powerful franchise driver, approaching $3 billion in balances and representing the majority of our deposit growth this year. We are maintaining a disciplined approach to deposit pricing while providing meaningful value for our customers. Turning to expenses on Page 15, non-interest expense was $163 million, up 19% year over year. As we signaled last quarter, the majority of the sequential increase was driven by marketing spend as we continue to scale, test, and optimize our origination channels to support continued growth in 2026. We continue to generate strong operating leverage on our growing revenue, and our efficiency ratio approached an all-time best in the quarter. Let's move on to credit, where performance remains excellent. We continue to outperform the industry with delinquency and charge-off metrics in line with or better than our expectations. Provision for credit losses was $46 million, reflecting disciplined underwriting, stable consumer credit performance, and portfolio mix. Our net charge-off ratio improved modestly again this quarter to 2.9%, and we continue to see strong performance across our vintages. I would highlight that the net charge-off ratio also continues to benefit from the more recent vintages we've added to the balance sheet. We expect the charge-off ratio to revert upwards to more normalized levels as these vintages mature. These anticipated dynamics are already factored into our provision. On Page 16, you will see that our expectation for lifetime losses is also stable to improving across all vintages. Turning to the balance sheet, total assets grew to $11.1 billion, up 3% compared to the prior quarter. Our balance sheet remains a competitive strength, allowing us to generate recurring revenue through retained loans while maintaining the flexibility to scale marketplace volume as loan investor demand grows. We ended the quarter well-capitalized with strong liquidity and positioned to fund future growth without raising additional capital. Moving to Page 17, you can see that pretax income of $57 million more than tripled compared to a year ago, hitting a record high for the company. Taxes for the quarter were $13 million, reflecting an effective tax rate of 22.6%. We continue to expect a normalized effective tax rate of 25.5%, but we may have some variability in this line due to the timing of stock grants and other factors. Putting it all together, net income came in at $44 million, and diluted earnings per share were $0.37, which nearly tripled compared to a year ago. Importantly, return on tangible common equity of 13.2% showed continued improvement and came in above the high end of our guidance range, and our tangible book value per share now sits at $11.95. As we look ahead, the business enters the fourth quarter with significant momentum. Loan investor demand remains strong, loan sales pricing continues to trend higher, and our product and marketing initiatives are driving high-quality volume growth. As a reminder, in Q4, we typically see negative seasonality on originations due to the holiday season. With that in mind, we expect to deliver originations of $2.5 to $2.6 billion, up 35% to 41% year over year, respectively. Our outlook for pre-provision net revenue is $90 million to $100 million, up 21% to 35%, respectively. Our outlook assumes two interest rate cuts in Q4 and includes increased investment in marketing to test channel expansion, which will support originations growth in future quarters. We expect to deliver an ROTCE in the range of 10% to 11.5%, more than triple year over year. We will provide additional details on our strategic and financial framework at our Investor Day on November 5, where we hope you will join us. With that, we'll open it up for Q&A. Operator: We will now begin the question and answer session. A reminder that if you would like to ask a question, please raise your hand now. And star six to unmute. Your first question comes from the line of Bill Ryan with Seaport Research Partners. Your line is open. Please go ahead. Bill Ryan: Hello. I think you're on mute. Drew LaBenne: Got it. Operator: Thanks. So first question, I just want to ask about the disposition plans. Looking into the future between your various channels, structured certificate, whole loans, and extended seasoning, and what your plans are to continue to grow the held-for-investment portfolio on the balance sheet. Looks like there's a little bit of mix shift last couple of quarters dialing back on the whole loan sales focusing on the other two. And if you could also kind of maybe talk about the economics of what you're seeing between the various disposition channels. Drew LaBenne: Yeah. Great. Hey, Bill. Thanks for the question. So, you know, for HFI for Q4, it's kind of steady as she goes in terms of what we plan each quarter. So we're targeting, you know, roughly $500 million in HFI, and that sort of just depends on how the quarter evolves. Sometimes that's a little higher, a little lower. I'd say, generally, it's been a little higher the past couple of quarters. The other programs are roughly in line with where we've been for the past couple of quarters. We see demand for structured certificates being strong. We're seeing good pickup in the rated product as well, and as I mentioned, we sold one of those out of extended seasoning this quarter, a rated deal that is. So demand is strong and still there, and with issuance being targeted to be roughly the same, kind of the mix and disposition should also be roughly the same. I guess, Bill, to make sure you're tracking, you probably are. Not all of these sales are equal. Historically, whole loan sales to banks would come at a different price than, say, whole loan sales to an asset manager. As the insurance-rated transactions have been coming in, those prices, as we mentioned in the script, are really approaching bank prices now. And in those cases, we're generally not retaining the A note. So effectively, it is a whole loan sale, and it's coming at a higher price. So it's really the mix is based on where we're getting the best execution, and, you know, we are looking to certain channels. So that's a channel we're developing, and it's going in the direction we like, which is building demand and higher prices there. Bill Ryan: Okay. Thanks, Scott. And just one big picture follow-up. If you can maybe kind of touch on the competitive state of the market. I mean, origination volumes have increased quite a bit across the board. You've heard about some companies maybe have opened their credit boxes a little bit. Some with product structure, if you will. Fixed income investors' allocation more capital to the sector. I mean, if you could kind of give us an overview of have you seen any pressure on your underwriting standards at all? Scott C. Sanborn: No. We haven't. I'd say, you know, as we say every quarter, this has always been a competitive space. In our case, our growth is coming off of a low, and it's coming off of a low that's been informed not just by tighter credit underwriting, which, you know, we're maintaining the discipline there, but also because we just pulled back on marketing. So our ability to grow is if you still look at, you know, where you can see volume levels, you'll see we're still running below historical levels of spend and volume. In a TAM that's larger than it ever was. So we're not seeing the space as competitive. It's no more competitive than it was last quarter or the quarter before. As usual, we see a mix in who we're competing with in different environments. So when the interest rate environment shifted, we were competing more with banks and less with fintechs. I'd say now we're competing a bit more with fintechs and a little bit less with some of the banks, but that doesn't it's not changing certainly not affecting our underwriting standards. You know, we are absolutely in this for the long game. And as you know, we're bringing our own cooking here. So we are looking to make sure we are delivering the returns for ourselves as well as for our loan buyers, and we don't view the way we get rewarded long term is by posting a temporary jump in growth through short-term making on credit. Bill Ryan: Okay. Thanks for taking my questions. Operator: Next question comes from the line of Tim Switzer with KBW. Tim, your line is open. Please go ahead. Tim Switzer: Hey, good afternoon. Thanks for taking my questions. My first one is, can you explain what drove the higher loss in the net fair value adjustment? And, you know, I think you mentioned earlier on the call that pricing seems to be holding up on loan sales. So just curious what drove that adjustment line. Drew LaBenne: Yeah. So keep in mind, we had a positive fair value adjustment in Q2 that I believe was about $9 million in the quarter, and we had $5 million this quarter. So positive adjustments in both quarters, but it was larger in Q2 than it was in Q3. And so that's a big part of the delta right there. You know, as we said, prices moved up a little bit, so it's not price that's driving that. The other piece is as we have a larger extended seasoning portfolio, there is natural roll down that happens, and that comes through that net fair value adjustment line. So that's also a little bit of the change that we're seeing quarter over quarter. It's just a larger portfolio. Tim Switzer: Got you. Is there a good way for us to be able to model the impact of the extended seasoning portfolio? Drew LaBenne: There is. It's probably a little complicated to get into the details on this call, but we can follow up with you afterwards. Tim Switzer: Appreciate that. We can do it offline. Scott C. Sanborn: Yeah. Tim Switzer: And then can you also walk us through the loan reserve dynamic a bit this quarter because it went up quite a bit, but if we look at your slide 16 that indicates lower loss expectations for those legacy vintages, I guess, and you obviously didn't grow the HFI book a whole lot. So I'm just curious on, you know, what was that reserve going up for, I guess? Drew LaBenne: Yep. So two factors. Again, last quarter, there was a one-timer that we called out in the provision line because we had a re-estimation of the lifetime losses, and that caused a positive benefit in the provision line. And so I think there's about $11 million. Right, Artem? Yeah. $11 million last quarter that you know, credit was great again this quarter, but we didn't do a change in the reserve on the previous vintages. So that's one factor. The other is just as we're growing some of our businesses, like, for example, our purchase finance business into HFI, the duration's a little longer, so it has a little higher upfront CECL charge, but also fantastic economics on balance sheet. And so those are the two main drivers. Tim Switzer: Gotcha. Thank you. And, one last one real quick. Can you explain what drove the increase in diluted shares? And the period went up a little bit, but not nearly as much as diluted share count. Sorry if you said this earlier on the call. Drew LaBenne: Yeah. No. I think share price is probably the biggest factor. Right? If you just do the treasury, if you just think of treasury stock method on the diluted shares, the higher the share price, the more dilution you effectively get on the outstanding, you know, grants that have been issued. So there wasn't there was no step change in terms of kind of the, you know, the vehicles that cause diluted share count. Tim Switzer: Got you. Alright. Thank you. Drew LaBenne: Thank you. Operator: Next question comes from the line of Giuliano Bologna. Your line is open. Please go ahead. Giuliano, your line is open. Please go ahead. Joanna, I think you're on mute too. Okay. We can come back to Giuliano. We'll move on to Vincent Caintic of BTIG. Line is open. Please go ahead. Vincent Caintic: Hi. Great. Can you hear me? Scott C. Sanborn: Yes. Vincent Caintic: Yes. Having some tech issues. I have a feeling maybe others are as well. But yeah, so thank you for taking my questions. First question, kind of a follow-up on that funding side. And I want to ask it, kind of the demand for, you know, your marketplace loans, the structured certificates, and the seasoned portfolio. It's great to see that there's so much demand. And, you know, I think a lot of there's been a lot of investor questions over the past months where, you know, we've seen some other companies have some issues, some bankruptcies, and so forth. And so there's been some concerns broadly about institutional investor appetite for fintech originated loans. So it looks like your demand is great. And I was wondering if you can maybe talk about kind of the broad industry and if you're seeing any differentiation. And if maybe that's a competitive advantage of your funding vehicles and mechanisms versus the rest of the industry. Thank you. Drew LaBenne: Yes. So thanks for the question, Vincent. A lot there. So I'd say, first of all, the comments I'm gonna make are really just focused on our asset class in our industry, so not, you know, auto securitizations or any of the other things that are going on. But, you know, we just actually our team was just at a conference yesterday talking to, you know, loan current investors and potential investors, and I'd say the appetite is still very strong. I don't think there's any fade on the appetite at all for, you know, the various vehicles that are out there, whether it's a structured product, the rated product, or, you know, whole loans out of extended seasoning. So demand is definitely there. I think track record matters. So the demand is there for us. I think it's certainly there for other issuers as well. But I'd say on the margin that issuers are also being maybe slightly more cautious on who they're partnering with, and we're hearing that in we've been the partner of choice for years and I think continue to be. So I think that plays to our advantage. Obviously, we're always watching the ABS markets to see if there's any, you know, major disruption there. And haven't seen much. Certainly, there's been a little noise as you indicated over the past couple of weeks, but summary demand remains good. Prices are strong, so we're feeling good going into the fourth quarter. Vincent Caintic: Okay. Great. Thank you. That's very helpful. And I guess also, real quick. Scott C. Sanborn: Think just a little added color. We're certainly hearing that some capital providers are further narrowing their selection of who they're working with. But, you know, hard for us to kind of but, you know, we remain in the wallet and remain a really primary important partner there, but certainly hearing some chatter of that. Vincent Caintic: Okay. Great. That's super helpful. Thank you. And, actually, kind of related to, you know, the volatility we've been hearing over the past month just in broader consumer credit. Just wondering if you could talk about, you know, your credit performance and what you're seeing. So it was great to see charge-offs at 2.9% this quarter. That's great. Just wondering if you're noticing maybe not in the loans that you're that are on your balance sheet already. But as you get applications, maybe has the quality of that changed? Are you noticing maybe any themes in terms of delinquency evolution like, maybe with lower credit tiers or any comments you might say be seeing with that relative to press trend? Scott C. Sanborn: Yeah. No. I mean, I'd say for us, you know, reminder, we remain very, very restrictive compared to, you know, pre-COVID. And that is even more so the case in sort of the lower credit area. So I acknowledge there's definitely been a decent amount of press about a bifurcated economy and, you know, where certain subsets of consumers could be struggling. But, you know, in our portfolio, given how we're underwriting today, I mean, just for an example, there's talk about, you know, consumers earning less than $50k a year. I think that represents 5% of our originations right now. So very, very small. Same thing with student loans. As you know, we've restricted underwriting to that group. So the percent of that are, you know, delinquent on a student loan and current on us is, you know, now measured in basis points and is shrinking. So we on our book, aren't seeing anything more than the normal kind of, you know, variability that you adapt and continue to manage to, which our platform is set up and our team is set up to do that quite well. So no not, you know, no kind of broad themes. Despite, again, we're reading the same thing you are, but we're not seeing it in our book. And I think that's based on how we're underwriting. Vincent Caintic: Great. Thanks. And maybe I'll sneak one more in, and this might end up having to be for the investor meeting. We want to leave some meat on there. But your CET1 of 18% is very healthy. I'm just wondering how much is too much. Thank you. Drew LaBenne: We'll see you in November. Vincent Caintic: Sounds good. Alright. Thanks, guys. I appreciate it. See you then. Drew LaBenne: In all seriousness, I think, what you know, a little bit on that is, we do have what we would say is some excess capital, and our plan is to use that for growing the balance sheet as we ramp up originations. And, you know, if we have enough capital to satisfy that primary goal and more than enough after that, then I think we'll consider other options. Vincent Caintic: Okay. Great. And, see you November 5. Thanks very much. Operator: Okay. Thank you. Our next question comes from Giuliano Bologna from Compass Point. Your line is now open. Giuliano Bologna: Sounds good. Hopefully, you guys can hear me now. I have the unmute notification this time. Congratulations on a great quarter. You know, it's great to see that, you know, continued, you know, great results. When I look forward, I mean, there's obviously a tremendous amount of demand, you know, through the marketplace, whether structured certificates or whole loan sales. I'm curious in a sense how much more do you think you'd want to grow that versus grow the kind overall HFI pie? Because, you know, the outlook is called 45% between HFI and extended seasoning. Which is a pretty, you know, healthy amount, and it looks like that could, you know, keep growing balances. But just trying to think about, you know, how you think about the balance going forward because you have a lot of dry powder, a lot of liquidity, a lot of capital to kind of keep pushing. So I'm curious how you think about how much you do want to, you know, push both sides there? Drew LaBenne: Yeah. Yeah. And we'll get into this more at investor day. So but to give you an answer now for, you know, for Q4, the or even longer term. I mean, the end goal is to grow originations enough that we can feed all of our desires to grow the balance sheet and we can feed all the investors in the marketplace that are paying the appropriate price for the loans we're originating. So our goal is to be able to do both. And then, you know, if we're not quite there on total originations, then it's a bit of a balancing act. Right? We still want to see healthy growth on the balance sheet, but we originate loans that are better off in the marketplace on the sheet, and we're going to sell those. And we have long-term investors that we want to keep our relationship with, so we're going to make sure we're able to allocate to them as well. So, you know, always a bit of a balancing act while we're still ramping originations. The end goal is we have enough originations to feed both sides. Giuliano Bologna: That's very helpful. One thing I'm curious about, when I look at your marketing spend, as a percentage of volume, it, you know, came up a little bit, but it's still, you know, much lower than I would've expected, you given that pushing some new marketing channels. I mean, I'm calculating it, you know, 1.55%, 1.553%. You know, you obviously, you know, highlighted that you're gonna push a little bit more harder on the marketing side. In April, you know, in anticipation of, you know, growth in '26. Scott C. Sanborn: Know, Giuliano Bologna: looks like, you know, I mean, HFI was down, so there should be, you know, a little bit less of a benefit from more, you know, capitalization or amortization of that through, you know, on HFI. But seems like that's, you know, continued to be very efficient, you know, from a, you know, percentage of volume perspective. I'm just curious, you know, how I should think about that, you know, going over going forward over the next few quarters. Scott C. Sanborn: Yeah. So as I mentioned, I think we, you know, excitedly, I'd say we still see a lot of opportunity there. Right? We are coming from a place of reasonably low activity into a market that I think is pretty attractive in terms of the value proposition to the consumer, the experience we've got. We, you know, it's our efforts are working well. We are still, I mean, we're only two quarters into restarting direct mail as an example. We're on the third version of our response model. We will be on our fourth as we exit the year, you know, building the creative optimization library, optimizing the experience, and, you know, then take that across some of the other channels like digital and all the rest. So we still have a lot of opportunity in front of us. I think what you're also seeing in Q3 is not just the performance of those channels being, you know, positive. But also some of our other efforts. I touched on it in my prepared remarks. Our other we are growing we, you know, we delivered 37% growth year on year. That was both in new and in repeat marketing over indexes to driving new. But repeat is coming at a, you know, much lower much lower cost. So our ability to scale that at an equivalent pace, we're still at fifty fifty to jump in year on year marketing spend. We're still, you know, drive roughly fifty fifty with new versus repeat. So both of those efforts are working in the external marketing efforts. And then the efforts to drive repeat and lifetime value from our customers. Giuliano Bologna: That's very, very helpful. I appreciate it. And, yeah, congrats on team performance. I'm looking forward to seeing you guys, you know, in a couple of weeks. Scott C. Sanborn: Great. Thanks, Giuliano. Operator: Thank you. And your next question comes from Reggie Smith of JPMorgan. Your line is open. Please go ahead. Reggie, your line is open. Vincent Caintic: You're on mute, Reggie. Reggie Smith: There we go. Operator: Can you hear me now? Scott C. Sanborn: Yes. Operator: I'm sorry. I wanted to follow-up on the, on the last question. So Reggie Smith: kind of thinking about marketing, you know, obviously, it costs less to reengage a previous customer. I guess thinking about that expense ratio, you know, the 1.5 that we see on the income statement, my sense is that it's not evenly distributed and that, you know, maybe your incremental or your marginal loan is a little bit more. Help me understand, I guess, how inefficient that is, or where where is the marginal cost to underwrite a loan? And then maybe frame that against you could sell one for. Like, it's my my sense and my gut is that despite the fact that that your marketing channels are not optimized, that it's still, there's still room there to kind of kind of go, almost as though you're leaving money on the table possibly. Not in a bad way, but just just thinking about the opportunity there. So maybe talk a little bit about what the marginal cost to acquire a new loan is and then maybe frame that against, you know, what you can sell these loans for. Looks like origination, your marketplace ratio is about 5%. So there seems to be a lot of room there. But anything you could share there would be great. Thank you. Scott C. Sanborn: Yeah. So you're certainly thinking about it the right way. We're underwriting marginal cost of acquisition that reflects the lifetime value of the customer. And, you know, the part of this process, you know, book. And what we are very, very focused on is profitable sustainable growth. Right? We're not looking to just post inefficient volume that we can't rinse and repeat and drive further. So as we push into these new channels, we're where we'll find that efficient frontier and then we work to basically bring it in, right, by improving our targeting models, improving our creative and response rates, improving our pull-through on the experience and the conversion rate on the experience so that we can then go deeper and push harder in those channels. So I think you're right that we have more room to go, but it is it is very mathematically and or scientifically backed. Right? It's we've got a very good handle on what we can expect to get from our customers. Now that that number is going up. Right? As we and we'll share a little bit more info on this. But as we get better and better, you know, these repeat customers are not only lower cost to acquire, they're also lower credit loss. And, oh, by the way, if we get you back once, it's likely we're gonna get you back three or four times. So you know, there really is a real long-term benefit here. That will drive up the lifetime value, which will drive up our ability to pay up at acquisition, but we're building towards it. And we're building towards it incrementally every quarter. Reggie Smith: That makes sense. And if I could sneak one more in, I'd love to hear more about the BlackRock program and the insurance sales channel. Vincent Caintic: If I'm thinking about Reggie Smith: that right, I guess, this is a way for civilians to get exposure to these types of notes? Like, as liquidity the liquidity there for the consumer, they able to sell that stuff back? Like, how does that kind of work? And then on the insurance side, like, do you think we'll get to a point where you're announcing, you know, a committed number from the insurance channel. Like you do for, you know, kind of private credit, today. Vincent Caintic: Thank you. Drew LaBenne: Yeah. So a couple of things there. One, this is not this is not direct to consumer sales that's happening. This is really, you know, in the BlackRock example, I think they have many different ways that they may, you know, represent other clients where they're managing money to purchase this program. So I wouldn't want to box it into just one use case for them, but it's not a, you know, direct or indirect to consumer investors that's happening in any way. I think the insurance pool is extremely deep. And so the, you know, these are insurance companies who are taking premiums for various insurance policies. And investing that money. So, you know, it's a massive pool. It is, as Scott was saying, it usually, the price is not quite as good as banks, but generally, it's still a very low cost of capital. And so we think we can make progress in terms of growing that channel and helping our overall price that we're selling loans at as well. Reggie Smith: And I guess on the direct to consumer point, is that possible? I could maybe not with BlackRock, but is that, like, a channel that one day be a thing, or are there things that prevent that, regulatory wise that would prevent that or make that difficult? Scott C. Sanborn: So there is capital in our loan book today that is provided by it's usually coming through funds that are managed by RIAs. At some of the wealth managers and, you know, hedge funds and all the rest. So there is private individual investor capital coming in to purchase the asset. So that's one. Going direct to consumer retail would be, you know, going back to our original model. And if you recall, you know, it is doable. Then the loans become securities, which comes with a lot of overhead and disclosure requirements, and we have been able to operate a much better business without that because we're what I mean by that is you we are required to announce when we make pricing changes. We're required to announce when we make credit changes. We had all of our competition downloading our publicly available data and using it to compete against us because we had to tell them what we were doing. So it's not something I would gladly go back in that old structure. But, certainly, high net worth individual through funds is a source of capital today. I was thinking about how I would love to, to pick up some yield, versus what I get in my savings account now. Reggie Smith: So I think there's something there. I don't know. Scott C. Sanborn: We could open it up. Operator: Thanks a lot. Listen. Great quarter, guys. Reggie Smith: We'll talk soon. Thanks. Drew LaBenne: Thanks. Operator: Thank you. And a reminder that if you'd like to ask a question, please raise your hand. Our next question comes from Kyle Joseph of Stephens. Line is open. Please go ahead. Kyle Joseph: Hey. Good afternoon. For taking my questions. You guys have touched on this a bit, but just looking at looking at Slide 10 and kind of delinquency trends amongst FICO bands. Obviously, at least amongst the competitor set, you saw a pretty big increase on the lower band there. Just give us a sense for how that impacts your originations, and investor demand and, you know, where you're seeing kind of the best bang for your buck in term across the FICO band score? Scott C. Sanborn: Yeah. So that doesn't directly affect us as I touched on before. You know, we're certainly hearing some chatter about, maybe people consolidating with a smaller handful of originators that have shown themselves to have more stable and predictable performance. What you know, always looking at is what does the application profile look like coming at us? Is it shifting? Is it shifting in a way we like, we don't like? So, you know, when you see an uptick like that, it's generally gonna result in somebody else pulling back. It's we don't know. Is that one platform too? Three? Like, hard for us to say, but we'll be monitoring and adapting to is making sure we continue to get a consistent through the door population. And that that we want. And because it may provide some opportunity. It might provide some risk, and that's part of, you know, what our day job is. Kyle Joseph: Got it. Helpful. And then, just one follow-up for me. Talked a lot about marketing expenses today, but just, you know, and imagine you'll cover this at the investor day as well. But just, you know, a sense for the operating leverage you have on the remaining expense items. Drew LaBenne: Yeah. We think it's pretty significant. We will get into it more at investor day. I think you can already see it happening right now in terms of, you know, the revenue growth we've produced year over year compared to expenses. And that's certainly not to say that other expenses won't go up as we grow the company. But I think marketing is where you'll see the most variable cost as we scale up. Kyle Joseph: Got it. That's it for me. Thanks very much for taking my questions. Scott C. Sanborn: Great. Operator: Thank you for your questions. I will now turn the call to Artem for some questions via email. Artem Nalivayko: Alright. Thanks, Kevin. So Scott and Drew, we've got a couple of questions here that were submitted by our retail investors. First question is, we noticed a difference in origination growth rate across issuers and originators. To what do you attribute differences in growth? Scott C. Sanborn: Yeah. So first, thanks to all the retail investors for submitting. I understand from Artem that we got quite a few this quarter, so that's great. Yeah. As we talked about on the call, not all originations are created equal. Our focus is on profitable sustainable originations growth, and, you know, I think 37% growth in originations to a level that's, you know, really getting close to our highest over the last several years. Is also coming with record high pretax net income and also coming with outperformance on credit by 40%. So it's we're not just looking at one number, which is dollars originated year on year. We're looking at a combined balance of what we think makes for a sustainable, profitable business. Artem Nalivayko: Perfect. Alright. Second question. You talked a little bit about potential rebrand coming up. Any updates on the status? Scott C. Sanborn: Yep. I'm only talking about it because you all keep asking. But I would say we're yes. We have done quite a bit of work this year, and we're in the final stages of the let's call it, the research and development phase and landing on, you know, where we want to take it. Very excited about it. We're now entering the planning and execution phase. Which we're gonna be pretty deliberate about as it won't surprise anyone on this call. We built up equity in this brand after almost twenty years. We think a new brand will give us a broader permission set with our customer base and kind of create new opportunities for us, but we gotta make sure we don't lose the, you know, tens of thousands of positive reviews and awards and our conversion rate that we finally honed across all these channels and so lots of work to do. So when will it be, you know, out in the ether will be probably of next year. Don't hold me to that date exactly, but we're doing the planning phase to make sure we know exactly what we're gonna get and can support it with the, you know, marketing oomph that it's gonna need to be successful. Artem Nalivayko: Alright. Perfect. And last question. Just any updates on the product road map or launching any new products? Scott C. Sanborn: Yeah. So, obviously, this year, as we've been getting back to growth, we've also been, you know, expanding our ambitions on the product mix. We talked about LevelUp checking on the call today. Of savings has been a big driver, which I think Drew talked about that IQ this year. So there is absolutely more to come. That's part of the reason we're gonna be investing in a new brand. What I'd say is, you know, stay tuned for investor day where we'll talk a little bit more about some opportunities we're gonna be pursuing in the years to come. Artem Nalivayko: Alright. Perfect. Thanks, Scott. Alright. So thank you, everyone. With that, we'll wrap up our third quarter earnings conference call. Thanks again for joining us today. And if you have any questions, please email us at ir@lendingclub.com.
Operator: Welcome and thank you for standing by. At this time, all participants are in a listen-only mode. Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now I will turn the meeting over to Olympia McNerney, IBM's Global Head of Investor Relations. Olympia may begin. Olympia McNerney: Thank you. I'd like to welcome you to International Business Machines Corporation's third quarter 2025 earnings presentation. I'm Olympia McNerney, and I'm here today with Arvind Krishna, IBM's chairman, president, and chief executive officer, and Jim Kavanaugh, IBM's Senior Vice President and Chief Financial Officer. We'll post today's prepared remarks on the IBM investor website within a couple of hours, and a replay will be available by this time tomorrow. To provide additional information to our investors, our presentation includes certain non-GAAP measures. For example, all of our references to revenue and signings growth are at constant currency. We provided reconciliation charts for these and other non-GAAP financial measures at the end of the presentation, which is posted to our investor website. Finally, some comments made in this presentation may be considered forward-looking under the Private Securities Litigation Reform Act of 1995. These statements involve factors that could cause our actual results to differ materially. Additional information about these factors is included in the company's filings. So with that, I'll turn the call over to Arvind. Arvind Krishna: Thank you for joining us today. In the third quarter, International Business Machines Corporation delivered strong results across revenue, profit, and free cash flow, exceeding our expectations. Revenue growth accelerated to 7%, our highest growth in several years, with all our segments accelerating sequentially. These results underscore the strength of our business model and portfolio, and the innovation we are delivering to clients. Clients continue to turn to IBM as a trusted partner to help them modernize, embed AI, and build resilient infrastructure. Let me touch on the economy before I turn to our execution. Last quarter, I said we had moved from being cautiously optimistic to optimistic. Technology remains a key driver of growth and competitive advantage. AI adoption is accelerating, and hybrid cloud remains the foundation of enterprise IT. Clients are leaning on enterprise technologies to scale, innovate, and drive productivity. There are always macro uncertainties, but overall, we continue to see broad-based demand from clients and remain optimistic. Now turning to our execution this quarter. Our strategy remains focused on hybrid cloud and artificial intelligence. Our products and services fuel growth and productivity for our clients. You can see this in our results for the quarter. Software growth accelerated to 9%, led by strength in automation. Automation was up 22%, highlighting our end-to-end portfolio of leading solutions that optimize operations, automate infrastructure and workflows, build resiliency, and drive cost efficiency for clients. Many of our automation products are infused with AI, enhancing their capabilities. HashiCorp also continues to accelerate within IBM, benefiting from our go-to-market distribution and joint product innovation, highlighting our synergy potential. Consulting accelerated, reflecting growing demand for AI services as clients need help designing, deploying, and governing AI at scale. And infrastructure delivered robust performance, growing 15%, driven by continued strength in z17, our strongest February launch in history. The Spire Accelerator, which will be available in Q4, will bring advanced generative AI and real-time inferencing capabilities inside IBM Z, redefining how enterprises capture AI value within their most mission-critical environments. In addition to being a demand driver, AI is also a powerful productivity driver for IBM, contributing to our strong financial performance. In 2023, we set out on a goal to achieve $2 billion of productivity savings, and today, we are well ahead of that with an expectation of $4.5 billion of annual run rate savings exiting this year. I believe we have significant opportunity ahead of us to continue to become even leaner and more nimble. Our client zero approach sets us apart as we have internally identified and addressed pain points on data readiness, siloed and vertical workflows, application and IT sprawl, using our own technology and domain expertise. Clients see these results and look to us to help them on their own transformations, driving over 1,000 client zero engagements this year. The breadth of our AI offerings is a key differentiator, combining an innovative technology stack with consulting at scale and our client zero journey. Our Gen AI book of business continues to show momentum, at over $9.5 billion inception to date. In consulting, we are embracing disruption and leading the way with our digital asset and services and software strategy. While we are early in this journey, we have over 200 consulting projects using digital workers at scale. In software, demand for Watson X and Red Hat AI remains strong, with early momentum in our agentic platform WatsonX Orchestrate. WatsonX Orchestrate helps enterprises deploy AI by connecting agents, models, and workflows with governance and security. Orchestration will be critical as enterprises run a variety of models to optimize cost and performance. Our hybrid approach to models enables clients to use the best option for each use case. IBM's Granite models, third-party models, or open models from Hugging Face, Meta, and Mistral. We recently launched Granite 4.0, our next-generation family of open small language models. Granite 4.0 delivers high performance and cost efficiency using 70% less memory and offering twice the inferencing speed of conventional models. We also partnered with Anthropic to infuse Chloride into IBM products to unlock new Gen AI features and capabilities. This week, we announced a partnership to run Watson X on Grok, giving clients access to their inferencing technology, which provides ultra-high-speed, low-latency AI capabilities at lower costs. All this leads to real tangible value for clients. Companies like Deutsche Telekom and S&P Global are embedding Watson X into core workflows. In infrastructure, clients such as Nationwide, State Street, and Credit Agricole are turning to AI to manage increased workloads and use z17 for its advanced AI inferencing capabilities and enhanced resiliency. Accelerating innovation remains a core focus for IBM. At our recent IBM Tech Exchange Developer and Builder Conference, we showcased how we are helping clients and partners with innovation that blends enterprise strength and AI speed. We had almost twice the number of participants as last year, with speakers including United Airlines, T-Mobile, Prudential, UPS, Morgan Stanley, Verizon, and Cigna. We announced Project Bob, facilitating AI-powered software development, helping teams ship higher quality code faster. We have more than 8,000 developers within IBM that are using Project Bob, reporting productivity gains averaging 45%. Another powerful client zero use case. We also announced new automation capabilities, including a real-time infrastructure graph connecting applications, services, and ownership through HashiCorp Terraform. As outlined at our Investor Day, we are on a path to demonstrate the first error-corrected quantum computer by 2028 and continue to deliver key milestones in our quantum roadmap. As we collaborate with our ecosystem of over 280 partners, we are making tangible progress on near-term use cases. For example, HSBC achieved a notable improvement in bond trading predictions using IBM's Heron quantum processor. Vanguard announced a breakthrough in optimizing portfolios using IBM's quantum computing as a service. We recently announced a partnership with AMD to build quantum-centric supercomputing architectures leveraging IBM's quantum expertise and AMD CPUs, GPUs, and other accelerator technologies. Just last week, IBM and the BaaS government unveiled Europe's first IBM Quantum System Two. This marks the second installation outside The United States and underscores our commitment to global leadership in quantum computing. In closing, we are executing on our strategy of accelerating revenue growth and delivering higher profitability. Given these results and the momentum in our portfolio, we are raising expectations for revenue growth to more than 5% and free cash flow to about $14 billion for the year. With that, let me hand it over to Jim to go through the financials. Jim Kavanaugh: Thanks, Arvind. In the third quarter, our revenue growth accelerated to 7%, our highest growth in several years, with all of our segments accelerating sequentially. Revenue scale, mix, and productivity drove 290 basis points of adjusted EBITDA margin expansion, 22% adjusted EBITDA growth, and 15% operating earnings per share growth, highlighting the significant operating leverage in our business model. And through the first nine months, we generated $7.2 billion of free cash flow, our highest nine-month free cash flow margin in reported history. We exceeded our expectations on revenue, profitability, adjusted EBITDA, earnings per share, and free cash flow, reflecting the strength of our portfolio and the disciplined execution across our business. Software revenue grew 9%, fueled by accelerating organic growth, up a few points since last quarter, and continued contribution from our high-value annual recurring revenue base, which grew to $23.2 billion, up 9% since last year. Growth in automation accelerated to 22%, driven by strength in the organic portfolio and early synergies with HashiCorp, which maintained momentum and delivered its highest bookings quarter in history. Red Hat bookings growth accelerated to about 20%, and revenue grew 12%. This performance was driven by a softening in consumption-based services and Rell trending back towards single-digit growth as we wrap on last year's exceptional double-digit performance. Demand for our hybrid cloud products remains strong, and all three of our major subscription offerings gained market share again this quarter, with growth accelerating for both OpenShift and Ansible. OpenShift ARR is now $1.8 billion, growing over 30%. Data was up 7%, driven by continued strength in our AI portfolio. And transaction processing revenue declined by 3%, reflecting another quarter of z17 outperformance as clients continue to prioritize hardware spend on our latest IBM Z system. While this dynamic impacts near-term revenue, we're encouraged by a healthy pipeline that positions us well for future demand. Infrastructure delivered another strong quarter, growing 15%. Hybrid infrastructure grew 26%, and infrastructure support was flat. Within hybrid infrastructure, IBM Z delivered its highest third-quarter revenue in nearly two decades, up 59% year to year, fueled by the early success of our z17 platform, purpose-built for AI and hybrid cloud, with breakthrough capabilities in real-time inferencing, quantum-safe security, and AI-driven operational efficiency. Clients are investing in z17 not only for its reliability and scalability but because it enables secure high-performance computing at the core of their digital transformation strategies. Distributed infrastructure, up 8%, reflects broad-based growth across our storage portfolio as clients scale capacity to meet rising data and AI demands. Consulting returned to growth in the third quarter with revenue up 2%, improving sequentially and marking a positive inflection point in performance. Intelligent operations was up 4%, while strategy and technology revenue stabilized, with both lines of business showing quarter-over-quarter momentum. This growth reflects solid demand for our strategic offerings: business application transformation, application modernization and migration, and application operations as clients focus investments on solutions that accelerate AI transformation and maximize return. As Arvind mentioned, we are embracing AI disruption and leading with the software-driven services delivery model. We are transforming into a hybrid model of people plus software that delivers efficiency and scale. This approach is already driving internal productivity, reflected in the 220 basis points of segment profit margin expansion year to date, and resonating with clients seeking to operationalize AI strategies. By combining domain expertise with scalable technology platforms, we reinforce our role as a strategic provider of choice in this evolving landscape. Our consulting generative AI book of business accelerated to over $1.5 billion in the quarter, with the number of projects more than doubling year to year, underscoring our momentum. While total signings declined this quarter, the quality of signings continued to strengthen, with more strategic wins from new clients and expanded engagements within existing ones. Turning to profitability, we have delivered nine consecutive quarters of operating pretax margin expansion, highlighting the evolution of our portfolio mix and our laser focus on productivity, which again played out this quarter. Revenue scale, mix, and productivity drove expansion of operating gross profit margin by 120 basis points, adjusted EBITDA margin by 290 basis points, and operating pretax margin by 200 basis points, ahead of our expectations and well above our model. Segment profit margins expanded by 420 basis points in infrastructure, 270 basis points in software, and 200 basis points in consulting, with consulting margins at the highest level in three years. Revenue scale and mix contribution from IBM Z is a significant source of profitability and free cash flow, and combined with the three to four times stack multiplier, helps fuel our investment in innovation and drive growth. Productivity is also a key driver of profit margin expansion, as we deploy AI at scale across IBM in areas including finance, supply chain, sales, HR, service delivery, and customer support to improve efficiency and reduce costs. While we have made progress on this journey and expect $4.5 billion of run rate savings exiting this year, there is still significant opportunity ahead for us to drive even more efficiency and cost savings. Through the third quarter, we generated $7.2 billion of free cash flow, up about $600 million year over year, resulting in our highest year-to-date free cash flow margin in reported history. The largest driver of this growth is adjusted EBITDA, up $1.8 billion year over year, partially offset by proceeds from the Palo Alto Q Radar transaction, which resulted in a reduction in CapEx in the third quarter of last year, and working capital dynamics. Our strong liquidity position, solid investment-grade balance sheet, and disciplined capital allocation policy remain a focus for us. We ended the quarter with cash of $14.9 billion. Our debt balance ending the quarter was $63.1 billion, including $11.3 billion of debt for our financing business, with the receivables portfolio that is over 75% investment grade. In addition, year to date, we returned $4.7 billion to shareholders in the form of dividends. Now let me talk about what we see going forward. Through the first nine months of the year, we delivered 5% revenue growth, 17% adjusted EBITDA growth, 10% operating earnings per share growth, and 9% free cash flow growth. The strength and diversity of our portfolio, disciplined capital allocation, and relentless focus on productivity continue to drive the durability of our revenue and free cash flow performance. Given the strength of this performance, we are raising our expectations for revenue, adjusted EBITDA, and free cash flow. We now expect to deliver revenue growth of more than 5%, adjusted EBITDA growth of mid-teens, and free cash flow of about $14 billion for 2025. Let me focus on full-year growth for the segments. We continue to expect software revenue growth of approaching double digits for the full year. Through the first nine months, we delivered growth above our model of 17% in automation and inline model growth of 7% in data. And these trends should continue. And we continue to expect mid-teens growth for Red Hat, albeit at the low end. This is underpinned by strong bookings growth in the third quarter of about 20% and our revenue under contract, which is growing in the mid-teens. As we wrap an elevated growth in consumption-based services last year, we expect double-digit revenue growth in the fourth quarter, with an accelerated growth profile heading into 2026. While transaction processing was down 1% year to date, as clients prioritize spend on our high-value innovation z17, the strength of the new cycle provides future monetization value across the z stack. We are seeing this strength in our pipeline as we enter the fourth quarter, which we expect will return to growth. With continued strength in z17, we now expect infrastructure to contribute over 1.5 points to IBM's revenue growth this year. In consulting, we are encouraged by our return to growth this quarter and continued progress in our Gen AI book of business. And now we see an inflection in growth going forward, with fourth-quarter revenue performance similar to our third-quarter growth. Now turning to profitability. We started this year expecting over 50 basis points of operating pretax margin expansion, and through the first nine months of this year, we delivered 130 basis points of expansion, well ahead of our expectations. This performance is driven by our revenue scale, portfolio mix, and progress with productivity initiatives, enabling operating leverage while providing investment flexibility. We are raising IBM's full-year operating pretax margin expansion to over a point, and our operating tax rate expectation for the year remains in the mid-teens. For the fourth quarter, we are comfortable with consensus estimates for constant currency revenue growth and profitability. Let me conclude by saying we are pleased with our continued disciplined execution and look forward to capturing growth opportunities ahead of us. Arvind and I are now happy to take your questions. Olympia, let's get started. Olympia McNerney: Thank you, Jim. Before we begin Q&A, I'd like to mention a couple of items. First, supplemental information is provided at the end of the presentation. And then second, as always, I'd ask you to refrain from multi-part questions. Operator, let's please open it up for questions. Operator: Thank you. At this time, we'll begin the question and answer session of the conference. And our first question comes from Amit Daryanani with Evercore ISI. Please state your question. Amit Daryanani: Yes. Thanks a lot. Good afternoon, everyone. I guess maybe just want to focus on free cash flow. So I really appreciate the guidance of free cash flow at $14 billion for the year. And if I get my math right, this sort of implies free cash flow is up double digits in '25 and your conversion rates are around 125% give or take. Can you just touch on if there's any one-off dynamics that we should be aware of that are helping in free cash flow in 2025? I'm really just trying to think that as we get into 2026 and if your growth is in line with your longer-term models, is there anything that could preclude free cash flow from growing a few points higher than sales growth, sort of the way you have talked about it? I'd love to just kind of spend a little bit of time on free cash flow. And if anything alters on the capital allocation as well. Thank you. Jim Kavanaugh: Thanks, Amit. I appreciate the question. It's right at the heart of how Arvind is repositioning this company around the two key measures. One, accelerating revenue growth, and two is driving that free cash flow engine that's going to fuel the investments for us to continue to make to drive long-term sustainable competitive advantage. But if you take a step back first, as we said in prepared remarks, we're very pleased with our free cash flow engine starting out the next evolution of our journey coming off the midterm model. Year to date, $7.2 billion, up $600 million year over year, highest free cash flow margin reported history through three quarters for our company. And I'll just state that underneath it, we overcame in the third quarter a $500 million headwind from last year as a result of the Palo Alto QRadar transaction that was recorded as an asset sale and reduction in CapEx. So we got through 2025's headwind around that. What's driving that free cash flow? Probably the most important thing is the underlying fundamentals of our business. An accelerating top-line revenue growth profile and an operating leverage engine that is driving productivities like we haven't seen in a long period of time. I think we're nine quarters in a row of driving operating leverage and significant margin productivity. So I would tell you high quality, high sustainable free cash flow. And that's what gave us the confidence for the second quarter in a row to take up our free cash flow estimate for the year. Now about $14 billion. Why do we do that? We took up revenue, we took up operating margin, we took up adjusted EBITDA, we took up our profitability, and all that leads to free cash flow. When you take a look at what's driving that $14 billion, $2.5 billion give or take year-to-year growth in adjusted EBITDA. Mid-teens growth, well above our model. And underneath that, you take a look at some of the dynamics we've been talking about since back in January. Yes, higher profitable-based engine will pay higher cash tax. Yes, we're investing long-term for this business, we are going to have higher CapEx outside of the QRadar transaction. And, yes, we made a significant strategic acquisition. We've got acquisition-related charges and foregone interest. All of that is embedded in 2025's guidance. Now you take a step back to the heart of your question of 2026. 2026, I would tell you, what is our free cash flow generation engine flywheel? It's accelerated revenue growth, the 5 plus percent in this company, is driving operating leverage and it's leveraging an efficient balance sheet. We see all that continuing to play out in 2026. And those underlying fundamentals, yeah, they deliver a sustainable realization number by the way, in the mid to high one twenties. Kinda to your question. By the way, we've been there for four years in a row already. So we can handle that. So you bring that all together, I think it talks to the statement and the confidence of our focused portfolio. Our disciplined capital allocation, the diversity of our business model, and the relentless focus of us driving productivity and operating leverage that gives us the investment flexibility to continue driving long-term sustainable competitive advantage. So thank you very much for the question. Olympia McNerney: Great. Operator, let's take our next question. Operator: Thank you. And your next question comes from Wamsi Mohan with Bank of America. Please state your question. Wamsi Mohan: Yes. Thank you so much. Arvind, you said AI adoption is accelerating right at the top of the call. And I'm wondering if you can maybe help us think through the financial impact in maybe revenue terms for IBM, how we should think about the progression for that. Are we hitting some kind of inflection that we should see meaningful upside into 2026 on the AI front? And maybe quickly, your quick thoughts on maybe the impact of the federal government shutdown if there is any materiality to that to IBM here in the fourth quarter? And if I could, Jim, if you could just clarify the organic growth in software in the third quarter and expectations for transaction processing going into the end of the year? Thank you so much. Arvind Krishna: Wamsi, thanks for those questions. Let me try and unpack it. Let me go with the easiest one first. The easiest one is on the current government shutdown. I would tell you that we see a de minimis impact to IBM. It's always hard to say zero because something could happen. We still got two months to go in the quarter. But so far, we have not seen any impact from the shutdown. And the reason for that is the makeup of our business. Our technology business is largely comprised of hardware as well as software, software mostly on a subscription basis. These are running critical systems. Payments for social security, benefits for the VA. All of these are considered essential, so I don't really see that at risk. A little bit over half the business is consulting projects. But the consulting we do is of a similar nature. ERP, benefits, helping people reduce paper, reduce errors. Back to payments. These are all considered essential. And that is the reason that we may be in the minority of not seeing any direct impact so far. Now just leave it at that because so far we have not. Nobody has come to us about any of these projects. And so that's the first question that is straightforward. Next, you asked about AI. Look, our book of business, we talked about it being over $9.5 billion. Adjusted consulting piece was $1.5 billion in the quarter itself. These are very real numbers. So as those consulting projects start to get executed, as that backlog builds up, certainly the contribution to consulting is going to be very real. We talked about another number tied there, which is not a different number, is the 200 projects in consulting which are already using digital workers which effectively are the AI agents that we have built that get deployed by our consultants on behalf of our clients. About not quite, but close to 20% of our overall book of business is technology and software. And there, that is mostly subscription revenue, as well as products that people are purchasing from us. So those numbers certainly begin to add up. And I will tell you that a big fuel behind both our OpenShift growth as well as our automation growth is due to the AI capabilities that are infused inside those products. So if I sort of put the first two pieces together, de minimis on the government shutdown, and definitely the AI piece is a strong contributor to the software growth and I believe it's a big piece of why consulting is beginning to return to growth. Because we called the play to move towards AI almost two years ago. So as that book of business has built up, it is overcoming the headwinds from staff augmentation projects going away and people getting rid of discretionary spending and consulting. Jim, I'll let you take the third piece. Jim Kavanaugh: Yes. Just to amplify the last piece and then I'll get into your question about software organic and TP. To Arvind's point, you know, year to date from a software perspective, we're growing 8.5% overall. Approaching 9% right now. About two points of that growth is coming out from our GenAI book of business. So we're getting very good realization and penetration. Arvind's point on consulting, north of a $7.5 billion book of business I'd put that up against any consulting company right now. We called that play to Arvind's point a few years ago. We do think we have a differentiated competitive value proposition of a company with an integrated tech stack plus strategic partnership AI plus a consulting business at scale with an integral part of IBM client zero that drives distinctive use cases and references. We've already had over a thousand client engagements year to date around GenAI from an enterprise software and consulting perspective overall. In consulting, it's already north of 22% of our $31 billion backlog. And in this quarter, we eclipsed double-digit composition of our revenue, 12% of our revenue growing very nicely at still a two to three-point competitive advantage in terms of margin overall. And by the way, you see that play out in our consulting margins. You know, year to date up 220 basis points, the highest margins we've had in a long time. Now to your point about software. Software you know, we're very pleased, 9% in the quarter. We accelerated about three points organically quarter to quarter. This wasn't an inorganic contribution. In fact, our inorganic contribution came down as we wrapped on some of these. It's being driven by the strong contribution of our high-value recurring revenue, now a book of business, $23 billion, up 9%. And when you look underneath it, you know, TP right now given the strength of the mainframe cycle, driving cycle dynamics. We're very encouraged, around the future monetization value opportunity. And as you heard in prepared remarks, calling a return to growth in TP in the fourth quarter with the strong pipeline we got. By the way, if you map it back to the z16 cycle, what happened in '22? Our TP revenue was flat. In '23, we grew high single digit. In '24, we grew double digit. Look at '25 right now, we're calling back to growth probably a quarter early compared to a historical cycle. We feel very good about that growth profile. And given the strong z17 where we've shipped over 100% more MIPS than the z16 cycle, actually feeling pretty good about that valuation opportunity moving forward. Olympia McNerney: Great. Operator, let's take our next question. Operator: Your next question comes from Ben Reitzes with Melius Research. Please state your question. Ben Reitzes: Hey guys, thanks a lot. Appreciate the question. Arvind, I appreciate that fourth-quarter reported software growth is set to accelerate in your guidance, sounds like above 10%. I was just wondering about next year. You do wrap the Hashi acquisition in the spring, I think March. Are there signs that it can accelerate from here? Obviously with Red Hat decelerating a little, I just think folks would like to know broadly if you can keep double-digit next year or even accelerate based on the portfolio realizing that you're wrapping the acquisitions that timeframe? Thanks so much guys. Arvind Krishna: Yes, Ben, great question. So let me decompose it into the four parts of software that we talk about. And then we'll touch on acquisitions and their contribution. And then I'll ask Jim to try to put it all together back into the financial model for you. So let's take Red Hat. We talked about 20% signings growth this quarter. We had similar numbers in the previous quarter. As that becomes the bulk of the Red Hat book of business entering 2026, we do expect to see Red Hat returning to mid-teens or close to mid-teens growth. So that would be an acceleration from where we are this quarter. Then next, we talked about and in the last question, Jim touched on transaction processing, or mainframe software. We have seen this happen multiple times. In the first couple of quarters of a new cycle, TP tends to come down because people are very much focused on getting their hardware capacity. As that hardware capacity gets deployed, then the TP revenue begins to come up, along with some of the ELA cycle dynamics that are there. And we begin to see that. So I expect to see TP grow. Not quite in double digits to be clear, but let's call it low single digits for sure into next year. Automation has been growing in this last quarter at 22%. Yes, the HashiCorp acquired revenue was a piece of it. And as you point out, that'll go away in the second quarter. However, the acquired properties we have tend to provide continued growth for quite a while. Because of the Hashi bookings, which are significantly ahead of where we had planned them to be, I expect we'll continue to see growth out of Hashi through 2026 as well. Now not quite as much as an acquired growth, but I do expect that we'll continue to see automation in the double digits for sure. If but maybe not north of '20. And we've continued to see the data and AI portfolio grow in the mid to high single digits. Now that does put aside what other acquisitions we will do. Part of our model for software is we'll get a couple of points of growth from acquired revenue and we see a good market for targets, yes, that is yet to play out. But in the current regulatory environment, combined with what we can see out there, expect that we should be able to do that as well. So that was sort of giving you color on the portfolio and the different pieces I'll ask Jim to get into them closing it back up in terms of sort of what is the organic and inorganic and overall software numbers. Jim Kavanaugh: Yeah. Thanks, Ben, for the question overall. I mean, obviously, we are a software-centric platform company overall. So it's at the heart of both our top-line growth factor profile and also more importantly, from a free cash flow, generation engine overall. It delivers about three-quarters of our profit. And you take a look at '25, I think we positioned extremely well with regards to accelerating revenue growth through our throughout the year. Off of tougher comps at the '24. We gotta remember that. And I think that's a reflection of the strength that our portfolio, the diversity, of our portfolio across the board, and to the disciplined execution. Now when you look at '26, early indicators, I'll put them in some big buckets. Arvind went into some of the detail. First, I think we shouldn't forget, and Arvind called this out ninety days ago, which I think surprised many of you. We're operating in an attractive TAM and a positive backdrop from a technology perspective. Overall, we feel very good about technology being a source of competitive advantage, and you're seeing that play out in areas around hybrid cloud modernization, around AI, around automation. In many areas, we see that continue. So the market backdrop, we couldn't be more optimistic around twenty-six. Two, the strength and diversity of our portfolio not only has it been repositioned over the last three or four years to accelerate growth, what is happening? More and more of our composition is software is now aligned to higher growth end markets. Which gives us a better vector of growth even as we go into '26. Three, our annuity portfolio. And I don't think we get a lot of value for this, and we keep bringing it up. Over a $23 billion ARR book of business, feel we're gonna exit the fourth quarter at double digits. That's a great indicator for 2026 because that is 80% of our software portfolio overall. Four, new innovation, GenAI. I already talked about GenAI, the book of business and the acceleration we got, and all of the capital investment going into the infrastructure providers, I think, is just gonna accelerate the innovation curve for enterprise AI overall. And we are a leader in enterprise AI just given our tech stack, portfolio, and consulting, and that should deliver a few points. Five, Red Hat. You know, our bookings are three-month, are six-month, are nine-month, are twelve-month RPO shows accelerating growth coming off a 20% bookings overall. By the way, we actually had more opportunity to do even better than that 20%, and that fuel an inflected growth. Next, M&A. Now point I would bring up on M&A, Arvind already talked about, it's embedded in our model. We've said that all along. But, I think we've gotta continue selling the investor narrative because that M&A drives a much higher organic growth engine because those synergies play to those acquisitions. That's how we pay for control premiums. That's how we get an accelerated top-line growth. That's how we get an accelerated bottom-line growth. And we get accretive value in free cash flow in two years. So our organic engine continues to grow. And then finally, TP monetization. Arvind wrapped up on it. Let's just remind all the investors. TP gets monetized based on hardware installed MIP usage. I already said two quarters in, albeit early, we're a 130% program the program on z17. Off of a z16 was that was the most successful program in the history of IBM. We're at a 130%. So I do my math and calculation. Higher capacity opportunity creates higher monetization opportunity creates higher price opportunity, creates higher value creation opportunity. So I think when you look at it, we feel pretty good about delivering our model and software. Olympia McNerney: Operator, let's take the next question. Operator: Your next question comes from Eric Woodring with Morgan Stanley. Please state your question. Eric Woodring: Guys, thank you very much for taking my question. Just one quick clarification question there, Arvind. The growth rates you just provided in the response to that question for 2026 or into 2026, I just wanted to confirm those were all organic growth rates or whether they included M&A embedded in them. And then my question, just taking a step back Arvind is, we've seen cloud providers experience exceptional growth recently, particularly in infrastructure services and large-scale AI workloads. How does IBM view that trend? And do you see a similar opportunity for IBM Cloud to capture long-term infrastructure-driven demand? Thanks. Arvind Krishna: The growth rates that we talked about we tend not to do much M&A or any in both our mainframe or TPS. Well as in some of the other areas. The growth rates I mentioned, would call it are largely organic without having any significant M&A. But tuck-ins, small M&A are probably all included in there, but if we do anything substantial, it would help accelerate those growth rates. That's just put it that way. I'll also let Jim comment on it after I talk about the cloud opportunity. We actually partner deeply with all the hyperscalers. A thing that we haven't talked about, but it's certainly no secret, for example, we are one of CoreWeave's large clients. We also tend to use a lot of infrastructure at AWS, at Azure, as well as at GCP. So as opposed to that it's an opportunity for us, Eric, is the flip. We got a huge opportunity to do both consulting projects as well as deploy our software on those infrastructures for our clients. As an example, if I take one of our very large health insurance clients, as they think through where they're going to deploy their AI models, they do not like deploying in a public instance. But they are perfectly fine getting a private instance in a cloud and deploying models there, deploying our software stacks there, and getting growth. So we tend to do that. We also tend to, in some cases, for example, with Grok, we are deploying Grok in people's own data centers. So that's a big opportunity that comes there. That'll show up in revenue for us both in consulting as well as in software because on top of the Grok infrastructure, we tend to put our software stacks. In some instances. So it's less about us getting an opportunity in our cloud only but much more that that's a growth vector that we are able to ride and that helps increase overall growth rate in both software as well as in consulting. And lastly, let's not forget our biggest beneficiary of AI infrastructure is our mainframe, and our storage portfolio at this time. The latest generation mainframe we will surprise you with some of the numbers. This quarter, fully populated single system is capable of doing 450 billion inferences per day. As clients purchase that capability, that will be both a further accelerant to mainframe infrastructure growth but it also comes with a software stack that helps them do all of that inferencing. If I look at our storage portfolio, as many people have realized, you need a lot of storage to be able to do AI training. And we are gonna be beneficiaries of that. Inside our storage portfolio as people deploy that. So I would much more say, we are actually the direct beneficiary of the hyperscaler growth of AI capability and capacity as enterprises use this capability. And two, we will be a beneficiary in our mainframe and storage stack in a direct way. I think that that would I hope Eric addressed that part of the question. Jim Kavanaugh: Eric, and just to the numbers piece. I mean, overall, we are all focused here to execute a very important fourth quarter. To finish a very successful 2025 for IBM. But we both Arvind and I are given some color about '26, about the confidence we have in our portfolio. But let me just take a step back and remind you on software. Our software model shared at Investor Day approaching double digits, that is all in. That has two to three points give or take at each year, maybe a point more and maybe a point less depending on our disciplined capital allocation around M&A. Of inorganic contribution and six to seven to eight points of organic. When you look at 2025, you go do the math, work probably gonna be approaching six plus percent organic growth overall. We're gonna have somewhere three to four points this year because we took advantage of a very strategic opportunity with HashiCorp this year. But when you take a look at 2026, the TP growth monetization value that I talked about, the Red Hat accelerated growth profile that's on our revenue under the annuity growth profile, that is, you know, approaching or now gonna be double digits at the exiting the year. Each of those are gonna fuel that organic growth engine overall. So I think, you know, big picture, the model, is pretty much what we kinda look at right now for 2026. Olympia McNerney: Great. Operator, let's take the next question. Operator: Your next question comes from Jim Schneider with Goldman Sachs. Please state your question. Jim Schneider: Good evening. Thanks for taking my question. Arvind, I was wondering if you could maybe elaborate a little bit on how you're thinking about M&A from a target perspective. You've previously stated that you're looking to accelerate growth and you're looking for things that fit strategically with the portfolio. But on the margin, anything in any way you're thinking about differently about either the portfolio or the product piece of it or the potential size of transaction you might like to undertake? And specifically, would you consider undertaking a somewhat larger, transformative transaction not quite as big as you did with Red Hat, but of sort of similar scale relative to your overall portfolio? Thank you. Arvind Krishna: Yes. Jim, thanks for the question. Look, M&A is an extremely important part of our strategy. So I want to just perhaps reiterate because this has come up on prior calls as well. We look at it always in a multiyear window. So we gotta look at what is our excess cash flow over a few years. And once we have that window, that means we can sort of buy ahead, which means we can sort of lean in. Or if we don't find a good target like we didn't, for example, I think in 2023, then we actually spent much less than we could have. So that's just a backdrop to the amount of financial flexibility that we have which if I remember at our Investor Day earlier this year, we laid out that we have somewhere in the mid-twenties perhaps a bit more flexibility over a three-year window. That's kind of a way to start to look at it. Next. We are very focused on the areas that we have already explained as our strategy. Very top level, we say hybrid cloud and artificial intelligence. That translates into our hybrid portfolio, our automation portfolio, and our data and AI portfolio. And you've seen us do acquisitions in there. For example, we bought an AI company that does VLLM, but it fit into our hybrid portfolio. Because it's a direct part of the Red Hat and OpenShift portfolios. We did HashiCorp, which fits directly into automation. We did data stacks fits into data. When I look at the target lists, there is, I think, a pretty rich list of opportunities that are out there in the private markets, in the PE world, and public markets across those opportunities that we think will some of them will be actionable. It's hard to predict upfront. Which are and which are not. I think that if I put it that way, and just to be clear, anything that is of size has to fit three criteria. It has to fit with the strategy we just laid out, there has to be synergy aka the growth rate inside IBM will be above what it was as a standalone entity. Some of that comes from our geography spread. We have a sales team in most countries in the world. Some of it comes by the ability to bundle more attractive offerings together and it comes from faster deployment for example, leveraging our consulting team or the rest of our sales team. All three will be able to add to more to a faster growth rate. Third, if it is of size, then we are very disciplined also that we like it to become accretive to cash by the end of the second year. So those are the criteria. But as you've seen, we have found plenty in the last few years that do fit that whole criteria. So I hope that that gives you a sense. Now your question on larger, I'll just use that word larger, we will never rule anything out but it has to meet all the criteria that we just laid out. It is not for size alone. Red Hat allowed us to enter a new space helped accelerate IBM's overall growth rate by the way, both in software and in consulting. So that was the sort of the synergy piece that was there. And you many people forget Red Hat also had a very attractive free cash flow profile that we have been able to leverage since the acquisition. Olympia McNerney: Great. Operator, let's take one final question. Operator: Thank you. And that question comes from Brian Essex with JPMorgan. Please state your question. Brian Essex: Hi, good afternoon and thank you for taking the question. Arvind, maybe as a follow-up as to part of Eric's question, and I appreciate your hybrid exposure here. But could you generalize what you're seeing with regard to mix as enterprises focus on AI readiness? Are cloud-native ISP ISV-based agentic applications maybe targeted at task and point solution automation? Are those low-hanging fruit prove ROI before pursuing self-hosted projects? And then maybe within the IT budgets, where is the spending coming from? What's at risk of getting trimmed as companies focus on adopting AI-based technology? Arvind Krishna: So Brian, let me address the first part of your question with a bit of depth. I actually think that these are an and. Are people going to leverage ISV? Otherwise, I'll call it SaaS applications for getting exposure to AI and agents either as part of those entities or as added value onto them. And there are hundreds, if not thousands of little boutique companies that provide some of those agents that are out there. I think they would absolutely do that. They'll kick the tires on it. They'll get some value. But at the end of the day, to get real value from AI, people have to be able to integrate their existing applications. How do they tie what is happening in their payroll system and HR system to perhaps something that is happening in the CRM system, perhaps something that is happening in their ERP system? People begin to want to build much more profound agents, that that is where a lot of the action that we see is happening. As people try to build those agents out, then they get deeply concerned about what is that data, where is that data going. And they are going to deploy those either in their own data centers or in a private instance. Note, a private instance of the cloud is quite protected. People do deploy a lot of critical applications that are there. But if I think about our clients, in the regulated industries, banking and insurance, still is very much data center as well as a cloud picture. If I look at healthcare, healthcare data tends not to go out very much from their own data centers. If I look at telecom, most people build their own backbones. And their data and applications reside there. But certain other things like marketing may well reside in the public cloud. So as we begin to look upon all that, I believe that we are at the very beginning. I would actually characterize this, Brian, that if I was to use the baseball analogy, we in the first innings of enterprise AI rollout. And I expect that we'll be seeing and we will see more SaaS AI usage. We will see more public cloud AI usage. And will begin to see a lot more private AI usage as people begin to get into more critical applications and agents. On the IT budgets, look, IT budgets have been growing ahead of GDP. That's simply observation. I think this began four or five years ago. But IT budgets are growing typically two to three points ahead of GDP growth. You combine that then with inflation because GDP after all is real, not nominal. I see IT budgets staying healthy. So a lot of the growth comes from the fact that the IT budgets are growing as opposed to the cost of something else. That said, think people are getting very, very effective at trying to run and maintain with lower costs and putting more money towards newer projects. Five, ten years ago, that ratio used to be seventy thirty. 70 are running what is, 30 are new. I think that is shifting more towards the sixty forty spread. And where it'll go, is where we'll get the benefit. That is why our automation portfolio and our hybrid portfolio get a lot more growth because people are using that. So it's sort of substituting for labor and, in some cases, for services by letting those capabilities move into software. Olympia McNerney: Great. Operator, I think we have time for one last question. Operator: Thank you. And the next question comes from Mark Newman with Bernstein. Please state your question. Mark Newman: Hi, thanks for taking my question. Very good to see the growing AI book of business and thanks for those comments just now. Arvind, I don't think you've given any specific breakdown yet on the breakdown between software and consulting of the AI book of business. Is there any clarity on that? I think it used to be eighty-twenty, want to clarify, there's any clarity you've given on that today. And then a follow-up on consulting. I think there's two quarters in a row now where we are seeing the book to bill ratio a touch below one. I know you point in the earnings to a book to bill ratio greater than one if you're looking at the trailing twelve months. But I would just like to understand more on a shorter-term basis, last six months, it seems like the book to bill ratio is below one. And if you could explain kind of why maybe why that's the case, why we shouldn't be worried especially considering, I think, around 30% of signings you mentioned are AI which I believe are longer duration. So just a little bit of clarity around consulting and how AI plays into the book bill ratio and that recent number being below one would be appreciated. Thanks very much. Jim Kavanaugh: Okay. Mark, this is Jim. I'll take both of those. Well, let's start with the second one first, and then I'll come back to your clarify question on Gen AI. And in particular, around the software portfolio overall. I want to dive a little bit deeper in that. But, you know, when we take a look at consulting, let's dial back ninety days ago. I think we surprised many just compared to what many other consulting companies have been talking about publicly. We talked about green shoots. That we saw entering second half. But I think at that time, we were prudently cautious about how we were gonna monitor client buying behaviors and we didn't expect growth in the second half, although we saw many green shoots overall. Now we posted I think, a marked inflection point of consulting back to growth, up 2% and it's been driven by what we're seeing as continued opportunity for growth as clients accelerate investment in AI-driven transformation, what we've been talking about on many of these questions here. Why? Companies are looking to unlock efficiency, business model innovation, and growth, growth, growth. And AI is accelerating overall. When we take a look at right now fourth quarter, and more importantly, early parts of '26, we again see momentum around those key metrics, our backlog position, our Gen AI book, strategic partnerships, and around productivity. You know, backlog, $31 billion. Healthy growing 4% right now. Our best ever erosion in, I think, multiple years. What does that say? Clients' commitment to IBM Consulting, the quality of our delivery, and the value of our different offerings are doing extremely well. Now to your point about signings, signings were down 5%. By the way, signings been down five in the last six quarters, something like that. But as I've said many times before, why do I always start with backlog? That to me is the most critical component that's closest to the outcome measure. The outcome measure is revenue. Revenue growth, revenue growth. As Arvind always likes to say in this room with our operating team. Indicators are backlog. Indicators are signings. But signings are not all equal. And those signings numbers have been driven down think we posted down 5% based on lower large deal renewal. Volume. By the way, I would argue that's at best no revenue realization. And probably worst, dilutive revenue because renewals typically drive more price and more productivity. But underneath that, what are we seeing? We're seeing a tremendous improvement in the quality of our signings. Our net new business penetration, again, another quarter in a row, up double digits year to year on a penetration. Over 300 new clients year to date fueling our backlog. Our backlog realization is up over four points year over year. And when we take a look at our backlog run out, it's pretty healthy growing at market level growth rates here over the next three, six, nine, twelve months. Lot of work still to go. To sell and bill within quarter, but a lot of good indicators. And that GenAI to your point, over 22% of our backlog, 30% of our signings, 12% of our revenue, that's what's inflecting the growth overall. So we feel pretty good, and that's why we called the mark inflection, and we said we're gonna grow consulting here in the fourth quarter. And we feel pretty good about getting back to market growth levels in 2026. Now, GenAI, the over $9.5 billion book of business, Arvind already talked about over $7.5 billion in consulting. Well over $1.5 billion, almost approaching $2 billion in software. You know, we're, what, seven, eight quarters in here. That number might vary quarter by quarter as far as the composition. But we're still pretty damn close to that twenty-eighty overall. But the underpinnings behind that of the software book in the generation, you know, you see that play out and how it's accelerating automation growth. But also Red Hat. I know there's been a lot of questions around Red Hat. Let me just spend a minute just to close the call on Red Hat. Red Hat, we delivered 12% growth. We were down a couple points quarter to quarter. And year to date, we're at 13% low teens. Right? Let me break down some of the performance. One from a physician strength, and Arvind talked about a few points. OpenShift up nearly 40% bookings. Our ARR $1.8 billion up mid-thirties year over year, accelerating profile. Virtualization, now we've closed total contract value of bookings over $400 million. We got a $700 million pipeline over the next five plus quarters. And Ansible, 20% bookings in the quarter, accelerating the high teens. So what happened on the sequential decline? One, as we knew we were facing tougher comparison on the consumption-based services. That impacted us by about a point. And Rell, about 50% of our portfolio. We've been talking about we've been growing web rel abnormally in the mid-teens. We reverted back to our model growing 6% and had about a point. Now taking a step back Red Hat models mid-teens. When you look at it, our 80% subs business we gotta grow low end of that high teens. The consumption base, we gotta grow high single digit. When you look at our year to date, Arvind talked about our bookings year to date, we're well positioned on that subscription-based business growing high teens already on bookings. And when you look at that six, nine, twelve-month revenue under contract, we're accelerating that growth as we go into '26. That gives us confidence in that acceleration comment that Arvind talked about and I talked about as qualitative statements about confidence in '26. And when you look at fourth quarter, let's put this in perspective. We're gonna accelerate Red Hat growth in '25. It's gonna be a nice acceleration on the subs and we got about a two-point headwind on consumption-based services. We knew about that. Because last year, we grew consumption-based services high teens. And when you look at fourth quarter, we're gonna wrap on that. We've known about that all year long. So when we look at fourth quarter, double-digit solid double-digit growth in Red Hat. Low teen growth for the year, nice composition of where that acceleration is. But the most important thing, we're well positioned 2026. So with that, I'll turn it back over to Arvind to close out the call. Thanks, Jim. Arvind Krishna: Look. To close out, we are pleased with our performance this quarter. All of our segments accelerated sequentially, our portfolio strength business model and relentless focus on productivity reinforce our confidence in the trajectory. I look forward to sharing our progress as we close out the year. Olympia McNerney: Thank you, Arvind. Operator, let me turn it back to you to close out the call. Operator: Thank you for participating on today's call. The conference has now ended. You may disconnect at this time.