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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 afternoon, and welcome to the Alcoa Corporation Third Quarter 2025 Earnings Presentation and Conference Call. Participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note that this event is being recorded. I would now like to turn the conference over to Louis Langlois, Senior Vice President of Treasury and Capital Markets. Please go ahead, sir. Louis Langlois: Thank you, and good day, everyone. I'm joined today by William Oplinger, Alcoa Corporation President and Chief Executive Officer, and Molly Beerman, Executive Vice President and Chief Financial Officer. We will take your questions after comments by Bill and Molly. As a reminder, today's discussion will contain forward-looking statements relating to future events and expectations and are subject to various assumptions and caveats. Factors that may cause the company's actual results to differ materially from these statements are included in today's presentation and in our SEC filings. In addition, we have included some non-GAAP financial measures in this presentation. For historical non-GAAP financial measures, reconciliation to the most directly comparable GAAP financial measures can be found in the appendix to today's presentation. We have not presented quantitative reconciliation of certain forward-looking non-GAAP financial measures for reasons noted on this slide. Any reference in our discussion today to EBITDA means adjusted EBITDA. Finally, as previously announced, the earnings press release and slide presentation are available on our website. Now, I'd like to turn over the call to Bill. William Oplinger: Thank you, Louis, and welcome to our third quarter 2025 earnings conference call. Let me begin with safety. In late July, we experienced a tragic loss with the passing of a colleague due to a fatal incident at the carbon plant of our Alumar smelter, our first workplace fatality since 2020. This event has deeply affected the entire Alcoa family; our thoughts remain with his loved ones, friends, and colleagues. Following the incident, safety leaders from across Alcoa, supported by independent external experts, conducted a comprehensive investigation. We held a town hall with employees to share findings, address concerns, and reinforce our safety protocols. Already, the implementation of the associated actions is well advanced at Alumar, and a series of global measures have been introduced to prevent such incidents in the future. This loss is a solemn reminder of the critical importance of safety in everything we do. We remain steadfast in our commitment to provide a safe working environment. In the third quarter, we delivered strong operational performance and stability, achieving year-to-date aluminum production records at five of our smelters. These additional tons are particularly valuable as they carry higher margins and contribute meaningfully to our bottom line. With increases in the Midwest premium this quarter, related revenue on our U.S.-produced tons more than offset the net unfavorable tariff impacts on imports of aluminum to the U.S. from our Canadian smelters. We had three one-time items impacting the quarter, which Molly will cover: the permanent closure of the Kwinana refinery, the closing of the sale of our 25.1% interest in the Ma'aden joint venture, and a sizable increase in asset retirement obligations, primarily related to our Brazil operations. Looking ahead to the fourth quarter, we anticipate higher shipments and a sequential release of working capital. The recent rise in the Midwest premium is now sufficient to cover the full cost of logistics for importing aluminum into the U.S., including the 50% Section 232 tariff. While we continue to evaluate the most profitable placement of our spot volumes and direct those shipments accordingly, the Midwest premium now covers costs on the shipments to our U.S. customers on contracts supplied by our Canadian smelters. Earlier this week, we announced that the United States and Australian governments will provide funding to develop a gallium plant, which will be co-located at our Wagerup alumina refinery in Australia. This follows the support by the Japanese government, which we announced in August. The partners will receive a gallium offtake in proportion to their interest. This project has strategic benefits for Alcoa and the governments supporting it. The support from all three governments underscores Alcoa's role in the development of the critical mineral supply chain and enables us to provide maximum value from the bauxite resources we already extract in Australia. The continuity and competitiveness of Alcoa's Australian mining and refining operations not only support the aluminum industry but also support manufacturing, technology, and defense industries. Additionally, earlier today, we announced a new long-term energy contract for our Massena operations, as well as a $60 million investment in the anode bake furnace. Securing long-term, competitively priced energy is essential to supporting investments like the rebuild and modernization of the furnace, an initiative that will enhance operational efficiency. This energy contract and major investment commitment are a big deal. Alcoa is taking steps to further strengthen the United States' primary aluminum production capabilities. I made a commitment to the Massena employees to secure power and to invest in their operation. Now I will ask them to respond with their commitment to continuously improve the operation's profitability. We look forward to celebrating this step and certainly welcome President Trump, Governor Hochul, Senator Schumer, and the entire New York congressional delegation, as well as members of the New York Power Authority and Empire State Development, to visit our Massena operation to see what great U.S. manufacturing looks like and to thank them for their support. The Australia mine approvals process is moving forward with the completion of the public comment period in August. We are preparing our responses and expect to submit to the Western Australia EPA by year-end. The Western Australia EPA has indicated that it will publish its assessment and recommendations by the end of 2026, and we anticipate ministerial approvals by year-end 2026. In summary, this quarter brought both sorrow and progress. The tragic event at the Alumar Smelter underscores the importance of our unwavering commitment to safety. Despite challenges, we achieved record aluminum production and took strategic steps to strengthen our future. Looking ahead, we're focused on increasing profitability through higher shipments, improved operations, and key investments such as the Massena Energy contract and anode bake furnace. Now I'll turn it over to Molly to take us through the financial results. Molly Beerman: Thank you, Bill. Revenue decreased 1% sequentially to $3 billion. In the Alumina segment, third-party revenue decreased 9% on lower volumes and price of bauxite offtake and supply agreements. In the Aluminum segment, third-party revenue increased 4% on an increase in average realized third-party price, partially offset by lower shipments and unfavorable currency impacts. However, this was lower than our revenue expectation for the segment, primarily due to certain aluminum shipments from Canada to U.S. customers being in transit at quarter-end. This also explains why our tariff costs sequentially were lower than expected. Third-quarter net income attributable to Alcoa was $232 million versus the prior quarter of $164 million, with earnings per common share increasing to $0.88 per share. The results reflect a $786 million gain on the sale of our interest in the Ma'aden joint venture and a subsequent favorable mark-to-market change of $267 million on the Ma'aden shares, partially offset by restructuring and related charges of $895 million for the permanent closure of the Kwinana refinery in Australia. On an adjusted basis, net loss attributable to Alcoa was $6 million, or $0.02 per share. Adjusted EBITDA was $270 million. Let's look at the key drivers of EBITDA. The sequential decrease in adjusted EBITDA of $43 million is primarily due to increased U.S. Section 232 tariff costs on aluminum imported into the U.S. from our Canadian smelters, adjustments to asset retirement obligations, unfavorable currency impacts, and lower alumina prices, partially offset by higher aluminum prices. The Alumina segment adjusted EBITDA decreased $72 million, primarily due to adjustments to asset retirement obligations, primarily in Brazil. Also, lower volumes and price of bauxite offtake and supply agreements and lower alumina prices were only partially offset by lower production costs related to the timing of maintenance activities. The Aluminum segment adjusted EBITDA increased $210 million. Higher metal prices and lower alumina costs were partially offset by tariff costs, which reflect a full quarter at the 50% tariff rate after its increase from 25% on June 4. In addition, production costs improved due to the timing of maintenance activities. Outside the segments, other corporate costs increased, while intersegment eliminations changed unfavorably, primarily due to the absence of a benefit in the prior quarter resulting from a lower average alumina price requiring less inventory profit elimination. Moving on to cash flow activities for the third quarter. We ended the third quarter with cash of $1.5 billion. Cash used for operations was $85 million, including a slight working capital use of $25 million. We also received a tax refund of $69 million from the Australian Tax Office for the deposit held during the five-year transfer price dispute that was resolved in our favor in April. Cash from investing included $150 million from the sale of the Ma'aden joint venture, shown here net of transaction costs. Cash used for financing activities included a $74 million full repayment on a term loan, which was the last borrowing associated with the AWAC joint venture structure. Let's look at other key financial metrics. The year-to-date return on equity was 14.5%. Days working capital increased sequentially by three days due to an increase in accounts receivable days, primarily due to higher aluminum pricing. Our third-quarter dividend added $26 million to stockholder capital returns. We closed the quarter with $1.635 billion in adjusted net debt, making progress toward the top end of our target of $1 billion to $1.5 billion. Cash flow for the quarter includes an increase in capital expenditures to $151 million. Turning to the outlook. We have a few adjustments to our full-year outlook. First, we are decreasing our annual outlook for interest expense to $175 million. Second, we have adjusted our total CapEx for 2025 to $625 million, down from $675 million, primarily due to less spending on mine moves in Australia. Third, we have adjusted our payment of prior year income taxes for 2025 to zero, previously $50 million, to reflect the tax refund from the ATO matter mentioned earlier. And last, the outlook for total ARO and environmental spend in 2025 is expected to increase by $20 million to approximately $260 million, consistent with the guidance update we provided in the Kwinana closure press release. For 2025, in the Alumina segment, we expect performance to improve by approximately $80 million due to the absence of charges recorded in the third quarter to increase asset retirement obligations, as well as higher shipments and lower maintenance costs. In the Aluminum segment, we expect a sequential unfavorable impact of approximately $20 million due to restart inefficiencies at the San Ciprian smelter and lower third-party energy sales, partially offset by higher shipments. While current Midwest premium pricing and higher shipments of our Canadian metal into the U.S. are expected to have a favorable impact on the fourth quarter, we expect tariff costs to increase by approximately $50 million due to increased shipments. Further tariff impacts from changes in LME pricing during the quarter can be calculated from our tariff sensitivity. Alumina costs in the Aluminum segment are expected to be favorable by $45 million. Below EBITDA, other expenses in the third quarter included favorable foreign currency gains of approximately $10 million, which may not recur. Based on last week's pricing, we expect fourth-quarter operational tax expense of $40 million to $50 million. Now I'll turn it back to Bill. William Oplinger: Thanks, Molly. Let's discuss our markets, starting with alumina. Alumina prices have declined significantly over the past month, with recent prices around $315 per metric ton as the market remains under pressure due to ample spot availability and refinery expansions in Indonesia and China. Outside China, the timing mismatch between new refining capacity coming online in Indonesia in 2025 and additional smelting capacity expected only in late 2025 or into 2026 is creating a short-term imbalance. In China, most previously curtailed capacity has been restarted since May, adding further supply pressure. Many Chinese refineries operate at the top of the cost curve. Continued downward pressure on domestic prices may prompt further supply-side response, resulting in curtailments. Looking ahead, alumina demand will be supported by new smelting capacity in Indonesia and anticipated to come online in 2026. However, uncertainty around the Mozal smelter could weigh on demand and pricing. Meanwhile, bauxite prices remained firm, supported by seasonal supply disruptions in Guinea and the market working through stockpiles accumulated earlier in 2025. Alcoa continues to deliver on strong fundamentals, consistent quality in our smelter-grade alumina products, and preferred supplier status due to our reliability. We remain on track for a record year in third-party bauxite sales volumes. Let's now move on to aluminum. LME prices rose approximately 7% sequentially and have continued to increase, recently reaching $2,775 per metric ton, reflecting a combination of factors: a weaker US dollar, expectations of monetary easing, and persistent supply tightness amid resilient global demand. In the U.S., the Midwest premium continued to increase during the third quarter and recently reached import parity. This reflects declining inventories and reduced aluminum imports following the Section 232 tariff increase earlier this year. European premiums also rebounded from earlier lows, signaling improving market fundamentals. Demand remains steady across Europe and North America. Packaging and electrical sectors continued to show healthy demand growth in both regions, while construction and transportation remained soft. The automotive sector is weak based on tariff uncertainty. On the supply side, growth remains constrained. Outside China, restarts and ramp-ups have been moderate, while China is approaching its smelter capacity ceiling. Additionally, potential disruptions at the Mozal smelter could further tighten the market. Looking ahead to 2026, the impact of increasing supply from Indonesia is expected to be limited, given constrained growth elsewhere, including in China, and the expectation of continued demand resilience. Importantly, our core markets in Europe and North America are expected to remain in regional deficit. Specific to Alcoa, we had an overall stable order book of value-add products in the third quarter, with the exception of foundry. In North America, demand for slab and wire rod remained strong, while billet demand is steady but spot activity is subdued. In Europe, wire rod demand is robust, slab performance is mixed, with strength in packaging but weakness in automotive, and billet demand remains cautious with customers maintaining short order visibility. I'm very excited to host you on October 30 for our Investor Day 2025. It's been almost four years since Alcoa has had its last Investor Day. It's a great opportunity to discuss why Alcoa is the investment choice in aluminum. We will discuss our strategic vision and market position, operational excellence and innovation, talent, the long-term market, and our financial outlook. We will also provide additional details on our Spanish operations and our Australia mine approval process. Please visit our website for additional details. To conclude, in the third quarter, Alcoa maintained strong operational stability, took strategic actions to strengthen the company, and continued our engagement with trade policymakers. Looking ahead, we will focus on safety, stability, and operational excellence, deliver fourth-quarter financial improvement, and progress our Australia mine approvals. I look forward to welcoming you to our Investor Day event on October 30. With that, let's open the floor for questions. Operator, please begin the Q&A session. Thank you. Operator: We will now begin the question and answer session. Chris LaFemina: And our first question will come from Chris LaFemina with Jefferies. Please go ahead. Chris LaFemina: Hey guys, thanks for taking my question. Hi Bill. Just wanted to ask about, I guess, capital allocation. I mean, you're approaching your net debt target range. You could be in a position where you're able to start returning capital a bit more aggressively in 2026. You're obviously focused on further operational upside. I know you're going to give us a lot more detail around this at the upcoming Investor Day, but just wondering about how you think about potential M&A opportunities in the market? And to the extent that you think about that at all, is it any particular spot in the supply chain that you'd be focused on? Would you be interested in bauxite and alumina? Is it more in the downstream? Or is that really not even on your mind right now because of all the stuff you have going on internally? Thank you. William Oplinger: So Chris, let me let Molly address the capital allocation and then we'll come to the M&A question. Molly Beerman: Hi, Chris. We are $135 million away from the top of our adjusted net debt target of $1.6 billion, and the top target is $1.5 billion. We do have a priority to continue to pay down debt. We have notes, the 2027 notes, with $141 million remaining, and on the 2028 notes, $219 million remaining. That will be our first priority. But as we stay within the net debt target, we will certainly be evaluating additional returns to stockholders in parallel with pursuing some growth options. William Oplinger: And Chris, to address the M&A question, we did the Alumina Limited transaction last year, and that showed that we have the ability to successfully do M&A work. That transaction, if you look back upon it, allowed us to do the Ma'aden transaction where we're swapping out the Ma'aden equity interest for shares. As I look forward, we will look at opportunities for M&A across the spectrum of the product line. I would not say at this point that we have any particular part of the product line that we need to add to. But we will look at opportunities as they come up, and we'll do the evaluation. And what we'll do is, where we have opportunities to create significant synergies that aren't available to our shareholders otherwise, we would look at those opportunities from the acquisition perspective. Chris LaFemina: That's very helpful. Thanks, Bill. See you next week in New York. William Oplinger: Yes. Thanks. Operator: Your next question today will come from Lawson Winder with Bank of America. Please go ahead. Lawson Winder: Great. Thank you very much, operator. Good evening, Bill and Molly. Nice to hear from you both. Could I ask about the U.S.-Australia Alcoa partnership? Would you be able to provide some background on how this came together? Was that an initiative driven by Alcoa? William Oplinger: It was an initiative that really began between Alcoa and the Japanese. The Japanese were looking for the potential offtake of gallium. We got that joint development agreement put together a little while back. And we've been talking to both the U.S. and the Australian governments for a number of months now. The real strategic advantage of this deal is that it provides a supply chain outside of China for gallium that is around 10% of the world's gallium market. It will be at our Wagerup facility in Western Australia. That solidifies the importance of that facility in Australia. And it really strengthens the relationship between, and you saw this in the press conference yesterday and in the joint signing ceremony between President Trump and Prime Minister Albanese, strengthens the relationship between the U.S., Australia, Japan, and really shows the importance of Alcoa in Australia. Lawson Winder: Thank you for that. And then as a follow-up, can you give us an idea of what sort of approvals or permits might be needed and the timeline to first production on that facility? William Oplinger: So that's one of the reasons why Wagerup was chosen. The approvals, we have line of sight to get the approvals done fairly quickly. We are pushing to have first metal by 2026. We think we will be first to market outside of China on an aggressive schedule. The next step is that we need to get final documents signed, but we're pushing to be able to create, to extract gallium by 2026. Lawson Winder: Okay. Thank you, Bill. William Oplinger: Thanks. Operator: And your next question today will come from Timna Tanners with Wells Fargo. Please go ahead. Timna Tanners: Yes. Hey, good evening. I'm looking forward to hearing more about Australia and Spain as you teased for next week's Investor Day. But I didn't hear mention of Canada or the U.S. I thought I would probe those topics. Didn't hear mention, in particular, on the negotiations with Canada regarding any carve-out of aluminum. So I'd like to hear about that export opportunity, the latest there. And then given that the U.S. now has arguably the lowest aluminum smelter production costs in the world, just if there's any rethinking of expanding capacity domestically, like at Warrick with that idle hotline? Thanks. William Oplinger: Wow, there are a lot of questions there, Timna. So as far as the Canadian-U.S. negotiations that are going on, we are providing information to both sets of governments so that they have the right information, the right data to make the right decisions. And we're working with both administrations to ensure that they understand the trade flows because we're probably the world's expert on the trade flows between Canada and the U.S. when it comes to aluminum. I'm a little bit surprised by your comment around the lowest cost in the world for aluminum. We have not yet seen, with the exception, and I'll cover the Massena Project, we have not yet seen significantly competitive energy prices available for the long term in the United States. You know that globally, we would be shooting for energy prices between $30 and $40 a megawatt hour. We've not seen those available yet for long-term packages in the U.S. In fact, the opposite of that is occurring because some of the data centers and the AI centers are able to pay $100 a megawatt hour, whereas we're looking for $30 to $40. And then lastly, around your question around Warrick, the Warrick restart is a complex restart for that fourth line. It will cost us probably about $100 million, and it'll take anywhere between one to two years to get that fourth line up. We'll continue to evaluate it, but we won't make an investment decision simply on a tariff. Tariffs can and do change over time, so we won't be plowing $100 million into the ground at this point based on a tariff cost. Did I answer all of that? Timna Tanners: That's helpful. I think you did, and I should clarify that that comment on the lowest production cost is adjusted for tariff and actually came from CRU, but that's helpful detail. I appreciate it. William Oplinger: Oh, and I should have highlighted Massena. And let me just take a second to highlight Massena. Really big deal. And I said this in my prepared remarks, but maybe it didn't come out as exciting as I wanted it to. Really big deal in Massena. We have a ten-year contract that has two potential extensions of five years each. That allows us now to make long-term decisions associated with Massena, and we've decided to invest in the bake furnace in Massena. So really excited for the people of Massena. And as I said in my prepared remarks, I committed to them. We're going to get them a globally competitive long-term power contract. They've committed to me that they're going to work on the profitability of that plant, the safety of that plant, and the production of that plant. And I'm looking forward to getting up to Upstate New York and celebrating here soon. Timna Tanners: Okay. Thanks again. William Oplinger: Thanks. Operator: And your next question today will come from Carlos De Alba with Morgan Stanley. Please go ahead. Carlos De Alba: A question on gallium. Do you have any color that you can share on the economics of that project? And if it is too early, maybe when do you expect a technical report or feasibility study that you can share, given that it could come up rather quickly? And maybe related to that, does this project change in any way the ongoing mining permitting process you have going on in Western Australia? William Oplinger: I missed the second half of that. Does it impact our approvals at all? Carlos De Alba: Like, if it changes the ongoing mining permit process that you have in Western Australia? William Oplinger: Right. So let me go there fairly quickly. The approvals process that we're going through currently is related to Huntley and Pinjarra. Huntley, the mine, Pinjarra, the refinery. So this would have no impact on that approvals process. In Wagerup, we will be going through an approvals process there at a later date. And this should have no impact on that approval process either. When it comes to the economics, Carlos, this is not a large plant. It is not a large plant. It is going to be financed via a couple of the Japanese entities, the U.S. government, and the Australian government. Alcoa will have a small part of the financing. The really critically important thing here is to have a supply chain of gallium outside of China. And this is what the governments want, and they will be taking an offtake of that gallium. So Japan, Australia, and the U.S. will all have an offtake of the gallium. Molly Beerman: I'll just add that the structure for that offtake is a cost-plus margin, which is still in the process of negotiation. Carlos De Alba: Great. Thank you for that. And then one more, if I may. Maybe related to the last question, didn't ask. Any intention to maybe look at getting back into the rolling business and unfortunate situations from some of the current producers there maybe highlighted the need for having a more robust supply chain? William Oplinger: Hey, my attorneys always tell me not to make unequivocal statements. But I will make an unequivocal statement. No. There's no interest in getting back in the rolling business. Carlos De Alba: Fair enough. Thank you very much. See you next week. William Oplinger: See you. Operator: And your next question today will come from Daniel Major with UBS. Please go ahead. Daniel Major: Hi, Bill, Molly. Thanks for the questions. I think most have been answered, but discussed most of the strategic elements. Next week. But just one follow-up, just on the comment you made on gallium. Would you you said that the pricing would be an offtake agreement at a cost-plus or a fixed margin. Is that for all of would that be for all of the volumes associated with the project? Is that the right way to think about it? William Oplinger: All of the volume. Alcoa and we still have to get through definitive agreements. So we're making these comments based on the MOU that was signed. Alcoa will have a very small offtake, very small offtake, the rest will be cost-plus. Daniel Major: Okay. And just one follow-up on the gallium dynamic. Can you give any insight on the ownership structure of the JV and your equity participation in the 100 tons? William Oplinger: So the ownership structure is two entities will own the plant. The Japanese will own 50%. The combination of the U.S., Australia, and Alcoa will own the other 50%. We have not publicly said the ownership of that second 50%. And the offtake will be similar in line with the ownership percentages. Daniel Major: Right. So I'll go yeah. Comfortably less than 50% of the economics of the joint venture. William Oplinger: Yes. To put it in perspective, we would anticipate taking again, this is all in negotiation. Something like five tons of the 100-ton capacity. Daniel Major: Okay. Thank you. And then your second question, again, trying to front-run next week. Can you still confirm the target for San Ciprian smelter running at steady state is mid-2026? Is that still correct? Molly Beerman: Yes. That is our target that we will have full run rate mid-2026, trying to get to the level of profitability at the smelter in the back half of '26. Daniel Major: Okay. And then yes, last we've seen a bit of an uptick recently in both Midwest and European premiums. Can you give any color on what's trying to drive that? Are you seeing any green shoots in end demand? Or is this some tightening in the supply chain? What would you attribute that uptick to? William Oplinger: So in the Midwest, the Midwest has finally risen to a level where it covers the full tariff cost. In Europe, we're seeing some uncertainty around Mozal, the potential Mozal shutdown. And then the Century shut that's occurred within the last day or two, that could put further pressure on the European premium. Molly Beerman: Both markets are still in deficit, and the supply is very tight. So I think you're seeing the price react to that. William Oplinger: Yeah. In the U.S., I think our days' consumption has gone down to something like thirty-five days, which typically triggers it's below a level where it typically triggers higher pricing. Daniel Major: Very clear. Thank you. Operator: And your next question today will come from Alexander Nicholas Hacking with Citi. Please go ahead. Alexander Nicholas Hacking: Yes, evening Bill and Molly. Look forward to seeing you next week. Congratulations on the agreement at Massena. Just one question for me. Your geographic mix of shipments from your Canadian smelters, I know at one point you were rerouting some of that material away from the U.S. With the MWP back where it is, are those kind of flows back to normal again? Thanks. William Oplinger: So we had redirected about 135,000 tons during the course of the year so far. But at this point, with the Midwest premium as high as it is, it would be back to normal shipments in the United States. Alexander Nicholas Hacking: Thank you. Operator: And your next question today will come from Nick Giles with B. Riley Securities. Please go ahead. Nick Giles: Thank you, operator. Bill, coincidentally, net income attributable to Alcoa was $232 million this quarter. My question is, what do you think the administration needs to see from here to ultimately come to this agreement with Canada and reach a resolution on the tariffs? William Oplinger: You know, Nick, I'm not going to speculate on what the U.S. needs to see. The position that we're in, and I was in Washington over the last two days, and I was meeting with key decision-makers on both sides of the table. The position that we're in is we're explaining to them the market flows. And just so everybody knows, and I'm sure you've heard these numbers, the U.S. is short roughly 4 million metric tons on an annual basis. Canada provides around 3 million metric tons out of that 4 million metric tons. I know there's been some discussions, and you've probably heard some of the rumors around lower tariffs or potentially a tariff wall around North America, potentially tariff rate quotas. We are a resource to both to help them understand the impacts of those, and that's the function that we've been fulfilling. Nick Giles: Appreciate that, Bill. My second question was, you've noted some production records at several of your assets year-to-date and assume that's the result of all the productivity and competitiveness work over the past twelve months. But what assets would you still consider to be underperforming today? And any other commentary about how much more you could improve at some of those other assets? William Oplinger: So I am very pleased with the operations globally. It starts with stability, and that gets reflected in generally higher production levels and lower costs. When I look around the world, if I just take you on a tour around the world, our Western Australian refineries have dealt with really, really poor bauxite quality. This is bauxite that we would have typically thrown away in the past, and they've been able to offset a massive amount of that deterioration with better operating procedures and technology. If I then go to, and I should have stopped in Spain just for a second. The startup in Spain is going really, really well. You know, we've never questioned the ability of our workers in Spain to run that facility extremely well, and the startup is going well. We've hit production records in Quebec. We've hit some production records in Norway. And the U.S. is running well from a smelting perspective. It all starts with stability, a focus on the relaunched Alcoa business system, really focusing around maintenance and getting maintenance done right. And I should highlight down in Brazil, we hit a production record in our refinery, our Alumar refinery, in September. Fantastic performance there. And the smelter is up to around 93%, 94% starting. Start at capacity. And every day, they just add a pot or two. So are there areas? Yeah. There are definitely areas across the patch. As I look at opportunities for improvement, Brazil now has to get the stability and take the cost out. We still have opportunities to serve our customers better out of the cast house in Massena, New York, for one, and in Mosjøen in Norway. So as I look across the system, there's still a lot of opportunity for improvement. Nick Giles: Bill, that was a great tour. I appreciate all the color and continuing best of luck. William Oplinger: Thanks. Operator: Your next question today will come from John Tumazos with John Tumazos Very Independent Research. Please go ahead. John Tumazos: Could you give us some color on the continued ten-year agreement in Massena? Is it a region where the demand for electricity has risen? Are there data centers or other new uses, new buyers? And is there new electricity capacity such as wind or natural gas or solar? And then secondly, does any of the infrastructure from the old prior Massena West plant still exist? Is this a candidate, or are there any candidates among your properties where old capacity could be brought back? William Oplinger: Oh, wow. You ended that in a different way than I thought you were going. So let me address each one of those, and Molly, feel free to jump in on any of this. The agreement that we have with the New York Power Authority extends the power contract for Massena out ten years, plus two opportunities to extend it another five and five. So Massena can have very competitive, low-cost green energy for the next twenty years. That allows us line of sight to be able to make the bake furnace investments. So we're going to invest $60 million in the bake furnace. So as I talk to people, for instance, in the U.S. administration, this is what aluminum needs in the United States. It's competitive, globally competitive electricity, preferably green, because at some point, we will get a green premium that's significant in the U.S. But this is exactly what's needed for investment in the United States, and that's why we've announced it and why we've done it. Your second part of that question is, is there competition for the electricity in Upstate New York? There absolutely is. I think New York Power Authority and the state of New York, and you remember New York Power Authority is part of the state of New York, understands the commitment to jobs in the North Country. Unlike a data center, we actually employ people. And we have approximately 550, 600 direct employees up in Massena, and this solidifies the future for them. They have to now deliver on a lot of things that I'm going to ask them to deliver upon. You then went to Massena, you said West, it's actually Massena East that's the curtailed capacity there. Massena East, there is no potline left, so we are not going to be restarting aluminum production. What we do have opportunities in Massena East is around data centers and AI, and there is electrical infrastructure still in place, and we're looking at opportunities there along with everywhere else in North America, but we're really looking at opportunities at Massena East. The electrical infrastructure is there. John Tumazos: Thanks, Bill. Congratulations. William Oplinger: Thanks, John. Good to hear from you. Operator: And your next question today will come from Glyn Lawcock with Baron Joey. Please go ahead. Glyn Lawcock: Good morning from Australia, Bill. William Oplinger: Hey, Glyn. Glyn Lawcock: Bill, on the call, you said the public review period has closed. Have you been privy to what was in the public review period? And has there been anything that you've seen, you know, been outside what your expectations, etcetera, in the review period that you have to respond to? William Oplinger: For the question, Glyn. Yes, the public review period is closed. We have received the comments from the EPA. Rough numbers, 60,000 comments, which is a very large number of comments to come in through a public review period. We had originally thought out of those 60,000, about 5,500 were individual comments. We've subsequently had the time to go through each of the comments and use a set of tools that can help us go through those comments. There's probably around 2,000 individual comments that have been submitted. We have a very large team in Western Australia that is completely focused on replying to those comments and addressing those comments. As you can imagine, there's probably two or three areas that those comments are focused on. One is proximity to water. And just so that everybody knows, we've been mining in Western Australia for sixty years. We've never impacted the water supply at Perth. But I understand the concern around proximity to water. That's why we've agreed to step back some of the mining farther away from the water sources. The second is really around mining in the jarrah and that's rehabilitation and any potential impact on black cockatoos. I think, Glyn, you were probably out on our tour that we took you through. You've seen it for yourself. I would invite anybody else that wants to take a tour of Western Australia. We have public tours to show you the rehabilitation in Western Australia. It is world-class. And that's one of the two areas that people are focused on. Glyn Lawcock: Alright. Thanks, Bill. If I could squeeze in a second and staying in Australia, you announced the Kwinana permanent closure the other day. You talked about the potential for a significant offset from the land sale. Just two questions. $1.6 billion seemed a lot of money for the closure. Was there anything that's specific to the closure versus other refineries? And then secondly, when you say significant for the land sale, is it commercially zoned? And could it be rezoned to make it more valuable? Or do you not think there's a zoning opportunity change as well? Thanks. Molly Beerman: So, Glyn, I'll take this one. So the significance of the closure costs for Kwinana, we have a large water management with the RSAs there, and this is the largest that we've seen in any of our prior refinery closures. So that's the accelerated up. Higher cost that you are seeing and our accelerated attempts to remediate that as quickly as possible. As far as the zoning, it's in an industrial park, so it is already a part of a large complex. We do believe the land will be quite valuable. It has port access, rail access. And because in Kwinana, we have the residue areas physically separated from the refinery site, we will focus on remediating the refinery site and preparing that for redevelopment and resale there to try to get a full recovery of those closure costs and possibly exceed it. Glyn Lawcock: Alright. Thanks very much for the response. Operator: And your next question today will come from William Chapman Peterson with JPMorgan. Please go ahead. William Chapman Peterson: Yes. Hi. Good afternoon, and I look forward to the update next week on the longer-term areas. Maybe as a snapshot and picking up on an earlier response on hyperscalers and maybe interest in idled assets or some of the interconnections. Have you seen hyperscaler interest pick up in recent months? You mentioned specifically Massena. So I'm just wondering how the dialogue is proceeding and is a snapshot relative to earlier this year when you first started up? William Oplinger: So the interest in data centers and AI centers hasn't really mitigated at all, hasn't come off at all over the last six months. We have spent a significant amount of time within the company trying to completely dimension what the opportunities are for our sites and how we aggressively market those sites to the right customers, the right developers for that land. So more to come on that in the future, but a lot of work going into what are the opportunities that we have, what electrical infrastructure we have, what interconnect that we can provide, and who the best developer or buyer of the site would be. And these are the closed and commissioned sites, not so much the active sites. William Chapman Peterson: Yes, understood. Earlier in your prepared remarks, you talked about the demand profile. And I guess specific to the U.S., you spoke of strength in packaging and electrical weakness in construction and transportation. Is this a sign of demand destruction? Or potentially substitution given tariffs and high Midwest premium? Is this kind of more of a cyclical statement? Trying to get a sense of how the higher Midwest premium could be contributing to some of this demand weakness, if at all? William Oplinger: We don't think it's demand destruction at this point. When and I think you ran through the end markets pretty well. When I look at the end markets, packaging and electrical conductor are very strong. Building construction hasn't gotten worse. We were expecting, as probably most people were expecting, lower interest rates in the second half of this year. Those have not materialized. That will spur residential construction. The real weakness that we're seeing both in Europe and in North America is the automotive. And is that demand destruction, or is that in the case of Europe, really substitution by electric vehicles coming out of China? It's really hard to say. But, at this point, we're not seeing significant demand disruption. William Chapman Peterson: Okay. Thanks for that. And, again, look forward to next week. William Oplinger: Thanks. Operator: And your next question today will come from Nick Giles with a follow-up of B. Riley. Thanks. Nick Giles: Please go ahead. Thanks for taking my follow-up. Obviously, we've gotten some updated measures in the EU on safeguards for steel. So I was curious if there are any updates you could share on what we could see on the aluminum side or how those discussions have progressed? William Oplinger: No. I can't give you any update on that in Europe. The next big set of regulations will be coming into Europe is CBAM. And our company's position is that we think CBAM will go into effect as of 2026. There are still some pretty big loopholes in CBAM, and anybody that wants to discuss that next week with me, we can. But the two big loopholes are scrap and end-user and product production. We think that CBAM will raise the Midwest not the Midwest, the European premium probably $40 or $50 a ton in 2026. That will be a slight positive for us. Ultimately, costs will go up too as carbon costs creep into the overall cost structure. So CBAM, we think, will be coming in, in 2026 and at least in the near term have a positive impact for Alcoa. Nick Giles: Thanks a lot, Bill. Appreciate it. Operator: This will conclude our question and answer session. I would like to turn the conference back over to Mr. Oplinger for any closing remarks. William Oplinger: Thanks, operator, and thanks to everybody for joining our call. We hope that you will join us for Investor Day next Thursday. I really look forward to seeing many of you there in New York. And that concludes the call, so thank you. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good morning, and welcome to AT&T Inc.'s Third Quarter 2025 Earnings Call. At this time, all participants are in a listen-only mode. Should you need assistance during the call, please press star. Following the presentation, the call will open for your questions. If you would like to ask a question, if you are in the question queue and would like to withdraw your question, as a reminder, this conference is being recorded. I would now like to turn the conference call over to our host, Brett Feldman, Senior Vice President, Finance and Investor Relations. Please go ahead. Brett Feldman: Thank you, and good morning. Welcome to our third quarter call. I'm Brett Feldman, Head of Investor Relations for AT&T Inc. Joining me on the call today are John Stankey, our Chairman and CEO, and Pascal Desroches, our CFO. Before we begin, I need to call your attention to our Safe Harbor statement. It says that some of our comments today may be forward-looking. As such, they are subject to risks and uncertainties described in AT&T Inc.'s SEC filings. Results may differ materially. Additional information as well as our earnings materials are available on our Investor Relations website. With that, I'll turn the call over to John Stankey. John? John Stankey: Thank you, Brett, and good morning, everyone. I appreciate you making the time to join us, and I hope everybody is doing well. I am pleased to report that we had another solid quarter and remain on track to achieve this year's consolidated financial guidance. We continue to attract and retain high-value customers and perform well across different operating environments, thanks to the durable and differentiated connectivity franchise we continue to build. In mobility, we delivered over 400,000 postpaid phone net adds in the quarter, which is slightly ahead of our performance a year ago. In Consumer Wireline, the scale we have achieved as a nationwide provider of home Internet services through our significant investments in fiber and 5G is proving to be a winning play. At the end of the third quarter, we passed more than 31 million total locations with fiber, and we expect to reach more than 60 million customer locations by 2030. We also offer our fixed wireless service, AT&T Internet Air, in parts of 47 states, and we continue to expand availability into new areas as we open and modernize our mobile network. You can see the durable impact of these investments in our third quarter results, which include over 550,000 new subscribers to our most advanced broadband services, AT&T Fiber, and Internet Air. This resulted in our highest total broadband net adds in more than eight years. Let me say that again. We achieved our highest total broadband net adds in eight years. This includes a major milestone by reaching over 10 million premium AT&T Fiber subscribers, more than doubling our fiber customer base in less than five years and nearly tripling our quarterly fiber revenues over that same period, and the train keeps rolling. We offer fast and reliable connectivity for 5G and fiber at attractive price points, and more people are choosing AT&T Inc. for both wireless and home internet services. Today, more than 41% of AT&T Fiber households also choose AT&T Inc. for wireless. The pace of this convergence trend within our customer base continues to grow. These customers remain our most valuable, with the lowest churn profile and highest lifetime values. Our success with convergence also extends to fixed wireless. More than half of our Internet Air subscribers also choose AT&T Inc. for their wireless service. Similar to fiber, these customers exhibit lower churn and drive higher lifetime values than customers with standalone services. We continue to make solid progress, but our work is not done. Our goal is to become the best advanced communications provider in America and to lead our industry in share of retail connectivity service revenue by the end of this decade. This year, we've made a series of strategic moves that both strengthen our ability to lead in convergence and accelerate our future growth trajectory. Our planned acquisitions of spectrum licenses from EchoStar and fiber assets from Lumen significantly enhance and expand our advanced connectivity portfolio. This aligns with our vision to build the most efficient high-performance network with an ability to deliver traffic at the lowest marginal cost. We believe this will establish a durable competitive advantage for AT&T Inc. in the coming years. The EchoStar spectrum we agreed to acquire will improve our 5G wireless performance in a cost-efficient manner while allowing us to grow Internet Air at a faster pace. We are already making great progress delivering on our commitment to deploy this valuable spectrum for the benefit of American consumers and businesses. We started deploying the 3.45 gigahertz spectrum that we agreed to acquire from EchoStar under a short-term spectrum manager lease. Based on our current rate and pace, we expect these mid-band licenses will be deployed in cell sites covering nearly two-thirds of the U.S. population by mid-November. This should position us to further expand the availability of Internet Air in our sales channels in 2026. Our ability to move this quickly reflects the great work of our teams and the FCC's pro-investment and supportive policy environment. We are also making great progress in preparing to close our transaction with Lumen. Most of the senior leadership team has been identified, and we now expect to close this transaction in 2026. As I've said before, where we have fiber, we win. With both fiber and 5G, we plan to win even more as our investments in these assets bring advanced connectivity to more Americans. The supportive policy environment is also making it easier for us to transition away from outdated legacy infrastructure and invest in the AI-ready connectivity that Americans want and need. The bottom line is that we now have the right building blocks in place to realize our scaled fiber and fixed wireless ambitions, complete our wireless modernization, and successfully transition away from legacy infrastructure. As we complete our key investments, acquisitions, and transformation initiatives, we expect to increase our fiber and convergence penetration rates and see a majority of incremental revenue growth originate from converged customer relationships. For several consecutive years, we have demonstrated that this strategy works by efficiently growing our business while investing in our network, strengthening our balance sheet, and returning value to shareholders. The opportunities ahead of us are in our control, and I wouldn't trade our assets and position for anyone else's in our marketplace. Now it's up to us to continue executing on our vision to become the best advanced communications provider in America. With that, I'll turn it over to Pascal for a detailed review of our third quarter results and outlook. Pascal Desroches: Thank you, John, and good morning, everyone. At a consolidated level, total revenues grew 1.6% year over year. Adjusted EBITDA grew 2.4%, and we expanded adjusted EBITDA margins by 30 basis points. Adjusted EPS was $0.54 in the quarter, consistent with the prior year. Adjusted EPS excludes a gain recognized on the sale of the DIRECTV investment, legal settlement costs, and other items. Third-quarter free cash flow was $4.9 billion versus $4.6 billion a year ago. Capital investment was $5.3 billion, which was down $200 million year over year. We also contributed $400 million to our employee pension plan in the third quarter, which is reported within cash from operations and therefore impacts free cash flow. We discussed in our second-quarter results, we expect to contribute $1.5 billion to our pension plan by 2026 using a portion of the cash tax savings from provisions within the One Big Beautiful Bill Act. This includes an additional $400 million of contributions planned in the fourth quarter, with the remaining $700 million of contributions next year. Turning next to our business unit results. Starting with mobility, our third-quarter performance highlights how our differentiated strategy enables us to deliver consistent results across various operating environments. Similar to the first half of the year, switching activity remains elevated. However, our playbook is working, and we continue to execute well. We grew mobility service revenue by 2.3% year over year, which contributed to EBITDA growth of 2.2%. As a reminder, the prior year quarter included approximately $90 million in one-time service revenues related to certain administrative fees. This impacted our reported growth rates during the third quarter in mobility service revenue by about 60 basis points and in mobility EBITDA by about 100 basis points. We reported 405,000 postpaid phone net adds, which is up slightly from the third quarter of last year. Postpaid phone churn was 0.92%, up 14 basis points versus a year ago. This reflects increased marketplace activity and, to a lesser degree, an increase in the portion of our customer base reaching the end of device financing periods, which normalized as we exited the quarter. Based on this operating environment, we continue to plan for postpaid phone churn and upgrades to follow seasonal patterns in the fourth quarter when we typically see more switching and upgrade activity due to new device launches and the holiday season. Postpaid phone ARPU was $56.64, essentially consistent with a year ago when normalizing for the previously mentioned one-time service revenue impact in 2024. ARPU was also impacted by our success in attracting customers in underpenetrated segments that have lower ARPUs, such as our plan that targets adults 55 years old or older. Success in these underpenetrated segments drives higher incremental service revenues and attractive returns. The trend also reflects our success in growing our base of converged customers with higher lifetime values. These subscribers are typically eligible for a service discount but support growth in home Internet revenues, which we report in Consumer Wireline. We expect these dynamics to continue in the fourth quarter, which typically sees seasonally lower ARPU with some offsetting benefits related to a pricing action that becomes effective in December. Similar to the first half, we continue to operate in a marketplace where the cost of acquiring and retaining subscribers has increased. However, our continued success at adding high-value converged customer relationships points to the attractive returns we're driving through our offers. While total mobility operating expenses were up year over year, this was primarily driven by higher equipment costs and other acquisition-related expenses. We otherwise continue to execute well at managing our costs through operational efficiencies, including reductions in cost of service and customer support. I'm really pleased with how well the team is executing and remain confident in our ability to deliver on our full-year outlook for mobility service revenue growth of 3% or better and mobility EBITDA growth of approximately 3%. Our consumer wireline business unit also delivered another strong quarter. Total revenues grew 4.1% year over year, driven by 16.8% growth in fiber revenue. 15% for the quarter. This was driven by top-line growth and cost takeout, including lower expenses associated with our legacy copper network. As a result, Consumer Wireline EBITDA margins expanded by a robust 350 basis points year over year. Customer demand for our leading home Internet offerings is growing. As we reported strong gains in both fiber and Internet Air customers. We added 288,000 AT&T Fiber customers during the third quarter, reflecting seasonal tailwinds and the continued expansion of our fiber footprint. As a reminder, in the fourth quarter of last year, we benefited from some pent-up demand following the third-quarter work stoppage in the Southeast. This year, we expect our fiber net adds to exhibit typical seasonality in the fourth quarter, when we usually see lower levels of new connections as we get deeper into the holiday season. Once again, we saw strong growth in the portion of our fiber customer base that also subscribes to mobility services. At the end of the third quarter, this convergence rate reached 41.5%, up 180 basis points from a year ago. This represents one of our largest convergence gains over the past three years. We also reported 270,000 AT&T Internet Air net adds, doubling our subscriber gains year over year. Based on our operating momentum and strong performance through the first three quarters of the year, we continue to expect to achieve full-year growth in consumer fiber broadband revenue in the mid to high teens and Consumer Wireline EBITDA growth in the low to mid-teens range. Business wireline revenues declined 7.8% year over year, while EBITDA declined about 13%. As we shared last quarter, we've been reinvesting some of our cost savings into driving improved growth in fiber and fixed wireless, and our third-quarter results reflect early traction with these efforts. Fiber and advanced connectivity service revenues grew 6% year over year, representing an acceleration from 3.5% growth in the second quarter. Value-added services, which contribute about one-third of these revenues, can be variable from quarter to quarter. But we expect continued acceleration in our fiber and wireless connectivity revenues in the fourth quarter. While Business Wireline continues to manage through structural declines in legacy services, the team is doing a great job positioning the business to drive sustained growth in advanced connectivity services while operating more efficiently. Based on this solid execution, we continue to expect Business Wireline EBITDA pressures to moderate versus last year, with a full-year decline in the low double-digit range. During the third quarter, we returned $3.5 billion to our shareholders. This includes nearly $1.5 billion in stock repurchases, keeping us on pace to achieve our full-year target of $4 billion in buybacks. We ended the third quarter with net debt to adjusted EBITDA of 2.59 times, down slightly from 2.64 times last quarter, reflecting strong cash generation and growth in adjusted EBITDA. We ended the quarter with more than $20 billion of cash, including proceeds from recent debt issuances. This puts us in a great position to fund our capital returns program and pending acquisitions. We closed the sale of our remaining stake in DIRECTV in July and received approximately $320 million in cash in the quarter. We expect to receive an additional $3.8 billion of cash, with the large majority expected over the course of the fourth quarter and the early part of next year. As a reminder, these post-sale proceeds are reported within investing activities in the statement of cash flows and excluded from our reported free cash flow. Overall, our third-quarter results showed that we're executing well and are reiterating our full-year financial guidance. At a consolidated level, this includes service revenue growth in the low single-digit range and adjusted EBITDA growth of 3% or better. We had an opportunity to settle some out-of-pattern legal settlements that will impact our fourth-quarter free cash flow by approximately $500 million. The expense associated with these settlements was accrued in the third quarter and excluded from adjusted EPS. However, we continue to expect full-year free cash flow in the low to mid $16 billion range, including about $4 billion in the fourth quarter. We also continue to expect full-year capital investment in the $22 billion to $22.5 billion range, which implies fourth-quarter capital investments of roughly $7 billion to $7.5 billion. We also reiterate our full-year outlook for adjusted EPS of $1.97 to $2.07 and expect that we will come in closer to the high end of this range. Embedded within this guidance is an outlook for full-year depreciation and amortization expense that is up slightly versus 2024. In the fourth quarter, we expect to see sequentially lower depreciation and amortization expense as certain legacy assets become fully depreciated. So we expect our fourth-quarter depreciation and amortization expense of about $5 billion is more aligned with the quarterly run rate we expect heading into next year. As John noted, we're making great progress towards closing our pending acquisitions of fiber assets from Lumen and spectrum licenses from EchoStar. So we expect to provide an update to our long-term financial outlook early next year. We expect both of these transactions to boost our organic growth in revenues and profitability, and you should expect that this will be reflected in our updated outlook. In summary, we continue to deliver value for our customers and our shareholders, and we're really pleased with the team's performance through three quarters of the year. Brett, that's our presentation. Now ready for the Q&A. Brett Feldman: Thank you, Pascal. Operator, we are ready to take the first question. Operator: We will now begin the question and answer session. To ask a question, if you are using a speakerphone, the first question today comes from Peter Supino with Wolfe Research. Please go ahead. Peter Supino: Hi, good morning. The broadband results were really striking, and I have two questions on broadband. Take them in whichever order you like. First, your 60 million fiber home target is the most important among numerous industry-wide fiber expansion plans. Our best attempt to estimate the intentions of all the fiber expanders, builders, developers rolled up is about 110 million in a country with 135 million homes. And so a question we hear frequently and I think is important is, at what point do AT&T Inc. investors have to worry about insurgents getting to some of the homes that AT&T Inc. plans to pass before you do? And if they do, could that alter your plans at all? Would you be responsive to that? And then a related question is within two years, your DSL base will be gone or declining much more slowly? I mean, your VDSL base. And what should that mean for your broadband strategy and for your competitive outlook? Thank you. Hi. Good morning, Peter, and thank you for noting the broadband results. They are very, very strong. I'm delighted with them. And as I said in my comments, despite all the other things going on in the industry and the questions that come in around change of tactics by various other players, this team continues to consistently deliver results quarter over quarter in this space because we have a great product. John Stankey: I'll tell you we pride ourselves on being smart about how we build. We think we have the most scaled build engine in the industry. With that scalability comes a degree of agility. It means we have the flexibility to work with our base and move supply around. We try to be very deliberate about ensuring that everybody knows when the train rolls into town that the train's in town and it's probably not a good place for anybody else to come and deploy their capital because this is a company that has a track record of going in and penetrating aggressively and being successful in markets, and there's probably easier places for people to go than come up against us. And so we try to be very, very deliberate in how we allocate our capital in the markets that we're building in to make sure everybody knows where we're going and how aggressively we're going because we believe the right thing to do is to ensure that there's a good solid market structure for ourselves moving forward. And occasionally there are times where while we lay our plans out three years in advance and we believe we have some insight and fidelity of what's going on in the market, something changes in that period, and we have to recalibrate and think differently about how we're going to draw the boundaries about where we're going to build and how we're going to build. But while I know there's a lot of announcements out there that may add to 110 million homes being built, it doesn't mean they're getting built. It doesn't mean the people are effectively getting permits. So they have their supply chain issues worked out. And our job is to remove that friction and be better than everybody else and ensure the 60 million that we're building are in fact the first and that we're doing it more than anybody else. And when we run into those occasional circumstances where they're not, we rethink about where we deploy our capital and what we do. So I feel pretty comfortable that the team understands that and has been doing that by and large. And we also know that when somebody overbuilds a small portion of a metropolitan area, this is a scale business. Having 230,000 homes passed isn't going to cut it. And so when we come in and we're able to use our brand and use our marketing position, we can do very, very well when there's this small amount of overlap and still get the share we need to drive the returns into our business. Your observation on the DSL base is accurate. As you know, we're trying to turn down our legacy infrastructure. The DSL base is part of that. We don't want that equipment on our network anymore. We don't want it sucking down power. We don't want to be maintaining copper. And so, part of what you're seeing is a very deliberate approach. In almost all instances, we can replace DSL with fixed wireless. In places where we're not building fiber or we can actively replace it with fixed wireless if we're in a holding pattern where we know we're not going to be getting our overbuild in place of fiber for another two years or so. And we're actively trying to hold those customers with more attractive conversion offers. And that's part of the motion and the momentum that you're seeing in our converged basis and how we're using these products, and we're really excited about the advanced spectrum that we picked up because we think it's going to give us even more tools to make that happen both within our base where we're going to overbuild in those places where we will be wireless first. And we don't intend to build fiber as part of that deployment of capital that gets us just above 60 million. So we'll actively manage it. As you can see, we're getting better at managing it. That's why our nets are the best they've been in eight years. And I'm really confident that we haven't quite hit our full stride on that yet. But we can do even better on that front as we move forward in the coming quarters. And to my point in my comments, I would not change position with any company in this industry right now given the asset base we have and the place it affords us to run. Brett Feldman: Thanks, Peter. We'll take the next question, operator. Operator: The next question comes from Benjamin Swinburne with Morgan Stanley. Please go ahead. Benjamin Swinburne: Thank you. Two questions. John, the AT&T Internet Air momentum is pretty clear in your results. I'm wondering if you could talk a little bit as the company expands your footprint, you mentioned parts of 47 states, how are you making sure you're sort of segmenting the market the right way between fiber and fixed wireless and being efficient with your marketing, etcetera? And maybe you could comment on how you're approaching SMB as well. And then for Pascal, Pascal, you've mentioned the competitive environment in wireless this year. Has led to some higher equipment costs and subscriber acquisition costs, which we can see in mobility EBITDA margins being a little pressured this year. Your three-year guidance assumes that gets better, that margins expand next couple of years. Wondering if you could talk a little bit about how you deliver that if we think that the competitive environment maybe stays this elevated over the period? Thank you. John Stankey: Good morning, Ben. So first of all, one of the big changes you've seen us make in our messaging is we're no longer leading kind of top-of-funnel awareness and advertising with a specific technology bent. We talk about getting Internet from AT&T Inc. and we're doing that in the business market and the consumer market because we're now approaching this point that we can offer Internet nationwide. So the first thing is to make awareness that people just think about going to AT&T Inc. for Internet and that our messaging supports that, and you probably picked up on that if you watch any football or anything else in mass media. And then to your point, underneath that top-of-funnel messaging is to make sure that we're tuning the messaging for what we offer in a particular geography. And digitally that's really straightforward because we can ring-fence literally what we want to do with a lead offer, and that's one reason why we're spending a little bit less in mass media is because given our targeted approach to how we want to converge customers, we can get a lot more out of digital marketing based on knowing where the customer is and what the right best offer is to put in front of them. We've had pretty good success doing that. I think we even shared with you in December during the Analyst Day, if I recall correctly, an example of the map of the metropolitan area where we sell both products, and you will see that there isn't Internet Air subscribers sitting in the fiber footprint. And there really shouldn't be. There not only shouldn't be any of our Internet Air subscribers in the fiber footprint, but there shouldn't be anybody else's Internet Air subscribers in a fiber footprint. And my intent is to ultimately market and sell and structure the product in a way that we make sure that that is in fact the case. Because there is no lower marginal cost way to deliver broadband than fiber. And once it's in, it's in, and it should basically have a preferred run at the market. And I think we can still even get better than that. And that's one reason why I'm not as attached to ARPUs right now and worried about that. I'm worried about our growth in service revenues and managing our profitability because I think there's segments in the market that we can even do better at given the technology and what we've deployed. So you'll see us be very targeted in that, and it's very specific in our support systems when people come into the stores, etcetera. A lot of this is not left at the discretion of the individual. It's supported to them as to what they should be selling and can sell. And our effectiveness, as I mentioned when I answered Peter's question, and doing that over the coming years is a really important part of the success of this management team and managing the sustainability and durability of our profitability in the company. And we're very focused on making that happen operationally both with our messaging as we work our way through the funnel and operationally how people move forward on it. We're getting our momentum in business around Internet Air. We're still not as good as we can be. But as I've told you many times before, we've always viewed fixed wireless as a good solution in the business market given the usage characteristics of a small business or a medium-sized business and the nature of how those companies operate. And it's getting your distribution lined up. I think we're doing pretty well on our owned and operated distribution channels. But as you know, in the mid and low portion of the market, a large part of your distribution comes through third party, and we're not fully ramped in the third-party distribution yet. When I compare our effectiveness to others in the market, we can get there, and we will get there, and we're scaling it and ramping into it, and that's why you're seeing results improve. But I think our mix of business can be a little bit stronger moving forward. And I think it will hinge on how effectively we ramp in third-party channels to make that happen. So that's part of the when I say I think we can even get better than where we are, which I'm really pleased with the strong results, but I think we can get better. This would be an area, for example, where I think we can get better. Pascal? Pascal Desroches: Hey, Ben. Good morning. With regards to margins, we continue to expect overall company margin expansion consistent with what you saw this quarter. Keep in mind when you look out the next several years, we are working through several transformations, all of which will continue to drive overall efficiency. With each passing day, we have less and less copper in the network and less underlying infrastructure to support it. Similarly, we're in mid-flight in modernizing our wireless network. We expect that to be substantially complete by 2027. As more and more towers get modernized, it's going to drive efficiency in maintenance and power, and it's going to deliver superior service. Also embedded in our strategy is a goal to continue to drive convergence. And over time, the more convergence we drive, the overall churn should come down. And as a result, the efficiency of our acquisition spend should also improve. So all those things together make me feel really good about how we're positioned for the future to continue to drive profitable growth. Benjamin Swinburne: Thank you. Thanks for the question. Thanks, Ben. Operator, we'll take the next question, please. Operator: The next question comes from John Hodulik with UBS. Please go ahead. John Hodulik: Great, thanks. Good morning, guys. If I may. Maybe first on wireless, John, how would you say the company is positioned? If we see higher promotional activity in the fourth quarter given the changes at Verizon and T-Mobile actually? And maybe touch on the sort of cohorts coming off plan, if you could, given what versus what you've seen in the last couple of quarters? And then for Pascal, the comments on ARPU and actually with a follow-up comment from John in your recent response, I mean, it sounds like you guys are down the pressure on ARPU is a little bit stronger than we expected in wireless and in broadband. With most of the growth coming from converged services going forward, and your comments, should we expect continued pressure on ARPU on both wireless and broadband as we look out over the next several quarters? Thanks. John Stankey: Good morning, John. Look, I think the answer to the question is we're well-positioned for a competitive market. Excuse me, it's been competitive. It continues to be competitive. There are shifts in tactics all the time that occur in this market, and we're in a cycle right now that because of the maturity level, tactics have shifted. And as Pascal just very effectively articulated to you, our shift in tactic is to focus on converged customers. And we know that there are some things we have to do differently for that to happen, but we also can project out given how we know they behave and their lifetime values and what occurs that when we're successful doing this, and we drive the percentages of our base up higher on converged customers, we're going to get in a position where we drive down churn, we make that base more profitable, we have happier customers who ultimately move up the continuum and buy more, and we believe that. And that is why we're architecting the business the way we are with the asset base we have and the strategies we're using moving forward. In terms of the fourth quarter, I may be probably sit in a little different chair. I actually don't believe many of my peers walk into their job and say my goal is to lose share and I'm going to deliberately do things to make that happen. I think most CEOs want to win, and I think they try to operate their business to win. And you can debate whether or not the tactics are right or need to be adjusted. We all make good decisions and bad decisions. But just because there's a change at the top, I don't know that that suggests to me that there's going to be a 180-degree posture change. I think our competitors have been pretty aggressive, and they've tried to win, and they're going to continue to try to win moving forward. And we've demonstrated that we can be successful against all those tactics. And if there's a recalibration or a change, just like there may have been a recalibration or change in one of my competitors early this year, or last, we're going to adjust to that, and we're going to continue to run the plays that we've outlined, which is to focus on convergence and focus on those customers that we can bring together and make sure that when we're acquiring new customers, we're getting those that we think can be accretive. Which may be leaning into what Pascal is going to talk to you about on ARPU, I would describe what's going on in ARPU more as a feature, not a bug. When we talk to you about the fact that we're underpenetrated in certain segments, and we know that we can do better in certain places, and we talk to you about our desire to push convergence, which at the front end of investing in convergence means that we give the customer a square deal and a lot of value. That's what happens at the front end of those things. And we believe we get to a more sustainable place moving forward. And over time, what we do is we end up getting more value out of the relationship as a result of that. We deepen that relationship with the customer. We move them up a continuum of products and services. We, as I've said before, we don't just raise prices to raise prices. We raise prices when we think we've given the customer greater value. And we try to time it to that. And so investing in our wireless network to deliver massively superior performance with new spectrum that we're deploying opens up opportunities for us to do things like drive more value price relationship into the customer base to return on those investments. Pascal, do you want to talk about the ARPU characteristics? Pascal Desroches: Sure thing. Good morning, John. Here's the thing to keep in mind. When we look at our base of customers, we have a pretty broad base of customers. Candidly, we tend to over-index on the higher ARPU continuum. In order to grow service revenue, we have to be willing to also target other places where we're underpenetrated. And as John effectively laid out, that is a part of our strategy. But it doesn't mean that going down ARPU is at the sacrifice of overall service revenue. We are trying to maximize service revenue. And in the fourth quarter, as an example, we expect to have a pricing action that becomes effective that will contribute to service revenue growth. So overall, when you're managing a big base of customers like we are, it's important that we try to expand that base as well as over time drive more value by giving the customer more and driving more overall top-line growth. John Hodulik: Great. Thanks, guys. Brett Feldman: Thanks, John. Operator, we will take the next question. Operator: The next question comes from David Barden with New Street. Please go ahead. David Barden: Hey, guys. Thank you so much for taking the questions. I appreciate it. So John, just if I put all the pieces together, the Lumen deal, the Spectrum deal, the desire to get leverage back down to 2.5 times, the desire to maintain a dividend and an equity stock buyback return, recognizing the upper C band auction is coming, is it fair to say that when you say that you wouldn't trade assets with anybody, that you don't need any more assets? That AT&T Inc. is out of the M&A acquisition game, the inorganic game, and now it's time to build on what you have organically at the margin. And then I have a follow-up. Thank you. John Stankey: Hi, Dave. First of all, never going to answer a question absolutely and say never. But I will tell you what I've shared with the management team, which is we have all the assets in front of us. We've run the plays that we need to run to be successful over the next five years, and everything that's going on outside of our business right now is external and distraction. And there's going to be, to the question earlier, maybe new leadership or different tactics taken or approaches used. I feel very, very confident in the path we set for this business. And I feel very confident that the actions we've taken over the course of the last several years have put us in a position to be the leader in this industry, to lead on retail service revenues by the time we get to 2030. To effectively have better and deeper relationships with more customers for communication services than anybody else. And we have that asset base to do that at this point. And our job now is to organically invest in this business and make it a better company, operate better, serve customers better, become more efficient, and put a nail in the coffin of the legacy infrastructure that we have. Those plays all sit in front of us and are all contained within the four walls of AT&T Inc., and they don't require uncertain regulatory approvals or difficult external issues or other partners to get it done about us getting it done. And that is absolutely the focus and the rallying cry within the four walls of AT&T Inc. and how we're talking about it at the leadership level. I think you should take that as a strong indication that the management team right now is focused internally about doing the things we need to do to run those plays and do them effectively and not worrying much about what's going on outside of our industry and where assets are. David Barden: And so John, thank you so much for that. And so to key off that comment, I feel like I have to ask outside the four walls of AT&T Inc., there's been a lot of change in the C suites. That's obviously what people don't know what they don't know. What is your or AT&T Inc. Board's succession plan? How would that look? When might it happen? Would you become Chairman and give up the CEO title to Jeff? And then watch that happen. And could you just kind of elaborate a little bit because everybody is talking about it? John Stankey: Dave, nice question, but we're focused on what we need to do to operate our business every day right now. We don't have those distractions that others have. And I know what I'm entirely focused on, which is making sure that the management team understands their priorities and executes effectively, and that's all we're worried about. We're not worried about your question. David Barden: Okay, great. Thank you very much, guys. Brett Feldman: Thanks, Dave. Operator, we'll take the next question. Operator: The next question comes from Michael Ng with Goldman Sachs. Please go ahead. Michael Ng: Hey, good morning. Thank you for the questions. Following up on the comment related to boosting the long-term organic revenue growth and EBITDA outlook early next year, has your confidence around accretion from the Lumen Fiber assets and the EchoStar spectrum licenses increased as you've spent more time strategizing and looking at those assets? And you could spend a little bit of time also talking about kind of the key buckets in terms of the EchoStar spectrum accretion, whether that's AT&T Internet Air passing acceleration, some of the infrastructure deployment, cash tax savings, the Boost Hybrid MNO, would be very helpful. Thank you. John Stankey: Hi, Mike. I don't think there's any change in our point of view. First of all, we're not that far down the road of when we did the transaction as to where we stand. I think we continue to get data points to support that we had very conservative modeling in our approach to these things. The most notable would be the Lumen asset base. Certainly, we have not seen anything in our planning that is unexpected, that we said where did that come from or that's different than what we expected. I think most importantly, because we did pretty good diligence before we announced the transaction. We're buying a hard asset in this case, and we did our diligence literally at the hard asset level. So I think we know what we're getting. We've managed to get additional confidence. As you know, we're operating out of region with Giga Power. Giga Power has been scaling nicely. We're in that point right now where we can see the data coming in and markets that we've been able to build enough that we're beyond very smallpox of overbuild. And the assumption set that we've used in Lumen is based on our experience in having built outside the footprint. And we see that results are coming in the way we would have expected. And it's doing all the things that we said we need to do on a converged basis, which is driving both products into a household, driving them at the right ARPU, seeing customer satisfaction levels go up, brand gets a better image, churn goes down, all those things are happening, and that data is coming in. So it gives us confidence that we're on the right path. And that's why I said earlier that our job is to look organically internally and go the plays that we know we need to go execute. I would tell you on probably the upside around that is, as you know, largely built this as a consumer-oriented play. As we build brand reputation in a market and presence in a market, there's no reason to think we can't even move beyond that. And so I think there's upside in our conservative modeling on these things. On EchoStar, there's the old-fashioned way that accretion is driven in, which is it's going to defer some capital because of the depth we get in the network in places for capacity. So we defer out splits and augments on capacity, that's an important driver. That's pretty rote. We do that every time we buy spectrum. We know how to do those things. We have a better wholesale play. As you know, this moves into a wholesale network as a service construct for the Boost brand and for whatever DISH EchoStar chooses to do moving forward. That movement is underway now. I know that EchoStar is working through some of the regulatory issues around their consent decree to give them the freedom to do everything they need to do. That's probably a question better suited for them to ask how that progress is going. But I can see it on my side that they're migrating a lot of customers over to our network right now. So what we expected to have happen is happening, which is our wholesale revenues are growing and improving right now as a result of that, and we expect some incremental accretion over what we would have had in the business plan because of our previous wholesale relationship with EchoStar, which will add value into the acquisition. And then, of course, as you noted, the scaling that's going on in Internet Air, this is only going to allow us to be more successful in places where we're not building fiber and find those right business customers and find the right segment of the consumer base that we think has more durability with the converged offer and grow in that area. When Pascal shared with you that we're going to be out talking with you in the early part of next year as we get close to the approval of both of these transactions that we would expect to happen early next year, we'll come out and we'll give you the texture around that as to how we have that market segment and what we expect to do. The good news is, as you can see, operationally we're moving through those continuums now, including deploying the 3.45 spectrum that allows us to get the machine up and running even before we close that transaction, which should by the time we get those things in order start to reflect our volumes in 2026, that we can ultimately give you some better insights to as we move forward. Pascal Desroches: Mike, one other point to note, John said this, but I think it's worth underscoring. When you look at, in addition to adding fixed wireless, the mobility attachment associated with that currently across our footprint, we are at 50%. We're better than 50%. And that's really before any meaningful marketing that put behind it. As the spectrum is deployed and as we become more aggressive with marketing, that's another pool of value that we're really excited about. Michael Ng: Great. Thank you, Pascal. Thanks, John. That's very clear. Brett Feldman: Thanks, Mike. We'll take the next question, please. Operator: The next question comes from Sebastiano Petti with JPMorgan. Please go ahead. Sebastiano Petti: Hi, thanks for taking the question. Maybe Pascal or John, just a clarification question on FWA. You talked about the seasonality within the fiber business typically in the fourth quarter. You get towards the holidays, see a little bit of a step down in 4Q 2024 had a little bit of one-timer because of the work stoppage. In FWA, I mean, have you noticed a similar pattern on an underlying basis? Because obviously, you will see an acceleration. I think John you talked about lighting up some of the 3.45 for two-thirds, I think, of POPs by mid-November. Any help on how we think about the pacing of FWA underlying subscriber results and then as we kind of think about the broader expansion from the EchoStar spectrum coming on. Then I guess also sticking with broadband, I mean any update on Giga Power and how that's perhaps going? I think there was a press report in the third quarter about Giga Power perhaps bringing on a new ISP onto their network. Any way to kind of think about that and the risk that your wholesale partners within the, I think, piggybacking on Peter's question about getting to the 60 million within that obviously a decent portion of that would come from open access wholesale partners. How do you assess the risk of your partners meeting that target? Over time? Thanks, John. John Stankey: Good morning, Sebastiano. So, I'd say there are elements about the holiday season that I can speak to the Stankey household and what we notice in some of our customer base as people become busy and distracted and they have a lot going on. And as a result of that, I think we all prioritize our time and energy. And while we like to make an acquisition of our product and service seamless and without friction, it isn't yet there. And so people sometimes do research and have to ask themselves some questions. Is this the time they want to change a very important in their life, which is their Internet service provider? And I think because of that nature of that season and the bandwidth that people have to get things done, there's just some decisions that are deferred as a result of that. And I wouldn't expect that that would be entirely different for fixed wireless than it might be for a fiber installation, short of the fact that somebody doesn't have to come out to the house. So, do I think we can still move the product during the period? Yes, I do. I think businesses are a little bit different than consumers, and certainly fixed wireless has a little bit more of a dent on the business side right now with some of the penetration. So I wouldn't expect that to be as dramatic, but I do believe there's some seasonality that just works its way into consumers and businesses that are busy at that time of year. And that's why you get a degree of seasonality that occurs. Moves are down, people don't move homes during the fourth quarter. I don't think that's going to change. That's a dynamic of a buying decision. But we don't have multiple years of experience on fixed wireless where I can be perfectly empirical with you and tell you I know exactly where that's gonna come in. On Giga Power, look, I think our relationship with our partner there has been great. I think they're really satisfied. I think we're satisfied. We'd all like to go a little bit faster, but once the footprint is turned up, I think people are looking at the model and saying it's working exactly the way it's working. And I would expect with our partner the way we meet our obligations around rate of penetration and how we bring customers on, we are going to continue to be the anchor provider on that network. And have the dominant share of customers that are supported over that network, and that is as it was intended to do when the construct was designed, will be the foundation of the profitability and the return on that network. And I don't see anything changing in our results to date, anything that's going to be done going forward to be inconsistent with that. And I'm confident that we're going to get the customers that we need to get and that we're penetrating in the way we want to penetrate, and I don't worry about whether or not a second or third provider on the network ultimately creates a problem for AT&T Inc.'s retail activities and brand in the market. As opposed to are we attacking a segment that we just weren't effective at getting at that wholesale can be an extension and increase in penetration with the margin. Thanks, Sebastiano. Brett Feldman: All right. We'll take our next question. Operator: The next question comes from Michael Rollins with Citi. Please go ahead. Michael Rollins: Thanks and good morning. John, there's some about whether or not LEO satellites pose competitive threats to your mobile services, direct to device LEOs get access to spectrum and improve their technology. And also, whether these constellations will impact the future competitive landscape for broadband to the home and business locations. So just curious if you can give us an update on your views with respect to these constellations as competitors to your strategic wireless and broadband services? And if you can also give us an update on how you're planning to offer your own direct to device satellite offering to customers? Thanks. John Stankey: Hi, Mike. Don't know that I'm going to add anything to what you probably heard me say before publicly. Have you the LEO technology is really exciting technology. I think it's going to be fantastic for consumers and businesses. I think it's going to bring a realm of innovation into networking that we're gonna see new things pop up that are gonna make networks more resilient, more trusted, do some things that they couldn't do before. So I'm really excited about them. I think we're a natural integrator of that technology given our extensive customer relationships, our ability to market, use our brand to aggregate, take friction out of acquisition. So I would expect moving forward that we can be a big purveyor of those products and services. As you know, we have a very close relationship with AST. We want to help them move along and scale their product, and we think it's a unique approach to it where they right from the start were designing satellites to be perfectly compatible with consumer end-user devices that were out there that didn't require large investment and CPE and equipment to make it work. And we think there's a space for that, and that's why we've advocated for that. I'm interested to see now that others in the LEO space are understanding that they maybe need to engineer these constellations to do more directed device, and that will be good because I'd like to see a market where there's more than one purveyor of products and services. I think that would be healthy. And we'd certainly support that occurring over time. The way I think about it is mostly complementary. I can give you my reasons for that in a minute, but there's going to be places where the LEO constellation becomes maybe a better alternative to a terrestrial solution. Certainly in the IoT space, there's going to be circumstances where it might be easier to use LEO to solve certain types of IoT-related applications that will be part of the innovation of what they bring forward. Complete replacement of terrestrial wireless networks strikes me as a it's probably not that it couldn't be done, but it would require an awful lot of time and money. I think you can probably ask Charlie Ergen about that. People don't always recognize the fact that we do deploy cell sites, and that's part of our capital deployment. We do an awful lot of deployment of capital inside buildings, hospitals, stadiums, high rises, hotels, those aren't things that are easily served necessarily from just laying up some 40 megahertz of spectrum on a satellite. And so if you really want a cohesive network that is going to deliver on the kind of AI demands moving forward, which is really managing traffic aggressively, giving strong quality of service on the uplink, low latency, I would tell you that just generally speaking, it takes a lot of engineering to do that. It's embedded over years and years of deployment of capital and work. It's not replaced quickly, and it's not necessarily optimal to see from the sky. I would tell you the other thing you need to think about is while spot beam technology will, of course, get better than maybe a 20-mile radius over time, there are physical limitations to what that can do. A typical cell site right now is probably running roughly about a two-mile radius, a little bit more, a little bit less in some cases. And when you have over 300 megahertz of spectrum, in a two-mile radius, it's really hard to see 40 megahertz spectrum over a 20-mile radius replacing that capacity, especially when you multiply the fact that there are three providers on a stick that are doing that and have those kind of scaled networks that have massive backhaul at that cell site, 10 gig or better. It's hard to replace that, and it's also hard to outperform that from a performance perspective. So I do believe they can be really complementary. I believe that ultimately hybrid networks can play. I think it's very hard in an AI world to build a hybrid network going to deliver the kind of performance indoor and outdoor over time that we're building. That's why we think fiber is so important. When you have dense fiber and you can pick up workloads closer to the customer, you're always going to have a better performing network and a more scalable network and a network that operates at a lower marginal cost. And that's our belief and why we're playing the way we're playing. Brett Feldman: Thanks for the question. We have come to the end of our time. That was going to be our last one. Operator, I'll turn it back over to you. Operator: This concludes our question and answer session. I would like to turn the conference back over for any closing remarks. Brett Feldman: We're all set. Thanks for everyone for joining us today. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Ladies and gentlemen, 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: 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: Good day, and welcome to the Crown Castle Quarter III 2025 Earnings Conference Call. All participants will be in listen-only mode. To withdraw your question, please press star then 2. Please note this event is being recorded. I would now like to turn the conference over to Kris Hinson, Vice President of Corporate Finance and Treasurer. Please go ahead. Kris Hinson: Thank you, Chloe, and good afternoon, everyone. Thank you for joining us today as we discuss our third quarter 2025 results. With me on the call this afternoon are Chris Hillebrandt, Crown Castle's President and Chief Executive Officer, and Sunit Patel, Crown Castle's Chief Financial Officer. To aid the discussion, we have posted supplemental materials in the section of our website at crowncastle.com that will be referenced throughout the call. This conference call will contain forward-looking statements, which are subject to certain risks, uncertainties, and assumptions, and actual results may vary materially from those expected. Information about potential factors which could affect our results is available in the press release and the Risk Factors sections of the company's SEC filings. Our statements are made as of today, 10/22/2025, and we assume no obligation to update any forward-looking statements. In addition, today's call includes discussions of certain non-GAAP financial measures. Tables reconciling these non-GAAP financial measures are available in the supplemental information in the Investors section of the company's website at crowncastle.com. I would like to remind everyone that having an agreement to sell our fiber segment means that the fiber segment results are required to be reported within Crown Castle's financial statements as discontinued operations. Consistent with last quarter, the company's full-year 2025 outlook and third-quarter results do not include contributions from what we previously reported under the Fiber segment, except as otherwise noted. To aid in the review of our third-quarter results, our earnings materials include year 2024 results on a comparable basis. As we indicated last quarter, within the 2025 outlook, and in our quarterly results, all financing expenses are included in continuing operations and do not reflect the impact of any expected use of proceeds from the sale of our fiber business. Additionally, SG&A has been allocated between continuing and discontinued operations to develop our outlook. However, these allocations may not represent the run rate SG&A for Crown Castle as a standalone tower company. As a result, adjusted EBITDA, AFFO, and AFFO per share in our 2025 outlook and quarterly results may not be representative of the company's anticipated performance following the close of the sale. With that, let me turn the call over to Chris. Chris Hillebrandt: Thank you, Kris, and good afternoon, everyone. It's an honor to address you for the first time as CEO of Crown Castle. As you've seen from my background, I've been in the telecommunications industry for many years, and I have long admired Crown Castle and its high-quality portfolio of approximately 40,000 towers, both as a customer and as a previous competitor. In my first forty days, I've traveled across the country to host town halls and hear from many of Crown Castle's employees and customers, and I've gained several key insights. First, I am really pleased by the high level of engagement of our employees and their excitement about our goal to become a best-in-class US tower company. We believe that the fiber-owned small cell transaction remains on track to close in 2026. Second, I believe that the US wireless communications infrastructure industry is entering a period of significant opportunity, supported by solid fundamentals, continued growth, and customer demand. Third, Crown Castle is uniquely positioned to drive attractive risk-adjusted returns during this period, as the only large publicly traded tower operator with an exclusive focus on the US. In September, CTIA, a leading wireless industry association, reported that mobile data demand in 2024 had increased by more than 30% for the third consecutive year. We believe mobile data demand is the best indicator of long-term demand for our assets, as incremental network investment by our customers is required to enable higher levels of mobile data traffic. As data demand continues to grow, it will require operators to expand network capacity by both deploying new sites and adding new spectrum bands to existing sites. We're seeing this dynamic unfold in real-time. Over the past year, each major mobile network operator has acquired additional spectrum despite having collectively secured approximately 700 megahertz of spectrum less than five years ago, the same amount of spectrum acquired in the prior forty years combined. Looking ahead, the FCC has said it plans to auction at least 800 megahertz of additional spectrum beginning in 2027. As we saw during the early stages of the 5G deployment cycle, spectrum acquisitions by well-capitalized carriers tend to create significant opportunities for tower operators. With this in mind, I am excited by Crown Castle's long-term value creation opportunity. As the only large publicly traded tower operator with an exclusive focus on the US market, I believe we have an opportunity to generate attractive long-term risk-adjusted shareholder returns by focusing on becoming the best operator of US towers with the following strategic priorities: First, to empower the Crown Castle team to make the best and timely business decisions by investing in our systems to improve the quality and accessibility of asset information. Second, strengthen our ability to meet the business' needs by streamlining and automating processes to enhance operational flexibility. And third, as the team has already started doing, drive efficiencies across the business. We will advance our data management and process engineering capabilities to deliver on these strategic priorities, and over the long term, we expect to maximize cash flow by unlocking additional organic growth while driving continuous improvement in profitability. This strategy is supported by our previously announced standalone tower capital allocation framework, which balances the predictable return of capital to shareholders with the financial flexibility to invest in our core business. Following the close of our sale transaction, we intend to grow our dividend in line with AFFO, excluding amortization of prepaid rent, by maintaining a payout ratio of 75% to 80%. Additionally, we continue to expect to spend between $150 million to $250 million of annual net capital expenditures to add and modify our towers, purchase land under our towers, and invest in technology to enhance and automate our systems and processes. We believe these enhancements, which are already underway, are fundamental to our strategic priorities to improve the quality and accessibility of asset information, enhance operational flexibility, and drive further efficiencies. Lastly, after paying our quarterly dividend and pursuing organic investment opportunities, we intend to utilize the cash flow we generate to repurchase shares while maintaining our investment-grade credit rating. So in conclusion, I am excited by the opportunity ahead for both the US wireless infrastructure industry and Crown Castle specifically. As the only large publicly traded tower operator with an exclusive focus on the US, we are well-positioned to deliver attractive risk-adjusted returns over the long term, with our strategy designed to maximize organic growth while enhancing profitability and our capital allocation framework which balances the predictable return of capital to shareholders with financial flexibility. With that, I'll turn it over to Sunit to walk us through the details of the quarter. Sunit Patel: Thanks, Chris, and good afternoon, everyone. We delivered solid third-quarter results and are increasing our full-year 2025 outlook as demand for our assets remains strong, and we continue to identify opportunities to operate more efficiently. Starting on page four, the tower business performed well in the third quarter, highlighted by 5.2% organic growth or $52 million, which excludes the impact of Sprint cancellations, and benefits from a $5 million timing-related uplift to core leasing activity in the quarter. However, this was more than offset at the site rental revenues, adjusted EBITDA, and AFFO lines largely due to an unfavorable $51 million impact from Sprint cancellations, a $39 million reduction in non-cash straight-line revenues, and a $17 million decrease in non-cash amortization of prepaid rent. Moving to page five, our updated full-year 2025 outlook includes increases at the midpoint of $10 million to site rental revenues, $30 million to adjusted EBITDA, and $40 million to AFFO. The higher site rental revenues are driven by continued strong demand for our assets, which we expect will result in a $10 million increase to full-year straight-line revenues and fourth-quarter leasing activity and non-renewals in line with the first half of 2025 results. We also expect a $40 million increase at AFFO consisting of a $5 million increase in services gross margin, driven by higher services activity, a $15 million decrease in expenses, and a $5 million decrease in sustaining capital expenditures as we continue to identify opportunities for greater operational efficiency in the tower business. And finally, a $15 million decrease in interest expense largely due to lower than expected floating rates and a push out in the assumed term out of our floating debt. Included in our updated full-year 2025 outlook is a $30 million reduction in discretionary capital expenditures from spend that has been pushed into next year. The updated outlook for 2025 discretionary CapEx is $155 million or $115 million net of $40 million of prepaid rent received. In conclusion, we are pleased with our third-quarter results and believe we are well-positioned to meet our increased outlook for full-year 2025, and our range for estimated annual AFFO following the fiber business sale closing that we reiterated last quarter of $2.265 to $2.415 billion. Longer term, we're excited by the opportunity for Crown Castle as the only large publicly traded tower operator with an exclusive focus on the US to deliver attractive risk-adjusted returns with our balanced capital allocation framework, investment-grade balance sheet, and focus on operational execution. With that, operator, I'd like to open the line for questions. Operator: We will now begin the question and answer session. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. The first question comes from Michael Rollins with Citi. Please go ahead. Michael Rollins: Chris, congratulations on becoming CEO of Crown Castle. Chris Hillebrandt: Thank you. Michael Rollins: So a couple of questions. First, Chris, it'd be great to get your perspective. You shared some of the course already in terms of some of your priorities and your initial takes. But as you look at the growth opportunities for Crown, can you frame maybe in more detail what are the opportunities to grow further with your existing customers and how that opportunity rates relative to the efficiency gains by divesting the fiber operations and just looking for more opportunities to be more efficient and effective? And then just a second topic, if I could. Just curious for an update on the relationship with EchoStar. Have you received any feedback in terms of what their approach to the network may be and how you look at collecting the rest of the contractual commitments that you have with that customer? Chris Hillebrandt: Yeah, great. Thanks, Michael. So I think four questions in one, if I counted them up correctly. Let's start with the growth one that you mentioned. I think, look, one of the reasons why we're so excited about becoming a large public US tower operator is that we believe that we can really unlock the value on both revenue and the profitability side. Fundamentally, we will be focusing in on almost the back to basics to just maximize the revenue opportunities that we have with the existing portfolio overall. And I think we feel good, as recognized by the results that you just heard today. In terms of efficiency, look, this is one of the things that we have a huge focus on. Not only in terms of what we promised to deliver as part of this, and so we need to get through first the actual fiber sale itself. This is our number one priority as a management team to get this over the finish line here by the end of the first half of next year. But then we're already starting to focus on those efficiency areas. And again, you saw that in the results that we're reporting this quarter. We started to accelerate those activities where we can. And we as a company will spend a great deal of focus on looking for the opportunities to drive efficiency across our platforms, both through process changes and new tools, but also just execution and delivering against customer expectations in what will be a best-in-class tower co. And then finally, the EchoStar question that you asked, look, we have a good agreement in place. It runs through 02/1936. And the bottom line is we expect to be paid for the terms of the agreement. Operator: Thanks very much. Thank you. The next question comes from Benjamin Swinburne with Morgan Stanley. Please go ahead. Benjamin Swinburne: And welcome to the earnings calls, Chris. Nice to hear your voice. Wanted to ask you guys a couple of questions. AT&T this morning talked about deploying 3.45 from EchoStar kind of prior to close. In fact, we talked about getting that to two-thirds of their pops by mid-November. I'm curious. I know you can't talk about specific carriers, but as we see the EchoStar spectrum get deployed, particularly where it's simply a software upgrade, is there any opportunity for Crown Castle from a revenue point of view? How do you think about this migration of spectrum from Boost to the majors? I was just wondering if Sunit could talk a little bit about the one-timer in the quarter. I think you said it was $5 million. Any color on sort of what drove that would be interesting. Thank you. Sunit Patel: Yeah, I'll take both. Yeah, I saw those remarks. Look, I think in general, what I would say, because it's tough for us to comment on AT&T's specific plans over the next years. But in general, I would say, the massive investment in Spectrum, which is usually followed by depends generally. And, you know, it depends on whether they would do a software upgrade to existing coverage areas or they want to go into more coverage areas, again, I wouldn't know. But what I would say over the long term is most spectrum bands get occupied and as mobile data demand continues to grow, in general, that's favorable for the tower sector, and we hope we'll do a good job of serving AT&T for whatever its plans are. So I think that's the main point there. On the one-time benefits, yeah, it's a combination of different things happening in the third quarter with several of our carrier customers. So we had a one-time benefit. As we said, we expect to revert back to the sort of activity levels we saw in the first half of the year in the fourth quarter. So these things are never linear. Sometimes, you can have lumpiness, and that's what you saw in the third quarter. Benjamin Swinburne: Got it. Great. Chris Hillebrandt: Well, thank you very much. Operator: The next question comes from Michael Funk with Bank of America. Please go ahead. Michael Funk: Yeah. Hi. Good evening. Thank you again for the question. And Chris, congratulations on your new role. Chris Hillebrandt: Thank you, Mike. Appreciate it. Michael Funk: Yeah. So a couple if I could. Sort of, you know, following on the last one, you know, we've heard carriers talk about less densification due to spectrum that they're acquiring. And just wondering if that's filtered through to your conversations with them, either maybe pulling back on plans that they had or discussions that they were having, or if it's too early and you wouldn't necessarily already have those, the conversations around densification. Chris Hillebrandt: I don't think we've seen anything. As you can see, leasing is continued strong for us. We're seeing solid demand for our assets and no material changes at this time. Michael Funk: Great. And then, Sunit, a lot of discussion about efficiency efforts. Where would you say we are in that process today? If you had to put it in innings? Sunit Patel: Yeah. I mean, I think we are you can see with our progress every quarter, we are basically taking down the execution risk on the guidance that we've provided for next year's AFFO for the period, July 1, next year to June 30 of the following year. So think where we are is we keep looking for opportunities to drive efficiencies, various automation systems implementations in a phased approach. But clearly, big benefit comes as we simplify from, you know, running three businesses to one business. So I think that you'll start seeing benefiting us as we get to the close of the transaction and beyond that. But meanwhile, there's plenty to do within our entire business, our corporate segments, and that's where we are focused on. Michael Funk: Great. Thank you, Chris and Sunit. Operator: The next question comes from Ric Prentiss with Raymond James. Please go ahead. Ric Prentiss: Thanks. Good afternoon, everyone. And, Chris, yeah, always nice to start on a beat and raise quarter, so good talking to you again. Chris Hillebrandt: Timing is everything. It is. Ric Prentiss: Wanna follow Mike's question earlier. On the DISH MLA, clearly, you've got a contract. It's written well. You expect to get paid. Sunit Patel: Putting the spectrum on the towers was really critical to make sure they kept the spectrum rights and be able to sell it. My question was to go at it we look at your 24 actuals and your 25 guidance, I know you've said in the past, your boost this boost contract had some step-ups in it. How should we think about how much was in the 24 actual and the 25 guidance that was kinda related to DISH activity that we should be thinking about that's continuing to grow while the contract's in place in 2627? Any kind framework can give us even rough basis points what it might have been. Sunit Patel: Yeah, Ric. So mean, as we as we've said before, you know, DISH represents about 5% of our revenues on the tower side. And so I think as we look forward, you know, we'll see what happens with DISH EchoStar. We feel really good about our contract. And beyond that, it's tough to get into too many specifics given the confidentiality with our clients. Ric Prentiss: Sure. Okay. So I'd try. When you think about dealing with Charlie Ergen and Hamid and the EchoStar Boost folks, are you willing and open to saying, well, let's look at maybe an NPV basis Let's look at what you owe me. Can we have some kind of discussion? And I guess the extra piece of the question would be help us understand what decommissioning cost ballpark might be because I think the contract also includes that they're supposed to return the towers remove the equipment. Sunit Patel: Yeah. So what I would say, you know, tough to tell what direction when, what discussion would go, and tough for me to comment on any discussions with them generally and then, you know, and similarly to comment on specific contract provisions on some of the things you're talking about just, you know, all of these things are confidential, but we are we feel very good about the contract we have with DISH. Chris Hillebrandt: Rick, maybe the other way to put it is, you know, look, our goal here as management is to maximize shareholder value and we're always open to working with our customers to accomplish that. Right? So right. Yeah. Maybe leave it open-ended like that. Ric Prentiss: Okay. Last one for me. Touched on it briefly to Feng's question. That famous slide seven from the fourth quarter deck, where you laid out kind of that pro forma second half twenty-six, first half twenty-seven. There's that one stack bar in there that talks about SG&A stand-alone. You'd mentioned, I think, previously that you'll update that slide. Are we still waiting for the deal to close, or how should we think about when do we get more granularity on that I'll call it, my famous slide seven from your four q deck? Sunit Patel: Good question. I think that when we report next quarter, obviously, we'll provide guidance for 2026, and I think you can expect a little more detail then. Ric Prentiss: That'd be great. Okay. Thanks, guys. And, again, welcome, Chris. Sunit Patel: Thanks, Rick. Operator: The next question comes from Jim Schneider with Goldman Sachs. Please go ahead. Jim Schneider: Chris, I was just wondering if you could maybe give us a sense of given your prior experiences, how would do those inform your role at Crown Castle And you've been very clear about the strategic goals of the company, but on the margin, are there any areas where you might look to sort of slightly shift those goals, whether they be at the operational level, at the capital allocation level or otherwise relative to what's already been laid out there? Chris Hillebrandt: The short answer is no. We are focused on becoming the best-in-class US tower operator, you know, full stop. You know, I think once we close the transaction, we achieve all our operational objectives, even then the bar for say, like, and a will remain high. And really limited to The US for the foreseeable future. Right? So the fact that I have that experience is great, but, you know, the clear strategy that we've embarked on is clearly the right strategy and the winning strategy for Crown. Jim Schneider: Great. And then just a quick follow-up. Can you maybe just comment on the impact of the T-Mobile's acquisition of U.S. Cellular on the business over the next several quarters and years? Thank you. Chris Hillebrandt: Yes. I'll just start, maybe Sunit can bring it home. But, you know, this is fairly de minimis for us from our perspective. It should be very little impact from what we see, at this time. Sunit Patel: Yep. That's correct. Chris Hillebrandt: Thank you. Operator: The next question comes from Nicholas Del Deo with MoffettNathanson. Please go ahead. Nicholas Del Deo: Hi, thanks for taking my questions and I wanna echo others and congratulate Chris, on your appointment. I guess, Chris, you know, you described improving Crown Castle's and information availability as your number one priority, in your prepared remarks. I guess how would you describe the state of the company's systems today relative to those of some of the other firms that you've led what you think best-in-class systems can offer? Chris Hillebrandt: Yeah. It's a great question because having just literally gone through a multiyear journey at Vantage Towers where we were focused on the exact same types of issues. The good news is that many of the same platforms that we're in the process of utilizing over there Crown has already started in that journey to deploy those systems here. So overall and I feel like we're on the right track. This will take some period of time. There's a lot of work to be done. Defining what best-in-class looks like in terms of the cycle times on how we deliver to our customers and the efficiency in how we spend our capital and OpEx dollars, so that they're the most efficient use of that money. This is really our challenge over the next year. Us really to lay out, what great looks like. And then bringing the team along on that transformation. The good news is I've just seen how this works because I just lived through it the last few years. And hope to be able to bring that same level of discipline and leadership to the team here. In executing those plans. Nicholas Del Deo: Okay. That's very, very encouraging. Can I ask one more kinda high-level philosophical question maybe? You know, most of your business today is contracted under holistic master lease agreements. Some of those may roll off over the coming years. Just wondering how you think about MLAs and the puts and takes or what you find important Just so we understand how you might think through that as deals potentially roll off over time. Chris Hillebrandt: I think in the end, we will always look to do good business for Crown. And so for any future MLA renegotiations or extensions, we're always gonna look for win-win with our customers on finding both long-term value creation. What we won't do is just go run after an MLA for the sake of an MLA. We'll only do it where we see value creation for the company. And ultimately, driving that customer experience, the winning combination is ultimately to have a strategic partnership with your customers. And, again, maybe something I have some fairly unique viewpoints on having been both in the operator space in the OEM space, and now here in the tower space. But in the conversations I've had with customers so far, it's been very warm and welcoming and looking for ways to partner into the future in ways that both companies can profit. So I'm encouraged by the direction we're headed in. I mean, you know, stay tuned to the space. Nicholas Del Deo: Okay. Great. Thank you, Chris. Operator: Thank you. The next question comes from Richard Choe with JPMorgan. Please go ahead. Richard Choe: Hi. I wanted to see if we can get a little more color on application volumes, kind of what are you seeing. And then also just wanted to clarify, do you expect ex the $5 million that the second half of the year is gonna be the same as the first half of year in new core leasing, or what should it be higher? Sunit Patel: Yeah. So the answer to the second question is, as I said, we expect the fourth quarter to be consistent with what we saw in the first half. If you look at the first two quarters of the first half, they were about the same. So I think that's what we meant that the third quarter was lumpy or higher, but that the fourth quarter will be consistent with what you saw in the first two quarters. And then on the application levels, I think you've heard us say previously, application levels do not necessarily correlate to our leasing activity per se. But, yeah, we've seen healthy levels of activity as we pointed out in the last couple of quarters. You can see the benefit of that in our service business. So and, you know, it was a good quarter also. In the third quarter. Richard Choe: Got it. Thank you. Operator: The next question comes from Batya Levi with UBS. Please go ahead. Batya Levi: Great. Thank you. Can you provide a little bit more color on how should think about the 5% organic growth ex Sprint churn tracking into next year, maybe kind of the pieces in terms of the amendments and leasing mix? And then how do you think about your scale in the Tier two, three markets where incremental activity seems to be going right now? Like how would you approach maybe adding to your footprints either organically or through M&A? And finally, one clarification question. The new leasing activity of about $115 million this year does that include any take or pay contribution from EchoStar? Sunit Patel: Yeah. I'll let me take through that. So, you know, as far as organic growth in the next year, we'll come back to that when we report fourth quarter and provide guidance for 2026. So not much to comment there, but we'll have more to talk about that then. On the scale, tier two, tier three, you know, all of us have different footprints, but our general goal is to make sure that we can support our customers where we do have coverage or towers in tier two, tier three markets and we suddenly have very active conversations with our clients of that. And two, we are open to, as Chris mentioned, his comments, to add towers where it makes sense. So we continue to engage with clients to look at that. And then I think your third question was on sorry. Oh, the leasing activity. Yeah. I mean, I think, as we said, we didn't change guidance for that. So I think we will continue to see good leasing activity line with the guidance and the expectations we've laid out. Hence, the guidance that we provided for the year. Batya Levi: Yeah. Just to follow-up on that, I think there is a bit of a good confusion if EchoStar's contribution is in the base, or is it also in the growth? In the core leasing piece, 115? Is there some part of the contract that's embedded in there from EchoStar? Sunit Patel: Yeah. So, I mean, generally, we don't comment on specific client contracts, but all our leasing activity includes activity from all our clients. So I'm sorry. That's tough to get into detail on specific. Right? Each of our clients and the contracts. Batya Levi: Thank you. Operator: The next question comes from Brendan Lynch with Barclays. Please go ahead. Brendan Lynch: Great. Thank you for taking my question and congrats Chris. I look forward to working with you. In terms of laid out kind of the bull scenario where, CPI data is supportive of growth, spectrum auctions are in acquisitions of spectrum. Continue to be supportive. Maybe you could just help us frame some of the risks that exist in the industry related to additional spectrum swaps or efficiency gains via technology or spectral efficiency? It seems there's a lot of negative sentiment in the industry and maybe you can kind of tackle some of these risks head on in think and inform us how we should think about them? Chris Hillebrandt: I mean, overall, the biggest risk is we don't have the detailed knowledge of what any of these new spectrum purchase owners are planning to do. And the correlation that we're drawing here is the fact that spectrum that wasn't being put into use is now being put into use. Something that will generate incremental leasing for infill sites or capacity growth and or lease up amendment revenue. Is something that is, again, based on what we've seen this year, seems to be in a very steady state. What could happen where the technology will go and allow for? Again, the customers have very defined space on the towers. And as they continue to deploy additional capacity, it represents a growth opportunity for us as a business. Brendan Lynch: Great. Thanks. That's helpful. Maybe another question. You sound very committed to the pure play U.S. Tower business as being your core. Can you talk about any ancillary services that would fall within the realm of tower exposure that you would be willing to or interested in scaling more? Now that Crown Castle has scaled back on services, maybe there's an opportunity to expand that in the future or build to suits or anything that would kind of be within that realm. Chris Hillebrandt: Yeah. Let's start with the fact of, like, we are our goal is to really maximize the revenue opportunity of our existing base of assets. And we think that there's room to go there, and that's what we'll be focusing on developing. Much of what I'm focusing on doing now over the next couple of months is meeting with our customers and to engage to understand where their unmet needs. And you're right, there are things that are services related. There could be things like, you know, shared power systems. There's a whole slew of potential opportunities that are out there. We need to do, I think, in a very disciplined way, is to make an inventory of what those opportunities are working with our customers and prioritizing them. And then making sure that there's good business to be done. Because I'm confident that there is business to be had, but I think it's, you know, specifics are probably a little bit early, at least in my tenure, to be able to share with you what those But know that this is a high priority for us. You know, we wanna really maximize the opportunity on our sites. And again, based on the earlier question that somebody had on my experiences, I've seen what the art of possible is. Of really providing great partnership with your customers. To be able to generate those incremental revenues. Brendan Lynch: Great. Thank you. That's helpful. Operator: The next question comes from Eric Klubchow with Wells Fargo. Please go ahead. Eric Klubchow: I appreciate it. And Chris, great to connect over the phone. So I just wanted to check again on the cost efficiency program. I know it's in your pro forma AFFO guide you put for less next into next year, but you could talk about opportunities beyond what you've guided to. As we look at your margins relative to your two tower peers in the public market, is there any reason why can't get SG&A efficiency or gross margins to kind of similar levels? I know there's some structure and structural differences some of the sale leasebacks you have. But just wanted to get your perspective on how much runway you have on the cost side the next few years. Sunit Patel: Yeah. So I think first as it pertains to the guidance we provided, you know, when that was provided at the announcement of the transaction, there were efficiencies factored in going from running three businesses to one business. I think we're just executing a little earlier on that. But if you look out over the next couple of years, two or three years, there are several things. There's the implementations of systems, process automation, all of that, I think, will yield benefit over the next several years. There's the opportunity for us to buy out ground leases as we talked about. I think that can help us. So, you know, we so we comparison to our peers. So I think we bought quite a few things over the next couple of years, but certainly the guidance that we provided for next year incorporated the sort of efficiencies you'd expect. Moving from running three businesses to one business. Eric Klubchow: Gotcha. And I guess I know it's a little early for 2026 guide, but, you know, just wondering, you know, if you see anything kind of takes you off the expectation that you've talked about where you can grow kinda four to 5% organically pretty consistently even if we assume the EchoStar contribution continues to wane. Just based on everything they've announced, do you think that's still a reasonable assumption based on all the activity you have in your pipeline? And I guess related to that, is there any kind of mix shifting you're seeing between new colos and amendments as you look out into Q4 and into next year? Thank you. Sunit Patel: Yeah. So on the last question, we're not seeing any big changes in the mix. Between those two items. And then again, we haven't really provided guidance for next year. So we'll come back and talk about it. There's obviously terrible things happening that we're excited about with our clients, but yeah, we'll when we get to reporting fourth quarter, we'll have a much better sense of where we are and cover that then. Operator: The next question comes from Brandon Nispel with KeyBanc Capital Markets. Please go ahead. Brandon Nispel: I think the efficiency one has been asked. Answered multiple times, so I'll refrain from that. I wanted to just maybe ask on the discretionary CapEx guide decrease this year. You know, why was that? And, really, why is the right number? I think Chris, you said a 150 to 250 million. So I guess, yeah, why decrease this year, and then why so much going forward? Thanks. Sunit Patel: Yeah. I think some of that is timing when you look at those capital expenditures there. There are several buckets. There's, you know, whether you're buying out ground leases, whether they are tower modifications, different things. But again, as we said, that's just more timing and it's pushed out to next year. Nothing fundamental happening per se. But it's just a push out to next year. Brandon Nispel: Timing? Sunit Patel: Got it. Thank you. Operator: This concludes our question and session as well as our conference. Thank you for attending today's presentation. You may now disconnect.
Operator: Ladies and gentlemen, welcome to Avery Dennison's Earnings Conference Call for the Third Quarter Ended on 09/27/2025. During the presentation, all participants will be in a listen-only mode. Afterward, we will conduct a Q&A session. If you have joined via Zoom, please use the raise hand function. As a reminder, this webcast is being recorded and will be available for replay on the Avery Dennison Investor Relations website. I'd now like to turn the call over to William Gilchrist, Avery Dennison's Vice President of Investor Relations. Please go ahead, sir. William Gilchrist: Thank you, Karina, and welcome to Avery Dennison's Third Quarter 2025 Earnings Conference Call. Please note that throughout today's discussion, we will be making references to non-GAAP financial measures. The non-GAAP measures that we use are defined, qualified, and reconciled from GAAP on schedules A-4 to A-8 of the financial statements accompanying today's earnings release. We remind you that we will make certain predictive statements that reflect our current views and estimates about our future performance and financial results. These forward-looking statements are made subject to the Safe Harbor statement included in today's earnings release. On the call today are Dion Stander, President and Chief Executive, and Greg Lovins, Senior Vice President and Chief Financial Officer. I'll now turn the call over to Dion. Dion Stander: Thanks, Gilly, and hello, everyone. Delivered a solid third quarter with earnings up 2% year over year and above the midpoint of expectations while continuing to execute in a dynamic environment. This outcome underscores the strength and durability of our franchise, demonstrating our ability to activate multiple levers in our portfolio to deliver across a range of macro scenarios. As expected, our business continues to be impacted by ongoing trade policy changes. Encouragingly, we fully mitigated direct cost increases through strategic sourcing adjustments and select pricing surcharges. Moreover, while base apparel volumes were still in the third quarter, we did see improvement sequentially relative to the organic growth headwind in the second quarter. In Materials Group, operational excellence was key to margin expansion during the quarter. A sustained focus on productivity and benefits from modest volume mix growth drove margins up 50 basis points year over year. Modest revenue declines in high-value categories were primarily driven by low single-digit declines in graphics and performance tapes, which faced headwinds from isolated customer and distributor inventory management adjustments. This is partially mitigated by continued strong growth in specialty durable labels and adhesives. We expect the inventory adjustments impacts to be short-lived and to see high-value categories return to growth in the fourth quarter. Overall, Materials Group and base label materials volumes were up slightly compared to the prior year. Importantly, we continue to see growth in our differentiated films volumes, which is a positive mix driver for the business. Solutions Group delivered organic sales growth of 4% driven by high single-digit growth in high-value categories. VESCOM continued its momentum, growing over 10%, and Embellix delivered more than 10% growth as well. Overall, apparel sales exceeded expectations, rising low single digits in the quarter. As you can see on Slide seven, our apparel business is seeing divergent trends. High-value category apparel sales grew high single digits, benefiting from strength in Embellix with strong growth related to next year's World Cup and mid-single-digit apparel IL growth. While base apparel sequentially improved as expected, it remains down low single digits, reflecting soft retail retailer and brand demand as they continue to navigate the impacts of tariff policies. Solutions margins performed better than typically sequential declines, were down 90 basis points compared to the prior year. Profitability was impacted by higher employee costs, continued growth investments, and network inefficiencies stemming from tariff policy changes. Turning to enterprise-wide Intelligent Labels, sales grew approximately 3% compared to the prior year, in line with our expectations. We are encouraged by the sequential improvement in the business, which was driven by key growth market segments. Specifically, apparel and food, logistics, and industrial grew at mid-single digits rate. In apparel and general retail, both market segments are still being impacted by tariff policy changes. However, apparel partially recovered in the quarter while general retail remained soft. Strong growth continued in food as our strategic collaboration with Kroger ramps up as expected. Longer term, our conviction in this large addressable market continues to grow. This morning, we jointly announced a major partnership with Walmart to leverage Avery Dennison's RFID innovation and solutions in their fresh grocery categories of bakery, meat, and deli. This adoption of IL in fresh food in the second large grocer is a key industry milestone and reinforces our conviction in the growth potential of this large addressable market. In logistics, the business expanded sequentially but was down slightly compared to the prior year. Our share in this market segment remained strong, and we have a robust pipeline of opportunities. As we highlighted in the second quarter call, executing initiatives to reduce identified network inefficiencies and associated costs created by the tariff policy changes. These improvements will help drive profitable growth while maintaining high quality and reliability for our customers. Looking forward, we anticipate the fourth quarter will deliver an improved rate of year-over-year growth versus what we saw in the third quarter. While growth will likely continue to remain constrained by trade policy uncertainty, particularly in apparel and general retail market segments, we view this as a temporary headwind. Our conviction in the long-term growth of this high-value category platform remains strong given the value we are creating for our customers and the adoption we see across new segments. Turning back to the total company. Taking into account the continued dynamic environment, we are anticipating both overall sales and earnings per share growth in the fourth quarter. We remain prepared for a range of scenarios, leveraging our proven playbook to safeguard earnings in the near term while accelerating initiatives to drive differentiation and growth over the cycle. Shifting to our core strategies. I am confident that we have the initiatives, innovation, capital allocation framework, and team in place to consistently deliver strong profitable growth and top quartile returns across the cycle. Progress in each of these strategies was evident in the fourth quarter, further cementing our conviction. Our business is positioned for success with secular growth tailwinds that fundamentally outweigh cyclical events over the cycle. Key trends including item-level digitization, enhanced consumer engagement, product customization, and business productivity needs are aligned with a growing portion of our business. The drivers in our high-value categories are clear, and our exposure to them continues to expand. These categories now represent 45% of our total business year to date. An increase compared to the prior year, underscoring our strategic shift towards higher growth and higher margin opportunities. Intelligent Labels adoption is accelerating, with our largest addressable market segment in food now gaining significant traction. Our focus on innovation outcomes and commercial excellence is creating differentiation across our businesses. Examples include introducing new RFI innovation in food, our stalling software in VESCOM, and expanding our Clean Flake adhesive adoption in filmic labels for recycling purposes. Finally, we continue to harness the power of our disciplined capital allocation approach and balance sheet strength to return capital to shareholders and strategically expand our presence in high-value categories where we hold competitive advantages. Year to date, repurchased approximately $454 million in stock and have grown our dividend by 7%. Concurrently, we closed the $390 million Taylor adhesive bolt-on, immediately strengthening our materials group high-value category adhesives franchise with clear cost synergies and strong growth potential. In summary, while the current backdrop has muted our overall growth in 2025, we have further strengthened the resilience of our franchise, deployed capital into attractive opportunities, and advanced our strategic priorities. This underpins our confidence in returning to strong growth and maintaining top quartile returns for our business and shareholders. I want to extend my gratitude to our entire team for their unwavering focus on excellence, dedication to overcoming the challenges at hand, and relentlessly focusing on executing our strategic priorities. Over to you, Greg. Gregory Lovins: Thanks, Dion, and hello, everybody. We delivered adjusted earnings per share of $2.37, up 2% compared to the prior year and above the midpoint of our expectations. Results were driven by productivity and higher volume mix, partially offset by higher employee-related costs investments. While trade policy uncertainty continued to present a headwind to our results, the impact improved sequentially. Compared to the prior year, reported sales were up 1.5%, and sales were comparable to the prior year on an organic basis. As positive volume mix was offset by deflation-related price reductions. Adjusted EBITDA margin was strong at 16.5% in the quarter, up 10 basis points compared to the prior year. And we again generated strong adjusted free cash flow of nearly $270 million in the quarter. Our balance sheet remains strong with a quarter-end net debt to adjusted EBITDA ratio of 2.2. And during the quarter, we issued a €500 million note to pay down some commercial paper and to fund the Taylor Adhesives acquisition closed earlier this week. We continue to effectively execute our disciplined capital allocation strategy, successfully balancing significant cash return to shareholders with strategic M&A. In the first nine months of the year, we returned roughly $670 million to shareholders through the combination of share repurchases and dividends, and we allocated $390 million to the Taylor Adhesives acquisition. Turning to segment results for the quarter. Materials group sales were down 2% on an organic basis. As modest volume mix growth was more than offset by low single-digit deflation-related price reductions. Organically, both high-value categories and the base businesses were down low single digits. Turning now to regional label materials organic volume mix trends versus the prior year in the quarter, continued soft consumer product demand led to roughly comparable volume in both North America and Europe. Offset by continued growth in emerging markets. With Asia Pacific up low single digits and Latin America up mid-single digits. High-value categories declined at low single digits compared to the prior year. Graphics and Performance tapes declined low single digits were impacted by customer inventory adjustments, which we expect to normalize in Q4. The Materials Group once again delivered strong margins with an adjusted EBITDA margin of 17.5% in the quarter, up 50 basis points compared to the prior year. Regarding raw material costs, including the cost of tariffs, we experienced modest sequential global raw material cost deflation in the third quarter. Mitigated tariff cost through strategic sourcing adjustments and the implementation of select pricing surcharges. Overall, including tariffs, our outlook is for relatively stable sequential material cost in Q4. Shifting to Solutions Group. Sales were up 4% organically, and high-value categories were up high single digits. And base solutions were down low single digits. Improving sequentially from down mid-single digits in the second quarter but still impacted by tariff-related uncertainties. Within High-Value Categories, VESCOM was up more than 10% driven by the continued benefit from new program rollouts. Embellix was also up more than 10% as we saw a ramp ahead of the World Cup next year and apparel intelligent label sales recovered to mid-single digit growth. Enterprise-wide, intelligent label sales expanded approximately 3% compared to the prior year. In addition to apparel improving to mid-single digit growth, food, logistics, and industrial categories combined were also up mid-single digits. General retail categories continued to experience tariff-related softness. With sales down mid-teens which impacted both Solutions Group and Materials Group Intelligent Label sales. Solutions Group adjusted EBITDA margin was 17%, relatively flat sequentially but down 90 basis points compared to the prior year. As benefits from productivity and volume were more than offset by higher employee-related costs such as wage inflation, and growth investments. Shifting to our outlook. For the fourth quarter, we expect reported sales growth of 5% to 7% with the following contributing factors: sales growth excluding currency of 1% to 3% with organic growth of 0% to 2%. With approximately 2% from currency translation, approximately 2% from extra days in the quarter due to the shift to the Gregorian calendar next year, approximately 1% from the Taylor Adhesives acquisition. We expect adjusted earnings per share to be in the range of $2.35 to $2.45 above the prior year at the midpoint as benefits from organic growth, productivity, and share count are partially offset by wage inflation, investments, and higher interest expense. Our Q4 guidance incorporates seasonality and incremental productivity, which is partially offset by higher interest expense and less favorable currency. We've outlined some contributing factors to our full-year results on Slide 14 of our supplemental presentation materials. To highlight a few of the key drivers, we now anticipate a $5 million currency translation benefit operating income slightly below our previous projection of a $7 million tailwind. We now expect restructuring savings net of transition costs of approximately $60 million, up $10 million from our previous expectation as we continue to ramp our productivity efforts. And we continue to expect strong free cash flow targeting roughly 100% conversion for the year. We now expect interest expense to be $135 million, an increase from our prior outlook largely driven by interest expense from the €500 million notes we issued in September. And finally, expect tailored adhesives will have an immaterial impact on Q4 earnings per share due to the timing of the close in the quarter and expected intangible amortization expense. In summary, we delivered a solid third quarter achieving EPS above the midpoint of our expectations through a continuing dynamic environment. Expect slight improvements in organic sales growth and continued year-over-year EPS growth in the fourth quarter. And we remain well prepared for a variety of macro scenarios. We're strongly positioned to execute our profitable growth in disciplined capital allocation strategies, which we expect to deliver exceptional long-term value to all of our stakeholders. And now we'll open up the call for your questions. Operator: Thank you. Ladies and gentlemen, if you've joined via telephone, and would like to register a question, you will hear a confirmation of your request. Please press star followed by the number 6 to unmute your line. If you have joined via Zoom, please raise your hand using the raise hand function. If your question has already been answered, and you would like to withdraw your registration, please press star followed by the number 9 again, use the raised hand function. To accommodate all participants, we ask that you please limit yourself to one question and then return to the queue if you have additional questions. One moment for the first question. Your first question comes from the line of Ghansham Panjabi from R. W. Baird. Your line is open. Please go ahead. Ghansham Panjabi: Hey, guys. Good morning. Can you hear me okay? Gregory Lovins: Yeah. We can, Ghansham. Good morning. Ghansham Panjabi: Okay. Good morning. Sorry. Just getting used to the new system. First off, as it relates to the materials segment, is it your sense that volumes are starting to how are how are volumes progressing on a sequential basis just given the macro uncertainty in and so on and so forth? I know you called out the impact on apparel as you have over the last couple of quarters, but is it your sense that materials are starting to sequentially weaken as well? Dion Stander: No. Ghansham, I'd say in the third quarter, volumes, while positive overall, were less than our expectation and pretty much across all regions. And I think there's a couple of factors playing into that. One of which is certainly, we see we continue to see lower retail volumes overall, particularly in North America and Europe, and our scanner data also suggests that there's lower muted demand coming from CPGs overall and when they think about volume. The second thing is, in our high-value categories, we also had a couple of episodic events that happened really around our graphics and reflective business, which we know will remediate as we get into the fourth quarter. Our outlook for the fourth quarter is actually to see kind of similar growth as we move forward. I think the final thing I'll say is it's certainly clear in certain pockets that we're emerging markets have had exposure to tariffs those economies and the consumers in those economies are more cautious as they look into the impact of what those tariffs mean for those countries. And so we're seeing slightly lower volume in those areas as well. I think fundamentally for us as we look forward, I'll just remind everybody, our materials business is really anchored in consumer staples. And so over time, it's been a GDP plus business. And I anticipate that changing once the trade environment, the trade policy normalizes. Operator: Your next question comes from the line of George Staphos from Bank of America. Your line is open. Please go ahead. George Staphos: Hi, everybody. Getting used to the new technology here. For the time, the details. I guess with one question at a time, I'll go with the Walmart news today. If you can talk a little bit about that. And what it might mean for you over the next couple, three years. We're doing some quick searching over the last hour or two it be fair to say that the the opportunity here, recognize you're not going to get that next quarter or the following, would be roughly maybe a million and a half packages when you think about, you know, the Walmart protein cabinet and other related end markets, how would you have us size that? Thank you. Dion Stander: Yes. Thanks, George. I think it's for us, we see this as twofold. First of all, I think it's a critical validation of the effectiveness of our technology and solutions to solve challenges that all grocers really have, which is around freshness of perishable products, labor effectiveness, gross margin expansion, and Net Promoter Score increases because consumers are getting the products that they want, which is the freshest they need. And we saw that start in Kroger, and now I've been manifest in Walmart and our partnership announcement this morning. So we see it both strategically important because we believe it will further catalyze the largest growth segment there is which is in food, which we estimate to be about net order of 200 billion units. And the second large growth are going really sends a signal that the technology has application, the returns are there and the rollout now will commence. In terms of Walmart specifically, while we don't necessarily always comment on exact details of partnership, perhaps I can just frame the scale of what we think it could be. Our estimates are and this will be subject to typical rollout timing, what will happen intra quarter, the number of stores that goes, the individual pieces of those departments of bakery, deli and protein and sorry, meat and when they go. We would typically see this across a two-year period being in the order of sort of high single digit to low double digits growth on our total 25 enterprise IL revenue. And we typically would see that ramping as we go through the couple of years. One other point I'd make on this is we are driving this partnership because we to provide differentiation in the market. A lot of our differentiation over here is anchored in what we've been able to do from an innovation perspective as it relates to activating proteins and meats, particularly for intelligent labels, something that had been very challenging in the past that we've been able to solve for. And so we look forward to seeing the results of that partnership and the results of our effort we've been leaning forward for very long in the market to make sure that we continue to drive activation. Operator: Your next question comes from the line of John McNulty BMO Capital Markets. Please go ahead. John McNulty: Yeah. Good morning, Thanks for taking my question. Can you speak to what you're seeing in the IL pipeline right now? Obviously, there's been a lot of chaos around tariffs and delays in certain programs and yet it seems like there may be some acceleration. So other areas as people try to get better understanding of supply chains, etcetera. So I guess, can you speak to that? And also, just given the size and scale of the Walmart program that's being added in, do you have to start thinking about putting new capital to work around intelligent label capacity, etcetera? I know you put some in a while ago. I guess, where do we stand on that need now? Dion Stander: Thanks, John. So in terms of pipeline, we continue to see our pipeline grow actually both by number of opportunities and by dollar value across all of the key segments. I'm just once again reinforcing that when the benefits are obvious, and they're implementable, then we tend to see good traction because it fundamentally solves challenge of our supply chain visibility, inventory accuracy. And then when you're into the store, specifically labor productivity, fresh produce, waste reduction, and employee and associate experience is much better as well. So from a pipeline perspective, we continue to see good progress overall. In terms of Walmart size and scale, yes, it's a substantial add to the adoption now within the overall food and more broadly the IL market. I'll remind you that in terms of capital allocation, we typically, from a roofline perspective, have added capacity from an infrastructure perspective, typically three to five years out. Hence why we added our Queretaro facility in Mexico to we started that two years ago. When it comes to individual assets for production, we tend to be investing twelve months to eighteen months ahead of the curve. So in the initial phase of this, I don't anticipate us needing additional capacity. As we get through to the end of the second year, we'll revisit that and adjust accordingly. For us, that's much more of a modular approach. These are assets where we've significantly improved our capital reduced our capital intensity billion units produced over the last five years. And so I'm looking forward to that continuing to take advantage of the scale manufacturing that we have in this regard. Operator: Your next question comes from the line of Jeff Zekauskas JPMorgan. Your line is open. Please go ahead. Jeff Zekauskas: Hey, Jeff. Can you hear us? Thanks. Gregory Lovins: I can. Thank you very much. In the in the press release that that came out over the Walmart announcement, there was, a phrase about joint sensor technology. Is there something about technology that you're using with Walmart that's really unique to your relationship with them Or maybe another way of saying this is is is what you're doing with them something that would constrain you in being able to use the same technology with other customers? Dion Stander: No. Jeff, what we've done with Walmart is we've really focused on the three areas that in much of our pilots and trials up until this point. And those are around bakery which is very similar to what we do with some other customers as well. Protein specifically is where we've had to lean into our innovation capability, both on our material science side think about adhesive technology required in cold environments, and then environments that ultimately will be defrosted and even microwaved at that stage. So from material science, have put a lot more effort into solving some of those problems. And then more specifically from what we call the RF side things, radio frequency side of things is how do we make sure that our uniquely designed antennas are capable of being able to sense within very, very densely packed items that are very high dielectrics meet has those properties. And so how do you make sure that you're able to read everything even within a freezer container or a fridge container as well? And those are presented significant challenges in the past. So our ability to generate innovation in this area I think, is going to help us unlock not just the Walmart partnership, but also more broadly across the market as we look forward as well, Jeff. Operator: Your next question comes from the line of Matt Roberts Raymond James. Your line is open. Please go ahead. Matthew Roberts: Morning, Matt. Operator: Mister Roberts, you'll need to unmute yourself. Matthew Roberts: Can you hear me now? Dion Stander: Yes, Matt. Thank you. Matthew Roberts: Okay. Good morning, everybody. Sorry about that. I may, in regard to intelligent labels, so understand you're probably not going give the 2026 guide here and understanding visibility is limited. 2025 certainly had its unique headwinds from tariffs but we're starting to see some momentum that you referenced for Walmart and others. So maybe more broadly in Intelligent Labels, how much of the initial five points that you expected in 2025 from new programs have shifted into 2026? How many incremental points could you get from new program rollouts other than Walmart that you just gave? And given weak comps in apparel and general and some of the headwinds you've seen there, do you believe 2026 could support at or above the long-term growth rate? Or if you only want to give one quarter ahead, any color on 4Q could be helpful as well. You for taking the question. Dion Stander: Yes, Matt. Specifically, we talked to remember those are incrementally about those five basis points that will come through through. Program rollouts. Largely, those actual rollouts are on track through this year. And they came really in a couple of buckets. One bucket was in apparel themselves, some new rollouts new technology deployments, The second bucket was really in some of our food rollouts, which we've talked about. The third bucket was also in some of the additional general merchandise rollouts that were happening as part of the compliance programs with some of our customers. Across all three of those, if you exclude the impact of tariffs, we're actually roughly on track. Now in apparel, we haven't seen any rollout delay, but what we've seen is some of the volume being a little bit more muted than we would expected given, as I'm sure, you recognize the tariff implications. It's a little early for us to look out currently to 2026 as well. And I said in the context, I think the environment remains highly uncertain. Just call everybody's attention to fact that the tariff policy changes have only impacted India more recently by up to 50%. And as all you know, we're on the road currently with China being currently 100% again. And so I think that uncertainty certainly limits our near-term visibility. What I am confident in is our continued ability to drive not only innovation that secures our differentiation, but drive adoption, particularly with things like Walmart, that will certainly help deliver growth as we go through next year. We'll characterize and wrap that all together when we get to the January outlook as well, Matt, for you. The other thing I would just add to what Dion's earlier comments in his prepared remarks, Matt, is that we talked about Q4 expecting our growth rate in IL to be better than what we grew in Q3 versus prior year. Operator: Your next question comes from the line of Anthony Pettinari, Citigroup. Your line is open. Please go ahead. Anthony Pettinari: Good morning, Good morning, Anthony. Hey, just another question on the Walmart partnership. You know, during the quarter, they they had a a press release talking about deploying IoT technologies with Williotte and and know, Avery has a strategic partnership with Willyot. And I'm I'm just from a big picture perspective, can you talk about how RFID and maybe other IoT technologies, you know, coexist in an environment like Walmart Are are you kind of agnostic to what wins in the market? Or how do they interact with each other? How should know, investors think about those two sets of technologies? Dion Stander: Yes, Anthony, I think I've always said from the start, we fundamentally believe that UHF RFID is the most ubiquitous best placed sensing technology for item level identification visibility through supply chain and in a store environment. But we've also said that there are other sensing technologies particularly when it relates to ambient issues, things you want to monitor temperature pressure and so forth, that will also have a specific use case. Now Williard is a strong partner of ours. We have strengthened our strategic partnership. We're going to be supporting them in their rollout that they have fact, we're gonna be managing part of the rollout for them with Walmart as well overall. And that is really orientated around palette and case level. So at a high level, think about UHF RFID being applied at an item level, most likely set broader sensing devices like WILIA technology we provided at the palette and case level. And we're involved in both of those areas I think they present a suite of solutions that in the long term are going continue to drive to what I think will be the end outcome, which is digital identities, on all physical objects. In time. Operator: Your next question comes from the line of Mike Roxlin Truist Securities. Your line is open. Please go ahead. Michael Roxland: Hi, can everybody hear me? Dion Stander: Hey, Mike. Thanks, Mike. Thanks. Yes. Thank you, guys. And getting used to the new congrats on all the progress and the new Walmart deployment. Michael Roxland: Thank you. Just one question for me in terms of logistics. Obviously, was a little bit weaker in this quarter. As you mentioned. Any potential for new deployments in the near term? Any comments you may have on potential like share gains? Obviously, there was some share loss last year. Any insights as to whether maybe you're going to regain some share from that business? Anything you can help around logistics and what's happening with deployments and potential share gains on the horizon? Thank you. Dion Stander: Yes. Sure, Mike. We continue to do really solid work in our partnership with UPS. And that fact that partnership continues to grow. My sense is through the end of this year, we'll actually expand our share with UPS. It's a good performance by both our team, both on service quality, delivery and some new innovation we've even brought to UPS as well in terms of how they can drive higher speed application to their packages relative using our technology as well. If I think more broadly about the logistics environment, I think we've been very clear. We didn't anticipate another rollout during 2025. And we're going to be assessing what the likelihood of that will be during 2026. We'll give more color on that as we get to the January. But I'd say overall, we continue to make really good progress with a number of the key logistics providers. Our pilots and trials have expanded with almost all of them And we spent a lot of time engaging around all the various use that could come out of not just managing last mile fulfillment accuracy, but also how do you originate parcels that go back to source at shipper, what role can we play in that. So as always, I'm encouraged by what I see when I look across the business and our relationship we have with all the large logistics providers. And for me, it's just going to be a case of when we're able to get them to adopt at scale. We'll be able to give a broader update, I think, by the time we get to January, Mike. Operator: Your next question comes from the line of Josh Spector from UBS. Your line is open. Please go ahead. Joshua Spector: Hey, good morning guys. Can you hear me? Dion Stander: Yeah, we are. Joshua Spector: Okay, great. So I wanted to ask kind of a technical one around the quarter and the guide here. Is I think from a sales perspective, you're guiding sales up about $100 million maybe a bit more sequentially But from an EPS perspective, you're close to flat I think historically there's some accretion of margins in fourth quarter So I know with the M and A piece of it that maybe creates a bit of noise as Meridian layers in. But are there other factors that we need to consider, like some lagged price downs or Some other costs that maybe mute the accretion q on q? Gregory Lovins: Yes. Thanks, Josh. So when we look at sequentially, there's a number of puts and takes, of course. Seasonality, as you mentioned, is historically, has been a little bit positive. I would say this quarter, we're probably expecting a little less than typical. Since we saw apparel have a bit of a catch up in Q3. From the tariff impacts that we had in the second quarter. We'll still have some positive logistics volume improvement sequentially into Q4 materials is usually a little bit of a headwind Q3 to Q4 given the holiday period. On the biggest parts. Of that business in North America and Europe. So sequentially, expect seasonality to be relatively flat this year, I think. When we looked in, have some slight positives from share buyback that we've been doing across the year. And continuing to do as we enter the fourth quarter here. We've got some slight favorability from restructuring. I talked about ramping that up we're moving through the back half. And then we've got a little bit of a slight headwind quarter over quarter I think Dion talked about our network inefficiencies we've had related to some of the tariff moves and our sourcing moves or our production moves accordingly with that. We've got a little bit higher inventories in the system over the last few quarters. And as we're bringing that down, we'll have a little bit of an inventory absorption impact on the P and L in the fourth quarter. Sequentially. Otherwise, price deflation, somewhat immaterial sequential impact those are kind of the big puts and takes when we look Q3 to Q4. Operator: Your next question comes from the line of John Dunnigan from Jefferies. Mr. Dunnigan, please press 6 unmute your line. John Dunnigan: Hey, guys. Thank you very much for all the details. I just wanted to ask a quick one on the Walmart collaboration, and then have one other here. So the the collaboration, when when will that start flowing through? Is that more of a 2026 event? And then it just looking at Embellis, I mean, the inflection in volumes was pretty impressive, not to something that we were necessarily expecting. I get that it's related to the World Cup, but is that that kind of trend kind of high single digit, low double digit expected going into 4Q twenty twenty six. Kind of what your expectations are for that business would be helpful? Dion Stander: Thanks. Sure, John. Yes, on the Walmart collaboration, we've been piloting a trial, as I'm sure you sense for a while now. And the full the rollout will start sequentially at very small amount in the fourth quarter really, and then we'll go from there as we go through 2026 and 2027. The current plan. Again, that may be subject to change into quarter shift depending on what stores rollout at what pace and which departments go in which sequence in order. In terms of AmbelliX, yes, I've been very pleased with our AmbelliX performance in the third quarter. Largely, on the performance that we have as related to the World Cup. So we do a lot of preparation for the key World Cup teams and the brands that support them. In advance. And that typically happens a little bit in the second quarter, the majority in the third quarter and a small amount happen in the fourth quarter. What we would call happening at source. The garments are produced at source. They're decorated at source. And then as we get into next year, when the actual World Cup happens, there will be a smaller opportunity for us to do what we call on in stadium venue customization, the names and numbers that you can do when you go there. We haven't necessarily given a perspective on how that decides that, but an opportunity certainly for us as we get into next year. Aside from that, on our base Imbellx business, we continue to see improvement is largely anchored in our Performance Brands as they start to ramp up as well. And then separately, in our Embellis business, we continue to make progress in what we call our in venue and consumer customization applications. I'll give you an example of that. We recently launched a NFC connected device in a garment for a Turkish football club We've done the same thing again for the San Francisco 49ers. And this really helps clubs and fans engage more directly on a one to one basis. So leveraging our technology with some of our adhesive science and our Embellics business overall. And in the long term, we continue to see this as a kind of mid- to high single digit growth segment for us as we move forward. Operator: Your final question comes from a follow-up from Jeff Zekauskas from JPMorgan. Your line is open. Please go ahead. Jeff Zekauskas: Great. Thanks for taking my call. Another question about the Walmart arrangement. Different RFID tags have different prices. In that, you know, apparel tags, you know, tend to be priced higher than logistics tags. Where do tags on Meet fall? Are they in the middle or higher? Or lower? And then for Greg, what calendar are you switching over to for next year? Dion Stander: Jeff, so let me address the warm up one and Greg can take on the calendar question. Yes, I mean, typically across our estate, we have I'd characterize our products as kind of good, better, best. And ranging in differentiation from good all the way through to best. There's also unique circumstances, which certain products or certain inlays are put into more complex tags or format. So an inlay that goes on to, let's say, plain white label has less complexity and typically a lower price point than something that goes into a highly decorated graphic tag to make an apparel. So you can see a range of ASPs across them. As it relates to meat, given some of our proprietary innovation, would see these as typically products that are in the best range. And our AS there will probably be a little higher there's also mix in with the bakery products that we have and some of the deli products. And so overall, anticipate our ASPs across that program to really reflect our portfolio largely at an aggregate level and with profitability to be in a similar aggregate range we currently see across our IL portfolio as as well. Gregory Lovins: Thanks, Ian. And Jeff, on your question on the calendar, we are moving from our historical fourfourfive calendar to a fiscal calendar that aligns with the actual calendar, the Gregorian calendar. So we're making that shift at the end of this year. So this year, we'll extend to the December 31. Then from now on, heading into 2026, we'll be following the Gregorian calendar. And if I go back to Josh's question a little bit earlier, that does add about two points of growth in our fourth quarter sequentially and versus prior year. By adding those extra days into the fourth quarter They're not really high quality days. We had four days to the calendar this year. That includes a Sunday and it includes New Year's Eve, so they're not really high quality days. But nonetheless, we'll get some incremental revenue from that Not a huge flow through because we'll have four or so days of fixed cost with less than that of actual revenue given the softness of those typical days. But that's the impact we're we're shifting to the Gregorian counter next year. Operator: Your final question comes from the line of George Staphos from Bank of America. Your line is open. Please unmute. George Staphos: Hi, Thanks for taking the follow on. A two part one. And again, thanks for all the details. First of all, can you talk a bit about where you're seeing deflation in materials such that prices are a touch lower And kind of where you sit right now, how would you gauge what is normal deflation versus price competition given the macro Related point, the last couple of quarters, again, third quarter was nice to see the improvement. But apparel's weakness in base was one of the reasons that IL is having some difficulty growing. This quarter, with apparel being up 3%, on IL, base is down Why is it why are we getting a positive disconnect this quarter that we were not getting in prior quarters with IEL relative to apparel. Thanks and good luck in the quarter. Gregory Lovins: Thanks, George. I'll start with your deflation question. Overall, what we've been seeing and we've talked about from a year over year perspective, think the biggest drivers we've seen are in paper. Particularly in Europe and Asia. Where overall we've got low single digit deflation year over year in the third quarter Paper is a little bit more than that specific to a couple of regions. And we saw pulp kind of coming down through the quarter in those areas as well. We've got a little bit of year over year benefit on chemicals and films as well also primarily in Europe and Asia. And then in The U. S, we've got some tariff related inflation that we've put surcharges through as we talked about. We do have a little bit from a price perspective then We've got a little bit of low single digit impact on pricing as well. And net net, we've got a slight headwind between price inflation. And I think some of that is still over the cycle when we look over on multiyear horizon we had a lot of inflation a few years ago. It's been slightly deflationary for a couple of years now. And prices have come down to go with that. So that's something we expected as we've gone through the quarters this year. We'll probably have another quarter or so as that continues from a year over year perspective in Q4. Dion Stander: And George, on your second question, even in the second quarter, our base apparel performance was lower than our apparel IL performance, both were down. And as you saw, our base apparel performance has improved, it's still low single digits, the base apparel piece. And our aisle performance is now sort of low single digits around 3%. The difference there really is in rollouts, not necessarily relative to the absolute volume of the base apparel. It's new rollout. For example, we extended our rollout with the Inditex Group, leveraging our new proprietary loss detection technology that they've introduced. And separately, we've also got continued rollout in new apparel customers, a couple of them small, one of them large, that have been rolled out through the third and then the fourth quarter increasingly as well. Operator: Mr. Gilchrist, there are no further questions at this time. I will now turn the call back to you for any closing remarks. William Gilchrist: Thank you, Karina. Just to recap, we delivered a solid third quarter in a dynamic environment. We are well prepared for a variety of macro scenarios. And well positioned to deliver superior value through the cycle. We want to thank you for joining today's call. This now concludes our call. Operator: Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.
Operator: Welcome to the third quarter of 2025 Earnings Conference call for Amphenol Corporation. Following today's presentation, there will be a formal question and answer session. Until then, all lines will remain in a listen-only mode. At the request of the company, today's conference is being recorded. If anyone has any objections, you may disconnect at this time. I would now like to introduce today's conference host, Mr. Craig Lampo. Sir, you may begin. Craig Lampo: Thank you very much. Good afternoon, everyone. This is Craig Lampo, CFO, and I am here together with Adam Norwitt, our CEO. We would like to welcome you to our third quarter 2025 conference call. Our third quarter 2025 results were released this morning. I will provide some financial commentary, then Adam will give an overview of the business and current market trends. Then, of course, we will take your questions. As a reminder, during the call, we may refer to certain non-GAAP financial measures and make certain forward-looking statements. So please refer to the relevant disclosures in our press release for further information. The company closed the third quarter of 2025 with record sales of $6.194 billion, a record GAAP and adjusted diluted EPS of $0.97 and $0.93, respectively. Third quarter sales were up 53% in US dollars, 52% in local currencies, and 41% organically compared to the third quarter of 2020. Sequentially, sales were up 10% in US dollars and local currencies and up 9% organically. Adam will comment further on trends by market in a few minutes. Orders in the quarter were a record $6.111 billion, up a strong 38% compared to the third quarter of 2024 and up 11% sequentially, resulting in a book-to-bill ratio of 0.99 to 1. GAAP and adjusted operating income were both $1.702 billion in the quarter, and operating margin was a record 27.5%. On an adjusted basis, operating margin increased by a strong 560 basis points from the prior year quarter, and 190 basis points sequentially. The year-over-year increase in adjusted operating margin was primarily driven by strong operating leverage on significantly higher sales volumes, which was only modestly offset by the dilutive impact of acquisitions. On a sequential basis, the increase in adjusted operating margin reflected strong conversion on the higher sales levels, as well as further progress on profitability improvement on acquired businesses. I am extremely proud of the company's record operating margin performance in the third quarter, which reflects continued strong execution by our team. Breaking down third quarter results by segment compared to the third quarter of 2024, sales in the Communication Solutions segment were $3.309 billion and increased by 96% in US dollars and 75% organically. Segment operating margin was 32.7%. Sales in the Harsh Environment Solutions segment were $1.516 billion and increased by 27% in US dollars and 19% organically, and segment operating margin was 27.1%. Sales in the Interconnect and Sensor Systems segment were $1.369 billion, increased by 18% in US dollars and 15% organically, and segment operating margin was 20%.The company's GAAP effective tax rate for the third quarter was 23.5%, and the adjusted effective tax rate was 27%, which compared to 21.4% and 24% in the third quarter of 2024, respectively. The increase in our adjusted effective tax rate this quarter is due to some shift in income mix to higher tax jurisdictions during 2025. The third quarter includes an adjustment to bring the year-to-date taxes to a 25.5% adjusted effective tax rate, which resulted in a three-cent impact to our third quarter EPS. Our fourth quarter and full-year guidance assumes this higher 25.5% tax rate, and we expect this higher tax rate to continue into 2026. EPS was a record $0.97 in the third quarter, up 102% compared to the prior year period. And on an adjusted basis, EPS increased 86% to a record $0.93 compared to $0.50 in the third quarter of 2024. This was an outstanding result. Operating cash flow in the third quarter was $1.471 billion, or 117% of net income, and free cash flow was $1.215 billion, or 97% of net income. Also, an excellent result. From a capital standpoint, inventory days, days sales outstanding, and payable days were all within a normal range.During the quarter, the company repurchased 1.4 million shares of common stock at an average price of approximately $109, and when combined with our normal quarterly dividend, total capital return to shareholders in the third quarter of 2025 was $354 million. As noted in the earnings release, the company has increased its quarterly dividend by 52% to $0.25 per share, effective for payments beginning in January of 2026. Total debt on September 30th was $8.1 billion, and net debt was $4.2 billion. Total liquidity at the end of the quarter was $10.9 billion, and this included cash and short-term investments on hand of $3.9 billion plus availability under our existing credit facilities, including the $4 billion term loan facility recently put in place in anticipation of the acquisition. Third quarter 2025 EBITDA was $2 billion, and our net leverage ratio was 0.7 times at the end of the quarter. As of September 30th, the company had no outstanding borrowings under its revolving credit facility or its commercial paper programs. I will now turn the call over to Adam, who will provide some commentary on current market trends. Adam Norwitt: Well, thank you very much, Craig. And thank you to everybody for taking the time to join our call today. And I hope that all of you are having an enjoyable fall. I can tell you it's a beautiful day here in Connecticut. I'm going to highlight our achievements in the third quarter. I'll discuss our trends and progress across our served markets, and then comment on our outlook for the fourth quarter and the full year. And then, of course, we'll have time for questions thereafter. There's no doubt that our results in the third quarter were much stronger than expected, exceeding the high end of our guidance in sales and adjusted diluted earnings per share. Sales grew from prior year by a very strong 53% in US dollars and 52% in local currencies, reaching a new record $6.194 billion, or nearly $6.2 billion. On an organic basis, sales increased by a very strong 41%, the same level that we actually achieved in the second quarter. And this was driven by double-digit organic growth in all but one of our end markets. We're very pleased that the company booked a record $6.111 billion in orders in the third quarter, and that represented a book-to-bill of 0.99 to 1. Orders grew by a very strong 38% from prior year, and were also up 11% sequentially. I have to say that we're particularly pleased to have delivered record operating margins of 27.5% in the quarter, an increase of 560 basis points from our prior year adjusted operating margin and 190 basis points sequentially. This strong profitability is a direct result of the outstanding execution of the team around the world, all of whom continued to manage extremely well in a very dynamic environment. As Craig mentioned, our adjusted diluted EPS also grew very strong, 86% from prior year, reaching a new record of $0.93, and the company converted those earnings into record operating and free cash flow in the quarter of $1.471 billion and $1.215 billion, respectively. Both clear demonstrations of the quality of the company's earnings. Finally, I'm very pleased that our board has approved a 52% increase in the company's quarterly dividend to $0.25 per share. I just can't express enough my pride in the team. I would just say that our results this quarter, once again reaffirmed the value of the passion, discipline, and agility of our entrepreneurial organization as we continue to drive superior performance. Now, as we announced in mid-August, we're very excited that we signed a definitive agreement to acquire Trexan for approximately $1 billion in cash. Trexan is a leading provider of high-reliability interconnect and cable assemblies, primarily for the defense market, and expects to generate 2025 sales in EBITDA of approximately $290 million and 26%, respectively. We're very excited about the incremental potential that Trexan capabilities will bring to Amphenol, and we look forward to welcoming the entire Trexan team to the Amphenol family. We continue to expect this acquisition to close by the end of the fourth quarter. We're pleased as well to announce that we closed on the acquisition of Rochester Sensors earlier in the third quarter. Based in the Dallas, Texas area and with annual sales of approximately $100 million, Rochester is a leading manufacturer of highly engineered, application-specific, liquid level sensors for the industrial market, with a particular focus on propane, heavy vehicle, and refrigeration. The company has a strong and long-respected brand in the sensor industry, and no doubt will be a great complement to our already broad sensor offering. In addition, we remain excited about the pending acquisition of the business from Commscope. Given our good progress on the path towards closing, we now expect to close CCX by the end of the first quarter of 2026. About a quarter sooner than originally anticipated. We remain confident that our acquisition program will continue to create great value for Amphenol. In fact, as our ability to identify and execute upon acquisitions and then to successfully bring these new companies into the Amphenol family, that remains a core competitive advantage for the company. Now, turning to our trends across our served end markets, I would just note that we continue to be very pleased that the company's end market exposure remains diversified, balanced, and broad. This diversification continues to create great value for the company, enabling us to participate across all areas of the global electronics industry while not being disproportionately exposed to the volatility of any given market or application. The defense market represented 9% of our sales in the quarter, and sales grew from prior year by a strong 29% in US dollars and 23% organically. And this is really driven by robust growth across virtually all segments of the defense market, with the contributions in particular related to space, naval communications, and ground vehicle applications. Sequentially, our sales grew by 8%, which was higher than our expectations coming into the quarter. And looking into the fourth quarter, we expect a mid-single-digit increase in sales from these already lofty third quarter levels. And for the full year 2025, we expect sales to increase by more than 25%. I would just note that this outlook does not include any impact from the Trexan acquisition. We remain encouraged by the company's leading position in the Defense Interconnect market, where we offer the industry's widest range of high-technology products. Amidst the current dynamic geopolitical environment, countries around the world continue to expand their investments into both current and next-generation defense technologies. With our existing offerings as well as the complementary capabilities that Trexan will bring, we're positioned better than ever to capitalize on this long-term demand trend. The commercial aerospace market represented 5% of our sales in the quarter. Sales increased by 17% from prior year and 16% organically, as we benefited from increasing production levels of our customers together with our continued progress in expanding our content on next-generation commercial aircraft. Sequentially, our sales grew by 7% from the second quarter, which was better than our expectations coming into the quarter. Now, looking into the fourth quarter, we expect a mid-single-digit sales increase from these third quarter levels. And for the full year 2025, we expect sales to increase in the high 30% range from last year, helped by the acquisition of Sit back in 2024. I'm truly proud of our team working in the commercial air market. With the ongoing growth and demand for jetliners, our efforts to expand our product offering, both organically and through our acquisition program, continue to pay real dividends. In particular, I just want to mention that we're very pleased with the progress of the Sit team, who's now completed more than a full year as part of the Amphenol family. We look forward to further capitalizing on our expanded range of product solutions for the commercial air market long into the future. The industrial market represented 18% of our sales in the quarter, and sales in this market grew by 21% in US dollars and 11% organically. And that was really driven by organic growth in all three geographies. In particular, our organic growth was driven by strong performance in factory automation, medical instrumentation, industrial electric vehicles, and our heavy equipment segments. On a sequential basis, sales grew by 5% from the second quarter, which was better than our expectations coming into the quarter. As we look into the fourth quarter, we expect sales to moderate slightly from these third quarter levels. And for the full year 2025, we expect our sales to grow by approximately 20%, reflecting both strong organic growth as well as the benefit of acquisitions. We remain encouraged by the company's strength across the many diversified segments of this important market. As demand continues to recover, I'm confident in our long-term strategy to expand our high-technology, interconnect, antenna, and sensor offering, both organically as well as through complementary acquisitions. Indeed, with the acquisition of Rochester Sensors, we have further broadened our sensor offering for the industrial market, and that strategy has really enabled Amphenol to capitalize on the many electronic revolutions that are taking place across the diversified industrial market, thereby creating continued opportunities for our outstanding team working in this important area. The automotive market represented 14% of our sales in the quarter, and sales in the third quarter grew by 13% in US dollars and 12% organically, as we once again drove growth in all regions. Sequentially, our sales grew by 8% from the second quarter, which was actually much better than our expectations coming into the quarter. And that really reflected the ability of our team to quickly execute on a wide range of opportunities around the world. For the fourth quarter, we expect a moderate sales decline from these third quarter levels. And for the full year 2025, we expect sales to increase in the mid to high single-digit range from 2024. I remain very proud of our team working in this important market. And you know well, there are no doubt many areas of uncertainty in the global automotive market. Our team continues to be focused on driving new design wins with customers who are implementing a wide array of new technologies into their vehicles. We look forward to benefiting from our strengthened position in the automotive market for many years to come. The communications networks market represented 11% of our sales in the quarter. Sales grew from prior year by 165% in US dollars and a strong 25% organically, as we benefited from the Andrew acquisition that we completed earlier this year, as well as from increased spending by both communications network operators and equipment manufacturers. Sequentially, our sales grew by 8% from the second quarter, which was better than our expectation for sales to remain flat. As we look into the fourth quarter, we do expect sales to decline in the low teens range on normal seasonality, and for the full year 2025, we expect more than 130% growth, driven by the acquisition of Andrew, together with robust organic growth. With our expanded range of technology offerings following the acquisition of Andrew earlier this year, we were well positioned with both service provider and OEM customers across the global communications networks market. Our deep and broad range of products, coupled with an expansive manufacturing footprint, have positioned us to better support customers around the world. And as those customers continue to drive their systems to higher levels of performance, we look forward to enabling these important networks for many years to come. The mobile device market represented 6% of our sales in the quarter, and sales moderated by 3% in US dollars and organically, as growth in wearables, as well as basically flat sales, enhanced year over year, was more than offset by moderations in sales related to laptops and tablets. Sequentially, our sales did grow by 18% from the second quarter, which was much better than our expectations coming into the third quarter. As we look into the fourth quarter, we expect sales to increase modestly from these levels, and for the full year 2025, we expect sales to grow in the low single-digit range compared to 2024. I remain very proud of our team working in the always dynamic mobile devices market, as their agility and reactivity have once again enabled us to capture incremental sales in the quarter. I'm confident that with our leading array of antennas, interconnect product, and mechanisms designed in across a broad range of next-generation mobile devices, we're well positioned for the long term. And finally, the IT Datacom market represented 37% of our sales in the quarter. Sales in the quarter grew by a very strong 128% in US dollars and organically, and that was driven by the continued acceleration in demand for our products used in artificial intelligence applications, together with continued robust growth in our base IT Datacom business. I'm really proud of our team's outstanding execution here in the third quarter, as we were once again able to significantly outperform our expectations in this very exciting market. On a sequential basis, sales increased by 13% from the second quarter, and that was substantially better than our expectation for mid to high single-digit decline. This outperformance is actually driven both by sales of AI-related products, as well as by growth in our base IT Datacom business. As we look towards the fourth quarter, we expect sales to increase slightly from these very strong third quarter levels. And for the full year of 2025, we expect our IT Datacom sales to more than double compared to the prior year. We are more than ever encouraged by the company's position in the global IT Datacom market. There's no doubt that our team has done an outstanding job securing future business on next-generation systems with a broad array of customers. The revolution in AI continues to create a unique opportunity for Amphenol. Given our leading high-speed and power interconnect products, whether high-speed, power, or fiber optic interconnects, our products are critical components in these next-generation systems, and that creates a continued long-term growth opportunity for the company. Turning to our outlook, and obviously assuming the continuation of current market conditions as well as constant exchange rates for the fourth quarter, we now expect sales in the range of $6 billion to $6.1 billion, and adjusted diluted EPS in the range of $0.89 to $0.91. This would represent a sales increase of 39 to 41%, and an adjusted diluted EPS increase of 62 to 65%, compared to the prior year fourth quarter. Our fourth quarter guidance also represents an expectation for full-year sales of $22.660 billion to $22.760 billion, and full-year adjusted diluted EPS of $3.26 to $3.28. This outlook represents full-year sales and adjusted EPS increases of 49 to 50% and 72 to 74%, respectively. There's no doubt that 2025 has been a very strong year for Amphenol thus far. I remain confident in the ability of our outstanding management team to adapt to the many opportunities and challenges in the current environment and to thereby continue to grow our market position, all while driving sustainable and strong profitability through this year and into the long term. Finally, I'd like to take this opportunity once again to thank our entire global team for what were truly incredible efforts here in the third quarter. They worked unbelievably hard to deliver this level of growth and performance, and I'm truly grateful to each and every one of them. And with that, operator, we'd be very happy to take any questions that there may be. Operator: Thank you, Mr. Norwitt. The question and answer period will now begin. Please limit to one question per caller. To ask a question, please press star followed by one on your telephone keypad now. If you change your mind, please press star followed by two. When preparing to ask your question, please ensure your device is unmuted locally. We have a question from Steven Fox from Fox Advisors. Please go ahead. Steven Fox: Hi. Hi. Good afternoon. Thanks for taking my question. As you guys mentioned, your margins are quite impressive. Another record. I was wondering if you could zero in on the incrementals a little bit from two aspects. One is the harsh environment and communications incrementals were 40%. Obviously, volumes are helping, but what else is helping produce that? And then secondly, it seems like you mentioned, Adam, there's a lot of product complexity. We just saw, you know, a lot of your products at OCP last week. How does that either help or make it harder to deliver like these types of incrementals as you get into next-generation data centers, aerospace, things like that? Thank you. Adam Norwitt: Thanks, Steve. Yeah, no, listen, we're super proud, obviously, of our results this quarter and specifically the profitability we were able to achieve here in the third quarter after coming off of a really strong quarter, actually in the second quarter, you know, at 25.6. So, you know, the 27.5% profitability for the company is something that certainly will take a lot of work. And I think really is driven by, you know, certainly a few factors. Number one, you know, obviously we're growing quickly. We had a really great quarter from a growth perspective. And we're continuing to execute in order to leverage that into strong profitability. And I think that's what you saw in the quarter. You know, and, you know, and the other part of it is our acquisitions also are doing really well. I mean, you mentioned the segment. I mean, that's kind of where the CET business sits. And I would tell you that business is performing very well. And certainly as contributing to the margins and the conversion margin that you just mentioned in your question. So, you know, I think the overall profitability of the company is kind of hitting on all cylinders. You know, it's the execution, you know, related to the growth of the company in addition to acquisitions that we're starting to see real progress on from a profitability perspective. So, you know, these are things that, you know, certainly proud of. I think that, you know, certainly the value we're adding to our customers, the technology that we're bringing to the table here is being reflected in these margins. And that's, you know, that's kind of the results you're seeing here. And these really great results. Yeah. Well, thank you, Craig and Steve, thank you for the question. And thanks for stopping by the booth at OCP. We really appreciate that. Look, you saw a slice of our products there, which certainly reflect an increasing complexity primarily related to the IT Datacom market. And there's no doubt that as interconnect products have become more fundamental to the performance of the systems, the networks into which they are incorporated, there is more being demanded of those products. They become more complex. Whether those are higher speed products, whether those are high power products. And to make those products, to design those products, to innovate around those products, to develop the manufacturing processes, to make these and to ramp those products up at scale and at the speed that our customers and the market would like to have. This is not a trivial task whatsoever. And I'm just so proud of our team for really working over many, many years to build the fundamental building blocks that have ultimately allowed us to be so successful. But I would also say this, it's not confined to that market. We see interconnect products across all of our end markets, becoming increasingly high technology, having increasing complexity around them, whether you're talking about in the defense market, in commercial air, where we can now offer a broader suite of value-add interconnect products to our customers, in part because of the Sit acquisition and what that brought. If you look at the Trexan acquisition that we announced this quarter, which brings us into even more advanced complex interconnect assemblies for customers in the defense market. We see that across the industrial market as well, the automotive market, and certainly in the communications networks, with the complexity of the products, the antenna products, the interconnect products that came along with the Andrew acquisition, I would tell you that today, more than ever before, customers recognize the importance they rely upon the technology value of interconnect products, and they represent a bigger hurdle for many of our customers, one that we can solve. You know, you asked, interestingly, that question around margin at this out of the same breath as that question around product complexity. And I don't think the two are unrelated. Yes, it's hard to do that. But if you are creating more value for your customers through the technology of your product, by creating that value, then maybe those customers will be willing to share some small part of that value also with you that's embedded in that complex technology of the products. And I think that's something that Amphenol, that we certainly, as a company, are seeing more of today than ever before. Operator: Thank you. Our next question goes to the line of Amit Daryanani with Evercore. Please proceed. Amit Daryanani: Yep. Good afternoon, everyone. Thanks for taking my question. Yeah. Adam, last quarter, I think, you know, we talked about about $150 million of AI performance in the June quarter was driven by out execution. And that resulted in, I think, initially guiding it. Datacom revenues down mid-single digits or so. As you think of the better performance you just had in that segment, I think you folks, it's up 13%. How much of that do you think was driven by the traditional IT Datacom markets doing well versus AI? If there's a way to parse that out, it would be really helpful. And then how do you feel about the broader inventory levels in the AI ecosystem as you wrap this year? Get into calendar 26. Thank you. Adam Norwitt: Well, thank you very much, I appreciate the question. And look, I think if you think about our performance in the third quarter, I'd say it's pretty balanced. I mean, I can't get super granular about this. You never know on the exactly the margins of what product does it exactly go into. But I would say our impression is that it's pretty balanced. Our upside in the quarter between AI related and then more traditional Datacom. And look, relative to inventory. What we don't see any signs of anything abnormal. And there's no doubt, you know, in the third quarter we obviously beat our expectations. And there's there was clearly more demand from our customers. And we were able to satisfy that demand. And so even though we came out of the second quarter with, as you talked about it, maybe shipping a little bit ahead to what our customer demand was anticipated, the demand got better here in the third quarter. And our team was able to flex to really react to that. Both on the AI as well as the more traditional IT Datacom side. Operator: Thank you. Our next question goes to the line of Guy Hardwick from Barclays Capital. You may proceed. Guy Hardwick: Hi. Good afternoon, Adam and team. Obviously with so much of the incremental growth coming from AR, it Datacom, it's natural for investors to kind of fret on about major architectures in AI. Can you kind of allay any concerns about Amphenol content on, say, the the Khyber architecture due to coming 2027 versus the Oberon architecture? Adam Norwitt: Yeah. Thanks very much, Guy. Look, I'm not going to talk about specific customers and specific architectures. There's a lot of different design activity going on. And what I can tell you is this, you know why we have been so successful in establishing ourselves as a leader in this unique and high-value architecture of interconnect products in accelerated compute AI, machine learning, whatever you want to term it is a very long-term, multi-decade build-up of our capabilities on high-speed and also power products, and then also commensurate with that building up the capabilities to make these advanced products and to ramp those products up when our customers need them. And those capabilities have enabled us to continue to win with customers up and down the stack of the AI ecosystem. And, you know, people want to talk about one or another platform, but you know that there are lots of things going on in AI. We treasure our relationships with each of those customers, and we work directly with customers up and down the stack from the folks who are really the service providers, all the way down through the equipment manufacturers, the data center builders, and down through to the folks who are designing and specifying the chip-based architecture. And I can tell you that we have a strong position today, and we have a strong position in future platforms really up and down that stack. Operator: Thank you. Our next question comes from the line of Luke Junk from Baird. You may proceed. Luke Junk: Good afternoon. Thanks for taking the question. Maybe a simple question, but more complex answer. I'm just wondering how you think about book to Bill at this level of growth. I mean, it just seems like at these levels, maybe that becomes a less meaningful metric to look at. And also, I think some of your sales are shorter term in nature, especially in IT. Datacom. Just how that's impacting the book to bill measure as well. Thank you. Adam Norwitt: Well, thanks, Luke. Actually, it's a very good question. And I think you're kind of spot on like with these growth levels, the fact that our bookings grew also in the quarter on a year-over-year basis by 38%, and that we had so much upside in the quarter in terms of our revenues to what our expectation. And yet we still manage to have a book to bill that was really just under one. I think it rounds to 0.99. But I mean, more than $6.1 billion in orders in the quarter. I would say that when we were in the earlier part of the ramp-up of, in particular, this ramp-up related to IT Datacom and specifically related to AI. There's no doubt that our book to bill was a very strong book to Bill in particular because we were making a lot of significant investments, and it was very much on the. Com and our customers, you know, wanted to give us the confidence that we would make those various investments. Now, look, I can't tell you what the cadence of bookings will be. You know, here in the fourth quarter. We don't give guidance for bookings for that reason, it's very hard to tell. Maybe, maybe it'll be above one or below one. And we shall see. You know, is it a shorter cycle? What I would say about this, IT Datacom specifically is there's no question that as we've gone through this cycle of the build-out and the ramp-up, our lead times have certainly come down relative to what they were early on as we were building out the capacity. And as your lead times come down, that naturally has an impact on your book to bill. And it's a slightly shorter cycle. And so I think that's not also totally far off base either, Luke. Operator: Thank you. Our next question comes from the line of Samik Chatterjee from JP Morgan. You may proceed. Samik Chatterjee: Oh, great. Hi, thanks for taking my question. Maybe just putting IT Datacom aside, the recovery and the strong organic growth that you had in the other end markets as well, like industrial communication networks, like really strong growth in all of them. Maybe one, how are you sort of overall looking at the landscape right into 90 days ago? Have things in those underlying markets improved and then what is the visibility? I get that maybe book to bill is in the best metric to look at for IT Datacom. But what is the visibility of the book to bill in those end markets, giving you in relation to future demand? Is the visibility improving with the book to bill numbers as well? Thank you. Adam Norwitt: Yeah. No, thank you very much. I mean, look, it's hard to say that we don't have a more positive view today than we would have had 90 days ago. Really broadly across the company with the performance that we had here in the quarter. I mean, growing sequentially as we did by 10%, is really, you know, an outstanding performance. Especially compared to what our expectations were coming into the quarter. And if you look at our performance across really all of our end markets with the small exception of mobile devices, which was slightly down year over year, all of our end markets were up in double digits organically. And honestly, if you even took IT Datacom totally out of our performance in the quarter, we would have organic growth in the mid-teens levels, which to me sounds like pretty good performance. And so there's no doubt that we feel, you know, incrementally positive on the overall landscape in terms of books to book to. Bill's in the other markets. I mean, I would say that, you know, we had some favorable book to bills in particular. I would say, like defense. We have pretty strong book to bill in that market. I'd say others are, you know, plus or minus, but certainly not negative. And so I think we feel incrementally encouraged and that, you know, ultimately goes into our expectations where we look next quarter, for example, in the defense market, commercial air market, those two in particular to be up kind of, you know, in the mid-single digits on a sequential basis, which is a very strong finish for each of those areas. Operator: Thank you. Our next question comes from the line of Mark Delaney from Goldman Sachs. You may proceed. Mark Delaney: Yes. Good afternoon, and thank you very much for taking my question. Adam, you mentioned the company saw better than expected strength in the auto market in the third quarter, and you spoke to some of that being a function of Amphenol executing well against opportunities that came up in the quarter. Could you speak a bit more on what some of those opportunities were? And what was supporting that strength that the company saw in 3Q and then maybe just give a bit more color on what you're seeing in the auto market for the fourth quarter, please. Thanks. Adam Norwitt: Well, thanks very much, Mark. I mean, look, I think our team did well on a global basis in automotive in the third quarter. I mean, growing really sequentially in all regions, growing pretty strongly in all regions on a year-over-year basis, including, by the way, we saw double-digit organic growth in Europe. Which is maybe not what one reads in the papers every day. And so we feel really good about the performance. And I'm really pleased with our team there. And, you know, look, there's a lot of moving pieces in automotive right now. You hear about lots of different things, you know, different government policies impacting certain automotive demand. You hear about different supply chain things going on plus or minus. In that area. And you know, so as we look into the fourth quarter, taking all of that into account, you know, we expect it, you know, sort of modest sequential reduction here in the fourth quarter, which is not totally abnormal. You know, sometimes we'll see that in a fourth quarter for automotive. But our position is really strong. And in addition, I would tell you that we're really pleased to see, you know, a kind of growth in that market in new kind of platforms. You know, EVs where we've had strong performance in our automotive last quarter. But also in traditional and hybrid vehicles around the world. And so I think it's a pretty broad-based, positive view that we had, which I think does contrast with maybe some of the more cloudy things you read about every day in the paper. But I tried not to read all these cloudy things too often. Operator: Thank you. Our next question goes to the line of Andrew Buscaglia with BNP Paribas. Andrew, your line is open. Andrew Buscaglia: Hey, good morning, everyone. Adam Norwitt: Morning, Andrew or good afternoon, I should. Andrew Buscaglia: Say. Yeah. Good afternoon. Yeah, I want to check on your margins have been great. And you're talking about this kind of higher incremental margin shift. But yet your guidance to get to the midpoint of your guidance, it does imply margins would step down. If you look historically, usually they're flat or up, you know, from Q3. And I'm just wondering are there some dynamics in there that are causing that or anything you want to call out? You know, ahead of that. Craig Lampo: Yeah. Thanks a lot, Andrew. Yeah. No, listen, you know, our fourth quarter kind of guidance here certainly I think is actually very strong both from a top line and the bottom line perspective. I mean, we're guiding down slightly our margins in the fourth quarter kind of implied are slightly down. But also revenue is slightly down. And we're talking about, you know, not a significant I think a 2% I think on the high end sequential decline. So I guess I wouldn't call out anything too specific. I mean, the reality is that these at these revenue levels, that these growth levels, I mean, there will be some variability in margins. And we're going to, you know, I think we talked about our 30% kind of conversion, you know, or approaching 30 on the growth. And I would think on, on the, you know, when we have some declines, you're going to see a little bit higher conversion on the decline. And you would typically see at these margin levels that we're at. But so I wouldn't call anything out too specifically. I mean, we are, as I've mentioned before, adding some level of cost, you know, kind of given the significant growth we've seen in the inability to necessarily add some cost as quick as you can when you're growing kind of 40% organically or 41% in this quarter. So I would say maybe that's having a slight impact, but maybe I would say modest, but I mean, this implied margins, I think still would be close to 27%. So I mean, this is not a significant drop in margin. And I think this is still a very good overall profitability for the company. And certainly we believe sustainable. And, you know, as we continue to grow and but there will be some level of variability for sure. Operator: Thank you. Our next question comes from the line of Wamsi Mohan from Bank of America. You may proceed. Wamsi Mohan: Yes. Thank you so much. Adam, can you talk a little bit about the opportunity that you see on the power side as these AI data centers and standing up racks that are consuming maybe 2 to 3x of 100 kilowatt rack, which itself used to be a lot lower just a year ago. And maybe you can just address some of the products that are driving that opportunity for you. And if I could, Craig, could you just talk about the CapEx trajectory? It was slightly down quarter on quarter. I think you'd expected it to be flat. How should we think about the trajectory from here? Thank you so much. Craig Lampo: We spent I would say we spent in the range of what we expected to spend in the quarter. I mean, there's no precision around exactly what you're going to spend in the quarter. We expected kind of in the ballpark of what we had in the second quarter. And we were, you know, slightly under that. But I think still kind of roughly where we expect it to be. I think we hadn't really I haven't mentioned the fourth quarter. I mean, I guess I would expect kind of to be in a similar range, maybe slightly higher than we were in the third quarter and the fourth. But, I mean, these are given the level of growth we've had, given the revenue that we've had, we're kind of growing into our capital spending right now. Which we would expect to do. And that's certainly, you know, so we're closer to kind of again, the higher upper end of that kind of 4% kind of target that we would typically have. And that's what we did here in the third quarter. And I kind of would expect it, you know, roughly in that range, kind of as we move forward, certainly into the fourth quarter here. Adam Norwitt: Yeah. And look, relative to power, I mean, look, power is a big story here. I'm not saying anything. None of any of you don't know. But there's no doubt that power in these next-generation architectures is a really fundamental part of the operating of the systems. And we've been involved in power connectors essentially since the birth of the company. If you think about our legacy back into military and industrial high power, high voltage, I mean, we've been making interconnect products related to really high power consumption systems for most of the modern history of Amphenol, which means that we have dialed in the knowledge of what it means to be handling so much power. The safety, the efficiency, the throughput of the power. You know, this concept of millivolt drop and all of that that goes along with it. And so, you know, we're involved in a very complex way across a lot of different interconnect products, complex interconnect assemblies, Busbars board level interconnect, bringing power, you know, as soon as the power gets to the side of a building, you know, we're helping it get all the way around there all the way until it gets to the board of the chips. I mean, as you mentioned, AI is only going to increase in the needs of power. And I have to say, you know, I use these tools probably more than most. I am just dived in head and shoulders into using AI. And I will admit that once in a while when I'm doing something pretty complex and it's waiting a little bit, I get a little pang of guilt that I might be using a little more power. I mean, I was making, you know, immunology models for my daughter who's studying for a test last night. And, you know, I see the little thing thinking and know that, you know, that's probably burning a few light bulbs of power while doing that. And I think our job at Amphenol, our job at Amphenol to do this is to make sure that as little as possible of that energy that comes in the building is lost through the interconnect products that ultimately our products are the most efficient and the safest. So that the maximum amount of electrons can make their way to where they need to go, which is to the GPUs and to the associated things that go on these systems. And if we can do a good job at doing that, we're pretty good at doing that. We've been developing that skill for many decades. You know, our customers are going to keep relying on us to support them. And I'm really proud of what our team has done here. And, you know, I look forward to more opportunities related to power in the future. Operator: Thank you. Our next question comes from the line of Asiya Merchant from Citigroup. You may proceed. Asiya Merchant: Great. Thank you very much. Great results here. If I may, Adam, I know you talked a lot about, you know, how the interconnects are now creating more value. And I think it's pretty well understood on the AI side. But I do get questions from investors on, you know, the other end markets, you know, where is that extra value that is being created that can sustain the incremental margins that you're talking about and sort of related to that? You know, how do you think about the competitive dynamics now? You know, what, whether it's within the IT Datacom or outside within the other end markets, that you participate in? Thank you. Adam Norwitt: Well, thank you very much, Asiya. And I hopefully I pronounce your name correctly. There. Sorry about that. Look, there's no doubt that as I mentioned earlier, we see interconnect becoming increasingly embedded with more technology. Increasingly complex and thereby increasingly creating value for our customers across the entire gamut of this wonderful array of markets that we serve. And, you know, how is that happening and why is that happening? It gets to just the intensity of electronics that our customers are embedding in their products to create more functionality, more value for the end customers. Everything from a combine that is cutting down soybeans or corn in the Midwest. Now operating as an autonomous vehicle where one driver can drive five of these massive farming machines, as opposed to having to have five drivers to do that. Mining equipment. The same, you know, with autonomy, with hybridization of the drive trains across the defense industry. I mean, we just see so much more complex adoption of electronics that thereby then requires a more complex interconnect system. The density, the number of different nodes, the sensors that and the processes that are being associated therewith. All of this adds up together to create a complexity and a need, and ultimately an opportunity for us to create value for our customers. Now, look, we have a lot of competition. To your second question, and everywhere that we operate, and it's up to us to create a sustainable advantage for our company through our technology. Number one, through our capability and capacity to build that technology. Number two, and then ultimately through our agility, reactivity, and speed. And that last piece of it, that last piece of it comes from that unique culture that I talked till I'm blue in the face about because it ultimately is the nucleus of what makes this company successful. And so we will always have competition, and we respect those competitors. And there's some wonderful companies, large, medium, and small around the world with whom we have really wonderful competition. But at the end of the day, if we can develop a better product, if we can build that product at scale and if we can do that in an agile, fast, and flexible fashion, I believe that we'll continue to be able to win more than our fair share and thereby be able to outperform the market. We've done that for more than a quarter century, and I have a lot of confidence that we will be able to do that for many years to come. Operator: Thank you. Our next question comes from the line of Joe Spak from UBS. You may proceed. Joe Spak: Thanks. Good afternoon. I just want to go back to some of the incremental margin commentary from before, particularly by segments, because I understand growth's really the largest driver here, but is there anything structural between the segments that we think can impact incremental margins, like, you know, if you look at com services and harsh environments, you know, similar incrementals quarter, but you know, Com services grew three times as fast as harsh. So is there some more investment that's needed there. And then, you know, if we think about the interconnect and sensor. Segment, is there anything that ultimately preventing that segment from also hitting, you know, 30% plus incrementals if they achieve. Faster growth? Thanks. Craig Lampo: Yeah, thanks for the question. I mean, I think the short answer is I don't think there's anything structural in any of the segments that's limiting them from or enhancing their, their profitability. I mean, there's no doubt that the segment has had a significant amount of growth. And when we talk about kind of adding cost to support, kind of 40% plus organic growth, we're talking about also adding costs of support. I think the 74% organic growth or whatever they had in the quarter. So certainly there's some of that kind of in that segment that maybe is more than some other segments in terms of adding some of those costs that will catch up a little bit over time. But these are modest amounts. These aren't things that are going to have a super meaningful impact on overall, the overall profitability of segment or on the company. I mean, I think, you know, all of the segments have the ability to, you know, grow, continue to grow their margins and continue to expand over time. I mean, I'm actually I say I would say I'm particularly proud of this quarter, you know, achieving 20%, you know, profitability, operating margins in the quarter. I mean, just outstanding, you know, performance by that, by that segment. And actually they did achieve, I believe sequentially about 30% conversion margin. You know, in that segment. So they absolutely have the capability and the opportunity to continue to do that. I think, you know, in the future. So I would say all three of our segments have the opportunity to continue to expand margins. And, you know, certainly the level of growth that, you know, each of those have will have some impact on the margin expansion. But overall, I think this 30% kind of, you know, targeted long-term target we have here as we kind of come down to normal levels of growth over time, I think we're doing much better than that right now. Is something that, you know, all of them will contribute to. Operator: Thank you. Our next question comes from the line of William Stein from Truist Securities. You may proceed. William Stein: Great. Thanks for taking my question and congrats on the great quarter and outlook. Adam, in the last couple of meetings, we had you discussed incremental automation that you're doing in the IT Datacom business. I think you noted that it helps you meet high product performance requirements, high quality standards. I think you talked also about time to market and time to volume. Maybe that even helps your print position with customers overall. But I'd love to hear any further clarification on that effort. Especially if there's anything afoot to extend what you're doing there beyond the IT Datacom end market, which is where it came up. Thank you. Adam Norwitt: Well, thanks very much, Will. And thanks for your kind comments. Yeah, we did talk about this and I think I mentioned this in the past in our quarterly calls that when I think about the building blocks of our success, I mentioned, you know, it's about having a great product and building the fundamental engineering elements, the technology elements that go into those products. But then it's about how do you make those products at volume, at quality and ramp those in a time that's expeditious and especially in this kind of, you know, hyper speed, speed of light kind of world that we are in right now. And over the last, you know, I don't know, ten, 15 years plus, you know, we've been kind of around in our sort of typical Amphenol, decentralized way, developing an enormous amount of in-house capabilities related to automation. And I wouldn't even say that those capabilities started out necessarily related to IT Datacom. I mean, we were doing a lot of automation in our mobile business and others. But no question that as we design these next-generation products as the product life cycle shortened, it became imperative that we have our own capabilities to automate so that we could do that automation in lockstep with the product design and validation, as opposed to design and validate a product, then go outside and ask someone to make an automation machine for you, which could take another year plus. And then at the end of the day, it comes back and it's not what you wanted. And so working hand in hand between our design engineers, our automation engineers has allowed us to really shorten that cycle. And it has allowed us to make sure that when you have these products that are operating at the highest levels of performance, high speed, for example, you know that those products are so sensitive. There's such a delicacy and a precision to those products that really they need to be automated in order to ensure that the good performance of the product. Now, in terms of going beyond it, I mean, we've been doing this for a long time as well. I mean, as entrepreneurial and decentralized as we are, we also talk about the company as being collaborative entrepreneurship. And there's been an enormous amount of collaboration, unstructured, not incented in any funny way. It's not like some matrix structure of an automation corporate team or anything like that, but there's a really organic kind of efforts around the company to work with each other to see where automation really makes sense. And I would tell you that in every one of our end markets as products get more complex as, as sort of the, the sort of cost environment changes as, as the trade environment changes, whatever. I mean, we are adopting automation in places where it really makes sense now, are we just saying, you know, from above, thou shalt automate everything? Absolutely not. I mean, this is a decision left to our general managers who know their products, who know what their customers need, who know where they make the products, who know the life cycles and who ultimately own the financial, the financial assets that they're creating when they make these automation. And having that push down to 140, general managers. But enabling that through the collaboration across the company has been a really good recipe. And so we see a lot of automation around the company, but it's reasonable automation. It's homegrown automation, it's lower cost automation. And thereby allows us kind of to have our cake and eat it too. In terms of the flexibility and the low cost of the company. Operator: Thank you. Our next question comes from the line of Joseph Giordano from TD Cowen. You may proceed. Michael: Good afternoon. Thanks for taking my question. This is Michael on for Joe. Adam Norwitt: Hi, Michael. Michael: You mentioned earlier. Thank you. You mentioned earlier strong year-over-year and sequential performance on the commercial aero side. And I mentioned some potential for like content or share gains in that area. Do you mind just diving through the different parts of Aero or the applications that are related to some of those content gains or share gains? Thank you. Adam Norwitt: Well, thank you very much. Look, we're really pleased with our commercial air business and in particular, you know, the, the, the really quantum increase in the breadth of our products that came from the Sit acquisition a year ago. And so, you know, as we, as we have conversations with customers around the global commercial air market, you can imagine we're having conversations at every part of the plane where there's electronics. And today, you know, there's very few parts of a big airplane that don't have some degree of electronics from, from the engines to the avionics to the entertainment systems, cabin management systems, safety systems, you know, the all the way to something as mundane as, like a coffee maker or a laboratory. These things all have now electronics on them. And with Sit joining Amphenol, together with our interconnect, our, our, our wonderful value add business that we already had the connector products, the cable and wire products that Sit brings and very complex interconnect assemblies as well that we can now do together with them. You know, we really have the broadest product offering of interconnect products for the commercial air market at a time when you know that technology and the push of electronics into planes continues to grow. And so I think that just puts us in a very strong position. And in addition, I would tell you that our global footprint has been also a great asset because customers are very sensitive to making sure that you can support them around the world. And so now having even a broader footprint, again, with Sit and other steps that we've taken internally, you know, we have not only the right product, not only the right breadth of product, but also the right capability to make those products for our customers need them to be made. Operator: Thank you. Our last question will go to a line of Scott Graham from Seaport Research. Your line is open. Scott Graham: Hey. Good afternoon. Great quarter. Thanks for taking my question. Squeezing me in. So really, you've answered a lot of the questions I had around, you know, incremental margins. And their movement. I was just if you can just maybe flip the script a little bit and talk about acquisitions, you guys have obviously been very active the last couple of years. To the extent, that you're able to comment on perhaps what you're missing, you know, your wish list and does that wish list, perhaps include some of the end markets that you have? Kind of imported with new acquisitions, sort of either new or end markets that we've talked about with the deal flow or markets where you're already in, but you've really increased your critical mass in them with the deals. So could acquisitions be more tuned toward some of these newer verticals going forward? Adam Norwitt: Yeah. Well, thanks very much, Scott. Look, M&A is something near and dear to our heart. And there's no doubt that over the last three years, the company has made more acquisitions and also more fundamentally large acquisitions. And you know, I don't want to use the word transformative because none of these are at that level that you would say that's a merger of equals or anything like that. But we've clearly accelerated the expansion of our offering for our customers across our end markets. At the same time, even with the growth that we have had and the great array of wonderful new companies that we have brought into the Amphenol family, or we will soon bring into the Amphenol family in terms of those that haven't closed yet, like Intrexon, you know, there's a lot of opportunity in this industry. This is a highly fragmented industry. The interconnect industry is just such a wonderful place. When you think about the fact that interconnect products go into every place where you have electronics. I mean, we estimate it's a market of more than a quarter trillion dollars in size. And even with, you know, our relative growth this year, we still see a lot of room to grow, both organically as well as through our M&A program. And, you know, do I have a wish list of companies? You know, I'm certainly not going to articulate names of companies here. But I can tell you this. You know, we look at great companies across all of our end markets. We never put all our eggs in one basket. We don't chase a thing of the moment in M&A. We take a very, very long-term view of our acquisition program. We look for companies, we develop relationships with them. For many, many years. I mean, I have been developing certain relationships with companies since I was an intern in the company. 27 years ago. And, and we'll continue to do that. And my team will continue to do that. And we take a very, very long view on M&A, because at the end of the day, when we make an acquisition, it's for life. And we're not a trader. We're not buying and selling things all the time. You know, if it doesn't work out, we develop long-term relationships and then we're not chasing what's the right thing in the market at that moment. And I think that's been a great recipe for us for a long time. It's been a great return on the wonderful cash that we have generated. And it's one where we continue to see great potential for many years to come. Operator: Thank you. We currently have no further questions, so I'll hand back to Mr. Norwitt for closing remarks. Adam Norwitt: Great. Well, thank you very much. And thanks to all of you for spending a small part of your beautiful fall day with us. And we appreciate your interest in the company, and we look forward to getting back together with you. Amazing to say it in 2026. In just 90 days from now. Thanks, everybody. And we'll talk to you soon. Operator: Thank you. Bye bye. This concludes today's call. Thank you for joining. You may now disconnect your lines.
Operator: Good 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 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 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: 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, 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 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: 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 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: Good day, and welcome to the Northern Trust Corporation Third Quarter 2025 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Jennifer Childe, Director of Relations. Please go ahead. Jennifer Childe: Thank you, operator, and good morning, everyone. Welcome to Northern Trust Corporation's Third Quarter 2025 Earnings Conference Call. Joining me on our call this morning is Michael O’Grady, our Chairman and CEO; David W. Fox, our Chief Financial Officer; John Landers, our Controller; and Trace Stegeman from our Investor Relations team. Our Third Quarter Earnings Press Release and Financial Trends Report are both available on our website at northerntrust.com. Also on our website, you will find our Quarterly Earnings Review Presentation, which we will use to guide today's conference call. This October 22 call is being webcast live on northerntrust.com. The only authorized rebroadcast of this call is the replay that will be made available on our website through November 22. Northern Trust disclaims any continuing of the information provided in this call after today. Please refer to our Safe Harbor Statement regarding forward-looking statements in the back of the accompanying presentation, which will apply to our commentary on this call. During today's question and answer session, please limit your initial query to one question and one related follow-up. David W. Fox: This will allow us to move through the queue and enable as many people as possible the opportunity to ask questions as time permits. Thank you again for joining us today. Let me turn the call over to Michael O’Grady. Michael O’Grady: Thank you, Jennifer. Let me join in welcoming you to our Third Quarter 2025 Earnings Call. Our third quarter results underscore the momentum and disciplined execution of our One Northern Trust strategy. For the fifth consecutive quarter, we delivered positive organic growth and operating leverage, demonstrating our ability to capitalize on a constructive market environment while advancing our transformation agenda. Supported by favorable equity markets and well-managed expense growth, third quarter revenue increased 6%. Our pretax margin expanded by nearly 200 basis points, and our earnings per share grew 14%, each as compared to the prior year and excluding notable items. Return on equity reached 14.8%, and year to date, we have returned 110% of earnings to shareholders, contributing to a 5% decrease in shares outstanding. Our strategy is firmly rooted in our mission to be our clients' most trusted financial partner, powered by a culture of high performance. Our enterprise growth program is driving steady improvement in organic growth, particularly within private markets, where our integrated solutions are gaining traction across all business lines. The transition to a client-centric, capability-driven operating model is already yielding measurable productivity gains. For example, in our enterprise COO organization, we have created approximately 40 capability teams, moving thousands of people from regional reporting structures to global capability reporting lines. This has enabled us to create a baseline for improving resiliency, process efficiency, and quality. AI is rapidly becoming a catalyst for innovation and efficiency. Our early investments, inclusive of providing all employees with access to Copilot, are already generating measurable results. Across the organization, AI is embedded in more than 150 use cases, enabling teams to more efficiently service client requests, automate workflows, analyze data, and digitize documents, saving our partners tens of thousands of hours and allowing them to focus on higher value initiatives. As we continue to deploy AI across the company, we expect it to accelerate these improvements, driving greater efficiency, further bending the cost curve, and unlocking additional capacity for reinvestment in growth initiatives. Let me turn to our businesses, starting with wealth management. We advanced key strategic priorities in the third quarter, adding experienced leadership and strengthening our geographic strategy. Our value proposition continues to resonate most with the highest wealth tiers, driving elevated win rates and client retention. Our deep expertise, institutional-grade capabilities, and high-touch service culture position us to offer services across the entire continuum of family office structures, from the largest stand-alone single-family offices supported by our GFO business to virtual and outsourced solutions offered by our new Family Office Solutions Group. This offering for ultra-high-net-worth families is most mature in the Central Region, where robust demand has translated into several high-profile wins this quarter. Building on this momentum, we see significant runway for future growth as we replicate our playbook across other regions. Client appetite for alternative investments within wealth management is accelerating, fueling both innovation and adoption. We continue to expand the number of third-party fund offerings in the quarter and are on pace to more than double the number of funds we have had in market within a calendar year. This builds upon the substantial amount of alternative assets raised by 50 South Capital this year, with wealth and GFO clients making meaningful commitments. Notably, 50 South Capital introduced a feeder fund structure in the third quarter, giving wealth clients direct and exclusive access to top-tier alternatives managers. Overall, new business activity remains brisk, contributing to healthy growth in core advisory fees. However, this positive momentum has been tempered by ongoing challenges at the investment product level. Moving to asset management. In September, we announced the transition in leadership, appointing Mike Hundstedt, a 25-year industry veteran and proven leader within Northern Trust, as President of NTAM. Under his leadership, NTAM will continue its focus on strengthening foundational core capabilities, including liquidity, indexing, and quant equity, while accelerating growth across alternatives, custom SMAs, and our ETF platform. The third quarter was marked by product innovation, including the launch of 11 new ETF strategies, eight of which are industry-first fixed income distributing ladder ETFs, developed in collaboration with wealth management investment leaders to address the needs of taxable clients seeking more tax and cost-efficient cash flow management. Liquidity continues to be a standout area, with NTAM reporting its eleventh consecutive quarter of positive flows. We expanded our global money market fund platform in the quarter with the launch of a US dollar treasury liquidity strategy for European clients, building on the success of our onshore US treasury instrument strategy, which has already amassed more than $6 billion since its launch in June 2024. Beyond liquidity, we saw positive flows in ETFs and custom SMAs, both key areas of focus, and fixed income, including two large high-yield mandates. And finally, moving to asset servicing. Our Asset Servicing business delivered strong results this quarter, executing on a disciplined strategy centered on scalable growth across key focus areas, including large asset owners, capital markets, and alternatives. Success with large asset owner clients continued, with year-to-date revenue from front office solutions increasing materially relative to the prior year period. This growth was driven by the strategic appeal of our integrated product offering, differentiated service model, and ability to deliver meaningful efficiencies for clients. Notable third quarter custody and fund administration wins included the $14 billion Sacramento County Employees Retirement System, a $16 billion Atlanta-based private foundation, and the $19 billion New Mexico Educational Retirement Board. Not-for-profit health care was another highlight, with strong third quarter wins bringing our coverage to 75% of the nation's top 50 not-for-profit health care systems, a clear testament to our competitive positioning and deep commitment to the space. Capital markets activity remains strong, with more than 100 new clients added year to date, primarily through cross-sell, driving significant growth in core brokerage and FX trading. Capitalized businesses that carry highly attractive margins. Momentum in the alternative space also remained robust, with our hedge fund services and private capital practices generating double-digit year-over-year increases in both reported revenue and won but not funded business. This included continued success in the LTIP and LTAPH space, highlighted by a marquee win in The UK, extending our market-leading position in this attractive high-growth area. Our commitment to exceptional client service was recognized with the Best Administrator Overall Service Award at the US Hedge Fund Management Service Awards. We were also honored as Custodian of the Year by the European Pensions Awards, our third win in six years, further validating our leadership and reputation in the industry. Our disciplined strategy to drive scalable, profitable growth continues to yield tangible results. While recent wins may be smaller in scale compared to some of our prior asset manager mandates, they remain meaningfully accretive to pretax margins. We are also selectively allowing noncore and underperforming business to roll off as contracts expire. Therefore, we expect to see a continued gradual trajectory of margin improvement and overall growth. To wrap up, as we enter the fourth quarter, our foundation is strong and our momentum is unmistakable. Nearly two years into our One Northern Trust strategic journey, I am deeply encouraged by the progress we have made and grateful to my Northern Trust partners for their hard work and dedication. This decisive, collaborative spirit that defines our organization is unlocking new opportunities to accelerate execution and fully capitalize on our core strengths. Looking ahead, we remain laser-focused on the disciplined execution of our strategy, which is positioning us to deliver consistently strong financial performance and create enduring value for our stakeholders, regardless of the broader economic environment. And with that, I'll turn it over to Dave to review the financials. David W. Fox: Thanks, Mike. Let me join Jennifer and Mike in welcoming you to our Third Quarter 2025 Earnings Call. Let's discuss the financial results of the quarter starting on Page five. This morning, we reported third quarter net income of $458 million, earnings per share of $2.29, and our return on average common equity was 14.8%. Our third quarter results reflect another quarter of solid progress toward achieving our financial objectives and enhancing the durability of our financial model. We delivered positive operating leverage of 110 basis points, 120 basis points of year-over-year improvement in our expense to trust fee ratio, which was down to 112% in the third quarter, and returned nearly 100% of our earnings. Relative to the prior year, currency movements favorably impacted our revenue growth by approximately 50 basis points and unfavorably impacted our expense growth approximately 30 basis points. Relative to the prior period, currency movements were immaterial to both revenue and expense growth. Trust and investment and other servicing fees totaled $1.3 billion, a 3% sequential increase and a 6% increase compared to last year. Interest income on an FTE basis was $596 million, down 3% compared to the prior period and up 9% year to date from a year ago. Excluding notables in the prior year, other noninterest income was up 10% year over year, largely reflecting stronger capital markets activities, particularly securities commissions and trading, and FX trading income, reflecting our focus on driving growth in these areas. Our assets under custody and administration were up 1% sequentially and up 5% compared to the prior year. Our assets under management were up 4% sequentially and up 9% year over year. Overall, our credit quality remains very strong, with all key credit metrics in line with historical standards. We recorded a $17 million release of the credit reserve in the third quarter, largely reflecting changes in macroeconomic projections. On a year-to-date basis, our provision remained essentially unchanged. Our effective tax rate was 26.1% in the third quarter, up 70 basis points over the prior period's rate as a result of higher tax impacts from international operations. Expect the full year's effective tax rate to be in line with the year-to-date effective rate. Relative to the prior year period and excluding notable items, revenue was up 6%, expenses were up 4.7%, our pretax margin was up 200 basis points, earnings per share increased 14%, and our average shares outstanding decreased by 5%. Turning to our wealth management business on page six. Wealth management had a healthy quarter with particular strength in the regions. Assets under management for our wealth management clients were $493 billion at quarter end, up 11% year over year. Trust investment other servicing fees for wealth management clients were $559 million, up 5% year over year, primarily due to strong equity markets. Trust fees within the regions were up 7% year over year and are up 6% year to date, with strength mostly attributable to favorable equity markets. Within 1% year over year and are up 5% year to date. Sequentially, GFO growth was muted by a combination of asset allocation changes and portfolio restructurings. Importantly, the underlying business remains very healthy. We generated positive flows of $2 billion in September alone, and new businesses on pace to break last year's record levels. Average wealth management deposits were flat, and average loans were up 2%, both relative to the second quarter. Wealth Management's pretax profit increased 11% over the prior year period, and the pretax margin expanded 250 basis points to 40.5%. Moving to asset servicing results on page seven. Our Asset Servicing business delivered another strong quarter. As expected, transaction volumes normalized from elevated second quarter levels. Capital markets activities remained robust, on pace to beat 2024's record levels, and new business generation continues to be healthy and margin accretive. Assets under custody and administration for asset servicing clients were $17 trillion at quarter end, reflecting a 4% year-over-year increase. Asset servicing fees totaled $707 million, reflecting a 6% increase over the prior year. Custody and fund administration fees were $483 million, up 7% year over year, largely reflecting the impact from strong underlying equity markets, net new business, and favorable currency movements. Assets under management for asset servicing clients were $1.3 trillion, up 9% over the prior year. Investment management fees with asset servicing were $160 million, up 5% year over year, due mostly to favorable markets. Average deposits within asset servicing declined 6% sequentially, while loan volume decreased by 7%, albeit off a small base. Asset servicing pretax profit grew 14% over the prior year period, and the asset servicing pretax margin was up 150 basis points year over year to 24.7%. This reflected the benefit from favorable markets, that pivot in our new business approach, including our focus on cross-selling high-margin capital markets and other adjacent products and services, and our efforts to streamline operations. Moving to page eight and our balance sheet and net interest income trends. Our average earning assets were down 4% on a linked quarter basis, as softer deposit levels drove a decline in cash held at the Fed and central banks. At the same time, we opportunistically added fixed price securities to the portfolio to provide downside protection. Fixed floating breakdown of the securities portfolio is now 54% to 46%, including the impact of swaps. The duration of the portfolio remained flat at 1.5 years, and the duration of our total balance sheet continued to be under one year. Net interest income on an FTE basis was $596 million, down 3% sequentially but up 5% as compared to the prior year. Sequentially, NII was unfavorably impacted by the lower deposit levels. This was partially offset by favorable deposit pricing actions we have taken outside of rate cuts. The quarterly contribution from transactional and other one-time items normalized in the third quarter following elevated second quarter levels. Our net interest margin increased sequentially to 1.7%, reflecting the favorable deposit pricing actions taken, partially offset by unfavorable change in asset mix. Deposits performed largely as we expected. Average deposits were $116.7 billion, down 5% compared to second quarter levels, reflecting typical seasonal patterns coupled with normalization from elevated second quarter levels. Within the deposit base, interest-bearing deposits declined by 5%, and noninterest-bearing deposits decreased by 3%, but remained at 14% of the overall mix. Turning to our expenses on page nine. Expenses increased 4.7% year over year in the third quarter. There were no notable expenses in the current or prior periods. Excluding unfavorable currency movements, expenses were up 4.4%. Turning to page 10. Our capital levels and regulatory ratios remained strong in the quarter, and we continue to operate at levels well above our required regulatory minimums. Our common equity Tier one ratio under the standardized approach increased by 20 basis points on a linked quarter basis to 12.4%, driven by capital accretion and a decrease in RWA. Our tier one leverage ratio was 8%, up 40 basis points from the prior quarter. At quarter end, our unrealized after-tax loss on available-for-sale securities was $437 million, and we returned $431 million to common shareholders in the quarter, through cash dividends of $154 million and common stock repurchases of $277 million, reflecting a payout ratio of 98%. Year to date, we returned over $1.3 billion, reflecting a 110% payout ratio, which puts us on track to return at least 100% for the full year. Turning to our guidance. Continue to expect our operating expense growth to be below 5% for the full year, excluding notable items in both periods and regardless of currency movements. We now expect full year NII to grow by mid to high single digits over the prior year. And with that, operator, please open the line for questions. Operator: Thank you. If you would like to ask a question, please signal by pressing star one on your tone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question. We'll pause for just a moment to assemble the queue. We will take our first question from Ebrahim Poonawala with Bank of America. Ebrahim Poonawala: Hey, good morning. Morning. I guess maybe this first Dave, where you ended on the NII outlook. The mid to high. Maybe address it two ways if you could. One, on the deposit trends, it felt like this the runoff was more than we expected. Are you seeing in terms of growth outlook and the mix shift in deposits going forward? And how should we think about the asset sensitivity of the balance sheet the Fed were to cut three or four times in quick succession? Does that put negative pressure on the NII? As we think about the first half of next year? Thanks. David W. Fox: Yeah. Sure. Happy to answer that. You know, deposits actually did perform pretty much in line with what we had previewed. And they're actually up from last year at this time. So from that perspective, may be less than you had anticipated, but I think generally, in the area we we had anticipated. You know, we've already seen a slight pickup in deposits in Q4, and we ended, obviously, September at $135 billion. But we think that Q4 deposits are gonna be, I think, a little bit higher on average during the quarter. You know, and since we've already posted a 9% year to date year over year NII growth, that's why we feel comfortable tweaking our our guidance a bit to mid to high single digits in NII. And then which would imply, frankly, that would be about flat to marginally one to 2% up in the fourth quarter. As far as 2026 is concerned, we have some mitigating factors that we can take going forward. We obviously have a rate cuts built into our in into our projections. We not anticipating more than two rate cuts, in The US, next year, for example. We have carry in, that we've done in terms of our repricing initiatives that we've taken. We have deposit pricing initiatives as well. We have all the securities that we know are gonna be rolling off in in that quarter in the in the various quarters in '26. So when you do the puts and takes, we feel that NII in 2026 should be you know, flat to up one to 2%. Ebrahim Poonawala: Got it. That's helpful. I'm not sure if I caught this when you were in in your prepared remarks when talking about when you go into sort of wealth management, then you talked about some of the challenges at the investment product level. I was wondering if you could just kind of elaborate on what the issues were when it on that front. And what sort of what are the actions you're taking to kind of get that back on track? Michael O’Grady: Sure, Ebrahim. It's, it's Mike. I'll take that. And so as you know, through NTAM, we offer a number of different, investment solutions and products to our wealth management clients. And we're also open architecture. So that we're offering, you know, the products of of other asset managers as well. And where we tend to focus is on those core foundational areas. So think about liquidity, index, quant, other areas like that. And the areas where we've seen pressure some of it on the index, where it can be a combination of just asset allocation, but also pricing pressure. Fee pressure, and that then, causes flows to lower fee products. And then second is asset allocation when it comes to areas of whether it's growth versus value. And on that front, we offer a multi manager platform solution and it tends to lean more towards the value side of the equation. And there where we've seen know, a very narrow market, as you well know, it's difficult for those active managers to to outperform. And so we've seen some flows out of that multi manager platform and so that's been a drag as well. Now as to what we're doing to, address that, in addition to just focusing on those areas and making sure the the products are not only performing but pricing, at the right level. Also, as we've talked about, focus on ETFs. SMAs, for the wealth management clients. But also alternatives. And that's an area as you heard, where we've, increased the number of offerings for our clients on the alternatives platform, for our wealth clients. Ebrahim Poonawala: That's good color. Thanks, Mike. Operator: We will take our next question from Kenneth Michael Usdin with Autonomous Research. Kenneth Michael Usdin: Thanks. Good morning. Just wanted to ask you to talk a little bit about just some of the the the moving pieces of this quarter. I know it might just be temporary, but, AUCA up 1%. I know you're talking about new business wins. You saw also in the press release some some outflows. So is that just kind of a the normal state of kind of getting some wins and some losses every quarter? Just a a dynamic for this quarter that you saw just relative to the market strength that we saw? Thanks, guys. David W. Fox: Yes. I would say that you take a look at the AUCA growth, there were you know, a number of individual clients that drove those, AUCA numbers. And had they not done that, we would have probably been on par with our peer group. These are asset management clients, and there was one client in particular that represented know, two thirds of, I think, of the degradation in the in the AUC. You have to remember that not all AUC is created equal. You know, not all AUC creates the same level of fees. And in this particular case, the vast majority was a was a restructuring that an asset manager made you know, moving from mutual funds through a like kind conversion into a CIT structure that's less expensive to the participants. And so still we didn't lose clients. We lost assets. And that happens, as you as you mentioned, the the the sort of puts and takes. Of the asset manager space. One other loss was really just a redemption by one large client as part of a fund. That fund has actually started to fill back up again. And so you add it all up in terms of impact, the total AUC that we're talking about is is the fee realization on that AUC is gonna be less than 10%. What we would normally see on a normalized AUC. And so, you know, you have to just take into consideration the type of business that is. And so you wanna translate that into dollars, all combined, all the degradation that we saw won't amount to more than 3 to $400,000. You know, a month of, of, you know, of of fee changes. You know, of fee decreases. Some of that could be earned back by the next quarter. So, yeah, I I think it's it's a lot of ebb and flow in the asset manager space is the way I would put it. Kenneth Michael Usdin: Great. That that's that's really great. Helpful, Dave. Second point, you're obviously firmly committed to that sub five. We saw it again this quarter. And just as you're starting to think about looking forward, I know you've said that you're strongly committed to it inclusive of FX translation. I just any any any incremental thing we should think about, you know, that as we go forward just know you're gonna be thinking about positive operating leverage. We don't know what the markets will do from here. They've obviously been a big helper. But as you continue to kind of, you know, hone that messaging around the expense base, Any new thoughts about, like, where you can kinda try to hold that level on expense growth overall? Thank you. David W. Fox: Yeah. So for fourth quarter, we're pretty locked in. We're not changing our expectations at all. We feel like we have the measures in place to flex if necessary. And so I'm sticking very strongly to the below 5% growth number for for Q4 and for the full year. So I think we feel very good about that. Nothing nothing in particular that I would really cite We're just starting to think about 2026. We're we're just getting into the the the planning of that. And I one thing I would say is that, you know, we continue to bend the cost curve down on expenses. If you if you look at where I started, I think we were coming off a 6% growth. Down to 5% or five and a half. It's been grinding down every quarter and without currency, we would have been closer to four than we are to five. Right? So and we're not done. I think the message there is we're not done bending that cost curve down. The productivity that we have have are going to realize in twenty five, is great, but '26 will probably be greater. And and so I think that we're just know, we're we're still seeing some opportunity there to keep grinding that expense curve down going going forward. Kenneth Michael Usdin: Got it. Thanks, Dave. Operator: We will take our next question from Brennan Hawken with BMO. Brennan Hawken: Good morning. Thanks for taking my questions. Mike, I'd love to drill into a comment that you made in your prepared remarks where you talked about sort of allowing more marginal business to roll off So it's and you you you spoke to that aiding growth. Is that growth comment, like, an indication that it's gonna be more about profit growth than top line growth? Do you expect that some of these efforts might result in more of a top line headwind, but you're gonna be able to make it up for it in the, you know, sort of better unit economics. On each of the new businesses that you're focused on? Can can you help me maybe think through some of that? Michael O’Grady: Sure. So it is definitely a focus on profitability. So we have a great asset servicing business. But right now, the margins are below the level that we think the business should be performing at. We're seeing nice improvement in that So we were, you know, at one point, kind of, like, 22%. We moved up to 23. Saw this this quarter moving up, closer to 25%. That's a combination of, I'll I'll say, a number of factors. First is the new business that comes in. We're making sure that it's coming in at very accretive margins. And that to your point, that can have an impact on you know, the the gross top line growth that you're going to get. In our view at this point, again, we wanna see greater profitability and growth and profitability. Second, I would say is in the the business that we do have and the activities that we do have, just trying to look very carefully at those areas and see if, one, if we can improve on the situation, either the activity, or with the economics with the client. But to the extent that we're not achieving that, then it is something where, you know, we'll have to look over time to transition that that business out. And so that that's the second piece of it, which, again, will aid profitability. And then the third, you know, Dave touched on it a little bit just with his comments around expenses, but really, you know, focusing on the efficiency of our operations. I and so I talked to my comments as well, Brennan, about our client centric capability operating model. You know, everything around that is is trying to be organized in such a way that we can deliver our services in a way that is both resilient, but also efficient. And so that that's where a year ago, we reorganized in a way that brought a lot of those activities together, and centralized them under a COO organization. So that we could be, you know, more aligned both between operations and technology to drive the scalability and efficiency that's necessary to see that continued improvement in, profitability. Brennan Hawken: Great. Thanks for that, Mike. And then you you there's there's been a lot of movement in the markets. You you already spoke a bit to GFO and some of the changes that happened within some portfolios, but but we did see fee rates the way at least the way we're able to calculate them, and I know that that's sort of flawed given how you guys bill. Because we don't have intra quarter visibility. But but did you guys see fee rate pressure in some of the other businesses this quarter as well. Or was it just around the mass in how you bill and how much the markets moved? If you could help maybe disentangle that a bit. Thank you. David W. Fox: Yeah. So think about GFO, in particular, as resembling a little bit more of the asset servicing side of the business than the wealth management side of the business. They've got extremely strong pipeline, and and they're gonna produce a record year of new business. Off another a previous record year. And so what you do see in GFO is large shifts in portfolio composition. And a higher sensitivity to cash. And so Q2 is pretty volatile, and then there's a lot of movement going in there. Other thing I'd say about GFO is they're much they're less exposed, at least at Northern, to fixed income and equity, movements. They are very cash focused. And so unlike the regions, not as influenced as much. By the overall equity market. A better way to look at the business like a GFO business would be look at their year to date fees. So year to date fees are up 5% and revenues are up 9%. And then, you know, GFO had Brennan Hawken: Yeah. Hey, I'm I'm I'm sorry. I'm sorry. I'm I'm probably boarded my question poorly. I was looking at the businesses aside from GFO. Like, I I get that GFO had some of those I mean, like, in the servicing business and the investment management business, we felt a little fee rate pressure there too. So I was just curious about whether that was the mass, you know, in markets or whether there was actually some you guys experienced fee rate pressure. Michael O’Grady: Sure. I what I would say, Brennan, is on the asset management side, you know, there's consistently, you know, persistent pressure on fees overall. Nothing, that I would note in the quarter. I did mention know, in a previous question just about making sure that our pricing is competitive for all of our clients but particularly within wealth management. So from time to time, yes, we will, you know, bring down the fees on an investment management product to to make it more more competitive. On the servicing side, I would say, you know, once again, there's always, you know, it's a competitive marketplace. But there's nothing that transpired in the quarter that necessarily you know, resulted in a reduction in fee levels. And in fact, if anything, Brennan, you know, to your to your first question, you know, we're we're trying to be very disciplined around pricing and economics to make sure that the the business we're bringing on is at those accretive margins. Brennan Hawken: Makes a lot of sense. Thanks for taking my questions. Michael O’Grady: Absolutely. Operator: We will take our next question from Michael Mayo with Wells Fargo Securities. Michael Mayo: Hi. Just want to make sure I understand the big picture correctly. So I think you're running you know, asset management and wealth, especially GFO, for growth. And you're running, asset servicing, relatively more for profitability. And to get there, you're putting some low margin business runoff. Did I get that correctly? Michael O’Grady: Yes. Michael Mayo: Okay. So I guess the question is, you know, under what circumstances would you say, you know what? The the custody business you know, maybe you should downsize even more or disinvest. And I know this is an old question, and you I think you've usually said, look. You might not have scale in absolute terms, but you have scale where you wanna compete. I think that's kind of where you've been. But does does that still hold and under what circumstances? Would that change? Michael O’Grady: Yeah. So it absolutely still holds. And if anything, Mike, I would say, you know, the both the market, if you will, and what we're doing it takes it even more that direction, I e, that we have the necessary, scale, to be able to deliver these services efficiently. And what I mean by the market part, first, of all, is just everything that's happening around both digital assets and AI make these activities more scalable. And and when we talk about, you know, our operating model, it's just trying to make sure that we're then organized in such a way to take advantage of those things. So of all, when you think about digital assets, tokenization, and even stablecoins, The whole idea there is around you know, greater efficiency in the marketplace. And so as that happens, again, that that leads to you know, more straight through activities, more liquidity in those markets, in those products, etcetera. And we're certainly making sure that we have the capabilities to do that. With AI, it's about, you know, automating processes and taking things that right now maybe not be so straight through. So if you take an example like you know, private capital and and the processing of private capital, for our clients. So thinking, you know, we're their LPs, and they're invested in literally you know, hundreds of funds, and a lot of that activity is still paper based. Mean, I would say we could estimate that right now, only maybe a quarter of that activity that we do for our clients on that front is straight through. What we're focused on is how do we turn that into, you know, 50%, 75% automated, and that's where we're utilizing AI. To be able to do that. So all of those things take us to a model that I think gives us the necessary scale, meaning that as you grow, the unit economics, improve. And to your point, you know, these are all measurable things both from a I'll call it, internal perspective, but also from a financial performance perspective. That if it's not, you know, proving to be the case there, you certainly have to look at it differently. Michael Mayo: And then last follow-up. If the the one liner why someone of your size can compete with the the Goliaths of the industry, I mean, it's always skill versus scale, the the argument. Why can you win in in tech and AI if you don't spend as much money? Michael O’Grady: Yeah. It's I first of all, it's differentiation. Right? So our strategy is focused on delivering a unique value proposition to our clients. I and in doing so, that requires greater focus for us. So as I think you pointed out in one of your earlier comments, we're not looking to compete in every segment across the globe. We're picking areas like asset owners in The United States, like pension funds in The UK, like Global Family Office, you know, like hedge fund services, where we believe that that value proposition, that differentiation resonates because there's still it's still about, you know, the overall package. What do they get when it comes to you know, not only the technology, but the service that goes with that and who that financial partner is. But then can we deliver it in an efficient way such that the value they're getting overall is more attractive relative to other alternatives. So there's no doubt in my mind that in the marketplace, that clients want differentiated, offerings, and we believe that that's what we offer. And we just focus on those areas where we think that we can be successful with it. Michael Mayo: Alright. Thank you. Michael O’Grady: Sure. Operator: We'll take our next question from Betsy Graseck with Morgan Stanley. Betsy Graseck: Hi, good morning. Michael O’Grady: Morning. Betsy Graseck: So just one more question on this thread. Regarding AI. I know at the beginning you highlighted that AI is already generating measurable results with 150 plus use cases. Could you give us a sense as to where, you see AI helping the you know? Well, let me put it this way. Is there any differentiation within the organization about how much AI will be helping out. In other words, do you expect to see it more in the servicing services side or wealth side or it's equal across the organization. I'm just wondering if the efficiency improvements coming from AI are different materially different between the different businesses that you run. Michael O’Grady: Sure. So, Betsy, what I would say what's so exciting about this is it is impacting all of the areas of the company. And just to give you, you know, some idea because you know, how it's being utilized, is different, and and maybe the results yes, they may vary in different groups, but the applicability is basically across the board. So, you you know, we talked about operations there. I talked a little bit about know, what we're doing in the private capital space. So that gives you some idea, but think about so many processes that are involved in operations. It clearly lends itself there. And know, arguably a very high level. That you'll get. I'm gonna do another easy one, which is within technology. You know, utilizing GitHub and other types of, of AI, we're seeing you know, I'm gonna call it about 20% improvement in the the programming, the engineering part of technology there. And I think, again, still in the the earlier days of that. But as you move to the businesses, take asset management. That's an area where a lot of the activity can be automated. Think about what we're even doing here with you know, investor calls. We're already utilizing AI in our fixed income muni, area within asset management to essentially you know, summarize and analyze all the transcripts for all of the investor calls, where they have investments. And this is, you know, in the hundreds of calls that normally you know, an analyst has to listen to calls, summarize them, and and most importantly, take away the key points. Well, so much of that now has been automated, so it saves dramatic you know, time, but also provides better insights. Within wealth management, this is making, at this point, our advisers much better. And much more efficient. Because in advance well, first of all, in thinking about where the opportunities might be and prospecting, You know, AI is enabling that process to happen in such a way that it's highlighting, you know, where the best prospects are. But then from there, it's how to prepare for that. And so it can go in and it can pull the information both from our internal databases, but also what's publicly available about a particular, prospect and do so much more quickly than someone could do you know, say, on their own to be able to do that. And when they have a question, you know, once again, we're working on the ability for our advisers essentially to be able to tap in to proprietary databases that we have, like the Northern Trust Institute, to be able to immediately answer those questions. So it makes them better at serving the client. On that front. You think about risk, you know, again, and whether it's AML, KYC, whether it's fraud detection, these are all things right now where we have you know, hundreds of people who do this activity, and we'll still have plenty of doing, but they'll be using better tools to be able to do it better. And faster. So know, cuts across I I would say, the entire company. And I think at this point, we're still in the early days. Betsy Graseck: Okay. And then just to follow-up on the technology impacts on the business. Could you give us an update on how you're thinking about the outlook for how you would utilize a stablecoin? Do you your own? Do you get involved with the industry consortium? As we move towards $24.07 trading? Having a stable coin cash leg is gonna be critical. So I wanna understand how you're thinking about that dynamic as we roll forward here. Thank you. Michael O’Grady: Sure. So I think that what's happening in the digital asset space there there are four key drivers from my perspective. Innovation, regulation, client demand, and then interoperability. And on the innovation front, to your point, you know, whether it's stablecoins or tokenizations, there's so many things that are coming out and the technology is getting much better, much more scalable. Things like blockchain becoming more scalable. Going from private blockchains to public blockchain. So the innovation front, I think, is you know, probably leading. What's been lagging is more on the regulation front. And, obviously, now with the the the Genius Act, this is going to change. And that is going to I think, significantly facilitate further demand on the client front. And then you get to the idea of interoperability. Which the point on that is you know, our clients don't wanna have to, I'll say, operate in two worlds. They wanna be able to utilize whether it's stable coins or a tokenized asset, with their other assets. And so we're just making sure that our platform can do both of them. Now specifically to Stablecoin, know, I would say stablecoin will, you know, find the areas that have the greatest friction. And a lot of that, as you know right now, is, you know, probably you know, cross border or outside The US. And I I'll say we'll we'll have the ability to you know, utilize stablecoin, but we're not planning to issue a Stablecoin on that front. Where we're more focused is on tokenization. Because we believe that that will impact multiple asset classes. And a good place to start would just be around money market funds. Thinking about a tokenized money market fund, know, that's an area where I'd say we would look to be an issuer of a tokenized money market fund. So that gives you some idea of the the direction that we see. Betsy Graseck: Thank you so much. And, yeah, tokenized money market fund is a type of stable coin cash like too. Michael O’Grady: Exactly. Betsy Graseck: Appreciate that. Thank you. Operator: We will take our next question from Glenn Schorr with Evercore. Glenn Schorr: Hi, there. Michael O’Grady: Hi. Glenn Schorr: Hello. Small but interesting one, re regarding the deposit rate paid on saving money market. And other deposits. So so after going down for four quarters straight because rates have been coming down it was actually up six basis points, and we had a cut in the quarter, I think. So it's just a it's interesting. I'm more thinking about the go forward. But what what caused the the that saving in money market rate to go up in a quarter when there's a rate cut. And I know you gave us the the your thoughts on next year, so I appreciate that. I'm just curious what's going on on on these deposits. David W. Fox: Yeah. Well, deposits are also multicurrency. They're not just US dollar. Right? So may be some some differences there. You might wanna take a look at, but we could certainly get more granular with you. But on the top of it, I can't I can't say in particular. I'd have to look at each currency in each particular investment that we made to to kind of give you that read. Glenn Schorr: No worries. We can move on to the the bigger question. You've been talking about some of the initiatives that you've picked up pace on on private market side across wealth, asset management, and asset servicing. You dangled a little bit with your comment on the fifty South Feeder Fund. I would love to know a little bit more about what that is, what's on it, and, what's in it. If it's a fund to fund structure, things like that. And then maybe you could also just complete the thought on what's going on in terms of the asset servicing side as well. Thanks. Michael O’Grady: Sure, Glenn. So the the feeder fund, basically, as you know, 50 South, historically, was focused on fund to fund. And that business has performed very well and has been I'll say, a perfect fit for our wealth clients. And continues to be. And they've continued to expand their offering, both for our wealth clients, but then for other wealth platforms and and institutionally as well. Specifically, what happened in the in the third quarter is they have the relationships and have done the diligence and everything on hundreds of managers. And as a part of that, we're now using those relationships to be able to have specific single fund offerings for our wealth clients. And this enables us, I'll say, to pick, like, the best of the best, funds, where access is all often an issue. But through our relationship and by having, you know, the diligence done, we're able to to offer it to our wealth clients. And so this was one of the, I'll say, you know, high performing, venture funds that, that was offered to wealth clients in the quarter. And then to you said to the to the broader picture there, say, just first of on the on the wealth front in 50 South, once again, an area of a lot of innovation. And, I think you know, coming our direction when you think about evergreen funds and other things that just have greater liquidity, that only enables our clients to get more comfortable, I'll say, investing in, alternatives. And then on the asset servicing side, you know, there, you know, not only is it the work that we're doing with as I mentioned, hedge fund hedge funds, but then also private capital administration, for other private equity funds, private capital funds. But then specifically, around the vehicles, the LTAP and the LTIP vehicles. And I would say that, is a similar you know, trend phenomena, if you will, in the European markets where there's, the introduction of more vehicles that have greater liquidity. So that it allows for greater distribution and expansion of alternatives. So we think it's still kind of earlier days for those vehicles as well. But whether it's you know, The UK vehicle or the Luxembourg vehicle, we're we're well positioned to be able to provide those, capabilities for the asset managers. Glenn Schorr: Okay. Thanks very much. Michael O’Grady: Sure. Operator: We will take our next question from Steven Alexopoulos with TD Cowen. Steven Alexopoulos: Good morning everyone. Michael O’Grady: Morning. Steven Alexopoulos: I wanted to start so I know on the pretax margin, and I know it bounces around quite a bit. But when you look at the revenue trajectory, expense trajectory, right, the guidance you're giving for 4Q and full year, you're bending the cost curve down. Do you guys think you could remain fairly comfortably above that 30% medium term target moving forward? And even if the Fed's cutting rates? Michael O’Grady: So to your point, Steve, that there there's certainly the impact of of markets and and rates. And levels of liquidity in the marketplace. So there's lots of factors out there. But our view is that the financial model that we have definitely, should operate in that 30 plus percent pretax margin on an ongoing basis. So you have a quarter like this where you know, we we got there somewhat because of the environment, but also because of the provision release. That bumped it up a little bit. All the same, the the longer term trend longer term meaning over the last you know, couple years, has been an improvement in the pretax margin. So when you look at the year to date margin, it's closer to kind of 29%. And, we expect to move into to 30%. And then even though we're in that 30%, it doesn't mean that we're not still trying to drive positive operating leverage. We very much are. And so, yes, the the objective is to stay above that 30%. Steven Alexopoulos: Got it. That's helpful. And and then going back to all the commentary on AI and productivity gains, terms of the financial impact, so far, is this material Like, is this helping you this year keep expenses below 5%? Or is 99% of that benefit still to comp? Michael O’Grady: Yeah. So it's a great question. Because it's it's what I call capture. So, you know, we have these efficiencies, and everybody's utilizing Copilot and other tools to become more efficient. How do we make sure that we're capturing that? And to your to your point, know, it's it's difficult if somebody's, I'll say, you know, 3% more efficient as a result of it, well, how does that actually affect your your financials and and your need for resources? And so that's why you know, we've also been, you know, very disciplined around head count, around span of control, around how we're organized. So that it's a way to to capture that. So that you know, as you go forward and as you add new business and you grow, you know, you're not adding more know, people, in order to service that, but instead you're capturing the efficiencies that you're getting from utilizing those tools. Some areas are easier to do than others. So know, we talked about GitHub and with the programmers. Like, those are the areas, Steve, where I'd say yes. We're getting savings now. But to your point, it it's still in the earlier days of capturing the the efficiencies that you're gonna get. Steven Alexopoulos: Got it. That's great color. Thanks for taking my questions. Michael O’Grady: Of course. Operator: We will take our next question from David Charles Smith with Truist Securities. David Charles Smith: Good morning. Michael O’Grady: Good morning. David Charles Smith: Is there any more color you can offer on the relative strength in FX trading and securities commissions and what you're what you've been doing to drive this? You mentioned some initiatives to drive growth here. I wonder if you could just kind of help us frame how much of the strength you feel like is a result of share gains and other things that are more result of things that were in your control, as opposed to just simply benefiting from broader market volumes being healthy. Thank you. Sure. Michael O’Grady: Sure. So capital markets our capital markets business has performed extremely well. And it's a combination of both execution of their strategy and then also the favorable market conditions. But on on the strategy parts specifically, what the the team has been doing there over the last several years is building out a more durable capital markets business. So what I mean by that is yes, know, historically, the business has performed well when the the markets and volatility are strong, but then you know, has gone down when it's not there. What they've tried to do is turn it into more of a service, if you will, in the activities that they, that they pursue. And so what that means, for example, on the trading side, on the brokerage side, is being the outsource provider of trading for the asset manager. So instead of some of our asset manager clients having their own trading desk, they've outsourced that to us. And as a result, that's when I talk about adding a 100 clients A number of those clients are where they've outsourced, the trading to us. And that produces a more kind of recurring predictable stream of know, brokerage commissions as a result of that. On the FX front, we're you know, we've always, in that business, basically enabled our clients to hedge positions that they want in one currency or another. But it's in the past, done just on a transactional basis, where what we've, done over the last few years, several years, is to turn that more into a service again by providing currency management as a service where it becomes automated and it's just done over time. As opposed to, you know, a transactional business. So that has also built up over time. And then also from a liquidity perspective, we've expanded our liquidity capabilities know, certainly, we talk all the time about, deposits and and, money market funds and being able to be on that side of it. The other side is at times, they need over, overnight liquidity the other direction. So not only securities lending, but also, thick repo has been an an area where we've added capabilities. To be able to serve those clients, but then create a business that's, both, I would say, diversified from the other activities we have, but also attractive financial profile. David Charles Smith: Got it. Thank you. Michael O’Grady: Sure. Operator: We will take our next question from Gerard Cassidy with RBC. Gerard Cassidy: Good morning, Dave. Good morning, Mike. Morning. Kinda different questions for you guys. I always like to get the perspective from folks like you because you know, I have a big exposure to this area. There's been a lot of talk this quarter about loans to nondepository financial institutions, and, of course, your in the top 20 banks. You're at the lowest. You've got the least amount of exposure. Can you give us some color on what you know, I'm not asking you to talk about other banks, but these categories that are within this NDFI whether it's private equity or mortgage, credit intermediaries, etcetera, What how do you guys look at that NDFI category? David W. Fox: Yeah. That's a good question, and I'll I'll start, and then maybe Mike can talk about the broader, industry, issues. There was a reclassification in the reporting methodology implemented by the FDIC that moved some loans into other categories, that were into the n FDI category. So when you look at Northern you know, the vast majority of what we do are subscription lines to private equity firms. And those are lines of credit backed by the LP's capital commitments. And on top of that, there's borrowing bases that reflect uncalled capital as well. And so that is not the same thing as lending directly to a you know, a private credit fund. Right? There's also sometimes loans to management companies that we do. But in that case, you've got the the management fees that secure your loan. Right? And then thirdly, on the wealth side, we have, obviously, some NAV loans that we do. The advance rates are extremely low. Like, I wanna say around 30%. Those could have some private credit funds in them, but they're highly across their entire private equity portfolios. We don't lend against one particular fund. So that that's sort of how Northern has looked at that business. Individually. I'll let Mike talk broader about the industry in terms of what's what's going on. But we don't have we don't have any of the similarities as you pointed out to what's going on with everybody else. Gerard Cassidy: Correct. No. I I would agree, Jared. The and then as a follow-up question, the IMF has come out as as well as the Bank of England with reports in the last couple of weeks citing I hate to use the word bubble, but really inflated asset prices. And they point out then we've gotta be careful of some maybe serious corrections. Obviously, when you look at your wealth management business, it's not all equities. You've got fixed income and cash in there. Can you share with us how you guys approach you know, managing wealth management should a big correction come or or or just your view on how you approach it with your clients. Michael O’Grady: Sure. So to your point, you can never you know, say, time the markets or predict the markets. There's gonna be volatility. Valuation is know, one one person may say it's a bubble, another person say, you know, there's still tremendous upside, you know, to that. And as a result True. That's why with our wealth clients, we take a different approach which is what we call goals driven wealth management. And that is it's not only an approach, but it's also a technology. It's a a platform that is utilized with those clients where upfront, we go through the process of really determining what their needs are going to be. Not just in the next year, but literally over their lifetimes and often cases then, you know, into next generations. And as a result of that, we can then back into what is the right asset allocation. As a part of that. And one of the most important components of it, Gerard, then is knowing that there will be drawdowns in the equity markets over time, how do you make sure that you have the right reserve capacity in essentially risk off assets? Such that you, you know, do not get into a liquidity situation, not get into a situation where you don't have the the funds necessary for achieving what your objectives are. Frankly, at that point, it's a lot easier also to have the conversation with the client. And make sure that, you know, they're they're able to digest what's happening in a volatile market and, you know, be able to stay focused on what their long term goals are. And not, I'll say, overreact which, again, the empirical you know, research would tell you that, you know, overreacting to market volatility is not the best long term strategy. Gerard Cassidy: Great. Thank you for the insights, Mike. Michael O’Grady: Sure. Operator: And there are no further questions in the queue at this time. I will now turn the conference back over to Jennifer Childe for closing remarks. Jennifer Childe: Thanks, operator, and thanks, everyone, for joining us today. We look forward to speaking with you again soon. Operator: This concludes today's call. Thank you for your participation. You may now disconnect.