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Operator: Good day, ladies and gentlemen, and welcome to Hancock Whitney Corporation's Third Quarter 2025 Earnings Conference Call. At this time, participants are in a listen-only mode. Later, we will conduct a question and answer session and instructions will follow at that time. As a reminder, this call may be recorded. I would now like to introduce your host for today's conference, Kathryn Mistich, Investor Relations Manager. You may begin. Kathryn Mistich: Thank you. Good afternoon. During today's call, we may make forward-looking statements. We would like to remind everyone to carefully review the Safe Harbor language that was published with the earnings release, and presentation and in the company's most recent 10-Ks and 10-Qs including the risks and uncertainties identified therein. You should keep in mind that any forward-looking statements made by Hancock Whitney speak only as of the date on which they were made. As everyone understands, the current economic environment is rapidly evolving and changing. Hancock Whitney's ability to accurately project results or predict the effects of future plans or strategies or predict market or economic developments is inherently limited. We believe that the expectations reflected or implied by any forward-looking statements are based on reasonable assumptions but are not guarantees of performance or results. Our actual results and performance could differ materially from those set forth in our forward-looking statements. Hancock Whitney undertakes no obligation to update or revise any forward-looking statements, and you are cautioned not to place undue reliance on such forward-looking statements. Some of the remarks contain non-GAAP financial measures. You can find reconciliations to the most comparable GAAP measures in our earnings release and financial tables. The presentation slides included in our 8-Ks are also posted with the conference call webcast link on the Investor Relations website. We will reference some of these slides in today's call. Participating in today's call are John Hairston, President and CEO, Mike Achary, CFO, and Chris Ziluca, Chief Credit Officer. I will now turn the call over to John Hairston. John Hairston: Good afternoon, and thank you all for joining us today. The 2025 was a remarkably strong quarter. With an ROA of 1.46% versus 1.32% a year ago, our results reflect continued profitability improvement, production in our efficiency ratio, and progress on our organic growth plan. Net interest income continued to expand as our average earning assets grew at higher yields and we continue to reduce deposit costs down one basis point this quarter. For the third quarter in a row, fee income grew totaling $106 million, an increase of 8% from the prior quarter. Investment in insurance and annuity fees lead this increase hitting a record high for the organization. Expenses remain well controlled. Compared to prior quarters, adjusted net interest expense was up less than $3 million or 1% from the prior quarter. Much of this increase was in personnel expenses due to our investment in revenue producers along with higher incentive income from a strong quarter of loan production and really terrific fee income. Loans grew $135 million or 2% annualized. As shown on Slide 27 of our investor deck, our production was quite strong, increasing 6% quarter over quarter and 46% from the same quarter last year. The net growth number was impacted by higher payoffs of larger credit including SNCs which were down $114 million and ended the quarter at 8.9% of total loans. Likewise, we encountered a larger than expected reduction in line utilization among industrial contractors as favorable project completion dates led to earlier payments on very large projects. We remain focused on more granular full relationship loans with the goal of achieving more favorable loan yields and relationship revenue. We expect low single-digit growth in 2025 and perhaps low single-digit net growth for the fourth quarter as paydowns persist. Deposits were down $387 million largely driven by seasonal activity in public fund DDA and interest-bearing accounts decreased $269 million. Our interest-bearing transaction balances were up and retail time deposits and DDA balances down reflecting promotional pricing changes inside the quarter. DDA mix ended the quarter at a strong 36%. Earnings contributed to growth in all of our capital while we continue to return capital to investors by repurchasing 662,000 shares of common stock. We ended the quarter with TCE of 10.01%, common equity Tier one ratio of 14.08%. This quarter, we continue to make progress on our organic growth plan. We've hired 20 net new bankers from the same quarter last year, a 9% run rate. We're well underway in our plan to open five new locations in the Dallas market. These branches will open either in late 2025 or early 2026. While too early in the year for 2026 guidance, we do anticipate an increase in the pace of hiring to solidify our target compounded annual balance sheet growth rate. We remain optimistic about closing out 2025 with continued growth and profitability. As we look back over the past several years, we hope investors are pleased to see the combination of a fortress capital stack, solid allowance for credit losses, superior profitability, ample liquidity, benign asset quality, and a new emerging trend of balance sheet growth. Despite the current somewhat dynamic macroeconomic environment, we are confident in the company's ability to navigate any challenges before us, support our clients, and continue running a very successful playbook. With that, I'll invite Mike to add additional comments. Mike Achary: Thanks, John, and good afternoon. As John mentioned, we're very pleased with the company's strong performance this quarter. Our adjusted net income for the quarter was nearly $128 million or $1.49 per share, compared to adjusted net income of $118 million or $1.37 per share in the second quarter. Second quarter results included $6 million of supplemental disclosure items related to our acquisition of Sable Trust Company. PPNR for the company was up $8 million or 5% from the prior quarter. Our NIM was stable at 3.49% and NII was up $3 million or 1%. Fee income was up $7 million or 8% from the prior quarter and expenses remain well controlled up just $3 million or 1% from the prior quarter's adjusted expense. Our efficiency ratio continued to improve reaching 54.1% this quarter compared to 54.91% last quarter. Our efficiency ratio year to date of 54.73% is nearly 100 basis points lower than last year's 55.67%. The quarter's stable NIM was driven by a better earning asset mix, higher average loans, and a higher securities yield, which was offset partially by higher other borrowings volumes and rates. As shown on Slide 15 of our investor deck, the yield on the bond portfolio was up six basis points to 2.92%. We had $135 million of principal cash flow at 3.08% and we reinvested $200 million back into the bond portfolio at 4.61%. Next quarter, we expect about $207 million of principal cash flow at 3.53% that will be reinvested at higher yield. We expect the portfolio yield should increase with continued reinvestment at higher rates for the remainder of 2025. Our loan yield for the quarter was up one basis point to 5.87%. Yields on fixed rate loans were up seven basis points to 5.24% while the yield on variable rate loans was down six basis points. The yield on new loans was flat at 6.78%. With two rate cuts expected in 2025, we expect the overall loan yield will be down accordingly. Our overall cost of funds was up two basis points to 1.59% due to higher average other borrowing volumes and rates partially offset by lower deposit costs. The downward trend in our cost of deposits continued albeit at a slower pace with a decrease of one basis point to 1.64% in the third quarter. The drivers were CD maturities and renewals at lower rates and lower rates on public bond deposits. We expect deposit costs will be down in the fourth quarter following expected rate cuts in October and December. For the quarter, we had $2.4 billion of CD maturities at 3.69% that were repriced at 3.58% with a strong 88% renewal rate. CDs will continue to reprice lower in the fourth quarter given maturity volumes and anticipated rate cuts. As shown on Slide 11, EOP deposits were down $387 million mostly reflecting $269 million in seasonal reductions of public fund balances. DDA balances were down $334 million including an $83 million reduction in public fund DDAs. Retail time deposits were down $145 million but interest-bearing transaction deposits were up $278 million. Our updated guidance is included on Slide 20 and has mentioned includes two rate cuts of 25 basis points in October and December. For the third consecutive quarter, our criticized commercial loans improved decreasing $20 million to $549 million. Non-accrual loans increased modestly to $114 million. Net charge-offs were down this quarter and came in at 19 basis points. Our loan portfolio is diverse and we see no significant weakening in any specific portfolio sectors or geography. Our loan reserves are solid at 1.45% of loans consistent with last quarter. We expect net charge-offs to average loans will come in at between fifteen and twenty-five basis points for the full year 2025. Lastly, a comment on capital. Our capital ratios remain remarkably strong with growth this quarter due to our higher earnings levels. We bought back about $40 million of shares consistent with prior quarter. We expect share repurchases will continue at this quarter's level in 2025. Changes in the growth dynamics of our balance sheet, economic conditions, and share valuation could impact that view. I will now turn the call back to John. John Hairston: Thanks, Mike. Let's open the call for questions. Operator: Thank you. We will now begin the question and answer session. We'll take our first question from Michael Rose at Raymond James. Michael Rose: Hey, good afternoon, everyone. Thanks for taking my questions. Maybe we can just start on loan growth. I think last quarter you guys had talked about a mid-single-digit or 5%-ish growth in the back half of the year. Certainly understand there's been some ongoing paydowns. And just wanted to get a better sense of I know SNCs are at 8.9%. You've talked about 9% to 10% on a go-forward basis. So at the low end there. It looks like Healthcare has had two down quarters in a row. Can you just give some context on are we near or nearing the end of payoffs? And then how should we think in light of relatively solid production, assuming those paydowns would slow. What initial 2026 growth could look like because the underlying production has been pretty solid Thanks. John Hairston: Sure, Michael. Thanks for the question. This is John. I'll try to put all that together. And certainly, you have a chance to redirect if I'm missing the points. But first, just talking about loan production. I think I mentioned in the prepared comments that loan production was up 6% over prior quarter and a healthy 46% over the same quarter a year ago. So really all of the production level that we're getting is, in line with our expectations. And in fact, it was stronger than last quarter when we had a little bit higher end of period growth. So when you look a little under the covers, the average loan growth numbers are quite consistent from Q3 to Q2. It about $180 million between or for each of those two quarters. Just had different end of period numbers. That said, there are several different categories that you mentioned that are either growing as well or better than expected and some underperforming. So for the quarter, and we talked about this on the same call a quarter ago, we'd like to see a little different mix in the growth categories that would command a little better yield. As we go into the end of all the deposit repricing benefit that maybe back with rate decreasing. So first, owner-occupied real estate was an area of interest that grew about $144 million. Investors CRE also grew about $135 million. That enabled equipment finance to come in a bit lighter at $50 million. And as you remember, we get a better yield on the first two categories than the third. So really good production, very solid production in the areas that we wanted to see. With good deal flow and it made its difference in the yield of all the new business. So the contrast I'll kind of run through them to give you better flavor. First line utilization was down about 90 bps. Was about $50 million. That was almost entirely due to large industrial projects that got done a little faster than expected. I mean, those projects fund up and then get paid down and combination of really good weather, throughout the last several months and just good engineering led those projects to finish a little faster. So those paydowns came a little bit quicker than expected. But then the bigger component was we had a number of large client core client sales to larger organizations upstream. That occurred during the quarter. Those happened every quarter, but it was a little bit higher than normal. And then our old friend, private credit and private equity, did take down a few of the healthcare deals, that I would have expected to be closer to flat. This quarter. So it's sort of a tale of ins and outs. The production level was exactly where we expected through the organic growth plan, maybe a little better. The pay downs were likewise heavier. So that brings us to what to expect. I mean, obviously, a mid-single is where we wanna be. We think we can fund that with very high-quality deposits that are lower in cost. At that rate. We're a little over 3% right now at the growth pace we're at. It needs to be closer to mid-singles. And I don't I want to be really realistic about the pay down environment. You know, in your question, you said when do we think that's over. I don't think pay downs are ever are gonna diminish when we have this good of an environment and this many players interested in the Southeastern part of the country. So what that means is we'll have to continue running playbook which is a lot of hustle, but also additional offensive players deployed to take that production level up another couple of $100 million a quarter. Right now, we're running about $1 billion per quarter. It needs to be about $2 billion maybe a little north of that to generate a really consistent and dependable quarter over quarter 5% annualized growth rate. So certainly pay downs could go down, but if we think about money rates burning down or going down, and then all these occupancy improvements that we're seeing across the multifamily space, think it's unrealistic to think they're gonna just go away. They may temper a little bit, but we're gonna assume as we go into 2026 that pay downs remain high. And boost production to cover it running the same disciplined playbook. And when I discipline I refer to that, I mean pricing discipline, credit discipline, concentration discipline, continue running playbook that's led us to have superior profitability. If I missed any of your points, please redirect me. Michael Rose: No, John. That was a lot of color. I really appreciate it. Maybe just one follow-up for me. I did want to kind of address the capital question. I know you guys have talked about over time running CET1 11% to 11.5%. You talked about the buybacks this quarter about $40 million continuing at this pace at least for the next quarter. The CET1 was still up a tick. Know there's some AOCI recovery in there too, but I guess, you talk about the ability to maybe do more on the repurchase front? I know you have the outstanding program, but if you were to get through that over the next quarter or two or maybe three quarters, would you look to re-up that? And then I think there's a pervasive view out that you guys are looking at a deal, potentially a larger one. Can you just address your thoughts around M and A and now given the environment that we're in? Thanks. Mike Achary: Yeah. Hey, Michael, this is Mike. I'll address that question. And the last part first around M and A. So our stance on M and A hasn't changed. Despite what you may be hearing out there. We're not really focused on that right now. At all. We have talked about being opportunistic as kind of time goes by. Opportunities present themselves. But aside from that nothing's changed. So that's first and foremost. As far as continuing to look at capital priorities in a way we think about being proactive in terms of deploying capital Again, a lot has not a lot has changed really in the last quarter or so. I know this notion maybe exists that we've asked the question around where we feel comfortable operating the company. And the answer is for common Tier one to be in the range of 11% to 11.5%. But that does not mean there's an active program to reduce our capital to those levels. Instead, we would like to deploy it in what we would describe as meaningful ways. And the first priority, as it's been for many quarters now, continues to be to deploy capital in terms of organically growing the balance sheet. We have not been able to grow loans as John mentioned this year as much as we would have liked to. And having said that, as we move into 2026, the effort is going to be there to deploy that capital in terms of organic growth. We do have the five branches that we're going to open in the Dallas region late this year, early next year. And the potential certainly exists for us to deploy capital in that manner. In other markets. As far as returning capital to shareholders, I mean that's a great point that you make around the buybacks. And certainly something we could look at in coming quarters is to incrementally increase the level of buybacks. But for now for the fourth quarter, I would assume that we would buy back pretty much the same level we have in the second and third quarter in terms of how much capital we actually buy back in terms of dollars. And then certainly, as we've talked about many times, in the first quarter in January, feel pretty certain that we'll have a discussion with the Board around looking at the dividend. So all of those means of deploying capital and being proactive in terms of how we manage it you know, are still, you know, top of mind and things that we'll continue to do going forward. So hopefully that made sense. Michael Rose: It did. Thank you guys so much for taking my questions. I'll step back. John Hairston: You bet, man. Thanks a lot. Operator: We'll move next to Ben Gerlinger at Citi. Ben Gerlinger: Hi. Good afternoon, guys. John Hairston: Hey, man. Ben Gerlinger: I know you don't wanna give a 26 guide. But on slide seven, you kinda lay out the investment opportunities for further growth of branches and just the future for Hancock down the road. So when you guys think about the numbers that you put on those bullet points of eight and a half for revenue and then 6.2 for facility expansion, is that kind of implying that, like, basically, rough $15 million or so spot to spot expense growth of 25 or four q twenty five into '26? Or how should we layer in expansion and investment down the road? Obviously, be opportunistic on hires, especially with the disruption from m and a in the Southeast. But just kind of what you have in front of you, how do you guys think about that? Mike Achary: Yes. So Ben, when we look at slide seven and talk about the numbers you just mentioned, those are kind of annualized numbers of what we expect to spend this year. On things like expenses related to hiring new revenue producers and in the new facilities in Dallas. So again, are kind of the annual run rate numbers. But the point is well as I mentioned, I think on the question the previous question is when we look at 2026 and beyond, we fully intend to continue to make these kinds of investments. In other markets. So again, when we talk again in January, after fourth quarter earnings, we'll talk about our guidance for 26,000,000 and the same level of detail that we always do. And we'll talk about some of these investments that we're planning for next year. Ben Gerlinger: Got you. Yes. That's good. You probably want to save it for January, but we're the shot. Just wanted to clarify on the forward guide. For it can only have one quarter. Remaining There's no change across the border except for PPNR. It seems like it basically kind of implies lower end of revenue, higher end of expenses. To get that new range. I missing something beyond that? Mike Achary: No. That's right. And, you get to the point where there's one more to go And when you're talking about annual guidance, it's not very difficult to kind of solve for that one quarter. But I think if you look at our numbers for the third quarter, two of the areas that we really outperformed was the income growth as John kind of mentioned in his prepared comments. And then also controlling expenses. So I think as we think about the fourth quarter, what you can expect to see is in terms of fees, probably not the same level of growth in the fourth quarter that we had in the third quarter. And then for operating expenses, the same thing kind of applies but in the other direction. So I think the expense growth in the fourth quarter will be a little bit more than what we saw in the third quarter. So if you put all that together, it does lead you to conclude that the PPNR growth will probably be in the 5% to 6% range. And probably a little bit of a bias toward the upper end of that 5% to six. Ben Gerlinger: Got you. Appreciate the time. Thank you. John Hairston: You bet. Yeah. Ben, this is John. Just a little bit more detail on it. Topic. In terms of next year, we will wait till January. But since it was worth a shot, I'll give you this. The and I mentioned this in the prepared remarks. The pay down environment this year has been higher than we anticipated. Our production has been better than we anticipated. So as we go into next year, any expense growth that you see will be heavily weighted towards the addition of more offensive players. To ensure that we get to I mean, I wanna be at the end of every quarter sitting on pins and needles looking at that loan growth number. I'd like to kind of have it in the bag when we start the quarter. That's going to happen because we have more players out there hustling business. I like the hustle of our current team. We just need more players. And so so I think when we get to next year, we're gonna talk about a more aggressive run rate of bankers than we're on a lot of annualized 8.6%. Run rate now. It needs to be well north of ten. To have that surety and growth. And, and then also in terms of branch locations, know, a couple of quarters ago this isn't new news, but a couple of quarters ago, Mike answered one of those questions around about the same plan for additional offices per year until, you know, we need to let them catch up. And so that would imply that you may see some of the same general comments around new office locations for '26 as we talked about. In '25. Now that's not new news. It's just been a while since we talked about it. In terms of that fee income category, Mike mentioned, just as a pointer, we've got a really great book of fees. I love talking about it. I won't share anymore in case somebody else wants to ask questions about fees other than this. But the chunk of our fees that are more transaction related you know, around specialty fees and syndication fees, derivative fees, some of the SBA fees. As well as some of the fees we enjoy on the wealth management side. About the time we get to Thanksgiving, that environment pretty much pulls back for the holidays. So we really only get about a half a quarter solid run rate for transactional fees versus the full quarter. And so that's the so the annuitized fees are going to come in for Q4 probably just like they did. Q3, we may see a little lesser run rate on the transaction related. Fees because of the holidays. Does that make sense? Ben Gerlinger: Yep. Thank you so much, guys. John Hairston: Okay. You bet. Thank you. Operator: We'll move next to Casey Haire at Autonomous Research. Casey Haire: Great. Thanks. Good afternoon, everyone. Just a I wanted to follow-up on the previous about the the guide. I know it's only one quarter, but if the the NII guide I mean, all the all the line items, NII fees, expenses imply some pretty sizable moves. I guess, just starting with the NII, if I'm reading this right, you have it going from to the low 280s to almost $300 million or $297 million just wondering, like, it doesn't sound like I know NIM is up, but, like, what is the driver behind? What's the significant move quarter to quarter? Mike Achary: Yeah. I don't know that we're going to see an increase quite that high. Casey. We have something I think a little bit more modest So again, the guide year over year is to come in at 3% to 4%. And I think that the bias will be definitely toward the lower end of that range. We do expect to have a pretty good quarter in terms of potential NIM expansion. When I say a pretty good quarter, I'm talking about a handful of basis points expansion. And of course, the third quarter we were flat. to. But I don't know that I see the kind of increase in NII that you're referring. Casey Haire: Okay. Alright. And then just the the pay down pressure that you guys are seeing what is, where are you guys I mean, like, I'm hearing private credit a lot. I know it's difficult to kinda quantify our size, but, like, is it you know, how much of of private credit pressure is coming on the on the pay down side? Is it all of it? Is some of it? Or is it you know, I'm just trying to quantify that that pressure. John Hairston: Yeah. Casey, this is John. I'll tackle that one. In the the list of of contra's I mentioned before, the private credit, you know, slash private equity takedowns were about in line with what we've been experiencing. That really wasn't a real it was higher, but it wasn't the lion's share of it. The primary drivers were the $50 million reduction in line utilization through the industrial contractor pay downs. Not lost clients are just projects completing a quarter earlier than anticipated. And then the number of of of organizations that we bank fully that's sold to upstream organizations, not private credit, was the highest we've had, you know, really in several quarters. Maybe maybe last couple of years. So there was a a driver well in excess of $100 million in reductions from that alone. That really made the difference between about a 5%, 5.5%, end of period growth rate and the numbers that we actually announced. Does that answer your question? Casey Haire: Yes. Thank you. So I would anticipate the the the private credit run rate to be about the same depending on the macro environment. I would certainly expect the amount of pay downs from from industry consolidation to decline. But in my comments earlier, I said I don't wanna bank on that. I don't wanna bet on that. As we go into '26. So the adding of additional players to generate loans to offset that potential is part of the recipe as we move into next year. Hopefully, that makes sense. Casey Haire: Yes. Thank you. Operator: We'll go next to Catherine Mealor at KBW. Catherine Mealor: Thanks. Good evening. John Hairston: Hey, Drew. Catherine Mealor: Was gonna get just another question on the margin. And and you've given us the cycle to date betas, on deposits. Is there any reason to believe the next, let's just say, 100 basis points deposit and maybe even with term loans too, but the the betas will be very different than what we've seen in the past 100 basis points of declines? Mike Achary: Yeah. Hey, Catherine, this is Mike. Short answer is no. We expect to expect to be pretty proactive or at least as proactive as we've been in the past in reducing deposit costs. So no big change and we fully expect to come in and hit the numbers that we've kind of talked about as far as what we expect to do on a cumulative basis. Catherine Mealor: I know I've only had a few weeks since the last cut, but you give any any kind of color around what you saw with that last 25 bps cut? The most recent cut? Yes. Mike Achary: Yeah. I mean, it came in. We were able to reduce deposit costs accordingly. And that's what we'll continue to do going forward. If you look at our promotional rates the most current ones right now, our best rate is 3.85% for five months. Then we have three fifteen for eight and eleven. And then we reduced our money market proactive rate to 3.75%. So all of those have been reduced accordingly. And assuming we get two additional rate cuts which is built into our guidance, we expect to be able to continue to reduce rates. We have a bit more in terms of CD repricing in the fourth quarter of about $1.7 billion coming off at about $3.89 That will go back on at about $3.59 We assume about 86% renewal. So those the dynamics that we're looking at. Catherine Mealor: Okay. Great. Maybe just within the same question, if you look at your variable rate, loan yields, Dave, it's already started to come down a little bit. $3.58 to three fifty two quarter over quarter. Was that just from an impact from the most recent cut and kind of just a few weeks of that? Or was there any other mix change kind of already happening at play that we should just kind of be aware of and think. Mike Achary: Well, when we look at our new loan rates on the variable side, we're actually up one basis point from six eighty seven to six eighty eight. So I think the dynamic that you're seeing again is mostly related to mix and just the pricing that we have to face like every other bank does out there in terms of customer impact and how competitive it is. Catherine Mealor: Great. Alright. Thanks for the color. Appreciate it. John Hairston: Okay. Thank you. Operator: We'll take our next question from Gary Tenner at D. A. Davidson. Gary Tenner: Thanks. Good afternoon. Mike, I appreciate the thoughts you just provided on the deposit beta side of things. Can you just maybe provide the spot rate as of September 30 on the deposit just to give us a jumping off point going to the fourth quarter? In terms of our cost of deposits. Yes. Mike Achary: Yes. It's $163 million in September and the third quarter we were up 164. And our cost of funds in September is flat with the quarter at 159. Gary Tenner: Okay. Appreciate that. And then just as it relates to the increase in non-accruals quarter quarter, anything in there just of note? Is that single credit of size? Or or or a collection of multiple, direct? Chris Ziluca: Hey, Gary, it's Chris Ziluca. Thanks for the question. I was feeling a little lonely over here. Yes. I mean, was really a mix of transactions that were in there. Well, all of them in the the C and I space for the most part. If you look at our our consumer loans, for instance, we've been held holding pretty steady from a non-accrual standpoint. Despite some of the challenges that households and and and individuals are experiencing as it relates to kind of higher operate, you know, cost for household cost. We feel we feel pretty good about where we are on the consumer side. And I think really on the c and I side, not really on Cree, You know, it's just really where we are in the cycle. I mean, there are higher operating costs for these companies. They are starting to kind of normalize in their performance and some of them are having issues. We take them through the accrual non-accrual process and reserve accordingly, and we feel pretty good about where we have them from that standpoint as well. Gary Tenner: Thank you. Chris Ziluca: You're welcome. Thanks for the question. Operator: We'll go next to Matt Olney at Stephens Inc. Matt Olney: Hey, guys. Good afternoon. Hey, just on that last question on the credit front. On the criticized commercial loans, I think we continue to move lower on that front. Just looking for some color going forward here. Just trying to appreciate if you're confident that we'll see criticized commercial loans continue to move lower or said in other way, what's the confidence level that we've seen the peak in criticized commercial loans few quarters ago? Thanks. Chris Ziluca: Yes. Thanks for the question. I think a lot of what we saw in the way of a buildup in criticized loans earlier in the last year. Was really kind of a function of how low we had gotten a criticized loan perspective. I mean, if you look at our historical performance, criticized off the back of the pandemic now five years ago, you know, we were able to really kinda hold steady through the next couple of years before things started to kind of percolate from the standpoint of supply chain. Higher operating costs, wage pressure, things like that. Which started to kind of create a little bit of a migration just in general but also then specifically in the criticized loan area. And in earlier, calls, you know, I kind of indicated that it does take somewhere in the neighborhood of four to five quarters for companies to kind of perform in a way that you know, they could justify rehabilitation back to, you know, a past rating or something better than they are or seek alternate financing, or position themselves in a way that they can seek alternate financing. So I think we're seeing a little bit of that activity, come to fruition. And I think it's a mix of both. I think we're seeing companies able to refinance away And then we're also in a position where some of our customers are performing a little bit better off of some of the challenges they may have had earlier so we're seeing that, you know, no crystal ball in the future, but we feel pretty good about a nice return to moderation in criticized loans. Matt Olney: Okay. Thanks for the color on that. And then I guess switching gears, we John, you mentioned trying to outrun the heavier loan pay downs with hiring some new loan producers. Can you just talk more about the opportunities you're seeing for the new hires so far this year? And I guess since we talked last time, we've seen a few more banks with pending sales in some of your growth markets. Just curious about the opportunities as you move into next year. John Hairston: Sure. Thanks for the question. That's a fun topic. I mean, that, you know, everybody wants good bankers and everybody wants experienced bankers. And so, you know, the landscape is certainly competitive. And, you know, we have a couple of benefits that are maybe a little unusual. One of those is the fact that, being a pretty heavy c and d bank as part of ICREE and having managed that overall number pretty low throughout the pandemic, we're one of the lower CRE concentration banks out there. So for organizations that may find themselves a bit full, that may not be as aggressive at hiring out of disruption than we can be. We're actively looking for folks that meet our experience and credit risk acumen to join, and all of that is really an emerging market. And so Texas, Florida, Tennessee, maybe even Georgia and The Carolinas are all places that our client sponsors do projects. That we have the capacity to grow in. And so I would expect to have a good story there as moving to next year. And production for Ikree is way up over last year. But, you know, it takes a little while in construction. To get to our borrowings from the buyers or the owners' equity. But, we'll begin to see that as we get into next year. The other area are just conventional bankers that are business purpose from business banking all the way up to middle market. And that's primarily gonna be where we already have branch coverage. But we don't have high market share, and that pretty much means Central Florida and really all things Texas. I think the opportunities are certainly there. And as we get toward the beginning of the year and sort of the restart of how people feel about how their look their year is gonna look, those in disrupted organizations have their antenna up and you have to have the earnings firepower, which we have, to take people out of agreements that maybe they have to leave a little money on the table to jump ship earlier than when the final assimilation of the two organizations has occurred. And that same thing would just apply to banks that maybe don't have disruption, but bankers may be looking for a place to where certainty of deal closure may be a little bit better. So we plan to be aggressive. And in terms of adding that firepower. And, you know, hopefully, you know, hope there's not a plan, but if I'm a little bit too cautious on the competitiveness and the pay down environment next year, then that would bode well for net growth maybe above what we're contemplating. But I don't wanna take that risk and not hire aggressively while the disruption's out there. So I think I said earlier, we ran at 8.6% net banker growth number for the previous twelve months. And that's you know, we wanted 10%, so we didn't meet what our expectations were for the past twelve months, and that's gonna have to get a good bit bigger. Between now and this time next year. To have surety in that mid-singles growth, you know, quarter over quarter over quarter throughout next year. So, so we got a little bit of hiring work to do there. Feel confident in it. We've learned an awful lot this year about, who's who's easier to pick on and those that are harder to pick on. And so we'll deploy that knowledge as we move into next year. Matt Olney: Thank you. Last answer on the question about it if I didn't give enough detail. John Hairston: No. That's perfect. Thank you. Thank you. Thanks for the question. Operator: And we'll go next to Brett Rabatin at Hovde Group. Brett Rabatin: Hey, good afternoon, everyone. Wanted to go back to deposits for a second. And just if you look at the guidance, you know, the low single digit are up from end of year in '24. That implies pretty strong growth in the fourth quarter I know there was some seasonality in 3Q related to municipal deposits and other things, But any color on the growth in the fourth quarter expectations And then John or Mike, I was just hoping to get you've given a lot of color on deposit. Trends, was just hoping to get maybe how you think about the competitive landscape and just if that's gotten tougher, easier, the same? I know deposit competition is always pretty robust. Mike Achary: Yes, Brett. I'll start. With the deposit question. So yes, the fourth quarter seasonally is usually a pretty good quarter for us in terms of deposit growth. We're usually able to grow the public fund book somewhere between $203 million, $100 million. No reason to expect that that wouldn't be the case this year. That growth tends to be weighted a little bit more toward the end of the quarter. And then on DDAs, again, the fourth quarter seasonally is usually a pretty good quarter for DDA growth. We expect that to be probably in the $200 million range. So if you put those two together, you're getting close to the $400 to $500 million range in terms deposit growth. And that should put us around somewhere between 33.5% year over year. So again, low single digits. And related to the question about competitive pressures on deposits, and deposit pricing, honestly, no real change from our perspective in the last quarter or so. This cycle for whatever reason seems to be a little bit better behaved compared to prior cycles. I think some of that has to do with in our markets maybe the absence of some some irrational players that are no longer with us. For whatever reason, the credit union seem to be behaving a little bit less irrational. I think that's contributed to the overall basically non-big issue deposit pricing quarter. And no reason from right now we expect that to change. With two rate cuts on the horizon and maybe another two in the first half of next year. Brett Rabatin: Okay. That's helpful. And then the other question was just around the organic growth plan, particularly the Dallas operation. You're obviously pushing pretty hard with some new openings of facilities, etcetera. Can you give us any idea of the goals you might have for that market over the next few years? Then it sounds like you might also be thinking about doing a similar approach in some other MSAs? Just any any color on that would be helpful. John Hairston: Sure. I'll take that and then if Mike wants to add some color, he certainly can jump in. You know, the number of offices that we have in the Dallas MSA today is about the same. I mean, today. It'll more than double over the next several months. But that number of offices is about the same number as we got from the old Mid South transaction back, right before the pandemic. However, the book has completely turned over and is today, very much driven toward business purpose clients both on both sides of the balance sheet. And has been growing at north of a 40% CAGR throughout the pandemic. I would anticipate that growth percentage to go up even though the denominator is larger by virtue of not as much as the branches, but also the staffing complement in those locations, which is slated to be a combination of both financial advisors out of wealth where we have a terrific track record in penetration of fee income into customer relationships and then also adding business and commercial bankers in and around those locations. So the where those locations are provides a little bit more of access to client feeling more local. There's a lot of disruption going on in Dallas today and it will be worse in turn well, will be better next year for us in terms of that disruption. Manifesting in the opportunities. So not quite ready to talk about additional locations and where they would be, but we have four different MSAs right now. That we are debating, in terms of mid to late next year laying down a number of additional location additional financial services operations. But we really want to see kind of what disruption may get announced here in the next couple of months before finalizing that plan. But I'm sure by January, we'll be able to talk about that. With a little bit more definition. So you know? But but I think you read the tea leaves correctly, Brett. Dallas, and particularly North Dallas is a very important market to us, not just because the growth rate, but the quality of the business And, you know, one of our aspirational goals that is becoming more in focus as the quarters go by is becoming the best bank in the Southeast for privately owned business. And that's a big goal to have. It's quite aspirational. Think we're one of the best banks today, but not not the best, and we aspire to get there. And in markets like that where you have a lot and a lot of middle-sized to smaller business, being able to be really good and fast have low amounts of air and not waste people's time. Is really a big sales point for moving relationships and talent. And so I think that'll be a good play You didn't specifically mention the fee income piece, but since you brought up the competitive issues before, I'll mention it. And that know, we set out a number of years ago and we talked about investing in fee generating business on just about every call. Seems like, for about a year and a half. And, you know, we see all that benefit this year. And in fact, just in the area of investments, annuities and insurance, which was a pretty meager producer back four or five years ago. Seven of the last eight quarters, that's thrown off $10 million in top-line revenue. The one quarter we missed it, we only missed it about $200,000. So I think that's been established as a core competency and we have just begun to tap those types of categories in the Texas area through adding FAs this year we'll add more next year. So between that and the treasury advisors, that will be the secret sauce to growing deposits. And fee income as we move into 2026. Did I give you what you needed there or did I miss? Brett Rabatin: Yeah. No. That's very helpful, John. And, yeah, for sure, the annuity fees have certainly been a star for the fee income bucket. Appreciate all the color, guys. Thanks. John Hairston: You bet. Thank you. Operator: And that concludes our Q and A session. I will now turn the conference back over to John Hairston for closing remarks. John Hairston: Thanks, everyone, for your attention. Thanks, Aldra, for moderating the call. We look forward to seeing you on the road. Very soon. Operator: And this concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Good morning. My name is Jennifer, and I will be your conference facilitator today. At this time, I'd like to welcome everyone to the BlackRock, Inc. Third Quarter 2025 Earnings Teleconference. Our hosts for today's call will be the Chairman and Chief Executive Officer, Laurence D. Fink; Chief Financial Officer, Martin S. Small; President, Robert S. Kapito; and General Counsel, Christopher J. Meade. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period. Thank you. Mr. Meade, you may begin your conference. Good morning, everyone. Christopher J. Meade: I'm Chris Meade, the General Counsel of BlackRock, Inc. Before we begin, I'd like to remind you that during the course of this call, we may make a number of forward-looking statements. We call your attention to the fact that BlackRock's actual results may, of course, differ from these statements. As you know, BlackRock has filed reports with the SEC which lists some of the factors that may cause the results of BlackRock to differ materially from what we say today. BlackRock assumes no duty and does not undertake to update any forward-looking statements. So with that, I'll turn it over to Martin. Thanks, Chris, and good morning, everyone. Martin S. Small: It's my pleasure to present results for the 2025. Before I turn it over to Larry, I'll review our financial performance and business results. Our earnings release discloses both GAAP and as adjusted financial results. A reconciliation between GAAP and our as adjusted results has been included in the tables attached to today's press release. I'll be focusing primarily on our as adjusted results. At BlackRock, Inc., we always challenge ourselves to raise the bar; our results consistently reflect that mindset. We've been focused on building capabilities that we anticipate our clients will need in the future while also implementing some of the largest and most multifaceted mandates in our history. This combination of forward-looking investment and consistent execution has fueled strong results across our business. The momentum we saw in the first half of the year accelerated in the third quarter. Our builds across ETFs, private market whole portfolio, and cash management drove 8% organic base fee growth over the last twelve months. That's our highest level in over four years, but even more importantly, it's broadly diversified. We have great momentum across both our foundational businesses and categories that we've developed in just the last few years. That strength and diversification is resonating meaningful opportunities across regions, client channels, product types, and asset classes. We're entering what's typically our seasonally strongest quarter and coming off significant milestones in just the last ninety days. Since July 1, we've closed our acquisitions of HPS and Elmtree, announced an $80 billion SMA solution with City Wealth, and onboarded a $30 billion pension mandate. These represent just the start of what our newly integrated platform can unlock. We've expanded our capabilities across private markets, digital assets, data, and technology. That strategy now moves forward with greater strength and scale. The opportunity in front of us far exceeds what we've ever seen before. We finished the third quarter with record AUM, record units of trust of $13.5 trillion. Over the last twelve months, clients entrusted BlackRock, Inc. with nearly $640 billion of net new assets, powering 8% organic base fee growth. We generated $205 billion of net inflows in the third quarter, reflecting 10% annualized organic base fee growth, our highest quarter since 2021. This organic base fee growth was driven by broad-based client demand for iShares, private markets, systematic outsourcing, and cash strategies. These are all capabilities we've invested in over recent years and demonstrate the success of our structural growth strategy. Moving to financial results, third quarter revenue of $6.5 billion was 25% higher year over year, driven by the acquisitions of GIP, Preqin, and HPS, organic base fee growth over the trailing twelve-month period, and the positive impact of market movements on average AUM. Operating income of $2.6 billion was up 23% year over year. Earnings per share of $11.55 increased 1%, reflecting higher operating income offset by lower non-operating income and a higher diluted share count in the current quarter compared to a year ago. The higher share count included 6.9 million shares issued at the close of the GIP transaction on October 1, 2024, and 8.5 million BlackRock SubCo units issued at the close of the HPS transaction on July 1. The SubCo units are exchangeable on a one-for-one basis with BlackRock common stock and included as if converted in the company's fully diluted shares outstanding. Non-operating results for the quarter included $84 million of net investment losses, primarily due to a mark-to-market non-cash loss linked to our minority investment in Circle. Our as adjusted tax rate for the third quarter was approximately 24% and benefited from discrete items. We continue to estimate that 25% is a reasonable projected tax run rate for 2025. The actual effective tax rate may differ because of nonrecurring or discrete items or potential changes in tax legislation. Third quarter base fee and securities lending revenue of $5 billion increased 25% year over year, reflecting the positive impact of market beta on average AUM, organic base fee growth, higher securities lending revenue, approximately $215 million, and $225 million in base fees from GIP and HPS, respectively. On an equivalent day count basis, our annualized effective fee rate was approximately 0.5 basis points higher compared to the second quarter. This increase was primarily due to the onboarding of higher fee alternative credit assets of HPS, which was partially offset by $48 million of lower private markets catch-up base fees compared to the second quarter. Performance fees of $516 million increased 33% from a year ago, primarily reflecting $270 million of performance fees from HPS. Quarterly technology services and subscription revenue was up 28% compared to a year ago, reflecting sustained demand for our full range of Aladdin technology offerings and the closing of the Preqin transaction, which added $65 million of revenue in the third quarter of this year. Excluding Preqin, technology services revenue would have increased approximately 12% year over year. Annual contract value, or ACV, increased 29% year over year, including the impact of Preqin. ACV increased 13% organically. Total expense was 26% higher year over year, primarily driven by higher compensation, sales, asset and account expense, and G&A expense. Employee compensation and benefit expense was up 33% year over year, primarily reflecting higher incentive compensation associated with performance fees, as well as higher operating income. The year-over-year increase also reflects the impact of the onboarding of GIP, Preqin, and HPS employees. G&A expense was up 18% year over year, primarily due to M&A transactions and higher technology investment spend. Sales, asset, and account expense increased 21% compared to a year ago, driven by higher direct fund expense and distribution costs. Direct fund expense increased 22% year over year and 5% sequentially, primarily as a result of higher average ETF AUM. Our as adjusted operating margin of 44.6% was down 120 basis points from a year ago, reflecting the impact of higher performance fees and related compensation. We continue to deliver margin expansion on recurring fee-related earnings. Excluding the impact of all performance fees and related compensation, our adjusted operating margin for the third quarter would have been 46.3%, up 110 basis points year over year. We provided additional disclosure in our earnings supplement on the contribution of performance fee-related compensation to total expense. In line with our guidance in July, we continue to expect a low teens percentage increase in 2025 core G&A expense. This year-over-year core G&A increase is mainly driven by the onboarding of GIP, Preqin, and HPS. Our capital management strategy remains consistent. We invest first in our business, either to scale strategic growth initiatives or drive operational efficiency, and then return cash to our shareholders through a combination of dividends and share repurchases. In the third quarter, we repurchased $375 million worth of shares. At present, based on our capital spending plans for the year and subject to market and other conditions, we still anticipate repurchasing at least $375 million worth of shares in the fourth quarter, consistent with our previous guidance. BlackRock's third quarter net inflows of $205 billion reflected deepening client engagement and were led by a new record flows quarter for iShares ETFs. iShares ETFs generated $153 billion of net inflows in the third quarter. Core equity and index fixed income led the way, with $53 billion and $41 billion of net inflows, respectively. Our digital assets, EGPs, raised another $17 billion in the third quarter. Our flagship offerings in iBit and Ether were among the top five insulin products in the ETP industry. We're also seeing demand for our high-value, higher-fee active ETFs, which gathered $21 billion of net inflows. Our institutional active franchise saw $22 billion of net inflows, driven by the onboarding of a $30 billion Dutch pension outsourcing mandate. This inflow was partially offset by a $15 billion single client transfer from quantitative to index equity with an immaterial revenue impact. Institutional index net outflows were $14 billion, inclusive of this transfer. Retail net inflows of $10 billion were led by demand for active fixed income, liquid alternatives, and Aperio. Across private market strategies, we saw $13 billion of net inflows driven by strength in private credit, multi-alternatives, and infrastructure. Work with clients spans their entire portfolios, from long-dated private markets exposures to more near-term liquidity needs. Our cash management platform recently crossed $1 trillion in AUM, with $34 billion of net inflows in the quarter. The platform has grown 45% in just the last three years. We're seeing demand across scaled money market funds, customized and tokenized liquidity products, and money market ETFs. Our partnership with Circle, as the primary manager of their cash reserves, is driving meaningful growth. Our mandate surpassed $64 billion this quarter. BlackRock, Inc. delivered some of the strongest organic base fee growth in recent history, and we enter the fourth quarter in an excellent position. The fourth quarter has traditionally been our strongest for organic growth. In my nearly twenty years at BlackRock, Inc., I've never been part of deeper, more far-reaching client engagements than in recent months. I believe our strategy will continue to deliver for both our clients and shareholders, resulting in market-leading organic growth, differentiated operating leverage, earnings, and multiple expansion over time. With that, I'll turn it over to Larry. Thank you, Martin. Laurence D. Fink: And good morning to everyone. Thanks for joining the call. Our third quarter results reflect the strength of our global relationships and the deepening trust we've earned with clients. All of the high conviction growth themes we anticipated and invested ahead of are now leading in client conversations. BlackRock, Inc. is always thinking out to the future, towards what our clients will need and want. ETFs, private markets, tech and data, digital assets are just a few examples. We were ahead of the game in recognizing their importance for clients, and we took leading positions. The accelerating activity we're seeing is a validation of the BlackRock, Inc. business model. We nurture enduring and local client relationships, and we invest boldly. Total net inflows of $205 billion were positive across all asset classes and client types, and powered 10% organic base fee growth in the quarter. That growth is even more notable than its diversification. Just looking across our top five organic base fee contributors, it's our systematic franchise, it's our private credit franchise, it's a digital asset franchise, our cash franchise, and the whole business of outsourcing portfolios and general accounts to BlackRock, Inc. BlackRock, Inc.'s multiple sources of growth differentiate us and make us really optimistic for the future. In April, tariff announcements shocked global markets. At the time, I traveled to several of our international offices to reinforce BlackRock, Inc.'s strong local mandates with each of our country managers. We bring our global expertise and tailored local insights to clients through an on-the-ground presence. That presence has strengthened our position as a trusted partner and advisor over many years, and it continues to further strengthen in 2025. Over the last twelve months, we generated 8% organic base fee growth, exceeding our target each quarter. Revenues grew 20%, new AUM records. Clients have entrusted BlackRock, Inc. with $1.4 trillion of net inflows over the last three years, and $2.3 trillion over the last five years. When BlackRock, Inc. acquired BGI and iShares, we gave investors the ability to blend active and index strategies seamlessly, something they hadn't been able to do before. Today, the convergence of public and private markets is increasing. Clients are focused on strategies and solutions that work across the whole portfolio. Investors are seeking deeper, more dynamic partnerships across public and private asset classes. They come to BlackRock, Inc. for a partner in portfolio management and in technology across a full range of capital markets. As I meet with clients around the world, they've been excited about the opportunity to do much more with BlackRock, Inc. And it's expanding the growth potential for GIP, HPS, and Preqin. Our history of integrations is very different, and it has set us apart. BlackRock, Inc.'s acquisition philosophy has always been about growth. What makes our acquisition so successful is our belief in full integration. Our culture strengthens and evolves as we welcome new teams and new capabilities. But we continue to operate as one BlackRock, Inc., not a collection of boutiques. We do the work to make sure we are seamlessly connected to our clients with one platform, shared goals, and a common Aladdin technology. We're organized so the clients have access to all of BlackRock, Inc. in a comprehensive, consistent way. We intentionally structured the GIP HPS transaction so that the consideration was largely in BlackRock, Inc. equity, with long-dated performance milestones. We all have the same interest as significant shareholders alongside our broader shareholder base. Our acquired firms are becoming a part of the fabric of BlackRock, Inc., and I'm proud of the successes we see in just these early days. Our closing of HPS just three months ago brought more than 800 colleagues to the BlackRock, Inc. family. Our combined platform is becoming a first call for clients and borrowers around the world. Clients' engagement is even stronger than we expected, especially in the insurance and wealth channels. We're positioned to be a preferred capital partner with insurers while maintaining our balance sheet light approach. In wealth, we brought together highly complementary capabilities that position us to be a leading player. On the investment side, our scaled franchises range from our non-traded senior bank BDC HLEN to credit solutions across the capital stack. HLEN continues to generate around $1 billion of net inflows a quarter, and from a distribution perspective, HPS has had strong connectivity to private banks and high network practices. Now that is now augmented by BlackRock, Inc.'s extensive network across wirehouses, independents, and RIAs. Our $370 billion private financing solution platform, alongside our over $3 trillion public fixed income franchise, positions us to be our client's strategic partner across public and private debt markets. And just a year into our closing of the GIP acquisition, we made significant progress in both fundraising and deployment. GIP5 closed above its $25 billion target in July, and it represents the largest ever client capital raise in a private infrastructure fund. Our AI partnership continues to attract significant capital interests. Market-leading global technology, energy, and financial organizations are consolidating around AIP as a partner of choice. AIP includes MGX of Abu Dhabi, Microsoft, KIA of Kuwait, and Temasek of Singapore, and Technology and Energy Advisors in Nvidia, xAI, Cisco, GE, Brnova, NextEra Energy. Our combined relationships and expertise are coming together to advance key discussions on fantastic investment opportunities for our clients. GIP's track record in one of the largest data centers in the United States has been instrumental. There are significant opportunities for us ahead in the data center space. An estimated $1.5 trillion of capital is going to be needed in the next five years in just the core and shell of data centers, and that's not including the chips. The growth of cloud computing and AI are propelling this capital demand, and BlackRock, Inc. for GIP is well-positioned to expand our leadership. Teams across BlackRock, Inc. are exploring how AI can play a bigger role in making markets more accessible and more efficient. We see future commercial opportunities in using tokenization to further bridge the gap between traditional capital markets and the growing digital asset space. This is one of the most exciting areas of growth in financial markets. There's over $4.5 trillion in value sitting in digital wallets across crypto assets, stablecoin, and tokenized assets. We see this market growing significantly over the next few years. Today, there's no access to high-quality traditional investment products in digital wallets. BlackRock, Inc. plans to change that. BlackRock, Inc. is a foundational player in the ecosystem. We manage the largest crypto asset ETP with over $100 billion AUM. We're the largest reserve fund manager for stablecoin with over €60 billion in Circle's reserve fund. And we built a tokenized liquidity fund for digital assets native investors, which is available across multiple public blockchains. Bittle has grown to nearly $3 billion in AUM. Now we're exploring tokenizing long-term investment products like iShares. We envision a future where investors never need to leave a digital wallet to allocate efficiently across crypto, stablecoin, and exposures to long-term stocks and bonds. The U.S. economy has been propelled in many parts by its leading market infrastructure. I believe the U.S. needs to accelerate regulatory clarity and investments in digital assets innovation. We need to be a leader in market infrastructure for much of the larger part of the world of digital assets. BlackRock, Inc. brings technological and operational scale, client trust, and a global footprint across 100 countries. We believe all these factors put us in a prime position to be a part of global conversations around tokenization and digital assets. We've seen through ETFs how innovation in financial technology can unlock growth by making it easier for more investors to access the capital markets. Our iShares franchise today has crossed over $5 trillion in assets during the third quarter, with record net inflows of $153 billion. Double-digit organic base fee growth was once again led by digital assets, bond ETFs, and active ETFs. Our digital assets and active iShares franchise is an example of how BlackRock, Inc. operates as an innovation and scale engine. We build these businesses from the ground up to be a category leader in just a few years. Our digital assets, ETPs, and active ETFs have grown from practically zero in 2023 to over $100 billion in digital assets and over $80 billion in active ETFs. The rapid growth of these premium categories is another proof point of our success in scaling distribution and quickly adapting to new offerings and in new markets. In Europe, the growth of the ETF market is at an inflection point. Our 2025 net inflows of $103 billion have already surpassed last year's record full-year flows. We're bringing learnings from our U.S. offerings to help grow the ETF market in Europe and better serve our clients in this region. And we're planting seeds for the future through our local investments as we facilitate the growth of capital markets and investing around the world. In India, our GEO BlackRock joint venture recently launched its first systematic active equity offering, building on our already high-performing global systematic franchise. The Indian market remains largely untapped and is today a country of savers rather than investors. Through GEO BlackRock, we're enabling individuals to more easily invest in their local economies and their local financial assets, helping them build towards a more secure financial future. Many of our clients are investing on behalf of retirement savers, and they're turning to BlackRock, Inc. to scale and modernize their retirement plans options. BlackRock, Inc. continues to lead with innovation for retirement. With LifePath Paycheck, we're embedding lifetime income into plan options. And we're working to enable access to growth-oriented private market strategies in 401(k)s. Defined benefit pension funds and pension plans have been investing in private markets for decades. And we believe this opportunity should also be available for U.S. defined contribution plans. Even if a path clears for private markets in 401(k)s, the fiduciary standard rule still holds. Plan fiduciaries will need to carefully diligence all investments, just as they are required to do today. I think that could create an acceleration in demand for all the Aladdin products, including Preqin. Plans would need better data, better analytics on private markets to substantiate and justify their inclusion in 401(k)s, representing a large potential unlock for Aladdin and Preqin. We're already helping clients better manage private markets investments with eFront alongside Preqin performance and investment data. We recently signed our first whole portfolio technology mandate encompassing Aladdin, eFront, and Preqin as a seamless public-private workflow and data solution. And we're continuing to engage with clients on opportunities to integrate these capabilities to drive greater efficiency and growth for each and every one of our clients' portfolios. I'm immensely proud of the connectivity we've seen from employees and clients alike as we fully integrate GIP, HPS, and Preqin. As we've grown our firm, we've also evolved our leadership structure to help us meet client needs and develop our talent. We recently expanded our executive team to include a group of exceptional enterprise leaders to better serve clients and advance our long-term strategy. Together, we're both defining and fulfilling the future of asset management through a truly differentiated platform. One that is anchored by public, private, investment models backed by Aladdin technology united by a shared culture of performance and client service. I have never been more excited about the future of BlackRock, Inc., our firm, and the opportunities ahead for the entire worldwide position for BlackRock, Inc. in the future. Operator, let's open it up for questions. Operator: Thank you. Please limit yourself to one question. If you have a follow-up, please reenter the queue. Your first question comes from Craig Siegenthaler with Bank of America. Craig Siegenthaler: Morning, Craig. Hey, good morning, Larry. Hope everyone's doing well. Question is on the breadth of the 10% base fee organic growth in the quarter. So we can all see that iShares was the major driver of the AUM flows, but I was curious on what the contribution looked like on a revenue-adjusted basis, really because it looked like alts, digital assets, and systematic all look pretty sizable. When you look at it on a base fee basis. Thank you, Larry. Laurence D. Fink: Pardon? Hi, Craig. Thanks for the question. Just think contextually, I go back to our Investor Day in June, we outlined our growth plan to 2030 targeting five-plus percent organic base fee growth. Organic base fee growth continues to outperform that five-plus percent target at 10% for Q3, 8% in the last year, 8% for the trailing twelve months. And that growth continues to take higher each quarter, Craig. From 5% in the third quarter last year, 6%, seven in the few quarters, and now 10% for the third quarter. BlackRock, Inc.'s strategy has always been a whole portfolio strategy. We've always been about breadth, but I'd say this quarter and the way the strategy is playing out is what we're trying to do. That breadth is really impressive. It's every corner of a client's portfolio. And you see that in the contribution. The growth was highly diversified across franchises. Some of those are foundational platforms, like ETFs that we've been in for years, and others are more recent innovations from just the last few years. The top organic base fee growth contributors, you're right, they were in digital assets with iBit and Etha in the top grossing categories. Active ETFs we've had $40 billion of flows year to date that basically doubles what we did in active ETFs last year. Including two of the leading tickers there with DYNF that managed by the systematic team, that's now a $30 billion franchise. And BINC, the flexible income fund that's managed by Rick Reeder and the team, that's a $13 billion franchise. We had huge outsourcing wins that we noted. The Imperial direct indexing business continues to really grow a double-digit organic growth. And overall, we're seeing liquid alts also as a contributor from systematic and fixed income teams as well. With more growth coming from private markets, systematic strategies, and models, we think we should be able to power organic base fee growth. I think we're consistently at six, 7% or higher. And when markets are supportive like this, with risk-on sentiment, think that can tilt even higher. The last thing I'd flag is these strategies are contributing I think, to field improvement. We continue to see deals on flows increasing with these high-value add capabilities. We showed that in Investor Day in June. The fee yields on new assets to the firm are six to seven times higher than they were in 2023. And we'll continue to really aim at serving clients' whole portfolios and driving breadth. Operator: Your next question comes from Michael Cyprys of Morgan Stanley. Michael Cyprys: Hey, morning. Thanks so much for taking the question. Just wanted to ask about tokenization. I was hoping you could talk about your ambitions and steps that you're taking there, including how you might go about tokenizing ETFs. You already have the tokenized money fund with Petrol. So if you could talk about some of the traction there you're seeing and more broadly on use cases, how you see this developing? And when we think about tokenization, your views on what's been the holdback from wider adoption as this technology has been around for some time. What do you see as the major unlock here? Laurence D. Fink: So, first of all, this is probably one of the most exciting potential markets for BlackRock, Inc. Let's just start off with our global footprint. With our scale operation in ETFs worldwide. And our leading position in terms of digital assets that we already are a part of. We are having conversations with all the major platforms today about how can we move forward on the whole digitization and tokenization of traditional assets they could play a role in the role of digital wallets. The theory is, as I said in my prepared remarks, if you could keep all your money in a digital platform, in a digital wallet, you could then seamlessly buy what we would traditionally say, traditional assets like stocks and bonds. You know, there was we we we we we had a survey related to the, you know, the of young people who are investing in equities that came out last weekend. And we believe if we could orchestrate a business plan around tokenization of ETFs. It is young people who are heavily users of tokenized assets. That we could introduce them to more and more traditional assets sooner in their life path the more prepared people will be related to long-term savings opportunities like in retirement. And so we are in deep conversations. We're spending a great deal of time on the tech on trying to develop our own technology related to do this. I do believe we have some exciting announcements in the coming years on how we could play a larger role on this whole idea of the tokenization and digitization of all assets. I mean, it is our belief that we need to move rapidly, not just financial assets, but we need to be tokenizing all assets. Especially assets that have multiple levels of intermediaries. So when you see the intermediaries in each and every intermediary is charging fees, for instance, like in real estate, the tokenization of these types of assets would eliminate much of the fees and it would make it you know, we're talking about homeownership and home the cost of homeownership. It would reduce the cost of buying real estate. That's something that we're not focusing on, but that to me, that is just one of the great applications and the simplification. But if we could legitimately move towards digital offerings of ETFs through tokenization, it could bring down the execution cost, the ability to deliver seamlessly remaining in a digital wallet environment. We believe this will begin a sooner and a broader pathway for more investments in our capital markets across bonds and stocks. Martin, do you want to add anything to that? You got it? That said, thank you. Operator: We'll go next to Alex Blostein with Goldman Sachs. Alex Blostein: Hi, Alex. Hi, Larry. Good morning, everybody. Question you guys around private credit. The market has grown increasingly anxious given some of the recent dynamics both related to perhaps growth kind of amid lower rates and tighter spreads. As well as some of the kind of specific credit names out there. I'm curious what the HPS team is seeing on the ground, both with respect to credit trends across their direct lending portfolios in the third quarter. And any growth implications you're seeing for the asset class broadly from lower rates and tighter spreads? Thanks. Martin S. Small: Thanks, Alex. Hope you're doing well. So listen, I'd start by saying just that the heritage of BlackRock, Inc. and HPS definitely the combined firms it's steeped in rigorous underwriting. It's steeped in managing credit risk. Our clients, they expect us to generate risk-adjusted returns, attractive risk-adjusted returns, and they also, of course, expect us to protect their investments and protect their principal. So we've been talking a lot with the teams about the news. But I'd say the teams are generally seeing strong credit quality from borrowers. They're generally seeing a positive environment for credit investing. Even in syndicated loan markets, default rates have been declining. We, of course, read the same headlines that you do around private credit bankruptcies. But those exposures are actually in syndicated bank loan and CLO markets. They're not with large private credit managers and direct lending books. And in those very public cases, the ones that we're reading about, you're reading about, potential frauds also been reported. I think stepping back, when we talk to the teams, they always highlight the private credit market, the of banks and public debt markets is a 2-plus trillion dollar market. It's mainly focused on direct lending to corporates. Those are companies that borrow in private credit. They're not inherently riskier than those that borrow with banks or syndicated loan markets. And the team would highlight that private credit lenders have more control over credit agreements and terms, tend to have more access to management teams, have more information about company performance relative to the public markets. I think they'd also flag on much of what we're reading in the news that private asset-based finance is a smaller market, call it somewhere between $203 billion and $1 trillion, and the consumer receivables portion of that market is even smaller at maybe 10% of total. It's smaller in scope, and the reported cases look more like pockets of stress and things like deep subprime, or, again, where there's been potential fraud reported. They don't look like broad stresses on asset-based finance or consumer credit. All that said, I know the teams are being very vigilant with our clients and monitoring credit conditions, but they're not seeing widespread credit stresses at this point. We're seeing steady allocations to our non-traded BDCs in HLEND and B debt. You see the deployment numbers in the earnings release are strong and steady. They would tell you the historical experience is that when syndicated loan markets and banks may reduce their lending activity and volatility, that tends to be some of the best opportunity for private credit deployment. And the potential for wider spreads. That's generally, I think, good for continued access to credit for corporates. But it's also a good opportunity for clients to secure excess spread and long-term attractive risk-adjusted returns. Operator: We'll go next to Ken Worthington with JPMorgan. Ken Worthington: Hi, good morning. Good morning. Thanks for taking the question. You mentioned throughout the call the success you're having in your active ETFs. There's been recent developments to potentially create ETF share classes for mutual funds. What could this mean for BlackRock, Inc.? And do you think this could change the ETF landscape? Martin S. Small: Thanks, Ken. Let me start by just saying that there's a proven track record that the ETF vehicle, the ETF wrapper, I think, is most optimal for the management of active equities and fixed income. We've launched almost all our active strategies that are new strategies in the last few years in ETF format. You can see the results that we've highlighted in our active ETF book. I talked a bit about DYNF managed by Raffaele Savi in our systematic team. That's a $30 billion ETF today, $10 billion of flows this year. BINC, the flexible fixed income ETF managed by Rick Reeder and the fundamental teams, $13 billion plus. Our active ETF inflows are over $40 billion. So there's a proven track record that this wrapper and vehicle is optimal for managing these strategies. That said, we view the introduction potentially of ETF share classes as a positive development, I think, for investors moving from brokerage to fee-based advice relationships, and the ability of wealth and asset managers to serve them more efficiently in that context. At BlackRock, Inc., we're definitely committed to providing clients choice on the investment products we offer. And we ultimately think the multi-share class structure will allow advisers and investors to choose share classes that best fit their needs. Not just about investing, it's about their operational model. There's a lot of excellent work being done across the industry. I'm part of the operational teams in the investment company institutes that's working to operationalize ETF share classes, especially with service providers and intermediaries. And so there's really good progress there, but it'll take some time for this to work its way, I think, through the product ecosystem. For BlackRock, Inc., an ETF share class would allow us to leverage our mutual fund AUM and track records to offer mutual fund strategies need ETF wrappers. It would allow us to expand distribution reach within fee-based models and self-directed accounts where ETFs are becoming more of a vehicle of choice. As far as what we would pursue, we're going to evaluate that on a fund-by-fund strategy level basis, whether to offer an ETF share class. These considerations that we'd apply would be things like does the investment strategy fit well to the creation and redemption process? Does the portfolio turnover match well with creation and redemption? How do we think about transparency in the shareholder base? For example, ETF share classes, they're not as relevant for fund shares largely held in retirement accounts or brokerage. So this really is a bottom-up kind of building brick by brick by product and platform set of questions. I do think it could give us an opportunity to expand our share in the liquid active market, capturing money in motion as we continue to see a transition from mutual funds to ETFs. Again, that'll take some time to play out, but we've really been able to capture the flag, I think, in active ETFs. And this would give us another lever to do so. Operator: We'll go next to Dan Fannon with Jefferies. Dan Fannon: Good morning, Dan. Thanks. Good morning. Good morning. I just wanted to follow-up a bit more on private credit. You talked about momentum in insurance and wealth with HPS. So I was hoping you could expand upon that opportunity a bit more in terms of what you're specifically doing in terms of expanding distribution as well as give the contribution of all the of what HPS can in terms of flows did in the quarter. Thank you. Martin S. Small: Great. Thanks so much for the question. Let me tackle each of those. So we've been really on what we're trying to do, I think, on the private credit markets. Both in delivering private credit to insurance portfolios and in trying to deliver, I'd say, kind of retail alts more broadly. Start with the fact that BlackRock, Inc. is the largest insurance company general account manager in the industry with over $700 billion of assets across core fixed income. Insurance company asset management is a really highly customized effort working with clients every single day. It's not an arrangement where clients say, let's give you some money and here's a benchmark. Go beat it. You're highly connected. You're basically insourced by the company. To be looking at premium cash flows every day, to be thinking about credit every day, to be thinking about the intersection of accounting and capital in managing those portfolios. So we think we're in a great position effectively being extensions of the in-house team to help insurance companies rotate their portfolios to build great public-private portfolios in particular with exposures to high grade. We have over 20 conversations going on now with the largest leading insurers in the general account about building private ABF and building private high-grade exposures. The team at HPS has brought some really terrific talent both on the origination, asset management, but also the insurance solution side. Those have been core skill sets with BlackRock, Inc. as well. And being able to integrate all of that with Aladdin, we think will really allow us to grow and make meaningful progress here. Those discussions are all ongoing. We're starting to see some wins pull through. And I expect you'll see a lot more of that in the numbers into 2026. When I think about the wealth markets, HPS has a long heritage here of building, I think, a market-leading BDC in HLEND. Across the private wealth market. BlackRock, Inc. has the largest distribution teams and great home office relationships across the U.S. and Europe. We really see an opportunity to accelerate what we're doing here. We are accelerating the launch and marketing of semi-liquid products for wealth in both the U.S. and Europe across private credit, capital solutions, multi-asset credit and interval funds, triple net lease REIT, real assets, multifamily and senior housing, and, of course, model portfolios. I think Scott Kapnick laid this out really well at Investor Day. With a vision to go from probably what's about $30 billion of retail alts today a fully consolidated basis with all these capabilities to $60 billion plus across private markets for wealth by 2030. We think there's real upside in that number, and we'll be looking forward to working on that with the teams over the coming quarter and into 2026. Operator: We'll go next to Brennan Hawken with BMO. Brennan Hawken: Good morning. Hi. Larry. Thanks for taking the question. You spoke to this a little bit in your prepared remarks, but I was hoping to get maybe a bit more color on it. You guys have now done two rather substantial mergers with the private asset side. And BlackRock, Inc. has got a very strong M&A track record. But these businesses are kind of different than a lot of the sort of platform approach. Given how alpha-oriented they are. So I was hoping to hear a little bit about how you're adjusting the approach to integration in order to maintain that One BlackRock, Inc. approach even though these businesses are rather different? Laurence D. Fink: Of course, they're different, but we were already in those beforehand. And we had teams that are absorbed and part of the overall private credit team and the infrastructure team. We look at these integrations no differently than the integrations we did years ago with BGI or Merrill Lynch Investment Management. In actuality, those merger integrations were far more difficult than what we're accomplishing here because those were much broader in developing the entirety of the firm. This is not enveloping the entirety of the firm by any imagination. We, you know, we're so the reality is what I think is as our new partners join the firm and they see the power of the platform, as they are participating in more and more of our presentations where we have conversations about Aladdin. As an insurance company, we do have conversations about LifePath paycheck. It is about how can we take on a part of their general account, let's say, in private credit, how can we invest in infrastructure to help their general account? I think what we've witnessed and now we, you know, in October 1, we crossed the one-year anniversary with GIP. I would say across the board throughout the firm, the success of integration, the success of interconnectivity between all our parts of the firm, the interconnectivity with our clients worldwide has been a huge success, and we're gonna have many, many more announcements over the coming year about all the successes we're seeing in infrastructure. With GIP and BlackRock, Inc. And I think we'll be the HPS closing was three months ago, but we're not as far down the pathway as we were at HPS. But these are these take time. And in some cases, they take, as you know, one and a half, two years to fully integrate. As I said, the GIP integration was probably less than six months. In terms of fully integrated onto the platform. So we actually feel very, very good about it because I think as more and more of our new partners and more and more of our old partners who are now part of the new platform seeing the virtue and the business logic, and they're seeing it firsthand, it brings that spirituality of everybody understanding how this could be built forward. So it's early with HPS. We are far down the road with HPS, we're actually far down the road with Preqin. Which is another one. I think we feel as strong and as good as ever related to the integrations of these organizations. As I said in my prepared remarks, we do all the hard work upfront. The key is if we are going to win whole portfolios, we cannot represent ourselves as a boutique. So I think across the board, our more and more of our teams are realizing we can't just go in there and selling a product. We're going there in a comprehensive way. Now indeed, clients, they only want one product, and that's what we're going to try to do. But then we then bring the entirety of the firm together, and then it expands the conversation, and they see the breadth of the opportunity. And I could highlight many different insurance companies now where we had this legacy huge platform that Martin talked about earlier we had over $800 billion, $900 billion of insurance assets. Now bringing those relationships into HPS, those relationships with GIP, it shows the acceleration of our business and the opportunity. So I could not be more happy. That being said, we're not perfect. Everything takes time. But I think our business model is intact. And it is going to again, and I want to underscore it again, differentiating yourself versus all the other organizations that generally add on different businesses, but they keep them siloed boutique, we will not do that because we want to see each and every client worldwide as one firm. And through that, we are able to win more share of wallet by representing ourselves to the organization as one firm, one conversation. Operator: Your next question comes from Brian Bedell with Deutsche Bank. Brian Bedell: Great. Thanks. Good morning, Brian. Good morning. Thanks for taking my question. A lot of good things to talk about. If I can tie two concepts together, the tokenization concept that you discussed and then tying that with maybe model portfolio. So as you think about exploring tokenization opportunities, do you envision having this be BlackRock, Inc. centric digital wallets or rather participate in the broader intermediated ecosystem allowing your products to be tokenized therefore sort of open on an open architecture basis? And then tying it into model portfolios, is there an opportunity to create BlackRock, Inc. centric digital wallet model portfolios? Martin S. Small: Great question, Martin. Thank you. Listen, the first thing I'd do is I'd echo Larry's comments. This is one of the most exciting areas in the financial markets. There's over $4.5 trillion of value sitting in digital wallets across crypto assets, stablecoins, and tokenized assets. But Larry's point here resonates, which is there's really no access to long-term investment products. And so our goal is to basically replicate everything that sits in traditional wealth management, everything that sits in traditional finance, in the digital wallet so that an investor never leaves, never needs to leave the digital wallet in order to build a long-term investment portfolio that's high quality, in order to build an asset allocation portfolio that can mix stocks, bonds, cryptos, commodities, and the like. And we really think that model is best executed through partnerships, which is what we've been pursuing. We have successful partnerships with many of the leading exchanges and providers. And so that's pretty much what we expect and what we're actively working on, as Larry mentioned now. And so we do see a world where we could build great model portfolios that bring together crypto assets, tokenized long-term investment products, and other exposures all natively in your digital wallet with all the same technologies effectively that we've used to build a scaled model portfolio platform. Tokenization can make that even better, faster, more efficient. When I think about some of the operational things that happen in managing a model portfolio today, especially one that's public-private, it's having to deal with different settlement systems. It's having to deal with PDFs, sub docs for private markets, and then dealing with cash markets for t plus one mutual funds or ETFs. The idea that all of these could be cleared and instantaneously settled in a tokenized market could make model portfolios even better than the ones that we know in traditional finance. So that's where we've gained a lot of our energy. Operator: Your next question comes from Ben Budish with Barclays. Ben Budish: Good morning, Ben. Hi. Good morning, Larry. Thanks for taking the question. I wanted to ask just a few housekeeping questions on HPS and the private markets business. I guess maybe two I can wrap into one. First, just on the performance fees, I think the $270 million reference came in a bit ahead of what was sort of implied by the guidance last quarter. So curious what came in better than expected. And then just looking at your private markets flows, those sort of stepped up nicely sequentially as they did earlier in the year when you acquired GIP. Just curious if we're looking at a fair sort of run rate as we think out over the next several quarters or anything unusual about this quarter? Thank you. Martin S. Small: Thanks very much for the question. So as I mentioned in my prepared remarks, HPS added $225 million in base fees in the quarter and $270 million in performance fees inclusive of Part one fees. HPS and GIP, they're both stable, high earnings power businesses. I think you've all had a chance to observe kind of HPS, excuse me, GIP management fee, run rates now for a couple of quarters. HPS now for this quarter. Stable high earnings power businesses, think the third quarter is a good starting point for modeling HPS management fees. The performance fees have some seasonality to them. I think we'd expect slightly lower performance fees from HPS in the fourth quarter. And so I think that's a good model. Just in terms of, I think, kind of the deployment numbers, and flow numbers that you've seen, I think quarter, I think in private credit, is a good indicator of kind of the velocity that we've seen a mix between deployment that's coming from drawdown funds like the junior capital strategies as well as coming out of HLEND and the BDCs. I'd say in infrastructure, that can tend to have a bit more of periodicity to it. There's large transactions, and then there's larger realizations, and you see some of that come through. In the move of Impre AUM. Those teams are tending to do kind of bigger, more episodic deals. So I'd expect those flows to have a little bit more periodicity to them rather than the private credit flows that are a little bit more regular way. Operator: Your next question comes from Bill Katz with TD Allen. Bill Katz: Hi, Bill. Thank you very much. Good morning, everybody. Thank you so much for taking the question today. Maybe to switch gears a little bit and talk about the retirement area. You seem to be ahead of many of your peers in terms of positioning as we look ahead. Could you speak to a couple of just how your conversations with maybe the consultant community, the regulators, the legislators are going around sort of this change? And then how you sort of see pricing relative to maybe the legacy book of business that's sort of not retirement? Thank you. Martin S. Small: Thanks, Bill. I appreciate it. I have spent a lot of my time this year in Washington DC. I know Larry has well and so is our team. I've had a lot of detailed discussions with policymakers, lawyers, trade associations for asset managers, plan sponsors. Let's not forget that this is about bringing the same portfolio of public and private markets that defined benefit plan investors have enjoyed for generations to the hourly workers that have defined contribution in 401(k) today. I've seen more momentum in the last six months than we've seen in decades of managing target date funds. There's the President's executive order. There's drafts of various safe harbor provisions. That I think are making good progress. There's a draft, class exemption under ERISA to address a lot of product level issues and address the obligations of service providers. And I'd say there's real interagency coordination and engagement between the Department of Labor and the SEC, is so critical and important. And we really applaud all that work. All that said, still lots to do, very significant word ahead, but the momentum is positive. For BlackRock, Inc., more than half the assets we manage are for retirement. We're the number one DC investment-only firm $585 billion in target date AUM, and today we have over $660 billion in private markets and alternatives. Which allows us to bring the best of public and private to the target date fund. I think it's a great opportunity for BlackRock, Inc. to do well for our clients in retirement, but also grow our business in target date. And importantly, as Larry mentioned in his remarks, in data. We've got a leading presence in retirement channels, we've got relationships. Distribution, investment expertise. So the regulatory bodies coming into focus here, I think, will be a real accelerant for us. We do think the vast majority of the opportunity is embedding private markets in target date funds. It's embedding private markets in target date funds. In that structure, there's a professionally managed qualified default investment alternative that fits well within the existing ERISA framework. It also fits well within the operational rails of the DC market. There's a reason that QDIA target date funds today capture the substantial majority, really the bulk of 401(k) participant-directed individual account plans. And in target date, BlackRock, Inc., I think, is really well positioned against the market with our Glide path design as a differentiator. Our glide path, meaning, how we scientifically take clients from their mix in stocks, bonds, real estate, commodity, public, private, has more than thirty years of IP and experience actually implemented it with a real track record over three decades. And we think that it allows us to build portfolios that take appropriate levels of risk across a working life and manage different levels of portfolio liquidity. I think some of what we've seen in the market are ideas that have fixed 10% or 20% allocation to private asset classes. Regardless of age and circumstances, like those things we just don't think are right for every investor. Early career investors generally need growth assets. While later career and in retirement investors need diversification, capital preservation, and income. And we think our glide path and our product lineup allow us to do that in a way that's really, really unique and differentiated. The second thing is data, where I think, it's a real opportunity. As Larry said, like good fiduciary practice and all of the advice safe harbors they're going to require some format for benchmarking and portfolio analysis. Like, DC plan sponsors and their consultants are gonna need more data and analytics to support a fiduciary decision that involves private markets and target date portfolios. We think that's a real another meaningful unlock for Preqin. Just going to market and some of your questions about kind of pricing and product, our initiative with Great Gray, the collective trust company that we told you about earlier this year, it's a great first step in providing more access to private markets. Pricing on that is firming up as it comes to market. We'd expect the smaller adviser sold plans to be first movers. They have the most familiarity with private markets and wealth management accounts. And historically, smaller plans have historically led faster on innovation. We're expecting to launch a proprietary LifePath with private's target date fund in 2026. And depending on the status, I think, of legal and regulatory to more meaningful engage with our clients on exposures in the existing LifePath range. Executive order is a great positive step, and we look forward to kind of keeping you updated in this area. Laurence D. Fink: Let me just add one last point. The sooner we could get young people to be investing in their retirement plans, and that's why we're so encouraged about what's going on. Digital digital wallets, where that money is, if we get transform some of that digital liquidity into a retirement product at to ETFs or whatever we can do, the better off the individuals will be and they'll have they'll enjoy a much longer duration of compounding returns over time. I think it's essential that we elevate this call to action to get more and more people focusing on the needs to investing in retirement sooner. This is a worldwide phenomenon. Operator: Ladies and gentlemen, we have reached the allotted time for questions. Mr. Fink, do you have any closing remarks? Laurence D. Fink: Thank you, operator. I want to thank everybody for joining us this morning and for your continued interest in BlackRock, Inc. Our third quarter results demonstrate again the depth and breadth of our global platform. Our local position with clients, our ability to provide them with whole portfolio analytics and research. We exhibited in the third quarter the strong momentum, and we already are entering the fourth quarter with even stronger momentum. We're confident in our ability to deliver performance for our clients and our long-term value for our shareholders. Once again, thank you, and have a good quarter. Operator: This concludes today's teleconference. You may now disconnect.
Operator: The JPMorgan Chase earnings call will begin shortly. The JPMorgan Chase earnings call will begin shortly. Jamie Dimon: Good morning, ladies and gentlemen. Welcome to JPMorgan Chase's Third Quarter 2025 Earnings Call. This call is being recorded. The presentation is available on JPMorgan Chase's website. Please refer to the disclaimer in the back concerning forward-looking statements. Please standby. At this time, I would now like to turn the call over to JPMorgan Chase's Chairman and CEO, Jamie Dimon, and Chief Financial Officer, Jeremy Barnum. Mr. Barnum, please go ahead. Jeremy Barnum: Thank you and good morning everyone. Let me begin by noting that this quarter we are experimenting with shorter prepared remarks. We are streamlining this part of the call to move more quickly to your questions to minimize the amount of time spent on repeating what you have already seen in the earnings materials. So with that, turning to this quarter's results, the firm reported net income of $14.4 billion and EPS of $5.07 and an ROTCE of 20%. Revenue of $47.1 billion was up 9% year on year, predominantly driven by higher markets revenue as well as higher fees across asset management, investment banking, and payment. The increase in NII driven by the impact of balance sheet growth and mix was offset by the impact of lower rates. Expenses of $24.3 billion were up 8% year on year driven by similar themes as in prior quarters, including higher volume and revenue-related expense. The detailed drivers are in the presentation. And credit costs were $3.4 billion with net charge-offs of $2.6 billion and a net reserve build of $810 million. In wholesale, charge-offs were slightly elevated as a result of a couple of instances of apparent fraud in certain secured lending facilities. Otherwise, in both wholesale and consumer, credit performance remains in line with our expectations. And in terms of the balance sheet, we ended the quarter with a CET1 ratio of 14.8%, down 30 basis points versus the prior quarter. You can see the puts and takes in the presentation. This quarter's higher RWA is primarily driven by increased wholesale lending across both banking and markets as well as other markets activities. Moving to our businesses, CCB reported net income of $5 billion. Revenue of $19.5 billion was up 9% year on year predominantly driven by higher NII largely incurred on higher revolving balances. A few points to highlight. Consumers and small businesses remain resilient based on our data. While we are closely watching the potentially softening labor market, our credit metrics including early-stage delinquencies remain stable and slightly better than expected. We retained our number one position in retail deposit share in a relatively flat deposit market based on FDIC data, marking our fifth consecutive year of leading the industry. And in light of the attention our Sapphire refresh has received, we want to note that this has already been the best year ever for new account acquisitions for our Sapphire portfolio. Jeremy Barnum: Next, the CIB reported net income of $6.9 billion. Revenue of $19.9 billion was up 17% year on year driven by higher revenues across markets, payments, investment banking, and security. To give a bit more color, IB fees were up 16% year on year reflecting a pickup in activity across products with particular strength in equity underwriting as the IPO market was active. Our pipeline remains robust and the outlook along with the market backdrop and client sentiment continues to be upbeat. In markets, fixed income was up 21% year on year with higher revenues in rates and credit as well as strong performance in securitized products. Equities were up 33%, from robust client activity across the franchise with notable outperformance in Prime. Turning to Asset and Wealth Management, AWM reported net income of $1.7 billion with a pretax margin of 36%. Record revenue of $6.1 billion was up 12% year on year predominantly driven by growth in management fees due to long net inflows and higher average market levels as well as higher brokerage activity. Long-term net inflows were $72 billion for the quarter led by fixed income and equities. AUM of $4.6 trillion was up 18% year on year and client assets of $6.8 trillion up 20% year on year, driven by continued net inflows and higher market levels. And before turning to the outlook, corporate reported net income of $820 million and revenue of $1.7 billion. In terms of the outlook, since we have already reported three quarters of results I am going to update the full year guidance in terms of the fourth quarter. And in addition to that, we have done the implied full year math on the page, you can easily compare it to previous guidance. We expect fourth quarter NII ex markets to be approximately $23.5 billion and fourth quarter total NII to be about $25 billion. We expect fourth quarter adjusted expense to be approximately $24.5 billion implying $95.9 billion for the full year with the increase driven by the stronger revenue environment. Jeremy Barnum: And on credit, we now expect the 2025 card net charge-off rates to be approximately 3.3% on favorable delinquency trends driven by the continued resilience of the consumer. In keeping with our focus on the fourth quarter and recognizing that you will likely annualize the fourth quarter NII and ask us questions about 2026, we are providing the central case for NII ex markets in 2026 which is about $95 billion. Note that this is a preliminary view subject to the usual caveats as well as the fact that we have not finished the annual budget cycle yet. And for expenses, completing the budget cycle will be even more important is why we are not providing an update today. While you probably have not spent a lot of time refining your 2026 estimates yet, it is worth saying that when we look at the fourth quarter and adjust for seasonality, and expected labor inflation as well as adding some growth, the consensus of about $100 billion does look a little bit low. We will formally provide the 2026 outlook for NII in expense and card MCO rate at fourth quarter earnings and we will have another opportunity to discuss the outlook at our recently announced company update in February. We are now happy to take your questions, so let us open the line for Q and A. Operator: Thank you. Please standby. Our first question comes from John McDonald with Truist Securities. You may proceed. John McDonald: Thank you. Good morning. Thanks for the initial outlook on the 2026 NII. Jeremy, wanted to ask about the retail deposit assumptions that were embedded in that. At Investor Day, you had discussed an expectation for deposits to grow 3% year over year by the fourth quarter and I think accelerating to 6% next year. Looks like they were flat this quarter. So just wanted to see if you are still expecting those kind of previously expected growth rates of 36%? Jeremy Barnum: Yes, good question, John. Thanks for that. So yes, you are referring specifically to a page that was presented at Investor Day by Marianne for the CCB. With some illustrative scenarios for what we might expect CCB deposit growth to do as a function of some different potential macroeconomic scenarios. And in the kind of then prevailing central case scenario, if you say we had 3% growth in the fourth quarter of this year, and 6% projected for 2026. So as we sit here right now and we sort of update the macro environment, a few things are true. One is the personal savings rate is a little bit lower than expected, Consumer spending remained robust while income was a bit lower. So that is all else equal decreasing balances per account in CCB. And as you obviously know, equity market performance has been particularly strong, which is driving flows into investments, and we are capturing that in our Wealth Management business again, that is a little bit of a headwind to balances per account. And relative to the scenario that we had at the time, rates are a little bit higher than what was in the forwards and that is producing again slightly higher than otherwise expected yield-seeking flows. They are still below the peak, but they are still a factor. So as we look forward from here, the drivers are all still in place if you break it down, a key driver is obviously ongoing net new accounts. And if you look at this quarter, been strong with over 400,000 net new checking accounts this quarter. And so what you are left with is just the question of how that average balance per customer evolves and when you hit the inflection point of that number, based on the factors that we have just gone through. And so the margin, that kind of upward inflection point has been pushed out a little bit. But at a high level, we remain quite confident about the overall long-term trajectory here and optimistic. But the macro environment shift is just slightly pushed out some of the growth inflection dynamics. John McDonald: Got it. That is helpful. And maybe just sticking with that 2026 initial outlook, what are some of the other key assumptions in there particularly around commercial deposits and maybe loan growth and rates? Jeremy Barnum: Sure. Yes. So as we always do, we are using the current forward curves as of September 30. So that has the relevant cuts are, I think. The impact of the 75 basis points of cuts this year and I think as of the September, it was two twenty-five basis point cuts in the 2026. So that all else equal is obviously a headwind as we remain asset sensitive and the annualization of this year in the first half next year. And then offsetting that, you have all the growth dynamics, which include card revolve growth, which has been obviously a significant tailwind it is going to slow down a little bit given that the normalization of REVOLVE is close to complete now, but we still see very healthy acquisition dynamics there. So that will be a growth driver, albeit a little bit lower. And similarly, I mean pivoting a little bit to deposit for a second, just talked about the contribution of deposit balance growth to that, which will be a factor. In wholesale deposits, it was a very strong growth year this year. So we would expect it to be a little bit more muted next year, but core franchise is doing great. And then wholesale loan growth will kind of be what it is. But trends there are solid. So it is the usual mix of rate headwinds offsetting balanced growth and mix. So we will refine it more next quarter, and we will see how it goes. John McDonald: Got it. Thanks, Jeremy. Jeremy Barnum: Thanks, John. Operator: Thank you. Next we will go to the line of Glenn Schorr with Evercore ISI. You may proceed. Glenn Schorr: Hi, thanks very much. Wanted to drill down a little bit more on credit and you gave us enough I think on the consumer side. You noted the idiosyncratic names on the broadly syndicated side. So maybe if we could step back and say, you are a big player in obviously everything, broadly syndicated loans, high yield markets and increasingly on the private debt side. So my question is both of demand and credit fundamentals, What are you seeing in terms of drivers of client demand there on the lending side? Wholesale front? And then importantly, are you seeing differentiated credit fundamentals across public and private markets? Because there has been a lot of discussion about that lately and I feel like you are like in the best position to help us. Jeremy Barnum: Okay. I will do my best to try to help. So let me just get one thing out of the way because you were sort of polite enough not to touch on it, but I already kind of disclosed it on the press call. We generally, as you know, Glenn, are not in the habit of talking about individual borrower situations. But given the amount of public attention, the Tri Color thing has gotten in particular, I think it is worth just saying that that is contributing $170 million of charge-offs in the quarter, which we call out on the wholesale side. Also worth noting, there has been a lot of attention on the first brand situation. Do not have any exposure to them. So anyway, that is just worth getting out of the way. So you asked about demand and you asked about public private differentiation. On the demand side, I really think I mean not to overuse the phrase, but from the perspective of our franchise, this kind of moment of revived animal spirits, let us say, is driving demand. We are seeing very healthy deal flow. We are seeing acquisition finance come back. Obviously, we were very involved in a particularly large deal this quarter. And I would say broadly, and maybe this goes a little bit also to public private point, are kind of product agnostic credit strategy across the whole continuum is playing out very nicely. And I think some of the events of the quarter prove that like now when you have got something big to do, the right people to call and we will give you the best solution across a very complete full product suite. You asked whether we are seeing differentiation in fundamentals between private and public spaces. I do not know. I have not heard that particularly. Think it probably depends a little bit on how you define the spaces and what you are differentiating. Like obviously, to make the obvious point like subprime auto has been a challenging space for people in that industry. But that is probably not quite what you meant by private credit. And I have not heard anything to suggest that the private deals are performing differently from the public deals. It probably is true at the margin, that some of the new direct lending initiatives involve underwriting at slightly higher expected losses and that is significant because as we have been discussing here, the wholesale charge-off rate has been very, very low for a long time. And I think simply having that normalized would produce some increases in wholesale charge-offs. And obviously, as we have been discussing a lot in consumer over the last couple of years, when you are in that normalization moment, you are constantly wondering, is this a normalization or have we switched to deterioration? I do not know if we are seeing that yet in wholesale, but it is also worth noting that the current portfolio is going to have a slightly different mix from what we have had over the last ten or fifteen years. And so the expected charge-off rate is going to be a little bit higher, all else equal, but obviously that comes with appropriate revenues and returns. Glenn Schorr: Okay. I appreciate that. Thank you. Jeremy Barnum: Thanks, Glenn. Operator: Thank you. Next we will go to the line of Betsy Graseck from Morgan Stanley. You may proceed. Betsy Graseck: One follow-up on that is on the reserve build, know that you mentioned largely due to card loan growth. Could you give us a sense as to how you are thinking about the reserve that you have against the commercial book, especially given what you just mentioned? Around the mix of the portfolio is different today than it was prior cycle? I am thinking prior cycle means pre-COVID, but let me know if it is a different timeframe that you are thinking Well, I mean, think we were thinking of the entire post-GFC era. I think a couple of Investor Days ago, we put up a slide showing that wholesale charge-off rate over ten years. Might be wrong, but from memory, was like zero on a net basis, which is obviously not reasonable going forward. But on your narrow question about the reserve, I think you have actually in that a little bit, I mean, maybe it pop in the consolidated numbers. But in some of the recent quarters, as we have sort of started doing some more of these direct lending deals, When we put those deals on the books, they come with quite significant day one reserve balances. So in the normal course, that growth comes with healthy reserves. And hopefully, we get the underwriting right and we got all that money back obviously. So, but as you well know, our entire wholesale reserve methodology is highly granular and very specific. And so it to the extent that the mix shifts, loan growth will come with slightly higher reserve and intensity, but that will be situation by situation. Betsy Graseck: Okay, perfect. Thank you. And then just a follow-up is on how you are thinking about your excess capital utilization. I know yesterday you had the press release on leaning into industries that are critical for U. S. Security, etcetera? And maybe you could speak a little bit to that incremental $500 billion is it that you are talking about supporting growth of over the next ten years? Relative to the potential for a dividend hike? I mean you could do both obviously. But I did just want to understand the press release yesterday in that context as well as the opportunity set for a dividend hike? Thanks. Jeremy Barnum: Sure, fine. And yes, you kind of answered your own a little bit and that like it is kind of an all of the above thing. Obviously, we are not going to give forward guidance on buybacks or dividend policy. But as you know, yes, we are generating a lot of organic capital. We have a very large access. We have kind of said that we wanted to rush the growth of the access. We have more or less done that since we said it. And that is actually enabling us well, And in the meantime, we are actually grown RWA quite a bit, which has resulted in some actual decreases in the CET1 ratio. So as we all know, we do not love buying back the stock at these levels, but we want to keep the reasonable. And in the meantime, we are using our financial resources to lend into the real economy very broadly across the entire franchise. And yes, yesterday's press release is an extension of that. So both in terms of what we were already going to do in the normal course, plus an aspiration to add another high trillion dollars of this type of lending at the margin. That is the type of RWA growth that consumes excess. And obviously, in the context of the excess, $10 billion of direct equity investments that are incremental is a nice deployment of a modest portion of the excess. And obviously, it is not going to happen instantaneously. So I think all of the above is probably the short answer to your question. Betsy Graseck: Thank you. Operator: You. Next we will go we will go to the line of Ebrahim Poonawala with Bank of America. You may proceed. Ebrahim Poonawala: Good morning. I guess maybe Jeremy, a broader question like when we read the quote from Jamie in the press release, customers are resilient, but there is still massive amounts of uncertainty. I am just wondering if based on what you see both commercial versus consumer, are things getting better as we look into 2026? Does it feel like we are at a tipping point where we could see a slump in unemployment over the coming months that then leads to concerns around the credit cycle. Just if there is a bias that you have on how things could play out, that would be helpful color. Jeremy Barnum: Sure. I mean, Jamie may have his own personal opinions here, but I think that a high level, the story that we are trying to tell is one that is anchored on the current facts. And the current facts on the consumer side is that the consumer is resilient, spending is strong and delinquency rates are actually coming in below expectations. So those are facts that we really cannot escape. Now talking to our economists, I was struck by something that Mike Carole said about thinking about the current labor market in this moment of what people are describing as a low hiring, low firing moment. You can think of that as potentially explained by employers experiencing high uncertainty. And so if you believe that and you think about this moment as a moment of high uncertainty, I think tipping point is a little bit too strong a word. But certainly, as you look ahead, there are risks. We already have slowing growth. There are a variety of challenges and sources of volatility and uncertainty. And so it is pretty easy to imagine a world where the labor market deteriorates from here. And if that happens, obviously, as you well know, we are going to see worse consumer credit performance. So I would not say we are pounding the table with this view, but we are just noting as we always do that our risk and that the fact that things are fine now does not mean they are guaranteed to be great forever. Ebrahim Poonawala: Got it. And I guess just one follow-up on your comments around expenses. I think there is a lot of discussion among shareholders whether AI and AI-driven productivity gains mean something for the banks as we look out over the next two to three years. You all have obviously talked about this at the Investor Day. I am just trying to contextualize when you talk about the expense growth outlook or just sort of preliminary indication for next year. How should bank shareholders think about AI-led productivity gains in terms of making a dent on the expense growth either next year or for the next few years? Jeremy Barnum: Yes. So I will give you my personal opinion about this. Certainly presume to tell people how to think about this at the system as a whole. But I think the risk is because of how incredibly overwhelming the AI theme is for the whole marketplace right now. And all the various effects that it is having in terms of equity market performance, Mag seven, data center build out, electricity costs, like it is an overwhelming thing. And I think for us, running a company of this type we need to make sure we stay anchored in like facts and reality and tangible outcomes. So we are putting a lot of energy into this. A lot of people are spending a lot of time on it. We are spending a lot of money on it. We have very deep experts. As Jamie always says, we have been doing it for a long time, well before the current generative AI boom. But in the end, the proof is going to be in the pudding in terms of actually slowing the growth of expenses. And so what we are doing is kind of rather than saying you must prove that you are generating this much savings from AI, which turns out to be a very hard thing to do. Hard to prove and might at the margin result in people scrambling around to use AI in ways that actually not efficient and that distract you from doing underlying process reengineering that you need to do. What we are saying instead is, let us just do old-fashioned expense discipline. And constrain people's growth, constrain people's heads growth. We have talked about that last year. We are going to do the same this year. I have a very strong bias against having the reflective response to any given need to be to hire more people. And feeling a little bit more confident on our ability to put pressure on the organization because we know even if we cannot always measure it that precisely, are definitely productivity tailwinds from AI. So that is how we are going to do it. And hopefully, that will show up. In lower growth than we would have had otherwise. But a lot of the drivers of growth, which are per capita labor inflation and revenue-related expense and investments, are always going to be there. We are never going to stop doing those things. So that is how we think about it. Ebrahim Poonawala: Got it. Thank you. Operator: Thank you. Our next question comes from Mike Mayo with Wells Fargo Securities. You may proceed. Mike Mayo: Hi. If I could get an answer to this, from both you Jeremy and Jamie. The question really is how much of a risk is the lending to the NDFIs just because you guys are always out front highlighting what could happen, whether it is cyber or as you point labor market or inflation. And I feel like you have not really highlighted this as potential risk area, maybe that is because you do not receive it as such, but you have Tricolor, you have First Brands, one area of your biggest growth I think has been NDFIs over the last year. So I am just trying to this in some sort of context that it relates to Tricolor who bears the losses? There is it end investors in the funds? Do you put skin in the game and have your own investments? Are you an underwriter? Where are you exposed I guess I am asking JPMorgan specifically, but then Jamie more generally for the industry. Is this something that is flashing yellow that we that you are spending more time on? How should we think about that? Thank you. Jeremy Barnum: Sure. All right. So let me do what you asked Mike and put a little bit of context around this. So a couple of just some housekeeping first. So talked about Tri Color, you talked about First Brands. I just want to reiterate, we do not have any exposure to First Brands. On Tricolor, it represents $170 million of the wholesale charge-off this quarter. Obviously, by definition, that reflects on balance sheet loans that we are charging off. And with respect to other exposures, I do not really have anything additional to say about that at this point. It will play out as it plays out. But in the normal course, we are always quite conservative about taking all possible hits that we can based on what is knowable upfront. So pick up or whatever it is worth. More generally, I think one thing that is important to say in terms of context about NBFI lending is that the vast majority of that type of lending that we do is highly secured or in some way structured or securitized. In other words, it is not like we are doing extremely high risk, low rated lending the NVFI community. And so that does not mean that there is no risk. That does not mean that things cannot go wrong. And obviously, if you are doing secured lending and there are problems with the collateral, that is an issue, which is clearly relevant in the case of Tricolor. So and we have talked a lot about the question about risk inside the regulated perimeter versus risk outside the regulated perimeter. But we have also acknowledged that a lot of the private credit actors are large, very sophisticated, very good at credit underwriting. So I think you are supposed to jump in confuse them that they are necessarily lower standards. There are a huge systemic problem. And to the extent that we lend to some of these folks who are clients of ours as well as competitors of ours, that lending follows our normal practices. It is often highly secured. And everything we do is in one way or another risky. But I am not sure that our lending to the NBFI community is an area of risk that we see as more elevated than other areas of risk, I guess, is what I would say. Yes. Mike, I would just add that it is a very large category non-bank financial institutions and probably a number like half of it we will consider very traditional not like different. There is a component which is different today than it was years ago and there is a component which is not that different, but if you look at like CLOs and lending to leveraged entities that are underwritten with leveraged loans. So there is kind of a little bit of double leverage in I would say that yes, there will be additional risk in the that category. That we will see when we have a downturn. I expect to be a little bit worse than other people expected to be because we know all the underwriting standards that all these people did. Jeremy said these are very smart players. They know what they are doing. They have been around a long time. But they are not all very smart. And we do not even know the standards that other banks underwriting to some of these entities. And I would suspect that some of those deals may not be as good as you think. Hopefully, we are very good, though we make our mistakes too. Obviously. So yes, I think you would be a little bit worse. We have had a benign credit environment for so long that I think you may see credit in other places deteriorate a little bit more than people think. When in fact there is a downturn. And hopefully, it will be a fulfilling normal credit cycle with What always happens is something is worse than a normal credit cycle and the normal downturn. So we will see. But we think we are quite careful and obviously we scoured the world looking for things that we should be worried about. But I do remind you, we have had a bull market for a long time. Asset prices are high, A lot of credit stuff that you would see out there, will only see that it is a downturn. Mike Mayo: And so just a quick short follow-up. After Tricolor. Again, this is a real puny drop in the bucket for you guys, but have you gone back and looked at your processes and done anything different? Jamie Dimon: Yes. I mean, Michael, you should assume that whatever something happens we scour all process, procedures, all underwriting, all everything. And we think we are okay in other stuff. I my antenna goes up with things like that happen. I probably should not say this, but when you see one cockroach, there are probably more. And so we should everyone should be forewarned on this one. And first brands, I would put in the same category, couple of other ones out there I have seen I put in similar categories. So we always look at these things and we are not omnipotent. We make mistakes too, so we will see. It clearly was, in my opinion, fraud involved in a bunch of these things. But that does not mean we cannot improve our procedures. Mike Mayo: Got it. Thank you. Operator: Thank you. And next we will go to the line of Gerard Cassidy with RBC Capital Markets. You may proceed. Gerard Cassidy: Hi, Jeremy and Jamie. Jeremy, obviously you guys are in the residential mortgage lending big players granted home lending when you look at the revenue to banking and wealth management obviously, it is not that big. But I got a question for you. This administration seems to be, when they come out with comments, they follow-up on those comments with actions. And Secretary of the Treasury, Bessen, has pointed out about a couple of months ago, that he thinks is a housing emergency in this country. And so the question for you guys is what do you think they could do to lower the spread between mortgage rates and the corresponding treasury yield assuming the treasury yields do not go down. But what do you what do you think they can actively do to lower that spread to lower mortgage rates to get housing more active and refinancing activity of course would pick up with that? Jamie Dimon: So I will take that one. First on the supply side, I mean it is we know what it is. It is permitting, it is rules, it is local rules, it is how long it takes to get permits and build not in my backyard, you cannot build two stories in certain places. That is the supply side. The demand side and remember, do not always push homeownership. That was we made a huge mistake that the government policy years ago. But the supply side, we pointed out over and over and over again. I have been talking about it for 30 to 40 basis points overall. Would that create any additional risk? There is just excessive stuff put in place after great financial crisis, which obviously demanded a response, but it is excessive. Anyone who take it on a mortgage will tell you they had to sign 17 forms, 17 documents and all these things. So that is to me the most obvious one. And obviously, policy, if you the government wants to do more FHA or they could do that. That is up to them about whether they want cheapen mortgages for near prime or all stuff like that. But if they did have it like that, I would say always do it really thoughtfully. Gerard Cassidy: Very good. Thank you. And as a follow-up, just speaking about regulators in general, obviously been a major change with this administration. Can you guys give us any color of what you are actually seeing on the ground? We are what nine months or so into this new administration with the new regulators? And then also any color on when you think Basel III Endgame may come out and what you are hearing in terms of how it will compare to what the original proposal was in July 2023? Thank you. Jeremy Barnum: Yes. Thanks for that, Gerard. So I agree with you. This administration is the same things and from what we are seeing transitioning to action quite quickly. So what we are seeing from our engagement in Washington and there has been some reporting in the press recently that is quite comprehensive on the evolution of potential new control proposals, which is aligned with what we are hearing as well. But in general, there is a bias for action, getting things done quickly, and they are looking at things quite comprehensively. What we see. And as you know, we have argued for a long time, Jamie has argued a lot that this is not about some overall calibration of the system, some like back solving exercise for some number of whatever type. This is about looking at all the individual components, of the capital rules understood holistically, doing the math right and letting that roll up to whatever answer it going to be. And by the way that answer is going to be different for different firms depending on their business mix. And that is okay. And that is part of the reason it does not really make sense to kind of try to calibrate to some overall level for the system. It is just like do the math right in a way that makes sense for the individual product or business area or source of risk. And you will get a reasonable outcome for the system. And from what we are hearing, that is very much the direction of travel. The relevant agencies are working well together. There is a sense of urgency. And so we are encouraged. And I would note actually back to your first question that one area where getting things right at the individual product level as relevant is allowing banks to play their appropriate role in the residential mortgage lending market when it in the instances where it makes sense. Keep those instruments on the balance sheet, you want the capitalization of those to be reasonable aligned with the risk. And again, from what we understand, that is the direction of travel. So in terms of timing, I mean your guess is as good as mine. I think there have been some public comments, and I would just anchor myself on those and the press reporting. But we definitely hear a desire to get things done quickly. And these things are complicated in some areas. Might have some disagreements at the margin. We would still dislike G SIB as a matter of principle. But we do not want to let the perfect be the enemy of the good here. And what we are doing is trending in the right direction. And I can just add data number, they are doing that. They are looking at it holistically. That is great. But gaining the number is right. I have said for years, GSIB, CCAR, operational risk capital, double counting of trading book, I mean it is just wrong. And some of these numbers are so inaccurate that they publish that they should publish them with the disclosure saying, we know these are highly inaccurate like the CCAR test. We know that this is not remotely related to reality and stuff like that. It is almost a dishonest disclosure of these terms. Like do the actual number. The second thing they really should do which I think they are doing is what is the intended effect and what is the unintended effect? So we talk about we have got eight thousand public commits 4,000 public companies we have gone from pushing mortgage out of the banking system to a huge buildup in parts non-bank free institutions and a huge amount of arbitrage taking place. If I was a regulator, I would be looking at all that and saying, my God, is that what I wanted? And the biggest frustration is they could have fixed all these things, reduced liquidity, reduced capital. All these things and made the system safer. So we had a Silicon Valley bank blow up because they are so focused on governance they forgot to focus on interest rate exposure. And they are making changes now like what is actually real risk banks in bearing as opposed to walk signaling what a bank should be doing all the time. So hopefully, they will do it. I think they are devoted to doing it. Like look at their words, their speeches. I am talking about the OCC, the Fed, the FDIC. I think it is very good. Let us get it done quickly. Gerard Cassidy: Thank you for the color. I appreciate it. Jeremy Barnum: Thanks, Gerard. Operator: Thank you. Our next question comes from Erika Najarian with UBS. You may proceed. Erika Najarian: Yes, thank you. My first one is for you, Jeremy. Under the category, no good deed goes unpunished, just wanted to ask a quick question on the expense outlook for '26. You mentioned that $100 billion could be a little low and that you are in the middle of the planning cycle. That would imply 4% growth year over year. Is that the sort of new normal labor rate inflation that we should assume at this point? Jeremy Barnum: Okay. So yes, a couple of things about that. One is not to get too much into the weeds here, but our expenses are a little bit seasonal. So annualizing the fourth quarter like sometimes you get a bunch of offsets and it is like okay to do that, sometimes it is not. So we always try to do this based on a sort of launch point of the annualized fourth quarter rate. And while that is a reasonable thing to do for NII, it is a lot harder to do for expenses. But taking a step back for a second, I am not telling you anything that you do not already know. Like you can look at whatever ECI or whatever other government measure of labor cost inflation. We know that even while inflation is like a lot lower, we are very far from the moment the mid-2010s where inflation was for all intents and purposes zero. So yes, I think the new normal for labor is some number like that, whatever, 3%, 4%. And it is not just labor, I mean, again, I do not want to fail to recognize the extent to inflation has more or less come back to normal. But by normal, we mean the Fed target. And for a while, it was below target. So whether it is labor or goods and services, not to get into tariffs or whatever, that is a factor that applies to our entire cost base. In addition to that, as we noted, we are going to invest where it makes sense. We are going to pay for performance to the extent that there is higher performance and also generally revenues will be associated with other variable expenses. And then overlying all of that, the question of productivity. And it includes, but is not limited to AI-driven productivity. So you can assume that we are going to be pushing hard on all fronts to extract as much productivity out of the organization as possible. But as is always true, we are going to try to keep that focus separate from our commitment to invest for growth in the places where we want to. And could you just add to that? Medical, we spent $3 billion of so in medical. Going be up 10% next year. And so when you look at some of these things and we know that already and maybe think it actually might be up another 10% in 2027 for a whole bunch of different reasons, And that is one thing. Another thing about comp I just want to point out, there is normal inflation and paper performance, all that. There is a lot of pressure on from other people who are paying people quite well. Hedge funds, law firms, private equity, non-bank institutions, and we are going to pay our people competitively. That is a sine qua non if you want to have a great company for the next twenty years. And so there is some of that too, I am not sure that it is going to change very much when you look at it, but I would put it the back of your mind too. It is probably good for you all to hear me say that. Erika Najarian: Sure. Someone's job is I will make sure to send this I will make sure you send this transcript to my boss. But the second question is actually for you, Jamie. You have always had a differentiated way of thinking about risk. And a two-part question for you. Number one, I feel like we do not even know what the right questions are to ask when it comes to NDFI. Exposure and risk, is such a broad category And so two-part question here. Number one, what would be what would be the questions you think investors should ask when assessing NDFI exposure as it relates to future credit risk? And second, should investors be concerned about the SSFA accounting for RWAs in certain structures where you could lower the RWAs to NDFI exposures from 100% to something much lower? Jeremy Barnum: With SFFA. God, used to know that acronym. It is a technical thing inside securitization where under some conditions you can lower the RWA weighting. Insurance related or No, no, it is for us. It is like a part of the rent cap rules. Yes. Want me to do that one first and you can do the first one? Yes. So even though I do not remember what the I think it is like standardized securitization something, something. I forget what it stands for. But from what I recall about looking at that one, I think it is a mechanism by which you can take what should be otherwise punitive risk weighting for certain types of structures. And reduce it from 100 to 20 where arguably 20 is actually probably still too high because you have essentially mitigated the entire risk. So my first answer to your question is, of all the things to worry about I would not worry about that whatever you want to call it, protection enhancement or risk weighting decrease in that narrow context. And on your question of like what questions to ask about about the NVFI space in general, mean, Jamie will have his views. But yes, I think it starts by acknowledging that like it is a very, very broad space. And so we probably need to narrow the focus a little bit. Like subprime auto is one thing, lending to like trillion dollar asset managers on a secured basis is a very different thing. So Maybe we should take a crack at telling you a little bit more about it. We feel fairly comfortable with our exposures in that. But think what you should do is I think when we have a downturn, this is the important thing, there will be a credit cycle. And we should not be surprised. The credit card laws will go up, middle market laws go up. Everything gets worse in a downturn in credit. I do suspect, I cannot prove this and I do not know because we do not know everyone's underwriting standards. Every now and then we see what someone else is doing, we are surprised that there is standards. And I am particularly good, but that is always been true. I suspect with the downturn, you will see higher than normal downturn type of credit losses in certain I just suspect that. And so the other thing which you can do which I am going to ask Michael Greff to do from you, Dan, because I ask periodically, look at the price of the BDCs and their publicly traded private credit facilities, and do the homework. There are disclosures around that. We do it and And so maybe we should just crack at one point, laying out the different carriers of MBFIs and ones with might be concerned and ones that concerning. Erika Najarian: Thank you. Thanks, Erica. Thank you. Operator: Our next question I am have lost Erica. So let us go to the next question. Comes from Jim Mitchell with Seaport Global Securities. You may proceed. Jim Mitchell: Hey, good morning. Maybe just on the investment banking environment. Obviously things have gotten better. Just curious where you see the most strength in the pipeline? And as we get rate cuts coming, do you feel that we are starting to see more activity pick up or the potential for more activity to pick up among financial sponsors Just curious your thoughts. Jeremy Barnum: Okay. Interesting question on the sponsors. I mean, I do not know. I personally am not persuaded of the notion that cuts coming through that are fully priced in are going to meaningfully change behavior in sort of highly sophisticated professional community like financial sponsors. If that plays into like flattening of the yield curve, other reasons etcetera beyond what is priced in the forward that could be a little bit of a different story. But I think what is clearly true, a little bit to the point of your question is that the environment is is the results are very robust and the tone is very upbeat. I think an interesting thing from my perspective is to think about the narrative starting from the beginning of the year, right? We had the moment of everyone was talking about animal spirits and big booming moment. And then we had Liberation Day and all the tariff uncertainty and equity market volatility. And so things kind of went quiet for a while. But what is interesting is that from the IPO perspective, for example, processes were kicked off early in the year. And those processes continued even during the moments where conditions were not ideal for the deals. And what that meant is that there is a lot of stuff like in the queue that is kind of ready to go. And now conditions are much more favorable both in terms of equity market valuations, at least until recently, relatively low equity market volatility, a bit more breadth in the rally in terms of multiples, including smaller cap tech sector or whatever. So, yes, that is one area. And in the meantime, as you know, we are starting to see more M and A activity as well. I noted earlier, I think it was busiest summer we have had in like a long time in terms of announced M and A activity. We are seeing that play through into acquisition finance. I think the rate environment is good enough from the perspective of being able to get deals done. So it is a pretty supportive environment, but as you well know that can change overnight. Jim Mitchell: Yes. It is all fair. And then maybe just a follow-up on just capital relief and how you are or at least starting to think about adjusting to that RWA growth is picking up. Is there other aspects whether it is in the markets business, or other marginal return activities before that you see opportunities to lean into growth to use up capital because, obviously IRRs and buybacks today at these levels are not great? Jeremy Barnum: Yes, exactly. I mean that is the exact math that we are always doing, which is like, subject to certain assumption, what is the return on a buyback and what is the alternative? Now obviously, we want to be careful there, right? I mean if you take that argument to the extreme and you say like, oh, we want to do every piece of business that is like one basis point above the theoretical return on buybacks. You wind up potentially making a lot of really dumb risk decisions. So you want it to be franchise accretive business and you want to recognize that your estimate of the return of that business is itself subject to some uncertainty, Jamie, I always says like putting liquid par assets on the balance sheet and adding leverage is not a thing that actually generates value no matter what the supposed return of that instrument is in the spreadsheet. So it is a thing that we see on them. It is a thing that we think about a lot. And but I would say to the extent that that shaping our behavior, it is probably already shaping our behavior as you know, we have had the access for quite a while The price of tangible book multiple has been going up for quite a while. So we are going to continue looking for ways to deploy. While making sure that we do not do anything stupid, frankly. Jim Mitchell: Okay. Thanks for the color. Jeremy Barnum: Thanks, Jim. Operator: Thank you. Next we will go to the line of Ken Usdin from Autonomous. Your line is open. Ken Usdin: Thank you. Good morning. I wanted to ask a question about just overall loan yields. Noticed that they were up three basis points in the quarter. Obviously, rates had not been moving during the quarter. And now that we are starting to head back down. Just wondering just what are the main drivers of still being able to actually see higher loan yields? Thanks. Jeremy Barnum: I never look at that. So I have literally no idea why the loan yield is three basis points in the quarter. But if I had to guess, I think it is almost always a function of various types of mix effects recognizing that we have loans of radically different yields across the company, from silver plus 20 basis points to curveball. So relatively small changes in mix can make a big difference. Then obviously you have got a lot of floating rate instruments All else equal, you would expect those yields to be lower given the cuts that have come in, but mix effects can easily overwhelm that. So I am sure Michael will have a good answer for you by the time the call is over. I had not looked at that one. Ken Usdin: Okay. I will follow-up on that. And secondly, with the Saphyr refresh, just assume that we are starting to see some of the awards amortization show in the card fees line and in card revenue rate. So I am just wondering if you could kind of walk us through that now that that card coming on and you mentioned good good additions there. Just what do we have to think about in terms of what card leads the horse in terms of card revenue rate and eventual volume growth and related benefits? Thanks. Jeremy Barnum: Yes, it is a good question. So one thing that you might have noticed talking about kind of micro supplement points is that the revenue rate is actually lower than the NII yield, which implies a negative NIR yield. And by the way, that card yield is a number that is often quite close to zero. So it does not take a lot to make it negative, but it is like currently negative. And while there is a lot of puts and takes inside that number in terms of rewards liability, annual fees and so on, particular dynamic that is happening now is that as part of the refresh, customers are getting increased value ahead of the moment where the annual fee goes up. So there is a kind of transitional period of a few months as the refresh rolls through. Those numbers are slightly elevated. The fee comes in over a year and some of these rewards come in as negative NII over a year. Exactly. It is one example of like really bad accounting. Yes. So Yes. That is exactly what Yes. As that stuff normalizes through, we some of these numbers like return to slightly more normal PRNs, but it might actually take a couple of quarters for that to play out. Ken Usdin: Okay, got it. Thank you. Jeremy Barnum: Thanks. Operator: Thank you. Our last question comes from Chris McGratty with KBW. You may proceed. Chris McGratty: Great. Thanks for sneaking me in. Related to the 15% long-term national retail deposit market share, Does your pricing need to be materially different from recent history? Or said another way, do you need to price a little bit more competitive to get that four points of improvement over time? Thanks. Jeremy Barnum: In short, I would say no unless my CCB colleagues disagree or eventually change their strategy. But I think what you see right now actually those numbers is you do see us losing a little bit of share in the FDA recently released results, which have us as number one, which happy to celebrate for the fifth year in a row. And the other leading banks or other large banks, which have adopted similar pricing strategies are also seeing a little bit of loss of share. So that is from our perspective expected a conscious result of being disciplined about the pricing of deposits. And it sort of has no particular bearing on the long-term growth strategy to get to 15%, which is all about expansion and deepening and the core value proposition that we offer. And interestingly, interestingly, when you look inside the granular market by market results in that FDIC data, what we see is us actually taking share and a lot of the kind of highest priority, highest profile expansion market. So in that sense, it is actually a validation of strategy. And by the way, I got my answer on the wound guilt question. It is mix, including cards. So my guess was correct. I understand the retail branch system As Jeremy said, deepening but remember, it is better products, better services, more branches and better location deepening with customer segmentation if we do a good job in all that, then we hope to gain share. I think we are doing a good job in that, but that is we have to deliver that for years to get to 15%. Chris McGratty: Great. Thank you for the color. Appreciate it. Thanks. Jamie Dimon: Folks, thank you very much. Spend time with us. We will talk to you all soon. Thank you. Operator: Thank you all for participating in today's conference. You may disconnect at this time and have a great rest of your day.
Operator: Welcome to the Albertsons Companies, Inc. Second Quarter 2025 Earnings Conference Call. And thank you for standing by. All participants will be in listen-only mode until the Q&A session. This call is being recorded. I would now like to hand the call over to Cody Perdue, Senior Vice President, Treasury, Investor Relations, and Risk Management. Please go ahead. Cody Perdue: Good morning and thank you for joining us for the Albertsons Companies, Inc. second quarter 2025 earnings conference call. With me today are Susan Morris, our CEO, and Sharon McCollam, our President and CFO. Today, Susan will provide an overview of our business and the opportunities ahead before recapping the 2025 and updating you on our progress against our strategic priorities. Then Sharon will provide the details related to our second quarter 2025 financial results, and our outlook for the remainder of fiscal 2025. Before handing it back to Susan for closing remarks. After management comments, we will conduct a Q&A session. I would like to remind you that management may make forward-looking statements within the meaning of the federal securities laws. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These risks and uncertainties include, but are not limited to, the factors identified in our filings with the SEC. Any forward-looking statements we make today are only as of today's date, and we undertake no obligation to update or revise any such statements as a result of new information, future events, or otherwise. Additionally, we will be discussing certain non-GAAP financial measures. A reconciliation of these financial measures to the most directly comparable GAAP financial measures can be found in this morning's earnings release. And with that, I will hand the call over to Susan. Susan Morris: Thanks, Cody. Good morning, everyone, and thanks for joining us today. Before we dive into our quarterly update on our strategic priorities, I want to take a moment to zoom out. To reflect on who we are as a company, the foundation we've built, and the growth opportunities ahead. Albertsons Companies, Inc. is operating from a position of strength with compelling opportunities to drive customer and shareholder value. Opportunities that are within reach and accelerating. Internally, our rally cry is a new day at Albertsons Companies, Inc. It isn't a new day because the market or the competitive landscape has changed. It isn't a new day because our customer has changed. It is a new day because our mission is clear. A new day is not a slogan, it's a mindset. It means that it's a new day to make bold decisions. And to invest with purpose. Driving long-term sustainable growth across our banners. A new day to ignite the passion of our 280,000 associates and amplify customer centricity. A new day to leverage our strength, sharpen our competitive edge, and double down on the competitive modes that sustain our business. With this mindset as our foundation, I've spent the last five months as CEO conducting deep dives across every facet of our business. My goal? To identify how we can accelerate growth as transformational leaders leverage tech and AI to drive efficiency and speed to market, unlock areas of underperformance, and make smarter decisions about what we will build and own versus where we can partner to improve speed or optimize our capital allocation. And through this work, several major themes have emerged. First, our banners. These are not just names on storefronts. They're trusted brands. Deeply woven into the fabric of the communities that we serve. For decades, they've stood for convenience, quality, care, and connection. And they continue to earn that trust every day. We have an incredible opportunity to leverage our national scale to even further embed ourselves in these communities as we capitalize on being locally great and nationally strong. Inside our stores, the core of our experience, we lead with fresh. And deliver industry-leading service from our on-site butchers where we deliver custom cuts to our customers in over 2,200 stores. To vaccinations, where we deliver more per store than any other pharmacy. To flash delivery, where if you change your mind and decide you want tacos for dinner tonight, we can have the ingredients to you within thirty minutes or less. We are about delivering curated personalized experiences each time a customer walks through our doors or engages with us digitally. In e-commerce, we've grown at a compounded annual growth rate of 24% over the last three fiscal years. Our digital experience offers a fully integrated and increasingly personalized journey. We're not only selling food, we're simplifying meal planning. Making shopping easier and more convenient. We are serving our customers how, when, and where they want to be served. Our stores are community hubs within minutes of the vast majority of our customers' homes, offering an on-demand and fresh assortment. Trusted service, and local relevance that online-only competitors simply cannot replicate. Our in-store fulfillment model delivers fresher products faster with greater flexibility across pickup, delivery, and in-store experiences. We are a strong portfolio of brands, and we've invested in a unified national network powered by common systems. Enabling us to harness our cloud-based centralized data, drive operational efficiencies at scale, and elevate the customer experience while remaining highly relevant to the preferences of customers in our local communities. I'm extremely excited by the early success we're seeing in leveraging these systems and utilizing our data with today's most advanced algorithms and tools. This foundation is also anchored by a $14.3 billion portfolio of owned real estate. Located in the most valuable and sought-after retail corridors in our markets. These irreplaceable assets just appraised in July 2025 are not only among the most valuable in retail, but also operationally essential supporting seamless customer access, optimized logistics, and fueling long-term growth by placing us exactly where our customers live, shop, and engage. In addition to our core real estate portfolio, through the deep dive I've undertaken, we are actively evaluating our broader asset base, operating model, and market footprint to ensure that we are running as efficiently and as effectively as possible. This includes making thoughtful incremental decisions around where and how we want to grow while at the same time evaluating underperforming stores and non-core assets to better align with our long-term priorities. Year to date, we've announced the closure of 29 stores and expect to open nine new stores by year-end. All of this creates a transformational foundation for long-term value creation. And while this will not happen overnight, the opportunity in front of us gives us the confidence to take decisive action today. To exit a $750 million accelerated share repurchase representing an incremental 8% of our outstanding shares at current prices. This reflects our conviction that our share price is very much underappreciated and does not fully reflect the strength of our foundation or the opportunities within our strategy to drive long-term shareholder value. That's what a new day looks like. It's a day of confidence, a day of action, a day of growth. Now turning to our second quarter. Our teams delivered solid results with adjusted ID sales growth of 2.2%, adjusted EBITDA of $848 million, and earnings per share of $0.44. These results are in line with our expectations and reflect steady execution against our five strategic priorities. Driving growth and engagement through digital connection, growing our media collective, enhancing the customer value proposition, modernizing capabilities through technology, and driving transformational productivity. Together, these priorities are driving our current performance and positioning us to enter our long-term growth algorithm for fiscal 2026. Our four digital platforms continue to be key engines for customer acquisition, retention, and engagement, driving measurable increases in sales and frequency among our most loyal shoppers. These platforms not only deepen relationships but also generate rich, actionable data that fuels the media collective's targeting capabilities and monetization strategies. This integrated ecosystem is accelerating our ability to innovate, optimize marketing spend, customer reach, and unlock new revenue streams. E-commerce remains a key growth driver. With 23% year-over-year growth this quarter and in line with our three-year CAGR. E-commerce growth flattening at ACI. Grocery penetration is now well above 9%. Our first-party business led by Drive Up and Go continues to scale rapidly and represents the majority of e-commerce transactions and sales. By leveraging our store-based fulfillment model, we operate from a network that places us closest to the customers we serve. Giving us a structural advantage in last-mile fulfillment. This proximity combines our rich asset base allows us to deliver a differentiated customer experience built on speed, service, convenience, quality, and assortment. At the same time, our digital investments, including AI-powered features, are driving engagement, customer acquisition, and retention. Loyalty continues to be a powerful driver of digital engagement value creation, with membership growing 13% to more than 48 million in the second quarter. Program enhancements and simplification are fueling deeper engagement. Members are transacting more frequently. Redeeming rewards more easily spending more. Notably, nearly 40% of engaged households now choose the cash-off option, underscoring the appeal of immediate value. Loyalty also serves as a rich data source for our merchants and media collective, enabling targeted marketing and monetization. Most recently, we extended the value of our loyalty platform beyond grocery. With the launch of 4U Travel. A new partnership powered by Expedia that allows members to earn up to 10% cash back on travel bookings redeemable towards grocery purchases further strengthening engagement, and broadening the appeal of our platform. Pharmacy grew 19% year over year. Fueled by continued strength in GLP-one strong core prescription volume increases, and share gains from competitor store closures. All supported by our top-tier customer satisfaction. As we've consistently said, customers who engage across both grocery and pharmacy channels demonstrate materially higher value with increased visit frequency and broader spending across the store. To capture this opportunity, we're investing in personalized omnichannel pharmacy and health solutions that are driving new customer acquisition, and converting single-channel shoppers into high-value cross shoppers. As a key pillar of our Customers for Life strategy, scaling these pharmacy and health solutions profitably through higher-margin services, central field expansion, and innovative procurement and operational efficiencies is a top priority. In the integrated mobile app experience, we introduced the app as a Swiss army knife of tools that simplify planning, shopping, saving, and more. Whether customers shop in-store or online. Since then, we've enhanced it with advanced personalization and AI. Our newest feature, Ask AI, delivers a conversational search experience that helps customers build smarter baskets faster. It enables natural cross-category discovery and personalized recommendations. Customers no longer need to know exactly what they're looking for in our aisles or online. They can simply ask, what are healthy snacks for kids? Or say, my holiday party is tomorrow, and I'm not prepared. Ask AI will offer tailored ideas and guide them to relevant products. Our media collective delivered strong momentum in the second quarter, significantly improving the year-over-year return on ad spend for our partners. This was driven by enhanced data quality, more precise targeting, and faster campaign measurement. On-site digital ad inventory has grown meaningfully year to date. While improved speed to market has enabled advertisers to launch and optimize campaigns with much greater agility. Off-site, our media offerings are gaining traction. By leveraging real-time transaction data and integrating item-level sales reporting, with platforms like Google, Meta, and Pinterest. We're delivering greater transparency and measurable performance across the customer journey. We've also advanced our full-funnel strategy through shoppable recipes, app integration, connected TV, and new in-store digital signage, creating seamless experiences for customers and measurable value for our partners. Looking ahead, we remain focused on building innovative customer-centric media solutions that drive growth for our partners and value for our business. In our customer value proposition, we continue to invest through a balanced approach of enhanced loyalty, incremental and personalized promotions, competitive pricing actions, and vendor funding. This includes surgical price investments in select categories and markets along with dynamic management of cost inflation to help stretch customers' wallets. During the quarter, we made incremental shelf price in specific divisions, and while early in the journey, we're already seeing an inflection in unit sales growth. We continue to strengthen our own brands portfolio this quarter. Introducing new offerings across multiple categories that deliver exceptional value to our customers. These enhancements are driving customer engagement and loyalty, while also contributing to margin accretion through improved mix and merchandising. As we elevate the visibility and appeal of our own brands, we believe we can drive outsized growth in this critical area of our business. Reinforcing our competitive advantage and long-term profitability as we drive penetration from 25% to 30% over time. Technology remains central to our long-term growth strategy. As we shared last quarter, our technology-first approach is enabling us to innovate faster. Operate more efficiently and deliver greater value at a lower cost. We're energized by the progress we're making as we embed technology across every part of our business. Our modern cloud-native platform continues to power key operations across e-commerce. Stores, pharmacies, supply chain, merchandising, and retail media. It also positions us to rapidly scale emerging technologies like AI. We are actively deploying AI agents to enhance core business functions. Including cogeneration, price and promotion, personalization, and customer care and experience, like Ask AI. Unlocking new levels of speed, precision, and productivity. Looking ahead, we see technology innovation as a key enabler of both margin expansion and customer experience differentiation. And we remain very focused on building capabilities that drive long-term sustainable value creation. Driving transformational productivity is not a priority. It's an imperative. As we navigate a dynamic operating environment, it's critical that we unlock the sustainable efficiencies to reinvest our strategic growth initiatives offset inflationary headwinds, including annual union labor cost increases. As previously shared, from fiscal 2025 through fiscal year '27, we expect our product engine to deliver $1.5 billion in savings and are on track to achieve the 2025 savings. Our productivity savings are tightly integrated with our technology modernization strategy, which includes AI and data analytics to enhance decision-making and operational agility, automation across the supply chain, to optimize costs, improve speed, and support business continuity. Shrink in labor management tools, including Vision AI and electronic shelf labels to drive store-level efficiency and accountability. We're also making meaningful progress in reducing existing overhead and expanding our global capabilities. With continued investment in our India Technology and Innovation Center, and scaled back office operations in Manila. These hubs are accelerating our ability to deliver productivity at scale while also enhancing operational support capabilities. One of our most significant opportunities continues to be leveraging our consolidated scale to improve purchasing efficiency. Through national buying strategies and more streamlined supplier relationships, we are driving better cost outcomes and consistency across our network. At the same time, we are completely transforming our merchandising organization end to end. Structurally building a house of merchants empowered by AI. We're also reimagining our assortment strategy. And upgrading our tools and processes to drive more effective execution and stronger results. Including a partnership with OpenAI, to use Agencik AI to power merchandising intelligence. This transformation is designed to unlock the full potential of our talent and scale enhance customer relevance, deliver improved financial performance. Sharon, over to you. Sharon McCollam: Thank you, Susan, and good morning, everyone. It's great to be here with you today. As Susan shared, it is a new day at Albertsons Companies, Inc. Under her leadership, a right to win energy is mounting across the company, and the pace of change at both the division and national levels is accelerating. We are also seeing our investments in digital loyalty, e-commerce, pharmacy, and retail media taking hold and adding to our competitive war chest. With this said, these opportunities in front of us have remained underappreciated in our equity story. And there is clear dislocation between our stock price and the underlying value of our business. So before I dive into our Q2 financials, I want to talk about capital allocation. With the strength of our balance sheet, and our belief that our stock is undervalued, we announced two capital allocation actions this morning. To quickly return value to our shareholders. First, we increased our existing share repurchase authorization from $2 billion to $2.75 billion. Under this new authorization, today we announced and executed a $750 million accelerated share repurchase on top of an already repurchased $600 million in shares since the beginning of the fiscal year. Combined, assuming today's share price for the ASR, these repurchases represent over 12% of our beginning of the year outstanding shares. With a remaining authorization for future repurchases of $1.3 billion. This $750 million accelerated share repurchase is immediately accretive and including it our net debt to adjusted EBITDA ratio will be 2.2x versus 2x at the end of the second quarter. Still well within a range that gives us significant operational flexibility. Turning now to our second quarter results. I'll start with identical sales. Adjusted identical sales grew 2.2% this quarter. Adjusted for a 12 basis point negative impact related to the three-week Colorado labor dispute in 47 stores. This 2.2% increase was driven by strong growth in pharmacy and a 23% increase in digital sales. Pharmacy in particular outperformed even our own expectations. Driven by ongoing growth in GLP-one and share gains from the standalone pharmacy channel. We also saw encouraging growth in areas where we made surgical investments like Fresh. As Susan mentioned earlier, where we invested we saw improving unit trends. Gross margin in the second quarter was 27%. Excluding fuel and LIFO, gross margin decreased 63 basis points versus last year. But importantly, it improved sequentially from Q1 on a year-over-year basis. The ongoing mix shift toward digital and pharmacy drove the significant majority of this decline. Incremental investments in our customer value proposition, however, were substantially offset by gains from our productivity initiatives. Also driven by productivity, we saw a 50 basis point improvement in our selling and administrative expense rate compared to last year, excluding fuel. That's on the same trend as last quarter and reflects the benefits of leveraging employee costs and lower merger-related expenses. We expect continued discipline in the selling and administrative expense rate in the back half of 2025 and beyond. Interest expense picked up slightly in Q2, $105 million this quarter versus $103 million last year. The increase was mainly due to costs associated with the refinancing and maturity extension to two and thirty. Of our $4 billion asset-based credit facility which was completed during the second quarter. Finally, adjusted EBITDA in Q3 was $848 million and adjusted EPS was $0.44 per diluted share, in line with our expectations and reflective of the strategic investments we're making for long-term growth. I'd now like to give you a quick update on our year-to-date labor. In fiscal 'twenty-five, we had 120,000 associates up for renewal. To date, we've successfully reached agreements covering more than 107,000 of those associates. Now let's walk through our updated 2025 financial outlook. As Susan said, we remain focused on our five strategic priorities, Through the balance of fiscal 'twenty-five, we will continue to invest in our customer value proposition, customer experience, digital growth, the media collective, and health and pharmacy. These investments are expected to enhance our customer value proposition and drive outside growth in digital and pharmacy. Both of which drive higher future customer lifetime value. We will also continue to focus on our productivity agenda to fuel this growth and offset inflationary headwinds. With that as our backdrop, we are updating our fiscal 2025 outlook as follows. We are increasing the lower end of our identical sales range and now expect it to be in the range of 2.2 to 2.75%. This assumes ongoing outsized growth in pharmacy and digital as well as continued surgical price investments in grocery, to accelerate unit inflection. We continue to expect adjusted EBITDA to be in the range of $3.8 billion to $3.9 billion unchanged from last quarter including the approximate $65 million in adjusted adjusted EBITDA in the fourth quarter related to our fifty-third week. We are increasing, however, our adjusted EPS to a range of 2.06 to $2.19 reflecting the 2025 accretion of the $750 million accelerated share repurchase announced today. The effective income tax rate is expected to be in the range of 23.5% to 24.5%. Unchanged from last quarter. We do, however, expect a cash flow benefit in the range of $125 million to $150 million in 2025 from recent tax legislation. Capital expenditures are expected to be in the increased range of $1.8 billion to $1.9 billion as we accelerate our investment in digital and automation. And finally, as it relates to tariffs, tariffs have not had a material impact on our financial performance yet this year. As 90% of the products we sell are sourced domestically. Insulating us from global trade volatility. Beyond that, we have and are taking proactive steps to mitigate cost exposure leveraging sourcing and supplier partnerships, to minimize the downstream impact to both our margins and our customers. And with that, I'll hand it back to Susan for closing remarks. Susan Morris: Thank you, Sharon. In closing, this is a new day at Albertsons Companies, Inc. And we're operating from a position of strength. We are executing with clarity, discipline, and momentum. Our strategy is working and it's delivering measurable results. Our owned real estate portfolio, our trusted local banners, and our locally great and nationally strong operating model give us a strong foundational competitive advantage. One that we are leveraging to drive long-term sustainable growth. We are also deepening engagement through our customer-focused associate connections digital platforms, expanding our reach through loyalty and e-commerce. And unlocking new revenue streams through our growing media business. At the same time, we're modernizing our capabilities with scalable technology driving transformational productivity and making strategic investments that will enhance our customer value proposition. We are confident in our ability to deliver on our fiscal 2025 commitments and even more excited about the opportunities ahead as we enter our long-term growth algorithm in fiscal 'twenty-six and beyond. To our 280,000 associates, thank you. Your passion, resilience, and commitment to our customers is what will fuel our next chapter. You are the heartbeat of our company. The architects of our customer experience, and the driving force behind our transformation. We look forward to continuing to create value for our customers, our communities, and our shareholders. We'll now open the call for questions. Operator: Thank you. Our first question comes from the line of Edward Kelly with Wells Fargo. Please proceed with your question. Edward Kelly: Yes. Hi. Good morning, everyone, and thank you for the update. Clearly, you're expressing your confidence in the business and the return of the algo in '26 with the ASR. I was curious if you could maybe you know, take a step back for us and, you know, maybe revisit the building blocks of returning to algo next year and, you know, what is driving that incremental confidence that we're hearing today. I mean, '25 is certainly an investment year and, you know, it's a choppy investment year. So, you know, just curious around, you know, around that around that confidence in the building blocks for next year. Susan Morris: Good morning, Ed. So sure. First and foremost, what I would say is it's it's really sticking to the five priorities that we've laid forth. Driving our customer growth through our digital connections, growth in our media collective, enhancing the customer value proposition, modernizing our capabilities through technology, and driving transformational productivity. And within each of those, we're seeing strong proof points of success. As an example, I think about the customer value proposition. With great intention, we've invested surgically in key markets and we're seeing a positive inflection in units there. We're starting to see the returns. In addition to that, we made deeper investments in promotions, in loyalty, and personal personalization. And again, we're seeing those customers engage with us at a deeper level and more frequent. Frequently. From a productivity perspective, we've we've spoken of the 1 and a half billion dollars in productivity. We are on track for those savings. In 2025, most of that is coming from SG&A. As we look forward into the future, we'll start to see that coming from gross margin expansion. Edward Kelly: Just a follow-up on on all this. I mean, from a pricing standpoint, obviously, you've been investing in price. You know, you're starting to get some you know, result associated with that. But it's been pretty surgical. How are you thinking about, you know, the outlook for price investment as you continue forward? I'm curious from a price competition standpoint, have you seen price competition know, increase in all? And I think overall, I guess what I'm trying to ask here is that I think you know, investors are worried that that we may see a more accelerated investment from a pricing standpoint. So I'm just curious as to how you see that playing out as things move forward here. Susan Morris: We're very pleased with the price investment so far as I mentioned. And I I can't underscore enough that they are incredibly surgical by category, by market. We've we've got an aggressive agenda laid forth on pricing, but it's also we recognize the fact that we are striving to offset it with increased vendor funds and with other sources of productivity. So this is a very measured exercise, very surgical, We don't anticipate making any brash moves. It's all built into our plan. And again, it seems to be working. We're we're very pleased with the initial results. Sharon McCollam: And Ed, I would just add to that. That so many of these pricing surveys do not capture the personalized discounts that the customers receive through our loyalty programs, gas rewards, and the now they're even converting those rewards into cash, which when they're checking out, they are getting cash off as they walk out of the store. And we think that that is a very powerful way to leave the store when you've just had your bill reduced. When you take that into consideration, customers are receiving great value through those programs. And when we think about that, we also have to think about the acceleration that we are moving forward with with owned brands. One of the biggest things we will do to bring value to our customers is to continue to invest and grow our penetration of owned brands. Edward Kelly: Great. Thank you. Operator: Thank you. Our next question comes from the line of Rupesh Parikh with Oppenheimer and Company. Please proceed with your question. Rupesh Parikh: Good morning and thanks for taking my question. So just going back to I guess just gross margin dynamics for the balance of the year. Just curious the puts and takes for the back half. Anything changed versus what you saw in the first half first half of the year? Susan Morris: We don't see any significant real change in the margin. The mix shift we expect that to continue. As a reminder, those are our highest customer lifetime value customers. In RX and e-commerce. So that we expect to continue. And what you saw in the second quarter is how our productivity funded a significant amount of the surgical price investment. So we expect that also to continue. So when I look at Q2 and I look at the full year, I would expect that margin to be very similar with the main explanation of the variance year over year to be mix shift. Rupesh Parikh: Great. And then maybe my follow-up question, just given a lot of concerns out there on the consumer backdrop, just curious what you guys saw with your consumer during the past quarter and then your expectations for the balance of the year? Susan Morris: Sure. So what we've seen from the consumer is a continued focus on value. A shift to trading down, maybe it's smaller package sizes, a focus on own brands, hence why we believe we have an incredible upside opportunity. Increasing our penetration well above 25%. We see an increased usage in coupons. We see them sticking closer to their shopping list maybe not buying that extra item, that extra bottle of whatever they're they're kind of shortening their list and sticking to it. On the other side of it too, we're still seeing a lot of impacts from healthier eating. Whether it's just I think it's an overall awareness of making better choices categories like functional beverage, protein shakes, protein-enhanced milks, and those kinds of things, supplements. All of those continue to grow. We're seeing a nice and what what we enjoy about that is those are the categories that also include things like fresh meat, fresh produce, and they're margin accretive for us so we see some positives there. The pressure continues. And we're working very hard to give the customers what they want by market in a way that fits their budget. We also offer tools through our app to help them create lists that fit within their budget that meet their health and wellness needs, and and and ease and simplify sort of the mental load of of shopping in today's environment. Rupesh Parikh: Great. Thank you for all the color. Operator: Thank you. Our next question comes from the line of Mark Carden with UBS. Please proceed with your question. Mark Carden: Good morning. Thanks so much for taking the questions. So to start just on the full year guidance, you're boosting your top line but maintaining your EBITDA expectations. Just wanted to get some color on the primary driver of the gap there and how much of that is related to any incremental price investments versus conservatism or anything else? Thank you. Sharon McCollam: The increase in the sales range in the guidance is primarily which was driven by pharmacy. And we expect due to the performance in Q2, volatility in the ID sales to be driven by ongoing growth in the pharmacy. It's an area that we are taking share and we are continuing to capitalize on the benefits we can get from those new customers. As it relates to the adjusted EBITDA, because we expect that to come from pharmacy, it doesn't have a significant impact on adjusted EBITDA. Mark Carden: That's great. And then as a follow-up, just on the pharmacy cross-selling front, are you seeing any deviations just in the spending lifts from customers using GLP-one? Just in other words, is it having any impact on your ability to see as much of the sales left for those specific customers? As you guys have seen in the past over time? Susan Morris: Sure, Mark. So what we typically see with the GLP customers is that there might be an an additional excuse me, an additional dip in their purchase size, but we see that recover fairly quickly. And then if they do continue to expand their basket once again, as I mentioned, they are leaning into some of the categories and protein supplements chicken, beef, fresh vegetables, and we love about that is, again, they're very margin accretive for us. And how the customer shopping the entire store, expanding the breadth of categories that they're shopping with us. So there may be an initial impact, but we quickly see recovery from that. Mark Carden: Great, thanks so much. Good luck. Operator: Thank you. Our next question comes from the line of Leah Jordan with Goldman Sachs. Please proceed with your question. Leah Jordan: Good morning. Thank you for taking my question. Just wanted to ask about the updated comp guide and see if you could talk about what's embedded regarding the cadence in the back half? Has anything changed in your view on how you're thinking about inflation versus tonnage? Maybe on the pharmacy piece, I mean, there anything to think through on the timing shift with vaccines and how that could drive the comp in the third quarter versus the fourth quarter? Thank you. Susan Morris: Yes. So as we think about the comp pharmacy will drive higher comp in Q3. Than we think it will drive in Q4 for the very reasons that you've just mentioned regarding vaccination and the ongoing market share gains we're getting from the closure of other pharmacies. We're picking up those customers and are thrilled to do so. So from that perspective, Leah, I expect there to continue to be momentum coming from pharmacy. We also expect to see continued growth in e-commerce. And from a difference between the two quarters, I don't think it's materially different. Between the two quarters. Sharon, I would just add to that from a pharmacy perspective as well. The delay in vaccines maybe had a slight impact at the end of Q2. But that actually accelerated at the beginning of Q3 and a credit to our pharmacy teams. Who once the vaccines were released, we were out there in full force and are pretty excited about what we're seeing in vaccine growth this year. Leah Jordan: Okay. That's helpful. And then just on productivity, I mean, you guys are driving nice improvement on SG&A leverage, better than we were expecting. I think, Susan, you highlighted a number of items in the prepared remarks that can drive that. I think AI, automation, reducing overhead, among others. But just as you think about that long list of opportunities, I guess which are the ones that are circled near term versus longer term within the three-year plan? And then as we think about this year, what about cost savings? Right? Like, how much of a relative magnitude shift is that in the back half? Versus the front half? Susan Morris: Sure. So with regards to the productivity side, what we're seeing, first and foremost, and I I think I said it earlier, is the bulk of the savings in 2025 are SG&A related. And this is us looking end to end across the organization, understanding where we made the tough decision to lay off close to 1,000 individuals this year. We're also looking behind the scenes on processes where we can automate, eliminate, simplify them. And and and looking at what we can take to our offshore businesses again, to cost savings, but also to enhance our capabilities. As we look forward, we'll start to see greater improvement in margin expansion as I mentioned, and this is where we'll start to see the impact of our buying better together. Leveraging our national size and scale, to secure better cost of goods. And, oh, by the way, partnered with that is technology. So there's tools that were that were launched or that are in process, I should say, with OpenAI as one example to help us improve our category strategies, to help us make better decisions faster, and to leverage the amount the vast amount of data that we have to secure stronger negotiations with our vendor partners. Sharon McCollam: Sharon, would you like to add? And, Leah, I would just add to that. During the second quarter, we did open our Technology Innovation Center in India. And we successfully moved a large piece of our back office accounting finance functions to Manila. That Manila operation, just to remind you guys, has been there about twenty years. So it's an established entity for us. And we are very pleased with how these moves have gone. They've been really seamless, honestly. And we will continue to balance onshore and offshore going forward. Leah Jordan: Very helpful. Thank you. Operator: Thank you. Our next question comes from the line of Paul Lejuez with Citi. Citigroup. Paul Lejuez: Hey, thanks guys. I'm curious within your productivity initiatives, how much you are focused on shrink, I guess, both fast and and spoilage or or waste? And what are the levels of sit today versus history? And how do you look at the opportunity to improve those items reducing theft, reducing waste as a potential driver of stronger profitability in the future? And then just a quick follow-up on the pharmacy business. I'm curious if you can talk about how much of that sales growth is being driven by existing versus new customers. I think you cited gaining some market share from from closing competitors. And I'm just curious how that would break down existing versus new? Thanks. Susan Morris: Sure. Thanks, Paul. So with regard to shrink, we are seeing improvements year over year. And much of that is driven by improvements in operational effectiveness, just being frank. And but a lot of it is being driven by tools and technology. As an example, we've now got AI cameras systems over our registers to understand perhaps items are being scanned properly at the self-checkouts or even by our own clerks. We've got improved tools and processes in order management and also in production planning, leveraging history leveraging current trends to give us best-in-class order sizes and production planning lists so we can optimize for sales but also manage our shrink levels. From the pharmacy perspective, on the GLP-one side, we are seeing, of course, the lion's share of growth comes from GLP-1s also our core pharmacy business, our core script growth is doing quite well. We are One example of where we're doing well outside of GLP-one are speaking of vaccines earlier today, We are three times our market share in vaccines versus our normal share in pharmacy. So we're working very hard to find outsized growth and profitability to help our bottom line and our top line. Sharon McCollam: And during the quarter, we did see a significant number of new customers come into the brand. But remember that they don't have to be completely new to us. It is possible that when a Walgreens or a CVS closes, that a customer that is currently grocery shopping at Albertsons Companies, Inc. may be filling their prescriptions there because of the health plan they may be associated or another reason that it may be unbeknownst to us. So we are bringing in customers that are in grocery today that are coming into pharmacy. We are bringing customers in the store that have not shopped in grocery in our stores, which is our biggest opportunity. But we are seeing all of the above. But always keep in mind the majority of our pharmacy sales will always come from grocery customers in our stores today that then convert to becoming pharmacy customers. Paul Lejuez: Thank you. Good luck. Operator: Thank you. Our next question comes from the line of Jacob Aiken Phillips. Melius Research. Please proceed with your question. Jacob Aiken Phillips: Hi, morning. So I I wanted to talk about e-commerce. I'm just curious, like so I think last quarter you said it it was nearing breakeven and there's some mixture towards e-commerce just pressuring gross margins. Over the long term, how are you balancing the structural labor and capital requirements of you know, direct delivery and immediacy versus, like, cost efficiencies? Susan Morris: Jacob, thanks for the question. So with regards to e-commerce, yes, we're getting closer to breakeven to profitability there. And there's a few items that play. First and foremost, our business continues to grow exponentially. We're very excited about that. We're proud of that. And at the same time, we've been leveraging technology, data, information to optimize the picking path. For our shoppers within our stores, whether it's picking one order at a time, picking multiple orders at a time, giving them a pathway to shop up and down the aisle, to create productivity. We're continuing you mentioned the capital allocation side of things. And as we look at this exponential growth, when we go through our remodel process, as we're building new stores, we're continually evaluating the space that we're allocating to our e-commerce operations and making the right decisions to expand. We're also able to go back and retrofit certain stores, perhaps adding refrigeration. Adding hot food holding so that we can give the customers what they want. When they want it. That part of the process is is essential to us because, again, we don't know what high looks like. We expect it to continue to grow in the future. The beauty of our model is our twenty-two seventy-ish stores are located in the neighborhood where our customers are shopping. We've solved for the last mile purely by our proximity to the customers that we serve. So that that helps us with the profitability side, and maybe more importantly, it helps us on the customer experience side. You're getting product that was picked for you fresh, Right? You can you can custom order a cut of meat. We can write happy birthday on a cake for you. But you're getting those products from the store that other shoppers are shopping and up in as quickly as in thirty minutes if you'd like, or next day if that's what's most convenient for you. But our proximity is really a huge advantage for us as a company. Sharon McCollam: And, Jacob, I'll just add to that that when you think about the fact that we actually believe that the winner in e-commerce would be in the last mile. Who successfully delivered best and highest quality fresh product in the last mile. And we built our e-commerce model with that in mind. So we have been, from the date that we actually started e-commerce, we have been using our stores as fulfillment centers in order to achieve that. As part of that, we have evolved proprietary systems to support the entire picking distribution process in our stores and continue to engineer those capabilities and those systems to drive the highest level of efficiency, which is why we can sit here and say we are getting very close to near breakeven in the e-commerce business. Jacob Aiken Phillips: Thanks. That's helpful. And then so I appreciate all the comments on using AI. I partnership with OpenAI. It's a big team right now, obviously. If you can take take a step back and talk about how you're managing, like, integration across the organization of these some of these cutting-edge tools, like, what use cases? You've mentioned some. What are the And how you it evolving over the next few years? Susan Morris: Sure. So honestly, of the most effective methods that we have for deploying new technologies across 285,000 associates. Is they help us build the solution. So you mentioned OpenAI. We actually have division merchants. So, yes, our corporate team's engaged, of course, and our national tech team, but we're actually using some of our merchants that work in the divisions today that are closest to the stores to help us build these tools, So they're incredibly intuitive. They're they're meant to take work away. As an example, you know, we we have an incredible amount of data available to us. It can actually become very complicated to be able to get answers. By leveraging AI tools, we're able to simply ask business questions. Why were my ice cream sales up yesterday? What were the key items that I sold the most of, or or why was I down? And with the AgenSci AI, we're able to actually get information back at a at a really rapid pace after getting our information back. And we're able to then action upon that information as opposed to spending all the time digging into it. When I think about what we've done with AI at store level, Afresh. It's a tool that we use for order writing in our fresh departments. That tool was literally created in partnership with one one or two store managers department managers in produce helped us write that tool. So that it was very intuitive to the actions that they were taking today, but of course sped up the process and added that multidimensional data that we're looking for. It's really getting the team involved and building the tools that they will use in the future that's part of our success in this space. Sharon McCollam: We're also using it, extensively in the real estate side of our business. We are it can help us assess the performance across our banners, markets, formats, It provides clear visibility into where we're the strongest and where the opportunities exist. And we're also training the AI agents to perform advanced geospatial type analytics. That's mapping competitive proximity trade areas. And market dynamics. And we can do that in real time. And these are extremely valuable insights for us as we continue to focus on future growth new locations. And in Susan's deep dive that she talked about, it's been one of the foundational tools that she's been looking at to look at all of our assets noncore assets, etcetera. Jacob Aiken Phillips: Thank you. Operator: Thank you. Our next question comes from the line of Simeon Gutman with Morgan Stanley. Please proceed with your question. Simeon Gutman: Hi, Susan. Hi, Sharon. Thanks for the question. My first question, it's on the ASR So Susan, since you've joined, you've kind of opened the of reinvesting a little bit more. And the business is still under comping the industry. So thinking about spending on stores or something related to digital, how did you weigh that versus repurchasing the stock or, frankly, even paying down some debt? Susan Morris: Hi, Simeon. Once we does not preclude the other. So the ASR does not prevent us from continuing our capital expenditures as planned. We've got a very aggressive agenda there in terms of remodels, new stores, driving technology improvements, We've also left ourselves, and Sharon can speak to this, dry powder. We are interested in growing in many ways organically, but also, you know, through acquisition. So we've left ourselves some room to be able to accomplish whatever we need from a capital perspective, an acquisition perspective, or whatever else might come our way. Sharon? Yeah. And, Simeon, not prepared remarks, we said it. With our adjusted EBITDA ratio at 2.2 it leaves us able opportunity and tremendous flexibility. So we don't see the ASR as having any impact on any of the strategic initiatives that we've been talking about. Simeon Gutman: Thanks for that. And then, one follow-up. The e-commerce growth digital was excellent. Can you talk about the drivers of it? And can you remind us this this pharmacy growth factor into that, or is that just, I guess, grocery orders? Susan Morris: Yeah. So thank you for the question. Pharmacy growth is separate, so this is truly just the rest of the store growth. And some of the key factors there are, first, and foremost, our five-star certification program. And this is really just ensuring that our associates are delivering the customer experience that we expect. They're meeting productivity timelines, that they're delivering the quality our customers are looking for, And I have to say, our team is doing a phenomenal job in that space. The other side of it is as we look at the improvements that our team has been making on the app. Your ability to create lists, your ability to add items, from recipes, your ability to seek recipes, and and be able to look at your app as sort of a one-stop-shop solution for all your needs in your shopping experience with us. By the way, that's for e-commerce, but that's also true for online. Simeon Gutman: Thank you. Good luck. Operator: Thank you. Our next question comes from the line of John Heinbockel with Guggenheim Partners. Please proceed with your question. John Heinbockel: Hey, Susan, can you you mentioned sort of looking at assets noncore assets. How do you think about those You know, what are sort of non-core And then when I when I think about store assets, you've got markets with dual banners right, multiple banners. How do you think about that in terms of possible banner consolidation And when you look at markets where you might lack share, is there a real thought of you know, exiting some markets, Or do you try to gain requisite share through selective M&A. How do you look at the portfolio? Susan Morris: Yeah. Sure. So thanks, John. So as we look at our our assets, first and foremost, one of the things that Sharon just mentioned Our real estate team is doing a phenomenal job of aggregating data for us to be able to look at our fleet across the entire country, overlay that on top of customer growth, you know, in an influx of population growth. Looking at where we performed strongest with our customers, where the brands resonate best and so forth. So we're looking across the entire organization it's helping us identify first and foremost where are we doing well? Where do we wanna double down? How can we either, again, grow organically or we're looking for fill-ins? One of our top priorities is saying as we see growth across the entire organization, where are those markets where we've got a strong suite, we need to to double down and and buy or build more, or adjacent opportunities where there might be a fill-in, a We're a banner company built of acquisitions. It's what we do. We're very good at it. And looking for those strategic fill-ins is really important to us. From a Banner perspective, we've gosh, we've been what we call flipping banners for years. That's where we look at a market and say, gosh. We've got two or three banners. Which ones are performing the best? Which ones resonate most with the that we serve. The Northwest is one example where I can think of where we've flipped many of our stores from Albertsons Companies, Inc. to Safeway as an example. In Southern California, we flipped stores from Vaughan to Pavilions. So we're using this data and information that we have to make very surgical decisions, strategic decisions on how we can improve the fleet moving forward. John Heinbockel: And then maybe a quick follow-up. Just remind us as part of the secular algo on top line, Food volume, I I think, the plan is to be modestly positive. Correct me if I'm wrong with that. When do you think you inflect to that point? You know, is it next year or or that too early? And I guess, is pharmacy, you would think pharmacy alone could play a big role in getting to positive. Susan Morris: John, what we previously said is that as we enter 2026 into the algo, it is our expectation that we are getting to near flat units. Now if the industry continues to decline, of course, we will still continue to move forward. And I think within that two plus we believe that that could be an inflection point for us. If not, it will move into '26, depending on what with the industry. But we still believe regardless that we will be in the algo in 2026 at two plus percent comp. It may come a little bit differently. And one of the things to keep in mind with that is that as we move forward with pharmacy, the scale that we have been able to take or or grow is allowing us to do things that we were not able to do before to improve profitability in pharmacy. I don't want us getting overly excited about the pharmacy business profitability. But as we all know, today, it is actually dilutive to adjusted EBITDA. And everything we can do, like Central Fill. Like vendor negotiations on drugs, direct negotiations, will help improve incrementally that pharmacy contribution. So we do expect that to happen over time. Additionally, you think about it, an e-commerce. As we get closer to break even in e-commerce, every additional order helps lever into adjusted EBITDA. So we're expecting the identical sales growth of two plus and then adjusted EBITDA slightly better than that. So based on everything we've talked about here today, and the priorities and everything Susan shared, we are very confident in our ability to get there for 2026. John Heinbockel: Thank you. Susan Morris: Great. Thank you all so much for your questions. We appreciate your time, and we look forward to talking to you over the next couple of days. Operator: Thank you. Ladies and gentlemen, this concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.
Operator: Good day, and thank you for standing by. Welcome to the Third Quarter 2025 Domino's Pizza, Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Greg Lemenchick, Vice President of Investor Relations and Sustainability. Please go ahead. Greg Lemenchick: Good morning, everyone. Thank you for joining us today for our third quarter conference call. Today's call will begin with our Chief Executive Officer, Russell Weiner, followed by our Chief Financial Officer, Sandeep Reddy. The call will conclude with a Q&A session. The forward-looking statements in this morning's earnings release and 10-Q, both of which are available on our IR website, also apply to our comments on the call today. Actual results or trends could differ materially from our forecast. For more information, please refer to the risk factors discussed in our filings with the SEC. In addition, please refer to the 8-K's earnings release to find disclosures and reconciliations of non-GAAP financial measures that may be referenced on today's call. This morning's conference call is being webcast and is also being recorded for replay via our website. We want to do our best this morning to accommodate as many of your questions as time permits. As such, we encourage you to ask one question only. With that, I'd like to turn the call over to Russell. Russell Weiner: Thank you, Greg, and good morning, everybody. I'd like to start off by saying how incredibly proud I am of our team and our franchisees as they continue to bring our Hungry for More strategy to life and deliver best-in-class results. It was a great Q3 for our US business. We grew in all areas key to our success. Our carryout business was positive, our delivery business was positive, and our order count growth was positive. All of this resulted in meaningful market share growth. The momentum we're seeing in the business is due to initiatives that are working across all four of our Hungry for More strategic pillars. When we execute against Hungry For More, we drive more sales, more stores, and more profits. Let's start with our Best Deal Ever promotion, which was a meaningful driver of our strong US results in Q3. In my opinion, Best Deal Ever is, well, the best deal in restaurants. The price point screams renowned value, and the taste drives our most delicious food perceptions. After all, consumers are building and eating their dream pizzas. In a world where prices have gone up, and discounts never seem to be on the items you truly want, Domino's gives customers their favorite pizzas at our best price. Best Deal Ever also highlights the operational excellence our system has achieved. We wouldn't have been able to execute this kind of a promotion just a few years ago. The myriad of ever-changing topping combinations customers are putting together requires best-in-class operations, that was unlocked by franchisees leveraging our training programs, and DomOS systems. Last but certainly not least, Best Deal Ever is driving franchisee profitability. Because of the scale of our media and purchasing power, Domino's can drive the volume it takes to make a great deal like this profitable for franchisees. In fact, Best Deal Ever has been running longer than we originally planned because our franchisees asked to bring it back. Domino's franchisees are truly hungry for more. Parmesan stuffed crust pizza was another contributor to our strong results in the quarter. This launch has gone extremely well and continues to meet the expectations that we had for it on every level. Mix, incremental new customers, and franchisee profitability. Most important, our teams continue to execute this complex product very well, which is key to its long-term success. The new flavors of bread bites we just launched marked our second innovation of the year and highlight our innovation with intent approach. Our intent with this innovation was twofold. First, adding two new flavors, garlic and cinnamon, brings news to the BreadBytes platform that we launched in 2012. Second, by adding these BreadBytes flavors, we were able to remove the more operationally complex bread twists from our menu. In addition, customers prefer the taste of bread bites over twists, and love that they can get 32 bread bites for $6.99 as part of our mix and match deal. Another part of our renowned value barbell strategy is tapping into the aggregator marketplace for pizza delivery. Q3 marked the first quarter where we were fully rolled out on DoorDash and we remain encouraged about its long-term potential for our business. We continue to expect our sales on DoorDash to grow as awareness and marketing increases, and believe this will be a meaningful contributor to our US comps in Q4 and as we move into 2026. I wanted to quickly touch on the progress we continue to make on the upgrades to our ecommerce platforms. I'm excited to announce that we are now fully live with our website and mobile web experiences. Where our goal prior to full launch was to see our conversion equal to or better than our old platform. The new site does just that. It's much quicker in particular, during the checkout process, which provides a better user experience. The apps come next, and our goal is to have them rolled out by the end of the year. Next is something our entire system is buzzing about. We are bringing all aspects of Hungry for More to life with a completely new brand refresh. It's our first in thirteen years. The new campaign makes every aspect of the brand as craveable as what is inside the box. The new look and feel will roll out over the coming months in all of our marketing. Hungry for More is no longer just a strategy. It has a look, a sound, and a heartbeat. Seeing everything come to life this year gives me the confidence that in 2026 and beyond, we will be able to achieve our goal of 3% same-store sales in the US and continue to take meaningful market share. We have best-in-class franchisee economics in QSR pizza, the largest advertising budget, a supply chain with incredible purchasing power, a rewards program that is bigger than ever. And we're just getting started. As you know, we don't usually do LTOs at Domino's. So everything we have launched over the last two years, aggregator ordering, new loyalty platform, stuffed crust, and more is a part of our base and will be part of our growth in the future. And we will continue to add new products, technology, and renowned value promotions on top of that. This will be how we drive best-in-class results and long-term value creation for our franchisees and shareholders well into the future. I'll now hand the call over to Sandeep. Sandeep Reddy: Thank you, and good morning, everyone. Our third quarter financial results continued to be impacted by a challenging macro backdrop but we drove profit growth that was slightly ahead of our expectations due to our strong sales performance and the timing of investments. Income from operations increased 11.8% in Q3 excluding the impact of foreign currency. This increase was primarily due to higher U.S. franchise royalties and fees, and gross margin dollar growth within supply chain. Excluding the impact of foreign currency, global retail sales grew 6.3% in the quarter due to positive U.S. and international comps, and global net store growth. In Q3, retail sales grew by 7% in the U.S., driven by same-store sales and net store growth. This growth was slightly ahead of our expectations due to the strong performance from our Best Deal Ever promotion. We also paced well ahead of the QSR pizza category, which has grown over the last quarter to approximately 1% year to date. Same-store sales accelerated to 5.2% for the quarter, on the strength of our Best Deal Ever promotion and Parmesan Stuffed Crust which drove positive transaction counts. Average ticket benefited from 1.3% of pricing and stuffed crust, which carries a higher price point. This was partially offset by a slight decline in our mix, due to a higher carryout business that has a lower ticket than delivery. Our carryout comps were up 8.7% due to the previously noted initiatives as well as continued growth from our loyalty program. Delivery was positive 2.5% primarily driven by the strength of our Best Deal Ever promotion and stuffed crust. It also benefited from aggregators coming from the launch of DoorDash. Shifting to US unit count, we added 29 net new stores, bringing our US system store count to 7,090. International retail sales grew 5.7% excluding the impact of foreign currency in the quarter. This was driven by net store growth of 185 and same-store sales of 1.7% that met our expectation. In the quarter, we continue to see strength in Asia which was primarily due to strong comps in India. We have not seen any material impacts to date from global macro or geopolitical uncertainty. I wanted to highlight the refinancing transaction that we completed in the third quarter. We had two tranches of debt totaling approximately $1,150,000,000 with a blended interest rate of approximately 4.3% that was due in October. We paid down approximately $150,000,000 of this and refinanced $1,000,000,000 in two $500,000,000 tranches, at a blended rate of approximately 5.1%. We were very pleased with the outcome of this transaction. We expect it to have an immaterial impact on our interest expense in 2025, and in 2026 and beyond. As a reminder, our next two tranches of debt come due in July 2027, and total approximately $1,300,000,000. Moving to capital allocation. We repurchased approximately 166,000 shares at an average price of $450 per share for a total of $75,000,000 in the third quarter. At the end of Q3, we had approximately $540,000,000 remaining on our share repurchase authorization. Now turning to our outlook for 2025. We continue to believe that global retail sales growth should be generally in line with 2024. As part of that, we expect the following. First, we continue to expect our US comp for the year to be 3% and to grow our market share meaningfully in QSR pizza. Our comp could be pressured by the macro environment in the U.S., which we have seen intensify across the restaurant industry at the start of our fourth quarter. Second, we continue to expect our international same-store sales growth to be 1% to 2%. This could tilt towards the high end of the range, if we do not see any material impacts from macro and geopolitical uncertainty for the balance of the year. Third, our pipeline remains strong in the U.S., where we continue to expect 175 plus net stores and internationally, net store growth to be in line with what we had in 2024. We continue to expect operating income growth of approximately 8%, excluding the impact of foreign currency, severance expenses related to the organization realignment we previously announced in Q1 and the refranchising gain in Q2. Thank you. We will now open the line for questions. Operator: Thank you. Our first question comes from Dennis Geiger with UBS. Your line is open. Dennis Geiger: Thanks, guys. Appreciate it. I wanted to ask a little bit more about the U.S. sales outlook, same-store sales outlook for the year. The reiterated 2025 guidance for 3%. You talked about the difficult macro there. Could you just kind of break down maybe anything on what you're seeing at a high level thus far, sort of unpacking that macro dynamic and the impact on the business? And then just the confidence in that number given some of the initiatives that seem to be resonating across the promotional activity and some of the other levers? Thank you very much. Sandeep Reddy: Morning, Dennis. Thanks for the question. Yeah. No. I think as we said in the prepared remarks, we're reiterating our 3% outlook for same-store sales in the U.S. And I think as far as we're concerned, we've been talking about the macro environment being a key factor all year. So this is not new. But I think what we did want to point out was we've definitely been seeing a slowing across restaurant industry sales. To start our fourth quarter, and that's just a factor that's out there. But as far as we're concerned, we are expecting to continue to gain share against the QSR pizza industry. We've done so really well so far this year. And we expect to continue to do that in Q4. So in terms of initiatives, we actually are running Best Deal Ever, as you know, right now. We're excited about DoorDash and the continuing impact of DoorDash as we called out from the beginning of the year to be more of a backup impact. So it should continue into Q4. And we'll have a whole bunch of stuff going on from the renowned value perspective as we move forward. So we just want to make sure that we do all the things that we need to do in terms of initiatives and drive them. And we're excited about our business, but I think we just wanted to point out that we're observing what's happening in the macro environment. Russell Weiner: And, Dennis, morning. It's Russell. I would just say, you know, in this kind of environment, what I'm very confident that we'll continue to do is drive market share. And what that does is it really puts distance between us and our competition. It puts pressure on the economics of their stores. So even some short-term restaurant headwinds lead to share gains and long-term gains for Domino's in that environment. Operator: Thank you. And our next question comes from the line of David Palmer with Evercore ISI. Your line is open. David Palmer: Thanks. Russell, I was just hoping maybe you can make a comment about the overall delivery market and what you're seeing not just from a consumer standpoint, but competitively. It looks like from where we're sitting, like, there is a lot of maybe desperate discounting promotional activity on the third-party sites right now. Effectively, it's the industry's version of stuffing the channel late in the quarter. You saw a lot of this activity. And we're seeing these deals pop up on our app. So could you speak to the broader ecosystem of delivery right now and what's happening there? And how you see this playing out. Is this sustainable? What does it mean for you and maybe the pizza category? Russell Weiner: Yeah, David. Good morning. You know, I think if you take a step back, that's part of why we're happy that both our delivery business and our carryout business was up for the quarter. There are a lot of pressures out there, but the fact that we're able to sustain that and, I'll maybe use your words in a second to say sustain that profitably, is really important. I think, we gotta look back at the notes. I think you used desperate pricing or something like that. I'll compare that to our renowned value. You know? This is value that we put out there that absolutely is aggressive. And is aggressive, you know, certainly if you're a competitor of ours with different store level economics, different ability to drive volume, different ability to bring food cost down to a manageable amount. But the value we have out there is value we can sustain. So, yeah, I think, you know, whereas we've got a lot of growth in carryout, and continued growth in delivery as more and more people come into delivery, they're having to buy their way into it. And I think in that kind of marketplace, we succeed. We excel. Sandeep Reddy: And, Dave, I'm gonna add another thing on this because we talked about this from the get-go on the aggregated channel, but we are pricing for profitability for franchisees. So no matter what's been going on in the delivery channel, we've actually been able to optimize that, and we'll continue to optimize that as we learn more and move along. And more importantly, I think, just to put context behind what's going on in the delivery business, in a challenged environment to put up, like, the comps that we did plus the new stores that we've opened, we're talking about close to mid-single digits retail sales growth on the delivery channel in a very tough environment. So we feel really good about our delivery business. We understand what's going on in the landscape. But we have the best franchisee economics, and we have the best ability to price for profitability in the industry. So we feel confident that we're doing the right things. Russell Weiner: We get excited about delivery here at Domino's Pizza. I'd say, you know, one addition to that is, you know, this is why I'm so bullish about our long-term prospects on aggregators. You know, we deliver, like, one in every three pizzas out there. We're not at that share yet on aggregators. And I think a lot of that is because, well, one, we just started to we just got on DoorDash. But we're still growing, and there is pricing that in some places for the competition is probably not sustainable. And over time, that's what's gonna enable us to grow to our fair share and that's why I think aggregators are a multiyear tailwind for us. Operator: Thank you. Our next question comes from Brian Bittner with Oppenheimer. Your line is open. Brian Bittner: Thanks. Good morning. As it relates to your Best Deal Ever promotion, obviously, it's part of your renowned value strategy, and it's proven to be successful. And I think the main question that we get from the investment community is how do you ensure that you aren't training the consumer to rely on that price point or that deal for times when you aren't running it, you know, considering it is the best deal ever. And a follow-up to that is just can you talk about the economics of this for franchisees? I mean, clearly, we can see your company-owned margins. It didn't have a big impact on COGS margins. So just curious if there's any other tidbits you can add on the economics of Best Deal Ever. Russell Weiner: Yeah. Sure, Brian. I'll take economics first, and then we'll go into Best Deal Ever. I mean, the best thing I can tell you about the economics is, we're on with Best Deal Ever longer than we originally intended. Because our franchisees called us and told us that they wanna continue to lean in. Because this is driving business in their stores, and it's driving profitable business. And so I think that, you know, even beyond numbers, speaks to what it's doing in our stores. And then, you know, when you think of Best Deal Ever, this is just part of what we've got in our arsenal. Both on renowned value. We've got that. We've got BoostWeeks. We've got emergency pizza, carryout tips. All of these things we come up with new every year as a way to kinda reinvent value but in a way that's really ownable. And then what we'll do is we'll continue to mix this, the renowned value, with the most delicious food aspects. And so, you know, you're seeing that actually play out right now, you know, on air with the launch of the new product going on at the same time as Best Deal Ever. The other thing that's really interesting about Best Deal Ever, yeah, it is a great price point. But the amazing thing is when you talk to consumers, when they're able to build any pizza they want to build, they come and their takeaway is not only that it's a good price, but they actually think that the food tastes even better. And so this is not just a value-driven promotion. It's a most delicious food promotion, and we'll continue to weigh that with all the other strong things that we've got on our calendar in our arsenal for the future. Operator: Thank you. And our next question comes from the line of David Tarantino with Baird. Your line is open. David Tarantino: Hi, good morning. Russell, I think you mentioned in your prepared remarks your confidence in delivering 3% comps in 2026 and beyond. And a common narrative on Domino's is that, you know, this year had a lot of sales drivers that are gonna be tough to lap. So I just wanted to ask you to maybe explain your thought process on how the next few years could evolve and why you're so confident that 3% is the right number going forward? Thanks. Russell Weiner: Yeah. Thanks a lot for the question. You know, I think some of the reason for the question is maybe, you know, we run our business a little bit different than other restaurants. This is not a company that does a lot of limited-time offers. And so when we launch a product, we launch it because we know it's good enough to stay on the menu, and we know it can build over time. And that's for menu items and value items. An example is our loyalty program. We launched our loyalty program in 2023. It was bigger in '24 than it was in '23, and it'll be bigger in '25 than it'll be in '24. And, David, I think that's the approach some of these other ones. I just talked earlier about aggregators. And how, you know, over time, we're gonna get to our fair share, but we're not there yet. So it's not like we launched and hit our maximum for aggregators, for stuffed crust, for loyalty, for any of these things. What happens is they become part of our base for our future, where we continue to come back to them and grow. And then add things on top of that. If this was an LTO business, then I think people would need to worry. Because you're launching something and you're taking away, and you gotta build on it. This is part of our base and part of our growth moving forward. Operator: Thank you. Our next question comes from Gregory Francfort with Guggenheim. Your line is open. Gregory Francfort: Hey, thanks for the question. Russ, I just wanted to ask maybe going back to Best Deal Ever. The $9.99 price point's a couple bucks higher than some of your existing value programs. And how did customers use $9.99 versus the other two major platforms? And is there a possibility that you would maybe more permanently shift the customer up a couple bucks, but give them more and maybe make that a more permanent piece of the menu? Thanks. Russell Weiner: Yeah, Greg. You know, when I explain what we're doing with Best Deal Ever sometimes, my simple explanation is like opening up an ice cream store. Depending on your preference, your first flavor is probably either gonna be chocolate or vanilla. And then the other one's gonna come in and then maybe a strawberry. You're not gonna do a vanilla and then a French vanilla as your second flavor. And that's kinda what we're doing with our deals right now. The mix and match at $6.99, those are medium pizzas. And other items are available on the menu, you know, sandwiches, pastas, salads. Those types of things. The large customers is like that chocolate ice cream added to the vanilla. We're going after somebody else. We're going after someone who, you know, may not want all that food, could be a smaller eating occasion. And is willing to pay a little bit more for what they want. You know? I think this is a really important point, and maybe we can address that later as well. I think one of the reasons Domino's, we, you know, we had the quarter we had is, yeah, Sandeep talked about their pressures right out there in QSRs today. And, you know, one of them is economic, but I think the other is what is being offered and not being offered by restaurants out there. I think consumers are looking at deals and saying, well, this is the deal you wanna give me. This is not the deal I want. And with Best Deal Ever, we're giving them the deal they want because they can, you know, they can create any pizza they want. So these two deals, mix and match and Best Deal Ever, work complementary to each other which is I think why we got the quarter that we got. Operator: Thank you. Our next question comes from Danilo Gargiulo with Bernstein. Your line is open. Danilo Gargiulo: Great. Thank you. Russell, I've a very quick clarification and then a question. So the clarification is you mentioned that you have not reached the maximum among some of the innovations that you have launched. And so I was wondering if you have already reached the same 15% sales mix on the stuffed crust pizza. Given that, you know, that's been out for almost six months now. If not, are you planning to do any tweaks to the go-to-market or product? To be able to reach that 15%? And then the real question is, you were talking about short value, right, and renowned value. And we've seen some peers being fairly successful in launching the six-inch personal pizza that are very sharp price points capturing individual consumers, growing lunch, dayparts, and whatnot. So this is one aspect that is still not available on your menu. So is there a strategic rationale like your real estate, margin sustainability, and whatnot, that could prevent or that has prevented Domino's from launching it? Thank you. Russell Weiner: Yeah. Thanks a lot, Danilo. You know, we had really high expectations for stuffed crust, both from a mix bringing in consumers new consumers, and also operationally from our franchisees. And those high expectations were met, you know, both during launch and, you know, and since then. I've got actually a fun statistic. I'll throw out. It'll be interesting to see what projections are on this one. But if you took all the cheeses that are in the stuffed crust, that string cheese, and you line them up next to each other, you would wrap around the earth and still have a lot left over. So we'll see what that means that model is. I'm not gonna tell you it's a 15% that you asked or not. But I'll tell you, we were really happy with this launch. We're absolutely gonna come back and talk to it, you know, in the future. As far as renowned value in the individual pizzas, you know, we've got a lot of items right now that are for individuals that are on our mix and match. You know, we've got sandwiches and pastas and salads and chicken and all those pieces. When we decide what we promote, Danilo, we make decisions based on the numbers. And what it's gonna deliver. And, you know, these smaller kinda lunch single person, they are but the opportunities we have that we put our money behind at least right now are much bigger than that, we think. And that's why you're seeing some of the results that you're seeing in our business. So we've got the options there. But we're putting more of our money. We're kinda pouring gas on the fire where it's burning. Operator: Thank you. And our next question comes from the line of John Ivankoe with JPMorgan. Your line is open. John Ivankoe: Hi, thank you. Obviously, there's a lot of pushes and pulls in terms of franchise economics. And your underlying return on investment for the aggregate units in the U.S. are obviously quite strong. But my question is really around U.S. unit development over the next several years. Ending the quarter at around 7,100 units. Think 7,700 is the target in fiscal 2028. Remind me on that, and 8,500 in the TAM. So how are you thinking, I guess, firstly, about that 8,100? When can we get there? And maybe in terms of thinking about more near visibility, do we expect linear growth in '26, '27, '28 if there's kind of an early indication about the pace of U.S. unit development given what you're seeing on a trade area by trade area basis? Thank you. Sandeep Reddy: Hi, John. It's Sandeep. So I think on the franchisee economics side, as you pointed out, our economics are very compelling. And I think the appetite from franchisees continues to be very strong, which is why the pipeline visibility this year, frankly, is a little bit better than last year at the same time, and we're very confident of the 175 stores we're talking about for this year. And really, the algorithm was based on 175 plus a year through 2028. And we see a good line of visibility based on the economics that we're generating and the white space opportunities that we see, whether they're split stores or whether they're greenfield stores. To see that we have a good line of visibility to the 7,700-ish number on 2028. In terms of the 8,500, I'll go back to something that Russell said during the investor day. Which is we've had long-term targets. Multiple times over the years. But somehow, they start getting bigger and bigger over time. Why? Because what we take into consideration when we're coming up with those long-term markets is the current competitive environment. What has been happening consistently over the past decade is we've been taking share consistently. Competitive stores are closing. We are opening up stores. And actually, that opens up even more opportunity for us to open up even more stores around what the stores we're opening. So that 8,500 is a perspective based on where we were in 2023. Two years on, you know what's been happening. We've gained a couple of points of share. Number of competitor stores have closed. That is expected to continue happening over the remaining few years of the Hungry for More time frame of 2028 and probably beyond. And so that's how we look at the full potential number of stores, and I think it evolves over time. And we feel very bullish about it. Russell Weiner: Yeah. I'll just that just kind of that builds, Sandeep, on what I was talking about before is, you know, even at a time where, you know, maybe restaurant traffic is pressured. That's actually good for Domino's. One is we know we can provide value to our customers when other folks can't. But we think we're gonna emerge from that stronger, and probably our competitors are weaker. Which is what you know, why that opens up. You know, this is a long-term game for us. And we get excited about that. I think I'll add just to add to John's question. What makes me excited about our builds this year is we broaden our builder base. And so we've got a lot of smaller franchisees who are now adding to that base. So we have more people than we did, you know, prior years building stores, which just talks about not only the health of our business, kinda broad-based, but our ability to handle when you got more people opening, it's easier to hit those store numbers. Operator: Thank you. And our next question comes from the line of Lauren Silberman with Deutsche Bank. Your line is open. Lauren Silberman: Thank you very much. I have a two-part question. Just starting on the consumer environment, you guys have been calling out the macro challenges at the consumer since '24. We've seen throughout the industry. It sounds like it's incrementally worse. What do you think is driving that weakness more recently in restaurants, just broadly? And then the follow-on to that is just to help level set 4Q expectations. If the macro remains as challenging as you've seen to start the quarter, is 4Q coming in below a 3% comp? Just trying to understand how significant the macro detail is. Sandeep Reddy: Yeah. So I think your question's really good, Lauren, and I think you're keyed in on what we've been talking about. Really speaking, we saw the macro get really tough starting around the back half of last year in 2024, starting in really in Q3. And I think as we kinda came out of '24 and built our expectations for '25, our base expectations were gonna be tough macro. And that's why we've been talking about the tough macro as something we've been paying attention to all along. And so far this year, the macro really has paced as we expected it to. The first March, we started seeing a slowing across the restaurant industry broadly relative to where Q3 was, and we're pointing it out. And look. I mean, if it intensifies even further, knowing that we're up against a tough macro environment last year, that could put pressure on our full-year same-store sales number. So that's being realistic about it. But what we have is a slate of initiatives where we can control our destiny with those initiatives, but the macro, if it gets incrementally worse, could be a pressure. Russell Weiner: And I'll just add to that kind of repeating what I said before maybe in a different way is that short-term category pressure leads to long-term opportunity for us. And short-term share growth. So thanks, Lauren. Operator: Thank you. Our next question comes from Peter Saleh with BTIG. Your line is open. Peter Saleh: Great. Thanks for taking the question. I just wanted to ask big picture on the pizza category. I think the pizza category was you guys were commenting that it was about flat for the first half of the year and now seems to be up 1% before maybe weakening a little bit or the entire industry weakening in the fourth quarter. I was hoping you'd give us a little bit more color maybe in the third quarter that acceleration, what you're seeing by maybe income cohorts, geographies, dayparts? Just trying to understand maybe what changed or kind of where the acceleration is coming from in 3Q? Russell Weiner: Yeah. You know, the income cohort pressure on the lower-income customers had been seen kind of throughout restaurants. What you know, I think speaks to the kind of renowned value we have out there is we actually were up amongst all income groups for the quarter, and that's our second quarter in a row where we're up against, you know, the lower-income customers. So no matter what pressure is out there, you know, we seem to be breaking the trend. Sandeep Reddy: And, Pete, what I'll add is, you rightly pointed out that we're now at 1% year to date, and there was an acceleration in the cap a little bit compared to the first half of the year. And really, this gets us very close to a 1% to 2% historical growth rate. So the pizza category is continuing to grow kind of in the range of what we expected. When we set out the Hungry for More algorithm, and our plans are constructed around that. So I just I think that was an important point to make because a lot of some of the questions I was getting was, is the pizza category declining? And it's not true. I mean, it's up slightly. Up 1%, which is close to our history. Operator: Thank you. Our next question comes from Chris O'Cull with Stifel. Your line is open. Patrick: Great. Thanks, guys. This is Patrick on for Chris. My question was on carryout. I mean, you had a nice sequential pickup in the comp. Two-year stack was really healthy this quarter. I was curious if you were able to just disaggregate where that growth was coming from. And, you know, how much is higher frequency versus new customer acquisition, but additionally, I know historically you said that there hasn't really been much crossover between carryout and delivery. And just given some of the broader softness in the environment, especially that you're seeing in the beginning of the fourth quarter, I mean, is there any evidence that some delivery customers, maybe even on the lower end of the income spectrum for that channel, maybe increasingly opting for carryout? Sandeep Reddy: Yeah. So I think look. On the carryout business, we're just really excited about where the momentum is taking our business. And we even talked about it on the last call when we had a, I think, 5.8%, if my memory serves me right, on same-store sales, and now we have an 8.7%. Fantastic. But the drivers of carryout were everything that we talked about in the prepared remarks, Best Deal Ever was a huge factor. Parmesan stuffed crust is a huge factor. Compounding impact from the loyalty program that we talked about in the last call continues to be a factor. Russell just talked about the fact that our loyalty database continues to build upon itself. That's the compounding impact that you're seeing so clearly on the carryout business. And look, we always look at that crossover between carryout and delivery, and we really haven't seen a shift on that crossover somewhere in the mid-teens. And so I think as far as we're concerned, we're getting off an incremental customer for the most part. And building their frequency behind all the initiatives that we have. Russell Weiner: Yeah. And that carryout number is more of a share growth within carryout than it is, you know, taking folks from delivery to carryout. I think also, you know, Sandeep talked about our initiatives, but you'll remember, for example, when we talked about the relaunch of loyalty, there was intent. There was purpose behind that. We redid the program because the original program was launched in 2015. Was more of a delivery program, was more of a program for delivery customers who were high-frequency customers, higher ticket customers. And so a lot of the growth we're seeing is because of the changes we made in the loyalty program as well as Best Deal Ever and Stuffed Crust. Operator: Thank you. Our next question comes from Andrew Charles with TD Cowen. Your line is open. Andrew Charles: Great. Thank you. I was wondering if you could help us understand your confidence in the compounding impact of aggregators in 2026 as it's unclear in the 2.5% delivery same-store sales this quarter you're seeing second year of growth within Uber sales. Russell Weiner: Yeah. The Uber sales are absolutely within our expectations. We're, you know, now fully on with DoorDash in Q3. And so, you know, we're just getting started. Q4 into 2026 we expect aggregators to continue to grow. I see no reason, Andrew, why if we are one out of every three pizza deliveries, off aggregators, why we can't be that on because what works on these platforms is what works off the platforms, which is, you know, scale, price, and kind of delivery times and location. We own, you know, the delivery experience there. So we've got a lot of confidence and a lot of room to grow over the next couple of years. Also makes you realize that a lot of what you saw at least in this quarter with the positive delivery number, while certainly aggregators were a piece of it, the two biggest things were kind of I hate using the word self-help, but call it self-inspired initiatives in Best Deal Ever and Stuffed Crust. So I love the health at which we grew our delivery business this quarter. Sandeep Reddy: And, Andrew, I'm just gonna point out something that we've talked about previously. To Russell's point, Uber is tracking where we expected it to, and we're very happy with that. But you look at the cadence with which Uber built last year, it took time. It kind of steadily built over the course of the year. And this is the first full quarter that we've been on DoorDash. So it's going to slowly build over time, and I think that's why we expect that compounding impact to move all the way through 2026. And we're gonna have even more time on Uber by that time in addition to DoorDash getting to a point where it's fully annualized as well. So we feel really good about the aggregator business, and we really want to manage the delivery business as one whole understanding that there's gonna be one p and three p data. Russell Weiner: Yeah. And, Andrew, back to the question from earlier. You know, we're not gonna we're gonna price competitively, but we're not gonna be irrational in pricing. And so we're gonna grow at a steady rate on this channel. And I think to compete here in the long term in a sustainable way you have to offer discounts that you can sustain. And we can absolutely do that. Operator: Thank you. Our next question comes from Christine Cho with Goldman Sachs. Your line is open. Christine Cho: Thank you for taking my questions. So really excited to hear about your first brand refresh in thirteen years. Could you walk us through some of your major considerations here? What's specifically triggered the decision that now is the right time? And are you able to share kind of any additional color related to timeline, required investments, and how it will be split between you and your franchisees. Thank you. Russell Weiner: Yeah, Christine. Thanks. You know, the last time we did the brand refresh thirteen years ago, I was the chief marketing officer, and I can just say I'm jealous at what Kate Trumbull and the team have done with this brand refresh. They've just really taken it to the next level. And it's really it was kind of inspired by our Hungry for More strategy. And what we saw that we were doing really well. Which is driving renowned value, the R in Hungry For More. And what we saw that we had a little bit more opportunity to do which is to drive perceptions, not actual, but perceptions around our deliciousness. And so what you'll see that the team did is kind of reinvent ourselves with, you know, our color palette, food photography that we've just never had before. And doing everything we can to drive deliciousness. The research that we have shows us that there is not a brand out there in restaurants that does both deliciousness and value very well. And we know that if we can do that, we're in territory all by ourselves. And then, you know, just at the end of the day, when you realize that, you know, the middle of your name Domino's has a minute, you also realize you hit the jackpot. And so this is really a culmination of Hungry for More, which was a strategy coming to life in something that consumers can hear, can see, and taste every day. Operator: Thank you. Our next question comes from Brian Harbour with Morgan Stanley. Your line is now open. Brian Harbour: Hey, morning guys. Maybe just your comments about some of the pressures picking up more recently last four or six weeks or whatever. Is there any texture you'd add to that as you look at your own business, whether it's certain customer groups, you know, any differences delivery versus carryout or, you know, third-party delivery. Could you expand on that a bit? Sandeep Reddy: Yeah. So, Brian, I think look. The comments that we made about what we've seen across the restaurant industry were really broad and intended to be what we're seeing from a macro perspective and certainly a sequential slowing. I think we typically don't talk about current quarter trends, and we're not gonna do that on the call over here. We're just pointing out that there has been an intensifying of the macro environment, and that's just a factor that's out there that we gotta keep monitoring. Our initiatives change. They're gonna be what they were planned to be, but that's pretty much where we are. Russell Weiner: And I realized I didn't answer the second part of Christine's question from before on how the costs are split. All of the rollout for the new campaign is funded by our national advertising fund, which is a 6% fee that our franchisees pay in. So it's fully funded by them. Operator: Thank you. Our next question comes from Alex Slagle with Jefferies. Your line is open. Alex Slagle: Question on your expectations for the balance between the carryout growth you're seeing, the delivery growth and then also between traffic and check and just how has this played out relative to your expectations and whether you see this balancing out a bit more as you head into April or '26. Sandeep Reddy: Yeah, Alex. I think we've talked about this from the beginning of the year, and this is the year that we expect to see balanced comp growth between ticket as well as order count. Clearly, we're doing things like Best Deal Ever in addition to aggregators that actually are beneficial to order count. We're doing things like Parmesan stuffed crust, which are beneficial to ticket with a higher price point. So there's a good balance that's out there. And I think in terms of delivery and carryout, we expect to be growing both. But the key over here is we're not gonna show our cards on exactly how much we're gonna grow on each because some of the initiatives may be started to one channel versus the other. And we don't wanna tip our hand to our competitors. But overall, there's gonna be a whole very balanced approach to how we think this through over time. Whether it's in Q4 or beyond into 2026. Operator: Thank you. Our next question comes from Sara Senatore with Bank of America. Your line is open. Isaiah Austin: Hi, good morning. Thanks for the question. Isaiah Austin on for Sara. Just wanted to ask a quick question around DoorDash. I know it's only been one full quarter, but when you're looking at incrementality, is that still around that 50% range that you know, you were anticipating previously? And do you see any real distinction so far between the Dash and the Uber Eats customer? And that'll do it. Russell Weiner: Yeah. We're obviously, it's early in the game, and we still feel pretty confident on the 50% incrementality number. You know, there's the differences that we're seeing are ones that we expected going in. Uber tends to be a little bit more urban. DoorDash, a little bit more rural. And a little higher income on Uber than DoorDash. But, obviously, DoorDash is bigger than Uber. So we'd expect more volume to come through that channel over time. Operator: Thank you. Our next question comes from Jeff Bernstein with Barclays. Your line is open. Jeff Bernstein: Great. Thank you very much. A question, looking outside the U.S., as we close 2025 here, just wondering if you have any initial thoughts that you can share in your confidence in reaccelerating that international unit growth. I think in '24 and now in '25 you're talking about maybe 615 units net, which is just sub-four percent growth. I know that's below your long-term 975 net annually. And I think DPE is seemingly the greatest headwind. So any early color as we assume new unit growth visibility probably better than comp. So assume there's some at least idea as to where that directionally could go next year versus this year. Russell Weiner: Thank you. Yeah. Maybe I'll start off macro, then Sandeep, feel free to add. I mean, yeah, no. You're certainly right. We are working with DPE right now. To drive sales, particularly in France and Japan. But, you know, throughout their markets because that drives profitability. And, you know, sales and profitability, we get store growth. And so as that continues to go and as they continue to get more confident, we'll have some more visibility into their growth. But I think through all of this, what I want to make sure I point out is that the two markets that we think are gonna be the majority contributors to our store growth moving forward. Japan and the I'm sorry. China and India are just doing amazing. I mean, China last year 240 stores. They talk about being on target for, you know, 300 this year. And so the place that we expect a lot of our future growth right now is strong. Sandeep Reddy: Yeah. And I'll just probably add a couple of points to that. I think Russell just mentioned China. I think India has got a different fiscal calendar, but it's about 250 stores is what they're expecting for their fiscal calendar. But if you think about what's really happened in '25, we really have been pressured by DPE's store closures, which are around 200 stores that they've closed in the first quarter. And I think what we're saying is, from what we've understood from DPE to this point, most of the store closures should be behind us. Assuming that we don't have any further deceleration in same-store sales trends. But I think on a going forward basis, we need to make sure that we have good visibility to the potential paybacks from new store openings. To really understand what the flex on that is gonna be for DPE. And they're working on it. But I think, overall, we feel that everything outside of DPE is tracking the plans. And so both in '25 as well as in '26, and continues to be our expectation. Operator: Thank you. Our next question comes from Andrew Strelzik with BMO Capital Markets. Your line is open. Andrew Strelzik: Hey, good morning. Thanks for taking the question. I wanted to ask about the brand refresh. And in particular, there was a comment in the announcement about defining how Domino's launch bolder menu innovation. So the question is, are you thinking about innovation opportunities differently moving forward? And how are you thinking about the brand refresh, amplifying the impact of innovation moving forward? Thanks. Russell Weiner: Yeah. No. I think yeah. That's a great question. You know, one of the things that we had been stressing since with the original relaunch in 2013 was the diversity of all of our menu items. Right? We launched mix and match, and we had all these things that you could get for what started at $5.99. It became $6.99. And we became very retail-oriented in the price points and frankly, the product. It was just a kind of little a lot of show and tell. Here's what we have for $6.99. It was kind of flat. And what you'll see now, and I think you're seeing this, you know, with the Bread Bites launch, is a real focus on the deliciousness of the food. Of the food that we're talking about. People know a little bit more about our menu. We have a new redesigned, you know, website now that helps them explore it a lot better. And so the best thing to drive them, to buy Domino's in addition to renowned value is just delicious product. And so the new campaign really focuses on just that. Operator: Thank you. Our next question comes from Todd Brooks with The Benchmark Company. Your line is open. Todd Brooks: Hey, good morning. Thanks for my question. On Best Deal Ever, Russell, you talked about how the franchisees were so pleased that they looked to extend the program, and that was granted that it's been a successful driver of share within the category, and then you and Sandeep have both outlined a tough macro. I just wanted to ask, as you look to Q4 and other initiatives, that have been planned, the ability to overlay this type of value that's resonating with a consumer and what's going to be a tougher macro environment? Is this something that could be extended further? Thanks. Russell Weiner: Thanks, Todd. I mean, you bring up a great point, and I'd maybe take a step back and say, we've got an arsenal now of value whether it's Best Deal Ever, BoostWeeks, carryout tips, you know, emergency pizza that we could bring at any time and they've already got recognition around the country. We're not starting from scratch. And so that gives us optionality. That said, you know, we've built our Q4 we obviously never give forward-looking information on what that is. But we feel really good about the quarter. Obviously, we've started with Best Deal Ever. And you'll see us leaning into all aspects of Hungry For More in Q4. Operator: Thank you. And our final question comes from Zach Fadem with Wells Fargo. Your line is now open. Zach Fadem: Hey, good morning, and thanks for fitting me in. You talk about the metrics you look at internally to measure the success of a promotion? And in light of the environment today and elevated industry discounting, curious how your promotional success has evolved better or worse as industry promo steps up. Russell Weiner: Yeah. That's a great question. Maybe I'll answer it a couple ways. One is I think we're really unique in that the discounts we're offering during these tougher macro times are off items that people actually want. A lot of what we're hearing now are the discounts I'm getting out there are not on the kind of the main item that I want. How we determine, you know, what we put on TV or on the website, you know, Zach, is we got a pretty good formula for success history here, which is essentially we know if we can drive profitable order counts that works to drive, you know, franchisee profitability. Short-term gains in ticket at the sacrifice of order count, once your pricing is in the right realm are not sustainable. And that's, you know, and that's what we're seeing now. I mean, if you just looked at, you know, Best Deal Ever and said, hey. Are you gonna get the same volume that you would do on non-Best Deal Ever, then you'd say, oh, I'm not gonna do that because we're not putting enough dollars in the bank. But something like Best Deal Ever, we know ahead of time from the research what it's gonna drive. So we could be a little bit more aggressive on the price point because, you know, we already tell our franchisees, you know, we put dollars in the bank, not percents. Sandeep Reddy: And then I'm gonna add one thing to what Russell just said. Absolutely. The lagging indicator is gonna be franchise economics and profitability for all the reasons you explained. But really, the leading indicator of that is compounding frequency. If we aren't seeing compounding frequency across our customer base, the likelihood of actually building up into that franchisee profitability is going to be more difficult to achieve. So that's something that I've been actually watching continuously happening since we launched Hungry for More. And I think the loyalty program ends up being the perfect accelerator for all of that to happen. Russell Weiner: Yeah. I think the idea of looking at order counts and frequency, you know, like Sandeep said, is a great way not to just look at our business, but to look at all restaurant businesses. Order counts are key to sustained success. Operator: Thank you, Zach. That was our last question of the call. I want to thank you all for joining our call today, and we look forward to speaking to you all again soon. You may now disconnect.
Operator: Good morning, and welcome to Johnson & Johnson's Third Quarter 2025 Earnings Conference Call. All participants will be in a listen-only mode until the question and answer session of the conference. This call is being recorded. If anyone has any objections, you may disconnect at this time. If you experience technical difficulties during the conference, you may press now turn the conference call over to Johnson & Johnson. You may begin. Darren Snellgrove: Hello, everyone. This is Darren Snellgrove, Vice President of Investor Relations for Johnson & Johnson. Welcome to our 2025 third quarter review of business results and Updated Financial Outlook. First, a few logistics. As a reminder, today's presentation and associated schedules are available on the Investor Relations section of the Johnson & Johnson website at investor.jnj.com. Please note that this presentation contains forward-looking statements regarding, among other things, the company's future operating and financial performance, market position, and business strategy. You are cautioned not to rely on these forward-looking statements, which are based on the current expectations of future events using the information available as of the date of this recording and are subject to certain risks and uncertainties that may cause the company's actual results to differ materially from those projected. A description of these risks, uncertainties, and other factors can be found in our SEC filings, including our 2024 Form 10-Ks, which is available at investor.jnj.com and on the SEC's website. Additionally, several of the products and compounds discussed today are being developed in collaboration with strategic partners or licensed from other companies. This slide acknowledges those relationships. Moving to today's agenda, Joaquin Duato, our Chairman and CEO, will discuss our business performance and growth drivers. I will then review the third quarter sales and P&L results. Joe Wolk, our CFO, will then close by sharing an overview of our cash position and capital allocation priorities, followed by additional details on our intended separation of the Orthopaedics business. He will also provide an update on 2025 guidance, key milestones, and qualitative considerations for 2026. Jennifer Taubert, Executive Vice President, Worldwide Chairman, Innovative Medicine, John Reed, Executive Vice President, Innovative Medicine Research and Development, and Tim Schmid, Executive Vice President, Worldwide Chairman, MedTech, will be joining us for Q&A. To ensure we provide enough time to address your questions, we anticipate the webcast will last approximately sixty minutes. With that, I will now turn the call over to Joaquin. Joaquin Duato: Thank you, Darren, and hello, everyone. We are looking forward to sharing our very strong third quarter results with you. They are a clear sign Johnson & Johnson is in a powerful new era of growth. The success of our portfolio and pipeline is proof that our relentless focus on innovation is doing more than fueling progress. It is accelerating it. In the third quarter, we delivered operational sales growth of 5.4% across our business. In Innovative Medicine, we reported 5.3% operational sales growth and a second consecutive quarter of sales of more than $15 billion. Some were not convinced we could grow through the loss of exclusivity of STELARA, but we were confident we have now unequivocally answered that question. How did we accomplish that when other companies have failed? In Q3, we did it by delivering double-digit growth across 11 brands, including DARZALEX, CARVICTI, TALVE, TEKVYLI, ERLIDA, DRIBREVAN, PLASLASKLUS, Caplitas, Spravato, Symphony, Remicade, and remarkable growth of 40% in TREMFYA. In MedTech, operational sales growth was even stronger, accelerating to 5.6% with improvements across all businesses. And as you have seen from this morning's news, we have announced the planned separation of our Orthopaedics business. This decision further sharpens our focus as a healthcare innovation leader and accelerates the shift of our MedTech portfolio to areas of greatest unmet need and higher growth, which includes cardiovascular and robotic surgery. I will touch more on this later. But one thing is clear, Johnson & Johnson's momentum is strong, and our achievements are multiplying. I will now focus on the progress we are making across our six priority areas: oncology, immunology, neuroscience, cardiovascular, surgery, and vision. These are areas where we have deep expertise and clear leadership positions. First, Oncology, where Q3 operational sales grew nearly 20%. You have heard me say before that we are much more than a one-shot company, and our expertise in blood cancers and solid tumors in our oncology portfolio is a great example. Take multiple myeloma, where our competitiveness is unrivaled. No other company has the expertise or success in multiple myeloma that we do. We have treatments in every line of therapy, and DARZALEX is the gold standard with more than 50% market share across all lines of therapy. Q3 operational sales of DARZALEX grew by 20%, and its potential continues to build with the approval this quarter in Europe as a treatment for high-risk smoldering multiple myeloma, as well as promising new studies of DARZALEX fast in combination with TEGBYLI. I also want to say a word about Carvicti, our CAR T treatment for multiple myeloma. We have now treated more than 8,500 patients globally, making CARVICTI the most successful CAR T launch ever. With operational sales growing by more than 80% this quarter, we are increasingly confident in Carvicti's $5 billion peak year sales potential. Turning to solid tumors, we were thrilled to receive FDA approval for our bladder cancer treatment, Inlexo, last month. Inlexo highlights what is unique about Johnson & Johnson. Building on our unmatched capabilities in both Innovative Medicine and MedTech, it is the first and only drug-releasing system to provide sustained local delivery of a cancer treatment directly into the bladder. It is transformative for patients, and it is transformative for doctors. It will also contribute significantly to future growth, with a targeted release platform projected to be another blockbuster treatment with at least $5 billion in annual peak year sales. Sourced through an early-stage deal, Inlexo is also an example of our outstanding business development model. In fact, in the last eighteen months alone, we have completed more than 60 deals of this kind. And in lung cancer, we recently published results in the New England Journal of Medicine for Ryberman plus Las Cruze, showing a statistically significant reduction in the risk of death compared to osimertinib. We are now seeing the potential for patients to live significantly longer than anyone thought possible. The combination of DriverBand plus Las Cruze is another of our $5 billion big year sales assets. Next, I want to talk about immunology, where we have been leaders for twenty-five years. From REMICADE to SIMPONI and STELARA to TREMFYA, some of our biggest blockbusters have come from our immunology portfolio. We have long talked about Tremfya as the next big innovation to follow the success of Stelara. Based on this quarter's performance, it looks like it could be both bigger and better, having delivered operational sales growth of 40% driven by new indications in inflammatory bowel disease. TREMFYA is the only IL-23 inhibitor to offer a fully subcutaneous regimen across ulcerative colitis and Crohn's disease. Even prior to the launch of our subcutaneous formulation, Tremfya was capturing approximately half of all new patient starts for IL-23 ulcerative colitis treatments in The U.S., which we achieved within one year from launch. We are confident Tremfya will become a more than $10 billion asset. And in typical J&J fashion, we are deep in the development of our next immunology innovation, ICOTROKINDA, initially for moderate to severe plaque psoriasis. Historically, the most effective immunology treatments have been injectables. As the first oral peptide to selectively block the IL-23 receptor, icotrokimbra has the potential to revolutionize the treatment of plaque psoriasis with a once-a-day pill. We submitted the icotokinra for plaque psoriasis to the FDA in July. And you know, this is just the beginning, as we have already presented data from our Phase two trials in ulcerative colitis. Let's now turn to neuroscience, with the Spravato operational sales growing an impressive 61% in Q3. SPRAVATO remains the only approved standalone therapy for treatments in depression, a major depressive disorder with suicidal ideation. Through Q3, we have now treated more than 180,000 patients, and I could not be prouder of the impact this team is having. Our leadership in neuropsychiatry was also strengthened by this year's acquisition of intracellular therapies, with FDA approval for CAPLYTA in major depressive disorder anticipated soon. CAPLYTA is already FDA approved for the treatment of schizophrenia, as well as depressive episodes associated with bipolar disorder one and two. We project CAPLYTA to reach $5 billion annually. Now let's turn to MEDTEC, starting with our cardiovascular portfolio. In Q3, cardiovascular operational sales increased by approximately 12%. As we fortify our leadership in the fastest-growing cardiovascular interventions segment. With operational sales growth of over 20%, Shockwave's unique intravascular lithotripsy technology is helping treat more atherosclerotic cardiovascular patients than ever before. In fact, last quarter, Shockwave supported their one millionth patient. And with the recent European approval of the Javelin peripheral Lithotripsy Catheter, we expect strong momentum moving forward. We anticipate Shockwave becoming our thirteenth billion-dollar MedTech platform by year-end. In electrophysiology, we are industry leaders, and with the strength of our MAPI technology, that continues. In Q3, we again delivered close to 10% operational sales growth, and our position will further strengthen with real-world data showing variables achieved 99.7% acute effectiveness in nearly 800 patients with strong safety and no incidents of stroke. Our Abiomed business also continues to perform strongly, with more than 15% operational sales growth in the quarter. Our success reflects the impact that our Impella CP hard pump is having on the lives of patients, which you could see in the long-term survival data that was published in the New England Journal of Medicine this quarter. In the ten-year DANGER SOX study, routine use of Impella CP in patients who have had a heart attack with cardiogenic shock reduced mortality by 16.3% compared to the standard of care, with patients gaining an average of 600 additional days alive. It is a perfect example of what we mean when we say Johnson & Johnson is delivering groundbreaking innovation. In surgery, we are making progress on multiple fronts. Our surgical technologies are used in most operating rooms globally. And in Q3, delivered more than 9% growth in biosurgery and almost 7% in wound closure, driven by accelerating adoption of our latest innovations. We also continue to make positive progress with Ottava as we anticipate FDA de novo submission in early 2026. And now to vision, where we grew more than 6% last quarter. Our Technis intraocular lenses are the fastest growing in the market where we have launched, fueling our 13.8% operational sales growth in Surgical Vision. And after launching the world's first multifocal contact lens for people with astigmatism in The U.S. last quarter, we brought this latest member of the AccuView Oasis MAX one-day family to Europe and Korea in Q3, further strengthening our momentum. And finally, to this morning's orthopedics news. As you know, the healthcare industry continues to evolve rapidly, and we are constantly evaluating our overall business and portfolio to ensure Johnson & Johnson remains best positioned to truly lead where healthcare is going. We continue to invest at industry-leading levels in our pipeline and portfolio while making disciplined decisions to exit businesses that we believe will be better able to thrive outside of Johnson & Johnson. For our orthopedic business, the planned separation creates new opportunities. Operating as the Pew Synthes are led by Namal Nagwana, it would be the largest, most comprehensive orthopedics company with leading market share positions across major categories and addressing a more than CHF 50 billion and growing market opportunity. We expect Depew Synthes to benefit from a more focused business model with greater flexibility to extend its market leadership, invest in its commercial capabilities, and capitalize on profitable growth opportunities. Following the completion of the planned separation, Johnson & Johnson will retain a leadership position in our six core growth areas across Innovative Medicine and MedTech: oncology, immunology, neuroscience, cardiovascular surgery, and vision. And be able to place even greater focus in our investment towards higher growth areas where we can meaningfully extend and improve lives. We are positioning each business to win and deliver for our stakeholders. As we move forward in the separation process, we will provide additional information as appropriate, and Joe will share more details shortly. As I said at the start of the call, we are in a new era of accelerated growth at Johnson & Johnson. This is more than just another strong quarter. It is proof that our momentum is building and that our impact is accelerating. Thank you very much. And I will now turn the call back over to Darren. Darren Snellgrove: Thank you, Joaquin. Moving to our financial results. Unless otherwise stated, the percentages quoted represent operational results, therefore exclude the impact of currency translation. Starting with Q3 2025 sales results. Worldwide sales were $24 billion for the quarter. Sales increased 5.4% despite an approximate 640 basis point headwind from STELARA. Growth in The U.S. was 6.24.4% outside of The U.S. Acquisitions and divestitures had a net positive impact on worldwide growth of 100 basis points, primarily driven by the Intracelia acquisition. Turning now to earnings. For the quarter, net earnings were $5.2 billion, with diluted earnings per share of $2.12 versus diluted earnings per share of $1.11 a year ago. Adjusted net earnings for the quarter were $6.8 billion, with adjusted diluted earnings per share of $2.8, both representing an increase of 15.7% compared to 2024. As a reminder, results in 2024 were impacted by the acquired IPR and D expense of $1.25 billion associated with the NM-26 bispecific antibody. I will now comment on business sales performance in the quarter, focusing on the six key areas where meaningful innovation is driving our performance and fueling long-term growth. Beginning with Innovative Medicine, where our results demonstrate the depth of our expertise across oncology, immunology, and neuroscience. Worldwide sales of $15 billion increased 5.3% despite an approximate 1070 basis point headwind from STELARA, illustrating the continued strength of our key brands and new launches. Growth in The U.S. was 64.3% outside of The U.S. Acquisitions and divestitures had a net positive impact of 160 basis points on worldwide growth due to the Intracellular acquisition. In oncology, starting with multiple myeloma, DARZALEX growth was 19.9%, primarily driven by continued strong share gains of approximately 5.7 points across all lines of therapy, with nearly nine points in the frontline setting as well as market growth. Carvictee achieved sales of $524 million with growth of 81.4%, driven by share gains and site expansion. This reflects continued strong sequential growth of 18.5% as our expansion outside The U.S. progresses. Tekvele and Talve growth was 29.959.1% respectively, bolstered by continued expansion into the community setting. In prostate cancer, a leader delivered strong growth of 15.3% due to market growth and continued share gains, partially offset by the Part D redesign. In lung cancer, Ribrovan plus Lasclus delivered sales of $198 million and growth over 100%, driven by continued strong launch uptake. We continue to see share gains in both first and second lines of therapy. Within immunology, Tremfya delivered very strong growth of 40.1%. We continue to see share gains across all indications, with particularly robust momentum from our IBD launch. STELARA declined by 42% driven by the impact of biosimilar competition and Part D redesign, which is in line with our expectations. In neuroscience, SPRAVATO grew an impressive 60.8% driven by continued strong demand from physicians and patients. CAPLYTA, which was acquired in Q2 as part of the Intracellular acquisition, delivered sales of $204 million and reflects healthy sequential growth of 13.4%. Now moving to MedTech. Worldwide sales of $8.4 billion increased 5.6% with growth of 6.6% in The U.S. and 4.5% outside The U.S., driven by strong performance in our three focus areas: cardiovascular, surgery, and vision. Acquisitions and divestitures had a net negative impact of 10 basis points on worldwide growth. In cardiovascular, electrophysiology delivered growth of 9.7% versus prior year, driven by procedure growth, commercial execution, VariPulse, and other new products, and strength in competitive mapping. Abiomed delivered growth of 15.6% with continued strong adoption of Impella technology, and Shockwave increased 20.9% driven by double-digit growth globally in both coronary and peripheral. Surgery grew 3.3% despite divestitures negatively impacting results by approximately 50 basis points. Performance was primarily driven by technology penetration in wound closure, the strength of the portfolio, and commercial execution in biosurgery, as well as a one-time reserve adjustment in the quarter. Growth was partially offset by competitive pressures in Energy and the negative impact of China VBP across the portfolio. In Vision, contact lenses and other products grew 3.5%, driven by market growth, strong performance in the AccuView OASIS one-day family of contact lenses. This includes the recent launches of Oasis MAX one-day multifocal for astigmatism and MAX one-day for astigmatism, as well as continued strategic price actions. Surgical Vision had another strong quarter with growth of 13.8%, driven by new product innovations such as TACNES PureC, ODYSSEY, and iHance, robust demand, and strong commercial execution. These results further solidify our leadership positions in Vision. As Joaquin noted, we have today our intent to separate the Orthopedic business. Orthopedic growth this quarter is gaining momentum and increased to 2.4%. Importantly, hips and knees returned to growth this quarter, delivering 5.15.6% growth respectively. Now turning to our consolidated statement of earnings for 2025. I'd like to highlight a few noteworthy items that have changed compared to the same quarter a year ago. Cost of products sold leveraged by 60 basis points driven by a reduction in amortization expense and favorable currency in the Innovative Medicine business, as well as the non-recurring fair value inventory step-up related to Shockwave in 2024. This was partially offset by unfavorable product mix in Innovative Medicine, along with 40 basis points driven by increased investment in the recent intracellular acquisition for CAPLYTA and promotional spend across the Innovative Medicine business, partially offset by expense leveraging in MedTech. Research and development expenses leveraged by 670 basis points, primarily driven by the expense of $1.25 billion to secure the global rights to the NM-26 bispecific antibody recorded in 2024. We continued our strong investment in research and development with $3.7 billion or approximately 15% of sales in Q3. Interest income and expense was a net expense of $18 million as compared to $99 million of income in 2024, primarily driven by a higher average debt balance and a lower average cash balance. Other income and expense was net income of $500 million compared to an expense of $1.8 billion in the prior year, primarily driven by a talc litigation charge in 2024 and higher gains on the sales of securities in 2025, partially offset by the monetization of royalty rights recorded in 2024. Regarding taxes in the quarter, our effective tax rate was 31.2% compared to 19.3% in the same period last year. The increase is primarily driven by the one-time $1 billion remeasurement of deferred tax balances, which are required to reflect the changes in statutory tax rates associated with the enactment of the One Big Beautiful Bill Act in the third quarter. More information can be found in the company's Form 10-Q. Lastly, I'll direct your attention to the box section of the slide, where we have also provided the company's income before tax, net earnings, and earnings per share adjusted to exclude the impact of intangible amortization expense and special items. Now let's look at adjusted income before tax by segment for the quarter. Innovative Medicine margin improved from 37.9% to 44.3%, primarily driven by the one-time expense of $1.25 billion to secure the global rights of DNM-26 bispecific antibody recorded in 2024, partially offset by increased investment in commercial spend in 2025 and the non-recurring monetization of royalty rights in 2024. MedTech margin declined from 24.1% to 21% driven by macroeconomic factors and cost of products sold, partially offset by expense leveraging in SM and A. This concludes the sales and earnings portion of the call. Joe Wolk: Thanks, Darren. Hello, everyone, and thank you for joining us today. The third quarter, we sustained momentum across our end market portfolio, delivering upon the heightened financial expectations we guided to last quarter. In Innovative Medicine, we continue to grow to the STELARA loss of exclusivity as we said we would. The progression of our pipeline, evidenced by significant regulatory milestones, adds further depth to our three focus areas of oncology, immunology, and neuroscience. We are well-positioned for the balance of the decade. In MedTech, we improved adjusted operational sales across key areas of the business. As Joaquin mentioned, we are sharpening our focus on high-growth, high-margin markets where we can improve patient outcomes, as this morning's announcement regarding the Depew Cynthesis business indicates. In a moment, I will build upon Joaquin's comments regarding that announcement. The foundation we have set, combined with the progression of our pipeline, strongly positions the company for accelerated growth. It also reinforces our conviction to deliver on the upper end of our long-term growth targets. Let me provide a brief update on the Daubert Motion's pending in the talc litigation. As you are aware, this is the judicial process by which the court will re-examine the junk science that the mass tort plaintiffs, Bart and Cox, to fuel baseless claims against Johnson & Johnson as well as many American businesses. We look forward to and expect to secure favorable rulings on the Dalbert motions, which should be rendered by 2026. Now turning to cash and capital allocation. We generated $14 billion in free cash flow through the first nine months of the year. We ended the third quarter with approximately $19 billion in cash and marketable securities, $46 billion of debt. We have a net debt position of $27 billion versus the $32 billion of net debt reported in the second quarter. We continue to utilize our free cash flow generation and strong balance sheet to invest in innovation and return capital directly to shareholders. We are often asked about our appetite for acquisitions to meet financial targets. I can be very clear on this. We rely on our thoughtful long-term approach to growing through any loss of exclusivity and won't carelessly deploy capital on speculative transactions out of desperation. Our current portfolio and pipeline have momentum, and with the Stellara loss of exclusivity increasingly in the rearview mirror, we do not need to rely on large transactions to drive our growth. We intend to remain disciplined, opportunistically pursuing strategic high-value opportunities that utilize our expertise and capabilities that deliver appropriate return for the risk that we bear on behalf of shareholders. Regarding the planned separation of our Orthopedics business, as Joaquin noted, the separation is expected to enhance the strategic and operational focus of each company, drive value for our shareholders and other stakeholders. Given that we are early in the process, there are limited details available. But we are committed to providing you with information on a timely basis. While we will, of course, communicate material developments, we don't expect to have anything newsworthy to convey until mid-next year. But what can we say at this moment? First, the separation will further strengthen our overall MedTech business and increase Johnson & Johnson's top-line growth and margins. To give that some directional context, if we just look at normalized year-to-date 2025 results, MedTech's top-line revenue growth and operating margin would both improve by at least 75 basis points. Next, we are targeting completion of the separation within eighteen to twenty-four months, subject to the satisfaction of certain conditions. Given it is the most resource-intensive and likely longest duration, we are prioritizing and have begun the separation assuming a spin-off, with the intention for that to qualify as a tax-free separation for U.S. Federal income tax purposes. However, we will consider other avenues that optimize shareholder value. We do not expect any change to the Johnson & Johnson dividend and are mindful of any impact from stranded costs that are typically present in these types of transactions. Finally, following the separation, we would expect the Pugh Cynthies to have a strong capital structure that would allow the Orthopedics business to build on its long history of innovation, extend leadership positions through enhanced organic investment and strategic growth accretive M&A. As we pursue this separation, the orthopedics unit will operate in alignment with the business' current strategy, continuing to make investments in growth, margin improvement, and innovation. Turning now to full-year guidance for 2025. We are increasing operational sales guidance for the full year by approximately $300 million, resulting in operational sales growth for the full year in the range of 4.8% to 5.3%, with a midpoint of $93.2 billion or 5.1%. Excluding the impact from acquisitions and divestitures, our adjusted operational sales growth is now expected to be in the range of 3.5% to 4% compared to 2024. As a reminder, we started the year guiding to a midpoint for 2.5% for adjusted operational sales. As you know, we don't speculate on future currency movements, and last quarter we utilized the euro spot rate relative to the U.S. Dollar of 1.17. The U.S. Dollar has stayed relatively flat to the euro spot rate, and as a result, we now expect reported sales growth between 5.4% to 5.9% with a midpoint of $93.7 billion or 5.7%. Turning to other notable items on the P&L. We are reiterating our operating margin guide of a 300 basis point improvement for the full year, assuming what we know today as it relates to tariffs. For net interest expense, we are now projecting between 0 and $50 million, an improvement from the previous guidance primarily driven by higher cash balances. We are expecting a higher effective tax rate to be in the range of 17.5% to 18% for the full year, with the increase largely due to the recently enacted One Big Beautiful Bill. We feel strongly that U.S. tax policy has enabled Johnson & Johnson to increase our manufacturing footprint in The U.S. We have more manufacturing facilities in The United States than in any other country, and we remain committed to $55 billion in U.S.-based innovation and manufacturing over the next four years. In March, we broke ground at our Wilson, North Carolina facility, and in August, we announced a $2 billion commitment to further increase our presence in North Carolina with a more than 160,000 square foot dedicated manufacturing facility at FUJIFILM's new biopharmaceutical manufacturing site in Holly Springs. Our overall U.S. investment plans also include three additional new advanced manufacturing facilities, as well as the expansion of several existing sites. Turning to earnings per share. You may recall we started the year guiding to adjusted EPS of $10.6. Today, we stand much higher, even after including dilution of $0.25 from the Intercellular acquisition. Today, we are reaffirming our elevated July earnings per share outlook, which also absorbs a higher annual effective tax rate and fourth-quarter investments that will further position the business for long-term success. As such, our expected adjusted earnings per share guidance remains $10.85 or 8.7% at the midpoint, with a range of $10.8 to $10.9. Our adjusted operational earnings per share guidance is $10.68 or 7% at the midpoint. Looking beyond our financial commitments for the year, we are on track to add to the already impressive number of milestones that we achieved across our pipeline in 2025. In Innovative Medicine, we anticipate U.S. FDA approval for subcutaneous Ribrovant for non-small cell lung cancer, as well as for CAPLYTA in adjunctive major depressive disorder. We recently filed for a label expansion on TREMFYA in psoriatic arthritis and plan to present data for Ribrovant in head and neck cancer at ESMO in the coming week. In MedTech, we continue to make progress with our clinical trial for our Ottava robotic surgical system. In our cardiovascular portfolio, we are planning regulatory submissions for the dual energy Thermo Cool SmartTouch SF catheter for cardiac arrhythmia in The U.S. And Envision we will continue to roll out AccuVue Oasis MAX for astigmatism. As we are close to year-end and with the strong caveat that we are still finalizing plans for next year and macro factors can change quickly, let me provide some preliminary thoughts to inform your modeling for 2026. For Innovative Medicine, we remain very confident in our ability to deliver accelerated growth despite STELARA loss of exclusivity. This will be driven by our in-market brands and continued progress from our recently launched products, including Tremfya in inflammatory bowel disease, Ribrovant plus Lascluse in non-small cell lung cancer, and Alexo in bladder cancer. We currently anticipate a 2026 approval for icotrokinura in psoriasis. In MedTech, we continue to expect accelerated growth off this year's levels, driven by focus on higher growth markets, as well as the continued adoption of newer products across all MedTech platforms. We also anticipate the launch of Shockwave C2 Aero Coronary IVL Catheter, the Technis Pure C intraocular lens in The U.S., as well as regulatory submission for the Ottava robotic surgical system. Again, while early, I like the way 2026 is shaping up. In fact, based on my last look at your 2026 models, it appears current revenue consensus of 4.6% growth in your models for 2026 is lower than we project, which we believe in total will exceed 5%. Similarly, with the expectation that adjusted earnings per share is commensurate with sales growth, there appears to be some upside to the current adjusted earnings per share consensus of $11.39, perhaps as much as $0.05. This commentary considers investments we will be making behind many of the new product launches I just highlighted, but you can also expect some margin improvement. It also reflects our understanding of the present legislative landscape, tariffs, foreign exchange rates, and procedural volumes. We look forward to sharing further details regarding our official guide for 2026 during our Q4 earnings call in January. In summary, the strength of our business model, with a focus on where we can have the greatest impact for patients, will enable Johnson & Johnson to deliver against our strategic objectives and financial commitments. We are as confident as we have been in recent memory about the future. I'd like to end my remarks by thanking our colleagues around the world for their continued hard work and steadfast dedication that serve our patients and who make these financial results possible and sustainable. With that, we are happy to take your questions. Kevin, will you please open the call for Q&A? Operator: Certainly. Our first question is coming from Alexandria Hammond from Wolfe Research. Your line is now live. Alexandria Hammond: Good morning and thanks for taking the question. On the orthopedic spin-out, I'd be interested to understand the why now and also if we expect similar separations for other divisions in the future? And as a quick follow-up, how should we think about the long-term guidance in light of the separation? Should we expect J&J to revisit these forecasts in the near term? Joaquin Duato: Thank you, Alexandria. And let me take the first question: Why now, why the orthopedic separation? It's been a hallmark of Johnson & Johnson to be a good steward of our capital and to make decisions in our portfolio to prioritize where we think breakthrough innovation can come through. And that's exactly what we are doing. We're moving Johnson & Johnson into high-growth markets with significant medical need. And at the same time, we have the foresight to recognize when a standalone company could be better and could be in a better position to drive growth, innovation, and better margins. That's exactly what we are doing with our orthopedic separation. We are fueling the innovation within Johnson & Johnson, focusing on our six priority areas, continuing to invest as we are doing in cardiovascular with the acquisitions of Abiomed, Shockwave, and also in Pharmaceuticals with the acquisition of Intracellular, and creating a standalone company that is going to be a champion within the context of the orthopedics sector. Orthopedics is a growing market, a $50 billion market. It's fueled by the aging of the population. We have commanding market shares in the most important segments of the Orthopedics business. The company is going to be called DePuy Synthes. It's going to be led by Namal Nawana, who is an industry veteran. And I have no doubt that they are going to be better positioned to succeed, to drive innovation, to drive growth, and to become what they are: the largest orthopedics company in the world. Overall, this is a clear move to be able to manage our portfolio to position Johnson & Johnson to be able to deliver breakthrough innovation and the results that you are seeing so far with a very, very strong quarter. I want to underline, this is not only a very strong quarter, it's also an indication, a signal that Johnson & Johnson is in an accelerated cycle of growth, which we expect is going to last the balance of the decade. Moving in the right direction, I'm sure investors are going to be happy to see that Johnson & Johnson is an active portfolio manager. Joe Wolk: Yes. Alexandria, maybe just to build on Joaquin's comments. Thanks for the question. So there were two other parts that I thought I heard from you. This is not a precursor to anything else. We look at what we have now in the clarity of our portfolio, three strongholds in Innovative Medicine serving unmet needs with transformational innovation that elevates the standard of care in oncology, neuroscience, and immunology. And likewise, now in MedTech, where we have market-leading positions, cutting-edge technology that is improving care for patients in surgery, eye health, and cardiovascular. So we're going to be real pleased with the portfolio. We think orthopedics is set up for success going forward based on their profile and their ability to compete against other singularly focused orthopedics companies. With respect to guidance revisions, so as we mentioned in the scripted comments, this will take eighteen to twenty-four months. So anything we say about 2026 will likely include the Orthopedics business in our outlooks. We would expect maybe some material developments in the middle of next year, but we commit to keeping this audience particularly advised on a timely basis should anything material unfold. Operator: Thank you. Next question today is coming from Danielle Antalffy from UBS. Your line is now live. Danielle Antalffy: Hey, good afternoon, guys. Thanks so much for taking the question. Just a question on, Joe, your commentary around potential margins post the ortho spin. 75 bps, I don't want to get too greedy, but that feels a little light to me. So just curious about why, given the mix of the business, it's high growth cardio, surgical, which I think should be relatively high margin and vision. Feels like maybe it could be a little bit more than that. So just want to make sure I understand the puts and takes to that 75 bps number appreciating. That's just, you know, a very early target. Joe Wolk: Yes. Thanks, Danielle. That's an insightful question. And I think it really depends on the time period by which you're measuring. If we were just to take 2025, you're absolutely right. It would be probably closer to 100 bps both on top and bottom or margin improvement. What I would say is we looked out a couple of years given this will take a couple of years to go through the process. And as Abiomed, Shockwave, and the other businesses have higher growth profiles, margin improvements initiatives that are already underway under Tim's leadership, it will have a more muted impact as it goes forward. So I think on today's math, you're probably closer to being right. It's okay. I don't consider it greedy. Tim might, but I don't. But I think as you look out a little bit further, with some of the stronger profile businesses from a financial perspective, it will have more of a muted impact. Tim Schmid: Yes. And Danielle, maybe just building on Joe's comments, as I'm sure there'll be a lot of questions on this topic, and we'd like to try and get them out of the way so we can focus on the broader business. I wanted to highlight why this makes sense for Johnson & Johnson MedTech. And as you heard from Joaquin and Joe, this is all about our commitment to continuous portfolio optimization and value creation. And as you know, we've been on a journey over the last couple of several years to really aggressively move our portfolio into higher growth markets and adding attractive assets such as Abiomed and Shockwave in our growth markets like cardiovascular are good examples of the bold moves we already made. This decision to separate ortho is the next major step in that direction. Ortho is a great business, but frankly, one that participates, as you know, in lower growth markets. This is all about shrinking to grow faster for MedTech. And last time I looked, you're not rewarding size, but really rather best-in-class performance, and that's the path that we're on. As you already have heard, we expect the separation would increase our top-line growth and margins following the completion. And this allows us in MedTech to really focus on the businesses that will remain, which is our priorities of cardiovascular, surgery, and vision. Joaquin Duato: Thank you, Danielle. Look, I want to reiterate, as I told you, day one when I became CEO, I am fully focused and determined to make our MedTech sector the best-in-class MedTech group in the industry. That's a total priority for me. It's a priority for Johnson & Johnson, and we are fully committed to delivering on that, and we are on track to become the best MedTech sector in the industry. Operator: Thank you. Our next question today is coming from Christopher Schott from JPMorgan. Your line is now live. Christopher Schott: Great. Thanks so much. Maybe just a question for Joaquin. There seems like there might be a framework for MFN agreements with the administration that's emerging across the space focused on new launches in Medicaid. Can you just talk about how you're thinking about MFN tariffs, etcetera, and J&J's approach to some of these kind of policy dynamics that are floating around out there? Thanks so much. Joaquin Duato: Thank you for the question. And we've been talking with this administration with an open dialogue since day one, even before day one. And we are always looking, as we have done as Johnson & Johnson, for common ground to build in the administration priorities that are similar to ours. Priorities like making sure that American patients have access to innovation in an affordable and timely way, priorities like making sure that foreign entities do not feel right on American innovation, making sure that we are able to maintain the overall leadership that this country has in Life Sciences. And finally, making sure that we continue to invest in manufacturing in this country to build good middle-class jobs. So we are delivering on that. We announced our plan to invest €55 billion in The U.S. in the next four years, which is essentially going to make it so that all our advanced medicines that are used in The U.S. are going to be manufactured in The U.S. As far as the discussions, those are ongoing. I don't have anything to share today, but I am optimistic that we are going to land in a place, which is going to create common ground between the administration and ourselves. Operator: Thank you. Our next question today is coming from Larry Biegelsen from Wells Fargo. Your line is now live. Larry Biegelsen: Good morning. Thanks for taking the question. Joe, you talked about the accelerating sales growth in both Innovative Medicine and MedTech next year. Is the 5% plus I heard you say earlier, on a reported or adjusted operational basis? I think FX is a tailwind. How are you thinking about the extra week next year? I guess I'm trying to understand if growth will accelerate next year. On an adjusted operational basis excluding the extra week. And the same for EPS, is that on a reported or operational basis? Thank you. Joe Wolk: Yes, Larry. Very simply, since consensus is based on reported for both top line as well as EPS, that was the comparator I used. So there is a slight tailwind, as you mentioned, for FX. But I, and I know Larry, you and your team are very astute at capturing the FX impact, would assume that's already baked into the 4.6% top-line growth that I saw consensus have for 2026. Similarly with the earnings. So it is a lift, I would say, across the board, but on a basis by which the analysts, yourself included, look at it. Operator: Thank you. Our next question today is coming from Asad Haider from Goldman Sachs. Your line is now live. Asad Haider: Great. Thanks for taking the question. Just a big picture question. You'll be exiting this year in a clear position of strength. Where a number of headwinds from the Stellara LOE are fading into the background, the base businesses are strong, and you've got new product cycle momentum accelerating through the Innovative Medicines portfolio, and you're also seeing a second-half improvement in MedTech. So in that context, and with the announcement of this morning to spin off Dupuy, can you just maybe double-click a little bit more on how you're going to be balancing capital allocation priorities? To sustain acceleration in innovative meds and push MedTech sustainably towards the 5% to 7% ERB targets. And then related in the Innovative Medicines business, the sales growth acceleration in 2026, like you said, Joe, that's not getting modeled by consensus. So what are the biggest disconnects there that you're able to highlight today specifically for next year? Thank you. Joaquin Duato: So first, look, we are in a favorable position as far as capital allocation. It means we have a number of important opportunities to invest within our pipeline and portfolio. So that is our number one priority now as far as capital allocation. We're in the middle of the launch, and Tim and Jennifer will discuss that, of major blockbuster products. On the Innovative Medicines side, we are launching Tremfya in inflammatory bowel disease, Ribrevan and Lascluse in lung cancer, Inlexo in localized bladder cancer. We continue with the growth of Carbiti and Espravato. And we just filed for Aikotrokindra in Plexor IAC. So we have a wealth of opportunities to drive significant growth in our Pharmaceutical business that Jennifer will describe. Just to give you an idea of the strength of our Pharmaceutical business, excluding Stelara, the pharmaceutical business in the third quarter grew a whopping 16%. So that's a very big business, more than $50 billion business growing at 16%. So we have multiple opportunities to drive capital allocation in the Pharmaceutical business as well as in our pipeline there. I mean, we're working on biospecific prostate cancer, try specific for multiple myeloma, a wealth of opportunities to drive capital allocation. On the MedTech side, I mean, we're in the middle of major things in the MedTech side. On one hand, we are committed to remaining leaders in the electrophysiology segment with the launch of VariPulse, our dual energy catheter. We continue to work on improvements in the Cartos system, and we are determined to invest there to remain the leaders as we have been. We are working to expand our heart pumps. You guys all know about the New England Journal of Medicine publication showing the DANGER study in patients with acute myocardial infarction that had cardiogenic shock that show a 600 days improvement over a ten-year period, impressive breakthrough innovation there. We have a lot of opportunities in Shockwave with the Javelin peripheral catheter and the AERIO system in coronary that we are launching. And if I move into the second priority, which is our robotic surgery expansion, we are about to file with the FDA in the first half of the year our Ottava soft tissue robotic system. We are also determined to be a major player in robotics. I'm always telling you, we are determined to be a major player in robotics. So we continue to have opportunities for capital allocation in both businesses. And our priority now is to be able to fuel the growth in our portfolio and our pipeline. We, as Joe mentioned before, we are in a position just to be clear that we do not need large M&A to deliver in the high end of our growth targets. Let me repeat that. We do not need large M&A to deliver in the high end of our growth targets. We are going to be looking at opportunities as we always do, but we are in a position in which our number one capital priority is going to be to fuel our pipeline and our portfolio. Joe Wolk: Yes. I think Asad, the only thing I would add to that is just the number of smaller deals we do that don't make headlines on the day of the transaction, I think 60 over the last two years. And those lead to products like Inlexo, which we acquired in 2019 for a couple of $100 million and through really tax for their craft as well as passion for meeting patients' unmet needs. Doctors Chris Coote, Doctor. Charles Drake were able to find, and their teams were able to find a bladder cancer treatment that is revolutionary. Nothing has been new in the last few decades with respect to not only ease for the patient but also ease for the administrating physician. It's deals like that. We look at next year's product for icotrakinda, where we're expecting again a couple $100 million investment will turn out to be a $1 billion platform for us because that's where our competitive advantage lies is the scientific expertise that we're able to recognize early on bringing forth a label that is most expansive, most complete, and in record time. Jennifer Taubert: Thanks, and good morning, everybody. So, I'd love to double down on the fact that it really was a great quarter in 3Q, and those numbers that for 90% of our business, we actually grew 16%. And that's really driven by 11 key brands that grew double digits, brands like DARZALEX, ERLITA, BRAVATO, CARVICTI, and so on, as well as the strength that we're seeing in our new launches. And most notable there is in Crohn's disease and ulcerative colitis with 40% growth, that is four-zero. And so we've got a lot of strength in the business right now. Those growth drivers are growing double digits are not only now in just this year, these really are our growth drivers throughout the rest of the decade, as well as the pipeline assets that are coming in and the great growth that we're seeing, and most notably, Trampfya. If we take a look versus your models in the areas where we have even or were even more bullish, a few areas to note. So first, is TREMFYA. And we think that there's a lot of strength with TREMFYA already. We're seeing in ulcerative colitis about fifty percent share of the IL-23s. This was actually before we got the subcutaneous induction dose, which we just got approval for. We're seeing really, really strong uptake there. And I think things bode real well for Tremfya. As a reminder for STELARA, about seventy-five percent of Stellara sales were in Crohn's and ulcerative colitis, so in IBD. We think that, that's entirely like or may even be stronger for Tremfya. So we think that there's a lot of growth opportunity there. We believe SPRAVATO there is a bit of a disconnect. We are more bullish there as well. And we continue to expand into new treatment centers, as we expand globally. That product is offering so much value for patients with treatment-resistant depression. Throw in Riborvant Lasclus for non-small cell lung cancer. We're anxiously anticipating our launch of the subcutaneous dosage form. We think that there is a lot of runway there as a $5 billion plus asset. We're also anticipating new data coming out in head and neck cancer and also colorectal cancer. So great growth. Joaquin mentioned Inlexo, formerly known as TerrAs, and we just got approval and are in the process of launching for bladder cancer. This is one of our next $5 billion plus assets. And last but not least, I co which we have filed and are also in the midst of showing new data both in psoriasis as well as in ulcerative colitis. And so when we take a look at the business both as well as these future growth drivers, we've got a lot of bullishness there. And so those are really the major areas for disconnection. Tim Schmid: Asad, maybe just building on Jennifer and Joaquin's comments for MedTech, a couple of things that I'd really highlight. Joaquin mentioned our continued confidence and commitment to winning over the long term in electrophysiology. We had a standout quarter, and what really marked it was our continued improvement, especially here in The U.S., which will continue to be the largest and most attractive market. We saw a doubling of our growth rate in this quarter. We continue to build momentum. Vision, which we haven't touched on also, which had a standout quarter, 6.1% growth, 14% growth in the IOL category with significant share gains against our major competitors there. And then surgery, our largest business around 3.3% growth, but really bolstered by strong performance in wound closure at 7% and biosurgery. And once again, that launch of OTAVA next year is going to really bolster our performance there. And then I think also what made us more proud and excited about this quarter versus last is that we had performance across the board. Ortho, back to growth, with significant improvements in spine, knees, trauma, and border. Darren Snellgrove: Thank you. Thanks, Tim. And just before we take the next question, we will actually run a little bit longer than the sixty minutes we planned just given the announcement that we had leading to longer script remarks. Next question, please. Operator: Thank you. Next question is coming from Shagun Singh from RBC. Your line is now live. Shagun Singh: Great. Thank you so much. Joaquin and Joe, congratulations on all the operational progress at J&J. I think the key message that I'm hearing is the acceleration in sales growth. And in your prepared comments, you did indicate the higher end of the 5% to 7%. I guess my question is, and a lot of your businesses are growing very lively in the double digits. So what gets you to exceed those levels? And as we think about 2026, why is 5% a good number given that you have easy comps? Could you do better, and what would drive that? Thank you for taking the question. Joe Wolk: Yes, Shagun, thanks for the recognition. It's a great job by the entire Johnson & Johnson team across the globe. I think towards the 5% to 7%, obviously, we made that commitment back in 2023. We've seen significant progress with our portfolio. We've added some acquisitions that fortify that number. We are striving for something better than that, don't misconstrue our ambitions here. What I would say for the year specifically, we are still going to face significant erosion with respect to Stelar. There will be additional discounting in the Innovative Medicine portfolio. And we will still have the orthopedics business, and we will continue to make progress with electrophysiology going back to market leadership with the PFA platform. So there are things that we will obviously look to improve upon those numbers. But when I glimpsed at your models for 2026, I did see a clear disconnect, and I'll provide more details when it comes to January. But we feel very confident in not just how we're going to conclude 2025, not just the backdrop for 2026, but really the balance of the decade. As Joaquin has said, both on media interviews as well on today's call, this is a new era of growth, accelerated growth for Johnson & Johnson, and we feel very good about not just our in-market portfolio, but all the new products within our pipeline that will come to launch over the next one to two years. Operator: Thank you. Next question is coming from Terence Flynn from Morgan Stanley. Your line is now live. Terence Flynn: Great. Thanks for taking the questions. Congrats on all the progress. This one's for John. I know at our healthcare conference you talked about some upcoming data you're going to have for your anti-tau antibody, which is in Phase two. Just I was wondering if you could help frame that data for us, what you're hoping to see there? And could that trial actually be used to support an accelerated approval? Or will you need a Phase III? Thank you. John Reed: Hey, thanks, Terence. We expect to have the data on the Phase two study in-house within this year and would then be in a position to share those at a medical congress sometime in the first half of next year. The endpoints in that study include first and foremost cognitive endpoints that are traditionally used for regulatory approvals for medicines in terms of looking for effects and efficacy in Alzheimer's. But in addition, we'll also have important neuroimaging data looking at tau spread using PET imaging. So that'll be an important piece of the data as well. And based on the quality of those data, that will be a decision-making point for us in terms of go, no go. We have designed our antibody to attack a specific epitope in tau that's differentiated from what some others have exploited. And feel confident in the ability to prevent the spread of tau based on the preclinical data. But of course, the data will be the data, as we say, when we get the clinical results. So we'll be eagerly awaiting those results and look forward to communicating in the fullness of time. Operator: Thank you. Next question today is coming from Jayson Bedford from Raymond James. Your line is now live. Jayson Bedford: Good morning and congrats on the progress. Maybe just a quick one for Joe or Tim. Just trying to gauge the underlying growth in MedTech. It looks like there was a reserve adjustment that helped MedTech growth, perhaps offset by this go-to-market change in energy. Is there a way to quantify the net impact of these adjustments as it relates to the, what, 5.7% adjusted operational growth in MedTech? Joe Wolk: Yes. I'm happy to take one. We do believe that the one you're referring to has any significant materiality and shouldn't impact, we'd say moderate, certainly not material from an overall performance perspective. Operator: Thank you. Next question is coming from Vamil Divan from Guggenheim Securities. Your line is now live. Vamil Divan: Great. Thanks so much for taking my questions. I can't wait on the next slide. Really two-part question. So one is sort of the near-term uptake. Just curious if you can comment on sort of what initial feedback is from doctors and is this buy and bill model? Just curious you're seeing doctors already sort of step in and purchase the product or are they waiting for the permanent J code? And then second is more of a longer-term question on this. It's just what should we expect in terms of updates both clinical data-wise or regulatory-wise in the next, say, twelve to eighteen months to just expand the addressable population here to other patients with bladder cancer and also outside The U.S. I think we're getting excited about the outlook for this product, before you mentioned that there's a big disconnect between your internal expectation and where consensus is. And I think that suggests you guys think this will be sort of $2 billion plus product by 2028. So just trying to get a sense of how you expect to build on the initial launch to that level. Thanks. Jennifer Taubert: Sure. Thanks so much for the question. So yes, we did just get approval for Inlexo, and the teams are out in full launch mode. And we have a lot of confidence that this is one of our $5 billion plus assets for Johnson & Johnson. The receptivity has been very strong. We like to say that this product was really designed by urologists for urologists. And really is addressing a high unmet need. There hasn't been much advances in the way of bladder cancer for a very, very long time. And so in the initial launch, it's in BCG unresponsive, risk non-muscle invasive bladder cancer. And we've been able to demonstrate the highest complete response rates without a need for re-induction, and over half of responders are still cancer-free at one year. And so really, really transformational results. The product was designed to seamlessly fit into your urology practice and be relatively speaking easy on the patient compared to other therapies and like I said, seamless work into practice. And so, so far, the response from clinicians has been very positive. For our Executive Committee, we actually had one of our top investigators come and spend time with us last week. And show us on models their demonstration and talk about why he is so excited about it, both as a clinician as well as for his patients. So we've already had a number of insertions. Based on the high level of unmet need, but as you know, we're also anticipating the J code for reimbursement come April. So we think that, that will be an important catalyst for uptake as is normal and common in route buy and bill type products. So we're excited about that. John, maybe you want to talk a little bit particularly about Sunrise three and what's coming as well as TAR-two 10. John Reed: Yes. Thank you so much for the question. We have a broad development program underway with several Phase III studies to address the non-muscle invasive bladder cancer population high risk, that's about half of all the non-muscle invasive bladder cancer patients. And our studies include both the patients who are BCG experienced in the first approval that was for BCG non-responsive. We also have studies in BCG relapsed. And then we also have head-to-head frontline studies against BCG. So really covering a broad landscape there. And just to remember that there are about 600,000 patients every year who are newly diagnosed with bladder cancer. Seventy-five percent of those have the non-muscle invasive localized, and then another twenty percent have localized, but it is muscle invasive. There too, we're also doing studies, and in fact, at the ESMO conference, in a couple of days, we'll present data. Where in the neoadjuvant context, we've used Inlexo in combination with our PD-one antibody, sotrelimab. And we'll report the data there showing that we're able to render a much higher percentage of patients completely free of any evidence of disease that you can find histologically or by other methods, what's called pathological complete response. And therefore, voting for better outcomes for these patients who already have muscle invasive disease and are having surgery to remove their bladder as a result of that risk. So really see a broad opportunity for Inlexo, particularly in the non-muscle invasive across all lines of therapy. In that high-risk non-muscle invasive, which is about half of all of those patients, as well as in some subpopulations of patients with the muscle invasive as well. And then I would just give a shout-out that that's not going to be a one-trick pony for us. We have TAR-two ten coming rapidly on the heels. This is a next-generation device that releases instead of a chemotherapy, a targeted therapy or erdafitinib drug. That inhibits receptor tyrosine kinase. That is commonly mutated in bladder cancers. It's the most common genetic mutation that occurs in bladder cancers. In there, we've seen response rates, complete response rates north of ninety percent in our next-generation device for that. Releases the medicine at a steady rate not just for three weeks like Inlexo, but for three months. So more to come, really excited about this platform for addressing the great unmet need of bladder cancer. Operator: Thank you. Next question is coming from Matt Miksic from Barclays. Your line is now live. Matt Miksic: Hey, thanks so much. So just a couple of follow-ups. One on just sequential strength in the quarter, a little bit unusual for a summer quarter. So much of that do you feel like is these speaking of MedTech mostly here, even though pharma was pretty strong also, but just the sequential improvements from you think the market feels stronger, or was this predominantly user leaning back into competition in some of your core MedTech markets? And then just a follow-up on all the discussion about the spin, just if I if we should think of holding on to MedTech concentrating on the key businesses that you mentioned. This has also opened the door to sort of I guess, loosen up the capital structure and balance sheet in such a way to start adding to some of those areas as you get closer to or through this span? Thanks so much. Tim Schmid: Matt, thank you for the question. Let me take the first one. What was really attractive about this quarter and built on the tremendous performance in the second quarter was the solid performances across all businesses. And so where you saw that sequential improvement, if you'll recall, our Ortho business struggled in the first and quarter. We saw a nice improvement in Q2. Q3, we returned that business to growth with tremendous performances in categories like hips with 5.1%, knees 5.6%, strong performance in trauma, and actually returning to growth in Spine. And so Ortho was a major competitor or major contributor to that performance. And then of course, we had continued tremendous performance in our fastest-growing category in cardiovascular, solid performances in surgery, and acceleration within Vision, as I mentioned earlier, driven by our performance primarily in the intraocular space. Joaquin Duato: Thank you. And overall, as we discussed at the beginning of this call, our focus and priority within MedTech is around our three areas, which are vision, cardiovascular, in which we already have acquired a number of companies, and also robotic surgery, where we are focusing on being able to submit our Ottava soft tissue robotic system to the FDA in 2026. We'll continue to look for opportunities there in order to enhance our portfolio and be able to make our MedTech group the best MedTech Group in the industry, which is a clear goal for me and for Johnson & Johnson. Darren Snellgrove: Thanks, Matt. We have time for one last question. Operator: So our final question today is coming from David Risinger from Leerink. Your line is now live. David Risinger: Yes. Thanks very much and congrats on the performance. So my question is on icropinra. I'm curious about how you plan to position it relative to TREMFYA given the similar indications for the two therapies? Thank you very much. Jennifer Taubert: Great. Thanks. Good morning. And we are really excited about the opportunity for iCotra Kinra and see this as one of our next big $5 billion plus brands. And so why are we excited about it? So we believe it's really going to set the new standard of care in the treatment of plaque psoriasis. And that will be the first indication. Unprecedented combination of complete skin clearance and a favorable safety profile with the simplicity of an oral pill. We're really, really confident in what we've seen. And so not only are we studying it versus other orals, we're actually studying it head-to-head versus Stellara. And no oral agent has been able to really compete with that combination of both biologic-like efficacy and that known safety profile. And so we're really bullish. If you take a look at the despite today's treatments, they're still less than thirty of eligible patients who have moderate to severe psoriasis who are receiving advanced treatments. And so we think there is a significant market expansion opportunity to be able to bring patients into advanced therapies into that frontline setting. So we think there's a big opportunity there. We think as we move closer to the launches with the way the profiles are differentiating, there will be a unique and distinct position for icotrokinra and also a distinct and unique position for TREMFYA that will allow us to have both really continued significant growth on both assets, particularly given the high level of unmet need in the market. So more to come on that. I'm not going to give away everything on the positioning, but we think that there are really distinct places that they're going to play. AECO is going to be a really significant asset for us. And you can see how well Tromphaya is doing with the 40% growth that we achieved this quarter. John Reed: David, keep your eyes open when we have more publications coming out on our AGCOTROCHINRA data, two back-to-back papers in press at the New England Journal of Medicine. Describing the placebo-controlled studies and then a paper in at The Lancet showing our head-to-head against the leading tick inhibitor in psoriasis. So exciting times for that really novel targeted oral peptide for the autoimmune diseases where the IL-23 class plays. Darren Snellgrove: Thanks, David, and thanks to everyone for your questions and interest in J&J. Please reach out to the Investor Relations team with any remaining questions you have. I will now turn the call over to Joaquin for some brief closing remarks. Joaquin Duato: Thank you all of you for joining the call today. As you heard, we have had a very strong third quarter. We have sharpened focus around our six priority areas of oncology, immunology, neuroscience, cardiovascular surgery, and vision, and we are in a period of accelerated growth with innovation and pioneering treatments that are going to transform lives. Thank you for your interest in Johnson & Johnson. And enjoy the rest of your day. Operator: Thank you. This concludes today's Johnson & Johnson's third quarter 2025 earnings conference call. You may now disconnect.
Operator: Good morning, and welcome to FB Financial Corporation's Third Quarter 2025 Earnings Conference Call. Hosting the call today from FB Financial are Chris Holmes, President and Chief Executive Officer, and Michael Mettee, Chief Operating Officer and Chief Financial Officer. Please note FB Financial's earnings release, supplemental financial information, and this morning's presentation are available on the Investor Relations page of the company's website at www.firstbankonline.com and on the Securities and Exchange Commission's website at www.sec.gov. Today's call is being recorded and will be available for replay on FB Financial's website approximately an hour after the conclusion of the call. At this time, all participants have been placed in a listen-only mode. The call will be open for questions after the presentation. During the presentation, FB Financial may make comments which constitute forward-looking statements under the federal securities laws. Forward-looking statements are based on management's current expectations and assumptions and are subject to risks, uncertainties, and other factors that may cause actual results and performance or achievements of FB Financial to differ materially from any results expressed or implied by such forward-looking statements. Many of such factors are beyond FB Financial's ability to control or predict, and listeners are cautioned not to put undue reliance on such forward-looking statements. A more detailed description of these and other risks that may cause actual results to materially differ from expectations is contained in FB Financial's periodic and current reports filed with the SEC, including FB Financial's most recent Form 10-Ks. Except as required by law, FB Financial disclaims any obligation to update or revise any forward-looking statements contained in this presentation, whether as a result of new information, future events, or otherwise. In addition, these remarks may contain non-GAAP financial measures as defined by SEC Regulation G. A presentation of the most directly comparable GAAP financial measures and a reconciliation of the non-GAAP measures to comparable GAAP measures is available in FB Financial's earnings release, supplemental financial information, and this morning's presentation, which are available on the Investor Relations page of the company's website at www.firstbankonline.com and on the SEC's website at www.sec.gov. I would now like to turn the presentation over to Mr. Chris Holmes, FB Financial's President and CEO. Christopher T. Holmes: Thank you, Drew, and thanks to everybody for joining us this morning. And as always, thanks for your interest in FB Financial. For the quarter, we reported EPS of $0.43 and adjusted EPS of $1.07. We've grown our tangible book value per share excluding the impact of AOCI at a compounded annual growth rate of 11.8% since our IPO. This quarter, we completed the merger with Southern States Bankshares, and as a result, you'll see that impact throughout our financial results. This is our first quarter reporting on the combined entity. We'll walk through our results, which include the full impact of the transaction but also highlight our core operating results, where we think that's helpful for you. Our pretax pre-provision net revenue or PPNR for the quarter was $64 million or $81 million on an adjusted basis. Earnings were led by a net interest margin of 3.95% and an efficiency ratio of 63.2% or 53.3% on an adjusted basis. Adjusted returns were improved, reporting a return on average assets of 0.58% or 1.43% on an adjusted basis and a return on tangible common equity of 5.82% or 14.7% on an adjusted basis. As noted, we did complete our merger with Southern States, officially closing the transaction on July 1, and we completed the systems conversion over Labor Day weekend. When we opened our doors for business after conversion on September 2, we were fully transitioned to operating as a single team and serving our customers under one brand. We accomplished our internal targets of closing and converting the transaction, which was announced on March 31, by Labor Day, which was a proud moment for our team members. I'm proud of our team for their execution and moving us from announcement to legal close in about ninety days, and then completing the full systems conversion sixty days later. I want to recognize and congratulate this team for your commitment to the company and to each other and once again proving how truly outstanding you are at what you do. Our strategic and operational execution on this merger reinforces that our team is top tier, our processes are scalable, our client-first model works, and our team loves to compete and is hungry for more. Moving to the outlook for our markets, we remain bullish on our markets in Tennessee, Alabama, Georgia, Northern Kentucky, and North Carolina. We also feel very proud about our competitive position in those markets. We feel very good about those. Our industry is set to see additional consolidation, creating inevitable disruption in client and employee relationships. We've designed our business model and operating processes in a way that we can both grow and scale while continuing to provide a community banking style in our approach to serving our clients. We believe that our preparation and forward-thinking have us prepared to take advantage of the anticipated disruption in and around our markets and will be a key accelerator for our organic growth. As I look forward into 2025 and further into 2026, I'd like to share a few thoughts on key areas of focus for our team. The first of those is growth. As I touched on, we're bullish on our team's opportunity and ability to win talent and business across all of our markets. On the market expansion front, we're pursuing opportunities that will add value for our company. As with Southern States, we look for contiguous geography, talented teams, compatible culture, and strong financial performance. As we've shown improvement already this quarter, strategic finance, compelling and well-executed transactions have a compounding effect for our shareholders. With additional size, we're able to capitalize on scale and drive higher returns. Second is our earnings profile. Our results this quarter signal we're not willing to accept a return profile that doesn't advantage our shareholders relative to other comparable investment opportunities. I'm going to let Michael expand on our earnings outlook, but all in all, I'm pleased with where we ended the quarter and how we've set ourselves up heading into 2026. And finally, the strength of our balance sheet continues to be a bright spot for our institution. We continue to be in a solid position on capital, liquidity, and credit. When you merge two companies with strong balance sheets and good earnings, and you execute, you end up with a company with a stronger balance sheet and better earnings. This position allows us to capitalize on the opportunities that I referenced earlier around growth, market disruption, and acquisition opportunities that are likely to present themselves in the coming quarters. We will continue to play offense and pursue capital deployment opportunities that make good financial sense and are good long-term opportunities for the company. With that, I will turn the call over to Michael Mettee, our Chief Operating and Financial Officer, to provide a deeper look at our financial results for the quarter as well as some forward-looking commentary into 2026. Thanks, Michael. Michael M. Mettee: Thank you, Chris, and good morning, everyone. As Chris mentioned, our teams have been busy blocking and tackling on things that come with a merger close and conversion cycle while also managing our core businesses at First Bank. As I walk through our financial results for this quarter, the figures I will reference are on a combined First Bank and Southern States basis, unless specified otherwise. With the transaction closing on July 1, we did not have to account for any partial quarters, which made for a clean break from First Bank-only results in the second quarter to a combined basis for the full third quarter. Net income on a reported basis for the quarter was $23.4 million or $57.6 million on an adjusted basis. On net interest income and margin, we reported net interest income of $147.2 million, which represents a 32.2% increase from the prior quarter and a 38.9% increase from the same quarter last year. On a tax-equivalent basis, we saw margin expansion of 27 basis points in the quarter, from 3.68% to 3.95%. We benefited from the addition of Southern States portfolios, which carried an incrementally higher margin than legacy First Bank. We also benefited from net accretion of purchase accounting marks. Net accretion on the acquired portfolio was approximately $6 million for the quarter. We also benefited from the structural balance sheet maneuvers during the quarter. We saw the first full quarter margin lift from the securities transaction that we executed last quarter, and we followed through on paying down $100 million in legacy First Bank subordinated debt and called $30 million in trust preferred securities. The debt paydown gave us one month of benefit in the quarter, so we'll continue to see impact from that piece of the transaction in the fourth quarter. Non-interest income was up compared to last quarter when we had the $60 million securities loss, and on an adjusted basis, non-interest income came in at $27.3 million compared to $25.8 million in the prior quarter. We saw incremental increases in First Bank legacy First Bank businesses such as mortgage banking and investment services, while we saw benefit across other fee categories like service charges and interchange fees, largely from the addition of Southern States. Looking at expenses, we reported total non-interest expense of $109.9 million or $93.5 million on an adjusted basis. Our reported number includes $16.1 million of merger and integration costs, which peaked this quarter with transaction close and conversion. These costs are largely made up of employee-related payments and vendor payments, as you would expect. Going forward, we will have some additional transaction costs at the end of the year as we complete the merger process. The increase in adjusted non-interest expense is largely a product of the first full quarter of combined First Bank and Southern States operations. To date, we are on pace to achieve 50% of our deal synergies in 2025, and we expect to achieve 100% in 2026. This timing for recognizing cost saves was earlier than originally modeled due to a timely deal close and conversion coupled with the intentional focus from our management team. All in, our adjusted core efficiency ratio improved to 53.3% from last quarter's 56.9%, the same quarter last year where we reported 58.4%. Moving on to credit, our reported provision expense of $34.4 million includes $28.4 million in day one provision expense for the acquired non-purchase credit deteriorated loan portfolio and unfunded commitments, making our provision expense excluding merger-related impacts $6.1 million. We saw minimal charge-off activity this quarter with a net charge-off ratio of five basis points annualized. So our reserve impact in the quarter absent the acquisition was largely a product of loan growth and updated forecast assumptions. Loan growth came across our key categories that I'll touch on in a minute, while the forecast side was particularly impacted by a decrease in the home price index forecast, which drove incremental additional reserve in loan segments that are more sensitive to the metric. Our non-performing assets to total assets ratio ticked down three basis points to 0.89%, and we continue to hold a stable outlook on credit across the industry and slightly more positive for the markets that we serve. All in, our allowance for loan losses settled at $185 million or 1.5% of our loans held for investment compared to $149 million or 1.51% last quarter. On a dollar basis, we booked $7.5 million to establish PCD reserves through purchase accounting, and then we put another $25.1 million in non-PCD reserves. In our reserve for unfunded commitments, we established a day one reserve for the acquired Southern States commitment of $3.2 million. Both the non-PCD and unfunded commitment reserves were established through Q3 provision expense, as I noted earlier, those are excluded from our adjusted earnings figures. Looking at the balance sheet, broadly speaking, you'll see balances up across the board with the addition of Southern States during the quarter. Parsing through the noise, we saw organic quarter-over-quarter loan growth of $156 million or about 5% annualized. Included increases of $70 million in residential real estate, both single and multi-family, $50 million in owner-occupied commercial real estate, and approximately $24 million in consumer and other. Those were offset by declines in construction loans. On the liability side of the balance sheet, the story is mixed, but for good reason. We executed on several strategic deposit priorities, which included one, reducing our exposure to high-cost non-relationship deposits, and two, a targeted deposit campaign across our footprint to attract new relationships to the bank. Exclusive of the acquired Southern States deposits, deposit balances were down approximately $59 million on a period-end basis as we executed on this remixing strategy. Priority one resulted in deposit outflows of approximately $13.292 billion as we rolled off brokered balances, lowered pricing of non-relationship deposits, and reduced exposure to a large public funds deposit. On priority two, we executed our deposit gathering strategy across our retail network through promotional offers and internal incentives to attract new customers and forge new relationships. These efforts resulted in approximately $320 million in net new deposit balances, and we expect to see more growth here throughout the year. As I noted previously, we also took the opportunity to pay down our subordinated debt and trust preferreds. We also repurchased approximately $24 million of FBK shares during the quarter. We'll continue to keep our team busy on balance sheet and capital strategy to ensure we're fully optimizing our balance sheet structure. I'll now take a minute with thoughts on where we expect to end 2025 and end 2026. Our net interest margin, we expect to see the continued impact from accretion on acquired loans and also the compounding effects of the balance sheet restructuring we've executed over the past few quarters. Including the securities trade and the sub-debt paydown, last quarter we guided to 3.7% to 3.8%. Without accretion and for the back half of the year, we now expect to land between 3.80% to 3.90%, and we expect to continue that into 2026, which includes two assumed rate cuts before year-end. On expenses, we will continue to think that full-year banking expenses will land around $290 million to $300 million, which is in line with our previously guided range. And looking into next year, with earlier than originally modeled cost saves realized from the Southern States deal, coupled with marginal expense increases to support growth, we're expecting full-year 2026 banking expense to land between $325 million and $335 million, which puts our efficiency ratio in the low 50s for the full year and at about 50% by year-end 2026. Our banking expense guidance run rate is not inclusive of any large investments made in revenue producers or market expansion, and we are likely to get these opportunities in 2026. From a balance sheet perspective, in Q4 2025, we're guiding to mid to high single digits on both loans and deposits. And for 2026, we would expect to return to our normal organic growth rate, which is the high single-digit, low double-digit range. In summary, our team is proud of our work over the past quarter and pleased with this quarter's results. We will continue to be strategic in our growth planning and execution and look forward to continuing to share updates on our progress with you. With that, I will pass the call back to Chris. Christopher T. Holmes: Thanks for the color, Michael. And as you heard, the quarter had a lot of moving pieces, but those pieces come together to make a nice picture of a valuable enterprise for our customers, associates, and shareholders. Thank you again to our team. Thank you to all listening to our update this quarter and for your interest in FB Financial. Operator? At this time, we'd like to turn it back over to you to open the line for questions. Operator: Thank you. We will now begin the question and answer session. Before pressing the keys for a question, the first question comes from Catherine Mealor with KBW. Please go ahead. Catherine Mealor: Thanks. Good morning, everyone. Good morning, Chris. The higher margin this quarter and then the higher guide was really great to see. And so the question is just as we think about the margin moving forward with one rate cut and we presume we'll get another one or two in the back half of this year. Any updated thoughts on what the impact of SSBK has been on your margin and just as you and where kind of the balance is between your floating rate book and then what you think you can do on the deposit piece? And then within that question, maybe I'm curious what the average rate was on that $320 million of new deposit balances that came on from your retail campaign? Thanks so much. Michael M. Mettee: Hey, Catherine. Good morning. This is Michael. So margin, as you would expect, is a little bit of a convoluted bag as we kind of look at the combined balance sheet. The runoff of some of the public funds and pricing down some of the higher-cost deposits, paying off brokered, and then adding back new deposits. So a lot going on there. We're a little bit we're at 3.95% this quarter. That included the purchase accounting accretion. As Southern States' balance sheet certainly added to margin on a core basis. I'd say it's probably worth six to eight basis points on core, which puts us in that kind of mid-three-eighty range as we kind of look going forward. You mentioned the rate cuts. We're thinking that we're going to get rate cuts sooner, maybe October, and then one late in the quarter. And so that will have minimal impact on margin. We continue to have kind of a mixed 55-45 fixed to floating balance sheet. And so you obviously feel that in the loan portfolio. So where did deposits come on? We had a kind of a mixed it's a special promo deposit campaign that included core deposits, operating accounts, with money market accounts, which are tied to Fed funds. So we would see those reprice kind of January. They were in the low 4s. And so a lot of moving pieces on where margin is and where we expect it to go. Loan yields continue to come in the low sevens, so that's a positive. But as we expect deposit growth, we do understand that it's really competitive in our markets and seeing how competitors and our own team are able to react to Fed rate cuts will be key in kind of maintaining that margin. But we think we can stay in that range, the guided range. Catherine Mealor: Great. And my question is just on growth. I was glad to hear that you still think you can get back to that high single-digit, low double-digit range for next year. Can you just talk about pipelines and kind of what you're seeing to give yourself confidence for that into next year? Michael M. Mettee: Yes. Our loan pipeline is actually as good as it has been probably in the two years or so. So very confident on that. Obviously, with the conversion in the third quarter, we kind of stunted some of the legacy Southern States loan growth as everybody's working through systems conversion, training, and everything like that. So we're back on track from that regard. That gives us confidence. Customers seem to be kind of turned the page from all the tariff stuff, although there was some noise this week, obviously. But that seems to move on from our client perspective. And the real governor on loan growth is deposit growth. Really core deposit growth. So we'll continue to work on core deposit growth, operating accounts, and acquiring new relationships. But the pipeline on specifically on the credit side is pretty full and as full as we've seen in a while. Catherine Mealor: Great. Thank you. Operator: The next question comes from Brett Rabatin with Hovde Group. Please go ahead. Brett Rabatin: Good morning, guys. Hey, Chris. Wanted to start on you mentioned in the press release the aggressive goals of profitability and growth, and it sounds like you're talking more mid to high single-digit range for growth from here versus that kind of double-digit growth that you've been talking about. Anything that's changed relative to you wanting to get back to double-digit growth, economy, competition, demand, any thoughts on double-digit versus single-digit? Christopher T. Holmes: Yeah. I'd say housing would the difference between the high single-digit and low double-digit can be 1%. And so that's that we as we're presenting, we're trying to present a reasonable range. We always strive internally to be on the higher side of ranges, but sometimes we don't hit that. And so we as we went into this year, we said mid to high, we've been more mid, and so that's been a little bit disappointing to us. We've been consistently evaluating that and tweaking to try to make sure that we are on the higher end of our expectations. But right now, we're running more mid part of our mid-range of our expectations. And so there that's how we're thinking of that. We also as we heat up into 2026, and I made reference to disruption, we're really thinking about what we'll get with our RMs out driving business and Michael made the point of deposit growth can be the governor. We are, as you know, we try to strike a really nice balance between growth and profitability. We try to hit both. We try to be the best at both. But we do try to get both. And we don't sacrifice one for the other. So when we balance all that, that's how it comes out. So as you know, we're in good markets. The economy is good. I would say we'll grow as well or better than others that do what we do. Brett Rabatin: Okay. That's helpful, Chris. And then the other question I wanted to ask was on Slide sixteen, the EPS accretion for 2026 better than expected related to Southern States. Is that a function just of the cost savings being accomplished earlier than expected? Or is there also better organic growth or synergies that are coming from that transaction with revenue? Michael M. Mettee: Yes, Brett. Good morning. It's Michael. Yes, it's earlier than expected cost savings, but also I was kind of noting on margin, we've had better than expected margin from the combination. And so we've had margin expansion, so that's added to that as well. Brett Rabatin: Okay. Great. Thanks for all the color, guys. Operator: The next question comes from Russell Gunther with Stephens. Please go ahead. Russell Gunther: Hey, good morning, guys. I wanted to get a sense for how you would frame up the organic versus the acquisitive growth opportunity set in front of you. Would you expect to lean into one more than the other over the next twelve months? Christopher T. Holmes: Yes. Good morning, Russell. We just don't know for Brett. So good morning, Russell. And we are I know if we lean into one more than the other. I guess as I think about moving forward, let me back up and say, we're normally wired to lean into our organic growth more than inorganic growth. Okay? We think we should grow organically every day in all of our markets. And so and some of our markets are slower growth, and so we will accept a lower growth rate than our higher growth, higher GDP growth markets. But we expect them all to grow. And so that's really the foundation of the company. So I'd say we naturally are always going to lean in higher or on organic growth. That being said, we also think we're in a period from an industry standpoint or an industry where the industry is in terms of maybe some pent-up demand, a more favorable regulatory environment that does favor expansion and acquisition activity, especially in an industry that needs some consolidation. So we don't want to ignore that. And so we're going we are leaning into that heavier than we ordinarily would as we think about how we move forward because we think it's a time of opportunity. We are, I think, recognized and proven as skilled and good acquirer. And there are good opportunities. And so we're going to again, we're going to try to execute on both. I think we've shown we can do that. I would say that one place that maybe has changed our outlook some or our positioning going forward some is that we used to look heavily at how we could get more market share in our markets through acquisition. And we'll probably look more heavily today at how we expand our footprint via acquisition versus more in-market consolidation. Because we do think going back to your question, the organic opportunity is going to be really good in footprint. When you do acquisitions that are in footprint, it does create a little more disruption on the teams. And so we think part of what has us excited about both sides, both organic and inorganic, is that we can grow organically within the geography that exists but also expand the geography without too much disruption within the geography where we're expecting big organic opportunity. Russell Gunther: I appreciate it, Chris. Thank you. And then switching gears a little bit, but you had a pretty notable higher intra-quarter, to kind of run Nashville for you guys. You talked about in your expense commentary, potential to kind of punch outside of that should you know, the hiring opportunity, be more robust than you think it might. So could you share with us sort of what the total revenue producer hires were in 3Q and sort of what your expectations are going forward? Christopher T. Holmes: Yes. So to well, both both coming on that. I'm glad you actually picked up on that comment that Michael made in his when he was talking about where our expectations were. And he said, you know, our banking by banking expense guide is run rates not inclusive of large investments on revenue producers or market expansion. We don't know what those opportunities exactly are going to look like. When you have market disruption, it disrupts everything. And we anticipate has been some of that already. Look, we've created some of that down in some markets in Alabama and Georgia. And so we anticipate there's going to be more. And we're trying to make sure that we play our hands well there as we do that. And so but you're exactly right. It doesn't include investments in those that could be substantial. We could have markets across our geography where those could be substantial investments. We're going to be willing to make those because we think they would be if we make them, they're going to be long-term well-placed investments. And so I just want to make sure we're clear on that. That run rate doesn't include those, but if we get the opportunity, we will be looking to do those just as everybody else will. I want you to think we're the exclusive beneficiary of that, but it's a dog-eat-dog world out there, and we're going to try to be the big dog. Michael M. Mettee: Yeah. And Russell, good morning. Third quarter, we added about five revenue producers, so not a huge number. Yeah, these things take time. Quite everything to college football, you got to recruit takes years to recruit. And so you got to set the foundation. That's both clients and relationship managers. So, you got to earn their business, you got to earn the right for people to come work at your company. And so we've been doing that for a long time and we'll continue to do it and we expect as Chris mentioned, some opportunity to arise as the industry undergoes kind of a transformation here. Russell Gunther: Okay. Excellent guys. And then just a quick point of clarification on the margin guide, Michael, the 3.8% to 3.9% in 4Q and '26 to confirm that that would include your expectations for purchase accounting accretion. And then what you guys are contemplating for through the cycle deposit beta just given some of the comments around deposit pricing competition? Michael M. Mettee: Yeah. Russell, that's point. It does include accretion. And we do think, right, in our markets, continuous margin expansion with rate cuts going to be challenging to continue to grow deposits and organic deposits. So that's why it's a slightly lower number. We'd always aim to outperform but as Chris mentioned, we've got to balance profitability and growth. And so that's why you get to that $380 million to $390 million numbers. We expect deposit pressure in our markets. Russell Gunther: Thank you guys. I appreciate all the help this morning. Operator: The next question comes from Dave Rochester with Cantor Fitzgerald. Please go ahead. Dave Rochester: Hey, good morning, guys. Nice quarter. Christopher T. Holmes: Welcome, Dave. Dave Rochester: I wanted to circle back just on your comments on the growth, not to beat a dead horse, but with all the deal disruption in your markets right now, especially from one very large MOE that could be a gift that keeps on giving to you guys for the next several years. It just seems like a really big opportunity for you guys to pull in talent and business customers. Just wanted to get your take on that the single-digit one more time. It seems like that could add a few 100 basis points at least to growth. Even on the deposit side. Wanted to revisit that a little bit. Christopher T. Holmes: Yes, Dave. We don't disagree. We don't disagree. We do have some upside opportunity there. From disruption and you made reference to large transaction in our market. I do want to say this, nobody is asleep in our market, including the folks that are in core and large disruptions, okay. So nobody is sleeping through it. And also, by the way, including those in and around our market that are entering our market as a result. And so there's a lot going on there. You're right. It's an opportunity for all of us including those being disrupted. To execute. And so again, we're optimistic on our ability to execute. We have shown that over time and we continue to think that we'll be in we're in position to perform well. But your observations are accurate. The opportunities are going to be plentiful. And when we think about disruption, I think the important from our perspective is that it's not only today disruption is going to be around for the next couple of years. We don't think that's the last transaction that has a consequence in our markets that you're going to hear about over the next maybe even between now and the end of the year. I mean, we think you're going to continue to hear about disruption see disruption. And so we think that we're trying to position to be a stable long-term place for customers and for associates to land. And so that's again, I think your point is well made. Dave Rochester: Appreciate that. Maybe just one last one. Are there any areas, products, services, whatever that you don't have right now that you think you could potentially pick up in terms of pulling in larger team or group of teams as a part of some of that disruption that you're looking at potentially? Thanks. Christopher T. Holmes: Yes. I don't want to disclose anything there that would be strategic for us. But I will say this, and we've said this before, management is a part of our business. We have placed more emphasis on and we intend to we intend to make some headway and improvements there. And so that's something that's on our radar screen to just make sure really that our customer experience and our offering there, in terms of everything that we have to offer, competes with anybody and everybody. And so that'd be the one area I would comment on that we have some focus. By the way, that did not result from any specific transaction that was already an initiative for us even before the year started. Dave Rochester: Great. Thanks, guys. Operator: The next question comes from Stephen Scouten with Piper Sandler. Please go ahead. Stephen Scouten: Hey, good morning, guys. Wanted to follow back around real quickly on NIM and just make sure. I know, Michael, you said that the NIM was better, the deal was a little bit better on the combined NIM with SSBK. How much of that was from like more elevated accretion or maybe said differently like relative to the whatever it was $6.2 million or what have you what would you expect for kind of I don't know, straight line run rate accretion to be ex any sort of accelerated accretion? Michael M. Mettee: Yes, good morning, Steven. Yes, run rates low north of kind of call it $4 million to $4.5 million. Accelerated accretion for the quarter is about $1.5 million. So, it's a couple large payoffs there early on in the quarter which led to that accelerated number. So you're looking at kind of $4 million to $4.5 million number. Obviously, comes down a little bit over time. But so does CDI. Stephen Scouten: Yep. Perfect. Okay. Very helpful. Great. And then kind of thinking about, mortgages for a second. I know it's been a few years since we've really talked much about mortgage now. But I'm just wondering, if we get more rate cuts and if we see a real pickup in mortgage, what's the kind of potential of that unit today? I mean, obviously, there's a lot of verticals that you kind of have wound down through the year. So I'm just kind of wondering what's the upside potential of that mortgage division today in the way that it's scaled now? Michael M. Mettee: Yes. Steven, as you mentioned, we're in the retail business and mortgage now versus we won't relive too much of the history. But so it is a little bit muted but there's opportunity there, right? And so we will originate $1.3 billion this year and that's in a rate environment around high 6s. So if you saw meaningful decrease you could see some refinance activity. We're still running 90% purchase in that retail space. I will tell you even back in pre-call it 2016 to 2019, we were running 85%, 90% in our retail in purchase. They've always been new relationship-focused realtor builder type business. So, we're actually thrive in that space. But there will be refinance opportunities. There is probably pent-up demand in the industry because people haven't been able to move there's opportunity there. You should see some pickup in volume. So there is opportunity. Think margins will continue to be in and around the range they are around two seventy to 300. Yes, I don't see a whole lot of opportunity and kind of gain on sale margins at this point. But you could see some pickup. Christopher T. Holmes: If I could just make a couple of comments. One of our goals, if you remember, with mortgage, is when it's when we're not in good times for the mortgage business, don't want to lose money. And we've been able to achieve that. And so we're not losing any money. Frankly, we're not making a lot of money, especially if you take servicing out of the equation because we do get some servicing income in that line. And so we think the upside there is some upside and there's downside is the way that we've positioned the business. If we could ever get mortgage loans that started with a five, even if it was $5.99, we think that that helps in terms of origination activity, but I don't know that we're going to see that anytime soon. And so that's how I would view it. There is some upside to it if you get help in mortgage rates and we've tried to really limit the downside and so that's where we are right now. Stephen Scouten: Great. And then maybe just last thing for me. I mean, I think, used to be across $10 billion you think if you got to like $13 billion in assets, that might be enough to get the right scale. I think we've talked in the past, maybe you felt like you had to get to 17 to 20 more recently. We're kind of there now. Do you think you have the right size to be as profitable as you want to be, have the right scale? Today if these opportunities don't happen to materialize in the near term? Do you really feel like you need more deals to get more scale and be as profitable as you'd like to be? Christopher T. Holmes: Yeah. We think when you look at our adjusted profitability ratios today, we're getting our ROA is going to be between one and forty and one hundred fifty. Our ROTCE is going to be north of 15 and that's with a 10% plus TCE. Ratio. And so those numbers start to get to where we think numbers need to be to again as I said, give your shareholders an advantage for the types of investment that a bank is. And so we think that's good and sustainable where we are. We did we've said roughly 17,000,000 is 16,000,017 million $18,000,000 in assets where we thought we achieved that. That doesn't mean that it won't get incrementally better. As a matter of we think it would get incrementally better with the size but we think those returns are actually pretty good for Mid South Bank investments and we hope to scale it and improve it from there. So I hope that answers your question. I mean, we do think that in my comments, I made that, hey, it's getting now to where it's an acceptable return. And as we scale in size anything we look at is just going to move it positive from there. More positive. Stephen Scouten: Yes. No, for sure. No, hits the nail on the head with my question. So appreciate it, Chris. Thanks for the time you guys. Have a great day. Christopher T. Holmes: Thanks, Steven. Operator: The next question comes from Steve Moss with Raymond James. Please go ahead. Steve Moss: Good morning. Good morning, Chris. Is Mike. Just kind of curious here in terms of your thoughts on capital targets here. You bought back some stock this quarter. And even with the deal here, you're still in a very strong capital position. I know you redeemed some sub-debt. Just kind of curious are you thinking of running capital down a bit? With organic growth, continue with repurchases? Just thought process over the next twelve months and a more favorable regulatory environment? Michael M. Mettee: Yes, Steve. Good morning. It's Michael. Yeah, we've been running, as you mentioned, kind of higher capital levels and Chris mentioned it in his comments about credit capital and liquidity. It's always a focus. We obviously take it very seriously our commitment to the markets we're in and our customers. So, I think organic opportunities, we'd love to see organic growth in a situation where that capital level would. Come down and then some instances even after to grow through it. And get additional sources of capital. So we'd love for that organic opportunity to happen. We do think about Chris talked about organic, inorganic. We're thinking about all those things. So it's important for us to maintain kind of elevated capital levels at this time or really strong capital levels so that we can take advantage of any opportunities that come our way. So short shorter to mid-term, I think you see these same levels. We would obviously deploy it as opportunities arise and then, you know, with been adding capital back to the bucket pretty quickly and we would do that and get ready for the next opportunity. Christopher T. Holmes: Yeah. Steve, I would also just add a couple of things. We are now going to be building capital quickly. So we'll see the numbers continue to move up. Our tangible number at 10.1% is probably it's still a little high but we're not concerned with that. If it were anywhere even 9% to 10%, we wouldn't be concerned with that. And we'd be willing to run there. Although we've come to take the position over the last two or three years that we think hires better. We want to earn a good we want to earn a good return on higher capital. When I was talking about our return on capital, I made reference to the TD being 10% plus. We're comfortable running at that level. Our CET1 we're at 11.7. If you do get ready to do a transaction, then that's going to get looked at pretty heavily. And you're going to want to have north of 10. So we want to make sure we're staying comfortably above that so that we could act quickly. We're not crazy about the idea of having to raise capital on a transaction. The one area that I'd love to have to raise capital is for our organic growth to be so high over the next couple of years that we had to raise capital. That would be good for all of us. I don't know if we would actually make that happen, but that's my dream. Is for us to have to raise capital because our organic growth is so high. Steve Moss: Right. No, definitely appreciate all that color there. And then just in terms of following up on interest rates and positioning here, just Michael, from your comments, it sounds like you're a little more asset sensitive than neutral. Just curious, where are variable rate securities and variable rate loans as a percentage of those respective buckets? Michael M. Mettee: Yeah. We are a little asset sensitive. I missed the back half of your question on variable rates and securities. Steve Moss: Variable rate. What percentage of your loans are variable and what percentage of your securities are variable these? Michael M. Mettee: Got it. Yeah. Yeah. So variable rate loans, it's still in that roughly 45% range and securities variable rate securities are in that 30% to 35% range. So that's and our cash numbers come down a little bit. On a percentage basis. So that takes out a little bit of the asset sensitivity. So it'd be important for us as rates do go down that we reprice our deposits lower. We do have a large amount indexed to Fed funds effective rate. And then we're kind of as we've combined balance sheets, there's more fixed money market rates on the acquired deposits. And so, yeah, think you got to be very diligent in having a value proposition for your customers and a fair price. So, the securities piece being 30% to 35%, yes, that's actually worked out really well over the last couple of years as we've kind of transitioned with a focus on liquidity. So you can kind of move in and out of that portfolio as needed. And it's actually provided a higher margin than going into fixed rate securities over the last couple of years and we still see that. But obviously, it increases your asset sensitivity on the way down. Steve Moss: Right. Well, are all my questions. Really appreciate the color and nice quarter guys. Christopher T. Holmes: Thanks, Steve. Operator: The next question comes from Christopher Marinac with Janney Montgomery Scott. Please go ahead. Christopher William Marinac: Hey, thanks. Good morning. Chris and Michael, just wanted to drill back on kind of the core loan yield. It looks like it's a little bit north of six fifty. And I'm just curious kind of on an organic basis, how much pressure you have from that from pricing? Or do you think you can manage through that as you've given us the margin guide here in the near term? Michael M. Mettee: Yes. Good morning, Chris. Yes, the six fifty North, obviously, if you looked at that combined, it's the SSBK was running like six seventy seven on their portfolio prior to the combination. So that certainly benefited the overall yield. New production is still coming on high 6s, low 7s. So that's been steady even obviously the rate cut was late in the quarter, but even the last couple of weeks we've seen rates still in that range. We still have some repricing to go although it's tailing down all the loans made in 2020 and 2021. We typically stay three to five years on a bunch of our commercial paper. And so, you'll still see a little bit of repricing tailwinds, but it's getting smaller and smaller. So, we're pretty confident that we can maintain this loan yield. Christopher William Marinac: Great. Thanks for that. And then I guess just from a general standpoint, as you think about external market expansion, is there kind of a size limit that you want to stick within or maybe a dilution kind of boundary on the upper side of how much you'll accept there? Christopher T. Holmes: So our target size would really be, let's say, in total, I think if it's a bank, it'd be $3 billion in assets to about say $6.5 billion to $7 billion in assets would be meaningful. And so that'd be a target range. Frankly, there's not a lot of those in existence. And so we're more likely to get opportunities that are a little smaller than that. Is kind of we think about it. Christopher William Marinac: Great. Thank you all for taking our questions this morning. Christopher T. Holmes: Thank you, Chris. Operator: This concludes our question and answer session. I would like to turn the conference back over to Chris Holmes for any closing remarks. Christopher T. Holmes: All right. Thank you all. Thanks, everybody, for being with us. Always appreciate your interest. And don't hesitate to reach out to us directly if we can answer any questions. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Kayte: Good morning, my name is Kayte and I will be your conference facilitator today. I would like to welcome everyone to The Goldman Sachs Group, Inc. third quarter 2025 earnings conference call on behalf of The Goldman Sachs Group, Inc. I will begin the call with the following disclaimer. The earnings presentation can be found on the Investor Relations page of The Goldman Sachs Group, Inc. website and contains information on forward-looking statements and non-GAAP measures. This audio cast is copyrighted material of The Goldman Sachs Group, Inc. and may not be duplicated, reproduced, or rebroadcast without consent. This call is being recorded today, October 14, 2025. I will now turn the call over to Chairman and Chief Executive Officer David Solomon and Chief Financial Officer Dennis Coleman. Thank you, Mr. Solomon. You may begin your conference. David Solomon: Thank you very much, operator, and good morning, everyone. Thank you all for joining us. We delivered very strong results in the third quarter and generated net revenues of $15.2 billion, earnings per share of $12.25, an ROE of 14.2%, resulting in an ROE of 14.6% and an ROE of 15.6% for the year to date. This performance reflects the strength of our market-leading franchises, where we continue to harness the power of One Goldman Sachs to serve our clients with excellence in investment banking. We've seen increased momentum in our number one M&A franchise as clients turn to us for their most consequential transactions. Recently, we hit the milestone of advising on over $1 trillion in announced M&A volumes for 2025 year to date. This is $220 billion ahead of our next closest competitor and underscores our dominant position as the advisor of choice for clients. We've built this leadership position through decades of investment in our dedicated teams across the globe. This allows us to advise our clients on their most important transactions. We were the exclusive advisor to Electronic Arts in its $55 billion sale to a consortium comprised of the Public Investment Fund of Saudi Arabia, Silver Lake, and Affinity Partners. We were also the lead advisor to Baker Hughes on its strategic acquisition of Chart Industries for $14 billion and advised and provided financing to Thoma Bravo for its $12 billion leveraged buyout of Dayforce. Importantly, given our One Goldman Sachs operating approach, increased M&A activity creates a real multiplier effect. Whether it's bridge financing, derivative hedging, or investment opportunities for asset and wealth management clients, our advisory relationships are often the genesis for client activities across the firm. Looking forward, it's important to recognize the tailwinds behind our optimistic outlook for investment banking. We're encouraged by the steady build in sponsor activity, which is now tracking 40% higher versus last year. Considering that sponsors have over $1 trillion of dry powder and $4 trillion of private equity assets in their portfolios, coupled with the expected rate cuts in the U.S., the setup remains constructive for corporates. It's clear from our conversations in boardrooms that after a period of heightened uncertainty and volatility early in the year, many of our clients have navigated and adapted to the current state of play. Though near-term policy considerations are still relevant, many CEOs have shifted their focus back to long-term and strategic decision making, particularly amid a more supportive regulatory environment. Scale and investing for growth remain paramount, especially in the context of harnessing AI capabilities. In addition to a robust investment banking backdrop, we have seen continued strength across our leading FICC and equities businesses, which in total rose on a year-over-year basis for the seventh consecutive quarter. Much of the momentum from the first half of the year persisted through the summer and into September, contributing to our record year-to-date performance for equities and notable strength in our rates business within FICC. All in, our markets businesses continue to demonstrate resilience that comes from having a global, broad, and deep franchise. Taking a step back, there is no question that there is a fair amount of investor exuberance at the moment, with U.S. equity markets consistently hitting record highs over the last several months. Much of this has been fueled by a tremendous amount of investment in AI infrastructure, which has driven significant capital formation. As students of history, we know that following periods of broad-based excitement around new technologies, there will ultimately be a divergence where some ventures thrive and others falter. While I feel good about the forward outlook, on balance, the market operates in cycles and disciplined risk management is imperative. We are especially vigilant in times like these to proactively manage risks as we continue to serve clients with our best-in-class execution capabilities and insights. In asset and wealth management, we are relentlessly driving forward our growth strategy. Assets under supervision rose to a record $3.5 trillion. We again delivered record results across our more durable revenues and management and other fees. In private banking and lending in alternatives, we raised a record $33 billion in the quarter. As a result, we now expect to raise approximately $100 billion in alternatives this year, substantially exceeding our prior full-year fundraising expectations. In wealth, client assets rose to a record $1.8 trillion. As we continue to grow our advisor footprint and expand our suite of client offerings, it is clear that we've been making very strong progress in enhancing our business mix by growing our more durable revenues at AWM. We are also accelerating our growth via innovative partnerships and acquisitions. Yesterday we announced the acquisition of Industry Ventures, a leading venture capital platform with a track record of strong investment performance and the proven ability to invest across all stages of the VC life cycle. This transaction complements our market-leading secondary investing franchise we have been a pioneer for over 25 years and adds a highly attractive technology investment capability to the platform. This business will sit in our External Investing Group, or XIG, which has over $450 billion in assets under supervision across asset classes and is a market leader in investing in alternative manager strategies, secondaries, co-investments, and GP stakes. Importantly, facilitated by our One Goldman Sachs approach, Industry Ventures' deep relationships across the VC ecosystem have the potential to drive new opportunities for the firm, particularly in investment banking and wealth management. Additionally, last month we announced a strategic collaboration with T. Rowe Price to deliver a range of public and private market solutions designed for the unique needs of retirement and wealth investors. We are thrilled to partner with T. Rowe, which, like Goldman Sachs, has a strong brand with a long track record of success across investing in capital markets and in producing strong investment returns for clients. With our 30 years of experience in private markets and an ability to blend asset classes to address outcome-oriented objectives, we can help bridge the gap between growth opportunities in private markets and the needs of individual investors as we drive growth across our businesses. Operating efficiency remains one of our key strategic objectives. Although we review our operations on an ongoing basis, it is also important to make long-term decisions that best position the firm for the future, especially as rapidly accelerating advancements in technology present significant opportunities. To this end, earlier this morning we announced to our people the launch of One Goldman Sachs 3.0 propelled by AI. This is a new, more centralized operating model that we expect to drive efficiencies and create capacity for future growth. This is a multi-year effort that we will build over time, and we plan to measure our progress across six goals: enhancing client experience, improving profitability, driving productivity and efficiency, strengthening resilience and capacity to scale, enriching the employee experience, and bolstering risk management. To start, we are drilling in on a handful of front-to-back work streams that can significantly benefit from AI-driven process reengineering and will help inform our longer-term approach. These include priorities such as sales enablement and client onboarding that directly impact the client experience, as well as other critical areas that have touchpoints across the firm, for example, our lending processes, regulatory reporting, and vendor management. We have been successful by not just adapting to change, but anticipating it and evolving. The firm's operating model is part of the long-term discipline that our people, clients, and shareholders expect of Goldman Sachs. We will provide you with an update with additional details on our call in January. While we've made significant progress on our strategic priorities, we will continue to execute the foundation we've laid to grow and strengthen the firm. Coupled with our market-leading franchises and best-in-class talent, give me confidence in our ability to deliver for clients and drive strong performance for shareholders. I will now turn it over to Dennis to cover our financial results for the quarter. Dennis Coleman: Thank you, David. Good morning. Let's start with our results on page one of the presentation. In the third quarter, we generated net revenues of $15.2 billion, earnings per share of $12.25, an ROE of 14.2%, and an ROTE of 15.2%. Let's turn to performance by segment, starting on page three. Global Banking & Markets produced revenues of $10.1 billion in the quarter, with an ROE for the year to date of 17%. Turning to page four, advisory revenues of $1.4 billion were very strong, up 60% versus a year ago, reflecting a significant increase in completions in the quarter year to date. We remain number one in the league tables for announced and completed M&A, not only globally but in each of the Americas, EMEA, and APAC. Equity underwriting revenues of $465 million were up 21% year over year on significant pickup in IPO activity as we price some of the most highly anticipated IPOs, including Klarna, Figma, and Figure Technologies. More broadly, we're pleased to see the broad-based recovery in the IPO market pick up steam. Debt underwriting revenues of $788 million rose 30%, primarily reflecting higher leveraged finance activity. While acquisition-related activity is picking up amid more deal announcements, there is more room to run, which plays to our strengths as a firm. Year to date, we ranked second in high yield debt underwriting and leveraged lending. Across investment banking, we continue to see strong momentum, with our quarter-end backlog at its highest level in three years despite very strong accruals. FICC net revenues were $3.5 billion in the quarter, up 17% year over year. Intermediation results were driven by improved performance in rates, mortgages, and commodities, partially offset by lower results in currencies and credit products. Financing revenues of $1 billion were driven by strong results in mortgages and structured lending. Equities net revenues were $3.7 billion in the quarter. Equities intermediation revenues of $2 billion fell 9% year over year, driven by lower revenues in cash products, partially offset by better performance in derivatives. Record equities financing revenues of $1.7 billion were 33% higher year over year amid record average prime balances for the quarter. Total financing revenues of $2.8 billion rose 23% versus the prior year as we continue to deploy resources to grow FICC financing and bolster our leading position in equities financing while maintaining a keen eye on risk management. These revenues comprise nearly 40% of overall FICC and equities revenues. Let's turn to page 5. Asset and wealth management revenues in the quarter were $4.4 billion. Management and other fees were up 12% year over year to a record $2.9 billion. On higher average assets under supervision, private banking and lending revenues were $1.1 billion excluding the payment of interest on a previously impaired loan. Year to date, revenues were up in the high single digits year over year driven by higher net interest income from lending to our ultra-high-net-worth clients. In aggregate, our revenues across management and other fees and private banking and lending totaled a record $4 billion in the quarter and $11 billion for the year to date. We continue to expect growth in the high single digits on an annual basis over the medium term. In the AWM segment, we generated a 23% pre-tax margin and a 10.5% ROE for the year to date. Excluding the impact of HPI and its $3.6 billion of average attributed equity, our pre-tax margin and ROE would have been approximately 150 and 250 basis points higher, respectively. Now, moving to page 6. Total assets under supervision ended the quarter at a record $3.5 trillion, up sequentially on $80 billion of net market appreciation as well as $56 billion of long-term net inflows across asset classes representing our 31st consecutive quarter of long-term fee-based net inflows. Turning to page 7 on alternatives, alternative assets under supervision totaled $374 billion at the end of the third quarter, driving $597 million in management and other fees. Gross third-party alternatives fundraising was a record $33 billion in the quarter driven by demand across strategies, including private equity and credit, bringing year to date fundraising to $70 billion on page 9. Firmwide net interest income was $3.9 billion in the third quarter. Our total loan portfolio at quarter end was $222 billion, up modestly versus the second quarter. Our provision for credit losses of $339 million primarily reflected net charge-offs in our credit card portfolio. Turning to expenses on page 10, total quarterly operating expenses were $9.5 billion. Our year to date compensation ratio net of provisions is 32.5% and represents our best estimate for the full year inclusive of higher severance costs. The 100 basis point improvement year over year reflects stronger revenue performance. Quarterly non-compensation expenses of $4.8 billion rose 14% year over year, driven by higher transaction-based costs as well as charitable giving and higher litigation expenses. Our effective tax rate for the year to date was 21.5%. For the full year, we continue to expect a tax rate of approximately 22%. Next, capital on slide 11. In the quarter, we returned $3.3 billion to shareholders, including common stock dividends of $1.3 billion and common stock repurchases of $2 billion. Our common equity tier 1 ratio was 14.4% at the end of the third quarter under the standardized approach. In the current regulatory framework, our CET1 requirement is 10.9%, but the NPR on CCAR averaging is still outstanding. In conclusion, given the continued execution on our strategic objectives, our market positioning, and the improving operating environment, we are confident in the outlook for our businesses. We are the number one M&A advisor globally, well positioned to capitalize on the upswing in investment banking activity, which we expect in the next 12 to 24 months. We're delivering on our growth strategy to drive more durable revenues across AWM. We're focused on efficiency and leveraging AI to meaningfully transform the firm, and this is all in the context of the improving regulatory backdrop, which should allow us to be on offense as we deploy resources in service of our clients. Altogether, we remain confident in our ability to continue to deliver for shareholders. With that, we'll now open up the line for questions. Kayte: Thank you, ladies and gentlemen. We will now take a moment to compile the Q&A roster. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, please press star then two on your telephone keypad. If you're asking a question and you are on a hands-free unit or a speakerphone, we would like to ask that you use your handset when asking your question. Please limit yourself to one question. One follow-up question. We'll take our first question from Glenn Schorr with Evercore. Glenn Schorr: Hi, wanted to follow up on your question about remaining especially vigilant and actively manage risk at times like these. I did notice some more news stories lately that you and others in the industry have been more active on the SRT front and synthetic risk transfer. I wonder if we could talk about how you're executing that. Especially vigilant on managing risk and what loans are moving off, potentially off balance sheet on these risk transfers. Just curious what's driving that other than just we're 17 years into a good cycle and it's evaluations are high and things like that. Thanks. Dennis Coleman: Sure, Glenn, thanks. Thanks for the question. Look, there have been a number of articles on those transfers, including naming us. I would say that our practice is pretty unchanged and that we are constantly looking to dynamically risk manage our portfolio of credit exposures. We have a variety of different tools that we use to risk manage and hedge that risk. SRT is one of those tools that's available to us. We're basically trying to ensure that the firm's in a position to continue to be able to support ongoing levels of client activity, and prudently risk managing the existing portfolios we think gives us the capacity to do that. There are no flashing warning signs. It's just prudent risk management. It just so happens to be year end. You know, Fed cutting balance sheets, things like that, just keeping clean, good hygiene. This is ordinary course risk management for us. Glenn Schorr: Okay, cool. The other clarifier I wanted to get was the messaging behind the One Goldman Sachs 3.0. Meaning, normally you see some companies go through strong iterations of that when they're having some revenue issues. You're not having any revenue issues. You've been putting up great numbers, and you talked about a great banking pipeline next 12 to 24 months. Is technology enabling this heightened awareness on efficiency in some of your AI investments? I'm just curious a little bit more about the why behind the One Goldman Sachs 3.0. David Solomon: Yeah, thanks Glenn. I appreciate the question and you know, you've got it right. I think we're at a place where the evolution of the technology is allowing enterprises broadly. I find this as I'm talking to CEOs all over the world, all businesses are focused on this because the technology actually allows you to take a fresh look front to back at certain operating processes and really reimagine. This has nothing to do, obviously, the firm's performing, the firm's growing, we feel very good about the execution, but we see this as an opportunity to use technology to automate, drive scale, create efficiency, and actually give us the capacity to invest more in the growth of our business. Our responsibility to shareholders is to grow earnings. The goal is to run the firm the best that we can, that doesn't matter whether it's good times or bad. In order to execute on something like this at scale in the organization, you have to bring the organization along, too. Part of the purpose, we've been working on this for a while, we've been talking about it as a leadership team. Part of the purpose of putting this out is it now allows us to talk more broadly and create a framework for the organization to understand the process that we're going to go through. I think there's enormous upside for our business here to allow further investment in growth. By the way, I think you're going to hear this from lots of companies in lots of industries that people are very focused on taking advantage of this acceleration in technology to really allow automation, efficiency, and therefore investment. By the way, this is one of the reasons why we're optimistic about the forward, the productivity gains in the economy from enterprises finding ways to do this, I think are going to be very meaningful over the next few years. That creates a good tailwind that will balance other macro factors that may or may not come into play. Kayte: Thank you. We'll take our next question from Ebrahim Poonawala with Bank of America. Ebrahim Poonawala: Good morning. I guess if you could go back to there's been obviously a lot of headlines and some rights are misplaced around risks on the private credit side. I think David Solomon has an interesting perspective given how long you've been in this space and you've seen the evolution of the space. Address it in two ways if you could, please. One, when you think about the leverage that banks and Goldman Sachs provides to some of these players, how should shareholders think about the risk that at the back end you could suffer losses because of the lending to NDFIs? Secondly, does any of this cause you to kind of recalibrate how you're thinking about growing in the oil or the private credit business? Thank you. David Solomon: Yeah, I mean, I'll start. Dennis can add some more granular detail, maybe comment just on some of the things that have been in the press more recently. First of all, we're in business to serve our clients, finance our clients. All of this is underpinned by the fact that we have a very strong risk management culture and strong underwriting is really central to everything that we do. It's important to take a step back. You asked about NDFIs. It's a very broad category. There are all sorts of different activities. We have a very, very diversified book of lending exposure. The vast majority of our lending is collateralized financing and investment grade rated structures. The vast majority of it is investment grade rated. We're constantly risk managing. We're constantly trying to create more capacity to do other things to support our clients. We think about it as a broad, big diversified portfolio. Obviously, if you got into a period where we had a credit cycle, which we have not had in quite some time, there'd be headwinds for all the banks. I think we feel very, very good about our processes, our collateral, the structure of the book. A little bit back to the question that Glenn Schorr started with, we have a whole series of risk management processes that we constantly execute on to try to make sure we're being prudent at times like this. Dennis, you want to comment a little on some of the specific things that have been in the press and add anything to what I said. Dennis Coleman: The only things to add, we obviously don't have any direct exposure to either of the big names that have been in the press lately. Picking up on David's point, we've been in the business for a very long period of time. We've been lending through multiple cycles and analyzing downside risk and doing consistent high quality credit. Underwriting is key. The names in our portfolio are underwritten on a bespoke basis. We maintain very stringent standards with respect to our aggregate exposures, our diversification, our concentration risks, the attachment points, collateral packages, the risk return characteristics, duration, et cetera. For us, we're maintaining our standards. We've said on multiple previous calls that we've had good opportunities to grow the FICC financing line. We have said multiple times that the demand from our clients far outstrips the growth that we have maintained a level of selectivity with respect to credit selection, risk return profiles and that's still the case. Credit selection, being disciplined about that going in, is ultimately what protects you when inevitably certain things will go wrong. Ebrahim Poonawala: That's helpful. I guess just one more when we think about regulatory changes. We had the Treasury Secretary talk about this in a speech last week. Just give us a mark to market around your expectations as you think about the G-SIB surcharge and Basel III endgame. How are you thinking about the timeline and capital planning around all of that? I think the bigger question that's come up with investors is, is the competitive positioning of Goldman Sachs getting better where you're not being buried with incrementally new regulations? When we think about Goldman Sachs competing with the non-banks across a varied businesses, is that also just at the margin getting better? If you can comment on that. Thank you. David Solomon: Sure. I mean on the second point, I absolutely think that the regulatory direction of travel is improving our competitive position significantly on the timeline. It's harder to give you an exact timeline, but I'd say you're going to see real progress this fall and real progress during the first half of 2026. I would expect we'll have a very, very, very clear picture of a bunch of the regulatory issues that we're all focused on collectively over the course of the fall and the first half of 2026 into the end of the CCAR cycle next summer. I think we're certainly going to see SLR relief. I think we're certainly going to see more transparency around CCAR and a continued recalibration because of that. I think we're going to see a recalibration of G-SIB. I think we're going to see a much more constructive Basel III endgame. Obviously, the regulatory tone and the focus of resources that we have to direct toward regulatory is shifting in a way that we can redeploy those other things that create avenues of growth. I would say quite constructive. These things take time, but it's happening real time. Going back to where I started, I do think this improves our competitive position relative to others that are outside of the regulatory landscape. Kayte: We'll take our next question from Erika Najarian with UBS. Erika Najarian: Hi, thank you. Given the comments about the regulatory landscape and focusing on growth and the opportunity to play offense, and clearly you announced the cost collaboration with T. Rowe Price and Industry Ventures, I'm just wondering, David, as you think about Goldman Sachs in the future, One Goldman Sachs 3.0, what are those opportunities for growth that you think maybe are missing or not scaled in the business right now that will really maybe stabilize, enhance that 15% ROE as we look forward even without such a robust capital markets backdrop? David Solomon: Sure. I think we've, and I appreciate the question, I think we've talked about this a lot, Erica, but at the end of the day our strategy remains the same. We continue to invest in Global Banking & Markets and are very, very focused on share and wallet share. We believe through the cycle that is a mid teens business. That doesn't mean there couldn't be a year or environment where that business is different in a different capital markets environment. We believe consistently through the cycle we now have that business operating as a mid teens return business. We've been clear that Asset & Wealth Management remains a very, very attractive growth channel for the firm. You can see us improving margins and uplifting returns there. There's still more to go and we are highly confident in our ability to uplift the returns in Asset & Wealth Management over the next couple of years. That obviously strengthens and enhances the overall return profile and durability of the firm. We are executing against that. I think you can see through T. Rowe Price and also through our acquisition of Industry Ventures that this gives you an idea of how we're thinking about strategically accelerating that growth and strengthening that overall platform. We're going to do it thoughtfully, we're going to do it carefully, we're going to do it prudently, but we're going to make investments that we think strengthen the platform and allow us to continue on that trajectory. When you think about the firm, two big businesses, Banking & Markets, Asset & Wealth Management, Banking & Markets, mid teens through the cycle and as we execute on Asset & Wealth Management and continue to enhance the returns, that should produce a significantly higher return than it currently produces. We're confident on our ability to deliver that. That therefore gives you a more durable, targeted return. Erika Najarian: Thank you, David. Kayte: Thank you. We'll take our next question from Christian Bolu with Autonomous Research. Christian Bolu: Good morning David and Dennis. Just firstly on the equities business, I appreciate that we can't read too much into one quarter, but curious what drove or what you think drove the underperformance versus peers. Also, would love to get some more color around, I guess, the decline in equity intermediation revenues. I believe you called out cash equity as a driver. Dennis Coleman: Sure, Christian. As you say at the beginning of your question, the overall strength of our equities platform remains in excellent condition. We're having our best year-to-date performance ever for that business. The cash component of equities intermediation was softer. In the prior year period, that activity was up almost 30% and the prior quarter was a top decile quarter. Our comps were difficult and we had slightly less robust performance in the cash portion of the business. The rest of the franchise continues to perform extremely well across the derivative components of intermediation. The financing piece was a record and in aggregate, again, the franchise feels extremely well positioned. We're seeing high levels of client engagement and feel good about how it's set up for the forward. Christian Bolu: Okay, thank you. This one's a bit of a wonky question, so please bear with me. Given all the jitters around things like First Brands and Tricolor, which apparently had, I guess, some fraud issues around collateral being pledged multiple times, can you talk about or at least remind us how you manage risk in your financing businesses, especially around collateral integrity? Dennis Coleman: Sure, Kristen, this will sound familiar to some of my previous remarks, but the process for us is, and the importance for us is to make sure we have a consistent set of underwriting standards and that we have robust upfront due diligence, that we have ongoing monitoring and reporting diligence underlying collateral, that we manage the granularity of our portfolio within our own internally set diversification and concentration limits, and that we have consistent standards for what we expect the risk return characteristics to be. Some of those idiosyncratic names that you give reference to, we didn't have direct exposure to those names. Part of the key to credit underwriting is to make sure that you miss some of the more challenged credits, and that all comes down to upfront diligence and having a long-standing track record and an ability to be selective. We have a very big market presence here. We see a lot of opportunities, there's a lot of demand from clients for us to support them, and we have the ability to be selective with respect to where we extend our balance sheet, make sure it comports with our own standards of risk management. Kayte: We'll take our next question from Betsy Graseck with Morgan Stanley. Betsy Graseck: Good morning. Thank you. David, you mentioned earlier about how prudent, careful strategy execution. As you were discussing the partnerships and acquisition that you announced the other day, it would be interesting to understand what you think the opportunity set is for you in this space in wealth and asset management from an acquisition perspective in the sense of should we expect these kind of bite sized overtime building up over time or are there opportunities that you see that could potentially get you to a larger scale faster? David Solomon: Yeah, I mean, first of all, Betsy, I appreciate the question and some of this will sound familiar to things I've said on other earnings calls and I say publicly in my public comments. We're obviously focused on accelerating the asset wealth management business. Our wealth management business is an ultra-high-net-worth franchise and I would say it is scaled and we don't, unlike other peers, we are not looking to directly control client relationships in the broad high net worth space or in other broad wealth channels, that's not really our strategy. Our strategy is to continue to grow and be the leading ultra-high-net-worth, high touch wealth platform and to have it married with our extraordinary manufacturing capability and product offering in our asset management business. The acquisition that you saw today of Industry Ventures adds to that. It's giving our very, very wealthy clients access to other investment opportunities and products that are hard to access in different channels. We feel very good that that's very on strategy. Are there larger acquisitions that could enhance our wealth platform? Absolutely. Things I've said before, the bar to do more significant things is always going to be very high. I've also said when you look at the best companies and the best businesses around asset wealth management, they're generally sold, not bought, and most of the best ones are not for sale and not available. If we saw something that could accelerate our journey in asset wealth management, we'd certainly consider it, but always with a very, very high bar. At the moment, what we're seeing is interesting things that enhance our distribution, enhance our ability to offer very, very unique products to our client base already. We'll continue to capture through third party wealth channels opportunities to use our manufacturing capability and asset management more broadly. Betsy Graseck: Thank you. Just separately, should we still be anticipating an exit from the Apple Card at some point in the near or medium term, or is that no longer expected? David Solomon: We've been clear that credit cards are not a go forward focus for Goldman Sachs. I don't have anything more to say on the Apple Card program at the moment. You saw us completely, and we now are completely exited from the GM card platform. When there's something more for me to report on the Apple Card, I guarantee that this broad group that's on the call will be among the first to know it. Kayte: Thank you. We'll take our next question from Mike Mayo with Wells Fargo Securities. Mike Mayo: Hi. In what role does, on the negative side, Goldman Sachs 3.0, I would think platform solutions might not make the cut, and I guess that relates to the Apple Card. I guess I'm just wondering why you're the leading deal maker in the world and that's still hanging around. I guess that's a follow up. On the positive side, you said the quarter end backlog is at the highest level in three years. Can you give us a sense of that mix? Also, if I heard you correctly, you said—I might have heard this incorrectly—40% of your FICC and equity trading is financing. If I got that wrong, if you could correct me. What's comprising that? Dennis Coleman: Sure. You heard correctly, our backlog is the highest level in three years. That backlog that we report comprises the advisory, equity underwriting, and debt underwriting components in aggregate. We made a point that it actually stands at that position notwithstanding very high levels of accruals over the course of the previous quarter. It gives you a sense for our optimism on the outlook and our expectation for other types of activity that are to come through our franchise. Broadly, you're also correct in your understanding of the contribution of FICC financing and equities financing as a combined component of the FICC and equity lines combined. We continue to focus on growing those durable and predictable financing revenue streams and are just reporting out on the sort of marginal contribution that they represent within the overall FICC and equities business. As far as that 40%, that's up, I think, from 33% quarter over quarter. I'm just wondering what were the sources of that incremental growth. This has been an activity that we have been steadily, steadily growing over the last couple of years. As we think about the durable revenue profile of the firm, those components of Global Banking & Markets, together with management and other fees, private banking, lending, and asset wealth management, those are the areas of the firm that we've been consistently deploying resources against and been focused on that has been steadily growing. I don't think there's a new step function change in that contribution. It's been a constant commitment. It's been steadily growing the last couple of years. Kayte: We'll take our next question from Brandon Hawken with Bank of Montreal. Brennan Hawken: Good morning. Thanks for taking my question. I was curious about an AWM. If we adjust for the impact of HPI, pretax margins are roughly at the mid-20% and the roughly mid-20% target on a core basis. If we think about what's going to drive you to that mid-teens ROE, is it more around the capital side or do you still have continued room on the profitability front that drives that ROE higher? Dennis Coleman: I think, Brennan, at a high level, you know, just to boil this down, and we've been pretty consistent on this, we continue to fundraise and we continue to grow the scale of the platform as that fundraising goes on. That adds to the management fee and the marginal margin as you scale, the business continues to improve significantly. We are very confident as we continue to fundraise and scale the platform that there's more room on the margin side as we continue to shift our strategy and finish with the HPI portfolio, that will free up a little bit of capital. At this point most of the margin and return improvement is coming from the continued growth and scaling of the platform. Brennan Hawken: Perfect. Thanks for that color. David, on the expense side, you were clear in your expectations on the comp ratio. Curious about non-comp. We saw a charitable contribution this quarter, which is normally, I believe, in the fourth quarter instead. Was that just a timing change, or is there going to be contributions just the back half going forward, like third and fourth quarter? What's the right way to think about a jumping off point for non-comp? Dennis Coleman: Appreciate the comment on non comp. We continue to have all the same programming and discipline around managing overall non comp growth. The biggest driver for us again was transaction-based expenses. That's obviously correlated with the elevated levels of activity we're seeing across the board. We did call out the charitable expenses. You are correct in your recollection that traditionally we did recognize most of those expenses in the fourth quarter. This year we're making an effort to actually spread it out over the course of the year, so it won't be showing up only in the third quarter. Kayte: Thank you. We'll take our next question from Dan Fannon with Jefferies. Dan Fannon: Thanks. Good morning. You've exceeded or met most if not all of your targets in asset and wealth management except the kind of billion dollars of incentive fees, you're tracking below that this year. Just curious as to when you think your ability to hit that is sure. Dennis Coleman: Fair point, Dan. Your question actually also helps answer the question on how asset and wealth management sort of migrates towards a higher return profile over time. It's another one of the contributors to top line that also has significant marginal margin contribution. You're right to ask because the unrealized balance of incentive fees as of the last quarter is now at $4.6 billion. We still do have visibility and expectations that there's significant amounts of incentive fees that will pull through the P&L over the next several years. Ultimately it's going to be a function of the way in which certain of those vehicles are able to finally monetize their investments and return carry to their investors, enable us to recognize the incentives. The overall environment, deal making environment, monetization environment, proportion of sponsor activity in the world, all of that is trending in the right direction and that should help propel us closer to our medium-term targets of $1 billion of incentive fees per year. Dan Fannon: Great, that's helpful. I just wanted to follow up on the ULTS business. Given the strength in fundraising, you raised the guidance after several years of strong growth. Can you talk about the funds that are coming in either bigger, or are more funds coming to market? Anything specific you could point to that's driving some of that excess growth? Dennis Coleman: Sure. Obviously, the last five years we've been raising about $65 billion a year, which was a healthy clip. Our expectations now for this year are a step function higher, you know, approximately $100 billion. The contribution is broad based, so it's across multiple different asset types. It is a combination of having certain vehicles that are larger than previous vintages as well as launching new types of fundraising vehicles. It's a pretty broad-based contribution across the board. Kayte: We'll take our next question from Devin Ryan with Citizens. Devin Ryan: Great morning. David, Dennis, first question just on the financial advisory strength, obviously really nice on an absolute basis and then relative to peers as well. All the data we look at would suggest we're still pretty early in the recovery for that business. Sponsors are just starting to re-engage, and I know you touched on the market share gains as well. Just be good to get some additional context on where you feel like we are in the broader recovery for the advisory business for the industry right now. You know how far away we are from the baseline. From a market share perspective, is that Senior Banker headcount up a lot or is that just One Goldman Sachs resonating? David Solomon: A couple of aspects to it. Devin, appreciate the question. First, on the cycle we've been talking about an improvement in M&A all year because one of the things we see inside the firm is we've got really great transparency inside the firm as to all the transactions that are in progress and kind of what CEOs are doing and thinking. In my prepared remarks, if you remember, I said after a little bit of volatility early in the year, CEOs are really focused strategically where they want to go. I think one of the things to frame is that we're in an environment at the moment where CEOs think that the opportunity to get things done strategically is now possible after being in a period of time where they felt it was not possible. That's turning them all to focusing strategically. We have significant activity in the shop. You saw the comments around our backlog. That kind of shows you the sustainability. I think that we are going to see a very constructive M&A environment through the end of the year into 2026. I'd expect 2026 to be a stronger M&A environment unless there's some macro disruption. I think there's been a meaningful improvement in where we are in the cycle. I still think given market cap expansion growth, the fact that we were underpenetrated in terms of activity because of the regulatory environment for the last four years, I expect a pretty healthy environment. We commented on sponsors, sponsor activity is up kind of 40%. We see more of that in the pipeline and I think you're going to see an acceleration there. I think it's quite constructive. Devin Ryan: That's great. Okay. Just want to come back to the prime services and financing as well. I know it's been steady growth as Dennis mentioned, but I suspect there's also a bit of a cyclical component there, just tied to higher risk appetites. There's obviously the secular and kind of Goldman Sachs market share story. With where we are with record valuations across a number of assets, is there a way to frame how you're thinking about the cyclical demand in that business right now, significantly elevated? From a secular growth story, just talk about how much more room there is over the next handful of years here. Dennis Coleman: Thanks. Sure. You're right. This business definitely benefits from the underlying environment. Balances are very, very correlated with overall levels in the markets. That is an attractive feature of the business. There's obviously the composition of the portfolio and the nature of the activities and the flows that go into it. You can calibrate more or less growth relative to the underlying backdrop based on how you manage your portfolio of credit extension. It has been, together with FICC financing, a good source of stable revenues for us across the franchise. It's a product that is highly valued by our clients. There's a lot of demand for us to provide more by way of prime brokerage services to our clients. It's something that we're very strategically focused on continuing to provide to meet with clients' demand. Kayte: Thank you. We'll take our next question from Gerard Cassidy with RBC. Gerard Cassidy: Good morning, Dennis. Good morning, David. On the comments you made, David, on One Goldman Sachs 3.0, which obviously is very positive, as outsiders, how do you direct or where should you direct us? How we measure that success over the next three to five years as you roll this out throughout the organization, is it going to be primarily through the ROTCE number or is there something else we should focus on? David Solomon: Gerard, I appreciate the question. In my prepared remarks, when I laid it out, I said to you that, you know, in the first quarter we'll give you a further update on this. If you go back and you think about the way we've operated in the past, we give you information, we then hold ourselves accountable to that. Part of the reason that we made this announcement today is to do these kinds of things in an organization like Goldman Sachs. We have to bring the organization along and we have to create a roadmap for the organization when we're in a position that we can give you more concrete metrics that you can track and we can quantify and proportionalize. We have good ideas on those things now, really good ideas on those things. We're not prepared to lay that all out specifically for you. I promise you that as we go into the first quarter and the second quarter, you'll have more transparency on what we're doing, the opportunity, how to think about it, and how it drives further earnings growth for the firm. Gerard Cassidy: Very good, thank you. As a follow-up, obviously you guys are very well capitalized with a CET1 ratio just over 14%, the requirement 10.9%. You've been very active in returning that excess capital through share repurchases. As we go forward, assuming the regulatory environment continues to move in the direction that you referenced, David, where should we see the buffer? I mean, if you come in with a final number, maybe in a year or two, something closer to 10.5%, the regulatory requirement, what kind of buffer do you guys like to operate above your regulatory requirement when it comes to CET1? David Solomon: I think the way to think about a buffer is it depends on the clarity you have in the capital regime. I think that there is a reasonable chance or a good chance that after operating in a period of time where there was a lot of capital volatility and firms had a hard time planning their capital on a year-to-year basis, there's a good chance we're going to be in a regime where we have more clarity on our capital for a multi-year period of time, certainly within a tighter range. That would lead to narrower buffers than what we and others on the street have been running with over the course of the last five years when there's been more capital volatility. If you go back and you look over the last few years, most of the institutions have been running larger buffers because there was more capital volatility through the CCAR process. You have more transparency around that process, and also because you put in something like averaging, that means that there's going to be less volatility on a year-to-year basis. I think most firms, including ourselves, would be comfortable running with buffers that are less than the buffers you've seen on average over the last few years. As we have more clarity in that, as I said earlier, I think the direction of travel is quite positive. We'll give you more of a sense of how we think about the buffers, but that's a big macro way to think about it. This is another thing that's actually quite constructive for Goldman Sachs and for others in the industry. Kayte: Thank you. At this time, there are no further questions. Ladies and gentlemen, this concludes The Goldman Sachs Group, Inc. third quarter 2025 earnings conference call. Thank you for your participation. You may now disconnect.