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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.
Operator: Good day, and welcome to the Sono-Tek Corporation Second Quarter and First Half Fiscal Year 2026 Results Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note that this event is being recorded. I would now like to turn the conference over to Mr. Kirin Smith with PCG Advisory. Please go ahead, sir. Kirin Smith: Thank you, operator, and thank you, everyone, for joining us today. Sono-Tek Corporation released their second quarter and first half fiscal 2026 results this morning. If you do not have a copy of the release, please go to the company's website at sonatec.com and click the press release News tab in the Investors section. The product market and geography sales tables on the last page of the release will be part of today's discussion. With me on the call today are Dr. Chris Coccio, Sono-Tek Corporation's Executive Chairman, Steve Harshbarger, CEO and President, and Steve Bagley, Chief Financial Officer. Turning the call over to management, I would like to make the following remarks concerning forward-looking statements. Please note that various remarks that may be made on this conference call about future expectations, plans, and prospects for the company constitute forward-looking statements for the purposes of Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may vary materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in the company's filings with the SEC. The company assumes no obligation to update the information contained in this conference call. As a reminder, Sono-Tek Corporation currently holds two earnings calls per fiscal year. This is our mid-year fiscal 2026 call for the second quarter and first half ended August 31, 2025. Our next earnings call will be our full-year call for the twelve months ended February 28, 2026, and will be held next May. I would now like to turn the call over to Dr. Chris Coccio, Executive Chairman of Sono-Tek Corporation. Chris, please go ahead. Dr. Chris Coccio: Good morning and thank you, Kirin. And thank you, everyone, for joining us today. We are going to discuss our second quarter and first half fiscal 2026 results. They were released this morning before the market opened. I'll begin with some opening remarks and then Steve Harshbarger, CEO and President, will go through a deeper business and operational review. Following their comments, we'll open the call to your questions. We will be followed by Steve Bagley, our Chief Financial Officer, who will provide the financial review. This past August, we held our Annual Shareholder Meeting at our company headquarters and manufacturing facility in Milton, New York. I'd like to thank all the shareholders who attended and were able to see firsthand the core technology, the key advantages, and how it's being utilized by our customers in various industries. They were also able to see how bustling our facility is as we continue to grow. For those newer investors in our company, we welcome the opportunity to showcase our products and technology with an open invitation. As a refresher for the newer and prospective investors on the call today, Sono-Tek Corporation developed a revolutionary method of applying precision thin film coatings several decades ago. The proprietary technology involves the use of our advanced high ultrasonic nozzles incorporated into specialty motion control systems. They are able to achieve uniform micron and nano thin coatings onto our customers' products. Our unique value proposition and key differentiator is that our thin film coating machines provide dramatic savings of the expensive liquids being applied and are environmentally friendly by minimizing material usage and reducing overspray. Importantly, this often helps companies comply with increasingly stringent government regulations aimed at reducing hazardous waste entering the environment. But the real key advantage of our ultrasonic coating systems is the ability to apply precision thin films, which are vitally important in today's world. With thousands of products and micro components now requiring a functional or protective coating to be added to them. A major strategic shift that we made several years ago to offer more complex and complete solutions that meaningfully broaden our addressable market and resulted in significant growth in our average unit selling price. Our larger machines now commonly sell for $300,000 and system prices can reach $1,000,000 or more. This can significantly impact our quarterly revenue. Additionally, our move into the clean energy sector has shown excellent results in the next generation solar cells, fuel cells, green hydrogen generation, and carbon capture applications. As we help shape a sustainable future. This is what we saw last fiscal year where we saw the largest customer order in our history, followed by an additional order of the same size two weeks later. More recently, and in line with our diversification strategy, we announced a very large order of over $5,000,000 to a company in the medical device industry. And just yesterday, we announced another large order of over $2,800,000 from another major U.S. medical device manufacturer. The beauty of our technology is the immense value it brings across many industries, including the electronics market, life sciences, and clean energy, to name a few. The New Year has presented some changes and uncertainties for most businesses, such as changes taking place in relationships with trading partners and the redirection of climate policy and related government spending. On the trade issues, Sono-Tek Corporation builds our key ultrasonic hardware at our factory in Milton, New York, and a large portion of our other materials used are U.S.-based, so we see minimal concern there. On the export side, more than half of our current sales are to the U.S. market, and we have been exposed to tariffs in certain other countries for many, many years. So we could be affected for better or worse depending on the outcome of negotiations taking place. Clean energy continues to represent a significant portion of our sales. Fortunately, a large share of these sales come from commercial customers, such as U.S.-based solar panel manufacturers and carbon capture and conversion companies. The solar customers are supported by commercial users and the carbon capture customers by airlines and other corporations focused on reducing their carbon footprint. This includes efforts to develop sustainable aviation fuel and other carbon-based products. While we do anticipate a decline in clean energy orders this year, our diversification strategy helps us to mitigate and offset potential declines. This is being driven by ongoing enhancements to our equipment across all sectors, including new expanded features and functionalities that are supporting sales in the medical and semiconductor markets. I'm pleased to report that we're seeing strong momentum in the medical device industry, particularly in growing interest for our high-volume production systems and increased demand for our balloon catheter coating machines. It's important to note that we have used a form of forward-deployed engineering with a number of customers now to help them in their subsequent system purchases from us. For the first half of our fiscal year, we experienced modest annual revenue growth, and the second quarter marked the sixth consecutive quarter in a row of revenue over $5,000,000. On top of that, our first half revenue made a new record high at $10,300,000, and net income came in at $917,000, which is up about 36% from the previous year. We remain encouraged by the path ahead, supported by a solid backlog of $11,200,000 and a strong balance sheet with $10,600,000 in cash and no debt. For the full fiscal year, we are increasing our prior guidance to reflect modest revenue growth. This outlook balances continued caution as the market adjusts to the recent shifts in government clean energy and tariff policies, which we expect will be positively offset by growing demand from the medical device industry. We will continue to refine our guidance as we gain more clarity the remainder of the year. In closing my part, we are excited that our investments have begun to pay off and our strategies have positioned us well for continued success and long-term value creation. Our outlook for growth has been greatly enhanced by the early success of our strategy to shift to larger, more complex systems and platforms for production applications, our multiple and repeat orders, as well as our focus on opening new markets for our unique thin film coating technology. Thank you. I'll now turn the call over to Steve Harshbarger, our CEO and President. Steve, please go ahead. Steve Harshbarger: Thanks, Chris, and good morning, everybody. Appreciate you all joining us here today. Let me start by saying that we are very pleased with our overall performance and the strategies we have put in place to help shield us from these macro factors with a unique value proposition and clear product offering that solves critical problems for many diverse industries. It's extremely gratifying to see our investments hitting their stride. Our sales for the second quarter and first half met our guidance, with flat to slight revenue growth. That's even with an unplanned customer-requested shipment delay that moved one system into the third quarter. This comes on the back of a strong fiscal 2025, which benefited from growth in the clean energy sector. The strength and resilience of our business continue to grow, and it's exciting to see our diversification strategy paying off with momentum now building in the medical device industry. Our second quarter medical market sales increased by 150% year over year, or $602,000, to $1,000,000. This was led by balloon coating systems shipped to the U.S., Europe, and China. Regarding the second quarter, revenue was up slightly to $5,160,000 and increased sequentially compared to $5,130,000 in the first quarter of 2026, marking the sixth consecutive quarter of revenue over $5,000,000. Gross profit for the quarter increased 3% year over year to $2,600,000 compared with $2,500,000 last year. This is mainly due to a favorable product mix of mature high ASP systems with reduced costs and some favorable warranty expenses in the current period. Net income for the quarter increased 27% to $431,000 compared to $340,000 last year, reflecting a combination of higher gross profit and lower operating expenses. Now I'll provide a few other key highlights of the quarter. By geography, U.S./Canada sales decreased 22% year over year, or $775,000, driven by slowing momentum in the U.S. clean energy industry. However, this was positively offset by sales in Asia, which increased by 153% year over year, or $562,000, with major growth in China and other parts of Asia. Additionally, we saw EMEA sales increase 25%, or $288,000, while Latin America sales were down by $74,000. By product category, Integrated Coatings Systems sales, which we're now referring to as inline coating systems, decreased by $493,000, or 24%, to $1,530,000. This was primarily driven by the same customer-requested delivery delay that I just mentioned, which came from the clean energy sector and has since now shipped in our Q3 FY 2026. Here as well, we saw a positive offset with multi Coating Systems increasing by $99,000, or 5%, to $2,030,000. Fluxing sales increased by $46,000, or 30%, to $165,000, reflecting our increased demand for our flexors from Asia. Additionally, OEM sales increased by $188,000, or 92%, to $394,000, driven by strong shipments to our Fluxer OEMs and new optics-related OEM wins. The spare parts, services, and other sales category increased $161,000, or 18%, to $1,040,000. By end market, as I highlighted earlier, the medical market increased by 150% year over year, or $602,000, to $1,000,000, led by Balloon Coating System sales shipped to both the U.S., Europe, and China. Alternative clean energy decreased slightly by 3% year over year, or $65,000, to $2,430,000, supported by strong clean energy backlog going into FY 2026. The electronics markets declined by 1% year over year, down $22,000, to $1,460,000. The industrial market declined 68%, or $517,000, down to $288,000, influenced by a large FY 2025 European glass coating order that didn't repeat. Regarding our 2026 results, we reported record revenues of $10,300,000 compared to $10,190,000 in the year-ago period. Gross profit increased 6% year over year to $5,300,000 compared with $5,000,000, and net income increased 36% year over year to $917,000, or $0.06 per share, compared with $672,000, or $0.04 per share. The increase in revenue for 2026 was driven by a 65%, or $1,820,000, increase in sales from inline coating system sales, reflecting shipments of six high ASP systems to a major solar customer totaling $4,420,000. While we're not projecting further near-term orders from this customer in FY 2026, we do remain optimistic about potential future demand dependent on the customer's execution of expansion plans. The increase in inline coating systems we experienced was somewhat offset by our product division, which can fluctuate from time to time. U.S./Canada sales decreased 5% year over year, or $324,000, driven by slowing momentum in the clean energy industry, but was positively offset by increased sales in Asia with 74% growth year over year, or $647,000, led by strong medical sales in China and strong alternative energy sales in Japan and South Korea. EMEA sales were relatively flat, declining $60,000, and Latin America sales down $160,000 due to slowing fluxing sales in Mexico. By product category, as I mentioned before, inline coating system sales increased by $1,820,000, or 65%, to $4,580,000, driven by shipment of six high ASP systems to a major solar customer totaling $4,420,000. Flexing sales increased by $64,000, or 25%, driven by strength in Asia. Multi Axis Coating Systems declined by $1,890,000, or 41%, to $2,710,000 following a strong FY 2025 for semiconductor systems that didn't repeat, and slower clean energy activity in FY 2026. OEM sales were slightly down by $13,000, or 2%, and spare parts and services and others were up by $126,000, or 6%. By end market, the medical market rose by 44%, or $553,000, driven by strong balloon coating systems shipped to the U.S., Europe, and China, and increased stent coating activity in Europe and China. Alternative energy rose 19% year over year to $901,000 by the shipment of the six high ASP solar coating systems I mentioned earlier. The electronics market declined by 21% year over year, or $646,000, following strong FY 2025 semiconductor sales and FY 2026 timing for similar machines. The industrial market declined 67%, or $711,000, influenced by a large FY 2025 European glass coating order that didn't repeat. We closed 2026 with a solid equipment and service-related backlog of $11,200,000, which was near record levels. The backlog clearly represents the strength of our overall business and reflects encouraging order activity. We attribute the increase in sales and the strong backlog as a direct result of our investment in R&D, with a strong focus on product expansion. For the first half, we have invested $1,300,000 in R&D compared to $1,400,000 in the year-ago period, and our balance sheet remains strong, whereas of August 31, our cash, cash equivalents, and marketable securities totaled $10,600,000, still again with no outstanding debt. In closing, we're updating our prior guidance to reflect modest growth for revenue, and this outlook balances continued caution as the market digests shifts in the U.S. government clean energy and tariff policy, which we expect will be positively offset by our growing demand from the medical device industry. And most importantly, we remain very confident in our long-term growth prospects. Our momentum stems from our deliberate strategy and shift to large customized systems with accelerating ASP, and our proprietary ultrasonic nozzle technology remains at the core of our systems for all these diversified industries. And we've been able to achieve this significant shift organically through our own development efforts. With that, I will hand the call over to Mr. Steve Bagley, our CFO, to review our financials in more detail. Steve, please proceed. Steve Bagley: Very good. Thank you, Steve, and good morning, everyone. I will first walk you through the fiscal 2026 second quarter results, followed by our first half results. Net sales for the quarter increased slightly to $5,160,000 compared to the 2025, and also increased sequentially compared to the first quarter sales of fiscal 2026 of $5,130,000. Gross profit increased 3% year over year, or $74,000, to $2,600,000, and the gross profit percentage increased to 50% due to a favorable mix of product mix of mature high ASP systems with reduced costs and favorable warranty expenses in the current period. Operating expenses decreased to $2,170,000 when compared to $2,230,000 in the prior year's second quarter. The decrease is primarily due to reduced marketing and selling expenses. Research and product development costs decreased to $627,000 versus $696,000 in the prior year. And the decrease is primarily due to the decreases in research and development materials and supplies and salary expense. Marketing and selling expenses decreased to $871,000 for the quarter versus $988,000 in the prior year. The decrease is due to a decrease in salary expense related to the departure of a salesperson and a decrease in trade show expenses and travel expenses. These decreases were partially offset by an increase in salaries, which related to our sales application land. General and administrative expenses increased to $670,000 for the quarter compared with $546,000 in the prior year. The increase is primarily due to an increase in salaries, corporate expenses, and stock-based compensation expense. These increases were partially offset by decreases in legal and accounting fees. Operating income increased $135,000, or 47%, to $421,000 compared with $286,000 in the prior year. In 2026, an increase in gross profit combined with a decrease in operating expenses were key factors in the increase of operating income. Interest and dividend income remained steady at $82,000 in the second quarter. That compares with $85,000 in the prior year's quarter. Our present investment policy is to invest excess cash in highly liquid low-risk U.S. Treasury securities. At August 31, 2025, the majority of our holdings were rated at or above investment grade. In the second quarter, we recorded a tax provision of $103,000 compared to $74,000 in the prior year. Net income for the quarter was $424,000, or $0.03 per share, and that compares with $341,000, or $0.02 per share, in the prior year period. The increase in net income is primarily due to the current period's increase in gross profit and decrease in operating expenses. And now for the financial results for the first six months of fiscal 2026. Total sales for 2026 increased year over year by $103,000 to a record $10,300,000. Gross profit increased $283,000, or 6%, to $5,300,000, and that's primarily due to product mix and favorable warranty expenses in the current period. The gross profit percentage increased to 51% from 49% in the prior year period. Operating expenses decreased slightly to $4,350,000 when compared to $4,450,000 in the prior year's first half. Research and product development costs decreased to $1,300,000 versus $1,400,000 in the prior year first half. And that's primarily due to decreases in research and development materials and supplies, and salary expense. Marketing and selling expenses decreased to $1,700,000 for the first half, and that compares to $1,900,000 in the prior year. The decrease was due to a decrease in salary expense related to the departure of the salesperson and decreases in commission expense, trade show expenses, and travel expenses. These decreases were partially offset by an increase in salaries related to our sales application lab. General and administrative expenses increased slightly to $1,300,000 compared with $1,100,000 in the prior year. The increase is primarily due to increases in salaries, corporate expenses, and stock-based compensation expense. And these increases were partially offset by decreases in legal and accounting fees. Operating income increased considerably by 72% to $381,000 to $905,000, and that compares with $524,000 in the prior year period. And this underscores the operating leverage from our stronger gross profit and a decrease in operating expenses. Operating margin for 2026 was 9% compared to 5% in the prior year. In 2026, interest and dividend income decreased by $4,000 to $224,000, and that compares with $128,000 in 2025. Additionally, gain decreased $52,000 to $2,000 as compared with $54,000 in 2025. Net income increased $35,000 to $909,000, or $0.06 per share, for 2026, compared with $672,000, or $0.04 per share, for 2025. Diluted weighted average shares outstanding decreased slightly to approximately 15,700,000 shares. We continue to maintain a strong cash position with cash, cash equivalents, and marketable securities totaling $10,600,000 at August 31, 2025, and we continue to carry no debt on our balance sheet. CapEx for the six months was $113,000, and all of that is directed to ongoing upgrades of our manufacturing development labs facilities, and we expect to invest approximately $300,000 in new equipment for the full fiscal year. And now we'll open the call for any questions from the audience. Operator, please go ahead. Operator: Thank you. We will now begin the question and answer session. And your first question today will come from Ted Jackson with Northland Securities. Please go ahead. Ted Jackson: Thanks. Good morning. Congratulations on the quarter. Steve Harshbarger: Hey, good morning, Ted. Ted Jackson: So my first question, Steve, is I want to maybe augur in a little bit on the medical device strength and the Chinese exposure that's from it? In the past, I know that China has been a bit of a difficult market for you because there's been sort of copycat, you know, ultrasonic, you know, coding vendors there when try to cut you in price and so I'm a little curious in terms of how the business came about and kind of the competitive dynamics for the win and does this mean that we're going to see you have a better profile in China going forward and maybe some discussion with regards to tariffs around China and any kind of concerns you might have there? That's kind of a mouthful, but that's my first question. Steve Harshbarger: Sure, sure. Yes. Well, it is certainly still always on our mind. I should start by saying that even when we send our advanced coating systems over to China, they actually are not getting our most advanced coating systems. We actually keep those pretty close to home. They're usually getting like one generation behind us, just from a proprietary standpoint. But we were fortunate that in the medical device industry in particular, we've been able to capture some significant orders where these customers evaluated these Chinese copycat companies and they just found out that the quality just did not meet the bare minimum requirements to compete with Sono-Tek Corporation. So they actually made decisions to pay what's about maybe three or four times per machine if they could buy that same machine from a Chinese manufacturer to get it through Sono-Tek Corporation here in the U.S. And that's even with the significant tariff implications that are happening. So it's a real compliment, I guess, to us from the standpoint of the quality of our systems. And it's the one industry that defects are much more critical than, say, like on a printed circuit board. A defect is a life in those industries. So there is some level of paying a premium in those sort of particular niches for us right now, and in the balloon area in particular, that's an area that we believe that we are going to dominate similar to the stent manufacturing area that we've had in the past. So I think China's jumping on that knowing that they need Sono-Tek Corporation if they want to be heading into that market for medical devices. Ted Jackson: And then, so then are these customers or these are these actually Chinese? They're not Western companies manufacturing in China? Steve Harshbarger: Yes. These particular ones happen to be Chinese manufacturers, which is unusual also just as you're pointing out, it would be much more common for us to say have a Western entity manufacturing in China that is buying Sono-Tek Corporation. That would be a much more common scenario. But in these particular cases, it's actually surprisingly Chinese manufacturers that are saying, hey, the quality is so low of our domestically made stuff that we're going to buy Sono-Tek Corporation anyway. And that's certainly without encouragement by the Chinese government. The Chinese government has a big push right now to buy made in China. But there are certain technologies that they just are not able to perfect enough that they have to be buying from the U.S. even at these very premium prices over domestic manufacturing equipment. Ted Jackson: And then is there a similar industry in, you know, like, in terms of balloon catheters within the Western world and do you have exposure to there or is this driving interest for you outside of China? Steve Harshbarger: Yes, it is. It's kind of similar to the stent industry, which we're very familiar with, and it's that's one of those areas that we dominate the marketplace that if you capture the two or three major manufacturers of that particular application, you'll tend to get the second-tier manufacturers following them. And although it's all proprietary and confidential and nothing is ever supposed to get out, personnel travel from companies to companies. And so it does tend to snowball upon itself. And I believe right now we're in a position that we're capturing the major leaders in this particular niche. And I think it's snowballing across the globe. Geographically, it's snowballing, whether it's to Japan or to China or to Europe or in our home base in the U.S. They are we're becoming the industry standard in this niche. And this is thankfully, this is a niche that's just starting to grow. So what's great is that this is in the beginning phases. So there's a lot of growth ahead of us here for this area. Ted Jackson: And then, so got two more questions on medical and then maybe one to arrive at. Behind it, but I'll get out of line so I can always come back in. So using stent as kind of a like let's call it a guidepost to how the balloon catheter market might turn out. Can you walk us through like when you got your first order and in that market and how it evolved, you know, and then, like, how many systems have you sold that over what period of and you see what I'm saying, just kind so we can get a sense to that. Then the question behind that is, you've had tremendous success within The States It looks like you're positioned well for Balloon. What other stuff is out there for you in the medical market? And And then actually I will step aside and I'll come back in to queue know, for some I'm sure there's a couple of Steve Harshbarger: Sure. I appreciate that Ted. For sure, we are definitely trying to emulate the success that we had in Stend. I guess one of the big differences between the stent market and our newest markets like balloon catheter coating the drug eluting balloons. Is that our product offering at the time of stents was very limited and it was smaller ASP machines that were selling for maybe $50,000 to $80,000 Now those machines probably could have sold for 150,000 to $200,000 if we had the capabilities to add more offerings and more capabilities onto those machines. But we didn't at the time. But fortunately for us now, to all these investments we've made over the last several years, we are now able to offer a much more sophisticated platform for balloon coating than we would have ever been able to offer for stent coating at the time. And that has driven the ASP up higher on the machines. But even more importantly, it's resulted in a much more satisfied customer that's really able to see our capabilities beyond just the coding part of it. It's the capabilities of manipulating the product It's the capabilities of curing or cleaning and having this fully integrated systems which drives our ASP up and we're now finding it's starting to help improve gross margins as well. Is really significant for us And it opens us up where that customer now recognizes, oh, Sono-Tek Corporation they're not just a stent coating company anymore. They have manufacturing capabilities for coating just about any one of your medical devices. And although balloons is the one that's kind of taking off for us right now, there's a lot of other things in the hopper that we are also involved with, which we want to repeat and emulate that same process for as well. Ted Jackson: Sounds exciting. I'll I'll I'll I'll come back in queue. I know I have no questions. Thanks, Ted. Good talking to you. And your next question today will come from Bill Nicklin with Bill Will Insights. Please go ahead. Bill Nicklin: Hey, Steve. I'm on a cell phone in not a great area. So can you hear me? Steve Harshbarger: I got you, Bill. Good morning. Bill Nicklin: Good morning. Looking at the recent orders you have and kind of what's been taking place over the last few years, there's strong indications that Sono-Tek Corporation has intentionally and strategically taken a path of building out your applied engineering model. And I think it's pretty evident through customer accessibility to your lab and involvement in your lab testing infrastructure, new hires you've made, leadership promotions, and so forth. And it appears to me this is the strategy is the functional equivalent of what some popular known as FDA or forward deployed engineers. So in line with that, could you walk me through how the application engineering build-out fits into your broader growth strategy and what specific capabilities or customer outcomes are you building toward? Steve Harshbarger: Sure, sure. That's a great question. And it really I would say it gets at the heart of why we continue down a path of what we're now actually starting to refer just as you referenced as forward deployed engineering. That actually came out of the software term, but it's changed and it's grown over time. The definition of it, it's really a key part of our growth strategy and it touches on everything from customer adoption to sales efficiency and competitive pricing. And I'll do my best to walk through those areas that you just mentioned. Our forward deployed engineering model builds around what we originally called our custom engineered solutions team. And it really is core to scaling our growth. This team was created a couple of years ago now. And it was actually an expansion of our application engineering group and has already grown from one senior engineer now to three individuals showing the strong demand for what we see in this capability area. And it enables our most experienced engineers to work directly within the customer production environments to deploy and optimize customized and production scale quoting systems. And this hands-on approach really accelerates system adoption. It maximizes the real-world coding performance and it's very much strengthens our long-term partnerships. And all of these ultimately are key drivers in expanding our high ASP production platforms. And by embedding our FTE engineers directly with customers, we're hoping to expect to see shortened sales cycles and improve our win rates because the solutions are already proven in per production where they're not just proven in our labs. So over time, this should allow a lower customer acquisition cost since those same embedded engineers, they should often uncover new opportunities within our existing accounts. So I think that may kind of explain where they're coming from. So the really big thing for this model just sets us gets us closer to our customers. We move faster and turn that collaboration into bigger business for both sides. Bill Nicklin: Alright. Thanks. Maybe following on a little, what are the key performance indicators you're tracking internally to measure whether the FDA group is delivering a return on investment and what's the expected timeline for margin expansion or growth acceleration because of that? Steve Harshbarger: Yes. We've long tracked the percentage of revenue to like laboratory testing and application development. Which I think is right around currently around 60% to 70% of our shipments are tracked to that right now. And we also certainly measure with revenue tied to the highest ASP systems, which now represents roughly two-thirds of our total sales. And almost all of these big complex systems pass through that FTE group, that forward deployed engineering team. And while ROI and things are a little bit difficult to quantify directly, we certainly see positive results as more R&D and pilot line systems transition into these large multi-system production lines. And I would strongly expect margin benefits to build gradually over the next one to two years as more and more of these large accounts move into full-scale production. And that's similar to the multi-system orders for these high ASP that we delivered earlier this year for the solar industry. Which can end up coming through with really strong margins. So I would expect that to continue with this model. Bill Nicklin: Alright. And one more quick one. How does the application engineering investment affect your competitive position if you can give me some specifics and are customers selecting you over competitors specifically because of this capacity? Or capability? And how does that translate into pricing power and margin expansion? Steve Harshbarger: So, FDA, it's absolutely a clear differentiator. Customers increasingly are going to choosing Sono-Tek Corporation because we bring process engineering expertise directly right into their production floor. So it elevates our role from equipment supplier to really become a technology partner. And that supports strong pricing and really strong pricing power when you think about it, it's going to give us much deeper account penetration and more possibilities for recurring revenue from product expansions, as well as those same returning customers considering us for new projects, which they may not have otherwise. So I think we're going to see that rollover into margin expansion fairly quickly for us, as they become higher and higher developed and gone through our process, we've seen here historically that the margins will start to expand on those high ASP machines once the first round of them have gone through our manufacturing process. Bill Nicklin: Thanks, Steve. It's good to see all this hard work and money spent come to fruition and good luck the rest of the year. Steve Harshbarger: I appreciate that, Bill. It's been a big significant investment for us and we're happy to see it taking off for us. So it should be an exciting time. Operator: And your next question today will come from Dick Ryan with Oak Ridge Financial. Please go ahead. Dick Ryan: Morning, Dick. Hey, morning, Steve. Thanks for taking the question. And also congrats on the success of the diversification kick in. Steve Harshbarger: Appreciate that. Thank you. Dick Ryan: Just most things have been asked, but just a couple of questions specific. You mentioned two new related OEMs. Can you give a little detail? Is that are these significant wins? I mean, any win is worthy. But can you provide a little more detail on those two new OEMs? Steve Harshbarger: Yes. They are in the optics area, the lens area. What I would describe as significant for them is that right now they are not in a wheelhouse for Sono-Tek Corporation I would say has a great depth of knowledge. But these guys do have significant depth of knowledge. And that if we can get embedded with them, we will start to learn a lot more about that industry in that field. And that's very valuable for us. Often we need a partner to accelerate our entrance into these new newer type of applications. Because otherwise, it could take us you know? But we with the partner, we might be able to get in in one to two years, but without a partner it might take us four or five years to really understand the area effectively. So I think it's going to be significant. Probably not going to be significant from a revenue standpoint short term, but it could be significant from a new market entrance long term. Dick Ryan: Okay. That sounds good. What's going on in the semi side? That market seems to be holding up well. The front end has got some higher expectations of spending in 2026. What are you seeing on the semi side of the business? Steve Harshbarger: Yes. Well, until this past month, was thinking more almost flattish, but then we just came out of a trade show semicon it's called, in Arizona it was. And it was by far the best trade show we've ever had And the best interest of leads and customers talking to us very seriously about equipment. And when I asked about what was the differentiator although it was a very good year in general for semiconductor at the show, but they said really it was our product line expansion this year was significant enough that it was growing our addressable market at the show. So customers that would have walked by us last year or the year before now are starting to recognize, oh, these guys have a lot more capabilities than they had over the last several years. And we did make some more significant investments into the show to make sure we showed that and displayed that at the show. You had a larger sized booth. With actual machinery there running, but it really paid off for us And I think that we're going to start to see that become a fairly significant growth area for the organization over the next year or two, as a result of this. And that's still got a long way from stopping the upper peak on this. We're going to be showing some significant new product additions this year, and I think it will be ongoing like that for the next several years that we'll continue to grow that product offering. Dick Ryan: Okay. Have you been able to quantify what the addressable market opportunity might be for you guys? Steve Harshbarger: We haven't put a dollar figure to it, but I will say this is that our next strategic shift is moving from what is mostly a 200 millimeter high-tech lab environment over to 300 millimeter environments, which are mostly fab directed. And that's the expansion of our product line offering right now is heading in that direction. And that seems to be where most of the investment is heading and where we could bring the biggest benefit and impact So I think it's going to be again higher ASP machines that are more complex. But I think right now we have got the right strategic partners aligned with us. We've kind of worked out all details to enter into there this year pretty quickly. Dick Ryan: Fred, Well, congrats on that. That's a significant opportunity. Moving into the 300 millimeter space. I think that's it for me. Good job. Appreciate it. Thanks, Steve. Steve Harshbarger: Always good talking, Dick. Thanks. Operator: And your next question today is a follow-up from Ted Jackson of Northland Securities. Please go ahead. Welcome back, Ted. Ted Jackson: Hey, I just have a couple more left. So, one is just a backlog near record, like, over what time frame will that revenue be recognized? Steve Harshbarger: Yes. The largest orders that we have just recently announced, was that $5,000,000 last month and almost $3,000,000 order that came in last week, or this week, I should say, just yesterday. The bulk of those will be shipping in our FY 2027 year, so after March. But there will probably be some level, maybe 10% to 15% of that may ship out in the current fiscal year, just the beginning orders for those So that's the bulk of it, those going to be heading into next year. And that's why right now we're only projecting modest growth for the current fiscal year and that's just because the build time on these machines is significant. So although we'll be able to ship some of them, we won't be able to ship anywhere near a significant portion of them in the current fiscal year. But we're in good shape for this year. Like I said, so we'll come in at modest growth Had the clean energy sector kept on full steam like we anticipated was we probably would have shown huge growth this year. But hey, we deal with what we got. And fortunately, our team here were able to shift really quickly over to capitalizing on the investment we made into building these highly complex machines and just shifting it over to the medical sector very, very effectively. Ted Jackson: And then on the 2026, you are projecting modest growth for the year. Given that you had a piece of business slip from the second quarter to the third quarter, would we expect to see your second half sales be a little more weighted in the third quarter vis a vis the fourth quarter because of that? Steve Harshbarger: Yes. I think they're going be way off from each other, but it's probably going to be a little bit heavier in Q3 Q4 because of that one system that did get at their customer request get pushed into Q3. So I would suspect Q3 will probably be slightly higher than Q4. But they both should be pretty solid for us. Ted Jackson: Do you think that you can take your streak of $5,000,000 plus revenue quarters from 6 to 8. We haven't given any projections there yet, but Steve Harshbarger: I think I would be disappointed if we don't do it, but we haven't given any form projections there, but I would be disappointed if we don't do that. Ted Jackson: Okay. Alright. Well, that's it for me. Everything else got asked by other people. Thanks. Steve Harshbarger: You're welcome. See you, Ted. Operator: This concludes our question and answer session. I would like to turn the conference back over to Mr. Steve Harshbarger for any closing remarks. Steve Harshbarger: Okay. Sorry about that. Dropped all my papers here. Well, I just want to thank everybody for joining us today. And to tell you all that we look forward to having you come back for our next conference call. Sono-Tek Corporation's long-term outlook remains strong. Supported by the continued success of our newly developed high ASP platforms across advanced technology markets. So we look forward to sharing full fiscal year 2026 results during our next call in May. In the meantime, we will be presenting at some key upcoming investor conferences. Next week, we're actually at LD Micro in California. And please don't hesitate to reach out to us with any questions. And thank you again and enjoy the rest of your day everybody. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Welcome, and thank you for joining the Wells Fargo Third Quarter 2025 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. Please note that today's call is being recorded. I would now like to turn the call over to John Campbell, Director of Investor Relations. Sir, you may begin the conference. John Campbell: Good morning, everyone. Thank you for joining our call today where our CEO, Charlie Scharf, and our CFO, Mike Santomassimo, will discuss third quarter results and answer your questions. This call is being recorded. Before we get started, I would like to remind you that our third quarter earnings materials, including the release financial supplement and presentation deck, are available on our website at wellsfargo.com. I'd also like to caution you that we may make forward-looking statements during today's call that are subject to risks and uncertainties. Factors that may cause actual results to differ materially from expectations are detailed in our SEC filings, including the Form 8-Ks filed today containing our earnings materials. Information about any non-GAAP financial measures referenced, including a reconciliation of those measures to GAAP measures, can also be found in our SEC filings and the earnings materials available on our website. I will now turn the call over to Charlie. Charlie Scharf: Thanks, John. I'm going to use my time slightly differently today on the call and talk very briefly about the quarter. Then I will spend more time talking about our growth opportunities, what is different with the lifting of the asset cap, our capital levels, and how we see our path to higher returns over time. I'll refer to the presentation posted on our website. I will then turn the call over to Mike to review third quarter results in more detail before we take your questions. Let me start by saying we are very happy with our third quarter results. The momentum we are building across our businesses drove strong financial results with net income and diluted earnings per share both up from a year ago and the second quarter. Our results benefited from the investments we have made in prior years, and we are now on a path to grow more broadly with the lifting of the asset cap. Revenue increased 5% from a year ago, with growth in both net interest income and strong fee-based revenue. I pointed out the investments we have been making in our businesses on prior calls and the early signs of the positive impact on our results and the benefits were clear this quarter with investment banking fees increasing 25% from a year ago. Loan growth accelerated in the third quarter, increasing from both the second quarter and a year ago. Our credit performance was strong and continued to improve. And we increased our capital return, raising our common stock dividend and doubling our share repurchases from the second quarter. I want to spend the rest of my time today addressing the topics I mentioned earlier. First, a refresher on what our management team has accomplished since late 2019. We've talked much about our success in closing 13 regulatory orders and the removal of the asset cap by the Federal Reserve, and I want to reiterate the importance of continuing to build on that work and sustain our new culture. But I want to shift the conversation by reminding everyone that while we are incredibly proud of our success, we have worked in parallel to transform and reposition the company by changing our business mix and how we manage the company, and this has resulted in significantly improved returns and margins. Wells Fargo & Company without the regulatory constraints and with the changes we have made is a significantly more attractive company than what we were several years ago. We believe this positions us for continued higher growth and returns. I'm going to be referring to the slides from our presentation deck starting with Slide three. We love the fact that we are a U.S.-focused bank that benefits from the strength of our nation's economy and markets. More than 95% of our revenues are from U.S. consumers and U.S.-based companies. Our global presence exists because of the strength we have in this country. And while we have opportunities to grow our wholesale businesses outside the U.S., our primary opportunity and focus is growing all businesses domestically. The U.S. is and will continue to be the most attractive market for financial services, and as a U.S.-focused bank, we will continue to benefit from the strength of the U.S. Scale matters, and as you can see on Slide four, we have it in all of our businesses. In many of our businesses, such as consumer banking, wealth management, corporate banking, and commercial banking, we are top three. In these businesses, there is generally a gap between the top two or three and the rest of the market. In other businesses, such as credit card, investment banking, and markets, while we're not top three yet, we have enough scale to compete with the top three and have competitive advantages that we think support the ability to increase our share profitably. Turning to Slide five, we have simplified and refined our business mix by selling or scaling back many businesses. We sold or exited businesses that generated approximately $5 billion of annual revenue, but these businesses were either not core or did not produce high enough risk-adjusted returns over time, and we have targeted our investments in areas with higher growth and returns. While the asset cap constrained our ability to grow loans, deposits, and security financing and inventories, our strategic review uncovered areas across the company where we had room to invest to serve consumers and businesses more broadly and build our fee-based revenues without the need to grow the balance sheet. Moving to Slide six, we have made progress diversifying our revenue mix and growing fee streams and now consistently see the benefits of our refined business mix and strategic investments. Several of the businesses we have invested in are listed on this slide, and revenue from these businesses alone increased almost $5 billion since 2019. More importantly, we can now more aggressively and broadly pursue growth in other areas of the company. As you can see on Slide seven, we have also improved returns by reducing expenses but at the same time, have increased our investment in risk and control infrastructure and our strategic growth initiatives. In total, expenses have declined $3.6 billion since 2019. And just a reminder, I have said that we spent approximately $2.5 billion more on control and regulatory work in 2024 than when I arrived at Wells Fargo & Company. By the end of this year, we expect to have achieved approximately $15 billion of gross expense saves, and this has funded the large increases in spend to make us a better and stronger company and allowed us to reduce overall expenses. Savings have come from across our businesses. But let me highlight just a few examples. Our headcount has declined from a peak of approximately 276,000 in the second quarter of 2020 to approximately 211,000 in the third quarter of 2025, down 24%. With headcount reductions every quarter for five years. I want to note that this was not driven by business sales or outsourcing. But in fact, real improvement in our efficiency. We've also significantly reduced how much we spend on professional and outside services as well as non-branch real estate. Turning to Slide eight, we have made progress improving returns with the goal to achieve best-in-class returns for each segment over time. In 2020, our ROTCE was 8%, and we wanted to put a stake in the ground by setting what we thought was an achievable higher return goal of 15%. We said that this was not our final aspiration and would relook at it after we achieved it. We've made significant progress and are approaching this goal. And while we are proud of our progress, each of our lines of business still have the opportunity to improve further. All should eventually have returns comparable to our best peers who continually invest for the long term. And as you can see on this slide, this is not the case in all lines of business. Our progress will continue to come from both continued efficiencies and the higher revenues driven by our investment in growth. Given our progress and the lifting of the asset cap, we believe now is the time to update our return goal and describe our aspirations. First, our aspirations. To be the top U.S. consumer and small business bank and wealth manager providing industry-leading deposit, loan, investment, and payments products. Also, to be the top U.S. bank to businesses of all sizes, with the goal of being a top five U.S. investment bank. We expect all of our businesses to eventually generate returns and growth equal to our best competitors while continuing to invest for the longer term. We have the scale necessary in all of these businesses today. We have a strong and disciplined management team that has proven they can execute on our priorities. And with the regulatory constraints lifted, we have more degrees of freedom to grow and achieve our goals. Let me now talk about what has changed since the asset cap was lifted on Slide nine. I have consistently said that the lifting of the asset cap would not be a light switch moment where we would immediately expand the balance sheet significantly and change our risk tolerances. Instead, I've said that it would remove the constraints that we've had to grow our balance sheet-intensive businesses and allow us to compete more effectively as I just outlined. Having said that, we are now beginning to use this increased capacity and started to grow our balance sheet. Our total assets at the end of the third quarter were over $2 trillion for the first time in the company's history. We have grown our trading-related assets in the corporate and investment banking, which are up 50% since 2023. This is a client-focused, flow-based business where we serve corporate and institutional investors, most of which have broader relationships with us. We expect this growth to continue as we continue to onboard new clients and accommodate customer trading flows and financing activity without significantly increasing our risk profile. We have not actively grown consumer deposits. And we booked limited and at times reduced commercial and corporate deposits due to the asset cap. Within consumer and small business banking, we are now focused on reaccelerating checking account growth through enhanced marketing and expansion of digital account openings. Average deposit balances have now grown year over year for three consecutive quarters. We are also investing in our branch network and remain on track to have over half of our branches refurbished by the end of this year. Total consumer check account openings and branch-based credit card openings grew during the first nine months of 2025 compared to a year ago. We have highlighted in the past the biggest opportunity in our consumer lending business is credit cards. We've been making enhancements to our product offerings over the past several years, which has started to increase the size of our credit card portfolio, and new accounts grew 9% during the first nine months of 2025 compared to a year ago. We are focused on better penetrating the consumer and wealth management client base and are seeing progress. Just as a reminder, growing credit card portfolios are a drag on earnings and returns until approximately the third year before starting to add to earnings. Over the life of the portfolio, they have strong returns as long as spend balances and credit results are in line with expectations. And this is consistent with what we are seeing, so we are confident that this will become more accretive to our results. Within commercial banking, with the asset cap lifted, we are now focused on growing deposits through our global payments and liquidity business through targeted calling efforts and improved product and digital capabilities. More broadly, we've targeted 19 high-density markets for growth where we have less market share than other parts of the country. While our hiring is not complete, we have hired 160 coverage bankers over the last two years and are beginning to see increased production from this new group. We've also been investing to grow our corporate and investment bank. We're using our competitive advantages, including decades-long deep relationships with large corporates and middle-market companies, a complete product set, significant existing credit exposure, strong risk disciplines, and the capacity and resilience to support our clients through cycles. We have driven growth through investments in talent. Since 2019, we have hired over 125 managing directors across corporate and investment banking. These investments have translated into real growth. In Investment Banking, we have gained over 120 basis points of share in the U.S. since 2022, the most of any investment bank. In M&A, we are winning increasingly bigger and more complex deals. We recently advised Union Pacific's $85 billion acquisition of Norfolk Southern, the largest announced deal of 2025 so far. When you look more broadly at the industrial sector, of the top M&A transactions that have either been announced or closed in 2025, Wells Fargo & Company has advised on half of them. To help drive growth in our wealth and investment management business, we launched Wells Fargo Premier, helping us to better serve our affluent clients. We are starting to see benefits with net investment flows into Premier up 47% during the first nine months of this year. The opportunities remain significant. We estimate that our existing bank customers have trillions in assets at other financial institutions, and we are not fully meeting the lending, deposit, and payment needs of our existing wealth clients. In our wealth advisor channels, we've been investing to improve the advisor and client experience, including making improvements to our independent platform, which has helped to increase adviser retention and the quality of the financial advisors we've been able to recruit. Advisor attrition has declined every quarter this year. You can see on Slide 10 that we are now targeting a 17% to 18% ROTCE over the medium term and managing to a 10% to 10.5% CET1 ratio. We believe our ability to grow the balance sheet after years of the asset cap constraints, the opportunities I've discussed to grow in each of our businesses, and our excess capital position should be catalysts for continued improved returns over time. Our new ROTCE target is obviously dependent on a variety of factors, including interest rates, the broader macroeconomic environment, and the regulatory environment. This is not our final goal but another stop along the way to achieve best-in-class returns by businesses. And ultimately, our returns should be higher than this target. Our confidence in reaching this range is driven by several factors, including our commercial businesses are already achieving industry-leading returns, but will be more sizable as we continue to benefit from our growth investments. Our consumer businesses are currently generating returns below the industry. We've made good progress on transforming and simplifying our home lending business, and the remaining actions should generate a higher return business than we see today. I spoke earlier of the negative impact on our financial results of growing our card business in the early years of investment, but as these vintages mature, we expect our card business to drive increased returns. In addition, as we now seek to grow consumer, small, and business banking, the increased returns in this business should also contribute to higher returns. Many of these opportunities to drive higher returns in our business are distinctive to Wells Fargo & Company given the constraints we were under for many years. Finally, we have significant excess capital today. The results of our recent CCAR exam reduced our stress capital buffer by 120 basis points. We are now managing to a CET1 ratio of approximately 10% to 10.5%, and we may have the opportunity to manage our capital levels even lower pending further changes from our regulators. Our CET1 ratio has been at or above 11% for nine quarters, including the third quarter. Even after we grew our balance sheet, increased our common stock dividend, and repurchased $6.1 billion in common stock. We ended the third quarter with over $30 billion of capital above our regulatory minimums. Not only do we have excess capital today, but we continue to generate more excess capital as well. At today's run rate, we generate over $20 billion in after-tax earnings per year and pay approximately $6 billion annually in dividends. The remaining $14 billion provides us with a lot of additional flexibility to grow our businesses and support our clients and communities, manage through economic volatility, and return capital to shareholders. We believe the dividend payout ratio of 30% to 40% is still appropriate. We are at the lower end of that range today. Optimizing our excess capital provides us with the real opportunity to improve our returns. I want to close by turning to Slide 11, repeating how excited I am about the momentum we are building and for all the opportunities we have to produce higher growth and returns. We have made meaningful progress, and those actions position us well for the future. I have often said that we have one of the most enviable financial services franchises in the world. We have a breadth of both consumer and commercial products that few can match, and now we are able to compete and do more for our customers and clients and build a best-in-class company. This is what attracted me to Wells Fargo & Company in the first place. And I look forward to executing this next phase of our transformation. I will now turn the call over to Mike. Mike Santomassimo: Thank you, Charlie, and good morning, everyone. I'm going to review our financial results starting on Slide 13 of our presentation. We earned $5.6 billion in the third quarter, up 9% from a year ago, and diluted earnings per common share was $1.66. Strong performance reflects the progress we have been making on the priorities that Charlie highlighted, including investing in our businesses, executing on our efficiency initiatives, maintaining strong credit discipline, and returning excess capital to our shareholders. Our third quarter results included $296 million or $0.07 per share of severance expense primarily for actions we will take this year as we continue to focus on streamlining the company and improving efficiency. We continue to believe we have significant opportunities to get more efficient across the company. The areas of focus are broad-based, including third-party spend, real estate costs, and automation opportunities. Turning to Slide 15. Net interest income increased $242 million or 2% from the second quarter, driven by one additional day in the quarter, higher loan and investment securities balances, and fixed-rate asset repricing, which was driven by the turnover of debt securities, residential mortgage loans, and auto loans. While we grew net interest income, the net interest margin declined seven basis points from the second quarter, driven by growth in lower-yielding trading assets as we deployed more balance sheet after the lifting of the asset cap to support our strategy of growing our markets business. Excluding the impact of the markets business, our net interest margin would have been flat from the second quarter. Given the growth in our business, we plan to start breaking up markets net interest income next year. I will update you on our expectations for full-year net interest income later in the call. Moving to Slide 16. Both average and period-end loans grew from the second quarter and from a year ago, and we had the strongest linked quarter growth in period-end loan balances in over three years. Average loans increased $18.4 billion from a year ago, driven by growth in commercial and industrial loans in our corporate investment banking business. Securities-based lending and wealth and investment management, credit card, and auto loans also grew, while residential mortgage loans declined. Total average consumer loans grew from the second quarter after declining for ten consecutive quarters as growth in auto and credit card loans more than offset continued declines in residential mortgage loans driven by our strategy to primarily focus on our existing customers. Average deposits declined $1.8 billion from a year ago as we reduced higher-cost corporate treasury deposits by $37.5 billion, which more than offset deposit growth in our businesses. The growth in average deposits from the second quarter reflected an increase in corporate treasury deposits as well as growth in wealth and investment management and corporate investment banking. Turning to Slide 17. Non-interest income increased $810 million or 9% from a year ago. Our results a year ago included losses from the repositioning of the investment securities portfolio. We had strong growth in the areas where we had focused our investments, including wealth and investment management and investment banking. You can also see the momentum we are building in driving higher fee-based revenue when you look at our results versus the second quarter. Non-interest income increased 4% as growth across all business-related fee categories more than offset a decline in other non-interest income from the second quarter, which included a gain associated with our acquisition of the remaining interest in our merchant services joint venture. Turning to expenses on Slide 18. Non-interest expense increased $779 million or 6% from a year ago. Let me highlight the three primary drivers. First, as I highlighted earlier, we had $296 million of severance expense in the third quarter. Second, we had $220 million of higher revenue-related compensation expense predominantly in the wealth and investment management business driven by strong market performance. Finally, we had higher technology and advertising expenses driven by the investment we're making in our businesses to help drive growth. Turning to credit quality on Slide 19. Credit performance remained strong and continued to improve. Our net loan charge-off ratio declined nine basis points from a year ago and four basis points from the second quarter. Commercial net loan charge-offs were stable from the second quarter with lower losses in our commercial and industrial loan portfolio largely offset by higher commercial real estate losses. Office valuations continued to stabilize, and although we expect additional losses, which could be lumpy, they should be well within our expectations. Consumers continue to be resilient as income growth has generally kept pace with increases in inflation and debt levels. Consumer net loan charge-offs declined $58 million from the second quarter to 73 basis points of average loans, with improvements across all of our consumer portfolios with the exception of auto. Non-performing assets declined 2% from the second quarter, driven by lower commercial real estate non-accrual loans. Moving to Slide 20. Our allowance for credit losses for loans declined $257 million from the second quarter, driven by lower allowance reflecting improved credit performance and lower commercial real estate loans, partially offset by higher commercial and industrial, auto, and credit card loan balances. Our allowance coverage for our corporate investment banking commercial real estate office portfolio declined from 11.1% in the second quarter to 10.8% in the third quarter. Turning to capital and liquidity on Slide 21. We maintained our strong capital position with our CET1 ratio at 11%, well above our new CET1 regulatory minimum plus buffers of 8.5%, which became effective in the fourth quarter. We repurchased $6.1 billion of common stock in the third quarter. Given that we are now managing to a CET1 ratio of approximately 10% to 10.5%, we continue to have capacity to repurchase shares, and we currently expect fourth-quarter repurchases to be roughly in line with the third quarter. During the 94% they've declined 24% since 2019. Moving to our operating segments starting with consumer banking and lending on Slide 22. Consumer, Small, and Business Banking revenue increased 6% from a year ago, driven by lower deposit costs and higher deposit and loan balances. Results also reflected the transfer of approximately $8 billion of loans and approximately $1 billion of deposits related to certain business customers previously included in the Commercial Banking operating segment. Home lending revenue increased 3% from a year ago due to higher mortgage banking fees. We continue to reduce headcount in this business, which has declined over 50% since 2022 as we have simplified the business and reduced the amount of third-party mortgage loans serviced for others by 36% over the same period. Credit card revenue grew 13% from a year ago and included higher loan balances and card fees. While we had strong new account growth, adding over 900,000 accounts in the third quarter, up 49% from a year ago, benefiting from the strong digital engagement and better production in the branches. Auto revenue declined 6% from a year ago due to loan spread compression from previous credit tightening actions, but increased 6% from the second quarter driven by higher loan balances. Auto originations more than doubled from a year ago, and loan balances have grown for two consecutive quarters, reflecting the benefit from being the preferred financing provider for Volkswagen Audi vehicles that began in the second quarter as well as growth in the rest of the portfolio. The decline in personal lending revenue from a year ago was driven by lower loan balances. Turning to Commercial Banking results on Slide 23. Revenue was down 9% from a year ago as lower net interest income due to the impact of lower interest rates and lower deposit loan balances was partially offset by growth in non-interest income driven by higher revenue from tax credit investments and equity investments. Average loan balances in the third quarter declined $7.1 billion or 3% from the second quarter, reflecting the transfer of the business customer accounts to consumer small and business banking. Turning to corporate and investment banking on Slide 24. Banking revenue grew 1% from a year ago driven by higher investment banking revenue with strong performance across leveraged finance, equity capital markets, and M&A. Our results benefited from the favorable market as well as the investments we've been making to help increase our market share. Commercial real estate revenue was down 13% from a year ago, driven by lower loan balances, the impact of lower interest rates, as well as reduced mortgage banking servicing income resulting from the sale of our non-agency third-party servicing business in the first quarter. Markets revenue grew 6% from a year ago with growth across most asset classes. Average loans grew 8% from a year ago and 4% from the second quarter. Growth reflected higher balances in Markets and Banking driven by new originations as utilization rates were relatively stable. On Slide 25, Wealth and Investment Management revenue increased 8% from a year ago driven by growth in asset-based fees, from increased market valuations as well as higher net interest income due to lower deposit pricing and growth in deposit loan balances. Underlying business drivers showed solid momentum from the second quarter in advisor recruiting, net asset flows, loan and deposit balances, and total client assets. As a reminder, the majority of WIM advisory assets are priced at the beginning of the quarter, so fourth-quarter results will reflect the higher October 1 market valuation. Slide 26 highlights our corporate results. Revenue increased year over year, largely reflecting losses we had a year ago from the repositioning of the investment securities portfolio. Turning to our 2025 outlook on Slide 27. Starting with net interest income, we still expect net interest income for full year 2025 to be roughly in line with full year 2024 net interest income of $47.7 billion. Fourth-quarter net interest income is expected to grow from the third quarter to approximately $12.4 billion to $12.5 billion. The drivers of the expected growth in the fourth quarter include continued loan growth, particularly in our commercial, credit card, and auto portfolios, as well as the benefit of the growth we had in the third quarter. Continued repricing of fixed-rate assets at higher rates, including investments in the investment securities portfolio, and higher markets net interest income. Turning to expenses, at the beginning of this year, we expected our full-year 2025 non-interest expense to be approximately $54.2 billion. We currently expect our full-year 2025 non-interest expense to be approximately $54.6 billion and fourth quarter to be approximately $13.5 billion. There are two primary drivers for the increase in our full-year expectation. First, approximately $200 million of higher severance expense than we expected at the beginning of the year. We had assumed approximately $100 million in severance expense in the 2025 guidance we provided at the beginning of the year. As we highlighted, we had $296 million in the third quarter. As we finish our budget for 2026 and plan for our efficiency initiatives next year, we could have additional severance expense in the fourth quarter that is not included in our outlook. Second, approximately $200 million of higher revenue-related compensation expense predominantly in wealth and investment management due to strong market performance in the second half of the year. As a reminder, this is a good thing as higher expenses are more than offset by higher non-interest income. In summary, our improved financial performance in the third quarter reflected the consistent progress we've been making on our strategic priorities. Compared with a year ago, we had strong growth in net income and diluted earnings per share, increased revenue by 5%, including growth in net interest income and fee-based revenue across both our consumer and commercial businesses, continued to execute on our efficiency initiatives, improved credit performance, and reduced common shares outstanding by 6% and increased our dividend. These efforts helped improve our return on tangible common equity to 15.2% in the third quarter. And as Charlie highlighted, we believe we have an achievable path to a return on tangible common equity of 17% to 18% in the medium term. We'll now take your questions. Operator: At this time, we will now begin the question and answer session. Please record your name at the prompt. If you would like to withdraw your question, you may press star 2 to remove yourself. Ken Usdin: And our first question comes from Ken Usdin of Autonomous Research. Your line is open, sir. Ken Usdin: Hey, thanks a lot. Good morning. Thanks for the updates. Just one clarification, I just wanted to wonder. Your new 17% to 18% medium term, do you have a general range of how far out you're thinking for that? Charlie Scharf: Not really. Yeah. I mean, yeah, Ken, think it's obviously longer than a year, but like it's a reasonable timeframe I think when you look at sort of medium term. Maybe I'll just circle back on that. I think just one of the things and I said it in the remarks want to be a little careful about is it obviously is dependent on a bunch of things. So I want to make sure that people take that into account. We've got this substantial amount of excess capital. So depending on how the timing with which we choose to manage that can impact it. And then it's continued positive results in the business. And so as I think it's not it's not next year, but not looking at any extended period of time either. And also note comments in there that it's not our final destination relative to our targets either. Ken Usdin: Yes. Yes. Thank you for that Charlie. Appreciate that. And second question just Mike, can I ask you if you look for a little color on the fourth quarter NII ramp? You mentioned the fixed repricing. Can you talk to us about like what you're still getting on what parts of the book on that fixed repricing? And then secondly, just do you expect market NII to be a meaningful helper to that? And just I know you're going to give us more disclosure on that next year, but any help to kind of just help us understand the third to fourth ramp a little deeper would be great. Thank you. Mike Santomassimo: Yeah. Sure, Ken. I'll try to do that. So just if you look at the drivers there's three or four things that are sort of driving increase from Q3 to Q4. First is overall market NII going up. Part of that's driven by some lending that's in there, part of that's driven by a bunch of actions that we've taken as we've grown the business. And you get the benefit as like as rates start to come down on the front end, we've got higher coupons and bonds in like the mortgage book as an example. We're doing more hedging off balance sheet than on balance sheet in some of the asset classes. Some of our commodity balances are coming down, are dragged NII. So there's a number of things that are sort of that underpin the market piece, but that a component of it. You then get the benefit of the loan growth we saw in the third quarter plus some more that we expect to see in the fourth quarter. And then you really then you get like a little bit of everything else including the fixed asset repricing that you get there. Part of that's in the securities portfolio, which you can see the AFS yields continue to grind up quarter on quarter. You get a little bit of that in the auto book. And some of the other portfolios. Ken Usdin: All right. Got it. Thanks a lot, Mike. The next question will come from Ebrahim Poonawala of Bank of America. Your line is open. Ebrahim Poonawala: Hey, good morning. Guess two questions. One, I think Charlie, mentioned $15 billion of expense saves which were used to fund investments. I think as we think about the ROE improvement from here, just remind us where the opportunities are either on headcount rightsizing of technology, automation of processes, like how big is the opportunity on the cost free of side? That would allow you to continue to invest the way you have while driving improved efficiency? If you could sort of put some framework around that. Mike Santomassimo: Hey, Ebrahim. It's Mike. I'll I'll take a shot and can chime in if he's got anything to add. I think when you think about just the efficiency, it's agenda, as we keep saying over and over, I think we still think there's a significant amount to do across the company. Some of that's people related, headcount related and you can see our headcount just gradually and coming down quarter after quarter after quarter. And we still have more to do there as you start to continue to automate more more processes. AI sort of helps on some of that for sure. But you'll see that I think just continue to get more and more efficient over time on headcount side. And then there's a whole bunch of other stuff outside of the headcount whether it's third party spend, technology coming off over time. You've got more real estate costs coming down. So there's a whole significant amount of things that sort of will will continue to kind of grind down over over time. And then I think each year we'll decide on the investment side of how much we want to redeploy back into investments based on our ability to execute there. And we'll give you sort of guidance as we go. But the efficiency work is definitely part of continuing to drive returns up. Outside of the efficiency though, it's really getting the benefit of the investments we've been making across each of the business investment banking cards, the rightsizing of the mortgage business, wealth management continuing to grow and and the rest of them. And then it's as Charlie said in his remarks, it's it's optimizing capital levels as well. And I think when you add all that stuff, there's multiple paths to get there. And I think we just got to continue to execute on all the things that we've laid out. Ebrahim Poonawala: That's helpful, Mike. Thank you. And I guess just on capital, so you talked about the fourth quarter buybacks. In India, give us a perspective on just inorganic growth like it is interesting like you emphasized being a U.S. Bank and such in terms of your focus. It often comes up that could Wells do an M&A on wealth or global investment banking. And I'm not saying it one's right versus wrong, but would love to get your perspective if you think there are inorganic opportunities that would allow you to kind of accelerate some of these growth strategies in any of the businesses? Thank you. Charlie Scharf: Well, guess I start with we certainly have opportunities to think about things that we wouldn't have thought about in the past. And so it's always incumbent upon us to think about are there opportunities that would be additive to the strategy that we've laid out. What I would say is that anything that I think we would consider at this point we would think about in the context of what we've described this company as and what our strategy is. So it wouldn't be about going into something totally different. It would be asking the question, does it help us get stronger in the businesses that we've said that we want to pursue. But I would say that like what is we spend almost all of our time thinking about are the organic opportunities that we have. Given how constrained we have been and our ability to think differently about those things now. So that certainly I think is the thing that we get most excited about. But we'd be wrong not to about the inorganic things. But I just want to make sure we're not overthinking that at this point. Ebrahim Poonawala: Okay. Thank you. Operator: The next question will come from John McDonald of Truist Securities. Your line is open, sir. John McDonald: Hi, good morning. I was wondering, Mike, if you could give some more color on loan growth, which seems to have good momentum. Specifically, you mentioned not having as much drag. From some areas like CRE and auto and some of it seems like the front book momentum as well. Maybe you could give us a little color there and how much build out of the investment bank might be creating balance sheet opportunities too? Mike Santomassimo: Yeah. Thanks John. Look I think starting on the consumer side, you're seeing less of a drag from residential mortgage coming down. And so that's certainly helpful. And I think that will continue to likely decline in terms of the pace of decline there I think likely continues to get better. And you're seeing really good growth in card and auto. And for the first time in a while we saw overall consumer loans grow on a linked quarter basis. And we're seeing really good traction both on the card space and in auto. So I think hopefully that will continue. So that's good. On commercial side of things, you still see a little bit of a decline in the commercial real estate book. We're seeing the office portfolio in particular pay off each quarter. I think we're down roughly a third from just a couple of years ago in that portfolio. And so that's a good thing I think in that case. But we're seeing good demand across a lot of the other portfolios. So I think over a long slightly longer period of time, you'll start to see that overall grow again. And then in the C&I space, I think what you're seeing is a couple of things. One, we are seeing some growth across the CIB space particularly in some of the non-bank financial loan categories. We're seeing growth there. But we're also seeing growth in a lot of the other sectors which is really good to see it be broad-based coming across the kind of general banking book there. What we're not seeing is growth in the commercial bank yet. And really that's just because the utilization rates and the revolvers continue to be pretty stable now for a number of quarters. I think that likely picks up over time as people continue to gain more confidence that the economy is going to end up in a really in a good place and some other factors there and rates start to come down help as well. So we're seeing good growth despite still not seeing that utilization pickup in the commercial banks. So hopefully that will be a good enabler for more growth as we go into next year. John McDonald: And then maybe a follow-up specifically on credit card. Are you seeing new customers to the bank in card? Or are they mostly growth in existing Wells Fargo customers? Mike Santomassimo: Both. And I think depending on the week, it could be, you know, fifty fifty, sixty forty, the majority are still existing customers coming through, but there are a lot of new to bank customers coming through there. And I think you may have noticed in supplement, did see a big uptick in card originations this quarter relative to last quarter. And the really good part about that is that that's coming out of our branches and coming from our own digital properties. So wellsfargo.com. So it's really good to see that the majority of that growth is actually coming from our own assets, which obviously is the lowest cost way to originate stuff and usually has pretty good credit self-selection there in terms of credit profile. So overall we're pretty happy with what we're seeing there and it's bringing both new customers and sort of deepening what we're doing with the rest of the base. Charlie Scharf: And just to remind you of what we said in the past, but tacking on to this quarter, what Mike said is important, which is like it is continued really good execution inside of the broader bank relative to who the card business is pursuing. And not focused on well, on continued strong credit performance. As part of what this is like we're not chasing credit to get growth in accounts or growth in receivables. John McDonald: Got it. Thank you. Operator: The next question will come from Scott Siefers of Piper Sandler. Scott Siefers: Good morning, Thanks for taking the question. So wanted to start on credit. All the indicators are excellent. Was just hoping you could expand a little on your thoughts on the overall health of the consumer. And then just within there, there are just sort of more emerging concerns on auto in particular. I know you all have been working to become more of a kind of more fulsome lender. How you feeling about sort of the credit box? So maybe broadly thoughts on the consumer and then how it trickles down to you all in particular? Charlie Scharf: Sure. I'll start Mike and then you can pick up. It's one of these things that's have very little to say that's different from what we said last quarter. And it's because it's the performance of the consumers just very, very consistent. Consumer spend kind of week after week is up the same amount on that we've seen over the past bunch of months. On both credit and debit. If fuel prices go up, then you see less discretionary spending and vice versa. And we don't see any meaningful changes across different affluence levels. And again, we don't have any real subprime to speak of in our book. So it might not be representative of necessarily what everyone else might see out there. But we just see a lot of consistency. In fact, when we look at it, payment rates are better as opposed to even flat or worse. Deposits remain strong. And so when you look at it, see really strong credit results. You see strong consumer spend. And stable deposits and those things just kind of paint a picture of a consistently strong consumer. Even though what you read about is would lead you to believe that they're being more cautious. Our results just say that there's a high degree of consistency there without any real pockets of slowing. On the corporate side, we do see consistency in terms of especially as Mike pointed out, middle market companies being cautious. Whether it's not replacing people, not building inventories, as they want to see the whole tariff outcome play out and anything on the broader market. And then specifically in the auto business, the answer for us is we don't see any real change in our results. As we talk about becoming a broader spectrum lender, the volumes that we do at the credit levels below what we would have done in the past are very small. But are performing as we would have expected. So no negative surprises there at this point. Scott Siefers: Perfect. Okay. Thank you. And then Mike, just on the NII, definitely appreciate all that color. I think a lot of your focus was sort of on the asset side, whether it's repricing or volume what have you. Just curious about sort of what you're seeing and expecting on the deposit cost side now that the Fed's in sort of this round two of easing? Mike Santomassimo: Yeah. I mean, I you know, I think on the if you start on the commercial side, you know, the betas are are we still expect them to be, know, quite high. And that's been the experience that been the experience so far. And no reason to think that's not going be the case as we go through the rest of the year and into next year. On the consumer side rates went up less, right? So the betas are going be lower just by definition. But I but we're not seeing any we're not seeing any meaningful competition that's pushing pricing up for sure. And so I think you'll see that grind down a little bit as we go through the year. But so pretty much as we expected so far. Scott Siefers: Perfect. Okay, good. Thank you all very much. Operator: The next question will come from Erika Najarian of UBS. Your line is open. Erika Najarian: Hi, thank you. My first question is a bit of a two-parter, Mike, on the efficiency agenda towards 17% to 18%. The first, you mentioned third-party spend in your prepared remarks. I think that year to date it's about $3.3 billion annualizing of $4.4 billion.0 unchanged from last year. I guess the first question is, is that an opportunity to fund future sort of more revenue-related comp or initiatives? And second, it's clear the momentum in IB and trading and even card. But I'm wondering as we think about WIM, and sort of a sub-twenty pretax margin, obviously your peers are higher than that. I'm wondering if that's an opportunity as well as you march towards 17% to 18%. And should we be thinking about that pretax margin improvement on the revenue side or the expense side? Mike Santomassimo: Okay. There's a lot there. I guess if I don't hit it all just remind me. Maybe I'll start at the end first. On wealth management margins, there's certainly an opportunity to improve our margins in wealth management. And if you think about what drives margins, in that business, it's actually doing a lot more banking and lending business with customers. That's near that's one of the priorities that the team has had now for a while is to continue to do more. And if you look at our lending per dollar of assets or however you want to look at the penetration of lending in that business. It's well below where our peers are on really any way to measure it. So I think as you sort of look at that business that's certainly going be one of them. Second is continuing to make the advisors more productive. That could be through more alternatives, products or other tools that we give them to continue to grow their books. So there's a whole bunch of initiatives that underpin some of that. But we do expect to see a margin improvement in that business and that will contribute to overall returns as we look forward. And then just broadly on efficiency in the professional services, some of that some of the professional services line is driven by volumes in places like markets think market data and other pieces of it. But there is opportunity to continue to get more efficient across the number of vendors we use, There was still cost for completing some of the regulatory work this year. And so there's a whole number of things that will continue. But professional on-site services is definitely one of them. But as I said earlier, there's a there's hundreds of projects that are ongoing at any given point that drive the efficiency work that we're doing. Some of that's going to be the third-party spend, but a lot of it is also going to be continuing to rationalize some of our own costs around real estate continue to drive automation, which not only saves us money, but improves client experience in most of what we do. And so there's a whole range of things that I think will drive that efficiency agenda over time. Erika Najarian: Great. And my second question, I am unfortunately, it's not any less complicated. But in the previous two peer calls this morning, NDFI came up as a significant topic. And wealth has clearly been a big player here for a very long time, no issues. And this is a little bit a deja vu from a call. John will probably recall this from five years ago. And I'll ask this, the question the same way I asked JPMorgan for both you, Charlie and Mike. NEFI is clearly a sort of a broad swath, a broad definition. What should investors be asking banks in terms of assessing NDFI exposure and risk as it relates to future credit quality, And second, should investors be concerned about SSFA in terms of its role in allowing NDFI when wrapped in different structures to have an RWA that could be well less than 100%? Mike Santomassimo: Yeah. Maybe I'll take a shot and then I'm sure Charlie may have a view as well. You know, I think Eric it first starts with understanding what the exposures are. Not all lending to non-bank financials is the same, right? And it's not all credit equal. And so for our portfolio, it really is the biggest by far the biggest piece of that is lending that we do to the big private equity firms and providing capital call facilities through our fund finance group. And I think if you look at we very much focus that lending on the big established players which obviously reduces potential issues that you have when you lend in that area. And it's all pretty plain vanilla stuff that we do for that. And then when you start going down below that, the next piece is the lending we do against middle market loans or commercial loans there. And really our teams have been at this for a long time. They have a really good track record. We underwrite every single loan. We don't lend against portfolios at large. We underwrite all of them. So we underwrite 2,500 to 3,000 loans as an example in that business. And really have a good perspective on what's happening across a pretty broad borrower base there and that informs how we do underwriting. We're cross collateralized against if there's any issues with individual loans that get marked regularly. And so I think that so that we feel really good about the kind of risk return profile that sits on that book. Then the rest of it is spread across a whole multitude of different asset classes, whether it's consumer-oriented, receivables, vendor finance, supply chain. And so when you're really unpicking each component of it, you really need to make sure that you understand sort of the risks that are embedded in there and that you're managing it appropriately. And I think the regulatory capital framework is just one of those inputs into making sure you're thinking about how much capital you need and how comfortable you should be relative to the underlying risk that sits there. Erika Najarian: Great. I'm sure I have a lot of follow-up questions, but I'll save it for my follow-up call with IR. Thank you so much. Operator: The next question will come from Betsy Graseck of Morgan Stanley. Your line is open. Betsy Graseck: Hi, good morning. So thanks for the update on the RoTCE trajectory from here. Two-part question. One is on the trading, you indicated, look, NIM came down because trading leaned into trading, makes a ton of sense. I'm wondering, do you feel trading is maxed out relative to your risk profile and what you're interested in doing and what your client demand is? Or is there more that we should expect you're going to be leaning into trading same pace QQ or year on year? Or is it slowing from here? Mike Santomassimo: Well, I don't think we're gonna get into exact pacing, but I think we still have a lot of opportunity across the markets business. Some of that will be in financing trades. And so a lot of what you saw in this quarter was us putting on financing trades with customers. A little bit of real trading inventory and growth there. And I think we've got a lot of opportunity to do more of both of those over a period of time kind of all within the risk appetite that we have. Betsy Graseck: Okay. And then on the $2 billion of compliance expenses that you initially had to spend, has all of that come out? Are you now back to what you would argue is normalized level of expense run rate for that piece of the business? Or is there more to go there? Mike Santomassimo: No. I think as Charlie said in his remarks, we're spending more now than we did before he got here. Right. And that cost is still in the run rate. And as we've talked about over many quarters now is like over a long period of time, a longer period of time, we'll continue to look for ways to optimize that spend. A lot of what we built was built with plans that we put together five plus years ago at this point. And I think as we look into today, there's plenty of ways that we can make it more efficient whether it's through different use of technology or redefining different aspects of a process. But some of that just takes time for us to get out in a reasonable way. So the only thing that we've really reduced what I'll call it just like some of the project spend the third-party consultants and whatnot that helped us alongside which in the big scheme of things relative to the total amount of money is not a lot of money. So most of that money is still being we're still spending on the things that we put in place. And as Mike said, over time, we do have the opportunity to figure out how to do those things more efficiently now that we're actually living with it. Betsy Graseck: Right. So that should be a material part of the improvement in expense ratio from here. Charlie Scharf: It should be an opportunity for us to figure out how we're going to be able to spend smartly on the things that we want to spend on and be smart about the overall expense base of the company. Betsy Graseck: Thank you. Operator: The next question will come from Matt O'Connor of Deutsche Bank. Your line is open. Matt O'Connor: Good morning. I wanted to follow-up on the comments in the prepared remarks about targeting top five within investment banking. And I guess in short, just how do you get there? It's a pretty big step up from where you are now. I know you made a bunch of hires a few years ago that probably still have some accusing benefits as the wall improves here, but maybe just talk to kind of that big leap from six to five and how much is, you know, already kind of baked in the franchise and how much do you need to hire or expand from here? Thank you. Mike Santomassimo: Matt, it's Mike. Look, think we've added a lot of people over the last three point five years into the investment bank. And I think you're seeing that wallet share market share grow gradually each year. And I think we had a really good investment banking fee quarter this quarter. I think it's our highest quarter we've ever had. And so you're starting to see some of that investment come through. And by the way some of the some of those fees are also generated by people who have been here a long time as well. And so it's a good combination of some of the newer folks and the team that's been in place. And I think we'll just grind that up. I think grind up the wallet share over time. And I think we're going to continue to invest in sectors that we think we need to expand coverage. Think some of the technology sub-sectors I think we'll continue to look to add in people there. And where we need, we'll add some folks some of the product areas like M&A. But it's just going to be a methodical sort of continued effort to get there. And I think we feel that it's more than achievable to get to top five. Charlie Scharf: And the only thing I would add maybe a couple of things would be first of all, we thought it would just be helpful to just kind of put a marker out there of we wanted to get to. We talk about being top five internally. There too, we don't necessarily talk about that as the endpoint as like a waypoint along the way. We don't have a time frame that we feel like we've got to get there by. We're going to continue to do more of what we've been doing. Which is looking at where this franchise has strengths relative to the industries that we're good in, we lend, where we've got cash management relationships, where we have different levels of expertise across the company. Where we have underpenetrated customers like we have in our commercial banking franchise where there's opportunities to do more for them. And if we do that well, then given what we have to offer, then we think we'll continue to be able to not just grow share, make more money. I mean, that's what this is all about. It's about higher returns and making more dollars of profit both of those things combined. We compete with really strong people. But when you look at the people that we still that are still in front of us, we think ultimately we can have as much if not more to offer. And so it will be a continued disciplined build out. That we think we'll continue to do methodically and will help increase both our rankings but also profitability and returns. Matt O'Connor: Okay. Thank you. That's very helpful. And I don't have any follow-ups. Thanks. Operator: The next question will come from John Pancari of Evercore ISI. Your line is open. John Pancari: Regarding the 17 to 18% route to target, can you maybe help us in how to think about the efficiency ratio that you baked into that assumption? And could does it factor in that you're could reach the high 50s as you focus on the efficiency opportunity that you discussed earlier on the call? Mike Santomassimo: Yes, John, it's Mike. I'll probably give you a slightly unfulfilling answer, so I'm not going to give you an exact number. But I think as you sort of get to 17% or 18% returns, you should start getting to a more comparable efficiency ratio as part of that, right? And I think that would reasonable people can have a slightly different number, but that would get you to a number certainly much lower than it is right now. And so whether that ends up in the high 50s or 60s, like we'll see, but like it should be a meaningful improvement as we get to a higher return. John Pancari: Okay. All right. Thanks. And then on your CET1, the 10% to 10.5%. Could you maybe just talk to us a little bit about the cadence of getting down to that 10% to 10.5% level versus the current 11%? In terms of how much would be ideally coming from organic opportunity versus buyback? And then separately, I know you also put in the comment there that you may have the opportunity to manage the CET1 below that level over time depending upon the regulatory backdrop. What specifically on the regulatory front is the key driver there? Mike Santomassimo: Well, think we're still waiting on revised rules around regulatory capital all of Basel III and the correspondent G SIB and the rest of the package there. So I think we got to wait and see where that goes. But in terms of we've given you that we're to buy $6 billion or approximately about that in the fourth quarter. That's the intention at least at this point. And then the rest is just it's going to be a function of the pacing of the growth that we can see. Coming from each of the businesses. And then I think we'll get down to where we're going to imagine it manage it in a kind of in a reasonable time period, some of it may be a function of the pace of growth. John Pancari: Okay, great. Thanks, Mike. Operator: The next question will come from Gerard Cassidy of RBC. Your line is open, sir. Gerard Cassidy: Thank you. Good morning, Mike. Good morning, Charlie. Mike, you touched on credit quality how obviously you guys are seeing some stabilization in the office market and you're seeing lower non-accrual loans. Can you share with us just any color outside of the office market in terms of multifamily or other commercial real estate properties, any trends that you guys are noticing that may be different than earlier in year? Mike Santomassimo: Not really. I think there it's pretty stable overall. And I think the rest of the portfolio is performing quite well. And so you're not seeing any deterioration really or any real change in trend. I think things have been quite stable. If anything in the multifamily space where there were pockets of excess supply in certain parts of the country that's seems to be getting work through in reasonable way. But otherwise, I'd say things have been pretty consistent across the rest of the different parts of the commercial real estate portfolio for a while now. Gerard Cassidy: Okay. And it was a curse a year or two ago to grow commercial real estate mortgage. Do you think that we could see commercial real estate mortgage growth in 2026 for you guys? As if we see continued evidence of bottoming out of the commercial real estate markets? Mike Santomassimo: Are you talking about office or are you talking about the broader commercial real estate portfolio? Gerard Cassidy: In both areas generally speaking. Mike Santomassimo: Yes. I don't anticipate the office portfolio to grow really at all or much. I think on the broader commercial real estate, think there's opportunity to continue to look at like areas of growth there for sure over some reasonable period of time. When that actually manifests itself will be a function of what opportunity there is. But I do want to just come back and just be clear about one thing. Mike's talking about just overall total loans. We are lending across all the different categories in the commercial real estate space. Including office where we think their quality properties with the right sponsors and backing and things like that. So we're actively and have been actively looking at where we can continue to add loans. And the only question is how much is that relative to the payoffs that we continue to see. Gerard Cassidy: Very good. Thank you, Charlie. And then just as a follow-up, some of your peers are using security risk transfers to manage risk. Is that something that you guys have thought about or something that you might consider if you think you need to do it to manage risk? Mike Santomassimo: We've done one Gerard in the past and in the not so distant future and you know we'll decide as we go if we think we need to do more. Gerard Cassidy: Very good. Appreciate it Mike. Thank you. Charlie Scharf: But I'd just add like it is a tool used like in the right size the right way that we'd look at. But at the same time, when we underwrite something and when we do something inside the company, we do it with with the risk lens of we're going to keep it. And so so that's not going to change. And so the question is just as time goes on and we want to manage the overall risk profile of the company, doesn't make economic sense for us to do that. Gerard Cassidy: Got it. Okay. Thank you, Charlie. Operator: And the final question will come from Chris McGratty of KBW. Your line is open. Chris McGratty: Great. Thanks for getting me in. Within your deposit growth expectations within retail specifically, could you speak to geographies or products you're pushing the hardest and maybe where there's the biggest opportunity for growth over the coming years? Thanks. Mike Santomassimo: Well, I think on the consumer side, what we're most focused on is growing checking accounts. And grow and expanding sort of the Active core primary checking accounts. Households. And I think when you look out over a long period of time, that's that's our focus is. Operator: Okay. Thanks everyone for the questions. We appreciate it. We'll see you next time. Thank you all for your participation on today's conference call. At this time, all parties may disconnect.
Operator: Hello, and welcome to Citigroup Inc.'s Third Quarter 2025 Earnings Call. Today's call will be hosted by Jennifer Landis, Head of Citigroup Inc. Investor Relations. We ask that you please hold all questions until the completion of the formal remarks, at which time you will be given instructions for the question and answer session. Also, as a reminder, this conference is being recorded today. If you have any objections, please disconnect at this time. Ms. Landis, you may begin. Jennifer Landis: Thank you, Operator. Good morning, and thank you all for joining our third quarter 2025 earnings call. I'm joined today by our Chief Executive Officer, Jane Fraser, and our Chief Financial Officer, Mark Mason. I'd like to remind you that today's presentation, which is available for download on our website, citigroup.com, may contain forward-looking statements which are based on management's current expectations and are subject to uncertainty and changes in circumstances. Actual results may differ materially from these statements due to a variety of factors, including those described in our earnings materials as well as in our SEC filings. And with that, I'll turn it over to Jane. Jane Fraser: Thank you, Jennifer, and a very good morning to everyone. This morning, we reported another very good quarter with net income of $3.8 billion and earnings per share of $1.86 with an ROTCE of 8%. Now, excluding the goodwill impairment from the Banamex transaction, our adjusted EPS was $2.24 with an adjusted ROTC of 9.7%. Revenues were up 9%, and every business had record third-quarter revenue and improved returns. We continue to generate positive operating leverage for the firm and in each of our five businesses. The consistently strong results that we've been delivering are a consequence of how we have fundamentally changed the bank in recent years. We're running the businesses differently and capturing the synergies between them. We've added new senior leaders to complement the excellent talent we already had. We are disciplined stewards of our shareholders' capital, investing it where we should and returning what we don't deploy. And the best part is there is much more upside ahead. Turning to the businesses, Services had a record quarter with revenues growing by 7%. Pleasing growth in cross-border transactions and U.S. Dollar clearing reflects the sharp focus we put on increasing fee revenue. AUCA grew 13%, reaching nearly $30 trillion. New client wins and share gains demonstrate the confidence our clients have in our ability to help them navigate a very dynamic global environment and to lead through innovation. Despite low volatility, markets had a record third quarter. Revenues were up 15% as we continue to drive momentum and traction with clients. Activity and rates were particularly high, and equities grew nicely, with continued progress in prime where balances were up over 40%, complementing our historical strength in derivatives. In banking, increased clarity around tariffs and record equity prices fueled CEO confidence. We capitalized on this with investment banking fees up 17%, with continued growth across all products. On the back of our investment in talent, we improved our position in tech, healthcare, consumer, and responses. We continue to add talent to the team, which will help us deepen or establish relationships that will bear fruit over the next two to three years. Wealth had another good quarter with revenue up 8%, driven by Citi Gold and the private bank. Our emphasis on growing investment assets resulted in record net new investment assets of $18.6 billion and client investment assets increasing by 14%. We announced a new partnership with BlackRock, where they will manage $80 billion of our clients' assets, fully aligning to an open architecture strategy. USPB had record quarterly revenue of $5.3 billion, reaching 12 straight quarters of positive operating leverage, and delivered an ROTCE of over 14%. We drove momentum in branded cards with the well-received launch of our Citi Strata Elite card, and this quarter, we will introduce the new mid-tier product to round out the Citi Advantage portfolio. It will elevate the travel experience for American Airlines customers and create access to premium benefits. In the retail bank, we continue to innovate, including by the launch of instant payment through FedNow and enabling digital issuance for Citibank debit cards. The retail bank continues to strengthen as a pipeline to our wealth business, with $4 billion in deposits transferred in the quarter. Wealth is capitalizing on those transfers, and we continue to see improved investment penetration and significantly higher investment-related revenue from those customers. We returned over $6 billion in capital to our common shareholders during the third quarter. The $5 billion in share repurchases was $1 billion more than we guided, and this reflects our commitment to returning capital. Year to date, we have repurchased $8.75 billion of shares as part of our $20 billion repurchase plan. We ended the quarter at a common equity Tier 1 capital ratio of 13.2%, over 100 bps above our regulatory requirement at quarter-end. The agreement with Fernando Chico Pardo to purchase a 25% equity stake is a very significant step towards the divestiture of Banamex and progresses the overall timeline to deconsolidation and beyond. We are confident that this path is in the best interest of our stakeholders in terms of certainty and value, and we could not be more pleased to have Fernando, with his proven track record for investors, as our partner. As we simplify, we continue to invest in technology to catalyze our transformation and become a more agile and modern bank. We have been relentless in our execution, and it is creating results. Over two-thirds of our transformation programs are at or close to our target date, and we're making very good progress in the remaining areas. I'm particularly pleased with the improvement in our controls this year through standardizing, automating, and digitizing them. We continue to lead in digital payments innovation, enabling payments clearing and settlement capabilities to operate on an always-on basis across multiple borders and currencies. As networks evolve towards an always-on future, we are taking the next step by integrating Citi token services with our 24/7 clearing platform. Now, this integration will allow Citi clients to seamlessly send funds to third-party banks in real-time within our U.S. Dollar clearing network, delivering true interoperability across more than 250 institutions. We are committed to embedding AI into how we work. Nearly 180,000 colleagues in 83 countries now have access to our proprietary AI tools and have used them almost 7 million times this year. These tools save hours each day by automating routine work, analyzing data, and creating materials in minutes instead of hours. Our services and USPB teams are using AI to resolve client inquiries faster. In wealth, advisors are gaining real-time insights that help them deliver more personalized advice. AI-driven automated code reviews have exceeded 1 million so far this year and are dramatically improving our developers' productivity. This innovation alone saves considerable time and creates around 100,000 hours of weekly capacity as a very meaningful productivity uplift. In September, we launched the pilot of agentik.ai for 5,000 colleagues. It allows complex multi-step tasks to be completed with a single prompt, and the early results are very promising. We will expand access to this in the months ahead. Finally, we have launched a firm-wide effort to systematically embed AI in our processes end-to-end to drive further efficiencies, reduce risk, and improve client experience. Taking a step back, the macro environment reflects the global economy that's proved more resilient than many anticipated. The U.S. continues to be a pace setter, driven by consistent consumer spending as well as tech investments in AI and data centers. That said, there are pockets of valuation fuzziness in the market, so I hope discipline remains. But overall, while growth is cooling somewhat and keeping an eye on the labor market, America's economic engine is indeed still coming. In Asia, China's domestic spending has slowed. However, the investments they are making in technology are staggering, and the world should take notice. India's fundamentals of a young, tech-savvy labor force and robust domestic consumption continue to drive high growth there. In Europe, structural challenges still need to be dealt with for the continent to escape this low-growth cycle. One certainty through all of this is our commitment and ability to serve our clients with excellence no matter what challenge they face. As you can see, the steady and disciplined execution of our strategy is delivering better business performance quarter after quarter and improving our return. The cumulative effect of what we have done over the past years—our transformation, refresh strategy, our simplification—have put Citigroup Inc. in a materially different place in terms of our ability to compete. We know success isn't linear, but I am so proud of the progress our people have made and how things are coming together. We intend to end the year with momentum into 2026 as we close in on our medium-term return target. In terms of what will come next, we very much look forward to sharing that with you at our next Investor Day, which will be on May 7. There is still so much upside left for us to capture, and we look forward to laying out how we are going to do it. With that, I'll turn it over to Mark, and then we'll be happy to take your questions. Mark Mason: Thanks, Jane, and good morning, everyone. I'm going to start with the firm-wide financial results, focusing on year-over-year unless I indicate otherwise, and then review the performance of our businesses in greater detail. On Slide six, we show financial results for the full firm. This quarter, we reported net income of $3.8 billion, EPS of $1.86, and an ROTCE of 8% on $22.1 billion of revenues, generating positive operating leverage for the firm and each of our five businesses. On an adjusted basis, excluding the impact of a notable item consisting of the goodwill impairment that Jane mentioned earlier, we reported net income of $4.5 billion, EPS of $2.24, and an ROTCE of 9.7%. Total revenues were up 9%, driven by growth in each of our businesses and legacy franchises, partially offset by a decline in corporate other. Net interest income, excluding markets, which you can see on the bottom left side of the slide, was up 6%, driven by USPB services, wealth, legacy franchises, and banking, partially offset by a decline in corporate other. Non-interest revenues, excluding markets, were up 12% as better results in banking, wealth, and legacy franchises were partially offset by declines in corporate other services and USPB. Total markets revenues were up 15%. Expenses of $14.3 billion were up 9%, largely driven by the goodwill impairment I just mentioned. On an adjusted basis, expenses of $13.6 billion were up 3%. Cost of credit was $2.5 billion, primarily consisting of net credit losses in U.S. Card as well as a firm-wide net ACL bill. Looking at the firm on a year-to-date basis, total revenues were up 7%, driven by growth in each of our five businesses along with the benefit of foreign exchange translation, partially offset by a decline in all other. Expenses, which have also been impacted by foreign exchange translation, were up 2% and flat on an adjusted basis. We've generated positive operating leverage for the full firm and each of our five businesses and reported an ROTCE of 8.69.2% on an adjusted basis. On Slide seven, we show the expense and efficiency trend over the past five quarters. On an adjusted basis, this quarter we improved our efficiency ratio by approximately 360 basis points. The increase in adjusted expenses was driven by higher compensation and benefits along with the impact of foreign exchange translation. As you can see on the bottom right side of the slide, the increase in compensation and benefits was driven by performance-related compensation, higher severance, and investment in transformation and technology productivity and stranded cost reduction, partially offsetting continued growth in the businesses. Year to date, we have incurred approximately $650 million of severance, slightly above our original expectation for the full year. As we've said in the past, we are very focused on managing our expense base in a disciplined manner, reducing stranded costs, and generating productivity savings to largely self-fund investments in transformation technology and the businesses. This discipline, combined with top-line revenue, will continue to drive improvement in our operating efficiency. On Slide eight, we show consumer and corporate credit metrics. As I mentioned, the firm's cost of credit was $2.5 billion, primarily consisting of net credit losses in U.S. Card as well as a firm-wide net ACL bill. Our reserves continue to incorporate an eight-quarter weighted average unemployment rate of 5.2%, which includes a downside scenario average unemployment rate of nearly 7%. At the end of the quarter, we had nearly $24 billion in total reserves with a reserve to funded loan ratio of 2.7%. We continue to maintain a high credit quality card portfolio with approximately 85% to consumers with FICO scores of 660 or higher and a reserve to funded loan ratio in our card portfolio of 8%. It's worth noting that across our U.S. Cards portfolios, delinquency and NCL rates continue to perform in line with our expectation. Looking at the right-hand side of the slide, you can see that our corporate exposure is primarily investment grade, and while corporate non-accrual loans increased in the quarter, resulting from idiosyncratic downgrade, they remain low, as do corporate net credit losses. We feel good about the high-quality nature of our portfolios, which reflect our risk appetite framework and our focus on using the balance sheet in the context of the overall client relationship. Turning to capital and the balance sheet on Slide nine, where I will speak to sequential variance. Our $2.6 trillion balance sheet increased 1%, driven by growth in cash and loan. End-of-period loans increased 1%, driven by markets and services. Our $1.4 trillion deposit base remains well diversified and increased 2%, driven by services and wealth. We reported a 115% average LCR and maintained over $1 trillion of available liquidity resources. We ended the quarter with a preliminary 13.2% CET1 capital ratio, which is 110 basis points above our 12.1% regulatory capital requirement during the third quarter. Effective October 1, our new standardized CET1 capital ratio requirement is 11.6%, which incorporates the reduction in our SCB from 4.1% to 3.6%. That said, we're still waiting for clarity from the Federal Reserve on whether the averaging of STB results from the previous two consecutive years will become effective in the next few months. Given this uncertainty, we will be targeting a standardized CET1 ratio closer to 12.8%, which incorporates a two-year average SCB of 3.8% as well as a 100 basis point management buffer. As we've said in the past, we remain very focused on efficient utilization of both standardized and advanced RWA while providing the businesses with the capital needed to pursue accretive growth opportunities. We will continue to prioritize returning capital to shareholders through buybacks, as evidenced by the $5 billion of buybacks in the third quarter and nearly $9 billion year to date. Turning to the businesses on Slide 10, we show the results for Services in the third quarter. Revenues were up 7%, driven by growth across both TTS and Security Services. NII increased 11%, primarily driven by the increase in average deposit balances as well as higher deposit spreads, while NIR was down 3% due to the impact of higher lending revenue share. Total fee revenue was up 6%. We see very strong activity and engagement with corporate clients and momentum across underlying fee drivers, with cross-border transactions up 10%, U.S. Dollar clearing volume up 5%, and assets under custody and administration up 13% as we continue to roll out our innovative products and services with digital capabilities into new markets. Expenses increased 5%, primarily driven by higher compensation and benefits, including severance, as well as higher volume and other revenue-related expenses. Average loans increased 8%, driven by continued demand for trade loans as we continue to support clients as they plan for potential shifts in trade corridors. Average deposits also increased 8%, with growth across both North America and international, largely driven by an increase in operating deposits. Services generated positive operating leverage for the fifth consecutive quarter and delivered net income of $1.8 billion with an ROTCE of 28.9% in the quarter and 26.1% year to date. Turning to markets on Slide 11. Revenues were up 15%, driven by growth across both fixed income and equity. Fixed income revenues increased 12%, with rates and currencies up 15%, largely driven by growth in rates amid policy uncertainty and elevated client activity. Spread products and other fixed income were up 8%, largely driven by higher mortgage trading, higher financing activity, and lower commodities activity. Equities revenues were up 24%, driven by higher client activity in derivatives, increased volumes in cash, and continued momentum in prime with balances up approximately 44%. Expenses increased 5%, primarily driven by higher compensation and benefits along with the impact of FX translation. Transactional and product servicing expenses were down as growth in transaction volumes was more than offset by efficiency actions. Average loans increased 24%, primarily driven by financing activity and spread product. Markets generated positive operating leverage for the sixth consecutive quarter and delivered net income of $1.6 billion with an ROTCE of 12.3% in the quarter and 13.5% year to date. Turning to banking on Slide 12. Revenues were up 34%, driven by growth in corporate lending and investment banking. Investment banking fees increased 17%, with growth across all products. M&A was up 8%, with momentum across several sectors and continued share gains with financial sponsors and more sell-side activity. ECM was up 35%, with growth across all products, notably in convertibles given the favorable environment. DCM was up 19%, driven by leveraged finance. Corporate lending revenues, excluding mark-to-market on loan hedges, increased 39%, driven by an increase in lending revenue share. Expenses increased 2%, driven by higher volume-related transactional and product servicing expenses as well as compensation and benefits, which includes recent investments we've made in the business. Cost of credit was $157 million, which included a net ACL build of $148 million driven by changes in portfolio composition, including exposure growth. Banking generated positive operating leverage for the seventh consecutive quarter and delivered net income of $638 million with an ROTCE of 12.3% in the quarter and 10.7% year to date. Turning to wealth on Slide 13, revenues were up 8%, driven by growth in Citi Gold and the Private Bank, partially offset by a decline in Wealth at Work. NII, which you can see on the bottom left side of the slide, increased 8%, driven by higher deposit spread, partially offset by lower mortgage spread. NIR increased 9%, driven by higher investment fee revenues as we grew client investment assets by 14%, despite a reduction of approximately $33 billion related to the sale of our trust business. We had record net new investment assets of $18.6 billion in the quarter and over $52 billion in the last twelve months, representing approximately 9% organic growth. Expenses increased 4%, driven by investments in technology and volume-related transactional and product servicing expenses, partially offset by continued productivity savings. End-of-period client balances continued to grow, up 8%. Average loans were up 1%, and we continue to be strategic in deploying the balance sheet to support growth in client investment assets. Average deposits were flat, as operating outflows and a shift from deposits to higher-yielding investments on Citi's platform were offset by net new deposits as well as client transfers from USBB. Wealth had a pretax margin of 22%, generated positive operating leverage for the sixth consecutive quarter, and delivered net income of $374 million with an ROTCE of 12.1% in the quarter and 12.5% year to date. Turning to U.S. Personal Banking on Slide 14. Revenues were up 7%, driven by growth in Branded Cards and Retail Banking, partially offset by a slight decline in retail service. Branded cards revenues increased 8%, driven by higher loan spreads, higher interest-earning balances, which were up 5%, and higher gross interchange, partially offset by higher rewards costs. We continue to see strong customer engagement, with spend volume also up 5%. Retail Banking revenues increased 30%, largely driven by the impact of higher deposit spread and balances. Retail Services revenues were down 1%, largely driven by higher partner payment accrual. Expenses were flat, as lower advertising and marketing expenses as well as compensation and benefits were offset by higher volume-related transactions and product servicing expenses. Cost of credit was $1.8 billion, driven by net credit losses in card. Average deposits increased 6%, as net new deposits were partially offset by the client transfers to wealth that I mentioned earlier. USPB generated positive operating leverage for the twelfth consecutive quarter and delivered net income of $858 million with an ROTCE of 14.5% in the quarter and 12.9% year to date. Turning to Slide 15, we show results for All Other on a managed basis, which includes corporate other and legacy franchises and excludes divestiture-related items. Revenues were down 16%, with a decline in corporate other partially offset by an increase in legacy franchise. The decline in corporate other was driven by lower NII resulting from actions that we've taken over the past few quarters to reduce the asset sensitivity of the firm in a declining rate environment as well as lower NIR. Growth in legacy franchises was driven by Mexico, which included the impact of Mexican peso appreciation, partially offset by the impact of continued reduction from our exit and wind-down market. Expenses increased 4%, with growth in corporate other, including higher severance, largely offset by a decline in legacy franchise. Cost of credit was $331 million, primarily consisting of net credit losses of $297 million driven by consumer loans in Mexico. As you can see on the bottom right side of the slide, divestiture-related expense items in the quarter included the $726 million goodwill impairment, which is capital neutral and based on the fair value of 100% of the entity. On Slide 16, we provide an overview of the agreement with Fernando Chico Pardo to purchase a 25% equity stake in Banamex. This transaction progresses the overall timeline to exit Banamex but is subject to certain closing conditions and local regulatory approval. Before I walk through the financial impacts related to this stake at closing, I'd like to ensure you understand the net capital impact at a full exit. The cumulative capital benefit to Citigroup Inc. upon full exit will be driven by two things: one, the capital release associated with the RWA reduction, and two, the cumulative impact of any potential gains and losses on sale. However, between now and then, there will be a few steps to get there, and it starts with this transaction. So looking at the right-hand side of the page, at the time of close, and subject to the book value of Banamex at closing, we expect assets to increase by approximately $2.3 billion for the total consideration paid for the 25% stake, which reflects the fixed price-to-book value multiple of 0.8, and total equity will also increase by a net $2.3 billion, but it will be driven by a few factors. First, there will be a temporary benefit to stockholders' equity due to the reclassification of the negative cumulative translation adjustment from stockholders' equity to non-controlling interest, which will be slightly offset by the loss on sale. Second, the non-controlling interest will increase by the 25% of the Banamex book value sold, but this will be largely offset by the CTA that was reclassified as part of this transaction. So net-net, a $2.3 billion increase in assets and on the equity side, a $1.8 billion increase in stockholders' equity and a $500 million increase in non-controlling interest. At deconsolidation, there will be balance sheet impacts and P&L impacts. As it relates to the balance sheet, all of Banamex's assets and liabilities will be removed from our balance sheet and be partially offset by any remaining equity stake. In terms of the P&L, the entire amount of the cumulative translation adjustment related to Banamex, which is approximately $9 billion, will flow through the P&L as a loss and will reverse the temporary capital benefit from the prior sale. Therefore, at deconsolidation, the cumulative impact of CTA is capital neutral. So to wrap it up, while there are a number of accounting nuances between now and full exit, the cumulative capital impact to Citigroup Inc. will be the full release of RWA associated with Banamex and the cumulative impact of any potential gains and losses on sale. Turning to the full-year 2025 outlook on Slide 17. Before I get into the outlook, I want to say how proud I am of the company as we execute against our strategy and drive top-line revenue growth, which continues to be fueled by our investments across the businesses and in key areas such as technology and data. We've made significant progress in terms of improving return with an adjusted year-to-date ROTCE of 9.2%. So now, with regard to the outlook, given the very strong year-to-date top-line revenue growth of 7%, we remain confident in our ability to exceed $84 billion in revenues for the year. We now expect NII ex-markets to be up around 5.5% for the full year, incorporating stronger performance as well as the impact of FX relative to our previous expectation. For NIRx markets, we expect continued momentum in underlying fee drivers. In markets, historically, we've seen revenues decline 15% to 20% from the third to fourth quarter. However, given the strong performance in the third quarter, the sequential decline could exceed that range this year. Now turning to expenses. Our year-to-date expense base incorporates both the level and mix of revenue we've seen, as well as the impact of FX. Given what I just mentioned about revenues, full-year expenses will come in higher than we previously guided. However, you should expect the efficiency ratio for the full year to be consistent with the revenue and expense guidance that we provided during the course of the year, which is slightly below 64%, excluding the impact of the goodwill impairment this quarter. In terms of credit, our expectations for the year remain unchanged, and we will continue to repurchase shares in the fourth quarter under our $20 billion program. As we take a step back, the performance in the quarter and so far this year represents significant progress towards our goal of improved firm-wide and business performance. We remain steadfast and focused on executing our transformation, achieving our ROTCE target of 10% to 11% next year, and further improving returns over time. With that, Jane and I would be happy to take your questions. Operator: At this time, we will open the floor for questions. Please note, you will be allowed one question and one follow-up question. Our first question will come from Mike Mayo with Wells Fargo. Your line is now open. Please go ahead. Mike Mayo: Hi. So I think you said you're at least two-thirds done with a lot of the transformation. And I assume that relates to the consent order. So can you just give us an update on your actions with the consent order as it relates to risk compliance controls and reg data? And if you can elaborate on the reg data part because this current regulatory environment, I don't know why so much effort needs to go to something that's more process-oriented, which they're trying to get away from as opposed to just financial strength. Thank you. Jane Fraser: Good morning, Mike. So, I do feel good about the progress we've made, and as you refer, over two-thirds of our programs are at or mostly at Citigroup Inc.'s target state. Some of the biggest bodies of work are now embedded just into how we run the bank and operate it on a BAU basis. You've heard me talk about risk and the progress we've made in compliance, and those are two areas where we are largely at the target state and are running through sustainability. But we're also now at the back end of the working controls. This is a big body of work this year to drive automation and implement more preventative controls. We now have preventive controls for any large and anomalous payments in 85 countries that cover about $13 trillion in payments daily, covering 55 payment apps. We also have preventive controls covering over 99% of manual payment flows in our institutional businesses. We've standardized controls to common processes across the firm, which was very much enabled by the org simplification that we did. We're now in line with peers in terms of level of automation and preventative controls. All of this work is going to help us implement AI across our process, as I referred to in the earlier remarks. Now, data for regulatory reporting is going to take more time, but we have made significant progress in the last twelve months. Through our own testing, we're seeing really improved, dramatically improved accuracy for our most critical regulatory reports. We're also putting in tech and AI-enabled capabilities to ensure we sustain these improvements on a BAU process and basis. In terms of the regulatory environment, we are clearly seeing in the regulatory environment coming from DC, and I think like everyone, we welcome the proposed changes, including recalibration to center on safety and soundness. For us, we're on track with what we're doing across all the programs, including data. We're focused on getting over the finishing line for our work, and we're looking forward to the transformation expense coming down next year because as we complete the different bodies of work, the associated expense comes off both as a result of the implementation and from the efficiencies that we're gaining. Mike Mayo: And a short follow-up, the transformation expense for 2025, maybe this is for you, Mark, you said it's going to be more than $3 billion, so it was like $3.5 billion, $4 billion, $5 billion kind of range for that? Mark Mason: Mike, I'd say it's a little bit under $3.5 billion in 2025. And again, as Jane mentioned, a lot of work is being put in place to execute on that more efficiently, which is going to help bring that number down in 2026. Operator: Your next question will come from Betsy Graseck with Morgan Stanley. Your line is now open. Please go ahead. Betsy Graseck: Hi, good morning. Jane Fraser: Hey, Betsy. Betsy Graseck: Jane, I did just want to understand how you're thinking about the Banamex transaction. I heard all the prepared remarks, and we understand that you prefer to go with the IPO route in ultimate value for shareholders. And I guess I wanted to understand how you're thinking about the timing between the offers that you've received versus the IPO timing that you are planning on executing? And is there a timeframe in mind for ultimate value determination? Thank you. Jane Fraser: Yeah. First off, I just say, look, the 25% stake is a very significant step in our path towards deconsolidation and ultimately a full exit, which is what everyone is focused on. We firmly believe that this transaction and the subsequent IPO are going to both maximize value for our shareholders and critically have a high degree of certainty around it. Those two have been our North Stars as we've been going through this process. I would also just point to the Mexican president and her government, who have been publicly very supportive of this investment and our path forward. That obviously gives us a higher degree of comfort around the certainty of closing. When we look at this path forward, I think the investment by Fernando is a real show of support for Banamex, and we believe his partnership is going to be very valuable as we move towards an IPO, deconsolidation, and ultimately full exit. There are a couple of big reasons for that. One, he's a highly reputable business leader with a fifty-year track record of really driving value in his investments, so he's going to be a strong partner in realizing greater value from Banamex. He also brings a lot of experience and credibility that is very attractive to other investors. His investment alone is a strong endorsement of Banamex's relevance and potential, and that's also going to be very helpful as we look at bringing others through the IPO and the like into the mix here. Betsy Graseck: Okay. Jane Fraser: In terms of the next steps, the 25% stake requires regulatory approval in Mexico. That typically takes nine to twelve months. For obvious reasons, it makes a lot of sense to get Fernando's regulatory approval ahead of the IPO. He's filed his regulatory approval, and it's already in with the government, so that will go through the process. He's not dilly-dallying and hanging around on this, I'm delighted to say. We will be ready to move forward once we get those approvals, and we're not hanging around in terms of getting all the work done for that. Betsy Graseck: Okay. And the nine to twelve months approval timing, when does that commence? Jane Fraser: That's already started because his regulatory approval filing was put in this week. Operator: Next question will come from Glenn Schorr with Evercore. Hello there. Glenn Schorr: Morning. I wanted to get to the evolution versus revolution in stable client adoption. I've seen some press releases, I've seen you join the euro stablecoin banking coalition, and I saw your announcement on Citi Payments Express. I'm assuming you're making a lot of investments towards this evolution. So I want to take your pulse on what is the pace of stablecoin adoption? How important is it to your traditional banking and payments pipelines? Do you feel like you're ahead of the curve and you can make more money, not less, as this all plays out? Thank you so much. Jane Fraser: Yes, of course, Glenn. Look, I want to take a step back on this one because frankly, for our client base, the institutional client base, we see tokenized deposits as delivering what clients need. This is an area that we've invested in most heavily. What the clients are after is real-time money movement with minimal to no friction and low cost. As we talked about last earnings call, we've been driving innovation around digital assets for many years. What is it our clients want? They want interoperable multi-bank cross-border always-on payment solutions. They want it provided in a safe and sound manner, and they want all the complexities solved for them: compliance, reporting, accounting, tax, AML. That frankly is best done by tokenized deposits. We are that one-stop shop for our clients. We're constantly linking in new capabilities, emerging technologies, and we're bringing in partners. So we offer that holistic killer app for the institutional clients. You saw this earnings call we're talking about linking our Citi tokenized services to the 24/7 U.S. Dollar clearing network. Now that means we can facilitate transactions across 250 banks in 40 plus markets. That allows clients to frictionlessly transfer funds 24/7 to suppliers and third parties who hold accounts within Citi's extensive 24/7 U.S. Dollar clearing network. We are seeing demand and adoption increasing, but frankly, the gating factor is our clients' treasury departments being ready for an always-on environment, and they just aren't at the moment. So what does that mean for stablecoin? We will stand ready to support our clients' needs, whatever they are. We view stablecoin as another option in the overall digital asset toolkit. It's got more friction because of the on-off ramp. It's got more friction because of the tax, the accounting, the AML, these other requirements that our tokenized deposit capabilities avoid. But we will continue to provide the on-off ramp solutions for stablecoin exchanges, we will be providing and are providing custodial solutions to crypto assets to our asset manager clients, and we'll be providing corporate cash management services to the stablecoin providers. We're about to go live with a number of new capabilities in that, and we're considering issuing our own TrueCity stablecoin. But I think there's an over-focus on stablecoin at the moment, whereas as a major payments player, most of this is going to get solved by the tokenized deposit capabilities. Glenn Schorr: That was a great full answer. Thank you, Jane. Jane Fraser: I'm passionate about it. Sorry, Glenn. Glenn Schorr: I love it. I can't wait for May. Can we maybe just—this is a super quick follow-up—is you're fired up about tokenized deposits and what that can mean. Way ahead of that. Does the potential—is there a potential for the tokenization of all securities? Does that change how financial markets operate in general? Just wonder if you could just expand that a little. Jane Fraser: Yes, absolutely. I was just talking about the payments piece. In the future, clients are going to want solutions that seamlessly offer financing, securities issuance, and settlement in a regulated, trusted environment. As you can imagine, oil, you can imagine equities—this is going to go much, much broader. We will be providing that as part of our toolkit. So that is definitely in the equation here. It's really terrific that the regulators are now letting us innovate in a responsible way because I think that is going to help the development of the market as we and other banks participate in this space. It will really help scale up. Operator: Your next question will come from John McDonald with Truist. Your line is open. Please go ahead. John McDonald: Thank you. I wanted to ask about the efficiency path for next year. It seems like you have some potential tailwinds to drive expenses lower next year, potentially lower severance, transformation spend, and stranded costs. So Mark, I wanted to ask, is that fair that you see a path for directionally down expenses next year even if revenues are strong? And do you still see the potential to exit next year at an efficiency ratio below 60? Mark Mason: Thanks, John, and good morning. I'd point to a couple of things as we think about 2026, and I'd just remind you and others that we're targeting an ROTCE of 10% to 11% next year. It's important that we continue to show progress in our returns across the franchise. The second thing I'd point to is that if I just kind of go back to where we are year to date for a second, we are demonstrating strong top-line momentum. The year-to-date revenue is up 7%, and if you look at our expenses against that, leaving out the goodwill impairment, our expenses were flat. So we're showing very strong top-line momentum and very strong discipline around managing our expense base. As I think about 2026, that has to continue for us to deliver on the 10% to 11%. That is to say, continued top-line momentum, and I've given obviously it's more of what you've seen through the year-to-date performance and continued expense discipline. That expense discipline is going to consider at least two things. One, are the greater efficiencies that we've talked about in the past. You've mentioned some of those, the transformation expense coming down, the legacy/slash stranded costs continuing to come down, productivity from BAU activity, I've mentioned in the past a lower severance and more normalized severance. But it's also going to require investments in order to continue to fuel that top-line momentum. So investments, one that's tied to those higher revenue levels, but also continued investments in parts of the franchise like banking and parts of the franchise like services. You just heard Jane mention the investments we're making in token services. Striking that right balance so that we are not only delivering 10% to 11% but north of that beyond 2026 is really important. So what does all of that mean? That means as I think about 2026, I lead with the 10% to 11%. I follow on by productivity and the need for investments. I'm targeting the less than 60 as I come out of 2026 or in 2026 as I've said before. John McDonald: Great. That's really helpful. Then just a quick follow-up. Thinking a little bit longer term, what's the ultimate end state for the $3.5 billion or so in transformation spend? Does it go away? Does it morph into kind of a regular BAU investment spend at some point? And how does that evolve over time? Mark Mason: I'm smiling here, John, because I knew as soon as I shared the number, the very next question would be what happens with it, right? I think as I mentioned, it's going to come down in 2026 for all the reasons we've mentioned, including making significant progress on the transformation. We'll obviously share more with you in terms of where the expense base is going and the transformation expenses are going beyond that at Investor Day. So I'll ask you to kind of stay tuned as it relates to that. But I don't want to miss the opportunity to state again that in order for us to get to the improved returns beyond 2026, we've got to have that right balance of squeezing out as much as we can in efficiencies and redeploying so that we can capture growth and upside as we serve our clients beyond 2026. Jane Fraser: And I encourage everyone just to look at the track record we've got. I mean, we've been consistently growing revenues whilst investing in the transformation, whilst investing in the businesses. At the same time, we've been keeping the expense base at a low and very disciplined level. That's a discipline you can expect to see us continuing. Operator: Your next question will come from Jim Mitchell with Seaport Global. Your line is open. Please go ahead. Jim Mitchell: Hey, good morning. Mark, maybe just a question on NII. I think based on the guidance for this year, it seems like you're flat to up in the fourth quarter. As you guys have pointed out in your Qs, you have limited sensitivity to U.S. Dollars. So is 4Q a decent jumping-off point for next year? Can you grow from that level? How should we think about the puts and takes around asset repricing and balance sheet growth and headwinds from rates? Mark Mason: Yes. What I'd say is a couple of things. One, I do expect to see continued growth in NII as we go into 2026 at this point. We're obviously putting together our operating budgets now, but I do anticipate continued growth. I think there are a couple of drivers, many of which have played out through most of the year here. One is, I expect that we'll see continued growth in deposits. Operating deposits, deposits on our retail banking side, both of which have shown up quite healthily in the quarter. I expect that to continue. I expect to see continued loan momentum, particularly on the branded card side, but also in the trade lending activity, which also showed up very nicely this quarter. I'd expect that the investment portfolio that you've heard me talk about before will continue to roll off and mature, and we'll be able to deploy that yet still at higher rates in cash and other securities as we go through 2026. The final piece is, obviously, I would also expect that there'd be more rate cuts, and the discipline around pricing and the importance of us reminding our clients that our offering is a lot more than just holding their deposits will help to mitigate some of that pressure. When I put all of that together, I do see continued growth in NII, perhaps not at the same pace, but certainly continued growth ex-markets as I go into 2026. I hope that helps a little. Jim Mitchell: No, that's very helpful. Maybe just on the capital target of 12.8% and stepped-up buybacks this quarter. Is this a pace we should expect until you get to 12.8%? Just sort of curious on your thoughts on how quickly you get to 12.8%. Mark Mason: I'm smiling again, Jim, because the last quarter I said that we weren't going to give guidance on a quarterly basis as it relates to buybacks. I want to stick to that. But I would remind you that we do have a $20 billion buyback program that's out there. We've been making good progress against that. We'll continue to make progress against that. 12.8% is what we will target from a CET1 ratio, and I think you'll see that come 13.2% come down towards that over the next couple of quarters. We're going to strike the right balance between deploying capital back into the business at accretive returns in order to continue to drive growth that improves returns and returning capital to shareholders, particularly given where we're trading. While we have seen good performance in the stock over the course of the year, we're still adding around kind of one times tangible book value. I think there's more upside to the stock, and so we want to strike that right balance between return on and return up. Operator: Your next question will come from Erika Najarian with UBS. Your line is open. Please go ahead. Erika Najarian: Hi, good morning. My first question, Mark, is just wanted to make sure I understand all of the technical nuances that you laid out on Slide sixteen. So the CTA impact is essentially neutral at deconsolidation. In addition, we should get the capital release from the RWA reduction. I think it's $27 billion from the Mexican financial statements. Any gains and losses on sales. So the CTA is separately capital neutral, but the ultimate capital benefit will be determined by that capital release and the ultimate valuation of Banamex. If I'm understanding that correctly, what is the allocated TCE to Banamex? Mark Mason: Sure. Let me just kind of clarify one point. I think you've largely got it, which is there's an important distinction between deconsolidation and full exit. The deconsolidation, as you point out, will trigger that CTA flowing through the P&L, and ultimately that will be capital neutral. So that is absolutely correct. At the full exit, what we would expect in the way of the capital impact will be the capital associated with the risk-weighted assets and the gain or loss, the cumulative gain or loss on sale. The capital associated with the risk-weighted assets, the risk-weighted assets, is about $37 billion. So you can kind of run the math of 13.2% against the $37 billion and get a proxy for how much capital we have allocated here. Erika Najarian: Perfect. My second question is for Jane. Jane, your reward for all the improvement that you've shown is a higher bar, right? I think that's what you're seeing, and we're all looking forward to this May Investor Day. I guess this is a two-part question. As you approach the 10% to 11% return on tangible common equity goal for next year, and you think about being two-thirds of the way done with that transformation, is May the right time to address maybe more end-state capital targets the way JPMorgan has addressed and Wells also gave us an update today? If we get more regulatory certainty, you've obviously gotten a lot of volatility in the past from stress test results. Especially as we think about deconsolidating and fully exiting Banamex and the regulatory momentum, is 100 basis points still the right buffer for this company as we look forward? Jane Fraser: Well, a lot in that. Let me just try and pick a few pieces of it. So I've always been clear, the 10% to 11% ROTC target is a waypoint, not a destination. In May, as I talked about earlier, we see a lot of different areas of upside. Mark talked about some of the different areas earlier in the call on the revenue growth dimension. So we'll lay out what we see for the different businesses, what is the path forward, and therefore what the longer-term target that we're expecting to see. In terms of the regulatory environment, I think we're very happy to see a lot of the proposals getting more clarity. We saw ESLR coming through. We would expect to see GSIB, Basel III, CCAR with much more clarity in the first quarter. So that will be good timing for being able to lay out what that means for the May Investor Day, assuming that remains at pace. Obviously not in our hands as the timing around it. So I think you will end up with much more clarity about what that—what is the end state if there ever is an end state. Mark, why don't you jump in? Mark Mason: Yes. The only thing I'd add to that is, with the progress we're making in executing on the strategy, I'm sure you've noticed that we're generating a more steady and predictable earnings stream and on top of that growing our earnings. That in part has shown up in the stress capital buffer reduction that we've now seen for two years in a row. Now we have to get clarity on kind of how that's going to be applied, whether it will be averaging or not. But I highlight that we're going to continue the work and how we're running the franchise in order to improve and therefore continue to reduce what happens in a CCAR stressed analysis. The other piece that I'd highlight is there are obviously other aspects to the environment that are still in flux, although they look like they will be favorable. GSIB, the Basel III endgame, etcetera, and by the time we get to May, we hope to have clarity on that, which can therefore inform how we think about the future. As it relates to the management buffer, you heard me mention repeatedly that we look at that all the time. We're constantly looking at everything from the certainty we're getting in the regulatory capital requirements, and that's improving as we mentioned before, to how we think about internal stress analysis and the volatility in RWA and the like. So we'll continue to look at that and look for opportunities where it makes sense to reduce that, and we'll share that if and when we get to that conclusion. Operator: Your next question will come from Ebrahim Poonawala with Bank of America. Your line is open. Please go ahead. Ebrahim Poonawala: Good morning. Mark Mason: Good morning. Ebrahim Poonawala: I guess good afternoon at this point. Just a quick question, Mark. You talked about credit reserves and the unemployment rate that you have there. But just talk to us when we think about—and I think Jane said like some softness in the economy—when we think about the consumer cards book, expectations, any kind of red or yellow flag that you're seeing there? If you don't mind addressing—like I'm looking at sort of the non-accrual loans, a pretty decent jump in sort of corporate non-accruals quarter over quarter, like was that a one-off? Do you expect that as some of the sort of, I guess, banking book seasons? Would love some perspective there. Mark Mason: Sure. Let me start with that piece, and then we can come back to the consumer. We did see a tick up in NALs in the third quarter. The quarter-over-quarter increase is really driven by two idiosyncratic downgrades. I'd say the NALs represent a relatively small percentage of our funded loans. When you look at the percentage there, you can see on the page it is a small number. We're well reserved against from a coverage point of view. So the NAL reserve coverage remains adequate at over two times, and in many cases with sufficient collateral and some upgrades expected. So I think that while the number is large in terms of the increase, we could really point to two idiosyncratic names as the major driver and take some comfort in the NAL as a percentage of funded loans remaining low in the quarter. We're obviously watching this very closely, but again, with many of these still paying, we feel good about our exposure at this point. In terms of consumer, I'd point to a couple of things. So one, the losses that we've seen in the quarter are inside of the ranges that we've given both for the branded card portfolio as well as for the retail services portfolio. I think consumers are being very discerning in terms of how they spend. The spend increase that we've seen is largely in branded and has tended to be in the higher-income consumers. I think importantly, when I look at the delinquency trends, the delinquency trends are also performing in a very normal fashion. In terms of early buckets, I'm not seeing any signs of a change in that direction or in that normalcy. So as I look at our book, I'm very comfortable with our exposure. I'm very comfortable with the reserves that we have. I'm very comfortable, frankly, with some of the actions we took a year plus ago as we looked at how we wanted to underwrite consumers. I think that has afforded us some of what we're seeing here. I'm still very cautious. We're running our operations in a recession-ready mode. We're watching NIM payments in order to get any early signals of stress. But again, as I look at the book, I feel comfortable with where we are and where our consumers are trending. Jane, you may want to add to that. Jane Fraser: Yes. I think one of the things I point to everyone is the advantage of our strategy. If you look at our consumer customers, 85% of them are prime. If you look at our corporate customers, we've got a pretty pristine blue-chip portfolio. We moved from serving millions of clients internationally to a few tens of thousands. That affords us to have focus on them, a real understanding of them, a depth of diligence around them, and that is very beneficial. We're very disciplined in our credit assessments, in our client selection, in our concentrations, in our hedging, and in our sell-downs. So I look at an environment where you've had a sizable run-up in the markets, despite tariff and other headwinds, it could well be a correction at some point. But I feel very good about how we will be positioned around that. We have a very fiscally disciplined consumer base and, as I say, a very prime one. So we're ready for whatever the environment is and well-positioned. Ebrahim Poonawala: That's helpful. Thank you both. I guess just one—we could get a mark to market on the wealth business, Jane. When I look at sort of the year-over-year operating leverage being meaningful, revenue growth was an expense growth. But again, a lot of that driven by NII. Just talk to us in terms of if the low-hanging fruit has been picked in terms of what Andy is doing in that business. What's the outlook from here, both in terms of just how you think operating leverage and ROTC improving? Jane Fraser: Yes. Thank you. No, I think this quarter is another good one for Wealth in terms of good strong revenue growth at 8%, the improvement in the ROTC, the sixth consecutive quarter of positive operating leverage. I think the piece we were particularly pleased about was the $18.6 billion of net new investment assets. This is a direct result of the strategy we've been implementing over the past couple of years that you can expect to continue. It centers on becoming the lead investment advisor for our client. That is the center of the strategy. What we've been doing, we've been strengthening the CIO research product. We've been retooling key areas of the investment product platform. You've seen us aligning behind open architecture as a key operating principle. We've been deepening our partnerships with top-notch third-party asset management firms. All of this is helping us drive up the investments fee revenues and executing across this famous $5 trillion of opportunity we have with our existing clients. We're also elevating collaboration between USPB banking and markets. We're seeing some very strong two-way referrals between each of these different groups. That again supports our growth in net new investment assets and revenues in Wealth overall. We're deploying new AI capabilities, and that's also getting great early feedback. We've got Ask Wealth, which is a GenAI-powered inquiry engine that's handling thousands of client and service questions with rapid update. We have advisor insights, which was launched with very strong early adoption that delivers personalized data-driven engagement opportunities for advisors. We had a 75% usage rate on that, so a lot of advisor demand. What all of this means is this is driving our long-term objectives of becoming the lead investment adviser for our clients with a long runway ahead of us as we scale up the business. We will just continue. We will continue to have good expense discipline. We'll be focused around how we use the balance sheet in the context of the overall client relationship. You can see from the numbers we've come a long way, but there's just more work to do, but there's just enormous upside as we go, we scale up, and that scaling is all in our control. I hope that gives you a sense of what are the different elements. Ebrahim Poonawala: Thank you. Operator: Your next question will come from Ken Usdin with Autonomous Research. Ken Usdin: Thanks a lot. Just a quick one on the expense side, Mark. You mentioned the sub-sixty-four efficiency ratio for the year, just looking in the deck, it looks like the year-to-date has been 62. You typically do have a little bit of a higher exit on that. Just wanted to ask you just what should we be thinking about as far as fourth-quarter expenses versus the 13.6% in the third quarter ex the impairment charge in terms of the seasonality, the expected kind of downdraft in trading that you mentioned earlier, and the other pieces on the severance and such? Thanks. Mark Mason: I think the couple of things I'd point you to. One is the FX impact, which you can see in the back of the deck on page 26. You can see that's going to contribute to the 53.4% that we have out there to the tune of probably close to $400 million. That obviously—or should say obviously—it is going to likely be EBIT neutral, but that's certainly the headwind to think about as you think about how much higher the 53.4% might be. The other piece to think about is the performance. So what we assume in terms of how much higher than the $84 billion, if you include FX, how much higher that might be will be the other factor that drives the expenses up above the 53.8% if you will, right. I've already guided towards NII ex-markets being up around 5.5%, that obviously is going to contribute to whatever the number is north of the 84 we have on the page. On the markets piece, again, I've given you some context for what we've seen historically. But given the strong quarter here, you have to make an assumption in terms of how much sequential decline we might see in the fourth quarter. I think those are the puts and takes, really how much higher we are than the 53.4% as a byproduct of FX and outperformance on the top line. Everything else we've been very disciplined about as it relates to the expense targets that we set. Ken Usdin: Okay, got it. Right. Thanks, Mark. Operator: Your next question will come from Gerard Cassidy with RBC. Gerard Cassidy: Hi, Mark. Hi, Jane. Mark Mason: Hey, Gerard. Jane Fraser: Hey, Gerard. Gerard Cassidy: Can you share with us—I think in your second quarter Q you gave us the interest sensitivity of the balance sheet, and obviously we'll see it in the third quarter. If I recall, I think a 100 basis points instantaneous change in rates, you guys guided that NII could decline about $1.7 billion. But if we just see the Fed and say the long end of the curve stays anchored around 4% to 4.5% and the Fed cuts another 50 basis points in the next three months or so, how does that impact your net interest income for over the next six months or so? Mark Mason: I think the simple way to think about it is what I shared in the second quarter was for total U.S. and non-U.S. Dollars, and it was a drag of about $1 billion or 100 basis point decline across all currencies and across the curve. When you break that down, Gerard, it's only about $400 million in the U.S. Dollar, right? That's again for assuming a parallel shift across the curve 100 basis points. We've been working to bring that down further. We'll report a number in the third quarter Q, and you'll see that number coming down. I don't want to disclose it this way, but coming down from the negative $400 million. So you can kind of do the math on that. Again, that's the parallel shift. It's not that different if you were to look at kind of just on the overnight rate change. Most of our short-term exposures are out in the non-U.S. Dollar. So hopefully that helps, but you can see the number is relatively small and declining, assuming the 100 basis point. Gerard Cassidy: Very good. Thank you. Then as a follow-up question, there's been a lot of discussion on other calls today and among investors about loans to non-depository financial institutions, especially since when you look at the industry, it's more than doubled in about five years, and rapid loan growth is always something we want to pay attention to. Can you—and you guys have, according to the regulatory filings at the end of the second quarter, about $104 billion here—can you give us some color or insights into the different lines that you lend into? How comfortable you are with this credit? Thank you. Mark Mason: Sure. So the first thing I'd point out is that this MBFI disclosure that all the banks do in the Y9C consists of a very broad set of exposures. It includes private credit, but it is very broad. The second point I'd make is that it's primarily made up of securitization exposures with diversified collateral pools. So there's some consumer-related mortgage, credit card, audit. There's some corporate-related that includes the private credit or broadly syndicated. There's some commercial real estate. All of that is kind of captured in this MBFI category. Overall, I would say the MBFI exposure is predominantly investment grade. So that's a consistent theme for us as a firm. Certainly is the case as it relates to how it's reflected in this disclosure. That means we're working with top-tier asset managers that are sponsors for private credit or established consumer platforms. We're maintaining collateral pools that are well diversified with concentration limits. We're ensuring that there are structural protections, including ample subordination, that helps to result in the high investment grade attachment point. We're monitoring all the underlying collateral, and we have transparency at the loan-by-loan level. So when I kind of take a step back and look at that, we're very selective from a risk perspective as to how we play across all of these subcategories, but particularly as it relates to private credit. I think the key takeaway is that that category is very broad. Operator: Your next question will come from Scott Siefers with Piper Sandler. Your line is now open. Scott Siefers: Good afternoon, everybody. Thanks for taking the question. Turning to market, I was hoping you could expand a bit on the strategy in the card portfolio. I think with the Strata Card, you all left the impression that Citi is becoming a more visible competitor near the upper end. So is there a sort of conscious change in the complexion of the card portfolio overall that we should expect to see evolve over the few years? Or is this more just that you're kind of layering on a product that was a bit of a gap previously? What's the best way to think about that? Jane Fraser: I think the first thing you center around is we're a leader in payments and lending today. Top three rank with the U.S. Card balances. We're growing our position by launching competitive innovations and new capabilities. As you see, you've seen a considerable expansion in our branded cards products and offering suite this year. We reentered the premium rewards segment with the Citi Strata Elite that's had a very strong reception in the market. We refreshed the value proposition in the Costco portfolio. We've begun to roll out the new and very unique, pretty exciting capabilities, thanks to our partner with American Airlines, like the Points Transfer with our branded card portfolio and our own proprietary cards. As I have hinted, the team will shortly be announcing additional new offerings, in particular as we expand our partnership with American Airlines. I think you can expect to see more growth in the co-brand space versus the private label space. We're also investing significantly in AI capabilities that help us better serve our customers, also manage risk better, and drive efficiencies. So I think in all of this area, you're seeing us very much on the front foot, building out the ecosystems around our cards capabilities and being at the forefront of a lot of the innovation in AI and the like, applying it for our clients' benefits and for the shareholders' benefits. I'm excited by what we've got coming up. We'll also have the acquisition of the Barclays portfolio in the second quarter next year, which will be a nice boost to the scale of the franchise as well. Lots of good stuff going on. Scott Siefers: Yes. Perfect. Okay. Thank you very much for the color. Operator: Your next question will come from Chris McGratty with KBW. Chris McGratty: Great. Thanks for the question. Building on Ebrahim's question, on Slide four on operating leverage. You touched on wealth, Jane. Was helpful. Can you speak to the sustainability or perhaps source of improvement in operating leverage by segment as you near the 10% to 11% goal for ROE next year? Jane Fraser: Well, as we look at it, it's fairly simple in terms of services, as we say. We continue to grow the fee revenues, we're continuing to grow the volume, acquiring new clients and existing clients. I'm also on the market side. You've seen us be very disciplined there, where we're looking at the revenue growth potential that comes particularly in prime. You're seeing us in financing and in securitizations, it's helping. Wealth, we talked about in USPB, it's going to be the growth coming partly from the market, from the Barclays portfolio, as well as from the product innovations and really driving customer engagement as well as new customers, as well as bringing new customers in. Then you've got synergies across the businesses like the Alpha Alpha Trades, we're staying between markets and banking, two-way referrals that we were talking about between wealth and other businesses and the like. Then Mark laid out, I think, very succinctly, the efficiencies that we're going to continue to be driving on the operation efficiency side. So I think you've got a story of both revenue growth, investment in the businesses, and as Mark said, continued productivity improvement, and they'll be common across the board. Mark Mason: Yes. I think you can expect, obviously, we are targeting positive operating leverage for the full firm in 2026. You should expect that across most of the segments. If you don't see it in a segment, it's likely because we're leaning in on investments there. But generally speaking, the positive operating leverage for the full year, we should continue to see good momentum there. So we'll give you more color on that at the Investor Day in terms of how we think about it. But with all of these businesses driving improved return in 2026, that's likely to be how it plays out. I'll be careful on the quarterly look at that. For example, our markets business, for example, in the fourth quarter, where we see downward pressure on the top line, there could be a quarterly dynamic there. But again, I'd point you to a really strong year to date across every one of these segments. As the chart points out, consecutive quarters of positive operating leverage, and I'll just remind you that continued top-line momentum we certainly expect, but the need to invest is what's going to drive those improved returns beyond 2026. Chris McGratty: That's very helpful. Thank you. Operator: Your final question will come from Mike Mayo with Wells Fargo. Your line is now open. Mike Mayo: Hi. One more for Jane. Do you balance between celebrating wins and ensuring your team keeps the intensity on for all the hard work ahead? I guess it's—I heard a story that people are celebrating when the stock hit $100 a share, which I can understand you met recent targets, made progress, but the transformation, you have a new team in place. But for those who've been around for a long while, we wouldn't want you to miss the forest for the trees. The returns are still under 10%. Efficiency is still over 60%, the stock still has underperformed this decade. So I just thought that sort of celebration may have been premature, but you do want to celebrate the win. So how are you ensuring that intensity remains at Citigroup Inc.? Jane Fraser: Okay. It was a milestone moment, first. An important one for everyone as we go down this journey. To me, it's always—there are waypoints and there are destinations. The destination is the one that we're excited about. As I said at the top of the call, there is tremendous upside ahead for us. We're very motivated by the opportunities that are ahead of us. I've got a long list of them by the different businesses. We can't wait to tell that story at the Investor Day by each of the businesses and for the firm overall because all these different elements come together. But there isn't, I think, a single person in our firm that feels that we are declaring victory. We've still got a long way to go. It's great to have the momentum behind us. It won't be a linear path, but we are really excited to be so laser-focused on the opportunities and the upside that still remains and relentless in our execution against them. Mike Mayo: All right. Thank you. Operator: There are no further questions. I'll turn the call over to Jennifer Landis for closing remarks. Jennifer Landis: Thank you very much for joining us. Please reach out if you have any follow-up questions. Thank you. Operator: This concludes Citigroup Inc.'s third quarter 2025 earnings call. You may now disconnect.
Stephan Shakespeare: Good morning, everybody. Thank you for coming and thank you for coming at first -- my first one back. And I hope that it won't be too long before we see the rate of growth we've had before. We're at 388 -- GBP 389 million at the moment with a 16% margin, with 8% increase in reported -- in adjusted EPS, and -- sorry, in reported EPS. And the key thing here is that we're showing stable growth. Now stable growth sounds a bit of a contradiction, but actually, it represents the 2 things we're trying to do this year. One is to return to stability. And that means fixing things. And the other is to invest in growth. So we're not seeing yet the kind of leaps that we have had in the past, but we are investing for that very, very thing. And just to remind you of that story of YouGov's growth, there's a huge graph before this, which shows something like 10 years of growth, and we've just come off that. And we need to be reminded that this is fundamentally a growth company. And it's a growth company because we have always been led by innovation. And when we stop innovating, we go flat. But we are back on the road to innovation, something that I will show you in the second half of this presentation when I talk about the new methodology that we have produced. So in the last year, we've had some good successes, which is the stabilizing part that I've been talking about. We have continued rollout of ID verification on panelists. We spent quite a bit of effort focused on -- we're moving forward from panel. This is something that has been bedeviling the industry as a whole. I think we're a long way ahead of everybody else, partly because of our historical asset of a well-embedded panel and partly because we have been using the latest techniques, and I think we pretty much lead the pack on the reliability of our data. We've invested in our Cube powered products, especially on the data science side. A couple of days we'll be announcing a new addition to the team, a very important addition, someone who has led an important team for 10 years at Nielsen, really representing the seriousness with which we're taking the data science side and growing that to create the richness and the reliability of the entire Cube data. We've also established on the client services side a team that specializes in selling and educating clients about the value of our connected data, our data products. And we've continued our program of updating our dashboards, including putting AI into those to help create -- to help with discovery. And finally, for this section, we have done a pretty good job, I think, of integrating Shopper, it's a major job that was and it has been successful and Shopper is actually doing a little better than our expectations were. So that's a pleasant change. So with that, I hand over to Alex. Alex McIntosh: Thank you, Stephan. I just want to do a quick overview of our lines of business. I just want to point you to the stack charts on the top of the screen. We've gone from GBP 335 million to GBP 388 million -- sorry, GBP 389 million revenue for the year. You'll see the biggest contributor to that. We've got a full year impact of Shopper coming through. On an underlying basis, you'll see the 2 divisions, core YouGov growing at 1%. I think I want to make a -- specifically point out data products. We've turned that from a decline in the last period to growth. It's a lot of investment and a lot of focus that's going into getting us back on track. It was a key driver of our performance for the previous reporting periods that Stephan referenced in terms of those double-digit growth years. And I think you'll see the beginnings of an evolution of things that we're doing in that space. I think we're pleased to see we've had renewal rates normalizing, back up to 82%. And the couple of wins in the media agency space, that may be a little bit of surprise, people saying we are seeing a little bit of weakness as well, but it does go to show when we have high-quality data, there's still a demand for that, and we had a significant win in the retail space as well. In our Research division, a bit of a mixed bag in performance. We've seen some headwinds coming from our government sector and our gaming sector. Gaming has been a long-term decline for us, but we saw some real strength and demand in our academic technology and financial services sectors. Shopper just referencing what Stephan said. On an underlying basis, I mean we don't have this in our numbers. But if we were to look at it on a trailing 12-month basis, it's growing by about 4%. So we're pleased with the way that has performed. I want to make the point is a period of coming off the TSAs under the ownership -- under the sale from NIQ. We're now off the majority of those, a lot of heavy lifting, getting control of the finance systems, et cetera. And so it's been a period of lots of, in a way, disruption moving systems, et cetera, but we're really pleased with the way the teams have continued to perform. You'll see our profit on the bottom of the chart has increased from GBP 49.6 million to GBP 60.7 million. A big driver of that is contribution of Shopper, obviously, but also the amount of cost that we took out at the beginning of the year -- referenced that at the beginning of the financial year, we announced that we made -- we had pressed the button on GBP 20 million of annualized savings. Because of timing, we realized about 70% of that in the year. Just moving to a geographic analysis, a bit of a mixed bag in terms of performance. Europe, you'll see year-on-year growth is 0%. Part of that has been some headwinds that we've had within Switzerland and Germany. We're starting to see some improvement coming into the second half on that. In the U.K., which has historically been a strong driver for us, a lot of disruption going through the redundancy programs. We started that on the 1st of August 2024, lasted about 3 months. And so it was inevitable that we would see a slowdown in performance there as we went through the consultation process. But we've ended the financial year really strong, good trajectory going into the financial year. Areas of growth for us has been Americas. It's always been our big focus. We'd like to see that growing at a much faster pace, but 3% on an underlying basis is broadly in line with how fast the market has grown. And just a small point, Asia Pac continues to grow by 2% -- this chart, which is looking at our sector. We take out Shopper in this because it's so skewed to FMCG and retail, but we continue to be very well diversified. Technology remains our largest segment, and that's a combination of technology clients using our data, but also using more traditional market research type services. Good contribution from banking and insurance. Travel and tourism has picked up again. Retail, I mentioned academic coming through in research. I want to make that point again about shopper. Just moving on to higher -- our cash conversion and our cash capital expenditure. For the year, we remain about the same cash conversion ratio as the previous period. We've had a bit of working capital outflow to do with -- we've had a bit of accrued income increasing. We've also seen panelists redeeming more points this year, and that's in part, we're running a lot of surveys, particularly in America off the back of the U.S. election. CapEx is down slightly. You'll see we spent a little bit less on panel development. That's not necessarily we haven't been getting more panelists. We've been a bit more efficient in how we -- in our conversion, and we'd like to see that improving over time. And we've kept our investment in technology expenditure roughly flat. That's not to say we haven't increased the amount of people in our technology teams. We have been spending a little bit more time on maintenance. And I think when we get to the latter parts of this presentation, you'll see some of the things that they have been working on, which will drive some more performance into FY '26 and beyond. We end the year in a robust balance sheet position. We started the year with a EUR 240 million loan facility. We paid EUR 36 million of that down in the year. We have a EUR 40 million RCF, which of currently EUR 24 million is drawn. We made an adjustment to our amortization schedule in terms of payments. And we had a -- we negotiated particularly aggressive for us. We wanted to delever as fast as possible when we took the loan. We're not trading at the same levels we were before. So we've reduced our payments to EUR 20 million for the next 2 payments, EUR 20 million in FY '26, EUR 20 million in FY '27, just that we have the headroom to continue investing in the group. And again, we really want to get ourselves back into this growth trajectory. But I want to make the point, we remain well within our loan covenants throughout the year. Just moving to current trading and outlook. You'll hear us talk about investing. It's particularly important for the group that we are taking on this market. We used to be the challenger brand, and we certainly see we have a right to win in a number of spaces. So we've got a clear set of execution priorities that we have around panel and product innovation. We've got some investments that we'll be really focused on data science and product development people, which are moving us toward our SP3 strategy of being more of a platform business in the way that we go to market, the way that panelists and our clients consume data. And we're starting to invest in Shopper. And the idea around Shopper is to get their capability expanded in the markets they're currently in, filling out more of the European map. And over time, we'll be looking at how do we invest into getting Shopper into the U.S. For our trading currently has started in line with expectations. I think for FY '26, we expect to see modest improvement in revenue and margin, and that's after making some key investments, particularly in data scientists and technologists. But I think we start the year, I think there's a lot of compelling opportunities for us. I know it's a slightly challenging macro environment, but we're certainly seeing some good opportunities from clients coming into the financial year. And with that, I'd like to hand back to Stephan. Stephan Shakespeare: So yes, I mean, I said the YouGov story is growth through innovation. That was the promise that we made at Capital Markets Day in May 23. And the strategy that we put out there is the one that we are following. We are back on that road to growth, I believe, certainly on that strategic road. And that involves these 5 things: the renewed commitment to increasing visibility and quantity of public data. As you will see in a moment when I demonstrate the importance of public data to us, that is something that drives our reputation, our trustworthiness, our panels and a lot of other stuff. And it's something that we are highly committed to and we have increased our spending on. Innovation around panel recruitment and management of panel. We are changing the panelist experience. Again, you will find always this emphasis that we have on public data on panel, creating data that creates products that are good for clients. This is all part of a flow. And the way that we treat our panelists and the way that we get data from them is being enhanced. We're accelerating the execution of becoming a data platform. More and more of our dashboards are now containing AI and better ways of utilizing our data. Custom research is a huge part of what we do. The degree to which custom research is aligned with our platform is the degree to which our success strategy is working. Those two things being aligned is absolutely critical to us, and we've been putting energy into that. There are aspects of the custom research offer that are not so aligned. We need to bring everything in line. And AI is helping us to do that. And of course, something that we'll be focusing on in a moment, in fact, in the next slide is the innovation in AI that is massive for us leveraging the value of the assets that we've built. So that is the broad strategic view. You've heard it all before. There's nothing new in there other than that we are updating all of that with AI and we're coming at it with renewed enthusiasm. Now YouGov in the Age of AI is the big question that anybody would ask. And we, I believe, and I hope I'm going to show our company that is ideally suited to use this moment, this historic revolutionary moment for our growth because we are all about talking to real people. And the essence of the use of AI is real people. It is building extra value out of the real people in order to get even better data products, even better value to clients. And that is something I'm going to come to several times because we think that our industry has maybe gone a bit wrong in some areas. There are so many wonderful things that AI can do. Replacing humans isn't really the job of a market research company. There's lots of great things that synthetic data can do to get more value to make it easier to do things like ad testing, and there are a lot of places where that really works well. But remember, the vast majority of spend from our clients is in measuring change. That's what people are interested in. And change cannot be extrapolated. Change -- extrapolation is the assumption that things will be the same. Every time you use synthetic data, the underlying assumption must be that things are the same way you're extending into. That is the definition of synthetic data, it's extrapolation. And extrapolation tells you what you already knew. It extends it, but it doesn't tell you where the surprise is coming. And that's why people buy tracking data because they want to know what's changing, that they don't already know. If everything is going the same next month as last month, then it's all nice, but that data isn't very interesting. It's when the change is not what you expected, and that's not going to come from synthetic data. So we are actually very interested in synthetic data. As you know, MRP has been a very big part of our success in accuracy and getting more value out of our data. So we are actually pioneers of synthetic data. And it has fantastic value. There's nothing against that. But the vast majority of the market research spend is in tracking change. And change, you need real people. And real people are the basis of everything we do. So a data company focuses on the flow of data across 4 things: people, data, process and output. And for this to work, we have developed over the course of 25 years 3 major assets. First of all, YouGov has the best panel. We don't have the best panel in every single country, I wouldn't want to pretend that. But in our major markets where we have our strong panels, we have the best panels. Everybody knows we have the highest contact rates. We have the highest levels of representativity. We have the engagement that keeps them there for a long time so that you can build layers and layers of data. It's by building layers of data from engaged panels that you get the second big asset, which is that we have the best data. And it's the best data because it's a single source, it is connected, and it is always recent. It's always being updated. Every single day, it's updated. Recency, representativity and genuineness, which should be a given, but isn't these days, are the things that make great data. To have that, you need good panel that gives you the best data. And I'm putting there that it's also across different areas of demographic data, things about the people, what they're thinking, attitudinal, behavioral, passive data, that's part of that. Qualitative is the bit that's going to be a big new piece, which I'm talking about in a moment, added to quantitative. The third area is our incredibly strong brand. And it's always good to have a strong brand. But for us, it is key. It is a key function of what we do. Because strong brand yields better panels and builds trust amongst clients. And I have 2 examples here that I want to just run. [Presentation] Stephan Shakespeare: The importance of that for us is Trump says that assuming you know what YouGov is. And if you don't know what YouGov, the name still implies it's an authority. That phrase "according to YouGov" is incredibly prevalent in the media. It is what we want -- I used to say Google is to Google. According to YouGov, is our talisman as it were for this. And Meltwater tells us that we are the most quoted company in the world's press. There are over 1,000 mentions about us -- of us, of our brand every single day. The total number of -- is in the small 385,000 mentions in the last year for the YouGov brand. And you can imagine, this is a value in itself. We're also ranked #2, and this comes from the next -- this one and the last one are coming from independent research. We're ranked #2 for aided brand awareness globally among research buyers. And amongst those, switching to the last one, we are the most trusted market research provider. So even when we're not the most famous, we're just #2, we are the most trusted. And anybody I think in the industry would say, who is the most likely to get a result, like it's YouGov. And these are really fantastically important assets. A strong brand is strong reach. What isn't in here is -- sorry, I skipped it, is we have 4,000 active clients. Now all of those active clients, obviously, people that we can talk to and people we can show our new product to. And you could say this slide is a massive strength. And it's also, in some ways, an indicator of we've got a hell of a lot more assets than we've managed to convert to value. And so we know what to do. This is a massive asset. This is stuff that you can't -- you can't create this quickly. This trust, this reach, this visibility. And all of it will feed into the new products or the new methodology that I'm going to show to you. So what changes about all these assets in the age of AI? And it is a revolution that's happening. But for us, it's very much an evolution because everything that AI allows us to do is an enhancement of assets we've already built. Our mantra from Andrew Ng, who was the founder -- co-founder of Google Brain, really fantastic quote for us, "It's not who has the best algorithm that wins, it's who has the most data." And the other people say, oh, most data is, what's the best data or the best insight, all of that. All of that stuff just emerges from the quantity of data. Genuine human data at very high scale creates good data, it creates good insights, all flows from that. There's no shortcut to the value of really large-scale data. And that is what the whole world is turning on. While other people are trying to cut out the real sources of this, trying to say, hey, we can make more money by not bothering all these humans. We are saying no, it's all about the humans. It's all about the number of people talking to you, how much do they talk to you, how much do they give you? And that's what AI lets us do. And AI enables us to do data collection and discovery at scale. Data collection actually, you didn't need AI for until now, but we are talking today about qual data. And qual data is a different type of data. And it's a type of data that we haven't done much with. It's a type of data that is the Cinderella, if you like, of the industry. People do this as a good way of getting insights, of brainstorming and so on, but you can't base big decisions on qual data because it's touchy-feely stuff, right? It's not stuff that you can create a measure out of. Well, that changes. That changes when you have AI to, first of all, use the background data to choose the right people to talk to and to know what to say to them. And then to take all of this unstructured data that's produced by interviews held by AI and turn those into data that the clients can actually use. It's not enough to be interesting, it's not enough to be good for a brainstorm. It has to be things that you can use and base decisions on. And we are now doing thousands of interviews driven by AI on a daily basis. I'm showing you one example of this. Now I'd love to really -- not doing any demos here because you can't really demo this stuff. So I'm going to show you this one thing, which is a snatch of a conversation. And I'll just -- you probably can't read it, so I'll read it out to you. It says, I've noticed you've given top ratings to quite a few music artists recently, everyone from Rick Astley and Hall & Oates, to 50 Cent and Pussycat Dolls. They each got 5 stars out of 5 from you. What shaped your views on these artists given they span such different musical styles? Now this is a question that the bot came up with that was not based on a prompt of us asking them about anything in particular. They have the background data, the panelist, they were definitely told to talk about music, but they got the bot. The bot got the -- found something interesting in the data to turn into a question. And the answer is, I grew up listening to and appreciating music from different genres and eras. Bot comes back and says, what first got you into such a wide range of music? My mom, school friends, going to gigs and music channels. Which one of those -- which one do you think have the biggest impact on shaping your taste in music? Music videos in the '90s and the '00s. It goes on and it can go on as long as you like. But you've taken previous data, turned that into a relevant question that's targeted at this person. They know that you're listening to them. They know that you know something about them. And that's why they're here, by the way. It's not creepy when we do it. It's creepy when Google or Facebook or whatever does it because you didn't ask them for you, you didn't come there for that. You come to YouGov to be listened to. So this is listening to. And it's responding to and it's getting you in a conversation and it's coming up with an insight. And that can be used, built on in lots of different ways. Now we're not doing one of those. We're doing literally thousands of them, thousands that would cost you -- you could never imagine the cost of just this 20,000 conversation study that we're doing previously. And it is a very low cost. I'm not going to tell you what the costs are now because we'll have a Capital Markets Day before too long and we'll go through all the things and our expectations and things. I'm just showing you a new methodology. This is huge scale at low cost. It's automated, customizable, configurable, continuous data collection. Only YouGov can do this. Nobody else has the combination of things that this requires. This requires a large connected data. Imagine that bot going into the 2,000 or 3,000 things we know about a typical panelist and being able to use that and find the interesting things there to maybe open up a discussion, or to look for the particular thing that the client wants. Maybe the client is only interested in their supermarket habits. So the bot goes into there and finds anything you can find about supermarkets and takes that at a starting point. Only YouGov can do that, because nobody else has the range of connected data with live panelists now. Nobody else. And then only YouGov can do the scale of continuous questioning, so not asking 100 or 1,000. We can do 20,000, we can do 100,000 interviews a day. And we can do them at this scale because we have highly engaged panelists and they come back. They're not -- of course, there's a lot of churn, but our stable panel is with us over time, and we can build up a relationship and we can build up all of that data. So this is our right to win. It is the assets built over 25 years, the best panel connected at scale, the strongest brand and now adding the AI. All of that comes into something that is unique to us. This is a slide that attempts to encapsulate just in one picture what we're talking about and really what we're adding. So over here, we have, on the left-hand side, we have the world of things, the entities. YouGov, as you know, covers over 20,000 brands and products in our tracking. When you combine brand index and ratings, it's more than 20,000. But we say that because it's a changing number and ever growing. But it's musicians, it's TV shows, it's media products. It's supermarkets, it's brands, it's consumer goods, everything that you can think of that is in that commercial world that you might want to track is in our database, is in our Cube and it's all being processed through all of these people's heads. That's what's happening here. They're living their lives. And they come into YouGov and they ask questions and they become obviously noughts and zeroes, and that creates a line. And that's brand index. And brand index was the first, is still the only reliable daily measure of brand strength. And it goes up and down. And you really need to know that. You need to know a lot of companies put this stuff into their risk -- I mean, for example, Bank of America, it's embedded in their risk modeling. It's part of their understanding how news flow affects their accounts and new accounts opened and accounts money taken out and so on, is predicted by reaction to news flow measured by YouGov. But what this doesn't do is it doesn't tell you why something has gone down here. You might know why there might have been some incident, and you know why already, in which case, you might want to know, okay, how does it bother people? Who does it bother? And why? Or maybe you have no idea. There's a trend line, you say, I don't know why it's going down. What this new data does, of course, as you've guessed already, is it gives you the why, not the what. I can't remember if I mixed that what and why. But this is the what's happening. This is the why it's happening. It's in here. The way people are talking about your brand, you can be very specific and say, have you heard anything about Tesco lately, to try and pump that, or you can just say, what do you think about Tesco, or which is your favorite supermarket? You can decide how you want the prompt to go and generate these conversations, and then you can find out how are people talking about you. Then you can do several things. You can compare and contrast things within the data and -- within this data, but you will also take all the previous data that you've had because, if you're a Brand Index customer, we'll have a bank of sort of background hum data as to know what the normal conversation is like, and you can compare the normal conversation about you to the conversation happening today and find out what is it, what's driving this change? There's going to be a huge amount of value in this that we have yet to discover. This is like a whole new treasure chest. But just it's not abstract. After this, I can't demonstrate it to you here, but after this presentation, this goes up online, at the end, you'll find 2 links. One is to about 20 transcripts and the other is to the functional output. Now it is an output for one study. So all the buttons don't work the way -- I mean, it's showing you how it would work, but it's specifically around one study. But you can play with it and see. Because if you have all of this vast data coming along and you don't have a way that it turns into something usable, then that's interesting but no good. So obviously, there's a lot going on there. And really, it's very -- it's delivering real value to clients. It gives the why and the what else to the what that we've already done. It's automated, customizable, targetable and actionable. That is to say, it is really a custom thing as well as a product thing because you can turn it onto anything. You can have a single study from it or you can have it on all the time. Its scale reveals the long tail of new information. It isn't just the thought things that you -- and this is kind of under the next thing, it isn't just the thing that you thought you wanted to know, that's the known unknowns. That's what a survey is. You know what you were trying to find out and you write the questions for that. This is the unknown unknowns. The long tail. The stuff is -- what are people talking about? How are they talking about these things? Does somebody, maybe one person in that conversation come up with something anomalous? The AI will surface that and you can find out things you didn't know. And the last bit, all of those first 4 things, of course, happening already. This isn't just a plan. This is actual delivery. But the last part, the alerts, we have not got to and that's something we're productizing. So the idea is as this flows along and you're getting actually just open-ended questions to sort of pick up the continuous hum of chatter -- by the way, not the same as social listening on social media because the whole point about our panels is they're highly representative. They represent all the subgroups of a population and they represent them fairly. So when you get this hum, you find out what people are actually talking about, not what's on Twitter or whatever it is. That's not -- those are not the same things. So you get -- you look for the -- across this entire horizon and you will get alerts to say, "Hey, here's something you might look at, something that was unexpected." This significantly enhances the values to our data products, I should have actually said, to all of our outputs because you can do this to a single survey, if you want. This is not simply a new product, although it will exist as a product, you'll be able to do just a study of this based on conversations. But it enhances every single data output we have. Everything that we do that was a what becomes a what and why. And that's why this for us is a major revolution. It is going to, I think, have as much importance to us, the qual side as the quant side. And that's what's new. So we've got these 3 dimensions: the sheer quantity of data, the recency, the daily collection, and we've got this massive range. Nobody else has the range. Nobody else has the quantity. Nobody else does the daily collection. And you can say, well, you add up all these assets and you add up the stuff that I talked about before about our reach and our trustworthiness and so on, and then you may ask yourself, why the hell do you only make GBP 388 million? And I do think there is a massive gap, and that's something that we really have to address, how we do better at teaching people the value of our data. So that remains something that we are -- that we have ideas about but that we are working on. The last thing about this slide, this data is an ideal for processing and analysis by AI. I've said that AI, I think, is great for some things and not so great for others. This is right in its area of strength, taking large amounts of unstructured data and turning it into something meaningful is what it does like magic. It's like when we first saw ChatGPT talking. You can't really work out how it is. It isn't really the algorithm. It is the sheer quantity of connected data. Right. Well, we already have our first paying client. I have to say it's a tiny, tiny alpha version of this, but very good. So we already have engineered into the system into Brand Index, that if you want a daily collection or an occasional collection of open-ended data, you can trigger that, and you get that every day. And the version we have now is simply one question, why did you say that? So you've given Tesco or whoever it is a good rating or a bad rating, and it comes up and says, "Why did you give us that rating?" And that adds up to a really useful continuous a little bit of insight that we add to the Brand Index subscription. And that's just had its first subscriber. It's only been out -- we've only been talking for a couple of weeks. We have a lot of clients lined up for further discussions there. But what we're obviously really talking to them about is that question becomes a conversation. And that will be engineered in. It will be ready by Christmas. Just a last couple of points. We've talked about one very important use of AI, but we're using it across everything we're doing. It's helping us with fraud detection. And I think that we will be the -- we are the leaders in genuineness of data. It allows us to do new types of data collection at scale. As we've seen, it does data analysis for us. It does discovery and interactivity on our dashboards. And finally, it also is being used, we're working with a couple of LLMs to turn our data into usable things in search and so on so that the public side of our data is inserted in its best possible form inside the infrastructure of search, because we are a trusted source of data. We want to maximize the value of that data. Everything that we do, everything that we do for ourselves, our proprietary data, is available for free in top line form. That doesn't, in any way, hurt our products, I believe, because you always want the detail. No marketer just wants the top line. But the public is interested in the top line, like the President. It's valuable, it's used almost always in its top line form. And the more that's available, the more it teaches about the data that we have. So all of these things add up to YouGov becoming an AI-driven data company built on real people for all society. As I said, at the end, when you look at the end of this presentation later on, you'll find 2 links, one is transcripts, one is to the interface. It is obviously in a curtailed form. There's also a video to watch that's being added. And we are ready for your questions. William Larwood: Will Larwood from Berenberg. Firstly, just if you could provide some color on sort of the visibility for the top line in FY '26. Obviously, we've got the key renewal period for data products in November and December. That would be great if you could share a little bit more detail on that. And then secondly, in regards to sort of pricing more generally, how you're thinking about that in FY '26 and potentially beyond? And then finally, just -- is -- do you feel there's anything further that you need to do in terms of, from a commercial point of view, there's obviously been some change over the last, say, 18 months or so, particularly on sort of both the CPS side and the data product side? Alex McIntosh: I'll take first 2. I'll start on visibility. So I want to point to a couple of things. I'll pick on the U.K. We've got Will, who's the U.K. CEO here. We ended the year quite strong, in particular, building momentum into the second half in some of the markets that, in the first half, it underperformed. And so we go into the year and we have talked in the past about our backlog, the committed revenue that we have coming into the year. We came in 3% higher than we were last year. We're just a shade under 45% this year. We were just -- we were up 41% last year. So we're seeing that backlog increasing. So we've got fairly confidence on a sort of good performance in the first half. We're not talking -- I'll make this point again, expect modest growth. We're really looking at how do we continue doing a lot of work that's happening under the hood. But I think we're moderately pleased with that. Obviously, it shows some strength coming into the year, particularly with the macro environment. And so I think looking forward to the renewal season. For us, that's typically clients take a data product renewal from the 1st of January, and so November and December for us are key months to make sure that we're getting on top of that. We've amended the way the team structure works. We have a dedicated data product team back to the old model of a team that's really incentivized and focused on those renewals, getting those renewal discussions early. I think having some interesting things to talk about, new developments, in particular around this capability that Stephan's pointed to, shows we should be garnering more interest in that. So we're quietly confident on that. A little bit on pricing. I mean FY '25, we didn't touch it, there was a lot of change going on in the teams, and in particular, getting ourselves set up for changing some of the incentive structures in the 1st of August, which it's very hard to change the incentive structures midyear. We are now putting through. It's a relatively small thing, but we are pushing through inflationary price increases. That's something that we hadn't pushed in the last sort of 18 months. That's when we just started. And again, coming back to our peak renewal season, we should see some of the benefit coming from that. I'll pass to you on for the... Stephan Shakespeare: Just one thing I wanted to say about pricing, because you may have some more to say. I just wanted to say that there's something in the -- in one of those slides that I could have expanded on, and I thought we've already spent a fair amount of time on it, that one of the outputs of a data company is a Data Lake with APIs or an API. And we haven't done a lot of that. We have, in fact, got a number of clients who just take a feed of the entire Cube. But if we're a platform company, we won't be always just thinking of selling this product and this project and you have to come in at this high level or you don't get anything. In fact, it should be the opposite. You should be able to buy exactly the bit you want in any slice or any form that you want. If I just want one question and one -- that's always been impossible on Omnibus, but it should be possible for all of our data. And I think this is quite a big project. This is not something we can deliver. The API and the Data Lake bit is available now, and it's -- but it always involves some extra work on something. But a real front end to that, that says, I want just this particular data should be the way that we allow clients in. And part of maybe how -- when I said there's a big gap between all of our assets and what they're buying is make it easy for people to buy any bit that they like. There's no reason for us to say you have to have a very big subscription to Brand Index. You can ease your way into that. And when we've sometimes tried to do little data slices, it's been very successful. It's just we haven't wanted to do that. And that is a bigger project. That isn't an overnight thing. But that is definitely what a platform company would do to sell data at lots of different levels. Alex McIntosh: Further changes to the commercial team? Stephan Shakespeare: Yes. I mean we have put a very large -- not bounty. We've put incentives in place to make data products get more prominence, and hurdles that you have to hit before you make money on selling custom to sell products. And we have a dedicated team that does nothing but products. It's a small team, but it will grow. And this is really the change in our commercial -- in our sales approach. And there haven't been -- it hasn't been a massive -- it hasn't been as some -- somebody said we're having an overhaul or whatever. It's not an overhaul. It is an evolutionary change to our system. It's -- we've done well. We wanted to be better and we've made, as I say, some significant changes, including putting product as the #1 thing we're trying to sell and making it impossible not to sell a product if you want to get -- sell custom as well. The 2 things are so aligned that it is a matter of how you incentivize, when you're selling one, you can sell the other. But it has to be that you have to sell subscriptions first. Otherwise, you're not going to be a data company. Lara Simpson: It's Lara Simpson from JPMorgan. My first question was just to come back to the P&L. So you did GBP 61 million operating profit, which was really in line with expectations, but you clearly have benefited from sort of lower central costs and then some delayed spending in Shopper. Can you just talk a bit around the margin pressure you saw in Data Products and Research? Clearly, profitability was a bit weaker there. So where are you investing? Or is it sort of slow realization on the cost optimization side? And then you've obviously outlined increased investments into technology and data science. Can you just outline, sort of quantify those investments? And then maybe just give us some line of sight on exactly where they'll be going? Alex McIntosh: Yes. On DP, it's a very simple answer. We acquired Yabble at the beginning of the year. It was a loss-making entity when we bought it. This is about just a shade under GBP 3 million. That's been completely allocated to the Data Products division. So yes, the margin pressure is purely as we're ramping up the activity, wrapping up the integration, ramping up the Data Products, the capability behind this is in part driven by Yabble's applications. So we expect to obviously see some of the revenue growth coming from that to help absorb some of that cost that's going into the business. In terms of the investments, we're budgeting around GBP 4 million. There's a question mark on how fast we can bring that, about having head count. And so Stephan pointed to we have a new hire coming in as our head data scientist. And so it will be primarily focused on platform technology, which will support product, depending on the types of activities because Stephan is correct, this could be applicable to customers as well. So once we make a bit of progress, I'm just going to repeat what Stephan said, we'll come up with the Capital Markets Day to really flesh out what that looks like in terms of where do we see the growth rates coming and where do we see that landing. But for now, it will probably be even spread between the 2 because we're going to see some applications that are applicable to both of the lines of business. Lara Simpson: And then just another question for me was around the balance sheet. So you've obviously closed 1.7 net debt EBITDA, maybe slightly higher than what I think some were expecting. You've obviously pushed back some of the payment terms. It feels like there is more sense of urgency to deleverage post CPS. Obviously, now you're investing a bit. Can you just talk about sort of balance sheet expectations over the next 12 to 24 months and how we should think about that new deleveraging as a priority going forward? Alex McIntosh: Sorry, Lara, to kick off. It's still a priority. I mean for us, it's really -- we have to be -- not careful. Careful is the wrong word. We do need to make sure that we have capacity to invest. We do see some clear opportunities for us. As we start to go out of the market talking about some of this capability, if we can see some revenue potential there, then, of course, you'll see us being much more aggressive in terms of being able to go for a market. In terms of deleveraging, we're taking that down to EUR 20 million for the next 2 years. So we expect that to come down, albeit at a slower pace, but we do expect to have delevering happening. And of course the other side of that, we're trying to significantly increase our profits. So we're trying to achieve both, where we'd like to see some significant movement over the next 2 years in that deleveraging and, at the same time, making sure we're getting into that growth trajectory. Jessica Pok: Jessica Pok from Peel Hunt. I've got 3, please. The first is, can you comment a little bit on the custom -- the sentiment for custom research amongst your client base? I mean Data Products slowed down, but also custom research. And the second is on Shopper -- the Shopper segment and the investment going in. What is the key focus for Shopper over the next 12 months? I mean you've talked about broadening geographies and you've talked about product, but which is the main focus? And the final one is just on the new innovations that you've showcased. Does that change the way that panelists are monetized -- are paid by going into this form of interaction? Stephan Shakespeare: I'll start with the last one because I remember it, the -- and the second one, I remember too. It fundamentally changes our relationship with panelists and we're changing the structure of panel. We've already talked in the past about having a core panel that can do a lot more, called YouGov Plus. And we have -- we know that, by the way, people who are doing a lot more are not giving us worse data, they're giving us better data. It isn't like there's a professional survey taker that somehow gives you worse data. They give you better data that's more aligned with the reality, in fact. And so there's a core panel that we would talk to more and that we'll -- we can rely on more. And we are also now recruiting people not on the basis of any cash reward whatsoever, only on the basis of participation. This is a good way of actually making sure they're not frauds in the first place and as they come through the system. But more importantly, lots of people want to take part just for the sake of participation. If you give them large, boring surveys, that's not going to help you very much. But if you give them these conversations, they will -- we know that they enjoy them. And I mean not everybody wants to talk forever, but lots of people do. And so we have not only interesting surveys that are contributing to public data, but we can have these conversations. And actually, they will also do market research surveys and they would do -- and in any case, a lot of the things they notice and talk about is a form of unprompted market research. So these are sort of 2 ends and there's things in the middle, which is like our regular panel, which we don't interfere with because it's worked so well. So we're doing lots of things in panel and changing the relationship at different ends of that range. The second bit was Shopper. And there are, yes, 2 things: more countries and changing the product. So we've invested in the receipt stuff, which is a form of -- well, it's not entirely automated, but it's less onerous than scanning your shopping. Always remember that the old style here of actually scanning or shopping gives you a level of detail that no other methodology does. So that's why that -- even that old-style methodology of Shopper is incredibly valuable and retains its clients, and grows its clients actually because it goes down to the SKU level. But also we're doing passive data collecting and we are looking at other forms of doing that. And that is also something that will drive our entry into America with this behavioral data. I think that's the aim, as we add more types of behavioral data in there. So there's a mix of ways we're looking forward. I don't remember the first question. Alex McIntosh: Yes, just a change in appetite. Yes, we're seeing a little bit of a mixed bag. I think in some of our clients, we're seeing and having seen some good wins in Data Products in the financial year coming into this year, we are seeing some pressure from media agencies. And so we should anticipate that's going to be a bit of a struggle for us. There is an element of doing a fair amount of custom research for that sector. But on the flip side of that, we're starting to see more opportunity to pitch for larger things as well in the U.S. So I think it's, to one degree, it depends on what country you're in. It also depends on what sector you're in, it's a pretty obvious statement. But I think we should still see some progress within the custom team coming into FY '26 besides macro. And to come back to some of the points that Stephan is making, it is around the measurement. It's people looking for more tracking opportunities. We like that. There's lot of visibility in it. And I think the U.S. team has been working pretty hard to uncover some significant opportunities here. There's a couple that we're working on in the U.K. as well. It's difficult to -- when you're in the summer months, not very much happens from a client decision making. So I think when we come into our Q2, we'll start to see some of that, potentially unlocking, we'll see some decisions made from clients. Stephan Shakespeare: And I think that there's a change happening as well in expectations of clients. So they're expecting something new from AI. And they've been holding back, I think, because they're saying, well, what's this amazing stuff going to deliver? And so far, it's delivered essentially toys. The things that you get, people are not paying for those things. They think they should be there because it talks back at you and stuff like that. But it doesn't give you data that you're going to make decisions on, not for the majority of the market. So I think, obviously, I would say this, that our use of AI goes to the heart of what they are looking for. And so I think this is what they've been waiting for. I think they've been waiting for something that is new and yet that they can rely on them, that tells them something they really need to run their businesses. And that hasn't happened from AI yet. And I believe this is the start of that. Hai Huynh: It's Hai from UBS. I have a couple on Data Products and then one bigger picture, please. So on Data Products, you haven't mentioned category view this time. I know you mentioned that you want that to be the way going forward. But is there a bit more of a tangible time line on when you're expecting it to add into the 95% customers you haven't monetized from? My second question on Data Products is just a bit deeper on the margin perspective. So Yabble brought the margins down. But without Yabble from the numbers, it will be 35% margins, right? So what were the drivers in there? Was that the cost savings? And is that going to be continued? Where do you see the margins going forward essentially with Yabble, and deep into that, when do you expect Yabble to break even? And then the third question, a bigger picture, is you mentioned the LLM potential monetization. How big of an opportunity do you see that is? And how aggressive are you pursuing it given the data quality that you have. Do you think monetization opportunities are there? Stephan Shakespeare: I'll do the 2 outside ones. I think the monetization of our data is potentially high but it may be 0. I mean I can't give you a better answer than that because should they want it, of course, they should, because the thing that those models need is recency and trustworthy sources, and that's what we do. But are we of sufficient scale for that? I don't know. So we are going to scale it up, but I couldn't possibly make a -- say something about that. On the first question, category view. It didn't go well. We launched it, and the feedback was, well, we like what you have, but you're missing things that we need. And I'm afraid it was dropped at that point. There was no going back to fixing those things, which are highly fixable, and we are doing that. That is now with Joe Razza, our Head of Product, who is working on that as one of the things he's doing. So it very much ought to work. And it's actually, we have a good way of bringing it back, which is -- well, really, I'm not supposed to talk about it, but I mean, we want to apply it to a new category that doesn't have very good tracking. And that category is AI. And so we'll be seeing for long a variation of category view for that sector. Yes. And on the side, I would say that AI companies are definitely buying from us now. It's -- I have Investor Relations that I shouldn't mention that it's our fastest-growing sector because it goes from so small to something quite large, but we have made our first 7-figure sale to one of the LLMs. And we think that there is a need for our data by them. Alex McIntosh: I'll pick up on the Data Products margin. So a couple of things moving the margin around. Yabble is one of those and another is the cost reduction program. We've also had changes in the level of capitalization that we have and a lot of our developers are focused towards the Data Products. I think coming back to when do we expect Yabble to break even, a lot of that depends on the pace that we can get these particular products out. I do want to make the point -- repeat the point that Stephan has made, you've got a difference in the way that clients are approaching AI products. And some people are finding they don't want to pay for them, they've seen this as a hygiene factor of having summarization, et cetera, built into your tools. We're really looking for ways that we can monetize that. And again, we'll update more concretely when we come up with the Capital Markets Day. But we do think we should be able to get that being a positive contributor fairly quickly. Where do we see margins growing? I think there's a couple of things we'd like to see evolving. So one of those is just referencing back to what Stephan said, around data slices and having clients be able to come and self-service their own delivery of data. Obviously, that would be delivered at a high margin. You're just taking -- it's a repackaging of existing data. But we're also focused on data partnerships. It's evolving the way that we -- the market that we point to, the set of users that we point to. Primarily, we are still talking to market research buyers. I think, clearly, you can see there are opportunities for us to go beyond market research buyers, particularly the LLMs. A lot of people are doing data deals with LLMs. And we already have a relatively small, we call it data activation, but it's data that goes into marketing campaigns, as part of Shopper's investment area, we've also been -- we make a few million pounds in the core YouGov business around that. We can see that also accelerating. The more clients are using AI tools for their own campaigns, it's a clear space for us to be putting data into that. So as the use of that data evolves and the sophistication of clients using data for their own AI models, yes, we see that certainly moving up into their [ forte ] and beyond. But the pace of that is still to be determined. Johnathan Barrett: It's Johnathan Barrett from Panmure's. I guess I've got 3 questions. Just first of all, thanks for the interesting presentation on the AI interviews. I wondered if you could just walk us through the model for that, the commercial side of that. So what sort of volume of interviews do you need for this to be useful? What's the cost of that? And then how do you commercialize it? Is it a case of bundling with other products that you -- where you're already selling? Is that an uplift? Is it just a question of clients expecting more value for money and you end up with the same pricing? Obviously, at the moment, you're saying you're getting inflationary pricing increases through, but that sort of implies that volumes are flat. So is that -- what's the driver there? Does this drive growth in actual customer numbers? Or does it simply enhance your -- the value of the sale to existing? If you could just walk us through that. And then second question, and you've said a few things around this, so I'm just going to sort of try to round it up a bit, I guess, about data activation being used with clients. And just a more general issue of predictive work that you can do. Obviously, you've talked a lot about historic data, the what, the why, flagging what's going on. Can you move in that direction? Can you build your own personas for those purposes? Are you getting any commercial interest from clients? Just if you could wander into that side of the equation as well. And then thirdly, a very simple question, I think. Yes, obviously, we're wandering into this AI period. You're back in the hot seat, Stephan. Are you really just the CEO for this AI period? In other words, the company needs someone experienced like you who's been in the business for a long time to see through this and you don't want to take risks? Sort of a difficult question. I think it's just an open question. So I think we're all keen to understand that. Stephan Shakespeare: Well, on the first one, the business model is, in some ways, it's early -- maybe too early to have been talking about it because there is so much work to do as to how far does this go, what kind of other interviews can you do, how can you use the prompt. We are at an early stage of that. The reason it's legitimate to talk about it today is because we've sold and we will sell a bunch of subscription add-ons from the alpha version. And the methodology is one that is really to be used tomorrow. I mean we have lined up in the U.K., I'm looking at Will, 5 or 10, I don't know how many clients -- 4 clients. Always inflate. We have lined up 4 clients that are -- will be very excited to want to use this. And so it is active and it will be able to answer their questions now. And if you came along afterwards and wanted to -- representing brand or whatever, wanted something, we would do it. We could run it today. It is not a methodology that requires engineering other than what we've already got. It builds on every asset we have. It's putting together things we've already been doing. We've run 20,000 interviews. They are very low cost. It depends on whether you're paying the respondent or not paying the respondent. But if you're not paying the respondent, you can imagine that one of these sections is going to be less than $0.20, right, for -- just I'm talking about that bit of the cost. And this engineered part isn't a high cost thing. Brand Index isn't a high cost to collect. So I can only give you very broad indicators of the numbers involved. I don't know if it's 20,000 interviews per day or 5,000 will do, or it depends how many countries we're in and so on. So it's legitimate for us to talk about it because we are selling it now in some version and more versions over the next weeks. But it isn't in a place where I can give you a business model for. That's what we intend to do and that's what we've just done. And we're looking to see what does that yield. Does that -- is that something we could have got just as well with 5,000 or 3,000? Or did we need 80,000 or whatever? It's -- and it depends, I say, how many countries you do it in. And so we've done it in a way that allows us to come up with conclusions, initial conclusions, about all of those things. I mean the beauty of our system is experimentation is incredibly simple and incredibly interesting from the first -- from the get-go. The second part was predictive, yes. Well, so prediction is hard because prediction is extrapolation really, unless you know -- you can't know what's going to change something. So I think prediction is about extrapolation and tracking. And we've done with MRP. I mean the best thing -- the best measure of prediction is something real, and that takes -- that is totally visible and we are the best predictors of elections. There's no question. We do it in many, many countries. We have just had 3 MRPs in Australia, Germany and Canada, I believe -- may not be Canada. I think it might have been Spain, actually, which were bang on -- huh? Spain, sorry. And as have been -- many previous elections, bang on in market research terms would be within 5% or 10%. For elections, it's like 1% or 2%. And that is our average. So that's a prediction of sorts, but it's assuming that people -- what they say going to do soon. Long-term prediction. I don't see how you do it from what we do. So if there's a predictive model that somebody has, I think they would use us as opposed to us doing that stuff. As an aside, you may remember with the Trump election, one of a hedge known as the Trump Whale, made large amounts of money on betting on Trump, and praised the quality of the data that we had. That data was ours. That was a client of ours. He went on to eventually say. We would not have used it the way he used it, our data. So it's a good example -- we will supply the real data. And if somebody else is better at doing that, that's their job. It's not our job. Our job is to provide the best, most accurate, real description of things now. And that's -- we know how to do that. And my personal stay, I'm here to make sure we're back on track as the growth company we were in the sort of 9 or 10 years that we were growing at double digit year after year. Obviously, I'm not staying for that period, but I'm staying to the point where we feel, hey, we're back on track. Now that could be just the end of this year. I think our expectation was 1.5 years, something like that. I've just gone the half year. If it was 2.5 years, it's too long because I'm -- I should have made bigger success by then. So I can't say. I mean it could be 3 years, but it's more likely to be a year or so. But there's really no point in deciding that by the second. We've got at least 6 months to see what happens before we have to make -- start making a planning decision. I don't know if that's... Johnathan Barrett: It's really just, are you there for handling the AI thing right now? Stephan Shakespeare: Yes. Johnathan Barrett: Everyone's got this headache on the horizon, or it's right there right now hitting you. It's depending on who you are and what industry you're in, but. Stephan Shakespeare: Yes. Steven Craig Liechti: Steve Liechti from DB Numis. Just a few. On Data Products, I guess, in the second half, in my head, we had 3 things that you needed to do, which is category view, the AI -- sorry, the user experience tools and AI tools, which I thought was Yabble. Just talk us through -- you kind of alluded to category view didn't happen. Can you just talk us through on the other 2? And then going into fiscal '26 now, we still got -- have we still got those 3 to get the benefit from plus the qual stuff that you're putting into and launching into Brand Index. Is that the way to think about it? Can we do that, first of all? Stephan Shakespeare: Yes. So on category view, it's exactly what we should have been doing. We should have changed the product once we realized what it was they wanted. And that was -- they wanted more questions. They wanted 2 things. They wanted more questions around specific use in that sector, so more sector questions. And they wanted more -- they wanted historic data that we had. I've tried to avoid going back over what didn't happen and should have happened in my periods. We had a head of product that came to us and did not -- decided not to make category view, not to go back to it, not to fix it, just to move on. And I think it was wrong, and we've picked that up. But it's -- of the 3 things, it's not our -- wasn't our #1 because it already had been dropped. So it's that we're definitely doing category views, as I just mentioned, and reviving it in a new area. The other 2, the -- Yabble, obviously, is a major contributor to the product that we're just looking at. The summarization, they're working out what the data means and so on. And the other part was, I think, yes, the interfaces. And those have been improved and there will be a continuous improvement. So I think that those 3 things, the category view is the one that didn't happen, but is going to happen. Steven Craig Liechti: And you think that the 4 things that I said, i.e. repeating those 3 original plus the qual stuff are the key drivers for DP into fiscal '26? Stephan Shakespeare: Yes. And I think you were asking as well, Johnathan, I think you were asking, was this a separate product or an add-on or just making it more attractive? I think it's a major new type of data, which means it will be deployed as an enhancement to existing things, which you can -- which you have to pay for, or it can be used on its own. So I can't go further than that because I don't know how you will engineer some of these things, on what order we would do it. Number one is it's an enhancement to Brand Index that you pay for, which I think would make Brand Index a more exciting product to sell and therefore -- and to buy. And it would mean that existing users who are interested in this data are likely to be early buyers of it. That would be the beginning. And yes, the AI tool. Steven Craig Liechti: And I suppose we should put in, a fifth one actually, which is a more focused sales team as well on the product side. So that you've got the 5 things. Stephan Shakespeare: Yes. Steven Craig Liechti: So if you took those 5 things and I think about fiscal '26 between the first half and second half, last year, you did about 1% growth in DP in the first half and 1% in the second half, give or take-ish. How do you think that should flow through first half, second half? Is it kind of more of the same in the first half and then acceleration in the second half? Stephan Shakespeare: Well, there are so many moving parts here and, obviously, I'm so optimistic that you shouldn't probably listen to me anyway. But I think that we will have a Capital -- I mean I know that we will have a Capital Markets Day. I know you're going to ask for these updates. And we will have that as soon as we have some -- the next stage of concreteness around this. I would like it to be very soon, but I can't promise it until I have a little bit more customer feedback. Steven Craig Liechti: And then last question, just in terms of the overall profitability of the business, given you're putting in the investment that you talked about, this year, roughly, give or take, 30-30, won't be between the halves, if consensus is now low to mid-60s, how should we think about the profit flow through first half to second half? Alex McIntosh: I think these investments will take us a bit of time to come through. So I think we'll start to see those coming in really Q2, Q3 of our year. So as you project before both going into the latter half of the year with a higher cost base. Of course, the thing that we're still sort of working on, and not to rehash this too many times, we could see an acceleration of client adoption around these things. But for now, we're being fairly conservative in terms of we just can't predict what the uptick will be, it will be very client-dependent. So yes, the main factor will be how fast can we find people and employ them within these data science teams. But we've already made some progress in terms of getting a leader. Jessica Pok: Jessica Pok from Peel Hunt. I just have one follow-up, please, about the new products. Obviously, you're doing a lot of testing for clients in the U.K. who are interested. Do you -- I mean is the process now to deploy it to these initial customers' feedback, reiterate? I mean when do we get to the point, I guess -- or is it more second half of this year? Or are you really envisioning FY '27 of when you could possibly do a full launch of products? I mean, I'm assuming that whilst you're doing this testing, you're holding back a little bit on kind of showing it to all your customers and deploying it to all your customers. Stephan Shakespeare: So I mean, if you -- which you do know the business, you'll know how easy it is for us to do this, because we do at least 20,000 surveys anyway every day. By surveys, I mean, interviews. And we can add this to the end of every single survey and say, would you like to talk about anything that's on your mind now? And actually, we will. We will add it to every single survey as just a final sign-off question. And they can tell us what a s***** survey it was or they can tell us they'd like to do some -- they'd like to chat a bit. And some of these people talk about their divorce. They talk about their football team. In the first few thousand that we had, the variation in those are incredible. People want to talk. Now what proportion? Every single survey that we run, we will ask them if they want to talk some more. So it's really easy for us to set this up. And we have a prompt that allows them to talk about anything they choose or to choose one of the things that we put in there. So they actually can use it the way that they want. And it's sort of pre -- sorts itself as it's going through. It's unbelievably simple and rich in its product and enhances user experience. It isn't a cost for this because we're not going to pay people except when we wanted to talk about something really boring. That's the bit about being a panelist, sometimes you have to talk about your use of OXO cubes or something, and that's not what most people want to talk about. Nobody ever wants to talk about an insurance plan, right? You have to pay them for that. So you do have to do that sometimes. But you don't have to talk to them about music -- pay them to talk about music or about their lives or whatever. And that gives you a lot of background information that you can then divert when you need to and offer extra incentives. So what I'm saying is that this will be very quickly engineered to the entire running of surveys that we do. And we'll be able to do -- create products of it, I believe, all over the place. But it will not run out for a long time of ideas. There's so many things to try. But it just sits there as something people want to do anyway. I mean I should say, just -- please, just last. We have had a box at the end of surveys for years, which nobody reads. And we realized we had 10,000 comments coming in the day every day that we ignored that nobody ever looked at. We still don't know what they said. I mean it's a very bad thing. And that kind of triggered this. Unknown Executive: We have a question that's come in online. It's from Jonathan Cohen from Zipper Line Capital. And Jonathan's question is, SP3 called for 500 million of revenue excluding M&A and CPS, and 25% operating profit. Is that still what you're aiming for? And is that what you're guiding to in the medium term? Stephan Shakespeare: Yes. And you know what I'm going to say to that, I'm going to say that we will have a Capital Markets Day and we will remodel everything for that. It's impossible for me to say that now. But I will say that we are a data company that is incredibly ambitious to be the world's #1 supplier of opinion data everywhere. That's what we can do. It's incredible that we haven't done more in that sense because you see what's there, it's all engineered, it's all there, and we just haven't done enough. So our ambition remains huge. Our execution has not been good enough, and we are doing quite a lot. We haven't talked about this, but we're doing quite a lot. The Board has been very active in helping improve execution at YouGov. We have board members that are actively involved. We have new Board members. Nobody has asked about the Board members, but you'll have noticed, we've had some very high-quality board members. A couple from Silicon Valley, a couple from very good experience in U.K. PLCs, one of them from Kantar. We have high involvement now from the Board in pushing for better execution. And so my answer to that, Mr. Cohen is -- and he's been an interesting contributor in comments, I totally agree that we are pushing -- that we are a data company that should have very high ambitions. And we will give you a more realistic steer on that at the Capital Markets Day that we'll have. We'll have it as soon as we can -- as soon as it's ethical for us to do it. In other words, that we have enough actual information, complete information to base it on. Unknown Executive: Great. Thank you. Thank you, Mr. Cohen, for the question online. We don't have any more online. So unless we have any more from the room... Stephan Shakespeare: Thank you very much. Alex McIntosh: Thank you very much, everybody.
Operator: Thank you for standing by, and welcome to the Paladin Energy Limited September 2025 Quarterly Results Call. [Operator Instructions] I would now like to hand the conference over to Mr. Paul Hemburrow, CEO. Please go ahead. Paul Hemburrow: Good morning, everyone, and thank you for joining Paladin Energy's September 2025 quarterly investor conference call. With me today are Anna Sudlow, Chief Financial Officer; Alex Rybak, Chief Commercial Officer; and Paula Raffo, our Head of Investor Relations. We had a solid start in the first quarter of the financial year at Langer Heinrich with mining activities increasing significantly to the overall ramp are progressing steadily in line with our plan. I'd like to note some highlights achieved at Langer Heinrich during the quarter. Record quarterly production of 1.07 million pounds of uranium, the highest since the mine restart. Total material mined was up 63% from the previous quarter of the mine. Average realized price increased to $67.40 per pound while unit production costs were $41.60 per pound. Total recordable injury frequency rate of 3.2 per million hours worked on a 12-month moving average basis, better than the company's safety target. There were no serious environmental or radiation incidents or breaches of environmental compliance requirements during the period. Importantly, for Paladin's future growth, we have made significant progress at Patterson Lake South Project with completion of a comprehensive review during the quarter, confirming robustness of the project and derisking development and operation. The strong economics support our unwavering commitment to bring the PLS projects into production by early next decade, while continuing to derisk the development through feed and conducting further exploration to identify future expansion opportunities. An important step moving forward with the development of PLS was the appointment of Dale Huffman as President, Paladin Canada. Dale will be joining the company on the 20th of October. Additionally, the team in Canada continues to progress permitting activity for PLS, including the final environmental impact statement. We have also been progressing consultation with indigenous nations and local communities while continuing engagement with provincial and federal regulators. As the newly appointed MD and CEO, I was personally pleased to see the strength of investor and market support through our fully underwritten $300 million equity raising completed in September, which provides the balance sheet flexibility to support both the PLS developments and the LHM ramp-up to full mining and processing plant operations planned for FY 2027. Looking ahead, our focus remains on completing the Langer Heinrich ramp-up by the end of FY 2026 and advancing the development of the PLS project. I'll now open the call to questions. Operator: [Operator Instructions] Your first question comes from Rahul Anand from Morgan Stanley. Rahul Anand: Look, just wanted to test a bit of the cost base, really good cost performance at least versus my numbers. Just wanted to test how we should think about the fixed cost variable splits going forward? Obviously, you step into the main part of the mine next year, and wanted to understand what type of cost performance we can expect going forward? That's the first one, and I'll come back with the second. Anna Sudlow: Rahul, thanks for the call, and we haven't guided on the split, but I think you should probably assume that the fixed variable split is probably 20% to 30% fixed with the remainder variable. If you look at the -- one of the key costs being the reagents, and they're a key contributor to that mix. Rahul Anand: Got it. Okay. And then, I guess, any sort of clarity into what's going to change in terms of the fixed cost base going into next year. I would think that you probably get a bit more fixed component in your cost base as you kind of ramp up the mine more as opposed to stockpiles? Is that the right way to think about it, or are you there or thereabouts in terms of your fixed... Anna Sudlow: I think if you look at next year, we'll be moving into more mining than we currently are. So I don't see really -- and the majority of that mining cost is going to be the variable cost, right? So I think overall, the balance is probably going to remain pretty much as it is. Rahul Anand: Got it. Okay. Now that's very helpful. And look, for the second one. Obviously, a new uranium sales contract and then also sales volumes a bit weaker than us in consensus. Obviously, there's a bit of variability in terms of how you achieve those. Is there any further color you can provide as to how the analyst community in general can kind of forecast the sales a bit better? And then maybe a bit of an update on that new contract, and how you're seeing the market? Paul Hemburrow: I'll hand over to you, Alex? Alexander Rybak: Yes, thanks. So obviously, we've talked about it at length. Our sales are quite lumpy, and they can be anywhere between 200,000 and 500,000 pounds for any particular sale. In this particular quarter, we had a customer -- we had a shipping delay, which meant that a customer delivery got pushed out from the September quarter into the current quarter, and that was the main reason for that lower sales number. However, we have -- you would have seen we've built up quite a significant inventory balance of 1.8 million pounds. And of that -- all of that is earmarked for customer deliveries. And of that, about 1 million pounds is currently in transit on the water. And in fact, we've received cash for close to half of that 1 million pounds that's in transit already. So uranium is -- does have quite a long working capital cycle as we've previously discussed. But what it means is that it's a timing issue and these sales will come through in this quarter. So that's sort of on your first question. In terms of the additional sale agreement that we executed in the quarter, relatively small sale agreement, but with a very high-quality counterparty, which we've been targeting for quite some time. We're very pleased to have secured that offtake agreement. It doesn't materially move our pounds under contract from 24.1 million to 24.5 million pounds under contract to 31st of December 2030. And within that amount, obviously, we maintain a market-related price bias, but we also have quite a significant base escalated projection in our contract book, which is I think not unexpected in quite a high volatile environment. But we are seeing very strong sort of fundamentals in the pricing at the moment with TradeTech and JORC have increased their term pricing, spot pricing has strengthened which is great news for us because our book does remain tilted towards market-related pricing, and we do expect to realize the benefit of that. Operator: Your next question comes from Alistair Rankin from RBC Capital Markets. Alistair Rankin: Just the first on that total material moved of 5.27 million tonnes was really solid, given you've still only got about 50% of the fleet commissioned at the moment. So you must be very pleased with the team on that. So this strong performance given you a bit of a buffer in terms of the G-pit stripping schedule for FY '26? Or were you expecting to hit this level of material moved over this quarter? Paul Hemburrow: Yes. Thanks for the question, Alistair. We are really pleased with the results. We're seeing really good levels of availability and utilization of the 100-tonne fleet, and it was in line with our expectations for the quarter, but a very pleasing result. Alistair Rankin: Okay. That's great. Then just also on your primary non-low-grade ore. I just noticed that you had about 430 kilo tonnes mined over this quarter. So was all of that fed into the processing plant over this quarter, or did some of it go into stockpile? Paul Hemburrow: Yes. We do a bit of rehandle the outcome of the stockpile, and we blend to make sure we get the best throughput that we possibly can. So there is a bit of stockpile movement. So some drawdown of the MG3 and some of the fresh mine ore go into stockpile. Alistair Rankin: Okay. So I guess, in the next quarter for December, given you're still going to be doing quite a bit of G-pit stripping, do you have a plan to access similar volume of primary ore in the next quarter so you can keep those feed grades around where they are? Paul Hemburrow: Yes. We haven't guided on a quarter-by-quarter basis, but the expectation that we set when we delivered the guidance that the first half of this financial year would be in line with what we saw in the last quarter. And I think that's what we've delivered in this quarter. So my expectation is that the result for the remainder of this half will be in line with what we've seen in quarter 1. Alistair Rankin: Yes. Yes. Understood. And then maybe just lastly, could I just get a reminder on the current sequencing for which pits you're planning to mine? So obviously, doing the G-pit at the moment. You mentioned that you've done a little bit of work on the F-pit. And I think in your guidance for FY '26, you mentioned the J-pit as well. So could you just give us a quick refresher on what the plans are on the sequencing of the pits that you're going to mine? Paul Hemburrow: Yes. So most of our work is focused on G and F at the moment, and we may move into the J as well. We've got quite a well-developed 12-week schedule, and we're doing some reoptimization on the base of the new fleet we're getting. So we'll talk more about that as we get through the year. But fundamentally focused on G and F. Operator: Your next question comes from Regan Barrows from Bell Potter Securities. Regan Burrows: Congratulations on a good quarter in line with what you said. Just following on from Alistair's questions before on total material moved. At full capacity in the second half, what sort of run rate will you be targeting there? Paul Hemburrow: So we provided guidance for the full year at 4 million to 4.4 million, and we absolutely stand behind that. Regan, it actually depends on how quickly we're able to commission the new fleet. We got to go through the receivable of that mobilization of the fleet, recruitment, training, commissioning. So there's a few ifs. But by and large, we expect to stand behind the guidance at a 4 million to 4.4 million pounds rate for the full financial year. Regan Burrows: Sorry, just on -- as in if we sort of had a look at the material move in 1 million tonnes per annum annualized basis, I mean what's 100% operating capacity for that fleet that you're looking at? Paul Hemburrow: Yes. We haven't done -- we haven't guided on that. Regan Burrows: That's right. Okay. And just in terms of, I guess, mill performance over the quarter, can you give us a bit more of a breakdown on that blending strategy. And I guess what was fed into the mill, were you sort of 50-50, I guess, with the stockpile and fresh ore? How does that sort of shape out? Paul Hemburrow: Yes. The blend strategy varies as we go. As I've mentioned before, we typically got 4 types of feed going into the crusher, dry and wet coarse and dry and wet fine clay material. And we blend on the basis of what gives us the best throughput numbers. So as we progress through the MG3 stockpile and find different types of materials, and our blending strategy is adjusted accordingly. So we don't actually have blend strategy. It also depends on the material coming out of the pit and that, of course, depends on how it presents itself. So that blend strategy has varied quite significantly over the quarter. And just interestingly, it's produced the same 437 ppm this quarter as it did last quarter. Regan Burrows: Right. And if I could just squeeze one in there. You mentioned water availability over the quarter was managed well. Can you sort of elaborate on what you sort of mean by that? Were there any issues, I guess, with water availability coming out of the desal plant or your sort of allocation? Paul Hemburrow: Yes. So in terms of our infrastructure on site, we've got our 2 bladders. We're pretty much operating 2 bladders at full capacity. The NamWater system is able to supply at or above our contracted rates. There has been some challenges in the Orano desal system. But by and large, we've been unaffected by that with utilization of our on-site capacity, but we've also improved our unit consumption rates on site as well. So we're progressively having fewer and fewer impacts even considering the system variations from the Orano desal and the NamWater system. So it's going exceptionally well on the waterfront. Operator: Your next question comes from Milan Tomic from JPMorgan. Milan Tomic: Just a question on the sustaining CapEx. It was quite low compared to the previous quarter. Is this just a function of the movement in the stockpile ore? And is the expectation for the next quarter expected to be broadly in line with this quarter. I'll come back with the next one. Anna Sudlow: Yes. Look, I think the main reason the number is just low this quarter is really just a function of the timing. So we're still standing behind the guidance of the kind of [indiscernible] for the full year. It's not to do with the low-grade stockpile or capitalized stripping. They weren't included in that guidance. We've also got some kind of chunky capital numbers in there around in drilling and exploration. So that capital is not going to be evenly allocated over the year. Milan Tomic: Yes. Understood. And just going -- touching on the previous question regarding the water management strategy. Can you just remind me how many days of water buffer do you have on site? Paul Hemburrow: Yes, it's about 8 or 9 days. It depends on our water consumption per cubic meter of feed into the crusher. So it's 8 or 9 days. Milan Tomic: Yes. And has that issue with NamWater being resolved, or are you still relying on the capacity you have on site to provide water to the mill? Paul Hemburrow: Yes. We don't have any outstanding issues with NamWater. Operator: Your next question comes from Glyn Lawcock from Barrenjoey. Glyn Lawcock: Paul, can I just clarify, I think one of the questions or the answers to one of the earlier questions. Just when you look at the costs, obviously lower in the quarter, is it fair just to simply assume that you've got your guidance and as we move into the second half, you'll basically be staying to process what you mine as opposed to capitalizing it. And it's really just that drives the cost higher, or is there some opportunity maybe to do better than your guidance? Anna Sudlow: Yes, Ken, I think you're right. I think we will be ramping up mining. And so as you would imagine, the actual cost will increase because we are using a medium grade stockpile now. So yes, I think it's reasonable to assume that the costs are going to increase as the mining fleet comes on, and there's greater marked proportion of mine material. Glyn Lawcock: Okay. And then, Paul, just I know you've been mining a lot more waste than ore during the quarter, but just how is the pit shaping up? I mean, obviously, clay presence, et cetera. Is it sort of -- are you seeing what you expected to see as you mine through the pits in these early days? Paul Hemburrow: Yes. The G-pit is absolutely in line with expectations. So we don't have a lot of clay material in that area. So it's actually shaping up very, very well. Probably slightly lower weight than anticipated, but it's looking good. So I'm very excited about next quarter and particularly the second half of the year. Glyn Lawcock: Yes. And if I could just squeeze a third one in quickly. I mean everyone now globally is talking about support for critical minerals. I'm sort of unclear where uranium falls a little bit in that. But just what we're seeing, has it provided any more impetus for discussions with local governments here at WA, Queensland to maybe overturn mining? Or are you not really in any active discussions at the moment? Paul Hemburrow: Look, I think we've got plenty to keep us occupied at the moment, particularly finishing to ramp up this year at Langer Heinrich and pushing forward with PLS. So we're not really in the space where we're actively engaged in pushing forward in WA or Queensland at this time. Operator: Your next question comes from Dim Ariyasinghe from UBS. Dim Ariyasinghe: Just a couple of quick ones from me. Number one, on the plant and maybe recoveries, noted it's trended lower over last few quarters. Just wondering if there's anything to read into that as you ramp up, I presume it's all within range, but just any clarity on that? Paul Hemburrow: Yes. Thanks for the question. So typically, our target range is 85% to 90%, and we're in that range. In most plants like this, it's very, very dependent on your plant stability and that's particularly with respect in this circumstance to feed grade. With the stockpile ore and blend strategy that we use to focus on throughput, we do get a bit of feed grade variability, which does drive variability in the overall recovery rate. But as long as it performs within the 85% to 90% target range, we're pretty happy. Dim Ariyasinghe: Yes. And then the other one, so obviously, a bit of focus on the fleet pickup. Just in terms of what you can put through the plant. So you put that was kind of unchanged quarter-on-quarter. Can you -- I guess what's the bottleneck there to start running the plant more even as you're continuing to process stockpiles. Can you go into a bit more detail there, please? Paul Hemburrow: Yes, I can go into detail on this one. Look, there's a couple of different bottlenecks. And of course, it depends on what type of feed you're putting into the plant. So if you put wet clay materials, then the crush is going to be in the bottleneck. What we found is if we put dry coarse material in, then we can increase our plant throughput, and that doesn't become the bottleneck. Similarly, at the CCD, if we have low density feed that we have low settling rate and that becomes a bottleneck in the plant. The leaching circuit is not a bottleneck. Classification is not a bottleneck and the final recovery and packaging facility is not a bottleneck in the plant. So it really depends on the type of feed that we put through as to where the bottleneck appears. Dim Ariyasinghe: And I'm assuming, sorry, just kind of hard to hear a little bit. But as you get into the fresh ore that bottleneck lifts effectively, is that the way to dumb it down? Paul Hemburrow: Yes. Again, it depends on the type of material that we feed into the plant. So it's the feed grade lithology is heavily clay and wet, and that's going to be more difficult to process, and that means we adopt a blend strategy that optimizes our crusher throughput. So although fresh ore largely would be very helpful for us. Operator: Your next question comes from [ Josh Barr Jonathan ] from Canaccord. Unknown Analyst: Congrats on the results. In the last 2 updates, you mentioned how the mine plan has been optimized to now deliver medium- and high-grade ore to the processing plant, while stockpiling the low-grade ore. I was just wondering if you could provide some context around this change and maybe add some color on what this can mean for production during the initial mining phase. Paul Hemburrow: So what we've been doing is we've done several optimizations of the mine. And -- but every time we get a change in new price, for example, we can do some reoptimization to see if we can increase the pit shell as well as doing infill drilling around the fringes of the existing pit gives us a few more opportunities. So we continue to run optimization strategy to determine our feed to the pit. That will be an ongoing process over the life of the mine. Unknown Analyst: And the inventory level obviously appears quite strong at 1.8 million pounds. I was just wondering if there's an optimal level that you'll target moving forward as a buffer against any potential challenges. Anna Sudlow: Yes. I think the inventory level is not a deliberate strategy. It's really just a function of shipping availability and the working capital cycle. So Alex, as Alex said on the earlier Q&A, all of that material that's produced is in marked for sale. It's really about getting it from site to point of sale. So that drives that balance. We don't have a deliberate strategy around inventory other than I'd like it to be as low as possible, but it's a function of the shipping schedule ultimately. Operator: Your next question comes from Milan Tomic from JPMorgan. Milan Tomic: Just wanted to ask more of a high-level question. How is the performance of the pit performing versus the restart plan? I guess do you still see chances of getting to 6 million pounds. And maybe if anything else has changed relative to that study? Paul Hemburrow: Yes. I think what you will see or what we are seeing is that the performance is exactly what we thought it would be. So we guided on that 4 million to 4.4 million pounds full production rates for this financial year. And G-pit is performing exactly how we thought it would. My expectation as we progress through the year is a slightly stronger second half than first half. And when we get to July, we'll be in a position to provide you with the guidance for FY '27. At this point in time, I expect FY '27 to be very strong. Operator: There are no further questions at this time. I'll now hand back to Mr. Hemburrow for closing remarks. Paul Hemburrow: So we're really pleased with the results for the quarter and our performance is in line with our expectations. We appreciate the support from investors through the fundraise, and we're excited about the rest of the year and achieving the guidance that we've set. Thank you very much for joining us on the call today. Operator: Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.
Daniel Morris: Hello, everyone, and welcome to the presentation of Ericsson's Third Quarter 2025 Results. Joining us by video today is Börje Ekholm, our President and CEO; and in the studio, I'm joined by Lars Sandstrom, our Chief Financial Officer. As usual, we'll have a short presentation followed by Q&A. And in order to ask a question, you'll need to join the conference by phone. Details can be found in today's earnings release and on the Investor Relations website. Please be advised that today's call is being recorded and that today's presentation may include forward-looking statements. These statements are based on our current expectations and certain planning assumptions, which are subject to risks and uncertainties. Actual results may differ materially due to factors mentioned in today's press release and discussed in the conference call. We encourage you to read about these risks and uncertainties in our earnings report as well as in the annual report. I'll now hand the call over to Börje and Lars for their introductory comments. Borje Ekholm: Thanks, Daniel, and good morning, everyone, and a big thank you for joining us today. So we delivered a strong Q3 with continued expansion in our EBITA margin despite the FX headwinds. I would say that reflects our execution against both operational and strategic priorities over the last couple of years. We're optimistic about the growing demand for advanced mobile connectivity as AI is starting to be rolled out. By structurally improving our cost base, we have positioned Ericsson to deliver resilient margins, also in the current market backdrop, which will give further benefits from improving operating leverage when growth comes back and actually comes in reality. Beyond operational improvements, of course, we focus on technology innovation, and that positions us well for the next key driver of our industry, the broader adoption of AI. As AI workloads move to the edge, demand on the network will increase significantly. These AI applications and AI devices will require wireless technology by placing, but it will also place new demands on the connectivity, such as ultra-low latency, high dependability, guaranteed uplink and very high security demands. So best effort connectivity. Think of that as WiFi, 4G and 5G non-standalone will simply not be enough. So to cater to these new type of demands, operators will need to invest in and migrate to 5G standalone networks and later, of course, migrate into 6G. Their success here will depend on high-performing programmable networks. And here, Ericsson is a leader. And we're also seeing some front-runner operators now starting to realize new monetization opportunities of network slices as well as efforts to provide differentiated connectivity to different segments and different type of applications. So now let me move on to some key financial and strategic takeaways before Lars dives into the numbers. So organic sales declined by 2%, but we saw growth in 3 out of 4 market areas with only the Americas reporting reduced sales following a particularly strong deliveries in Q3 last year. FX continues to be a headwind, and we had a negative year-over-year impact of SEK 4.2 billion this quarter. As mentioned, we saw positive development in our margins. Gross margin came in at 48.1%, and we delivered another 3-year high EBITA margin of 14.7%, excluding the capital gain from the iconectiv side, and this is now starting to approach our long-term target. The margin expansion reflects actions we've taken over the last years to increase operational excellence and efficiency, including the work we've done on our cost base. Over the last year, we've reduced our headcount by some 6,000, leveraging new ways of working, and that, of course, includes AI. As we plan for a flattish market also going forward, we will continue our cost measures on levels similar to what we've done in the past years. The effect of actions we have taken over the past years are now kind of flowing through the P&L and establishing the profitability at the new level. Our continued focus on cost management will provide incremental benefits going forward, but it will also give operating leverage should the market improve. We ended the quarter with an elevated cash position, that's driven by strong recurring cash flow, but also, of course, the iconectiv sale. As a result, we see scope for increased shareholder returns through extra dividends and/or share buyback program. And the Board will revert with the proposal in time for the AGM, as you know, is the practice or is the Swedish governance model. In parallel with strengthening the company operationally, we're continuing to execute on our strategy to capture a bigger share of the value created by connectivity. So let me expand that a bit further. In our core mobile infrastructure business, we signed new customer agreements in the strategically important Japanese market following our recent R&D investments. With Japan being one of the countries with a strong industrial base in such areas as automation and one of the densest networks that have still not built out 5G coverage, we see this as a key market going forward. We also increased our share in the U.K. with an 8-year partnership with Vodafone-3 to supply a significant majority of the mobile networks and the entire core network. And this morning, we announced a 5-year strategic agreement with Vodafone in Europe for programmable networks, where we remain their primary vendor with more or less stable market share. Within the telco market, new monetization opportunities are needed to drive more network investments by our customers. So we continue to execute on our strategy to create new use cases for mobile networks. For example, we're seeing good development in fixed wireless access, where customer satisfaction is typically higher than for fiber due to the ease of use of cellular or wireless technology. In the quarter, we announced a contract with Bharti Airtel to support their fixed wireless access rollout with Ericsson's core network portfolio. And we're starting to see good traction in mission-critical including, of course, defense. We're also taking important steps in our strategy to create a market by exposing the capabilities of the networks through APIs. This remains one of the key opportunities for us to capture more of the value created on top of the networks. And as you know Aduna, our JV with the large operators for network APIs, closed this past quarter. Revenues are still small, but we see the uptake in Vonage API business is actually starting to come through. And we see that in areas such as fraud protection as an early use case, but also in industrial applications. And today, we have already applications live in the market. Also, in Vonage, we're expanding our ecosystem partnerships with AWS and added marketplace presence and product integration. So now let me comment a bit further on the market development we saw in Q3. In market area Americas, sales declined by 8% year-over-year with declines both in North and Latin America. This follows, of course, a very strong Q3 deliveries in 2024, where we had high deliveries to a number of large customers. Latin America continues to be a competitive market with overall low investment levels. Sales in Europe, Middle East and Africa grew by 3% year-over-year. But if we look closer at the region, we saw a very strong development in Africa, partly driven by new 5G launches in Egypt and Morocco. In both the Middle East and in Europe, sales declined, and we continue to see European customers being cautious with investments. In Southeast Asia, Oceania and India, sales increased by 1% year-over-year, and India continues to have rather low investment levels, but it actually grew quarter-over-quarter. We saw a decline in networks, partly due to the low level of network investments in India, but also stiff competition in Southeast Asia. Cloud software and service, on the other hand, saw an increase in sales. Lastly, sales in Northeast Asia increased by 10%. That was due to higher network investments and deliveries in Japan. In the quarter, we were awarded new agreements with customers in the Japanese market, including enhancement of SoftBank's 5G SA network, where we have clearly increased our market share. Overall, I would say that we continue to have good discussions with all our customers in Japan. With that, I hand over to Lars to go through the financials in more detail. Lars Sandstrom: All right. Thank you. So net sales in Q3 totaled SEK 56.2 billion, with organic sales declining 2% year-on-year. Most regions grew, but North America declined, mainly reflecting tougher comparisons with a high period of customer investments last year. At the same time, reported sales decreased by 9%, impacted by a negative currency effect of SEK 4.2 billion. Taking a look at IPR performance. Revenue declined by SEK 0.4 billion year-over-year, now standing at SEK 3.1 billion for Q3. It's worth noting that last year's quarter included retroactive revenue, so that skews the comparison slightly. The run rate coming out of Q3 is still around SEK 13 billion. In Q3, adjusted gross income was SEK 27 billion, including a currency headwind of around SEK 2 billion. We saw an improvement in our adjusted gross margin, reaching 48.1%. And this positive development is a result of our cost reduction measures and operational excellence in both Networks and Cloud Software and Services. Looking at gross margin sequentially, we held stable even though we lost a temporary boost from the Q2 IPR settlement. Excluding IPR, the improvement was around 2 percentage points. In Networks, this benefited from organizational effectiveness in the market areas with well-planned and executed service delivery. This helped also manage supply effectively and further optimize inventory. And in Cloud Software and Services, the improvement is mainly coming from services, where we are continuously improving our delivery performance. On the cost side, we made steady progress. Operating expenses, excluding restructuring charges, dropped to SEK 19.3 billion, around SEK 2 billion lower year-over-year. Of this, about half came from our cost initiatives, and the rest is mainly currency. Excluding the iconectiv gain, adjusted EBITA came in at SEK 8.2 billion, up by SEK 0.4 billion, including a negative currency impact of SEK 1.2 billion. The EBITA margin was up around 2 percentage points to 14.7%. Behind this improvement is the good progress we have seen in terms of optimizing operations and lowering our operating expenses. Cash flow before M&A was SEK 6.6 billion, driven by earnings with net operating assets broadly stable. Let's move to the segments. In Networks, sales decreased by 11% year-over-year to SEK 35.4 billion with a negative currency impact of SEK 2.8 billion. Organic sales decreased by 5%. We saw organic growth in market area Northeast Asia, driven largely by Japan, which Börje already mentioned. Europe, Middle East and Africa also grew, driven by Africa. Sales declined in market area Americas and in Southeast Asia and India. Networks adjusted gross margin increased to 50.1%, benefiting from cost reduction actions and operational efficiencies despite change in the market and product mix. Looking at the right-hand graph, the rolling 4 quarters adjusted gross margin reached 49.9% and stabilized at the new level. Adjusted EBITA in Networks decreased by SEK 0.9 billion to SEK 7.2 billion, including a negative currency impact of SEK 1.1 billion. EBITA margin of 20.3% remained stable compared to last year. Then moving to Cloud Software and Services, sales increased by 3% year-over-year to SEK 15.3 billion, which includes a negative currency impact of SEK 0.9 billion. So organically, sales grew by 9%, mostly driven by higher core sales across all market areas. Sales growth was helped sequentially by a softer Q2 as well. Adjusted gross margin came in very strong in the quarter at 43.6%, an improvement of 5 percentage points compared to last year. This was a result of the continued focus on automation, efficiency, commercial discipline and delivery performance. And looking at the right-hand graph, the rolling 4 quarters adjusted gross margin reached 41.3%, a new high level. Adjusted EBITA increased to SEK 1.9 billion with a margin of 12.5%, supported by higher gross income, lower operating expenses and effective implementation of our strategic initiatives, including AI and automation investments and our commercial discipline. In Enterprise, sales decreased by 20% impacted by divestments in currency. So organic sales were down by 7%. Global Communications platform declined by 9%, reflecting the decision to scale back activities in some countries last year. The financial impact of this is now largely behind us, so we expect Enterprise sales to stabilize on an organic basis in Q4. Adjusted gross margin declined to 51.6% driven by the iconectiv divestment. Margins improved in both global communication platform and enterprise wireless solutions. Taking out the contribution from Aduna and iconectiv, which were divested in the quarter, adjusted EBITA landed at minus SEK 1.1 billion. Turning to free cash flow, which was SEK 6.6 billion before M&A, a decline from SEK 12.9 billion in Q3 2024. So last year, our cash flow received a boost from a reduction of operating working capital, driven by the completion of large-scale rollout projects and lower inventories. Operating cash flow was SEK 7.9 billion in the third quarter this year, driven by earnings with net operating fairly stable. Net cash increased by SEK 15.8 billion compared to last year, of which around SEK 10 billion was from M&A. Net cash has now reached SEK 51.9 billion. Next, I will cover the outlook. The outlook assumes stable exchange rates and no changes in tariffs. For Networks and Cloud Software and Services, we expect Q4 sales growth to be broadly similar to the 3-year average quarter-on-quarter seasonality. And as mentioned before, we expect Enterprise sales to stabilize year-over-year on an organic basis. Next, then gross -- Networks' gross margin, we expect Networks adjusted gross margin to be in the range of 49% to 51% for Q4. Restructuring charges for 2025 are expected to remain at an elevated level and with a flat RAN market, cost out remains an important lever also for next year. With that, I will hand back to you, Börje. Borje Ekholm: Okay. Thank you, Lars. So our Q3 report highlights our laser focus on both strategic and operating priorities. Our strong results are a reflection of the actions we've taken to structurally improve our business in the past few years. This, of course, includes both the work we've done to improve our cost base and the way we run the business with greater operational efficiency and commercial discipline. The results of these efforts are now clearly visible in our P&L, and we expect them to continue supporting performance going forward. On the commercial side, we continue to strengthen our competitive position in mobile networks, and we're seeing good traction in key markets. This is a reflection of our technology leadership and the strength of our portfolio. And that has most recently been reconfirmed by both Gartner as well as Omdia. With programmable high-performance networks, our customers are well prepared for the growth in AI applications by having the best network for AI traffic. Our Open RAN-ready portfolio includes over 130 radio models and our future-proof, hardware-agnostic software architecture that is AI native, support both our own silicon, Ericsson Silicon and third-party CPUs and GPUs and is already integrated with more than 10 third-party radios. To put Ericsson on a growth trajectory, we're executing on our strategy to expand the monetization opportunities of the network. Here, we're taking some important steps, of course, including our work in fixed wireless access, mission critical as well as maybe more importantly, we're exposing to developers, the network features through network APIs to drive innovation. This will make it possible for Ericsson and our CSP customers to capture an increasing share of the value created from connectivity, which so far, as you all know, have been going to hyperscalers and over-the-top players. Of course, creating new cases and new markets takes time, but we're moving from proof of concept into commercial deployment. And this is reflected in our Enterprise segment, which we expect to stabilize in Q4. We will continue to invest in technology leadership to ensure that Ericsson is leading in both its core mobile infrastructure business, by having the best network for AI, and of course, into 6G, but also leading the development of new use cases and new applications of wireless networks. Looking ahead, we expect AI applications as well as AI devices to be increasingly the key driver of further investments in the networks. At the same time, we're facing a dynamic external environment with geopolitical uncertainty and the RAN market that has been flat for the last couple of decades. So we continue to take actions to structurally improve our business through rigorous cost management, including, of course, leveraging AI to change ways of working internally. This way, we're ensuring that Ericsson will continue to succeed across varying market conditions. Before we turn to Q&A, I would like to say a big thank you to all my colleagues for all their hard work in making these results possible. With that, let's open up for Q&A, and back to you, Daniel. Daniel Morris: Thanks, Börje. We'll now move to the Q&A section of the presentation. [Operator Instructions] Operator, we're ready to open the line for the first question. The first question this morning will come from Andrew Gardiner at Citi. Andrew Gardiner: So I wanted to follow up, Börje, on the point you were making about the sort of level of sustainable margins that you're achieving at the moment. Another quarter where you're at the top end of the guidance range that you provided back at 2Q. So just thinking historically, oftentimes when Ericsson would talk about gross margins, and in particular, talking to us in the financial market about what we could expect into the future, it was all about mix, and in particular, regional mix. But you've seen over the last year or so that regional mix has been dynamic, as you suggest, and yet you're still delivering pretty consistent gross margins quarter after quarter. Should we be looking less at the regional dynamics as we look into 2026 and beyond? And if so, can you just help us understand what within the business, particularly around the cost-cutting and the product costs that you've now been able to get to sort of this sustainable level of gross margins regardless of whether U.S. is up or down or India is up or down. A bit more detail there would be really helpful in terms of thinking to next year. Borje Ekholm: Thanks, Andrew. Great question. I would -- if just I start, maybe Lars fill-in, but the reality is we've been working over a number of years to structurally improve a couple of things in the business. One is the way we operate our supply chain, clearly. That's been -- of course, COVID disturbed it a bit, but those improvements we've been working on for a couple of years. And the last, I would say, year, we've had more COVID free supply chain, and that has, of course, helped. And that's what you see now coming through. I would say that's one of the key part. The other is on service delivery, where we have improved the way we operate internally by structurally taking out costs. All of these improvements we've done. In a way, actually, it takes out a bit of the mix dependency. We still have a mixed dependency on software, services and hardware in reality, but it's less so of a geographic exposure. So that's why, when you look going forward, there is still a mix dependency for sure, geographic, but the underlying improvements are coming through in other areas, where we still have a bit more to do. I think we can be even better on service delivery and actually leverage automation much more, and we can, for sure, be better on OpEx, but that you'll see come through already, but I think we have more to do there, primarily by leveraging AI and changing our ways of working. I don't know what you want to add, Lars? Lars Sandstrom: I think you covered the full P&L pretty well. And I think, as you highlighted there, it is really the product mix in the market that can vary between quarters depending on share of software, hardware, et cetera, and that is driving customers moving more and more into our advanced products with the margins that will come. That is also making it more even between different regions. Daniel Morris: Thanks for the question, Andrew. Moving to the next question, please. The next question today will come from Erik Lindholm-Rojestal from SEB. Erik Lindholm-Rojestal: One question from me. So Börje, you mentioned some -- you mentioned Edge AI being a key driver to future network investments. And I just wanted to hear your thoughts here. I mean, is this something you are seeing in discussions with operators already today and that operators, they are sort of acting on? Or is this more of something you see in the coming years? Borje Ekholm: Yes. If you look at so far, most of the AI investments have in reality been in the data center part for the -- for developing and training models, right? We see the market increasingly moving towards inference. And that, I would say, is going to be much more latency sensitive. And therefore, it will start to move out towards the edge. And here, we're -- I wouldn't point to an operator that have done investments, but we're starting to see certain application demanding edge compute and edge AI or whatever you want to call it. So I'm actually relatively hopeful that this will come through. It's not going to be next quarter. It's not going to be Q1, Q2. The amount of capital going into the big data centers, that's going to continue. But as applications start to pick up, I think the need for edge compute will be clear. So if you start to think about it, the next step is we've been smartphone-centric in the past. We may well move into other types of form factors. So think about AI glasses, that will require much more low latency performance to be really usable. So as we start to see that coming through, and there have been some launches of devices that actually will require a new form factor and will require new capabilities in the network. So I do think this is starting to happen, but I would still say we take a bit of a prudent look at the market, adjust our cost structure to that prudent outlook, and then, when the demand comes, then we'll be well positioned to capture that through our technology leadership. Daniel Morris: Thanks for the question, Erik. Moving to the next question, please. The next question will come from the line of Sébastien Sztabowicz at Kepler Cheuvreux. Sébastien Sztabowicz: On Cloud Software and Services, your business has accelerated quite substantially in the third quarter with the ramp of 5G Core deployments in many areas. You still see 5G Core picking up again in the fourth quarter and moving into 2026, and is it something that could trigger some upgrades to 5G advanced in the coming quarters? And could it have some positive implication to your mix and gross margin in the coming quarters? Daniel Morris: Do you want to take this one, Lars? Lars Sandstrom: On the financials, then you can fill in on the 5G connection there. But I think when it comes to core, we see a good development there and have seen for quite some time, and that is coming through now when other parts of the portfolio is stabilizing here when it comes to managed service, et cetera. So then, as I mentioned before, also Q2 versus Q3, Q2 was a bit slow. So we got a bit of a boost in the growth rate here in the third quarter. But having said that, we still see good development going forward also in managed services or in Cloud Software and Services, including then, of course, core that we highlight here where we are seeing good position, good reception in market. And to focus on stable, resilient network is very high among our customers. And I think we see that we have a good position there. I don't know if you want to add more on top of that, Börje? Borje Ekholm: Yes, I can add. The one thing which is important is, of course, that the operators need to migrate to 5G stand-alone, and that is something that's going to be required in order to deliver the capabilities of 5G. So when we have spoken in the past of low latency, very high bandwidth, network slices, et cetera, it's all depending on being on 5G SA. And so far, it's, I would say, 1 in 5 operators or 1 in 5 networks maybe are upgraded. There are a couple of big operators that have really solid 5G SA networks now, and they are also starting to realize extra revenues from network slices, from differentiated offerings. So we're seeing that they need to do that migration. And when it happens, it will help our business both in mid-band coverage, but it will also, of course, be in 5G Core. So the position we have in 5G Core is clearly today about leading, and I would say we stand to benefit from that migration that's going to happen over the next few years. So I actually think in that sense, we can be -- we should be optimistic about the prospects. Still, we run the business based on more flattish assumptions. So we run the right cost structure and get the full operating leverage when growth comes. So a little bit of the explanation of the better margins in Q3 is actually the operating leverage we get from growth as well. Daniel Morris: Thanks for the question, Sébastien. Moving to the next question, please. Next question is coming from the line of Andreas Joelsson of DNB Carnegie. Andreas Joelsson: I have a question on the cash flow. Börje, the CEO statement, you mentioned that it's a recurring cash flow, which is a phrase at least I have not seen before when it comes to Ericsson. Can you explain a little bit what you mean with recurring cash flow? Is it because of a better cost base that makes the cash flow less volatile? Or how should we see that recurring cash flow? Borje Ekholm: I could start, maybe. So that is -- the key is that we are a project business, right, and have been. And I think we have put more efforts into a couple of things here. One is to improve the cost base, so we have less exposure to that. We're also gradually changing the way we sell our product, and that will increase the portion of software revenues coming in different models and kind of advanced services also coming in different models. When you put all of that together, we feel more comfortable about the stability of our cash flow generation going forward. And therefore, we start to talk about the recurring underlying ability to generate cash flow, but it comes out of a couple of changes to cost structure and business model. Daniel Morris: Thanks for the question, Andreas. Lars, anything to add? Lars Sandstrom: No, I think that comment is, of course, we will have that can be swings within 1 or 2 quarters, that is normal in the project business that we have. But as Börje said there, we are working actively to sort out. So we have more the terms and condition in a way that also support more solid cash flow and reduce volatility. So that is what we have been working with for quite some time. And I think we can see the result coming out of that. Daniel Morris: Thank you. Moving on to the next question, please. Next question is coming from Sandeep Deshpande at JPMorgan. Sandeep Deshpande: Yes. Can you hear me? Daniel Morris: We do well. Sandeep Deshpande: My question is you're guiding to seasonal growth in both networks and the CNS business into the next quarter, but also flagging our increased uncertainty. Does this mean that if there was increased uncertainty that there will be a change to this growth in the fourth quarter? Or -- and which is the areas in which this increased uncertainty is coming from if there is incremental increased uncertainty that you're pointing to? Or it is just ongoing uncertainty? Lars Sandstrom: When it comes to the guidance for the fourth quarter, this is what we see now coming into the fourth quarter. And as you know, for us, our business is very back end heavy in the quarter, so -- but this is still what we see now. And when it comes to increased uncertainty, it's not so much maybe in the quarter per se, but really a little bit long term. There is an ongoing discussion on tariffs, as we all follow that could impact us or our customers, et cetera. So I think that is more what we are pointing to that area. Sandeep Deshpande: So do you mean that if the increased uncertainty diminishes that your -- you should do better than normal seasonality in the fourth quarter? Lars Sandstrom: No, that is not what we are saying. We are pointing to the reality that we live in. Daniel Morris: Thanks, Sandeep. Moving to the next question, please. Next question is coming from Daniel Djurberg at Handelsbanken. Daniel Djurberg: Congrats to a stable report. Yes, coming back to recurring changed business model on Cloud Software and Services, can you share with us ballpark the percentage of revenue that you consider being a recurring nature or at least a large part of the 5G Core revenues that is recurring? Lars Sandstrom: No, we don't go into those kind of agreements, but what we can say or share, so to say, but what we can see evolving here going forward, continuously, what we are doing is moving into more and more recurring, but also a model based on more connected to the utilization, which as utilization of networks increase also has an impact on our revenues. And that is maybe a little bit achieved from what we have had historically, where we had more kind of fixed price models. So I think that is also supporting our revenue going forward. Daniel Morris: Thanks, Daniel. Moving to the next question, please. The next question is coming from Jakob Bluestone of BNP Paribas. Jakob Bluestone: I had a question on your OpEx. I was wondering if you could maybe give us a little bit of an update on what your sort of current thinking is in terms of OpEx evolution. I guess, second half or Q4, I think you previously said you expected better than normal sort of H on H for the second half, but talk to that Q3 now, which is pretty good. Just kind of any thoughts sort of around OpEx next quarter and also how you see that perhaps evolving a little bit longer term as well? Lars Sandstrom: Yes. When it comes to Q4, I think what we say, we had quite a big impact last year connected to incentive provisioning there. And we -- that was sort of hurting or impacting the numbers there. But otherwise, it's rather normal seasonal. There is normally a bit of an uptick from Q3 going into Q4. So that is what we expect there as well this year. And when it comes going forward, as we talk about, we live in a flat RAN market, that is our, so to say, planning assumption, and that means that we need to continuously fight with inflation coming through, including salary increases. And just to keep flat, we'll require further activities on the cost side. And we will do that also going forward that I think is also part of the outlook that we say that remaining elevated levels. And that work will need to continue. And as Börje mentioned, we have -- just compared to a year ago, we are some 6,000 people less in the group, and that work will need to continue also going into next year. Daniel Morris: Thanks for the question, Jakob. Moving to the next question, please. Next question is coming from the line of Felix Henriksson from Nordea. Felix Henriksson: It's on the North American market. We see some increased appetite for mobile spectrum as witnessed by, for example, AT&T's spectrum acquisition from EchoStar recently. When you discuss with your local clients in North America, how do you expect this sort of to translate into RAN equipment demand for you guys in the coming years? Borje Ekholm: Thanks for the question. As you know, the spectrum is the lifeline of our industry and the -- what keeps it ticking, and it's the scarcest resource in the industry. What the strategies are of our customers, how to deploy that spectrum, I think they should answer. So I'll keep an answer more on the generic level. But this is clearly something that, of course, spectrum and spectrum free up is important for an industry. What we've seen in other markets, typically, it depends on your spectrum portfolio. So how does it fit into your spectrum portfolio, is it adjacent to some existing spectrum? If it is, you can most likely use some of existing equipment. If it's actually other spectrum, you will need more hardware. You will need software upgrades. And what we have typically seen in other markets is it actually drives CapEx in the total market because clearly, you're going to have more capacity, better performance of the network as you use more spectrum. And therefore, other operators to match that typically need also to invest a bit more. So overall, getting into a market where spectrum kind of is actually increasing deployed will typically help the total market and will actually help the customer experience at the end of the day. So in this case, let AT&T comment on their strategy. But I think it is worthwhile also to say that we had, as you may know, no market share with DISH. So let's see where this pans out, but AT&T talks about their own plans. Daniel Morris: Thanks for the question, Felix. Moving to the next question, please. Next question is coming from the line of Ulrich Rathe from Bernstein. Ulrich Rathe: Yes. I wanted to latch on to an earlier question on OpEx development. In the R&D spending, that's down 12% year-to-year -- sorry, year-on-year. You're highlighting in the report 3 percentage point effect. So that's still a very material cut on the R&D spend. Could you comment what measures you use to make sure that you're not underinvesting because there is, of course, in history in the industry, in the equipment industry of underinvestment and sort of result in competitive issues? How do you make sure that the R&D cutbacks don't lead you into that future? Lars Sandstrom: I can just give you a comment on the financials first before you answer as well, Börje. I think you need to remember the currency impact on the OpEx that we have. And as I mentioned here in the beginning, we have around SEK 1 billion in currency impact, and that is, of course, also in R&D. So if you look at Networks, R&D spending, taking out FX is actually rather stable, whereas in Cloud Software and Service, we have done work last years to reduce in some areas in the R&D and made prioritization in the product portfolio, and we had some extra cost on the transition that we did within R&D in Cloud Software and Services last year. So they were a little bit elevated. So you should not see this as a big reduction in R&D spend actually. Then, having said that, we continuously evaluate the different parts of the portfolio, where we spend our R&D and make decisions in that. Anything you would like to add as well on that, Börje? Borje Ekholm: Yes. Just to be clear on a couple of things. So yes, we have -- we -- to actually turn around BCSS, we needed to focus the portfolio a bit. So we actually said in a couple of areas, we're not going to compete. So those we have actually exited. That helps the R&D spend. It doesn't impact necessarily the output where you need to win, right? So that we've done. Then, as Lars said, in a bit of cryptic, but the geopolitical situation has required us to shift resources a bit politically. That led to, as we went through that whole transition, that we duplicated a large part of R&D spend that have now -- we don't need to have that anymore as we have relocated R&D, so rebalanced R&D. So that actually is another part. So yes, your question is well taken. We should always worry that to be competitive we need to spend enough to do that, and we need to really be competitive with the Chinese. So our ambition is clearly to benchmark ourselves there. So it's going to be their ambitions that drive our scaling of R&D. That's been the case for the last several years, at least during my tenure, and it will continue to be the case going forward. So we are not going to jeopardize technology leadership. And if we feel that there is any risk, and that's a risk I don't see today, then we would, of course, need to reassess. But as I see it, this is a natural -- yes, the FX part you can take out, but the other one actually of removing duplication, that's been the key driver and something that was in the plans to do. Just don't -- you didn't want to talk about it until it was done. Daniel Morris: Thanks, Ulrich. Thanks for the question. Moving to the next question, please. Next question is going to come from the line of Simon Granath, ABG. Simon Granath: And so on CSS, it once again delivered a quarter with year-on-year growth and strengthening margins. Now, the rolling 12-month margin is at some 8%. So I'm curious to hear on what sort of ball tank levels we should expect in the medium term. And then a question connecting to this, you continue to emphasize that 5G stand-alone is needed for the operators to fully leverage the networks. And with 5G, there has clearly been a mismatch between deployment of 5G stand-alone and non-stand-alone. But as we look into entering 6G in a couple of years, do you think that the matching will be better, and thus, the leverage of the networks? Daniel Morris: Maybe Lars briefly first on the margin. Lars Sandstrom: We have said to ourselves to work towards a solid double-digit margin in Cloud Software and Services, that is the first step that we are working on. And you can see here, in this quarter, you really see the impact on having a bit of growth on top and the leverage impact that gives together with continued tight ship on the cost side, it really pays off. So that is a continued work on that. And then on the 5G SA and 6G question there, Börje. Borje Ekholm: Yes. The -- it's -- the 6G will most likely be defined in the next few years, right, with first commercial sales. Everybody talks about 2030, I think it will be a bit earlier than that. So having said that, I think it's important to keep in mind. What I do think is that the big change between 5G and SA and 5G SA is that with 5G NSA or non-stand-alone, the market kind of continued to sell 4G plus. It was the established business model of most operators around the world. So it became very natural to take that step. That didn't give -- and then use 5G almost as a marketing icon on the phone. But in reality, it didn't give the extra capabilities. To get the extra capabilities, the operators would have needed or need to go to 5G SA. And I have no doubt that the new capabilities, call it, network slicing, call it low latency, quality improved security will be critical in applications over the next 2, 3 years that, that will require the operators to build out 5G SA. And by the way, when they have built out 5G SA, they will put themselves on the journey to upgrade to 6G when that happens. 6G will be much more AI cloud dependent. But actually, what you do in 5G SA paves the way into that world. And what's more important, by being in 5G SA, you create the monetization models that will be needed in 6G as well. So then you go through the, what I will call the business development portion and the changes in your go-to-market capabilities that you're doing during 5G and then you leverage that into 6G that will again provide better and stronger capabilities, but it will depend on new type of monetization. So that needs to happen. Daniel Morris: Thanks for the question, Simon. Moving to the next question, please. Next question is coming from the line of Sami Sarkamies at Danske Bank. Sami Sarkamies: I still wanted to go back to the strong performance at Cloud Software and Services. I guess, you didn't call out any large deals, but were there any like positive onetime factors impacting third quarter? And then thinking forward, can we assume that sort of the 8% run rate you've been able to achieve during the past 4 quarters? Is that something that you've been able to attain on a permanent basis? Lars Sandstrom: Yes. In the quarter, in Cloud Software and Services on the question around, let's say, onetime items, I think it was actually quite a straightforward quarter. There's always a bit of product mix, et cetera, but it was, I would say, a normal quarter to a large extent. So that is on that. And then the run rate, I think what we're trying to say is that we see that we have managed to increase our gross margins and keeping costs stable here and working -- continuing to work on that. That gives us a good foundation going forward. Then, we don't give guidance on run rate margins per se for segments, et cetera, so -- but I think we are coming out here in the quarter. And as you have seen the step-up over the last quarters, we have come to a new level that I think is good going forward as well. Borje Ekholm: The only thing I would add, Daniel, is the one big effect normally on the margins tend to be our IPR agreements, right? And that is nothing that impacts this quarter. Daniel Morris: Yes. Thanks, Sami. We'll move to the next question, please. Next question is coming from Richard Kramer at Arete. Richard Kramer: I don't know if you can flesh this out at all, but you mentioned that you want to keep a solid net cash position. And while you're considering what to do with the SEK 52 billion you've piled up on the balance sheet, can you talk through what the parameters of a solid net cash position are? Is it a portion of your percentage of your OpEx? Is it something to do with the working capital demand? And can investors assume Ericsson will not be deploying some of that SEK 52 billion to M&A after your experience with Vonage? Lars Sandstrom: When it comes to our net cash position, I think the message is that we want to have a solid net cash position, and that is foundational to ensure that we can maintain our R&D and our technology leadership, make sure that we have the trust of the customers. That is important that we as a partner with our customers have the financial strength to deliver long-term over the contracts and commitments we have together. So I think that is foundational for us. And then, of course, if there are volatilities happening in the market, we should also handle those kind of movements. So that is not a change in that sense. And then also, when it comes to -- but we are coming to a position where we talk now about excess cash and that we need to manage. Also here, after now the divestment of iconectiv coming into our net cash position. And that is the signal that -- and the comment we do here in the report now that this is work that has been ongoing by the Board since that was announced at the last AGM, and that work continues. And I think there is a good work progressing. We give the highlight here now in the quarterly report that we're looking at it. We're looking at the options of extra dividend and/or buybacks. But in Sweden, as we are a listed company here, the decision is made at the Annual General Meeting, which is taking place at spring. And normally, there is a proposal for the Board coming in connection with the fourth quarter report on that topic. So that's why it's coming at that stage. And when it comes to your question around M&A as well, that has also not changed. We see -- we have the product portfolio we need to a large extent. There could be some bolt-on acquisitions coming to -- into the product portfolio when it comes to geographical spread, but no major ones. So that is also unchanged. Daniel Morris: Thanks, Richard. We have time for one brief final question. So one more question, please, into the queue. Final question today is coming from Rob Sanders at Deutsche Bank. Robert Sanders: I just had -- I was just interested in an update on Germany. Given there has been some push to swap out Huawei and ZTE, there is this 2029 shutoff date, but there seems to be some resistance amongst the German telcos to actually go through with a full cleaning out of Chinese vendors. So I was just interested in just an update on that region, where clearly, your share is below what it is globally. Daniel Morris: Börje, anything you'd add? Borje Ekholm: Yes. No, you're right. I would first say that there isn't a need to swap out Chinese vendors by 2029. So that you should keep in mind, that's why it's a slow moving. And I would say there is no real progress on that. But the legislation is rather clear that it allows high-risk vendors in the 5G network beyond 2029. Daniel Morris: Thanks, Rob. Thanks for everyone for joining us. That concludes the conference call today.
Jason Honeyman: Good morning, and welcome to Bellway's full year results. I'm joined by Shane. Simon is with us, too, here in the front row. If I could take you to the first slide, just to set the scene. We had a good performance last year. Volume was up by over 14% to 8,749 homes. Operating margin increased to 10.9%, and that drove a strong increase in operating profit to GBP 303 million. And you can see that we are well positioned with land and outlets for FY '26. Now along with our usual financial and operational detail today, Shane will also set out our new capital allocation framework, which is central to our approach to drive assets harder in a more challenging environment. But firstly, I think it's important to provide some context with regard to recent trading. Trading, since the start of April, has been slower and never really recovered from the levels that we enjoyed in Q1 of this calendar year. Sales rates over the past 6 months have tended to hover between 0.5 and 0.6 per outlet. That said, the order book is still in good shape. We're well placed to have both a decent half year and achieve our full year guided volume of 9,200 homes. And to complement that growth, there is further opportunity for the business. We have a sharper focus on return on capital employed and being more capital efficient. And regardless of that trading backdrop, given our well-invested land bank and WIP position, Bellway have the ability to increase cash generation and returns to our shareholders. And our confidence is reflected in our announcement today to commence a share buyback starting with an initial GBP 150 million. In summary, I would describe our business as being very robust and well placed. But we must be mindful of the softer market conditions. And if the government are serious about growth and delivering more homes in this parliament, then that ambition needs to be reflected in the November budget. Now I will provide more detail on ops and outlook later. But first, our financial results and capital allocation framework with Shane. Shane Doherty: Thank you, Jason, and good morning, everyone. I'll start with the finance review. As Jason said, we've delivered a good financial performance in FY '25 despite ongoing challenges for our industry. The combination of our healthy order book at the start of the year and the improvement in reservation rates supported a 14.3% increase in volume output to 8,749 homes. That growth was driven predominantly by private output, which was up by 20.3% to 6,924 homes. Social output was 3.7% lower at 1,825 homes as the proportion of social completions reduced to a more normalized level at around 21%. The ASP was up by 2.8% to 316,000, and that was in line with expectations. The increase in ASP was driven by geographic and mix changes with underlying pricing remaining broadly firm. Turning then to gross margin. There was some modest progress here with a 40 basis point increase to 16.4%. Whilst we had the benefit of some higher margin land in the mix, this was partly offset by the absence of any HPI and ongoing low single-digit spot cost inflation. We also have higher embedded cost inflation in our WIP, which remains a headwind to margin in the nearer term. And this is reflected in our order book, and we currently expect gross margin progress in FY '26 to be similar to that achieved in FY '25. Looking further ahead with our planned volume output growth, we're working through our WIP balance and a growing proportion of output will benefit from newer higher-margin land. With a stable market supported by a more favorable HPI BCI dynamic as seen in previous cycles, we are well positioned to drive ongoing improvements in our margin in future years. The increase in volume output and revenue drove an improvement in overhead recovery of roughly 50 basis points. This, together with the higher gross margin, led to the improvement in underlying operating margin to 10.9%, which was in line with expectations. Underlying PBT was 27.9% higher at GBP 289 million, which drove the strong increase in the proposed full year dividend to 70p per share. This slide has covered the group's underlying performance. Adjusting items are shown in more detail in the income statement in Appendix 1. These include an adjusting item of GBP 15.4 million through admin expenses relating to the previously announced CMA investigation, comprising both our voluntary contribution and legal expenses. The other adjusting items relate to build safety, which I'll cover later in the presentation. Turning then to our balance sheet. We have a very well robust capitalized balance sheet. And at its foundation, we have a high-quality land bank and a very strong WIP position to support our plans for multiyear growth and increasing cash generation, which I will cover shortly as part of our capital allocation framework. To highlight the key balance sheet movements, firstly, the increase in fixed assets primarily relates to our investment in our new timber factory facility -- timber frame facility. Given that relatively stable market backdrop, our land investment has started to normalize from the lower levels in the previous 2 years. During FY '25, our overall land balance has risen by roughly 3% to GBP 2.5 billion. This increase in land activity is also reflected by the land creditor balance rising to GBP 338 million, although this remains modest overall and represents only 13% of our overall land balance. Jason will cover that in more detail later when he talks about the land bank. The work-in-progress balance, which includes site WIP, show homes and part-exchange properties, rose by GBP 52 million, roughly 2% to just over GBP 2.3 billion. This slight increase was primarily due to spend on our ongoing strong outlet opening program. And to finish on the balance sheet, as you'll see from the bottom of the slide, on our adjusted gearing, and I think this is particularly relevant when we talk about capital allocation later and how we utilize that. Our gearing remains low at 8.3%, including land creditors. And quickly, our NAV per share has risen to GBP 29.89. Turning then to cash flow, and you'll hear a lot of this throughout this presentation this morning. We generated good operating cash flow, and we ended the year with net cash of GBP 42 million. The chart shows a small increase in site WIP I referenced earlier, amounting to GBP 41 million. In relation to land, the monetization of land through cost of sales was GBP 521 million. Whilst this was higher than the cash spend on land as part of our drive -- to drive a more efficient capital structure, our increased use of land creditors towards a more normal level, as shown on the previous slide, helped to fund the GBP 70 million increase in the land balance in the year. After other working capital movements and tax, the operating cash generated before investment in land, build safety spend and distributions to shareholders was GBP 639 million. This represents a 50% increase in operating cash flow on FY '24. Again, I think that's a theme that we will come back to when we talk to capital allocation, strong year-on-year growth, primarily driven by better discipline around WIP investment. When in FY '24, there was a net cash outflow over the same period of GBP 260 million. As a result, the conversion of operating profit to operating cash flow has risen from about 1.8x to 2.1x, and I'll provide more detail on our ambitions in this area later. Adjusted operating cash flow is the fuel for future investment opportunities for the business and ultimately greater value creation and returns for shareholders. In this regard, we invested GBP 472 million in land, including settlement of land creditors and dividend payments totaling GBP 70 million. We also spent GBP 45 million on build safety, which I'll cover now. Overall, we've made good progress on build safety during the year. With regards to movements in the provision, in addition to the GBP 14 million adjusting finance expense, which was in line with previous guidance, there was a net increase of GBP 37.4 million in the build safety provision. I'll now cover the components of and the drivers behind the GBP 37.4 million, starting with the SRT. In December '24, following a period of industry-wide delays in obtaining building access licenses, housebuilders and the government committed to working together through a joint plan to accelerate assessments and remediation. We have now completed 100% of assessments in accordance with the joint plan for all of our legacy buildings in England and in Wales. Following this accelerated and extensive survey program, a higher proportion of legacy buildings was found to require works, both externally and internally than was previously assumed. And this has led to a net increase in the SRT and associated review provision of GBP 50.7 million through cost of sales. With regard to structural defects, there was a net credit through cost of sales of GBP 13.3 million. This was largely due to remediation strategy being finalized for reinforced concrete frame issued identified at a high-rise apartment scheme in Greenwich London in FY '23. This strategy is less invasive than remediation design applied in the previous year and has led to a reduction in the cost estimate for the Greenwich scheme of GBP 19.3 million. This has been partly offset by a GBP 6 million charge relating to a mid-rise building, which was identified during the year with a similar issue to the Greenwich building. We've since carried out further reviews across all of our buildings over 11 meters in height constructed by or on behalf of Bellway, where the same third party responsible for the design and the frame of these 2 developments have been involved. And to date, no other similar design issues with reinforced concrete frames have been identified. The provision at the 31st of July '25 is GBP 516 million, and I'm confident that we are well provided for the remediation works required across the legacy portfolio. Following a year of delivery against our requirements of the joint plan, with a particular focus on completing build surveys and procuring works, we will now be accelerating the pace of remediation. The strengthened team at our dedicated build safety division is focused on completing works as promptly and efficiently as possible. We have spent GBP 191 million on legacy build safety since the start of the program, including GBP 45 million in FY '25. For FY '26, we expect there will be a significant increase in spend to over GBP 100 million, although I must caveat that this level of spend will be dependent on receiving requests for payment from the government for works carried out on our behalf by their build safety fund. To finish off this section now, I'd like to just cover a summary of guidance for FY '26. We are targeting volumes of around 9,200 homes, of which 20% will be social. The average selling price will be around GBP 320,000 with an increase of FY '25 driven by mix predominantly. The admin overhead will increase to around GBP 170 million, and that's driven by underlying wage increases and the full year impact of employer NIC. Together, I think it's important to say with important investments that we see for the efficiency and growth program that we have over the next number of years, that includes areas like IT, timber frame facilities becoming fully operational. We currently expect the operating margin to be similar to the FY '25 level at around 11%. I'd now like to turn to the capital allocation framework. This is my second update that I've given to the city. And I think myself and Jason are very keen that we talk in detail today around our capital allocation framework and what that actually means for the business financially, value creation and strategically for the business. I think it's fair to say we've refreshed our approach to capital efficiency, and it's very much embedded across the group. There's a number of senior leaders here today from Bellway who are very much part of this journey. So I'd encourage you to talk to them as well as just the finance people in relation to this. This is very much a living, breathing thing across the business. And this section of the presentation covers our refined capital allocation framework and the strategy that we have to drive better value for our shareholders. So first of all, I'd like to set out the clear priorities for capital allocation. We have a strong balance sheet, and we have a well-invested land bank, and that will remain the bedrock of the business. And it supports our balanced approach for investing for growth. And it's very important that we don't lose sight that Bellway has a really strong track record of growth, and that's very much the bedrock of this capital allocation framework as well as well as delivering enhanced returns to our shareholders. We're going to run the business with an efficient capital structure with low gearing, and we're going to continue to invest for growth. Whilst our financial strength provides flexibility and headroom to grow our land bank, I think it's fair to say with the current market backdrop, we expect our near-term land strategy to be largely replacement only. We're also sharply focused on driving better efficiencies and our WIP balance presents a significant opportunity for much greater cash generation. If the trading environment remains stable, we can deliver growth in volume and profit. And that will drive strong cash generation, particularly as our elevated levels of WIP start to unwind. Combined with the ordinary dividend underpin, we believe that the value creation opportunities are significant for our shareholders. And I think this is evidenced today, as Jason said, with the launch of our GBP 150 million share buyback program, we're going to run that over the next 12 months. And I think it's important to emphasize we've got the capacity for this to be a multiyear program. This slide summarized our clear priorities for capital allocation, and I'll provide more details on the pillar of the framework in the following slides. Turning to our efficient capital structure. We're going to continue to run the business through the cycle with a strong balance sheet, but there are definitely opportunities to deliver greater efficiencies within the business. We're very well capitalized with total debt facilities of GBP 530 million. That comprises of GBP 400 million of bank facilities and GBP 130 million of fully drawn USPP notes. Over the next few years, we expect to run the business with modest average net debt and low year-end financial gearing of up to 5%. As we referenced earlier, land investment has started to normalize, and there will be a modest increase in the use of land creditors in the medium term. The range is expected to be between 15% and 20% of land value, and that's similar to our historic norms. When taking land creditors into account, our adjusted gearing is expected to rise modestly into the mid-teens. And the chart illustrates that we successfully run the business with a similar efficient capital structure and level of adjusted gearing in previous cycles that we've been involved. I'm confident that this strong and efficient capital structure will enable the group to continue to invest in attractive land opportunities to drive the growth and improvement in returns. It will also ensure that efficiencies generated within the operational divisions as measured to return on capital employed will generate an ROE percentage at similar levels, which I think that's something that's really critical. We're driving to ensure that our return on equity and return on capital employed percentages are as close as they can be. And this will help to ensure that the balance sheet structure doesn't dilute the returns capacity for shareholders from operational efficiencies that are generated within the business. Looking to improvements then in the WIP turn. This is the key area of focus across all 20 of our operating divisions, and it's a significant opportunity for the group. The chart shows our WIP turn fell by around 50% to 1.2x between FY '22 and FY '24. This was primarily driven by a sharp fall in volume output. Bellway stayed well invested in our WIP platform and our supply chain throughout the downturn. I think that's going to stand us -- that strategic decision is going to stand us in really good terms now as we look to harvest that investment that we made in the downturn as hopefully market conditions improve into the longer term. We've made some early progress in FY '25. The WIP turn has increased slightly, but this is an area where our discipline will improve further. We're well positioned to deliver growth in volume over the next 3 years. And if you think about 10,000 homes in FY '28, that would see our revenue increasing by 20% from FY '25 levels, but it will also enable us to monetize our WIP. So that will allow us to target significant net cash inflow on WIP, so you can juxtapose that 20% increase in revenue, and that should allow you to reduce your WIP balance by around 10% over that same time frame. So that 10% reduction in WIP growing your revenue will allow us to get a significant cash release over that time frame. And that would see our WIP turn growing to about 1.8x by FY '28. And I think that's a ratio that we and I think a lot of people in this room will be comfortable with over that time frame, and that's going to be a key driver in increasing asset turn and cash generation to enhance our returns over that time frame. Turning then to capital efficiency and cash generation. As part of our plans to deliver higher volume output and asset turn, we have an increased focus on bulk sales. They represent roughly 10% of our private reservations in FY '25, and they will remain a part of our strategy going forward. We will remain selective with our divisions working with our commercial finance teams, and it will be all around running scenarios and assess if a potential bulk sale is NPV positive compared to standard open market sales. So probably more of an NPV asset turn lens as opposed to just looking at the -- maybe what the margin differential between both options are. And we think that gives more options for our business leaders then who are running the divisions as they trade their way through the cycles, the ups and downs within the cycle. Regarding land investment, as we highlighted earlier, we expect the number of plots will be broadly in line with plots utilized in the year, and that will be a largely replacement-only strategy. So delivering volume growth enhanced by bulk sales will enable us to work through the top tier of the land bank more quickly, which is lower embedded gross margin. These plots will be refreshed with higher-margin plots, and that will include from our strategic sites. Whilst 20% gross margin will remain a requirement for land acquisition, we'll be taking a more balanced approach to liability and the key underpin really will be more around higher levels of capital employed from those investment decisions. And we'll be looking for the return on capital employed on those to be 20% plus underpinned by 20% plus gross margin. I think if you live by that in terms of land acquisition, that will create a lot of value for us and our shareholders over the coming years. The compounding effect of those initiatives and the drive to monetize our WIP, that should deliver a material increase to the group's operating cash flow conversion, and that's illustrated in the chart. If you take FY '23 to '25, Bellway generated an aggregate underlying profit of around GBP 1.1 billion. Our adjusted operating cash flow before land, build safety spend and shareholder returns for that period was just over GBP 1.7 billion. So that represented a conversion between operating profit and operating cash flow of around 1.6x. There was an improvement in each year through the period with that 1.3x rising to 2.1x in FY '25, and we're expecting to maintain the conversion at greater than 2x over the next 3 years. And as an illustration, based on a similar level of aggregate underlying operating profit of around GBP 1.1 billion between FY '26 and '28 of getting to that 10,000 unit number, if we were to improve our cash flow conversion to 2.4x, this would generate an additional GBP 1 million of cash compared to the previous 3 years. That will help cover the ramp-up in build stage disbursements that we have over the next number of years, further land investments and crucially providing returns capacity for our shareholders. So we think that's a very balanced scorecard as we think about capital allocation and fulfilling all the obligations that we have over the next number of years. And I've used that as an example. And whilst it's ambitious, we think it's definitely achievable. I've been at Bellway now for almost a year, and there's a clear focus across the group on delivering on all of these priorities. If the market remains stable, I'm confident that we can deliver greater cash generation and therefore, returns for our shareholders. And I'll turn now to value creation for our shareholders. We're in a strong position to deliver growth in volume output and a significant increase in pretax ROE in the years ahead. These remain our strategic priorities to deliver growth with a supportive market with a well-invested land bank outlet network and with position. Within our divisions, we've experienced teams with operational strength and their significant structural capacity to deliver organic growth. Combined with an efficient capital structure and our drive for greater cash flow conversion, I'm confident that we have an excellent platform to increase returns for shareholders. We will maintain our underlying dividend cover at 2.5x, and this will be supplemented by returns of excess capital. We started this today with an additional GBP 150 million share buyback and with a clear intention of returning further excess capital in future years as it arises. Returning excess capital is a key component of our strategy to increase returns. I think it's really important to say that our management incentives across the business are fully aligned with increasing cash generation and ROE and also profits and volume output that run commensurately with that. A new LTIP proposed for shareholder approval at this year's AGM includes a challenging FY '28 underlying pre-ROE stretch target of 14%. And whilst this would require exceptional delivery and more supportive market conditions than we are currently experiencing, it clearly demonstrates the extent of our ambitions collectively in Bellway. I'll now pass back to Jason, who will cover the operating review and outlook. Thank you. Jason Honeyman: Thank you, Shane. Before I start, I think it's worth recognizing the amount of hard work involved in pivoting the business to being more capital efficient, and much credit goes to Shane, but also to our senior management teams across the U.K., who have embraced the new approach with so much energy and enthusiasm. A deserved well done to all. Now I'll start with last year's trading. We achieved a private sales rate of 0.52 per outlet, with bulk sales contributing to a further 600 homes. Overall, the sales rate was 0.57, with cancellation rates steady at around 13%. Mortgage rates were relatively stable in the period. Affordability is still constrained for first-time buyers or for those without the benefit of a decent deposit, and those purchases are still exposed to rates of around 5%. Overall, I would describe customer demand as sensitive, sensitive to mortgage rates and sensitive to the commentary around further tax increases. And that's clearly reflective in current trading. In the first 10 weeks since the 1st of August, we achieved a private sales rate of 0.51 per outlet, with bulk sales only making a very modest contribution in that period. Pricing has remained firm overall, the Southeast and Southwest areas are still slower, where we tend to deal harder and maximize the use of incentives. Our order book at the 5th of October consists of 5,300 homes with a value of GBP 1.5 billion. And we are currently forward sold by around 65% for FY '26. In general, the market appears to be in the same pattern as last year, where the autumn selling season is largely flat, owing to the timing and noise around the budget. That said, you will recall that we enjoyed a busy start to the calendar year as homebuyers had waited for the outcome of the budget before making a commitment. And we will likely or hopefully see that pattern reemerge with a busy start into 2026. The next slide is about multiyear volume growth and the conditions required to create a path back to 10,000 homes by FY '28. We have assumed a stable market and the following realistic assumptions. A private carryforward order book of around 40%, modest outlet growth to around 260 outlets by FY '28, an increased focus on bulk sales and the private sales rate moving towards 0.6 per outlet. With those conditions or similar, we can deliver 10,000 homes by FY '28. Now if I could take you to the next slide, land bank. We have a total of some 95,000 plots nicely split between owned or controlled and strategic plots. Taking a look at gross margin within the land bank. The current margin for DPP plots is 18% to 19%, and we expect progression through '27 and '28 as the new higher-margin land come through from both pipeline and strategic. In the period, we contracted or acquired just over 8,000 plots. So my short-term ambition, as Shane has said, is simply to maintain the land bank and continue with just replacement land. Today, a land bank length of around 4.5 years feels about right, particularly with an improving planning environment. And based on DPP and pipeline plots with a volume of 10,000 homes per year, that allows me to grow into the land bank rather than invest further. Looking forward, our focus will be on strategic land with the aim to harvest more consented plots from that strat tier of the land bank, delivering better margins for '27 and '28. Turning now to outlets. We opened 56 new outlets during FY '25 and plan to open a similar number during this financial year. Overall, I would expect average outlet numbers to be between 240 and 245 for this year, with modest growth to around 250 for next year. Regarding planning. Government progress remains positive. We do still experience some delays as local authorities take time to adopt local plans. And as you can imagine, some local authorities are more supportive and keen to deliver new homes, whereas others are less enthusiastic. Although I tend not to worry too much about outlets and planning as we are very fortunate to have good visibility on both and already have 85% of our plots with DPP for FY '27, we are in good shape. Regarding production and costs, not much change over the past 12 months. Build cost inflation is still running around 1% or 2%. And it's still -- while still at very modest levels, it's still a margin headwind for housebuilders. And earlier in the year, you may remember, I mentioned Bellway Home Space, our new timber frame facility in Mansfield. We are progressing to plan and due to open in FY '26. Simon can offer a little more detail in Q&A and required, but our plans are very much part of our approach to drive WIP turn and return on capital employed. And finally, outlook. With the strength of our order book, we are well placed to meet our guided volume of 9,200 homes and will hopefully benefit from a busier market at the start of the year to build that order book for FY '27. Structurally, we are able to deliver more volume in the years ahead. We have the land, the planning, the people and the outlets, but we just need a supportive economy in which to do so. The key message from today is our focus on cash generation and our confidence to increase returns to our shareholders, which Shane has already set out. Thank you. We're now happy to take questions. Ami Galla: Ami Galla from Citi. A few questions from me. The first one was on the stretch of pretax ROE targets in your LTIP. Can you give us some sort of building blocks of framework of the sort of scenario where we can see that reasonably coming through by FY '28, i.e., what are the elements that we need to watch out to understand the moving parts there? The second one on the Bellway Home Space facility. I think in the release, you've mentioned, it is one of the drivers of build efficiency for the business over time. At what point into the ramp-up phase can we see that get -- giving us more meaningful gains on the build side as we think about your journey there? And the last one, just on the land market. You've kind of given us a reasonably strong framework of how you think about capital allocation. But in terms of the near-term sort of sentiment in the housing market, do you see any sort of near-term opportunities on the land? And how are land vendors really looking at this market today? Jason Honeyman: Ami, I'm going to give you a selection here. I'm going to get Shane to answer question one, Simon to do two, and then I'll close on three. So you get the full board. Shane Doherty: Do you want to do the ROE first? Yes. So I think if we're sitting up here talking about capital allocation, cash efficiency, and I see a lot of my colleagues sitting here beside me, which makes me very comfortable as we talk about this. It's really important that you've got an incentive scheme in place that, that mirrors it. So we've done a lot of work on both our short-term and our long-term incentive schemes. And it's not a case that the old incentive schemes didn't do their job. They did, but they were very much probably focused around the P&L. And I think that works well in a rising market, but we all know that the market is a bit tougher now. So the underpins within our STIP are around operating profit and operating cash flow. And then the LTIP is around return on equity, not return on capital employed, so return on equity, which means we have to return capital to shareholders as well. But we have to do that in a manner that allows us to grow as a business. So there's an EPS underpin within that as well. The 14% target is very much a stretch target. We've guided to 10,000 units today over 3 years. I think that's a number that we're pretty comfortable giving in the context of current market conditions. That's not going to deliver a 14% ROE. That probably delivers probably close to 12%. I think the thing that we're really keen, if there's one big message that I want to deliver today, I think what we're keen to emphasize is our strategy. It's nothing new or anything. But I think what we pride ourselves in Bellway is that we're very clear, we're very detailed orientated around what we want to do, and we're all about staging, posting where we think we can get to as a business. The sector has suffered a lot in terms of profitability loss and return on equity loss over the last number of years. So the 10,000 units that will still deliver a lot of value for shareholders compared to where we are today in terms of cash returns and indeed the growth and profit that you would see coming off that. But to get to 14%, you probably need to get unit output probably closer to 11,000 units. But both of those scenarios would see a lot of potential capital being returned to shareholders. We've obviously announced a GBP 150 million share buyback today. But clearly, if you get to 10,000 units and you're growing your revenues by 20% plus, there will be a cash monetization in that if you're being very disciplined around how you're doing land buying. I think it's fair to say in the context of the LTIP as well, the stretch component for management is very much between that 12% and 14%. So we're all very heavily incentivized to do obviously better than the 10,000 of the 12% plus, but that's not where we're guiding the market today because that's not where we see conditions. Simon Scougall: Good morning, everyone. So on Home Space and perhaps more timber frame, Ami, we have no doubt it's going to drive capital efficiencies in the medium term. That's very much the strategy by opening the new timber frame factory, which is forecast for early calendar year '26. We're currently at 10% timber frame production across the group. That's predominantly through our Scottish divisions and some other divisions, and we're going to ramp that up to around 30% of output by 2030, but we're going to do it in a very prudent, careful manner. It's a new facility for us. So we want to make sure we get it right. So over the next 2 to 3 years, we'll introduce Home Space products into the group initially through 7 of our operating divisions. But we've also got a partnership with Donaldson Timber Solutions, who are currently helping us across the rest of the group. And between DTS and Bellway Home Space, we'll ramp it up towards a 30% point by FY '30. Jason Honeyman: I'll be brief on land, Ami. Just at the moment, we've got a very full land bank, and I described how we can grow into it. So I'm not in a position that I'm keen to overinvest. I'm a little bit like our purchases at the moment, adopt a wait-and-see approach to see what happens towards the end of the year. We're still buying land, but we're selective. So in those bigger divisions in better selling areas, we're still investing. I guess that dynamic will change. If the market does pick up, then our land appetite will probably increase. But just at the moment, we'll -- we haven't stopped. We've just paused. William Jones: It's Will Jones from Rothschild & Co. Redburn. Three, if I can, please. The first, if you could just update us on your thinking around bulk sales. There was a mention of it on an NPV basis in the presentation, but I think it was 0.03 of the sales rate last year and 0.1 or so the prior year. Where is normal? And I suppose if we continue with somewhat subdued conditions for, say, the next 6 months to hit that flat sales rate for the year, would you be willing to up the bulk sales content? Or would you let the sales rate slip slightly? The second was just coming back to the balance sheet content. You gave some helpful guidance on the WIP balance potentially coming down 10%. How would you think about the land value balance? I think plots broadly steady. Does the value go up a bit as you replace a bit higher than you sell out at? And then last, just a technical one on the finance bill, whether you had any commentary on how we should think about that on a 3-year view as you return more cash? Jason Honeyman: I'll do bulk. You do the other 2. Well, as usual, your figures are more detailed than mine on bulk sales. We did about 8% to be this year in terms of bulk sales. But as Shane alluded to, we've got a bigger appetite and could do a little bit more this year. I don't think it's going to change the dial, but we'll probably do 10% plus. But sometimes it's dependent upon what's happening in the market, how busy it is. But if you talk to our RCs that are with us today, our regional chairs, there's certainly an appetite and some deals on the table that we're looking at. But if you said sort of 10% plus, I think that's about where we need to be, Will. Can I hand you for balance sheet and finance? Shane Doherty: Yes. On the land side, I mean, we've got roughly GBP 2.5 billion in land. That might tick up very slightly over the next 3 years, probably commensurate with our unit output, but it won't be a material movement. Probably the bigger piece there is that we're probably willing to take on more land creditors, and we're happy to let that go as high as 20%. So net-net, Will, that probably means the overall net land balance between land creditors and land won't increase that much. Probably the increase would be offset largely by land creditors. I'm sorry, I missed your third question. Would you mind repeating that, please? William Jones: Finance cost [indiscernible] Shane Doherty: Yes. I don't think that will be a material movement either because we have GBP 130 million of PP money. And when we set ourselves the kind of broad target of how do we actually make sure that return on equity and return on capital employed are broadly similar. Funny enough, when the PP money is kind of drawn fully at year-end, that kind of gives you close to the answer. So I would say our net debt is probably at year-end will probably only be kind of GBP 100 million to GBP 150 million, maybe slightly higher than that. So the finance costs themselves will not move significantly, I don't think, in relation to that. Allison Sun: Allison from Bank of America. Just one question on the share buyback. So I was wondering if in the next few years, if you see a better investment opportunities, for example, will you thinking maybe scale back GBP 150 million? Or is this is like the minimum you want to return per year in the future? Shane Doherty: Yes. Yes. I mean, I think -- I'm glad you asked that question because we're very keen to emphasize that the lens we look at through everything is long-term shareholder return. But long term can't mean that people are waiting forever. So if you were to ask me to anticipate, I would say, I think we will be -- as long as that cash is generated, I think we will be returning it to shareholders. But we look at everything now through an IRR NPV/ROE lens. So if there was an investment opportunity that we could undertake that made sense for us, we wouldn't be found wanting there. And -- but we wouldn't just turn around and say we've decided to make that investment to shareholders, which I think in the sector, we're guilty of doing sometimes, say, we're going to invest that money. I think what we'd be saying is we're investing that money because we actually see the IRR of that investment being greater than actually buying back the share at a certain price and the payback period of it will be X or Y. I think that's the level of precision you have to get down to when you've seen the hit that the sector has taken over the last number of years. So we are going to take our responsibilities around that very seriously, but we are absolutely going to invest in growth where that opportunity exists. Aynsley Lammin: Aynsley Lammin, from Investec. I think I've got 3 as well, please. Just first of all, any kind of extra color on pricing and incentives as we've gone through the autumn selling season? Second question, just on the kind of point you've just making, I guess. If you look at -- if the government does actually improve planning brilliantly and the sales rates do bounce back, is it right to assume that there is flexibility around that share buyback that you would open more outlets? I guess 260 outlets by FY '28 doesn't look that ambitious in terms of what the government wants and how much flexibility is there? And the third question, Jason, just you mentioned this kind of hope the government recognizes a supportive economies needed. I mean just what's your wish list for November budget? Thoughts ahead of that would be interesting. Jason Honeyman: Okay. I might start with 3 of those and just get a bit of help. But pricing, Aynsley, is not flat all across the U.K. Not everything is like the Southwest and Southeast. There are some pockets of buoyant markets. So we explore those as best we can. At the moment, the Southeast and Southwest, it's full fat incentive in those locations at the moment. We deal hard. So we try to balance the books across the U.K. The new year may be different. We look at it quite regularly. And in terms of outlets, I wanted to get across today that our ambition is based on realistic assumptions, and I've adopted the same approach with outlets. And if you assume that we're just going to buy replacement land, for me to offer you ambitious outlet growth doesn't seem right. I think I can deliver realistically modest outlet growth with an improving planning system. And you're quite right. It could get better. But I think what we've offered is deliverable. We need a slight tick up in sales rates. I think if you look at them in the round, the world doesn't end just with outlets from my point of view. And with government support, I look at things, they've done a reasonable job on planning. Let's give some credit. Bellway are in super healthy shape. We've got no debt. We've got the land, the people, the planning and the outlets. All I need is a supportive economy. And sentiment is most of it, Aynsley. We need to lift. Sentiment is low in the market, and we've made 2 requests to government, and that's not just me alone, that's the majors. Firstly, can we undo the stamp duty costs that were imposed on first-time buyers in April? And can we have a long-term deposit support scheme for first-time buyers? Not every young person has the benefit of the bank of mom and dad or fat family financial help to support them. So we think that that's fair to give them some lift. And if we can have that support, which isn't big numbers at the bottom of the housing ladder, we think that will improve the sector and get the market moving. Clyde Lewis: Clyde Lewis at Peel Hunt. Land creditors and large sites normally go hand in hand. But obviously, large sites don't necessarily help that ROE drive. So I'm just sort of looking for a little bit of help as to whether you are going to be more or less happy buying the larger sites, which will allow you to probably drive that land creditor position a little bit more. That was the first question. Second question around London. I mean it's become a fairly small part of the group at the moment, again, given part of the market going on. But where does London sit within your sort of strategic thinking now again, given that ROE backdrop? Third one was on the announcement yesterday from Barratt Redrow and Persimmon around the loan scheme. Are you tempted to get involved in that reside offering as well? But again, where does that sit from a margin point of view more than a capital point of view? I'd be interested on that. And I suppose the last one I had was around demand for PRS and bulk deals. And are you only thinking about vanilla-type deals that you've done in the past? Or are you thinking actually we can maybe change the structure a little bit and look to pull capital from them earlier as part of the deals that you might do? Jason Honeyman: I'll do the first 2, you do the second 2. On large sites, you're quite right. That's where the use of land creditors. We're not buying, Clyde, lots of large sites at the moment. There's 2 guys sitting directly behind you that we'd probably invest in, 2 strong MDs from big businesses in East Midlands and Manchester, and we'd probably invest in those locations, maybe Milton Keynes, too. So strategically, where we think there's long-term demand. But other parts of the U.K., we're probably small to medium-sized sites at the moment. In terms of London, listen, I love London, but the percentage of our business now in London, Clyde, is 2% to 3%. We come out a few years back, as you probably know, we was as high as 20% of our volume in London. And I didn't exit London because I predicted where we're going to be today, certainly not. It was just that the commercial terms were too hard for us to do business. And Bellway was sort of priced out of London. But you do need a function in London market to deliver meaningful improvement in housing supply, and it's not there yet. The viability concerns in London are significant and the housing numbers in London are dire. We will continue building in London, but on the fringes on the outside. Shane Doherty: On the Help to Buy, that is some conversation that we've been part of as well. We're keeping a watch and brief on. I think it's helpful. I think it's going to be a niche product. I think the participants would say that themselves, but I think certainly a welcome addition. We would have similar type measures, obviously, in terms of deposit support and all that for our homebuyers. So we'll absolutely keep an eye on that and see just how it stacks up. I think fundamentally, what's required there is some kind of state support for first-time buyers. I think everyone in the room would acknowledge that. I mean there's a GBP 500 or GBP 600 differentiator in terms of what your monthly mortgage repayment will be depending on whether you're fortunate enough to have a 25% deposit or a 5% deposit. And I think the thing that gives me heart has been relatively new still to this sector, just having worked in another jurisdiction is every division I visit, rental levels are consistently higher than what debt service costs are. So that tells us that the long-term fundamentals are strong. So we will absolutely keep an eye on that initiative and see if it's something that needs more extensive participation from us. On your other point around PRS, I think it's a really interesting question. And yes, is the quick answer to all of that. We will look at all of those things in terms of forward fund transactions, all of those things, if it makes sense for us in terms of asset turn and having greater return capability for shareholders. I think it gives the people running the divisions more tools in their kit as well in a market where the HPI has been pretty much nonexistent. You have to look at every capital efficiency that you can. So we look at forward purchases, we look at forward funds, all of those things. And we've no hard target or how high and low that number will be. It all just depends on whether it stacks up compared to the private sales rate and the private ASPs that you can get. Charlie Campbell: It's Charlie Campbell at Stifel. A couple of questions, one operational, one financial. Mortgage availability, we're aware that banks are allowed to change stress tests and also have slightly higher availability of higher loan to income. Has that made any changes on the ground sort of currently? And will that in future? And then secondly, the financial question is just on the dividend. I wonder sort of how you judge the balance between dividends and buybacks and whether there's a thought to maybe sort of cutting the dividend or widening the cover to do more buybacks. I just wonder how the debate came out on the answers we got today. Jason Honeyman: I'll start with mortgages. Charlie, I think what the banks have done has been really helpful. It's not going to move the dial. It's just a help. It's a movement in the right direction. Mortgage rates for 2- and 5-year money haven't really changed. They're around, I guess, 4.25%, something like that. But being able to loan more is a help for first-time buyers. It doesn't solve the deposit problem, but it's certainly a move in the right direction. So we welcome that. Can I hand... Shane Doherty: Yes. I mean, I think, again, an interesting question. I think where we've landed, I think, is a good balanced outcome. I think if we were sitting here saying that the cash generation wasn't going to be significant over the next number of years, I think we would have to have a hard look at our dividend policy in relation to that and maybe flip into a buyback. But I think you're going to see probably a 2:1 split between buyback and dividends roughly assuming that, that excess capital gets generated. And I think that feels right as a balance because I think having a dividend yield underpin is a good discipline for the business as well, just in terms of the growth ambitions that we have and just shareholders knowing that they'll get a cash return from the business every year as well. Christopher Millington: Chris Millington at Deutsche. Can I just ask about strategic land and how it kind of configures in your outlet opening plans, your margin plans. Perhaps you can also comment on the relative margins versus the DPP land bank so we can understand what benefit it can bring in the future. Next one, just curious about recoveries on the reinforced concrete frame. We had the Barratt court case there, which seem to open up avenues for recoveries. I know you can't recognize them, but would you hope to get some? And then also, is there likely to be anything different in H1, H2 split you can see them getting to the back end of the question queue. We have a question like that at the end. Jason Honeyman: If I do -- I'll do land. And can I ask you to do recoveries, Simon, just to keep Simon involved. If our DPP land bank has a gross margin of 18% to 19%, we think the strategic land is 23% plus. If we are currently delivering 10% of our volume through the strat tier of the land bank, we think, Simon, that we can double that to 20%. It's an ambition, and we might miss it a little bit, but 20% by FY '28. So they're the sort of numbers where we are on strat. So it also gives us flexibility in the market. It's not just margin accretive, Chris. It just gives us a few options. So we quite like that, and you know we've invested in that for probably 5, 6 years now. So it's starting to bear fruit. Is it worth you just commenting, Simon, on recoveries? Simon Scougall: Just picking up on -- just on the strat piece as well, just interesting, but very helpful, Chris. We're aiming to have around 80 planning applications running this financial year on the strategic land portfolio to give you an idea of what we're throwing at this to get our conversion through into the DPP ultimately. So there's a lot of work going on there to try and drive the outlook piece. On recoveries, yes, as you can imagine, we've got a very active program generally across our recoveries piece. It's only recently, of course, we've been able to quantify our liabilities properly with all the assessments being done. So on the SRT side of things, we're now gearing up to go after [ service ] and suppliers, and we've already recovered around GBP 80 million thus far on that. And so far as the structural defect is concerned, we've got good prospects of success against those who are involved in the 2 schemes that Shane has alluded to, and we are heavily involved in litigation on those as well. So I'd expect to see some sort of recovery, decent recovery in the fullness of time. But it's complicated, and it will take years rather than months to get there, but I'm determined to do so. Christopher Millington: Can I just quickly loop back to the strategic land? Let's say, you're up at 260 outlets by '28. Is that assuming you get that full conversion of 10% to 20% is strategic or... Jason Honeyman: It's a [indiscernible], Chris, and outlets. I just couldn't be more specific enough. There's too many moving parts in it, but we think it's doable. We wouldn't give you the number if we didn't think we could achieve it. Yes. Shane Doherty: I think your other one was H1, H2 split. Christopher Millington: Is there anything funny this year? Shane Doherty: No, not really. I mean we were pretty well for it. So it's all coming into this financial year. So it will be -- it won't be massive, 50-50, give or take, I'd say. Yes. Jason Honeyman: Not 70-30. All good. Thank you very much for your time. Thank you.
Operator: Good afternoon, and welcome to the Brand Engagement Network Inc.'s Second Quarter 2025 Earnings Conference Call. Today's call is being recorded. [Operator Instructions] Before we begin, please note that during this call, our speakers may make forward-looking statements regarding future results and performance. Please refer to the cautionary language included in BEN's filings with the Securities and Exchange Commission, included in their Form 10-K and 10-Q for additional information concerning factors that could cause actual results to differ materially from those forward-looking statements. I would now like to turn the call over to Tyler Luck, acting CEO and Co-Founder of Brand Engagement Network. Tyler, please go ahead. Tyler Luck: Thank you, operator, and thank you all for joining us today. I'd like to begin by addressing the timing of this report. While our Q2 10-Q filing was delayed, I want to be clear that this was not the result of negative financial performance. Instead, the delay reflected deliberate decisions to strengthen the company's foundation. First, we focused on reducing ongoing expenses by negotiating with prior existing vendors to ensure we operate with greater financial discipline. Second, we made positive management changes, including reengagement with our trusted outside accounting fund that supported us from 2021 to 2024, while continuing with our independent audit firm. These steps require time, but we're taking to build confidence in our financial processes. I've been with this company since day 1. I know our technology, our customers and our mission. And I can tell you that the entrepreneurial spirit at BEN is alive and strong. Capital has always been a precious commodity, and we are treating it with the discipline and creativity that investors expect. I'd also like to highlight that our team in Seoul, Korea -- today, our Korean Innovation Lab is home to more than 30 employees, and I'm incredibly proud of the work that they are doing to drive product innovation and client success. This team embodies the energy, expertise and commitment that defines BEN globally. In addition to these foundational efforts, I'm pleased to share some key milestones that underscore our progress in building partnerships and expanding our AI solutions. For instance, we entered a global partnership with Swiss Life, a process that began before our merger in March 2024. The announcement in April 2025 marked an important milestone and as acting CEO, I had the opportunity to attend their global conference in London a few weeks ago. It was encouraging to see firsthand the positive feedback from attendees around the world. And we are focused on supporting their partners globally to benefit from the efficiencies of our conversational AI. We've also made strategic inroads in emerging markets, such as our entry into Mexico with a partner just over a year ago. And this decision aligns well with markets that prioritize data sovereignty, allowing us to test and refine our products, while positioning us for a potential expansion and execution on our current pipeline. In the pharmacy sector, our launch at a conference in Boston a year ago provided valuable market feedback on our AI solutions. We are pleased with the results so far, though as with any innovation in regulated industries, reviews take time as corporations are rightfully cautious of this new era. But these steps are setting a solid foundation for future developments. Looking at verticals like automotive, we see opportunities where AI can help build trusted consumer engagement, a long-standing challenge in the industry. The integrations we've completed today position us well for initiatives we are planning in the coming quarters. And finally, with AI top of mind for many enterprises, it's important to note that brands and regulated sectors approach new technologies with caution to avoid risks from inaccurate engagements. So this is where BEN's emphasis on trusted data shines. By focusing on brand-specific data sovereignty rather than broad web data, we enable authentic and reliable consumer interactions. These efforts reflect our commitment to delivering solutions that meet enterprise needs. And looking ahead, we've already scheduled our next earnings call on November 4, 2025, and our Annual Shareholder Meeting on November 26, 2025. We see this as the start of a new chapter for BEN, one that's built on transparency, accountability and growth. And with that, let me turn the call over to our CFO and CEO, Walid Khiari, who will walk you through our financial performance. Walid Khiari: Thank you, Tyler, and good afternoon, everyone. Our Q2 results demonstrate significant progress in stabilizing operations as well as strengthening our financial position. By reducing expenses by over 55%, we've gained greater flexibility to execute our strategy and accelerate growth initiatives in regulated industries. Looking ahead, we're shifting our focus towards driving revenue growth, supported by a stronger foundation and the operational capacity to launch new customers more rapidly across our target verticals. As for financial highlights, I'll mention a few. Revenue, we did $5,000 of revenue in Q2 compared to none in Q2 of last year 2024, which reflects early traction in some of our conversation AI solutions. As far as operating expenses go, they've decreased, as I mentioned, by 55.6% to $2.8 million for the quarter, down from $6.3 million in the same quarter of 2024, which was driven by streamlined operations and strategic cost optimization. As for other income, plus $3.7 million, primarily from a gain on debt extinguishment of $4 million, which was partially offset by changes in the fair value of warrants. Net income, about $900,000 in Q2 of this year compared to a net loss of $3 million in Q2 of 2024, and our stockholders' equity increased 126% to $5.9 million from $2.6 million at the year-end 2024, which reflects improved financial health. A detailed summary of BEN's recorded financial results is included in the company's Form 10-Q for the quarter, which ended June 30, 2025, which we have filed with the SEC. And with that, I'll hand it back to the operator to begin our Q&A session. Operator: [Operator Instructions] Your first question comes from the line of Jack Vander Aarde with Maxim Group. Jack Vander Aarde: So in -- Tyler, welcome to the CEO role. I don't believe we've spoken last quarter. So would love to get your just kind of thoughts on what you're planning to focus on and if there's any changes on the horizon? Just talk about your management style and what you're focused on. Tyler Luck: Jack, nice to meet you. We haven't met before. So I think it's an exciting time to be leading BEN. And I would say my focus is really on 3 core priorities: the first being execution and discipline, making sure we're delivering against the commitments we've made to our customers and partners and certainly our shareholders. I believe we have built a strong foundation, and now it's about consistent reliable delivery. And secondly, I would say the commercial acceleration kind of translating the momentum we're seeing into scalable revenue. That's super important. That means really tightening our go-to-market motion, deepening customer relationships and, I'd say, expanding our footprint in the verticals that we're already winning. And third, being the -- also the Chief Product Officer, I think it's super important for our focus on product leadership. So continuing to push the boundaries of responsible, reliable AI engagement and BEN's technology has the potential to redefine how people really interact with brands. And we intend to lead that shift. So in short, it's about clarity, focus and forward motion, just really ensuring that BEN not only grows, but grows with purpose. Jack Vander Aarde: Okay. Great. I appreciate that. And maybe just a follow-up, something that was kind of a major ongoing development was the pending acquisition of Cataneo, obviously. I know that, that was terminated. And -- but just maybe can you just touch on what happened there? Or are you still working with them on other opportunities, maybe not M&A related, but just other business verticals and opportunities? And then also is the media -- just -- can you just touch on the media space maybe in general and how that fits into your focus going forward in terms of verticals? Walid Khiari: Jack, this is Walid. Good to hear from you. To answer your question, yes, we're continuing to work with the team at Cataneo. We still think that our partnership is strong. And in effect, we've been working in the field together for quite some time now and have built a good momentum among our customers as well as potential customers. So we see that continuing. I had mentioned in past calls that the advertising side of the business, which is related to media is a very important pillar of this business going forward alongside automotive, health care and financials. And we see that continuing. The media space evolves probably the fastest. I think Tyler alluded to earlier, the fact that some of the regulated industries by definition, and rightfully so, as Tyler mentioned, move much slower. This is one that moves very, very fast. And so being nimble through a combination of buy, build partner approach, I think, is going to be critical. There will be M&A, but there will always be both partnership opportunities in that space on an ad hoc basis as well as aligning with our general strategy to kind of keep rejuvenating the stack dedicated -- the technical stack dedicated to the advertising space around AI. And of course, under Tyler's leadership, continuing on the build side of the strategy by continuing to build a product, which have a common foundation, but find different use cases across industry verticals. Jack Vander Aarde: Excellent. Okay. I appreciate that, Walid. Maybe a follow-up too for you. The $5,000 revenue that came in the quarter, I'm not sure if this is -- not that I'm trying to parse that necessarily, but I would be curious to know, is this -- was this a pilot program? And was it a series of customers? Just maybe walk me through that. And then what do you expect kind of going forward in terms of are there more revenue pickups like this one? Or is this a onetime development? Walid Khiari: Tyler, do you want to take that one? Tyler Luck: Yes. So the $5,000 relates to a pilot program for a client we are working with in Armenia relating to hospitality, customer service in the hotel sector. And we expect this to be recurring. Jack Vander Aarde: Excellent. Okay. Great. I appreciate that. And then just maybe a follow-up, too. Just all of the pilot programs you guys did -- you guys have had in the past over the last few years, a lot of them sound pretty promising, and they've been ongoing for a while. Maybe just to get a quick update on anything in the pharmaceutical health care space? Are these past pilot programs and collaborations, are they still ongoing? Or are we -- I guess, when do you determine if you're moving forward and what to focus on? Because there is quite -- there's quite a number of these, and I'm not sure how you're tackling it anymore. So just an update on any of the prior pilots, just so we have a sense of where we're headed. Tyler Luck: Yes. So I would say all of our pilots are moving forward. I think initially, when we started to take them on, we were really more perhaps in the generative AI space. And naturally as any business comes to ask what is the ROI on this. And so that's when we have started to move more into the Agentic AI or at least a combination. So every AI pilot that we are building and deploying needs to have measurable impact. And so really, the next phase, which most, if not all, that are progressing is really about converting these pilots into scalable recurring relationships. And we're moving in that direction with momentum. And I'd say we expect to share more detailed results as those programs formalize into commercial agreements in the near future ideally. Operator: That concludes the Q&A session. I will now turn the call back over to Tyler Luck for closing remarks. Tyler Luck: Thanks, operator. To close, I want to emphasize once again that BEN is really regaining its entrepreneurial momentum. We are disciplined, focused and committed to creating value for our shareholders through strategic partnerships, market expansions and innovative AI solutions. We look forward to updating you again on our upcoming November 4 earnings call for Q3 results, and we invite you to join us at our Annual Shareholders Meeting scheduled for November 26, 2025. Thank you, everyone, for your time and continued support. Operator: Thank you. That wraps up today's call. Transcripts of this call will be posted on BEN's Investor Relations website. We appreciate your interest in the Brand Engagement Network, Inc.