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Operator: Good day, everyone. Welcome to Western Alliance Bancorporation's Third Quarter 2025 Earnings Call. To one question and one follow-up only. You may also view the presentation today via webcast through the company's website at www.westernalliancebancorporation.com. I would now like to turn the call over to Miles Pondelik, Director of Investor Relations and Corporate Development. Please go ahead. Miles Pondelik: Thank you. Welcome to Western Alliance Bancorporation's third quarter 2025 conference call. Our speakers today are Kenneth A. Vecchione, President and Chief Executive Officer, and Dale M. Gibbons, Chief Financial Officer. Before I hand the call over to Ken, please note that today's presentation contains forward-looking statements, which are subject to risks, uncertainties, and assumptions. Except as required by law, the company does not undertake any obligation to update any forward-looking statements. For a more complete discussion of the risks and uncertainties that could cause actual results to differ materially from any forward-looking statements, please refer to the company's SEC filings, including the Form 8-Ks filed yesterday, which are available on the company's website. Now for opening remarks, I'd like to turn the call over to Ken Vecchione. Kenneth A. Vecchione: Thanks, Miles. Good afternoon, everyone. I'll make some brief comments about our third quarter performance before handing the call over to Dale to discuss our financial results and drivers in more detail. I'll then close our prepared remarks by reviewing our updated outlook for the remainder of 2025. As usual, our Chief Banking Officer for Regional Banking, Timothy R. Bruckner, will then join us for Q&A. Also sitting in today is Vishal Adani, who recently joined the team as he and Dale begin their CFO transition. Western Alliance continued our solid business momentum in the third quarter that generated record net revenue and pre-provision net revenue of $938 million and $394 million, respectively. Healthy and broad-based balance sheet growth, with $6.1 billion in deposits along with stable net interest margin supported a 30% linked quarter annualized expansion in net interest income. Firming mortgage banking revenue from lower rates bolstered a $40 million increase in noninterest income. This contributed to a high operating leverage as our efficiency improved almost 3% in the quarter to 57.4%. The adjusted efficiency ratio excluding ECR deposit costs dropped below 50%. In total, Western Alliance generated EPS of $2.28 and improved profitability with return on average assets of 1.13% and return on average tangible common equity of 15.6%. 11.3% as we moved our loan loss reserve to 78 basis points from 71 basis points in the previous quarter. Asset quality performed in line with guidance as total criticized assets declined 17% with reductions in three of the four major subcategories and net charge-offs of 22 basis points. In light of the recent news regarding two credit relationships, let me address those head-on because I and the entire Western Alliance management team take these and any potential credit migrations extremely seriously. You have heard me say previously, early identification and elevation are the hallmarks of our credit migration strategy to protect collateral and minimize potential losses. And that's what's paying dividends now. For the $98.5 million note finance loan to Cantor Group V, which was the subject of our October 16 8-Ks, we believe our circumstances are different than other organizations and that our loan to this specific investment vehicle is secured by loans with a perfected interest in the CRE properties. We have confirmed our lien position through lien searches and title company verification. However, we have determined that in some cases we are junior to other lenders in violation of the credit agreement, hence our allegation of fraud. Although the most recent appraisals indicate sufficient collateral coverage, our reserve methodology for a $98 million non-accrual loan resulted in a reserve of $30 million. This reserve and our portfolio's qualitative overlays raised total loan ACL to funded loans ratio to 85 basis points. We believe the collateral coverage, limited and unlimited springing guarantees, as well as up to $25 million of insurance coverage for mortgage fraud losses will cover losses from this credit if any. Excluding this fraud, non-accrual loans would have remained flat. Once learning of the fraud, we initiated a title review of our $2 billion note finance portfolio. To date, we have reverified titles and liens for all notes greater than $10 million and have found no irregularities and are in the process of confirming titles for more granular notes. No additional derogatory filings or lien discrepancies have been discovered today. While incredibly frustrating, we believe this is a one-off issue in our note finance business and have adjusted our onboarding and ongoing portfolio monitoring practices. Regarding our ABL facility to Leucadia Asset Management subsidiary Pointe Benita Fund One as of October 20, the current balance stands at $168 million with a loan to value of below 20%. This facility is backed by $189 million in accounts receivable from investment-grade retailers led by Walmart, AutoZone, O'Reilly Auto Parts, NAPA, and other investment-grade borrowers. None of these companies have disavowed their obligation. The loan remains current and we continue to receive principal and interest payments as modeled. Jefferies has publicly stated they feel confident in PointBenita's near-term ability to pay off all debt due to the diverse set of assets apart from the First Brands related receivables. Jefferies remains confident and so do we. Overall, this is part of a small ABL portfolio of approximately $500 million and we do not see any other similar risks for this well-secured structured facility. As further support, we have investment-grade obligors that cover our loan balance greater than four times. As a reference point, it's important to remember we have operated in private credit business for over fifteen years. We view our underwriting expertise, ability to evaluate structured credit, and sophisticated approach to minimizing uncovered risks through strong collateral with low advance rates as core competencies of the bank that prevent and mitigate losses. Over the past five and ten years, our net annual charge-offs averaged just ten and eight basis points, respectively. Placing us among the top five U.S. Banks with assets greater than $50 billion. Our deep sector expertise in these areas will continue to separate Western Alliance from our peers and enable us to deliver superior commercial banking services to our clients. And now Dale will take you through the results in more detail. Dale M. Gibbons: Thank you, Ken. I'd first like to start just clarify one comment that Ken made. The facility from Leucadia Asset Management the collateral behind our loan amount is $890 million. That's how you get to this, this 19% advance rate. On the total. Looking closer at the income statement, net interest income of $750 million grew $53 million or 8% quarter over quarter as a result of solid organic loan growth and higher average earning asset balances. Non-interest income rose nearly 27% from Q2 to $188 million led by firming mortgage banking results as AmeriHome grew revenue $17 million quarter over quarter. Overall, lower mortgage spreads and rate volatility are beginning to improve home affordability and demand for adjustable-rate mortgages in particular. Loan production volume increased 13% year over year and the gain on sale margin improved seven basis points to twenty-seven. Non-interest expenses increased $30 million from the prior quarter to $5.44 mostly from the normal seasonally elevated balances and average ECR related deposits in advance of tax and insurance payments made in the fourth quarter. Overall, we delivered solid operating leverage this quarter with net revenue growing nearly 11% which outpaced sub-six percent growth in non-interest expense. Similarly, net interest income inclusive of deposit costs rose 5% or $25 million over the prior quarter driving adjusted efficiency ratio below 50%. Record pre-provision net revenue of $394 million grew 19% over the prior quarter. Overall, total provision expense of $80 million primarily rose from Q2 levels as a result of $30 million reserve and augmented portfolio qualitative overlays to reflect portfolio composition mix change towards C and I providing greater absorption for tail risks. Turning to our net interest drivers, interest-bearing deposit costs were stable. However, overall liability funding costs compressed eight basis points from the prior quarter and benefited from lower rates on borrowings and growth in ECR paying DDA accounts. The held for investment loan yield was relatively stable, ticking up one basis point despite resumption of FOMC rate cuts toward the end of the quarter. The securities yield declined nine basis points from Q2 to 04/1972 its average holdings of lower-yielding securities increased $2.1 billion quarter over quarter. As discussed earlier, net interest income rose $53 million from Q2 to $750 million driven by healthy loan growth as higher average earning assets increased $4.8 billion. Net interest margin was stable from Q2 at three point five three. As the impact of a slightly higher loan yield and lower debt costs offset lower securities yields and stable net interest bearing deposit costs. Non-interest expenses increased $30 million or percent quarter over quarter. Deposit costs of $175 million landed squarely in the middle of our Q3 guidance. Excluding deposit costs, however, non-interest expense was only $2 million higher compared to Q2. Our adjusted efficiency ratio of 48% declined 400 basis points from the prior quarter as we continue to achieve positive operating leverage from revenue growth outpacing non-deposit costs operating expenses. We remain asset sensitive on a net interest income basis but essentially interest rate neutral on an earnings at risk basis in a ramp scenario. This offset is supported by a projected ECR related deposit cost decline and an increase in mortgage banking revenue based upon our rate cut forecast. Our updated forecast is for two twenty-five basis point cuts next week and another one in December. The balance sheet increased $4.2 billion from Q2 to $91 billion in total assets which resulted from sustained healthy held for investment loan and deposit growth $7.00 $7 billion and $6.1 billion respectively. This strong deposit growth allowed us to reduce borrowings by $2.2 billion. On this slide, we also see the allowance for loan loss growth relative to the increase in loans. Over the past year, the allowance rose from 67 to 78 basis points. This explains how our strong year to over year EPS growth of 27% is dwarfed by our industry leading PPNR growth of 38% over the same period. This reflects our robust revenue growth alongside with rising efficiency. Finally, equity increased to $7.7 billion and tangible book value per share climbed 13% year over year. Hold for investment loans grew $7.00 $7 billion quarterly though average loan balances were up $1.3 billion from Q2. Which supported our strong net interest income growth Commercial and Industrial continues to lead loan growth momentum while construction loans fell $460 million as these loans converted to term financing. Regional banking produced $150 million of loan growth with leading contributions from end market commercial banking and homebuilder finance. National business lines provided the remainder of the growth with mortgage warehouse and mortgage servicing rights financing being the primary contributors. Deposits grew $6.1 billion in Q3 with mortgage warehouse clients only contributing $2.8 billion. Solid growth was achieved in non-interest bearing and savings in money market products and mitigated the impact of $635 million in designed higher cost CD runoff. Deposit growth was well diversified across all areas of the bank. Of note, during the quarter, regional banking deposits grew $1.1 billion with over $600 million in end market commercial banking $500 million from innovation banking. Specialty escrow deposits grew $1.8 billion in Q3 with contributions of over $750 million from Juris Banking and approximately $400 million each from our Corporate Trust and business escrow services businesses. This growth positions us to meet our funding for 2025 while incorporating the normal seasonal mortgage warehouse outflows in Q4. As Ken explained, asset quality continues to perform in line with guidance from last quarter. Criticized assets dropped $284 million from $196 million decline in criticized loans. And an $88 million reduction in OREO properties. The decline in criticized loans resulted from special mention loans falling $152 million and classified accruing loans decreasing $139 million. As for our resolution efforts with other real estate owned properties, stabilizing leasing and occupancy rates as well as improved net operating income on these properties reinforce our confidence in the current carrying values. Quarterly net charge-offs were $31 million or 22 basis points of average loans. Provision expense of $80 million was primarily driven by replenishment of charge-offs in the Cantor V reserve. Our allowance for funded loans moved from 46,000,000 higher from the prior quarter to $440 million. The total loan ACL to funded loans ratio rose seven basis points to 85. Relevant to current our current discussions with working with non-depository financial or NDFI clients, it is important to consider that some of the safest asset classes in commercial banking are categorized as NDFI. As mortgage warehouse and capital call and subscription lines of credit, have had virtually no losses across the entire industry. Our overall NDFI loan exposure is disproportionately weighted to mortgage warehouse lines but we have never experienced a loss. Our NDFI loan exposure excluding mortgage credit intermediaries would represent 8% of loan balances, which is aligned with peer averages and below a number of larger banks as seen on Slide 24 in the appendix. On slide 14, will see that Western Alliance's concentration and load loss category skews our ACL lower relative to peers. Reflecting the portfolio's lower embedded loss content. The top chart is our updated adjusted adjusted total loan ACL walk illustrates how credit enhancements such as credit linked notes in structurally low risk segments like fund banking, our low LTV, high FICO residential portfolio and mortgage warehouse elevate our normalized reserve coverage from 85 basis points to 1.4%. The bottom table demonstrates how a applying an industry median loan mix to our portfolio reducing our outside proportion of loans in lower risk categories like mortgage warehouse and residential loans while also increasing our proportion of loans at higher risk loan risk categories like consumer, which shift our allowance above 1%. Our CET1 capital ranks around median for the peer group If you add our less adverse AOCI marks and the loss reserve, our adjusted CET1 ratio capital would be 11.3% The 30 basis point quarterly increase reflects organic growth generating higher stated CET1 supported by improved AOCI marks. The augmented reserve ranks in line with the median for our asset peer group on a one quarter lag basis. We remain confident in our capacity to absorb any losses in concert with steady loan growth review the adjusted capital as the total amount available to absorb losses and support balance sheet expansion. Our CET1 ratio shifted higher to 11.3% from organic earnings accumulation. Our tangible common equity to total assets ratio edged down 10 basis points to 7.1%. Our stable capital levels demonstrate our ability to generate sufficient or capital organically to support balance sheet growth and given stock price volatility, the company is evaluating to issue subordinated debt and using a portion of the proceeds to augment its share repurchase program. We believe will be accretive to EPS. Tangible book value per share increased 2.69 from June 30 to 58.56¢ as a function of organic retained earnings. Of note, since initiating our $300 million share buyback program in September, we completed $25 million in purchases through October 17. Consistent with upward growth in tangible book value per share remains a hallmark of Western Alliance and has exceeded peers by five times over the past decade. Western Alliance has been a consistent leader in creating shareholder value. On Slide 18, we have provided nine metrics we believe are key factors in driving leading financial results strong profitability, sustainable franchise value that ultimately compounds tangible book value and produces long term superior total shareholder returns. For the last ten years, our TSR EPS intangible book value per share accumulation has ranked in the top quartile relative to peers. Based on business metrics, we are the leader in ten year loan deposit and revenue growth while maintaining top tier performance for the net interest margin. Lastly, return on tangible common equity should approach top quartile performance as we generated higher equity returns this quarter and should continue the upward trend in 2026. I'll now hand the call back to Ken. Kenneth A. Vecchione: Thanks, Dale. Our 2025 outlook is as follows: We reiterate our loan growth outlook of $5 billion and raise year-end deposit growth expectations to $8.5 billion. Pipelines remain in good shape, but we remain flexible to changes in the macro environment. Regarding capital, our CET1 is comfortably above 11% and we expect that to hold during the last quarter of the year. Net interest income remains on track for 8% to 10% growth and should lead to a mid-3.5 percent net interest margin for the full year, which has been our expectation. Non-interest income was up sharply in Q3 and positions us to exceed our lofty targets and finish the year up 12% to 16%. Non-interest expense is expected to be up 2.5% to 4% for the year. ECR related deposit costs are projected to land between $140 million and $150 million in Q4, which implies slightly above $600 million for the full year. Operating expenses absent ECR costs now expect to be $1.465 billion to $1.505 billion for the full year. Asset quality should remain should continue to perform as expected with full year net charge-offs in the 20 basis point area. Finally, our fourth quarter effective tax rate is forecasted to be about 20%. At this time, Dale and I and Tim will take your calls. Operator: Thank you. We will now begin the question and answer session. During Q&A, ask questions for your colleagues who request that you please limit yourself to one and Our first question today comes from the line of Christopher Edward McGratty with KBW. Chris, please go ahead. Christopher Edward McGratty: Hello, Greg. Good morning. Kennard Dale, the buybacks post quarter end and the comments about being supportive with the capital arbitrage. Could you just unpack that a little bit? Sure. Sure. So you know, we authorized a $300 million stock buyback We're not changing that number. We executed $25 million against it in advance of this call. And and but to perhaps accelerate some of that usage of that $300 million providing more liquidity at the parent would be helpful and doing a a subordinated debt deal at the bank will take our capital ratios, and you can see that we're about 14% kind of flat. Our capital is really supported Our capital growth has really supported our balance sheet growth, but it would it would enable us to have a little more with that. As you know, though, we also have another goal of 11% CET one, So I can see us come down from where we are at eleven three. That 11 number near there. Yeah. Chris, I'll add just a few other points there. So for the quarter, we purchased 101,000 shares at $83.08. Notably, a 128,000 of those shares were acquired at $77.83. And what that should tell you before the announcement of first brands, and the canter, we were feeling very confident to be buying this stock back in the mid to high eighties, and we even got more confidence to buy it back when the stock dropped. And so, the rest is what Dale said, is we'll we'll put out a subordinated deal and sometime in the future, and we'll look to continue to support the stock, which is what we said when we announced the authorization. Yep. If there was a disruption in the stock, we'd be to support it. Okay. So you chip away to 300 sooner versus you're not raising the 300. Got it. Then a follow-up just on the guidance, we have one quarter left, but the ranges are are fairly wide. Could you just speak to biases within the range for for the various items, would you steer us in any direction for NII fees expenses? Thanks. Well, I mean, maybe go with a couple of things. I mean, so coming out of the out of the second quarter for performance, there were some discussions about our about kind of our fee income levels. And we had a stronger in the other category and noninterest income, you can see it was up significantly. Think that's at least going to continue into the fourth quarter. We're in the process now of distributing one of the largest class action settlements of all time. And that will come in through. On the expense side, based upon kind of where we're headed, we believe that there are incentive accruals may need to be bolstered in the fourth quarter. To get to where we think our where we're going to be on a relative to our bonus targets, which were outlined in the proxy earlier this year. So that'll be a factor there. On the insurance piece, you can see that we had a significant significant decrease in FDIC costs. We've been talking about how we're going to continue to roll back, you know, what we've done in terms of, you know, network deposit like Intrify. We've also been scaling back broker. This is largely the fruits of that but we also had a benefit in the in the third quarter from a rebate from prior, overpaid insurance cost a little bit. That said, I think the fourth quarter we're going to earn through that that add back that we had or the benefit we had. And I think insurance costs are going to be fairly stable. Yeah. I want to take a step back here. You know, based on consensus estimates that you guys all produce, we're gonna grow earnings somewhere between 1719% for 2025. Just wanna make sure people remember, as we entered this year, the earnings trajectory had a very steep back end curve, and we're on track to achieving that curve. So, it's also noteworthy that I think there are very few banks at or above our size growing EPS at this pace. Operator: Thank you. Our next question comes from Andrew Terrell with Stephens. Andrew, please go ahead. Andrew Terrell: Hey, good morning. Had a question just around the seasonal kind of deposit flows. I appreciate $8.5 billion plus of deposit growth guidance for the year. You just talk about expectations of the seasonal component in the fourth quarter or how much that takes out specifically the ECR balances? And then just the strength you're seeing in other verticals that would, I'm assuming, offset some of that? Dale M. Gibbons: Yeah. I mean, really, the ECR pickup, you know, that we saw or that half of the deposits that we gained in the in the third quarter was really related to the mortgage cycle. We've talked about this, and those payments are gonna be made you know, sometime around the November, December. And so that's what's really gonna come off. So it ramped up and then it comes down, but it's here for most of the quarter, you know, in terms of an average balance basis, which, of course, is how we compute earnings credit rates. And then and then, you know, kind of more stabilized after that going into 2026. Andrew Terrell: Got it. And if I could ask on on the mortgage banking piece, I know fourth quarter of last year benefited pretty heavily from, I think, direct securities and loan sales directly to banks. I know that's something you guys invested in. Did you guys experience any of that in the third quarter of this year? Led to some of the margin increase? And is that something we should expect again in the fourth quarter of this year? Kenneth A. Vecchione: So for the third quarter, there was less fall volatility, so vol did not take a bite out of the revenue growth that we are showing here for the quarter. That's number one. Number two, we did take a position that rates were going to come down and we held on to a lot of a lot of our securities bonds, if you will, and did not sell them until later in the quarter. And we caught we caught the rise up in price on that. And that helped us a little bit. I I'm not we are not modeling that in our Q4 expectations again. As I said, I I just think Q4 mortgage revenues, come down a little bit from Q3 just because of the seasonal nature. And also, November and February are the two worst mortgage months of the year. And, you know, starting around Thanksgiving through the end of the year, activity begins to slow somewhat. Yeah. We we had some dispositions as we generally do on mortgage servicing rights, but it wasn't, it wasn't for any any type of a gain here. Operator: Thank you. Next question comes from Jared Shaw with Barclays. Jared, please go ahead. Jared Shaw: Thanks. Hi, everybody. Thanks for the color on credit. I guess looking at more broadly the trends in classified loans, What was driving driving that reduction? Was that credits leaving the bank or was that improving underlying fundamentals? And or was any of that from Cantor and First Brands potentially moving out of classified and into nonperforming? Kenneth A. Vecchione: No. So there's a lot of stuff there. So, let me kinda break it down. Our REO decreased $88 million. That is one property that was sold at a marginal profit to what we brought it in at. And another property that was transitioned out of REO. So that's the 88 million. Special mention declined because several credits got resolved with borrowers putting up incremental margin to make us comfortable, and then we were able to elevate the quality of that loan or the rating of that loan. And same thing I would say in terms of sub accruing substandard loans. Where we just got we just resolved a few credits, and those got upgraded in terms of its rating. In terms of nonaccrual substandard, the Cantor loan is in that category. Okay? So that's the one that went up. Right? So special mention went down by one fifty two. Accruing substandard loans fell by one thirty eight. REO decreased by $88 million, and the increase in non-accrual loans was the 95 was $95 million, which all that was for the Cantor Group five. Had that not happened, we would have been flat there. So that hopefully, unpacks it a little bit for you. Jared Shaw: Yeah. That's great. Thank you. And then I guess just as a follow-up Dale, you mentioned growth in Corporate Trust. Deposits. How is that market share gain? I mean, what's what's going on there? Should we expect to see sort of continued continued momentum and growth on Corporate Trust? Dale M. Gibbons: Yes. It is market share gain. I mean, I'm really proud of kind of how we've executed in this category. We we started two and a half years ago, really. And, really, with the the focus we have on CLOs to start, we're now going to be expanding into municipal. But we have become the the seventh largest CLO trust depository in the world. In just two years. And so I think we're gonna be continuing to move up that those ranks, in that in that in that group. It you know, I can't say it's gonna be exactly what's gonna do for the for the fourth quarter. Because some of these are, you know, these are $50 million deals, let's say, and and and there's some you said some of them are refinanced and things like this until they get they get taken out. But we have, we have strong expectations, for how this is gonna go in 2026. Kenneth A. Vecchione: I'll add one other thing too here, which, we've got a very powerful one two punch here. Which is our corporate finance where some of the private credit lending is done. Works alongside of corporate trust when we go in and see clients. And so we get the corporate trust business as well as a credit mandate. And those two things work really well. And what we are seeing, and this is really we're very excited about this on the corporate trust side, is once we get in there, our service level is so superior to some of the larger banks which have not invested in this area. That we get repeat business. And there are repeat businesses coming a fairly nice pace. So we have a great expectations for next year on the deposit growth. From corporate trust. Operator: Thank you. Our next question comes from Timothy Coffey with Ginne. Timothy, please go ahead. Timothy Coffey: Thanks. Everybody, thanks for helping us Looking at the loan to deposit ratio, that clearly come down the past couple of years. Is that a level now that you think is the right size for it? I've got kind of the mid to low 70% range. Kenneth A. Vecchione: So Actually, we think it's a little too low. Alright? And we'd like to see that be higher. And and so we're working on that. So we have plenty of liquidity to put to work. And what we're looking for are good, safe, sound loans that we can do very thoughtful credit underwriting. On. And if we find those loans, then we have the liquidity in front of us. Right now, that liquidity is probably not making any money, not losing any money for us, maybe on the on the on the margin, maybe it makes a couple of bps. But we like to put it to to good use. And so we can see strong activity which we're seeing decent activity in the in the in our markets, we'll put that liquidity to work. Timothy Coffey: Okay. Another question was on the OREO, that you your operating rental income on right now. How should how should we be thinking about that that line item going forward? Is that kind of a recurring revenue line item for right now? Dale M. Gibbons: Yeah. So it has two places. It has a place in other revenue where that's where we get the revenue the the collection of the rents. And then it has an operating expense, is in the other expense category. The net of those two are just marginally profitable, maybe a million to $2 million over the year. And so we took in these properties because we thought we could execute faster upon leasing up these buildings than the sponsors were. And the sponsors were happy to give it to us and we were able to we think we believe we were able to maintain the value of those properties and actually improve them over time. So our goal is as we are able to increase the occupancy of these buildings and then sell them, those the revenues from that will be adjusted accordingly. But right now, you know, the net benefit to the PPNR is really marginal at 1,000,000 to $2 million for the year. Operator: Thank you. Our next question comes from Ebrahim Poonawala with Bank of America. Please go ahead. Ebrahim Poonawala: Hey. Good good morning. I just wanted to follow-up Ken. So I I think credit's obviously a huge overhang on the stock, and I heard your comments around asset quality. But but just speak to us in terms of one, I think within the NDFI, the business services piece, on a macro level, like, you seen, and this is not just for Western Alliance, but have you seen underwriting standards weaken where we should be expecting more issues coming out of this area? And banks being exposed to non bank financials around this one. Just your comfort level in this space given your still quite active, would be helpful And then beyond this, as we think about asset quality, we had some commercial real estate issues you had in last quarter. Now this as you look forward, I think just your level of comfort when we talk about tested, are they getting better, at as if versus risk of, like, one offs popping up. Thank you. Kenneth A. Vecchione: Okay. You came in a little choppy. And so if I miss something in terms of one of your questions, just just do a follow-up. Or if Dale heard it, clearer than I did, then he'll jump in there. You know, right now, think the overall backdrop to the economy is is pretty good. You've got GDP growing at 3.8 to 3.9% You got the ten year rate coming down to under 4%. Employment for as much as people are talking about and nervous about it, are still in a rather low 4% area. You have greater investments being made into the country from foreign countries. So so that should help continue with economic growth. And you've got a a pro business president. So that's the backdrop to a lot of things that we're seeing. As it relates to us, and some of your question was, I think how do we feel about the non depository financial institution loans? Let me say that a good chunk of those are all mortgage related and MSR related. And as Dale said in some of his prepared comments, we've never the industry has not experienced any losses. And for those people that aren't really knowledgeable, what happens on these mortgage warehouse lines the average loan that we put on there stays for sixteen to eighteen days. And it rolls off very, very quickly. And so these are government generally qualified loans These are government loans, government backed. Credits. They're very high FICO scores. We we like these these these credits, meaning the specialized mortgage credits, the warehouse lending, they're very strong and so are the MSR credits that we have on our books. And we have not seen any weakness in the in that at all. Okay? As it relates to the other part of of our nondepository financial institutions, has gotten some exposure through the Point Bonita controversy that was disclosed about two weeks ago. We like private credit. And I think, for us, it's important that people understand why we like private credit. How it works here in the bank. First, we lend to lenders. Just remember that. We're lending to people that are lending to private equity. Our interests are automatically aligned. And anytime we recommend a covenant, if that means it's good for us, it's gotta be good for the private equity credit lender. And so we're very much aligned. Number two, we are working only with the brand name private credit funds. And we went back and looked at what their average loss rates were, only 25 basis points. All right? Now we still underwrite the losses in the funds because that's the right thing to do. K? But our attachment point which is defined as where will we first take a loss, is at 35%. So the fund has to lose 35% before we take $1 of loss. Right? Contrast that to the 25 basis points that their average loss rates are from these private credit shops. Alright? Most of our structures are rated either double a or triple a. Right? And that's what gets a lower risk weighting on these structures. Now on top of that, we have an active portfolio management process that connects with an active portfolio management process at the private equity private credit shops. And lastly, we have the ability we've got kick out in eligibility rights. On these credits as well. Right? And as we said, we don't think there's a loss here. With the Point Bonita credit. It's paying as we expected. It's unfortunate that our name got put out there. We put it out there, but it's unfortunate that it did. We've never we're we we were not worried because of the diversity of retailers and their investment grade and the fact that we have a loan to value relationship of 20% there when we have $890 million of credit accounts receivable backing up our loan amount, which, as I said, is over four times. So unless I missed anything, Dale, did I miss anything? Did I hear anything? Got it. Okay. Dale said I got it. Hopefully, I got it. Ebrahim Poonawala: Got it. Alright. So that is full response. On the buybacks, I think, Dale, you mentioned you were at 11.3 versus the 11% that you're targeting. Is there an implication there given where the stock is right now? You could accelerate some of the buybacks the first 30 basis points of CET1, you could do in short order if the stock remains where it is today? Dale M. Gibbons: I think that's a I think that's a safe inference. Ibrahim. I mean, we haven't done our debt deal yet. But, but, yeah, do I think we're gonna come down from eleven three closer to our target? Yes. Operator: And key. Our next question comes from Casey Haire with Autonomous. Please go ahead. Casey Haire: Great. Thanks. Good morning, guys. Ken, great answer. Long answer on the, NDFI, but I do have a follow-up. Specifically on on the collateral and how it's validated, You know, it it's all of these I mean, it sounds like you scrubbed the the note finance book the big ticket items there, which is $2 billion, but that leaves about $11 billion of NDFI exposure. It just seems like it's as long as you're not afraid to go to jail, seems easy to double pledge collateral. So what are you doing to validate your collateral and safeguard against future frauds? Dale M. Gibbons: Well, as as Ken indicated and, you know, in his in his remarks, you know, we are you know, confirming through direct sources, you know, with know, with the title insurance or with the title itself, that our lien has been placed in the first position, and then we and then we periodically check those to make sure nothing happened that pushed us down a second. I mean, the issue we had with, you know, with the Cantor deal is we were supposed to be in first position. And in some cases, we see that we are now in second. And, and but the reason why we say that we're okay with collateral is because if I net out the first in front of us, relative to the as is appraisals that we have that we're getting updated, we still have enough money to cover the entire amount of this loan of $98 million. Dollars which excludes the springing guarantees, from two individuals that are ultra high net worth as well as as well as the insurance policy that that we have to for fraud losses ourselves for '25 And, Casey, I wanna just correct you. I I I think I heard a number that Our note finance portfolio is only $2 billion. Okay? Casey Haire: No. I'm Right. And I think you're including that, but I'm talking about the the remaining in the exposure of $11 billion The rest of the NDFI exposure is the overwhelming preponderance. Is, is really these you know, basically lines for residential mortgage. And and those loans are only they only last two weeks, maybe seventeen days. So, you know, so the loan is cable funded to close a house or do a refi. You put the money in, we hold it, then it's pushed off to a GSE you know, two weeks later. So those those clear out all the time. Casey Haire: Gotcha. Okay. Alright. Just switching to the guide on on loans and deposits. It sounds like loan growth is going to have to have a pretty strong quarter. You guys you know, are certainly capable of that, but it's been some time to to that you've put up a $2 billion quarter. So just some color on the pipelines. And then on the deposit side of things, I think you guys had said that you are pricing it differently so that mortgage runoff would be less than the $1 billion that you've experienced last year. But the guide implies about $3 billion of of runoff. So just just looking for some clarification there. Kenneth A. Vecchione: I will split it up. I'll take the loans. I'll let Dale take deposits. You know, so we grew $700 million this quarter. That was a little below what our internal projections were. Had two, maybe three loans that were pushed out For closing from the end of the Q3, and they're coming into Q4. So, that's what gives us sort of the confidence that We'll have a much better Q4 than we did Q3. Dale M. Gibbons: Yeah. If you you'll go to the the deposit guide, like you mentioned, that that your your your analysis is is correct, Casey. So so what's transpired is, you know, gosh, we had this kind of, you know, kind of a rocket third quarter in terms of deposit growth. Mike, My instinctive reaction is, does that give us pricing leverage? Whereby we can we can maybe put put something down and still have, you know, a strong performance. So I think in some respects, in some respects, you know, our our guide, you know, anticipates maybe the run up would be a little bit higher. If we did that. But I hope we'd be able to save on pricing, in that scenario. I would say, that there is one other caveat though, So, you know, if the AmeriHome operation and mortgage banking generally picks up, what goes into those deposits is normally it's just, you know, your principal and interest. You make a payment, you know, for x thousand dollars. You know, we're gonna go in there and we're gonna see those funds. We're gonna have them for three weeks and then we're gonna remit them to a GSE typically. But, you know, if somebody does a purchase, you know, then maybe it's $500,000 that goes in there. And so those deposits could rise if we get into more of a purchase and or refi business moving in as rates continue to decline. Operator: Thank you. Our next question comes from Matthew Clark with Piper Sandler. Matthew, please go ahead. Matthew Clark: Hey, good morning. Thank you. Morning. Just on that lawsuit in the in the Juris Banking division, just quantify the the settlement or that you anticipate to realize here in the fourth quarter? Dale M. Gibbons: Yeah. So, so so the the the lawsuit was a it was I guess I'll it was Facebook. Cambridge Analytica deal. You probably heard about it. It has more plaintiffs or more participants in the class than anything ever. In the over 10 million. And, and that that process is taking place now. And so and and and if we're the distributor of that, gonna take, you know, a few months to do it. But, but get fees associated with distributing 15 million payments and going through the the process of verification of the individual you know, are they are they certified for the class, things like this? Matthew Clark: Got it. And then I don't think I saw it in the slide deck, but if you had spot rate on deposits at the September and the beta, we should assume as we go through you know, a rate cutting cycle here potentially? Dale M. Gibbons: Yeah. So so the the ending rate was $3.17. For interest bearing deposits. Know, the the beta that we've, you know, we've got, you know, it's we're a little bit little bit faster on the ECR, so it's going to be a little slower than that. In terms of what we're doing. But you know, hence, you know, you see on the net interest income guide in total, we're showing that we're know, slightly, you know, asset sensitive with maybe a little bit of compression as rates come down. But we more than make up for that with what we save on ECR costs and what we save in additional income from the Emera home operation. Operator: Thank you. Next question comes from Ben Gerlinger with Citi. Please go ahead. Ben Gerlinger: Hi. Hi. Good morning. I know we talked through Oreo a little bit. With respect to the properties of the office properties last quarter, seems like you've already sold one and you're leasing up others. I know, Ken, that you you acknowledge that, like, fees and and rent rolls going to in that in or fee income, and then expenses are basically de minimis to one another. Towards your net impact to the income statement. But as you roll those out, it seems like on occupancy levels, you probably acknowledge some gains over the next twelve months was just kinda curious if any timeline you might project on getting rid of the other four that you still have on the REO. Kenneth A. Vecchione: Yeah. I I really don't have a timeline for you. We We'd like to get them off our balance sheet as quickly as possible. The best way to do that is to lease these properties up. We see good leasing activity on the properties, as Dale said, in his prepared remarks. In addition, we're getting some tailwinds. With interest rate cuts coming, which should really improve cap rates. So the best I can say is fingers crossed, that I like to see a couple of those leave us sometime during the course of next year. But we're looking to maximize value here. We're looking to improve our tangible book value now that we brought them on And so we don't wanna sell them too cheaply. Because I we're kind of optimistic that we could we could improve the occupancy of these buildings. Dale M. Gibbons: Every one of these, we have a reasonably current appraisal on, and they're two values in that appraisal every time. Like, one is the as stabilized value, which is, hey. If this thing is operating normally and isn't under some kind of, you know, duress or distress. And then the, the as is guys, nope. Here's what it is today. You know, yes. Of the things don't work. You just see us at you know, you gotta take those into consideration as the buyer. So we're in a situation now that the disparity between the as is value and the as stabilized values on these are some of the highest we've ever seen. And so what you're getting at is, gosh, would it, you know, would it be nice as we stabilize these that maybe we can migrate those numbers up? I'd love to do that. We're obviously never gonna forecast anything like that. Ben Gerlinger: Got it. Okay. That makes sense. Are you looking to buy a building? Nothing. Not for what you're selling it for. I don't have that money. But in terms of in terms of danger, it might be a naive question, but was that an NDFI loan? And if so, what what kind of subcategory was it? Dale M. Gibbons: Yeah. It it was an India pie loan. And it was in, you know, you know, know, the mortgage cap or yeah. It's in our net in our you know, yeah, market banking situation and be you know? So so it it was because as a financial institution that it it's gonna be in there. And, as Ken indicated, you know, what we're doing in our know, our our advances here is our numbers would have been very strong had we had the first position as the borrower you know, presented that they did and as their contracts demand. That's where we get into this fraud situation. Otherwise, this would have never even come up. Operator: Thank you. Our next question comes from David Smith with Truist Securities. Please go ahead, David. David Smith: Hi there. You give us some more details on the mortgage assumptions in your overall earnings sensitivity guide for down rates? Just with a 75% ECR beta on top of what you disclosed about your NII sensitivity, Seems like there's very little, if any, mortgage upside in there. I was wondering if you could help us unpack that some. Thank you. Dale M. Gibbons: Well, so we we you know, one of the key factors in terms of how we do on our it's basically the valuation on the MSR relative to what we have as our hedge against it, is is the spreads that have increased over the past few years. We're seeing today those spreads compress. As if that continues, as spreads compress to historical levels, likely to see higher revenue. In that scenario, because the volatility is something that doesn't really work in our favor. And we saw the inverse of this at the beginning of the the basically, the tariff situation back in April. In terms of what the Mortgage Bankers Association is actually projecting a little bit a little bit better, in terms of, you know, purchase activity or total one to four family in the fourth quarter than in the third. We're not really counting on that. We're thinking it's going to maybe slip slightly just because that's been the seasonal trend. But maybe there will be some higher level of activity because of the rate cuts as long as people are comfortable that the shutdown and things like this aren't gonna move, unemployment higher. Kenneth A. Vecchione: Yeah. The numbers from the MBA for next year they they expect mortgage activity to rise, 10% to $2.2 trillion. Where almost $1.5 trillion will be purchased volume, and then about $700 billion will be refinancings. So again, Q4 revenues for mortgage should be just a little weaker than Q3. Although, you know, I've got some I got my fingers crossed here that could maybe get some tailwinds here. But we we are becoming more optimistic about where that revenue stream is gonna be for 2026. David Smith: Okay. And then just to circle back to the earnings at risk scenario, could you help us just roughly size how much of the offset to the NII asset sensitivity is coming from ECR benefiting and down rates versus mortgage benefiting and down rates for you? Dale M. Gibbons: Yeah. I think the preponderance is gonna be kind of in the mortgage side. But, yeah, but they're both contributors. And if there's more variability, in terms of it improving better in the earnings at risk, it's gonna be the mortgage related as well. I think we're gonna have have a higher beta on the beta based upon kind of what could happen there versus the ECRs, which we talked about those betas already. Operator: Thank you. Our next question comes from Bernard von-Gizycki with Deutsche Bank. Please go ahead. Bernard von-Gizycki: Hey, guys. Good morning. So you have a bit over a third of your total deposit base that has ECRs related to them. And when we think about the composition of the deposit base, and the ECR related costs, which represent about 30% of the total expenses, Can you just talk to expectations of how these change? Know, Dale, you're moving over to a new role next year focusing on deposit initiatives. But are you looking to drive down the percentage of the ECR related balances? Have them grow but more focused on reducing, ECR costs related to them or a combination of both? Any color, you can share with these dynamics? Dale M. Gibbons: Yeah. So so the ECR is really driven by two sectors. The largest, of course, is the kind of what we're doing in the mortgage warehouse deposits. We've talked about that. And the other one is our homeowners association. So going forward, I believe that the homeowners association deposits are not going to shrink. They're not going to grow as quickly as the overall footings of deposits for the company. So proportionately that will decline Meanwhile, I our HOA group, you know, we're the largest in the nation, in terms of what we provide services there. That growth is continuing to be strong. And I think that was going to at least keep pace with the overall size of the company as it grows. So in total, think you're gonna see that it becomes kind of less significant. And in terms of the expenses associated with it, you know, as you go to lower rate levels, you know, numbers just come down and there's really not as much of an offset anywhere else. It's just the dollars are going to fall back a bit. You know, to, to lower levels if, say, we get, you know, four rate cuts over the next twelve months. Bernard von-Gizycki: Okay. And then just on equity income, the uptick there in 3Q, was that primarily due to the reversal in losses from 1Q? Just curious if that's come back. And just given the cap markets activity picking up, how should we look at this line item from here? Dale M. Gibbons: I we don't have that reversal yet. Thanks for remembering that. But, that's still that's still pending. I know this was this these were other types of things. Look. That number does bounce around a bit. You can obviously see that. So, you know, this $8 million handle you know, certainly higher than usual. A little bit of a haircut there. Going forward, but we don't have anything that indicates that anything is either getting dramatically better or worse. Operator: Our next question comes from Anthony Elian with JPMorgan. Please go ahead, Anthony. Anthony Elian: Hi, everyone. You increased the range for ECR costs again this quarter, but this time you maintained the NII range of up 8% to 10%. The increase in the ECR deposit cost range tied to just higher balances or because of a lower ability to reprice? Down those deposits? Dale M. Gibbons: It's it's really balance driven. You know, I mean, frankly, we got a little more in the third quarter than we thought we would. So it's it's balance driven, and and there's been you know, we you know, it's it's a I guess it's a good problem to have in that, you know, some of these dollars grown more quickly, but, know, it does show up in expenses and and it contributes to, you know, the situation where you've gotta look at adjusted you know, adjusted, efficiency ratio, adjusted NIM. Anthony Elian: Okay. And then on my follow-up on your earlier comments, reviewing the note finance portfolio, have you given any thought to potentially casting a wider net in your reviewing the loan portfolio credit procedures more broadly? Beyond note finance and NDFIs. Just investor concerns on the company's credit quality? Thank you. Kenneth A. Vecchione: Hi. Yeah. The I I wanna quell any misconceptions that might be implied through even some of the questions. No one is is more concerned about credit governance, asset quality, than than our executive management. We we've got an entire construct built around the control environment for credit The the second line or credit risk review that's intimately involved. And so the at the earliest stages of something that didn't work, as we expected, those teams are involved inside of our company. We're we're we're listening and and reviewing on a much broader scale. So this work's been ongoing. It goes on all the time as part of our quarterly full portfolio review process. But in addition to that, we we we hold ourselves accountable and we hold our our business accountable through our second and third line who are actively, engaged in that. And so we're not asking ourselves, could this happen again? We're receiving validation of those things through through our internal control network. Operator: Thank you. Our next question comes from Jon Arfstrom with RBC Capital Markets. Jon, please go ahead. Jon Arfstrom: Hey, thanks. Hi, everyone. Hey, John. Ken, maybe for you. Hey, do do you have any balance sheet size limitations It looks like you're going through $100 billion very quickly the next couple of quarters. Anything for us to consider and how are you thinking about no. Not really. Think you're right. You know, of course, not gonna have a lot of growth in the balance sheet for Q4 just because as we've talked about the seasonal outflow of the warehouse lending deposits or the mortgage deposits. But two things we're doing. One, we're growing the business based upon opportunities that we have, and we're not holding our ourselves back. Because we're gonna cross over a $100 billion. Number two, we continue to build out the infrastructure to crossover a $100 billion and be LFI ready. Number three, we're waiting and we're hopeful that the tailing rules will come out probably sometime in the middle of next year. That will move it to $2.50. Alright? But, you know, in all the expense numbers, remember, non non ECR operating expenses quarter to quarter only went up $2 million For the first 3 quarters of this year, non ECR operating expenses were in a band of $5 million and that includes all the development and investment we're making to be LFI ready. So to your balance sheet question, we know we'll cross over a 100 when it's the right time. Based on the opportunities that are in front of us. Okay? And we'll be ready and we continue to invest And if the tail end rules come out, then we may slow some of our investment down to match what some of the tailwind rules are. Jon Arfstrom: Okay. Alright. Fair enough. And then, Dale, for you, in your prepared comments, talked about an upward bias in ROTCE. And top quartile and ability to show improvement I'm assuming you're thinking a starting point that includes a more normalized provision So maybe normalized ROTCE right now is high teens rather than the mid teens you printed? And you can do better from there. Is that fair? Dale M. Gibbons: Sure. Yeah. Yeah. Yeah. Know that that that's completely fair, John. You know, maybe just talk timing a little bit here as well. Yeah, normalized provision, you know, that would have obviously augmented the number, in in the third quarter. As we get to the first quarter in particular, it's a little bit strange. You know, we we lose a couple of days. That's meaningful for us. And, also, you step up again, everyone knows, on, you know, certain types of tax and things like this, you know, kind of starting the new year. So I'm looking for I'm looking for something to, you know, that kind of kick in you know, kind of in the back half of 2016 to hopefully get to the levels you're talking about. Kenneth A. Vecchione: Yeah. You know, one of the things that can really supercharge the return on average tangible common equity will be the mortgage business next year and the growth in the mortgage business. You know, if it grows more than moderately, that's gonna really provide excess earnings and that will improve the return on equity, John. Thank you. Operator: Our next question is a follow-up from Ebrahim Poonawala with Bank of America. Please go ahead. Ebrahim Poonawala: Thanks for taking my question. Dale, just follow-up, I think it's important Just wanna make sure sure in your slide 24, the 16% loans NDFI loans, mortgage intermediaries is about $9.1 billion. The warehouse is about $6 billion and change. I'm trying to figure what the balance is between the 6 and 9, and are those nonresidential warehouse loans, so, like, commercial real estate driven. And would you be holding reserves against those loans, as opposed to the resi mortgage where you show on the slide where you don't need reserves because of the zero loss nature. Just clarify that for us. Dale M. Gibbons: You know, I think we maybe need to pick this up you know, at maybe at the next call, Ebrahim, in terms of in terms of what this what this looks like. I mean, so we you know, we've talked about the the the warehouse piece. And and where we are on the, you know, the NDFI elements whereby we're assuming a first out position and another lender is, is in front of us with the, with the higher level of risk against loans that typically have low loss to begin with. So let's pick this up later today. Operator: Thank you. Our next question comes from Timur Braziler with Wells Fargo. Please go ahead. Timur Braziler: Hi, good morning. Just I guess looking at the Cantor relationship specifically, what internal controls maybe failed to detect some of the collateral deficiencies there? And then it looks like in going through the lawsuit that the credit was converted from the line of of credit in July to a term loan, and then the the suit was filed in August. Was the loan re underwritten in July and the new issues kind of identified we later? Maybe just give me a little bit of a timeline as to what happened around, July, August there. Kenneth A. Vecchione: Yeah. So I'll provide some updates. But, you know, appreciate that this is an active litigation. And our discussion here is gonna be somewhat limited. I'll try to help you with your question. First, we had a long term relationship with this borrower. Alright? It dates back to 2017. And as of this past August, the borrower was current. We made the decision to exit the relationship and convert the revolving loan to a term loan with a May 2026 maturity. It was during that time that we discovered the borrower failed to disclose material facts to us. Consequently, we wasted no time in filing a lawsuit alleging fraud. So that's probably as much as I can tell you given that we have an active lawsuit here. We're working hard to get a receiver in there as soon as possible. And with that, we're gonna have greater insight into the books and records of Cantor five. Operator: Thank you. This concludes our Q&A session. And I would now like to turn the call back over to Kenneth A. Vecchione for closing remarks. Kenneth A. Vecchione: Yes. Thank you all for attending the meeting. Appreciate all your questions. We look forward to the next call. Be well. Operator: Thank you everyone for joining us today. This concludes our call, and you may now disconnect your lines.
Operator: Good morning, ladies and gentlemen. Welcome to the Third Quarter 2025 Matador Resources Company Earnings Conference Call. My name is Jonathan, and I will be serving as the operator for today. At this time, all participants are in a listen-only mode. We will facilitate a question and answer session at the end of the company's remarks. As a reminder, this conference is being recorded for replay purposes. And the replay will be available on the company's website for one year as in the company's earnings press release issued yesterday. I will now turn the call over to Mr. Mac Schmitz, Senior Vice President, Investor Relations for Matador. Mister Schmitz, you may proceed. Mac Schmitz: Good morning, everyone, and thank you for joining us for Matador's third quarter 2025 earnings conference call. Some of the presenters today will reference certain non-GAAP financial measures, regularly used by Matador Resources in measuring the company's financial performance. Reconciliations of such non-GAAP financial measures with the comparable financial measures calculated in accordance with GAAP are contained at the end of the company's earnings press release. As a reminder, certain statements included in this morning's presentation may be forward-looking and reflect the company's current expectations or forecast of future events based on the information that is now available. Actual results future events could differ materially from those anticipated in such statements. Additional information concerning factors that could cause actual results to differ materially is contained in the company's earnings release and its most recent annual report on Form 10-Ks and any subsequent Quarterly reports on Form 10-Q. In addition to our earnings press release yesterday, I would like to remind everyone that you can find a slide presentation in connection with the third quarter 2025 earnings release under the Investor Relations tab on our website. And with that, I would now like to turn the call over to Mr. Joe Foran, our Founder, Chairman and CEO. Joe Foran: Thank you, Mac. It's good to talk to everybody again. We think we've had a heck of a quarter. And really pleased with our process. In all of our different areas. And the progress and gonna try to go around the table so you can hear directly from a lot of the people doing the actual work. And but I think they've just done an outstanding job today. We're particularly excited on this quarter because anytime you get to raise the dividend, you generally get a lot of edibles from some from your shareholders, particularly the rank and file shareholders. But also pleased that recognized by the Dallas Moore News as one of the larger companies and in the Dallas Fort Worth area. But the NICE is part of the bill is that when you do the calculations, we're although 36 in size, we're number one in profit per employee. So give a lot of credit to the staff and their contributions. And look forward to this report. And, I know, everybody is interested in knowing about capital spending and and the thought processes behind that. But would tell you if I were faced with the same situation, we would still spend this money just as we did this year. I think the teams really work together on that. And the executive committee of the board and the executive committee of the company all went through this and and and said not only about this quarter, but setting up next year is gonna be one of the most fruitful years we have as we have lots of inventory, lots of cash flow, and good liquidity. And and room on our RBL. So, ask away. I might turn it over to Chris, our chief operating officer, just to describe some of the thought and process that we went through before deciding on this capital structure. Christopher Calvert: Yeah. Thank you, Joe. This is Chris Calvert, executive vice president Chief Operating Officer. Thank you guys for taking the time to be on the call. And really, I'd like to take a few minutes here to highlight the positives of what was written in the release last night surrounding the capital program and really focus on three things that I feel were probably maybe overlooked. First, I'd like to talk about the underlying economics related to the projects that came into this capital plan. Specifically, we mentioned 12 additional wells that were going to be brought into the 2025 program. To highlight these wells specifically, you know, these wells are in excess of 50% rate of return, million BOE wells, half of which of these fourth quarter TILs we're going to be talking about are in Antelope Ridge. Which is what we've talked about of the highest EURs, not only in our company profile, but also in the basement. So really strong projects associated with this capital plan. Secondly, you know, I think it was somewhat overlooked or taken for granted the advantages and the efficiencies that have been made at the well cost level. We initially came out in 2025 and guided to a midpoint of $880 per completed lateral foot. 've since revised that number down to $8.35 to $8.55 with a midpoint of $8.44. And as we turn on, we expect to turn on roughly 1,200,000 net lateral feet this year that $30 to $45 savings equates to about 50,000,000 to $60,000,000 in capital savings. So not only are we turning on extremely economic projects, we're doing it at a lower well cost level. So our initial investments are actually reduced, which in turn help the economics of the wells. Thirdly, talking about the accelerated operations, I'd already spoken to the 12 wells that we accelerate into 2025. Will also have a positive springboard looking into 2026 with 13.6 net wells that will be turned on at the January. And so as we look to that, can provide extreme good excuse me, positive momentum going into 2026 to achieve 2% to 5% organic growth rate of what we feel is somewhat of an inorganic growth rate in 2025 And so I think when you consider those three things, you know, the economic underlying economic returns of the project, the reduced cost at the well level, and then the positive momentum leading into 2026. I think it leads to a very strong report and a positive outlook for 2026. Robert Macalik: Yeah. And this is Rob, CFO. So I just wanted to pile on a little bit to what Chris is talking about. So even though I'm CFO today, I've been chief accounting officer for the past ten years and I've been sitting here at this table with this management team And we're really proud of what we've accomplished and created in a consistent manner over those past ten years. And so one, just to bring in an accounting metric know, we've gone from accumulated deficit as early as just three and a half years ago to, for the first time this quarter, over 3,000,000,000 in retained earnings. So that strong balance sheet, and I'll refer you We have the slide deck out there. I'll refer you to slide 11 You know, I think it highlights the strength of our balance sheet with a point four leverage ratio, Over the past year, we paid 670,000,000 of our revolving debt and have about 2,000,000,000 in liquidity. So that allows us the flexibility to take advantage of like what Chris is just talking about. And so really excited about the well returns and the results that we've had so far this year. And, like Chris said, feel like that sets us up really nicely for 2026. So and at the same time, we're able to, at accomplish the other priorities that we have for free cash flow. We've as Joe mentioned, raised our dividend by 20% this quarter. Land spend, we continue to add on to our land position when we can find the accretive deals that we think make sense for us. And, we don't need to do anything, but we have a really good strong inventory of of greater than 50% returns even at $50 as we mentioned in the release. And then the last kind of piece of that is the opportunistic, share buyback. You know, the management team are buyers, and so, the company is as well. But overall, I think we were able to hit all those priorities this quarter. Like Joe said, had an excellent quarter. And really excited about how this sets us up for 2026. Jonathan, with that, we'll turn it over. Operator: To q and a. All right. Thank you. If your question has been answered and you'd like to remove yourself from the queue, simply press we would ask that you please limit yourself to one question until all have had a chance to ask a question after which we would welcome any additional follow-up questions. And one moment for our first question. Our first question comes from the line of Neal Dingmann from William Blair. Your question please. Neal Dingmann: Good morning, guys. Nice to see another nice quarter and solid outlook. Joe, my question is really for you or Chris and the team. Just on the op efficiency, something you were just getting at with the capital spend. I'm just wondering as you all continue to see the improvement, I'm just wondering, how do you all decide between continuing potentially with the same capital spend and likely increase in production growth or, you know, maybe continuing with the same production and decreasing capital spend? Is it one or the other? Or how do you all make that decision from a higher level? Thank you. Joe Foran: Neil, thanks for the question. It's a good question. And I wish I could give you an easy always answer. But it's always a balance between those two areas And and taking in account a number of other factors. It's just not a one variable question. Or one variable answer that is price oil up or price oil down because we've often made more money in the bad times than you know, and more robust times, by taking on some projects when others out the sideline. A great example of that if I don't is going back in time to when we bought the Rodney Robinson lease and the Bonnie and those leases they paid out at $20 a barrel. During the COVID. Period, and that's one of the best deals we ever did. There's a time of worst oil pricing. And they've really kept kept giving, during that time and come forward the same thing can be applied to times where the drilling rigs were stacking up we've kept the same rigs for ten fifteen years or more. And have found that that's sometimes where you have good rigged hands good pricing on your rigs, good pricing on your completion, Is it time to build that foundation? So we talk about it in committee system, and it's pretty lively. About what we want to do. And who wants to do something slightly different. But we weigh when you start out with just $270,000, as I did, get to where we are today you can be sure you've had lots of discussions and thoughts about how much to spend and where to spend And we've kinda worked out a system among ourselves where we really try to stress test it. And and think about all the factors because there's other factors that weigh in on keeping a rig and keeping it going. What's gonna happen next year what is the quality of the prospects, and I'm pleased to say our geologists have really knocked it out of park on some of their ideas on grilling here and there. As y'all have seen, so we've had steady rise in our, our our engineering reports. And and reserve studies that we do twice a year for the banks. There's been steady growth there. And so the capital spending, is it something that we weigh by itself, but in connection with everything else, and the other capital request from midstream and marketing for example, is another area that they've come up with ideas and have pointed out, let's spend some money here on the midstream. And, of course, with the flow assurance, the added flow assurance that you get out of the basin, has been a lifesaver for us at times when the rest of the basin was more or less shut down. So it's it's a multifactor deal, and it's lively discussions. And I think I gotta give a lot of credit to all the guys on the team that are helping make these decisions. I think they've been very wise and is as Rob pointed out, look what it's done for our retained earnings. Over the last three and a half years, we moved from a deficit to over 3,000,000,000 and retained earnings. So, it's a pleasure to come back in light of those good decisions and say we're raising the dividend again. Which in fact is now the fourth time in seven years. And, you know, getting up there to three and a half percent or more, And, we plan to keep going in that direction as long as Chris and his team and Tom and his team and the midstream guys are all making these I think, very good capital decisions. So, I think you can expect more of the same in the same manner but we look at it more broadly than just looking at capital decisions based solely on oil price. Christopher Calvert: Yeah. And, Neil, this is this is Chris Calvert again. And I think Joe hit it on the head and just provide a little more color. I think, you know, when we look at specific project returns, you obviously, like Joe said, you have two factors really multiple factors, one that has really what we feel dislocated in the back half of this year, and that is the cost components to those returns. And so that cost dislocation can come from efficiencies, which we have proven to be extremely good at to where whether it's simul frac, triaml frac, U turns, the efficiency driven cost dislocation has been the large player in 2025. Now as we look into the back half of this year, we are able to take advantage of some more competitive service costs pricing. And so when you have the confluence of efficiency and service cost reduction, you can really tip the scale on project economics. Now I would also say that as we look forward, the tenant of what we have always operated on is optionality. And so when we look at this, it is October right now when we provide a more clear picture of 2026 in February, we have the ability to flex up, flex down, to to revise this soft for 2026 if market conditions have changed. And so I think that is something that is extremely important to where if we see this cost dislocation somewhat converge back, we have the ability to make that change moving forward. Operator: Thank you. And our next question comes from the line of Derrick Whitfield from Texas Capital. Your question please. Derrick Whitfield: Good morning, Joe and team, and thanks for taking my question. Good morning. Perhaps leaning in on some of the efficiency gains you've highlighted this quarter, where are you seeing the greatest opportunity for continued gains And more broadly, how much of your recent projected gains have been factored into your soft guide 2026? Christopher Calvert: Yeah, Derek. This is Chris Calvert again. From an efficiency standpoint, I still think there is there's always going to be ground to be gained. We have talked a lot about completion operation, trimul frac, 2025, we utilize those two processes on about 80%, 85% of our wells. There's still ground to be made to where we can get that number. Right now, it's about 40% for 2025. Look to boost that in '26. There's going to be logistical operations to where we can look to to utilize money. Partnerships with San Mateo play a key part in this when it comes to treated produced water and using recycled water for fracturing operations is going to be a large part of efficiency gains from a logistics perspective moving forward. On the drilling side, extending laterals, excited that as we move into the fourth quarter, we're going to some of our longest laterals today, 3.4 mile laterals at the AmeriDev asset. So something where we are extremely excited to bring some of that value forward. From an efficiency standpoint, it's really across the board with completion drilling, production, facilities, measurement that we look to push forward. Now how does that play into 2026? Everybody on the call is is very aware that this $50 price world that we live in is relatively recent. You know, it's probably within the last seven to fourteen days. And so when we've looked at how we guide from a cap perspective, you know, if oil continues to be in this $50 region, I think there's potential to where we could improve upon a D and C cost per full range that we guided $835 to $855 for the back half of this year. So I think any sort of service cost reductions from a $50 oil commodity world I think there's potentially grounds to improve upon. But I think from an efficiency standpoint, we started the year at $8.80. We're going to finish $8.35, $8.45, give or take. A large part of that is efficiencies. So I think as we look into 2026, we look to improve upon that number. And, like like we've said in the release, we'll turn in line a similar net lateral footage, but do it on a cheaper capital budget from a DNC or more efficient capital budget from a DNC side. Operator: Thank you. And our next question comes from the line of Leo Mariani from Roth. Your question please. Leo Mariani: Hey guys, want to to to harp on the the same, you know, sort of point here. But clearly, you folks do have flexibility in your plans, which you certainly spoke to that you certainly could adjust some things, you know, come kind of formal guide. In February. Wanted to kind maybe get a better sense and terms of the variables that you guys are looking at. A number of folks out there are expecting kind of an oversupplied oil market in 2026. Just want to get a sense of how much kind of the oil macro kind of plays into your thought and I know you've certainly got some returns here, but if oil goes another leg lower here, is there kind of price level, where you maybe decide not to grow so much? Would that be kind of in the 50 to 55 range? Just trying to get a better sense of how you're kind of thinking about oil macro and how that factors in your decisions here on spending. Christopher Calvert: Yeah. Hey, Leo. That that is a great question. You know, I think as we look it'll go back to Joe's answer. I think it was on on Neil's first question. You know, I think that's a story that we unfold and we tell when we live in that world. You know, as we get closer to February, if commodity continues to slide, I think that's how we have to approach it. And like Joe said, done at the committee level here with all teams participating with with board contribution, and it's really an internal discussion. However, think as we look at that, the optionality that we maintain, whether it's at the rig level, even more flexibly at the completion level that we are able to to reduce activity in that world if cost don't continue to go down in that in that reduced commodity price. And so I think that's how we would kinda look at it, but it is not a single variable. And so I know if Joe or would like to chime in. Joe Foran: Look. Chris, yeah, those are all good points. But remember, that if we don't look just at the oil price, one factor that has influenced us and made us more active is the fact we've reduced days on well that if you drill these wells faster, you save about a $100,000 a day. And that makes it big difference in looking at your rate of return. So it it as each day you save, you improve what makes sense to drill. And what particular rate of return. This second thing that I'd say is that the the drilling companies use Patterson more often than anybody else. And Patterson is making improvements all the time on their equipment, and there's people. That you have that also creating the efficiency. So price some drops in price can be replaced by efficiency gains. But also these wells are gonna produce for thirty years. So to look at it just on the price of oil, what the price of oil is today, is narrow minded Because, again, I point you back to the Rodney Robinson Wells And the other wells we drilled in the COVID period, you had low oil prices then, but they were paid out within a year. The on the strength of its production, the low well cost. So they're just these other factors have to be not weighed once, and then you wait six months to drill the well, they're may close in time when you spud, and you can always postpone it. You can just say we're not gonna do it now. And if you have a long relationship with that service company, they'll they'll work with you. They don't wanna lose the business. So everybody works together on these things to do it. At or more or less optimal times. So the capital decision really isn't the one that drives it so much For a company like us that have the capital resources, do. 2,000,000,000 on our line of credit, know, paid down debt. To a small amount, it it really is a larger question on that is what efficiency gains taken into account what efficiency gains what these other costs are, and cost of product. And I really commend Chris and his team for reducing that where you're your per foot cost is less now than it what know, it's considerably less, in my mind, you can save $60,000,000 has to be taken into account on the decision. Do you go ahead with this capital spending now thinking that anticipating that with the efficiencies and the like here, you're gonna still come out ahead. And and they're gonna use their best equipment and best hands And, they they all know that reducing cost is a is there major objective and ours is working for the long term, and we're not spending just to be spending. But we're spending fully intending to make money. And you can see that by the number of shares as participation by our employees in buying buying stock in the open period. So I feel real comfortable that everybody's taking things into account and pointing out the positive. Of drilling these wells or doing other capital events at the same time and coordinating it So it's a balance between what the choices you have, to drill or to acquire properties or use them to keep building out your midstream, which he's worked at to be a real good deal. So we have a lot of opportunities, a lot of choices. And, there's a lot of thought and effort put into it. Yeah, Joe. This is, Brian Willard, exec vice president of midstream. I think you're exactly right. You mentioned the midstream business and, just a couple items on that. That business is before extremely well. We had a new processing record last quarter. 533,000,000 cubic feet per day of natural gas was processed. And we continue to have that success as we we get into the fourth quarter. It's been a great start to the fourth quarter. And not only is the business performing well, but we've talked a lot about the different options with that business because we don't believe that the value of the midstream is fully reflected in Matador share price. And so we continue to explore the options and and we can be patient there. We don't necessarily have to have that money as Matador, so we can be patient and make sure it's the right opportunity and the right transaction a matter of our shareholders and provide the most value. Maybe the last one I'd make is just Matador also has some wholly owned assets. That they retain and they continue to operate. And those are assets that we acquired in the advanced acquisition and the Emerative acquisition. 250 miles of pipeline altogether. Great assets. And those assets are about 30 to $40,000,000 this year, and EBITDA is what we expect. And we also, next year, expect it to to be between 40 and $50,000,000 in EBITDA for those assets. So those are great assets that we could could drop down eventually down to San Mateo with the right situation. And know, it's a great business at at San Mateo. And and the midstream business because it's a fee based business. It's something that, you know, despite the ups and downs of commodity prices, we continue to get the the fees from our customers, including Matador, but also including third parties. Know, it's been a great year for third party. We've had a new customer on the oil side, and we continue to expand the relationships with our existing customer and repeat customers as we move forward. And so the midstream business continues to perform very well. And that relationship and partnership with Matador, the team there, and and and team here at San Mateo This really is a benefit that that I think is hard to replicate and very unique Matador and its shareholders. Gregg Krug: This is Greg Krug, EVP of Marketing and Midstream Strategy. I just wanted to pile on a little bit as far as the midstream business is concerned. As as Brian mentioned, as far as it is a a fee based business and not commodity. So these lower commodity prices do not have an effect on on the on the fees that we get on San Mateo. Also, I wanted to point out that know, as far as flow assurances, we parked on that every time have an opportunity to do so just because it is so important. To to Matador and to our third party customers. And, we feel like we're a step above, some of the other third party midstream companies just for the simple reason I mean, we're we're tied to those with some of our midstream or or wells at Matador, those other companies. And they're they're just not as reliable as as we are. We feel more comfortable with going to, the San Mateo and and Matador owned systems. So I think that's a huge a huge factor for us as well. And this this is Brian Willie. One other thing to add, if Slide 12 actually shows an outline of our assets. You can see the 50 miles of pipeline, the seven twenty million cubic feet per day of processing and and I think just generally, if you just look at the slides generally, if somebody took a minute to look at the slides, you'd be able to see what a great job Matador is doing altogether. And what a fantastic job that that we're doing. And so you know, I think if if you haven't taken the time to look at the slides, I think great opportunity to be able to look at those and get a great summary of the progress that we are making at Matador. And so now this slide 12 has Matador wholly owned assets. You can see those in blue on the map. But even all the different slides, they just really summarize the great progress that we're making Right. I hope that answers your question. But another thing to look at is that, look on slide number four. And you can see the progress we've made over these twelve years since we went public. In in this matador. And you know, where we sit and why having that midstream to service our area. And the other midstream companies have been very cooperative. We've all tried to cooperate with each other on offloads. So there's good having the midstream gives you puts you in that club where everybody helps each other. If if some is down for maintenance and wanna thank everybody for the way they do that. And get gas out of the market. Greg, you wanna add to that? Yes. I do wanna say I had a shout out to our third some of our third party offloads that we have. One of which is I wanna congratulate MPLX for their acquisition of of Northwind. We'd be we're gonna have a long relationship with the NBLX, and we're looking forward to working with them further on our North the Northwind asset and the the fact that's gonna be a solution for us for our our shower, our sour gas and c o two. And I might add as far as enterprise is concerned as well, you know, with their acquisition opinion, We'll have we've got quite a bit of of gas dedicated to them as well, and we look forward to that. We're also doing quite a bit of business with Target and, so we're, we're looking forward to doing additional business with them. And we've got a great relationship with all those folks. So Hope that answers your question. But if you need more, we, again, invite everybody on the call to come see us. We'll devote more time to you and to see our operation because there's aspects of our operation such as our MaxCom room, which is monitoring all of our drain activity. That has added to the efficiency gains that's led us to lower prices, which is opened up the door to more capital decisions. And and adds to the long term nature of what we're trying to establish in New Mexico. Operator: Thank you. And our next question comes from the line of Noah Hungness from BofA. Your question please. Noah Hungness: Good morning everyone. For my question here, was hoping to kind of ask the on water handling. We've seen a lot of activity in the water handling sector this year. Obviously, San Mateo has a large watering handling business. And as you guys continue to leverage Trimofrac and Simofrac operations, it seems to be playing a increasingly important role there. But I guess, could you maybe talk about just general growth aspects for that company or growth outlook and how you're thinking about that business today? Joe Foran: Yeah. Hey, Noah. I'll I'll start, from the Matterware side of things, and then and then Brian can also talk about it from the San Mateo side. But you know, next year, there is gonna be we're looking at roughly 40,000,000 to $50,000,000 investment in Matador's wholly owned midstream business. And a lot of that has to do with the build out of our water gathering system, both in the Ameridev area and in our Hat Maes kind of Ranger area. And so, of because that investment is really talks to speaks to the integrated nature of of of the upstream business with the midstream business. And to be able to provide an increased percentage of produced water for these intense hydraulic fracturing operations. Chris talked about of the efficiency gains that we've seen in that realm. And and, I think it is a great example of us working together to increase the amount of produced water It lowers use for hydraulic fracturing operations, which reduces our lease operating expenses. And it reduces the capital spend for the on the frac side. And so, there is an investment there. To to increase our watering handling capabilities. Operator: Thank you. And our next question comes from the line of Jon Abbott from Wolfe Research. Your question please. Jon Abbott: Thank you very much for taking our question. Question is going be on natural gas pricing. I mean, we did see some negative Waha negative during you know, the October. And then and then as you sort of look out in the Permian, could be additional takeaway capacity you think that gets filled So I just really sort of like, how do you think about gas pricing in April? And then how do you think of gas pricing longer term Do these pipes get filled? How do you think as you sort of report on a two stream basis? How do you think about the gas price? In your realizations? Joe Foran: Hey, John. I'll I'll start if if Greg and Anton wanna to pile in here, that's great. But yes, so in Q4, we as we highlighted in the release, we did elect to curtail some wells for a few weeks during this long haul maintenance long haul pipeline maintenance period. And in doing so, we avoided paying those those kind of deep negative, Waha pricing. I I do think it speaks to Matador and our ability to be nimble. And and make sure that you know, we have that lever as an as an option to pull, in this in this sort of environment. And and, you know, we saved a lot of money in doing so and really just just deferred that production to, you know, where Waha prices are positive as they are today. And then on your question, about these long haul pipes that have been already decided to be funded for building. You've got you've got Hugh Brinson. That's coming on later this year and Blackcomb and GCX expansion, all of which will add roughly four Bcf towards the latter part of this year. And so we do think that the longer term view of and really, I mean, just twenty '26. That the capacity you know, issues, if you call them, in the basin for Waha will be a leak be relieved by those by those pipelines. Anton Langland: Yeah. The other thing, Glenn, is to mention weather still plays a role in the gas pipeline business. And so you hit October each year or September, you're faced with this risk. You wanna be sure you have the you know, the balance sheet that you can work through those those periods. And the the second thing, is that that solutions are coming that the industry midstream industry, is is very responsive to this and finding ways out. And I'm pleased to that report today. Anton, you have a better handle, but price it gas or the selling price is a buck 50 now. This is Anton Langland, executive vice president of marketing. Is correct. Cash has gotten a little bit stronger out there as well at Waha, and we anticipated of this, and so we went out and put in hedges 2026 where we have a big hedge position to protect downside risk on Waha. As we know, all these pipelines are coming online in '26 We'll have TCX expansion mid twenty six for half a BCF, Blackcomb will come on for 2.5 BCF, and Hugh Brinson will come on at 1.5 BCF. And that's all gonna happen in 2026, which should alleviate of this pressure downward pressure on Waha prices. Going forward when you start looking at the '26 and the '27 should be a great time for Waha production and our gas and give us a lot more opportunity to produce more of our gassy wells that we have in inventory that we haven't drilled yet. Because of these lower gas prices. But in '27, '28, we'll have a lot of opportunity drill a of gas here benches out there. Operator: Thank you. And our next question comes from the line of Zach Prem from JPMorgan. Your question please. Zach Prem: Yes. Thanks for taking my question. I wanted to ask on well productivity Just looking at the publicly available state data, your well productivity on a per lateral foot basis is down a little bit year over year in 2025, though relatively in line with where you were in 'twenty two and 'twenty three as 'twenty four was a really strong year. I know there'll always be some variability in productivity data just given the geographical mix of wells and various lateral lengths But could you talk a little bit about your expectations for well productivity going forward and how you see that trending into 2026? Tom Nelson: Hey, Zach. This is Tom Nelson, our EVP for Reservoir Engineering. Going into 2026. We have a very strong program. We expect the same or better, VO per foot in 2026 as we have seen in 2025. Coupled with all the commentary about these longer laterals, we expect to see lateral length increase approximately 10% going into 2026 So that should be really positive for the for the total EURs. Really positive for the capital efficiencies, lowering well costs. These are very strong projects as we've talked about with rate of returns over 50%. And these are 1.1, 1,200,000 BOE wells. These are very strong wells that are very durable, a wide variety of of lower oil and gas prices. I think that the team should be commended for all the the hard work and cooperation they've, they put together. I think it's quite the opportunity to to bring these these flows forward. As Chris mentioned, you know, things have gone better than expected operationally. The teams coordinating with with midstream to have all the permits, the pipelines, all the drilling and execution, the completions, all the wells turned online, on time and under budget. I think has has really been been something that, really been something that we're we're proud of, and we expect to see that going forward. Think it'll continue on beyond 2026. I think that a lot of these really high quality, Wolfcamp and Bone Spring wells have been pushed further north, And as one example of that has been our Avalon well that we highlighted in the release. That at Gabilon. That's a well that has produced over 280,000 barrels of oil in the first twelve months of life. It's already paid out. It will continue to pay out many more times into the future. So I think our inventory is very strong, and, we're very, very excited for wells we're putting up on the board for this year. Operator: Thank you. And our final question for today comes from the line of Kevin McCurdy from Pickering Energy Partners. Your question, please? Kevin McCurdy: Hey, good morning. Thanks for taking my question. Just continuing to touch on the midstream angle, what is the impact of the increased activity on the San Mateo volumes and EBITDA outlook? Thanks. Brian Willey: Yeah. This is Brian Willig, Executive Vice President of Midstream. You know, it it that partnership we have with with Matador is critical to us. It's about, you 70 to 80% of our revenues come from Matador. And so as Matador grows, oftentimes, that leads to growth at San Mateo as well. Just depending on where the growth is. So I think we'll have more to talk specifically about that, of course, next year when we lay out our plan, but, that's a great partnership that we have with Matador. And it's something as you as you look at the capital expenditures for next year, Glenn mentioned earlier the Matador owned capital expenditures. I think we had mentioned in the release the eight to 12% tablet venture increase Approximately 90 to a 100,000,000 of that is is midstream, whether that's San Mateo and our shares of 51%, whether that's Matador owned. And so you know, we have some really great projects on on tap for next year to continue to grow the company. Continue to expand the business. So we support Matador. Operator: Thank you. Ladies and gentlemen, this ends the Q and A portion of this morning's call. I'd like to hand the call back to management for closing remarks. Joe Foran: Thank you very much, and thanks thank you everybody for spending the time in here with us. And again, I repeat, if you want more information or have more questions, you'll find us successful. Rob will be happy to take your questions and get answers for you. And we try to pride. I came didn't come up through private equity, but came up through friends and relatives. And with friends and relatives, they have a higher standard for communication and being accessible, and we wanna make that. You know, a lot of people, as I said, I think one of the issues just confronted directly, is quote, capital spending. Are we outspending our cash flow? And I think the answer is clearly not. If you don't believe the accounting that we've grown from a deficit to to over 3,000,000,000 having made good decisions, then look at it this way. I've never sold a share of stock in Matador. And we have a whole group of executives that haven't either. And the far as the employees go, we have a employee share purchase plan with over 95% participation. So the one the the people that know the company best we're we're buyers. Basically, not sellers. And, we can see the future coming up. We don't look upon it We look upon the more upon the quality of the rock and quality of the operations as opposed to what the oil price. Per barrel is. Because you can have a, a very high oil price, and the capital decisions. They don't have good operations. Or something else can affect it. That they're spending too much on their bank debt. And are in a bad position. But over forty years, remember, we started with just that 270,000. So over forty years, we've grown to this point. And it's from having a good decision making process. Not that we've never made a bad decision, but not many of them. And made a whole lot more in times of of oil price being shaken for one reason or another. And and I pointed out some of those instances. But if you keep going, and be that much more selective in your decisions, you can build an organization and there are more good people become available, And, it's worked to our advantage. Not that I've welcome $50 oil for a sustained period. But it's not fatal either. If you've maintained your balance sheet all through time and your bank relationships. You just have to be a little more careful. The midstream has helped. Because it's a fee based it gives us further balance. So as we say around here, we like our chances. And I think if you come to visit and meet the staff, you'll say these are people I could trust with my come on, say it's your life savings, but you could trust your investment because we come along a long way. You got a forty year history to look at. And we're pretty optimistic and we see the opportunities growing for us. Rather than being reduced. And and I think this this period going into the fourth quarter frankly, we've never looked so good with more options than we had before. And and and more targets of opportunity. For 2026. So we're we're excited. But I do think that helpful as these questions are on these kind of calls, it's even better to come see us. Have breakfast or lunch with us, or even dinner and meet the people behind these capital decisions. And say that, hey. They're they're reasonable people. They're professional. And they wouldn't be spending the money on this well or that well. If they didn't have a high degree of trust and confidence in it. And I think that's what you get for investing in Matador. We do have a sheet that says why Matador? It's at the back of your of the earnings release. And really encourage everybody to look through, those exhibits And I think they tell the story in five to ten minutes of why Matador. And an original investor in First Matador was in at 85¢. I mean, you know, sold for $18.95. And an original shareholder in this Matador is in for $3.56. So it's come a long way and we like our chances. And, better today than than ever. And I think we thank the board for working with us. We think they're distinguished and it's a good process. We rank up there Van can tell you more where we rank in New Mexico, but it's a top five top 10, type of companies. So start out with, you have on page four, how little we started with. Back in the early nineties to where we are today. So please give it serious consideration. And if you're want more information, we're here. And if you want a personal in person discussion to if that would give you greater comfort. Just give MAC a call. And he'll schedule it. And we'll enjoy meeting you. We would like to wish we could meet every one of our shareholders. So they would have that personal relationship. So thank you very much for your attention today. And come see us. We like our chances. And, we feel very comfortable that next year is gonna be a a good year for us one way or the other. Operator: Thank you. Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.
Operator: Good morning, and welcome to AT&T Inc.'s Third Quarter 2025 Earnings Call. At this time, all participants are in a listen-only mode. Should you need assistance during the call, please press star. Following the presentation, the call will open for your questions. If you would like to ask a question, if you are in the question queue and would like to withdraw your question, as a reminder, this conference is being recorded. I would now like to turn the conference call over to our host, Brett Feldman, Senior Vice President, Finance and Investor Relations. Please go ahead. Brett Feldman: Thank you, and good morning. Welcome to our third quarter call. I'm Brett Feldman, Head of Investor Relations for AT&T Inc. Joining me on the call today are John Stankey, our Chairman and CEO, and Pascal Desroches, our CFO. Before we begin, I need to call your attention to our Safe Harbor statement. It says that some of our comments today may be forward-looking. As such, they are subject to risks and uncertainties described in AT&T Inc.'s SEC filings. Results may differ materially. Additional information as well as our earnings materials are available on our Investor Relations website. With that, I'll turn the call over to John Stankey. John? John Stankey: Thank you, Brett, and good morning, everyone. I appreciate you making the time to join us, and I hope everybody is doing well. I am pleased to report that we had another solid quarter and remain on track to achieve this year's consolidated financial guidance. We continue to attract and retain high-value customers and perform well across different operating environments, thanks to the durable and differentiated connectivity franchise we continue to build. In mobility, we delivered over 400,000 postpaid phone net adds in the quarter, which is slightly ahead of our performance a year ago. In Consumer Wireline, the scale we have achieved as a nationwide provider of home Internet services through our significant investments in fiber and 5G is proving to be a winning play. At the end of the third quarter, we passed more than 31 million total locations with fiber, and we expect to reach more than 60 million customer locations by 2030. We also offer our fixed wireless service, AT&T Internet Air, in parts of 47 states, and we continue to expand availability into new areas as we open and modernize our mobile network. You can see the durable impact of these investments in our third quarter results, which include over 550,000 new subscribers to our most advanced broadband services, AT&T Fiber, and Internet Air. This resulted in our highest total broadband net adds in more than eight years. Let me say that again. We achieved our highest total broadband net adds in eight years. This includes a major milestone by reaching over 10 million premium AT&T Fiber subscribers, more than doubling our fiber customer base in less than five years and nearly tripling our quarterly fiber revenues over that same period, and the train keeps rolling. We offer fast and reliable connectivity for 5G and fiber at attractive price points, and more people are choosing AT&T Inc. for both wireless and home internet services. Today, more than 41% of AT&T Fiber households also choose AT&T Inc. for wireless. The pace of this convergence trend within our customer base continues to grow. These customers remain our most valuable, with the lowest churn profile and highest lifetime values. Our success with convergence also extends to fixed wireless. More than half of our Internet Air subscribers also choose AT&T Inc. for their wireless service. Similar to fiber, these customers exhibit lower churn and drive higher lifetime values than customers with standalone services. We continue to make solid progress, but our work is not done. Our goal is to become the best advanced communications provider in America and to lead our industry in share of retail connectivity service revenue by the end of this decade. This year, we've made a series of strategic moves that both strengthen our ability to lead in convergence and accelerate our future growth trajectory. Our planned acquisitions of spectrum licenses from EchoStar and fiber assets from Lumen significantly enhance and expand our advanced connectivity portfolio. This aligns with our vision to build the most efficient high-performance network with an ability to deliver traffic at the lowest marginal cost. We believe this will establish a durable competitive advantage for AT&T Inc. in the coming years. The EchoStar spectrum we agreed to acquire will improve our 5G wireless performance in a cost-efficient manner while allowing us to grow Internet Air at a faster pace. We are already making great progress delivering on our commitment to deploy this valuable spectrum for the benefit of American consumers and businesses. We started deploying the 3.45 gigahertz spectrum that we agreed to acquire from EchoStar under a short-term spectrum manager lease. Based on our current rate and pace, we expect these mid-band licenses will be deployed in cell sites covering nearly two-thirds of the U.S. population by mid-November. This should position us to further expand the availability of Internet Air in our sales channels in 2026. Our ability to move this quickly reflects the great work of our teams and the FCC's pro-investment and supportive policy environment. We are also making great progress in preparing to close our transaction with Lumen. Most of the senior leadership team has been identified, and we now expect to close this transaction in 2026. As I've said before, where we have fiber, we win. With both fiber and 5G, we plan to win even more as our investments in these assets bring advanced connectivity to more Americans. The supportive policy environment is also making it easier for us to transition away from outdated legacy infrastructure and invest in the AI-ready connectivity that Americans want and need. The bottom line is that we now have the right building blocks in place to realize our scaled fiber and fixed wireless ambitions, complete our wireless modernization, and successfully transition away from legacy infrastructure. As we complete our key investments, acquisitions, and transformation initiatives, we expect to increase our fiber and convergence penetration rates and see a majority of incremental revenue growth originate from converged customer relationships. For several consecutive years, we have demonstrated that this strategy works by efficiently growing our business while investing in our network, strengthening our balance sheet, and returning value to shareholders. The opportunities ahead of us are in our control, and I wouldn't trade our assets and position for anyone else's in our marketplace. Now it's up to us to continue executing on our vision to become the best advanced communications provider in America. With that, I'll turn it over to Pascal for a detailed review of our third quarter results and outlook. Pascal Desroches: Thank you, John, and good morning, everyone. At a consolidated level, total revenues grew 1.6% year over year. Adjusted EBITDA grew 2.4%, and we expanded adjusted EBITDA margins by 30 basis points. Adjusted EPS was $0.54 in the quarter, consistent with the prior year. Adjusted EPS excludes a gain recognized on the sale of the DIRECTV investment, legal settlement costs, and other items. Third-quarter free cash flow was $4.9 billion versus $4.6 billion a year ago. Capital investment was $5.3 billion, which was down $200 million year over year. We also contributed $400 million to our employee pension plan in the third quarter, which is reported within cash from operations and therefore impacts free cash flow. We discussed in our second-quarter results, we expect to contribute $1.5 billion to our pension plan by 2026 using a portion of the cash tax savings from provisions within the One Big Beautiful Bill Act. This includes an additional $400 million of contributions planned in the fourth quarter, with the remaining $700 million of contributions next year. Turning next to our business unit results. Starting with mobility, our third-quarter performance highlights how our differentiated strategy enables us to deliver consistent results across various operating environments. Similar to the first half of the year, switching activity remains elevated. However, our playbook is working, and we continue to execute well. We grew mobility service revenue by 2.3% year over year, which contributed to EBITDA growth of 2.2%. As a reminder, the prior year quarter included approximately $90 million in one-time service revenues related to certain administrative fees. This impacted our reported growth rates during the third quarter in mobility service revenue by about 60 basis points and in mobility EBITDA by about 100 basis points. We reported 405,000 postpaid phone net adds, which is up slightly from the third quarter of last year. Postpaid phone churn was 0.92%, up 14 basis points versus a year ago. This reflects increased marketplace activity and, to a lesser degree, an increase in the portion of our customer base reaching the end of device financing periods, which normalized as we exited the quarter. Based on this operating environment, we continue to plan for postpaid phone churn and upgrades to follow seasonal patterns in the fourth quarter when we typically see more switching and upgrade activity due to new device launches and the holiday season. Postpaid phone ARPU was $56.64, essentially consistent with a year ago when normalizing for the previously mentioned one-time service revenue impact in 2024. ARPU was also impacted by our success in attracting customers in underpenetrated segments that have lower ARPUs, such as our plan that targets adults 55 years old or older. Success in these underpenetrated segments drives higher incremental service revenues and attractive returns. The trend also reflects our success in growing our base of converged customers with higher lifetime values. These subscribers are typically eligible for a service discount but support growth in home Internet revenues, which we report in Consumer Wireline. We expect these dynamics to continue in the fourth quarter, which typically sees seasonally lower ARPU with some offsetting benefits related to a pricing action that becomes effective in December. Similar to the first half, we continue to operate in a marketplace where the cost of acquiring and retaining subscribers has increased. However, our continued success at adding high-value converged customer relationships points to the attractive returns we're driving through our offers. While total mobility operating expenses were up year over year, this was primarily driven by higher equipment costs and other acquisition-related expenses. We otherwise continue to execute well at managing our costs through operational efficiencies, including reductions in cost of service and customer support. I'm really pleased with how well the team is executing and remain confident in our ability to deliver on our full-year outlook for mobility service revenue growth of 3% or better and mobility EBITDA growth of approximately 3%. Our consumer wireline business unit also delivered another strong quarter. Total revenues grew 4.1% year over year, driven by 16.8% growth in fiber revenue. 15% for the quarter. This was driven by top-line growth and cost takeout, including lower expenses associated with our legacy copper network. As a result, Consumer Wireline EBITDA margins expanded by a robust 350 basis points year over year. Customer demand for our leading home Internet offerings is growing. As we reported strong gains in both fiber and Internet Air customers. We added 288,000 AT&T Fiber customers during the third quarter, reflecting seasonal tailwinds and the continued expansion of our fiber footprint. As a reminder, in the fourth quarter of last year, we benefited from some pent-up demand following the third-quarter work stoppage in the Southeast. This year, we expect our fiber net adds to exhibit typical seasonality in the fourth quarter, when we usually see lower levels of new connections as we get deeper into the holiday season. Once again, we saw strong growth in the portion of our fiber customer base that also subscribes to mobility services. At the end of the third quarter, this convergence rate reached 41.5%, up 180 basis points from a year ago. This represents one of our largest convergence gains over the past three years. We also reported 270,000 AT&T Internet Air net adds, doubling our subscriber gains year over year. Based on our operating momentum and strong performance through the first three quarters of the year, we continue to expect to achieve full-year growth in consumer fiber broadband revenue in the mid to high teens and Consumer Wireline EBITDA growth in the low to mid-teens range. Business wireline revenues declined 7.8% year over year, while EBITDA declined about 13%. As we shared last quarter, we've been reinvesting some of our cost savings into driving improved growth in fiber and fixed wireless, and our third-quarter results reflect early traction with these efforts. Fiber and advanced connectivity service revenues grew 6% year over year, representing an acceleration from 3.5% growth in the second quarter. Value-added services, which contribute about one-third of these revenues, can be variable from quarter to quarter. But we expect continued acceleration in our fiber and wireless connectivity revenues in the fourth quarter. While Business Wireline continues to manage through structural declines in legacy services, the team is doing a great job positioning the business to drive sustained growth in advanced connectivity services while operating more efficiently. Based on this solid execution, we continue to expect Business Wireline EBITDA pressures to moderate versus last year, with a full-year decline in the low double-digit range. During the third quarter, we returned $3.5 billion to our shareholders. This includes nearly $1.5 billion in stock repurchases, keeping us on pace to achieve our full-year target of $4 billion in buybacks. We ended the third quarter with net debt to adjusted EBITDA of 2.59 times, down slightly from 2.64 times last quarter, reflecting strong cash generation and growth in adjusted EBITDA. We ended the quarter with more than $20 billion of cash, including proceeds from recent debt issuances. This puts us in a great position to fund our capital returns program and pending acquisitions. We closed the sale of our remaining stake in DIRECTV in July and received approximately $320 million in cash in the quarter. We expect to receive an additional $3.8 billion of cash, with the large majority expected over the course of the fourth quarter and the early part of next year. As a reminder, these post-sale proceeds are reported within investing activities in the statement of cash flows and excluded from our reported free cash flow. Overall, our third-quarter results showed that we're executing well and are reiterating our full-year financial guidance. At a consolidated level, this includes service revenue growth in the low single-digit range and adjusted EBITDA growth of 3% or better. We had an opportunity to settle some out-of-pattern legal settlements that will impact our fourth-quarter free cash flow by approximately $500 million. The expense associated with these settlements was accrued in the third quarter and excluded from adjusted EPS. However, we continue to expect full-year free cash flow in the low to mid $16 billion range, including about $4 billion in the fourth quarter. We also continue to expect full-year capital investment in the $22 billion to $22.5 billion range, which implies fourth-quarter capital investments of roughly $7 billion to $7.5 billion. We also reiterate our full-year outlook for adjusted EPS of $1.97 to $2.07 and expect that we will come in closer to the high end of this range. Embedded within this guidance is an outlook for full-year depreciation and amortization expense that is up slightly versus 2024. In the fourth quarter, we expect to see sequentially lower depreciation and amortization expense as certain legacy assets become fully depreciated. So we expect our fourth-quarter depreciation and amortization expense of about $5 billion is more aligned with the quarterly run rate we expect heading into next year. As John noted, we're making great progress towards closing our pending acquisitions of fiber assets from Lumen and spectrum licenses from EchoStar. So we expect to provide an update to our long-term financial outlook early next year. We expect both of these transactions to boost our organic growth in revenues and profitability, and you should expect that this will be reflected in our updated outlook. In summary, we continue to deliver value for our customers and our shareholders, and we're really pleased with the team's performance through three quarters of the year. Brett, that's our presentation. Now ready for the Q&A. Brett Feldman: Thank you, Pascal. Operator, we are ready to take the first question. Operator: We will now begin the question and answer session. To ask a question, if you are using a speakerphone, the first question today comes from Peter Supino with Wolfe Research. Please go ahead. Peter Supino: Hi, good morning. The broadband results were really striking, and I have two questions on broadband. Take them in whichever order you like. First, your 60 million fiber home target is the most important among numerous industry-wide fiber expansion plans. Our best attempt to estimate the intentions of all the fiber expanders, builders, developers rolled up is about 110 million in a country with 135 million homes. And so a question we hear frequently and I think is important is, at what point do AT&T Inc. investors have to worry about insurgents getting to some of the homes that AT&T Inc. plans to pass before you do? And if they do, could that alter your plans at all? Would you be responsive to that? And then a related question is within two years, your DSL base will be gone or declining much more slowly? I mean, your VDSL base. And what should that mean for your broadband strategy and for your competitive outlook? Thank you. Hi. Good morning, Peter, and thank you for noting the broadband results. They are very, very strong. I'm delighted with them. And as I said in my comments, despite all the other things going on in the industry and the questions that come in around change of tactics by various other players, this team continues to consistently deliver results quarter over quarter in this space because we have a great product. John Stankey: I'll tell you we pride ourselves on being smart about how we build. We think we have the most scaled build engine in the industry. With that scalability comes a degree of agility. It means we have the flexibility to work with our base and move supply around. We try to be very deliberate about ensuring that everybody knows when the train rolls into town that the train's in town and it's probably not a good place for anybody else to come and deploy their capital because this is a company that has a track record of going in and penetrating aggressively and being successful in markets, and there's probably easier places for people to go than come up against us. And so we try to be very, very deliberate in how we allocate our capital in the markets that we're building in to make sure everybody knows where we're going and how aggressively we're going because we believe the right thing to do is to ensure that there's a good solid market structure for ourselves moving forward. And occasionally there are times where while we lay our plans out three years in advance and we believe we have some insight and fidelity of what's going on in the market, something changes in that period, and we have to recalibrate and think differently about how we're going to draw the boundaries about where we're going to build and how we're going to build. But while I know there's a lot of announcements out there that may add to 110 million homes being built, it doesn't mean they're getting built. It doesn't mean the people are effectively getting permits. So they have their supply chain issues worked out. And our job is to remove that friction and be better than everybody else and ensure the 60 million that we're building are in fact the first and that we're doing it more than anybody else. And when we run into those occasional circumstances where they're not, we rethink about where we deploy our capital and what we do. So I feel pretty comfortable that the team understands that and has been doing that by and large. And we also know that when somebody overbuilds a small portion of a metropolitan area, this is a scale business. Having 230,000 homes passed isn't going to cut it. And so when we come in and we're able to use our brand and use our marketing position, we can do very, very well when there's this small amount of overlap and still get the share we need to drive the returns into our business. Your observation on the DSL base is accurate. As you know, we're trying to turn down our legacy infrastructure. The DSL base is part of that. We don't want that equipment on our network anymore. We don't want it sucking down power. We don't want to be maintaining copper. And so, part of what you're seeing is a very deliberate approach. In almost all instances, we can replace DSL with fixed wireless. In places where we're not building fiber or we can actively replace it with fixed wireless if we're in a holding pattern where we know we're not going to be getting our overbuild in place of fiber for another two years or so. And we're actively trying to hold those customers with more attractive conversion offers. And that's part of the motion and the momentum that you're seeing in our converged basis and how we're using these products, and we're really excited about the advanced spectrum that we picked up because we think it's going to give us even more tools to make that happen both within our base where we're going to overbuild in those places where we will be wireless first. And we don't intend to build fiber as part of that deployment of capital that gets us just above 60 million. So we'll actively manage it. As you can see, we're getting better at managing it. That's why our nets are the best they've been in eight years. And I'm really confident that we haven't quite hit our full stride on that yet. But we can do even better on that front as we move forward in the coming quarters. And to my point in my comments, I would not change position with any company in this industry right now given the asset base we have and the place it affords us to run. Brett Feldman: Thanks, Peter. We'll take the next question, operator. Operator: The next question comes from Benjamin Swinburne with Morgan Stanley. Please go ahead. Benjamin Swinburne: Thank you. Two questions. John, the AT&T Internet Air momentum is pretty clear in your results. I'm wondering if you could talk a little bit as the company expands your footprint, you mentioned parts of 47 states, how are you making sure you're sort of segmenting the market the right way between fiber and fixed wireless and being efficient with your marketing, etcetera? And maybe you could comment on how you're approaching SMB as well. And then for Pascal, Pascal, you've mentioned the competitive environment in wireless this year. Has led to some higher equipment costs and subscriber acquisition costs, which we can see in mobility EBITDA margins being a little pressured this year. Your three-year guidance assumes that gets better, that margins expand next couple of years. Wondering if you could talk a little bit about how you deliver that if we think that the competitive environment maybe stays this elevated over the period? Thank you. John Stankey: Good morning, Ben. So first of all, one of the big changes you've seen us make in our messaging is we're no longer leading kind of top-of-funnel awareness and advertising with a specific technology bent. We talk about getting Internet from AT&T Inc. and we're doing that in the business market and the consumer market because we're now approaching this point that we can offer Internet nationwide. So the first thing is to make awareness that people just think about going to AT&T Inc. for Internet and that our messaging supports that, and you probably picked up on that if you watch any football or anything else in mass media. And then to your point, underneath that top-of-funnel messaging is to make sure that we're tuning the messaging for what we offer in a particular geography. And digitally that's really straightforward because we can ring-fence literally what we want to do with a lead offer, and that's one reason why we're spending a little bit less in mass media is because given our targeted approach to how we want to converge customers, we can get a lot more out of digital marketing based on knowing where the customer is and what the right best offer is to put in front of them. We've had pretty good success doing that. I think we even shared with you in December during the Analyst Day, if I recall correctly, an example of the map of the metropolitan area where we sell both products, and you will see that there isn't Internet Air subscribers sitting in the fiber footprint. And there really shouldn't be. There not only shouldn't be any of our Internet Air subscribers in the fiber footprint, but there shouldn't be anybody else's Internet Air subscribers in a fiber footprint. And my intent is to ultimately market and sell and structure the product in a way that we make sure that that is in fact the case. Because there is no lower marginal cost way to deliver broadband than fiber. And once it's in, it's in, and it should basically have a preferred run at the market. And I think we can still even get better than that. And that's one reason why I'm not as attached to ARPUs right now and worried about that. I'm worried about our growth in service revenues and managing our profitability because I think there's segments in the market that we can even do better at given the technology and what we've deployed. So you'll see us be very targeted in that, and it's very specific in our support systems when people come into the stores, etcetera. A lot of this is not left at the discretion of the individual. It's supported to them as to what they should be selling and can sell. And our effectiveness, as I mentioned when I answered Peter's question, and doing that over the coming years is a really important part of the success of this management team and managing the sustainability and durability of our profitability in the company. And we're very focused on making that happen operationally both with our messaging as we work our way through the funnel and operationally how people move forward on it. We're getting our momentum in business around Internet Air. We're still not as good as we can be. But as I've told you many times before, we've always viewed fixed wireless as a good solution in the business market given the usage characteristics of a small business or a medium-sized business and the nature of how those companies operate. And it's getting your distribution lined up. I think we're doing pretty well on our owned and operated distribution channels. But as you know, in the mid and low portion of the market, a large part of your distribution comes through third party, and we're not fully ramped in the third-party distribution yet. When I compare our effectiveness to others in the market, we can get there, and we will get there, and we're scaling it and ramping into it, and that's why you're seeing results improve. But I think our mix of business can be a little bit stronger moving forward. And I think it will hinge on how effectively we ramp in third-party channels to make that happen. So that's part of the when I say I think we can even get better than where we are, which I'm really pleased with the strong results, but I think we can get better. This would be an area, for example, where I think we can get better. Pascal? Pascal Desroches: Hey, Ben. Good morning. With regards to margins, we continue to expect overall company margin expansion consistent with what you saw this quarter. Keep in mind when you look out the next several years, we are working through several transformations, all of which will continue to drive overall efficiency. With each passing day, we have less and less copper in the network and less underlying infrastructure to support it. Similarly, we're in mid-flight in modernizing our wireless network. We expect that to be substantially complete by 2027. As more and more towers get modernized, it's going to drive efficiency in maintenance and power, and it's going to deliver superior service. Also embedded in our strategy is a goal to continue to drive convergence. And over time, the more convergence we drive, the overall churn should come down. And as a result, the efficiency of our acquisition spend should also improve. So all those things together make me feel really good about how we're positioned for the future to continue to drive profitable growth. Benjamin Swinburne: Thank you. Thanks for the question. Thanks, Ben. Operator, we'll take the next question, please. Operator: The next question comes from John Hodulik with UBS. Please go ahead. John Hodulik: Great, thanks. Good morning, guys. If I may. Maybe first on wireless, John, how would you say the company is positioned? If we see higher promotional activity in the fourth quarter given the changes at Verizon and T-Mobile actually? And maybe touch on the sort of cohorts coming off plan, if you could, given what versus what you've seen in the last couple of quarters? And then for Pascal, the comments on ARPU and actually with a follow-up comment from John in your recent response, I mean, it sounds like you guys are down the pressure on ARPU is a little bit stronger than we expected in wireless and in broadband. With most of the growth coming from converged services going forward, and your comments, should we expect continued pressure on ARPU on both wireless and broadband as we look out over the next several quarters? Thanks. John Stankey: Good morning, John. Look, I think the answer to the question is we're well-positioned for a competitive market. Excuse me, it's been competitive. It continues to be competitive. There are shifts in tactics all the time that occur in this market, and we're in a cycle right now that because of the maturity level, tactics have shifted. And as Pascal just very effectively articulated to you, our shift in tactic is to focus on converged customers. And we know that there are some things we have to do differently for that to happen, but we also can project out given how we know they behave and their lifetime values and what occurs that when we're successful doing this, and we drive the percentages of our base up higher on converged customers, we're going to get in a position where we drive down churn, we make that base more profitable, we have happier customers who ultimately move up the continuum and buy more, and we believe that. And that is why we're architecting the business the way we are with the asset base we have and the strategies we're using moving forward. In terms of the fourth quarter, I may be probably sit in a little different chair. I actually don't believe many of my peers walk into their job and say my goal is to lose share and I'm going to deliberately do things to make that happen. I think most CEOs want to win, and I think they try to operate their business to win. And you can debate whether or not the tactics are right or need to be adjusted. We all make good decisions and bad decisions. But just because there's a change at the top, I don't know that that suggests to me that there's going to be a 180-degree posture change. I think our competitors have been pretty aggressive, and they've tried to win, and they're going to continue to try to win moving forward. And we've demonstrated that we can be successful against all those tactics. And if there's a recalibration or a change, just like there may have been a recalibration or change in one of my competitors early this year, or last, we're going to adjust to that, and we're going to continue to run the plays that we've outlined, which is to focus on convergence and focus on those customers that we can bring together and make sure that when we're acquiring new customers, we're getting those that we think can be accretive. Which may be leaning into what Pascal is going to talk to you about on ARPU, I would describe what's going on in ARPU more as a feature, not a bug. When we talk to you about the fact that we're underpenetrated in certain segments, and we know that we can do better in certain places, and we talk to you about our desire to push convergence, which at the front end of investing in convergence means that we give the customer a square deal and a lot of value. That's what happens at the front end of those things. And we believe we get to a more sustainable place moving forward. And over time, what we do is we end up getting more value out of the relationship as a result of that. We deepen that relationship with the customer. We move them up a continuum of products and services. We, as I've said before, we don't just raise prices to raise prices. We raise prices when we think we've given the customer greater value. And we try to time it to that. And so investing in our wireless network to deliver massively superior performance with new spectrum that we're deploying opens up opportunities for us to do things like drive more value price relationship into the customer base to return on those investments. Pascal, do you want to talk about the ARPU characteristics? Pascal Desroches: Sure thing. Good morning, John. Here's the thing to keep in mind. When we look at our base of customers, we have a pretty broad base of customers. Candidly, we tend to over-index on the higher ARPU continuum. In order to grow service revenue, we have to be willing to also target other places where we're underpenetrated. And as John effectively laid out, that is a part of our strategy. But it doesn't mean that going down ARPU is at the sacrifice of overall service revenue. We are trying to maximize service revenue. And in the fourth quarter, as an example, we expect to have a pricing action that becomes effective that will contribute to service revenue growth. So overall, when you're managing a big base of customers like we are, it's important that we try to expand that base as well as over time drive more value by giving the customer more and driving more overall top-line growth. John Hodulik: Great. Thanks, guys. Brett Feldman: Thanks, John. Operator, we will take the next question. Operator: The next question comes from David Barden with New Street. Please go ahead. David Barden: Hey, guys. Thank you so much for taking the questions. I appreciate it. So John, just if I put all the pieces together, the Lumen deal, the Spectrum deal, the desire to get leverage back down to 2.5 times, the desire to maintain a dividend and an equity stock buyback return, recognizing the upper C band auction is coming, is it fair to say that when you say that you wouldn't trade assets with anybody, that you don't need any more assets? That AT&T Inc. is out of the M&A acquisition game, the inorganic game, and now it's time to build on what you have organically at the margin. And then I have a follow-up. Thank you. John Stankey: Hi, Dave. First of all, never going to answer a question absolutely and say never. But I will tell you what I've shared with the management team, which is we have all the assets in front of us. We've run the plays that we need to run to be successful over the next five years, and everything that's going on outside of our business right now is external and distraction. And there's going to be, to the question earlier, maybe new leadership or different tactics taken or approaches used. I feel very, very confident in the path we set for this business. And I feel very confident that the actions we've taken over the course of the last several years have put us in a position to be the leader in this industry, to lead on retail service revenues by the time we get to 2030. To effectively have better and deeper relationships with more customers for communication services than anybody else. And we have that asset base to do that at this point. And our job now is to organically invest in this business and make it a better company, operate better, serve customers better, become more efficient, and put a nail in the coffin of the legacy infrastructure that we have. Those plays all sit in front of us and are all contained within the four walls of AT&T Inc., and they don't require uncertain regulatory approvals or difficult external issues or other partners to get it done about us getting it done. And that is absolutely the focus and the rallying cry within the four walls of AT&T Inc. and how we're talking about it at the leadership level. I think you should take that as a strong indication that the management team right now is focused internally about doing the things we need to do to run those plays and do them effectively and not worrying much about what's going on outside of our industry and where assets are. David Barden: And so John, thank you so much for that. And so to key off that comment, I feel like I have to ask outside the four walls of AT&T Inc., there's been a lot of change in the C suites. That's obviously what people don't know what they don't know. What is your or AT&T Inc. Board's succession plan? How would that look? When might it happen? Would you become Chairman and give up the CEO title to Jeff? And then watch that happen. And could you just kind of elaborate a little bit because everybody is talking about it? John Stankey: Dave, nice question, but we're focused on what we need to do to operate our business every day right now. We don't have those distractions that others have. And I know what I'm entirely focused on, which is making sure that the management team understands their priorities and executes effectively, and that's all we're worried about. We're not worried about your question. David Barden: Okay, great. Thank you very much, guys. Brett Feldman: Thanks, Dave. Operator, we'll take the next question. Operator: The next question comes from Michael Ng with Goldman Sachs. Please go ahead. Michael Ng: Hey, good morning. Thank you for the questions. Following up on the comment related to boosting the long-term organic revenue growth and EBITDA outlook early next year, has your confidence around accretion from the Lumen Fiber assets and the EchoStar spectrum licenses increased as you've spent more time strategizing and looking at those assets? And you could spend a little bit of time also talking about kind of the key buckets in terms of the EchoStar spectrum accretion, whether that's AT&T Internet Air passing acceleration, some of the infrastructure deployment, cash tax savings, the Boost Hybrid MNO, would be very helpful. Thank you. John Stankey: Hi, Mike. I don't think there's any change in our point of view. First of all, we're not that far down the road of when we did the transaction as to where we stand. I think we continue to get data points to support that we had very conservative modeling in our approach to these things. The most notable would be the Lumen asset base. Certainly, we have not seen anything in our planning that is unexpected, that we said where did that come from or that's different than what we expected. I think most importantly, because we did pretty good diligence before we announced the transaction. We're buying a hard asset in this case, and we did our diligence literally at the hard asset level. So I think we know what we're getting. We've managed to get additional confidence. As you know, we're operating out of region with Giga Power. Giga Power has been scaling nicely. We're in that point right now where we can see the data coming in and markets that we've been able to build enough that we're beyond very smallpox of overbuild. And the assumption set that we've used in Lumen is based on our experience in having built outside the footprint. And we see that results are coming in the way we would have expected. And it's doing all the things that we said we need to do on a converged basis, which is driving both products into a household, driving them at the right ARPU, seeing customer satisfaction levels go up, brand gets a better image, churn goes down, all those things are happening, and that data is coming in. So it gives us confidence that we're on the right path. And that's why I said earlier that our job is to look organically internally and go the plays that we know we need to go execute. I would tell you on probably the upside around that is, as you know, largely built this as a consumer-oriented play. As we build brand reputation in a market and presence in a market, there's no reason to think we can't even move beyond that. And so I think there's upside in our conservative modeling on these things. On EchoStar, there's the old-fashioned way that accretion is driven in, which is it's going to defer some capital because of the depth we get in the network in places for capacity. So we defer out splits and augments on capacity, that's an important driver. That's pretty rote. We do that every time we buy spectrum. We know how to do those things. We have a better wholesale play. As you know, this moves into a wholesale network as a service construct for the Boost brand and for whatever DISH EchoStar chooses to do moving forward. That movement is underway now. I know that EchoStar is working through some of the regulatory issues around their consent decree to give them the freedom to do everything they need to do. That's probably a question better suited for them to ask how that progress is going. But I can see it on my side that they're migrating a lot of customers over to our network right now. So what we expected to have happen is happening, which is our wholesale revenues are growing and improving right now as a result of that, and we expect some incremental accretion over what we would have had in the business plan because of our previous wholesale relationship with EchoStar, which will add value into the acquisition. And then, of course, as you noted, the scaling that's going on in Internet Air, this is only going to allow us to be more successful in places where we're not building fiber and find those right business customers and find the right segment of the consumer base that we think has more durability with the converged offer and grow in that area. When Pascal shared with you that we're going to be out talking with you in the early part of next year as we get close to the approval of both of these transactions that we would expect to happen early next year, we'll come out and we'll give you the texture around that as to how we have that market segment and what we expect to do. The good news is, as you can see, operationally we're moving through those continuums now, including deploying the 3.45 spectrum that allows us to get the machine up and running even before we close that transaction, which should by the time we get those things in order start to reflect our volumes in 2026, that we can ultimately give you some better insights to as we move forward. Pascal Desroches: Mike, one other point to note, John said this, but I think it's worth underscoring. When you look at, in addition to adding fixed wireless, the mobility attachment associated with that currently across our footprint, we are at 50%. We're better than 50%. And that's really before any meaningful marketing that put behind it. As the spectrum is deployed and as we become more aggressive with marketing, that's another pool of value that we're really excited about. Michael Ng: Great. Thank you, Pascal. Thanks, John. That's very clear. Brett Feldman: Thanks, Mike. We'll take the next question, please. Operator: The next question comes from Sebastiano Petti with JPMorgan. Please go ahead. Sebastiano Petti: Hi, thanks for taking the question. Maybe Pascal or John, just a clarification question on FWA. You talked about the seasonality within the fiber business typically in the fourth quarter. You get towards the holidays, see a little bit of a step down in 4Q 2024 had a little bit of one-timer because of the work stoppage. In FWA, I mean, have you noticed a similar pattern on an underlying basis? Because obviously, you will see an acceleration. I think John you talked about lighting up some of the 3.45 for two-thirds, I think, of POPs by mid-November. Any help on how we think about the pacing of FWA underlying subscriber results and then as we kind of think about the broader expansion from the EchoStar spectrum coming on. Then I guess also sticking with broadband, I mean any update on Giga Power and how that's perhaps going? I think there was a press report in the third quarter about Giga Power perhaps bringing on a new ISP onto their network. Any way to kind of think about that and the risk that your wholesale partners within the, I think, piggybacking on Peter's question about getting to the 60 million within that obviously a decent portion of that would come from open access wholesale partners. How do you assess the risk of your partners meeting that target? Over time? Thanks, John. John Stankey: Good morning, Sebastiano. So, I'd say there are elements about the holiday season that I can speak to the Stankey household and what we notice in some of our customer base as people become busy and distracted and they have a lot going on. And as a result of that, I think we all prioritize our time and energy. And while we like to make an acquisition of our product and service seamless and without friction, it isn't yet there. And so people sometimes do research and have to ask themselves some questions. Is this the time they want to change a very important in their life, which is their Internet service provider? And I think because of that nature of that season and the bandwidth that people have to get things done, there's just some decisions that are deferred as a result of that. And I wouldn't expect that that would be entirely different for fixed wireless than it might be for a fiber installation, short of the fact that somebody doesn't have to come out to the house. So, do I think we can still move the product during the period? Yes, I do. I think businesses are a little bit different than consumers, and certainly fixed wireless has a little bit more of a dent on the business side right now with some of the penetration. So I wouldn't expect that to be as dramatic, but I do believe there's some seasonality that just works its way into consumers and businesses that are busy at that time of year. And that's why you get a degree of seasonality that occurs. Moves are down, people don't move homes during the fourth quarter. I don't think that's going to change. That's a dynamic of a buying decision. But we don't have multiple years of experience on fixed wireless where I can be perfectly empirical with you and tell you I know exactly where that's gonna come in. On Giga Power, look, I think our relationship with our partner there has been great. I think they're really satisfied. I think we're satisfied. We'd all like to go a little bit faster, but once the footprint is turned up, I think people are looking at the model and saying it's working exactly the way it's working. And I would expect with our partner the way we meet our obligations around rate of penetration and how we bring customers on, we are going to continue to be the anchor provider on that network. And have the dominant share of customers that are supported over that network, and that is as it was intended to do when the construct was designed, will be the foundation of the profitability and the return on that network. And I don't see anything changing in our results to date, anything that's going to be done going forward to be inconsistent with that. And I'm confident that we're going to get the customers that we need to get and that we're penetrating in the way we want to penetrate, and I don't worry about whether or not a second or third provider on the network ultimately creates a problem for AT&T Inc.'s retail activities and brand in the market. As opposed to are we attacking a segment that we just weren't effective at getting at that wholesale can be an extension and increase in penetration with the margin. Thanks, Sebastiano. Brett Feldman: All right. We'll take our next question. Operator: The next question comes from Michael Rollins with Citi. Please go ahead. Michael Rollins: Thanks and good morning. John, there's some about whether or not LEO satellites pose competitive threats to your mobile services, direct to device LEOs get access to spectrum and improve their technology. And also, whether these constellations will impact the future competitive landscape for broadband to the home and business locations. So just curious if you can give us an update on your views with respect to these constellations as competitors to your strategic wireless and broadband services? And if you can also give us an update on how you're planning to offer your own direct to device satellite offering to customers? Thanks. John Stankey: Hi, Mike. Don't know that I'm going to add anything to what you probably heard me say before publicly. Have you the LEO technology is really exciting technology. I think it's going to be fantastic for consumers and businesses. I think it's going to bring a realm of innovation into networking that we're gonna see new things pop up that are gonna make networks more resilient, more trusted, do some things that they couldn't do before. So I'm really excited about them. I think we're a natural integrator of that technology given our extensive customer relationships, our ability to market, use our brand to aggregate, take friction out of acquisition. So I would expect moving forward that we can be a big purveyor of those products and services. As you know, we have a very close relationship with AST. We want to help them move along and scale their product, and we think it's a unique approach to it where they right from the start were designing satellites to be perfectly compatible with consumer end-user devices that were out there that didn't require large investment and CPE and equipment to make it work. And we think there's a space for that, and that's why we've advocated for that. I'm interested to see now that others in the LEO space are understanding that they maybe need to engineer these constellations to do more directed device, and that will be good because I'd like to see a market where there's more than one purveyor of products and services. I think that would be healthy. And we'd certainly support that occurring over time. The way I think about it is mostly complementary. I can give you my reasons for that in a minute, but there's going to be places where the LEO constellation becomes maybe a better alternative to a terrestrial solution. Certainly in the IoT space, there's going to be circumstances where it might be easier to use LEO to solve certain types of IoT-related applications that will be part of the innovation of what they bring forward. Complete replacement of terrestrial wireless networks strikes me as a it's probably not that it couldn't be done, but it would require an awful lot of time and money. I think you can probably ask Charlie Ergen about that. People don't always recognize the fact that we do deploy cell sites, and that's part of our capital deployment. We do an awful lot of deployment of capital inside buildings, hospitals, stadiums, high rises, hotels, those aren't things that are easily served necessarily from just laying up some 40 megahertz of spectrum on a satellite. And so if you really want a cohesive network that is going to deliver on the kind of AI demands moving forward, which is really managing traffic aggressively, giving strong quality of service on the uplink, low latency, I would tell you that just generally speaking, it takes a lot of engineering to do that. It's embedded over years and years of deployment of capital and work. It's not replaced quickly, and it's not necessarily optimal to see from the sky. I would tell you the other thing you need to think about is while spot beam technology will, of course, get better than maybe a 20-mile radius over time, there are physical limitations to what that can do. A typical cell site right now is probably running roughly about a two-mile radius, a little bit more, a little bit less in some cases. And when you have over 300 megahertz of spectrum, in a two-mile radius, it's really hard to see 40 megahertz spectrum over a 20-mile radius replacing that capacity, especially when you multiply the fact that there are three providers on a stick that are doing that and have those kind of scaled networks that have massive backhaul at that cell site, 10 gig or better. It's hard to replace that, and it's also hard to outperform that from a performance perspective. So I do believe they can be really complementary. I believe that ultimately hybrid networks can play. I think it's very hard in an AI world to build a hybrid network going to deliver the kind of performance indoor and outdoor over time that we're building. That's why we think fiber is so important. When you have dense fiber and you can pick up workloads closer to the customer, you're always going to have a better performing network and a more scalable network and a network that operates at a lower marginal cost. And that's our belief and why we're playing the way we're playing. Brett Feldman: Thanks for the question. We have come to the end of our time. That was going to be our last one. Operator, I'll turn it back over to you. Operator: This concludes our question and answer session. I would like to turn the conference back over for any closing remarks. Brett Feldman: We're all set. Thanks for everyone for joining us today. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Welcome to the KKR Real Estate Finance Trust Inc. Third Quarter 2025 Financial Results Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note that this event is being recorded. I would now like to hand the conference over to Mr. Jack Switala. Jack Switala: Please go ahead. Jack Switala: Great. Thanks, operator, and welcome to the KKR Real Estate Finance Trust earnings call for 2025. As the operator mentioned, this is Jack Switala. This morning, I'm joined on the call by our CEO, Matt Salem, our President and COO, Patrick Mattson, and our CFO, Kendra Decious. I'd like to remind everyone that we will refer to certain non-GAAP financial measures on the call which are reconciled to GAAP figures in our earnings release and in the supplementary presentation. Both of which are available on the Investor Relations portion of our website. This call will also contain certain forward-looking statements which do not guarantee future events or performance. Please refer to our most recently filed 10-Q for cautionary factors related to these statements. Before I turn the call over to Matt, I will go through our results. For 2025, we reported GAAP net income of $8 million or $0.12 per share. Book value as of 09/30/2025, is $13.78 per share. Reported a distributable loss of $2 million due primarily to taking ownership of our Raleigh multifamily property. And prior to net realized losses, DE was $12 million or $0.18 per share. We paid a $0.25 cash dividend with respect to the third quarter. With that, I'd now like to turn the call over to Matt. Matt Salem: Thank you, Jack, and thank you everyone for joining us today. I'll begin with a brief update on the commercial real estate lending market. The number of real estate opportunities remains robust. As we enter the $1.5 trillion wall of maturities over the next eighteen months. The debt markets are liquid with banks returning to the market while increasing their back leverage lending. Despite a tightening of whole loan spread since the beginning of the year, with lower liability costs we are still able to generate strong returns and we believe that real estate credit offers attractive relative value. As lenders, we think about safety first, and the ability to lend on reset values well below replacement cost combined with decreasing new supply creates a unique credit environment with strong downside protection. Overall, sentiment for real estate is turning positive as investors recognize the lagging values and strengthening fundamentals. We've been actively lending into this opportunity. In the fourth quarter, we expect over $400 million in originations and have already closed $110 million across the United States and Europe. In October, we closed our first real estate credit loan in Europe for KREF, secured by a 92.5% occupied portfolio of 12 light industrial assets across Paris and Lyon, France. This transaction highlights the breadth of our platform and our ability to draw on KKR's global resources. Although this is KREF's first European loan, over the last couple of years we have been strategically building our European real estate credit platform. Establishing a dedicated team and originating over $2.5 billion to date. Through our European real estate equity business, we have strong connectivity across markets, giving us unique insight access to opportunities that align with our disciplined approach. Within our broader real estate credit platform, we have been actively investing across the risk reward spectrum. Our platform lends on behalf of bank insurance, and transitional capital targeting institutional sponsors and high-quality real estate. Our CMBS team is one of the larger investors in investment grade and B pieces. Across our global team, we will invest approximately $10 billion in 2025. To support our investing activity, we built a dedicated asset management platform called KSTAR, which now has over 70 professionals across loan asset management, underwriting special servicing, and REO. KSTAR manages a portfolio of over $37 billion in loans and is named special servicer on $45 billion of CMBS. Moving next to our third quarter results. We reported distributable earnings of negative $0.03 per share or distributable earnings excluding losses of $0.18 per share compared to our $0.25 per share dividend. We set our dividend at a level which we believe we can cover distributable earnings prior to realized losses over the long term. We continue to see upside in our REO portfolio where we are making progress. And as we stabilize and sell those assets, we can repatriate that capital and reinvest into higher earning assets. Therefore, there's embedded earnings power of $0.13 per share per quarter that we will be able to unlock over time. Looking at risk rating, we downgraded Cambridge Life Science loan from risk rated three to four. With increased CECL provisions due to the downgrade, book value per share remained mostly unchanged at $13.78, a decrease of 0.4% quarter over quarter. We are proactively managing our current portfolio of $5.9 billion. We received repayments of $480 million this quarter. Year to date, we have received $1.1 billion in repayments and have originated $719 million with $400 million of originations circled in the fourth quarter. Underlying activity level remains strong, we continue to see robust market activity. In 2026, we expect greater than $1.5 billion of repayments and expect to continue to match repayments with originations. With that, I'll turn it over to Patrick. Patrick Mattson: Thanks, Matt. Good morning, everyone. Thanks to strong investor demand and close coordination with the KKR Capital Markets team, we successfully upsized our Term Loan B by $100 million to $650 million, which now has approximately six point five years remaining until its 2032 maturity. The loan repriced 75 basis points tighter, reducing the coupon to SOFR plus two fifty basis points and locked in more efficient funding. During the quarter, we also upsized corporate revolver to $700 million up from $610 million at the beginning of the year. With continued momentum for repayments, and the term loan B upsize, we ended the quarter with near record liquidity levels of $933 million including over $200 million of cash plus our $700 million undrawn corporate revolver. Overall financing availability sits at $7.7 billion including $3.1 billion of undrawn capacity. Importantly, 77% of our financing is non-mark to market and KREF has no final facility maturities until 2027 and a corporate debt due until 02/1930. In the quarter, we continued our share repurchases totaling $4 million representing a weighted average price of $9.41. Year to date, we repurchased $34 million for a weighted average price of $9.7. And since inception, we have repurchased over $140 million of common stock. We remain committed to deploying capital through buybacks, as well as new investments. Overall, our liquidity position gives us meaningful flexibility to manage the portfolio, stay on offense, and take advantage of new opportunities. We're encouraged by the market backdrop and momentum we're seeing. Turning to our watch list. Our current portfolio has a weighted average risk rating of 3.1 on a five-point scale. Our total CECL reserve at quarter end is $160 million representing around 3% of the loan portfolio. Over 85% of loan portfolio is risk rated three or better. And as of the third quarter, our debt to equity ratio is 1.8 times and total leverage ratio is 3.6x consistent with our target range. Now turning to our REO portfolio. We took title to the Raleigh multifamily loan which is already appropriately reserved for and therefore no additional impact on book value. Our business plan is to invest additional capital into the property to enhance the amenity base, improve operations, and reposition the asset for sale. On our Mountain View, California office, market continues to heal with leasing demand picking up. And as mentioned last call, we're actively responding to tenant requests for proposals. Given our asset offers to tenants the ability to have a full campus setting and control their amenities and security perimeter, we believe positioning for a single user is the optimal strategy. On our West Hollywood asset, we launched condo sales. We launched the condo sale process last week and are focused on executing our sales strategy. Finally, on our Portland, Oregon redevelopment, our entitlement process is progressing with final entitlements expected in 2026 giving us the ability to unlock value and return capital through parcel sales. In summary, we see significant opportunity ahead. Origination pipeline continues to build. We remain focused on optimizing our REO portfolio, working through the watch list, and redeploying capital efficiently as we position the business for its next phase of growth. Thank you for joining us today. Now we're happy to take your questions. Operator: Thank you. We will now begin the question and answer session. And your first question today will come from Tom Catherwood with BTIG. Please go ahead. Tom Catherwood: Maybe Matt or Patrick's help us triangulate something here. So there's kind of two ways to view the lower leverage and higher liquidity that you had going into the end of the third quarter. One is like a defensive positioning to kind of bolster the company against headwinds. Or the second one is really a timing issue, where if a couple of originations had closed a week or so earlier, it might look very different from FUD's level of the distance between repayments and originations and might be a very different story. Which is the case here? Is this just timing? Or is it could we see further deleveraging and further liquidity building as we get through the rest of this year? Jack Switala: Hey, Tom. It's Jack. Give us, give us just a minute here. We're just having some technical difficulties. We'll be right back to you. K. So just give us about two minutes here. We're redialing in and folks should join shortly. Thank you. Pardon me, ladies and gentlemen, please standby as we reconnect. Thank you for your patience. Pardon me, is the conference operator. I've reconnected speaker lines. Please proceed. Matt Salem: Okay. Thank you. Tom, can you hear me now? It's Matt. Tom Catherwood: Yes, I can. Matt Salem: Okay, thanks. Sorry about that everyone. We are down in our Dallas office and had a new system here and just had some technical difficulties, but I think we're working now. So we'll jump back in and appreciate everyone joining. Tom, you for the question. It's really the latter, I'd say. It's just a timing issue and it's really related to two things. I'd say the first one, just when you think about repayments, one of our repayments this quarter just happened to be a larger repayment. It actually the largest loan in our portfolio repaid. It was multifamily property just outside of Washington DC that got taken out by the agencies. On a refinance. And so that is a relatively large single repayment. And then secondly, when you think about our originations this quarter, I think we mentioned this in the prepared remarks, a bunch of our originations just happened to be in Europe, and those take a little bit longer to close. Just the closing timelines are somewhat elongated in Europe versus The U. And so that's why you see the bigger pipeline, I think in the fourth quarter and a little bit of a slower originations and closings I'd say in third quarter. So just timing, we haven't really changed our strategy at all. And certainly, expect to continue to invest and originate in line with our repayments. Right now we're at the lower end of our leverage ratio. So we've got the ability to kind of take that up and grow the portfolio back to where we were before. Tom Catherwood: That's perfect. And maybe just following up on that and thinking of the cadence of earnings and you talk about the lag between receiving repayments and putting that capital back to work. And also you mentioned, I think it was greater than $1.5 billion of repayments that you're expecting in 2026. Could that lag take us lower from an earnings front for a longer period of time just while you put that capital back to work? Or are there some other levers you can pull to boost distributable earnings as you're repatriating and redeploying capital? Matt Salem: No, I wouldn't look at it like we're always behind. I think some quarter like this quarter obviously we got a little behind and again, kind of do the timing of those closings, but I think other quarters will be ahead. You can see us getting ahead of it a little bit. So it you can't time the repayments, right? And you can't necessarily time the closing dates of your origination. So there's just a little bit of ebb and flow that happens naturally, in the business. So but I wouldn't necessarily, like, model anything. Like, we're always waiting for a repayment to come in before we originate. So we're forty five days behind. I think there's just a little bit of give and take in the overall investing profile. Tom Catherwood: Understood. And then last one for me. We've had a number of lab space owners this past quarter that have noted kind of an early stage rebound in demand from smaller life science tenants looking for space kind of following a upturn in VC funding over the past twelve months. In terms of the four assets in your life science loan portfolio, that remain three rated, how are they proceeding on their business plans? And are you starting to see that least early stage recovery in tenant demand? Matt Salem: Yes. I think we're starting to see green shoots and from the sponsors, right, and some of the commentary about about leasing. And I'd say we've got honestly a little bit of a mix. Most of our assets that we've lent on are more the tenants are going to be larger pharma companies and not necessarily some of the smaller VC funded ventures. But we are starting to see a little bit pickup in sector. And again, we're long term like we're pretty positive on that on that sector. And certainly understand, it can be cyclical both from a capital perspective and certainly some of the things you see going on at the NIH and things like that. But I'd say over the medium to long term, say we're still pretty positive on the overall sector. Tom Catherwood: Got it. Appreciate all the answers. Thanks everyone. Operator: Thank you. And your next question today will come from Jade Rahmani with KBW. Please go ahead. Jade Rahmani: Thank you very much. Wanted to follow-up on Tom's question. Can you give an update as to the state of dialogue with the sponsors across the life science deals? And then on Cambridge, you could touch on what drove the downgrades? Matt Salem: Yeah. I'd say really the the let's go starting with the with the last question. What drove the downgrade was we've entered negotiations and modification negotiations with that sponsor. And so it was really as it related to those discussions. And then I think on the other three rated loans, Jade, there's no other really discussions happening outside just a normal course. We're getting leasing updates and any any property level financial updates. But really no other detailed conversations happening at this point in time. Jade Rahmani: Thank you. And then broadly speaking, have you done an NPV analysis comparing the cost and benefit of weighting on these deals. As well as any other sub performing deals versus selling down the exposure, taking that capital and reinvesting in the current uptick in deal flow that we're seeing, which that would drive stronger distributable earnings and eventually dividend growth more near term than perhaps the market expects. How do you view the trade offs versus waiting since I think that the life science recovery is quite nascent at this point. So, for at least that sector, it's probably going to be a while before these buildings get to stabilized occupancy. Matt Salem: Yes. It's a great question. And it's something that I'd say we look at every quarter, something that we certainly discuss with the Board in terms of portfolio positioning and specifically Jada as it relates obviously to the REO, which is directly impacting our earnings. And as we liquidate that, obviously, we can redeploy that capital and increase earnings which we talked about on the last few calls. And so it's something we're consistently looking at. When you look at where we've decided to hold things, and I'm talking more about the REO because that's really the biggest impact right now. It's really around quality and we feel like we've got quality real estate and our job as fiduciaries is to maximize, the outcome there. And if we've got a great asset, we think it's going to lease over time. And we'll be able to to optimize the value. But we definitely look at NPVs and we look at what's that IRR and is it better to sell today versus and redeploy capital now versus holding out? So far, I'd say we're pretty I think we've we've been right to kind of be patient. And certainly, when you think about things like our our office, in Silicon Valley, that market has come back significantly and we're seeing real leasing demand in that market. So to be patient, wait, quality asset, let's get a tenant and then we can evaluate liquidity options. I think that strategy has will work out over time. But we have to continuously evaluate this because I know that we can't we have forever, that we need to and we need to repatriate some of this capital. Jade Rahmani: Thanks very much. Operator: Thank you, Jade. And your next question today will come from Rick Shane with JPMorgan. Please go ahead. Rick Shane: Hey, guys. Thanks for taking my question. Looking back last quarter, there was commentary about $1 billion repayments in the second half. It seems like you're on track with that. And I think the implication least the way we interpret it was that that capital would be redeployed and suggested sort of again, not we didn't fully assume this, but targeting towards that $1 billion in reinvestment. Should the way we think about this be there's a one quarter lag, you get the repayment and quarter '1, you're able to redeploy in quarter two, you get repayments in quarter two that are redeployed in quarter three. Should we see this as sort of the $1 billion of repayments in the second half of this year manifesting into Q4 and Q1 originations close to $1 billion? Patrick Mattson: Rick, it's Patrick. Good morning. Yeah, thanks for that question. I think as Matt sort of referencing a little bit earlier, I think the goal is to sort of match up the repayments minimize some of the timing that happens between repayment and origination. That always when we snap the line, at quarter end, that always won't sort of match up. But we think over time, there's going to be some quarters where get a little bit ahead of that. If you think about our liquidity position today, certainly have ample capital to be able to do that. There are going to be some quarters where we're ahead of it. Maybe there are some quarters that were behind it. But on balance, we should think about as we're getting those repayments, they're going to be matched. And our goal effectively is to minimize some of that of that drag because ultimately we want to optimize what we can return to shareholders in terms of earnings. Rick Shane: Got it. Yes. I mean, think the thing that's that confuses me about it is I understand that the difference between a deal closing on September 30 and October 1 from your perspective, it's a day from an accounting perspective it's very different. You've talked about $400 million of originations this quarter. I think what surprises me is given the lag in 3Q originations again, a big deal, but that that Q4 pipeline doesn't look bigger given that sort of timing issue. I think that's what's confusing people a little bit here today. Patrick Mattson: Understood. Thanks. Yeah. I think look as we think about the fourth quarter obviously a lot of that will be front ended in the quarter in terms of the originations. The year is not out. The pipelines are still very active. I think we've been focused on being disciplined around deployment focused on diversity, So when you look at these asset sizes, they'll reflect that. Obviously, Matt mentioned some of the activity that we have in Europe. But as I said, our goal is to continue to deploy capital. I suspect that, if things continue to proceed as they are, going into year end and into first quarter, we're continuing to see build for that origination pipeline. And we know what we have a good idea of what we expect to come forth in the next two quarters. And I think we're preparing to to match that up and to close some of that gap. Rick Shane: Got it. Okay. Thank you. And then the other question is this and Jade's touched on this in but if we look at the current ROE, it's about half of what you need to support the dividend as it exists today. Obviously, moving resolving challenged properties and challenged loans is the key to that. Realistically, how long do you think it takes for you to be able to double that ROE to put yourself in a position where and again, we there are all these different earnings metrics, but at the end of the day, this really is an NII issue. How long do you think it really takes to get there? Matt Salem: Yes, can jump in there Rick. It's a good question and certainly something we think about a lot. In my mind, we kind of bucket the REO into kind of three timelines. One is like near term twelve to eighteen months. Medium term maybe that's twenty four or so months, twenty four to thirty six months and then longer term. And I'd say about about half of that we think we can get back in the near term and that's concentrated on things like our Portland, Oregon asset, which we should be fully entitled to then the market with next next year on an individual parcel basis. The West Hollywood condo, which Patrick mentioned, we're in the market now live selling selling or offering units there. The Raleigh, North Carolina multifamily deal, which is largely stabilized and we're doing a little bit of value add there. But can kind of execute on that in a short amount of time. And then the Philadelphia office, which there's kind of one or two leases outstanding that were that we're working on and then kind of effectively sell that as well. So if you if you group those together, that's really the short term. And again, it's about half of that. Number. So we can that back more quickly. I'd say in that medium term bucket, is the Mountain View asset. As I mentioned to Jade, like we're making good progress. The market is really coming back there, and we're kind of actively engaged there with tenants. So I put that more in medium term, although we could have something happen there shorter than that, but then there'd be a business spend to execute if we were able to sign a lease there in terms of just tenant improvements and CapEx etcetera. And then lastly, I kind of put the Seattle Washington Life Science and just given where Life Science is, we'll see that market come back quickly. But just given where we're seeing there, we did it execute a pretty important lease on that asset. So we're pretty happy about that. But, it could take longer to fully stabilize that asset. Rick Shane: Hey, Matt and Patrick, really always appreciate your willingness to try to dimensionalize the answers these tough questions and I appreciate it a great deal. Thank you guys. Matt Salem: Sure. Thank you. Operator: And your next question today will come from Chris Muller with Citizens. Please go ahead. Chris Muller: Hey, Thanks for taking the questions. It's nice to see you guys branching out into Europe. Can you contrast some of the EU loans versus U. S. Loans? Guess what I'm looking for is our term similar, return similar, any color here would be very helpful. Matt Salem: Sure. Yes. Thank you for the question. Let's start with kind of how they're similar and then we can think about how they're different. I'd say from a quality of real estate perspective, from a sponsorship perspective, it's the same program we're running in The United States. This is institutional quality real estate in sponsorship. And in fact, a lot of the clients we went to in Europe are the exact same clients we're lending to in The U. S. And so it's nice to have that global connect connectivity there. I'd say the opportunity set there is a little bit different than what we're seeing in The U. S. The loan sizes tend to be a little bit bigger. There tend to be more portfolios, where we're and then also I would say multi jurisdictional is an opportunity as well. It's a heavily banked market. So contrast think about Europe is like 80% of that market is is banks, whereas in The U. S. it's around 40%. And the back leverage there structurally I think is a little bit more advanced in our favor than what we're seeing in The U. S. From a whole loan perspective spread wise, now you're talking about different base rates, between The UK and EU. But I'd say overall, spreads on whole loan and and then the ability to back leverage and generate ROE are largely in line with The U. S. From a relative value perspective, I think it's pretty balanced right now, although we've been living there for a few years now, it has not always been like that. I'd say two years ago, we probably saw a lot more opportunities and relative value in Europe versus The U. S. And but now as The U. S. Activity has picked up materially, it's probably a little bit more balanced. So but ultimately, I think the ROEs are really about the same between The U. S. And Europe right now. And that's on a U. S. On a hedge U. S. Dollar basis. Chris Muller: Got it. That's all very helpful. And I guess on the Long Island family loan you guys originated this quarter, is this ground up construction? And then are you guys looking at heavier transition projects now? Or was this more of a one off type loan? Matt Salem: It is ground up. Yes, it's ground up construction to a repeat sponsor who we've went to a couple of times now on construction projects. So it's we know them well and we think they do a great job and build a really high end product. So it's great to be able to sign that one up again with with the repeat sponsor there. I don't think we've really changed the DNA of what we want to do. We've always had a small percentage of construction in the portfolio and we'll continue to do that. Think there's some some relative value in that sector. The bulk of the opportunity of what we're seeing right now is what I still refer to as like almost stabilized versus transitional lending. I still think that there's like stretch the market is really the opportunity around the market is really around stretch seniors where it's like a 70% LTV mostly leased assets. And so that's where we've been participating. We think that's where there's the most relative value. We'll look at projects that have a larger business plan, but just a relative value perspective again, like it seems like, the kind of almost stabilized lending is just offers a better better investment right now? Chris Muller: Got it. That's all very helpful. Thanks for taking the questions. Operator: And your next question today is a follow-up from Jade Rahmani of KBW. Please go ahead. Jade Rahmani: Wanted to ask about the platform overall. I know you mentioned you're in Dallas with K Star and you all have a servicing operation quite substantial. You buy B pieces. So a nice complement to that could be the CMBS conduit business, which is capital light and I think the securitization outlook seems quite healthy given that the regional banks still continue to pull back. Any interest in that? And then another follow-up would just be on the special situation side, if you see any opportunities to combine with another, either public or privately held mortgage REIT, I think scale is a huge differentiator across the real estate landscape. We see huge premiums between market cap ranges in all real estate sectors. And I think it's clear that having gone through this cycle, there's also a big differentiator in the commercial mortgage REIT space. So, you could combine stock for stock or NAV for NAV transaction gain scale, that probably would help with consistency of dividend. So you just respond to those two items? Thanks very much. Matt Salem: Sure, Jade. Thank you again for the question. First on the CMBS side, it's something we've looked at we have a the expertise I think in house to do that, whether it's from the credit or the origination side. Or some of us have backgrounds in that business and capital markets. I think right now, real plans to begin a CMBS originations business. I think the one thing that we is a real consideration for us is it doesn't really overlap with our client base for the most part. Think about we're lending in major markets to institutional sponsors and that tends to be a more diverse set of borrowers and markets. So we'd have to probably change a little bit of the way we're oriented and that's not sure that's in our kind of credit DNA to do that. But we'll continue to to evaluate it as I think as the market evolves. On the M and A question, I would say we continue to, look at opportunities as they arise. I think there'll be consolidation in the industry over time. We'd like to grow not for the sake of of scale for scale sake, but to have a more liquid stock as as you mentioned, I think would be able to attract more shareholders and and create a better cost of capital. And as we've discussed, we want to try to do things that also give us the ability to diversify our portfolio and moving into Europe is one of those things, but also potentially adding duration to the portfolio. So we're going to continue to evaluate, opportunities that are on the table but there's nothing we're looking at currently. Jade Rahmani: Thanks very much. Operator: Thank you, Jade. This concludes our question and answer session. I would like to turn the conference back over to Jack Switala for any closing remarks. Jack Switala: Great. Thanks, operator. Thanks, everyone, for joining today. Please reach out to me or the team here if you have any questions. Take care. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by. Welcome to Teck Resources Limited's Third Quarter 2025 Earnings Release Conference Call. At this time, all participants are in listen-only mode. Later, we will conduct a question and answer session. This conference call is being recorded on Wednesday, October 22, 2025. I would now like to turn the conference over to Emma Chapman, Vice President, Investor Relations. Please go ahead. Emma Chapman: Thank you, operator. Good morning, everyone, and thank you for joining us for Teck Resources Limited's third quarter 2025 conference call. Today's call contains forward-looking statements. Actual results may vary due to various risks and uncertainties. Teck Resources Limited does not assume the obligation to update any forward-looking statements. Please refer to Slide two for the assumptions underlying our forward-looking statements. We will reference non-GAAP measures throughout this presentation. Explanations and reconciliations are in our MD&A and the latest press release on our website. On today's call, Jonathan Price, our CEO, will provide third quarter 2025 highlights. Crystal Prystai, our CFO, will follow with further details on the quarter. Jonathan will then wrap up with closing remarks and an opportunity for Q&A. Over to you, Jonathan. Jonathan Price: Thank you, Emma, and good morning, everyone. Starting with highlights from our third quarter 2025 results on Slide four. The most significant highlight of the quarter was our September 8 announcement of a merger of equals agreement with Anglo American. This is a unique opportunity to create a global leader in critical minerals and a top five copper producer, and I could not be more excited about it. Particularly about the substantial value creation that could be generated. Anglo Tech will have an industry-leading portfolio with more than 1,200,000 tons of annual copper production underpinned by six world-class copper assets and outstanding future growth optionality. This will make Anglo Tech one of the world's leading investable copper opportunities. Offering both scale and quality with over 70% copper exposure. This transformative combination will unlock significant value for shareholders through compelling adjacencies generated by integrating the resources and infrastructure of QB and neighboring Coahuasi and through meaningful corporate synergies. Anglo Tech will work with stakeholders to optimize the value of the adjacencies. We expect to produce 175,000 tons of incremental copper and generate an annual average underlying EBITDA uplift of at least $1.4 billion per year for at least twenty years on a 100% basis. Working together as Anglo Tech will materially de-risk and accelerate our ability to realize this value opportunity. With aligned incentives on both the QB and Coyoacci sites, over $800 million recurring annual synergies have also been identified, and we expect approximately 80% of that to be achieved by the end of the second year following completion. In addition, the combined company is expected to have a strong balance sheet supported by a larger, more diversified asset and cash flow base including premium iron ore and zinc. Anglo Tech's scale and balance sheet will expand the opportunity set as we optimize the approach to growth. Through the combination of two significant project pipelines that will compete for capital based on risk-adjusted returns. Both Anglo American and Teck Resources Limited believe the merger will enhance portfolio quality, financial and operational resilience, and strategic positioning and it will be highly attractive for our respective shareholders and stakeholders. Another key highlight of the quarter was the completion of our comprehensive operational review. The focus of our review was on improving performance, through a detailed QB action plan and identifying opportunities to enhance practices across the portfolio. This included a detailed assessment of operational plans for all our assets. With review and input from third-party technical experts and independent advisers and with oversight by the Safety, Operations, and Projects Committee of our Board of Directors. As a result, we now have updated risk-adjusted operational plans that are reasonable, achievable, and more conservative as we embed assumptions based on demonstrated performance rather than design rates. At QB, our revised operating operational plan reflects ongoing work on development of the tailings management facility, or TMF, and the resulting constraint on our mill. In the QB action plan, our near-term priority remains enabling safe, unconstrained production by raising the crest height of the dam and working on solutions to improve sand drainage towards design targets. We are confident that we have thoroughly assessed and understood the issues at QB we have a defined and measurable path forward. And from 2027 onwards, we expect that TMF development work will no longer be a constraint on the mill. Overall in the third quarter, our profitability improved compared to the same period last year to $1.2 billion of adjusted EBITDA. Our established operations performed well, particularly Red Dog and Trail, with Red Dog sales exceeding guidance and continued improvement in Trail's profitability. Performance also improved at Highland Valley and CDA, compared with Q3 2024. Excluding QB, our copper production increased from the same period last year. Our balance sheet remains very strong, with $9.5 billion of liquidity including $5.3 billion in cash. And the Board sanctioned the Highland Valley mine life extension in July which will extend production from a core asset to 2046. Turning to safety and sustainability on slide five. Year to date through September 30, our high potential incident frequency rate was 0.06 at Teck Resources Limited controlled operations. Safety performance is considered a key indicator of stable operating performance, and we have seen a strong improvement with our HPI rate trending 50% below the annual rate last year. And we were thrilled to see our Chilean operations reach 100% renewable power on October 1, when our long-term Clean Power Agreement for QB's electricity supply came into effect. We'd signed that agreement some time ago when there was not enough renewable in place in Chile to be able to make that switch. The agreement enabled our partner to put additional renewable capacity in place and it's great to see the benefit of that come to fruition. And with that, I will turn it over to Crystal. Crystal Prystai: Thanks, Jonathan. Good morning, everyone. I will start with our third quarter 2025 financial performance on Slide seven. Our adjusted EBITDA increased by 18% in the quarter compared to a year ago to $1.2 billion driven by higher base metals prices, byproduct revenues, and significantly lower copper smelter processing charges as well as strong performance across our established operations, most significantly in our zinc business. Red Dog zinc sales and another profitable quarter from Trail Operations drove an increase in our adjusted EBITDA although this was partially offset by higher operating costs at QB. And while we completed $144 million of share buybacks in July, we have not executed share buybacks since July 25 and will not be permitted to execute further buybacks through the closing of our proposed merger with Anglo American. Importantly, we will continue to return cash to shareholders through our annual base dividend of $0.50 per share which is paid quarterly. Slide eight summarizes the key drivers of our financial performance in the third quarter compared to the same period in 2024. Our adjusted EBITDA increased by $185 million to $1.2 billion. In Q3, we realized higher copper and zinc prices as well as higher byproduct revenue. Lower smelter processing charges, and an increase in sales volumes. This was partially offset by an increase in royalties at Red Dog, due to strong profitability and higher operating costs at QB. Our Q3 2024 EBITDA was impacted by a post-tax impairment charge on Trail operations. Now looking at each of our reporting segments in greater detail and starting with copper on slide nine. In the third quarter, gross profit before depreciation and amortization from our copper segment improved 23% to $740 million compared with the same period last year, primarily due to higher base metals prices and lower smelter processing charges. QB production was constrained due to TMF development work, but we expect to see less downtime impacting performance in the fourth quarter. Excluding QB, our production increased from Q3 2024, driven by higher throughput and grades at Highland Valley, and higher grades and recoveries at Carmen De Adecollo. Antamina's production reflects a higher proportion of copper zinc ore this year as expected in the mine plan. Our copper net cash unit costs improved by $0.16 U.S. per pound despite higher operating costs at QB, primarily due to lower smelter processing costs and increased byproduct credits including QB molybdenum. Following Board sanction of the Highland Valley mine life in July, the project has entered the execution phase. Engineering and procurement activities are well underway and site mobilization has begun. Our outlook for our Copper segment is aligned with our October 7, news release. For 2025, we expect annual copper production of 415,000 to 465,000 tons and copper net cash unit costs of $2.05 to $2.30 per pound. Turning to our zinc segment on slide 10. In the third quarter, gross profit before depreciation and for our zinc segment improved 27% to $454 million compared with the same period last year. This was primarily due to higher byproduct revenues, higher zinc prices, and lower zinc treatment charges partially offset by higher adjusted cash cost of sales and higher royalties tied to Red Dog's profitability. Red Dog and Trail Operations both had a strong quarter of performance. At Red Dog, zinc sales of 203,000 tons were above our guidance range of 200,000 to 250,000 tons following a successful shipping season as we experienced favorable weather conditions. Production reflected lower grades as expected in our mine plan. In the third quarter, Red Dog inventories were drawn down by approximately $200 million. However, this was more than offset by elevated trade receivables of $570 million at quarter end, due to the volume of sales in Q3 and higher zinc prices. We expect Red Dog's trade receivables will be substantially reduced in the fourth quarter, providing a source of cash through the reduction in working capital. As of October 21, approximately $350 million of Red Dog receivables were collected, driving an increase in our cash balance post Q3. Our zinc net cash unit cost improved by $0.08 per pound driven by lower smelter processing charges and higher byproduct credits. We reported another quarter of profitability at Trail Operations, reflecting our focus on improving Trail's profitability and cash generation through prioritizing processing of residues over maximizing refined zinc production. Processing residues enables us to reduce concentrate purchases in the low treatment charge environment. Looking forward, we expect Red Dog zinc sales to be between 125,000 to 140,000 tons in the fourth quarter, reflecting normal seasonality. Red Dog shipping season commenced on July 11 and was completed yesterday. Our outlook for our zinc segment is aligned with our October 7 news release. For 2025, as a result of Red Dog's strong year-to-date performance, we expect Red Dog zinc production to come in towards the top end of our guidance range of 430,000 to 470,000 tons. We continue to expect our total zinc to be 525,000 to 575,000 tons, including Antamina. We also expect to be at the high end of our annual refined zinc production guidance range for Trail Operations. We continue to expect zinc net cash unit costs of $0.45 to $0.55 per pound. With Red Dog's strong performance, we continue to build the NANA royalty accrual which is expected to be a source of working capital in Q4 and a use of working capital in Q1 2026. Turning to our balance sheet on Slide 11. We have maintained a strong balance sheet and currently have liquidity of $9.5 billion including $5.3 billion of cash. Our cash balance has increased by approximately $500 million in the month of October so far, particularly due to the collection of Red Dog receivables built in Q3. Our use of cash through September reflects significant cash returns to shareholders of over $1.2 billion, as well as the payment of taxes related to the sale of the steelmaking coal business and the advancement of our copper growth options, including the start of the execution of the Highland Valley mine life extension. And while we completed $144 million of share buybacks in July, we have not executed buybacks since July 25, and will not be permitted to execute further buybacks through the closing of our proposed merger with Anglo American. Importantly though, we will continue to return cash to shareholders through our annual base dividend of $0.50 per share which is paid quarterly. Overall, our very strong balance sheet ensures we maintain our resilient position. Back to you, Jonathan. Jonathan Price: Thanks, Crystal. Looking forward on Slide 13, our priorities are disciplined execution across our operations and projects, and on progressing our transformative merger of equals with Anglo American. We are advancing approvals for the transaction, and both Anglo American and Teck Resources Limited strongly believe it is a significant value creation opportunity for our respective shareholders and stakeholders. At the same time, we are laser-focused on delivering against our operational guidance provided following completion of the comprehensive operational review. This includes continuing to progress the QB action plan and the necessary work on QB's tailings management facility to complete the ramp-up of the operation. At QB, there are multiple paths to value and significant upside potential beyond our current guidance, and we aim to realize the full value of this Tier one asset. Finally, our Highland Valley mine life extension project to extend production from a core asset to 2046 has moved into the execution phase and we are progressing early works. Turning to the outlook for QB on slide 14. Significant work has been undertaken to improve sand drainage times and complete the TMF development work. We have started the implementation of the new cyclone technology in one of the cyclone stations and we are seeing positive early results. We have finished the construction of the new paddock designs, we are also seeing improvements in sand drainage. Collectively, these results give us confidence that we are on the right track to finding solutions to improve sand drainage. We currently expect to be well-positioned to catch up on the construction of the sand dam and we aim to install the permanent infrastructure that will hydraulically deposit tailings and sand, replacing the current mechanical process by 2026. This will allow us to push QB to run at steady state from 2027 onwards. Turning to Slide 15. Importantly, QB remains a world-class Tier one asset. The foundation of QB's potential is its large long-life deposit, with around 10 billion tons of reserves and resources. The operation has the advantage of a very low strip ratio. Which enables competitive all-in sustaining costs. And QB has a tax stability agreement in place through 2037. QB has previously demonstrated that it is capable of operating at design recovery and throughput levels when there is no constraint on the mill. The design, construction, and operational capability of the plant was previously validated by independent specialists through completion testing and found to be robust. Beyond our current guidance for QB, there is significant upside potential. Optimization and debottlenecking offer the potential for efficient, near-term throughput uplift to at least 165,000 tonnes per day with a potential to go to 185,000 tons per day. We are working on improving recoveries towards our design recovery rates of 86% to 92% with more consistent plant online time and geometallurgical testing to optimize reagents and drive improvements in recovery. And while we expect 2028 to be impacted by transition ores, average grades are expected to improve on average for the five years thereafter. Overall, we have multiple potential paths to create value for our shareholders through QB including the potential adjacencies with neighboring Koyoasi and the value of QB continues to be validated by Anglo American through their due diligence for our merger of equals. We look forward to welcoming many of you to QB on November and we are confident that you will see the significant progress that has already been made and that QB remains a world-class Tier one asset. Turning to slide 16, I'll wrap up where I started with the merger of equals with Anglo American. The combination is truly compelling, and will lead to significant value creation opportunities for shareholders. Together, we will become a leading critical minerals producer a top five global copper portfolio. We will deliver tangible corporate synergies of $800 million per year with a roadmap to unlock an additional $1.4 billion of annual underlying EBITDA uplift from the substantial adjacencies between QB and Koyawasi. And we will have the resilience and enhanced financial capacity to balance shareholder returns with valuable investment opportunities from this incredible suite of assets. The scale of the combined entity will increase the company's relevance in the global capital markets and could see a significant multiple rerating that will further increase the value generation of the combined Anglo Tech. Slide 17 is a reminder of the expected timeline and required approvals for the transaction. We expect completion within twelve to eighteen months from announcement. Both Boards support and recommend this merger, and there will be concurrent separate votes by the shareholders of Teck Resources Limited and Anglo American on December 9. We expect to publish our circular in mid-November. And it will be available on our website at teck.com. The transaction will then be subject to regulatory approval and customary closing conditions. Including approval under the Investment Canada Act competition and antitrust approvals, and various other applicable regulatory approvals globally. We are excited at the potential of Anglo Tech to create a global leader in critical minerals substantial value creation opportunity for shareholders. With that, operator, please open the line for questions. Operator: Certainly. To join the question queue, The first question comes from Liam Fitzpatrick with Deutsche Bank. Please go ahead. Liam Fitzpatrick: Good morning, Jonathan sorry, good afternoon. Depends where you're based. Jonathan and team, I've got two questions. The first one is just on the deal. And whether any preliminary discussions have started with Glencore. Over the JV of the two assets? And if not, any rough guidance on when that could begin? And the second question, just on the guidance or the updated guidance for 2025, it looks like you're tracking towards the low end across unit cost guidance and CapEx guidance. Just wanted to check if that's the case or whether there's something we should be looking out for in Q4. Thank you. Jonathan Price: Thanks, Liam. It is indeed morning here in Vancouver. So Starting with your first question just on the QB Koyawasi synergies. Of course, with this being structured as a friendly deal, ourselves and Anglo American, it did give us significant ability to understand the capability of both assets and comprehensively assess the potential opportunities that could be generated from cooperation both through the and, of course, through the extensive infrastructure. As we've said, much of that value comes from the processing of the higher grades softer Coahuasi ore through the QB plant and it's a very capital way to add low-cost production into the combined portfolio. These synergies of course were also reviewed and validated by external advisers in order for them to be published. So there's a good deal of rigor that's been put around that. But, you know, we think this will be the benefit to significant benefit of the owners of QB and of Koyoasi and we expect all parties to be motivated to work together to generate this value for their shareholders. And of course, much of that work in terms of the commercial agreements and the structure of the agreements going forward remains ahead of us. But as I said, we think this is a compelling opportunity, and we do expect all shareholders to be engaged here to capture that value for their shareholders. Crystal, maybe if you just like to comment on Liam's second question in terms of where we're trending on guidance. Crystal Prystai: Yeah. Sure. Hi, Liam. Good morning. Just in the context of CapEx first, I think the guidance range remains reasonable as we look at where we're trending with our growth capital as we, you know, continue to progress the MyLife extension. Program through the fourth quarter. I'd expect a come in within that range. Similarly, on the capitalized stripping side of things. And then on the sustaining capital side, of the guidance, we are obviously continuing to progress the work on the TMF and expect that spending to continue into the fourth quarter. So I would suggest you continue to use a midpoint on the aspects. Similarly on unit costs for the copper business, I would I would expect us to come in towards the middle of the range. I wouldn't use the low point. And for Zinc, I think you're probably it's probably reasonable to be using somewhere between the low and the mid-case just based on where we're tracking there. But there isn't anything, there isn't anything anomalous in those numbers. Liam Fitzpatrick: Okay. Jonathan, if I could briefly follow-up just point taken, Reed, the discussions are ahead of you. Should we be thinking that the discussions will get going post-deal completion? Which is well into next year? Or is the plan to begin those earlier? Jonathan Price: Look, there's nothing that requires the deal to be completed to enable discussions between QB and Coyoacci. I mean, I think over the past couple of months since the announcement of the merger of equals with Anglo American. We've clearly surfaced the value here that's available to all of the owners of both QB and Coyoacci, and I think that creates a good platform for engagement. Liam Fitzpatrick: Okay. Thank you. Thanks, Liam. Operator: The next question comes from Myles Allsop with UBS. Please go ahead. Myles Allsop: Great. Thank you. Maybe just bring up slightly on Liam's question first on QB Colossae. I presume that all shareholders need to agree to the joint venture to be able to execute if Glencore or another shareholder gets difficult they you can't force them into a joint venture. Jonathan Price: No. There's no way of forcing anybody into a joint venture. I think it will require the agreement of all parties. Of course, Coahuasi is an incorporated entity. So unlike QB, is unincorporated where Teck Resources Limited is clearly the operator and takes the lead. Koyoasi has to engage as a consolidated entity. We've said before, we think there's a significant advantage from the cross-ownership that will be created through this merger of equals with 60% of QB being owned by Anglo Tech and 44% of Coyoacci being owned by Anglo Tech, and we consider that to be a significant de-risking and accelerating factor. In capturing these synergies. Over time. But again, I've just said, all shareholders of both assets should be highly motivated to work together to capture what we think is significant new value for our shareholders. Myles Allsop: Yes, and it wasn't that long ago, so I was quite excited about it. Could you just on QB, where should we think normal like I guess it's hypothetical now that in when production normalizes in 2027, 2028, where will unit costs normalize? What's your best guess? Is it the $1.15 or $1.52 What's the kind of new norm based on your current best guess? Jonathan Price: So Miles, there is no structural change to the asset based on the guidance we've previously given for QB. Of course, there's the impact of inflation that is across the whole of the industry. At the moment. So we would expect that to develop over time. But structurally, as we've said, we see the asset capable of performing at the levels that we'd used previously to define unit cost guidance. And I think that's probably the best indication I can give you at this stage. Myles Allsop: All the original normalized unit cost when you did the feasibility and stuff? Jonathan Price: So we were using $1.40 to $1.60 US dollars per pound previously. Obviously, that's predicated on the plant running at full capacity on hitting the design recovery rates on the full production of molybdenum and of course operating the port through our shiploader, which is a situation we expect to return to in the first quarter of next year. And of course, as I mentioned before, they are unescalated numbers as in they don't reflect the impact of inflation over the coming years. Myles Allsop: Yeah. Cool. That's clear. Thank you. Jonathan Price: Thanks, Miles. Operator: The next question comes from Anita Sarney with CIBC. Please go ahead. Anita Sarney: Good morning, Jonathan and team. Thanks for taking my question. The first one, just I just wanted to see if you could give us some more color in terms of the improvement in sand drainage rates. Could you quantify that? And I think previously, was like we're taking about seven days for the sand to drain. Is that has that improved from could you quantify it in the number of days? Jonathan Price: Hi, Anita. Thanks for the question. I'll hand this over to Dale. We won't quantify that, but I can get Dale to give a description of the work that's ongoing and some of the progress that we have seen. Particularly in the underlying drivers of sand drainage. Thank you very much, Jonathan, and thank you for the question. Dale: I think as Jonathan mentioned earlier, we've made a few changes to the operations since our startup in October. One, we have started the replacement of Cyclone technology, and with that we are starting to see improvements in sand drainage in the paddocks. And that at the same time, as was changing some of our operational practices and design of paddocks as well. And those together are indicating some good initial results. But it's still too early to tell in terms of what magnitude of improvement is. Other than we're on the right track, and that's giving us some confidence on the path we're going forward. So that's where we sit today. Jonathan Price: I would say, Anita, of course, awesome opportunity to see this up close in weeks' time with far more detail around the work that's ongoing and how we see this developing. Anita Sarney: Yeah. I'm I will be attending the tour. And then my second question is with respect to the mill product rates. I think previously you talked about well, I can't remember off the top of my head, but the utilization and the availability, could you put it in context of what you seen over up October? October to date in terms of when you provided the guidance for Q3 results, yeah, I think it was I don't want to say incorrectly, but I think it was, like 61% availability or and 70% utilization. But can you just tell us what the old one was and what you've seen to date in October? Jonathan Price: Yeah. So year-to-date, when we communicated a couple of weeks ago, we'd seen 87% availability in the mill, but only 70% utilization because of the constraints put on the mill by the downtime associated with the TMF since starting up. In early October, we've seen very good availabilities. I won't quantify that right now, but very strong. Anita Sarney: Okay. And then am I correct in thinking when you're looking at the 87 in the 70, you should be multiplying those to get to your total capacity. Is that correct? Jonathan Price: No. It doesn't quite work like that. I mean, the utilization is a function ultimately of that availability. But we were only able to utilize the mill 70% of the time. Ultimately, you don't need to multiply the two things. Anita Sarney: Okay. Alright. Thank you. Thanks very much for clarifying that. Jonathan Price: Thanks very much. Operator: The next question comes from Lars van Wunder with Bank of America Securities. Please go ahead. Lars van Wunder: Thank you very much, operator. Good morning, Jonathan, and Crystal. Thank you for today's update. If I could come back to the merger, could I ask to what extent Teck Resources Limited and or Anglo American have engaged with Investment Canada on the transaction? Is there any indication that moving the combined head office is sufficient? And then just a follow-up to that, if you could address what you would perceive as sort of the bottleneck an antitrust and other approval point of view once the vote is done? Thank you very much. Jonathan Price: Yeah. Thanks, Lawson. Thanks for those questions. Look, we are engaging on an ongoing and collaborative basis with the Canadian government here. Those discussions have been frequent and productive. As we've said, we've put forward what we believe to be a very strong and comprehensive package of commitments to Canada in particular. You know, as you note, a key element of that is Anglo Tech having its headquarters in Canada in perpetuity, and that's in addition to the significant capital spending commitments we've made of $4.5 billion over five years and other assurances and meaningful undertakings associated with the activities of the new company. So those conversations are ongoing and we're very pleased in the way that they're unfolding at the moment. We don't see a particular bottleneck here Lawson, necessarily. You know, we'll work through the shareholder vote, of course, in early December. We'll continue in parallel to work with the Canadian government under the Investment Canada Act. And, of course, then this week, we will complete all of our filings related to antitrust and competition regulators globally. Of course, then those processes will unfold in due course. So now a lot of activity going on a lot of engagements underway, and, you know, we hope to continue that in a very productive and to the extent possible expedited fashion. Lars van Wunder: Okay. Thanks very much, Thanks, Lawson. Operator: The next question comes from Chris Lipponen with Jefferies. Please go ahead. Chris Lipponen: Thanks, operator. Hi, Jonathan. Thanks for taking my question. Just wanted to follow-up another question on the QB Kalawasi synergies. The shareholder vote is going to be on December 9, but at that time, we won't know whether the JV is certainly going to happen. We won't know what the economic split would be between Teck Resources Limited, Anglo, and your partners in those assets. And obviously, that JV is a big component of this deal. And my first question would be, whether you think it's a compelling merger even if you cannot get that JV done. I understand that it's compelling from all parties involved, under the assumption that that JV doesn't happen, it's just still a very good deal for Teck Resources Limited. That's my first question. Jonathan Price: Yeah. Thanks for that, Chris. So look. Absolutely. I mean, you know, we think the creation of this, this new company, the fifth largest copper producer in the world, sixth world-class assets, 1,200,000 tons of annual copper production, a company of both scale and quality. We expect this to trade very, very well in equity markets. In addition to that, of course, we've got the $800 million of synergies that we will work through coming through the corporate combination, coming from marketing, coming from procurement. In addition to that, of course, Teck Resources Limited shareholders will gain access to synergies being created through the agreement that Anglo American has put in place with Codelco for Los Bronces Andina. Etcetera. There are lots of sources of value creation here. We do think that the QB Koyoasi, of course, is a very meaningful component of the value creation here. And as I mentioned before, I would expect all of the owners of both QB and Koyoasi to be highly motivated on behalf of their shareholders to work collaboratively to capture that value that's ahead of us. Chris Lipponen: Right. That makes sense. Then in terms of a framework for how you value the split of the economics in that JV, have you had discussions with partners regarding just generally how to think about that? Because each partner is going to want to maximize their cap for the economics. I would that's going to be a sticking point. You think about the framework to value to each partner involved? Thank you. Jonathan Price: So that is to be worked out, Chris. That is part of the commercial agreements we have ahead of us. Of course, again, with Anglo Tech, at 60% of QB and Anglo Tech at 44% of Coyoacci, you can see a win-win. There on both sides of this transaction. We will get into the nuts and bolts of this in the period ahead of us. But, again, I would expect all owners of both to be highly motivated to capture this value on behalf of their shareholders. Chris Lipponen: Got it. Thanks, Jonathan. Good luck. Jonathan Price: Thank you very much, Chris. Operator: There being no further questions, I will now pass the call back to Jonathan for closing remarks. Please go ahead. Jonathan Price: Thank you, operator, and thanks again to everyone for joining us today. As mentioned, we look forward to seeing many of you at our QB site visit and to many others joining us via webcast on November three. Wish you all a good day. Thank you. Operator: This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a great day.
Operator: Good day, and thank you for standing by. Welcome to the Fulton Financial Corporation Third Quarter 2025 Results Conference Call. At this time, participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You would then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Matt Jozwiak, Director of Investor Relations. Please go ahead. Matt Jozwiak: Good morning, and thanks for joining us for Fulton Financial Corporation's conference call and webcast to discuss our earnings for the third quarter ending September 30, 2025. Host for today's conference call is Curtis Myers, Chairman and Chief Executive Officer. Joining Curtis is Richard Kraemer, Chief Financial Officer. Our comments today will refer to the financial information and related slide presentation included with our earnings announcement which we released yesterday afternoon. These documents can be found on our website at fult.com by clicking on Investor Relations and then on News. The slides can also be found on the Presentations page under Investor Relations on our website. On this call, representatives of Fulton Financial Corporation may make forward-looking statements with respect to Fulton's financial condition, results of operations, and business. These statements are not guarantees of future performance and are subject to risks, uncertainties, and other factors, and actual results could differ materially. Please refer to the Safe Harbor statement and forward-looking statements in our earnings release and on Slide two of today's presentation for additional information regarding these risks, uncertainties, and other factors. Fulton Financial Corporation undertakes no obligation other than as required by law to update or revise any forward-looking statements. In discussing performance, representatives of Fulton Financial Corporation may refer to certain non-GAAP financial measures. Please refer to the supplemental financial information included with Fulton's earnings announcement released yesterday and Slides 30 through 37 of today's presentation for a reconciliation of those non-GAAP financial measures to the most comparable GAAP measures. Now I'd like to turn the call over to your host, Curtis Myers. Curtis Myers: Well, thanks, Matt, and good morning, everyone. For today's call, I'll be providing a few high-level comments as well as some operating highlights for the quarter. Then Richard will review our financial results in more detail and discuss updates to our 2025 operating guidance. After our prepared remarks, we'll be happy to take any questions you may have. We were pleased with our strong third-quarter operating results. Our community banking strategy and regional scale continue to deliver customer value and strong results for our shareholders. Operating earnings of $101.3 million or $0.55 per share demonstrate the impact of positive operating leverage, strong profitability, and a diversified balance sheet. Total revenue increased linked quarter as we grew both net interest income and fee income while we continue to show strong expense discipline. All of these positive factors combine to generate quarterly trends that drove our efficiency ratio down to 56.5%. Delivered an operating ROA of 1.29%, and resulted in an operating ROTCE of 15.79%. These are all strong results for the quarter. Touching on capital, we repurchased 1,650,000 shares during the quarter at a weighted average cost of $18.67 per share. We routinely evaluate all of our capital deployment options and found the opportunity to repurchase shares at attractive levels. Plan to continue to use our share repurchase authorization. Even with this quarter's repurchase activity, we grew our tangible book value per share 18% on a linked quarter annualized basis. Our strong performance, disciplined approach to balance sheet management, and our diversified business model provide us financial flexibility and position the company for continued success. Now let me provide a few operating highlights on the quarter. Deposit growth outpaced loan growth at $194 million for the quarter. Deposit growth was primarily driven by targeted sales campaigns and seasonal net inflows of municipal deposits. During the quarter, total demand and savings balances grew $387 million offset by declines in brokered and time deposits. We were able to drive this growth while maintaining a disciplined and targeted pricing strategy. Turning to loans, originations were up linked quarter as well as compared to the prior period. Total loan balances grew $29 million for the quarter as increased originations were offset by the impact of strategic actions we have been executing on throughout the year. Year to date, these actions represented more than a $600 million headwind to our loan balance growth. Moving forward, we expect these actions to moderate and loan growth to return to our long-term growth trends. Turning to the income statement. Revenue growth was driven by a strong net interest margin and a solid linked quarter increase in our non-interest income. As a result, total quarterly revenue hit an all-time high. Our non-interest income as a percentage of revenue ended the quarter at 21%, with our fee-generating businesses growing nicely and we are positioned well for continued growth. Lastly, let me touch on credit. While we remain cautious on credit given general economic and geopolitical uncertainty, we continue to see steady performance in our portfolio. During the quarter, we saw improvement in non-performing loans and charge-offs. Additionally, we saw improved risk rating migration and a continued reduction in classified and criticized loans. The provision for loan losses remained favorable to expectations and the allowance ratio was stable compared to the prior quarter. Overall, we are encouraged by the trends we're seeing but always remain focused on identifying and managing any potential areas of weakness that may arise. Now let me turn the call over to Richard to discuss the details of our financial results and provide comments on our 2025 operating guidance in more detail. Richard Kraemer: Thank you, Curtis, and good morning. Unless I note otherwise, the quarterly comparisons I discuss are with the 2025. Loan and deposit growth numbers I reference are annualized percentage on a linked quarter basis. Starting on Slide five, operating earnings per diluted share was $0.55, $101.3 million of operating net income available to common shareholders. Net interest income growth driven by a strong NIM and a stable balance sheet, combined with increasing fee income helped to more than offset the anticipated increase in operating expenses. We are encouraged by the improved positive operating leverage we generated when compared to the previous quarter and on a year-over-year period basis. Total end-of-period loans increased $29 million during the quarter. Residential and commercial mortgage drove growth offset by declines in C&I. We continue to proactively work certain credits out of the portfolio that don't align to our long-term strategy. During the quarter, we saw a runoff of approximately $32 million of indirect auto and sold approximately $40 million of small ticket equipment finance loans. Additionally, we saw about $40 million in note sales and resolved an additional $139 million of C&C loans. Combined, these actions accounted for over $250 million of loan balance headwinds during the quarter. With the exception of the continued planned runoff of indirect auto, we expect the impact of these activities to moderate as we move into 2026 and expect growth to revert towards our long-term historical organic growth trends. Deposits grew $194 million or 3%. Growth of $387 million in demand and savings products offset a $192 million decline in time deposits which included a $108 million decline in broker deposits. A primary driver of growth was a seasonal increase in municipal balances of $450 million in line with expectations. We anticipate outflows in municipal balances in the fourth quarter similar to historical trends. Our non-interest-bearing balances trended lower, ending the quarter at 19.5% of total deposits. The decline in balances appears to be driven by normal corporate customer activity as our number of commercial accounts remained stable. As a result, our loan-to-deposit ratio ended the quarter at 91%. Moving to investments. Securities purchases lagged cash flows by about $100 million partially offset by an improvement in AOCI. Investments as a percentage of total assets were 15.8%, a level that provides balance sheet optionality moving forward. Net interest income on a non-FTE basis was $264.2 million, a $9.3 million increase linked quarter. While net interest margin increased 10 basis points to 3.57%. Loan yields increased seven points to 5.93%. Fixed rate asset repricing represented a tailwind during the quarter. We believe this will continue to provide some cushion for margin in the face of declining short-term rates as illustrated on slide 21 of our earnings presentation. Over the next twelve months, we have approximately $5.4 billion of fixed and adjustable rate earning assets subject to repricing. Currently at a blended yield of 5.08%. Our net interest margin further benefited from a modestly higher level of accretion interest which was up $1.3 million linked quarter to $12.7 million. For the quarter, our average cost of total deposits decreased two basis points to 1.96% while our total cost of funds declined four basis points due to quarterly wholesale repositioning aided by municipal inflows. Through the current rate cutting cycle, our cumulative interest-bearing deposit beta has been 33% while our total deposit beta has been 22%. Our deposit pricing strategy continues to balance the desire to fund future balance sheet growth while defending margin. Turning to Slide seven. Non-interest income for the quarter was $70.4 million. The linked quarter increase was driven by our wealth and consumer businesses, and aided by modest gains from asset sales. Non-interest income as a percentage of total revenue equaled 21% for the third quarter. Notably, our wealth management business, Fulton Financial Advisors, reached $17 billion in assets under management and administration and continues to be a material driver of fee income growth. Moving to slide eight, non-interest expense on an operating basis was $191.4 million, an increase of $3.8 million linked quarter. This was mostly attributable to an increase in salaries and benefits driven by one extra day in the quarter, a lower level of deferred loan origination cost, and outside service spend related to planned internal projects. Items excluded from operating expenses as listed on slide eight include charges of $5.4 million of core deposit intangible amortization and $207,000 benefit of other items. Turning to asset quality. Provision expense of $10.2 million was slightly higher than last quarter. However, well within the guidance we provided last call. As Curtis mentioned, we saw positive trends throughout the book. Net charge-offs declined to 18 basis points while non-performing assets to total assets improved four basis points to 0.63%. Our allowance for credit losses to total loans ratio remained at 1.57% while our ACL to non-performing loan coverage increased to 189%. Slide 10 shows a snapshot of our capital base. We maintain a healthy capital position that provides us with balance sheet flexibility. During the quarter, we repurchased 1,650,000 shares at a weighted average cost of $18.67. As of September 30, we had remaining buyback authorization of $86 million under the current plan. Inclusive of the share repurchases, internal capital generation was robust at $84 million. This was driven by a combination of strong earnings and a $44 million benefit to AOCI from the impact of lower interest rates. Our tangible common equity to tangible asset ratio increased to 8.3% while CET1 increased to 11.5%. On Slide 11, we are updating our operating guidance for 2025. Considering the recent Fed action, associated dot plot, we have updated our rate forecast to include the recent 25 basis point cut in September, one 25 basis point cut in October, and an additional 25 basis point cut in December. Given these macro assumptions and our strong year-to-date performance, we have made the following adjustments to our guidance with emphasis on the midpoint of the ranges. We are increasing net interest income to a range of $1.025 billion to $1.035 billion. We are lowering and tightening provision expense to a range of $45 million to $55 million. We are raising the bottom end of fee income tightening to a range of $270 million to $280 million. We are lowering the top end of operating expense to a range of $750 million to $760 million. We are modestly increasing our effective tax rate to a range of 19% to 20%. And last, lowering our estimate of non-operating expenses from $10 million to $7 million. And with that, we'll now turn the call over to the operator for some questions. Thank you. Operator: Your telephone and wait for your name to be announced. To withdraw your question, please press. Our first question comes from the line of Daniel Tamayo with Raymond James. Your line is now open. Daniel Tamayo: Thank you. Good morning, guys. Good morning, Curtis. Good morning, Richard. Good day. Maybe, first on the net interest income guidance. Being revised higher, it looks like it implies some margin compression, if that's correct. And the fourth quarter. Presumably related to the rate cut. Just curious for your thoughts around the impact, if that's correct, the impact of this first cut that we had last quarter relative to future cuts, if there's kind of a rebound or less impact after, you know, with future cuts going forward. Thanks. Richard Kraemer: Yeah. Thanks for the question, Danny. Yeah. No, you're right. Interpretations, I mean, would imply a little bit of margin pressure in 4Q. Look, I'll say that for every 25 basis points on an annualized basis, it's about $2 million of annualized NII headwind. That said, you know, as we continue to manage the deposit side of this, you know, and try to reach for higher betas, that does offset some of that over time. But there's a lag to that. Right? So for every 25 bits that happens, you really don't catch up on the cost of the interest expense side for probably about three months. All in. So there will be some kind of near-term pressure, but you're right. If the Fed stops or when the Fed stops cutting, you will start to level out several months after that. Daniel Tamayo: Got it. Okay. Helpful. And then maybe one more high level for you, Curtis. Just curious of your thoughts on positive operating leverage in 2026. It sounds like the rate cuts could certainly have an impact on that. But just curious how you're thinking about if that's a possibility for the company, if it's likely, and if there is some kind of breakeven point in terms of cuts, how you're thinking through that. Thanks. Curtis Myers: Yeah. So I mean, we're focused on continuing to generate organic growth so that we can drive positive operating leverage. You know, there's a lot of components, expense levels, revenue levels, some things within our control and some things that are not. You know? But we're gonna manage to a point that we are our goal is to generate positive operating leverage on a consistent basis. To Richard's point in your prior question, around the impact of rate cuts, I mean, we are more neutral on our balance sheet than we have been in prior periods. And we think that will help. And then we will manage the other components of that operating leverage calculation to focus on generating that. Daniel Tamayo: Okay. Helpful. Alright. Well, I appreciate the color, guys. I'll step back. Operator: Thanks, Dan. Thank you. Our next question comes from the line of Casey Haire with Autonomous. Your line is now open. Casey Haire: Yes, great. Thanks. Good morning, guys. I guess one more follow-up on sort of the NIM outlook, Richard. Cumulative interest-bearing deposit beta, I think you mentioned was 33%. Just where do you expect that to trend as the Fed cuts? Richard Kraemer: Yeah. I think that's a level we aim to maintain, if not to get a little bit more. Obviously, you know, as we start to revert to more normalized loan growth, that could be some pressure. But I think around that 30% level is really the target. Casey Haire: Okay. Very good. And on the asset side of things, fixed rate asset repricing was a nice tailwind. You know, can you any color on where new money yields are versus, I think, you mentioned that $5.08 coupon on what's coming, what's maturing in the next year? Richard Kraemer: Yeah. New originations during the quarter were right around six and a half percent. Just, I think, a couple of bps below that. $6.48. Casey Haire: Okay. Great. And just lastly on capital management. So, you guys have been one of the banks that have been openly, you know, kinda looking for deals. Just wonder it feels like it is active in that part of the market, that $1 billion to $5 billion asset bank crowd. Just wondering why we haven't seen a deal from you. Is it a bid ask, lack of targets? Just some color there. Curtis Myers: Yes. So our strategy remains the same. And that as you referenced and I previously referenced that $1 billion to $5 billion community bank that would be an infill to give us a greater market penetration in our five-state market is the focus. We feel we continue to have opportunities there, and we want to be positioned to always be able to move forward with the things that we want to move forward with. And it is an active strategy for us. Casey Haire: Thank you. Operator: Our next question comes from the line of Christopher Marinac with Janney Montgomery Scott. Your line is now open. Christopher Marinac: Good morning. Curtis, I wanted to extend on your answer there and just look further at sort of your organic opportunities in Virginia, Maryland, and even Philadelphia? And how much more opportunity do you see there in the next several quarters? Curtis Myers: We definitely have opportunity for organic growth. So, you know, primarily, we drive that by winning customers each and every day. We also drive that by adding to our commercial banking team, our wealth team, and we're always focused on talent recruitment. Strategy. And then, you know, we have Fulton First strategies around small business to enhance growth there and, you know, we really have a lot of levers for organic growth, and think what you've seen this year is we have, you know, decent originations, and we've had some strategic headwinds that have offset balances. This year. So underlying, we're really focused on those organic originations right throughout the company. But in those areas where we have a lot more growth potential, with more limited market share. Christopher Marinac: Good. Thank you for that. And then just a follow-up on the commercial fee income line from your commercial deposits. Does that track typically with the growth of those deposits? Or do you see other opportunities even if those balances were to be flat? Grow the fee income side? Curtis Myers: Yeah. So there's a lot of components to that. So on the account level, cash management, and account level fees, they track with account growth and then activity. Expansion, you know, within or contraction within those account like the activity volume. You know, we also have our swap fees or in that that are tied to originations. As well. So it's a real mix of transactional account level growth and then things that are more tied to originations. And, you know, we've had steady performance overall. Feel good about the overall fee income or a commercial fee income trajectory. Christopher Marinac: Great. Thank you for taking my questions this morning. Curtis Myers: Welcome. Thank you. Operator: Our next question comes from the line of Matthew Breese with Stephens Inc. Your line is now open. Matthew Breese: Hey. Good morning. Good morning, Matt. Richard Kraemer: Rick, in your opening remarks, thought you had mentioned a little bit of a mismatch in securities purchases versus maturities, and maybe there's some optionality there going forward. Could you just talk a little bit about to what extent we might see securities purchases and maybe some framing for where you want cash and securities as a percentage of total assets. Richard Kraemer: Yeah. I think we've, you know, we kinda positioned in the past. We probably coming into the year, we're a little light from a liquidity perspective on security. So we've moved that higher. I think managing around that 16 to 17% level of assets is about right. For investments where we are. We've been fairly opportunistic and kinda pick our points when we want to invest and when we have additional liquidity. I think there's, you know, the expectation, obviously, we mentioned earlier is that you'll get some municipal headwinds in the fourth quarter, so deposits will those deposit balances will be down a little bit. I think just managing kind of for those, you know, for those really depends on when we buy. But like I said, 16 to 17% long term is probably the right target. Matthew Breese: And looking at securities yields three seventy today, I'm guessing what you're putting on the books has either a high four, maybe low five handle on it. Richard Kraemer: That's right. Matthew Breese: Yeah. When might I yeah. When might we see a more pronounced better than others and acceleration in securities yield? It's like there is there a cash flow year work towards that 45% level? Sorry to interrupt you. Richard Kraemer: No. No. Sorry. Yeah. I think you're right on the yield, and more recently, it's been in the high high fours. But no. There really isn't a pronounced cash flow. It's pretty steady stream, barring any acceleration in prepayment. So I think that's kind of the wild card, which we haven't really seen a material pickup yet. But now it's pretty steady now. And we kinda we gave a little bit of additional color. I think it's on slide 21 of our deck. On some of that fixed repricing fixed and adjustable repricing schedule. So when you go out beyond twelve months, so basically everything right at that left column, the weighted average yield on those on those segments combined are around four and a half percent. That just gives you some idea of upside in the outer years as well, assuming elevated rates. Matthew Breese: Okay. Then also in both your opening remarks and Curtis's, you made reference to loan growth headwinds dissipating. You talked about reverting to kind of longer-term levels of loan growth. Could you just talk a little bit about the pipeline, how your strength of pipeline, where you're expecting to see growth over the next few quarters? And is it fair to say that that longer-term average is kind of low to mid-single digits? If you had to pick a side, low or mid, where would you lean over the next few quarters? Thank you. Curtis Myers: Yes. So the long-term trends have been 4% to 6%. You know, and I think we're trying to climb back to that 4%. We've been below that given the headwinds in strategic actions we've taken. So we want first get to the low end of that and see where we go from there. You know, the pipelines are up a little bit. Year over year, and we've had an increasing trend. But the pull-through rate is still lower than historical norms. Customers still remain cautious in spending. So we do see improvement, but it's modest. At this point. Overall, where we want the growth having a very diversified balance sheet, has served us really well over time, and we want to grow in all categories. And we feel like we're positioned that we can grow in all categories. You know, even CRE, our position relative to the market is good, so we can really attract high-quality borrowers, high-quality projects there. So really across the board, we're trying to get organic growth because we want to win customers. And that really is the engine behind the growth over the long haul. Matthew Breese: Great. And then just last one for me. Curtis, as you climb back to that 4% loan growth threshold, does that leave room in kind of the capital stack for repurchases? Or what are your capital priorities as you get to a 4% loan growth rate? That's all I had. Thank you. Curtis Myers: Yes. So the thanks, Matt. The priorities are the same. Organic growth and corporate activities, whether it be M&A or asset purchases or, you know, uses of capital and then buybacks. And I think you saw us in this last quarter that in the absence of those first two things and really strong capital generation. We lean more into the buyback. I think if those things persist like we think over the next couple of quarters, then you know, we'll probably be more in that buyback focus. We have $86 million, I believe, left in the authorization, and then we typically, you know, look at that each year, but we still have $86 million remaining on the buyback that we have in place. Richard Kraemer: And Matt and maybe just to add, I mean, you made reference to climbing back to 4%. I want to just reiterate that the strategic actions we took this year as Curtis said earlier, were over $600 million. It's about 3.5% annualized growth, you know, if you added that back in. So I think moving from three and a half to four is not that big of a lift here. So we are seeing the growth. It's just, you know, you're obviously, we're masking that with some very strategic runoff. Operator: Thank you. Our next question comes from the line of David Bishop with Hovde Group. Your line is now open. Kyle Garmin: Hey, guys. Good morning. This is actually Kyle Garmin asking questions on behalf of David. Morning, Kyle. So with the recent scrutiny around loans to NDFIs, could you update us on your current exposure levels and how you think about the sector? Curtis Myers: Yeah. So we have very low levels, pretty de minimis levels of NDFI overall. And the primary in that is loans to bank holding companies, community bank holding companies in our market. We put them in that bucket if they're non-rated debt issuances. So that's the primary. So we really, you know, are not heavily engaged in that activity. Richard Kraemer: Yeah. It's tier two sub-debt structured as notes. Because they're non-rated non-CUSIP institutions. And that's the primary thing in our NDFI disclosures as you would see in the call report. Kyle Garmin: Thank you. That was helpful. Operator: Thank you. Our next question comes from the line of David Conrad with KBW. Your line is now open. David Conrad: Real quick follow-up for me. And I think Richard already answered this one a little bit. But, you know, deposit cost came down four bps, quarter over quarter. As you paid off the broker CDs. With the municipality seasonality in the fourth quarter. Is the $2.45 a good jumping off point? Or will you increase your broker CDs, or will it just be a reduction in cash and a smaller balance sheet? Thanks. Richard Kraemer: Yeah. We so we did we ran off brokered during the quarter, obviously. We also had some declines in SHLB as well. So I think, you know, as we look towards fourth quarter and run out, typically, we saw about $450 million come in municipal during third quarter. We usually see 40% to 50% of that move out. So we'll look. We'll look towards the most cost-effective way to manage that and it could also be customer deposits and specials on that end too. But any of those alternatives work for us. David Conrad: Okay. Perfect. Thank you. Richard Kraemer: You know, we're gonna continue to manage our loan deposit ratio appropriately. Operator: Thank you. And I'm currently showing no further questions at this time. I'd like to turn the call back over to Curtis Myers for closing remarks. Curtis Myers: Well, thank you again for joining us today. We hope you'll be able to be with us when we discuss fourth-quarter results and year-end results in January. Thank you. Operator: This concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Welcome to the Old National Bancorp Third Quarter 2025 Earnings Conference Call. This line is being recorded and has been made accessible to the public in accordance with the SEC's Regulation FD. Corresponding presentation slides can be found on the Investor Relations page at oldnational.com and will be archived there for twelve months. Management would like to remind everyone that certain statements on today's call may be forward-looking in nature and subject to certain risks, uncertainties, and other factors that could cause actual results or outcomes to differ from those discussed. The company refers you to its forward-looking statement legend in the earnings release and presentation slides. The company's risk factors are fully disclosed and discussed within its SEC filings. In addition, slides contain non-GAAP measures with management's beliefs provide more appropriate comparisons. These non-GAAP measures are intended to assist investors' understanding of performance trends. Reconciliations for these numbers are contained in the appendix of the presentation. I would now like to turn the call over to Ovation's Chairman and CEO, Jim Ryan, for opening remarks. Mr. Ryan? Jim Ryan: Good morning. Earlier today, Old National Bancorp reported outstanding third quarter 2025 results that reflect our strong financial performance and our continued commitment to being a better version of ourselves quarter after quarter. We delivered third quarter performance at or above our guidance across all major income statement line items. We beat earnings expectations, delivered an adjusted 20% return on average tangible common equity, a 1.3% plus ROA, and a sub 50% efficiency ratio with improved credit metrics. Provision and charge-offs aligned with expectations, and we saw a meaningful decline in both the thirty-plus day delinquencies and criticized and classified loans. There has been discussions this earning season about some potential credit cracks within our industry. From my perspective, these are not indicative of something larger yet to come in future quarters. In fact, many of the credit items reported by other banks are quite manageable and within normal long-term operating conditions. In my conversation with the peers, there does not seem to be a plague of, quote, cockroaches on the horizon. Our industry, including Old National, is well reserved, well capitalized, and has robust operating results, which serve as a strong buffer for potential credit changes. Meanwhile, at Old National, we continue to build a stronger franchise by leveraging our leading market position, investing in ourselves, and strategically recruiting top-tier talent. We are taking advantage of market disruptions and have accelerated talent conversations across our footprint. This has been one of the catalysts behind our momentum. At the same time, we are actively pursuing opportunities to enhance efficiency and effectiveness. Our efficiency ratio is below 50% and improving. But we are still investing in our future to enhance growth opportunities. We also continue to exceed expectations by growing core deposits and managing our deposit costs. Our franchise is built to perform in any environment, and this quarter was no exception. Capital management remains a top priority. Our high return profile drives significant capital generation and opens the door for additional capital returns. 28 basis points this quarter to despite merger-related charges and while repurchasing 1,100,000 shares late in the quarter. We are threading the needle between growing capital coming off our Bremer partnership and returning capital to our shareholders. And let me be clear, the best acquisition we can make in the next twelve months is ourselves. We are not chasing new partnerships. We are focused on organically growing our balance sheet and capital and delivering the best return for our shareholders. Last weekend, our team successfully completed the systems conversion and branding for our Bremer Bank partnership. We are now operating as Old National, all former Bremer locations, and are excited about future growth opportunities. Thank you to all of our team members for their collaboration, hard work, and dedication to the integration. We believe our quarterly results speak for themselves with strong and increasing profitability, better efficiency, improved credit, and the recognition of our focus on being a better bank and rewarding our shareholders. If you step back a bit from the quarterly results, our core EPS has grown 7.6% on a compounded annual growth rate since 2018 with even stronger momentum heading into 2026. Objectively, we have become a better bank each year, and there has never been a better time to invest in us. Thank you. I will now turn the call over to John who will provide more quarterly insights. John Moran: Thanks. As Jim mentioned, our third quarter was highly successful. Beginning on Slide five, we reported GAAP 3Q earnings per share of $0.46. Excluding $0.13 of net merger-related expenses, adjusted earnings share were $0.59, an 11% increase over the prior quarter and a 28% increase year over year. Results were driven by the full quarter impact of Bremer operations, margin expansion, better than expected growth in fee income, and well-controlled expenses. Importantly, credit remained benign with a 6% reduction in total criticized and classified loans and normalized levels of charge-offs. Our profitability profile, as measured by return on assets and on tangible common equity, remained in the top decile among our peers. Lastly, our capital position has rebuilt quickly with CET1 over 11%, 28 basis points higher linked quarter we grew tangible book value per share over 17% annualized. On Slide six, you can see our quarterly balance sheet trends. Highlighting improvement in our liquidity and our strong capital position. Our deposit growth over the last year has continued to allow us to fund our loan growth, our loan to deposit ratio is now 87%. We grew tangible book value per share by 4% from 2Q, and 10% over the last year, even with the impact of the Bremer close, and absorbing approximately $70,000,000 of merger charges while repurchasing 1,100,000 shares this quarter. These liquidity and capital levels continue to provide a strong foundation, which strengthens our position as we end 2025 and look forward to 2026. On slide seven, we show trends in our earning assets. Excluding Bremer, total loans grew 3.1% annualized from last quarter. Production was up 20% from the prior quarter was strong throughout our commercial book while the legacy Old National pipeline is up nearly 40% year over year. Higher production levels were partly offset by late quarter payoffs it is worth noting that our average loan balances exceeded second quarter's end of period balances by nearly $300,000,000. These payoffs were mostly due to strategic portfolio management as evidenced by our lower criticized and classified levels as well as by increased transactional velocity in commercial real estate and lower line utilization. Bremer balances declined due to payoffs, largely due to strategic portfolio management. The investment portfolio increased approximately $430,000,000 from the prior quarter given favorable rates and changes in fair values. We expect approximately $2,800,000,000 in cash flow over the next twelve months. Today, new money yields are running about 70 basis points above back book yields on securities as the repositioning of the Bremer book lifted the yield on our back book. The repricing dynamics for both loans and securities, combined with loan growth in the Bremer partnership support our expectation that net interest income and net interest margin should be stable to improving in the 2025. Moving to Slide eight, we show trends in total deposits. Total deposits increased 4.8% annualized and core deposits ex brokered increased an even better 5.8% annualized primarily driven by growth from both existing and new commercial clients. Non-interest bearing deposits remained 24% of core deposits. Our brokered deposits decreased modestly and at 5.8% total deposits, our use of brokered remains below peer levels. With respect to deposit costs, the four basis point linked quarter increase in our cost of total deposits played out as we expected due to the full quarter impact of Bremer's cost of deposits and our offensive posture with respect to client acquisition. We achieved an approximate 85% beta on our exception price, both spot in conjunction with the Fed rate cut in September. These actions resulted in a spot rate of 1.86% on total deposits at September 30. Overall, we remain confident in the execution of our deposit strategy, and we are prepared to proactively respond to the potentially evolving rate environment. As has been the case for the last several years, we are proactively driving above peer deposit growth at reasonable costs. Slide nine shows our quarterly income statement trends. As I mentioned earlier, adjusted earnings per share were $0.59 for the quarter, with all key line items in line or better than our guidance. Moving to Slide 10, we present details of our net interest income and margin, both of which increased as we had expected and guided driven by the full quarter impact of Bremer as well as asset repricing and organic growth. Slide 11 shows trends in adjusted noninterest income which was $130,000,000 for the quarter, exceeding our guidance. All line items showed increases reflecting Bremer, and organic growth in our primary key businesses with outsized performance within capital markets driven by a handful of larger swap fees. While we are very pleased with our performance in fee income this quarter, we do expect trends to normalize somewhat in the fourth quarter. Continuing to Slide 12, which show the trend in adjusted noninterest expenses of $376,000,000 for the quarter, reflective of a full quarter impact of Bremer operations. Run rate expenses remained well controlled and we generated positive operating leverage on an adjusted basis year over year, with a low 48% efficiency ratio. As a reminder, the full run rate cost saves from Bremer will materialize later in the fourth fourth quarter, and will be more evident in the first quarter's reported results. On slide 13, we present our credit trends. Total net charge-offs were 25 basis points or 17 basis points excluding charge-offs on PCD loans. Our non-accrual loans in thirty-plus day DQs as a percentage of total loans declined one basis point and 12 basis points, respectively, during the quarter. Importantly and positively, criticized and classified loans decreased $223,000,000 or 6%, reflective of the continued focus on active portfolio management. The third quarter allowance for credit losses for total loans, including the reserve for unfunded commitments, was 126 basis points up two basis points from the prior quarter, primarily driven by Bremer related TCV reserves. Consistent with the second quarter, our qualitative reserves incorporate a 100% weighting on the Moody's s two scenario, which additional qualitative factors to capture global economic uncertainty. Lastly, given the increased focus on loans to non-depository financial institutions, we'd like to emphasize that our exposure is de minimis. All said, NDFIs are less than 50 basis points of total loans, All are performing. And like other businesses that we bank, most are long term relationships. Slide 14 presents key credit metrics relative to peers. As discussed in past calls, we have historically experienced a lower conversion rate of NPLs to NCOs as compared to our peers driven by our approach to credit and client selection. We remain comfortable around the credit outlook. It is also worth noting that roughly 60% of our non-accruals are from acquired books with appropriate reserves and or marks. In addition, roughly 50% of our NPLs are paying principal and interest or interest only, and approximately 40% of our classified and criticized assets are in investor CRE, we continue to have confidence in collateral values and the quality of our sponsors. On slide 15, we review our capital position at the end of the quarter. All regulatory ratios increased linked quarter due to strong retained earnings. Tangible book value was up 4% linked quarter and 10% year over year, and we expect AOCI improve approximately 20% or a $105,000,000 by year end 2026. Our strong profitability profile continues to generate significant capital which opened the door for capital return this quarter. As previously mentioned, late in the quarter, we repurchased 1,100,000 shares of common stock. Slide 16 includes updated details on our rate risk position and net interest income guidance. NII is expected to increase with the benefit of fixed asset repricing and continued growth. Our assumptions are listed on the slide, but I would highlight a few of the primary drivers. First, we assume two additional rate cuts of 25 basis basis points each in 2025, which aligns with the current forward curve. Second, we assume a five-year treasury rate that stabilizes at 3.55%. Third, we anticipate our total down rate deposit beta to be approximately 40% in line with our up rate terminal betas. And fourth, we expect the non-interest bearing mix to remain relatively stable as a percentage of core deposits. Importantly, our balance sheet remains neutrally positioned to short term interest rates. As such, the path of NIM and NII in 2026 will depend on growth dynamics and the shape of the yield curve more than the absolute level of short term rates. Slide 17 includes our outlook for the fourth quarter and full year 2025. With the exception of full year 2025 loan growth all guidance includes Bremer. We believe our current pipeline support full year loan growth excluding the impact of Bremer, of 4% to 5%. We anticipate continued success in the execution of our deposit strategy and expect to meet or exceed industry growth in 2025. Other key line items are highlighted on the slot. Note that we have increased fee income guidance to reflect our strong third quarter performance with other lines unchanged. Importantly, our full year outlook once again proved durable as compared to the initial guidance that we provided in January. As we always have. Do our absolute best to transparently tell you what we know we know it, and then deliver against the plan. At the midpoint of the ranges, you'll note that we expect full year results that yield earnings per share in line with current analyst consensus estimates and, again, feature positive operating leverage and a peer leading return profile, with good growth in fees, controlled expenses, and normalized credit. In summary, echoing Jim's opening comments, year to date 2025 has been exceptionally strong. We have successfully completed the core systems conversion for Bremer Bank, We delivered 3Q twenty five and year to date performance at or above plan while demonstrating improvement in our credit, capital, and liquidity profile. We are focused on organic growth and returning capital to shareholders, while investing in ourselves strategically recruiting talent, and maintaining our peer leading profitability. With those comments, I'd like to open the call for your questions. Operator: At this time, I would like to remind everyone in order to ask a question Your first question comes from the line of Scott Siefers with Piper Sandler. Scott Siefers: Good morning, Scott. Thanks for taking the question. Hey, let's see, maybe John, first one is for you. So really strong third quarter for NII but a little bit of reduction in the expectations for the fourth quarter. So maybe if you can sort of walk us through puts and takes of what drove the anticipation for the you know, I guess, I mean, we'll still grow, but, you know, million dollars less than had been the case sort of previously. John Moran: Yeah. Hey. Hey, Scott. Thanks. Yeah. Hey. Look. $5,000,000 down on on what had been $5.90 is now squiggly line $585,000,000 We're talking about a balance sheet of close to $65,000,000,000 in earning assets. I mean, we're slicing the cheese pretty dang thin there, if you ask me. Look, I I would I would tell you I I view that as very stable and we're just doing our best to kind of tell you exactly what we think it's going to be. I think the dynamics are you know, look, five year came in a little bit. And and the launch point for the quarter is a little bit lower than where we had had thought it was gonna be, when we when we set the the guide ninety days ago. But, again, you know, 1% of NII on a $65,000,000,000 earning asset base And I'd I'd say that's pretty dang good. Scott Siefers: Alright. Fair enough. Fair enough. And then, let's see. Jim, next one is for you. So it sounds like m and a is off the table for now, but, you know, by contrast, I was glad to see the a little over 1,000,000 shares of repurchase there late in the quarter. Maybe just if you could spend a bit more time kind of discussing your preferred uses for capital and then is that 1,100,000 shares representative of what we should expect going forward or could we see that pace get bumped up just given the strong and improving capital levels? Jim Ryan: Let me start with M and A. And again, we think the best acquisition we can make is in ourselves. And so the most important thing we can do. Given where we're trading at, we think it's particularly great investment. That's why we encourage you all to continue to buy more shares. For us, I think we're going to be opportunistic on the buyback. You know, we're trying to thread that needle between building some capital back coming off our Bremer partnership, but also recognizing that we are accreting capital back very quickly. And so we're going to continue to do that in the fourth quarter. Once we get through the fourth quarter, then I think we'll have a better perspective on what the full year would look like terms of returning capital. But I'd say the first use is organic growth, But even with the organic growth, given that high relative return, we still have an opportunity to return capital back to you all via buybacks. Scott Siefers: Alright. Terrific. Thank you guys very much. Jim Ryan: Thanks, Scott. Appreciate your support. Operator: Your next question comes from the line of Jared Shaw with Barclays. Jared Shaw: Everybody. Good morning. Jim Ryan: Good morning. Jared Shaw: Just looking at the at the dynamic of acquired Bremer or loans acquired through Bremer, Were they did you have loan sales this quarter? Bringing that down? You talked about running balances off. Is that just organic or were you able to sell any of those? And what sort of the expectation for additional flow from from acquired loans in fourth quarter? Jim Ryan: Yes, Jared, I'll just start. Anytime we partner with another institution, there are books of businesses. Particularly any national related we're just not going to continue on here. And I think if you saw that in this quarter, you saw it at the CapStar and you saw it at First Midwest. I mean, it's just a normal part of that. We don't anticipate large swings. So this is just kind of normal attrition in those lines of businesses that we don't plan to continue to operate. So I don't expect it to be dramatic, but it puts a little bit of pressure in that transition period you just kinda stop doing business. So but but I wouldn't plan anything material and certainly don't have any loan sales teed up, to run that portfolio off any faster than than it would just happen naturally. Jared Shaw: Okay. And then when we look at the the provision on the PCD loans and then the charge offs on PCD What was driving, I guess, that incremental weakness? Was that just you're in there and get to see it? Or was that just that exit There were there were exit costs Yes. Pretty normal sort of first quarter or second quarter, third quarter post acquisition. You get your arms around credit and you know, for as long as that, that mark stays open, those will run PCD. Okay. And then just finally, a any update on how the systems conversion went? And when we look at the accelerated merger charge this quarter, is that just pulling forward from from being able to bring everything online on systems? Jim Ryan: Yeah. I think it's just normal merger charges. There'll be some pluses and minuses along the way. I would say, knock on wood, I don't want to this has been our best our best systems conversion to date. We've got a lot of monitoring places. Client sentiment is high. The branch locations have been busy. There have been a lot of calls to the contact center, but we monitor all the statistics and look. I've been doing these integrations now for more than twenty years at Old National. I can tell you this is the best one we've ever done. I think that's a reflection of the client base that Bremer had. I think it's a reflection of the hard work for our teams and and the and the fact that we try to get better just every single time. So I'm really pleased with where we stand. I don't want to knock that they're with any transition, there's always little minor bumps in the roads for our clients as they navigate you know, new systems and new passwords and and new login IDs and all that, but it's gone very, very well from my perspective. Jared Shaw: Jared, in terms of charges, 70,000,000 this quarter was about right in line with where we thought they were going to land. There'll be some more coming in fourth quarter, about 50,000,000, in the fourth quarter. And then it really trails off. Front half of next year will have a couple of little stragglers. And as John said, we start to realize the cost savings really thirty days post conversion. And so the full run rate you should assume would be impacting us in 1Q next year. Jared Shaw: Okay. Alright. Appreciate that. And then just finally I guess Jim talking about the optimism for organic growth in your markets. Do you anticipate increasing hiring to take advantage of that? Or do you think you have the team on the field that that you need to take advantage of that? Jim Ryan: Well, me start with we got a great team on the field and we've got great market opportunities in front of us, and there's a little bit of help with just disruption wins out there. So all of that's kind of net positive. And Tim and I talk weekly about hiring new team members. We've met with a bunch of new folks. You know, we're looking at the organization to to make sure we got the right people in the right seats and we're absolutely gonna be out hiring folks. It's a little bit of arm wrestling between our CFO and myself about how much money we're gonna spend on talent, but I know you all would be supportive of hiring talent that quickly adds to the revenue outlook. So definitely going to plan on doing that for we might get a little bit done yet this year, but we'll definitely be doing it all of next year. Jared Shaw: Great. Thank you. Operator: Your next question comes from the line of Ben Gerlinger with Citi. Ben Gerlinger: Hi, good morning. Jim Ryan: Good morning, Ben. Ben Gerlinger: Your fourth quarter loan growth guide implies a step up. It's not by no means a heroic, and I mean wouldn't give that guide unless we're a quarter of the way through the fourth quarter here. So I imagine it's probably pretty accurate. Can you just give a little color on, like, where it's coming from? Is it some Bremer relationships deepening quickly with a bigger balance sheet? Is it across the footprint? Is there anything specific you would highlight? John Moran: Ben, this is Tim. Our legacy year over year pipelines are up close to 40%, so we feel very well positioned to achieve that fourth quarter guidance. So we're seeing a good healthy mix on legacy Old National Bank pipelines and feel very good about achieving that. Ben Gerlinger: Alright. Was great color. What do you think about the, the savings and opportunity? I know that the one q next year is probably the clean quarter. But when you think about opportunities for reinvestment across the board, it should we assume that there's reinvestment already baked in 1Q? Or could you theoretically be kind of over earning a little bit because it just doesn't hit in the first ninety days of the year? John Moran: No. I think we're in a really good place in term in terms of operating expense and investment. Know, Jim's kinda teasing me a little bit. It is an arm wrestle. Right? I and and I get it. A good talent will pay for themselves very, very quickly. On the revenue line, particularly in commercial bank. Right? On wealth, earn back can be a little bit of a longer period of time. Those relationships take longer to move over. It's a longer sell cycle. But I think we're going to be on offense with respect to investment And and there's clearly look. There's disruption across our footprint. There's a lot of opportunities out there. And we're getting a lot of looks. We've got a great story to tell. We're out there telling I would also say, and you all know us well enough. I mean, becoming a better bank, being more efficient, more effective is what we do day in, out. So we will also look for ways to continue to just be more efficient and to pay for those investments And, you know, net net, I mean, we're driving just amazing efficiency as of this organization, but it's a part of the culture in our DNA here. So is so is investing in our future. And, that's what we absolutely plan to do. And as John said it well, I don't think anything, you know, materially changes how we're thinking about the year out of the gate. I would love it quite frankly if we could do that, right? That means we've hired many more people. That would be fantastic. We can do that. Ben Gerlinger: And that would be my goal, but but not nothing to give you any guidance on at the hard time. Ben Gerlinger: Gotcha. Okay. Thanks, guys. Operator: Your next question comes from the line of Brandon Nosal with Hovde Group. Brendan Nosal: Hey, good morning. Thanks for taking the question. Hi. Just to start off here, could you unpack this quarter's increase in loan yields a little bit? And just kind of dig into the various pieces, whether it's back book loan repricing, new origination yields or maybe some pull through of the fair value mark that you took on the book? Thanks. John Moran: No. The fair value mark was relatively unchanged. There was a little bit of an impact on a full quarter of Bremer, and the credit component of that added about one basis point to the total margin. In terms of production yields, pretty steady. It was really sort of fixed asset repricing, I think, drove the bulk of the loan yield improvement. Brendan Nosal: Okay. Okay. John Moran: That's helpful. And then kind of maybe turning to deposit growth and liquidity. Really nice core deposit growth this quarter. To the extent that going forward funding inflows out loan growth, just talk about how you think about liquidity deployment and plans for the overall size of the securities book? John Moran: Yeah. Look, we'll wave in new deposits every single quarter, quarter in, quarter out. That is, made up t-shirts around here that says iHeart deposits. And has become famous for running around the footprint pounding on things saying we're all deposit gatherers. So we'll take deposit in excess of earning asset growth all day every day. We're on offense there. That's client acquisition. In terms of if it were to in any given quarter, sort of have loan growth that didn't keep up with deposit growth. In my mind, that might be a high problem to have, and we would just deploy it in short liquidity. Brendan Nosal: Okay. Fantastic. Thanks for taking the questions. Operator: Your next question comes from the line of Terry McEvoy with Stephens. Terry McEvoy: Hi, thanks. Good morning, everybody. John, just to follow-up on that last question, when you talked about pull forward, I just want to make sure the proactive portfolio actions how did that impact accretion or NII in the third quarter? I know Slide 10 has that one basis point impact from credit accretion. I just want to make sure I'm clear on your last response. John Moran: Yeah. The total, the total accretable was relatively unchanged. Terry McEvoy: Okay. John Moran: And I guess more I guess I'll call this a softball question, but I think it's important this quarter. Virtually no NDFI loans, that's where all the focus is. Just when you take a step back, others were chasing after that growth because it sounds like it was easy, you guys were not. So Jim, could you just maybe talk about how that's reflective of Old National, how you run a business? And I think it's a good example of how you're different than many of your peers or at least some of your peers. Jim Ryan: Thank you, Terry. It's a great question. No, Terry, you've known us a long time. We call this old fashioned basic banking, right? We're not trying to we it's banking the hard way. You know, we call it the old national way. I mean, this is just bread and butter. And I will tell you, since Tim's been here for the last ninety days, we've had a lot of fun talking about doubling down on those issues. Building more small business business banking capabilities, building business banking capabilities, doubling down on C and I, putting more talent in all of that space. That's what we will continue to do. We're not going to build big, large specialty teams that go after national businesses You know, this is banking, by and large, in our footprint for clients that we know and trust will continue to bank for a long, long time. Somebody pointed out in some commentary to us about one of our peers growing by multiple billions of dollars during the quarter And I said, if we ever do that, you ought to be asking us really hard questions about what we're doing to get there. So that's just not our style. This is old fashioned. Bread and butter banking. So, thanks for the question. But that's our plan. We're With Tim coming on board, we're doubly committed to doing this. And I think that's going to serve our shareholders over the long term. And to John's comment around deposit growth, we are always going to be out in the market running and looking for good long term deposit relationships And as long as we can continue to fund that bread and butter loans those business banking loans with retail commercial deposits, that's a good trade, and we'll do that every day. Terry McEvoy: Perfect. Thanks for taking my questions. Jim Ryan: Thanks Terry. Operator: Your next question comes from Brian Foran with Truce. Brian Foran: Good morning. Hi. Maybe to come back and ask the Bremer loan question a different way. Certainly appreciate your comments there's always going be some trimming you want to do as you take in the business. But as we look to 2026, would you think we should be whatever we think Old National loan growth is consolidated loan growth should be a similar number. Or would you say 2026 Okay. So we call it in low grade. Jim Ryan: Right. Same organization. Same objectives, same goals. Absolutely. And in fact, I mean, if you look at how we would think about that internally, we would expect based the Bremer footprint, Minnesota, where we've been for a long time now, actually generate more on average than than our total company would do. So absolutely, we think about it It's just, you know, some quarterly changes, you know, due to the newness of the portfolios And as John said, we're going through all the portfolios reviewing those, looking at those national businesses that we just don't do. And it had a small impact this quarter. And will continue to have a small impact, but absolutely the growth should be more like our total average loan growth. Brian Foran: And maybe to ask about the same dynamic on the deposit side, is Bremer already contributing to deposit growth? In the current quarter? And think it will have a similar trajectory as the old fashioned legacy going forward. Jim Ryan: Yes. I mean, overall, it the total balance sheet should have a similar mix. Total fee income line should have a similar mix. We in fact, again, I would suggest just everything, just given the relative size of that, markets, the opportunities for growth, on average, it's going to lead our organization So I don't expect any kind of outline differences as we head into 2026. Brian Foran: Okay. Thank you for that. That's great. Operator: Your next question comes from the line of Chris McGratty with KBW. Chris McGratty: Good morning. Good morning, Chris. Chris McGratty: Good morning, everybody. Jim or John, the capital buyback comment on that you made in your prepared remarks and I kind of want to square it up with your comments about being sensitive to CET1 growing versus returning capital. So you're 11% today. If you grow the balance sheet low single digit, keep the dividend and continue to buy back stock, you're still going to build 50 basis points of capital per year. I mean, is I guess the question is, is 11 the right number? It feels like a lot of your peers are moving 10.5 or even 10. Jim Ryan: Yeah. It is just there's a healthy tension between you know, making sure that we're looking at all of the constituencies. Obviously, shareholders have a view. The ratings agencies have a view. We're looking at forward at the economic conditions And I do think there is opportunities to let that come down over time. And not build as quickly as it would build just organically given our high profit profitability. We're just not ready to make that commitment quite yet. But it's something we're actively looking at. And you're right, we could have substantially more buyback and still keep capital unchanged. And so I would suspect though as you look forward, we might see a little bit of capital build here just as we get more optics in all this. And but we're very sensitive. And I think that is the best use of of our capitals to return it back to our shareholders. And I think we could do substantially more than that you know, in future periods, once we just kind of get a view of of those competing factors. Chris McGratty: Okay. Perfect. And then, John, one for you on NII comments. I think you said irrespective of the short end, you talked about the NII guide with the cuts. Jumping off point of 5.85% in the fourth quarter, if you kind of say to Brian's question about 3% to 5% Old National type of growth next year, Does NII grow from here into '26? John Moran: Yes. I think NII will absolutely grow. I think margin would be you know, stable ish or or depending. I you know, it'll depend a little bit on yield curve dynamics and and look, the point of the curve that matters to us is still inverted and projected to be inverted for the first half of next year. That's no different than it's been for a long time. You know? But if we got some steepening in take your pick, whether it's three month, five year, effective Fed funds against five year, If there were steepening in that in the back half of the year, I think that would be really this is not unique to Old National, but it would be good for Old National, and I think it'd be good for our industry. Chris McGratty: Okay. The growth off the fourth quarter is definitely the base case. Okay. Thank you. Yes. Operator: Your next question comes from the line of Jeanette Lee with TD Cowen. Jeanette Lee: Good morning. Morning. Going back to Bremer, could you could you size up how much of a runoff that you saw from Bremer and when you say when in terms of the loan growth guidance, when you say excluding the Bremer, is it also excluding the impact of Bremer runoffs or just the whatever the loan amount that was added initially in the second quarter? John Moran: Yeah, Janet. The third quarter runoff was about $200,000,000. The loan growth guidance for the fourth quarter is inclusive of everything. So that's Old National plus Bremer. Reason that we're still guiding full year excluding Bremer is that Bremer wasn't there for the first you know, four four months of the year. The fourth quarter, that three to 5% that's there, on the guide for for April, that is inclusive of everything. Jeanette Lee: Okay. And and the expectation is that the runoffs from the Bremer impact will be reduced in the coming quarters versus the $200,000,000 Is that the right way to think? John Moran: Well, I think Jim said it well. There's a handful of lines of business that that Bremer was in that that you know, are unlikely to continue here. And there'll be there'll be a little bit of up out of those portfolios, but that's totally normal course for any m and a transaction that that Old National has been involved in certainly for the last five plus years. Jeanette Lee: Got it. That's helpful. And just on fee income, that came in nicely above It looks like it's a lot of it is just, you know, organic growth. The the jump in capital markets, other fee and bank fees, Did you, like, are these the organic trends that you're seeing or is there any unusual trend that was embedded in it? Is that a good run rate that we could grow off of? John Moran: Yeah. I think the right level to be thinking about total fee income is probably in the $120,000,000 sort of ZIP code. This quarter was really exceptionally good, particularly in capital markets So some rate volatility is good for that line of business. But I would expect that that probably comes back down to earth. You know, they're they're doing great. You know, we're really pleased with those results, but I don't think $13,000,000 in quarter is gonna run rate on that business. And then, obviously, mortgage is seasonally strong in three and that'll come down in the fourth quarter and that's totally normal. Jeanette Lee: Got it. Alright. Thank you. Operator: Your next question comes from the line of Jon Arfstrom with RBC Capital Markets. Jon Arfstrom: Good morning, Jon. Jim Ryan: Good morning. Jon Arfstrom: Couple of follow ups here. Just on expenses and efficiency, maybe John or Jim, can you remind us the Bremer related efficiencies, what you expect in the fourth quarter and rolling into the first quarter? And then are there you have any type of broader efficiency objectives Or does this current efficiency ratio feel kind of like the right range for the company? John Moran: Yeah. So fourth quarter, we'll start to see some, John. But it really Jim said, you know, it it happens sort of thirty days post conversion, which puts us into, you know, the November. So, you know, you'll get a little bit here in the fourth quarter, but but I wouldn't count on a ton of cost saves showing up in 4Q. Really, the number that that you'll see a cleaner quarter on will be first quarter of next year. At that point, we'd be fully realized and fully realized is a touch over $115,000,000 on an annualized basis. Yes. So the efficiency ratio has some room to get a little bit better from here. Jim Ryan: And, you know, we are planning for growth and investments within our budget set there. But John as you know, this is not a program. This is not a one-time thing. This is just an ongoing effort to constantly find ways to be a better organization to be more efficient, more effective, to serve our clients in a little bit better ways. And we've got you know, a lot of the investments we make each and every day are self funded. And that's what we're gonna, obviously, try to do. And I hope I have to come to you and tell you that I spent more money on talent and to take your expense guys up. That means we're that means we're hiring a lot more people. So that would be a good thing. So we're not there yet We're not saying that's gonna happen, but that would be a good thing if I had to come ask for a little bit of forgiveness. Jon Arfstrom: Yep. Yep. Okay. A follow-up on credit. I see your numbers. They look fine. And I understand your comments on non-performing loans. But would you guys describe credit as stable, mixed bag, no change, getting a little tougher. How would you big picture, describe the credit environment? John Moran: Yes. I would say, from a credit perspective, very stable, in our outlook. You know, we feel comfortable with the guidance we've provided and the trends we're seeing in the portfolio we feel good about. Jim Ryan: Hey, John. I'd say stable to improving. I mean, the the deep in classified criticized assets was a was a good, a good guy for the quarter. Continue to feel really comfortable with where we We had this conversation too in our preparation here, Carrie said, hey, We work really hard every single day to scrub our bucks to make sure there's nothing unusual in there and nothing we don't know about. We're going through the portfolios constantly. You know, we're trying not to surprise anybody. And so that's just our our ongoing monitoring is, tough. And aggressive. We wanna call it as early as possible. And we continue to do that. But we feel really good about what we saw this quarter. John Moran: And we've seen that delinquencies really improved, which was also a good factor. Okay. Jon Arfstrom: Good. Yeah. It obviously looks fine, but just it's a hot button issue. Jim Ryan: Yeah. And I just wanna We can appreciate that. Hopefully, everybody takes it off the table for Old National. Jon Arfstrom: Yep. Yep. For sure. And then just curious on on the ticky tacky, but the timing of the repurchase late in the quarter, any reason behind that? Is that just more confidence in capital and Bremer Why was it later in the quarter? Thanks. Jim Ryan: Yes. I think there were a lot of questions around our desire to return capital back and we got more confidence that we saw the trajectory and we also felt good about you know, we were able to sell the Bremer Insurance Agency too, which continue to bolster the capital ratios. And so I think all that just gives a lot more confidence in our ability to start returning capital, probably a little bit sooner than we had planned as we talked about on this last quarter's call. But I think that gives us an ability to continue to be more active here, you know, as we head into the fourth quarter and into next year. Jon Arfstrom: Okay. Thanks a lot. I appreciate it. Jim Ryan: Thanks, John. Operator: There are no further questions at this time. I'd like to turn the call back over to Jim Ryan for closing remarks. Jim Ryan: Well, thank you all for joining us. We appreciate your support. As usual, the whole team will be available to answer any follow-up questions you have. Hope you have a great day. Operator: This concludes Old National's call. Once again, a replay along with the presentation slides will be available for twelve months on the Investor Relations page of Old National's website oldnational.com. A replay of the call will also be available by dialing (800) 770-2030, access code 939-4540. This replay will be available through November 5. If anyone has additional questions, please contact Lanell Durkholz at (812) 464-1366. Thank you for your participation in today's conference call. You may now disconnect.
Operator: Thank you all for standing by. The Vertiv Third Quarter 2025 Earnings Conference Call is going to be starting in about four minutes' time. Good morning. My name is Breeka, and I will be your conference operator today. At this time, I would like to welcome everyone to Vertiv's Third Quarter 2025 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. Please note that this call is being recorded. I would now like to turn the program over to your host today, to begin, Lynne M. Maxeiner, Vice President of Investor Relations. Please go ahead. Lynne M. Maxeiner: Great. Thank you, Breeka. Good morning, and welcome to Vertiv's Third Quarter 2025 Earnings Conference Call. Joining me today are Vertiv's Executive Chairman, David M. Cote, Chief Executive Officer, Giordano Albertazzi, and Chief Financial Officer, David J. Fallon. We have one hour for the call today. During the Q&A portion of the call, please be mindful of others in the queue and limit yourself to one question. And if you have a follow-up question, please rejoin the queue. Before we begin, I'd like to point out that during the course of the call, we will make forward-looking statements regarding future events, including the future financial and operating performance of Vertiv. These forward-looking statements are subject to material risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. We refer you to the cautionary language included in today's earnings release, and you can learn more about these risks in our annual and quarterly reports and other filings made with the SEC. Any forward-looking statements that we make today are based on assumptions that we believe to be reasonable as of this date. We undertake no obligation to update these statements as a result of new information or future events. During this call, we will also present both GAAP and non-GAAP financial measures. Our GAAP results and GAAP to non-GAAP reconciliations can be found in our earnings press release and in the investor slide deck found on our website at investors.vertiv.com. With that, I'll turn the call over to Executive Chairman, David M. Cote. David M. Cote: Good morning, all. Well, this is a very strong quarter by any measure. Although I have to say, by looking at the stock price reaction right now, I wonder what would have happened if we hadn't blown the doors off of every single metric. We exceeded guidance across all metrics in a very convincing way. I continue to say I'm more excited now than ever, and you're seeing why. We're in the early stages of the digital age, and Vertiv's position today reflects the years of focus on customer relationships, disciplined investment, operational excellence, and R&D expansion. Selecting a good strategy, sticking with it day by day, and reinforcing it with monthly growth days works. Our technology leadership comes from consistently staying ahead of where the industry is going. This digital transformation is just beginning. The scale and speed of what we're seeing in AI and data centers today is just a preview of what's ahead. Data will continue to increase rapidly, and data centers are essential to storage and processing. We are very well positioned to continue to lead through it. I've seen many business transformations over the years, and what's clear is that our strategy is working. As our technology focus grows market share, investments we've made in R&D and capacity are delivering results today, and more importantly, we believe they're building a sustainable competitive advantage that will serve us well for years to come. I'm more confident than ever that we're in the early stages of what I believe will be a multiyear period of significant growth and value creation. And we couldn't have a better leadership team than Gio and his group to make it happen. So with that, I'll turn it over to Giordano Albertazzi. Giordano Albertazzi: Well, thank you, Dave. And welcome, everyone. We go to Slide three. Our Q3 performance demonstrates the strength of our strategy and execution. Our adjusted diluted EPS of $1.24 was up about 63% year over year, driven by higher adjusted operating profit. Q3 organic sales grew 28% with a strong Americas up 43% and APAC up 21%. EMEA declined 4%, relatively in line with our expectations. Particularly encouraging is the 1.4 times book-to-bill ratio in Q3. Our trailing twelve-month organic orders growth of about 21% demonstrates strong momentum with Q3 orders up 60% year over year and 20% sequentially. The market growth ranges from our November 2024 Investor Day remain valid, though tracking at the higher end with the Kola Cloud share expanding as the fastest-growing segment. The overall market growth is accelerating. We continue to outgrow the market through superior technology and execution. Q3 adjusted operating profit reached $596 million, up 43% year on year with a 22.3% margin and exceeding guidance. Adjusted free cash flow of $462 million was up 38%, reflecting our strong operating performance. Our 0.5 times net leverage demonstrates our strong balance sheet. Given our momentum heading into Q4, we're raising full-year guidance for adjusted EPS, net sales, adjusted operating profit, and adjusted free cash flow. And with that, we go to Slide four. Vertiv's order momentum and pipeline continued to outpace the strong market. While orders can be lumpy, our Q3 about 21% trailing twelve-month organic orders growth and the 1.4 times book-to-bill ratio showcase our competitive advantages. As mentioned in July, starting next year, we'll move to providing full-year orders projections with quarterly updates to better reflect our long-term strategic focus. Our sales grew 29% in the quarter while building an additional $1 billion in backlog from Q2. Our total backlog now stands at $9.5 billion, up about 30% year on year and 12% sequentially. This clearly gives us a strong visibility into 2026. The phasing of our backlog remains consistent with historical patterns, a healthy backlog in a healthy market. Our application expertise and proven track record have positioned us as a preferred partner for strategic projects. Early involvement in project technology and in project planning further drives our above-market growth. Pricing remains favorable, expected to exceed inflation. EMEA sales continued to be muted as a market due mainly to power availability and regulatory challenges. Here, we're implementing regional restructuring programs to have the right structure for future strong growth. Though acceleration may not come until the second half of 2026. When we talk about tariffs, we view them as another cost to our business. The situation remains fluid. And we're addressing it with comprehensive mitigation actions. And pricing programs. We expect to materially offset current tariffs impacts as we exit Q1 2026. While optimizing our supply chain and manufacturing footprint. We are progressing well in addressing the operational and supply chain challenges we experienced in Q2. We are accelerating manufacturing and service capacity investments across all regions, and particularly in The Americas. While maintaining disciplined fixed cost management. Our engineering and R&D spending continues to accelerate to further strengthen our industry leadership. And speaking of leadership, let's go to Slide five. And let me elaborate on our services capabilities. Services turn market complexity into opportunity. From liquid cooling to higher voltages, services are fundamental to our competitive position. We support the complete customer journey from consultancy through implementation to life cycle and optimization. Our advanced technology platform combines remote monitoring, predictive analytics, and energy optimization. Our advanced diagnostic and predictive capability, including thermal mapping and power quality analysis, are helping customers maximize reliability and efficiency with a similar system integration. What truly sets us apart in combining this technology with our unmatched global scale. The recent WeiLay acquisition accelerates this advantage by analyzing real-time machine data, identifying operational trends, and proposing predictive actions from maintenance to energy optimization. As rack densities increase and systems become more complex, this integration of AI-enabled capabilities with our established field service becomes even more advantageous. But technology alone is not enough, presence and capacity in the field are fundamental. We're scaling our service capacity in parallel with manufacturing, staying ahead of the demand curve. Services, combining advanced technology, global reach, and growing capability is truly one of Vertiv's superpowers. And with that, over to you, David Fallon. David J. Fallon: Thanks, Gio. Turning to slide six. Let me walk you through our strong third-quarter financial results, starting with adjusted diluted EPS of $1.24, up approximately 63% from last year's third quarter with the improvement driven by higher adjusted operating profit and a lower effective tax rate, primarily from progress with tax planning and timing of some discrete items in the quarter. Organic net sales were up 28% with continued momentum in The Americas up 43%, while APAC was up 21% as we continue to drive top-line expansion across that region. EMEA was down 4%, but as Gio mentioned, we continue to see encouraging signs of accelerated growth in that region likely looking to 2026. Our adjusted operating profit of $596 million was up 43% from last year and $86 million higher than guidance. Adjusted operating margin of 22.3% exceeded prior year by more than 200 basis points primarily driven by operational leverage on the higher sales, positive price cost, and productivity, but partially offset by the negative tariff impact. And as we summarized last quarter, operational inefficiencies driven by supply chain actions to mitigate tariffs. This 22.3% adjusted operating margin was 230 basis points higher than guidance. Aided by operational leverage on the higher sales, but also by strong operational execution, including addressing supply chain inefficiencies more quickly than expected just three months ago. Still work to do, but we are encouraged as we move into the fourth quarter and 2026. Importantly, our year-over-year incremental margin in the third quarter was approximately 30%, a good indication that we continue the path towards full-year adjusted operating margin target of 25% in 2029. And finally, on this page, we generated $462 million of adjusted free cash flow. That's up 38% from last year, and that translates into approximately 95% free cash flow conversion. And that is consistent with our long-term expectations. Net leverage was 0.5 times at quarter end and we expect to exit the year at 0.2x providing significant flexibility with future capital deployment. Moving to Slide seven. This page illustrates our segment results. And as mentioned, Americas delivered strong organic top-line growth of 43% driven by accelerated AI demand across product lines and customer segments. And margin expanded 400 basis points despite the tariff headwinds, as we continue to drive operating leverage productivity and positive price cost. Moving to the right. Operating leverage was critical for margin expansion in APAC, which saw 21% organic growth as AI infrastructure continues to drive current and future expected growth across that region. In EMEA, organic sales were down 4% due to continued industry challenges. However, sales were higher than expectations heading into the quarter, reason for optimism as we expect EMEA to reaccelerate in the back half of 2026. Driven by the latent, although inevitable, AI infrastructure demand there. Third quarter adjusted operating margin was significantly below prior year and we think at a low point. Driven by deleverage on lower sales and higher fixed cost as we continue to invest in regional capacity to ensure readiness for the anticipated market recovery. As Gio mentioned, we are implementing a restructuring program primarily in EMEA, but also impacting other regions. And this global program, which commenced in the third quarter cost approximately $30 million and we expect an annualized benefit of approximately $20 million commencing in 2026. Now let's move to guidance, where we will address the midpoint of our guidance ranges for both 4Q and full year in slides. Eight and nine. Turning to Slide eight. Our fourth quarter guidance. We expect adjusted diluted EPS of $1.26 up approximately 27% from prior year and primarily driven by higher adjusted operating profit. We project net sales at $2.85 billion with organic growth of approximately 20%. Looking at regional growth rates, we expect momentum to continue in The Americas up high 30s. With APAC up mid-single digits and EMEA down high single digits but up mid-teens sequentially from the third quarter. Adjusted operating profit is expected to be $639 million up approximately 27% year over year with adjusted operating margin of 22.4%, ten basis points higher than the third quarter despite higher sales, due to headwinds from new tariffs announced since our last earnings release. Including those implemented under Section 232, and also a sequential quarterly increase in growth investment as we ready for future strong customer demand. Next, turning to Slide nine, our full-year guidance. We are raising our projection for adjusted diluted EPS to 4.1044% higher than 2024. This improvement is primarily driven by higher adjusted operating profit with benefit from lower interest expense and a lower effective tax rate. Are raising our expectations for net sales to $10.2 billion translating into 27% organic growth for the full year we expect adjusted operating profit of $2.602 billion up 33% from last year and full-year adjusted operating margin of 20.2% approximately 80 basis points higher than 2024, demonstrating strong expansion despite the negative impact from tariffs. We are raising our adjusted free cash flow guidance to $1.5 billion with free cash flow conversion at approximately 95%. And before turning it back to Gio, I do note that this guidance assumes tariff rates active on October 20 are maintained for the remainder of the year. So now with that said, back to you. Giordano Albertazzi: Well, thank you very much, Dave. And we go to Slide 10 to share some thoughts on 2026. So the data center market continues to show remarkable strength. Driven by accelerating AI adoption. Globally. Our order pipeline and market indicators give us confidence. In this trajectory. Though EMEA remains softer, and we expect it to rebound in 2026. Based on our substantial backlog and clear visibility of pipeline, when anticipate continued significant organic sales growth in 2026. To anticipate and stay ahead of our customers' evolving needs and timelines we expect to accelerate our investments in supply chain and services capabilities and capacity. Tariffs remain dynamic but we have a clear action plan and strong execution. Our mitigation strategies are progressing well. And under current conditions, we expect to materially offset their impact as we exit Q1. On profitability, multiple drivers support continued margin expansion. Strong operating leverage, certainly at these growth levels, ongoing productivity initiatives and effective price cost management. We remain fully committed to our November 2024 Investor Day margin targets. Our robust free cash flow provides significant strategic flexibility. And let me elaborate on this a little bit more on page 11. So let's go to slide 11. And we are accelerating our investments for growth. Along three dimensions: Capacity, we're investing globally, with a significant focus on Americas across multiple technologies. Some examples. Our infrastructure solutions capabilities are growing. With prefabricated solutions for both gray and white space and entire data center. Vertiv Infrastructure Solutions enable faster deployment, shorter time to revenue and alleviate skilled labor constraints on-site. Smart Run, our innovative prefabricated white space system shared with you in July exemplifies this acceleration capability. The Great Lakes acquisition strengthens our IT systems offering and deepens our white space presence. We are scaling these capabilities as we have done with previous acquisitions. A playbook that we know quite well. In general, our capacity expansion strategy keeps us six months, twelve months ahead of demand curves. Maintaining technology leadership while driving operational efficiency. The other axis of course is technology, And our engineering and R&D spending will grow 20% plus in 2026 with flexibility to accelerate further. Through aggressive R&D investment, we're committed to stay in multiple GPU generations ahead. We are accelerating our funding for the system layer, connecting all critical infrastructure elements and this is a crucial advantage as data centers are becoming increasingly complex. When it comes to M&A, our strong balance sheet enables us both opportunistic bolt-ons and the largest strategic acquisitions. All according and in line with our value creation framework. We maintain a vibrant pipeline across technologies, regions and deal sizes. As the industry accelerates we need to stay ahead whether through smaller technology acquisitions or larger scale opportunities. This strategy strengthens our complete system solution offering. Expands our TAM and enhances our global reach. So we will continue investing to expand our technology leadership and deepen our capabilities to serve customers in ways no one else can. So let's now go to Slide 12. I'll last slide. And we're we're certainly pleased with our performance this quarter. Confidence with what we see leads us to raise our full-year guidance. Our 2025 execution demonstrates the strength of our strategy. And it positions us well for 2026. Our strategic acquisitions and increased investment in CapEx and engineering R&D reflect a sense of urgency. In capturing opportunities ahead. While the global landscape presents complexities, from tariffs to geopolitical shifts, our approach remains unwavering. Develop robust mitigating strategies assign clear accountability, and execute with precision. We are pleased with our progress but there is more work to do And as you know, we're never satisfied. Looking ahead, our 800 volt DC portfolio planned for release in the 2026, aligns directly with NVIDIA's 2027 rollout of their Rubin Ultra platforms. Are collaborating closely with NVIDIA to advance these platform designs. This is about staying ahead of where the industry is going not just where it is today. What sets Vertiv apart is our system level expertise across AC and DC power combined with our thermal management and service capabilities. Delivering solutions that address the complete power and cooling infrastructure. Our team understands that leadership means constantly raising the bar for tomorrow. And that's exactly what we'll continue to do. So with that, I'll turn it over to Breeka for our question. Operator: Thank you, Gio. We will now begin the question and answer session. In the interest of time, please limit yourself. Your first question comes from Amit Daryanani with Evercore. Your line is open. Amit Daryanani: Morning, everyone. Thanks for taking my question. Impressive set of results here despite the stock reaction today. Do have hoping you could just maybe help us understand the order of that you're seeing that you're talking about today up 60%. What is driving this And really the part I would love to understand is, when you see Oracle reported $300 billion plus RPO number or OpenAI announced a 10 gigawatt deal with NVIDIA, what's the cadence for these big announcements to flow into orders and revenues for Vertiv? I suspect none of these multiple recent announcements have really made it to orders for the ecosystem yet. But love to understand just a little bit on what's driving this order growth in September and the timeframe for when these big headlines we're seeing start to become orders for the company? Thank you. Giordano Albertazzi: So good morning, first of all, Amit. Thank you for your question. So certainly the drivers are a combination of things. Very good market. Certainly, technology evolution in the market that goes into in our direction. Certainly, an industry that trusts the scale that Vertiv is displaying. And, you know, what we have multiple times being vocal about our competitive advantages, our service, our technology, etcetera. So all things that certainly drive that demand combined with a reliable execution. On the Oracle side, as an example, I don't want to go too specific, but in general, we see some of the players, many of the players, the large players in this space that talk about backlog expansion that really has to do with their service agreements. So I don't want to go into details of what these customers and how they look and measure their backlog. But typically those are different types of backlog, different types of agreements. And on the back of this, in the back of these plans and facts and commercial situations, we have an that is being built. And that build-out is rapid, but gradual nonetheless. So the dynamics of the orders to Vertiv or to the likes of us relative to the dynamics of the order intake and the backlog of our customers can be very But there are two sides of the same very positive coin, if you will. But they beat to a slightly different drum, you see what I mean. Amit Daryanani: Great. Thank you. Operator: We now have the next question from Scott Reed Davis with Melius Research. Line is open. Scott Reed Davis: Hey, good morning, guys. And congrats on having a great year so far. Giordano Albertazzi: Thank you. Scott Reed Davis: Gio, since you emphasized it on Slide five, kind of the services opportunity here, could you give us a little bit more color on perhaps the margin structure of services versus equipment, the growth rate? Is it outgrowing equipment? Or since we're in such a hyper-growth period for equipment, perhaps it's not, but it comes in later. Just a little bit more color about how that service opportunity kind of flows through the P&L over the next few years. Thanks. Giordano Albertazzi: Yes. Thanks for the question, Scott. So clearly, we love our service business a lot. We believe it's a unique competitive advantage, uniquely strong competitive advantage. Certainly accretive. Now if you go to Page five, you see there are various components to our services portfolio. Of course, different slightly different dynamics in the various components. But certainly, overall, accretive to our business and certainly generating a lot of recurring revenue in everything that is linked to everything lifecycle services optimization. It's a very robust business. But in times where the product system side of the business is growing at this pace typically and it's very normal that the service business lags. But again, it's a very strong flywheel. That is catching up speed. So it is it's almost you know, bound to happen. It's going to happen. We see it accelerating. We like the direction in which it is going. And quite frankly, I'm really let's say excited about the technology that we're bringing about. So it's really the combination of technology and capacity and presence and customer experience. So expand that to continue to accelerate that flywheel continue to accelerate. I think an important element is that the type of equipment that is being deployed, the density of technology that is being deployed nowadays is new and newer data centers certainly conducive to more business service penetration. Scott Reed Davis: Helpful. Thank you. Operator: Your next question comes from Charles Stephen Tusa with JPMorgan. You may proceed. Charles Stephen Tusa: Hey, good morning. Giordano Albertazzi: Good morning, Steve. David J. Fallon: Just you guys had said, I think in the release maybe in the presentation that you're on track for, I think it was the margins that are embedded in kind of the long-term outlook. I would assume that that means that's more of a that's kind of more of an absolute margin comment. So if revenues are looking better that we should assume that those margins are good, but that would obviously imply a bit lower decremental margin. I guess I'm just curious as to kind of the outlook for sorry, incremental margin. The outlook for incrementals and once you get through these tariffs, can we kind of get back on the horse of 35%? Or are we now in a at a point where with the types of projects you're doing and all the modular work and things like that that maybe a little bit less than more revenue, same margins, which is still very good, but not quite the incremental. Giordano Albertazzi: Same incremental. David J. Fallon: Yeah. Yeah. No. Understand your question, Steve. This is David. I would say our path to the 25% long-term margin target in 2029 stays intact. I think we certainly had some noise this year specifically as it relates to tariffs, not only with the tariffs themselves, but also some of the supply chain countermeasures to address those. Our long-term model assumes incrementals in that 30% to 35% range. I think low 30s gets us to that twenty-five percent and twenty-nine If we're at the upper end of that range, we could do it sooner. But I would say everything that we see certainly based on Q3 and what we see shaping up for Q4 certainly keeps us on that path. The one variable, and we were very clear with this, in both Investor Days, is going to be the timing of growth investments. And their investments. So you invest upfront, you get the return over time. But even with that, we would believe going into any given year, our expectation is to be in that 30% to 35% range. Maybe the one dynamic for next year is we certainly wouldn't anticipate a headwind from tariffs. They continue to remain volatile and uncertain, but that was probably the most significant headwind that got us below that $30.35 dollars percent range in 2025. Operator: Thank you. We now have Christopher M. Snyder with Morgan Stanley on the line. Christopher M. Snyder: Thank you. I wanted to follow-up on the prior margin commentary. The one thing that really stood out to me Q2 to Q3 was the sequential margins. Operating profit up more than revenue sequentially. So I know margins are swinging around a lot with tariffs and how that's being phased in. But I guess kind of the question is if we step back, do you think the price conversations or negotiations versus the customers have changed versus a year ago? Specifically, do you think they've gotten any harder? Or is this kind of still the same environment where they're paying for speed of supply and innovation of the technology? Thank you. Giordano Albertazzi: Thank you for the question, Chris. So I'd say that first and foremost, we continue to be focused on and deliver on a on a price cost positive type of performance. When it comes to the conversation with a customer, I think we have to be all very, very, very careful. In the sense that I don't think we should think about as price conversations ever being easy. I mean, we have very professional knowledgeable, savvy customers And they correctly behave as such. So the price that one can achieve is really in the back of the value that is being delivered to our customers. And very commercially savvy, technically savvy customers I don't see a dramatic change in that respect. What is absolutely critical is really innovation, but the innovation not in and of itself, but innovation that enables additional value creation for them, for our customers, It is a service level It is a quality you bring to the party. We think we're doing a very good job in that respect across all axes. But our customers more or less price sensitive. They're very business sensitive. They've always been very business sensitive. So it's up to us to deliver. Value to them that enables price to be achieved for us. Christopher M. Snyder: Thank you. I appreciate that. Operator: Thank you. Thank you. Your next question comes from Jeffrey Todd Sprague with Vertical Research. You may proceed. Jeffrey Todd Sprague: Have two questions on my mind. I guess I'll ask one, actually. Just curious on Europe, actually. Your apparent confidence that it does, in fact, get better 2026 sounds like a long way away. Mean, watching France, think, is on on their fourth government here in twelve months. So just your confidence that they get their act together, do you actually see a product pipeline, coming together there? And maybe just address a little bit, I guess, the restructuring you're doing prepare for that eventual growth that you're expecting? Giordano Albertazzi: Sure. Well, Jeff, thanks a lot. So I probably have been more sanguine about the Europe reacceleration in the past that have been now. So saying it is going to be a year from now, I mean, year from now when we sit around the same table and phone summarizing our twenty-six Q3 twenty twenty-six performance, that means that we are building some wiggle room therefore thanks to to really come back. And I truly believe that they will come back because the market is in a bad need for capacity AI capacity. And there are very stringent data sovereignty reasons why that capacity for inference needs to be in country, in region, in the EU or in The UK etcetera. So vacancy rates are extremely, extremely low. And, oh, by the way, new technology data center design need to be built. Pipelines, are encouraging in terms of the total size of the pipeline. But what I see different is there is a certain vibrancy in the conversation with customers that was not there to the same extent. So one of the things I've said in the past to say, hey, the people, our customers have many open fronts and the American front is so demanding that it's absorbing them a lot. While that continues to be the case, I think that they are making headroom, if you will, or let's say, the dedicated few more brain cycles to the rest of the world and Europe is certainly one of those. We are positive also about The Middle East landscape from a margin standpoint. We will not go into the details of the restructuring. For obvious reasons. But rest assured that it means making sure that as the market accelerates in the direction of AI infrastructure build out, want to have an organization that from a delivery and execution and also go to market standpoint is exactly tailored to that. So I want to make sure that we do not miss any opportunity and certainly are agile in our full year reacceleration. So but I will not go too much into these. Jeffrey Todd Sprague: Bye. Thank you. Operator: Thank you. We now have Andrew Burris Obin with Bank of America. Your line is open. Andrew Burris Obin: Hi, guys. Good morning. Giordano Albertazzi: Hey, Ender. Andrew Burris Obin: Yeah. Just a question on services, the team services, part of your moat, being the industry leader. As you're getting the strong equipment orders, could you just comment on your investment in services and specifically any KPIs you can give us on headcount, you know, how are you scaling up your support function to keep up with the top line? Thank you. Giordano Albertazzi: Yes. Well, certainly, those big orders and A orders in general infrastructure requires a service for in sometimes installation, not always. Certainly, all the time, very often project management and commissioning and start So very, very important. I agree with you. That is moat or as we like to call it, superpower. When it comes to the headcount, we were talking about 4,000 engineers globally I think we were on 4,400. So there we go. We are certainly accelerating and continue to invest. The way we approach that is really when we do our SIOP for product demand, on the back of that, there is SIOP for services. And SIOP for services has also a geographic dimension by which we have to understand where our backlog will land and where we will need to increase capacity. So it's of course a much more disposed than a manufacturing capacity for obvious reasons, but they are all dimensions that we'll that we are taking into consideration. So if you think about that call it about $4,400 4,500 field engineers expect that to continue to expand. By the way, just like just like we talked about productivity in the manufacturing environment, there is productivity in the service environment. So we really look at services. From a from a way we run it. In terms of a distributed supply chain, distributed factory. So we are very rigorous in terms of how we measure the performance in terms of the service level, in terms of time it takes to be on-site relative to our contractual commitments, etcetera. Very, very, very experienced, mature and paranoid about our service level in the field. Andrew Burris Obin: Thank you. Operator: Thank you. We now have Andrew Alec Kaplowitz with Citigroup. Andrew Alec Kaplowitz: Good morning, everyone. Giordano Albertazzi: Hi, Andy. Hi, Andy. Andrew Alec Kaplowitz: Gio, can you give us a little more color into your capacity investments that you talked about that you're making, particularly North America? You mentioned you're increasing R&D by 20% plus but how do we think about CapEx growth in 2026? And we have enough capacity to keep up with your current backlog growth of 30%. With the assumption that your revenue growth may not slow much, if at all, think, high twenties this year? Giordano Albertazzi: So we will not be explicit when it comes to CapEx in 2026, Andy. But clearly, as usual, there are two things at play. One is more footprint and CapEx. The other is productivity and vertical operating system. So that's not get the second part because to us it's very, very, very common. But you're right. I mean, clearly with the backlog, it's expanding with the comments that I made, very encouraging comments on the pipelines. We clearly are expanding our capacity. And that's particularly true in North America. The expansion as we have said in other occasions is predominantly expansion of existing sites That's something that we like a lot in terms of the speed that it enables from the decision to having that capacity available and the ability to scale very experienced teams that are already running running Vertiv Vertiv plan. So that will continue. That is our philosophy. I don't rule out of course, brand new locations. But in general, what we do and what we do well is grow the footprint six to twelve months ahead of when the footprint is needed. Now I think we do a very, very good job. Never perfect, It's never perfect. There's always multiple product lines, multiple regions, but we're pretty satisfied with direction of travel. And we believe it will it will well sustain our future trajectory. That That's that's really don't know. If I'm ready because, Eddie, that I can that I can have that. Andrew Alec Kaplowitz: Helpful. Thank you. Operator: We now have Nigel Edward Coe with Wolfe Research on the line. Nigel Edward Coe: Thanks. Good morning, everyone. To go back to margins. Obviously, very impressive outcome in 3Q. Maybe, David, give us an update on sort of where we are on plank reconfiguration. I think was meant to be completed by the end of the year. And just on the 4Q margins specifically, you did take it down by maybe a point versus the original what was embedded in the 4Q plan. Just wondering if that's tariff inflation, some of these secondary tariffs or whether there's an EMEA mix there. And I know I'm rambling a bit here. I just clarify the points about 2026 Because tariff mitigation, maybe yeah. Yeah. So so Do we think '26 can be above above stage of phase out? Sorry. Do we think '26 can be above the bar in terms of that incremental margin guiding Got it. David J. Fallon: Yes. Would say you weren't rambling until the last five to ten seconds. But, no. I think all your questions are are are very much very much linked together. But, looking at Q4 margins, we did take those down versus prior guidance about 100 basis points as you mentioned. I would say half of that on the contribution margin side. And certainly, driven by the incremental tariffs that we saw post earnings last time. In addition, and we're very proud of our operating leverage but we're not afraid to invest in fixed costs. And are planning to accelerate fixed cost investment into Q4. That were previously planned in the first half of next year. So if you put those two together, it's probably half related to contribution margin, with tariffs and the other half related to operating leverage. And if you look at margins sequentially, relatively flat Q3 to Q4. Once again, we see benefit as it relates to addressing the operational challenges, but we do have the additional tariff headwinds. Your question related to incrementals for 2026, probably premature to provide any specific numbers. But once again, we'll reiterate, we expect to be in that 30% to 35% range in any given year over the next three to five years that the 25% target is pertinent. We're still evaluating the impact of tariffs, but we do anticipate to materially offset the tariffs that we have line of sight to today. With countermeasures we're enacting with both pricing and also transitioning the supply chain. We expect to be materially offset exiting Q1. Which would imply certainly tariffs not being a headwind year over year. And despite uncertainty, we would expect that actually to be somewhat of a tail tailwind. So again, too soon to give any specific numbers as it relates to incrementals. But if you backtrack a year, there's nothing in particular that we're looking at, at 2026 that would be different than any other year as it pertains to incrementals. Nigel Edward Coe: Great. Thanks, David. Yep. Operator: We now have a question from Nicole Sheree DeBlase with Deutsche Bank. Your line is open. Nicole Sheree DeBlase: Yeah. Yeah. Thanks. Good morning, guys. David J. Fallon: Good morning. Operator: So I just wanted to ask on EMEA margins. I think David, the opening remarks, you kind of shared confidence that 3Q was kind of below watermark for EMEA margins. So what is the path back to mid-20s? Can we get there without volume growth driven by what you're doing on restructuring? Or do we really need volumes to come back to kind of get back to where margins were within EMEA? Thanks. David J. Fallon: I would say a combination of both. And we we we did mention that we do anticipate number one, a sales acceleration in EMEA in I think I mentioned in my comments up mid-teens That certainly facilitates improved operating leverage versus Q3. And I would say overall that we do anticipate margins in Q4 in EMEA to be significantly higher than what we we saw in Q3. Including addressing operational inefficiencies. So when we talk about the operational inefficiencies as we put in place to address some of the tariffs. We have a global supply chain and a lot of those actions have been put in place to address those inefficiencies. In EMEA. And we would start to certainly see some definitive impact in Q4. Nicole Sheree DeBlase: Thank you. David J. Fallon: Thank you. Operator: We now have a question from Mark Trevor Delaney with Goldman Sachs. You may proceed. Mark Trevor Delaney: Yes. Thank you very much for taking my question. I was hoping to circle back to the order and pipeline topic. Do you, I think, you said in your remarks that the backlog phasing is within typical levels for Vertiv at this point. And I think that implies backlog that is project related would typically be for shipments that are up to twelve to eighteen months forward. And so when I take that comment on the phasing of your backlog, it would seem to imply that most of these bigger data center that have come out in recent months and are often for projects that are over the next many years have not yet been fully booked by Vertiv. So one, is that right? And two, is that what's underpinning some of your comments about the pipeline being healthy? Giordano Albertazzi: Let me elaborate a little bit on this, Mark. Thank you for the question. So when we talk about the phasing of the backlog is if you take a snapshot now of the $9.5 billion backlog, and you look at what is in the twelve months, eighteen months, twenty-four months, whatever, And you look at the same picture, for the backlog a year ago, you will see pretty much a similar shape, clearly bigger 30% bigger, but similar shape. That means that our backlog has not grown by virtue of, let's say, elongation or overstretching. So that's good. For us. We believe that, that is good because that represents the way the industry works. Now clearly, have seen a lot of very strong, very credible announcement and projects. And one would expect Vertiv to be involved in many of those. And that would probably be a very reasonable expectation. Let's put it this way. But those projects are then deployed in phases. And if we go back to our pretty maniacal let's say sticking to sticking to the rule of only a PO is a legally binding PO constitute backlog, then you'll see that that backlog pretty much mimics the way and the speed at which deployments occur. So I in that respect, there's certainly a lot of the more that will be done to fulfill those announcements in our pipeline. And as those projects mature, as those projects projects mature in terms they are ready for deployment maybe the next two fifty megawatts in a one gigawatt deployment, that's the time when orders start to flow in the likes of us and hopefully for us. Hopefully, addresses your question, Marc. Mark Trevor Delaney: Thank you. Operator: We now have Michael Elias with TD Securities. Go ahead when you're ready. Michael Elias: Great. Thanks for taking the question. So, Geo, on the ground, I'm seeing a massive acceleration in data center demand. Think in the third quarter, run rate data center demand is up close to 4x. So it's great to see you guys investing in production capacity. My question for you is that as you think about adding production capacity, could you help us understand from when you make the decision to expand capacity? How long does it take to have the first unit come off the lot in that new production capacity? And as part of that, what's the earliest that you could book into that new production capacity? I only ask if I think you're going to need the equipment in a hurry. Giordano Albertazzi: Well, Mike, first of thank you for for the question. We like the reinforcement about the market trajectory. We wholeheartedly agree on a very, very strong market, too. To the point of capacity. I wouldn't say I would that there is one answer. To that. A lot of our capacity expansion is used more use that 25%, 30% of capacity that we have latent in the way we build things. If you think about our capacity build out, do not please think of it inaccurate as one discrete step happening sometimes. That's been going on for forever. We continue to expand. What we are saying expand the expansion rate will accelerate, but expansion has always been going on. It depends again the time to first unit, let's say, the time to revenue for new capacity. Is it can vary from a few months for line reconfiguration, like, three, four, five months. Two, maybe twelve months for for larger expansion that require building from scratch. Again, one thing that we like a lot and that's why we like a lot is that if we just expand existing facilities that is really the just a technical time to have the new equipment available. But, you know, we have the systems, the people, the leadership, all ready to go and and really expanding their their their volume of business, a lot of scale and a lot of speed. So think about something that can go from a few months to maybe nine to fifteen months window. So we of course build on on our backlog, but also on on the visibility that we have in a pipeline. Hopefully addressing your question Mike. Michael Elias: Yes, it does. Thank you. Really appreciate it. Giordano Albertazzi: Thanks. Operator: We now have Amit Singh Mehrotra with UBS on the line. Amit Singh Mehrotra: Thanks, operator. Hi, everybody. Gio, I wanted to maybe ask you to address, you know, the competitive environment across all your products and only reason I asked that, seems like every three or four months, there's some announcement or some innovation that gets everybody to question the entire thesis around Vertiv's position in the market. You know, there was obviously AWS in in row heat exchangers a few months ago. Recently, Microsoft Microfluidics and people are talking about 800 volt DC eliminating the need for PSUs. May maybe address all of those, if you don't mind. Obviously, not AWS, microfluidics and the 800 volt DC dynamic and and and kind of how your content is evolving against that $3,000,000 per megawatt, and and maybe what your message is to to folks when they on the receiving end of these innovations every three or four months that causes them to question the entire thesis? Giordano Albertazzi: Oh, well, we will use the next two hours Amit, for this. This is a great question. But I'll try to be super concise here. We love the innovation intensity in the industry. We love it because we are at the center of it. If anything, we drive it. And that's exactly we go back to one of the questions we had. How do you make sure that the the price equation, I think it was Chris, the the price equation stays favorable. That's exactly what innovation does. And being ahead in the innovation curve enables us to continue down that path. So very important that's why we relentlessly invest more and more in innovation. That's why we nurture our relationships so intensely as you know we do. When it comes to specific examples, take microfluidics take 800 volt DC, different stories. For example, take microfluidics and you say, oh, if anything, this is exactly direct to chip direct to chip liquid cooling just done with other means than a cold plate. It preserve everything, thermal chain. Vertiv is a thermal chain absolutely intact if anything. Would have probably smaller microchannels and more pressure drop and more cleanliness needs in the system. So let's not be afraid of innovation. Innovation is absolutely our friend. Our friend certainly is the 800 volt DC, leveraging our decades-long DC power and AC power experience and DC power specifically. So being at the forefront as our page 12, I think it was explains at the forefront of it is a competitive advantage. When we think about our TAM per megawatt, start to see really a range that goes from three to 3.5 megawatts sorry, million per megawatt. So So if you will narrowing a little bit on the upper end of the spectrum that we have given you in the past. And that's a good thing. Again, it's because of that technology. Clearly, the industry is becoming more interesting. To many players, but also we think better we see a better delineation of the competitive landscape. If we compare, for example, everything thermal and liquid cooling now compared to what it was a year and a year and a half ago, So that is in the direction of more consolidated, more rational players not bad. And again, we continue hold true to our competitive advantages and reinforcing them, service, innovation, ability to scale, all the things that you heard from us. So absolutely intact. If anything, we love this environment. This innovation intense environment. Amit Singh Mehrotra: Okay. Thank you very much, Gio. Appreciate it. Giordano Albertazzi: Thank you. Operator: Thank you. This concludes our question and answer session. I would like to turn it back over to Gio Albertazzi for any closing remarks. Giordano Albertazzi: Enrique, thanks a lot. And thanks, everyone, for your for your questions. And time today. But before I wrap up, I want to take a moment to express my sincere gratitude to David J. Fallon our CFO, who will be retiring So whoever has been kind of 12 earning calls together. Probably 12 plus one. I was kind of a semi in the row. So big thank you. David has been instrumental in our success, bringing great financial leadership and strategic insight during a period of significant wealth transformation and acceleration and growth. So David, thank you wholeheartedly for your partnership and for your dedication. Absolutely excited to welcome Craig Chamberlain as our incoming CFO. Craig brings strong experience and capabilities that will help drive Vertiv's next phase of growth. I couldn't be more excited about our future. We continue to demonstrate our ability to execute and adapt in every in an ever-evolving market. While our progress has been strong, we stay focused on doing more. Opportunities ahead are extraordinary. With our technology leadership, global scale and deep customer partnership, Vertiv is uniquely positioned for the future. A big thank you to team Vertiv constantly focused on delivering value for our customers and investors. And with that, thank you, and have a great rest of your day. Operator: The conference has now concluded. Thank you for attending today's presentation. May now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the BankUnited, Inc. Third Quarter 2025 Earnings Conference Call. At this time, participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session. To ask a question during this session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Jacqueline Bravo, Corporate Secretary. Ma'am, please go ahead. Jacqueline Bravo: Thank you, Michelle. Good morning, and thank you, everyone, for joining us today for BankUnited, Inc.'s Third Quarter 2025 Results Conference Call. On the call this morning are Rajinder P. Singh, Chairman, President and CEO; Leslie N. Lunak, Chief Financial Officer; Jim Mackie, Incoming Chief Financial Officer; and Thomas M. Cornish, Chief Operating Officer. Before we start, I'd like to remind everyone that this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, that reflect the company's current views with respect to, among other things, future events and financial performance. Any forward-looking statements made during this call are based on the historical performance of the company and its subsidiaries, or on the company's current plans, estimates, and expectations. The inclusion of this forward-looking information should not be regarded as a representation by the company as the future plans, estimates, or expectations contemplated by the company will be achieved. Such forward-looking statements are subject to various risks, uncertainties, and assumptions, including those relating to the company's operations, financial results, financial condition, business prospects, growth strategy, and liquidity, including as impacted by external circumstances outside the company's direct control, such as adverse events impacting the financial services industry. The company does not undertake any obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments, or otherwise. A number of important factors could cause actual results to differ from those indicated by the forward-looking statements. These factors should not be construed as exhaustive. Information on these factors can be found in the company's Annual Report on Form 10-K for the year ended December 31, 2024, and any subsequent quarterly report on Form 10-Q or current report on Form 8-K, which are available at the SEC's website. With that, I'd like to turn the call over to Mr. Rajinder P. Singh. Rajinder P. Singh: Thank you, Jackie. Welcome, everyone. Thanks for joining us. Third quarter results were pretty solid. I will try not to get into the level of detail that Leslie and Tom will but just hit the highlights. For the quarter, earnings are up, ROA is up, EPS is up, ROE is up, margin is up, and expenses are very controlled, and credit is flat. So if I was to summarize this, this is, you know, as good a quarter as I could have expected even just a month ago. This is, you know, if there if there's oh, by the way, deposits did exactly what we've had expected them to do, almost to a T. Loans CRE was up modestly. Mortgage warehouse was up nicely. C and I was down, unfortunately, not because of production, but of the ongoing payoffs that we've been seeing. So hitting margin 3% a quarter early, I think that's sort of the highlight. We're very happy about that. We kind of hinted on that. Even on our last call, we were running further ahead. We've been running further ahead all year, so we're very happy that we're at 3%. And by no means is 3% the destination. This was just a waste of, we want to get further, and we will get further, and we'll give you more guidance in January where margin can get to. In the short term. ROA of 82 basis points is improvement over last quarter certainly a big improvement over last year. ROE of 9.5%, EPS of $0.95 I think our I checked a couple of days ago. The consensus was 88¢. So happy to beat that. Capital continues to grow. Set one is now at 12.5%, and tangible capital book value per share is up to $39.27 I think total book value per share is now over 40. The buyback is in place, though we didn't really hit much of it, or any of it, in the third quarter. We're being more opportunistic with the buyback. Rather than in the past, our buyback strategy has been by a little bit every day. This time around, we have a strategy because the amount of volatility we see in the marketplace, we think it's better to be more opportunistic and lean in hard when there is the opportunity to do so. So you'll see that play out over the course of next few months. What else am I missing? Like I said, with credit, everything was about as flat. You know, criticized, classified, NPLs, our ACL, our charge offs, everything was like when I first looked at the numbers, I I thought maybe there a typo, but it's not. Everything has been just very, very flat this quarter. So we have put in some new disclosures around NDFI, Leslie and Tom will walk you through because those are the kind of questions we're expecting. But, again, there also there is not much sensational news either. But with that, I'll turn it over to Tom, and and then Tom will turn it over to Leslie. Great, thank you, Raj. So before I dive into a little bit of details about Thomas M. Cornish: the quarter, just a couple of comments from an environment perspective that we're operating in right now. And what we kind of see as we look forward into this coming quarter and the start of next year. So Raj and I have done a number of events with major clients over the last few weeks. We've visited almost all of our offices, including the new office locations that we've been announcing. We've seen a fair amount of hiring that's really good quality hiring that we're starting to see a really good build. In those areas. So we have traditionally been an early of the year deposit grower an end of the year asset grower on the loan side. And I would expect that we would see that based upon what we're looking at right now. We've got very, very good pipelines in commercial teams across the bank. We've got very good pipelines in the real estate team. Real estate's been a good growth area for us all year long. Deposit pipelines look strong. From an operating account perspective in the fourth quarter. So I think the and when we track business sentiment of clients both on the commercial side and on the CRE side, I think businesses are feeling pretty optimistic. Right now. And we had a lengthy session for the group of CRE clients the other night, probably over 100 clients. And I think the optimism in the free markets heading into the end of this year and next year is is very strong. So we're quite optimistic about what we expect to see in the near term environment. A little bit more detail on the quarter. As Raj said, total deposits were basically flat for the quarter. Declined by $28,000,000 We did experience the normal seasonal fluctuations that we always see in the title business at this point in the year and to a lesser extent HOA and government banking, the municipal quarters generally and outgo during the third quarter. Overall, are pleased with $1,200,000,000 in non brokered deposit growth that we've had over the last twelve months We expect to see seasonality continue. In the fourth quarter, but kind of broadly across the bank, the level of market penetration, new relationships, net new relationships in each of our operating segments and geographies, is really very strong and very encouraging. On the loan side, as Raj mentioned, of course CRE and C and I loan portfolio declined by $69,000,000 for the quarter, CRE being up 61 while C and I segment declined by 130,000,000 For the quarter, we still see payoffs larger than we have historically seen, but we also see those kind of coming to a close as it relates to relationships that we may have decided to exit. We are seeing a little less utilization than we've traditionally seen on the book. I think part of that is because we are continuing to focus on relationships that tend to be more deposit rich. That's one of the reasons. But we're seeing a slight dip in utilization. But nothing that I don't think new business opportunities in production can outrun as we move forward. Mortgage warehouse grew by $83,000,000 in the quarter, which was a good quarter. And the resi franchise equipment in the municipal finance were down in line with what we have guided to in the past and what we expect Overall loan to deposit ratio, finished at 82.8% for the end of the quarter. Raj mentioned NDFI, so there's been a lot of talk about that recently. So we added some information on slide 16 in the supplemental deck about our NDFI exposure. In total, we have 1,300,000,000.0 in NDIF exposure as of ninethirtytwenty five. Which excludes mortgage warehouse lines, That's about 5% of our total loan portfolio. The largest components are B2B credit and subscription lines or subscription line outstandings as you look at the exhibit. Are almost all predominantly investment grade very high risk graded from a quality perspective portfolio. And our B2B portfolio is predominantly secured lending facilities that we have to real estate investment funds. We're not really in the kinds of larger lending to private credit that people are reading about and talking about. Our facilities are more moderate in size and generally secured by the pledges of assets and real estate collateral. That we have Substantially all of the September only one loan was on non accrual for 26,000,000 through a real estate investment fund. Brief comments on CRE exposure. Our CRE exposure totaled 6,500,000,000.0 or 28% of loans and 185% of risk based capital. Pretty consistent with the prior quarter. I think if you look at Page 11 of the supplemental deck, you can see we've got a well balanced portfolio. It's kind of interesting. It's almost $1,000,000,000 in every major asset class from retail to to industrial to office, including medical office, and to multi family when you include the construction portfolio. Which is predominantly multifamily. So very balanced overall real estate portfolio. Consistent with last quarter at September 30, the weighted average LTV of degree portfolio was 55%. Weighted average debt service coverage was one point seven seven, 49% of the portfolio was in Florida. 22% in the New York Tri State area. And these numbers are becoming a little less concentrated in those two as we do more real estate in the Atlanta market, the Southeast market and the Texas market. Over a period of time. Office exposure was down $122,000,000 or 7%. From the prior quarter end criticized classified CRE loans declined by $41,000,000 in the third quarter primarily as a result of payoffs and pay downs. We are seeing a more normalized refinancing market in the office market. I think everybody has seen positive comments about most of the office markets that we're in, particularly the New York market. In the recent months, the CMBS market, has picked up and there are more players involved in looking at new office. So that's part of the reason why the portfolio continues to trend down. We're seeing a little bit more of a normalized refinancing market out there. Pages 11 through 14 of the deck have more details on the CRE portfolio including the office segment. And with that, I think I'll turn it over to Leslie. Leslie N. Lunak: Thanks, Tom. Just one quick point. That $41,000,000 decline was specifically CRE office, not CRE overall in size and classified. So to reiterate, net income for the quarter was $71,900,000 or $0.95 per share. Net interest income was up $4,000,000 and as Raj said, we're very happy to report that the NIM was up seven basis points to 3%. So we hit that target that we had put out there for you a quarter sooner than we thought we would at the beginning of the year. To reiterate what we've been saying for a while now, margin expansion has been and will continue to be primarily driven by a change in mix on both sides of the balance sheet rather than by the Fed's actions with respect to rates. Continued execution on this has continued to remain our priority in the static balance sheet remains modestly asset sensitive. We've done some hedging to protect the margin if rates should decline more than the forward curves would suggest. And there'll be details about those in the upcoming 10 Q filing. This quarter margin expansion was mostly attributable to an improved funding Average NIDDA grew by $210,000,000 and average interest bearing liabilities declined by $526,000,000 On average, higher cost brokered deposits were smaller part of the funding mix this quarter. We did redeem the $400,000,000 of outstanding senior debt in August, that improved the funding mix from a cost perspective. The yield on that was 5.12. So that was helpful also. The average cost of interest bearing liabilities declined to three fifty two from three fifty seven, and the average cost of deposits declined by nine basis points to 2.38 The average cost of interest bearing deposits was down eight basis points to three forty And on a spot basis, the APY of deposits continued to trend down to two thirty one and with the rate cuts that we expect in the fourth quarter, that trend should continue. The average rate paid on FHLB advances did increase and that was mainly due to the continued expiration of cash flow hedges. Again, there'll be details on all of that in the the queue. The average yield on interest earning assets was flat at five thirty eight this quarter. While the yield on loans decreased marginally, the yield on securities was up a little bit to offset offset that. All of our guidance assumes two additional rate cuts in 2025, one in October and a 75% chance of another in December. On the provision and reserve, the provision this quarter was $11,000,000 The ACL to loans ratio was 93 basis points, consistent with the prior quarter end. And I'd refer you to slide 17 of the deck for a waterfall chart that talks about the changes in the ACL for the quarter. Couple of things that were driving the movement in the ACL and provision for the quarter. We had improvement in the economic forecast. Offset largely offsetting an increase in specific reserves, and the majority of that increase in specific reserves was related to one C and I credit and, to a lesser extent, one office loan. That C and I credit appears to be idiosyncratic in nature, Doesn't seem to be any kind of common thread with respect to industry. Or geography emerging there. We also had increases in certain qualitative overlays and obviously net charge offs. Reduced the reserve. Net charge offs totaled 14,700,000.0 The net charge off rate was 26 basis points. For the nine months ended September thirty and twenty seven basis points for the trailing twelve months, so pretty consistent. And those net charge offs primarily related to those same two loans. The one C and I loan and the one office loan. The commercial ACL ratio was pretty consistent with last quarter at 135. And the reserve remains a little more than double historical net charge offs over the weighted average life of the portfolio. As Raj mentioned, NPLs were essentially flat quarter over quarter, up 3,000,000. Of $136,000,000 in total CRE non accruals, 119,000,000 is office and the other 17,000,000 is New York rent regulated multifamily. NPA ratio was pretty flat quarter over quarter, 99 points this quarter compared to 98 last, excluding guaranteed SBA loans. Nothing of note to point out in non interest income or expense this quarter. I will point out, however, that year over year noninterest income for all categories combined other than lease financing, which we know is running down as expected, is up 24% as some of our commercial fee businesses start to gain traction. So I think I think that's very noticeable. We've been pointing that out. Think that 24% increase is worth noting. And that's early innings for us? Yes. Very much so. Yep. And noninterest expense remains well controlled. Couple of comments on guidance. For the fourth quarter. We expect margin for the fourth quarter to be flattish, essentially flat. Double digit NIDDA growth for the year is what we have guided to. We're at 13% year to date. And while we do expect some headwinds to that in the fourth quarter, I think we'll easily hit that double digit guidance that we gave you for the full year. Total loans likely flat year over year. And core C and I we expect year over year to end with low single digit growth, which echo Tom's comments that we do expect pretty strong core commercial loan growth in the fourth quarter. Because of some opportunistic purchasing activity, I think know, the securities portfolio will be down in Q4, but still up slightly year over year. Non interest expense, we had guided to being up mid single digits for the year. I think we'll do a little bit better than that, probably closer to the 3% area. So those remain well controlled. So with that, I will turn it over to Raj for any closing comments. Rajinder P. Singh: No. Listen, I'll I'll I'll close with where I started. And I'll just add one thing to to it, which you just alluded to, which is 20% growth in core fee income is something we're very happy about and celebrating. And and but not again, it's a it's not a destination. This is just this maybe the first or the second inning what we wanna do in the in the in that category. So we're very off you know? Optimistic about long term prospects for fee income. But like I said, I'll I'll end where we started you know, strong EPS growth ROA, ROE got better, margin got to 3% a little earlier than we thought. And the balance sheet for the most part behaved like we had expected it to, and credit remains pretty stable. So and capital continue to accrue. So the other thing I would like to say is this is Leslie's last earnings call. And I talked to her yesterday. I wanted to make sure she tear up. I am a little bit. She has been my partner as CFO for thirteen years. Yep. Thirteen years. So they've come you know, they've gone by very fast. But I just wanna thank her for her partnership helping me build what we have and not just a strong finance department, but a strong company. And the transition to Jim is going very well. It's been a couple of months. And over the next couple of weeks we will see the transition actually officially happen. Leslie will be with us through the end of the year. And will be a friend of the company forever. So I'll probably still reach out to her for advice into next year. Wherever she is traveling. But Good luck finding me. I'll find you. I'll find you. But but thank you. Thank you for everything you've done for the company and and for me specifically. Leslie N. Lunak: Thanks, Raj. And just one thing I would add to that, Seriously, and I mean this very sincerely, one of my favorite parts of this job has been interacting with and working with and getting to know all of you in the analyst and investor community. I really have enjoyed that. I've enjoyed working with each and every one of you. And that's one of the parts of this job that I'm gonna miss the most. With that, let's, turn it over, for Rajinder P. Singh: Q and A. Operator: Thank you. Star one one on your telephone and wait for your name to be announced. To withdraw your question, please press 11 again. One moment while we compile our Q and A roster. Our first question is going to come from the line of Benjamin Tyson Gerlinger with Citi. Your line is open. Please go ahead. Benjamin Tyson Gerlinger: Hi. Good morning. Leslie N. Lunak: Good morning. Thomas M. Cornish: Thanks again, Leslie, for all the help and really, really dumbing, dumbing, dumbing things Benjamin Tyson Gerlinger: down for me. Appreciate that. Not to start on credit, but I'm gonna start on credit. When you think about the the one C and I and CRE, you have a specific reserve, and you're also charging off. But the reserve was the build was bigger than the charge off. Is it fair to anticipate a potential charge off in four q or another one down the road as we wait for those two loans? Leslie N. Lunak: Yeah. I think with the one c and I credit yes, there will be an additional set few million dollars charge off in April. Related to that loan, but it's been fully reserved for And then with the other one, the office loan, the charge off has already been taken. Benjamin Tyson Gerlinger: Oh, got it. Okay. And then as we kind of finish out the year, I know you gave some preliminary guidance When you just think about the loan opportunity, when you think are clients becoming more comfortable with the environment we're working in? And are are you seeing it increased traction in Atlanta? And I know the Charlotte one is is fairly new, but just kinda think, like, longer term, is is the opportunity set getting better over because, I mean, you're arguably the most competitive area in The United States. So I'm just trying to think, like, is it risk adjusted spread that's not meeting the hurdles? Or why why are loans so kinda stuck? I get there's payoffs, but what what can we expect over the road? Rajinder P. Singh: I'll I'll have Tom answer this, but I just wanna start by saying our without being in markets outside Florida, the the opportunity set is actually bigger. And, yes, these are competitive markets, but they're also healthy growing markets. Right? That that that's a trade off. You wanna be in good markets, but good markets are competitive markets. So you know, we've chosen these markets intentionally and we'd rather be in growing markets that are healthy that are competitive than the opposite. So I'll let Tom speak specifically where we're seeing the opportunities and we are being very disciplined about pricing. Right? Because we have one eye on margin and the other on volume. So it is a it is you have to and, of course, credit is always front and center. So you have to balance all those three things But I would still say that it is the miss that we've had in specifically in C and I, is not about missing on production. It has been mostly because of a large amount of runoff Some of it that we don't control, but some that we do control, which is you know, pricing and credit and letting those things run out prudently. But, Tom, you just add some more color to it, please. Thomas M. Cornish: Yeah. I would say when you talk about opportunity in markets, Raj has asked me to find great markets that are not competitive and I've not been able to do that yet. Every every great market we're in is pretty competitive but I think if you look at the pricing piece of it for a second, I think we have held there is a lot of price compression and there is a lot of price competition When we look at pricing through the end of the third quarter, I was actually very happy with where we held spreads. At the end of the third quarter and we had some key segments that actually had a couple of basis points of spread increase for the quarter and that might not seem too exciting, but this is a game of inches. In keeping spreads at the level that we're keeping them is a big part of making the overall margin numbers we're looking at. I think the environment is is very good. I am always heavily impacted by ensuring that we're hitting overall production numbers. Because I believe as long as we're hitting overall production numbers, we will will see growth over the long run and we're also growing core relationships which are really, really critical to the bank. I think new markets we've invested a lot in new markets and we're investing even in markets that were maybe older markets that we were a bit under invested in. Like Tampa in the past, we're investing in new producers. In these markets. So I'm very optimistic about what we're going to see The environment's good. Business owners and executives are optimistic. About what they see in the economy and they're optimistic about what they see in companies. To some extent, it is a very complicated answer, but to some extent mix plays a big role in what we've seen in loan growth, particularly on the upper end of the C and I market more towards the corporate banking market. In terms of a lot of times you're in deals and you're approving deals that have delayed term funding in it, they have acquisition components in it. So your production on some of these kinds of opportunities doesn't immediately turn in the funding. It almost looks like a construction loan. In many ways. But I feel very good about what we're looking at in the very near term and in the next year in terms of business environment, where clients are, where we're positioned in the market, and actually how we're doing from a spread perspective and a competitive perspective in the in the market. I feel very, very enthused about where we are. Leslie N. Lunak: And I will reiterate on a little bit shorter term focus, Q4 has traditionally and historically been a stronger loan production quarter for us. With respect to next quarter in particular, that's another factor that comes play. We're a big Q4 player. Benjamin Tyson Gerlinger: Gotcha. Thank you again. Operator: Thank you. And one moment for our next question. Our next question comes from the line of David Rochester with Cantor. Your line is open. Please go ahead. David Rochester: Hey. Good morning, guys. And, Leslie, know I've already told you this before, but, it's been a real pleasure of the the years working with you. You've been extremely helpful. Good luck in retirements. And, Jim, looking forward to to picking it up with you. Thanks. Just Yeah. Absolutely. On expenses for next year, know you may still be working on those at this point, but is there any reason for expense growth to accelerate next year just given everything you want to do in the new markets or upgrading systems, anything like that? And then is there anything big that's coming that people should be aware of? Thanks. Leslie N. Lunak: I mean, Dave, I we're not prepared to give any 2020 guidance on this call. We'll you'll hear all that from Jim in January. But but there you know, we've talked about some investments in in teams and, you know, platforms and whatnot, but it's not like any giant rip everything out and replace kind of investment that we're looking at. But we'll give more specific guidance on the January call. David Rochester: Yep. That sounds good. I figured I'd try one last time. On deposits, if you could give an update on the title business on some of the trends this quarter, just from a customer growth perspective. Know you gave the balance of title, which is great. But be great to hear just what the customer acquisition was this quarter. I know you typically grow around 40 customers plus or minus. Yeah. And then, how how many customers do you have at this point? And and what's your outlook there? Rajinder P. Singh: It's very similar to the run rate that we've over the last many quarters. So I don't have the exact number in front of me, but I also am looking at you know, I'd I'd gotten an update on the pipeline for the next couple of quarters and very strong. So that title business is doing just great. And you know, it's total customers. You know, we have about 10% market share. If not more. Of the entire industry already. I'll leave it at that. Yeah. And that's the best we can tell because nobody publishes it to the to the perfect accuracy. But this business is growing It's growing at the same speed as it has over the last two, three years. And I don't I don't expect anything to slow down. Slow us down. Someday, hopefully, the mortgage market will come back, and that'll help us. But but David Rochester: yeah. Not counting on it. We're we're not counting on it. We're just when that happens, it happens. Yep. It'll it'll be nice. Just one last one on on capital. At this point, trading below tangible book, it's about a 6% discount right now. It seems like a great time to lean into that. Your capital levels are very strong. Just wanted to get your thoughts there. Rajinder P. Singh: Yeah. Like I said in my comments, we are being opportunistic with the buyback because there's been a a lot of volatility in the marketplace. So the 10 b five one plan we have out there is designed to take advantage of that opportunity of that volatility. David Rochester: Sounds great. Thanks, guys. Thanks again, Leslie. Rajinder P. Singh: Yep. Operator: Thank you. And one moment for our next question. Our next question will come from the line of Wood Neblett Lay with KBW. Your line is open. Please go ahead. Wood Neblett Lay: Hey. Good morning, guys. Good morning, Steve. Wanted to start on fee income. I I appreciate you sort of highlighting the core growth trends because it does get masked a little bit just with lease financing Yep. Cuts down. So that so that growth rate is pretty impressive. And I know a lot of it gets lumped into the other noninterest income bucket. So I was just curious if you could sort of break down some of those initiatives and given we're in the early innings, what are what are some what's the growth potential of those businesses? Rajinder P. Singh: Yeah. I'll tell you what is in that, like, the big buckets. Without breaking it out like dollars and cents, but things that are in there. It's lending fees, syndication fees, capital markets, interest rate derivatives, business capital markets, FX business, which is very new and very small so far, but could be much bigger. There's capital commercial card purchasing card businesses in there. All of that Effects more broadly, not just the derivatives? Yeah. Exactly. The FX, the spot business as well. So all of those are investments that were made over the last three, four years, some as recently as just twelve months ago, some about four, five years ago. But they're all different levels of their I'd say they're all in early innings, question is, what is in first inning and what is in second So there's a lot of room to grow. And, you know, probably the most exciting part of the bank right now growing that. Lease financing business absolutely is something which is being wound down you can see quarter over quarter, those numbers are coming down. And the deposit business, the deposit service charges, that's more related to DDA. Some of the benefits of growing DDA get picked up at margins, some in that fee income. But that's also growing at a healthy clip, not at 24%, but it's also growing. So overall fee income, should grow very nicely, especially once that lease finance drag is behind us, which we're getting close to. So we're excited about this contributing to profitability in a meaningful way very soon. Leslie N. Lunak: Yeah. And I would say all of those buckets that Raj mentioned are complementary to our core commercial lending and deposit businesses. Yeah. And Yeah. I and I think that's an important Rajinder P. Singh: And there's no, like, gain on sale type of stuff in there. We don't a mortgage origination business that can you know, go up and down on a on a moment's notice. It's all related to a core commercial business. You're making a loan, you sell a swap. You're moving money around internationally, you sell an FX product. You know, purchasing card, it's it's an annuity. Once some you know, once you sell it you know, it's a recurring income item. So we focus on trying to build stuff that is recurring, and it's closely tied to our core business, didn't just go out there and say, let's start something totally different and just generate fee income. So we don't have wealth management. We don't have some funky servicing income in here. It's very, very core to what we are doing with our clients. Leslie N. Lunak: And I do think the derivatives business, the FX business, the card business, the syndications business, all of those have tremendous growth potential. Yeah. Thomas M. Cornish: Yeah. Would add that, you know, if you look two years ago, we have invested a lot in syndication's capability. If you look two years ago, we were normally either in a bilateral deal where we were the only bank or we may have been in in a deal led by somebody else. Today, are leading more and more deals on both the CRE side and the corporate side, and that's what's driving the syndication revenue. And FX is brand, brand new. It's a baby business. Wood Neblett Lay: Yeah. Leslie N. Lunak: And, you know, not even make you know, making today a pretty insignificant contribution and that's one of the areas where we see the biggest growth potential in the markets we're in. Thomas M. Cornish: We're in high international business markets where you have a lot of international trade. And I think this gives us the opportunity to focus on when you're in places like Miami and New York and Atlanta and Dallas. You're in big international trade markets and having this capability allows us to not just take advantage of sort of daily transactions, but to focus on this kind of a client base that will drive that revenue. Business we can win that Leslie N. Lunak: we couldn't have won when we didn't have the capability as well. And, you know, like I said, I Jim will now be looking forward to the day when those numbers are all big enough that we have to break them out on the P and L. Right now, they're still new and they're a bit lumpy, but Wood Neblett Lay: Right. That that's really great color. I I appreciate it. And, obviously, there's a bunch of sub verticals there. But if I kind of just track, you know, compensation from a year ago, it feels like the fee income growth is is you know, growing a lot faster than the expense side. Yeah. So how do you how do you expect sort of, like, the efficiency ratio impact of those businesses. It feels like it should help drive improvements. Leslie N. Lunak: A 100%. I think all of those businesses are very efficient from that you know, from a cost revenue relationship perspective without question. And I do expect you know, operating leverage to continue. Wood Neblett Lay: Alright. That's great to hear. And then last I appreciate the updated disclosures on the NDFI lending book. I I was just interested on sort of how that portfolio has grown over the past several years. Is it been pretty stable? Or has it just any note on the growth trends over the years in that specific portfolio? Thomas M. Cornish: Yeah. I'd say there's been modest growth in it. Leslie N. Lunak: Yeah. I don't have all the numbers in front of me, but I would agree with that. I mean, there are certain segments Thomas M. Cornish: that have grown more. There are certain segments that have grown less when we look at that. We have grown more in business to business and sort of real estate underlying businesses and we've reduced substantially the portion of it that was consumer lending related over the last couple of years as we had more concerns about what was happening at consumer level. In some of those. So the overall bucket has grown modestly, but there's been some shifts within those buckets to kinda reflect portfolio strategy. Wood Neblett Lay: Got it. All right. Well, for taking my questions and congrats, Leslie, on the upcoming retirement. Really appreciate all all the help you've given given me in my seat. Thanks, Woody. Operator: Thank you. And one moment for our next question. Our next question is going to come from the line of Jared Shaw with Barclays. Your line is open. Please go ahead. Jared Shaw: Hey. Good morning, everybody, and congratulations also, Leslie. I guess, you know, maybe on on the CRE side, where's your appetite for incremental CRE here, multifamily balances? Rajinder P. Singh: Were down quarter over quarter. The office was down Jared Shaw: quarter over quarter. Where do see sort of opportunity and and, you know, within those subsectors. Thomas M. Cornish: I I would say it's in, three areas. I think the retail market has been very strong, particularly the gross anchored urban market and every market that we're in. We've seen good growth in that asset segment over the last eighteen months, twenty four months. We continue to feel good about the industrial segment, which has had good growth over the last few years. Industrial is performing well in virtually every market that we're in and even in the Northeast as well in places like New Jersey. The industrial market is very good. And multifamily has shifted a bit because we have a little bit less in stabilized lending and a little bit more in construction. When you look at the construction line, that's virtually all multifamily. Most stabilized loans are now moving to permanent markets. But we still see in all the markets that we're in, for the most part particularly in the South, you're still seeing good population migration You're seeing good development of new multifamily. And when you look at big picture data, around the cost of owning versus the cost of renting, In most of the markets we're in, we still see a very big differential in cost of owning versus cost of renting for homeowners. So we see continued growth in multifamily in virtually all of the markets that we're in. So those would be the three you know, primary points of emphasis that we would have. We we will still be open to a little bit of medical office But I would say the big three will be retail, industrial, and multifamily. Leslie N. Lunak: Yes, Jared, I think the decline in multifamily, the quarter wasn't any anything intentional or by design. It's just the way the chips fell for the quarter. Jared Shaw: Okay. Alright. Great. And then on the on the the non performers in office, I know it's relatively small numbers overall, but what drove sort of the incremental weakness that caused that that uptick in non performers? Was it Leslie N. Lunak: I I don't know. Or vacancy or rate? I don't even know if I'd really call it an incremental weakness, Jared. I I I think it was just episodic as these things work their way through the resolution process. I don't think it was a trend or, you know, if anything, looking forward over the medium term, I would expect it to trend down as opposed to up. Wouldn't make that comment necessarily for any one quarter specifically. But I don't think it was a trend or or incremental weakness. I think it was just the kind of episodic things that are going to happen as we work through that portfolio. Yeah, there's a small batch of loans Rajinder P. Singh: Yeah. If you look at the overall portfolio and look at the average debt service coverage ratio, Thomas M. Cornish: obviously, overall portfolio is performing pretty well to be over 1.5 We you know? But there are a handful of assets Rajinder P. Singh: that can move up or down, and there are situations where you, you know, you lose a Thomas M. Cornish: tenant in any one building and now you're in abatement period even if you bring in a new asset that things can shift up and down. Just step aside. Yeah. Overall, when we look at the whole portfolio, which I'm staring at the printout right now, the general trends in most markets are improving each quarter as abatements run off. That's the big driver is abatement runoff. Leslie N. Lunak: Yeah. And I would say the one we took the charge off on this quarter Jared, that's one that's been sitting in workout for a long time, and it finally just reached its final resolution. And yeah. So that that's what was going on with that one. Jared Shaw: Okay. And then just finally, going back to the capital discussion, we've seen a steady increase in capital CET1 and TCE. And I guess if we're assuming that the buyback is more limited in opportunistic, Any other uses of capital we should be thinking of, whether that's accelerated increase in dividends or a special dividend or M and A? And I guess what would be the upper end of capital where you would start to be more interested in the buyback versus opportunistic? Rajinder P. Singh: Yeah. I I I don't think my answer is gonna be very exciting. It's going to be the same that I've given in the past. Which is, yeah, you know, dividend growing dividend is a priority for us. And that usually we do early in the year, so stay tuned for that. Special dividends are not on the table We have gotten feedback from investors that has been very clear that don't do special dividends. Buyback is certainly something that is one of the tools that people use, though opportunistically. M and A has never really been a lever for us. As demonstrated by our history of building the bank organically. So my number one priority would be to grow. Right, organic growth. And but if it is not that, then buybacks and dividends but not special ones, just regular ones, Those will be the way to deploy it. Leslie N. Lunak: And the only other thing I would add to that, Jared, I know we're being a little maybe vague we're right in the thick right now of our annual business and capital planning process. Yeah. So you know, probably maybe a little bit more to say about this on the January call when we give you guidance for 2026. Jared Shaw: Yep. Okay. Thank you. Appreciate it. Operator: Thank you. And one moment for our next question. Our next question comes from the line of Timur Felixovich Braziler with Wells Fargo. Your line is open. Please go ahead. Timur Felixovich Braziler: Hi. Good morning. Rajinder P. Singh: Good morning. Leslie N. Lunak: Good morning. Timur Felixovich Braziler: Looking at you know, margin over 3%, reach on equity, if you round up, you're you're you're at that 10% level. I know you'll give us more detail as to the margin trajectory on the January call, but for the 10% return on equity, benefited a little bit this quarter, maybe from a lower provision. But is that pretty sustainable here going forward? Are are we kind of at that level where we're gonna continue grinding that higher? Or is there still going to be potentially some kind of back and forth the either provision expense or PPNR or whatever else? Rajinder P. Singh: I expect it to grow. Yeah. A 100%. Margin to grow. I expect ROA to grow, and I expect ROE to grow. Leslie N. Lunak: Yep. Absolutely. And I would say with respect to provision, I don't think it was abnormally low this quarter. Because we have largely a commercial lending base and things can be episodic, you can see some volatility quarter over quarter. But I don't know that I would characterize this quarter's provision overall as being abnormally low in terms of the range of what we could one could expect. Timur Felixovich Braziler: Okay. Got it. That's good color. A couple on credit. Just the $26,000,000 NDFI loan that was called out for the real estate investment fund. Can you just give us some more detail there? What's driving that MPL status? And then The underlying the underlying assets or office? The underlying what? Leslie N. Lunak: At real estate assets or office. That's what? The underlying That's that's the answer. And that that's the only one we have with an office concentration. Timur Felixovich Braziler: Okay. And then the bucket that b to c I guess, how big is that bucket and and just in terms of underlying collateral there, is there any exposure to the subprime consumer? Maybe just talk me through kind of what's in that bucket more broadly. Thomas M. Cornish: Yeah. The if you look at the b to c Which is in other in that chart. Which is Yeah. That portfolio is relatively small. Timur Felixovich Braziler: Okay. Timur Felixovich Braziler: Okay. Leslie N. Lunak: And then maybe the And it's been substantially reduced over the last few Timur Felixovich Braziler: Okay. Timur Felixovich Braziler: But in terms of in terms of of borrower type, is there any kind of distribution either by FICO or collateral type? Leslie N. Lunak: It's literally a handful of loans. Timur Felixovich Braziler: Okay. Yeah. We've been negative on the lending space for a couple of years, so we've been working that portfolio down is why it's not even making the chart. In that other, there are a lot of different categories, but, you know relative. All of which are are tiny. But it it it's you know, if we had done this chart, years ago or three years ago, that would have been you know, bigger and would have stood out here. Timur Felixovich Braziler: But now it's it's a rounding error. We say handful. It's only one handful. Leslie N. Lunak: Got it. Timur Felixovich Braziler: Okay. How about on the commercial side? Commercial delinquencies, you know, ticked up across the board. You had the the the charge and reserve for one c and I credit, but allowance looks like it's it's down kinda couple quarters in a row in the C and I book. Can you just maybe talk through is that an indication that maybe we're getting through some of the more kind of ringed in credits and and the outlook is is improving indicative of the reserves, or is there, maybe a chance for commercial allowance has to catch up on the back end of the year just given some the way the delinquencies? Leslie N. Lunak: So I really I'm pulling up this slide now, but I think the commercial reserve overall was pretty consistent quarter over quarter. The slight downtick in C and I was really because of charge off that we took. For the one loan. So I I don't think really there's anything changing at a high level about how we think about the reserve for that that portfolio. I think the delinquencies are exactly what you said. They're just you know, the normal ins and outs. I did actually ask for a list of them. It's you know, a couple loans and, I I don't think there's anything going on in there that feels like a trend. Timur Felixovich Braziler: Got it. And then just last for me, Raj, one of your Southeast peers made a comment last week that there's a lot more banks potentially for sale in the Southeast. Maybe just talk through that dynamic. Are you getting more inbounds? How are you just thinking about the the broader m and a environment in the Southeast? Rajinder P. Singh: I think mostly, I'm getting calls from investment bankers trying to you know, do the best that they can to to, you know, they're feeding the FOMO sentiment if anything else, like, everybody's doing a deal. Everyone's you better be talking. So that's the the sentiment I would say. It's mostly driven from innocent bankers Having said that, I will say it. There will be more deals. I've been saying that for for better part of a year that there's a pent up demand for deals. And we're seeing it, and we'll see more of it in the coming weeks, months, And as a buyer, you know where I stand. We're we're we're we're we wanna build the bank organically. We've had that stand for ever since we started the company. But any other deal that makes sense for us, we're always open to having a discussion. But we don't spend our day to day thinking about a deal, because if you do that, you're not gonna build a company. So we're focused on building, and if a deal ever comes along that makes sense, whether it's tomorrow or ten years from tomorrow, we're always here. To talk about it. Timur Felixovich Braziler: Great. Thank you. And and, Leslie, again, just echo the, congratulations on on retirement. Leslie N. Lunak: Thank you. And just a quick follow-up on your delinquency question in the c and I bucket. It's actually three loans, and they've been in the criticized classified bucket, but paying for a while. And so not unexpected. Timur Felixovich Braziler: Great. Thank you. Thomas M. Cornish: Nor nor are we seeing any trends No. With the language perspective that we're gonna Trevor doesn't like a trend. Yeah. Operator: You. And one moment for our next question. Our next question comes from the line of Jon Glenn Arfstrom with RBC Capital Markets. Your line is open. Please go ahead. Jon Glenn Arfstrom: Thanks. Good morning. Leslie N. Lunak: Good morning, John. Congrats, Leslie. Rajinder P. Singh: Thank you. Jon Glenn Arfstrom: Yep. Just a few follow ups. This can be rapid fire as well, but has your buyback appetite changed at all? Or is it just your approach and timing? Rajinder P. Singh: Our approach. Yeah. Jon Glenn Arfstrom: Okay. And and do you wanna grow the balance sheet over time, Raj? Or are we still kind of in the medium term in the loan mix shift mode? Rajinder P. Singh: I I we certainly wanna grow the balance Hold on one second. Getting weird music. Yeah. Emphatically, yes. We wanna grow the balance. Jon Glenn Arfstrom: Yes. The investment bankers calling, Raj. They are entertaining if nothing else. Okay. And then I I I think I know the answer but you touched a little on CRE optimism and some slower utilization as well. But is borrower sentiment better? Than it was a quarter ago? Is it generally improving at this point? Or is it Yeah. Kinda the same as it was a quarter ago? Thomas M. Cornish: I wouldn't necessarily compare it to quarter ago as much as I'd compare it to the beginning of the year. There was a lot more concern about tariff issues and which way the economy was going to head and would interest rates decline as much as people expected that was particularly in CRE investors' mind. So I would say clients have a more clear and optimistic view. That's getting a little bit better every day. Mhmm. Okay. Good. Jon Glenn Arfstrom: I guess, Raj, on the balance sheet growth question, I guess, back to that, we were interrupted. But medium term, do you expect to grow the balance sheet? Is it still a near term mix shift? What are your thoughts there? Yes. Rajinder P. Singh: Yes. I expect the balance sheet to grow in the medium term. I do expect the balance sheet to also keep changing the mix. Because we're not gonna stop on the resi runoff. So that'll keep happening, but I eventually expect C and I growth to overtake that runoff. Jon Glenn Arfstrom: Okay. Okay. Thanks a lot. I appreciate it. Operator: Thank you. And one moment for our next question. Our next question will come from the line of David Jason Bishop with Hovde Group. Your line is open. Please go ahead. David Jason Bishop: Yes. Thank you, and congrats again Leslie. You've enjoyed the working with you over the years, and, I I think I will cry if you tell me Isis is leaving as well. Hey. Quick follow-up question on the NDFI. Appreciate the color there. Just curious in terms of the the granularity of both the other and the b two b NDFI. Is that comparable average loan size to the rest of the commercial bank? Just curious if you have granularity there you can share. Leslie N. Lunak: Probably. I would say if Thomas M. Cornish: you looked at the NDFI portfolio, the average credit size is maybe slightly larger but not much. It's pretty comparable. Pretty comparable. You know, it's a fairly granular portfolio as you look at the entire like the overall loan portfolio is. We're generally prudent about taking very large exposures and credits. And if you look at this portfolio or the remainder of the whole, portfolio, you'll see a lot of mid sized credit exposures. You will not tend to see extremely large individual credit exposures. Leslie N. Lunak: Is it fair to say, Tom, that we're really not in the business of or we're really not concentrated in lines to private credit fund? Thomas M. Cornish: Yeah. No. No. We're not at all. I mean, our our b two b exposure would look like a small handful of BDC corporations which are very modest facilities. In size and we would have credit facilities that are predominantly to real estate investment funds largely in the Northeast. That have been long term historical clients and major depository clients. Of the institution and were secured by pledges of assets. These are not like not to say anything negative about any of the large private credit funds. But we're not in, you know, the $2,000,000,000 fund to, you know, whatever fund you wanna pick. That's an unsecured facility for, you know, supporting their general obligations. We're not in those kinds of deals. David Jason Bishop: Got it. Appreciate the color then. Tom, maybe a a a follow-up question, final question for you. You noted some of the headwinds on the some of the runoff in the C and I segments and such. Just curious, I don't know if you have a dollar basis or maybe what inning we're maybe in, in terms of runoff from some of those maybe noncore portfolio. Thanks. Thomas M. Cornish: Yeah, I'd say we're in the bottom of the ninth inning on that We're we're we're pretty much finished with the work that we wanted to do. From a rate perspective or a risk perspective or, you know, client focus perspective, we're at the very bottom of the game. David Jason Bishop: Got it. Thank you. Operator: Thank you. And one moment for our next question. Our last question will come from the line of Stephen Scouten with Piper Sandler. Your line is open. Please go ahead. Stephen Scouten: Thanks, guys. So Tom, your last comment was encouraging, kind of similar to what I was curious about. You know, thinking about you guys in, man, 2013, '14, was a strong double digit kinda loan grower. Haven't you know, loans have basically been flat since 2019. So what's kind of the spectrum of how we could think about potential loan growth if we really are kind of past all the needed remixing? Is it is it kind of a mid single digit run rate in a perfect world, or or could it be better than Rajinder P. Singh: We'll give you the exact guidance in January. Leslie N. Lunak: But expect growth. Yeah. Yeah. Yeah. Thomas M. Cornish: And I would say expect balanced growth across the segments that we're in, across geographies that we're in. And when you look at the CRE book, expect us to keep a very balanced portfolio. And as the overall size of the bank grows, decree book will grow, but it will remain reasonably in line with a 28% to 30% kind of size range. And when you look at the asset distribution that we have today, it will be evenly spread among major asset categories. We will We will not be overly indulgent in chasing any one asset category. It will be a balanced growth portfolio. Stephen Scouten: Got it. But it sounds like 2026 could kinda be the inflection point from versus what we've seen the last, you know, five or six years in terms of loan and balance sheet growth. Is that fair to say? Leslie N. Lunak: I think that's fair. Thomas M. Cornish: Yeah. And you you should remember during that five to six year time frame, we were taking the leasing portfolio from $2,000,000,000 to a couple $100,000,000 and we were taking multifamily rent regulated multi Leslie N. Lunak: family. That dropped dramatically by Thomas M. Cornish: three plus Minor matter of a global pandemic. Three plus billion dollars in we're awful happy to be sitting where we are. Yeah. Yeah. No. For sure. I think that's why the remix question is important to know if if if that process is kinda completed after all the puts and takes. And then maybe last thing for me, just you know, obviously, we we've seen a bit of an uptick in in the banking space in terms of more activism from investors. Stephen Scouten: I'm kind of curious if you've seen any incremental pushback from your around the path and the pace of progress and kind of what your response would be you know, if anyone were to get more more aggressive in terms of you know, asking you guys where where's profitability and what's really the pace of improvement to come? Leslie N. Lunak: I'll take the first part, then I'll let Raj take the second part. We have not been getting any increase level of pushback, and I will let Raj answer what we say if we did. We engage. We we hope we're we're Rajinder P. Singh: we're we're happy to engage with anyone. Yeah. And and we actually reach out and, you know, do as many conferences as we can. And try and go see investors as often as we can. So, you know, what I wanna make sure is that our investors understand the approach that we've taken and the progress that we're making, I wish I could just do, you know, give you a catalyst that tomorrow everything will improve. This is as Tom said in his earlier remarks, this is a game of inches. But that's how you build a franchise. It's not something know, this is a nuts and bolts business, one client at a time business. And but that's how you build something which sustains in value for a long time. So we're we're open to engaging with any investor who wants to talk to us. We do. And we do all the time. And when we sit down and talk to them, I rarely have I come across an investor saying, don't agree with what you're doing. Yeah. No. They've been very supportive of what we've been doing. You know? And they've asked some of the same questions Leslie N. Lunak: that you guys are asking. What's our more medium and longer term thoughts about growth? But but we haven't gotten you know, I think there's been supportive of what we've done thus far. Yeah. Stephen Scouten: Perfect. Thanks, guys. Appreciate the transparency. And, Leslie, congrats on the retirement. Leslie N. Lunak: Thank you. Thank you. Operator: Thank you. And I would now like to hand the conference back over to Rajinder P. Singh for closing remarks. Rajinder P. Singh: Thank you all for joining me and joining us And we will talk to you again minus Leslie in ninety days. I'll be listening. She'll be listening. She'll be asking questions. Yeah, know. I'm getting Q and A. Thank you so much. But if you have any more detailed questions, you know how to reach, either Jim or Leslie. Feel free to call us. Thank you. Bye. Yep. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.
Operator: To all sites on hold, appreciate your patience, and please continue to standby. Please stand by. Your program is about to begin. If you require assistance throughout the event today, please press Good morning. Thank you for joining OFG Bancorp Conference Call. My name is Chloe, and I will be your operator today. Our speakers are José Rafael Fernández, Chief Executive Officer and Chairman of the Board of Directors, Maritza Arizmendi, Chief Financial Officer, and Cesar Ortiz, Chief Risk Officer. A presentation accompanies today's remarks. It can be found on the homepage of the OFG website under the Third Quarter 2025 section. This call may feature certain forward-looking statements about management's goals, plans, and expectations. These statements are subject to risks and uncertainties, outlined in the Risk Factors section of OFG's SEC filings. Actual results may differ materially from those currently anticipated. We disclaim any obligation to update information disclosed in this call as a result of developments that occur afterwards. All lines have been placed on mute to prevent any background noise. Instructions will be given at that time. I would now like to turn the call over to Mr. Fernández. José Rafael Fernández: Good morning and thank you for joining us. We are pleased to report our third quarter results. Let's go to Page three of the presentation. We had a strong quarter with earnings per share diluted of $1.16, up 16% year over year on a 5.6% increase in total core revenue. Loans and core deposit balances increased year over year with particular growth in commercial loans, which has been a strategic focus as auto loans moderated, something we have been anticipating for a while. Performance metrics continue to be strong. Credit was solid. Capital continued to grow, and we repurchased $20.4 million of common shares. Business activity remains strong in Puerto Rico with a continued outlook for growth. Please turn to Page four. Our Digital First strategy is making significant strides expanding our positioning as leaders in banking innovation in Puerto Rico. As a result of our digital first strategy, we're gaining strong momentum in both adoption and new accounts. During the third quarter, nearly all our routine retail customer transactions were made through our digital and self-service channels. This is driven by continued year-over-year growth in digital enrollment at 8%, digital loan payments at 5%, virtual teller utilization at 25%, net new customer growth at 4.6%. All this is being enhanced by two related strategies. The first is our innovative product service offerings. Last year, we introduced the Libri account for the mass market and the Elite account for the mass affluent. Both offer reward programs unique to Puerto Rico and have been successful in attracting deposits from new and existing customers. The number of Libre new customers increased 17% year over year, 27% of Libre accounts have been opened digitally versus 19% last year. And new Libre accounts generated a 14% increase in related deposits. The Elite account continues to lead the market as a unique alternative for clients who want to maximize their financial progress. We have also enhanced our oriental biz account suite making treasury management easier and secure for small businesses driving higher new account openings and deposits. The second strategy is leveraging AI. Customers now receive tailored insights based on cash flows and payment habits, helping them monitor their budgets and access value-added tools to improve their finances directly from their mobile phones. We are providing an average of nine insights per month per account. Customer feedback has been running 93% positive. This quarter, we also launched internal initiatives to apply AI to boost efficiency across all banking operations and make it faster and easier to solve our customer questions and needs. All this has directly contributed to our increased market share in retail deposits and positions OFG for continued success in the coming years. Now here's Maritza to go over the financials in more detail. Thank you, José. Maritza Arizmendi: Let's turn to Page five to review our financial highlights. All comparisons are to the second quarter unless otherwise noted. Core revenues totaled $184 million driven by solid performance across key areas. Total interest income was $200 million, an increase of $6 million. This mainly reflects higher balances of loans and investments and $1 million from one additional business day. Total interest expense was $45 million, an increase of $3 million. This mainly reflects higher average balances of core deposits, higher average balances of wholesale funding, and a $500,000 impact from the extra business day. Total banking and financial services revenues were $29 million, a decrease of $1 million. This mainly reflects a decline in mortgage banking revenues due to a change in MSR valuation. Compared to a year ago, when we were first subject to reviews interchange fees under Derby, total banking and financial services revenues were up $3 million or 11%. Other income category was $2.2 million. This included gains from OFG Ventures investment in FinTech-focused funds. Looking at non-interest expenses, they totaled $96.5 million, up $1.7 million. This reflected a strategic investment of $1.1 million in technology, people, and process improvement. Dollars 1,100,000.0 tied to increased business activity and marketing and an $800,000 reduction in foreclosed real estate costs. Income tax expenses were $9.5 million with a tax rate of 15.53%. This reflects a benefit of $2.3 million in this great items during the quarter and an anticipated rate of 23.06% for the year. Looking at some other metrics, tangible book value was $28.92 per share. Efficiency ratio was 52%. Return on average asset was 1.69%. Return on Tangible Common Equity was 16.39%. Now let's turn to Page six to review our operational highlights. Total assets were $12.2 billion, up 7% from a year ago and steady compared to the second quarter. Average loan balances were $8 billion, up close to 2% from the second quarter. End of period loans held for investment totaled $8.1 billion. Sequentially, loans declined $63 million or 0.8%, mainly due to repayment of commercial lines of credit funded in the second quarter. Year over year, loans increased 5% reflecting our strategy to grow commercial lending in Puerto Rico and the U.S. Loan yield was 7.9%, down one basis point. New loan origination was $624 million. As José mentioned, this reflected in part moderation in auto loans that we have been anticipating and an expected easing of our auto sales after a surge of pre-tariffs purchasing in the second quarter. Year over year originations were up 9% and the commercial pipeline continues to look good. Average core deposits were $9.9 billion, up close to 1%. End of period balance $800 million decreased $76 million or 0.8%. This reflected increased retail and government balances and reduced commercial deposits. By account type, it reflected increased savings deposit and reduced demand and time deposits. Compared to the year-ago quarter, core deposits were up $287 million or 3%. Core deposit cost was 1.47%, up five basis points. Excluding public funds, the cost of deposit was 103 basis points compared to 99 basis points in the second quarter. The increase in costs mainly reflects higher average balances in savings accounts within the upper pricing tiers. Investments totaled $2.9 billion, up $151 million. This reflected purchases of $200 million of mortgage-backed securities yielding 5.32% partially offset by repayments. Cash at $740 million declined 13% reflecting the new securities purchases. Average borrowings and broker deposits totaled $769 million compared to $672 million. The aggregate rate paid was 4.11%, level with the second quarter. End of period balances were $746 million compared to $732 million. The third quarter reflected increased variable rate borrowings and decreased brokered deposits. Net interest margin was 5.24% compared to 5.31%. This quarter NIM reflected increased interest income from the securities portfolio and slightly higher cost of deposits and increased variable rate borrowings. Please turn to Page seven to review our credit quality and capital strengths. Credit quality continues to be stable. Provision for credit losses was $28.3 million, up seven reflected $13.5 million for increased loan volume. Maritza Arizmendi: $5.6 million for specific reserves on two commercial loans, the impact of two items from our annual assumptions update to $300,000 from updated repayment assumptions in commercial loan and residential mortgage portfolio. And $2.9 million for macroeconomic factors. Provision also included $1.3 million due to the auto qualitative adjustment related to the seasonal increase in early delinquency not captured in the model. Net charge-offs totaled $20 million, up $7.4 million. Total net charge-off rate was 1%, up 36 basis points sequentially. This includes $3.6 million from one of the two commercial loans mentioned before. Year over year, the net charge-off rate improved in consumer and auto portfolios. Recovery rate in mortgage. Looking at other credit metrics, the early and total delinquency rates were up from the second quarter but in line with the range over the past year. The non-performing loan rate was 1.22%. On the capital side, our CET ratio was 14.13%. Stockholders' equity totaled $1.4 billion, up $41 million. And the tangible common equity ratio increased 35 basis points to 10.55%. Now to summarize the quarter. The third quarter. Net interest income continued to grow reflecting our strategy of an increased volume of loans in particular commercial more than offsetting our lower NIM. We continue to anticipate annual loan growth in the range of 5% to 6%. While deposits were down sequentially, they increased year over year. We continue to expect annual growth driven by both retail and commercial accounts. Net interest margin was 5.32%, for the nine months. In line with our target range of 5.3% to 5.4% for the year. During the fourth quarter, we anticipate a range of 5.1% to 5.2%. Credit quality remains stable. Reflecting the strong economic environment in Puerto Rico. Third quarter, non-interest expenses were a little above our range, but we continue to anticipate that will be between $95 million to $96 million a quarter. As I mentioned, we now anticipate our effective tax rate for the year to be 23.06% compared to our previous expectation of 24.9%. Capital continued to build we anticipate continuing to buy back shares on a regular basis. Now, here's José. Thank you, Maritza. José Rafael Fernández: Please turn to Page eight. The Puerto Rico economy continues to perform well. Wages and employment remain at historically high levels. Consumer and business liquidity is solid. The economy also got a boost this summer from a surge in tourism. More importantly, new developments in onshoring confirm Puerto Rico's position as a world leader in medical device and pharmaceutical manufacturing. Turning to OFG, we will continue to pursue our differentiated unique customer-centric strategies, our Libre and Elite accounts and our Oriental commercial accounts are helping to grow core deposits and loans. Our commercial pipeline and credit trends are solid. And our risk management capabilities and asset liability management discipline are strong. Combined with the level of business activity, all this continues to position OFG well for growth and expanded market share. Having said that, we continue to be watchful regarding all the global macroeconomic and geopolitical uncertainties. As always, we could not have achieved these results without the hard work of our dedicated team members. We are thankful to them and excited about the future. With this, we end our formal presentation. Operator, let's start the Q&A. Operator: Certainly. Star two. We will take our first question from Erin Cyganovich with Truist. Your line is open. Erin Cyganovich: Good morning. Thank you. Maybe you talked a little bit about the deposits in the quarter, the costs of your deposits rose modestly. Is that driven by the competitive environment? Maybe you could talk a little bit about the dynamics impacting that? José Rafael Fernández: Yes. First of all, welcome to our call. Your first call with OFG and thank you for covering us at Truist. So appreciate that. To answer your question regarding the higher deposit cost, it's really driven by our strategy. When we talk about the Libre account, which is mass but we talk about the elite account, which is mass affluent, we really are strategically positioning ourselves to attract mass affluent clients through that account paying a little higher rate and that's kind of the short-term cost of it. But also betting on a long-term strategy of deepening that relationship with the customer. And that's how that product is structured. So what you're starting to see is a little bit of a higher cost on the savings side because we're being very successful with our strategy. We're really happy with the results. And we'll continue to leverage the added features that we're adding to our positive customers in terms of the insights and the predictive insights that we provide through AI are unique to each customer. And that's actually something that no other bank in Puerto Rico offers and it's giving us great momentum for us to attract new customers and potential for deepening. So that's a little bit of what's driving some of that higher customer cost on the savings side. Erin Cyganovich: Okay. That helps. And then in terms of the commercial loan originations, those were solid, but yet some pay downs on lines of credit. Maybe you'd talk about the dynamics for commercial and outlook for commercial loan growth ahead? José Rafael Fernández: Sure. So as Maritza pointed out in her remarks, part of what occurred in the third quarter was the repayment of some of the commercial lines that were drawn in the second quarter. So that's a little bit of what drove the balances to be to go down. But going forward, we have a very solid pipeline. We continue to see great business activity in Puerto Rico. And Oriental going after those opportunities. So we're very confident about our commercial pipeline in the fourth quarter and starting to build the 2026 pipeline also. Erin Cyganovich: All right. Thank you. José Rafael Fernández: Yes, you're welcome. Thank you. And again, welcome to the team. Erin Cyganovich: Appreciate it. Operator: We'll take our next question from Timur Braziler with Wells Fargo. Your line is open. Timur Braziler: Hi, good morning. Thanks for the question. José Rafael Fernández: Good morning, Timur. Timur Braziler: Just a follow-up on paying up for some of the savings account deposits. Can you just maybe talk us through what type of rate is being required to win some of those balances? And as you think about from a competitive landscape, where are you really targeting to take some market share here? José Rafael Fernández: Yes. So as I explained earlier a little bit, just we go after the mass market with a zero-cost account. It's a checking account and we drive the growth through our uniqueness in terms of the offering. On the Elite account, average cost is around 1% plus, let's say, 0.5% on average. Let's just say. And it's targeting the mass affluent. And again, it's us driving value add and focusing on the customer just to attract those customers to OFG and be able to deepen those relationships as we build trust with them. And that is again, paying playing very nicely for us on our strategy. And the key here is deepening, right? And how do we be are able to deepen that relationship through debit card utilization, auto loans, mortgage loans, wealth management, etcetera, which we offer throughout. And that's kind of what's driving that higher cost on the savings side. There's nothing else to it. Timur Braziler: Got it. Thanks. And then maybe two questions around credit. The first, if you could just provide any kind of additional color on the commercial loans. And then looking at that commercial portfolio, on the mainland in particular, two out of the last three quarters, we saw some pretty large charge-offs out of that portfolio. Can you just maybe speak a little bit more broadly about what you're seeing within Mainland CRE? José Rafael Fernández: Yes. So let me answer your second question first. On the Mainland portfolio, we do see some very good opportunities for us to continue to build the book and use it as a geographic diversification. We do small participations on the small and mid-sized commercial lending. With some partners and that strategy continues to play out. On the second on the first part of your question, where you've seen some charges in the last several quarters. It's part of our way of managing risk within that portfolio. And it's actually started like a couple of years ago when we started to feel pressure in the U.S. economy and felt that we should reduce some of those risks and it required some charge-offs. So that's kind of we don't see that as we see it more idiosyncratic than being more market-wide. And feel comfortable with our team and the efforts that we're doing. Now in particular to the quarter, the two commercial loans. One is a U.S. loan and one is a Puerto Rico loan. The U.S. loan it's a $5 million loan where we basically took a provision and the charge-off this quarter because we sold it. And the second loan is a Puerto Rico commercial loan. It's a company that acquired a large did a large acquisition. They're having some operating and financial weaknesses and we're proactively provisioning for that loan. So these are idiosyncratic. We see them as being market related. Timur Braziler: Okay. Thanks. And then just lastly on auto loans, the pickup in charge-offs there, it's kind of more in line where it had been 3Q, 4Q, 1Q. Is this kind of just getting back to that type of rate? I know you've been calling for origination sales down in auto for quite some time. We finally got that there. Just talk a little bit more about just broader auto trends, both from a growth standpoint and then from a credit standpoint? José Rafael Fernández: So I'll talk about the growth and I'll pass it to Cesar to talk about the credit. On the growth side, we were expecting the slowdown. I think on the auto lending side, what we're seeing is we see the bottoming coming in right now in terms of loan originations. And we might see a slightly higher in the fourth quarter. But these are more normal levels in our view. And we feel comfortable with the originating levels that we're having right now, Timur. Can you talk about the credit? Cesar Ortiz: Yes. On the charge-offs, what we're seeing is seasonal dynamics of the retail portfolios. Usually at the lowest levels of the first quarter and then gradually those statistics come up and they peak towards the fourth quarter. So what we saw quarter over quarter is a modest increase on charge-off and all the statistics. But when we compare it to last same period last year, we see a better trend. So we're optimistic, based on those comparisons. Timur Braziler: Great. Thanks for the color. José Rafael Fernández: Yep. Thank you, Timur. Thank you for the call. Operator: We will take our next question from Kelly Motta with KBW. Your line is open. Kelly Motta: Hey, good morning. Thanks for the question. José Rafael Fernández: Hi, Kelly. Kelly Motta: Maybe circling back to the Q4 margin guidance, 5.10 to 5.20. Wondering, Maritza, what that what that what the Fed funds assumption is in that given that you guys are asset sensitive? One. And then two, maybe you could talk a little bit about I think we on on the last quarter call, you were calling for some margin expansion provided we got some loan growth all else equal. Just with the margin being down kind of if there was anything in that that you know, differed from your expectations maybe three months ago that that drove that? Thank you. Maritza Arizmendi: Yes. Thank you, Kelly, for your question. And first, I think one point when we look back at the quarter and the inflows into the deposits that has been better than expected in the savings account that one of the deviation from our original estimate. So that's the answer to that. So the second part relates to what we are expecting in the fourth quarter. And the reality is that we are asset sensitive on the last cut was end of September. So we will have most of that impact during the fourth quarter. The repricing, the full effect will be on the cash and in the variable rate portfolio that we have in the commercial that is half of it. So that's why we are reviewing our guidance towards 5.1 to 5.2 and always depending on the funding mix. So right now, everything remaining equal is mostly related to the 25 basis point cuts. José Rafael Fernández: And I don't know if you realize too, but we do have inflows and outflows throughout the quarter. Of large deposits. And that is also part of what creates a little bit of the quarter volatility. But as Maritza said, fourth quarter guidance as as the one that she mentioned, $510 million to $5.20. Kelly Motta: Does that just to clarify, does that $5.10 to $5.20 contemplate any additional cuts here in fourth quarter? Maritza Arizmendi: Well, we are expecting 50 basis points cuts, but since it won't be outstanding most of the quarter, the most of this impact relates to the 25 basis point that was made late September. José Rafael Fernández: Yes, we are modeling 50 basis points reduction in Fed funds in the fourth quarter. Kelly Motta: Great. That's really helpful. Maybe one for you José. You've highlighted the investments you're making in AI to drive some efficiencies ahead and that drove expenses a bit higher. I know that's over time to generate greater revenues or recognize better improvement on the expense side. So maybe if you could talk a bit more about that and kind of, like, the cadence because I know it takes some time to realize that. So how how you strategically approaching? Thanks. José Rafael Fernández: Yep. Thank you. Not only, you know, just to clarify, we are making the investments, but we're also delivering on the features and the benefits for our customers on the value proposition that we provide and it's unique. And no other bank in Puerto Rico is actually today providing any insights to their customers based on their cash flows and their payments and whatnot. So that's a very big differentiation that we're going to continue to drive forward. Now regarding the investments that we're making in technology, we will continue to make those investments but we are also starting to see opportunities for us to bring efficiencies in our banking operations and we will be guiding you guys into the expenses of 2026 in the fourth quarter. But we're starting to see opportunities for us to bring efficiencies and be able to pass those efficiencies as part of our investment in technology. So we're very cognizant of the investments that we're making in technology, but we're equally cognizant of the importance of bringing efficiency and we're seeing it in the operating side of the bank particularly with people efficiencies. Kelly Motta: That's really helpful. Maybe last question for me. You guys were more active on the buyback this quarter. Given capital is strong, you're generating a ton of earnings, like what's the go forward outlook? Can you remind us of capital priorities here, including M&A? José Rafael Fernández: Sure. I mean, capital is strong. We feel that we have great opportunity to fund loan growth and that's our priority. But we're seeing we're going to be a lot more active on the buyback in the fourth quarter and into 2026. Because the earnings momentum that we have and the earnings power that we're having puts us in a great spot in terms of capital management. Also backed up by Puerto Rico economy that remains pretty good and it's driving infrastructure investments. We mentioned the onshoring benefits that are starting to become somewhat of a reality. It will take some time, but it's moving along. We're also seeing Puerto Rico well positioned given the current geopolitical challenges in The Caribbean and Puerto Rico being the hub for that. All those things give us confidence on the Puerto Rico economy. And certainly, it's going to drive our business forward. So from a capital management perspective, loan growth number one, buybacks and dividends number two and number three. Because we really are in a good spot right now. Kelly Motta: Great. Thank you so much for all the color. I'll step back. José Rafael Fernández: Yep. Thank you, Kelly, for your question. Operator: We'll move next to Anya Pellshaw with Hubd. Your line is open. Anya Pellshaw: Hey, guys. I'm asking questions on behalf of Brett here. I know you guys already talked about loan growth, but I was hoping you could expand on any payoff activity that might also affect commercial in the future? José Rafael Fernández: I'm sorry, I could not understand well your question. Can you repeat it? Anya Pellshaw: Yes. You've already talked about loan growth. But could you expand and talk about any payoff activity that might also affect commercial from here? José Rafael Fernández: Yep. Payoffs are hard to predict. But what we are seeing is there's usually some small seasonality on the lines of credit in the third quarter, given some clients that we have that receive funds, federal funds either for construction services or education. And they kind of draw on the line of credit in the second quarter. Then they get the funding in the third quarter and pay them off. That's usually on the third quarter. But we are not expecting any significant variability on the lines of credit in the fourth quarter. Anya Pellshaw: Thank you. And you've talked about charge-offs a little bit. But is there anything else you guys might be seeing as far as credit quality goes? José Rafael Fernández: As I mentioned, we're not seeing anything apart from a couple of idiosyncratic commercial loans that I mentioned earlier, the rest on the consumer book and the auto book we're not seeing anything that concerns us. We're seeing, again, supported by an economy that has a lot of activity. So and liquidity in the system. So not seeing anything that drives us to be concerned on credit. Anya Pellshaw: Thank you. Appreciate it. José Rafael Fernández: Yep. Thank you for your questions. Operator: At this time, there are no further questions. I will now turn the call back over to management for closing remarks. José Rafael Fernández: Thank you, operator. Thanks again to all our team members. Thank all our stakeholders. Who have listened in. Operator: My apologies. We do have a follow-up from Timur. Timur Braziler: Thank you. Got in there at the last second. José, you made a comment on new onshoring investments in Puerto Rico. Can you just maybe talk us through what those have been and maybe how that's progressed? In the Trump two point o administration? José Rafael Fernández: What we are what we know is what we hear and read in the papers. We are seeing around 10 or 11 multinationals that are already announcing investments in Puerto Rico. Some of them are medical devices, others are pharmaceuticals. We're seeing solar panels. We're seeing textiles. It's a little bit broader than what we have seen in the past. Again, it points out to Puerto Rico's positioning in terms of manufacturing that we've been for many years and is an opportunity for these companies to expand their production lines. Some of them have already operations. There's one or two that are going that have announced new operations in Puerto Rico, but the majority are existing companies that are announcing investments in additional production lines in the island. So overall, I think it's all driven because of the onshoring benefits that provide the tariffs, the tariff threats and all the tariffs that have been imposed. And Puerto Rico being a U.S. jurisdiction and being a manufacturing hub for medical devices and pharmaceuticals is just the right hub for those companies to invest further in the island. So it's something new for Puerto Rico because we haven't seen this in several decades. And for the first time, we're starting to see those announcements. So it's encouraging. And that will drive indirect benefits because there's a lot of hires with well-paid employees. It also drives indirect suppliers to these companies and all that. So it has a trickle-down effect to the economy that is pretty positive. So we're encouraged with that. Again, this is not flowing in now. But it's a great way of starting to see the light at the end of the tunnel when federal funds start to fade away and we have some private investments coming in. To us, it's a win-win. Timur Braziler: That's great color. Thank you. José Rafael Fernández: Yes. Thank you, Timur. Well, thank you everybody for the call. I appreciate everyone participating and looking forward to the fourth quarter results. Have a great day. Operator: This does conclude today's program. Thank you for your participation. You may disconnect at any time and have a wonderful afternoon.
Operator: Good day, everyone, and welcome to the Moody's Corporation third quarter 2025 Earnings Call. At this time, I would like to inform you that this conference is being recorded and that all participants are in a listen-only mode. At the conclusion of the prepared remarks, we will open the conference up for Q&A. As a reminder, the call will last one hour. I will now turn the call over to Shivani Kak, Head of Investor Relations. Please go ahead. Thank you. Good morning, and thank you for joining us today. Shivani Kak: I'm Shivani Kak, Head of Investor Relations. This morning, Moody's released its results for 2025 and updated guidance for select metrics. The earnings press release and the presentation to accompany this teleconference are both available on our website at ir.moodys.com. During this call, we will also be presenting non-GAAP or adjusted figures. Please refer to the tables at the end of our earnings press release filed this morning for reconciliations between all adjusted measures referenced during this call in U.S. GAAP. I call your attention to the safe harbor language, which can be found towards the end of our earnings release. Today's remarks may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In accordance with the act, I also direct your attention to the management's discussion and analysis section and the risk factors discussed in our annual report on Form 10-Ks for the year ended December 31, 2024, and in other SEC filings made by the company which are available on our website and on the SEC's website. These, together with the safe harbor statement, set forth important factors that cause actual results to differ materially from those contained in any such forward-looking statements. I would also like to point out that members of the media may be on call this morning in a listen-only mode. Rob, over to you. Robert Scott Fauber: Thanks, Shivani, and thanks everybody for joining today's call. This morning, I'm going to start with the highlights from Moody's strong third quarter results, and I'm going to provide some insights from our latest refunding wall studies as well as some examples of how we're winning in the deep currents that we're operating in. But let me give you the punch line. We delivered record quarterly revenue, we're raising our full-year guidance across almost all metrics, and we continue to drive significant innovation throughout the firm all at the same time. Now following our prepared remarks, Noemie and I, as always, will be glad to take your questions. So with that, let's get to the results. We finished the third quarter on a high note. Markets closed with the busiest September on record, and Moody's notched a new record of our own. We exceeded $2 billion in quarterly revenue for the first time ever in our history, that was up 11% from the third quarter of last year. Moody's adjusted operating margin was almost 53% in the third quarter, up over 500 basis points from a year ago demonstrating the tremendous operating leverage that we've created in our business. We delivered adjusted diluted EPS of $3.92 in the third quarter, which was up 22% from last year. And that's particularly impressive given the tough comp in 2024 when we posted 32% year-over-year growth on top of the 31% growth in 2023. And just to put this in perspective, we've more than doubled adjusted diluted EPS from the same quarter just three years ago. Consistently strengthening the earnings power of the firm year after year after year. And all of this while investing to harness the immense opportunities and the deep currents that we've talked about over the past several years. Now on to the highlights for our ratings business. MIS delivered 12% revenue growth for the quarter and surpassed $1 billion of quarterly revenue for the third consecutive quarter, setting an all-time record. Our position as the agency of choice enabled us to capitalize on a healthy issuance environment and record tight spreads. And the strategic investments we've made in technology, analytical tools, and talent are equipping us to meet surges in issuance volume and capital markets innovation. Now looking forward, the issuance pipeline is robust. Demand is solid with spreads hovering around near record lows. And the refi walls continue to build. Additionally, demand for debt financing remains strong in areas that we've consistently spotlighted over the past year or two. That includes private credit, AI-powered data center expansion, infrastructure development, and transition finance. And you can see this coming through in some of the marquee deals that we rated in the quarter. First, we were the sole rating agency on the first of its kind emerging market CLO in APAC for the International Finance Corporation, which is a member of the World Bank Group. And that was a very innovative financing vehicle for frontier markets. Second, our corporate ABS team rated a more than $1 billion data center securitization, also the first transaction of its kind. Which is backed by three high-quality newly constructed data centers and their related leases. And third, we rated the largest Asian corporate bond ever issued at almost $18 billion with much of the proceeds being used for data center investment. And all of these are notable examples of deep currents driving demand for debt financing. And while those deep currents are driving new issuance, refunding needs continue to grow as well. Our most recently published refunding study shows that refunding needs over the next four years are projected to surpass $5 trillion, which represents a compound annual growth rate of 10% from 2018 to 2025. That number is approximately double the dollar volume seen in 2018 and this gives us some real confidence in the medium-term growth trajectory for MIS. Now there's typically a lot of interest in these reports, on this call, so let me just share a few key findings with you. First, non-financial corporate refinancing walls in both the US and EMEA grew 6% over the upcoming four-year maturity horizon. Overall, investment-grade maturities are up 5%, while spec-grade maturities are up 7%. And notably, within spec-grade, US bond maturities have increased by more than 20% and in EMEA, spec-grade bonds and loans each rose by approximately 20%. And all of this points to a favorable backdrop for future issuance and the mix is especially encouraging. Given that spec-rate issuance tends to be more accretive to our revenue profile. So for those of you interested in exploring the full reports, they're available on moodys.com. Or through our investor relations team. Now beyond the refunding walls, we remain well-positioned to meet the evolving market needs in private credit. And that's a theme that we've consistently highlighted on prior calls. Private credit continues to be a growth driver for ratings. In the third quarter, the number of private credit-related deals grew almost 70%. Notably, direct lending remains the smallest portion of our private credit-related activity, while fund finance and securitization are leading the way in both deal counts and issuance volumes. Revenue tied to private credit grew over 60% in the third quarter across multiple MIS business lines, albeit off a relatively small, but expanding base. We're also seeing a growing number of private deals returning to the public debt markets for refinance. And according to Bloomberg's left Fin Insights, issuers are realizing material savings. On average, something like 200 basis points, but in some cases, as much as 400 basis points. When compared to private market rates. And as I've mentioned before, this dynamic effectively acts as a deferred maturity wall as we see unrated private direct lending deals refi into the rated BSL market. And as this market continues to grow, we continue to invest in experienced analytical teams and methodological rigor to ensure ratings quality. Now turning to Moody's Analytics. We delivered strong results again this quarter. Revenue growth was 9% year over year, including 11% in Decision Solutions. ARR is now nearly $3.4 billion, which is up 8% versus last year. And we're delivering margin improvement ahead of our plans just earlier this year. Our cross-MA initiatives are yielding results, delivering a 34.3% adjusted operating margin up 400 basis points versus last year, and as a result, we're increasing our full-year margin outlook for MA to approximately 33% and we believe this puts us solidly on track to meet our medium-term margin commitments. Now we're continuing to invest in scalable solutions across high-growth end markets, while at the same time simplifying the product suite and optimizing our organizational structure. So one example of that simplification in the third quarter, we entered into a definitive agreement to sell our Learning Solutions business to Fitch. We had a good run with our learning business, but we felt it no longer fit the profile of where we're seeking to invest in scalable recurring revenue businesses. In parallel with these portfolio simplification efforts, we remain very focused on the deep currents driving demand for our analytics offerings. And in MA, that includes an increasing focus on fiscal climate risk, and enhancing and expanding our solutions to help customers embed AI more deeply into their workflows. On a recent trip to Asia where we celebrated forty years of Moody's in the region, I heard firsthand about two customers who are investing in our physical risk solutions to understand the impact of extreme weather events and both of these are outside of the insurance sector. First, one of the largest banks in Japan and for that matter, the world, is using the RMS models that are traditionally used by our property and casualty insurance customers to understand physical climate risk across lending and portfolio management. Second, we recently won a multiyear deal with an Asian regulatory agency to deliver physical climate risk data to 11 banks and insurers. And this marks the first time globally that a regulator has purchased Moody's Climate Solutions on behalf of its financial sector. And this initiative enables the integration of physical risk analytics into regulatory reporting, and core business functions and also establishes a precedent for further regional adoption and collaboration. Now on AI, you've heard me talk before about the very encouraging engagement that we have with a number of large banks who are interested in leveraging our data and models their internal AI-enabled workflows. And while these discussions have taken time to move through banks' risk governance frameworks, we're now seeing some tangible momentum. In the third quarter, we signed over $3 million in new business with a Tier one U.S. Bank, which included solutions to automate credit memo creation and to deploy early warning systems across its real estate portfolios. These solutions are driving meaningful efficiency gains for our customers, are accelerating time to decision, and delivering a competitive edge. And this is a powerful example of how Moody's is uniquely positioned to bring together proprietary data advanced analytics, software and now GenAI capabilities and agents into our customers' mission-critical workflows. Now these Agenza capabilities are just one part of a broader investment strategy, one that's focused on unlocking the full potential of our data and analytics estate. And we're not only investing in how we build intelligent AI-powered workflows, but also in how we package and deliver our proprietary data and analytics, embedding that directly into our customers' internal systems and our partners' platforms. As we've discussed on recent calls, partnerships are an important part of this strategy. And we're embedding our data into partner ecosystems extending our reach while preserving the depth of our domain expertise. And this approach not only scales our impact, it also deepens customer integration, improves retention, and it will help to continue to drive durable growth across our portfolio. So a prime example this quarter is our partnership with Salesforce, where we continue to see strong growth from our integrated suite of connectors, includes company firmographic data news and other content. And this supports third-party risk management and compliance monitoring among other functions. Bringing Moody's unique data and intelligence directly into Salesforce workflows. With great success. We're now expanding our partnership to make available our proprietary GenAI-ready data and analytics within Salesforce's AgentForce 360, and in addition, Moody's will make available on agent exchange our new agentic AI sales tool, that I think I've talked about on prior earnings calls, and that elevates sales teams by automating lead prioritization and delivering predictive insights. Leveraging our data. And this is one part of our broader AI strategy. So zooming out, there are a few dimensions to that AI strategy. The first is our foundational AI agent builder platform that all of our employees can use to reimagine workflows and increase productivity. As we've highlighted before, we're delivering efficiencies in engineering and customer support, and we're now setting our sights on sales, product development and a variety of corporate functions as well as ratings workflows. The second dimension is our AI Studio factory, which is a platform designed for agentic product development. And the third is our recently announced AgenTic solutions, enabling us to commercialize smart APIs, MCP servers, and domain-specific agents that leverage our vast proprietary data and content estate and deep subject matter expertise. So switching gears, we also continue to invest in growing our ratings footprint in emerging markets. And this past quarter, we signed a definitive agreement to acquire majority interest in MIRAS, the leading ratings agency in Egypt. And this transaction will deepen Moody's presence in The Middle East and Africa giving us a very strong first-mover advantage across all of the region's domestic debt markets. And you've heard me say this before, these are generational investments. As emerging markets, including China, are expected to account for more than 60% of global GDP by 2029. And to that end, of the approximately $30 trillion of debt outstanding in those markets, only about 10% is cross-border. That means that the remaining 90% is issued locally, and rated locally. And that's why these domestic market investments are so important. So before I hand it over to Noemie for more details on the numbers, a few key takeaways. This past quarter, we delivered strong growth, significant operating leverage, and we have good momentum heading into next year. And of course, just a quick shout-out to all of my teammates for the fantastic work this quarter helping deliver one of the strongest quarters in Moody's history. Noemie, over to you. Thanks, Rob, and hello, everyone. Noemie Clemence Heuland: Q3 was outstanding. We showcased the full force of our earnings power. We are lifting both our top and bottom line guidance. And we're proving we can invest for growth and expand margins at the same time. Let's dive right in. Starting with MIS, revenue grew 12%. A very strong result, especially given the typical softness in Q3. All Ratings lines of business contributed to the growth, supported by the constructive issuance environment. The largest increase came from leveraged finance activity, followed by financial institutions driven by heightened issuance from infrequent issuers including fund finance and BDCs. Issuance totaled nearly $1.8 billion marking the highest third quarter on record. This reflects a combination of factors we've previously discussed, including historically tight spreads, strong investor demand, and the announced rate cut near quarter end as well as a pickup in M&A activity. MIS transaction revenue rose 14% slightly trailing the 15% growth in issuance due to high volume of repricing activity this quarter. As noted before, simpler and less complex bank loan repricings typically yield lower revenue and are less favorable from a mix perspective. MIS recurring revenue increased 8% year over year, reflecting the impact on ongoing pricing initiatives portfolio expansion and sustained monitoring fees. Foreign exchange contributed to a favorable 1% uplift consistent with the benefits seen in the second quarter. Now some color on Q3 transactional revenue by asset class. Corporate Finance transaction revenue increased by 13% supported by a 29% rise in bank loan revenue compared to 58% issuance growth. This issuance surge was largely driven by repricing activity which rebounded following subdued levels in Q2. Spec grade revenue rose 43% marking the strongest quarter for rated issuance since 2021. This was fueled by positive investor sentiment and robust market access for these issuers. Investment grade revenue declined 176% drop in issuance. Despite the decline, overall activity remained solid supported by several large M&A transactions. Notably, Q3 of last year was the second highest third quarter on record for investment grade. Driven by significant yield volume in the energy, oil and gas sector, creating a bit of a challenging comp base. In Financial Institutions, transactional revenue grew 34%, significantly above the 3% issuance growth. This was driven by the strongest volumes in a decade from frequent issuers within the banking sector. Public, Project, and Infrastructure finance transactional revenue remained relatively flat reflecting weaker activity in Project Finance and Sovereign. However, this was partially offset by strong performance in U.S. Public finance especially within the Regional and Muni space. Structured Finance transaction revenue rose 10%, supported by strong activity in CLOs especially new deals driven by growth in leveraged loan formation. This was complemented by improving activity in U.S. RMBS, underpinned by sustained investor demand and healthy deal flow. As Rob mentioned, private credit continues to be an important driver of MIS revenue growth, mainly from fund finance and business development companies or BDC activities. First-time mandates reached 200 in Q3, that's up 5% year over year. Growth was strong across both North America and LatAm, putting us on track to reach $700 million to $750 million for the full year. This momentum was partially driven by private credit-related mandates across financial institutions structured finance, and private investor requested ratings in PPIF. As a reminder though, with the growth in private credit, some issuance activity will not be captured in rated issuance figures, reported by external data providers. Now turning to margins, MIS delivered an adjusted operating margin of 65.2%, which is an expansion of 560 basis points year over year. And as a result, we are raising our full-year guidance to a range of 63% to 64%. Looking forward, and as shown on this slide, we are updating our issuance outlook by asset class. Our forecast for the remainder of 2025 assumes continued momentum from the quarter, even as we approach the typical and expected normal seasonal slowdown towards year-end. We expect issuance growth to be mid-single digit for the full year, with notable updates in investment grade, leveraged loan and high yield bond issuance bolstered by improving M&A activity. As previously noted, we expect spreads to remain near historic lows, despite some modest widening. Investor demand remained strong and size of renewed M&A momentum are emerging. That's actually reflected in the uptick in our Rating Assessment Service or RAS business, which often serves as a leading indicator for M&A. In fact, Q3 marked record quarterly revenue for RAS, this reinforces our expectation that M&A will be a positive contributor as we head into 2026. In the near term, we're raising our estimate of M&A issuance to a range of 15% to 20% for the full year 2025. Now translating this to revenue, we now anticipate full-year MIS revenue growth in the high single-digit range, and that's an upward revision from our previous outlook. Overall, we remain optimistic about issuance activity, but it's important to note that our guidance doesn't factor in a significant disruption like the one we've experienced earlier this year. Risks remain with ongoing tariff and trade negotiations, and the full impact of a prolonged government shutdown on market conditions is difficult to predict. That said, we believe we've accounted for the broad spectrum of the most plausible scenarios in our updated guidance. Turning to Moody's Analytics. This business continues to deliver an impressive financial profile. 93% recurring revenue, a 93% retention rate, and consistent growth at scale. Reported revenue grew 9% year over year, while recurring revenue grew 11% or 8% on an organic constant currency basis. As we've talked about a lot in recent years, we've been actively reshaping the revenue mix by downsizing lower margin services, and increasingly leveraging implementation partners across regions. As a result, transactional revenue continues to decline, down 19% this quarter. ARR growth of 8% is consistent with last quarter, you'll notice some quarter-to-quarter movement in individual line of business growth rates. Often driven by large new business wins or large attrition events. Across the portfolio, though, retention rates consistently hold in the low to mid-ninety range, and that supports high single-digit AR growth. Now let me double click into each of the lines of businesses to give you a clearer view of the underlying dynamics. First, Decision Solutions, which includes our banking, insurance and KYC delivered double-digit AR growth this quarter at 10%. KYC continues to be the fastest growing part of Decision Solutions, with sustained growth in the low to high teens over the last several quarters. This quarter, we reported 16% AR growth and I want to highlight two recent sales in the tech sector that illustrate the appetite for our KYC solutions beyond financial service customers. First, a large technology company signed a major deal to integrate Moody's Orbitz data into its denied party screening system. Helping block transactions with entities in countries of concern. This deal positions Moody's as a trusted provider of critical data for regulatory compliance, and showcases our ability to address complex challenges with innovative solutions. Second, a global social media platform is using Moody's to strengthen fraud detection and business verification across its ecosystem. Our data helps uncover hidden ownership structures, circular directorships, and brand inconsistencies streamlining investigations, reducing minor review, and accelerating decision making. Insurance delivered 8% AR growth this quarter and there are a few dynamics worth noting, given the diversity in the end markets we serve. First, growth in our Life business remains strong and has been bolstered recently by customers adopting more sophisticated models and increased usage. On the Property and Casualty side, 2024 was a standout year for both new business and retention, with several large cross-sell wins and retention rates in the high 90s, presenting a bit of a tougher comp. In our banking line of business, which includes our lending suite, as well as risk regulatory and finance solutions, we delivered ARR growth of 7% in Q3. Reported revenue was flat in the third quarter versus last year, influenced by the revenue accounting for multiyear sales of on-premise solutions. With risk, regulatory and finance solutions growing at mid-single digit, the headline growth rate masks the strength of our lending business, including Credit Lens, which continues to grow AR at a low to mid-teens pace and is the largest revenue contributor. We're investing to expand our offering into a more comprehensive solution that spans the full lending workflow. This approach is resonating with our core customer base. Mid-tier banks, and is increasingly enabling us to cross an upsell across our solution set. Next, turning to Research and Insights, we delivered AR growth of 8%, and that's an improvement as we lapped last year's attrition events. Growth was further supported by strong upsell execution fueled by our ongoing investments in CreditView, including research assistance and our suite of organic adjunctive solutions. Finally, Data and Information ARR grew 7%, and continues to be affected by cancellations from earlier this year. On the positive side, we still see strong pricing power, sustained demand for ratings data feeds and strong Orbis new business volume. Moving on to margin, We delivered ahead of our initial plan so far this year with a 400 basis points improvement in Q3, and we now expect approximately 33% for the full year. This represents over 300 basis points of year-over-year margin expansion before absorbing a headwind of about 100 basis points from the three M&A deals within the last year. But let me be clear, we're not stopping there. This progress is rooted in programs designed to maximize investments in strategic growth areas, and realize a more efficient organization footprint. We remain focused on expanding margins towards our medium-term commitment of mid to high 30s over the next two years. To get there, we are prioritizing and redeploying R&D spend across our portfolio, redesigning enterprise processes with GenAI, deploying productivity tools, and optimizing vendor relationships. We remain confident in Moody's Analytics' high quality, predictable ARR growth our ability to deliver sustained margin expansion strengthening the earnings durability. Now, to help with modeling, I'll walk through a few additional details behind our updated outlook assumptions. You can see the MIS and MA guidance updates here on slide 13. We now expect MCO revenue to grow in the high single-digit percent range. We are reaffirming our operating expense guidance which supports an adjusted operating margin of about 51% highlighting the strong operating leverage of our business. At the MCO level and excluding restructuring charges, we anticipate operating expenses to increase by $10 million to $20 million quarter over quarter consistent with expectations we shared in the second quarter. We also expect incentive compensation to be approximately $100 million in line with Q3. As demonstrated by our margin performance, particularly in MA, our efficiency program continues to deliver meaningful improvements. We have already executed over $100 million of annualized savings, helping offset annual salary increases and variable costs. We're updating our adjusted diluted EPS guidance range of $14.5 to $14.75 which implies roughly 17% growth at the midpoint versus last year. One modeling note on our tax rate. In October, a statute of limitations expired related to certain pre-acquisition tax exposures Moody's assumed in a prior year M&A transaction. This will result in a one-time approximate 200 basis point favorable impact on our full-year 2025 effective tax rate. Please note, this benefit will be fully offset by the release of the indemnification asset so there will be no impact to net income or EPS. Turning to cash flow, we now anticipate our free cash flow to be approximately $2.5 billion and we are increasing our share repurchase guidance to at least $1.5 billion. That puts us on track to return over 85% free cash flow to our shareholders this year. To wrap it up, this quarter's results reflect the strength of our strategy and execution. We are approaching transformative shifts in technology from a position of financial strength, allowing us to invest in innovation while continuing to expand margins and grow revenue as seen again in Q3. And with that, operator, we're now happy to take any questions. Operator: Thank you. Star one on your telephone keypad. If you are on the speaker phone, please pick up your handset and make sure your mute function is turned off so that your signal reaches our equipment. We ask that you please limit yourself to one question. The option to rejoin the queue will be unavailable. Again, that is star one to ask a question. Our first question will come from the line of Mona McNayat with Barclays. Please go ahead. Brendan: Good morning. This is Brendan on for Manav. Just wanted to ask, oh, just to get your guys' thoughts on just pros and cons of AI in your analytics business? It sounds like you had some recent wins, but just curious how you're thinking about seat-based exposure, whether or not it's explicitly tied to your contract or not, and just and just what you're hearing from your key financial services customers. On the topic. Robert Scott Fauber: Yeah. Hey, Brendan. So first of all, we've really never had, you know, kinda seat-based exposure. That's generally not the way the contracts have been structured. So, you know, AI is not gonna be any different. I would say maybe just to kinda zoom out in terms of how we're thinking about it and going about it. First of all, we're embedding AI into a bunch of our own workflow solutions and software, obviously, we've done that with research assistant. We now have something like 20 different standalone or AI-enabled applications. So we're that that gives us an opportunity to monetize there. But we also just launched what we call agentic solutions. So we've got smart APIs and MCP servers, and think about that as, like, tools that are built on top of Moody's data. You know, this huge data estate that we talk about all the time. And they can power LLMs and third-party agents with that Moody's data. And then we, we have been building a suite of highly specialized workflow agents. We've got more than 50 domain-specific agents already today. That leverage our proprietary data and subject matter expertise. And support all that automation and can be embedded into customers' internal workflows. I gave one example of that. On the call. So and I think what you're seeing from us is you know, we have this massive content estate. AI is really an unlock and we're trying to meet our customers where they are. Whether they need to have access to that content through our own workflow and supported by AI, whether they want it on partners platforms, or whether they want it embedded into their own internal AI workflow or orchestration. So everything we're doing is to try to meet our customers where they are. Operator: Our next question comes from the line of Peter Knutson with Evercore. Please go ahead. Peter Knutson: Hi. Thanks so much for taking my question. I'm just wondering if you could help me think about what extent, if any, did third quarter's record issuance reflect pull forward activity? And then within that as well, what you guys are assuming for CLO activity maybe in 4Q, but more broadly in 2026? Since that was such a large driver of that upside? Robert Scott Fauber: Yeah. I can start with the kind of the pull forward. I would say, you know, and I we've talked about this before that there's a lot more pull forward that goes on in spec grade than there is investment grade. Understandably, right, because investment grade issuers tend to always have market access, and that's less true for spec grade issuers. So we tend to see pull forward more in spec rate. I would say the pull forward that we've seen in 2025 is pretty consistent with what we've seen over the last, call it, four years. So it's in line with that. Very little pull forward from investment grade. As we've talked about, we've got some pretty healthy maturity walls going forward. Operator: Our next question comes from the line of Jason Haas with Wells Fargo. Please go ahead. Jason Haas: I wanted to focus on the KYC business. Can you talk about what data sets were within that business are proprietary? And are you seeing the longer tail of competitors there stronger by being able to integrate AI. That's a concern that we've been hearing, so I was hoping you could you could weigh in on that. Thank you. Robert Scott Fauber: Yeah. So there there's a few datasets that really go together for our KYC solutions. The first is Orbis, which is our massive company database. And I think it's we think of that as derived data, first of all. It's accessed through a global commercial ecosystem where we've got the right to use and aggregate the data, and then we cleanse it and we normalize it. And that really enhances the value of all that data. So it's not as easy as just going out and web scraping that content. That's first of all. And the second dataset that we have is around politically exposed people and risk relevant people. That's a fairly unique dataset that we have. That was originally that that was actually part of our RDC business that we purchased years ago that was formed by a consortium of banks after nine-eleven. Who wanted to combat, terrorist financing. And so that business grew out of that. And then the third is our AI curated news. And then I think part of the secret sauce is that we then link that together, and we have really the world's best beneficial ownership in a hierarchy data. And that really gives our customers a 360-degree view of who they're doing business with. That I think is relatively unique in the marketplace. Operator: Our next question comes from the line of Andrew Steinerman with JPMorgan. Please go ahead. Andrew Steinerman: Hi, Rob. If you saw, there's a Wall Street Journal article from October 15 that wrote up the Moody's report on refi walls. And the way they portrayed it, was for US companies that there was a decline in refi walls Again, I don't know if you saw the article. It caught my eye. But, obviously, that's framed a lot differently than slide six. Where you're seeing a really favorable environment for refi walls And if you could try to square the difference that would be helpful and, you know, mention something about The US refi walls. Robert Scott Fauber: Yeah. Andrew, I think that article was citing US spec grade which was down, call it, five to 6%. That's right. Yeah. That's right. So it was really a subset of the of the broader maturities. And, you know, I think I might point out, you know, a couple things that there there's actually as we kinda look farther out, there's actually a significant portion of maturities that are actually a good bit farther than four years out. And that's because of the basically the steepening of the yield curve you know, the last, know, call it year or so. So we've actually seen average tenors shortening. We've seen issuance less than seven years being more attractive than issuance out past, you know, kinda seven to ten years. We've seen average tenors shorten up. And all of that ultimately is going to be, I think, positive. As we think about the stock of what needs to get refinanced over you know, not only the four-year walls that we quote, but even beyond. Operator: Our next question comes from the line of Toni Kaplan with Morgan Stanley. Please go ahead. Toni Michele Kaplan: Thanks so much. Rob, usually during the third quarter, you talk about your early thoughts into 2026 for issuance and just in light of that, you know, refi wall is still healthy, but maybe less of a tailwind next year and M&A, though, could provide a nice uplift. And then wanted to also get your thoughts on the data infrastructure financing and if that's gonna be a meaningful driver in '26 and how you think about that opportunity overall. Thanks. Robert Scott Fauber: Yeah. Thanks, Toni. So you know, it's as always, in October, it's a little too early for us to actually give guidance for next year, but we can kind of tell you how we're thinking about next year. And I would say that and you've heard me use this, you know, kind of framework in years past. Right now, I think there are more tailwinds than there are headwinds going into 2026. So we're thinking it's going to be a pretty constructive issuance environment into 2026. And let me talk about let me start with the tailwinds because we think they're they're more tailwinds. So first of all, we've we've got spreads at at at very tight ranges right now. We have Fed easing, so we have the potential for lowering benchmark rates. You touched on M&A. We've certainly seen the M&A environment really pick up in the third quarter. You heard Noemie talk about our RAS pipeline is very robust. We're hearing very positive commentary from the bank about the M&A discussions and pipelines that they have. So 2026 may be the year that we really see not just M&A, but sponsor-backed M&A come back into the market We've talked about what a positive that will be. We do have the potential for further resolution in some of these geopolitical conflicts that I think could provide a little bit more market confidence. You know, kind of a mixed sentiment really around economic growth, a slowdown, the current thinking is that we're not looking at a recession while there's been a little bit we think the current levels of growth across the G20 are generally sustainable into next year. You mentioned the refi walls And we do think that the default rates will continue to decline. They're a little bit above historical averages at the moment, but we look for that to continue to decline. So all that feels pretty good. And just in terms of what the headwinds could be, I mentioned economic growth. And obviously, we're looking at things like job growth and consumer confidence and spending to get a sense of whether there could be actually you know, a further deceleration of economic growth. Obviously, we've got some headline risk around global trade dynamics, particularly with The US China that creates volatility in the markets. That's usually a negative for issuance. It can create some risk-off environments. It can widen out spreads. So in general, Toni, feeling pretty good about it. And you asked the last thing you asked about data centers. That's why we talk about these deep currents. You're seeing tens and hundreds of billions of dollars going into infrastructure investment and particularly around digital infrastructure and data centers. And we're having a lot of dialogue all around the world, and we expect that to continue into 2026. So that'll that'll be a deep current that continues. Operator: Our next question will come from the line of Alex Kramm with UBS. Please go ahead. Alexander Kramm: Yes. Hi. Good morning, everyone. Just coming back to Moody's Analytics. A lot of things going on there. It seems that things are maybe tracking a little bit slower than your expectations at the beginning of the year. Correct please, me if I'm wrong. And I know I know you you mentioned a couple of things, but but maybe just talk about relative to expectations at the beginning of the year, what maybe are the things that the surprised you negatively and how we should be thinking about those items as we get into 2020? Thanks. Thank you. Noemie Clemence Heuland: Yes. Maybe, Alex, I'll start, and then Rob can add if needed. So if I look at the top line for the third quarter in MA, we were right on our expectations in Q3. You may recall earlier in the year, we took slightly down our guidance for the full year because of some attrition in 8%, very in line with with the second quarter. We have a strong pipeline for the fourth quarter growing nicely, very strong coverage. So pretty heavy weighted in December. I think there's a very strong focus on execution. The way we look at the portfolio, I know there's a few puts and takes in each of the different lines. But overall, we're managing to a high single-digit growth. We're investing in our lending, underwriting, KYC for corporate. We had a few very nice wins in the third quarter. So that balances out to a high single-digit growth, and we're pretty confident with the outlook for the full year. And we'll talk about next year bit more color in February, but we're delivering as expected. Operator: Our next question comes from the line of Scott Wurtzel with Wolfe Research. Please go ahead. Scott Darren Wurtzel: Hey, good morning, guys, and thank you for taking my question. Just wanted to ask one on private credit. You know, we're starting to hear more you know, see more headlines, hear more concerns about just the health of private credit. I'm wondering if you can talk about you know, how you see that potentially impacting your growth there. Like, I think there's potentially a school of thought that if there is more concern around the health there, there could be more demand for understanding of risk and ratings. There could also be more debt as you said, moving from public or private to public markets. Just wondering if you can kind of, tease out some of the potential ramifications of that. Thanks. Robert Scott Fauber: Yes, Scott, it's Rob. I think you started to nail it there. You know, we've been talking for a number of these calls about you know, how important it is to have a rigorous you know, third-party independent assessment of credit risk in the private credit market. And that was the driver behind what we did with MSCI and you know, it's interesting. I mentioned on the in my prepared remarks, we don't have a lot of rating exposure in the direct lending market. Right? And that's, again, one of the reasons that we partnered with MSCI to be able to provide investors with that third-party view. And I mentioned that so I'd say two things. You know, whenever you start to see a little bit of credit stress in the market, and I talked about at least in the public markets, the spec rate default rate is higher than historical averages. So you can imagine that there's some similar, you know, stress in the private credit market, that drives more demand for credit insight and research. We see that with the usage of our website and all sorts of things, the engagement that we have with investors. So I would say that's true. And then second, you're right. I mean, we're now seeing a little bit of a flow back into the public markets because at the end of the day, those coupons that you can get in the public markets are typically represent a fairly substantial savings versus, you know, funding in the private market. So, you know, I think we could see an ebb and flow between the private and public markets. But I think we're pretty well positioned to serve the needs of investors and issuers, whether it's you know, in the private market or the public market. And that's what we've really been working on over the last you know, call it two years. Operator: Our next question comes from the line of Jeff Silber with BMO Capital Markets. Please go ahead. Jeffrey Marc Silber: Thanks so much. I just wanted to shift back to the MA discussion we talked about a bit earlier. Noemie, I think you said that you're managing MA growth top line to high single digits If I remember correctly, before you came, there was an Investor Day. I think the medium-term guidance for that business was low to mid-teens. Has that changed? Or should we be looking more medium-term MA growth the high single digits? Thanks. Noemie Clemence Heuland: Yes. We've updated our medium-term outlook for MA earlier this year in February. So we're looking at a high single-digit growth for AR and revenue. That said, there's different dynamics within the portfolio. We are obviously having printing more higher growth rates in areas where we're strategically investing. And that was also the logic behind the restructuring program and looking at our organizational footprint. The way we deploy our engineering teams, the way we deploy our product groups, our sellers to the areas where we think we can generate higher growth. But overall, the growth rate is expected to be high single-digit. And we've also expanded margin quite significantly We've updated that also in February, and we are now going very well on track to meet those commitments. As a matter of fact, we've increased our full-year guidance for MA margin to approximately 33% So that's another thing we've also updated along the top line. Robert Scott Fauber: Yeah. And I would just say, you know, we talked to a lot of investors, and you know, over the over the years, and we had heard about this idea of the kind of the sweet spot being kind of high single-digit growth and getting some further margin expansion. And so that's what you see reflected in the medium-term targets, and that's where what you see us executing on. Operator: Our next question comes from the line of Craig Huber with Huber Research Partners. Please go ahead. Craig Huber: Great, thank you. Rob, I want to ask you, there's a school of thought out there with investors for the last year plus that AI on a net basis is bad for your company. And for other information services stocks. So I wanna give you a chance to just talk about that, about the moats around your businesses, both on the rating side as well as MA. You could fight that off any new potential entrants out there. And then secondly, just wanted to quickly ask, what in your mind was better about debt issuance so far this year versus your original expectations coming into the year? Thank you. Robert Scott Fauber: All right. So first on the AI is bad for our business. I'd love to double click with you on that. I just don't see that. You know? And I've been pretty consistent about it. You think about we have a massive, mostly proprietary data and analytics estate. And remember, what anchors that, Craig, is it starts with the ratings agency. We're producing unique proprietary rating content and research every single day. That is our largest content set. And then I talked about Orbis and how it's not just aggregating publicly available company data. This is a complex curated web of information providers where you have to have the rights to this data. And then we're aggregating it and normalizing it and creating value. You know, even where we've got workflow software. Right? Let's so let's talk about you know, let's talk about our insurance franchise. Yes, we're delivering our solutions through software, but at the core of what we do in insurance, are, I would say, you know, mission-critical models. Right? It's the access actuarial models. And it's the RMS physical risk and catastrophe models. That is really, really unique IP. That's delivered through software. And so, Craig, I actually think about in some ways, we have a lot of this content that has been effectively trapped in our workflow software. Right? If you wanted to get access to our cat models, you had to be a subscriber to our software. And you're a cap modeler. Guess what? Now we have the ability to democratize that access to this content. To commingle the access and get unique insights. So it makes it much easier to access our content, in many more channels as you heard me talk about, that's gonna open up new ways for us to monetize the content on different platforms with different customer segments. Where there's different value that they derive out of our content. And it's also gonna allow us to have unique insights as this content is commingled. So I feel very good about AI. And that's why, Craig, we've been really trying to be so front-footed on this. From back in 2022 is because we believe that this ultimately is an unlock. And you know, we've talked about this on these calls. It takes a little bit of time, we're working with the regulated financial industries But we are seeing some good signs of traction. Your second question was you know, what is driving you know, the issuance? I'd say, look. In the first four months of the year, obviously, April, we had a lot of in the market with the tariffs. That was, in a way, kind of a lost month. Right? And, you know, we hadn't factored that into the guidance at the time. But you've seen, I think, and you see it with the equity markets. The markets have gotten much more comfortable with the current environment. You've seen I said default rates are a little bit above average, but still fairly close to the long-term average. So spreads are tight. You've got and you've got a real pickup in M&A activity. And you remember back in February, we had talked about our M&A assumptions and that this would be back half loaded. And so I think we are starting to see that M&A volume and activity that's supporting issuance and business investment that we had been thinking we would see back in the that call in February. It's just that we hadn't anticipated the volatility in the first half of the year. Yeah. And to that point, we if you look at our Q4 implied guidance for MIS, that's pretty consistent with what we had at the beginning of the year. We've always had a pretty strong fourth quarter with low teens MIS transaction revenue growth, and that's been pretty consistent throughout the year. Operator: Our next question will come from the line of Russell Quelch with Rothschild and Co Redburn. Please go ahead. Russell Quelch: Hi, guys. Thanks for having me on. Noemie, you cut out some headwinds around slowing retention and sales driving that slowdown in insurance ARR. I wonder if you can elaborate on that a little bit more, given insurance has been a strong pillar of MA growth over the last twelve months. Wondering how you're thinking about insurance growth into 2026, given the slowdown in premium growth in the underlying P&C market and normalization in storm activity. Noemie Clemence Heuland: Yeah. Insurance, we have few dynamics going on in the third quarter, and that translates into the full-year outlook that I talked about. We have actual data and models, so access is running very nicely. We have high double-digit growth. We continue to see customers switching to a higher definition. Models, and that's been really driving growth this quarter. The RMS and the RRP migration, we had a lot of significant transactions in 2024 and early 2025. There's bit of pull forward of pipeline. So now there's a digestion going on with our customers. We're going after the largest the remaining pool of customers who haven't yet moved to the platform. So that's one driver. So we have a lot of pipeline there that we expect will drive growth of that business in long term. There's just a it's not so much of a headwind in fact, it's just more like tough comparison from 2024 where we had a lot of those customers migrating into the RMS platform and we still have a lot of pipeline with the remainder as we head into 2026. Yeah. Russell, I would also I mean, I spent a lot of time, with our insurance customers, and I feel pretty bullish about what we can do in that industry. You've got insurers who I would say are behind the banks in terms of their adoption of digital platforms know Amy talked about moving to the cloud. But, but also just sophisticated third-party data and analytics. And so there's a lot of interest from insurers in thinking about how they can leverage a lot of our content to get signal value to help them understand risk. And you've seen us broaden from really a property focus with our cat business and obviously we have a have a life business as well. But in the P&C business, we've moved into casualty. There's a lot of interest from insurers to have a more data-driven approach to thinking about casualty risk, and that's what we did when we acquired Predicate. We've pulled together a cyber working group, across the industry. I think there's still a lot of opportunity for that market to grow in terms of GWP and so do the insurers. But they need to have models and data that they can be very confident in to help that market grow. So, I feel very good about it. Over, you know, let's call it the medium term. Operator: Our next question comes from the line of Sean Kennedy with Mizuho. Please go ahead. Sean Kennedy: Thanks for taking my question and nice results. I had a follow-up on Moody's Analytics. So I believe last quarter, you mentioned that sales cycles were lengthening a bit. I wanted to ask if anything has changed there as we got further away from the spring. Also, how's the general demand environment for banking? Thank you. Robert Scott Fauber: Yes. So I'll with the demand environment for banks. It's actually pretty good. We're having some very good discussions and wins, frankly, with our banking customers. I talked about that one kind of marquee deal, but actually we're seeing very good engagement and growth from our biggest banking customers. For the reasons that I talked about. And so I'd say I'm not sure there's much of a change from the last quarter in terms of how we talked about kind of sales cycles. I think we talked about you know, there was a little bit of a lengthening in the sales cycles, know, over the, you know, call it last year. But there was also an expansion of the size and the complexity and number of products that we're pulling together as solutions for our customers as well. So, you know, to me, when I look at those together, you know, I feel fairly comfortable, you know, when those things are moving in tandem. And I would say the last thing I would say, spend a lot of time with our customers. There's a lot of focus right now on growth. And that, at the end of the day, and we get asked about is it regulatory drivers that drive the growth of your solutions, There's nothing better than being able to talk to your customers about how you can drive growth. And that ultimately means that there's a more positive sentiment across the customers as they're thinking about you know, the future and investing in their business. Operator: Our final question will come from the line of Jeff Meuler with Baird. Please go ahead. Jeff Meuler: Yes. Thank you. Rob, you had a couple of callouts on climate solution wins outside of PNC Insurance. That was one of the thesis points of the RMS acquisition. Is the message behind the message that you feel like you're at an inflection point where you expect that to really start taking off, or are you just kind of conveying some large ones that you had in the quarter? And then just to be clear, does that revenue when you sell climate solutions outside of insurance does that get reported within insurance or elsewhere? Thank you. I guess, you know, one of the reasons I brought it up is, you know, that was as you as you noted, that was one of the theses that we had when we bought RMS was that this content the this the models and the data to help institutions really understand the physical risk of extreme events was gonna be important beyond just the insurance business over time. And so we you know, I've been trying to give some examples of where we've had some wins of banks who are taking these solutions. Would say that that started with the biggest, most sophisticated banks who are who are who are using the RMS models. We've been thinking about how do we take some of that content and package it differently so that we can make it more useful and available to a broader segment of banks over time. But, you know, you can you know, we hear from banks as they're underwriting loans that they're interested in understanding physical risk of the collateral they're taking. We hear from corporates. They're interested in understanding the physical risk of locations across their supply chain and across their own physical footprint. We're engaging with governments who want to understand vulnerability of communities to various extreme events. And of course, we're starting to hear that from investors as well. So you know, there's some product development work as we start to see the demand from these other sectors to be able to package the content in a way that's useful for those different customer segments. So I'd say it's still relatively early, but I am giving examples of demand outside of insurance. Yep. And we're gonna continue to lean in on the last point on two point, On your question about where that the revenue goes, goes into the insurance line within Decision Solution. And then the other thing I'd add is we when we acquired RMS, we had revenue synergy targets that we've published, and we are well on track to achieve those. Operator: And that will conclude our question and answer session. I will turn the call back to Rob for any closing remarks. Robert Scott Fauber: Okay. That's a wrap everybody, for joining. We'll talk to you next quarter. Bye. Bye. Operator: This concludes Moody's Corporation third quarter 2025 earnings call. Immediately following this call, the company will post the MIS revenue breakdown under the Investor Resources section of the Moody's IR homepage. Additionally, a replay will be made available after the call on the Moody's IR website. Thank you. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the PROG Holdings Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please note that today's conference is being recorded. I will now hand the conference over to your speaker host, John Baugh, Vice President of Investor Relations. Please go ahead. John Baugh: Thank you, and good morning, everyone. Welcome to the PROG Holdings third quarter 2025 earnings call. Joining me this morning are Steve Michaels, PROG Holdings' President and Chief Executive Officer, and Brian Garner, our Chief Financial Officer. Many of you have already seen a copy of our earnings release issued this morning, which is available on our Investor Relations website, investor.progholdings.com. During this call, certain statements we make will be forward-looking, including comments regarding our revised 2025 full-year outlook, our guidance for 2025, the health of our lease portfolio, our capital allocation priorities, and the benefits we expect from our sale of the Vive Financial portfolio to Atlantica Holdings Corporation, such as improving our capital efficiency and profitability profile. Listeners are cautioned not to place undue emphasis on forward-looking statements we make today, all of which are subject to risks and uncertainties that could cause actual results to differ materially from those contained in the forward-looking statements. We undertake no obligation to update any such statement. On today's call, we will be referring to certain non-GAAP financial measures, including adjusted EBITDA and non-GAAP EPS, which have been adjusted for certain items that may affect the comparability of our performance with other companies. These non-GAAP measures are detailed in the reconciliation tables included with our earnings release. The company believes that these non-GAAP financial measures provide meaningful insight into the company's operational performance and cash flows and provides these measures to investors to help facilitate comparisons of operating results with prior periods and to assist them in understanding the company's ongoing operational performance. With that, I would like to turn the call over to Steve Michaels, PROG Holdings' President and Chief Executive Officer. Steve? Steve Michaels: Thanks, John, and good morning, everyone. Thank you for joining us today as we report our third quarter results and share our perspective on how we are positioned heading into the final stretch of 2025. I'll also provide context around the recently announced sale of our Vive portfolio and how that decision aligns with our long-term strategic priorities. In the third quarter, we surpassed the high end of our outlook for revenue and earnings. These results were driven by continued strength in portfolio performance and strong momentum within our BNPL business for technologies. Non-GAAP diluted EPS of $0.90 exceeded our outlook range of $0.70 to $0.75 per share, marking our third consecutive earnings beat this year. This quarter's outperformance reflects the discipline of our team, the strength of our business model, and our ability to execute through macroeconomic volatility. Throughout the quarter, we navigated persistent consumer challenges marked by ongoing inflationary pressures, growing financial stress among lower-income households, and early signs of labor market softening, all of which impact discretionary spend in our leasable verticals. While the overall unemployment rate is still low, the heightened financial stress and greater caution among lower-income consumers across our leasable categories is a headwind to GMV. As I shared in July, two primary factors weigh on Progressive Leasing GMV this year, including in the third quarter. The first is the previously disclosed Big Lots bankruptcy, which created a significant GMV headwind. The second is our intentional tightening actions of lease approvals, a necessary step to preserve portfolio health in an unpredictable environment. Adjusting for these two discrete items, underlying GMV in Q3 grew in the mid-single digits, reflecting strong operational execution and healthy demand across other areas of the business. We are growing balance of share with key retail partners, strengthening existing relationships, and scaling our omnichannel ecosystem. As Brian noted in July, we expected approval rate comparisons to ease slightly in Q3, and they did. Our progressive leasing two-year GMV stack improved from negative mid to low single digits in the first half of the year to flat in Q3, which had the toughest year-over-year compare given the strong growth in Q3 2024. These trends give us confidence in the durability of our go-to-market strategy and the long-term scalability of our platform. Progressive Leasing's portfolio performance remains strong and within our targeted 6% to 8% annual write-off range. Q3 write-offs of 7.4% improved both sequentially and year-over-year. These results reflect the success of our ongoing refinements to our decisioning posture and risk analytics. We are encouraged by the early stage performance indicators and believe we can deliver consistent portfolio outcomes while driving profitable GMV. Consolidated revenue came in at $590.1 million, which reflects a slight decline compared to the same period last year. This result was driven by the impact of the Big Lots GMV loss and a smaller portfolio entering the quarter for our leasing business, offset by another standout quarter from four Technologies, which again delivered triple-digit revenue growth. Consolidated adjusted EBITDA was $67 million, and non-GAAP EPS was $0.90, both exceeding the high end of our outlook. Before diving deeper into the Q3 business results, I want to take a moment to address today's announcement regarding the sale of our Vive Financial credit card receivables portfolio to Atlantica Holdings Corporation. This transaction represents a meaningful step in our long-term strategy to improve our capital efficiency as we focus on opportunities with the greatest economic returns. While Vive has been part of our ecosystem since 2016, we believe this decision enhances our overall profitability profile and positions us to deploy capital more effectively. We are pleased to be partnering with Fortiva, the second look credit offering of Atlanticus, to ensure continuity for our retail partners and consumers, allowing us to maintain access to a comprehensive set of flexible payment options to underserved consumers while aligning our resources with the future of the product platform. The sale of the Vive receivables strengthens our balance sheet, giving us additional flexibility to invest in strategic priorities. Brian will speak to the capital implications shortly, but I want to underscore that we are committed to deploying capital in ways we believe will drive sustainable shareholder value through investments in growth, strategic M&A, and disciplined return of capital through share repurchases and dividends. I want to take a moment to thank the entire Vive team for their contributions. Their hard work and commitment played a critical role in helping us serve customers who may not have otherwise had access to credit, and we are proud of the positive impact they have made. We have made every effort to support Vive team members through this transition, including identifying some opportunities within the broader PROG Holdings organization. We wish them all the best as they move into this next chapter. Moving back to the business, we made significant progress in our strategic pillars of grow, enhance, and expand in Q3. Under grow, we continue to ramp direct-to-consumer performance, saw strong returns from our omnichannel partner marketing initiatives, and increasing e-commerce penetration. Our marketplace team also onboarded additional affiliate and e-commerce partners. E-commerce GMV is at 23% of total progressive leasing GMV in Q3 2025, up from 20.9% in Q2 and 16.6% in Q3 2024. Additionally, we launched or signed three recognizable new retail partners since our last earnings call, each representing GMV expansion opportunities. These exclusive partnership wins, all earned through a competitive selection process, underscore our leadership position, the strength of our value proposition, and our ability to drive incremental sales. Our pipeline is healthy, with a focus on converting near-term opportunities and deepening engagement with existing accounts as we expand our footprint across both national and regional segments. We strengthened our position within existing retail relationships by extending long-term exclusive agreements with several of our major national partners, reinforcing our role as their exclusive lease-to-own provider. We have successfully renewed nearly 70% of our Progressive Leasing GMV to exclusive contracts reaching to 2030 and beyond. With these additional renewals in place, we can focus on integrations and accelerating our initiative roadmap with these partners to drive future growth. As I have mentioned previously, millennials and Gen Z make up a growing share of our customer base, and we are evolving our marketing, product design, and engagement strategies to meet the expectations of these digitally savvy consumers. Their strong preference for mobile and self-service is driving increased adoption of our digital application flows and mobile platform, emphasizing our omnichannel strategy and validating the investments we made in personalization and seamless user experiences. Steve Michaels: PROG Marketplace, our direct-to-consumer platform, remains a meaningful growth engine, delivering another quarter of strong double-digit GMV expansion. This channel not only broadens our reach beyond traditional retail partnerships but also plays an increasingly important role in building relationships with consumers and enabling us to direct consumers to our POS partners through a new renew channel. We are investing in brand building, personalization, and lifecycle marketing to increase customer engagement, and we are seeing encouraging trends in repeat usage and retention as a result. PROG Marketplace is helping us create a more durable and self-sustaining customer ecosystem, one that supports growth across our leasing, BNPL, and cash advance offerings alike. Under our enhanced pillar, we made strategic investments in technology that improve both customer and employee experiences across the Progressive ecosystem. Our innovation team at PROG Labs is at the forefront of these efforts. Our AI-powered transactional consumer chat platform has now handled over 100,000 customer interactions, supporting customers from the approval stage through conversion into the servicing of their lease agreements. We are proud of how this tool is already enhancing our ability to deliver timely, personalized support, and it is reducing friction in our service model. With new capabilities introduced in Q3, customers can now make payments, request approval amount increases, and inquire about the account status directly within this chat platform. These initiatives are already proving valuable, but we believe we are still in the early innings of what is possible. We expect these AI-driven capabilities to be a key differentiator as we scale customer personalization, drive efficiencies, and set the bar for digital innovation in lease-to-own. Under our expand pillar, our multiproduct ecosystem is maturing, growing connectivity between offerings. Our cross-marketing campaigns between PROG and Progressive Leasing have proven effective in increasing repeat usage and driving incremental GMV. Turning to our BNPL platform, four technologies have exceeded expectations once again, delivering its eighth consecutive quarter of triple-digit GMV and revenue growth. As we first shared last quarter, engagement trends are strong, with an average purchase frequency of approximately five transactions per quarter for the last year and more than 160% growth in active shoppers year-over-year. We are seeing strong momentum in unique shoppers and merchant relationships, driving high engagement across the platform and contributing to overall GMV. Additionally, our four-plus subscription model continues to be a key driver, with over 80% of GMV coming from active subscribers. Importantly, four's take rate of approximately 10%, defined as revenue generated as a percentage of GMV over the trailing twelve-month period, is a strong indicator of monetization efficiency. Four has operated profitably year-to-date, and its role in our broader ecosystem is expanding meaningfully, not just as a standalone business but as a cross-sell driver for Progressive Leasing and as a catalyst for customer acquisition. From a profitability standpoint, four generated year-to-date adjusted EBITDA of $11.1 million through Q3 2025, representing a 23% margin on revenue. As we look ahead to Q4, we are forecasting an adjusted EBITDA loss driven by seasonal dynamics that require an upfront provision for credit losses for new originations. Despite this anticipated Q4 loss, we believe four will have positive adjusted EBITDA for the year. Given that the peak holiday season will account for more than 20% of four's full-year GMV, this provision creates a timing impact on profitability. This pattern is well understood and consistent with our operating model, as these holiday originations generate the majority of their revenue in Q1, we expect to see a meaningful rebound positioning four to deliver its highest quarterly adjusted EBITDA margin of the year in 2026. Looking ahead, we are closely monitoring the macro environment, especially as consumers face ongoing liquidity constraints and shifting spending behavior. The demand environment remains soft across many durable goods categories, which will likely continue in Q4. That said, we are not waiting for the environment to improve. We are leaning into the areas we can control: portfolio health, disciplined spending, deepening partner engagement, and driving sustainable profitable revenue through our multiproduct ecosystem. Our capital allocation priorities are unchanged. We are investing to drive long-term growth through sales initiatives, marketing investments, AI and other innovation, digital infrastructure, exploring strategic M&A opportunities that strengthen our ecosystem, and returning excess cash to shareholders through share repurchases and dividends. We did not repurchase shares during the quarter due to ongoing discussions with Atlanticus regarding the sale of the Vive portfolio. Those discussions began in January and progressed to a stage in Q3 that restricted our ability to be in the market until the transaction was publicly announced. As Brian will outline, we ended Q3 with a strong cash position and generated meaningful free cash flow, reinforcing our capability to fund growth while maintaining financial flexibility. To close, we are confident about how we are executing across the business. We delivered strong earnings, improved portfolio performance, and successfully executed the strategic divestiture of a portfolio business, allowing us to reallocate capital towards our highest conviction opportunities. At the same time, we are building momentum in our fastest-growing segment, four technologies. I am proud of what we have accomplished this quarter and confident in our ability to sustain this momentum into the future, which we expect will create long-term value for our customers, partners, and shareholders. With that, I'll turn the call over to Brian for more details on Q3 results and our 2025 outlook. Brian? Brian Garner: Thanks, Steve, and good morning, everyone. Our third quarter results highlight execution and innovation across our product offerings. Once again, we exceeded the high end of our guidance on revenue and earnings, despite pressures on consumer demand across our key categories. Non-GAAP diluted EPS at $0.90 per share beat the high end of our outlook by $0.15 and was up approximately 17% compared to the same period last year. This outperformance reflects a combination of three key factors: strength in our portfolio performance, mostly monitoring levels of spend, and momentum from our buy now, pay later and direct-to-consumer initiatives. We are focused on profitable growth and actively managing the business to optimize returns while staying agile in a dynamic operating environment. Let me start with the Progressive Leasing segment. GMV came in at $410.9 million, which represents a year-over-year decline of 10%. However, as Steve noted, the underlying performance tells a more compelling story. Adjusting for the loss of GMV related to the Big Lots bankruptcy and the impact of our deliberate tightening of approval rates, the business would have delivered mid-single-digit growth, driven by solid balance of share gains within key retail relationships and growing traction among e-commerce and direct-to-consumer channels. PROG Marketplace, our direct-to-consumer channel, delivered 59% year-over-year GMV growth for the quarter. Q3 revenue for Progressive Leasing was down approximately 4.5% at $556.6 million compared to $582.6 million in the prior year. Revenue benefited from slightly better customer payment performance. This tailwind, however, was offset by GMV headwinds, primarily driven by the Big Lots bankruptcy and tightening actions we took in '24 and early 2025. Portfolio performance remains strong, with write-offs coming in at 7.4%, representing an improvement sequentially and year-over-year. This result reflects the impact of our deliberate tightening actions. As always, we are actively monitoring early performance indicators to ensure our decisioning posture is consistent with delivering write-offs within our targeted annual range of 6% to 8%. Progressive Leasing's gross margin in Q3 came in at 32%, representing an approximately 80 basis point improvement year-over-year. This margin expansion was driven in part by a higher proportion of customers staying in their lease agreements longer as well as higher year-over-year yield from our lease portfolio. Progressive Leasing's SG&A for the quarter was $79.3 million or 14.2% of revenue, compared to 13.1% in 2024. As we have discussed in prior quarters, we have made targeted investments to support long-term growth focused on customer-facing capabilities, technology modernization, and partner enablement, while maintaining cost discipline across the organization. EBITDA for Progressive Leasing came in at $64.5 million or 11.6% of revenue, landing within our 11% to 13% annual margin target and improving by 20 basis points year-over-year. This performance underscores our ability to deliver profitability through disciplined execution, even in the face of challenging year-over-year GMV comps and a softer demand environment. Turning to consolidated results, Q3 revenue was $595.1 million, which reflects a slight decline compared to the same period last year at $606.1 million. That came in at the high end of our guidance range. The year-over-year decline is driven by the impact of the Big Lots GMV loss and a smaller lease portfolio entering the quarter, largely offset by another triple-digit revenue growth quarter at four Technologies. Consolidated adjusted EBITDA was $67 million or 11.3% of revenue, compared to $63.5 million or 10.5% of revenue in 2024. This year-over-year improvement reflects strong adjusted EBITDA performance of four and year-over-year margin improvement at Progressive Leasing. Non-GAAP diluted EPS came in at $0.90, exceeding the top end of our outlook, driven primarily by strong underlying earnings performance. As Steve noted, we did not repurchase shares during the quarter due to the ongoing discussions with Atlanticus related to the Vive portfolio sale, which restricted our ability to be in the market until the transaction was finalized. Let me now turn to the divestiture of the Vive portfolio, which was announced earlier this morning. The transaction will be reflected in our Q4 financial results and classified as discontinued operations. As I'll discuss later, our updated outlook reflects the impact of the divestiture. The proceeds of approximately $150 million provide incremental liquidity and strengthen our balance sheet, bringing greater flexibility as we assess opportunities through our capital allocation framework. In the near term, we will continue our investments across our ecosystem of products. As always, we remain disciplined in our capital allocation approach. Our priorities are unchanged. We are focused on funding impactful growth initiatives, pursuing selective high-return M&A opportunities that complement our ecosystem strategy, and returning excess capital to shareholders through our ongoing share repurchases and quarterly dividends. These actions reflect our commitment to driving long-term profitability and delivering sustained shareholder value. Moving to the balance sheet, we ended Q3 with $292.6 million in cash and $600 million of gross debt, resulting in a net leverage ratio of 1.1x, which is comfortably within our target range. We maintained ample liquidity during the quarter and had no borrowings outstanding on our $350 million revolver. In Q3, we paid a quarterly cash dividend of $3 per share. As of quarter-end, we had $309.6 million of unused capacity under our $500 million repurchase program. For our 2025 consolidated outlook, in light of this morning's announcement regarding the Vive divestiture, we have removed Vive from our outlook for both the fourth quarter and full year 2025. Our revised outlook has consolidated revenues in the range of $2.41 billion to $2.435 billion, adjusted EBITDA in the range of $258 million to $265 million, and non-GAAP EPS in the range of $3.35 to $3.45. This outlook assumes a difficult operating environment, soft demand for consumer durable goods, no material changes in the company's current decisioning posture, an effective tax rate for non-GAAP EPS of approximately 27%, and no impact from additional share repurchases. To summarize, Q3 was a strong quarter across the board. We delivered earnings above expectations, maintained healthy portfolio performance, advanced key initiatives aimed at supporting long-term growth, and subsequent to the quarter-end executed a strategic divestiture. With a solid balance sheet, scalable cost structure, profitable growth in our buy now, pay later business, and a proven multiproduct ecosystem, we are well-positioned to deliver sustained value for our customers, retail partners, and shareholders. With that, I'll turn the call back over to the operator for questions. Operator? Operator: Thank you. And wait for your name to be announced. To withdraw your question, simply press 11 again. Please stand by while we compile the candidate roster. Operator: Our first question is coming from the line of Kyle Joseph with Stephens. Your line is now open. Kyle Joseph: Hey. Good morning, guys. Thanks for taking my questions. Given all the headlines we've seen around the consumer, I was just looking to get an update and I recognize there's some moving parts. But you know, we're looking at write-offs coming down for you guys, you know, even though you guys have headwinds from Big Lots on that front. And then it sounds like, you know, GMV ex Big Lots are underwriting. There's some positive trends there. And then just weighing that with some of your commentary in terms of macro data and some of the headlines we've seen in the consumer finance arena, just kind of looking for an update on the pulse of the consumer in your opinion. Steve Michaels: Yeah. Thanks, Kyle. And, yeah, it's certainly been in the headlines, and it's something that we are constantly battling and analyzing. But to your point, we're pleased with where the portfolio is. I'm really proud of our data science teams, and they do a job delivering that consistent portfolio in a very dynamic environment. The write-offs did improve both sequentially and year-over-year due to the, you know, our deliberate actions that we took earlier this year for the most part. Some of them late last year. But we're watching it very closely. I mean, we feel pretty good about where we are right now. But we are seeing some stress in the consumer as you said, there's lots of headlines around liquidity pressures and just macro pressures on the consumer, especially in the cohort that we serve. Our DQs are elevated at this time compared to previous years, including last year. And we're watching it very closely. We haven't found the need or seen the need to tighten additionally yet. I'm not saying that that won't happen based on how the data comes in the door, and that's one of the great aspects of our short-duration portfolios across our products. And the fact that we get quick feedback loop that we can adjust very quickly to trends we're seeing in the data. So I mean, we're defensively postured and kind of braced for potentially having to tweak additional dials, but we have not done that in any material way since earlier this year. We always are looking for, you know, we're always adjusting dials, some positive and some negative. But in what I would call a tightening action, we haven't had to do that since earlier this year. But we're not ruling it out based on what we see for the rest of the year. Kyle Joseph: Got it. Really helpful. And then in terms of the GMV outlook for the rest of the year, I think Steve, you highlighted that 3Q was a tough comp in terms of 03/2024 growth. But, you know, just factoring in the timing of Big Lots and the timing of underwriting changes, should we think about 3Q as kind of the bottom point or similar headwinds into 4Q before things really ease up into 2026? Steve Michaels: I think the comps really don't clear up until Q1. We put out that supplemental slide page with Big Lots, and Q4 is a similar headwind to previous quarters this year. And the tightening, while we did do some of it in late last year, most of what we're referring to was in Q1 of this year. So from a comp standpoint, I don't think the pressures are still roughly the same. I will say that, you know, our Q3 GMV did come in slightly below where we expected it to, and we were updating you in July. I think a lot to do with some of those pressures that you're talking that you were referring to on the consumer. And so we've adjusted some of our view on Q4 as well. We're continuing to fight every day, and we have big plans for the holiday season. But there's mixed reports out there about what to expect from a consumer discretionary spend during the holiday as well. So got some internal initiatives, some things we're trying to get across the goal line with existing retail partners before we go into code freeze for the holidays. And we're pleased with where we are, but the macro is a challenge and has been impacting GMV in addition to the discrete headwinds that we've called out. Kyle Joseph: Got it. One last one for me. Just in terms of the guidance on other, it looks like better revenue guidance and then marginally lower profitability. Is that just a function of timing and growth math really? Steve Michaels: Yeah. We tried to address that in the prepared remarks. Our four business is we're very pleased with what it's doing, how it's growing, and its profitability year-to-date. And then there's just a very understandable seasonal dynamic in Q4, and more specifically, in kind of November, December with the surge of GMV that we have observed in last year as well as are predicting for this year. And how that upfront provisioning with very little revenue recognition will cause four to swing to a loss for Q4. Nothing to be concerned about. It's just the dynamic of the model. And it'll swing back in Q1 of next year. But the strength of BNPL business year-to-date is undeniable, and it's going to continue. But there will be some P&L dynamics, which have been reflected in the other segment and are impacting our PROG Holdings level guidance for the full year or implied for the fourth quarter because of that swing to adjusted EBITDA loss. Kyle Joseph: Yep. That all makes sense. Great. Thanks a lot for taking my questions. Brian Garner: Thanks, Kyle. Operator: Our next question is coming from the line of Bobby Griffin with Raymond James. Your line is now open. Bobby Griffin: Good morning, guys. Thanks for taking the questions. Hey, Steve. I guess good morning. I wanted to just maybe talk more on the current environment. I you know, your comments on the low end and some of the pressure make a lot of sense. I didn't hear much on trade down. So can you maybe just touch on that? Is part of what's going on here, you guys are having to be a little bit tighter or incrementally tighter as you did this year. You're not seeing that happen in the tiers above you. Just trying to get a sense of how this environment might be evolving versus some of the earlier trade down we saw when everybody started tightening together. Steve Michaels: Yeah. It's a good call out, Bobby, and we certainly saw the impacts of the supply above us tighten in 2024. And then kind of stayed static while they saw what their portfolios were doing. Earlier this year, I think there were calls that folks may be loosening here in the back half of 2025. I think providers are reevaluating that potential strategy. But based on the headlines that we've seen over the last I don't know, six to twelve weeks, which would indicate some stress out there. And auto portfolios and elsewhere. We have not yet seen or observed in the credit stacks where we participate and have good visibility any trade down or any tightening with the supply above us. So we did have to tighten earlier this year. We have not seen any additional benefit from supply above us tightening so far. I think it's you know, just my opinion is it's unlikely that they will loosen in the holiday season, but I'm not we haven't seen any evidence of them tightening and creating more of that trade down for us. Bobby Griffin: Okay. That's helpful. And then maybe on just the GMV cadence through the quarter, I mean, interesting or notable kind of how the month played out and anything in October to help us think about you know, kind of the early I know we're still a little early for holiday, but just anything in October as well. Steve Michaels: Yeah. Nothing on holiday yet. You know, obviously, it's difficult right now, but this is the case every year. That such so much of the quarter is made in the five weeks between Black Friday or the seven days of Black Friday, whatever you want to call it, to Christmas Eve for the leasing business. The quarter for Q3, it was fairly similar, but it did you know, September was lower than August and July from a negative standpoint. But you know, I don't know if the headlines and the psychology from the pending government shutdown and all those things kind of played into people's confidence and sentiment. But, you know, we did see some softness. Bobby Griffin: Okay. And then lastly for me, Brian, I hate to be the guy that asks about 26, but I'm going to do that here just because there's a lot of moving parts. But, like, when you think about 26 and you just want to maybe level set the model, not ask for guidance, of course, but, like, you got Vive flowing out. Got a smaller portfolio because of this GMV, but then you have the Big Lots headwind coming off. So just help us frame up, you know, kind of all those moving parts and, you know, to keep kind of in line with the smaller portfolio, but potentially GMV actually starting to show growth again? Brian Garner: Yeah. I think starting with the tailwinds, you look at '26. And, again, not providing guidance, but just you know, as things are shaping up. I think you're right. So from a decisioning standpoint, as Steve alluded to, the biggest relief from a year-over-year comp comes in Q1. That was the most meaningful tightening that we did here in 2025. So as that rolls off, should start to see some relief there. Along with that, and obviously getting past the Big Lots comp, which we've provided information about in our supplemental deck. And I think the other positives are the portfolio is being managed effectively. So, you know, we've as we talked about, we're down year-over-year and sequentially with the 7.4% that we posted this year. So I think a similar kind of write-off posture is probably appropriate. You've also got this growth in four that's really exciting and buoying the results here in the quarter. And I think we've got a trajectory there that's encouraging. And, you know, I think the offset or, you know, what we're paying attention to a little bit is this macro. And the impact on leasing just more broadly that'll I think, continue to serve a challenge here in Q4, and we'll see what 02/2026 holds. But I think that's how it's shaping out from a you know, we talked about this 11, 13% EBITDA margin target for the leasing segment. There's not been an intent to revisit that, at least at this point in time. So that's our mandate is to actively manage the cost structure in light of what our top line allows. And that's you know, those are really the inputs as I shape up 2026. The buy portfolio, as you said, is really not consequential to earnings. It's about a $65 million haircut off of revenue from a run rate perspective, and so that's how I'd size that up. Bobby Griffin: Perfect. That's very helpful. Appreciate the details here, and congrats on the transaction and the portfolio management. Best of luck, guys. Brian Garner: Thanks, Bobby. Appreciate it. Operator: Thank you. Our next question is coming from the line of Anthony Chukumba with Loop Capital Markets. Your line is now open. Anthony Chukumba: Good morning. Thank you for taking my question. Guess my first question, you mentioned the three new retail partners. Can you tell us who those retail partners are? Steve Michaels: Hi, Anthony. Good morning. And I had money that you would be the one that noticed that and talked about that, so I appreciate that. Yeah, we're not going to name them. We just wanted to highlight because our biz dev teams are out there working their tails off all the time, and they can't control the timing of when we get things across the goal line. But it's not for, you know, a lack of effort and a lack and or quite frankly. So we were pleased with the results in the quarter. And actually, one of them was subsequent to the quarter end. But we use the term recognizable retail logos on purpose because while they may not have been, you know, standalone press releases, they are logos that you would recognize. And so we're pleased with those wins, those competitive processes, and prevailing in those processes. And while they'll have very minimal impact in 2025, they will be part of the building blocks of how we're building the GMV picture and profile for 2026. And the teams also have a number of other opportunities in the pipeline that we're excited about. And unfortunately, as you've observed with us for many years, the timing is very choppy on when those things come across. Anthony Chukumba: Got it. Okay. So I guess that's a new project for my research associate to figure out who those retailers are. So second question. Okay. So you got $150 million for the Vive portfolio, that's more than 10% of your market cap. And then you've got this nine-figure windfall coming from the one big beautiful bill, which makes me feel dumber every time I have to say that. I guess my question then becomes, you know, how do you think about capital allocation? Right? You mentioned you're at 1.1 times leverage. You're very comfortable with that. I would think, particularly given where your stock is, that you would, you know, back up the truck in terms of buying back stock. But how do you sort of think about that? Brian Garner: Yeah, you're right. And that 1.1 times leverage was previous to the sale of the Vive portfolio. So but point taken. Yeah, I mean, you set it up. We look at it through the lens of net leverage ratio, right, which we think is kind of one and a half to two turns is kind of a comfort level. But then we look at our capital allocation priorities. And growing the business is priority one. And, obviously, we're in a negative GMV situation currently with leasing, but we don't expect that to be the case for, you know, forever. So, hopefully, we'll have some working capital requirements to grow GMV within the leasing business. Four is obviously a juggernaut. And while very short-duration transactions, will need some capital here, especially in the fourth quarter. And so but we're fortunate in that our business models do allow us to kind of check that box when it comes to organic growth and reinvesting in the business. Second, we have said that strategic or opportunistic M&A is something that's on our radar. And we would look for something synergistic to our ecosystem and that fits into our strengths of serving this below prime and underserved customer and assessing risk. And then absent those two first things, then we would define excess capital and look to return it to shareholders, and our history has been through repurchases. And, you know, obviously, we initiated a dividend about two years ago. So the capital lens and capital allocation priorities haven't changed. We just have a high-level problem of having more of it on the balance sheet right now, and so we'll look to check those three boxes and be good stewards of capital. Anthony Chukumba: Got it. That's helpful. Thanks, and good luck with the remainder of the year. Brian Garner: Thanks, Anthony. Operator: Thank you. Our next question is coming from the line of Hoang Nguyen with TD Cowen. Your line is now open. Hoang Nguyen: Good morning, team, and thanks for taking my questions. I guess you are now seeing some softness from maybe the consumers, the lower-end consumers. So but then you haven't tightened yet. So can you talk about the difference between now and maybe this time a year ago when you guys started to tighten? What's the difference that hasn't made you guys do additional tightening at this point, given the pressures that are starting to surface? Steve Michaels: Yeah, I mean, I think the difference is that the portfolio is in a different place than it was last year because of the tightening. So as you know, it turns over fairly quickly. And so the actions that we took in the back half of 'twenty-four, but more specifically in 'twenty-five, have helped to make the portfolio more healthy. We are seeing some elevated DQs, the delinquencies, but one of the good achievements of our data science teams are some of the changes they made to the approvals, approval amounts, is that we have been able to choke off, if you will, kind of some of the straight rollers or the no-pays that roll right to charge off or write off. So the idea that you can have some elevated delinquencies but not negative dispositions or negative outcomes, those things can be true at the same time. And so we are again, we're white-knuckled like we always are because portfolio is job one. We're watching the portfolio and poised if we have to do something, but the early indicators are showing us things that we should be paying attention to but have not just have not told us that we need to do additional tightening at this point. Brian Garner: Yeah. And I would just add to that. Dynamic Steve just illustrated is coming through in that 80 basis points of gross margin expansion. And so you asked what from a year-over-year perspective, what's the dynamic? We're certainly seeing a more favorable mix in the way that this plays out, and those changes we've made from a decisioning scientist standpoint are playing through. And so I think that's an important element in comparing and contrasting last year to this. Hoang Nguyen: Got it. And follow-up is on the Vive sales. Given that you guys are getting $150 million, and you guys didn't do buyback in 3Q, I mean, should we expect catch-up buyback in 4Q, and what you plan to do with this proceed going forward? Steve Michaels: Yeah. I mean, I guess I would just kind of refer to the answer previously about what we're going to do with the capital and just kind of go back to our capital allocation priorities. And then we don't really guide or speak to what we're going to do in the future about repurchases in any given quarter. And we would just look to the three-pillared strategy on capital allocation. Hoang Nguyen: Got it. Thank you. Operator: Thank you. Our next question is coming from the line of Brad Thomas with KeyBanc Capital Markets. Your line is now open. Brad Thomas: I wanted to follow-up on four. And first of all, congratulations on the nice momentum in that business, a really exciting outlook that I think is still underappreciated by many investors. I was curious, Steve, as you continue to grow that business, there's this sort of ongoing question of does BNPL compete with lease-to-own? And so I was curious as you have success cross-marketing, what your new learnings are as you have more overlap in who those customers are. Steve Michaels: Yeah. Thanks, Brad. And, yeah, we're very excited about four and its current state, but also its potential and where we're going to where we think we can take it. Yeah, I mean, it's been interesting to have that product in our ecosystem to be able to watch it because I you know, before well, we've had it for four years, but it's you know, it was very small in '21, '22, and '23. And the view has always been that BNPL and more specifically, the pay in four providers not you know, not some of the longer installment sales that people call BNPL. Are not really a competitor to leasing. Most very simply because of the average order value. Right? And the average order value is still in the 125 to a $140 range. Which is materially different than an $1,100 average ticket for our leasing business. Also, the categories that are predominant in our four business are different. Right? You have consumables and cosmetics and apparel and sneakers, and it's provided us a nice insight into those shopping patterns. And I think that is also a reason why they have diverging growth rates currently because people are still consuming those things that I mentioned at a $140 purchase, but they're maybe more reluctant or deferring purchases of the larger ticket durable goods that are traditionally in the leasing business. We are excited and encouraged by our cross-sell motions and developing those further. Because there is overlap in the consumer for four will serve a low prime consumer all the way up to a super prime consumer. But there is considerable overlap with the leasing customer. And to the extent that they can come to us if they need a new refrigerator from Samsung versus, you know, a shoe drop on a Saturday afternoon for some new Jordan. And use our different products for that is, we think, a big opportunity for us. And we're doing that currently, and we have plans to do it more and better in the future. But we don't really see the Pay in four as a competitor to leasing. It's and we believe that it can be complementary. Brad Thomas: That's very helpful. Thank you, Steve. And maybe a follow-up for Brian. I know you're not giving 2026 guidance, and Bob, you already took a stab at this. But as we think about the margin side of things, I guess, is there anything you would call out? Again, as you talked about with Bobby, it does feel like the revenue outlook at the beginning of next year would be challenging if the GMV is down at the end of this year? Outside of the leverage side of things, are there any broad steps that we should keep in mind as we think about margins? Brian Garner: Yes. No, it's a good question. It's something that we're very focused on and trying to make decisions internally to balance the investments that need to get made in this business that have high ROI potential and also adhering to this 11 to 13% for the lease certainly, for the leasing segment that we have set as a standard for prior years. And, you know, as implied in our guidance, I think we're right around the bottom end of that 11 to 13%. And as we look into 2026, the factor that really breathes some oxygen into the room is getting GMV moving in the right direction. You've got this right now in part of the headwind we're facing is a bit of a deleveraging just from a revenue perspective. And so that's task number one is to reinject a positive of, you know, a more favorable trend in GMV and working towards that end. And that's not stating, you know, anything for '26. That's just the mission as we try and improve that result. I think the other factor that I would point to, and Steve also offered some color in the prepared remarks, which was you know, four is north of 20% here in the quarter in terms of EBITDA margin. And so the ability to grow that business profitably and the contributions that we believe it can offer particularly as it gets scale, I think is really encouraging. You know, as you go kind of down to P&L, gross margin, we obviously had a really strong gross margin print here for the quarter. And I think there are some things that we have done internally around decisioning and trying to optimize that. And so I think that may very well be something that we can maintain into next year, which is encouraging. So all that being said, I think there are certainly the building blocks for us to maintain that 11 to 13% is the north star and, you know, try to work against this deleveraging component, build for and keep our costs in line while addressing the investments that need to get made. I think that's the task at hand. But we understand the mandate of not growing costs substantially faster than revenue. But we think we've got some good things in the hopper that'll help GMV going forward. Operator: Thank you. Our next question is coming from the line of John Hecht with Jefferies. Your line is now open. John Hecht: Good morning, guys. Thanks very much for taking my question. I guess just a little bit more into four just because, I know, Steve, you gave us some of the seasonality facts and so forth, but, you know, it's had very, you know, eight quarters of really good kind of growth patterns. Maybe can you give us some, you know, some insight as to, like, customer acquisition and Steve, you even mentioned, like, some the opportunity to cross-sell maybe just a little bit more into that opportunity. Steve Michaels: Sure. Yeah. And one of the really nice things about four so far, and we think it can continue, is just the organic growth that it's seeing in its MAUs, its installed the app downloads. And, ultimately, the GMV has really been driven primarily by referral and word-of-mouth, and user-generated content that wasn't paid for. We have a lot of good ambassadors out there that are really happy with four and getting their friends and family to use it. And that's evidenced by, you know, sometimes the four app in the App Store for iOS will be a top 10 shopping app for a period of time because of some TikTok video or something that we didn't pay for. We are leaning into some marketing as much to prove that we have the sophistication of that muscle in case we need it. Not really to sustain or to juice the growth rates. And so far, we're very pleased with the cost per download and the cost of customer acquisition in the small dollars that we're spending, but we believe that that's a lever that we can pull in the future if necessary. So the referral rate, the word-of-mouth, has been really strong. Four plus has been a very pleasant adoption rate. We introduced it in early 2024. And we have a very growing subscriber base. And as we said, about 80% of our GMV coming from four plus subscribers, which certainly helps that take rate metric that's prevalent in the industry. The cross-sell is an exciting area as well. It's an internal initiative for all of our teams. And we're doing some marketing primarily from the Ford acquired customers to the leasing business. But there's certainly opportunities to go bidirectional. And those are things that we'll be looking at, you know, for 2026 as well to go in both directions across the ecosystem of products. But four is, you know, really becoming a standout in the ecosystem. And getting more integrated. And we think that there's a lot of opportunities across the products. But one of the really nice things has been this organic word-of-mouth and referral marketing or sorry. Customer acquisition without paid marketing that we've been able to achieve. And it's kudos to the brand that the team has built. And the user acceptance and the frictionless experience. John Hecht: Okay. That's super helpful. And then I guess, follow-up maybe, Brian. I think you mentioned if you correct for Big Lots, and some of the tightening that your GMV growth is mid-single digits. I think I heard, you know, in a normal environment, and I know that's a tough question, to define what's a normal environment, but, you know, maybe if you think about the period of 2015 to 2020 or something, what do you perceive as kind of normal secular growth trends for GMV growth relative to that mid-single-digit number? Brian Garner: Yeah. I appreciate you directed that at me versus Steve, but that is a tough question. You know? And, look, the period that you're referring to for 2015 to 2020, that was an environment where I think it was certainly, there was a lot of momentum on the enterprise level. Retailers. And in 2019, launching Lowe's and Best Buy was certainly a high growth period. So it's tough to normalize for it. I guess what I would say is we're looking at the GMV opportunity. We see the pipeline is strong. We see conversations with meaningful retailers that while the sales cycle is long, we are engaging them. And we think there's a lot of opportunity still within our current installed base. As we look at, you know, the metrics across the board, whether it's levels of conversion, or leases per door productivity type metrics, there's a lot of opportunity there. And I'm not giving a satisfying answer about a specific range that you can take, say, into '26 and beyond. I would just say that, you know, if we're growing mid-single digits with the headwinds that are existing today, when you adjust for decisioning and the Big Lots bankruptcy, it gives it's encouraging to me to think about what still leverage still exists for us to penetrate the existing book and beyond? And it makes you feel comfortable that we should be able to drive that north. And that's you know, our best days are not behind us, and I think we've got a lot of opportunity ahead. So that's probably the color I would offer, and welcome any thoughts you might have on that. Steve Michaels: No. I mean, you nailed it. We've got good growth available to us from within our installed base. And, you know, we'd love to rerun the 2015 to 2020 time frame because it was a growth period of, you know, our retailers had positive comps, and we were adding new retailers to the platform all the time. So that's certainly what we're rooting for now. John Hecht: Right. Thank you guys very much for the context. Operator: Thank you. Our next question is coming from the line of Vincent Caintic with BTIG. Your line is now open. Vincent Caintic: Hey. Good morning. Thanks for taking my questions. Kind of first one on GMV, and I guess a two-part question. We talked earlier about the underwriting posture and that you know, feel the needs to tighten yet just kind of wondering if you can put give us some sort of framework for what your underwriting posture, I guess, currently can absorb and maybe in terms of what how we think about the macro or consumer deterioration and maybe what would cause it you have to have to tighten further. And then, second part, so you mentioned those retailers that you signed up. And if you could maybe disclose, like, what the potential opportunity is in terms of the GMV size, that would be very helpful. Thank you. Steve Michaels: Yeah. I mean, Vincent, on the decisioning side, I mean, we've got all kinds of indicators that we look at from first pay bounces to four-week delinquencies to roll rates from bucket to bucket, all the things that you would imagine we're looking at. And, you know, we don't just look at one. We look at all of them because, as I mentioned, DQs are elevated, but it's not something that is impacting overall portfolio yield or negative disposition outcomes currently. So it's, you know, it's a mosaic, if you will, of all those things. And we know what we need to see in order to tighten. And I want to be clear, though. It's when we say like, we may see something to tighten, but it won't be, like, a broad brush stroke changing internal risk scores across every retailer. It could be pockets. It could be in a particular vertical. It could be in a particular retailer. It could be in particular geography. It's very dialed in. Credit to the team for that. So are the things we're looking at, and we look at them very, very frequently. With a lot of folks around the room and on the Teams meeting weighing in. So the three retailers, I would say that we would look at those. They're recognizable logos, so they're not some two-store mattress chain in Denver. And of the three, it's new to them. So as you probably remember from previous when someone adopts a new payment type, it doesn't go from zero to 60 overnight. It kind of ramps up through training and productivity gains. And so we will be working with the counterparts at those retailers to make sure that we move up that productivity curve as fast as possible. I guess you kind of look at them as, like, a super regional, if you will, from a sizing standpoint. Vincent Caintic: Okay. Perfect. That's super helpful. Thank you. And then last question. I wanted to go back to four. So great GMV results over the past eight quarters, and then it was nice to see that strong EBITDA margin this quarter. I know there's variability as you're growing that business significantly. But I'm just wondering if you can maybe talk about how you think of that business at some point in the future when it reaches maturity. What sort of what's the economics? What's the maybe the EBITDA margins of that business? Because I guess when I look at it, I'm making comparisons to some of the other public buy now pay later companies like, you know, Sezzle and Affirm and seeing their high EBITDA margin. So I'm just kind of wondering how you're thinking about that framework, if you can help us out. Thank you. Steve Michaels: Yeah, Vincent. I mean, I think that, you know, the public comps are certainly a place to look. And four has pivoted over the last several years to a direct-to-consumer model. So probably similar, but several years behind, Sezzle. And so if you think about where we were year-to-date with four from an EBITDA margin standpoint, and even though it's going to swing to a loss here in Q4, which like I said, is not a surprise to us and is nothing to be worried about, but it'll bring probably that full-year EBITDA margin down into the mid to, you know, mid-ish single digits. But we do expect with two dynamics scale, as you mentioned, and then with that scale comes more GMV coming from repeat shoppers, so scale and improving loss rates over time we believe, can will result in margin improvement over the next several years. And the unknown is just the rate of growth. Right? So we've been growing, you know, of a 150% GMV each quarter this I guess, it was, like, one forty-seven in Q1, but been over one sixty in Q2 and Q3. You know, just from the law of numbers, you would expect that to decelerate in 2026. But you know, whether there's an opportunity for us to it decelerates a lot, then you'd have more margin expansion. But if we keep the growth there in an effort to get to that scale faster, then we'll have margin expansion, but not as much as you would if you really throttled the growth. So we're not in the business of throttling growth as long as we feel good about the unit economics of each deal we're putting out. And so but over the next several years, we see no reason why we can't look more like those public comps that you're citing there. And that's an exciting opportunity. Vincent Caintic: Okay. Great. Very helpful. Thank you. Operator: Thank you. And I'm showing no further questions in the queue at this time. I'll now turn the call back over to Steve Michaels for any closing remarks. Steve Michaels: Yeah. Thank you very much. Appreciate everybody joining us today. Your interest in PROG. We delivered another strong quarter and are excited about our opportunity to finish the year strong and then set up for 2026, which we'll talk more about here in February. Thank you so much, and have a great day. Operator: This concludes today's conference call. Thank you for your participation. And you may now disconnect. Goodbye.
Operator: Greetings, and welcome to the Lithia Motors, Inc.'s 2025 third quarter Earnings Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance, it is now my pleasure to introduce your host, Jardon Jaramillo. Thank you. You may begin. Good morning. Thank you for joining us for our third quarter earnings call. Jardon Jaramillo: With me today are Bryan DeBoer, President and CEO; Tina Miller, Senior Vice President and CFO; and Chuck Lietz, Senior Vice President of Driveway Finance. Today's discussion may include statements about future events, financial projections, and expectations about the company's product, markets, and growth. Such statements are forward-looking and subject to risks and uncertainties that could cause actual results to materially differ from the statements made. We disclose those risks and uncertainties we deem to be material in our filings with the Securities and Exchange Commission. We urge you to carefully consider these disclosures and not to place undue reliance on forward-looking statements. We undertake no duty to update any forward-looking statements that are made as of the date of this release. Our results discussed today include references to non-GAAP financial measures. Please refer to the text of today's press release for reconciliation of comparable GAAP measures. We have also posted an updated investor presentation on our website investors.lithiadriveway.com, highlighting our third quarter results. With that, I would like to turn the call over to Bryan DeBoer, President and CEO. Bryan DeBoer: Thank you, Jardon. Good morning, and welcome to our third quarter earnings call. This quarter was all about execution at speed. We improved our same-store revenue across all business lines, focused on cost control, and deepened the integration of our adjacencies within store operations. The result is a high-quality earnings mix with more profits coming from recurring streams to create compounding cash flows. Quarterly revenue was $9.7 billion, up 4.9% year over year, and adjusted diluted EPS was $9.50, up 17%. These outcomes reflect the power of our ecosystem in combining local market leadership with a unique omnichannel platform. This quarter highlights an inflection in our performance with strong top-line growth across all business lines, highlighted by the accelerated growth in our highly profitable used vehicle and aftersales segments, demonstrating our focus on execution. We look to continue to capture market share and increase customer loyalty, finishing strong in 2025 and springboarding into 2026. Tina Miller: Our team is quickly converting our momentum into share gains, faster throughput, and sustained cost efficiency so earnings power builds from here. Our unique and diversified earnings engine is the industry while also being more durable, despite a mixed customer backdrop of normalized GPUs and customer affordability issues. The gross profit growth in our recurring aftersales department, resilient F&I attachments, and a focus on increasing market share created strong top and bottom-line results. Combined with tight SG&A control and a focus on fast-turning used cars, we have multiple levers to expand margin and cash flow in any environment. Our results reflect our momentum in building value for customers through simple, empowered, and convenient solutions. As such, same-store revenues for the quarter increased 7.7%, driven by growth in every business line. Despite continued normalization of front-end GPUs, total gross profit also increased 3.2%. Total vehicle GPU was $4,109, down $216 year over year, consistent with industry trends. Note that all vehicle operation results are on a same-store basis from this point forward. New and used volumes both contributed nicely to top-line growth. New retail revenue grew 5.5% with units up 2.5%. New GPU was $2,867, down $348 sequentially. The past few quarters of lagging domestic brand performance shifted this quarter and drove most of our year-over-year improvement. Adversely, luxury brands performed the weakest year over year and import brands were relatively flat. Our used vehicle performance continues to improve nicely, now considerably outperforming the industry with used retail revenue increases of 11.8% over last year. This was driven by a 6.3% increase in unit growth and higher average selling prices. Our value segments continue to deliver high growth with a 22.3% unit increase year over year. Well done, team Lithia. Lastly, used front-end GPU was $1,767, declining by $90 sequentially. Our strategic focus on used vehicles provides another durable layer in any cycle and affordability level. Bryan DeBoer: We will continue to prioritize high ROI used vehicles, keeping all price levels of our vehicles in our ecosystem, turning inventory efficiently, and increasing the F&I and aftersales attachment to deliver more connected and repetitive ownership experiences with our customers. F&I also continues to grow with F&I revenue up 5.7%, reflecting our continued focus and opportunity in this high throughput area. F&I per retail unit reached $1,847, up $20 year over year, which includes the impact of lower F&I from increasing penetration of EV leases and strengthening DFC penetration in the quarter. Vehicle inventory and carrying costs improved nicely with new day supply at 52 days, a decrease of 11 days sequentially. Used DSO was 46 days versus 48 in Q2. Floorplan interest expense declined $19 million year over year due to tailwinds from decreases in inventory balances and slightly lower interest rates. Aftersales continues to be the largest single driver of customer retention and earnings growth. Aftersales revenue increased 3.9% while gross profit rose a hefty 9.1%, with margins expanding to 58.4%, up 280 basis points year over year. We saw strength in all key aftersales categories with customer pay gross profit up 9.2% and warranty gross profit up 10.8%. The strong growth across both categories shows the resilience and opportunity of aftersales and illustrates the value of increasing the number and frequency of customers in our ecosystem. Cost discipline driven by productivity gains and managing performance through people is a key element of our earnings engine. North America's adjusted SG&A was flat sequentially at 64.8%, as we bent the cost curve even as GPUs continued to normalize. In The UK, our teams are responding to market conditions and regulatory labor costs that increased in the year by improving productivity and managing performance through people. Globally, we are increasing market share and growing our high-margin aftersales business as we simplify the tech stack with Pinewood AI, retire duplicative systems, and increase sales efficiency without compromising the customer experiences to drive incremental SG&A leverage. This leverage is amplified by our digital platforms, where we're unifying the customer experience across driveway.com, green cars, and our My Driveway owner portal to make shopping, financing, and service simpler and faster. The sale of our North American JV back to Pinewood AI streamlines the path to market for North America rollout, creating a single industry platform for stores and customers, reducing duplication, and increasing speed of delivery by empowering associates and customers. Together, these steps deepen retention, support SG&A leverage, and reinforce the power of our ecosystem. Driveway Finance continues to build a growing base of stable earnings, with healthy spreads and disciplined underwriting. The path to higher penetration is clear as our focus on growing market share provides us a larger funnel of high-quality loans as we move towards our long-term targets, converting retail demand into recurring stable earnings through any economic cycle. I'm happy to congratulate our DFC team and our store leaders for achieving our 15% penetration rate milestone a few quarters earlier than expected. Well done, team. Turning to capital strategy. We remain focused on investing where we can create the most shareholder value. With our stock trading at a meaningful discount, this quarter we prioritized repurchases, buying back 5.1% of our outstanding shares at prices that will drive significant long-term accretion. This quarter, we issued low-cost, well-priced bonds, increasing our flexibility without stretching risk. Looking ahead, we'll keep making incremental accretive decisions, buying back more when the discount is wide, funding selective acquisitions when returns are clear and more affordable, and continuing to invest in technology. Each element of our ecosystem is building traction and momentum. We're increasing market share and productivity, building stable earnings power in our service drives, accelerating high ROI, value autos, and scaling our adjacencies while improving SG&A leverage. Optionality in our free cash flows and expertise in M&A provides a strong foundation to grow durable EPS and cash flow in any environment. Strategic acquisitions remain a core pillar and key differentiator of our growth model. From $12.7 billion of revenue in 2019 to approaching $40 billion today, we've paired scale with consistent EPS compounding in one of the most unconsolidated retail sectors. This growth was accomplished while also building a much more diversified and profitable business model. Today, our cash engine and unique ecosystem give us the flexibility to both accelerate buybacks and continue to grow organically through exceptionally high return targeted acquisitions. We remain disciplined and U.S.-focused in our acquisitions, prioritizing stores that strengthen our network, especially in the Southeast and South Central regions, where population growth and operating profits are strongest. Alongside these additions to our network in the quarter, we reiterate our $2 billion acquisition revenue estimate for 2025, expecting a strong finish with some complementary acquisitions by year-end. Our acquisition financial hurdle rates are unchanged to acquire at 15 to 30% of revenue, or three to six times normalized EBITDA with a 15% minimum after-tax return. It is important to note that our track record over the past decade has yielded high rates of return, nearly doubling these hurdle rates. Over the long term, we continue to target $2 to $4 billion of acquired revenue annually, deploying capital where each incremental dollar compounds value per share the fastest. If seller expectations stay elevated, we'll lean harder into repurchases. When fit and value align, we move with speed to integrate accretive acquisitions. With the foundation set, and strategic design now providing meaningful tailwinds, Lithia Motors, Inc.'s differentiated model is delivering. Our long-term $2 of EPS per $1 billion of revenue targets are powered by a consistent set of levers. Lift store level productivity and throughput, expand our footprint and digital reach to grow U.S. and global market share, increase DFC penetration, reduce costs through scale efficiencies, SG&A discipline, and an optimized capital structure, and capture rising contributions from omnichannel adjacencies. Together, these levers will continue to convert momentum into durable EPS and cash flow growth. Our nationwide network of amazing people, paired with industry-leading digital tools, is driving engagement across the full ownership life cycle. Strengthening used vehicle aftersales in our captive finance business deepens customer economics and smooths out any economic cycles while inventory and network scale improve speed and choice. Operational leaders across the network are driving store and departmental towards potential, integrating adjacencies, leveraging our ecosystem, and elevating our customers' experiences. The result is a model with consistency, resilience, flexibility, and visible compounding power that will deliver accelerating shareholder value. With that, I'll turn the call over to Tina. Tina Miller: Thank you, Bryan. Our third quarter momentum is clear. Year-over-year EPS improved, financing operations delivered continued growth on solid credit and healthy spreads, and we made progress on SG&A efficiency. Strong free cash flow generation supported meaningful share repurchases, and our balance sheet remains flexible with ample liquidity to fund growth and returns. These outcomes reflect disciplined cost actions, a maturing captive finance platform, and balanced capital deployment. Taken together, they position us to continue compounding value per share. Adjusted SG&A as a percentage of gross profit was 67.9% versus 66% a year ago. On a same-store basis, SG&A was 67.1% compared with 65.1%. As Bryan mentioned, sequential SG&A in North America was essentially flat at 64.8%, which reflects the cost discipline of our teams considering the sequential decrease in total vehicle GPU of $315. Our teams continue to focus on managing costs through growing market share and gross profit as we start to lap prior comps that reflect our sixty-day cost saving last year. In The UK, macro and mixed headwinds pressured margins and labor costs, we are focused on actions to increase gross profit, including increasing market share in used autos and aftersales and reducing SG&A through efficiency and cost control. We've seen solid SG&A results as we bend the cost curve in North America, we're making improvements across our network. Particularly in The UK with specific levers raising productivity through performance management and technology, simplifying the tech stack, and retiring duplicative systems, renegotiating national vendor contracts, and automating back-office workflows. These actions should build benefits each quarter, containing the SG&A trend even if front-end GPUs continue to normalize. Driveway Finance Corporation continues to scale profitably, underscoring the differentiation of our model. Financing operations income was $19 million in the quarter, with portfolio growth offsetting seasonal trends and profitability. We achieved $52 million in financing operations for the year to date, hitting the low end of our full-year expectations a quarter early. Net interest margin of 4.6% was up 70 basis points year over year, while North America penetration reached 14.5%, up 290 basis points year over year. Our disciplined underwriting and credit management practices resulted in strong provision experience, and we have not seen meaningful changes in consumer credit trends within our portfolio. Our position at the top of the demand funnel and high-quality originations keep credit risk low and capital efficient, managed receivables now above $4.5 billion, the maturing portfolio is delivering profitability that our earnings trajectory with steady, consistent growth. Strong origination flow, improving margins, and a clear runway to increase retail penetration rates gives us confidence in the path of our long-term DFC profitability targets. Now moving on to our cash flow and balance sheet health. We reported adjusted EBITDA of $438 million in the third quarter, a 7.7% increase year over year, primarily driven by lower flooring interest. We generated $174 million of free cash flow, converting operating momentum into liquidity, that lets us both return capital and invest for growth while maintaining a strong balance sheet. This steady self-funded cash engine keeps us nimble and focused on deploying dollars where they compound value fastest. This quarter, we strengthened our capital allocation commitment to focus on share buybacks. With our share price significantly lower than intrinsic value, we allocated approximately 60% of capital deployment to share repurchases, buying back 5.1% outstanding shares at an average price of $312. So far in 2025, we have repurchased 8% of outstanding shares at an average price of $313. Slightly less than one-third of capital was deployed to high-quality acquisitions in targeted regions and the remainder to store capital expenditures, customer experience, and efficiency initiatives. Our capital allocation philosophy is to act opportunistically and with leverage in our target range and ample liquidity, accelerated share repurchases to capitalize on the meaningful disconnect between our stock price and the fundamental value of our business. This quarter, higher buyback pace allows us to compound returns for shareholders while still preserving capacity for high-return strategic acquisitions. Our strategy remains consistent while we continue to grow. Generating differentiated stable earnings from an omnichannel platform that serves the full ownership cycle. With talented teams, class-leading digital and financing capabilities, and a strong flexible balance sheet, we're scaling core operations and high-margin adjacencies with measured discipline. Our omnichannel model creates durability and flexibility as business conditions evolve. Preserving capital flexibility to deploy where returns are highest. As we move into 2026 and beyond, we will continue our focus on translating share gains and throughput into cash flows compounding value per share. This concludes our prepared remarks. With that, I'll turn the call over to the operator for questions. Operator? Operator: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press 2 to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. One moment, while we poll for questions. Our first question comes from the line of Ryan Sigdahl with Craig Hallum Capital Group. Please proceed with your question. Ryan Sigdahl: Hey. Good morning, Bryan. Tina. Nice to see the operational improvements. Wanna start with EVs. EVs were given the tax credit expiration. But it seems like Lithia Motors, Inc. cleared through most of their EV inventory or refreshed a lot of it anyways. But can you talk through kind of what you saw in the quarter, what that meant from a sales standpoint and then also GPU standpoint, and then how you think about that category going forward? Bryan DeBoer: Sure, Ryan. This is Bryan. Thanks for joining us today. Believe it or not, our electrified vehicles in the quarters were back to 43% of our total new car mix. Which was a nice number. We actually started the month of September and this is close to correct. Okay? I think we had 6,000 electrified vehicles that qualified for the $7,500 federal credit. Going into the month, and then we ended at just under 2,000. With really the only product that's remaining is a little bit of the higher price stuff. Which we spoke to in the past. The other thing that's pretty important to remember is manufacturers incentivized those cars quite nicely as well. Many of the manufacturers are carrying over those incentives plus that we they're basically replacing the $7,500 credit on top of that. To be able to keep that volume, hopefully, somewhat static. I imagine it's gonna drop a little bit, and I don't have the preliminary October results, but I would imagine it'll drop a little bit. But the important thing to remember is that the way that they push those units out the door and what the impact is of the $7,500 is basically an affordability issue because most of those vehicles were leased. So our lease penetration I think, was the highest we've ever had on a blended basis. We were almost 40% lease penetration on new vehicles, which was quite nice, which means most of those customers are coming back in the next twenty-four to thirty months or whatever the length of those terms are. So need to see that we can move the market when we need to. And I think what I would take away from it is those vehicles, those 4,000 vehicles or so that we pushed out, in September were really first-generation BEVs. A lot of first-generation BEVs, Hondas, Toyotas, Subarus, and some of the domestic products that now second-generation cars are coming either in the twenty-sixth model cycle by the end of the year or early in 2026. So we're gonna have rather than a 200-mile range car, we're gonna have three to 400-mile range car. For about the same price. Ryan Sigdahl: Yeah. It's great color, and not just consumers coming back, but like you said, the first rate of refusal for that inventory on the used side coming in the door for you guys. Wanna switch over to The UK. Appreciate the disclosure on kinda North America SG&A to gross. If I back into it, I think it implies The UK was something in the high 80 range. Understanding kind of the margin challenges there, the labor challenges, etcetera. But sounds like a lot of company-specific initiatives from cost efficiencies focusing on parts and service and used and things that The US did, you know, a decade ago. But do you see any kind of line of sight to improve market conditions there, or is it really kind of a self-help do what you can do given the Chinese mix and kind of the constraints in the market? Bryan DeBoer: No, Ryan. Great questions. And I think the insights on the labor market really happened in January. And it was twofold. One was a minimum wage, and then one was a payroll tax. And the actual impact to the organization was $20 million. For us. Okay? And they curbed about $11 million of it in the first six months, sheerly through headcount reductions and productivity gains. They've now earmarked another 8 or $9 million, but it'll get them beyond what the impact was, but there's another 3 million coming in 2026. So they're really working on how to do that. And I think even though our SG&A is higher than last year, and the market has shifted, our team's doing a pretty nice job relatively speaking of how to respond to that. And a lot of the increases I think we were up $1,010 million dollars approximately in operational net profit in parts and service. So big improvement there. Our used cars are beating the market by a little bit, and our new cars are in line with the marketplace. And I would say this, last year, we had let's see, we had three BYD stores and an MG store which are Chinese brands. This year, right now, we have seven total brand total Chinese stores with, I believe, five more that open in the next sixty days. So unlike The United States where you have to go buy and pay goodwill to be able to shift your manufacturer mix in The UK If you've got a facility and you've got good relationships, with manufacturers, you have the ability to add and respond pretty quickly to the marketplace. So we're pretty pleased about what we're seeing there and our team there is doing a really nice job responding. So we should exit the year with almost a dozen Chinese brands, which are up a pretty nice amount. Now some brands like Ford and stuff are up quite nicely as well. So you know, I think we're able to respond to the market. But like you said, it's our response. It's not necessarily coming from strength in the marketplace right now. Ryan Sigdahl: Helpful. Thanks, Bryan. Good luck. Bryan DeBoer: Thanks, Ryan. Operator: Thank you. Our next question comes from the line of Federico Merendi with Bank of America. Please proceed with your question. Federico Merendi: Good morning, everybody. We've seen some turmoil in the supply market, and today, there were more news on that front. So what my question is, Bryan, could you give us an overview of the used market and how subprime can impact it? I understand that your higher credit quality, but what are the ramifications for this the credit portfolio? Bryan DeBoer: Would love to, Federico. And I think let me speak directly to the used car market as a whole. And as a whole for Lithia Motors, Inc. not specifically to our DFC part of our organization. Okay? Because their buying behaviors are different in the marketplace. Of more of a prime type of lender. What we're seeing in the in the marketplace, in the used car marketplace, is a lot of opportunity. This is from a Lithia standpoint. In the value auto segment. Okay? And the value auto segment is our most affordable cars. And I think there's a general belief in the industry that value autos are driven off of low-quality credit. It's the exact inverse of what you think. Okay? Lower-priced vehicles are only financed about 50% of the time. Okay? Whereas a certified vehicle is typically financed 90% of the time. The reason why is that lower-priced vehicles or what we call value auto are typically quite scarce. Okay? They take money to recondition. So your price to book value is typically quite high, meaning it's difficult to finance. Okay? And I got Chuck sitting next to me here shaking his head that those are really hard cars to finance because you know, at a $15,000 car, if you've got $3 in disequity, you're now financing 20% over LTV with profitability and without down payment. So you've got some big anomalies that remember that value autos are driven off a higher credit quality customer typically saves their money or has the ability to finance at a fairly high LTV. Loan to value. Okay? So really interesting dynamic, and this is what we teach our stores and why our value autos were up 22% on a unit basis. In the quarter. And a lot of our real strong tailwinds. Other market dynamics that are important to remember. We actually achieved 74% of our used car sourcing. In the quarter was bought directly from consumers. Okay? And that's trade-in, obviously, or buying them directly off the street from consumers. Or off-lease vehicles. So on and so on. That's the highest we've had all year. Okay? Meaning, that our teams are keeping pretty much every vehicle that they can make stop, steer, and go. So you're selling a safe vehicle, but you're digging into the affordability landscape of these high-quality customers that ultimately you make pretty good money on because the vehicle is scarce. Okay? Some other little tidbits of information Our margins on used vehicles, and I believe this is more of a Lithia thing because we now have driveway and green cars to be able to spread our wings and get more eyes in front of every type of car. And this is a little better than what we've been in the past. We made 5.1, 5.2% margins on both certified and core product. Okay? As a percentage. Right? Our value auto this quarter was almost 16%. Okay? And remember, that's a lot lower-priced car So our actual annual return on our value add is a 130% cash on cash return. Okay? Massive improvement. Relative to certified and core, that's under 50%. Okay? So nice improvements. We're pretty excited about what's happening in that space. To finish that thought, Federico, remember that the mix in the market nationally in North America only 11% of used vehicles sold are one to three-year-old vehicles. Okay? Only 11%. Okay? So we spend very little of our time, and it only makes up about a fifth of our total sales. Selling those. We do it because we've got the off-lease returns, and it's easy People expect us to have those certified cars. Another quarter of the market comes from Coradas or three to eight-year-old vehicles. Okay? And we were about you know, that makes up 26% of the market which leaves over nine-year-old vehicles makes up 63% of the marketplace. Okay? That's a huge amount. Okay? That's a number that's bigger than new car star. Okay? So remember, that's where the big money is in the business, and as a new car retailer, we're top of funnel to get the first waterfall effect of trade-in and then the second waterfall effect and ultimately, that second and third trade-in, which is really that value auto that brings those nice returns that we're looking at. Hopefully, that helped, Federico. Thanks for your question. Federico Merendi: Thank you, Bryan. It was super helpful. And the second question I have is on The UK and the regulatory environment. I mean, we have seen that in The US, the EV regulatory environment has changed. And Continental Europe is it seems that they're moving to that direction. What do you think is going to happen in The UK over the next I don't know, eighteen months in the regard of EVs. Bryan DeBoer: Yeah. So, Federico, let me just reiterate for everyone that UK makes up a little over 10% of our revenue and makes up about five to 6% of our net profit. So we don't have a ton of impact coming from The UK. But what we're seeing is growth of the Chinese brand but it's not coming from the electrified segment. It's coming from their introduction of ICE vehicles, into the marketplace. So and I think when they when BYD when MG and those others first came in the market, they were electrified vehicles. Okay? Today, the reason why they're gaining market share is they're selling ICE vehicles and plug-ins. Okay? And I was there four weeks ago, okay, and traveled the marketplace. We now have a cherry franchise there as well. Looking at the product and what I see in the electrified vehicles. At the price point that they're selling them for in The UK, they have zero ability to compete in North America. Okay? And that may change, and they may have margin that they can still take out of the formula. But I looked at a cherry vehicle that was £37,000, which is an equivalent to almost $48,500 American dollars. Okay? It was an electrified vehicle that had about a 256, 57-mile range. Okay? And wouldn't hold a candle to any of the imports or the domestic cars at about $10,000 less. Okay? So we're actually not as concerned, and it's great to be able to see what's happening in The UK. Remember this also. In China and UK, they've plateaued in terms of electrified vehicle sales. They both sit at about 55%. Penetration rates. Okay? And that's the same as it was last year. Okay? So, really, the impact that's happening is coming from the ICE vehicles that I don't think that message gets out there. I do believe that the labor Party in The United Kingdom is definitely into sustainable vehicles. You know? At times, I wish we were a little bit more into that as well, but you know, that's probably now five to seven years out in in The United States. But you know, it is making it hard expense-wise. In the in The United Kingdom, and I imagine they'll embellish that further with more quotas on electrified vehicles. Federico Merendi: Thank you very much, Bryan. Bryan DeBoer: Thank you. Operator: Thank you. Our next question comes from the line of Michael Ward with Citi Research. Please proceed with your question. Michael Ward: Good morning, Bryan. How are you, sir? Bryan DeBoer: Good. Did you Two things. On the USB EV sales, you mentioned there are about 4,000 units. If I believe what I hear of the industry, the margin on those is very light. So if you take that out, you probably your overall gross new vehicle gross has been relatively flat. If I'm doing the math right, over the last couple of quarters. Is that correct? Bryan DeBoer: I believe you're correct, Tina. Do you got any insights there? I'm looking here real quickly. Tina Miller: Yeah. I think that that's a fair assumption, Mike, that the BEVs are a little bit lighter, and we're pushing those out the doors. Our manufacturers are asking us to help them meet their CAFE standards so they can ultimately continue to build other higher demand cars at the current time. Michael Ward: You know? And Yeah. Now we need better cars. It is. It is. What kind of plan? It's a much higher repeat buyer too. Right? The EVs? Like, once they people buy them, they love them. Bryan DeBoer: I think you're right about that. The big thing is is we're conquesting second and third-generation Tesla customers. Massively conquesting them. So that's a positive thing, especially in the West where Tesla penetration is high. And I would say our managers and store leaders are not as opinionated of whether they should sell an electric car plug-in hybrid, or an ICE engine. You know? They seem pretty savvy on being able to convert customers. And I think what a customer gets is a wonderful service and aftersales experience. So the life cycle of the ownership is a much different experience than maybe their first one or two experiences with the Teslas. And to be fair, most manufacturers now have competitive product in price in range, and in speed, which is something that a man that a lot of consumers are looking at that the performance elements of the car are quite excited and we're really excited about the next gen of the of the Japanese and Korean imports that are hitting in the next couple months. Okay, to really be able to start to push those vehicles out to the consumers at really affordable levels. Michael Ward: And it sounds like the profitability aspect probably bottomed with the three q. With the the rush to buy. So maybe that's just a little bit. The second thing is, you kind of alluded to that you have about it sounds like, about $1 billion in acquisitions that could close by year-end. Is that what you're seeing? And is have the multiples come back into check? And it looks like it sounds like you have a lot of opportunity there. Bryan DeBoer: Yeah. You know us. I mean, we don't use these threats on deals. We're fortunate that we've got great relationships with our manufacturer partners, allows us to fish in every possible pond. And I think in North America, we've been real fortunate to be able to find a few deals in the first March of the year. But we've got some really nice deals coming in Q4. And are pretty excited that you can find them in this type of market, especially the quality of the deals and you know, it's those long-term relationships that may take three to five years to be to be get into that point where certain things start to drive the decisioning of those sellers. And we're fortunate that they chose us to be able to be their suitors. And their successors at what we would look at as, you know, well within our 15% hurdle rates on ROI and three to six times EBITDA and on and so on. Michael Ward: Well, you're keeping that allocation plan tight. It's nice to see, so thank you. Bryan DeBoer: Thank you, Mike. Michael Ward: Appreciate it. Operator: Thank you. Our next question comes from the line of Rajat Gupta with JPMorgan. Please proceed with your question. Rajat Gupta: Great. Thanks for taking the questions. I just wanted to dig in a little bit more on The U.S. Versus UK performance. Anything more you can share in terms of, you know, how the GPUs were in US versus UK? And how was the services growth, I appreciate the SG&A comment, but just any more clarity around the profit performance would be helpful. And then, relatedly, any more color on US in terms of how you feel you're doing versus the marketplace now? Particularly given, like, historically, you've had some tough exposure in terms of your regional mix. So curious, like, how that's doing versus the broader market. And I have a quick follow-up. Thanks. Bryan DeBoer: Yeah. Sure, Raj. I think maybe I'll spend most of the time on what we think of our North American performance and where we where we sit in the marketplace. I mean, the it does look like that we massively beat on used cars. The market is showing flat. Okay? So think we sit quite nicely at 11.8% revenue increase and almost 7% unit increase. Also, you reflect back on the used-only retailers that have reported so far, remember, they were down 6%. So it speaks to the strength of our model and ability to respond to the marketplace in a little bit tougher conditions. We're pretty excited about that. Also, if you look at our aftersales business, we were up over 9% in gross profit. Okay, which was a really really nice number as well. And that's driving a lot of the profitability. In The United States. Which is great. I mean, really, the new car market was where maybe a little bit of weakness lied. Okay, because ultimately, our GPUs did come down. Even though we were up five or 6%, that also looks better than what the marketplace was. So I'd say this. I think our team is responding and you know, to be fair, last quarter, our results were kind of middle of the pack. This quarter, I believe that we're going to be we're going to look nice in terms of top-line revenue growth and we'll see tomorrow and next week of where we sit. And no matter what, I believe that we've got lots of opportunity I think our team believes there's lots of opportunity. And they're really driving towards that two to one ratio. In terms of The UK, The UK's profitability was only was down 2.4% year over year. So it wasn't that much, and it didn't affect things that much in terms of our overall numbers. So most of the $300 in GPU was truly North America. Okay, which is the sound byte. Now we did we have read some third-party information. It appears that the GPUs as a whole were down almost 16% on new vehicles. Okay, for the nation. Okay? So if that's true, we probably beat by five to 7% in terms of GPUs and obviously on the top-line side on new unit volume, we beat on a pretty good amount there as well. So all in all, I can tell you this. My team is looking forward to the challenge, and I think being back in operations and getting to know a lot of our operational middle leaders and top leaders a little bit better. We've got great people. That understand the opportunity and know it's game on and are looking for how to show that Lithia Motors, Inc. is the best operator in the segment. And most importantly, how to leverage the ecosystem and the massive amounts of acquisitions that we've added over the last five years, to really differentiate ourselves as operators. Rajat Gupta: Got it. Got it. That's helpful color. I just wanna follow-up on, you know, Mike's question around just m and a. Just a little more finer point on that. If possible. You reiterated your $2 billion target for the year. But you also noted, like, you're very return focused. So I'm curious, like, is that, like, a hard target that you wanna meet here in the fourth quarter? If not, like, would we expect that excess cash flow to go into buybacks? I'm just curious, like, know, how much of I mean, is that something you're, like, you're forcefully working towards to achieve? Know, in the fourth quarter? Thanks. Bryan DeBoer: Yeah. I think the return thresholds at any given time are balanced. But we that is a hard number. We don't flex. Okay? And we haven't had to flex even over the last three or four years where earnings were elevated and as such prices were elevated, we've always bought off normalized earnings. We have not put in the value creation that comes from the ecosystems in our return metrics still. Okay, which gives us another 50% of lift when we think about, where we stand there. So you know, there's good opportunity out there. You just gotta be able to fish in a bigger pond. To find the opportunities that are great. Okay? And I think you know, one thing that I know about how we think about our network is we do look at density. We are starting to gain market share and expand loyalty. Okay? And at about 188 miles from over 95% of the population in our in in, The United States. We sit in a nice place to be able to grow and push market share. And I think our team spent the last three or four years getting to understand the benefits of what driveway.com can do what the My Driveway consumer portal can do, and how DSC can help drive sales. While still being extremely controlled in what we buy. In DFC to be able to get there. So we're pretty pleased and you saw that we bought, what, 5.1% of our shares back in one quarter. Okay? The implications of that, we buy the whole company back in five years. Okay? That's 20 quarters. Okay? So I don't believe that can happen. And if but if the world can't see what we built, and can't see that we know what we're doing and that we had the courage and the boldness to be able to redesign our organization for a higher profit model that has lower costs okay, and can't see that the synergies that are coming from DSC and Driveway and Fleet Management businesses and Pinewood experiences and partnerships I'm not sure what they're looking at, but this management team and our board believe that we have the we have a rocket launching into space. And if people don't get it, we'll continue to buy our shares back. Rajat Gupta: Understood. Thanks for all the color, and good luck. Operator: Thank you. Our next question comes from the line of Glenn Chin with Seaport Research Partners. Please proceed with your question. Glenn Chin: Good morning, folks. Finally. Can we just scroll down a little more into your use performance? So you know, as you pointed out, very promising 6.3% same-store unit growth. I mean, that's the best number you've put up in almost four years. Can you just tell us what drove that, Bryan? Was it a change in focus? Change in process? It doesn't sound like it was a change in market. Bryan DeBoer: Well, I can tell you this. Adam did a nice job kicking off used car focus. And to be fair, that's my love. Okay? So everyone's getting the message and it's very clear that we know what we're doing. It's a matter of keeping those. And remember this, Glenn. We bought $25 billion in revenue, with not a lot of messaging to the stores over that first three or four years of ownership. That we keep every car. Okay? And we bring people into our ecosystem through affordability, and then they eventually step up to buy better or newer cars then eventually buy new cars. Okay? And that is our model. And I think I'm proud of that $25 billion that joined us to be able to clear their mind that they can actually sell these cars in a respectful way and it's a higher quality car than 16% profit margin on those value auto cars. We're gonna continue to push, though, in all three of the buckets. Okay? And I know that our team can do it, and it's truly a focus. On being able to walk, chew gum, and then eventually run at the same time. And I think our top our teams in the walk stage and we'll continue to get to jog and run on used cars. But it's the biggest area that we built the ecosystem for. Okay? And even our sustainable vehicles and used cars is looking like a quite quite nice number at almost 20%. Of our sales were electrified and used cars as well. Glenn Chin: And you've emphasized that messaging to me the last several quarters that was it was going to be a point of focus for you and the team. I mean, so so is last quarter the inflection point? Meaning, I mean, should we expect positive comps from from here on out? Is that a safe assumption? Bryan DeBoer: Absolutely. Okay. If you remember pre-COVID, Clint, pre-COVID, the company the company basically for eight years. Had high single-digit, low double-digit, increases in used cars quarter over quarter. I don't remember a quarter that we were ever below seven and a half, 8%. Okay? I mean, the market is there. Remember, we have less than 2% of the used car market. Okay? And we're top of funnel. Okay? We we built our ecosystem to be able to grow used cars out by finding the best cars reconditioning them closest to the consumer, meaning I don't got the fees to transport cars because I got 350 reconditioning locations in North America. Okay? And on top of that, 75% of our cars or three-quarters of our cars are coming directly from consumers, so we don't have to pay option fees. Okay? It's about a thousand dollar advantage over used car retailers. Okay? Important thing to remember and we're just getting started. Glenn Chin: Yep. And to your point, I mean, I'm looking at my model here. You have positive comps every quarter prior to COVID. Apologize for the noise. Back to as far as my model goes from so from 2012 through 2020, you have positive comps every quarter. Bryan DeBoer: Well, great. Well, since I've got everyone on the call, in October, we're trending up 10% in unit sales. Okay? And we've got tough comps. Okay? And we had tough comps last quarter. Because we had all the carryover units from CDK. That gave us a bigger number last year in used car sales. So we're just getting started. Glenn Chin: Very good. Thank you. Operator: Thank you. Our next question comes from the line of Christopher Bottiglieri with BNP Paribas. Please proceed with your question. Christopher Bottiglieri: Hey, guys. Thanks for taking the question. Two quick ones for me. The self-sourcing was 74%. This quarter, the highest of the year. Can you just remind us what that looked like pre-COVID? Bryan DeBoer: Actually, pre-COVID, we were low seventy percentile. The area that's grew is what we procure directly private party. Meaning, what we buy directly from a consumer, they don't actually trade in the car. And buy a car from us. And that was three or four percent if I remember pre-COVID. And that's pushing eight to ten percent in most quarters now. A lot of that is driven off of the driveway ability to be able to procure a couple thousand cars a month. Okay? And that driveway procurement is really retraining a lot of our store leaders that cars are worth more than what they think. And when they pay a little bit more on a trade-in, somehow they sell them for a little bit more. Because remember, our thesis on our design elements ten years ago is that we buy cars for about 12 to $1,500 less than what the used-only retailers. Primarily driven off what I just spoke about of reconditioning closer to the customers and closer to what car sale not having auction fees, having more of our cars come off trade-in, okay, that gives us a distinct advantage. But unfortunately, we pass it all through to the consumer, and we sell cars for about a thousand to $1,500 less than what Carvana and CarMax sell them for. Okay? And that's purely because we believe because they've got more eyes on cars and it's a pretty nice transparent selling process that they have much like what we have in Driveway. Christopher Bottiglieri: Gotcha. Okay. Yeah. That's what my I show that too, that thousand $15 gap in my price surveys and whatever believes me. But, anyway, my follow-up question would be can you just give elaborate more on the net losses as percentage of managed receivables this quarter and then also the allowance for the end of the quarter? A percentage of ending receivables. Just wanna get a sense. Sure. Great. Check with You had a, yeah, you had a really good quarter last quarter. The allowance didn't really move much. Just wondering if that's conservatism or just you're a little bit spooked by maybe some of the fringe part of the subprime market. You guys don't really play there, but just kinda curious how you're thinking about that allowance going forward. Chuck Lietz: Yeah. Chris, this is Chuck. I would say know, there's a lot of noise in the marketplace, but we're very happy how our portfolio is performing. Just a couple of quick data points. Our first payment default, which is the biggest in the of fraud and highly likely fraud, is actually down year over year. Our delinquency rates are down year over year. On a sequential basis, and our default rates, which leads to the provision that you're talking about, are also at or below at each credit segment year over year after we adjust for seasonal adjustments. So this really speaks to the power of our ecosystem. Of being top of funnel, Chris. And that this credit discipline while still increasing our originations by 33% over last year, That's pretty much, you know, key to DFC's ability to drive and hit our long-term goals of 500,000,000 of pretax profit. And as it relates back to the provision, we're very comfortable that keeping that at where we've got it should be more than enough to cover what our losses are on a go-forward basis. So thanks for your question, Chris. Operator: Thank you. Our next question comes from the line of Jeffrey Lick with Stephens Inc. Please proceed with your question. Jeffrey Lick: And the rest of the team. Good morning, Bryan. Congrats on a great quarter. Bryan, I was wondering if we could if you wouldn't mind just drilling down a little more on the new GPUs as we go forward, I think we're gonna be lapping a tougher Q4 than last year with the election bump and I think the OEMs had some dealer incentives. And you know, then we as we get into next year, I mean, we there really hasn't been any talk on this call of tariffs, which is amazing in itself. I'm just curious how you see the outlook for new GPUs as we go through Q4 and 2026? Bryan DeBoer: I think that's a good insight Jeff, that Q4 of last year did have some nice numbers in it. But to be fair, when we think about how we grow our business, it's taken us a year or so to get back to Performance Through People. And our store leaders out there are making good people decisions, and a lot of those were made in the summer and are now taking hold. Now what happens in the in the quarter? Will we'll we'll have to see. I would say this, when we look at tariffs, and the impact of those tariffs on GPUs I would say it's offset more by the competitive environment that manufacturers are all dealing with new entrants. They're dealing with new product lines. It feels like incentives are starting to creep even though they only show up slightly year over year. We feel like there's a turn there I just got from one of the Korean manufacturers this morning that dropped that dropped their APR on their two highest moving products. Down to 0% again. On top of the big rebates that they already have on the table. So I'm feeling like that could help offset some of the some of the the comparative numbers that came from the election period last year So we're feeling pretty good. I would also say that the tariffs though there is some pretty big implications and it does look like some of those may stick, I think the biggest sound bite is to whether we're at 50% or 150% tariffs on China the North American market is not gonna behave. Like Europe or the rest of the world. Okay? Knowing that those vehicles are selling for a certain price and the rest of the world, and then adding on a doubling factor to the cost of that vehicle there's no chance that I think that Chinese manufacturers are here in the next half decade at or so at scale. Okay? Someday, they may be able to do that. And the product quality that I saw was pretty good. I mean, it was it was up there with the Koreans and the Japanese, which are truly some nice high-quality vehicles. So we'll see what happens there. The good news is I believe that the Koreans and the Japanese are responding to the market nicely. They are not raising prices. I think our increases in two of the main import Japanese brands talking about 250 to $300 increases. On their main product lines like CRVs RAV fours, and so on. And these cars are now full hybrids or they're plug-in hybrids that are just better and more economical cars. So on an affordability level for a consumer, I don't think tariffs I think tariffs can be overcome by better gas mileage and lower bills at the pump or electrification. To be able to help with the affordability. Component and offset that or maybe even more than offset that. Jeffrey Lick: And just a quick follow-up. Any elaboration on the 300 basis point improvement service and parts gross margin percent, that's obviously pretty impressive. Just curious what's driving that? How sustainable you view it? Any details would be great. Bryan DeBoer: Yeah. A lot of times, Jeff, that's driven off of the mix between the 30% margin inventory or parts business. And the 65% labor businesses. And our labor portion of our business was up a lot more. But will say this, we are retaining more growth. And our manufacturer partners, because of inflation, it they are increasing our labor rates on warranty. And corresponding, we will increase our customer pay labor rates. And as a competitive environment, we're able to maintain pretty good profit margins because generally speaking, inflation and our labor costs are going up. Yeah. K? And we're able to bring that to the bottom. Mike, go ahead, Tina. I would add to that, Jeff, too. We had strong performance both in customer pay and warranty in the third quarter. And those are more heavily labor-based. And so that shift and that overall performance also drove some of the margin improvement. Tina Miller: Yeah. That outpaced by seven, 6%. Yeah. Jeffrey Lick: That's a good point. Great. Well, it was a great quarter. I'm happy for you guys, and I look forward to catching up later. Bryan DeBoer: Thanks, Jeff. Operator: Thank you. Our next question comes from the line of Bret Jordan with Jefferies. Please proceed with your question. Bret Jordan: Hey, good morning, guys. As you build out the Chinese brand mix in The UK, could you talk about the rooftop economics of BYD or an MG, the sort of seen as lower price point or lower ASP units maybe in some cases. Are you getting similar GPUs and aftersales and mix out of those brands as you do out of your legacy UK product? Bryan DeBoer: Good question, Brett. And the answer is yes, on GPUs. Are getting margins similar to what the mainstream brands are getting. Now BYD is a little bit different. They are a little bit higher priced Chinese brand. So they kinda fall in this area between The US manufacturers and the Japanese and Korean and other European mainstream manufacturers. And luxury cars. Okay? So important to remember that. Here's the difficult thing. So even though our volumes are increasing quite nicely, with the Chinese brands, there's no units in operation. Okay? So the way that we're making a difference is we're going out and doing what Lithia Motors, Inc. does best and we've got this great mainstream leader, Gary, who knows how to sell used cars. In fact, I probably could learn some things from Gary because he's selling almost three to one used to new. In the mainstream or Evans Hallsha brand. In The United Kingdom. So a lot of our business model, when we think about adding Chinese or opening those points, is in the interim, why you build your units and operations, which is what drives your aftersales business, you've gotta sell used cars. And he's doing a nice job being able to quickly get to those two, three, and four to one one ratios. Keep it up. It's neat. It's neat to be able to see that in set the buy bar maybe even a little higher for our North American store stores because ultimately, I'll tell you this, we sit at 1.2 used to new ratio on in in North America. The marketplace is at 2.5 to one. Okay? Just to put in in reference of what we're looking at, that's what we believe the potential is. Okay? And in The UK, it's a little bit better use to new ratio, and Gary gets all of it. Okay? Which tells us that we should be able to get that. So Gary and Neil in The UK, big shout out to you guys. Bret Jordan: Okay. And then a question on aftersales, the growth rate. Could you parse that out between price and car count? You know, how much is, just same service price inflation versus incremental traffic in the bay? And I guess, how do you see the price on a year-over-year basis in the fourth quarter on a same service basis? Are you seeing tariff impact or labor inflation flowing through? Bryan DeBoer: Good question, Brett. A little bit more than half is coming from price increases. With a little less than half coming from, from customer count. And RO. Bret Jordan: Okay. And we continue to sort of see inflation being a comp driver at the end of the year, or we seen most of it play out already? Guess, what what how long is the tailwind from price? Bryan DeBoer: I think that the way that we go to market and the way that my presidents and vice presidents are thinking about things, is we've gotta grow our RO count. And you know, our top performing or what we call our Lithia Partners Group stores they somehow seem to be able to do both, and they're carrying a lot of that 9.1% year-over-year same-store sales gross profit growth. But they're also carrying along with it most of the improvements in top-line growth. Okay? And that shouldn't be that way. Our Northeast and Northwest regions are a little bit softer in terms of RO count. But we're challenging them, and I think they see the opportunity. And there could be some nice tailwinds there that that that that come into play as you know, we really start to help people see a more bright future on growing your customer base. Bret Jordan: Great. Thank you. Bryan DeBoer: Thanks, Brett. Operator: Thank you. Our next question comes from the line of Daniela Haigian with Morgan Stanley. Please proceed with your question. Daniela Haigian: Thanks. Just squeezing one in here on forward demand. Bryan. As we pass through the peak tariff fears from April. Excuse me. And now we're seeing OEMs revise up their guidances. It kinda clears the bar. On this, and I appreciate the color on sales tracking 10% higher in October. Just wanted to get your commentary on how you're seeing pricing on these new model year vehicles and how you're thinking about demand going into '26? Bryan DeBoer: Sure. Sure. Daniela, real quick, the 10% was used vehicle. Volume. Okay. Okay? Thank you. So just to clarify that to make sure that was clear. And that's an early October number where two-thirds of the way through the month. In terms of peak tariff, I think when we think about the tariff impact, I think we're through most of the impact. I think that it's going to get better. I think the manufacturers need to know how stable the ground is that they stand on. And then determine what their three to five-year product cycle is going to look like. To decide where they're gonna ultimately build those cars. Okay? And I think we sit in a nice position as new car retailers and we have to remember this. We're a new car retailer. But less than a quarter of our profitability is derived from new cars. Okay? Remember that 61% of our profitability is coming from aftersales business. I think that's why we spend a lot of time in aftersales. New cars is somewhat a function of your marketplace. Okay, and what your manufacturer's incentives are. So as a retailer, I'd love to be able to say that I could take a bunch of market share in new We, to some extent, we can be plus or minus 10%. But outside of that, our manufacturers and our mixed base is what dictates that. In our geographic base. So, hopefully, that helps you a little bit, Daniela. You have a follow-up on that? Daniela Haigian: Thanks. No. That's alright. We went through a lot of topics here. Bryan DeBoer: Great. Thanks for your question. Operator: Thank you. Our next question comes from the line of Michael Albanese with Benchmark Company. Please proceed with your question. Michael Albanese: Yeah. Hey, guys. Thanks for taking my question. Hung with you till the end here. Just a quick one circling back on used, specifically the value autos. Just given what you said about the, you know, typical credit quality of a buyer there and generally how much is financed, Are the value autos or value auto demand inversely or, you know, correlated with consumer affordability. Or maybe a better way to ask the question is, if new and used again a question. Go ahead. Bryan DeBoer: Go ahead. That's a yes on the first question. Go ahead and balance sheet. Yeah. Okay. Michael Albanese: And to take that a step further, I guess, and maybe a better way I thought to ask it was you know, if the gap between new and used pricing kinda widens and there is a trade down, you know, where does value fit within that? And you know, is there a segment within your mix, CPO core value that generally sees a pickup in demand or, you know, does it depend on a host of different variables at any given time? Bryan DeBoer: Yeah. I would say that value auto vehicles have very little impact caused by new vehicles. It's too different of customer. Okay? It's too different levels of affordability. So definitely certified vehicles and some of the you know, I would say one to five-year-old vehicles. Have an impact based off new vehicle pricing. Tariffs, so on and so on. But value auto is so far downstream. Remember this, value auto, that 63% of the market that I told you is based off what, 41 million units. Okay. 42 million units, something like that. You're talking about 24 million units or a 160% of what your new car SAAR is in that segment. It is a bulletproof segment. Okay? It's where it's where probably most of the money is made in used car. Okay? And it's something that everyone can do. As a new car retailer or as a used car retailer. Keep the car that you take in on trade is the way to do it. I mean, we get 80, 90% of those cars from trade-in. Okay? So it's a very stable thing. But again, we have a third of our stores that probably don't keep those cars. You know? We've gotta help them understand that you're making 16% margin, and you know, yeah, I get it that you make a little bit less in f and I. But as a whole, the returns are massively better than any other segment. Michael Albanese: So does it come down to essentially sourcing being able to source these vehicles? And hold on to them and right? Like, what's driving demand specifically above the office? It's sourcing, but remember, the sourcing is right under your nose. Bryan DeBoer: It's just the it's it's it's a mindset of your sales department leaders and then a mindset of your service department leaders that they can make this car stop, steer, and go and that they can lower the expectations that I don't just sell new cars. Okay? And then you've got a secondary problem. Once those two people decide, then your salespeople and your technicians are gonna convince you you shouldn't do it. Why? Because they get comebacks. Okay? Meaning that there's a car that breaks forty-five days later or four days later, and they're trying to keep a car deal together rather than just take the person out of the car sell them another car, okay, and go fix that car so it's an easy experience for your consumer. Okay? So that sets you back. So we've always said that it typically takes a couple years to get people on that treadmill. To be able to keep all different all three of our categories. Okay? And I would say this, most of our growth was growing in value. It shouldn't. It should also be growing in certified. It should also be growing in late model conquest vehicles. And it should be growing in core product. Okay? All three of those buckets have the potential to grow in a double-digit manner, and we'll get those there. Michael Albanese: Do you generally see if you have a customer in value over time move up into core or CPO? Or You do. I think there's half of the customers that are always gonna buy a car that's depreciated and that they can buy that's a value. Okay? And they don't care that the car is scarce, and they don't really care what Kelley Blue Book says or what Black Book says. They just buy the card that's $10,000 because they're using it for transportation. They're not using it for status. The other half of the cars are using it as a stepping stone. A lot of parents will pay cash for cars for their kids. And it's an entry-level car. And then, hopefully, next time they're buying a certified used car and maybe eventually they buy new cars. So the waterfall, believe it or not, goes both ways. That as a new car retail abreth we look at affordability and how do we keep everyone in the Lithia Motors, Inc. life cycle at every affordability level. And I think as you see us move through economic cycles, affordability will shine and reign supreme at Lithia Motors, Inc. Because of our ability and the behavioral mindset of most of our stores today that understand that we can walk and chew gum at the same time. Meaning, new car, sell core product, sell value auto products, and then sell a certified product. Michael Albanese: Got it. Thank you, Bryan. Nice quarter, guys. Bryan DeBoer: Appreciate it. Operator: Thank you. Our next question comes from the line of Mark Jordan with Goldman Sachs. Please proceed with your question. Mark Jordan: Hey. Thanks for fitting me in here. Just a quick one on m and a. Bryan, you mentioned you don't buy dealerships based on expected value creation. But can you talk about what the drivers of value creation are when you bring a dealer into your system? You know, whether it be instituting best practices, putting inventory on the driveway platform, or maybe just consolidating systems. What are the drivers there that you expect when you bring a new dealership on? Bryan DeBoer: Sure. So, typically, the way that we get the returns that we're expecting and it's typically two to three times lift in net profitability, about a quarter of it comes automatically from scale synergies, lower interest rate costs, better vendor contracts, getting consolidation of vendors where you've got duplication even within the store that you buy, and that comes in the first, I would say, six months. Okay? The other two key drivers and like I said, they support each other. Is used vehicles. I mean, it's the ability to sell late model conquest cars, meaning if you're a Honda store, you sell Toyotas and you sell Fords too. Okay? Most new car dealers get spoiled off of selling the cars that they sell new. Okay? I believe our current run rates on all the stores that we bought it's somewhere north of two-thirds of the cars that they sell when we buy them. With it that they sell used or the same like model that they sell new. Okay? And for reference, when a store is mature at Lithia Motors, Inc., it's a sixty-forty split the other way. Meaning we sell about 40% of the brand we sell new We sell about 60% of Conquest vehicles. Okay? A lot of that comes from the ability to keep an over five-year-old car. Okay? Because of those that alignment of your consumer your service advisers, your salespeople, your other personnel that it's just a mindset that you have to get past. Okay? Alongside that all also, is this new car retailers, it's really easy to get spoiled off of maintenance in service. And off of warranty work. It makes great profit. Okay? So why do warranty work after the sale? It's more difficult. It takes more time. You've gotta do diagnostic. There's drivability issues, so on and so on. Okay? Well, we sell non-OEM parts for a reason. Keep our customers at an affordable level post-warranty period. Okay? So that's the other big lift that we get. Believe it or not, both of those things help embellish the life cycle of a customer which helps us sell more new cars as well. Okay? And then we can get into the gross profit part of the equation and if you've got more eyeballs looking at cars when we've got 10 million eyeballs looking at an average car, And when we buy a dealership, they've got 10,000 eyeballs looking at a car. Are you following me? So there is a supply and demand issue that comes from selection. Okay, that helps us as well in terms of what our price to market is. Is relatively better than what they're able to get. On an individual basis. So, hopefully, that gives you some color on how do we get that two to three times improvement in profitability. That's how we get it. Mark Jordan: Great. Thanks very much. Operator: Thanks, Mark. Thank you. Our next question comes from the line of Colin Langan with Wells Fargo. Please proceed with your question. Colin Langan: Oh, oh, thanks for taking my questions. If I look at your full-year targets, most of them seem pretty wide, but SG&A to gross, it's actually been trending pretty close to the high end of that target. And, usually, Q4, things tend to step up seasonally. So is the outlook that SG&A actually could even Seasonality hold in in Q4? Or is it just a more muted increase sequentially that should be looking at? And then how should we think about SG&A maybe longer term? Bryan DeBoer: Sure, Colin. Thanks for the question. I think when we think about SG&A, or we most importantly think about $2 of EPS for every billion dollars of revenue? We've given light guidance. I think it's on slides 14, if I recall from the slide deck. Okay. As to where we believe it can be, but that's not how we manage our business. We manage our business on a net profit basis year over year and a top-line basis that will ultimately generate more net profit in aftersales and reciprocal trade-in values and our reciprocal businesses like DFC and our wheels, you know, fleet management businesses. And those type of things. So that's it is an important delineation. But we purely look at that our goal is to get to $2 of EPS for every billion dollars of revenue. And the easiest way that I can get there is to have quarters like this where we grow top line at seven and a half percent. And we continue to grow used cars at double-digit numbers, and grow our gross profit in the in the aftersales space. So in terms of the quarter, we'll see where it comes out. A lot of that is dictated based off volume and GPUs. As well. So, hopefully, that gives you some insights and remember, slide 14 helps lay out our pathway to the $2. And you know, I would say this. The entire foundation is built, and like I said, we're just getting started. Colin Langan: Just one quick modeling follow-up. Tax is really low in the quarter. Is that what's driving that? And is that sustainable, I guess, as we move forward? Should we put in the new rate, or is that just a one-off? Bryan DeBoer: Colin, don't I think we got a half an hour later together. We're running awfully we'll get we'll get you that information. On our one and one. Colin Langan: Yeah. No problem. Thanks, Colin. Operator: Thank you. And we have reached the end of the question and answer session. I would like to turn the floor back to Bryan DeBoer for closing remarks. Bryan DeBoer: Thank you, everyone, for joining us today. Look forward to seeing, you on Lithia Motors, Inc.'s here, and results. And believe it or not, February. It was a vast year. Looking forward to continue to delight you. Operator: Thank you. This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.
Operator: Good day, and thank you for standing by. Welcome to the Q4 2025 UniFirst Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Steven Sintros, President and Chief Executive Officer. Please go ahead. Steven Sintros: Thank you, and good morning. I'm Steven Sintros, UniFirst's President and Chief Executive Officer. Joining me today is Shane O'Connor, Executive Vice President and Chief Financial Officer. I'd like to welcome you to UniFirst Corporation's conference call to review our fourth quarter results for fiscal year 2025. This call will be on a listen-only mode until we complete our prepared remarks. But first, a brief disclaimer. This conference call may contain forward-looking statements that reflect the company's current views with respect to future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties. The words anticipate, optimistic, believe, estimate, expect, intend, and similar expressions that indicate future events and trends identify forward-looking statements. Actual results may differ materially from those anticipated depending on a variety of risk factors. For more information, please refer to the discussion of these risk factors in our most recent Form 10-Ks and 10-Q filings with the Securities and Exchange Commission. We closed our fiscal 2025 with a solid fourth quarter that modestly exceeded our expectations in top-line performance and was in line with our expectations on the profit side. We accomplished a lot as a team in fiscal 2025 that will help strengthen and grow our company as we move forward while advancing our investments in technology and other organizational initiatives. I want to sincerely thank all our team partners who continue to always deliver for each other and our customers as we strive towards our vision of being universally recognized as the best service provider in the industry. All while living our mission of serving the people who do the hard work. We serve the people who do the hard work as they are the workforce that keeps our communities up and running. They are our existing and prospective customers as well as our own UniFirst team partners. Our mission is to enable those employees and their organizations by providing them the right products and services to do their jobs successfully. Whether that means providing uniforms, workwear, facility services, first aid and safety, clean room, or other products and services, our goal is to partner with our customers to ensure that we structure the right program, products, and services for their business and their team. All while providing an enhanced customer experience. Shane will soon share further regarding our quarterly performance. However, I would like to provide a brief overview of the fiscal year. Full-year revenues reached $2,432,000,000, representing an increase of 2.1% compared to fiscal 2024 after adjusting for last year's additional week of operations. While this level of top-line growth does not yet reflect our long-term ambitions, we are confident that we are establishing a strong foundation for elevated performance in the years to come. From an adjusted EBITDA perspective, our performance reflects solid progress in operational execution and gross margin. In fiscal 2025, both the sales and service saw improvements in key performance metrics. We installed more new business than we did in fiscal 2024, even though fiscal 2024 included an additional week of operations and the installation of a top-three account. Although fiscal 2025 started slowly, the year concluded with the highest quarter of new account installations providing momentum into fiscal 2026. We also saw notable improvements in retention in fiscal 2025 after two years of lost business. We remain confident in our ability to drive continued improvement in customer retention as key leading indicators such as NPS scores and customers under contract continue to trend positively. Recent enhancements to our growth strategy are delivering progress. Though the pace of improvement has been moderated by a softer employment environment impacting parts of our customer base. As noted over the past few quarters, reductions in wearer numbers have become more pronounced and continue to affect overall growth rates. Nonetheless, fluctuations in employment cycles are a familiar challenge to our company and we remain committed to concentrating on factors within our control to drive improved performance. During fiscal 2025, we made some important organizational changes that generated positive momentum in our overall execution during the year and more importantly, positions us well going forward for greater improvements in overall performance. Earlier this year, the organization welcomed Chief Operating Officer Kelly Rooney, a strategic addition to our leadership team. Kelly has unified our operational approach and accelerated the company's transition toward a process-oriented and results-driven operating model. She introduced the UniFirst Way, a growing collection of service-focused procedures designed to enhance the customer experience and promote operational excellence. The positive impact of her contributions is already evident as we anticipate further advancements in retention, customer growth, efficiency, and overall performance as these initiatives progress. Equally important, Kelly has successfully preserved and strengthened the core aspects of UniFirst culture, which remain a competitive advantage and essential to our long-term success. Her extensive operational expertise combined with her commitment to empowering employees aligns seamlessly with our dedication to always deliver both to our customers and our team partners. Aligning operations under Kelly has enabled the change in ownership and structure of our sales organization as well. Direct oversight over local sales resources is now moving from our operations team to the sales organization led by our Executive Vice President of Sales and Marketing, David Katz. This adjustment is intended to clarify responsibility for performance within both sales and operations with ongoing collaboration between both functions. The sales team will continue advancing toward a tiered selling model to align each sales representative's skills and experience with the most appropriate prospects. This model has already delivered measurable improvements in sales effectiveness and conversion rates. Building on this momentum, further investment, including strategic headcount growth, is planned for fiscal 2026, positioning the organization for stronger customer acquisition and overall revenue growth in the future. In addition to sales, we are making other investments impacting fiscal 2026 to ensure we can support our primary near-term goal of accelerating organic growth. For example, during 2025, we invested in strengthening our service teams, expanding both capacity and stability. These enhancements position us to drive improved performance across all key aspects of our growth model, expansion of products and services for existing customers, customer retention, and strategic pricing approaches. We will accomplish this through key initiatives targeting each of these areas of opportunity. Together, these initiatives are designed to continue improving our promise to provide a differentiated level of service and business partnering with our customers to ensure we provide all the value we can to their business. We further expect to enhance overall operating performance and create a stronger foundation for continued growth in the years ahead. Near-term profitability will also be impacted by the ongoing investments in costs related to completing the remaining phases of our technological transformation. Over the next couple of years, we expect these investments will reach their peak as we complete the implementation of our ERP system and other related efforts. These efforts are essential to building a more efficient, data-driven foundation that will enhance performance and scalability over the long term. Looking ahead, we also expect the influence of tariffs will impact our short to medium-term profitability. Through 2025, newly imposed tariffs have not had a significant impact on our results primarily because goods procured at higher costs require time to move through our supply chain and then are usually amortized over an estimated useful life. We believe we are better positioned to navigate the evolving trade situation with our efforts over the last several years to improve the diversification within our supply chain. However, the situation remains dynamic with continued developments. Depending on how the situations evolve, the impact of tariffs on fiscal 2026 could escalate from our current estimates. We continue to take patient and prudent steps to minimize the impact of any cost increases through leveraging the most advantageous sources for our products as well as by working with our customers where appropriate to share the cost increases we are seeing. As we move through fiscal 2026, we will continue to provide updates on the impact that these factors are having on our results. Beyond the near-term impact of the items I discussed, we remain highly optimistic about our ability to drive meaningful improvements in overall profitability. As we look ahead, several key areas have been identified that are expected to strengthen margins and enhance returns in the coming years. Notable examples include robust incremental profitability resulting from accelerated growth, particularly through improved customer retention and increased adoption of products and services by existing customers, which delivers higher returns compared to new account installations. Focused operational leadership committed to promoting execution, consistency, and continuous improvement in line with the UniFirst Way, optimized procurement, inventory management, and sourcing facilitated by our Oracle ERP platform, strategic rationalization of resources and infrastructure that was built to support our multiyear digital transformation, and advancing our commitment to safety and operational efficiency through the ongoing implementation of our telematics program which will soon cover our entire vehicle fleet. This initiative features both inward and outward-facing cameras in every vehicle, representing a strategic investment that delivers multiple long-term benefits. Most importantly, it enhances the safety of our team partners while also contributing to improved profitability by reducing claims, insurance costs, and boosting fuel efficiency. This is also a good example of where we are incurring costs today which will provide measurable returns for the organization in the years ahead. To summarize, we are laser-focused on our goal of driving organic growth to mid-single digits and driving meaningful EBITDA margin improvements into the high teens. We are confident over the next couple of years we can make steady progress, particularly towards those top-line goals. While fiscal 2026 is expected to reflect a temporary step back in profitability, we are resolute in our belief that investments in growth are essential to achieve our longer-term objectives and unlock a new set of opportunities in the years to come. We also believe that working through the current sourcing and cost environment will require time, patience, and thoughtful execution to ensure we are taking care of both our customers and our shareholders as we work through these changes. Although most of my comments thus far have focused on our largest segment, Uniform and Facility Service Solutions, we also continue to be excited about our First Aid and Safety Solutions segment which offers significant potential for sustained growth and enhanced profitability. Adjusted for the additional week in the previous year, we achieved close to 10% growth in fiscal 2025 and anticipate double-digit expansion again in fiscal 2026. Investments in sales and service infrastructure, along with the completion of several small acquisitions, continue to strengthen our market presence enabling us to better serve both existing UniFirst customers and prospective customers seeking these solutions. Our first aid and safety products and services play an integral role in addressing customer challenges through comprehensive integrated services. By improving route density and increasing customer adoption of our full range of services, we expect continued improvement in this profit segment's profitability. Notably, we saw incremental advancement in first aid's adjusted EBITDA during fiscal 2025, and while further growth investments will mute significant profitability improvements in fiscal 2026, we do expect the inflection point to sustain higher profits is within reach. Our balance sheet and overall financial position remain robust, supported by a strong year of operating cash flow. We intend to continue deploying cash flows and making strategic investments that enhance our company's strength and increase shareholder value. We continue to identify several promising opportunities for investment including infrastructure enhancements and automation initiatives to promote growth, efficiency, and profitability, strategic acquisitions aiming at expanding scale and improving efficiency, and increased activity in our share buyback program reflecting our confidence that investing in UniFirst stock will deliver significant long-term returns as we execute on our strategic focus on accelerated growth and sustainable profitability. In conclusion, we are confident in the company's strategic direction to deliver enhanced performance in fiscal 2026 and beyond. Our initiatives are designed to accelerate growth, strengthen profitability, and deliver a differentiated experience for our customers. By embracing our always deliver philosophy, we remain committed to creating value for all stakeholders including our employees, customers, the communities we serve, and our shareholders. With that, I'll turn the call over to Shane, who will provide more details on our outlook as well as our fourth quarter results. Shane O'Connor: Thanks, Steve. Consolidated revenues in our 2025 were $614,400,000 compared to $639,900,000 a year ago. The 2025 had one less week of operations compared to the prior year due to the timing of our fiscal calendar. Excluding the extra week in fiscal 2024, revenue growth in 2025 was approximately 3.4%. Consolidated operating income for the quarter was $49,600,000 compared to $54,000,000 in the prior year. And net income for the quarter decreased to $41,000,000 or $2.23 per diluted share from $44,600,000 or $2.39 per diluted share. Consolidated adjusted EBITDA for the quarter was $88,100,000 compared to $95,000,000 in the prior year. Our fourth quarter results or our financial results in 2025 and fiscal 2024 included $1,400,000 and $1,800,000 respectively, of costs directly attributable to our key initiatives. The effect of these items on 2025 and 2024 decreased operating income and adjusted EBITDA by $1,400,000 and $1,800,000 respectively. Net income by $1,100,000 and $1,300,000 respectively diluted EPS by $0.05 and $0.07 respectively. As announced in last week's press release, starting in 2025, we are reporting our results under three segments entitled Uniform and Facility Service Solutions, First Aid and Safety Solutions, and Other. Our primary segment, Uniform and Facility Service Solutions, now includes our clean room operations along with our industrial operating locations. Due to it having a similar business model as well as having shared customers, resources, and technologies. This new structure aligns with our management approach and resource allocation. This change will also allow investors more visibility to our Nuclear Services division which is now broken out in the Other segment and experiences more volatility on an annual and quarterly basis. For further details on this change and our segment methodology, please see the Form 8-Ks filed with the SEC on 10/17/2025. Uniform and Facility Service Solutions revenues for the quarter were $560,100,000, a decrease of 4.4% from 2024. Organic growth, which excludes acquisition-related revenues, the impact of any fluctuations in the Canadian dollar, and the impact of the extra week, was approximately 2.9%. Uniform and Facility Service Solutions organic growth rate benefited from solid new account sales and improved customer retention. In addition, we discussed last quarter that our growth was impacted by the timing of direct sales which trended lower in the third quarter compared to the same period in fiscal 2024. As expected, the timing of those direct sales contributed to our fourth-quarter growth. As did a large customer buy-up. Uniform and Facility Service Solutions operating margin decreased to 8.3% for the quarter from 8.7% in the prior year. And the segment's adjusted EBITDA margin decreased to 14.8% from 15.3%. The cost we incurred related to our key initiatives were recorded to the Uniform and Facility Service Solutions segment, which decreased its operating and adjusted EBITDA margins for 2025 and 2024 by 0.2% and 0.3%, respectively. The segment's operating and adjusted EBITDA margins in 2025 were down from 2020 which benefited from the extra week of operations. Furthermore, quarterly results reflect some of the additional investments that Steve discussed that are intended to accelerate growth, improve customer retention through operational excellence, and support our digital transformation. Energy costs for the quarter were 4% of revenues, down from 4.1% a year ago. Our First Aid and Safety segment's revenues in 2025 increased to $31,100,000 with organic growth of 12.4%, driven by the segment's van business. Operating income and adjusted EBITDA during the quarter was $500,000 and $1,500,000 respectively, as the results continue to reflect the investments we are making in the business. Revenues from our Other segment, which consists of our nuclear services business, were $23,300,000, a decrease of 5.3% from 2024 due to lower activity out of the North American nuclear operation. As we mentioned in the past, this segment's results can vary significantly from period to period due to seasonality as well as timing and profitability of nuclear reactor outages and projects. At the end of our fiscal year, we continued to reflect a solid balance sheet and financial position with no long-term debt, and cash, cash equivalents, and short-term investments totaling $209,200,000. In 2025, we generated solid cash flows from operating activities totaling $296,900,000. Capital expenditures totaled $154,300,000 as we continue to invest in our future with new facility additions, expansions, updates, and systems. During the year, we capitalized $26,400,000 related to our ongoing ERP, which consisted primarily of third-party consulting costs and capitalized internal labor costs. During fiscal 2025, we also purchased approximately 402,000 shares of common stock worth $70,900,000. At this time, we expect our full-year revenues for fiscal 2026 to be between $2,475,000,000 and $2,495,000,000. And fully diluted earnings per share will be between $6.58 and $6.98. This guidance includes $7,000,000 in costs that we expect to incur directly attributable to our key initiatives, which at this point relate primarily to our ERP project. Our guidance further assumes at the midpoint of the range, that net income is $124,100,000, consolidated operating income and adjusted EBITDA $158,800,000 and $319,700,000 respectively. Uniform and Facility Service Solutions organic revenue growth is 2.6%. Uniform and Facility Service Solutions operating and adjusted EBITDA margins are 6.6% and 13.3% respectively. Energy costs will be 4% of revenues in fiscal 2026, in line with 2025. And fiscal 2026's effective tax rate is expected to be 26%, an increase from 2025 primarily due to lower expected tax credits benefiting the upcoming year. As Steve discussed, additional investments we are making in our Uniform and Facility Service Solutions segment to accelerate growth, improve customer retention, and support our digital transformation, contributing to a margin headwind in 2026. In addition, our operating results also reflect our current expectations of the impact of tariffs. Share-based compensation increased in fiscal 2025 and a larger increase is anticipated in fiscal 2026. These increases are primarily due to a change the company made last year in our share-based grants vesting lives. As a result of the change over the next couple of years, share-based compensation expense will be elevated prior to returning to a more normalized level. As a reminder, increases in stock-based compensation impact operating income but are excluded from adjusted EBITDA. Our First Aid and Safety segment's revenues are expected to be up approximately 10% compared to 2025, as the ongoing investments in our van business are expected to drive continued double-digit growth. The segment's profitability is expected to once again be nominally positive as the results continue to reflect the investments we are making in the business. The Other segment's revenues are forecast to be down from 2025 by 16.3%. This assumes that our nuclear service business will take a step back in fiscal 2026 primarily due to the expected wind-down of a large reactor refurbishment project during the year, as well as a cyclically lower number of reactor outages in 2026. The top-line headwind will have a more meaningful impact on the profitability of the segment due to the high fixed cost nature of the nuclear services business. Although 2026 is expected to be a down year, we feel we are well-positioned to capitalize on this segment's unique capabilities as future projects become available as well as with the recent resurgence in nuclear investments in the market. We expect that our capital expenditures in 2026 will again approximate $150,000,000, to remain elevated as a percentage of revenue primarily due to higher application development investments we are making, most significantly related to the ERP implementation. For an update on our ERP initiative, our project continues to progress largely in line with our intended schedule. That has the implementation continuing through 2027. As of 08/30/2025, we had capitalized $45,300,000 related to this initiative. Midway through fiscal 2026, we expect to go live with our current release, which is focused on moving our general ledger and finance capabilities into the new Oracle Cloud solution. On deployment of the system, we will start to amortize the amount capitalized. As a result, the outlook includes an additional $4,000,000 in fiscal 2026 related to the amortization of the system. Our guidance assumes our current level of outstanding common shares and no unexpected changes generally affecting the economy. This concludes our prepared remarks, and we would now be happy to answer any questions that you might have. Operator: Thank you. As a reminder, to ask a question, please press 11 on your telephone, and wait for your name to be announced. To withdraw your question, please press 11 again. And our first question comes from Manav Patnaik of Barclays. Your line is open. Ronan Kennedy: Hi, good morning. This is Ronan Kennedy on for Manav. Thank you for taking our questions. Can I confirm please at a high level, perhaps the puts and takes to the guided 2.6% organic for Uniform Facility Services? Given the constructive commentary on positioning the company for stronger organic through better acquisition retention. Already seeing some measurable improvements in the sales effectiveness and the conversion rates. Is it that the initiatives will take time, or is there also an element of the environment and what you alluded to as the more pronounced reductions in errors and anticipating further fluctuations in the employment cycles kind of a high-level characterization of the drivers for that outlook, please. Steven Sintros: Yes. I think you covered it pretty well there, but you're right. I think the momentum we're getting on the sales and retention side. We talked about elevated or reduced retention, I should say, over a couple of years. It improved meaningfully in '25. We're projecting additional improvements in '26. That will affect 2026 and into 2027. Your comment about the economic outlook in terms of impact on wearer adds versus reductions, over the last quarter or two. Based on limited hiring. We've been negative in adds versus reductions. And effectively, you're assuming a similar situation looking at kind of employment outlook over this year. So we're not expected to get any pull and probably or are expected some headwind in that area. So that is part of the formula that leads to the current year organic growth. But as we sort of build on some of the initiatives and investments we're making that I talked about, we expect to gain momentum to put us in a position to accelerate growth in the following years as well. Ronan Kennedy: That's helpful. Thank you. And then a similar question, if I may, please, on margins. In terms of for '26, the puts and takes, in terms of the improved execution, consistency, the continuous improvement, and then other things such as the optimized procurement inventory management, offset by, I think, you know, the investments on growth retention, digital transformation, and then also the tariff impact. If you can kind of size how to think about the puts and takes from those drivers for 26 for margins, please? Steven Sintros: Sure. A couple of the items you mentioned there on better inventory management and so on. These opportunities are more ERP enabled that will tail this year a bit. But in general, on the items impacting the year most significantly, we really mentioned four things as being the primary factors. We mentioned tariffs, we mentioned sales investments, service investments, and a peaking of investments to kind of get through the digital transformation that we're going through. All of those things probably contributed reasonably evenly to the call it, you know, 80, 90 basis points impact on our margins. Now it's not a perfect characterization across all of those items, but generally it's in that range. We do expect some offsets to those things. In terms of the operational efficiency and so on. But again, we're really trying to unlock that better retention, improved selling to our existing customers. We are seeing momentum in those areas that we think can expand growth, particularly beyond this year's guidance. And so really, we view this year as a transitional year of making some of those investments. And to your point, know how this business works. As you build momentum it builds through your numbers. It doesn't sort of hit all of a sudden in a quarter, in some cases even a year. But again, those investments, sales, service getting to our digital transformation and then the tariffs, all have a pretty, you know, call it 20 basis points or so impact then offset by some of the other positives. Ronan Kennedy: Thank you. Appreciate it. Steven Sintros: Thank you. Operator: Thank you. And our next question comes from Kartik Mehta of Northcoast Research. Your line is open. Kartik Mehta: Hey. Good morning. Steve. Just maybe to add a little bit more color to the margin impact and investment. Would you like to any of those benefits occurring in the latter part of 'twenty six? Or do you think the way the investments are scheduled, it will take till '26 before you start seeing some of the benefits. Steven Sintros: Until '27. Is that what you're referring to? Kartik Mehta: Yeah. I apologize. Yeah. Till '27. Yeah. Steven Sintros: Yeah. No. Look. I mean, I think as we as we you can use sales or service I think the technology ones that are ERP enabled, which we've been talking about, for the last year or so. Are not going to emerge in 2026 as much. We're talking about going live with part of our ERP system, which is really the financial core. But as we move into more of the inventory management procurement and other things, those are really '27 and beyond benefits. In terms of the investments we're making in sales and service, those will start to build throughout the year. We've been ramping up in some of those areas. We've made good momentum in sales efficiency and retention improvements in the last year. And in my comments, I sort of talked about how some of those improvements have been offset by some of the challenges from a wearer and employment growth perspective. But part of the reason we're making those investments is to make sure we can sort of power through maybe what might be a bit of a softer employment environment in '26 and then start to see more momentum in the back half and as we get into the following year. Kartik Mehta: And so maybe this is a little bit harder, but is there a way to quantify the benefits you'll get from the investments in the sales and servicing? Part of the business. Steven Sintros: Yeah. That that that is a little tougher. I mean, I certainly from the sales and the service, it's a balance. Right? Like, we are driving toward mid-single-digit growth. When you look at our sales organization, I'll start there. It's a little bit easier to talk about. When you look at our sales organization, we continue to look at ways to drive sales effectiveness and efficiency. With the heads we have. But also recognizing as we grow and as we shift our sales organization, I alluded to this, to one where we have more of a tiered selling model with different sellers responsible for different prospects. That transition is causing us to probably run a little bit heavy on the sales side as we kind of go through that transition. We want to make sure we carry that momentum and that's why I talked about a couple of times that driving that organic growth higher is really our top priority right now. We do believe that the benefits on the margin side are there for the taking. But without that strong organic growth, which we think these investments are necessary to make sure we achieve, the profit benefits in and of themselves would be nice. But not as sustainable as if we can get this growth to the places we think we can. On the service side, similarly, it's a balance. Right? We have benefited from a more stable service organization this year, and we've talked about that a little bit from the perspective of if you go a few years before that, the overall employment environment was stronger, but also led to more challenges and employee turnover and things like that. That has stabilized. And now we're capitalizing on that stability with some additional investments to ensure that we can unlock all the different areas of growth that exist in our service team. When you think about growth, sales is obviously the one that stares you in the face. But the other three aspects of the growth model retention, selling to our existing customers, through our service team, as well as managing price in an effective way are really on our service team. We want to make sure we're strong enough there to capitalize on all of those avenues. Kartik Mehta: Perfect. I appreciate that. Thank you very much. Steven Sintros: Thank you. Operator: Thank you. And our next question comes from Tim Mulrooney of William Blair. Your line is open. Luke McFadden: Hi. Good morning. This is Luke McFadden on for Tim. Thanks for taking our questions today. My first was just on price. Shared in recent quarters that pricing remains challenging. I'm curious if you're expecting that to alleviate as we move through 2026 just maybe as customers find their footing with tariffs or is this the go-forward dynamic you're expecting to operate under for the foreseeable future here? Steven Sintros: Yeah. It's a good question, Luke. I think, you know, as you reiterated, we had gone through a couple of years of heavy inflation. Which made a more call it, productive pricing environment. That has certainly shifted and we were experiencing that. I think the environment with the tariffs as I alluded to a couple of times is still pretty fluid. I think many organizations, as we certainly are, are trying to take a patient and prudent approach particularly because the impact of our tariffs on our business sort of flow in over time. And the dynamics around changing trade regulations and trade agreements is fluid in their development seemingly every week. And so we are going to manage our approach during that. I think historically, customers have been good partners to us. When we've been good partners, and managed through periods of increasing cost. And so we do anticipate that being an avenue that we will work through. But I think in general, there also is some inflation what's the right word, inflation fatigue. Thank you, Shane. Oh, from the last few years, so it's sort of a difficult inflection point where I think a lot of people are looking to recover from the inflationary period. And now seeing some of the tariff impact I think it does make it a challenging environment in that regard. Which is why we're trying to be patient and deal with the dynamics of the situation over time. So I know it's a little bit of a long-winded answer, but I think we will be working through things and expect our partners our customers to partner with us. Luke McFadden: No. Yeah. That's great. Really helpful color. And kind of maybe building off that, more nuanced question specifically around know, client bases. I wanted to ask, about any changes you're seeing with in your manufacturing clients. I know earlier you had talked about kind of a pullback from these clients due to those tariffs. Being more impacted. But starting to see some headlines from some larger manufacturers that this group might be adjusting to and acclimating to the current situation. Has that at all aligned with what you're seeing, around this client group specifically? Steven Sintros: Yeah. Probably too nuanced at this point to really say one way or the other, Luke. I would say that looking at the broader employment trends across kind of our more traditional uniform-wearing industries, I spoke to sort of the weakness we're seeing in the hiring there. I think a lot of companies are digesting and look over the long term, is there an impact that some of these manufacturing operations digest and potentially bring some tailwind to employment back here in North America. I think that's possible. I think at this point, probably too nuanced and we're not seeing big momentum one way or the other. Luke McFadden: Understood. We'll leave it there. Thanks so much. Steven Sintros: Thank you. Operator: Thank you. And our next question comes from Jason Halk of Baird. Your line is open. Justin Hauke: It's Justin. Hi. How's up? Steven Sintros: Good morning. Operator: Good morning. I just Steven Sintros: I guess I'm still confused on the sales service investments that you're talking about for 26. That is outside of the $7,000,000 key initiative costs. Right? I mean, the key initiative is still just the ERP and the system investments you've already been making. And I just want to make sure I understand that. Steven Sintros: Yeah. Absolutely. The $7,000,000, and at this point, I think it's a good clarify that the $7,000,000 is really very specifically directly related to the ERP. And it really is from as you go through a large project like that, there are aspects that are not capitalizable. And it's really the fallout from those additional costs we're spending with some of our primary contractors for that project. Sales and service investments, I mean, is a very simplistic way of looking at it, Justin, is in both of those organizations, we're making investments a bit ahead of the projected revenue growth for next year. Designed to accelerate the growth in years to come, right? It's really finding that right balance of each of those organizations. Quite frankly, sales is the best example. You could pull back on sales and probably show similar growth next year and better profits. But that's not going to get you to the more sustainable high levels of growth that we're working to get to. But those are two completely different things, just to clarify and answer your question. Justin Hauke: Okay. Alright. That's that's that's that's helpful. And then I there was a comment you made in maybe an missed it. I apologize. But I thought you said that you guys had record new sales this year, and I guess, just confirming if if that's what you said or or if I misunderstood that. And then where that's primarily coming from? Is it is it cross sell? Is it new business? Just you know, any color on vertical maybe? Steven Sintros: Yep. The comment I made about sales is that we did exceed our total selling new business from a year ago. Even though a year ago had the extra week and a very large account installed from a national perspective. If you look at the results this year, is it the biggest year of sales ever? I'd have to go back and look been a couple of other large ones. But it is probably one of the best install years that we've had. When you look at where it's coming from, yeah, it's it's pretty broad-based. I think we continue to have some success on the national side. Over the last couple of years, we've had some good larger wins. But the bulk of the business still comes from what I'll call the local and regional business. I think that line between national and local is becoming a little more blurred and that goes back to that tiered selling approach as we have diversified our rep base to include reps in that middle ground that are specifically focused on what we'll call major accounts versus national accounts. And those are more the larger regional accounts. And I think we've had some real good success there. That helped this year's sales. And that's the organization we're continuing to build out and causing some of that cost investment. Justin Hauke: Got it. Okay. Appreciate it. Thank you. Steven Sintros: Thank you. Operator: Thank you. And as a reminder, to ask a question, please press 11. Our next question comes from Brianna Kandam of UBS. Your line is open. Good morning, Steven and Shane. This is Brianna Candom on for Josh Chan. Thanks for taking my questions. Can you provide some color on the trajectory of margins in fiscal 2026? Are you expecting to see margin expansion at any point during the year? Steven Sintros: That's a good question. We don't typically give that quarterly breakdown, particularly at this point. I think our margins and the trajectory of them will probably reasonably follow our prior patterns. One thing I will say, and I have this fully quantified but as I talk about the impact of tariffs, those probably do become a bit more pronounced in the back half of the year based on what I said. Right? You bring in more products that are at a higher cost base. They sit in your distribution center for a month or two. They start getting amortized into your merchandise and service. And so that impact of the tariffs does build throughout the year. I'd have to kind of go back to the model to give you a best answer on the rest of it. But it's something we can give you updates on as we move throughout the year for sure. Shane O'Connor: Yeah. I would I would probably I would echo that, the fact that it's probably or the a good is that it's going to follow our margin trajectory that we've historically had. Most notable difference would be that second quarter. Where the profitability is down because of a number of costs that that we incur specifically in that in that quarter. So that that would probably be the best assumption. Brianna Kandam: Thanks for that. And and then for a follow-up, you mentioned softer results in nuclear. Can you frame out what impact you expect to have in fiscal 2026? And can you remind us which quarters are more likely to see softness understanding that this is a more volatile business? Thank you. Steven Sintros: Sure. I think when you look at the nuclear business, we talk about the expected wind-down of a large project, we expect that wind-down to occur over the first quarter. Our first quarter and third quarter for that business is always seasonally the best quarter. It may be a little more pronounced in the first quarter this year because that project is still active. Other than that, we expect the normal seasonality in that business across the quarters. Brianna Kandam: Great. Thank you, and good luck in the next fiscal year. Steven Sintros: Thank you. Operator: Thank you. I'm showing no further questions at this time. I'd like to turn it back to Steven Sintros for closing remarks. Steven Sintros: Again, I'd like to thank everyone for joining us today to review our results and about our fiscal 2025 and our outlook. We look forward to speaking with you all again in January when we expect to report our first-quarter performance. Thank you and have a great day. Operator: This concludes today's conference call. Thank you for participating, and you may now disconnect.
Operator: Good morning, ladies and gentlemen, and welcome to the Thermo Fisher Scientific 2025 Third Quarter Conference Call. My name is Claire, and I will be coordinating your call today. During the presentation, you can register a question by pressing star followed by one on your telephone keypad. If you change your mind, please press star followed by two on your telephone keypad. I would like to introduce our moderator for the call, Mr. Rafael Tejada, Vice President, Investor Relations. Mr. Tejada, you may begin the call. Rafael Tejada: Thank you for joining us. On the call with me today is Marc Casper, our Chairman, President and Chief Executive Officer, and Stephen Williamson, Senior Vice President Chief Financial Officer. Please note this call is being webcast live and will be archived on the Investors section of our website thermofisher.com, under the heading News, Events and Presentations, until February 1, 2026. A copy of the press release of our third quarter earnings is available in the Investors section of our website under the heading Financials. So before we begin, let me briefly cover our Safe Harbor statement. Various remarks that we may make about the company's future expectations, plans, and prospects constitute forward-looking statements within the meaning of applicable securities laws. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in the company's most recent reports on Form 10 and Form 10-Q under the heading Risk Factors. These forward-looking statements are based on our current expectations and speak only as of the date they are made. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even in the event of new information, future developments, or otherwise. Also, during this call, we will be referring to certain financial measures not prepared in accordance with generally accepted accounting principles or GAAP. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures is available in the press release of our third quarter 2025 earnings and also in the Investors section of our website under the heading Financials. So with that, I'll now turn the call over to Marc. Marc Casper: Thank you, Raf. Good morning, everyone, and thanks for joining us today for our third quarter call. As you saw in our press release, we delivered an outstanding quarter that included excellent operational performance reflecting our active management of the company. Strong execution from our team was ongoing focus meaningfully advanced a number of our customer relationships. And we made significant progress advancing our proven growth strategy, which continues to strengthen our foundation and build an even brighter future for our company. So first, let me recap the financials. Our revenue grew 5% in the quarter to $11.12 billion. Our adjusted operating income grew 9% to $2.59 billion. Adjusted operating margin expanded by 100 basis points to 23.3% and we grew adjusted EPS by 10% to $5.79 per share. Our performance in the third quarter enables us to raise our full year guidance. Now turning to our end markets. In pharma and biotech, we delivered another quarter of mid-single-digit growth. Performance in the quarter was led by our bioproduction and analytical instruments businesses, as well as our research and safety market channel. Turning to academic and government, revenue declined in the low single digits, representing a modest improvement versus last quarter. To provide some additional context, conditions in the U.S. in this end market were similar to Q2. In Industrial and Applied, revenue grew in the mid-single digits store in the quarter, representing a nice sequential step up. Performance in the quarter was led by our electron microscopy business, as well as our research and safety market channel. Finally, in Diagnostics and Healthcare, revenue growth improved over Q2, though it remained down low single digits for the quarter, largely due to conditions in China. Highlights in this quarter included strong growth in our transplant diagnostics and immunodiagnostics businesses. Wrapping up my comments on end markets, our team executed very well to capture the opportunities during the quarter. Let me turn to our growth strategy, which consists of three pillars: high-impact innovation, our trusted partner status with customers, and our unparalleled commercial engine. Starting with innovation, it was another excellent quarter for our company. Our new offerings demonstrate our continued leadership and further enable our customers to unlock scientific breakthroughs, advance precision medicine, and enhance productivity in their labs. In clinical next-gen sequencing, we continue to expand our offerings, strengthening our ability to help clinicians and researchers advance targeted care for patients. The OncoMindDx Express test on our iNTRON GenexisDx integrated sequencer received FDA approval as a companion diagnostic for a targeted therapy used to treat non-small cell lung cancer and for broader tumor profiling applications. We also introduced the Oncomine Comprehensive Assay Plus on the GeneXus system, providing clinical research labs with an all-in-one comprehensive genomic profiling solution that delivers next-day results. This capability provides clinical researchers with faster, more actionable insights to advance precision medicine. For proteomics, we launched the OLINK target 48 neurodegeneration panel to advance research into conditions such as Alzheimer's, Parkinson's, and multiple sclerosis. The new panel helps address the need for reliable detection and measurement of biomarkers that can unlock insights into these and other complex neurological diseases, while also enabling researchers to monitor disease progression and therapeutic responses. In analytical instruments, we unveiled two new electron microscopes at the recent Microscopy and Microanalysis Conference. These include the Thermo Scientific CALOS-twelve transmission electron microscope. This powerful new platform built on our popular Talos line and delivers exceptional image quality and ease of use for structural cellular analysis and biological research, pathology, drug development. We also introduced the Thermo Scientific SkyOS three, focused ion beam scanning electron microscope. Engineered with advanced automation precision and ease of use, this instrument accelerates material science research supports the development of new materials used across clean energy, aerospace, and digital devices. In chromatography and mass spectrometry, we launched 7.4, the first enterprise-ready compliance-focused software platform that unifies chromatography and mass spectrometry workflows. This system offers centralized secure data management and remote access across labs, empowering regulated bio clinical and environmental labs to streamline workflows, improve their productivity, and accelerate scientific decision-making. This launch is a great enabler for both our mass spec and chromatography instruments. Let me give you a quick update on our trusted partner status and our unparalleled commercial engine. We have a unique relationship with our customers, one that has been earned over many years through a relentless focus on anticipating, understanding, and meeting their needs. Our trusted partner status provides us with unique insights to guide our strategy and continually strengthen our capabilities. At the same time, our entry-leading commercial engine enables us to deliver those capabilities at scale. I'll share a few highlights of the actions we've taken recently to deliver even greater value to our customers and position our company for the future. One example is our strategic collaboration with OpenAI. The collaboration is focused on two broad areas. The first opportunity is to embed these capabilities into our products and services to make an even bigger impact for our customers. And the second opportunity is to make Thermo Fisher even more productive. As part of this collaboration, we are embedding OpenAI in advanced technology into critical areas of our business, including product development, service delivery, customer engagement, and operations. Our initial focus is on clinical research, to help improve the speed and success of drug development, ultimately enabling customers to get medicines to patients faster and more cost-effectively. We are deploying these capabilities to improve the cycle time of clinical trials. We'll also look to leverage OpenAI's capabilities to unlock value in our deep repository of data and experience to enable customers to focus on the most promising opportunities in their drug development pipelines. To enable the second focus area, we've launched ChatGPT Enterprise internally across the company to drive productivity, innovation, and ultimately, smarter customer engagement. I'm really excited about the ways Thermo Fisher and OpenAI, two innovation leaders, will work together to make a real difference in advancing science and bringing new medicines to patients. Another good example of our trusted partner status this quarter was the recently announced strategic partnership with AstraZeneca BioVenture Hub in Gothenburg, Sweden. This partnership will leverage the combined expertise of Thermo Fisher and AstraZeneca to drive innovation and strengthen the life sciences ecosystem. A dedicated team from Thermo Fisher will co-locate with AstraZeneca scientists to work on collaborative R&D projects with an initial focus on chromatography, molecular genomics, and proteomics. And it was also great to celebrate the grand opening of our Manufacturing Center of Excellence in Nevin, North Carolina this quarter. A high-volume, low-cost facility, this site was developed with support from the U.S. Government and is capable of producing at least 40 million laboratory pipette tips per week to support life science research and diagnostic laboratories and adds to the U.S. National supply chain resilience. So wrapping up our growth strategy, this was an excellent quarter where our actions strengthened our industry leadership today and positions our company for an even brighter future. Moving on now to capital deployment. We also had a very active quarter successfully executing our proven capital deployment strategy, which, as you know, is a combination of strategic M&A and returning capital to our shareholders. In September, we completed our acquisition of our filtration and separation business from Solventum, which is now part of our Life Sciences Solutions segment. As you know, this business expands our bioprocessing offering for pharma and biotech, as well as industrial filtration capabilities. The integration is progressing smoothly, and the early feedback from our customers has been incredibly positive. We also closed our acquisition of the Ridgefield, New Jersey sterile finish site from Sanofi, expanding our U.S. Drug product manufacturing. This is an excellent addition to our industry-leading sterile fill-finish network within our pharma services business. At this site, we'll continue to manufacture a portfolio of Sanofi's therapies and we'll invest in additional production lines to meet the growing demand for U.S. Manufacturing from our pharma and biotech customers as they reassure more activity to the U.S. Also in the quarter, we repurchased $1 billion of our shares. This brings our total repurchases to $3 billion for the year. So overall, a very active quarter of capital deployment. We have a company culture based on continuous improvement through our PPI business system, which once again was a key enabler of outstanding execution. We made great progress in the quarter leveraging PPI to manage our cost base and deliver very strong earnings growth. The PPI business system continues to drive great impact. And with the OpenAI collaboration, it will have even more impact going forward. The practical application of AI will enhance our colleagues' ability to find a better way, increasing our productivity and improving the customer experience. As I reflect on the quarter, I'm proud of what our teams accomplished and grateful for their contributions to our success. Let me now turn to our guidance. Given our strong performance in the quarter, we are raising both our revenue and earnings guidance for 2025. Steven will take you through the details in his remarks. I'll cover the highlights. We're raising our revenue guidance to a new range of $44.1 billion to $44.5 billion and raising our adjusted EPS guidance to a range of $22.6 to $22.86 per share. So to summarize our key takeaways from Q3, this was a terrific quarter. We delivered excellent operational execution reflecting consistent and active management of the company and the power of the PPI business system, which resulted in outstanding earnings growth. We continue to advance our growth and capital deployment strategies. And we're raising our full-year guidance and remain confident in our midterm and long-term outlook and the proven strength of our strategy to create meaningful value for our shareholders and continued success for our company. With that, I'll now hand the call over to our CFO, Stephen Williamson. Stephen Williamson: Thanks, Marc, and good morning, everyone. I'll take you through an overview of our third quarter results for the total company, then provide color on our four business segments, and I'll conclude by providing our updated 2025 guidance. Before I get into the details of our financial performance, let me provide you with a high-level view of how the third quarter played out versus our expectations at the time of our last earnings call. In Q3, our team executed really well and delivered results significantly ahead of what we'd assumed at the midpoint of our prior guidance on both the top and bottom line. Q3 reported revenue was approximately $300 million ahead of what we'd included in the midpoints of the prior guide, driven by stronger FX tailwind, a benefit from our recent acquisitions, and a slight beat on organic revenue. The beat on the bottom line was even more significant. We delivered $0.30 of adjusted EPS ahead of what was included in the midpoint of our prior guide for Q3. $0.11 of that beat was from a lower impact of tariffs and related FX than had been assumed in the prior guide. $0.20 of the beat was from very strong operational performance, and this was partially offset by $0.01 of dilution from the recent acquisitions. So to summarize, in Q3, once again delivered excellent operational performance. Let me now provide you with some additional details on Q3. Starting with earnings per share. In the quarter, adjusted EPS grew 10% to $5.79. GAAP EPS in the quarter was $4.27, in line with the prior year quarter. On the top line, Q3 reported revenue grew 5% year over year. That included 3% organic revenue growth, a 1% contribution from acquisitions, and a 1% tailwind from foreign exchange. Turning to our organic revenue performance by geography, in Q3, North America grew low single digits, Europe and Asia Pacific both grew mid-single digits with China declining mid-single digits. With respect to our operational performance, we delivered $2.59 billion of adjusted operating income in the quarter, an increase of 9% year over year. Adjusted operating margin was 23.3%, 100 basis points higher than Q3 last year. The very strong earnings results reflect our active management of the business and the power of our PPI business system. Total company adjusted gross margin in the quarter was 41.9%, 10 basis points higher than Q3 last year. We delivered very strong productivity, which enabled us to fund strategic investments further advance our industry leadership, and offset the impact of tariffs and related FX and unfavorable mix. Moving on to the details of the P&L. Adjusted SG&A in the quarter was 15.5% of revenue, R&D expense was $346 million in Q3. Reflecting our ongoing investments in high-impact innovation, R&D as a percent of our manufacturing revenue was 6.9% in the quarter. Looking at results below the line, our Q3 net interest expense was $113 million. As expected, the adjusted tax rate in Q3 was 11%, and average diluted shares were 378 million, approximately 5 million lower year over year driven by share repurchases net of option dilution. Turning to free cash flow on the balance sheet. Year-to-date cash flow from operations was $4.4 billion and free cash flow was $3.3 billion after investing $1 billion of net capital expenditures. Q3 was a very active quarter of capital deployment, we deployed approximately $4 billion of capital through the acquisition of our filtration and separation business from Silventum and the sterile fill-finish site from Sanofi. In addition, we repurchased $1 billion of shares during the quarter and returned $160 million of capital through dividends. Ended the quarter with $3.5 billion in cash and short-term investments, $35.7 billion of total debt. Our leverage ratio at the end of the quarter was 3.2x gross debt to adjusted EBITDA and 2.9 times on a net debt basis. Completing my comments on our total company performance, adjusted ROIC was 11.3%, reflecting the strong returns on investment that we're generating across the company. I'll provide some color on our performance of our four business segments. In Life Sciences Solutions, Q3 reported revenue in this segment increased 8% versus the prior year quarter, and organic revenue growth was 5%. Growth in this segment was led by our bioproduction business, which had another quarter of excellent growth. Q3 adjusted operating income for Life Science Solutions increased 15%, and adjusted operating margin was 37.4%, up 200 basis points versus the prior year quarter. During Q3, we delivered very strong productivity and volume leverage, which is partially offset by unfavorable mix strategic investments and the impact of the acquisition of our filtration and separation business. Which is included within this segment. In the analytical instruments segment, reported revenue increased 5% and organic revenue growth was 4%. Growth in the quarter was led by electron microscopy, and chromatography and mass spectrometry businesses. In this segment, Q3 adjusted operating income decreased 5% adjusted operating margin was 22.6%. Down 230 basis points versus the year-ago quarter. But this is a sequential improvement from Q2 2025. The majority of the year-over-year margin change was driven by the impact of tariffs and related FX. Outside of that impact, strong productivity was partially offset by strategic investments. And unfavorable mix. Seniors and Specialty Diagnostics in Q3 reported revenue grew 4% year over year, and organic revenue growth was 2%. In Q3, growth in this segment was led by our transplant diagnostics, and immunodiagnostics businesses. Q3 adjusted operating income for Specialty Diagnostics increased 10% and adjusted operating margin was 27.4%, 150 basis points higher than Q3 2024. During the quarter, we delivered strong productivity and volume leverage. Finally, in the Laboratory Products and Biopharma Services segment, reported revenue increased 4% and organic revenue growth was 3%. Growth in this segment was led by a research and safety market channel. The runoff of pandemic-related revenue had a 1% impact on the revenue growth in the segment in the quarter. Q3 adjusted operating income in this segment increased 12% adjusted operating margin was 14.5%. 100 basis points higher than Q3 2024. In the quarter, we delivered very strong productivity, which is partially offset by unfavorable mix, strategic investments. Turning to guidance. As Marc outlined, we're raising our 2025 full-year guide on both the top and bottom line, reflecting our continued active management of the company. Let me provide you with the details. We're raising our revenue guidance to an expected range of $44.1 to $44.5 billion. Organic revenue growth at the midpoint of the guide continues to be 2% for the full year, and as a reminder, that includes a one point of headwind from the run-up of pandemic-related revenue. Increasing our outlook for adjusted operating margin in 2025 to a new range of 22.7% to 22.8%. And we're raising our adjusted EPS guidance to a new range of $22.6 to $22.86. The increase of the midpoint of the guidance range reflects $420 million higher revenue than the prior guide. Driven by the benefit of our recent acquisitions, and an increase in the tailwind from FX. From an earnings standpoint, the increase in the midpoint of the guide reflects 20 basis points of improved adjusted operating margin expansion and $0.20 of higher adjusted EPS. This change includes $0.05 of dilution from the recent acquisitions. Continue to actively manage the company drive excellent operational performance once again enabling us to increase our guidance for the year. I'll now move on to an update of some of the modeling elements for the full year. Our guidance now includes the impact of the recently closed acquisitions, these deals added $260 million to revenue to our prior full-year guide, $20 million of adjusted operating income, and as I mentioned earlier, $0.05 for adjusted EPS dilution. In terms of tariffs, our guidance reflects the tariffs that are currently in place as of today. This includes the increase in tariff rates between the U.S. and Europe that occurred since the time of our last guidance. The changes in tariffs and trade policy once again caused intra-quarter volatility in FX rates in Q3, as a result, FX in Q3 was $220 million revenue tailwind to our prior guide, and a $0.10 adjusted EPS headwind. So for the full year, we now expect FX to be a year-over-year tailwind to revenue of $230 million and a headwind to adjusted operating income and adjusted EPS of $110 million and $0.37 respectively. Below the line, we now expect net interest expense to be $440 million in 2025, and we continue to expect an adjusted tax rate of 10.5% for the full year. We expect between $1.4 billion and $1.7 billion of net capital expenditures and around $7 billion of free cash flow for the year. Then in terms of capital deployment, our guidance now assumes that we deploy $7.6 billion of capital in 2025. $4 billion on the recently closed acquisitions, $3 billion on already completed share buybacks, and $600 million of capital return to shareholders through dividends. Finally, we estimate that full-year average diluted share count will be approximately 378 million shares. So to conclude, we delivered an excellent Q3, we're in a great position to deliver on our 2025 objectives. With that, I'll turn the call back over to Raf. Rafael Tejada: So with that, let's get started for the Q&A portion of the call. Operator: Thank you. When preparing to ask your question, please ensure your device is unmuted locally. The Thermo Fisher management team, please limit your time on the call to one question and only one follow-up. If you have any additional questions, please return to the queue. Our first question comes from Michael Ryskin from Bank of America. Your line is now open, Michael. Please go ahead. Michael Ryskin: Great. Thanks for the question and congrats on another strong print guys. I'll start just on market conditions and what you're hearing and what your customers' mark. I mean a lot has changed since we last spoke on the 2Q call. Especially on pharma, there's been a lot of progress in, I would say, de-escalation on some of the MFN and tariff concerns with pharma. Just wondering if anything has changed in your conversations with your major customers. Over the last couple of weeks and months. Talk of reshoring longer term. Could you just talk about how Thermo would benefit from that? Both from a facility build-out perspective, but also from Patheon and some of the other pharma services, some of your fill-finished capacity in the U.S. Just sort of how that come up in conversations? Marc Casper: Mike, thanks for the question. Very topical. So in terms of our dialogue with our pharma and biotech customers, as you know, we're very engaged, right, with this customer set, the senior executives, and if I say, what are they focused on? Probably is the first thing. Right? A lot of, you know, excitement around scientific breakthroughs. A lot of confidence actually in their pipelines. And they're partnering with us to help them drive their success. As we talk about the actual environment, right, which is a part of how they think about the world and the decisions they make, you know, there's a quiet confidence, actually, that they're going to be able to navigate the government policies effectively. And you're seeing that in some of the announcements that have been made on pricing as well as on reshoring more activity in the U.S. in terms of not being exposed to potential tariffs. On that dynamic, what I would say is we're very engaged in helping those customers think about, you know, new sites, how to best equip them, and support our customers. In that effort. And, you know, that will benefit our channel business, it will benefit our bioproduction business, analytical instruments businesses, will all benefit from those new construction. And that's really largely 27%, 28% by the time ground is broken on new things. For expansions, within existing facilities, it could be a little bit faster than that. So that is something we're actively engaged in, but it takes some time to gestate. More rapidly than that and in a way more cost-effectively for our customers, is leveraging our pharma services network to be able to move more of their volume to the U.S. You know that we are the industry leader in drug products sterile fill finish. We have very strong capabilities here. We've had very strong demand for those capabilities and our arrangement with Sanofi where we acquired one of their sites gives us another production node in the U.S. That is well trained, great workforce, and the ability to expand that facility as well. So we're excited to be able to enable our customers and pharma biotech has been a good environment for us. So thanks, Mike. Michael Ryskin: Okay. Thanks. That's all really helpful. And then maybe on the academic and government front, I mean, think you called out a low single-digit decline in the quarter. It seems like slight improvement from last quarter. But a lot of updates there as well. It looks like we're on track for hopefully flat budget next year, which is encouraging. But on the other hand, you've got the government shutdown over the last couple weeks now. So just give us an update on what you're hearing there. Is there any risk from government shutdown starting to hurt some of that? Potential recovery in A and G? Just sort of how you think about that playing out? Thanks. Marc Casper: Yeah. So, when I think about academic and government, in the quarter, the improvement was really slightly better in Europe. U.S. was very similar. China was very similar. To what we experienced in Q2 in both of those markets have headwinds, obviously different drivers of those headwinds. And when I think about so that government shutdown is kind of post-quarter. So I'll talk about that in a moment. But I say what's going on in the environment, in Q3, in the US, customers actually feel better about the idea of a more stable funding environment. Obviously, we'll have to get a budget in place and all of those things. But I think there's more consensus around relatively a flattish budget. And I think that will remove a headwind over time as the market stabilizes, once we get that funding in place. So I actually say from that perspective, while the conditions were, muted, I would say actually the noise or the it's less noise in a way. It feels a little bit better. On government shutdown, the way I would say is, obviously post-quarter, we're in the middle of it. Right now. I think it adds a little bit to customer hesitancy, right? It does add some uncertainty. And it obviously will delay some expenditures by the US government as well. On the things that they actually purchase. We put into our implied guidance range for the fourth quarter a reasonable set of action outcomes based on the government shutdown and based on our own experience. And how we think it's playing out and feel well positioned to navigate that. So that's how we thought about it. At this point in time. Michael Ryskin: Thank you, Mike. Thank you so much. Thanks. Operator: Thank you. Our next question comes from Tycho Peterson from Jefferies. Tycho, your line is now open. Please go ahead. Tycho Peterson: Hey. Thanks. Mark, I wanna maybe unpack some of the analytical instrument strengths. We're certainly better we've been modeling. Appreciate your comments on academic and pharma. But maybe just a little bit more color. Is this mostly mass spec? Is it cryo EM? Any particular segments that are emerging? And I guess, importantly, how do you think about kind of momentum on analytical instruments in the year-end? Any thoughts on budget flush and '26 at this point? Obviously, little bit too early to see a real pickup from onshoring, sounds good. Marc Casper: Yes. So Tycho, thank you for the question. So the team has been doing a good job in our analytical insurance business I'm proud of the efforts. The innovation that we've been talking about is really being incredibly well adopted. Say what is one of the drivers? Great launches in both mass spec and cryo electron microscopy. You know, it makes a real difference. And many of you have heard me say over the years, irrespective of funding environments, because they ebb and flow over time, you have relevant innovation and you think about what our customers are actually doing, they're doing their life's work. With this innovation. And if they don't have the best tools, effectively, they're really wasting their time. And because of that, you see an incredibly resilient and entrepreneurial set of customers getting funding. So the team's done a good job on that respect, and I'm proud of the mid-single-digit growth that we delivered in the quarter. When I think about what drove it really electron microscopy and chromatography and mass spectrometry. Were the drivers. We still have headwinds in our chemical analysis business. It was a little better. Than the previous quarter, but still pressure in some of the industrial and environmental segments. So largely, the two big businesses drove the strong performance. I think about the momentum going into the fourth quarter, really the only thing that's different, we have a much stronger comparison in the fourth quarter. We had very strong high single-digit growth last year. So comparison is difficult. Different. So that really is the will be the factor. But the underlying health of the business is quite good. Tycho Peterson: Great. And then a follow-up on Diagnostics You did flag China. Obviously, this has been a pressure point for some of your peers in China Diagnostics. Maybe Just Give Us A Sense Of What's Going On, You Know, On The Ground There. What If What Would Especially Specialty Diagnostics Have Done Ex That China drag? And then overall, I guess, just what are your assumptions around China for remainder of the year and early twenty six? Marc Casper: Yeah. So when I think about our specialty diagnostics, business, we provide high value medically relevant, critical testing. Right? And you think about that it's transplant diagnostics, it's immunodiagnostics, It's our protein diagnostics, which is our multiple myeloma business, which is part of our clinical diagnostics business. Our biomarkers for sepsis. These are just critical capabilities. And businesses that are, you know, a healthy long-term set of prospects. When I think about the environment in China, we have a much smaller presence than the market average for the diagnostic businesses in China in terms of what we do. So we saw very weak conditions based on the pricing and reimbursement environment. It's not different than what we expected. And those pressures flow through, but it's relatively modest portion of our business. And saw a little bit of improvement relative to the prior quarter in terms of what the growth rate was in the business. So think we're well positioned there over time. And you know, not much beyond that, I would say. Tycho Peterson: Okay. Thank you. Operator: Thank you. Our next question comes from Jack Meehan from Nephron Research. Your line is now open. Please go ahead. Jack Meehan: Thank you, and good morning. First question Good morning, Jay. Mark, just wanted just wanted to test your pulse You know, last quarter, you gave some initial framing thoughts around 2026 and kind of progression around the 3% to 6% organic growth. I guess just based on everything you've seen and the dialogue that you've had with customers, just great to get your latest thoughts on how you felt like you were tracking relative to that. Marc Casper: Yeah. So you know, when I think about the progression and the midterm outlook in the long-term outlook, we feel very good about that. Right? So nothing has changed about our confidence in the next couple of years. 3% to 6% organic is the right level of assumptions and strong operating margin and operating income growth coming out of that. So that's consistent. When I think about the first few agreements, on MFNs between the pharmaceutical companies, and the industry and the government in the US, that's what we expected to happen. Right? So that's a good thing, right, which is we expected that companies or the vast majority of companies would navigate the environment successfully. You're seeing the early ones do that. And that gives us confidence that the market conditions will continue to progress. I think it's worth remembering that today, we're basically at 2% organic and is about full point headwind from the COVID runoff, which doesn't which won't repeat next year. So we're kind of running at the 3% range. And over time, over this next couple of year period, the absence of negatives, meaning that academic and government won't decline as much, China at some point will stabilize, that in and of itself, without even improving the market conditions, ultimately gets higher in the range and then ultimately continued share gain in market conditions will get us further and further in the range over time. I feel very good about the position. I think for Stephen, it's worth commenting a couple of things that have changed. Stephen Williamson: Yes. So Jack, a couple of things to think about when you're doing the modeling for 2026. So based on current FX rates, there'll be a tailwind to revenue of a couple of million dollars. Obviously, I'd obviously monitor how rates change between now and the end of the year. We'll give more detail in terms of the current view in early 2026. Then in terms of the recent M&A, maybe it's worth actually taking a step back and giving a little bit more detail on kind of the implications for the current guide '25 and some thoughts in terms of modeling for you going forward. Starting with the filtration and separation business, revenue for this business for the full year 2025, not just the period we own but as I think about the full calendar year, expected to be just under $750 million in scale, so good sized business. When I think about going forward, the revenue growth there will be likely around or above the average for the company going forward. A good growing business. For the first twelve months of ownership, we continue to expect the transaction to be $0.06 dilutive, just under half of that is occurring in 2025. And then we're bringing this company this business into the company as a low double-digit margin business, and that quickly gets up to mid-teens and above. Once the integration stand-up costs are behind us. At that point, strong top-line growth, including strong synergies, will be nicely accretive to both margins and earnings for the business. Then moving to the Sanofi site acquisition. This comes with, as Mark mentioned, an existing book of business from Sanofi, approximately $75 million. And over the next couple of years, we're investing in additional lines that we're drive much stronger utilization of that site going forward. And as we go through the investment phase over twelve months of ownership, we expect the transaction to be dilutive by about $0.05. To get into 2027, the revenue profitability builds nicely as the new lines start to generate revenue there. So hopefully, that's some good color that will help you with modeling here. Jack Meehan: Yeah. That was all great. Wanted to follow-up and talk about the clinical research business. Mark, just any additional color you can share on trends and new authorizations, how you feel like pharma customers are feeling about getting back to work on trials, and any any just color around traction there would be great. Marc Casper: Thanks. Jack, thanks for the questions. They never stop working. It's really the business has progressed really well, very very proud of how the team is executing. The year has played out strongly. When I think about Q3, revenue growth stepped up. So we're growing in the quarter. Remember, we were just slightly positive in Q2. We're back to low single-digit growth. Authorization is incredibly strong. So ahead of that. So that positions that step up that we're expecting over time is playing out nicely. Are also innovating in what we do in clinical research. Right? And if you think about why that's relevant is because it is the lifeblood of the pharmaceutical and biotech industry is to be able to improve the speed and efficiency of the drug development process because that creates opportunities to improve the ROI on drug development. Which creates a virtuous cycle of more investments by our customers. A couple examples in the clinical research business where one is actively being, you know, implemented. We talked about accelerated drug development about a year ago. We're winning significant business. It's resonating incredibly well. Because what it's allowing us to do is shave time and cost out for our customers and leveraging our capabilities of not only our CRO business, but also our pharma services business to help our customers bring exciting medicines to market. The OpenAI collaboration is what we're creating together and what's new. Right, which is where, you know, deploying artificial intelligence in a way to help improve the cycle time of our clinical trials. We're co-creating new capabilities, right, in terms of effectively leveraging the large repository of data that we have to be able to add new value to our customers. So it's a super exciting time. Clinical research business, and the business is progressing nicely. During the course of this year. Jack Meehan: Yeah. It seems interesting. Talk to you. Marc Casper: Thank you. Operator: Thank you. Next question comes from Daniel Anthony Arias from Stifel. Your line is now open. Please go ahead. Daniel Anthony Arias: Hey, good morning guys. Thank you. Mark, maybe just following up on your biopharma comments. I'm just curious whether demand from small and emerging biotech is getting any better from where you sit. I mean, obviously, the BTK index is doing better, but I'm wondering if spending is loosening up at all. Marc Casper: Yeah. So, Dan, in terms of biotech, I'm sure it's a strong quarter. Right? When I look at what was going on sort of in the more detail, we really saw very nice momentum in our clinical research business. Of the early activities in pharma services. Obviously, in pharma services, it's going be smaller dollars as you get going. But there was a really nice progression there, which I feel good about. So I think that is encouraging. Actually think some of the M&A transactions that were done by large pharma acquiring biotech also helps sort of the ecosystem more broadly. So if I say not only do the equities perform better, but I think also you're seeing deal activity. And that deal activity ultimately will help drive a reinvestment cycle or cycling in of new capital. The market over time. So I think Q3 was a nice progression from that perspective. Daniel Anthony Arias: Yeah. Okay. That's great. Then maybe just taking the other side of Tycho's China question as it relates to pricing and just the initiatives that they have going on over there to control price. You know, the diagnostics markets are evolving, obviously, but what are you seeing on the research and industrial side? Is that fluid in a way that you think introduces some additional risk, or do you have your hands around the pricing dynamic? Such that you can think about it being stable into year-end or into the beginning of '26? Thanks a bunch. Marc Casper: Yeah. Dan, thanks for the question. So maybe if I step back on China. Right? Because we've been able to deliver stronger growth, around the world now for some period of time, China has become a smaller percentage of the company's total. Still an important market, but smaller. When I look at what's going on in China, know, academic and government, does benefit from some of the stimulus programs, but relatively pressured. As the government has tried to manage its own economic challenges, which are meaningful. But what was encouraging was that pharma biotech grew in the quarter modestly, but it was nice to see that happen. When I think about the quarter we declined in the mid-single digits. That was an improvement versus Q2. Really, the difference over those trends was we had that month of succession of trade activities back in the April timeframe. That absence really allowed us to have a bit more moderate declines. I would expect China for this year full year, to be down between mid and high single digits. The pricing dynamics, less government affected in the industrial sector, in pharma and biotech. They're more private enterprises or state-backed enterprises, but they don't have the same reimbursement dynamics. That you would see in the diagnostics and health care market. So that's a bit more manageable. Thanks for the questions. Operator: Thank you. Our next question comes from Daniel Gregory Brennan from T. D. Cohen. Line is now open. Please go ahead. Daniel Gregory Brennan: Great. Thank you. Thanks for the questions. Congrats, Mark and Stephen. Maybe, Mark, just going back to the onshoring announcement since it's been tremendous focus in the investor community. How to think about that? You gave a lot of color already in to some questions. I was hoping you can elaborate a little bit on two parts. First is, you know, we all ultimately think, like, kind of CapEx and, you know, capacity following drug volumes. So if drug volumes aren't necessarily changing, just trying to understand how to think about like what will be incremental in the U.S. Versus kind of that wasn't there before. So any way to help us think about that at this point? I know you talked about for the greenfield that would come with time, maybe like '27 and beyond. Just trying to think about that. And then I know you did talk about maybe more near term, maybe some of the brownfield there could be some equipment uptake. 'twenty six. Anyway, just help frame sizing magnitude or just any way to kind of contemplate what this can mean for Thermo Fisher? Marc Casper: Yeah. So, Dan, thanks for the question. So when I think about what is the aggregate dynamic, let's say, what the dollars are for us, but just what's going on. It is true incremental onetime demand. Right? And what I mean by that is there's gonna be new equipment new initial stocking inventory, new labs, all these things. I mean, none of these things are material in itself, but, you know, you just go through that process of getting a facility online. You do qualification runs. You just there's just a bunch of activity. That will generate demand over the next few years. But the volume in the industry hasn't changed. You do they're just real incremental in terms of that start up. But effectively, it doesn't mean that your ongoing consumables business grows more quickly because you're producing the exact same amount of medicines around the world, you're just producing in different sites. So from that perspective, it's kind of an unexpected positive over the next few years. We have a strong presence there. And interestingly enough, have a much stronger presence today than when those facilities were built many years ago in Europe. Right? Just if you think about how strong our bioproduction business is how strong the capabilities we're bringing in from solventum and filtration, the product launches around Dynaspin, which is our bioreactor technology. These are great things that position us actually have a higher share in the new facilities than the existing installed base. So I feel very good about the prospects. And we do it site by site in terms of what the opportunity is. So I don't have a good number to say how big is it in total, but should be a tailwind a bit in bioproduction. What I would say is our bioproduction is doing incredibly well, right? So when I able to look at a few of the companies that I've reported, very strong growth in Thermo Fisher. Clearly faster than what the others have reported. Broad-based strength geographically across our different businesses there. Really, the team did an excellent job. Bookings outpacing the strong, you know, teens growth in revenue is really the Teams are just doing great work. So it's an exciting business for us, and one with great momentum in the market. Daniel Gregory Brennan: Terrific. And then just a follow-up maybe to Steven. Just on the EPS impact and tariffs, could you just kind of level set? I know you gave the impact in the quarter, you said you mark to market the European tariffs, but you had the $0.50 potential from China. Think you recaptured some of that. Could you just kind bottom line, like how much ultimately kind of the tariff changes occurred and kind of what's happening in 4Q? Thank you. Stephen Williamson: Yes. Thanks, Dan. So when I think about the tariffs and the kind of the actual experience in Q3 came in favorably to what we'd had in the prior guide. In my prepared remarks, called out the $0.11 pickup, and that's a combination of tariffs and the related FX to, in terms of the changes in the kind of tariff and trade environment. Looking to Q4, given the tariffs increased from the time of our last guide most materially between U.S. and Europe. Our initial view is that that kind of assumptions we had around tariffs pretty much hold for Q4. So I'm not expecting a significant pickup in Q4. That's kind of how we've kind of framed the guidance for in terms of this update. Operator: Great. Thanks, Sam. Our next question is from Andrew Tupa from Raymond James. Your line is open. Please go ahead. Andrew Tupa: Great. Thanks everybody for the time. Just first, would love a little bit more color on the contract research side of the house and maybe in particular, how that accelerator bundled program has gained traction and kinda layering that into the context of all the discussion that's already occurred in terms of onshoring, how that changes the applicability to customers, and how they look at know, that kind of wraparound March partnership versus, CRO and CDMO kinda separately historically? Marc Casper: Yeah. So, Andrew, thank you for the question. So when I think about accelerator, right, we are one of the largest clinical research organizations. We are also one of the largest pharma services organizations that's developing medicines on the physical side, from early development all the way through commercial scale production. Both in drug substance and drug product and all of the physical clinical trials like activities around there. So we are touching these pipeline, these molecules in many different ways. And a hypothesis that we had at the time of deciding to acquire PPD back in 2021 was that there would be insights and capabilities that could streamline the way that companies develop medicines and how they produce them ultimately. We didn't bake that into our models, but we had a strong hypothesis. We spent a couple years doing a significant number of co-creation with our customers to bring that to life. We launched the official capabilities a year ago, and the adoption has been very strong. You see it very aggressively in biotech. Because, effectively, they outsource pretty much all of their work. Right? So when they think about it, they are looking for a partner that can help them bring insights, not only in how to design and execute their trials, but on also how do you develop and produce the medicines. And it's been very compelling. It's built us a nice book of authorizations. That turns into revenue over time. Takes a while for this flow through the pipeline. And in large pharma, there's been great interest in our leading clinical trials, physical capabilities, the logistics packaging, distribution of experimental medicines. And what that has allowed us to do is continue to drive share and gain momentum because, again, there, the linkages with clinical research shaves time and cost out of the process as well. So it's been, you know, it's early days, but they've been very positive. Andrew Tupa: That's helpful. Thank you. And then maybe just one of financial question. Your $0.2 operational beat in 3Q, you had the FX and tariff tailwinds as well. But you're raising the range about 20¢ in the midpoint as well. Maybe what's going on to off some of that operational traction as we think about 4Q? Is it reinvestment? Is it a little bit of mix? Is there something different to think about knowing we have that $5 of dilution from the acquisitions you called out as well? Just would love a little bit of color on kind of 3Q to 4Q. Stephen Williamson: Yes. Understood. We beat by $0.30 in Q3. As you mentioned, we have $0.05 of additional dilution from the acquisitions. And overall $0.20 raise in midpoint given where we are in the year, how we're performing, what the end markets are like, I think this is an even stronger raise on the low end of our guide. I think that's a good to be in as I think about going into the Q3. Q4 quarter. Operator, we have time for I just we're in a good position for finish the year. I don't overread into raising our guidance by $0.20 in the midpoint, but significantly raising on the low end I think that's a strong statement. Andrew Tupa: Thanks, Andrew. Okay. Thank you. Operator, are set for one more question? Operator: Lovely. Our next question comes from Patrick Donnelly from Citi. Your line is open. Please go ahead. Patrick Donnelly: Great. Thanks for taking the questions, guys. Mark, maybe one for you on just the capital allocation side. Obviously, continue to buy back stock as you talked about. You just talk about the M&A appetite, what those discussions look like? Any areas you're focused on? I know you guys always have a good pulse on that front, just curious what appetite there looks like for the conversations. And I just have a quick follow-up. Marc Casper: Yeah. So we have been active all year. We have deployed about $7.5 billion on M&A, $3.5 billion on return on capital through buybacks and dividends. We have a very busy pipeline. It's exciting. I like this environment because there are good companies that you know, struggle in environments where it's all about execution. And so we're busy, and we're looking at some interesting things. Obviously, those things will always fit well with our strategy. Going to be whether we can generate really good returns. And for those that feel good about, you'll see us continue to be active. Are many parts of the company given how fragmented our industry is, to expand our offerings that would be highly valued for our customers. So we're going to execute well against what we closed. And, at the same point in time, continue to look for great opportunities build more value. Patrick Donnelly: Okay. That's helpful. And then as we look ahead, it seems like the exit rate for 4Q somewhere at two or 3% organic. Obviously, you talked a little bit about 26% last quarter. Is the view that growth just continues to accelerate throughout next year? It sounds like China is turning the corner to a degree. Pharma sounds a little bit better. I guess, what segments are holding you back, if any, in terms of when you look at what's improving right now? And again, as that acceleration happens next year, are the key drivers? And what are you looking for still turn the corner? Thank you guys so much. Marc Casper: We are looking forward to our call at the beginning of the year to give you all the details. We'll benefit from, obviously, the perspective on how we exit the year. And our view is, over the next couple of years, growth is going to build over time. And I'm very excited about exiting this year. A couple percent organic and 3% when you have the non-repeats of the final bits of COVID runoff. So we entered the year at a good part, and going to execute really well in turning the revenue growth into excellent, excellent earnings growth. And we did in the quarter and finish up on a great note in '25 and set ourselves up for a great '26 and beyond. So Patrick, thank you for the final question. Let me wrap up. Thanks, everyone, for joining us on the call today. We're very pleased to deliver another strong quarter. We're well positioned to deliver differentiated performance in 2025 and continue to create value for all of our stakeholders and build an even brighter future for our company. Look forward to updating you on the fourth quarter and the full year performance early 2026. And as always, thank you for your support of Thermo Fisher Scientific. Thanks, everyone. Operator: This concludes today's call. You all for joining. You may now disconnect your lines.
Edra: Hello, everyone, and welcome to the SmartFinancial, Inc. Third Quarter 2025 Earnings Release and Conference Call. My name is Edra, and I will be your coordinator today. We will be taking questions at the end of the presentation. I will now hand you over to Nathan Strall, Director of Investor Relations, to begin. Please go ahead. Thanks, Edra. Nathan Strall: Good morning, everyone, and thank you for joining us for SmartFinancial, Inc.'s third quarter 2025 earnings conference call. During today's call, we will reference the slides and press release that are available in the Investor Relations section on our website, smartbent.com. William Carroll, our President and Chief Executive Officer, will begin our call followed by Ronald Gorczynski, our Chief Financial Officer, who will provide some comments and some additional commentary. We will be available to answer your questions at the end of the call. Our comments include forward-looking statements. These statements are subject to risks and uncertainties. The actual results could vary materially. We list the factors that might cause these results to differ materially in our press release and in our SEC filings, which are available on our website. We do not assume any obligation to update any forward-looking statements because of new information, early development, or otherwise, except as may be required by law. During the call, we will reference non-GAAP financial measures related to the company's performance. You may see the reconciliation of these measures in the appendices of the earnings release and investor presentation filed on 10/21/2025 with the SEC. And now I'll turn it over to William Carroll to open our call. William? William Carroll: Thanks, Nathan, and good morning, everyone. Great to be with you. And thank you for joining us today and for your interest in SmartFinancial, Inc. I'll open our call today with some commentary, then hand it over to Ronald Gorczynski to walk through the numbers in some greater detail. After our prepared comments, we'll open it up with Ronald, Nathan, Rhett Jordan, Miller Welborn, and myself available for Q&A. It's been a busy quarter for us, and we've had a number of very positive things happening with our company. The focus on execution that's going on right now is outstanding. Our team continues to have a keen focus on hitting targets we've set for this year in regard to revenue, returns, and prudent expense growth, and I remain very bullish on our outlook. So let me jump right into some of our highlights. First, and in my opinion, one of the most important metrics, we continue to increase the tangible book value of our company. Moving up to $26 per share including the impacts of AOCI, and $26.63 excluding that impact. That's growth of over 26% annualized quarter over quarter. For the quarter, we posted operating earnings of $14.5 million or $0.86 per diluted share. This is our sixth consecutive quarter of positive operating leverage and hit our $50 million quarterly revenue target in Q3, which we had set for our team this year. We actually hit it a few months early, and I look forward to seeing that number continue to grow. We had outstanding growth on both sides of the balance sheet, posting 10% annualized growth in loans and 15% annualized growth in deposits. Our history of strong credit continues. Only 22 basis points in nonperforming assets. I'm pleased to see these numbers continue at exceptionally low levels. Total operating revenue came in at $50.8 million as net interest income continued to expand and noninterest income was solid again. Our operating noninterest expenses also came in on target at $32.6 million. Looking at the charts on page four and five, you'll see very nice trends. We're building our return metrics and most importantly, growing our total revenue, EPS, and as I mentioned earlier, tangible book value. All those charts are great graphics to illustrate our execution. I'm looking forward to and expecting these trends to continue. So just a couple of additional high-level comments from me. On growth, our continued balance sheet expansion is a direct result of the focus of our sales team. I've enjoyed watching this company transform into a very good organic grower. As we have hired well over the last several years, we've also built an outstanding foundational process that includes aggressively going after new client relationships, growing existing ones along with a very diligent prospecting process. As I stated, we grew our loan book at a 10% annualized rate quarter over quarter. As sales momentum stays strong and balanced across all of our regions. Our average portfolio yield, fees, and accretion, was up to 6.14% and our new loan production continues to come onto the books accretive to our total portfolio yield levels. Regarding deposits, again deposits were up 15% annualized or $179 million for the quarter inclusive of reducing some of our brokered CD positions. It's important to recognize how we're building this bank with core relationships as we have an intense focus on both sides of the balance sheet. We've made investments in our treasury management team over the last several quarters and it's nice to see this line of business gain outstanding momentum. Our loan to deposit ratio was at 84% which is actually down quarter over quarter even with 10% loan growth. This strong position gives us continued flexibility to leverage a great balance sheet. Our pipelines continue to look good, and I'll discuss these a little bit more in closing comments. But, also, when you look at the highlight bullets, in our earnings release, we've had a lot going on this quarter. All of it tied back to building the foundation of a bank that is on track to becoming one of the Southeast's strongest regional community banks. Everything accomplished this quarter is part of our focus on efficiency and growth. A well-executed sub-debt issuance, a sale with a subsequent minority reinvestment on our insurance platform, a repositioning trade with our bond portfolio that did not impact our book value as we leverage the gain off the insurance deal. And continued contract evaluations and renegotiations. Including our core data processing vendor interchange payment rails, and some new tech token tech-focused initiatives looking into 2026. So all in all, a very nice third quarter for our company. And I'm gonna stop there, hand it over to Ronald Gorczynski to let him dive into some greater detail. Ronald? Ronald Gorczynski: Thanks, William, and good morning, everyone. I'll start by highlighting some key deposit results. For the quarter, we had strong non-broker deposit growth of $283 million representing more than 24% growth on an annualized basis. This increase resulted from both new deposit production and seasonal client liquidity build following the previous quarter outflows. The cost of new non-brokered production was 3.47%. This growth gave us the opportunity to pay down $104 million of brokered deposits which had a weighted average cost of 4.27%. Our overall interest-bearing cost rose by three basis points to 2.98% but were down to 2.93% for the month of September. Despite funding almost $100 million of loan growth, and paying down $104 million of brokered deposits, our overall liquidity position which includes cash and securities, at quarter end was approximately 21%. Included in our liquidity position was $98 million in net proceeds from our sub-debt issuance which closed in August. As we look ahead to Q4, we anticipate our liquidity position normalizing as we already retired $40 million in our existing sub-debt on October 2, and we expect to pay down an additional $111 million in brokered deposits with a weighted average rate of 4.28% during the fourth quarter. As William had mentioned, we utilized the gain generated from the sale of our insurance operations to offset losses associated with selling $85 million of securities with a weighted average rate of 1.4%. The proceeds of the security sale were reinvested in securities yielding 4.95% which will generate $2.6 million of additional annual interest income and increase our overall weighted average securities portfolio yield to 3.7%. During the quarter, our net interest margin experienced some temporary compression declining four basis points to 3.25% primarily as a result of timing differences between issuing new sub-debt prior to paying off our existing sub-debt and higher rates for new deposit production. However, the average rate of new loan production was 7.11% which continues to push the yield on our overall portfolio higher. Furthermore, any future cuts to the Federal Rates Fund will positively impact our deposit portfolio costs as approximately 45% is variable cost adjusting in lockstep with any Fed actions. We believe these factors in conjunction with anticipated broker deposit pay downs and enhanced yields on our overall securities portfolio has our balance sheet well positioned heading into the fourth quarter and into 2026. Looking ahead, we're projecting our fourth quarter margin to be in the 3.3% to 3.35% range. Our quarterly provision expense decreased to $227,000 from $2.4 million reported in the previous quarter. The growth-related provision this quarter was offset by the adjustment to our qualitative factors specifically an improvement in our CRE concentration ratio which decreased to 271% from 301% in the previous quarter. This decrease was due to the downstream of $45 million of proceeds from our sub-debt issuance to the bank as equity capital. Additionally, our asset quality continues to remain robust with non-performing assets comprising 0.22% of total assets and net charge-offs to average loans of 10 basis points on an annualized basis. Our allowance for credit losses is now at 0.93% of total loans. Operating non-interest income after adjusting for the gain in sale of our insurance operations and the loss on the securities restructuring was $8.4 million which is $500,000 lower than the previous quarter. As a result of the sale. All other income items remain consistent with our expectations. Operating non-interest expenses after adjusting for previously noted items totaled $32.6 million aligning with results from the prior quarter. We made progress again in our operating efficiency ratio which improved to 64% compared to 66% from the previous quarter. Our ongoing commitment to expense management has allowed us to maintain a level of expense base over the past four quarters and continue to trend positively towards our long-term efficiency goals. For the fourth quarter, with insurance operations removed, non-interest income is projected to be approximately $7 million and non-interest expense is expected to be in the range of $32.5 million to $33 million. Salary and benefit expenses are anticipated to range from $19 million to $19.5 million comparable to the previous quarter due to higher levels of variable compensation and anticipated costs associated with the new hires. Both our bank consolidated Tier two capital ratios increased during the quarter primarily due to the sub-debt issuance. Our total consolidated risk-based capital ratio rose to 13.3% up from the 11.1% in the previous quarter and the company's TCE ratio also improved to 7.8%. Looking ahead, we are confident that our capital ratios are appropriately balanced and well-positioned to sustain growth while optimizing returns on equity. With that said, I'll turn it back over to William. William Carroll: Thanks, Ronald. I want to reiterate again the value proposition with our company, drawing your attention back to page seven of our deck. We are successfully executing on the leveraging phase of growth for our company. We hit our 112% ROE and ROE targets this quarter. And have confidence that this will build from here as we gain even more operating leverage. We're building a great franchise. We're in arguably some of the most attractive markets in the country. And have put together a team that is rapidly moving us forward. You've heard me say before, I believe we are one of the Southeast's brightest stories. Outstanding markets, strong experienced bankers, coupled with a great operational and support team, plus very nice complementary business lines. We expect the remainder of 2025 to have a similar look to what we've seen in the last few quarters. And I believe this will continue into 2026. Our focus will be on doubling down on this current strategy. Getting deeper into our markets and our business lines. As I mentioned, pipelines are good and I think we can continue growing at this high single digits plus pace. On talent acquisition, this continues to be a focus as well. Recruiting is a process. We've added a number of great bankers this year, and have several more in our pipelines. Made some outstanding additions in the third quarter. And I believe we are included with a very small handful of banks that have built a culture where outstanding regional bankers want to work. We will continue to look for these organic growth opportunities and will remain very focused on recruiting. One of the reasons for our successful execution on adding great people is our culture. Arguably, one of the biggest highlights for the quarter for us internally was our company being named to Fortune's list of best workplaces. It is an honor we don't take lightly, and a big shout out to our people team led by Becca Boyd as we continue with huge accomplishments with the culture of our company. So to summarize, we're positioned well for our clients, our associates, our shareholders. We are executing, growing revenue, EPS, and book value while staying prudent on expense growth. We remain optimistic around our margin, as new production stays strong and as we see the tailwind coming with rate reset on our loan portfolio, over the next couple of years. Credit continues to be very sound and we're seeing great new client acquisitions coupled with great overall energy around our company. I appreciate the work of our SmartFinancial, Inc., SmartBank team and the efforts of all of our associates. I'm very proud of what we have going on here at SmartFinancial, Inc. And I'll stop there and open it up for questions. Edra: Thank you very much. Our first question comes from Brett Rabatin with Hofde Group. Your line is now open. Please go ahead. Brett Rabatin: Hey, good morning, guys. Thanks for the question. Wanted to start maybe, William, you mentioned some hires, and I think in the past, you've said the Alabama franchise could double in size over time and you felt pretty optimistic about Alabama. Can you talk maybe about where the hires were in the geographies? And then just, thinking about Alabama, just any update on the growth outlook for that franchise in particular? William Carroll: Yeah. Brett, thanks. It has. You know, as far as just geography, it's really been fairly evenly spread. You know, I think last quarter, I think we've talked about we had we hired several, and then we had several in the pipeline. We continue to add those. We added a couple in Alabama, added a couple in Tennessee, over the last little bit. And so it's really been throughout all of our zones. I do think we're still extremely bullish on Alabama as we're getting started. We're bullish on all of our markets. But we're seeing a lot of this Alabama growth starting to catch stride, especially with some of these teams that we've got in the Birminghams. In the Auburns, the Dothans, the Montgomery's. Those offices really are starting to generate some great momentum in Mobile too. I know Miller and I have been we've done we've been on we've been on the road a lot the last several weeks. And so we've been in most all of those markets over the last little bit. And it's exciting. A lot of new folks coming on. We had a new ad in Panama City. Did have a new ad in Murfreesboro as well. So it's really been across the board, Brett. But we're continuing to focus not just on Alabama, really all of our zones. That had you know, like I said, Florida as well. We're seeing some nice Panhandle opportunity there. And don't see that slowing down. Yeah. Yeah. It's just really been across the board. So again and I made the comment in here the momentum that we've got really everywhere in the company is just really good right now. Our culture's good. We're attracting some great bankers and you know, and our existing legacy teams are performing extremely well. So we're kinda hitting on most all cylinders. Still got always still got work to do and gaps to close, but it's been really good. Brett Rabatin: Okay. That's helpful. And then on the margin guidance for the fourth quarter, obviously a lot is going into that. Wanted to make sure I understood of the guidance relative to the liquidity that you added in 3Q. How much of that drains out? How should we think about maybe the average balance sheet size in the fourth quarter, you know, and how that might impact NII. Yeah. William Carroll: Ronald, do you wanna talk a little more on the margin detail? Ronald Gorczynski: Yeah. You know, a lot of our cash on the balance sheet today will be more deployed. You know, we did $40 million for the sub-debt. Another $100 million for brokered, and we expect to shrink some of the cash put into loans. So I don't think our asset size of our balance sheet's gonna move anything materially. We're just gonna use really the cash on hand to fund most of the production for Q4. Brett Rabatin: Okay. That's helpful. Then if I could sneak in one last one, you mentioned, William, you know, focused initiatives and next in the next year. Does that increase productivity, like AI, so you can have bots doing work that maybe frees up FTEs or any thoughts on how much that might add to an expense base? William Carroll: You know, it really you know, what we've done, Brett, over the last little bit, as I said, we've really worked and had some very favorable outcomes with some new contract renegotiations on several fronts across the company. But some of the stuff that we're doing in tech I think, is allowing us to get some expense reduction so we can reinvest. I obviously, Ronald will continue to quarterly kind of give our quarterly non-interest expense guidance moving forward. I don't see it having a really meaningful impact from an increase standpoint, even these new initiatives. I think we've got those kind of built in kind of where we think run rates are today. But, we've got some great platform enhancements. We're looking at AI. We've started using bots. I think we will continue to do more of that. We're looking at some new things on the digital front as well from a consumer-facing digital piece. We're leveraging Copilot a lot. In our company today. And I do think it overall, I think it increases efficiency. I don't know yet if it doesn't necessarily don't think it necessarily impacts you in from a spot where we're gonna look to reduce that. But I do think it continues to allow you not to add staff as you scale. And I think that's the biggest thing. We're seeing a lot of tools that we're starting to use. I know we've got great support stuff going on, our risk platform tools. Are very helpful. We're spending a lot of time, you know, evaluating risk, evaluating fraud in your company. So a lot of those technologies, I think, will allow us to continue at current staffing levels. Or maybe add just a few instead of adding a lot over the coming year. So it's kind of a mix it's a mixed bag. There's a lot of different moving parts to it, but I'm really excited. I think our technology team is as good as we've ever had it in our company today. And I feel really good about our ability to advance that while still staying within a very reasonable expense profile. It's as much a reallocation and reinvestment as it is. Ronald Gorczynski: Well, additionally, the first sliver of this will be to you know, we wanna provide our clients with better experience, easy to do business easier to do business with. So that's really our first focus when we're going down this path. Brett Rabatin: That's all really helpful. Thanks so much, guys. Ronald Gorczynski: Thanks, Brett. Edra: Our next question comes from Russell Gunther with Stephens. Your line is now open. Please go ahead. Russell Gunther: Hey, good morning, guys. I wanted to begin with just a follow-up on the expense. So six consecutive quarters of positive operating leverage. You've talked about continuing to hire bankers as the opportunity arises. We just touched on the expense initiative the tech initiatives. So how are you thinking about that streak of positive operating leverage going forward? Is that something we should expect to see over the course of 2026 alongside this franchise investment? William Carroll: Yeah. I'll start, and then, Ronald, maybe you can add some additional color as well. Yeah, Russell. I think so. I mean, you know, when you look at where the company's positioned today, we're really bullish on our ability to continue to grow that revenue line. Again, the production that we're seeing happen throughout all of our markets, the repricing that we've got going on, we're gonna get we're gonna continue to get that revenue lift. You know? And it's definitely gonna outweigh our expense run rates. Now we're gonna wanna continue to invest and add people but we're gonna do that balanced as we grow this revenue line. I think it's really important for us right now to continue hitting these operating leverage targets over the next few quarters. We really believe we can do that. We feel good. We're starting to run Air 26 models and feel very good about where our company can be. Again, we've gotta execute. We've gotta do the right things to do that. But, we've demonstrated our ability to do that. In '24 and '25. We think we can continue that in '26. So, yes, I do think we can continue to increase this consecutive streak of gaining operating leverage. But Ronald, I have any additional comments that you've got. Ronald Gorczynski: Yeah. No. Exactly right, William. You know, we're probably you know, again, we're not going into '26 guidance, but we're probably keeping our band tight. We've been focused on containment for the prior four or five quarters. And we're probably looking around the 34, if you want numbers, 34 to max $35 million range for the full year next year. So yes, we will be focused on containing it with our growth. Russell Gunther: That's great color, guys. I appreciate it. And then just switching gears, to the margin. Appreciate the sort of level set for 04/2025 given the moving pieces in March. You give great detail in the deck, around the average earning asset repricing schedule. And in the past, you've talked about how that would translate to about two to three basis points of margin expansion quarterly. Is that still sort of the range you're thinking about as we move beyond April, or have some of the actions taken this quarter changed that in any way? Ronald Gorczynski: No. Actually, you know, the prior quarters was two to three basis points. We're pretty bullish in our margin expansion going into 2026. Overall, I think we're probably looking at five to seven basis points expansion quarter over quarter for '26. Russell Gunther: That's very helpful. Scott. Thank you, guys. Okay. Thanks for taking my question. Thanks, Russell. Edra: Our next question comes from Catherine Mealor with KBW. Your line is now open. Please go ahead. Catherine Mealor: Thanks. Good morning. Ronald Gorczynski: Good morning. Edra: Maybe just one follow-up on the margin on the deposit side. With growth improving as much as it has into next year, how do you think the deposit beta could be on the next 100 basis points of cuts versus what we've seen on the past 100 basis points of cuts? Just given I think we'll see better growth rates coming, you know, in the next the next course of the year. Ronald Gorczynski: Yeah. I think I think, for the variable intend to, as best we can, is to really follow dollar or basis point per basis point. So we're still targeting 45%. I know we're probably in the thirties right now, but we wanna target that 40% range beta. Catherine Mealor: Okay. And from the past twenty-five of cut, I know it's early, but have you already seen the ability to do that? Ronald Gorczynski: Yes. Yes. We have. William Carroll: Yeah. We've been trying to step down, Catherine, a little bit as we were. You know, we've got we have we have some of the deposits are tied directly to, the rates or market rates. And so those come down as rates come down. Some are more correlated. Some and that gives us the ability to move a little bit faster in some other too. So, yeah, we've been able to move those down and still pick up the growth that we've needed. Teams have done a nice job to be able to do that. And I think, yeah, we're still staying right there in market and staying on top of of what's going on in all of our different zones, and each of our different zones have different competitive pressures. And different competitors, but, but we've done a nice job being able to pull that down. Catherine Mealor: Okay. Great. Then just a quick question on fees. Any outlook for fees as we go into next year of just things to be aware of that could drive better fee growth? I know that the insurance fees settled be over the moving piece. I was just kind of curious on how we're seeing that fee growth into twenty-six. William Carroll: Yeah. I'll start, and then, Ronald, I'd love to get your you know, some color Catherine as well on that. We yeah. We've got several things working. Again, yeah, we'll kinda reset without that insurance component line item going forward. But, yeah, we've got I think we still got some really good plans when you look at fees for us on the whole. Continue to think that that's gonna, have the ability to trend up. I know you know, we've talked a little bit about payment rails and renegotiation. I think we've got some things that we're working on on our, on our interchange income. I did mention I think there's some opportunities there. And I did in my comments our mortgage unit. I'll tell you. Our mortgage unit is having probably as good a year as we've ever had. And really excited about what that mortgage team is bringing to the company. We're seeing, as we've grown our footprint, grown our platform, we continue to add some, great new sales team members on the mortgage side, and our legacy team continues to perform well. So that's a, that's I think that'll be a plus. You know, our investments arm continues to really execute, you know, continue to grow our AU in there. We've added a really nice producer in one of our Alabama markets. New FA down there this year. Yes. And, you know, Ronald, I know we talk we always talk about TM. Well, TM is a piece of it as we continue to grow that TM platform. I know that those dollars continue to just kinda build and become a really nice annuity. So Catherine, I think there are several pieces. I don't know, Ronald, if there's any others that you think of, but I do think we'll continue to get some nice growth. We'd love to see that accelerate. That's going to be a strategic focus for us next year. But I know, Ronald, any comments on that from you? Ronald Gorczynski: Other than, you know, more like more looking at the customer fees and making sure more market. But, no, you hit all the highlights, William. Yeah. Catherine Mealor: Okay. Great. Thank you. William Carroll: Thanks. Edra: Our next question comes from Steve Moss with Raymond James. Your line is now open. Please go ahead. William Carroll: Maybe just starting here on loans, just on the pipeline here, Bill, you sound really optimistic on things. So I'm assuming it's going to be likely to be a really good fourth quarter. Just kind of curious as to is that pipeline enough to support double-digit growth into 2026 Again, I keep guiding to kind of the high singles. We've been able to beat that a little bit. You know? And you know, I think we'll be right there I think we'll be right there at that plus minus 10 number. You know, that's and that's a that's a big bogey as we get larger. I'll tell you, one of the things that we talk about a lot internally you know, the production levels that we've had have really been outstanding. Again, the teams are doing a nice job. You know, we're still seeing the payoffs in paydowns that that, you know, that'll you know, a lot of our as we read and look at other releases, and see a lot of other things going on the market, you know, we're not immune to that. We're getting a lot of pass paydowns. It's just our production is so strong It's still allowing us to get up there and kinda hit this 10% ish number. So, you know, that's know, that's that's a lot to continue to ask our team to do. But as we look over the at least the near term, I do think we can continue at at or around that pace. Again, pipelines are solid, you know, when you're out when you know when we're out in these markets and and with the rents at renting a lot of them, the miller and I are in a lot of them. I mean, we're out, and there's just there's a there's an energy and a really good calling effort. Going on throughout, throughout the company. So, yeah, I think we can continue that know, there might be a quarter that we're a little lighter. Little heavier, but I still think we'd be right around that plus minus 10. Ronald Gorczynski: Yeah. I like the markets. Okay. And they're just all so positive, and the teams seem to be so positive. It does get harder to feed the beast, but I think we're certainly up for. William Carroll: Right. And maybe just in terms of being the beast, I hear you guys in terms of hiring as well. Just curious, you know, as you think about I know you guys are always opportunistic, but know, you obviously have merger disruption in your markets. You'll kind of do you think there's a possibility of a step up in hiring over the next twelve months Just kinda curious. I know you guys are talking about positive operating leverage, but just curious on that aspect expense. William Carroll: Yeah. I'll tell you. See, we're we we're all we're very selective as we go through this hiring process. I you know, I don't necessarily think it's gonna pick up dramatically. I think couple of reasons. I think that it you know, you the disruption that you we see in the market I mean, these are these are good banks, they're gonna be they're gonna be fighting to hold on to good talent. And, you know, and I just and I think over the over a period of time, you may see some you know, dislocation in in in some different bankers and some of those, you know, different markets throughout the Southeast. But I don't think there's a lot. I think we're just gonna continue to be diligent and trying to find just incrementally good bankers that that fit our culture, that fit our teams, And I think we're probably gonna be I would imagine, looking into 26. Kinda keeping the same tight pace that we saw in '25, which will just be just, you know, add great talent. We can find it. Like I said, I think we probably in the process. I think we've added Nate, I think we stopped. We're probably maybe 12 to 15 net for, you know, kind of what we've done, you know, in the pipeline or on we've added this year, I think we'll continue to do that. And, I I think Steve, for us, it's just gonna be just continuing to be diligent. Again, find the right types of bankers that fit the types of of of deals that we wanna look at. William talks off about ADR, always be recruiting. Always be recruiting. That's talent and clients, and I but I think it's it takes a special we're recruiting the quality, not the quantity. And I think that's important for us, culture fit and who they are. Yeah. Alright. Appreciate appreciate that color there. William Carroll: Maybe just one more for me here on the loan loss reserve release. Ronald Gorczynski: Did I understand that correctly because you did I hear correctly that downstream some capital and therefore a lower reserve ratio lower, CRE concentration ratio, that was kinda one of the qualitative factors that drove the reserve lower. Ronald Gorczynski: Yeah. Our, our share concentration ratio one of our qualitative factors was there was our because we're over to 300 that we downstream $45 million from, you know, the parent to the bank, it lowered it to $2.71. Yeah. That was a that was one of the main factors. Okay. William Carroll: Okay. So going forward, you know, relatively stable to maybe a modest build on reserve ratio as as you continue to grow here? Ronald Gorczynski: Yes, sir. Correct. Okay. Awesome. Well, I'll step back in the queue. I really appreciate all the color here, and nice quarter, guys. William Carroll: Thanks, Steve. Thanks, Steve. Edra: Thank you very much. Our next question comes from Stephen Scouten with Piper Sandler. Your line is now open. Please go ahead. Stephen Scouten: Good morning, guys. Just wanted to clarify a couple of things real quick. Ronald, did you say that 45% of your deposits are variable costs? And is that to say, if I heard that right, that those are directly indexed? Ronald Gorczynski: We have the ability to move 45%. We have about 32% that are directly indexed, and we have the remainder that's tied to internal index that will move with the rate moves. So, yeah, 45% all in, though. Stephen Scouten: Okay. Great. Perfect. And then on the on the NIM trajectory, I think you said five to seven basis points a quarter in 2026. Is that your expectation each quarter in 2026? Or just wanna make sure I'm hearing that right. Ronald Gorczynski: Yes. Each quarter in 2026. Stephen Scouten: Great. Fantastic. Okay. And then last thing, think I know Catherine maybe had asked this on the on the fee revenues and insurance. Did you give a guidance for expected fourth quarter overall fee revenues? Ronald Gorczynski: Yes, $7 million. Stephen Scouten: $7 million. Great. Okay. Perfect. And then, on the broker deposit front, you obviously had some nice reductions here this quarter. Sounds like think you said maybe another 111 next quarter. So I'm doing math remotely correct. Like maybe a $120 million or so left in that ballpark. What's the plan for the remaining broker deposits? Would the objective still to get those down from here? Or is that kind of an acceptable level moving forward? Ronald Gorczynski: Yeah. We were at $268 million in June. September at $164 million. Minus the $111 million. Yeah. We intend to as soon as they are due, we're gonna pay those down. So yes, we're looking not to have brokered deposits at someday. That's our goal objective is not have those. Stephen Scouten: Okay. Great. And then I guess last thing for me, you know, the stock's been trading fantastically. The results have been great, kind of ahead of schedule on our operating revenue line. Sounds like hiring has continued well. Do you think about M&A as a piece of that puzzle at all? I think there were some a note maybe in the slide deck, that said you know, maybe more trying to find the verbiage. Maybe more strategic than it was previously. M&A focus shifted to strategic and or needle moving opportunities. I guess, maybe if you could kind of speak to that comment and what that might look like? William Carroll: Yeah. Steven, us, it really and I'm in my comments, said we've our strategy really hasn't changed a ton. A lot of it is just, again, doubling down on this organic strategy, deeper into the markets. That's strategy one a. You know? Yeah. Yeah. I think, you know, we're really not shifting that to really look at M&A. But we've said and continue to say, you know, we will evaluate you know, needle moving opportunities that make sense. I've said you know, before, we don't necessarily, you know, we don't wanna do M&A just to be bigger. You know, we want if we did it, we'd want it to make us better. And sometimes that's just tough to find. You know, if we find that unicorn, we find the right piece that fits us and we would evaluate. But, really, I mean, it's I say that because, you know, you never know what could come down the road. But, man, our strategy is really focused on continuing just to lever you know, this balance sheet and grow as we've done the last couple of years the way we've done it. That's the primary focus. You can't ever say you're not gonna look. I think we are open to look. But William talks often about now, you know, organic is one a and M&A would be one b. M&A might be one c, but we're continuing to look. Yeah. That makes a lot of sense. Well, the strategy is working, so I guess if it ain't broke, don't fix it. Right? So great job, guys. Stephen Scouten: Well, it is. You know, it is. But I but I think I do think you know, and as we've talked to you and a lot of your colleagues, I mean, it's just you know, it's really important for us to message what we've messaged. It's you know, we've built this company by design. We were, again, a little bit kinda mile wide inch deep. By design for a reason. And we it's been very important for us gain this operating leverage and do that. And that's done that. We've executed well. We're executing well. We still got room to grow, and we've got wanna continue to see this move forward. So not really changing anything, on our outlook moving forward. It's just we're gonna just keep doubling down on what we're doing. Stephen Scouten: Perfect. Thanks a lot. Edra: Thank you very much. Miller Welborn: Thanks. Edra: Currently have no further questions. So I will hand back over to Miller Welborn for any closing remarks. Miller Welborn: Thanks, Edra, and thanks, everybody, for being part of the call today. We are very excited about where we are and where we're going. Thank you for being part of the SmartBank family, and have a great day. Edra: Thank you very much, Miller, and thank you to all the speakers for joining today's line. That concludes today's conference call. Thank you, everyone, for joining. You may now disconnect your lines.
Operator: Good morning, ladies and gentlemen, and welcome to the M/I Homes third Quarter Earnings Conference Call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press 0. This call is being recorded on 10/22/2025. I would now like to turn the conference over to Phil Creek. Please go ahead. Phil Creek: Thank you for joining us today. On the call with me is Robert Schottenstein, our CEO and president, and Derek Klutch, president of our mortgage company. First, to address regulation for disclosure, we encourage you to ask any questions regarding issues that you consider material during this call because we are prohibited from discussing nonpublic items with you directly. As to forward-looking statements, I want to remind everyone that the cautionary language about forward-looking statements contained in today's press release also applies to any comments made during this call. Also, be advised that the company undertakes no obligation to update any forward-looking statements made during this call. With that, I'll turn the call over to Robert Schottenstein. Robert Schottenstein: Thanks, Phil. Good morning, and I too want to thank you all for joining us today. Despite the continued challenging market conditions and choppy uneven demand environment, we had a very solid third quarter. We generated $140 million of pretax income, though down 26% from last year's record third quarter results. Our pretax income percentage was a very solid 12% of revenue with gross margins of 24% and resulted in a strong return on equity of 16%. Consistent with our first and second quarter commentary, and also consistent with what our industry peers have reported, housing demand and overall market conditions remain somewhat challenging. In our view, housing conditions are just okay. Certainly not great, but still just okay. Probably about a C plus. We continue to incentivize sales and drive traffic primarily with mortgage rate buy downs. The cost of such buy downs is the primary reason for the decline in our gross margins. We will continue to use such rate buy downs where necessary on a subdivision-by-subdivision basis in order to drive traffic and generate sales. In terms of our third quarter performance, we closed a third quarter record 2,296 homes, a 1% increase compared to a year ago. Our third quarter total revenue decreased 1% to $1.1 billion. We sold 1,908 homes during the quarter, down 6% compared to 2024's 2,023 homes sold. Our monthly sales pace averaged 2.7 homes per community compared to a monthly pace of 3.2 homes in 2024. Year to date, we have sold 6,278 homes, down 8% from a year ago. Encouragingly, we continue to see quality buyers in terms of creditworthiness with a strong average credit score of 745 and average down payments of around 16%. Our Smart Series, which is, as we've stated previously, our most affordable line of homes, continues to be an important contributor to sales performance. During the third quarter, Smart Series sales comprised about 52% of total sales compared to just about 50% a year ago. We continue to make important progress in our cycle time. Our third quarter cycle time was about ten days better than last year as well as about ten days better than this year's first quarter. We ended the quarter with 233 communities and remain on track to grow our community count, balance of 2025 by about 5% from 2024. As Derek Klutch will review in a few minutes, our mortgage and title operations had a very strong quarter, highlighted by capturing a record 93% of our business in the quarter. Now I will provide some additional comments on our markets. Our division income contributions in the third quarter were led by Columbus, Chicago, Dallas, Minneapolis, Orlando, and Cincinnati. New contracts for the third quarter in the Northern Region decreased by 17% and new contracts in our Southern Region increased by 3% compared to last year's third quarter. Our deliveries in the Southern Region increased by 8% and our deliveries in the Northern Region decreased by 7% from a year ago. 59% of deliveries came out of the Southern Region, 41% out of the Northern Region. We feel very good about all 17 of our markets. That said, we are expecting particularly strong full-year results in Columbus, Chicago, Dallas, Minneapolis, Cincinnati, Orlando, and Charlotte. We have a strong land position. Our owned and controlled lot position in the Southern Region decreased by 6% compared to last year and increased by 3% versus last year in the Northern Region. 36% of our owned and controlled lots are in the North, the other 64% in the Southern Region. Company-wide, we own approximately 24,400 lots, which is slightly less than a three-year supply. In addition, we control approximately 26,300 lots via option contracts resulting in a total of 50,700 owned and controlled lots, equating to about a five to six-year supply. With respect to our balance sheet, we once again ended the quarter in excellent shape. During the quarter, we extended our bank credit facility by five years to 2030 and increased the borrowing capacity under that line from $650 million to $900 million. We ended the third quarter with an all-time record $3.1 billion of equity, equating to a book value per share of $120, up 15% from a year ago. We had zero borrowings under the $900 million unsecured line and over $700 million in cash, all resulting in a very strong debt to capital ratio of 18%, down from 20% last year, and a net debt to capital ratio of negative 1%. As I conclude, let me just say, we remain quite optimistic about our business and continue to believe that our industry will benefit from the undersupply of homes and growing household formations throughout our markets. Our backlog remains healthy and with our strong balance sheet and strong liquidity, we have tremendous flexibility as conditions evolve. We are well-positioned as we begin 2025. With that, I'll turn it over to Phil. Phil Creek: Thanks, Bob. Our new contracts were down 6% when compared to last year. They were flat in July, up 4% in August, and down 18% in September. Our cancellation rate for the third quarter was 12%. Last September sales were strong, it was our second highest September in our history. During the third quarter, our sales were really pretty consistent. We sold 618 in July, 660 in August, and 630 in September. 50% of our third quarter sales were to first-time buyers, and 75% were inventory homes. Our community count was 233 at the end of the third quarter, compared to 217 a year ago, up 7%, with the Northern Region up 9% and the Southern Region up 6%. The breakdown by region is 96 in the Northern Region and 137 in the Southern Region. During the quarter, we opened 14 new communities while closing 15. We currently estimate that our average 2025 community count will be about 5% higher than last year. We delivered a record 2,296 homes in our third quarter, delivering 89% of our backlog. About 35% of our third quarter deliveries came from inventory homes that were sold and delivered in the quarter. At September 30, we had 5,000 homes in the field versus 5,100 homes in the field a year ago. Revenue decreased 1% in the third quarter and our average closing price in the third quarter was $477,000, a 2% decrease when compared to last year's third quarter average closing price of $489,000. Our third quarter gross margin was 23.9%, down 320 basis points year over year, with 60 basis points of the decline due to $7.6 million of inventory charges. The breakdown of the inventory charges is $6 million of impairments and $1.6 million of lot deposit due diligence costs that were written off. Our construction costs were down about 1% in the third quarter compared to the second quarter. Our third quarter SG&A expenses were 11.9% of revenue compared to $11.2 million a year ago. Our third quarter expenses increased 6% versus a year ago. Our increased costs were primarily due to higher community count and higher selling expenses. Interest income, net of interest expense for the quarter was $4.5 million. Our interest incurred was $8.7 million. We had solid returns for the third quarter given the challenges facing our industry. Our pretax income was 12%, and our return on equity was 16%. During the quarter, we generated $157 million of EBITDA compared to $198 million in last year's third quarter, and our effective tax rate was 23.8% in the third quarter compared to 22.9% in last year's third quarter. Our earnings per share per diluted share for the quarter decreased to $3.92 per share from $5.10 last year, and our book value per share is now $120, a $16 per share increase from a year ago. Now Derek Klutch will address our mortgage company results. Derek Klutch: Thanks, Phil. Our mortgage and title operations achieved pretax income of $16.6 million, an increase of 28% from $12.9 million in 2024's third quarter. Revenue increased 16% from last year to a third quarter record $34.6 million due to higher margins on loans sold, a higher average loan amount, and an increase in loans originated. The average loan to value on our first mortgages for the third quarter was 84%, compared to 82% in 2024's third quarter. We continue to see an increase in the use of government financing, as 55% of the loans closed in the quarter were conventional, and 45% FHA or VA, compared to 66% and 34% respectively, for 2024's third quarter. Our average mortgage amount increased to $406,000 compared to $403,000 last year. Loans originated increased to 1,848, which was up 9% from last year, while the volume of loans sold increased by 19%. Finally, as Bob mentioned, our mortgage operation captured 93% of our business in the third quarter, and this was up from 89% last year. Now I'll turn the call back over to Phil. Phil Creek: Thanks, Derek. Our financial position continues to be very strong, highlighted by Moody's recent upgrade of our credit rating and the extension of our unsecured credit facility to September 2030, which increased our borrowing capacity from $650 million to $900 million. We ended the third quarter with no borrowings under this facility and had a cash balance of $734 million. We continue to have one of the lowest debt levels of the public homebuilders and are well-positioned with our maturities. Our bank line matures in 02/1930, and our public debt matures in 2028 and 02/1930. Our unsold land investment at 09/30 is $1.8 billion, compared to $1.6 billion a year ago. At September 30, we had $931 million of raw land and land under development, and $859 million of finished unsold lots. During the third quarter, we spent $115 million on land purchases and $181 million on land development for a total of $297 million. At the end of the quarter, we had 776 completed inventory homes and 3,001 total inventory homes. Of the total inventory, 1,245 were in the Northern Region, and 1,756 were in the Southern Region. At 09/30/2024, we had 555 completed inventory homes and 2,375 total inventory homes. We spent $50 million in the third quarter repurchasing our stock and have $100 million remaining under our current board authorization. Since the start of 02/2022, we have repurchased 15% of our outstanding shares. This completes our presentation. We'll now open the call for any questions or comments. Operator: Thank you. Ladies and gentlemen, we will now begin the question and answer session. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. Your first question comes from Kenneth Zener with Seaport. Good morning, everybody. Kenneth Zener: Good morning. If we could talk about orders a little bit, you had, as we measure, kind of normal seasonality, which is, you know, pretty impressive, and they so-so market, you reflect. Can you talk to that dynamic of you wanting to achieve right, what we see as seasonality? I mean, you might look at it differently. But and the use of incentives, and if you could quantify the incentives level in general and the mix between price and mortgage buy down closing costs, please? Robert Schottenstein: Yeah. Great question. Clearly, a somewhat challenging market, unpredictable too. You know, from week to week, a fair amount of intramarket volatility within our divisions. One month, certain of our divisions might have stronger sales and unexpectedly, things slow down then they pick back up. As I said, I think things are just okay. That said, it's critically important for us to drive traffic and do everything we can to incent sales in this market. And I don't think we're alone in this, but we have concluded that there is no better way to do that than through the selective use of mortgage rate buy downs. We have not offered any specifics on the exact amount that we're spending. It tends to change over time based upon what's happening in the market. You can go on our website and you can see that both with respect to conventional as well as FHA, we're offering rates in the very high fours. And that has we have found that to be a pretty good sweet spot to do what we are currently doing. Absent the inventory charges that Phil mentioned that accounted for about 60 to 70 basis points of our gross margin decline, our margins are down about 250 basis points year over year. And I would just simply say, that the majority of that is due to mortgage rate buy downs. There is some subdivision by subdivision incentivization, you know, that might be going on here and there. But the significant majority of it is rate buy downs. And then, frankly, some of the other decline is just increased cost on the land side. We've had a lot of success. I don't think we're alone on this, which is also encouraging. You don't want to be the only one doing something because it may not be sustainable. But we've had a lot of success on our sticks and bricks. Our, you know, our raw materials and cost with our subcontractors and suppliers relatively flat to down. Which has been very encouraging notwithstanding all the chatter about the impact of tariffs. We have seen no impact of tariffs to date. I think the jury's out on how things shake out as we move into next year. But thus far, we haven't seen any of that flow through to our results. But you know, we're gonna continue, as I said, Ken, to use rate buy downs as the primary driver for both traffic and sales as long as it keeps working. And, you know, if rates were to drop, there's been a little bit of movement recently. It didn't seem to have that much of an impact on demand. That's a bit of a fit and start kind of a situation. But if rates begin to drop, the cost of such buy downs hopefully will drop as well. And then more importantly, if we do see a drop in rates, that could help unlock the existing home market which, you know, we're getting these results really without much help from the sale of existing homes. That could be a big tailwind for housing if and when that begins to unlock because even though inventory levels of existing homes in our markets are not anywhere near the all-time highs, they are up considerably year over year and over the past two years and past three years. It's a long answer to your question. I hope it tells you most of what you asked. Kenneth Zener: Yes. And appreciate it. My second question, because you report this South, as a segment versus the North, the South obviously has Texas, Florida, which can be different which are different markets. Gross margins were about the same last quarter in those regions, EBIT a little different. But could you comment on kind of prior to the Q coming out, the gross margin trends we're seeing in those two segments? And if you any comments you could to illuminate, you know, the aggregation of Texas and Florida would be appreciated. Thank you, sir. Robert Schottenstein: I'll say a couple things about it. For us, Orlando on the East relative East Coast is stronger than Tampa and Sarasota. Fort Myers, we have a relatively new operation. So it's not really that meaningful in terms of results. But demand and margins for us are clearly holding up better in Orlando than they are in Tampa and Sarasota. I think Austin in Texas, that market was red hot a couple of years ago. And over the last twelve to eighteen months, it's cooled considerably. It's probably struggling the most in Texas. We have seen margins drop also in Houston and Dallas. But comparatively, I think they're still holding up quite well. We're expecting, as I said, a strong year in Dallas. Charlotte and Raleigh have both been pretty good. And as I also mentioned, we're expecting a strong year in Charlotte. So, you know, it's a not to be snarky, but it's a bit of tale of 17 cities. They're all a little bit different. And, you know, we've long said that this business is a subdivision business. We got about 233 of them, and we try to manage them that way. But within the cities, what I've just described is probably a pretty good snapshot from 10,000 feet. If you look also this is Phil. If you look at community count, you know, last year, our average community count was up about 7%. And this year, you know, our estimate is we'll be up about 5% on average. We feel good about that. If you look inside those numbers, as I said, both regions do have community count growth. Our Florida community count has actually been down a little bit this year. Our Texas community count's been up a little bit. And as Bob said, in general, you know, our Midwest and Carolina business as far as pricing and margins and so forth held up a little better than Texas Florida. But overall, we feel really good about where we are. Thank you. Kenneth Zener: Thanks. Operator: Your next question comes from Alan Ratner with Zelman and Associates. Your line is now open. Alan Ratner: Hey, Bob. Hey, Phil. Good morning. Thanks for the information so far. So, Bob, a lot of chatter over the last few weeks about some tweets from our administration and the FHFA about the homebuilders business. And I'm just curious, have you had any discussions with the administration or have any thoughts on, I guess, what some of the headlines are out there? Robert Schottenstein: We have not had any discussions at this point, and nothing is currently planned for us. Obviously, we're aware of it. Look. I think the I don't know if I can comment much more. I read what you read. I think that the good news from my view and this is both at the local and state level as well as federal, there's a lot of talk right now about what can be done to help unlock, if you will, housing improve affordability. We're seeing it, you know, in a lot of different levels. I was in an event last night where that was the primary topic of discussion as it relates to markets in the Midwest. I'll be at an event in another week or two as it relates to just Ohio, where that is a primary topic. I think people understand how important housing is as a driver of the overall economy. And that, you know, housing while it's certainly by no means dead, it's underperforming. And we need to be building more homes and we need to make sure we do the smartest and best things to help create that environment. I think we'll get there eventually. But if there could be some policies here or there at the local level, you know, we certainly would welcome those. We have long said and I think this view is widely shared, but we have long said that the greatest impediment in my in our judgment to affordability and to improve volume levels is local zoning regulations. And some markets are more favorable than others, but that to me remains the biggest impediment. You know, we're all sick of the NIMBY term, but the NIMBYism and the antigrowth. Again, some markets, the situation is more acute than in others. I think there's a reason why Texas has led the nation in housing production. I don't know if it's 15, 18% of total new home production, but it's a big number. And I think in general, while it's not easy there either, there's just been a much more favorable zoning climate that has contributed to more development, frankly, more affordability. Alan Ratner: I appreciate your thoughts. And, yeah, that seems to be the general sentiment so far is that, at least builders are happy to see it being talked about. So, hopefully, there could be some real change implemented from whatever discussion. Robert Schottenstein: Right. It's always bad when no one wants to talk to you. Be careful what you wish for. And as long as there's conversation, you got a chance. Alan Ratner: Exactly. Alright. Couple quick ones on just the margin both gross and SG&A. So on gross margin, it looks like this quarter, obviously, things are still under a little bit of pressure, but looks like things are stabilized a bit quarter over quarter. I know you don't guide, but, you know, maybe just if you could talk to the puts and takes going forward in terms of land costs flowing through? It sounds like construction costs are stable. Pricing and incentives, I mean, should we are we kind of getting a little closer to the bottom here on margin, do you think? Or is there more room for margins to drop in over the next handful of quarters? Robert Schottenstein: Well, I think we're a lot closer to the bottom than we were last quarter. How close are we? That remains to be seen. Look, going into this year, even though we didn't share this, internally, we believe that our margins would be under pressure somewhere. This was internal budgeting. Between two and three hundred basis points. Because we knew we were gonna have to spend a lot of money on mortgage rate buy downs as we've talked about this call, second quarter, first quarter. Absent the impairments, they're about 250 basis points down year over year. You know, could they drop a little more perhaps? I think we're getting close to some point. And the other thing that's hard to gauge and no one knows the answer to this is, you know, even though we may continue to be spending money on rate buy downs, if the cost drops by 50 to 100 basis points, that's a big plus on the margin side. And Phil, I don't know if you have anything to add on that. Phil Creek: Yeah. The pressures we have really, you know, we said in the third quarter, we sold 75% specs. The second quarter was, like, 73%. So it is up a little bit. And in general, our specs have a lower average sale price than our to be built and they also have a lower margin. So the amount of specs continues to be a pressure. Also, Bob mentioned higher land cost. We do have higher land cost coming through than we did a year ago. The good news is the last couple of quarters, land development costs, which actually were increasing more than the raw land, land development cost seemed to have stabilized. And, obviously, we're being very careful as far as buying new land parcels since we do feel very strong about our land position and also the choppy market conditions. So we're doing all we can. You know, you're always market pricing. We always need a certain amount of volume to come through. But, overall, we think our margins are holding up pretty well. But, again, there do continue to be pressures. And, you know, we have certain internal targets. We want to always have hopefully, double-digit pretax income percentage. We were 12% for the quarter. Given the market, we feel really good about that. Given our size, we feel particularly good about our return on equity. It's lower than it was a year ago, but it's still a very, very, I think, respectable 16%. We've got minimum targets on that that we're hitting. And, you know, we're gonna keep aiming to hit those targets. Alan Ratner: Absolutely. Alright, guys. Well, appreciate all the thoughts, and best of luck in happy holidays if we don't talk before then. Robert Schottenstein: Yeah. Take care of yourself, Alan. Operator: Your next question comes from Buck Horne with Raymond James. Your line is now open. Buck Horne: Good morning, guys. Wanted to go back to those regional splits on the order growth trends between the North and the South, just if I heard correctly, I believe you still had higher year-over-year community count in the North region, but orders dropped off 17%. I know there was a tough comp against last year, but just, you know, sounded like, you know, markets like Columbus and Cincinnati and Chicago were doing better, but just wondering if you can add any color kind of that divergence in order trends. Robert Schottenstein: I think we're very pleased with how well our Midwest markets have held up. You know, they may be off from where they were a year ago, but I think they're, you know, a very strong operation in Columbus since, frankly, Indianapolis. I didn't call out Indianapolis, but we have a much improved operation in Indianapolis over where we were several years ago. Very bullish about that market as well. Chicago is having a very strong year for us as is Minneapolis. And, you know, there's sometimes there's little noise in these numbers, you know, given when new communities open up and, you know, you gotta sort of look over a longer period of time. But, you know, we remain bullish about the Midwest. Bullish about the Carolinas, I don't think Florida's, you know, Florida's has a few struggles here and there, particularly on at least for us on the West Coast. And Texas is a little bit of a transition, but there's still tremendous economic vitality generally speaking, throughout nearly every one of our markets. You know, we're a relative newcomer in Nashville. We've got high hopes for Nashville going forward. Lots of job growth there. Lots of projected household formations. You know, Houston and Dallas continue to be very strong markets. In terms of just total macroeconomic conditions, off a little bit. I get that. Austin slowly coming back. You know, in general, in migration still in Austin. Terrific place. Glad we're there. If we weren't, we'd open up there. So we feel very good about all of our markets. And I think the diversity, you know, you never hit, you know this. You never hit on all cylinders. And if you do, it's lucky. Always something somewhere. And I think it's important to have the geographic diversities, the geographic diversity that we have. And I think it's particularly helpful to us right now. Where, you know, there's a little bit of a slowdown in Florida and, you know, parts of Texas as well, but the Midwest is, you know, as a Midwestern, I'm glad to see the Midwest, you know, standing pretty tall these days. Phil Creek: Hey, Buck. This is Phil. When you actually look at the numbers, as I said, our third quarter sales overall really were pretty consistent. You know, 618 in July, 660 in August, and 630 in September. The real last September, we sold, like, 775 homes. Last September. And the Midwest was really strong last September for different reasons. We do run periodic sales events. Last September was the start of a sales event. So that is really the reason that you're seeing the down sales quarter to quarter. The Midwest sales, as Bob said, really were fairly decent. Pretty consistent through the quarter. It's really just last September was a little unusual. Buck Horne: Gotcha. That's very helpful color. Appreciate that. Phil Creek: Yeah. Thanks for all the details there. Really good. Going to SG&A and kind of selling cost, I think one of your competitors noted that just in this competitive environment, you know, there's a lot of spec homes and a lot of, you know, builders are trying to clear before year-end. And they're one of the tools they utilize is more co-brokers and, you know, utilizing more realtors to try to get those inventory homes cleared before year-end. Are you guys pursuing a similar strategy? Should we think about that being an added cost into the fourth quarter in terms of just selling expenses? Robert Schottenstein: Phil's gonna give you the best and most detailed answer, but I just want to say a couple things first. You know, we've got over 200 more completed specs today than we did a year ago at this time. And, it's probably a little more than we'd ideally like to have. We're very, very careful from a management standpoint on our paying close attention to that broker coop percentage. You know, I wish, frankly, we welcome brokers. We need brokers. Company-wide, we're in the low to mid-seventies, I think, 75, 76 maybe. 77%. I know the exact percentage Phil does. I wish it were lower. We have a lot of, you know, programs that we think are effective in bringing that down without alienating an important part of our selling efforts, which is the third-party brokers. Phil, I don't know if you want to comment any further. Phil Creek: Yeah. When you look at the SG&A, as I said, the actual expenses were up 6% versus a year ago. We have 7% more communities, and you do have cost for every store, maintaining those stores. We have 3% more people. Again, you know, we have 7% more stores, those type of things. We also did have a slightly higher sales commission rate internal and external. Again, trying to drive traffic in sales. So that's how we kind of get to that 6% increase, Buck. Robert Schottenstein: One thing we have not done, there might be one or two minor exceptions, we're not out there incentivizing traffic or sales by offering more money to the third-party brokers. Some of our peers have. We're not doing that. Don't feel we need to do it. And we also think that, it's like a lot of things in life. Once you start, it's hard to stop. Buck Horne: Right. Yep. Alright. That's really helpful. Appreciate that added color. My last, if I can sneak it in, is just given the strength of the balance sheet here and the cash position and the increased financial flexibility you got with the credit facility, is there anything that's necessarily holding you back from, you know, accelerating repurchases into year-end? Working capital needs or otherwise, or, you know, you just want to continue to be very programmatic and consistent on that. Robert Schottenstein: Yeah. I mean, I'll say one thing, and then I think Phil's gonna add to this, which he should. Job one is to grow the company. Job and to do so with a very strong balance sheet. We thought we had a strong balance sheet back in 02/1956. Only to learn that we didn't. Our debt to cap was in the high forties, low fifties. So were many of our peers. We're not going back to that movie. And we're gonna maintain a very, very strong balance sheet with comparatively low debt levels as we are right now. That is our goal going forward. We also want to grow the company. But, you know, when we have this excess cash and for all these other reasons, we think we can also, at the same time without compromising growth, selectively buy back shares. Phil, if you want to add anything. Phil Creek: Exactly. We continue every quarter with our board, you know, to talk about stock repurchases and so forth. We have consistently for the last few quarters, repurchased, you know, $50 million a quarter. As far as the bank line, the bank line was going to mature in December '26. We really did not want to get within a one-year window of that. We just offer safety and flexibility, plus it now is a five-year term. We thought it made sense to go from $650 to $900. We're definitely kind of low leverage, conservative type people. We do like to keep that leverage low, especially during these times. You know, I do have, you know, 3,000 specs, compared to, you know, 2,300 or so a year ago. We think that makes a lot of sense in today's market. Especially take advantage of these rate buy downs, which are a lot more effective, you know, in shorter periods of time. So we're just gonna continue to adapt as best we can to market conditions but, you know, keeping a strong balance sheet and strong liquidity is, definitely job one. Buck Horne: Alright, guys. Congrats. Good luck. Thanks for the color. Robert Schottenstein: Thanks so much. Operator: Ladies and gentlemen, your next question comes from Jay McCanless with Wedbush. Your line is now open. Jay McCanless: Hey. Good morning, guys. Robert Schottenstein: Good morning, Jay. Jay McCanless: Just wanted to ask where your gross margins are right now on spec versus your build-to-order homes. Robert Schottenstein: They're a little lower. You know, it really depends on the community. Every location is a little different. But in general, they're just a little lower than to be built. Jay McCanless: And then, Bob, you were talking about some of your competitors increasing co-broker spend. I guess, in terms of some of the larger competitors who said they might be pulling back a little bit. Are you seeing any evidence of that in the field? Or is everyone selling pretty hard to get lighter ahead of the spring season? Robert Schottenstein: I don't think I made a comment about pulling back. What I said is that we have not elected to pay brokers more to drive traffic and incent sales. Our co-op rate has remained consistent throughout all of our divisions. Probably over the last five years. We've tried to be very consistent on that. Do what we can to have the best relationships we can but not interested in buying the business and fearful of how you go back to where you once were if you start that as I made comment. I don't know if and I'm not saying a lot are doing it, but I know there's a few examples out there of some that are. Whether they've pulled back, I don't know. I don't have current information on that. What was the other part of your question? Jay McCanless: Well, just the, you know, our people we've heard that some of your competitors are slowing down starts. But at the same time, we're hearing a lot of conversation about aggressively selling into year-end. I mean, to me, feels like this is just a normal year where the industry is a little heavy on inventory. People are gonna have to sell aggressively in the year-end. Is that what you're seeing out in the field right now? Or people being a little more reasoned with some of the discounts and incentives they're trying to offer? Robert Schottenstein: A community that's always a community by community discussion. I mean, some builders 100% spec, you know, they're fairly aggressive. Some are not. It just depends on the location, etcetera. And you just need to be aware of what's going on in the marketplace. You know, getting back to kind of our sales effort, we're trying to focus very much on internally, to make sure we're getting all the leads that we can, that we follow-up on the leads, as best we can. We have more people focused on those leads. We have in most of our communities, you know, more than one salesperson. We try to be focused very much on controlling all the things we can control. We're spending more money today on sales training, and driving leads online than we ever than we have in a long, long time. And we're gonna continue to. That's the blocking and tackling of our business. Don't often mention that on calls like this. But I'd rather spend money on that than on realtors. I'd rather spend money on that than on incentives. Now we may have to do both sometime, but it all starts with us. And, it's easy to get complacent during hot markets. But now more than ever, focusing on us is just absolutely the most important thing we can do. And we have an opportunity. I mean, last year, we opened about 75 stores. You know, this year, we're gonna open more than 75 stores. So, again, different location, different product, different price point in many situations. Those are the things we control. So those are the things we focus on, you know, every day and yeah, we do have higher spec limits, but, again, we don't accept going in that specs have to be a lower margin. Hopefully, we're putting the best products on the best lots. And that we're getting paid for that. Because that's the way the business is right now. And, you know, I want to give an I'm gonna give a very specific example. I bragged about the fact that our mortgage and title operations had a tremendous quarter because they did. And I mentioned that we had a record capture rate of 93%. I think a year ago, it was, like, 84% or something like eighty-nine. On the one hand, you could say, well, it should be higher. Because you're so aggressively using mortgage rate buy downs. And that is true. It should be higher. But I think it's even higher than it would be because of the training and the efforts that we're putting on the side of making certain that at each branch, each mortgage and mortgage branch, that we're doing the best we can to help people figure out the financing that's best for them. In this somewhat challenging market. And you know, we could easily be happy with a capture rate of 85 or 88%. It probably be at or near best in class. But with this higher capture rate, not only does that contribute to profitability, but we think it's contributing to sales performance. And every buyer is different. Some buyer, especially more affordable homes, they may very well need help in closing costs. Some builder some buyers do need help, they want a thirty-year fixed lowest rate possible. Some buyers are okay with ARMs. Some are okay with buy downs. So, you know, again, it just depends on what the customer needs. We're not just throwing the most money at every deal we have. Jay McCanless: Understood. And thank you for that. I guess the last one for me, with the balance sheet as strong as it is right now, is there any thought to doing some M&A, especially in the Midwest down into The Carolinas where you're already seeing pretty strong performance? Robert Schottenstein: There's nothing on the horizon. You know, if something happened to show up in one of our existing markets or perhaps in a market that we're not in, that we thought made a lot of sense, I think we take a very serious look at it. I mean, in the last six months, we've probably looked at a couple of deals. But right now, our job is to make sure we keep our balance sheet really strong, to your point, and to grow in our existing markets. Every one of our existing markets has growth goals. You know, we've said this before, and I'll say it again right now, our run rate today is around 9,000 units. You know, we believe in the 17 markets that we're in, that we can grow 13, 14,000 units without opening up in any new markets, just with the headroom that we have within our existing geographic footprint. That if we could grow that way, that would be the one that would be the most desirable. On the other hand, if something showed up and it made sense, you know, we'd analyze it like any other land dealer opportunity. But there's nothing planned at this point. Jay McCanless: Okay. And then one more just to kind of follow on that. Any inclination to talk about 26 community count especially with the amount of lots you guys have built up? It feels like y'all can grow count and unit volumes in 26. Any thoughts on that? Robert Schottenstein: You mean you're asking for guidance on projected community count growth? For 2026? Jay McCanless: I would never ask you for guidance, Bob. I'm just asking for how you're feeling about potential growth for next year. Robert Schottenstein: I think there will be community count growth next year. Yeah. I mean, we own 24,000 lots and we expect to have community count growth next year. Target is always to, you know, grow community count, you know, in that five to 10% range a year. Like I said, last year was seven. This year is probably gonna be about five. Even though we've slowed land purchases down the last couple of quarters. You know, we're still in great shape to continue growth. Jay McCanless: Sounds great. Okay. Thanks, guys. Appreciate it. Robert Schottenstein: Thanks, Jay. Appreciate it. Operator: There are no further questions at this time. I will now turn the call over to Phil for closing remarks. Phil Creek: Thank you very much for joining us. Look forward to talking to you next quarter. Operator: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.
Operator: Ladies and gentlemen, welcome to Avery Dennison's Earnings Conference Call for the Third Quarter Ended on 09/27/2025. During the presentation, all participants will be in a listen-only mode. Afterward, we will conduct a Q&A session. If you have joined via Zoom, please use the raise hand function. As a reminder, this webcast is being recorded and will be available for replay on the Avery Dennison Investor Relations website. I'd now like to turn the call over to William Gilchrist, Avery Dennison's Vice President of Investor Relations. Please go ahead, sir. William Gilchrist: Thank you, Karina, and welcome to Avery Dennison's Third Quarter 2025 Earnings Conference Call. Please note that throughout today's discussion, we will be making references to non-GAAP financial measures. The non-GAAP measures that we use are defined, qualified, and reconciled from GAAP on schedules A-4 to A-8 of the financial statements accompanying today's earnings release. We remind you that we will make certain predictive statements that reflect our current views and estimates about our future performance and financial results. These forward-looking statements are made subject to the Safe Harbor statement included in today's earnings release. On the call today are Dion Stander, President and Chief Executive, and Greg Lovins, Senior Vice President and Chief Financial Officer. I'll now turn the call over to Dion. Dion Stander: Thanks, Gilly, and hello, everyone. Delivered a solid third quarter with earnings up 2% year over year and above the midpoint of expectations while continuing to execute in a dynamic environment. This outcome underscores the strength and durability of our franchise, demonstrating our ability to activate multiple levers in our portfolio to deliver across a range of macro scenarios. As expected, our business continues to be impacted by ongoing trade policy changes. Encouragingly, we fully mitigated direct cost increases through strategic sourcing adjustments and select pricing surcharges. Moreover, while base apparel volumes were still in the third quarter, we did see improvement sequentially relative to the organic growth headwind in the second quarter. In Materials Group, operational excellence was key to margin expansion during the quarter. A sustained focus on productivity and benefits from modest volume mix growth drove margins up 50 basis points year over year. Modest revenue declines in high-value categories were primarily driven by low single-digit declines in graphics and performance tapes, which faced headwinds from isolated customer and distributor inventory management adjustments. This is partially mitigated by continued strong growth in specialty durable labels and adhesives. We expect the inventory adjustments impacts to be short-lived and to see high-value categories return to growth in the fourth quarter. Overall, Materials Group and base label materials volumes were up slightly compared to the prior year. Importantly, we continue to see growth in our differentiated films volumes, which is a positive mix driver for the business. Solutions Group delivered organic sales growth of 4% driven by high single-digit growth in high-value categories. VESCOM continued its momentum, growing over 10%, and Embellix delivered more than 10% growth as well. Overall, apparel sales exceeded expectations, rising low single digits in the quarter. As you can see on Slide seven, our apparel business is seeing divergent trends. High-value category apparel sales grew high single digits, benefiting from strength in Embellix with strong growth related to next year's World Cup and mid-single-digit apparel IL growth. While base apparel sequentially improved as expected, it remains down low single digits, reflecting soft retail retailer and brand demand as they continue to navigate the impacts of tariff policies. Solutions margins performed better than typically sequential declines, were down 90 basis points compared to the prior year. Profitability was impacted by higher employee costs, continued growth investments, and network inefficiencies stemming from tariff policy changes. Turning to enterprise-wide Intelligent Labels, sales grew approximately 3% compared to the prior year, in line with our expectations. We are encouraged by the sequential improvement in the business, which was driven by key growth market segments. Specifically, apparel and food, logistics, and industrial grew at mid-single digits rate. In apparel and general retail, both market segments are still being impacted by tariff policy changes. However, apparel partially recovered in the quarter while general retail remained soft. Strong growth continued in food as our strategic collaboration with Kroger ramps up as expected. Longer term, our conviction in this large addressable market continues to grow. This morning, we jointly announced a major partnership with Walmart to leverage Avery Dennison's RFID innovation and solutions in their fresh grocery categories of bakery, meat, and deli. This adoption of IL in fresh food in the second large grocer is a key industry milestone and reinforces our conviction in the growth potential of this large addressable market. In logistics, the business expanded sequentially but was down slightly compared to the prior year. Our share in this market segment remained strong, and we have a robust pipeline of opportunities. As we highlighted in the second quarter call, executing initiatives to reduce identified network inefficiencies and associated costs created by the tariff policy changes. These improvements will help drive profitable growth while maintaining high quality and reliability for our customers. Looking forward, we anticipate the fourth quarter will deliver an improved rate of year-over-year growth versus what we saw in the third quarter. While growth will likely continue to remain constrained by trade policy uncertainty, particularly in apparel and general retail market segments, we view this as a temporary headwind. Our conviction in the long-term growth of this high-value category platform remains strong given the value we are creating for our customers and the adoption we see across new segments. Turning back to the total company. Taking into account the continued dynamic environment, we are anticipating both overall sales and earnings per share growth in the fourth quarter. We remain prepared for a range of scenarios, leveraging our proven playbook to safeguard earnings in the near term while accelerating initiatives to drive differentiation and growth over the cycle. Shifting to our core strategies. I am confident that we have the initiatives, innovation, capital allocation framework, and team in place to consistently deliver strong profitable growth and top quartile returns across the cycle. Progress in each of these strategies was evident in the fourth quarter, further cementing our conviction. Our business is positioned for success with secular growth tailwinds that fundamentally outweigh cyclical events over the cycle. Key trends including item-level digitization, enhanced consumer engagement, product customization, and business productivity needs are aligned with a growing portion of our business. The drivers in our high-value categories are clear, and our exposure to them continues to expand. These categories now represent 45% of our total business year to date. An increase compared to the prior year, underscoring our strategic shift towards higher growth and higher margin opportunities. Intelligent Labels adoption is accelerating, with our largest addressable market segment in food now gaining significant traction. Our focus on innovation outcomes and commercial excellence is creating differentiation across our businesses. Examples include introducing new RFI innovation in food, our stalling software in VESCOM, and expanding our Clean Flake adhesive adoption in filmic labels for recycling purposes. Finally, we continue to harness the power of our disciplined capital allocation approach and balance sheet strength to return capital to shareholders and strategically expand our presence in high-value categories where we hold competitive advantages. Year to date, repurchased approximately $454 million in stock and have grown our dividend by 7%. Concurrently, we closed the $390 million Taylor adhesive bolt-on, immediately strengthening our materials group high-value category adhesives franchise with clear cost synergies and strong growth potential. In summary, while the current backdrop has muted our overall growth in 2025, we have further strengthened the resilience of our franchise, deployed capital into attractive opportunities, and advanced our strategic priorities. This underpins our confidence in returning to strong growth and maintaining top quartile returns for our business and shareholders. I want to extend my gratitude to our entire team for their unwavering focus on excellence, dedication to overcoming the challenges at hand, and relentlessly focusing on executing our strategic priorities. Over to you, Greg. Gregory Lovins: Thanks, Dion, and hello, everybody. We delivered adjusted earnings per share of $2.37, up 2% compared to the prior year and above the midpoint of our expectations. Results were driven by productivity and higher volume mix, partially offset by higher employee-related costs investments. While trade policy uncertainty continued to present a headwind to our results, the impact improved sequentially. Compared to the prior year, reported sales were up 1.5%, and sales were comparable to the prior year on an organic basis. As positive volume mix was offset by deflation-related price reductions. Adjusted EBITDA margin was strong at 16.5% in the quarter, up 10 basis points compared to the prior year. And we again generated strong adjusted free cash flow of nearly $270 million in the quarter. Our balance sheet remains strong with a quarter-end net debt to adjusted EBITDA ratio of 2.2. And during the quarter, we issued a €500 million note to pay down some commercial paper and to fund the Taylor Adhesives acquisition closed earlier this week. We continue to effectively execute our disciplined capital allocation strategy, successfully balancing significant cash return to shareholders with strategic M&A. In the first nine months of the year, we returned roughly $670 million to shareholders through the combination of share repurchases and dividends, and we allocated $390 million to the Taylor Adhesives acquisition. Turning to segment results for the quarter. Materials group sales were down 2% on an organic basis. As modest volume mix growth was more than offset by low single-digit deflation-related price reductions. Organically, both high-value categories and the base businesses were down low single digits. Turning now to regional label materials organic volume mix trends versus the prior year in the quarter, continued soft consumer product demand led to roughly comparable volume in both North America and Europe. Offset by continued growth in emerging markets. With Asia Pacific up low single digits and Latin America up mid-single digits. High-value categories declined at low single digits compared to the prior year. Graphics and Performance tapes declined low single digits were impacted by customer inventory adjustments, which we expect to normalize in Q4. The Materials Group once again delivered strong margins with an adjusted EBITDA margin of 17.5% in the quarter, up 50 basis points compared to the prior year. Regarding raw material costs, including the cost of tariffs, we experienced modest sequential global raw material cost deflation in the third quarter. Mitigated tariff cost through strategic sourcing adjustments and the implementation of select pricing surcharges. Overall, including tariffs, our outlook is for relatively stable sequential material cost in Q4. Shifting to Solutions Group. Sales were up 4% organically, and high-value categories were up high single digits. And base solutions were down low single digits. Improving sequentially from down mid-single digits in the second quarter but still impacted by tariff-related uncertainties. Within High-Value Categories, VESCOM was up more than 10% driven by the continued benefit from new program rollouts. Embellix was also up more than 10% as we saw a ramp ahead of the World Cup next year and apparel intelligent label sales recovered to mid-single digit growth. Enterprise-wide, intelligent label sales expanded approximately 3% compared to the prior year. In addition to apparel improving to mid-single digit growth, food, logistics, and industrial categories combined were also up mid-single digits. General retail categories continued to experience tariff-related softness. With sales down mid-teens which impacted both Solutions Group and Materials Group Intelligent Label sales. Solutions Group adjusted EBITDA margin was 17%, relatively flat sequentially but down 90 basis points compared to the prior year. As benefits from productivity and volume were more than offset by higher employee-related costs such as wage inflation, and growth investments. Shifting to our outlook. For the fourth quarter, we expect reported sales growth of 5% to 7% with the following contributing factors: sales growth excluding currency of 1% to 3% with organic growth of 0% to 2%. With approximately 2% from currency translation, approximately 2% from extra days in the quarter due to the shift to the Gregorian calendar next year, approximately 1% from the Taylor Adhesives acquisition. We expect adjusted earnings per share to be in the range of $2.35 to $2.45 above the prior year at the midpoint as benefits from organic growth, productivity, and share count are partially offset by wage inflation, investments, and higher interest expense. Our Q4 guidance incorporates seasonality and incremental productivity, which is partially offset by higher interest expense and less favorable currency. We've outlined some contributing factors to our full-year results on Slide 14 of our supplemental presentation materials. To highlight a few of the key drivers, we now anticipate a $5 million currency translation benefit operating income slightly below our previous projection of a $7 million tailwind. We now expect restructuring savings net of transition costs of approximately $60 million, up $10 million from our previous expectation as we continue to ramp our productivity efforts. And we continue to expect strong free cash flow targeting roughly 100% conversion for the year. We now expect interest expense to be $135 million, an increase from our prior outlook largely driven by interest expense from the €500 million notes we issued in September. And finally, expect tailored adhesives will have an immaterial impact on Q4 earnings per share due to the timing of the close in the quarter and expected intangible amortization expense. In summary, we delivered a solid third quarter achieving EPS above the midpoint of our expectations through a continuing dynamic environment. Expect slight improvements in organic sales growth and continued year-over-year EPS growth in the fourth quarter. And we remain well prepared for a variety of macro scenarios. We're strongly positioned to execute our profitable growth in disciplined capital allocation strategies, which we expect to deliver exceptional long-term value to all of our stakeholders. And now we'll open up the call for your questions. Operator: Thank you. Ladies and gentlemen, if you've joined via telephone, and would like to register a question, you will hear a confirmation of your request. Please press star followed by the number 6 to unmute your line. If you have joined via Zoom, please raise your hand using the raise hand function. If your question has already been answered, and you would like to withdraw your registration, please press star followed by the number 9 again, use the raised hand function. To accommodate all participants, we ask that you please limit yourself to one question and then return to the queue if you have additional questions. One moment for the first question. Your first question comes from the line of Ghansham Panjabi from R. W. Baird. Your line is open. Please go ahead. Ghansham Panjabi: Hey, guys. Good morning. Can you hear me okay? Gregory Lovins: Yeah. We can, Ghansham. Good morning. Ghansham Panjabi: Okay. Good morning. Sorry. Just getting used to the new system. First off, as it relates to the materials segment, is it your sense that volumes are starting to how are how are volumes progressing on a sequential basis just given the macro uncertainty in and so on and so forth? I know you called out the impact on apparel as you have over the last couple of quarters, but is it your sense that materials are starting to sequentially weaken as well? Dion Stander: No. Ghansham, I'd say in the third quarter, volumes, while positive overall, were less than our expectation and pretty much across all regions. And I think there's a couple of factors playing into that. One of which is certainly, we see we continue to see lower retail volumes overall, particularly in North America and Europe, and our scanner data also suggests that there's lower muted demand coming from CPGs overall and when they think about volume. The second thing is, in our high-value categories, we also had a couple of episodic events that happened really around our graphics and reflective business, which we know will remediate as we get into the fourth quarter. Our outlook for the fourth quarter is actually to see kind of similar growth as we move forward. I think the final thing I'll say is it's certainly clear in certain pockets that we're emerging markets have had exposure to tariffs those economies and the consumers in those economies are more cautious as they look into the impact of what those tariffs mean for those countries. And so we're seeing slightly lower volume in those areas as well. I think fundamentally for us as we look forward, I'll just remind everybody, our materials business is really anchored in consumer staples. And so over time, it's been a GDP plus business. And I anticipate that changing once the trade environment, the trade policy normalizes. Operator: Your next question comes from the line of George Staphos from Bank of America. Your line is open. Please go ahead. George Staphos: Hi, everybody. Getting used to the new technology here. For the time, the details. I guess with one question at a time, I'll go with the Walmart news today. If you can talk a little bit about that. And what it might mean for you over the next couple, three years. We're doing some quick searching over the last hour or two it be fair to say that the the opportunity here, recognize you're not going to get that next quarter or the following, would be roughly maybe a million and a half packages when you think about, you know, the Walmart protein cabinet and other related end markets, how would you have us size that? Thank you. Dion Stander: Yes. Thanks, George. I think it's for us, we see this as twofold. First of all, I think it's a critical validation of the effectiveness of our technology and solutions to solve challenges that all grocers really have, which is around freshness of perishable products, labor effectiveness, gross margin expansion, and Net Promoter Score increases because consumers are getting the products that they want, which is the freshest they need. And we saw that start in Kroger, and now I've been manifest in Walmart and our partnership announcement this morning. So we see it both strategically important because we believe it will further catalyze the largest growth segment there is which is in food, which we estimate to be about net order of 200 billion units. And the second large growth are going really sends a signal that the technology has application, the returns are there and the rollout now will commence. In terms of Walmart specifically, while we don't necessarily always comment on exact details of partnership, perhaps I can just frame the scale of what we think it could be. Our estimates are and this will be subject to typical rollout timing, what will happen intra quarter, the number of stores that goes, the individual pieces of those departments of bakery, deli and protein and sorry, meat and when they go. We would typically see this across a two-year period being in the order of sort of high single digit to low double digits growth on our total 25 enterprise IL revenue. And we typically would see that ramping as we go through the couple of years. One other point I'd make on this is we are driving this partnership because we to provide differentiation in the market. A lot of our differentiation over here is anchored in what we've been able to do from an innovation perspective as it relates to activating proteins and meats, particularly for intelligent labels, something that had been very challenging in the past that we've been able to solve for. And so we look forward to seeing the results of that partnership and the results of our effort we've been leaning forward for very long in the market to make sure that we continue to drive activation. Operator: Your next question comes from the line of John McNulty BMO Capital Markets. Please go ahead. John McNulty: Yeah. Good morning, Thanks for taking my question. Can you speak to what you're seeing in the IL pipeline right now? Obviously, there's been a lot of chaos around tariffs and delays in certain programs and yet it seems like there may be some acceleration. So other areas as people try to get better understanding of supply chains, etcetera. So I guess, can you speak to that? And also, just given the size and scale of the Walmart program that's being added in, do you have to start thinking about putting new capital to work around intelligent label capacity, etcetera? I know you put some in a while ago. I guess, where do we stand on that need now? Dion Stander: Thanks, John. So in terms of pipeline, we continue to see our pipeline grow actually both by number of opportunities and by dollar value across all of the key segments. I'm just once again reinforcing that when the benefits are obvious, and they're implementable, then we tend to see good traction because it fundamentally solves challenge of our supply chain visibility, inventory accuracy. And then when you're into the store, specifically labor productivity, fresh produce, waste reduction, and employee and associate experience is much better as well. So from a pipeline perspective, we continue to see good progress overall. In terms of Walmart size and scale, yes, it's a substantial add to the adoption now within the overall food and more broadly the IL market. I'll remind you that in terms of capital allocation, we typically, from a roofline perspective, have added capacity from an infrastructure perspective, typically three to five years out. Hence why we added our Queretaro facility in Mexico to we started that two years ago. When it comes to individual assets for production, we tend to be investing twelve months to eighteen months ahead of the curve. So in the initial phase of this, I don't anticipate us needing additional capacity. As we get through to the end of the second year, we'll revisit that and adjust accordingly. For us, that's much more of a modular approach. These are assets where we've significantly improved our capital reduced our capital intensity billion units produced over the last five years. And so I'm looking forward to that continuing to take advantage of the scale manufacturing that we have in this regard. Operator: Your next question comes from the line of Jeff Zekauskas JPMorgan. Your line is open. Please go ahead. Jeff Zekauskas: Hey, Jeff. Can you hear us? Thanks. Gregory Lovins: I can. Thank you very much. In the in the press release that that came out over the Walmart announcement, there was, a phrase about joint sensor technology. Is there something about technology that you're using with Walmart that's really unique to your relationship with them Or maybe another way of saying this is is is what you're doing with them something that would constrain you in being able to use the same technology with other customers? Dion Stander: No. Jeff, what we've done with Walmart is we've really focused on the three areas that in much of our pilots and trials up until this point. And those are around bakery which is very similar to what we do with some other customers as well. Protein specifically is where we've had to lean into our innovation capability, both on our material science side think about adhesive technology required in cold environments, and then environments that ultimately will be defrosted and even microwaved at that stage. So from material science, have put a lot more effort into solving some of those problems. And then more specifically from what we call the RF side things, radio frequency side of things is how do we make sure that our uniquely designed antennas are capable of being able to sense within very, very densely packed items that are very high dielectrics meet has those properties. And so how do you make sure that you're able to read everything even within a freezer container or a fridge container as well? And those are presented significant challenges in the past. So our ability to generate innovation in this area I think, is going to help us unlock not just the Walmart partnership, but also more broadly across the market as we look forward as well, Jeff. Operator: Your next question comes from the line of Matt Roberts Raymond James. Your line is open. Please go ahead. Matthew Roberts: Morning, Matt. Operator: Mister Roberts, you'll need to unmute yourself. Matthew Roberts: Can you hear me now? Dion Stander: Yes, Matt. Thank you. Matthew Roberts: Okay. Good morning, everybody. Sorry about that. I may, in regard to intelligent labels, so understand you're probably not going give the 2026 guide here and understanding visibility is limited. 2025 certainly had its unique headwinds from tariffs but we're starting to see some momentum that you referenced for Walmart and others. So maybe more broadly in Intelligent Labels, how much of the initial five points that you expected in 2025 from new programs have shifted into 2026? How many incremental points could you get from new program rollouts other than Walmart that you just gave? And given weak comps in apparel and general and some of the headwinds you've seen there, do you believe 2026 could support at or above the long-term growth rate? Or if you only want to give one quarter ahead, any color on 4Q could be helpful as well. You for taking the question. Dion Stander: Yes, Matt. Specifically, we talked to remember those are incrementally about those five basis points that will come through through. Program rollouts. Largely, those actual rollouts are on track through this year. And they came really in a couple of buckets. One bucket was in apparel themselves, some new rollouts new technology deployments, The second bucket was really in some of our food rollouts, which we've talked about. The third bucket was also in some of the additional general merchandise rollouts that were happening as part of the compliance programs with some of our customers. Across all three of those, if you exclude the impact of tariffs, we're actually roughly on track. Now in apparel, we haven't seen any rollout delay, but what we've seen is some of the volume being a little bit more muted than we would expected given, as I'm sure, you recognize the tariff implications. It's a little early for us to look out currently to 2026 as well. And I said in the context, I think the environment remains highly uncertain. Just call everybody's attention to fact that the tariff policy changes have only impacted India more recently by up to 50%. And as all you know, we're on the road currently with China being currently 100% again. And so I think that uncertainty certainly limits our near-term visibility. What I am confident in is our continued ability to drive not only innovation that secures our differentiation, but drive adoption, particularly with things like Walmart, that will certainly help deliver growth as we go through next year. We'll characterize and wrap that all together when we get to the January outlook as well, Matt, for you. The other thing I would just add to what Dion's earlier comments in his prepared remarks, Matt, is that we talked about Q4 expecting our growth rate in IL to be better than what we grew in Q3 versus prior year. Operator: Your next question comes from the line of Anthony Pettinari, Citigroup. Your line is open. Please go ahead. Anthony Pettinari: Good morning, Good morning, Anthony. Hey, just another question on the Walmart partnership. You know, during the quarter, they they had a a press release talking about deploying IoT technologies with Williotte and and know, Avery has a strategic partnership with Willyot. And I'm I'm just from a big picture perspective, can you talk about how RFID and maybe other IoT technologies, you know, coexist in an environment like Walmart Are are you kind of agnostic to what wins in the market? Or how do they interact with each other? How should know, investors think about those two sets of technologies? Dion Stander: Yes, Anthony, I think I've always said from the start, we fundamentally believe that UHF RFID is the most ubiquitous best placed sensing technology for item level identification visibility through supply chain and in a store environment. But we've also said that there are other sensing technologies particularly when it relates to ambient issues, things you want to monitor temperature pressure and so forth, that will also have a specific use case. Now Williard is a strong partner of ours. We have strengthened our strategic partnership. We're going to be supporting them in their rollout that they have fact, we're gonna be managing part of the rollout for them with Walmart as well overall. And that is really orientated around palette and case level. So at a high level, think about UHF RFID being applied at an item level, most likely set broader sensing devices like WILIA technology we provided at the palette and case level. And we're involved in both of those areas I think they present a suite of solutions that in the long term are going continue to drive to what I think will be the end outcome, which is digital identities, on all physical objects. In time. Operator: Your next question comes from the line of Mike Roxlin Truist Securities. Your line is open. Please go ahead. Michael Roxland: Hi, can everybody hear me? Dion Stander: Hey, Mike. Thanks, Mike. Thanks. Yes. Thank you, guys. And getting used to the new congrats on all the progress and the new Walmart deployment. Michael Roxland: Thank you. Just one question for me in terms of logistics. Obviously, was a little bit weaker in this quarter. As you mentioned. Any potential for new deployments in the near term? Any comments you may have on potential like share gains? Obviously, there was some share loss last year. Any insights as to whether maybe you're going to regain some share from that business? Anything you can help around logistics and what's happening with deployments and potential share gains on the horizon? Thank you. Dion Stander: Yes. Sure, Mike. We continue to do really solid work in our partnership with UPS. And that fact that partnership continues to grow. My sense is through the end of this year, we'll actually expand our share with UPS. It's a good performance by both our team, both on service quality, delivery and some new innovation we've even brought to UPS as well in terms of how they can drive higher speed application to their packages relative using our technology as well. If I think more broadly about the logistics environment, I think we've been very clear. We didn't anticipate another rollout during 2025. And we're going to be assessing what the likelihood of that will be during 2026. We'll give more color on that as we get to the January. But I'd say overall, we continue to make really good progress with a number of the key logistics providers. Our pilots and trials have expanded with almost all of them And we spent a lot of time engaging around all the various use that could come out of not just managing last mile fulfillment accuracy, but also how do you originate parcels that go back to source at shipper, what role can we play in that. So as always, I'm encouraged by what I see when I look across the business and our relationship we have with all the large logistics providers. And for me, it's just going to be a case of when we're able to get them to adopt at scale. We'll be able to give a broader update, I think, by the time we get to January, Mike. Operator: Your next question comes from the line of Josh Spector from UBS. Your line is open. Please go ahead. Joshua Spector: Hey, good morning guys. Can you hear me? Dion Stander: Yeah, we are. Joshua Spector: Okay, great. So I wanted to ask kind of a technical one around the quarter and the guide here. Is I think from a sales perspective, you're guiding sales up about $100 million maybe a bit more sequentially But from an EPS perspective, you're close to flat I think historically there's some accretion of margins in fourth quarter So I know with the M and A piece of it that maybe creates a bit of noise as Meridian layers in. But are there other factors that we need to consider, like some lagged price downs or Some other costs that maybe mute the accretion q on q? Gregory Lovins: Yes. Thanks, Josh. So when we look at sequentially, there's a number of puts and takes, of course. Seasonality, as you mentioned, is historically, has been a little bit positive. I would say this quarter, we're probably expecting a little less than typical. Since we saw apparel have a bit of a catch up in Q3. From the tariff impacts that we had in the second quarter. We'll still have some positive logistics volume improvement sequentially into Q4 materials is usually a little bit of a headwind Q3 to Q4 given the holiday period. On the biggest parts. Of that business in North America and Europe. So sequentially, expect seasonality to be relatively flat this year, I think. When we looked in, have some slight positives from share buyback that we've been doing across the year. And continuing to do as we enter the fourth quarter here. We've got some slight favorability from restructuring. I talked about ramping that up we're moving through the back half. And then we've got a little bit of a slight headwind quarter over quarter I think Dion talked about our network inefficiencies we've had related to some of the tariff moves and our sourcing moves or our production moves accordingly with that. We've got a little bit higher inventories in the system over the last few quarters. And as we're bringing that down, we'll have a little bit of an inventory absorption impact on the P and L in the fourth quarter. Sequentially. Otherwise, price deflation, somewhat immaterial sequential impact those are kind of the big puts and takes when we look Q3 to Q4. Operator: Your next question comes from the line of John Dunnigan from Jefferies. Mr. Dunnigan, please press 6 unmute your line. John Dunnigan: Hey, guys. Thank you very much for all the details. I just wanted to ask a quick one on the Walmart collaboration, and then have one other here. So the the collaboration, when when will that start flowing through? Is that more of a 2026 event? And then it just looking at Embellis, I mean, the inflection in volumes was pretty impressive, not to something that we were necessarily expecting. I get that it's related to the World Cup, but is that that kind of trend kind of high single digit, low double digit expected going into 4Q twenty twenty six. Kind of what your expectations are for that business would be helpful? Dion Stander: Thanks. Sure, John. Yes, on the Walmart collaboration, we've been piloting a trial, as I'm sure you sense for a while now. And the full the rollout will start sequentially at very small amount in the fourth quarter really, and then we'll go from there as we go through 2026 and 2027. The current plan. Again, that may be subject to change into quarter shift depending on what stores rollout at what pace and which departments go in which sequence in order. In terms of AmbelliX, yes, I've been very pleased with our AmbelliX performance in the third quarter. Largely, on the performance that we have as related to the World Cup. So we do a lot of preparation for the key World Cup teams and the brands that support them. In advance. And that typically happens a little bit in the second quarter, the majority in the third quarter and a small amount happen in the fourth quarter. What we would call happening at source. The garments are produced at source. They're decorated at source. And then as we get into next year, when the actual World Cup happens, there will be a smaller opportunity for us to do what we call on in stadium venue customization, the names and numbers that you can do when you go there. We haven't necessarily given a perspective on how that decides that, but an opportunity certainly for us as we get into next year. Aside from that, on our base Imbellx business, we continue to see improvement is largely anchored in our Performance Brands as they start to ramp up as well. And then separately, in our Embellis business, we continue to make progress in what we call our in venue and consumer customization applications. I'll give you an example of that. We recently launched a NFC connected device in a garment for a Turkish football club We've done the same thing again for the San Francisco 49ers. And this really helps clubs and fans engage more directly on a one to one basis. So leveraging our technology with some of our adhesive science and our Embellics business overall. And in the long term, we continue to see this as a kind of mid- to high single digit growth segment for us as we move forward. Operator: Your final question comes from a follow-up from Jeff Zekauskas from JPMorgan. Your line is open. Please go ahead. Jeff Zekauskas: Great. Thanks for taking my call. Another question about the Walmart arrangement. Different RFID tags have different prices. In that, you know, apparel tags, you know, tend to be priced higher than logistics tags. Where do tags on Meet fall? Are they in the middle or higher? Or lower? And then for Greg, what calendar are you switching over to for next year? Dion Stander: Jeff, so let me address the warm up one and Greg can take on the calendar question. Yes, I mean, typically across our estate, we have I'd characterize our products as kind of good, better, best. And ranging in differentiation from good all the way through to best. There's also unique circumstances, which certain products or certain inlays are put into more complex tags or format. So an inlay that goes on to, let's say, plain white label has less complexity and typically a lower price point than something that goes into a highly decorated graphic tag to make an apparel. So you can see a range of ASPs across them. As it relates to meat, given some of our proprietary innovation, would see these as typically products that are in the best range. And our AS there will probably be a little higher there's also mix in with the bakery products that we have and some of the deli products. And so overall, anticipate our ASPs across that program to really reflect our portfolio largely at an aggregate level and with profitability to be in a similar aggregate range we currently see across our IL portfolio as as well. Gregory Lovins: Thanks, Ian. And Jeff, on your question on the calendar, we are moving from our historical fourfourfive calendar to a fiscal calendar that aligns with the actual calendar, the Gregorian calendar. So we're making that shift at the end of this year. So this year, we'll extend to the December 31. Then from now on, heading into 2026, we'll be following the Gregorian calendar. And if I go back to Josh's question a little bit earlier, that does add about two points of growth in our fourth quarter sequentially and versus prior year. By adding those extra days into the fourth quarter They're not really high quality days. We had four days to the calendar this year. That includes a Sunday and it includes New Year's Eve, so they're not really high quality days. But nonetheless, we'll get some incremental revenue from that Not a huge flow through because we'll have four or so days of fixed cost with less than that of actual revenue given the softness of those typical days. But that's the impact we're we're shifting to the Gregorian counter next year. Operator: Your final question comes from the line of George Staphos from Bank of America. Your line is open. Please unmute. George Staphos: Hi, Thanks for taking the follow on. A two part one. And again, thanks for all the details. First of all, can you talk a bit about where you're seeing deflation in materials such that prices are a touch lower And kind of where you sit right now, how would you gauge what is normal deflation versus price competition given the macro Related point, the last couple of quarters, again, third quarter was nice to see the improvement. But apparel's weakness in base was one of the reasons that IL is having some difficulty growing. This quarter, with apparel being up 3%, on IL, base is down Why is it why are we getting a positive disconnect this quarter that we were not getting in prior quarters with IEL relative to apparel. Thanks and good luck in the quarter. Gregory Lovins: Thanks, George. I'll start with your deflation question. Overall, what we've been seeing and we've talked about from a year over year perspective, think the biggest drivers we've seen are in paper. Particularly in Europe and Asia. Where overall we've got low single digit deflation year over year in the third quarter Paper is a little bit more than that specific to a couple of regions. And we saw pulp kind of coming down through the quarter in those areas as well. We've got a little bit of year over year benefit on chemicals and films as well also primarily in Europe and Asia. And then in The U. S, we've got some tariff related inflation that we've put surcharges through as we talked about. We do have a little bit from a price perspective then We've got a little bit of low single digit impact on pricing as well. And net net, we've got a slight headwind between price inflation. And I think some of that is still over the cycle when we look over on multiyear horizon we had a lot of inflation a few years ago. It's been slightly deflationary for a couple of years now. And prices have come down to go with that. So that's something we expected as we've gone through the quarters this year. We'll probably have another quarter or so as that continues from a year over year perspective in Q4. Dion Stander: And George, on your second question, even in the second quarter, our base apparel performance was lower than our apparel IL performance, both were down. And as you saw, our base apparel performance has improved, it's still low single digits, the base apparel piece. And our aisle performance is now sort of low single digits around 3%. The difference there really is in rollouts, not necessarily relative to the absolute volume of the base apparel. It's new rollout. For example, we extended our rollout with the Inditex Group, leveraging our new proprietary loss detection technology that they've introduced. And separately, we've also got continued rollout in new apparel customers, a couple of them small, one of them large, that have been rolled out through the third and then the fourth quarter increasingly as well. Operator: Mr. Gilchrist, there are no further questions at this time. I will now turn the call back to you for any closing remarks. William Gilchrist: Thank you, Karina. Just to recap, we delivered a solid third quarter in a dynamic environment. We are well prepared for a variety of macro scenarios. And well positioned to deliver superior value through the cycle. We want to thank you for joining today's call. This now concludes our call. Operator: Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.
Operator: Good morning, and welcome to the EQT Third Quarter 2025 Quarterly Results Conference Call. All participants are in a listen-only mode. After the speakers' remarks, we will conduct a question and answer session. As a reminder, the conference call is being recorded. I would now like to turn the call over to Cameron Horwitz, Managing Director, Investor Relations and Strategy. Please go ahead. Cameron Horwitz: Good morning, and thank you for joining our third quarter 2025 earnings results conference call. With me today are Toby Rice, President and Chief Executive Officer, and Jeremy Knop, Chief Financial Officer. In a moment, Toby and Jeremy will present their prepared remarks with a question and answer session to follow. An updated investor presentation has been posted to the Investor Relations portion of our site, and we will reference certain slides during today's discussion. A replay of today's call will be available on our website beginning this evening. I'd like to remind you that today's call may contain forward-looking statements. Actual results and future events could materially differ from these forward-looking statements because of factors described in yesterday's earnings release, our investor presentation, the Risk Factors section of our most recent Form 10-Ks and Form 10-Q, and subsequent filings we made with the SEC. We do not undertake any duty to update forward-looking statements. Today's call also contains certain non-GAAP financial measures. Please refer to our most recent earnings release and investor presentation for important disclosures regarding such measures, including reconciliations to the most comparable GAAP financial measures. With that, I'll turn the call over to Toby. Toby Rice: Thanks, Cam, and good morning, everyone. Third quarter results built upon EQT's strong track record of operational and financial outperformance. Our performance this quarter resulted in $484 million of free cash flow attributable to EQT, which is net of $21 million of one-time costs associated with the Olympus transaction. We have now generated cumulative free cash flow attributable to EQT of more than $2.3 billion over the past four quarters with natural gas prices averaging just $3.25 per million BTU, highlighting the differentiated cash flow generation capabilities of EQT's low-cost, integrated business model. Production was near the high end of guidance despite price-related curtailments as we continue to benefit from robust well productivity and compression project outperformance. Our tactical approach to volume curtailments in response to volatile local pricing resulted in another quarter of significant price realization outperformance, with our corporate differential coming in $0.12 tighter than the midpoint of guidance despite local basis widening after we provided Q3 guidance. Operating costs were also lower than expected across the board, driving record low total cash cost per unit and underscoring ongoing benefits from water infrastructure investments and midstream cost optimization. Capital spending came in roughly $70 million below the midpoint of guidance, supported by further upstream efficiency gains and midstream optimization. Our team set multiple EQT and basin-wide records during the quarter, including our highest pumping hours ever in a month, our fastest quarterly completion pace on record, and the most lateral footage drilled and completed in a 24-hour period. Simply put, our execution machine is firing on all cylinders. Turning to our acquisition of Olympus Energy, we closed the transaction on July 1 and completed the full integration of all upstream and midstream operations in just 34 days. This marks the fastest operational transition in EQT's acquisition history. Our teams have already achieved significant operational improvements since taking control of the assets. An example of this is in the Deep Utica, where we drilled two wells during the third quarter at a pace that was nearly 30% faster than Olympus' historic performance, driving an estimated $2 million of per well cost savings. Deep Utica inventory represents significant long-term upside optionality on the Olympus assets, which we ascribed zero value to in the purchase price. Olympus' production also provides a significant supply source to feed the Homer City data center project that we announced last quarter, underscoring how assets can become more valuable once they are part of EQT's platform and our ability to unlock sustainable growth. Shifting to our growth project pipeline, we have made significant progress with the various in-basin power projects that we announced last quarter and are seeing additional opportunities to provide natural gas supply and infrastructure to service new load growth in Appalachia. We have also completed an exceptionally strong and oversubscribed open season on our MVP boost expansion project. Demand far exceeded our initial expectations, and as a result, we collaborated with our vendors and partners to upsize the project by 20%, increasing capacity to over 600,000 dekatherms per day. Even with the additional capacity, the region's appetite for Appalachian natural gas remains greater than what we can currently provide, a clear signal of continued market strength and long-term demand growth. The MVP boost project is 100% underpinned by 20-year capacity reservation fee contracts with the leading Southeastern utilities, highlighting the depth and durability of these customer commitments. We estimate a three times adjusted EBITDA build multiple for the expansion project, highlighting how strong the economics are for low-risk infrastructure investments in our midstream business. Once expanded by the Boost project, MVP will have a total capacity of 2.6 Bcf per day of gas, which is more than one Bcf per day greater than current flow rates on the MVP mainline due to downstream bottlenecks, which will be solved when the Transco southbound and northbound expansion projects are completed in 2027 and 2028. This additional takeaway should come online at the same time that in-basin power demand is inflecting higher, which we expect will drive improvement in Appalachian pricing over the coming years. In fact, the futures market is already starting to take note, with M2 basis futures in 2029 and 2030 tightening by more than $0.20 over the past few months. In summary, our third quarter performance once again demonstrates the power of EQT's integrated model and our relentless drive for continuous improvement. From record-setting operational efficiency to seamless acquisition integration and advancement of strategic growth projects, all aspects of our business are performing at a high level. The strength and consistency of our results, even in a moderate gas price environment, reflects the quality of our company, the durability of our low-cost structure, and the depth of our opportunity set. The foundation we've built at EQT is strong. Our strategy is working, and our future has never been brighter. I'll now turn the call over to Jeremy. Jeremy Knop: Thanks, Toby. Our strong financial results and free cash flow outperformance left our balance sheet in a stronger than expected position during the third quarter. Despite approximately $600 million of cash outflows from closing the Olympus transaction, the previously disclosed legal settlement, and working capital impacts, our net debt balance ended the quarter just under $8 billion. We continue to target a maximum of $5 billion of total debt, which is three times unlevered free cash flow before strategic growth CapEx at a $2.75 natural gas price. With $19 billion of forecasted cumulative free cash flow attributable to EQT over the next five years at recent strip pricing, we have plenty of capacity to execute on our capital allocation priorities, which include investing in high-return strategic growth projects, further deleveraging, steadily growing our base dividend, and building cash to opportunistically buy back shares. Last week, we increased our base dividend by 5%, to $0.66 per share on an annualized basis, as we begin returning permanent cost structure improvements and synergy capture to shareholders. Our credit ratings are stabilized, and we are on a glide path of further balance sheet strengthening. We have now grown our base dividend at an approximate 8% compound annual growth rate since 2022. This is a testament to our confidence in the sustainability of our business and a corporate free cash flow breakeven price that is among the lowest in North America. We will continue to look for ways to recycle structural cost savings into future growth, ensuring that our base dividend is bulletproof through commodity cycles. Turning to LNG, we signed offtake agreements with Sempra's Port Arthur, Next Decade's Rio Grande, and Commonwealth LNG beginning in the 2030 and 2031 time frame. These SPAs represent patient execution of the LNG strategy that we began formulating in 2022, as we waited for the right time to gain exposure to high-quality facilities with geographic diversification, competitive pricing, and favorable credit terms. We intentionally positioned our exposure to begin after the 2027 to 2029 window, which we have flagged for several years as a potential period of global oversupply. This oversupply should result in a trough period of new LNG FID activity, and lower prices should stimulate new international demand, setting the stage for tightening fundamentals concurrent with the commencement of our contracts. While we remain bullish on domestic demand growth, we believe that international growth will increase even faster, and it is important to have the right exposure in our portfolio to these markets. Our strategy of signing SPAs on tolling arrangements provides direct connectivity to the international markets, with less downside risk and greater upside optionality than netback deal structures. Our structures give us complete end-market flexibility, allowing us to provide tailor-made solutions to end-market customers globally, with varying contract tenors and price benchmarks over the 20-year lives of these contracts. We are taking the same direct-to-customer approach to LNG we have deployed domestically with utilities and data centers. We expect to enter into sales agreements and regasification capacity covering a large portion of our LNG exposure in the coming years, leaving us with a geographically diversified portfolio of customers and pricing exposure. Our recent discussions with international buyers give us confidence in the long-term LNG demand outlook and suggest a desire to contract with an integrated US-based natural gas producer that can offer greater flexibility than legacy LNG suppliers due to their short exposure at Henry Hub. It's worth noting that EQT is the second-largest marketer of natural gas in the U.S., ahead of all upstream and midstream peers as well as the super majors. LNG marketing is a natural bolt-on to our existing capabilities, and we've been building our expertise over the past several years. While the U.S. market has significant demand tailwinds over the near and medium term, global growth in natural gas demand should far outpace the domestic market over the long term. We expect natural gas demand outside the U.S. to rise by 200 Bcf per day between now and 2050, highlighting the tremendous opportunity for U.S. producers that can directly access international markets. However, that access will only be available to producers that have the combination of low-cost structure, multiple decades of quality inventory, an investment-grade balance sheet, and strong environmental attributes, all of which are hallmarks of the differentiated platform we have built at EQT. Turning to the natural gas macro, we see a supportive setup emerging as we head into year-end, with a tightening balance driven by factors including surging LNG demand and slowing associated gas supply growth as crude oil prices weaken. On the demand side, the U.S. is on track to exit 2025 with over 4 Bcf per day of incremental LNG demand compared to year-end 2024, the largest annual increase since the U.S. began exporting LNG almost ten years ago. The startup of Golden Pass and continued ramp-up of the Corpus Christi Stage 3 expansion are expected to add another 2.5 Bcf to 3 Bcf per day of demand by year-end 2026, providing a further tailwind for U.S. natural gas prices. Looking ahead to winter weather, several major forecasters are calling for one of the coldest winters in over a decade, as early indications suggest a transition from El Nino to a moderate La Nina phase. This transition tends to produce below-normal temperatures across key U.S. consuming regions, including the Midwest and Northeast. A return to sustained cold could drive a meaningful rebound in residential and commercial heating demand, tightening inventories and accelerating the drawdown pace by late Q1. Finally, on the supply side, we anticipate flat associated gas volumes through 2026. The rig reductions and capital discipline we've seen across major oil basins this year are beginning to translate into lower associated gas growth, particularly from the Permian. Should Brent and WTI prices remain in the 50s as OPEC increases production and geopolitical tensions in the Middle East ease, oil prices could approach breakeven economics for many producers and further discourage incremental oil activity. Together, these trends point to a tighter supply picture emerging into 2026 and 2027, supporting a more durable recovery in U.S. gas prices. In sum, the U.S. gas market is entering a critical inflection point. Rapidly growing LNG demand and slowing associated gas production point to a constructive setup in 2026, which could be bolstered further should a cold winter manifest. That said, we remain vigilant over the medium term due to the wave of new Permian pipelines scheduled to be completed by 2026 and an increasing risk of LNG oversupply later this decade, which we believe could temporarily back up gas supply into U.S. storage and set up another short down cycle. Wrapping up, I want to point out a couple of items on our updated guidance and provide a few thoughts as we think ahead to 2026. Our fourth quarter production and operating expense guidance includes the impact of 15 to 20 Bcfe of strategic curtailments during October, as our teams continue to optimize around in-basin pricing volatility. Additionally, recent IRS guidance suggests that we will not be subject to AMT in 2025, and thus, we now expect to pay minimal cash taxes this year, which will save nearly $100 million relative to our prior forecast. Looking ahead to 2026, we expect to maintain production volumes at a level consistent with our 2025 exit rate. We expect maintenance CapEx in line with 2025 plus the full-year impact of the Olympus acquisition. As our compression projects are completed and base declines shallow, we expect maintenance CapEx to decline towards $2 billion later this decade. As we highlighted last quarter, we have an expanding backlog of high-return infrastructure growth projects which will unlock sustainable growth for our upstream business. We are excited to allocate the first dollars of our free cash flow after maintenance CapEx to these opportunities, which we believe will create more long-term shareholder value than any other reinvestment opportunity available to us today. Our total capital spend in the years ahead will be based on the quality of the investment opportunity set in a given year, and we hope to continue sourcing opportunities and unlock differentiated value across our integrated platform. Our pipeline of projects provides a low-risk, high-return reinvestment opportunity that is unique to EQT, allowing us to drive sustainable cash flow per share growth and compound capital for shareholders for years to come. With that, I'd like to open the call to questions. Operator: Thank you. Our first question will come from Arun Jayaram from JPMorgan. Please go ahead. Your line is open. Arun Jayaram: Jeremy, Toby, I was wondering if you could start with the open season and talk about some of the key demand takeaways that you saw from the utilities during that process? Toby Rice: Yes. Arun, I think it's really interesting just to look at what took place with MVP compared to what took place with this MVP boost. I think the most significant signal is the fact that to get the MVP project going, it required a producer, EQT, to sign up for over 60% of the capacity to make sure that volumes were spoken for to get that pipeline built. In contrast with MVP boost, 100% of the shipping capacity is taken by the utilities. It just represents the fact that we're in a pull environment and should not be surprising just given the tremendous amount of demand that we're all seeing. We're seeing that show up in our projects with utilities. Arun Jayaram: Great. And then maybe just a follow-up. Jeremy, you provided some soft 2026 outlook commentary. I guess one question is how are you thinking about strategic midstream capital in '26 and over the next, you know, maybe through '28? Do you have any visibility on that spending in the midstream bucket? Jeremy Knop: Yeah. Arun, we're still working through that. We're not going to give any specific guidance today. But I would say it's going to be something at our discretion based on the quality of projects. We certainly don't need to spend any of it if we don't want to. But I think when we look at the full cycle returns, both on those projects but also the demand it unlocks for our products from our upstream business, the holistic return is so attractive and allows us to grow in a really differentiated way. We're going to be pretty disciplined about how we invest in those, but we also recognize it's a key differentiator for EQT to be able to bring those online. So we're going to keep it in balance. But we're continuing to see that opportunity set grow, which is pretty exciting. Arun Jayaram: Great. Thanks a lot. Operator: Our next question comes from Devin McDermott from Morgan Stanley. Please go ahead. Your line is open. Devin McDermott: Good morning. Thanks for taking my questions. I wanted to start on the commercial side. It's already been a big year for you guys on the commercial front, solidifying some of the power opportunities. I think, Toby, you mentioned in your prepared remarks that you're seeing additional opportunities still here. And I feel like you just the headline since the last call, I think there was another large data center site through a project in Greene County, Pennsylvania that actually did call out a new supply contract with EQT. So not sure if you can comment on that, but maybe broadly, the kind of trends you're seeing on incremental opportunities, any updated thoughts on price structure and how this all fits into your views on in-basin demand growth through decade end? Toby Rice: Hey, Devin. How are you doing? Good morning. Yes, so we have a robust opportunity pipeline. I mean, what we've announced to date has been pretty large. Our midstream growth teams are working multiple opportunities. I expect us to have more announcements in the future, can't say when. But I'll tell you this, I mean, the focus still is on scale and speed. That has been the factor. So as these projects are still trying to get as large as they can, figuring out exactly what they need once schedules get put in that baseline gets put in place, then people will be working on moving things to the left. As far as structuring on gas prices here, I think on that Robina site specifically, you talked about some structure on gas prices we talked about. We think that entering into conversations about structure on pricing, like specifically getting into more fixed nature, is an opportunity down the road. But the focus right now is on the scale and the speed. But I do anticipate once the dust settles, that will be a great optimization opportunity for these hyperscalers to solidify that a part of their cost structure. We'd be open to having those conversations. All of this would be a tool for us to continue to bring more durability to the cash flows at EQT. So it's a good strategic fit for us. Devin McDermott: Okay. Got it. Makes a lot of sense. And then sticking with the commercial side, but shifting over to LNG is an active quarter for LNG deals for you all. I mean, Jeremy, maybe could you comment on what you've done so far kind of solidifies your strategic goal of diversifying price exposure and giving some direct access to international markets? And then a little bit more clarity on how you think about terming this out and the evolution of your direct-to-customer sales strategy as you place these volumes over time. Jeremy Knop: Yes, absolutely. So look, we've been talking about LNG as a company for several years now. And we've been laying the groundwork in terms of team and expertise in negotiating with a lot of projects for that duration of time. You know, we've been very intentional about the time of these projects coming online. If you look back at our prior commentary over the last couple of years, we've been pretty eyes wide open about what we think will be a relatively well-supplied LNG market between, call it, 2027, 2029. So we've intentionally tried to partner with and take capacity out on projects that come online after that window. That's one of the reasons we've been so patient. But it's not only that, it's getting the right credit terms, making sure the right EPC is building these contracts. You have the right financial sponsor behind the facility itself. We think we got that with all of these facilities. We think they're really some of the best along the Gulf Coast. I think with what we signed up for today, our bucket is full now. We moved really swiftly once we saw that opportunity come up. I wouldn't anticipate we sign anything else near term. And our focus really going forward is getting our team fully built out, finishing the build-out of our systems, which we've been working on for really about a year now on the LNG side, and been working on those long-term sale agreements with customers around the world. And we're having a lot of really productive conversations there, seeing a lot of good traction in those discussions, and it's going to give us a lot of flexibility to diversify that exposure around different markets in the world, while giving us that direct-to-customer model that we've been talking about and developing domestically. So it's going according to plan, and we're really excited about the momentum. Devin McDermott: Okay, great. Thanks so much. Operator: Our next question comes from Doug Leggate from Wolfe Research. Please go ahead. Your line is open. Doug Leggate: Good morning. Thanks for having me on. I guess, Toby or Jeremy, whoever wants to take this, my first question is on marketing because obviously you guys had a phenomenal quarter in terms of marketing optimization. I'm trying to understand is this kind of a new normal for you guys and I wonder if I could bolt on to that. When you pivot into LNG, I mean, guys like Shell are your competition on this, confident on how that gives us some color, know it's some way off, but give us some color as to how your domestic gas marketing translates to a successful international marketing business? That's my first one. And my follow-up very quickly, Jeremy, you mentioned buybacks again, know where I'm going with this. We're heading into a much more volatile gas price environment one suspects. I think you've acknowledged that yourself. Where is the priority on the net debt balance sheet sit versus the priority for getting back to buybacks? And I'll leave it there. Thanks. Toby Rice: I'm going to count that as three questions, Doug. Yeah. Let me just state, I think one of the things coming into this year, we were most excited about this company is seeing Jeremy really spend a lot more time and attention on the commercial front. And I think you're seeing the results of that. So we'll save comments on marketing for him. But as it relates to just our positioning on the LNG marketplace, we think that we're going to be very competitive in this space. We've got the scale to be able to be meaningful here. I mean, just to give you some perspective, some of these customers with us being able to deliver up to over 800 million cubic feet of gas a day in LNG form, we are relevant. We've been networking in the LNG space for years now. You all remember the unleash US LNG campaign. We've been part of the global conversation about energy. We've made a ton of contacts and had a lot of meetings with energy leaders around the world. And now as we've solidified our offtake agreements, those conversations are now advancing, and we're excited about keeping people up to speed with how that portfolio shapes up over time. Jeremy Knop: Yes. Doug, I'll hop in on the other part of your question too on marketing. Look, I think we're in the early innings of the potential of the team here. We have the right leadership in place. We're redeveloping some systems internally. It's giving a lot of visibility to the team. I mean, our total trading team size today is about 45 people. So they're getting really dialed in, taking advantage of a lot of great opportunities. I mean, even stuff we've done in the past week, and the amount of volume, the amount of money we're making doing that's really exciting to watch. I would correlate the performance of that team with volatility. So for example, winter volatility and, like, winter's remain, fall shoulder season volatility, I think you'll see the most benefit in realizations relative to where you would just assume basis shakes out first a month. As the team optimizes around what we're seeing in the daily markets and capturing those spreads. And again, as you and I have talked about, the more volatility we see develop in the markets over the coming years, the more profitable that business will become. I expect it to be pretty consistent. It's not trading so much in a speculative sense. It's really just optimization. Very proactively in the markets. So I hope it becomes something that is more and more consistent. But again, I think we're in the early innings of the potential that that team has. And then your final question as it relates to balance sheet, capital allocation, look, as we said in the prepared remarks, we see $5 billion as our maximum total debt level going forward. Don't really have a view that when you look at valuation in the industry today, the companies get any benefit from having much debt on the balance sheet. In fact, I would argue there's really a ding in valuation that comes from that. So we're very focused on converting that liability into equity value and reducing that equity volatility. And at the same time, what that does is it opens up the optionality for us to take aggressive and decisive action when you see pullbacks in our stock price. Just look at what our stock has done over the course of this year. I mean, we've traded between the DeepSeek pullback, Liberation Day, what's happened over the summer between a range of, like, 45 and sixty dollars a share, is a lot of really great opportunities for us to step in and buy the stock once we have the capacity to do so. So that's what we intend to do as we go about executing that buyback once we have the capacity to do it. But I think, you know, a core tenet of our strategy is having low leverage and being able to act with conviction during down cycles and pullbacks like that. We think over the long term, that creates the most value for shareholders. Doug Leggate: Great answers. Thanks for taking my two and a half questions. Thank you. Cheers. Operator: Thanks. Our next question comes from Betty Jiang from Barclays. Please go ahead. Your line is open. Betty Jiang: Good morning, team. Want to ask about the growth capital and how you guys are thinking about allocation capital there. Jeremy, you mentioned earlier that you're looking at full cycle returns and not just the midstream, but the demand unlock for the upstream business. So can you just expand on how you assess the value of these? And is the flow through to upstream benefits coming from pricing uplift or volume growth? And is that like and are you looking at opportunities above and beyond the billion-dollar investment identified last year? Sorry, last quarter? Jeremy Knop: Yes, great question. So whether it's LNG or whether it's power, our teams have done a lot of work over the last couple of years to understand where along that value chain a lot of the value is accruing to. And, you know, I think the one thing that really jumps out to us is that the most value really comes back to being able to grow sustainably our base volumes and ideally into premium markets or premium contracts. And so what we're trying to do is use our midstream business to connect our upstream production to those markets and opportunities. Whether you have a really good low-risk return, which is a foundation for then allowing us to steadily and methodically increase our base upstream business by increasing volumes into that over time when the market needs it. So that's in essence what we're trying to do, just create this virtuous cycle, sort of a flywheel effect there. But I would argue the majority of that long-term value uplift comes from unlocking our multiple decades of upstream high-quality inventory and being able to pull that forward. But again, doing it in a sustainable way. So that is really what we're trying to unlock through these opportunities. And yes, I would say that growth pipeline, specifically on the midstream side, which is what then unlocks the upstream side, that continues to grow. We're working on a number of really high-quality opportunities right now. We're not ready to talk about them yet. But we're trying to increase the number of shots on goal to see what shakes loose and continue to increase that optionality and the amount of value we can create by growing the business in the years ahead. Betty Jiang: Got it. That's helpful. And then my follow-up is actually on the MVP boost. Just talking about that flywheel effect, you got the utilities signing up for the PIPE FTE, but do you see opportunity to sign separate sales agreements on the upstream side? For you guys to lock in premium pricing similar to what you have done in the past? Jeremy Knop: Yeah. We'll look. We'll see where those negotiations go. But if you think about where it connects to, it's really fed by our pipeline systems in Appalachia upstream. So I think there's opportunity both on further pipeline expansions upstream as well as sales deals, so I think this has set the stage for that next stage of negotiations for our business holistically. Betty Jiang: Got it. Thank you. Operator: Our next question comes from Josh Silverstein from UBS. Please go ahead. Your line is open. Josh Silverstein: Just on the LNG side, you had highlighted the four to $4.50 cash flow breakeven on pricing there. I was curious, can you not get the spread with the tolling agreement versus an offtake agreement? And maybe the suggestion is, you know, tolling agreements are more like a 5 to $7 range, and so the cash flow breakeven there would be much higher. I was curious about that. Thanks. Jeremy Knop: Yeah. Good question. Just to give us a chance to clarify this. So economically, they're, I mean, virtually the exact same. I would argue that the spread is the same needed to breakeven on the contracts. The difference in tolling is that we are responsible for delivering the physical molecules to the facility. In that case, we need to take out additional Feet and probably take out storage capacity nearby just to help with balancing. With an offtake agreement, we don't have to worry about any of that. So it just makes it a bit more of a pure expression on the international spread and diversifying into that pricing market. But that's why, look, we're open to both. I think something like tolling, we're more open-minded about on the Texas Coast market just because you have so much long-term Permian supply. I think as you move towards Louisiana, our appetite for offtake increases because we do have concerns about long-term just gas supply in the region because you have so much demand pull relative to a Haynesville play, which is pretty short inventory at this point. So we're trying to sort of match contract structure with where we see the risks long-term. Make sure we have the best exposure for EQT. But I would say in both situations, whether it's the tolling agreement we have at Texas LNG, which again is on the Texas Coast side, versus something more like Commonwealth on the Louisiana side, the spreads we need to breakeven are virtually the same. Josh Silverstein: Got it. Thanks for that. And then you had highlighted tighter Appalachia pricing a few years out from now. Given that you see this and that you have the ability to further ramp supply into that market, how do you think about your consolidation strategy in the basin as part of this? You've obviously had a lot of integration success with recent transactions, and that could provide a further uplift to you guys beyond tightening diff. So I was just curious how you're thinking about that going forward. Thanks. Jeremy Knop: Yeah. I'll make a comment or show on basis and let Toby talk about, you know, future strategic moves. I would encourage you to look at what has happened to M2 basis. If you look at, like, cal twenty-nine, twenty-thirty, that is tightened by, call it, cents. I mean, you're trading in the sixties now. Over the past six months, it's been a material move in response to these demand projects getting built. Discussion of new pipeline capacity out of basin. So I think you're already seeing the impact of that. Effectively around the time frame and beyond after these projects come into service. That is accruing entirely to the value of our asset base. A way that's not been factored in historically and is not really factored into our forecast today. So that tailwind is already in full effect and we hope continues. Toby Rice: Yes. And as it relates to acquisitions and strategically expanding, what is a pretty remarkable story that we have right here. I think you get to start with the story that we've created. You know, strategically, when we look at what we're doing, I mean, it's very simple, getting access to the best markets and supplying the best energy. With our asset base we have right now, we've got a lot of runway across all of those fronts that we can do organically. So it's easy for us to stay disciplined here, but there are, I think we're seeing the opportunities of scale. You're seeing that with our capture of these data center demand opportunities within our footprint. You're seeing scale coming from our more robust trading platform that we're leveraging. You're seeing the benefits of scale with our operations teams, the number of reps that they're getting. They're exceeding execution capabilities on the operational front. So, I mean, there's wins across the board from this company. Firing all cylinders. So, you can look and see the opportunity for us to replicate that in other assets. But we'll continue to make sure we make the best decisions and stay disciplined to value creation with what we have now. Operator: Our next question comes from Neil Mehta from Goldman Sachs. Please go ahead. Your line is open. Neil Mehta: Yes. Good morning, Toby, team. I just want to talk a little bit more about the 4Q outlook here. And you elected to take some curtailment in the quarter. And so I just talk about what the mechanism or what would be triggered to lower that near-term production is and what you're looking to bring some of that supply back on? And then any comments around CapEx as well where it did come in a little bit hotter than we expect in the quarter, but I think some of just probably reflected timing. Jeremy Knop: Yes, great questions. So first of all, on curtailment, so we went into the quarter assuming we base load a Bcf a day of curtailments. When you look at where pricing was a week ago, sub a 1.5, we were effectively fully curtailed. Where we sit today with pricing in basin, call it two fifty, we're fully online. So we have been very tactful about shifting production on and off in response to this. That is also what drives, you know, in many ways, our improved realizations that you've you saw in Q3 and hopefully in Q4 as well. So we're very responsive to market conditions and making sure a reliable supplier. As it relates to CapEx in, I mean, there's just some lumpiness in there to some degree. But you're also approaching the end of the year where typically when there are dollars that have been allocated, we and we have, call it, two to three months left in the year. We typically don't trim those back. We leave the option open for teams to spend that and finish up projects for the year. Some of that might not get spent or might get pushed, but we've left it in the budget for now. Look, there is a chance for being conservative, but we feel good about the guidance we've given. And hope to consistently beat that. Neil Mehta: Thank you. Apologies for the background noise, but the follow-up is just around 2027 and I know, Jeremy, you've been very consistent in your view that LNG markets could flip the U.S. gas market into oversupply potentially as well if there is any backup as well. So I know you're leaving '26 more open and that's been a really good call as the curve has strengthened up. But does this make you want to be more aggressive around hedging '27 now that the '27 curve rally as well? Jeremy Knop: Look, we're going to all options are open. Again, our approach to hedging is to be opportunistic and tactical. Right now, we don't have a specific plan in place, but we're watching the markets as always. And we continue to be patient. And look, I think what we're doing with price realizations and optimizing how every physical molecule is sold right now, also should continue to provide a big uplift there. And again, the more volatility that we see, the more we can optimize. So we'll see and if we decide to add some hedges, you'll see it in our quarterly results. But right now, we remain pretty bullish over the near term. Neil Mehta: Makes sense. Operator: Our next question comes from Kalei Akamine from Bank of America. Please go ahead. Your line is open. Kalei Akamine: Hey, good morning, guys. I want to come back to 2026. There have obviously been some portfolio changes over the last twelve months with Northeast non-op coming out, Olympus coming in, strategic curtailments here in 4Q. So that's quite a few moving parts. And I appreciate the call out for maintenance CapEx, but for fair can we also get your view on maintenance production? Jeremy Knop: Yeah, Kalei. Good question. We expect next year to be approximately flat to where we are 2025, so you could extrapolate forward our Q4 guidance adjusted for the curtailments. Kalei Akamine: Got it. I appreciate that. Next, I want to ask on data centers. So Homer City and Shippingport were obviously big wins, there's more in development. There's some attention on Ohio. Some would say that you don't have the same presence in Ohio as you do in Southwest PA. And, therefore, those projects might be out of reach. But you guys do have Feet and the ability to build lateral pipelines. I'm wondering if that expands your range for those kinds of sales agreements. Toby Rice: Yeah. I think you're exactly right. You know, we look at these opportunities that come to EQT sort of across three different tiers. Our option footprint, across our midstream footprint, the 3,000 miles of pipeline network that we have, and then also looking at opportunities across our commercial footprint, factors into all the pipelines that we have selling gas anywhere East Of Mississippi, which includes Ohio opportunity. So we're engaged in conversations on that now. I think the biggest focus has been around our midstream footprint, but we are having conversations around the commercial footprint as well. Kalei Akamine: Toby, a while back, you guys called out several smaller projects on the XCL midstream system. Parenting connector, Oakgate, and the purpose was to get more gas over to Rex in West Virginia. Just what's the latest on those projects? Toby Rice: So on Clarrington, that's a project that we're planning on putting in place in the next in 2026 budget. So, hopefully, we'll have we'll do a little bit of spend here in '25 and then that'll be bigger in 2026, so that will get completed. Our midstream team is going to continue to look inside the operational footprint we have to look for ways to continue to debottleneck the system. I mean, you look at where we're optimizing the energy systems, what started with the sites has now evolved to the gas systems and now obviously with Feet and debottlenecking some of those points like this Clarrington connector, we'll continue to look for more of those opportunities because those will be really great high rate of return low capital type projects. Kalei Akamine: Got it. Thanks, Stephanie. I appreciate it. Operator: Next question comes from Phillip Jungwirth from BMO Capital Markets. Please go ahead. Your line is open. Phillip Jungwirth: Thanks. Good morning. With the very successful open season for MVP Boost, wondering if you could give us an update on MVP Southgate here. And whether the changes in the marketplace, greater pull on gas demand, more favorable permit regime, provide any reason to maybe revisit the project scope? Toby Rice: Yes. So Southgate, I think the results of MVP Boost specifically, the fact that we're seeing a strong pull environment gives us more excitement over the future potential of Southgate. And the opportunity to potentially expand that pipeline system in the future. But when you look at this region here, I mean, there's some big things that are happening. Obviously, the customers are demanding more gas supply into this area. You see what happened in this region this last winter with MVP flowing above max rate. So the demand is there. MVP boost oversubscribed. And then on a federal level, you're seeing the drive for more reliable lower-cost energy systems. So I mean, I think all the factors are there. We're going to be looking at ways to optimize. Just like we did in taking advantage of upsizing the MVP boost project by increasing that by over 20%. So we're studying that right now. We'll report back. Jeremy Knop: Yeah. I would just say for the lack of clarity though, I mean, you know, we're moving ahead on Southgate. I mean, that's a project that we are counting on happening. And I think as Toby said, Boost open season I think just further underscores how important that is. And there is I would expect there to be overlap in customers there as well. So it just further highlights how much that gas is needed in that region. Phillip Jungwirth: Okay, great. And then you guys have talked about an LNG strategy a couple of years now really, only recently had announced some numerous agreements. Wondering if you could talk about how offtake terms have evolved maybe before and after the LNG export pause? And are you generally seeing a lot more favorable deals and structures than you would have a couple of years ago you'd signed up some of these arrangements. Jeremy Knop: Yeah. Look, I think the one thing that held us in a major way were some of the credit conditions that we were going to have to sign for with some of these projects in the past. And it was very much a seller's market where if you wanted to be an off-taker or have tolling capacity, it was very difficult to get it on terms that we were comfortable with. As you saw that LNG pause get released and a lot of these projects move rapidly towards FID, in our mind, it shifted to be more of a buyer's market. Shifting in the favor of the likes of EQT. And so that's why we tried to move pretty quickly in response to this. Also have a view that contracts of this quality at this cost LNG build-out it kind of happens in waves. And so once you get beyond this wave, if you do see a period of oversupply, that will probably put a chill on new FIDs for a couple of years. That next wave that comes up, I would expect the pricing on those projects to probably increase another level as well. So what we're trying to do is get in at the tail end of this wave, capacity comes online, post any sort of risk of LNG glut, we have the right credit terms, the right EPCs, and the right partners on the LNG facilities. And then I think we will be structurally advantaged long term as the cost of building equipment and facilities like this inevitably just goes up over time. So that I mean there's a culmination of factors leading to why we made the decisions we did at the time we did. But again, we feel really good about just the totality of the terms we've got. Phillip Jungwirth: Makes sense. Thanks, guys. Operator: Our next question comes from Bob Brackett from Bernstein Research. Please go ahead. Your line is open. Bob Brackett: Good morning. You guys highlight that you're the number two gas marketer in the U.S. If you look at your peers, they use that scale and that market insight to extend into gas trading, gas storage, even power marketing. There's a lot of adjacencies. What's your appetite to explore some of those adjacencies, and maybe what time frame? Jeremy Knop: Yeah. Look. We're not looking to get into speculative trading and things away from our base business. We're looking at optimizing the value of our production. So, again, we're sticking to our knitting and where we really have an edge. That's why we're able to produce the results we did and realize pricing this quarter as an example. You know, as it relates to LNG too, because there's been a lot of questions around the overlap between that business and LNG where you have a lot of big players like Shell internationally. In our view, you need to have a minimum of about four MTPA of LNG capacity on the water to where you can really start to optimize and be a real player and be competitive. That's part of what also held us back signing in the past is we didn't think that the cost structure and the balance sheet and everything else was lined up within EQT with enough scale to be able to do that. We thought we might be overextending ourselves by doing it. We were very patient until we could get to the point we could sign up for at least four. But we do think there's a lot of synergies between the two, and I think the discussions we've been having with international buyers of gas are proving that out. Toby Rice: Yeah. And I would just say, when we think about just strategically what we're trying to do with the best energy, you know, making it cheaper, making it more reliable, making it cleaner, we've spent a lot of time focusing on making our energy more affordable, lowering the cost structure of this business. That's been a huge focus. We focused a lot on making the energy cleaner. All the work we've done to become the first company of scale to achieve net-zero scope one and two emissions. And I think now you're seeing a little bit more focus for us on the reliability of the energy that we produce. And that simply put is just making sure the market has the energy when it needs it, and trading will be a big function there. And it's a part of the story here that we're spending a little bit more time improving the reliability of the energy systems we develop and work in. Bob Brackett: That's great. Appreciate the color. Operator: Our next question comes from Sam Margolin from Wells Fargo. Please go ahead. Sam Margolin: Good morning. Thanks for taking the question. Hey, Stan. There's a question on commercial. And it kind of relates back to an earlier comment Toby made. You know, one of the things that turbine manufacturers are talking about is a shift in customer mix. And, you know, data center customers, hyperscalers directly ordering turbines. And I wonder if that's the catalyst to change pricing structure around gas supply deals. Utilities are comfortable with variable pricing maybe the hyperscalers directly would prefer something a little more bracketed or stable. I just maybe if you could elaborate on that comment you made earlier, that'd be great. Toby Rice: Yes. What we're seeing on the turbine side of things is we're actually seeing some opportunities for turbines that have been put on order lock up that are actually looking for homes. You know, hyperscalers, I think, are going to be looking to relieve whatever constraints that they're facing. You know, for them getting into actually developing the power themselves, would be an interesting move for them. I wouldn't put a pass just given the cost, but that is outside their area of expertise. I mean, perspective is that if hyperscalers had it their way, they would be able to sign up and just pay a rate for every kilowatt that they use and keep it very simple because they've got so many other bigger things to focus on. But in the spirit of simplifying the story for them, yeah, I think that could create opportunities for EQT in creating more structure on pricing, increasing the durability of our cash flow. So we're certainly willing to entertain those conversations. Jeremy Knop: Yeah. I think from what I've heard in the market, whether it's I know Amazon has done a little bit of this, Meta might have. Some of these big facilities specifically down along the Louisiana, Mississippi corridor, you have to order a lot of this equipment multiple years ahead of time and it's very costly. Utilities are not in the business of speculating like that. And so whether it's done through like a PPA offtake or whether it's one of the hyperscalers stepping in and making the order, basically guaranteeing the cost, I think that kind of has to happen for these mega projects. So I wouldn't say that means the hyperscaler is building or owning the power themselves. I think it's more so inherently providing the credit support one way or the other for what are very large capital expenditures. Again, it really just speaks to the demand for power, and the necessity for all this stuff to get built as quickly as possible. So it's all positive either way. Sam Margolin: Got it. Thank you. And then, just on the marketing side, you know, you pointed out that on the curves, diffs are tightening. And I guess, in the past, that might have compelled you to hedge basis. If not, if not the flat price? And I guess the question is like with the evolution of this marketing team and the success it had, you know, should we expect basis hedging to really be reduced and deemphasized just given what your capabilities are now? Jeremy Knop: Yeah. In the past, I mean, we never provide a lot of clear disclosure on what we do in basis. Just because we don't want to influence the markets in any indirect way. But we, in the background, had usually hedged up to about 90% of our in-basin sales just to provide that stability. We are not doing that anymore. We will hedge basis and we do have some basis hedged. But it will be likely far less than that in 2026 and beyond. Just due to those dynamics. And if you think about it, we can also effectively hedge basis by just shutting gas in. And that is kind of a new paradigm shift in the ability to coordinate between our traders, our production control center, midstream control center, and make sure we're not just selling gas at a price that doesn't make sense when you can shut in for a month and sell it into winter. I mean, provide that reliability during the winter months when you can surge above your baseline of production capacity. So it is an evolution for us, but the need to hedge basis to protect that downside is just not there in the same way. And instead, we're turning it from, like, a defensive strategy to more of an opportunistic proactive strategy through what we're doing with curtailments. Sam Margolin: Thank you so much. Operator: Next question comes from Scott Hanold from RBC. Please go ahead. Your line is open. Scott Hanold: Yeah. On MVP boost and potentially Southgate, can you talk about do you expect that EQT will be the supplier for those pull volumes? If so, how do you think about where you source that? Is it pulling it from in Basin Appalachia or would you grow into that and just give us a sense of if it's a grow option kind of the timeframe at which it starts? Jeremy Knop: Yeah. Great question. So MVP again pulls off systems and comes out of the Mobley plant. So I would expect it to be at least majority EQT volumes, if not all of it. And that provides us the opportunity to grow. We're not committing to growing to fill that yet. We have to ultimately see how the markets balance out. But whether it's the data center projects or whether it's more egress out of basin, what that is doing is teeing up the opportunity for us to grow with confidence. And do so in a sustainable way. Scott Hanold: Yeah. To quantify that, from where MVP is flowing today, through the end of boost coming online, that we see over a Bcf a day of greater takeaway from the MVP complex and you pair that up with another $1.5 a day of data center demand, it's a pretty, pretty attractive demand setup. Jeremy Knop: Yes, that's right. Scott Hanold: Okay. And then real quickly, you talked that you feel you're good with the LNG offtakes right now, which I think is circa 10% of your production. And you've obviously done some of these power deals. Can you talk a little bit about like industrial types of deals? Have you seen any interest in there? How much are you willing to allocate toward those initiatives? Jeremy Knop: Yes. I mean, look, we're seeing opportunities across the board. I think our sort of reinvigorated commodities team and our gas origination efforts are turning up a ton of opportunities. Whether that ultimately manifests in a midstream deal or a supply deal, you know, we're open-minded about both. We're trying to be a sort of one-stop-shop solution for gas supply. Look, we're pretty flexible and open-minded about it. Scott Hanold: Thank you. Operator: Our next question comes from Jacob Roberts from Tudor Pickering Holt and Company. Please go ahead. Your line is open. Jacob Roberts: Good morning. Good morning. On LNG, you've laid out some thoughts on demand through 2050. And Jeremy, touched on this a few questions ago, but we were curious if you could comment on global supply over that timeframe? And maybe more specifically your assumptions on the cyclicality of the global LNG market over the contract life with respect to the outcomes on Slide 12? Jeremy Knop: Yeah. Great question. So, you know, what's interesting when a lot of people are focused on the risk of LNG oversupply right now, and I think rightly so. It is a short window where I think that is at risk. But just say haircut our assumptions in half if you want to. Right? The amount of new LNG that has to get built to serve that market means that that spread needs to be in excess of four fifty at a minimum. To justify new projects getting built. And as the cost of those projects goes up in time with inflation, that just means that spread has to widen out. So that spread has to structurally stay wide as long as you do have additional demand growth. Otherwise, the demand growth cannot be served. So that's why, like, structurally, we're really bullish on that setup long term. Ultimately, it just comes down to what that export ARB incentive is for new projects to get built though. And ultimately, a question of where does the gas come from. We think the U.S. is advantaged in many ways whether it's gas from Appalachia or gas from the Permian. That really will be the biggest source of demand over the next two decades. We are certainly bullish on the domestic opportunity, but when you think about the, call it, 20Bs of growth, we could see from domestic demand not including LNG over that time period. We think that global market is going to dwarf even what a really bullish domestic outlook will be. And that's why we're so excited about getting into that LNG market even in a small way because even a small increase in that export ARB can have meaningful impacts on our profitability and realize pricing. So it's a really good way for us to extend our exposure and further improve the profitability of EQT over the long term. Jacob Roberts: Great. Thank you. And then a quick follow-up on the Olympus results, the two Deep Utica wells, you point to in the presentation, you classify those as having met the EQT standard in terms of efficiencies and cost? And then how are those results shaping thoughts about development going forward? Toby Rice: Yeah. I would classify that as early innings for us. I mean, have not got a ton of reps on Deep Utica. So it's really encouraging to see the teams come out the gate and cut drilling times by over 30% in shape dollars 2,000,000 per well. In that area, we've got a pretty hefty amount of acreage, hundreds of potential sticks. So that's a starting point is the way we'd look at it. Where we're going to get to is going to be where we're at with Marcellus relative to peers. And that's going to be peer-leading setting operational records both on the CapEx side and peer-leading LOE. I think the table is set. We just need to get some more reps and it's something that we'll sprinkle and give the teams the opportunity to lightly touch improve themselves over time. But in the meantime, the core story is going to be continuing on the success that we've had with our core Marcellus in Pennsylvania and West Virginia. Jacob Roberts: Great. Appreciate the time guys. Operator: Next question comes from Bert Donnes from William Blair. Please go ahead. Your line is open. Bert Donnes: Hey, morning, guys. I'll keep it pretty short. I just want to follow-up on the potential for the data center fixed gas price agreements. It sounds like your view is that the structure might ultimately fit better for both parties involved. But is there also a discussion to potentially take some equity in a power project? Or is that not even on the table? Toby Rice: Yes. Right now, I mean, strategy is the same when it comes to vertical integration, whether it's LNG or power plants. We're taking a very capital-light approach towards creating value in these arenas. Infrastructure continues to get funded by others. Returns do not compete with our core business. And we're able to access the value potential of these arenas without taking the equity stake. So that's the situation right now. We'll continue to be capital light, but those are the factors that we're watching that drives our decision. Bert Donnes: Perfect. That makes sense. And then on the same topic, at a time, there was an idea that maybe a consortium of smaller E and Ps could potentially piece together a power deal. Is that no longer the case? You really need the midstream side of things in order to sign these deals? Or is there room for maybe smaller projects to work that way? Toby Rice: I mean, every project that we look at, the projects are only getting bigger. I mean, if we were in a situation where 50 megawatt data centers make sense, I guess, could say that would be an opportunity. We're talking about gigawatts, multiple gigawatts at a time. You're going to need large scale. I mean, 1.5 Bcf a day is a tremendous amount of natural gas. EQT is unique in the sense that we could say we've already got that gas flowing above ground at local markets, we could just allocate that to you when you're ready. The credit requirements here, again, investment-grade balance sheets matter. That's something that's not available to smaller peers. I look at this as sort of a big player opportunity, and it's a big response for EQT to make sure that we get our tech customers all the energy they can. Jeremy Knop: Yeah. I would also just add that I think one of the biggest obstacles to getting all these data centers specifically built out is you have too many parties already involved when you think about the needs for an $80,100,000,000,000 dollar project. Adding more chefs in the kitchen doesn't improve efficiency. I think one of our edges at EQT is really simplifying this and being a one-stop shop. So I think a strategy like that would actually be moving the wrong direction and make it even more challenging to get something done. And it doesn't solve the credit quality either. So I don't think that really holds water. Operator: Our last question today will come from David Deckelbaum from TD Cowen. Please go ahead. Your line is open. David Deckelbaum: Thanks for squeezing me in, guys. I did want to just ask on the margin. You guys have seen some outsized performance on the well productivity side, but we've seen an increase in liquids recovery. Is that happening from benefits on the midstream side? Or is that something that's more geologically driven? Perhaps if you could speak to that going into next year? Toby Rice: Yes, I think that would be more driven from just where we've been developing. If I'm being honest with you. And on that front, we have been reassessing some of our parts of our asset base and looking at opportunities we see from the Equinor trade, we just got done looking at that. Probably not a lot of running room from the Ohio Utica there, but have identified the prospect of the Ohio Marcellus be very perspective over 80,000 acres. This would be big upside. It would give us even more exposure to liquids. So, I mean, it's something that we're looking at and how we're shaping it. But just given the size of our base, we're going to be a dry gas story. David Deckelbaum: I appreciate that, Toby. Then maybe Jeremy just a high level, I think there's been a lot of questions around firm sales and LNG and data centers and I guess as you see all the market forces progressing here, do you see a long-term target? Obviously, you guys give guidance all the way up to 2050 on demand. As you enter into like the next decade, do you have an expectation for or a target for what percent of total EQT gas volumes will be on firm sales agreement in the direct-to-customer model? Jeremy Knop: Yeah. I mean, if I'm honest with you, we're seeing more opportunities pop up like, literally every single week. I consider it to be a bit of a, you know, what we call internally, like, an all-you-can-eat opportunity. We can grow volumes if there's really that much demand that comes up. We can market it, whether it's third-party gas, I wouldn't say there really is a limit. Our job as it relates to just what's best for EQT and shareholders is just to capture as much of that growth opportunity as possible. And I would say that continues to ramp up, and I think the teams are doing an amazing job just increasing the frequency of conversations and getting in front of every potential customer and making sure we capture. David Deckelbaum: Thanks, guys. Operator: We are out of time for questions today. I would like to turn the call back over to Toby Rice for any closing remarks. Toby Rice: Thanks for your time, everybody. This quarter stepping back just thinking about it, it's probably one of my favorite quarters just because of the fact that every is a really great example of the total team effort that's taking place here at EQT. We're seeing wins across the board from every department, CapEx, OpEx, volumes, the back office team is getting in the mix with lightning-fast strategic integrations of Olympus. Our commodities team, grinding wins on the trading front. It's a really great example of the culture we built of teamwork and trust in delivering for our stakeholders. So we look forward to continuing the success going forward. Thank you, guys. Operator: This concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Welcome to TrustCo Bank Corp NY earnings call and webcast. All participants will be on a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key. After today's presentation, there will be an opportunity to ask questions. Before proceeding, we would like to mention this presentation may contain forward-looking information about TrustCo Bank Corp NY that is intended to be covered by the safe harbor forward-looking statements provided by the Private Securities Litigation Reform Act of 1995. Actual results, performance, or achievements could differ materially from those expressed or implied by such statements due to various risks, uncertainties, and other factors. More detailed information about these other risk factors can be found in our press release that preceded this call and in the Risk Factors and Forward-Looking Statements section of our annual report on Form 10-Ks and as updated by our quarterly reports on Form 10-Q. Forward-looking statements made on this call are valid only as of this date hereof, and the company disclaims any obligation to update the information to reflect the events or developments after the date of this call, except as may be required by applicable law. During today's call, we will discuss certain financial measures derived from our financial statements that are not determined in accordance with U.S. GAAP. The reconciliations of such non-GAAP financial measures to the most comparable GAAP figures are included in our earnings press release, which is available under the Investor Relations tab of our website at trustcobank.com. Please also note that today's event is being recorded. A replay of the call will be available for thirty days, and an audio webcast will be available for one year, as described in our earnings press release. At this time, I'd like to turn the conference call over to Mr. Robert J. McCormick, Chairman, President, and CEO. Please go ahead. Robert J. McCormick: Morning, everyone, and thank you for joining the call. I'm Robert J. McCormick, President of TrustCo Bank Corp NY. I'm joined today as usual by Michael M. Ozimek, our CFO, who will go through the numbers, and Kevin M. Curley, our Chief Banking Officer, who will talk about lending. It is often said that actions speak louder than words. TrustCo Bank Corp NY's performance this quarter and year to date speaks volumes about the tactical effective application of our corporate strategic vision. TrustCo Bank Corp NY's mission is to deliver the best possible loan and deposit products, making the dream of home ownership come true for customers who we treat with respect. It is a fundamental principle of our company that loans are underwritten with professionalism and care to ensure fair lending outcomes and solid credit quality. This is true both in our residential and commercial lending areas. Looking back just five years, we have never exceeded annualized net charge-offs of more than 0.02% compared to our average loan portfolio. Throughout this year, our strong customer relationships have enabled us to grow deposits and loans while holding the line on cost of funds as the loan portfolio repriced. All of these elements have combined to generate these stellar financial results we proudly announced today. Both our profitability and efficiencies improved greatly over the quarter, compared to this time last year. Our return on average assets increased 21.4%, return on average equity grew 20%, and our efficiency ratio decreased by almost 9%. This is all done while staying focused on high-quality underwriting standards and loan processing functions, sticking to our lending philosophy by never sacrificing credit quality. We improved our nonperforming loans to total loans by 5% over the quarter, and our coverage ratio increased to over 280%, up 9% from the third quarter last year. Also, part of our longstanding TrustCo tradition, we do not rest upon our successes. Throughout this year, our management team has demonstrated we are not satisfied with simply delivering outstanding corporate performance in the present term. We always have an eye on building long-term shareholder value. Toward that end, we sought and received approval to repurchase 1,000,000 shares of our company's stock. So far, we have repurchased nearly half of that number. Further, we anticipate that the company will complete the currently authorized buyback and expect to seek approval for further substantial repurchase. It is our view that the stock is significantly undervalued and presents an outstanding investment opportunity without exposing us to the risks inherent with another investment. Could not be more pleased with the driving corporate value in the safe, sound, and strategically purposeful manner. Now Michael will go over the details with the numbers, and some impressive numbers. Michael? Michael M. Ozimek: Thank you, Robert, and good morning, everyone. I will now review TrustCo Bank Corp NY's financial results for the 2025Q3. As we noted in the press release, once again, the company saw strong financial results for the 2025Q3, marked by increases in both net income and net interest income of TrustCo Bank Corp NY during the 2025Q3 compared to the 2024Q3. This performance is underscored by rising net interest income, continued margin expansion, and sustained loan and deposit growth across key portfolios. This resulted in third-quarter net income of $16.3 million, an increase of 26.3% over the prior year quarter, which yielded a return on average assets and average equity of 1.02% and 9.29%, respectively. Capital remains strong. Consolidated equity to assets ratio was 10.9% for the 2025Q3, compared to 10.95% in the 2024Q3. Book value per share at 09/30/2025 was $37.30, up 6% compared to $35.19 a year earlier. During the 2025Q3, TrustCo Bank Corp NY repurchased 298,000 shares of common stock under the previously announced stock repurchase program, resulting in 467,000 shares repurchased year to date, and we have the ability to repurchase another 533,000 shares under the repurchase program. And as always, we remain committed to returning value to shareholders through a disciplined share repurchase program, which reflects our confidence in the long-term strength of the franchise and our focus on capital optimization. Credit quality continues to improve. As we saw nonperforming loans decline to $18.5 million in the 2025Q3 from $19.4 million in the 2024Q3. Additionally, nonperforming loans to total loans also decreased to 0.36% in the 2025Q3, from 0.38% in the 2024Q3. Nonperforming assets to total assets also reduced to 0.31% in the 2025Q3 compared to 0.36% in the 2024Q3. Our continued focus on solid underwriting within our loan portfolio and conservative lending standards positions us to manage credit risk effectively in the current environment. Average loans for the 2025Q3 grew 2.5% or $125.9 million to $5.2 billion from the 2024Q3, an all-time high. Consequently, overall loan growth has continued to increase, and leading the charge was the home equity credit lines portfolio, which increased by $59.9 million or 15.7% in the 2025Q3 over the same period in 2024. The residential real estate portfolio increased $34 million or 0.8% of average commercial loans, which also increased $34.6 million or 12.4% over the same period in 2024. This uptick continues to reflect a strong local economy and increased demand for credit. For the 2025Q3, the provision for credit losses was $250,000. Retaining deposits has been a key focus as we navigate through 2025Q3. Total deposits ended the quarter at $5.5 billion and was up $217 million compared to the prior year quarter. We believe the increase in these deposits compared to the same period in 2024 continues to indicate strong customer confidence in the bank's competitive deposit offerings. The bank's continued emphasis on relationship banking combined with competitive product offerings and digital capabilities has continued to stable deposit base that supports ongoing loan growth and expansion. Net interest income was $43.1 million for the 2025Q3, an increase of $4.4 million or 11.5% compared to the prior year quarter. Net interest margin for the 2025Q3 was 2.79%, up 18 basis points from the prior year quarter. The yield on interest-earning assets increased to 4.25%, up 14 basis points from the prior year quarter, and the cost of interest-bearing liabilities decreased to 1.9% in the 2025Q3 from 1.94% in the 2024Q3. The bank is well-positioned to continue delivering strong net interest income performance even as the Federal Reserve signals a continued potential easing cycle in the months ahead. The bank remains committed to maintaining competitive deposit offerings while ensuring financial stability and continued support for our communities' banking needs. Our wealth management division continues to be a significant recurring source of non-interest income. They had approximately $1.25 billion of assets under management as of September 30, 2025. Non-interest income attributable to wealth management and financial services fees represent 41.9% of non-interest income. The majority of this fee income is recurring, supported by long-term advisory relationships and a growing base of managed assets. Now on to non-interest expense. Total non-interest expense net of ORE expense came in at $26.2 million, down $42,000 from the prior year quarter. ORE expense net came in at an expense of $8,000 for the quarter as compared to $204,000 in the prior year quarter. We are going to continue to hold the anticipated level of ORE expense to not exceed $250,000 per quarter. All of the other categories of non-interest expense were in line with our expectations for the third quarter. Now Kevin will review the loan portfolio and non-performing loans. Kevin M. Curley: Mike, good morning to everyone. Our loans grew by $125.9 million or 2.5% year over year. The growth was centered on our home equity loans, which increased by $59.9 million or 15.7% over last year, and residential mortgages, which increased by $34 million. In addition, our commercial loans grew by $34.6 million or 12.4% over last year. For the second quarter, actual loans increased by $35.1 million as total residential loans grew by $38.5 million, and commercial loans were slightly lower for the quarter. Overall, residential activity is picking up. We are seeing additional refinance volume as mortgage rates remain in the 6% range. Our home equity lending also continues to grow steadily as customers continue to use their equity for home improvements, education expenses, or paying off higher-cost loans such as credit cards. In all our markets, rates have fluctuated within a 25 basis point range, with our current thirty-year fixed rate mortgage at 6.125%. In addition, our home equity products are very competitive, with rates starting below 6.75%. Our products are well situated across our markets, as we are ready to capture more growth as activity picks up. As a portfolio lender, we have the flexibility to manage pricing and implement targeted promotions to increase loan volume. Overall, we are encouraged by the loan growth in the quarter and remain focused on driving stronger results moving forward. Moving to asset quality. Asset quality of the bank remains very strong. At TrustCo Bank Corp NY, we work hard to meet strong credit quality throughout our loan portfolio. As a portfolio lender, we have consistently used prudent underwriting standards to build our loan portfolio. Our residential loans originated in-house, focusing on key underwriting factors that have proven to lead to sound credit decisions. These loans are originated with the intent to be held in our portfolio for the full term rather than originated for sale. In addition, we have no foreign or subprime loans in our residential portfolio. In our commercial loan portfolio, which makes up just about 6% of our total loans, we focus on relationship-based loans secured mostly by real estate within our primary market area. We also avoid concentrations of credit to any single borrower or business and continue to require personal guarantees on all our loans. Overall, our disciplined underwriting approach has produced strong credit quality across our entire loan portfolio. Here are the key metrics. Our early-stage delinquencies for our portfolio continue to be steady. Charge-offs for the quarter amounted to a net recovery of $176,000, which follows a net recovery of $9,000 in the second quarter and $258,000 in recovery in the first quarter, totaling a year-to-date net recovery of $443,000. Non-performing loans were $18.5 million at this quarter-end, compared to $17.9 million last quarter and $19.4 million a year ago. Non-performing loans to total loans was 0.36% this quarter-end, compared to 0.35% last quarter and 0.38% a year ago. Non-performing assets were $19.7 million at quarter-end versus $19 million last quarter and $21.9 million a year ago. At quarter-end, the allowance for credit losses remained solid at $51.9 million with a coverage ratio of 281%, compared to $51.3 million with a coverage ratio of 286% at year-end and $49.95 million with a coverage ratio of 157% a year ago. That's our story. We're happy to answer any questions you might have. Operator: Thanks very much. We will now begin the question and answer session. Before pressing the keys, our first question comes from Ian Lapey from Gabelli Funds. Your line is open, Ian. Please go ahead. Ian Lapey: Good morning, Robert and team. Congratulations on the great financial results. I was hoping maybe you could quantify a little bit. The release mentions that you expect meaningful net interest income upside for quarters to come. You mentioned the rates on the fixed rate and home equity. What about the CDs that are going to be maturing over the next quarter? What's sort of the average rate for that compared to what you're paying on new CDs that you're issuing? Robert J. McCormick: The highest rate we're offering right now, Ian, is 4%, and that's a three-month rate. And there's about a billion dollars in CDs that are coming due over the next four to six months. So we expect, based on what happens with the Fed and some competition, there should be opportunity in that CD portfolio to reprice. Ian Lapey: What's roughly the average, so for the billion coming due, what is the average roughly rate on those? Robert J. McCormick: The average rate on the billion coming due is about 3.75%. Okay. And then on the recoveries, obviously, very impressive. I was just hoping you could unpack that a little bit. For example, for the quarter, in New York, you had $194,000 in recoveries. Just curious, like how many homes typically would that relate to? Is this just a function of borrowers defaulting with significant equity still in the home? Maybe you can just explain a little bit. Robert J. McCormick: A lot of that, as you can imagine, Ian, in the real estate market, Upstate is still very, very strong, and there's still great demand with relatively limited inventory. So a lot of the transactions happened before we even end up taking the property back, which is the best possible scenario. But the $194,000 is probably around five properties we've taken back, and I think there was one commercial property in there and four residentials. Ian Lapey: Okay, great. And then I guess my only follow-up, my only remaining question. So it looked like branches were flat at 136 sequentially. What are you thinking about in terms of expansion, if at all, and would Florida still be sort of your targeted range for growth? Robert J. McCormick: We're looking at, well, Pasco County is something that we're very interested in, Ian. I'm sure you're tracking this, but on the West Coast of Florida, because of development and prices and things like that, people are being pushed further and further out from Tampa. We're seeing opportunity in loan demand in Pasco County. And then there are a couple of other infill locations that we would like to find something in Florida. But, you know, we are pretty cheap people, so we want the right transaction if we can in the right location. So and then there's always opportunity throughout Downstate New York as things open up there as well. So those would be the two opportunities we're seeing right now. Ian Lapey: Okay. Terrific. Thank you. Operator: Thank you. We currently have no further questions at this time. Now I'd like to turn the conference back to Robert J. McCormick for any closing remarks. Robert J. McCormick: Thank you for your interest in our company, and we hope you have a great day. Thank you. Operator: The conference call has now concluded. Thank you very much for attending. You may now disconnect your lines.